Q3 2023 Trinity Capital Inc Earnings Call
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Good afternoon, My name is Mike and I will be your conference operator today.
At this time I would like to welcome everyone to Trinity Capitals third quarter 2023 earnings Conference call.
Our hosts for todays call are Steve Brown, Chairman and Chief Executive Officer, Kyle Brown, President and Chief Investment Officer, David <unk>, Chief Financial Officer, Michael Chester, Chief Accounting Officer, and bid Malcolmson Malcolmson director of Investor Relations, Jerry harder Chief operating officer, Ron can ditch, Chief credit Officer, and Sara Stanton.
Compliance Officer and General Counsel Counsel are also on the call.
This call is being recorded and will be available for replay beginning at approximately three P. M Eastern time.
The replay dial in number is 88821 495 to three and no conference idea is required for access.
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Thank you, Mike and welcome everyone to Trygve Capital's earnings conference call for the third quarter of 2023.
<unk> third quarter financial results were released earlier this morning, and can be accessed from <unk> Investor Relations website at IR Dot Treaty cap dotcom.
A replay of the call will be available on <unk> website or by using the telephone number provided in today's earnings release.
Before we begin I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance.
May be deemed forward looking statements under federal Securities laws.
Because these forward looking statements involve known and unknown risks and uncertainties. There are important factors that could create that could cause actual results to differ materially from those expressed or implied by these forward looking statements.
We encourage you to refer to our most recent SEC filings for information on some of these risk factors.
Trinity Capital assumes no obligation or responsibility to update any forward looking statements. Please note that the information reported on this call speaks only as of today November one 2023.
Therefore, you are advised that time sensitive information may no longer be accurate.
At the time of any replay listening or transcript reading.
Now please allow me to introduce Trinity Capitals, Chairman and CEO, Steve Brown.
Thank you Ben and thanks to everyone for joining us today.
As you have seen in the earnings release, we generated strong third quarter results with record net investment income fueled by our robust originations pipeline.
Net investment income for the quarter was $23 4 million or NII per share of 58 cents, providing 118% coverage on our regular dividend.
NAV increased by two cents to $13.17 per share due in part to a healthy balance sheet and the stability of our portfolio, which out earned our distributions.
We further strengthened our liquidity during the quarter by accretive stock issuances under our ATM program as well as our $82 million equity raise in August.
I'm, especially pleased that we have increased our quarterly dividend by two 1%, marking the 11th consecutive quarter of dividend increases.
Last month, we increased our quarterly regular dividend of <unk> 49 per share. In addition to a supplemental dividend of <unk> per share to comply with tax regulations.
The board will further evaluate our tax position in Q4 and determine if additional supplemental dividends are required.
As we previously announced effective January one 'twenty 'twenty, four and consistent with the company's long term succession plan I will become executive chairman of the board of directors, while continuing to serve on the company's investment Committee and Karl Brown will become Chief Executive Officer.
S C E O of Trinity for the past 15 years I've had the privilege of leading a best in class team and together, we took the path formed public creating significant returns for our investors since our IPO in 2021 Kennedy has delivered more than $169 million in cumulative distributions.
Also we have been proved to launching our E E and have successfully started the JV both of which provide off balance sheet growth opportunities that give us the ability to generate accretive returns for our BDC investors.
I look forward to transitioning into this new role in partnering with Kyle as he leads this team towards our next phase of growth.
Since joining the firm in 2015, Kyle has played an important role in his capacity as president and Chief investment Officer, where he is overseeing the company's lending policies and investment strategy. He has been a driving force in building this team and our business and he is in a prime position to lead us to even better places. This is an exciting next chapter for Trinity.
With that I'll turn the call over to Kyle.
Thank you, Steve I'm looking forward to stepping into the role of CEO and continue to work with our record setting team in building. This platform for our portfolio companies as shareholders as Steve mentioned this planned transition as a result of a long term strategy and extensive preparation to position the company for tremendous opportunities ahead.
Our vision and mission remain the same to build the world's leading credit platform for the global growth economy will continue to maximize trinity's track record and trajectory as we expand the portfolio to add value for our shareholders. We focus on doing three things exceptionally well here at Trinity exhibiting uncommon care for our employees and partners being more than money for our.
