Trinity Capital Inc. (NASDAQ:TRIN) Q1 2024 Earnings Call Transcript May 1, 2024
Trinity Capital Inc. misses on earnings expectations. Reported EPS is $0.52 EPS, expectations were $0.55. Trinity Capital Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital’s First Quarter 2024 Earnings Conference Call. This call is being recorded and will be available for replay beginning at approximately 3 p.m. Eastern Time. The replay dial number is 1-800-839-2389, and no conference ID is required for access. [Operator Instructions] 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: Thank you, Jamie, and welcome to Trinity Capital’s earnings conference call for the first quarter 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, May 1, 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: Thank you, Ben. Thanks, everyone, for joining us today. First quarter was a strong start to the year for Trinity. We remain opportunistic in the current market by investing in our platform as we continue to scale and deliver value to our shareholders. Notable highlights during the quarter include $243 million of gross fundings across 8 new portfolio companies and 12 existing portfolio companies. Platform AUM growth of 38% year-over-year, pushing our assets under management to $1.6 billion. Record net investment income of $25.2 million, a 30% increase versus Q1 of last year and return of equity of 16.1%. Our performance allowed us to increase our quarterly dividend to $0.51 per share in the first quarter, making this the 13th consecutive quarter we’ve increased our dividend.
Credit underwriting and portfolio management continue to remain fundamental to our success. We maintain regular standards and origination diligence and portfolio management to position us to effectively navigate a dynamic market. Our team of nearly 80 professionals is the cornerstone of Trinity’s track record and is a key to our trajectory going forward. We’re committed to creating a unique culture here of excellence that is built around 6 pillars: humility, integrity, trust, uncommon care, continuous learning and an entrepreneurial spirit, all of which creates a differentiated lending platform that we built here at Trinity. We strive to provide value above and beyond expectations to every part of the Trinity platform, whether that’s employees, clients or investors.
And as an internally managed BDC, our employees and management own the same shares as our investors. Shareholders own a pool of assets as well as a management company, which maximizes returns and maintain strong alignment of interest with our shareholders. Our commitment to expanding the platform is highlighted by our investments in strategic growth initiatives across the platform. In the first quarter, Trinity solidified its position as a diversified lender by further growing our 4 distinct business verticals, equipment financing, life sciences, warehouse lending and tech lending, each with their originations, their own originations, credit and portfolio management teams. Our exceptional relationships with portfolio companies and industry partners have also been pivotal in achieving our strong performance.
In the first quarter, an aggregate of $1.2 billion of equity was raised by 21 of our portfolio companies, demonstrating that our portfolio companies are able to secure the funding may seek. We ended the quarter with a strong investment pipeline, including $405 million of unfunded commitments, leaving us well positioned for continued growth in 2024. As a reminder, all of Trinity’s unfunded commitments are subject to ongoing diligence and approval by our investment committee. Turning to the macro environment. Activity is picking up in the bench capital and private equity worlds. Exceptional levels of dry powder remain in BDCs and nonbank lenders continue to be vehicles of choice for sponsor-backed companies. With this high demand for capital, we maintain our selective approach with new opportunities.
As a direct lender, we own our pipeline and have originators strategically located in major markets around the country to further build deep relationships with sponsors, banks and operators. We pride ourselves on 3 core principles here at Trinity, exhibiting uncommon care for our employees and our partners. Serving our clients by being partners rather than just money and providing outsized returns for our shareholders. We’re bullish about the future. We plan to continue to invest in our teams and systems, diversifying our investments to mold a best-in-class direct lending platform. We’re just getting started. We look forward to extending this momentum in the quarters to come as we continue to grow and 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.
Mike?
Michael Testa : Thank you, Kyle. In Q1, we achieved record total investment income of $50.5 million, a 21.5% increase over the same period in 2023. Our effective yield on the portfolio for Q1 was once again strong at 15.8%. Our core yield, which excludes fee and prepayment income was 18.3%, mostly consistent with the prior quarter. Net investment income for the first quarter was $25.2 million or $0.54 per basic share, an increase of 30% compared to $19.3 million or $0.55 per basic share in the same period of the prior year. Our net investment income represents 106% coverage of our quarterly distribution, and our undistributed income is approximately $55 million or $1.33 per share. Our platform continues to generate strong returns for our shareholders with ROAE based on net investment income over average equity 16.1%, and ROAA based on net investment income over average assets of 7.5%.
