Trinity Capital Inc (TRIN) 2023 Q4 法說會逐字稿

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 fourth-quarter and full-year 2023 earnings conference call.

Our host for today are Kyle Brown, Chief Executive Officer; Michael Testa, Chief Financial Officer; Gerry Harder, Chief Operating Officer; and Ben Malcolmson, Head of Investor Relations. Ron Kundich, Chief Credit Officer; and Sarah Stanton, Chief Compliance Officer and General Counsel, are also present.

This call is being recorded and will be available for replay beginning at approximately 3:00 PM Eastern. The replay dial-in number is 800-839-7414 and no conference ID is required for access.

(Operator Instructions) It is now my pleasure to turn the call over to Trinity Capital's Head of Investor Relations, Ben Malcolmson. Please go ahead.

Thank you, Jamie, and welcome to Trinity Capital's earnings conference call for the fourth quarter and full year 2023. Trinity's financial results were released today prior to the open of the financial markets 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, March 6, 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.

Thanks, Ben. Thank you, everyone, for joining us today. Trinity's delivered record fourth quarter results to round out a tremendous year for our platform. In 2023, we advanced our strategy, significantly grew the platform, strengthened our balance sheet, diversified our portfolio, and enhanced multiple revenue streams, also the long-term benefit of our shareholders.

Most notably, we outperformed across multiple operating metrics, setting several financial and performance records throughout the efforts of our incredibly talented team. Headline accomplishments include record quarterly fundings of $267 million in Q4, contributing to a record year with $642 million of total fundings in 2023; platform AUM growth of 29% year over year, pushing our assets under management to approximately $1.5 billion; and a record $90 million of net investment income, up 26% year over year. This exceptional performance allowed us to increase our quarterly dividend to $0.50 per share in the fourth quarter, making this the 12th consecutive quarter we increased our regular dividend.

In the face of industry-wide pressure from disruption in the banking industry in 2023, we emphasized our proactive portfolio management strategies and partnered with borrowers to navigate a challenging operating environment while continuing to grow our assets under management.

Additionally, we continued to invest in our platform by growing our team, scaling the strategy, which we believe widens our funnel as we pursue attractive investment opportunities across the ecosystem of growth-oriented companies. We've organized our business around distinct vertical market opportunities: tech lending, life sciences, equipment financing, and warehouse lending, each with its own dedicated originations, credit, and portfolio management teams.

The performance of our life sciences vertical provides an excellent example of Trinity's commitment to scale and asset diversification. We launched this business vertical in 2022. And since that time, we've opened a satellite office in the location of San Diego and hired best-in-class talent to expand our deal teams.

As of December 31, 2023, our life sciences portfolio sits at approximately $183 million on a cost basis and represents nearly 14% of our total portfolio. Within our tech lending vertical, we continue to grow our footprint by adding proven experienced talent to our deal teams. In 2023, we expanded our East Coast presence with the appointments of three new originators in New York and Boston, giving us a regional footprint in several major tech markets. We also began to realize the benefits of our direct lending joint venture in 2023.

As we've mentioned in prior earnings calls, this off-balance sheet vehicle provides incremental capital for growth and accretive returns to our shareholders. In Q4 2023, the joint venture provided approximately $1.1 million of interest, dividend, and fee income to the BDC and had $153.4 million of assets at fair value as of December 31, 2023.

We ended 2023 with a strong investment pipeline, including $358 million in unfunded commitments. But as a reminder, many of our unfunded commitments are subject to performance milestones, and all of Trinity's unfunded term loan and equipment financing commitments are subject to ongoing diligence and approval by our investment committee.

We will remain very selective and committed to adhering to our disciplined deal selection and credit underwriting process. And as a result, we're seeing larger and more mature businesses enter the pipeline. This is great momentum as we head into 2024.

