Trinity Capital Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 9 speakers on the call.

Operator

Good afternoon. My name is Angela and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital's 2nd Quarter 2024 Earnings Conference Call. All participants have been placed in a listen only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the call over to Ben Malcolmson, Head of Investor Relations for Trinity Capital.

Operator

Please go ahead.

Speaker 1

Thank you, Angela, and welcome to Trinity Capital's earnings conference call for the Q2 of 2024. Today, I'm joined by Kyle Brown, Chief Executive Officer Michael Testa, Chief Financial Officer and Gerry Marder, Chief Operating Officer. Also joining us for the Q and A portion of the call are Ron Kundich, Chief Credit Officer and Sara Stind, Chief Compliance Officer and General Counsel. Trinity's financial results were released earlier today and can be accessed on our Investor Relations website at ir. Trinitycap.com.

Speaker 1

A replay of the call will be available on our 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 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.

Speaker 1

Please note that the information reported on this call speaks only as of today, August 7, 2024. 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 turn the call over to Trinity Capital's CEO, Kyle Brown.

Speaker 2

Great. Thanks, Ben. In the Q2, we continued executing across all our strategies to deliver a record quarter. We achieved record investment income of $27,000,000 21% increase versus quarter 2 of last year. Net asset value grew to a record $680,000,000 up from $626,000,000 last quarter.

Speaker 2

Platform AUM reached a record $1,700,000,000 up 36% year over year. In Q2, we made $231,000,000 of gross fundings, which includes debt investments to 10 new portfolio companies. That deployment was heavily driven by $118,000,000 of equipment financings. For Q2, Trinity paid a cash dividend of $0.51 per share, representing the 18th consecutive quarter of a consistent and growing dividend. We have been busy this year executing on several initiatives.

Speaker 2

While we historically have had a focus on venture debt, we evolved into a platform of diversified verticals. Venture debt is now just one of our products as today we're comprised of 5 distinct business verticals that enhance our ability to scale and reach more of our private credit market. Those five business verticals are tech lending, equipment financing, life sciences, warehouse financing and our newest vertical that we launched in May, Sponsor Finance, which focuses on private equity backed businesses. Each of these business verticals has its own originations, credit, portfolio and management teams. They have seasoned veterans who lead them, which allow for efficient scalability.

Speaker 2

Our commitment to expanding the platform is highlighted by our investments in these strategic growth initiatives, which have generated extraordinary momentum. We also recently announced our expansion into Europe, giving us global exposure, better access to an active tech landscape, allowing us to support high growth companies across multiple continents. In support of our growth, we've been active in our capital fundraising efforts. In Q2, we raised nearly $47,000,000 in net proceeds through our at the market equity program, all at a premium to NAV. Subsequent to quarter end, we raised $115,000,000 of unsecured notes, maturing in 2029 and completed an extension and upsize to our revolving credit facility.

Speaker 2

In June, we announced a new private vehicle through our strategic partnership with Eagle Point Credit. Trinity's wholly owned RIA is vehicle further enhancing our sources of capital and generating fee income that flows directly to our shareholders. Trinity is an internally managed BDC. We're different than externally managed BDCs in that when you buy our stock, you're buying into a pool of diversified assets across our various verticals, yes, and you're buying into a management company. We're not like externally managed BDCs that are simply a pool of assets.

Speaker 2

Over the past year, we started to leverage our internally managed structure as we launched a joint venture and an RIA to allow us to secure private capital. We began to generate income above and beyond the returns we collect from our direct lending. Our goal is to continue our accretive platform growth, driving further value for our shareholders. Our team of nearly 90 professionals is the cornerstone of Trinity's track record and is the key to our trajectory going forward. We're committed to fostering a culture of excellence built around 6 pillars: humility, integrity, trust, uncommon care for our people and partners, continuous learning and an entrepreneurial spirit.