Clients and providing outside returns for investors.
Looking at the macro environment. The V C industry remains an attractive place to make that investment given the mismatch between supply and demand for lending.
High quality growth companies are going to continue to need to raise capital and that will be a preferred avenue over heavily dilutive equity down rounds.
Interest from investors seeking to partner with a company founders to build positions in companies remains high.
And the dry powder in the V C industry remains at record numbers.
<unk> to surpass all previous years, except for the unusual activity in 'twenty, one and 'twenty two.
We have exceptional relationships with our portfolio companies and the breadth of our relationships with sponsors and investors allows us to see even more opportunities as we've worked with more than 900 different equity and sponsors.
Sponsors in our history.
Despite a somewhat challenging fundraising environment, our portfolio continues to get funded and see opportunities to raise additional capital year to date 45 of our portfolio companies have raised an aggregate of more than $2 $4 billion in new capital to drive their next phase of growth volatility.
Volatility in the banking industry and a more conservative approach toward lending continue to drive additional opportunities for trinity's direct lending solutions.
We finished the quarter with a strong pipeline of $348 million in unfunded commitments, all of which are subject to milestones ongoing diligence and approval by our investment Committee.
We remain very selective and committed to adhering to our rigorous diligence process with a smaller percentage of deals reaching the underwriting stage.
Our distinct structure and collaborative origination credit and portfolio teams takes a proactive approach to managing our inbound opportunities and active portfolio companies, which greatly mitigate risks and position us to excel in all cycles.
Gross fundings in Q3 were approximately $149 million.
Proceeds received from repayments of the company's debt investments during Q3 totaled approximately $177 million.
Q3, fundings are comprised of 81 million to five new portfolio companies and 66 million to 10 existing portfolio companies and two.
2 million of capital calls to our joint venture.
The composition of our portfolio portfolio remains consistent with prior quarters shows diversification across 19 different industries, we've intentionally constructed a portfolio with varied industry segmentation with our largest industry exposure, representing only 13% of the portfolio at cost.
As announced earlier this year, we have further built out our life science vertical by making key hires and opening a new office in San Diego, which places us in the heart of a major life Science research and innovation hub, we continue to be enthusiastic about the prospects of our life science vertical and believe the industry holds immense potential for growth.
Our team has built an attractive platform to support the financing needs of growth stage companies or people are trinity's biggest asset and as we continue to build and grow the organization. We never forget that our culture is built on humility trust integrity uncommon care and continuous learning and an entrepreneurial spirit as we serve our customers and partners.
We believe this mindset makes us a destination for the best talent in the industry and we continued to make strategic hires to bolster our team for the exciting road ahead.
In the third quarter. We also continued to realize the benefits of our direct lending joint venture this off balance sheet growth to provide incremental returns that flow to our shareholders.
R. R. E is positioned to be an opportunistic off balance sheet growth lever. Our team is engaging with several potential investment partners and we expect to have more progress to share in the coming quarters.
We're focused on building a platform both on and off balance sheet that is accretive for investors. As a reminder, we are an internally managed BDC and the fees charged to our off balance sheet entities will directly benefit shareholders.
Looking ahead, we believe companies will need to seek lending solutions that offer strategic partnership and less dilutive growth capital we want to be the go to letter for growth oriented companies, providing a wide range of financing solutions.
And we are well positioned to profitably grow the balance sheet and as we increase our off balance sheet activity will seek new ways to improve returns for our shareholders. Our CFO, David <unk> will now discuss our operating performance in more detail Dave. Thank.
Thank you Kyle and welcome to everyone joining us today.
We generated strong operational performance in the third quarter underscored by the strength of our balance sheet and the ability to execute our strategic vision.
In Q3, we recorded total investment income of $46 $4 million at 20% increase over the same period in 2022.
This growth was attributable to interest earned on the higher average loan balances in our investment portfolio the benefit of increases in the prime rate since Q3 of 2022 and OID acceleration.
Our effective yield on the portfolio for Q3 was $16, 7% compared to 16, 2% in the second quarter.