As we said before, our team is the cornerstone of Trinity's success and will be the key to our growth moving forward. We are committed to creating a unique culture of excellence that is built around our six pillars of humility, integrity, trust, uncommon care, continuous learning, and entrepreneurialism, all of which create the 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 structure allows us to maintain 100% alignment with our shareholders' best interests. Another key factor is that as a direct lender, we continue to own our pipeline with originators strategically located around the country to bring in opportunities through deep relationships with sponsors, banks, and operators. For Trinity, the commitment to our portfolio companies and the relationships we've developed as a result allows us to invest in a wide array of opportunities supported by quality sponsors.

In 2023, an aggregate of nearly $3 billion was raised by 45 of our portfolio companies. Our high-quality portfolio companies continue to secure the funding they seek, and Trinity continues to be a less dilutive source of growth capital for them. We focus on doing three things exceptionally well here at Trinity, exhibiting uncommon care for our employees and partners, being more than just money for our clients, and providing outsized returns for our investors.

We expect 2024 to be a strong one for sponsor-backed growth-oriented companies, providing us with the opportunity to continue to expand this platform. We look forward to continuing this trajectory into 2024 and in the years to come.

And with that, I'll turn the call over to Michael Testa, our CFO. Mike?

Thank you, Kyle, and welcome to everybody joining us today. As Kyle mentioned, we set records in several key areas in 2023.

In Q4, we achieved record total investment income of $48 million, a 15% increase over the same period in 2022. Total investment income for 2023 was $182 million, a 25% increase over 2022.

Our core yield on the portfolio for Q4 was once again strong at 16.7%. Our core yield, which excludes non-reoccurring fee income, was 15.2%, down slightly from 15.5% core yield in the prior quarter.

Net investment income for the quarter was a record $25.1 million or $0.57 per basic share, an increase of 16% compared to $21.6 million or $0.62 per basic share in the same period of the prior year. Our net investment income represents 114% coverage of our quarterly distribution.

Having out earned our regular and supplement supplemental distributions throughout 2023, we ended the year with more than $64 million of undistributed income or approximately $1.39 per share. Our platform continues to generate strong returns for our shareholders with ROAE based on net investment income over average equity of 16.9% and ROAA based on NII over average total assets of 8.3%, all while operating with leverage at the low end of our target range.

As of December 31, 2023, net asset value increased 7% to $611 million and NAV per share increased by $13.19 per share, up $0.02 from Q3. Year over year, NAV per share increased $0.04 from $13.15 per share. This increase in NAV was primarily the result of record net investment income, exceeding the company's declared dividends and accretive equity offering.

Moving to liquidity, as of December 31, 2023, we had total liquidity of $142 million comprised of $137 million of undrawn capacity under our credit facility and approximately $5 million in unrestricted cash and cash equivalents. Additionally, we have continued to co-invest with our joint venture, which provides additional investment liquidity, and as of December 31, had approximately $100 million of uncalled capital and availability on the JV's credit facility.

Our net leverage ratio, which represents principal debt outstanding was cash on hand was 1.05 times as of December 31, 2023. Our strong liquidity position and the fact that we're currently at the lower end of our targeted leverage range provides Trinity with the flexibility to manage a strong pipeline and be opportunistic in the marketplace.

During the quarter, we expanded our ATM program and added another sales agent. In Q4, we raised approximately $46 million in proceeds at a premium to NAV, further supporting the long-term growth of Trinity.

I'll now turn the call over to our COO, Gerry Harder, to discuss our portfolio performance and platform in more detail. Gerry?

Thank you, Michael. Trinity Capital experienced tremendous growth in 2023. As we continued to scale and diversify our platform in 2024 and beyond, we're hyper-focused on maintaining our disciplined and systematic investment approach as well as the culture and core values that have been the driving forces for our success and which differentiate Trinity from its peers.

The composition of our portfolio remained consistent with prior quarters and shows diversification across investment type, transaction size, industry, and geography. We've intentionally constructed a portfolio with varied segmentation across 21 industries, with our largest interest industry exposure space technology, representing 14.1% of the portfolio at cost.