Speaker 2

These values are what creates a differentiated lending platform we've built here at Trinity. We strive to provide value that exceeds expectations in every part of the Trinity platform for employees and clients and investors. It's also important to note that because we are an internally managed BDC, our employees, management and Board all own the same shares as you do, our investors. We can't think of a better way to maintain 100% alignment with our shareholders in order to maximize return. We continue to take a selective approach to new opportunities.

Speaker 2

As a direct lender, we maintain our own pipeline and have originations strategically located in major markets, cultivating deep relationships with sponsors, banks and operators. We are the agent on the vast majority of our loans and do not buy paper in large syndicated deals. Year to date through June 30, 40 of our portfolio companies have collectively raised just shy of $2,000,000,000 of equity, far exceeding our portfolio's 2023 capital raising pace and demonstrating our portfolio's quality and ability to secure funding. We ended the quarter with a strong investment pipeline, including $436,000,000 of unfunded commitments, leaving us well positioned for continued growth in the second half of twenty twenty four. As a reminder, all of Trinity's unfunded commitments are subject to ongoing diligence and approval by our investment committee.

Speaker 2

Credit and underwriting and portfolio management are fundamental to our success. We remain very selective and adhere to a rigorous diligence process with an increasingly smaller percentage of our deals reaching the underwriting stage. Our distinct structure and collaborative originations, credit and portfolio teams take a proactive approach to managing our inbound opportunities in active portfolio companies, all of which greatly mitigate risk and position us to excel in all macroeconomic cycles. At Trinity, we pride ourselves on 3 core principles exhibiting uncommon care for our employees, customers and stakeholders serving our clients by being partners rather than just money and then providing outsized returns for our shareholders. We are excited about the future.

Speaker 2

We plan to continue to invest in our teams and systems, diversifying our investments to create a best in class direct lending platform. We look forward to extending our momentum as we grow and maximize value for our shareholders. And with that, I'll turn the call over to our CFO, Michael Testa, to discuss financial results in more detail. Michael?

Speaker 3

Thank you, Kyle. In the Q2, we achieved record total investment income of $54,600,000 resulting in an 18.7% increase over the same period in 2023. Our effective yield on the portfolio for Q2 was once again an industry leading 16% and our core yield which excludes fee income was strong at 14.7%. Net investment income for the Q2 was $26,700,000 or $0.53 per basic share compared to $22,100,000 or $0.61 per basic share in the same period of the prior year. The increase of $4,600,000 or a 21% year over year net investment income growth is primarily attributable to the continued earnings power of the platform.

Speaker 3

Our net investment income represents 104% coverage of our quarterly distribution and our estimated undistributed taxable income is approximately $64,000,000 or $1.24 per share. We continue to reinvest this capital for the benefit of our investors and continue to maintain a consistent and meaningful distribution to our shareholders. Our platform continues to generate strong returns for our shareholders with ROAE of 16.3% based on net investment income over average equity and ROAA of 7.4% based on net investment income over average total assets. As of June 30, 2024, our NAV was $680,000,000 which increased from $626,000,000 as of March 31, 2024. And our corresponding NAV per share was $13.12 at the end of Q2, which increased $0.24 from $12.88 per share as of March 31, 2024.

Speaker 3

The increase in NAV per share this quarter was primarily attributable to out earning our quarterly distribution, net portfolio gains and accretive share activity. Under our ATM program in Q2, we raised $46,900,000 in net proceeds at an accretive premium to NAV to fund our ongoing portfolio growth. As of June 30, 2024, we had total liquidity of $141,000,000 comprised of $95,000,000 of undrawn capacity under our credit facility and approximately $46,000,000 in unrestricted cash and cash equivalents. Subsequent to the end of the quarter, we further enhanced our balance sheet and liquidity position by raising $115,000,000 through the issuance of investment grade unsecured notes maturing in 2029. We also amended our KeyBanc credit facility upsized from $350,000,000 to $440,000,000 in commitments and it includes an accordion feature pursuant to which we may increase the size of the credit facility to an aggregate principal amount of $690,000,000 We believe our current debt funding mix, which is currently 67% unsecured debt is appropriate and we remain consistent with managing the right side of the balance sheet.