Our core U, which excludes nonrecurring fee income increased to 15, 5% from 14, 8% in the prior quarter.
Yield growth was contributed to our solid NII performance in the quarter.
Our debt portfolio remains well positioned against interest rate increases with 74% of our debt investments at floating rates.
On the borrowing side, 19% of our outstanding debt at the end of the third quarter was it a variable sofa rate contributing to a solid net interest margin or NIM of 12, 9% for the quarter.
Net investment income for the third quarter was a record $23 $4 million or <unk> 58 per basic share an increase of 25, 6% compared to $18 $6 million or 56 cents per basic share in the same period of the prior year.
Our operating activities generated strong returns for our shareholders with our O N E based on NII over average equity of 17, 6%.
R O a a based on NII over average total assets of 8%.
Lastly, as of September 30th 2023, and a V increased 18, 1% to $569 $5 million and NAV per share increased to $13.17 compared to $13 15 in Q2.
I will now hand, the call over to Mike <unk>, Our Chief Accounting Officer, who will discuss our credit performance liquidity and capital allocation.
Thanks, Dave the credit quality of our portfolio companies remained strong and stable with approximately 97% of our portfolio are performing at fair value.
Our average internal credit rating for the third quarter stood at 2.8 based on our one to five rating system with five indicating very strong performance.
This rating is in line with our average credit rating each of the last four quarters and reinforces <unk> track record of low loss rates.
We currently have four portfolio companies on non accrual with a total fair value of approximately $28 million, representing just two 6% of the total debt portfolio.
Moving to liquidity as of September 30th 2023, we had total liquidity of approximately $257 million comprised of approximately $250 million of undrawn capacity under our credit facility.
And $7 million in unrestricted cash and cash flow.
Additionally, we've continued to co invest with our joint venture, which provides additional investment liquidity and as of Q3 had a $134 million of assets under management.
Yeah.
Our net leverage ratio, which represents principal debt outstanding less cash on hand.
Improved 2.92 times this quarter.
As a result of $82 million follow on equity offering and increased portfolio repayments.
We also utilized our ATM program during the quarter raising approximately $13 million in gross proceeds at a premium to NAV.
Supporting the long term growth of training.
The health of our capital structure and balance sheet remains the top priority for training as Carl mentioned this commitment is underscored further by the successful execution of the joint venture and.
And potential investment partner discussions under the I E.
These vehicles provide accretive earnings to the B C. While providing additional liquidity to the platform and we'll look forward to providing additional updates as appropriate.
At this time, we'd like to open up the line for questions operator.
Yeah.
Thank you.
This time, if he would like to ask a question. Please press the star and one on your telephone keypad.
You may remove yourself from the queue at any time by pressing star two and once again. It is star one if you would like to ask a question, we'll pause for just a moment to allow questions to queue.
Okay.
Okay.
And do we have our first question from Kyle Joseph with Jefferies.
Good morning, guys. Thanks for taking my questions and congrats on a great quarter.
I just wanted to get your take in all of our six plus months out since that Silicon Valley fall out and just give us a sense for how the markets evolved in those six months and whether you guys have seen some stabilization and how that impact.
Impacting competition as well.
Sure Hey, Kyle this is Carl.
So a couple of things and maybe just start with some of the data we've seen internally.
We have seen this year, a pretty significant uptick in senior loan the percentage of loans and opportunities that are senior secured and I'd say, that's primarily for even later stage companies, where we might have seen.
Providing some term debt or maybe some of the debt need there. We just internally have seen a really significant uptick in senior loan opportunities now, we primarily lend on senior secured loans, but that that data alone for more mature companies. It was really interesting. It just shows that theyre lending less money to us.
Yes.
Opportunities have significantly in <unk>.
Increased top of funnel.
<unk> kind of focusing on what they do best and we think that that trend publically continues going forward.
Got it very helpful.
Next one is <unk>.
Just the investment in our pipeline really got Florida, Obviously, you guys, Yeah, Delever de Levered a lot. Some from repayments came from the equity raise but with your balance sheet, where it is should we take that as a sign that the pipeline is really strong and then how do you guys think about managing leverage going forward.