As mentioned earlier, our life sciences portfolio represented a total of 14% of our portfolio at cost and was further comprised of a mix of medical devices, healthcare technology, and biotechnology with minimal regulatory exposure.

Equipment financing represented 25.5% of our year-end portfolio on a cost basis. I'd like to address one investment in our equipment finance vertical. We recently announced the commitment of $120 million in aggregate equipment financing to Rocket Lab, the leading provider of space launch services and advanced satellite technology. This deal closed just prior to yearend and shows on our year end scheduled investments for the cost and fair value of $108.4 million for the equipment financing.

However, subsequent to yearend and in addition to three scheduled amortization payments, the Company repaid approximately $40 million of principal. Additionally, we syndicated a portion of the remaining principal to our joint venture, bringing our investment in Rocket Lab to approximately 4.5% of our debt portfolio on a cost basis.

During Q4, early debt repayments were in line with our historical average totaling $43 million including an early payoff of our digital asset equipment financing to Hut 8 following the completion of their merger. We also received $41 million in scheduled repayments and $25 million of proceeds from sales to our joint venture.

Shifting gears to credit, the credit quality of our portfolio companies remained stable with approximately 96.5% of our portfolio performing on a fair value basis. Our average internal credit rating for the fourth quarter stood at 2.7 based on our 1 to 5 rating system with 5 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.

AT year end, we had five portfolio companies on nonaccrual with a total fair value of approximately $43.2 million, representing 3.5% of the total debt portfolio. However, this figure includes our investment in core scientific at a cost and fair value of $23.2 million and $25.4 million, respectively. Subsequent to yearend, we removed our investment in core scientific from nonaccrual status after its January 2024, exit from Chapter 11 bankruptcy and our election to receive shares of its common stock in lieu of our debt investments.

As we have communicated in the past in general, we are not equity investors and would anticipate making an orderly sale of our equity position for the benefit of our shareholders. Outside of core scientific, our other four nonaccrual assets represented only 1.5% of our debt portfolio on a fair value basis. We have a dedicated team of investment professionals who are solely focused on portfolio management and asset quality. And they continue to take a vigilant approach to the quality and overall health of our portfolio companies. We remain confident in their ability to find resolutions that benefit both the portfolio company and our shareholders.

At this time, we'd like to open the line for questions. Operator?

(Operator Instructions) Vilas Abraham, UBS.

Hey, everyone. Thanks for taking the question. For my first one, I just wanted to ask about capital management. You relevered the balance sheet in Q4, but also tapped the ATM for equity issuance. So as you think about supporting growth in '24, which clearly looks like there's an opportunity to do, how do you expect to balance the two? And is that leverage target range still the [1.1 to 1.3] that you've talked about before?

Hey, Vilas. This is Kyle. So we expect that leverage ratio to be between 1 and 1.3. I think some of the benefits that we are beginning to experience and will experience further in the future as managing capital off balance sheet, generating new income gives us the ability to really keep that leverage maybe even lower than some of the expectations or some of our history giving us really ample liquidity to be opportunistic with what the market presents.

And so I think that, you know, we're going to continue to build balance sheet. We're going to continue to add in equity and leverage appropriately. As you've seen, though, we make sure we do that to the benefit of shareholders so that we can continue to increase that dividend and out earn it. So that certainly plays into every discussion or thought around building the balance sheet.

The only thing I'd add to that is also we don't have any immediate maturities on our borrowings, but we will look to refinance opportunistically throughout 2024 on the debt side.

Okay. Got it. That's helpful. And just on the JV portfolio, so it's up about $25 million to $30 million or so per quarter. The last couple of quarters, around $150 million now, I believe. Is that the pace that we should continue to expect as we try to get to, I think, closer to that $500 million in capacity for that portfolio?

Yes, I think you'll continue to see that be consistent adding new assets. And I think the general theme of having assets off balance sheet and co-investing alongside of the BDC, that will just be a regular thing on an ongoing basis, whether it's a JV or a separate entity or separate entities.