Speaker 3

We also continue to realize the benefit of our co investment in the joint venture, which in Q2 provided approximately $1,300,000 or $0.03 per share of interest, dividend and fee income to the BDC. We also announced the launch of a private vehicle managed by our RIA subsidiary. And as of June 30, 2024, we had more than $250,000,000 of assets under management in these private vehicles, providing incremental capital for growth and accretive returns to our shareholders. In the Q2, we repaid $30,000,000 of our 2025 notes using a portion of the proceeds raised last quarter from unsecured notes maturing in 2029. Our weighted average cost of debt increased slightly from the prior quarter at 7.6% and we continue to benefit from the low fixed rate debt having access to unsecured market during the period of lower interest rates.

Speaker 3

Our net leverage ratio, which represents principal debt outstanding less cash on hand was 107 times as of June 30, 2024. Both our strong liquidity position and the fact they were operating within the targeted leverage ratio provide Trinity with the flexibility to manage a strong pipeline and be opportunistic in the marketplace. I'll now turn the call over to our COO, Jerry Harder to discuss our portfolio performance and platform in more detail. Jerry? Thank you, Michael.

Speaker 3

Since our last call Trinity has had an active summer. Our expansion into Europe and the launch of the 1st private fund managed under our RIA strengthen our business and enhance our ability to offer customized financing solutions to our evolving client base and new entrants in the market. We are dedicated to supporting companies at every stage of their growth journey. At the end of the Q2, on a cost basis, our total portfolio consisted of approximately 71% secured loans, 23% equipment financings, 4% equity and 2% warrants. The composition of our portfolio remained consistent with prior quarters with diversification across investment type, transaction size, industry and geography.

Speaker 3

Our portfolio is segmented across 21 industry categories with our largest industry exposure, finance and insurance, representing 13.1% of the portfolio at cost. Our next largest industry concentrations are green technology and medical devices, representing 10.9% and 8.9% of the portfolio at cost respectively. Life Sciences related industries including medical devices as well as healthcare technology, biotechnology, diagnostics and tools collectively made up 21.4% of our total portfolio on a cost basis. Among our 5 business verticals, the detailed breakdown of our $231,000,000 of gross fundings in Q2 went as follows: 52% to our equipment financing business, 15% to life sciences, 15% to tech lending, 9% to Sponsor Finance and 6% to Warehouse Lending. As of the end of Q2, our largest debt financing was to Rocket Lab USA Inc.

Speaker 3

And represents 3.6 percent of our debt portfolio and 3.4 percent of our total portfolio on a cost basis. Our 10 largest debt investments collectively represent 24.7% of our total portfolio on a cost basis. Moving on to credit. The credit quality of our portfolio companies remain stable with approximately 98.2% of our portfolio performing on a fair value basis. Our average internal credit rating for the 2nd quarter stood at 2.7 based on our 1 to 5 rating system with 5 indicating very strong performance.

Speaker 3

This rating is in line with our average credit rating in each of the last four quarters and reinforces Trinity's track record of low loss rates. The total number of credits in our lowest two credit tiers decreased from Q1, 2024 to Q2, 2024 and was reduced on both a cost and a fair value basis. Portfolio companies on nonaccrual decreased to 4 in Q2 from 5 in the first quarter. At the end of Q2, our non accrual credits had a total fair value of approximately $24,000,000 representing 1.8% of the total debt portfolio. At quarter end, 78% of our total principal outstanding was backed by 1st position liens on enterprise equipment or both.

Speaker 3

The weighted average loan to value of our entire portfolio sits at 21%, while 69% of our portfolio companies have a loan to value of less than 15%. These statistics demonstrate that our portfolio companies are generally not over levered and are in a healthy position to service the debt even in instances when our loan may not be in first position. In closing, I'd like to remind our stakeholders that our team is made up of dozens of veteran investment professionals who are solely focused on portfolio management and asset quality. They've always taken a vigilant approach to the overall health of our portfolio companies and when necessary they find resolutions that benefit both the portfolio company as well as our shareholders. And at this time, we'd like to open the line for questions.