As of March 31, 2024, our NAV was $626 million, which increased from $611 million as of December 31, 2023. Our corresponding NAV per share was $12.88 per share at the end of Q1, which decreased from $13.19 per share as of December 31, 2023. The decrease in NAV per share this quarter was primarily attributable to issuance of restricted stock award that enable us to continue to grow our platform as well as net unrealized depreciation that Gerry will discuss in more detail later in the call. Under our ATM program in Q1, we raised approximately $24.3 million in proceeds, all at an accretive premium to NAV to fund our ongoing portfolio growth. As of March 31, 2024, we had total liquidity of $172 million, comprised of $160 million of undrawn capacity under our credit facility and $12 million in unrestricted cash and cash flow.
We continue to realize the benefits of our co-investment joint venture, which in Q1 provided $1.3 million or $0.03 per share of interest, dividend and fee income to the BDC. During the quarter, the joint venture also expanded its revolving credit facility. And as of March 31, 2024, have more than $200 million of assets under management. This off-balance sheet vehicle provides incremental capital for growth and accretive returns to our shareholders. At the end of the quarter, we raised $115 million of unsecured notes that mature in 2029, further enhancing our balance sheet and liquidity position and extending our maturity ladder. We believe our current debt funding mix, which is currently 74% unsecured debt, is appropriate, and we remain consistent with managing the right side of the balance sheet.
We intend to repay $30 million over $225 million in May. Our weighted average cost of debt was in line with prior quarter at 7.4%, and we continue to benefit from low fixed rate debt having access to unsecured market during a period of lower interest rate. Our net leverage ratio, which represents principal debt outstanding less cash on hand, was 1.16x as of March 31, both our strong liquidity position and the fact they were operating within our targeted leverage range 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: Thank you, Michael. At the end of Q1, on a cost basis, our total portfolio consisted of 74.3% secured loans, 19.7% equipment financing, 3.7% equity and 2.3% 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 13.3% of the portfolio at cost. Growth in this industry sector was driven by investments in three new portfolio companies in the quarter. Our next largest industry concentrations or green technology and space technology, representing 10.5% and 8.7% of the portfolio at cost, respectively.
Life sciences related industries, including health care tech, medical devices, biotechnology and diagnostics and tools collectively made up 18.2% of our total portfolio on a cost basis. As of the end of Q1, our largest debt financing is to Rocket Lab, USA, Inc. and represents 3.9% of our debt portfolio and 3.6% of our total portfolio on a cost basis. Our 10 largest debt investments collectively represent 25.8% of our total portfolio on a cost basis. Moving on to credit. The credit quality of our portfolio companies remained stable with approximately 97.6% of our portfolio performing on a fair value basis. Our average internal credit rating for the first quarter stood at 2.7% based on our 1:5 rating system with 5 indicating very strong performance.
This rating is in line with our average credit rating in each of the last 4 quarters and reinforces Trinity’s track record of low loss rates. The total number of credits in our lowest two credit tiers did not change from Q4 to Q1, but was reduced on both a cost and a fair value basis. Quarter-over-quarter, we remain consistent with 5 portfolio companies on nonaccrual. Core Scientific was removed from nonaccrual in Q1 following its emergence from bankruptcy and our election to receive shares of its common stock in lieu of our debt investment. However, one additional credit was added to nonaccrual status. As Michael mentioned earlier in his prepared remarks, our decrease in net asset value per share in Q1 was a function of expenses related to growth of the platform as well as unrealized depreciation in the portfolio.
Out of approximately $12 million in unrealized depreciation within the portfolio, approximately $9 million is due to the single credit mentioned above. Additionally, approximately $5 million of unrealized depreciation was due to a decrease in the publicly traded share price for our common shareholdings in Core Scientific. Outside of these 2 positions, the fair value of the balance of our debt and equity portfolio was slightly up for the quarter. At the end of Q1, our nonaccrual credits had a total fair value of approximately $30.4 million, representing 2.4% of the total debt portfolio. At quarter end, 75% of our total principal outstanding was backed by first position leans on enterprise equipment or both. The weighted average loan-to-value of our entire portfolio sits at just under 19%, demonstrating that our portfolio companies are generally not over levered and are in a healthy position to service the debt, even if our loan is not in first position.
In closing, I’d like to remind our investors that our team has made up of dozens of veteran investment professionals who are solely focused on portfolio management and asset quality. They continue to take a vigilant approach to the overall health of our portfolio companies. And when necessary, work tirelessly to find resolutions that benefit both the portfolio company and Trinity shareholders. At this time, we’d like to open the question — open the line for questions. Operator?
Operator: [Operator Instructions] We’ll take our first question from Bryce Rowe with B. Riley.
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