Earnings Call Transcript - TRIN Q3 2024

Operator, Operator

Good morning, ladies and gentlemen. My name is Jim, and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital's Third Quarter 2024 Earnings Conference Call. All participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. As I stated, the call will be open for your question after the prepared remarks. 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, and welcome to Trinity Capital's earnings conference call for the third 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 on our Investor Relations website at ir.trinitycap.com. Before we begin, I would like to remind everyone that certain statements made during this call may be deemed forward-looking statements under federal securities laws, because these forward-looking statements involve known and unknown risks and uncertainties. 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. Now allow me to turn the call over to Trinity Capital's CEO, Kyle Brown.

Kyle Brown, CEO

Thank you, Ben. Thanks, everyone, for joining us today. In the third quarter, our strategies performed strongly, helping us deliver record results. Top highlights from Q3 include record net investment income of $29 million, a 26% increase versus Q3 of last year. Net asset value grew to $757 million, up 11% from $680 million last quarter. Platform AUM reached a record $2 billion. In Q3, we made a record $459 million of investments, gross fundings, which was largely driven by $406 million of secured loans and included debt investments to 11 new portfolio companies. Trinity paid a cash dividend of $0.51 per share, representing our 19th consecutive quarter of a consistent or increased dividend. We're proud of our performance in Q3 as our five distinct business verticals continue to fuel our growth and take market share. As a reminder, our verticals are tech lending, equipment finance, life science, warehouse financing, and sponsor finance, which focuses on private equity-backed businesses. Each of our business verticals has its own experienced team to lead origination, credit, and portfolio management functions, giving them the ability to scale efficiently. Our strategic growth initiatives have generated extraordinary momentum, highlighting our commitment to expanding the platform. Trinity Capital is first an alternative asset management company as well as a direct lender. We continue to see efficiencies of scaling our balance sheet at the public company level, and we're now hyper-focused on building out our asset management business to invest in our various business verticals. We're different than externally managed BDCs in that when you buy our stock, you're buying into a pool of diversified assets, yes, but you're also buying into a management company. We are not like externally managed BDCs that are simply a pool of assets. It's also important to note that because we're an internally managed BDC, our employees, management, and Board all own the same shares as our investors. This maintains 100% alignment with our shareholders and a focus on delivering growing returns for our investors. Earlier this year, we expanded into Europe, giving us increased global exposure and better access to an active tech landscape, which in turn allows us to support high-growth companies across multiple continents. We intend to replicate the success that we've had here in the U.S. with our complementary lending businesses in Europe and beyond. Regarding deployment, we maintain a strong investment pipeline, including $660 million in unfunded commitments, leaving us well-positioned for our continued growth. As a reminder, a vast majority of Trinity's unfunded commitments are subject to ongoing diligence and approval by our investment committee. Credit and underwriting, portfolio management are all fundamental to our success over the long-term. We have a unique structure characterized by collaboration between originations, credit, and portfolio teams to manage our inbound opportunities and active portfolio companies. We remain very selective and adhere to a rigorous diligence process. Only a small percentage of inbound deals reach the underwriting stage. This proactive approach greatly mitigates risk and positions 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; two, serving our clients by being partners rather than just money; and three, providing outsized returns for our shareholders. Investing in our teams and systems is key to our growth and enabling us to further diversify our investments to create a best-in-class direct lending platform. We are excited about the future and look forward to continuing to capitalize on our momentum as we continue to maximize value for our shareholders. And with that, I'll turn the call over to Michael Testa, our CFO, to discuss financial results in more detail. Michael?