Speaker 3

Operator?

Operator

We'll take our first question from Doug Harter with UBS. Please go ahead.

Speaker 4

Hi.

Speaker 5

This is Doug. Can you talk about you saw a decline in 1 in non accrual assets. Can you talk about the pace of resolution on the other 4 and what you're seeing more broadly in terms of credit quality?

Speaker 6

Hey, Doug. This is Ron Gundich, Chief Credit Officer. Be happy to take that. As you noted, we have 1 fewer non accrual credit this quarter as opposed to last actually promoted a company off of the non accrual list during the quarter. And is now a portfolio performing asset.

Speaker 6

The remaining four companies are holdovers from Q1. They're in various stages of workout as you might expect. Of note, Nexi is a 20 five, 75 participant deal with another publicly traded BDC. You'll see some movement on that and hear some news on that next quarter, but that company has gone through the Canadian equivalent of a bankruptcy and as a subsequent event has reconstituted itself,

Speaker 3

part of

Speaker 6

our debt has rolled forward, another portion of our debt has converted to equity. The remaining 3 companies remain in the same status of last quarter, Can get into a little more detail if you'd like?

Speaker 5

I appreciate that answer. Thank you.

Speaker 2

Thanks, Doug.

Operator

We'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Speaker 4

Hey guys, can you hear me? Hey, Christopher. Multi Sector Holdings, I thought given the new venture with Eagle Point, should we expect Trinity to carry debt for any debt for that entity similar that you do for Senior Credit Corp?

Speaker 3

Hey, Chris, this is Michael. At the current time, it's just an equity investment. We'll look as that investment grows, we start to scale whether it does make sense from a tax perspective as well as an income earning perspective to bifurcate our investments.

Speaker 4

Great. And then should we look at Senior Credit Corp sort of like a senior loan fund?

Speaker 2

It's a co investment vehicle. It invests ratably alongside the BDC and which is really how the co investment vehicles that we now manage are set up.

Speaker 4

Is there an outside partner for that one?

Speaker 2

Are you speaking about the Senior Credit Fund or are you talking about the new fund we just launched? I'm sorry.

Speaker 4

I'm just speaking about Senior Credit Corp specifically.

Speaker 2

Yes. We don't disclose who that is, but we do have institutional investors that we partner with there.

Speaker 4

Okay, great. And then, the move into Europe, I presume all these that's going for activities, which is going to be outside the BDCs because as I understand that the 1940 acts were limits the amount of non U. S. Investments.

Speaker 2

Is that fair way to look at

Speaker 4

it or am I misinterpreting that?

Speaker 7

Hi, Chris. This is Sarah. I'll take this one. We will continue to reevaluate how we make those investments in Europe on a go forward basis. At this time, as you know, we have the 30% bad asset bucket, which we have plenty of room in.

Speaker 7

I think it's under 10% full at this point and obviously continues to grow as the platform grows as well. So we'll continue to optimize that as time continues. But for the time being, we will be making some investments at the BDC level.

Speaker 4

Great. A final question, any consideration of getting an SBA license?

Speaker 2

Yes. There is definitely consideration. That's a process. We're working through it and more to come there.

Speaker 4

Okay. That's it for me. Thanks guys.

Operator

Our next question comes from Bryce Roe with B. Riley. Please go ahead.

Speaker 8

Thanks. Good afternoon from the East Coast. Wanted to maybe just start with the co investment vehicles. Obviously, good to see more progress there. Mike or Kyle, can you talk about the leverage that you expect to use in this maybe the newer vehicle?

Speaker 8

And any guidance or color on kind of ultimate leverage at the original JV would be helpful.

Speaker 2

Yes. I think we're focused on 1 to 1 leverage for the co investment vehicle that really will mirror what we do at the publicly traded BDC. So, we've got some new liquidity available to us with that in mind.