Yes, I'll touch on it Mike you can you can also.
Got you on it but we really wanted to make sure that we keep that leverage in a place where we have liquidity, we can take advantage of.
The market opportunities in front of us.
The combination of on and off balance sheet capital gives us some additional levers there to keep leverage low but also continue to drive up earnings and so we're really focused on on continuing to increase earnings per share Roe.
And increased that dividend and so the ability for us to offload.
Deals to some of our off balance sheet entities, yet drive up to new income while decreasing our leverage ratio. That's those are really interesting tools that we're going to continue to use going forward.
And just to provide color on the backlog and calls prepared remarks. He covered 348 million of unfunded commitments. We also have quite a bit of term sheets accepted so over $600 million and our backlog and a good portion of that is to our equipment financing products.
Got it very helpful. Thanks for answering my questions.
And our next question comes from Christopher Nolan with Ladenburg Thalmann.
Steve Congratulations on your transition and Karl Congratulations on your transition.
I guess going forward given the dividend the common dividend yield is roughly 14% right now.
Where do you stand in terms of cost of capital for further equity raises.
Yeah.
It was a little tough here and yes, Chris.
I think you said, how do you feel about future equity raises is that does that right cost of capital for future equity raises.
Yeah, the dividend yield 14% and.
Are you comfortable with raising equity you know, where you're paying out a 40% dividend yield on that new equity.
Yeah. So.
On future equity raises.
We are really good.
Dedicated to making sure we do not dilute investors were really dedicated on.
Increasing our ROE.
We are very dedicated to increasing that earnings per share and so to the extent that we go when we raised additional equity those things are front of mind.
We do have a significant pipeline, we have great opportunities in front of us.
But increasing AUM for the sake of AUM growth just doesn't that's not.
We're not structured to focus on that first and so we'll raise additional equity as is we need to.
None of the sake of it.
<unk>.
Chairs and decreasing returns for investors.
And then I guess.
Yeah. Please go ahead.
Yeah. This is the only thing to add is like we have some good flexibility and opportunities to raise capital.
Through the ATM or equity offerings, but also from a debt perspective, we have a good amount of liquidity in our AR and our credit facility and at the lower end of our leverage ratio have some have some flexibility there.
Gotcha, and then I guess.
What's.
You guys have raised the dividend consistently for the last 11 quarters and congratulations but.
What are your thinking in terms of incremental races are they really needed to support the stock price or anything.
What's the thoughts around that please.
As our off balance sheet income continues to increase and those earnings flow to the BDC.
We will continue to have new earnings to share with investors. So.
We're not a traditional BDC our story is not going to replicate traditional bdcs, we are going to be very consistent with the dividend and then we're going we're trying to create a growth story for our shareholders.
And I would also point toward dividend coverage on an 18%.
Okay. That's it for me thank you.
Yes.
Okay.
And our next question comes from Ryan Lynch with K B W.
Hey, good morning.
Following up on Kyle's earlier question about leverage obviously with the equity raise and kind of the minimal growth.
This quarter in our portfolio you guys are in a really good leverage spot.
I understand that you guys are looking at ways to increase the operating ROE you guys have.
Different tools out there like the JV that can increase the operating ROA by growing that but.
At this point.
Do you guys foresee is is it the kind of the expectation that leverage will move back up into kind of that targeted range.
One point.
Of.
Jewish area of one point to 1.3 ish area or is the expectation that it will kind of hover around these levels and you will continue to.
<unk> the ROE by by investing in the JV.
Potentially the DRA at some point.
Hey, Ryan.
It's a combination of everything you said there right.
It's we've got some really interesting levers in place. So that we don't have to increase our leverage to generate returns and higher returns for investors and so keeping it.
In that range of kind of one to one to 1213, I mean that gives us some real flex on a quarterly basis too.
Satisfy and make sure we close the deals need to close.
And also utilizing our off balance sheet activity there too.
Two.
To decrease the leverage ratio and so we have got some really great flex.
With our leverage but our long term less leverage and higher returns, we actually have the ability to do that with our off balance sheet activity.
Okay, Yeah that makes sense I would just say yes.