Christopher Nolan, Ladenburg Thalmann.

Hey, guys. What was the driver for the higher fee income in the quarter?

Yes, it's a combination -- it's Mike Testa here. It's a combination of some of the fees from early repayments that came in the quarter. We noted Hut 8 and we had another nice repayment on a physician that was funded one or two years ago. So we got nice repayment on that.

But also with our equipment financing in the quarter, we get the benefit of some of the upfront structuring fees that come in at that quarter. So you could see in our fundings this quarter skewed to the equipment financing vertical and that those fees being recognized in Q4.

Great. And then I guess turning to Rocket Lab, space tends to be a very expensive business? And should we see more activity on the space front and for also big funding commitments like that?

Yeah, I think, Chris, I'd start that discussion with just our equipment finance vertical in general, right? As we've discussed in the past and in other prepared remarks, we're looking for mission critical equipment for growth-stage businesses with strong investor capitalization support and unique technology, et cetera. So I think space definitely fits within that equipment vertical target. And so to that extent, it's an exciting space for us. But we're really focused more on the equipment than any one industry, if that makes sense.

And I guess a final question. Some of your technology BDC peers are seeing slower deal flow just from the slowdown in the venture sector. You guys don't seem to be experiencing that. Is it fair to say? And who would you consider your biggest competitors are in the equipment financing area?

Hey, Chris. This is Kyle. So I think one of the benefits we have is having these multiple verticals, which really are not all influenced by venture, right? So equipment financing, that is a very different and differentiated business. There's similarities there, but those are not all venture backed. They could be PE backed. They can be small market, public companies, et cetera.

Our life science and healthcare business with us focusing primarily on commercialized products scaling rapidly kind of post-FDA approval primarily. It's just a different market altogether. And then so, I think we're just -- we're playing in different boxes than many of our peers. The venture debt business, I would say, last year was a little bit more challenging and we have seen a lot of tailwinds really over the last couple of quarters there though.

On the equipment financing angle, there's really not notable groups to mention there. It's pretty discombobulated just smaller peers, nonpublic type peers. And so I would -- there's not even a single group I would point out that I say we compete directly with. I think we're one of the best in class for VC and PE backed growth stage companies on the equipment side.

Sorry, that's a non-answer. There's not notable groups I'd mention there.

Paul Johnson, KBW.

Yeah, good afternoon, guys. Just one more on Rocket Lab, just to make sure I heard correctly, it sounded like there was pretty big pay down, $48 million or so post quarter. I'm just curious why the sudden repayment on the loan, was that expected? And is there any sort of fee income associated with that prepayment?

So yeah, I mean, subsequent to the funding, the company raised a significant amount of capital over $300 million of new equity in convertible note and subsequently paid us down a bit. Was the other part of that question?

Yes, and do we recognize the fee income?

So this was, you know, somewhat scripted. Fault in that, you know, there was a timing issue, the company's need to refinance their prior facility and the timing of the Trinity facility and the timing of their additional capital. So we satisfy that need as of yearend, and they repaid us $40 million shortly after the first of the year as we expected.

Got it. Thanks. That makes sense. And then, Chris asked a little bit, but I'll ask again maybe in a different way, but 15% or so of the portfolio is in space technology. That may be a little bit lower post quarter with that Rocket Lab's paydown. But obviously, it's a meaningful exposure within the portfolio. I'm just kind of maybe curious to get your thoughts on, I guess, the opportunity that you think that you see there. And that's all.

Sure. So the exposure itself, we could really break it down and show you how granular really even within that one industry our exposure is. So we're financing equipment, right? So we're really focused on companies that are raising significant amount of capital and equity capital. We trail those equity investors and we find mission critical pieces of equipment. And that's typically -- these are non-specialized pieces of equipment. They have a use case outside of the company, outside of the industry. And we're financing that mission critical equipment and providing an advance against it. That's lower than the value of that equipment, generally.