Speaker 8

Okay. Maybe next question here. It looks like unfunded commitments continue to grow in size. And you've got the 5 verticals now and having added a couple as of relatively recently, can you talk about kind of what the mix of the unfunded looks like? And then maybe talk about how the pipeline is starting to build from a mix perspective between the multiple verticals?

Speaker 2

Sure. I think we broke this business into verticals a couple of years ago. We did that intentionally so that it could really scale. We brought in 20 plus year veterans to run each of those businesses both on the management side and the credit side. And we're seeing the results of that now.

Speaker 2

We're seeing the scale begin now and the pipeline has continued to increase there. You saw the mix of deployment this quarter. That's not too different than kind of how we see these verticals continuing to grow. Our venture debt business is a little bit more at scale, so it's growing a little bit slower on a percentage basis, whereas sponsor finance, life science, equipment are all growing at a higher percentage, as those businesses get up to scale. And so that diversification that you saw this quarter, that's I think you can expect that going forward across our verticals.

Speaker 2

And we're seeing as we see one vertical maybe have a little bit less activity in 1 quarter, another one is picking up the slack. And so being more diversified that way, having products focused on different industries and stages really gives us the ability to continue to scale regardless of what's going on.

Speaker 8

Okay. Okay. Maybe last one for me in terms of kind of asset sensitivity, we're starting to see some talk of rate cuts and lower short term interest rates. Just maybe remind us what the asset sensitivity position is of the BDC and how that may change as different verticals take more weight within the portfolio?

Speaker 2

Yes. I think, maybe the first thing I'll point out and you can just confirm this on our schedule investments anybody can. We've got floor rates on almost all of our deals. Flow rates that across the board are exceeding 12 plus percent. And so we've got this really interesting and I think this is different than most BDCs.

Speaker 2

We have an interesting dynamic where we can either see some offset to the lowering of rates where our floor rate remains with our borrowers and we're not making less revenue, but our cost of debt at the corporate level and our revolver goes down. And so it'll be interesting to see how that plays out. I think we're probably protected more than most BDCs in the event of a rate decreasing environment.

Speaker 8

And Kyle, when you say that maybe a little if you have if you guys have a kind of a weighted average floor for the portfolio, I mean, is that relative to I guess on Slide 15 of your deck, you've got a weighted average coupon rate line in that in one of the charts, would that weighted average floor kind of compare to that weighted average coupon rate that you show on that slide?

Speaker 2

That's fair. I think we can follow-up with you on the exact number when we have it, but that's definitely the ballpark.

Speaker 8

Okay. Thanks a lot.

Speaker 2

Sure. Thanks, Bryce.

Operator

It appears we have no further questions at this time. I will now turn the floor back over to Kyle Brown, Chief Executive Officer, for closing remarks.

Speaker 2

Great. Thanks. We're proud of the 2nd quarter results and we're looking forward to updating you on our next call in 3 months. I'd like to thank everybody for participating in the call today and appreciate your interest and investment in Trinity Capital. Have a great rest of your day.

Speaker 2

Thanks. Bye.

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Key Takeaways

  • Record financial performance: Q2 investment income hit $27 million, up 21% year-over-year, with NAV growing to $680 million and platform AUM reaching a record $1.7 billion.
  • Five distinct business verticals now drive diversified growth—tech lending, equipment financing, life sciences, warehouse financing and Sponsor Finance—complemented by recent expansion into Europe.
  • Capital-raising initiatives included $47 million via ATM at a premium to NAV, a $115 million unsecured note issuance, an upsized $440 million revolver (with $690 million accordion) and a new RIA-managed private vehicle with $250 million AUM.
  • Strong credit quality was maintained with 98.2% of the portfolio performing, only four non-accruals, an average internal rating of 2.7 and a weighted average LTV of just 21%.
  • Robust pipeline and alignment: Unfunded commitments stood at $436 million, 40 portfolio companies raised nearly $2 billion of equity year-to-date, and management’s share ownership ensures full alignment with shareholders.
AI Generated. May Contain Errors.
Earnings Conference Call
Trinity Capital Q2 2024
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