If you have the ability to do that I think that that makes a lot of sense just given the ROE is.
Already very very high today, and having some balance sheet flexibility I think is as valuable given the current market backdrop.
The other question I had was can you provide any update on where.
The situation with with core scientific stance.
Obviously.
We know what's going on there with that.
Investments.
The backdrop.
It looks like it was maybe written up slightly in the quarter, but still remains at a heavy discount there has been a big move in bitcoin prices Im not sure what the equipment has done but just can you give an update on that investment and have you seen any changes in the underlying market recently, given the big move higher in bitcoin.
Over the last several months.
Hey, This is Ron Ryan I'll go first and maybe Jerry I'll tack on.
Yeah.
Yeah, you know where it's at.
But you know theres been a couple of significant updates within the quarter.
The claim amount and our collateral amount has been finalized with the company which is.
Obviously, a positive thing and the company has also come to an agreement with the.
The equipment vendors.
Under three different restructuring option so.
Continues to move forward through the process you asked a question about bitcoin, maybe Jeremy if you want to tackle that one I think.
You tack that on at the end of your question Ryan I think you know.
So here's what I'd say right, we the collateral amount and the.
Yeah.
The collateral and the claim amount were finalized with the company that's what they're bringing into court. We understand the company is very close to reaching agreement with convertible noteholders, but as of right now we haven't heard that that's finalized.
The judge in the case needed to recuse themselves. There's a new judge we think the judgment data's at or around the end of the year and so we can't really say what will happen you know what the court judgment will make but as Ron alluded to.
The agreement that Trinity and the company have reached as well as all the other equipment lenders. The company has three debt repayment options may be.
See they can choose which suits them best so we considered those three options did discounted cash flow analysis to value our holdings.
And still maintain that.
You know it.
Relatively high discount rate just to account for the overall risk we will have in equities Asian option as well to consider moving forward.
The valuation and the exact terms of that are not completely clear at this time, so it's impossible for us to say.
What we might pick we expect to make that election within Q4.
And we're going to do what we believe is in the best interest of our shareholders when we make that decision.
Okay.
Understood I appreciate the time today.
Thanks Ryan.
And we have our next question from Bryce Rowe with B Riley.
What kind.
I wanted to ask you you made the comment and you made the same comment last quarter about you.
Your portfolio companies continuing to.
To attract new capital I think last quarter. It was 30 companies. This one at this time it's 45.
And the new capital is up $1 four to $2 4 billion.
Can you can you just speak speak to kind of what what's driving that and maybe maybe speak to the message that might be counter to what we're hearing.
Or what you might hear more broadly with the venture capital ecosystem. Thanks.
Sure.
So, let's say I think that certain industries raising capital isn't is challenging right now.
Though what we have seen in our own portfolio and across the board. There's a lot of there is a lot of equity flowing it's just coming at damaging down rounds for investors.
To the tune of 20% to 75% I mean, we've seen that within our own portfolio, even companies doing well and still growing or theyre going to have a correction in their valuation many of which have been delaying.
Delaying what has become kind of the inevitable and we're seeing that pipeline just kind of pushed through and companies are trying to they're having to take the pain and move forward and so.
The majority of our investments are relatively mature companies, who have real technology real businesses.
With something and technology.
Technology that has real value and somebody's gonna pay something for it and so we've just seen that play out over and over again within our own portfolio and.
The market and our own portfolio, there's a there's always going to be a handful of deals. We're working on it has to be that's our industry.
Right.
And since since we founded Trinity we've.
We've seen that our warrants and upside potential they cover our losses.
It provides some incremental upside to investors and so we've got a very dedicated portfolio team. We've got one individual for every 12 to 15 portfolio companies.
That's all they do and we're being incredibly proactive.
To renegotiate and provide incremental upside within our own portfolio is it's easy right now new deals you can see it there are priced higher we're getting more warrants there very exciting it's an interesting time to be investing making new investments, but we were actually within our own portfolio as new equity flows that are being very proactive on making sure we create those up.
<unk> potential that upside potential so that what we can cover any downside or losses, we might have in the future and create some additional upside for investors. So we're trying to be really consistent there.
Great that's helpful.