So even within the space industry, that's going to be a lot of different pieces of off-the-shelf type equipment, manufacturing equipment, et cetera, and pretty diversified even there. And so the exposure to that one industry is really just because there's a significant amount of equity flowing to that particular industry. That particular industry has significant CapEx needs and requirements which we are able to go in and finance.

We're seeing that with infrastructure type companies as well. And so you'll probably continue to see that, that market and industry expanding for us because there's a lot of equipment needs there as well. So we don't really think about it. We showed as the industry and exposure to that industry. But within it, you're talking about a lot of different pieces of mission critical equipment that have real value, whether or not it was with the company or not.

Got it. Thanks for that. And last one for me. The core scientific shares, do you guys -- are you guys subject to any kind of lockup or restriction period with those shares?

This is Kyle again. We ended Q4 with 5.64 million shares. We are not subject to any hold and we're going to liquidate those shares in a timely manner. That makes sense to maximize shareholder value.

(Operator Instructions) Bryce Rowe, B. Riley.

Thanks. I guess, good afternoon from the East Coast. I wanted to maybe start on a comment you made, Kyle. You said you're putting larger, more mature companies or they're entering your investment pipeline. And I think we've seen obviously the space deal, equipment finance deal, and then another deal here recently that was a little bit larger than what we might see from you all typically. Can you talk a little bit about that process of larger, more mature companies entering the pipeline and what it might mean from a, I guess, from a growth perspective, both on balance sheet and off balance sheet?

Yeah. So I think we really started to see last year, Q1, Q2 a pretty significant increase to top of funnel. We also in that same vein, we also really tightened up the bottom of the funnel and the requirements for deals to get across the finish line for funding. So the percentage of deals that come in the top and then we fund has actually decreased across the board.

But what we've seen are more mature companies that are and probably were capable of getting all of their needs satisfied from a bank are now looking for alternative solutions. And we really are positioned well there with permanent source of capital, the ability to make commitments, follow through on those commitments. And so we're positioned really well to provide capital to those companies.

So top of the funnel significantly increased quality of deals. Now certainly, there's some quality of deals that's less attractive that we're filtering out as well. But we are also seeing a lot of really mature companies further down the road. Average deal size increased 20% last year for us. So it reflects.

We also saw significantly more first lien and majority of our portfolio is first lien, but we are seeing a less kind of second lien type opportunities, which just shows you companies are looking for a different type of solution, an alternative type solution to the banks. So we feel good about where we're positioned there. Pipeline is robust. And we're being proactive and we're being opportunistic on what we fund.

Yeah, I would add that we do remain committed to our portfolio granularity. It's something you'd hear us talk a lot about quarter on quarter, right? And that we want to be very granular across industry and across financing size among other things. And so that's why we felt it was important to clarify the position on Rocket Lab, right, to really reassure our investors that we are committed to that level of granularity.

Yeah, the off-balance sheet vehicles will continue to give us the ability to, yes, grow check size, of course. But a lot of that's just making sure we're the incumbent lender. When our companies do really well, we want to keep them. We don't want to lose them to somebody else who want the ability to fund them and keep funding them into the future and continue to help the companies grow. And so I think you'll see our off-balance sheet vehicles give us the ability to do that. And then also enter -- like this, enter into new transactions that are higher price point, while not risking in putting too much capital into any one deal or trend.

That's helpful. And maybe a related question. I would imagine with the funding profile, you record fundings here in '23, sounds like your pipeline is really strong. There was some question about kind of liquidity and how you think about your liquidity at this point. But maybe give us an idea of how you're thinking about funding? And I mean, obviously, you have the ATM that's up and running and available with a premium price to NAV. But just kind of curious how you think about the debt side of the equation, whether it be the secured facility, expanding that or trying to get more active with the unsecured notes in the market? Thanks.