Michael Testa, CFO

Thank you, Kyle. In the third quarter, we achieved a record total investment income of $61.8 million, resulting in a 33% increase over the same period in 2023. Our effective yield on the portfolio for Q3 was once again an industry-leading 16.1%, and our core yield, which excludes fee income, was strong at 14.9%. Net investment for the third quarter was $29 million or $0.54 per basic share compared to $23 million or $0.58 per basic share in the same period of the prior year. The increase of $6 million or 26% year-over-year net investment income growth is primarily attributable to the continued earnings power of Trinity's growing platform, while the decrease in net investment income per share is mostly attributable to the shares issued over the past year. Our net investment income per share represents 106% coverage of our quarterly distribution. Our estimated undistributed taxable income is approximately $64.5 million or $1.12 per share. We continue to reinvest this capital for the benefit of our investors while maintaining a consistent and meaningful distribution. Our platform continues to generate strong returns for our BDC shareholders with ROAE of 16.2%, based on net investment income over average equity, and ROAA of 7.1%, based on net investment income over average total assets. As of September 30th, 2024, our NAV was $757 million, up from $680 million as of June 30th, 2024. And our corresponding NAV per share was $13.13 at the end of Q3, an increase from $13.12 as of June 30th, 2024. The increase in net assets per share was primarily due to net investment income exceeding a dividend and an accretive ATM offering, partially offset by portfolio activity and new RSA issuance in September. During the quarter, we continued to strengthen our balance sheet and enhance liquidity through a variety of capital markets activities. We expanded our ATM program, and in Q3, we raised $80 million in gross proceeds at an accretive premium to our NAV to fund our ongoing portfolio growth. We further upsized our credit facility to $510 million in total commitments, which is diversified across a total of 13 banks. We raised $115 million through the issuance of investment-grade unsecured notes maturing in 2029, and these notes are callable after two years and trade on our ticker, TRIN. Subsequent to the end of the quarter, we further enhanced our liquidity position by raising $142.5 million of unsecured private placement notes with maturities ranging from 2027 to 2029. Our reliance on unsecured debt continues to be at a conservative level and adjusted for the recent private placement issuance is under 30%. We also continue to realize the benefits of a co-investment in joint venture vehicles under the RIA subsidiary, which in Q3 provided approximately $1.6 million or $0.03 per share of incremental income to the BDC. During Q3, we syndicated $41 million to these vehicles. As of September 30, 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. Our net leverage ratio, which represents principal debt outstanding less cash on hand, was 1.2 times as of September 30, 2024. Our strong liquidity position with diverse capital sources, both from capital raised by the BDC and through our wholly owned RIA subsidiary, provides 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, Gerry Harder, to discuss our portfolio performance and platform in more detail. Gerry?

Gerry Harder, COO

Thank you, Michael. Since our last earnings call, Trinity has continued to focus on executing across our five business verticals, which strengthen and diversify our platform while enhancing our ability to offer customized financing solutions to our evolving client base of growth-oriented companies. We remain dedicated to supporting companies at every stage of their growth journey. At the end of the third quarter, on a cost basis, our total portfolio consisted of approximately 76% secured loans, 18% equipment financing, 4% equity, and 2% warrants. The composition of our portfolio remained consistent with prior quarters, providing diversification across investment type, transaction size, industry, and geography. Our portfolio is segmented across 22 industry categories, with our largest industry exposure, finance and insurance, representing 18.1% of the portfolio at cost. This exposure is spread across 15 borrowers and includes both term loans and asset-backed warehouse facilities. Our next largest industry concentrations are medical devices and space technology, representing 11.4% and 9.8% of the portfolio at cost, respectively. Life science-related industries collectively made up 26.3% of our total portfolio on a cost basis. Among our five business verticals, the detailed breakdown of our fundings in Q3 was as follows: 39.8% to tech lending, 29.4% to Life Sciences, 15.7% to warehouse financing, 9.1% to equipment financing, and 5.4% to sponsor finance. As of the end of Q3, our largest debt financing is to Solaris Corporation, which represents 3% of our debt portfolio and 2.8% of our total portfolio on a cost basis. Our 10 largest debt investments collectively represent 22.4% of our total portfolio on a cost basis. Now, turning our focus to credit. The credit quality of our portfolio improved quarter-over-quarter with approximately 98.6% of our portfolio performing on a fair value basis. Our average internal credit rating for the third quarter stood at 2.9% based on our 1 to 5 rating system, with 5 indicating very strong performance. This rating is an increase from the average credit rating in each of the last four quarters and is attributable to a combination of credit upgrades to existing portfolio companies, as well as strong originations of new credits within the third quarter. As a percentage of the debt portfolio on a cost basis, credits within the lowest two tiers remain virtually unchanged from Q2. Quarter-over-quarter, while the number of portfolio companies on nonaccrual increased from four to five, our nonaccrual credits decreased on both a cost and fair value basis. Our portfolio company, Nexi, was removed from nonaccrual as the transaction was fully realized in Q3 and a very slight decrease versus our Q2 net asset value. Two smaller credits, Sun Basket and Form Logic, were placed on nonaccrual within the quarter. At the end of Q3, our nonaccrual credits had a total fair value of approximately $22.2 million, representing 1.4% of the total debt portfolio, a slight decrease from Q2. At quarter end, 80% of our total principal outstanding was backed by first position liens on enterprise equipment or both. For our financings covered by all asset liens, the weighted average loan-to-value sits at 22.1%, while over two-thirds of these companies have a loan-to-value of less than 15%. These statistics demonstrate that our portfolio companies are generally not over-leveraged and are in a healthy position to service the debt even in instances when our loan may not be in the first position. Year-to-date through September 30, our portfolio companies have collectively raised $2.9 billion of equity, already surpassing the total amount of portfolio raised in all of 2023. Thirty-two of Trinity's portfolio companies raised equity in Q3 versus twenty-six in Q2 and twenty-two in Q1. These encouraging statistics speak to our portfolio's quality and ability to secure funding in an evolving market. In closing, we want to emphasize that our credit quality and portfolio management are of the utmost importance to Trinity. One of Trinity's hallmarks is that our staff members think and operate like shareholders, and we always strive for resolutions that benefit both our investors and our partners. At this time, we'd like to open the line for questions. Operator?