And maybe maybe a couple of follow ups.
Related to those to those to that answer number one.
About.
The top of the funnel kind of getting bigger.
And then you just also talked about kind of your team.
How do you how do you think about the employee base and the employee base growing.
With the with the better opportunity set that you are seeing in especially in the context of being internally managed and different from an externally managed BDC that doesn't have salary and benefit direct salary and benefit type of expense on the income statement can you can you talk about kind of the opportunity there.
From an employee.
They are capturing more employee perspective.
Yeah.
We have taken a real sniper approach to new employees, we are looking for the best talent in the industry.
We've got a pipeline filled with potential people across the platform.
And we're we're being very opportunistic about who we bring on board and we continue to hire in advance. So we've that's been a theme for us from the beginning we wanted to get this this platform to scale, we have a vision for what we want to build here.
Five years out in the future and then some and we're hiring according to that plan and so.
You know we're not you know are the bdcs not to scale, yet I think there's some real efficiencies, we'll see as we continue to grow and and and.
An increase.
And but we are.
We're excited about the people, we're bringing on board, we're going to continue to hire in advance of the plan that we're trying to execute upon right now.
All the while taking into account the fact that we want to make sure that we want to increase earnings per share and focus on that ROE growth and so we balance those two things and and we're going to continue to hire in advance and continue to build the platform.
Got it.
I appreciate those comments and again thanks guys.
Okay.
Yeah.
And we have our next question from Casey Alexander with Compass point.
Hmm.
Hi.
Good afternoon, Nick might be a little bit of a rambling question and it refers to a lot of things that you've already said, but I mean, just stepping back for a second and looking at the fact that at 93 or <unk> 94 times, you're under Levered on the balance sheet.
Which would argue two things to me one that you would take your foot off the gas of the ATM program and two.
Even though the JV is not anywhere near scale and not really contributing much income you would likely not contribute a lot to the JV right now until you reach a more fulsome leverage level on balance sheet, which would be the best way to maximize your earnings.
And so I was just wondering if you could speak to that because that mix is seems to make sense to me that things should go on balance sheet first until you're in a more fulsome leverage then perhaps you can tap some of the ATM and start to build that JV to scale.
Yes.
Casey. This is Kyle then I think Jerry Michael add onto it.
Yeah, I think youre looking at a point in time right. We are we had a pretty significant pipeline some of which got pushed.
Into Q4.
So there's that affects a bit.
But I think we can do both Casey.
What we're trying to do is keep that leverage lower.
So that we have we saw this we saw this with FCB went.
Went down.
There was suddenly some pretty significant opportunities and if you were highly leveraged at that point, you had less liquidity and less opportunity to take advantage of.
It's a difficult time, and we really want to position ourselves to.
The opportunistic, which I think creates outsized returns for shareholders and so I think there's this combination if we have the pipeline right. If we can put the money to work. There is this really interesting balance of continuing to issue new shares.
You utilize our off balance sheet funds.
While keeping that leverage in a position where we've got a lot of liquidity available to us and so if we can continue that up into the right trajectory of earnings.
Dividend increases well, while also doing those are the things I mean, that's the sweet spot right, Yeah, and I guess, one other point after three quarters Q4, Q1 Q2 of very low early repayments.
We did see a substantial uptick on that within Q3 right and this isn't something we can predict right. So we have to capitalize the business to be opportunistic we can't count on those early repayments, but when they come.
Might see that.
<unk> and the leverage ratio as of September 30, and I think that's what you're saying.
Yeah.
Alright. Thank you that's my only question.
Hey, Casey.
Okay.
Yeah.
And we have reached the allotted time for our Q&A session I would like to now turn the call back to CEO, Steve Brown for closing remarks.
Thank you we'd like to thank everybody for participating today, and we look forward to being in touch with you. After the holidays. One final note as a reminder, I want to highlight that members of the Trinity management team will be attending the Jefferies BDC Summit in New York on November 15th.
Arrested meeting with US at this event, please reach out to Ben or your Jefferies Representative. Thanks, again, and one last note <unk>, let's keep it going.
<unk>.
This does conclude today's program. Thank you for your participation you may now disconnect.
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