Earnings Call Transcript - TRIN Q2 2024

Operator, 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 Second 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. Please go ahead.

Ben Malcolmson, Head of Investor Relations

Thank you, Angela, and welcome, everyone, to Trinity Capital's earnings conference call for the second quarter of 2024. Today, we are joined by Kyle Brown, Chief Executive Officer; Michael Testa, Chief Financial Officer; and Gerry Harder, Chief Operating Officer. Also joining us for the Q&A portion of the call are Ron Kundich, Chief Credit Officer; and Sarah Stanton, Chief Compliance Officer and General Counsel. Trinity's financial results were released earlier today and can be accessed from our Investor Relations website at ir.trinitycap.com. 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. Please note that the information reported on this call speaks only as of today, August 7th, 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.

Kyle Brown, CEO

Great. Thanks Ben. In the second quarter, we continued executing across all our strategies to deliver a record quarter. We achieved record investment income of $27 million, a 21% increase versus quarter two of last year. Net asset value grew to a record of $680 million, up from $626 million last quarter. Platform AUM reached a record $1.7 billion, up 36% year-over-year. In Q2, we made $231 million of gross fundings, which included debt investments to 10 new portfolio companies. That deployment was heavily driven by $118 million 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. While we historically have focused on venture debt, we've expanded to a platform of diversified verticals. Venture debt is now just one of our products as today, we're comprised of five 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. 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 and 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 million in net proceeds through our aftermarket equity program, all at a premium to NAV. Subsequent to quarter end, we raised $115 million of unsecured notes maturing in 2029 and completed an extension and upsize to our revolving credit facility. In June, we announced a new private vehicle through our strategic partnership with Eagle Point Credit, Trinity's wholly owned RIA as the adviser to the 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 from externally managed BDCs in that when you buy our stock, you're buying into a pool of diversified assets across our various verticals, and you're buying into a management company. We're not like externally managed BDCs that are simply a pool of assets. 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 a 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 six pillars: humility, integrity, trust, uncommon care for our people and partners, continuous learning and an entrepreneurial spirit. These values are what create the 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, 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. 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 billion 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 million of unfunded commitments, leaving us well positioned for continued growth in the second half of 2024. As a reminder, all of Trinity's unfunded commitments are subject to ongoing diligence and approval by our investment committee. 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 and active portfolio companies, all of which greatly mitigate risk and position us to excel in all macroeconomic cycles. At Trinity, we pride ourselves on three core principles: exhibiting uncommon care for our employees, customers, and stakeholders; serving our clients by being partners rather than just lenders; and providing outsized returns for our shareholders. We are excited about the future. We're planning 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 Testa, CFO

Thank you, Kyle. In the second quarter, we achieved record total investment income of $54.6 million, 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 second quarter was $26.7 million, or $0.53 per basic share compared to $22.1 million, or $0.61 per basic share in the same period of the prior year. The increase of $4.6 million, or a 21% year-over-year net investment income growth, is primarily attributable to the continued earnings power of the platform. Our net investment income represents 104% coverage of our quarterly distribution and our estimated undistributed taxable income is approximately $64 million, or $1.24 per share. We continue to reinvest this capital for the benefit of our investors and maintain a consistent and meaningful distribution to our shareholders. Our platform continues to generate strong returns for our shareholders, with ROE 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 million, which increased from $626 million 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. The increase in NAV per share this quarter was primarily attributable to outperforming our quarterly distribution, net portfolio gains, and accretive share activity. Under our ATM program in Q2, we raised $46.9 million 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 million, comprised of $95 million of undrawn capacity under our credit facility and approximately $46 million 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 million through the issuance of investment-grade unsecured notes maturing in 2029. We also amended our KeyBank credit facility, upsized from $350 million to $440 million 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 million. 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. We also continue to realize the benefit of our co-investment in the joint venture, which in Q2 provided approximately $1.3 million, 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. As of June 30, 2024, we had more than $250 million of assets under management in these private vehicles, providing incremental capital for growth and accretive returns to our shareholders. In the second quarter, we repaid $30 million 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 to 7.6%, and we continue to benefit from the low fixed-rate debt having access to the unsecured market during the period of lower interest rates. Our net leverage ratio, which represents principal debt outstanding less cash on hand, was 1.07x as of June 30, 2024. Both our strong liquidity position and the fact that we were operating within the targeted leverage ratio by Trinity gives us flexibility to manage a strong pipeline and be opportunistic in the marketplace. I'll now turn the call over to our COO, Gerry Harder, to discuss our portfolio performance and platform in more detail.

Gerry Harder, COO

Thank you, Michael. Since our last call, Trinity has had an active summer. Our expansion into Europe and the launch of the first 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 journeys. At the end of the second quarter, on a cost basis, our total portfolio consisted of approximately 71% secured loans, 23% equipment financing, 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. 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 health care technology, biotechnology, diagnostics, and tools collectively made up 21.4% of our total portfolio on a cost basis. Among our five business verticals, the detailed breakdown of our $231 million 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. and represents 3.6% of our debt portfolio and 3.4% of our total portfolio on a cost basis. Our ten 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 remains stable with approximately 98.2% of our portfolio performing on a fair value basis. Our average internal credit rating for the second quarter stood at 2.7% based on our 1 to 5 rating system, with five indicating very strong performance. 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 non-accrual 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 million representing 1.8% of the total debt portfolio. At quarter end, 78% of our total principal outstanding was backed by first position liens on enterprise, equipment, or both. 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. At this time, we'd like to open the line for questions.

Operator, Operator

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

Doug Harter, Analyst

Hi. This is Doug. Can you discuss the decline in non-accrual assets, the pace of resolution for the other four, and your observations on credit quality in general?

Ron Kundich, Chief Credit Officer

Hey, Doug, this is Ron Kundich. I’d be happy to take that. As you noted, we have one fewer non-accrual credit this quarter as opposed to last, actually promoted a company off of the non-accrual list during the quarter. And it's now a portfolio performing asset. The remaining four companies are holdovers from Q1. They're in various stages of work out, as you might expect. Of note, Nexii is a 25-75 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. Part of our debt has rolled forward, and another portion of our debt has converted to equity. The remaining three companies remain in the same status as last quarter. I can get into a little more detail if you like.

Doug Harter, Analyst

I appreciate that answer. Thank you.

Kyle Brown, CEO

Thanks, Doug.

Operator, Operator

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