Yes. I mean, listen, it's going to be a combination of all those things, right? On the debt side, we're making sure that we've got unsecured and secured financing. We're making sure it's tuned out. We are making sure that we raise equity most efficiently. We have really ample liquidity right now on and off balance sheet. As we've indicated, we are raising additional capital off balance sheet to even bolster that liquidity further. We're charging management fees and incentive fees on that capital, which will -- 100% of that is owned by our shareholders and trend.

So we have and we're creating as many options as possible to give ourselves liquidity, to put ourselves in a position to be opportunistic and grow this platform in a way that's beneficial for our shareholders. We're really focused on that.

Vilas Abraham, UBS.

Thanks for the follow-up. I'm just wanted to ask if there were any updates on timing specifically on the RIA side of things that you're able to share?

We can't give you timing on exactly how the capital is going to be rolled out, how much of it and when. Our expectation and guidance has been that we'll start deploying in Q2. And that hasn't changed.

Okay. And then just maybe one last bigger-picture question. You mentioned life sciences, 14% of the book as of 12/31. Just how are you thinking about that particular vertical bool longer term, I guess, the attractiveness of deploying there now and just longer-term the concentration that could get to? and yes, just any color there would be helpful.

That's great. We are really excited about our life science and health care business. We see incredible opportunities to grow there. We're seeing significant equity dollars flow back into that industry.

If you think about big picture, what we're doing here and I mentioned different verticals, we really want to see these very, very complementary verticals continue to grow. From an asset management standpoint, we're really able to diversify our assets so that we're not -- a bank goes out of business or there's volatility in one sector, it's not going to have a massive impact on our overall business.

And so we're really focused on diversifying into these different verticals and growing each of them respectively. And so you continue seeing life science build. You'll see some of that exposure overall percentage probably grow as we build that business. And you'll see further diversification across the platform into these complementary verticals.

Casey Alexander, Compass Point.

Hi, good afternoon. You mentioned that second lien is shrinking part of your portfolio, but still 23% of your portfolio, if I read the release right, which is still one of the higher amounts in the venture debt space. I'm curious how that splits between secured lending and equipment finance. And what's the typical kind of structure that has you, end up in a second-lien position and makes you feel comfortable there?

Yeah. Gerry and I will just ping-pong on this one a little bit. So Casey, the way we think about second-lien deals, these are going to be some of our stronger transactions. None of those are equipment financings. Those are all secured loans, term loans. They are all on the tech lending vertical.

And typically, that's just partnering with the bank there. They may be providing receivable financing and the overall cost of capital, it's lower. It provides more runway for the company, and we are typically going into those because they're just very strong deals where bank is willing and able some of the capital.

And so we generally go into those deals with the mindset that we're willing to do the whole thing. And if it came down to it, we can pay off the bank. That's just our -- that's how we look at it. But having a bank in there, partnering with the bank, and providing a lower cost to capital is just overall better for the company. And so it's a way that we partner and do business with the banks. And it's also a way to benefit the company by extending the runway further.

Do you have the right to buy the bank out of their position?

Generally, we do. And I would say working relationships with the bank is such that even if that was not explicitly in the docs, I would expect that to be an option that they would gladly take up. But typically, that is included in our docs.

And that will conclude today's question-and-answer session. At this time, I'd like to turn the call back over to Kyle Brown, Chief Executive Officer, for any closing or additional remarks.

Thanks, Jamie. We're proud of our 2023 results and feel like we've laid the groundwork over the last 18 months to scale this business in a unique and profitable way for investors.

And lastly, our management team will be in New York and Boston later this month, and we look forward to meeting with any investors and key stakeholders. Please don't hesitate to reach out to Ben this digital meeting.

We'd like to thank everybody for joining and participating in our call today. We appreciate your interest and investment in Trinity Capital. Have a great rest of your day. Thanks. Bye.

Once again, ladies and gentlemen, that does conclude today's program. Thank you for your participation. You may disconnect at this time.