Operator, Operator

Thank you. We'll hear first today from Casey Alexander at Compass Point.

Casey Alexander, Analyst

Good afternoon. I guess it's still morning here, so good morning and thank you for taking my question. I think this is a sort of a multipart question, but it's an extraordinary amount of originations during the quarter. Investors have sort of been trained to be somewhat wary of growth that comes at that kind of pace. So I'm curious, how you feel about growing at that kind of pace and still making sure that credit quality stays really pristine? You did have a couple of new non-accruals this quarter. One of them, which is an equipment finance company. I think it's something that investors are always going to keep an eye on when you're growing at that pace, and would really like to hear from you how you intend to keep that credit quality pristine when you're growing at such a rapid pace.

Gerry Harder, COO

Hey, Casey, good to talk this morning. This is Gerry. I'll start out with that one on the multipart. We are aware of that sentiment from investors, that wariness. But the way we think about it is the diversification across our business verticals. We have extremely experienced individuals who are focusing on these verticals, both leading the vertical market and also leading the credit within the vertical markets. We built Trinity intentionally to scale, and our credit quality is going to show itself over time as it has throughout our track record. So we very much want our investors to believe that we've built this to scale, and we're going to show folks that we have.

Casey Alexander, Analyst

All right. My next question relates to that. Because of the large amount of originations that you had in this quarter, you also sold a considerable amount of stock to the equity ATM program. It actually increased shares outstanding by more than 10% quarter-over-quarter. If you think about that, it seems like an amount that might be more appropriate for a syndicated stock offering as opposed to being out in the market every day with an ATM program of that size. How do you balance the scales of where you raise equity and the manner in which you raise equity relative to that rate of growth?

Kyle Brown, CEO

Yes. Casey, this is Kyle. We're being opportunistic, raising both equity and debt. We're looking at the opportunities in front of us and taking advantage of them. This is a really efficient way to raise equity. We're doing it on balance sheet at the public company level. We're doing it off balance sheets onto the RIA. We're doing it in a way that's accretive to investors. So we'll continue to deploy capital if the opportunity is there. We'll continue to raise equity and debt when the opportunity is there, and we're going to do it in the most efficient manner, in a way that's good for investors, which I think we've shown.

Casey Alexander, Analyst

I'm not sure that entirely answers my question. Because the question was how do you balance between an ATM versus a syndicated equity offering, knowing that that when you're raising equity to the extent, being out in the market every day has some impact on the valuation of the stock?

Kyle Brown, CEO

You talk about doing an overnight opposed to an ATM, Casey?

Casey Alexander, Analyst

Correct. Correct.

Kyle Brown, CEO

Yes. I mean we've done a fair bit of that. I mean we're doing it for five years now. And I guess, every time we do an ATM, we do an overnight, the stock has been affected in a big way. That's probably affected shareholders in a more negative way. And it's more costly. I mean we use the ATM, it's 1% fee. 4% to raise equity. We do it overnight. It's at a cost of 6% to 8%. So if we can access the ATM, it costs a lot less, saves money for shareholders.

Casey Alexander, Analyst

All right. Thank you for taking my questions.

Kyle Brown, CEO

Thank you.

Operator, Operator

Our next question comes from Christopher Nolan at Ladenburg Tallman. Go ahead, please.