Trinity Capital Inc (TRIN) 2024 Q4 法說會逐字稿

Good morning. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to Trinity Capital's Fourth Quarter and Full Year 2024 Earnings Conference Call. (Operator instructions)

It is now my pleasure to turn the call over to Ben Malcolmson, head of investor relations for Trinity Capital.

Thank you and welcome to Trinity Capital's earnings conference call for the full year and fourth quarter of 2024. Today, our speakers are 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 is Ron Kundich, Chief Credit Officer.

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 forward-looking statements involve known and unknown risks and uncertainties.

We encourage you to refer to our most recent SEC filings for information on certain risk factors. Trinity Capital assumes no obligation or responsibility to update any forward-looking statements. Now please allow me to turn the call over to Trinity Capital CEO Kyle Brown.

Thank you, Ben, and thanks everyone for joining us today. 2024 was an excellent year for Trinity Capital, as our strategies continue to perform well and we achieved record results. Major milestones from 2024 include $116 million of net investment income, or $2.20 per share, a record $1.2 billion of funding, the launch of our sponsor finance and asset-backed lending verticals, giving us five complimentary diverse business verticals. The expansion of Trinity's lending platform into Europe with the establishment of a London-based team.

In the official launch of our RA's first co-investment vehicle, which further capitalizes the business and provides incremental income to our BDC shareholders. We finished the year with an especially strong fourth quarter. Here's some highlights from Q4. We delivered a net investment income of $35 million a 38% increase versus Q4 of last year. Net asset value grew to $823 million up 9% from $757 million in the prior quarter.

Platform AUM reached a record by exceeding $2 billion and Trinity paid 1/4 quarter cash dividend of $0.51 per share, representing our 20th consecutive quarter of a consistent or growing dividend. During the fourth quarter, our 5 business verticals continue to perform well, dealing growth and profitability. As a reminder, we've grown into a direct lending platform compromised of 5 business verticals, tech lending, equipment financing, life sciences, asset-backed lending, and sponsor finance focused on private equity backed businesses.

These verticals each have their own experience team that leads the originations, credit and portfolio management functions, which gives them the ability to scale efficiently. Our investments in these strategic growth initiatives have generated extraordinary momentum, highlighting our commitment to expanding the platform and broadening our investment opportunities.

Trinity Capital's first an alternative asset management company. In addition to a direct lender. We seek efficiencies by scaling our business, our balance sheet at the public company level, and we're building out our asset management business to invest alongside the BDC across our business verticals. What makes us different from externally managed BDCs is that when you buy Trinity stock, you're buying into a pool of diversified assets across our various verticals, and you're buying into a management company with the opportunity to also manage third party capital.

Additionally, as an internally managed BDC, our employees, management, and board all own the same shares as our investors. This structure creates 100% alignment with our shareholders as we strive to deliver growing returns for our investors. Turning to deployment, we maintain a strong investment pipeline, including $693 million of unfunded commitments, leaving us well positioned for continued growth.

As a reminder, the vast majority of these unfunded commitments are subject to ongoing diligence and approval by our investment committee. Credit underwriting and portfolio management ultimately determine our success over the long term. We have a unique structure of collaboration among our originations, credit and portfolio teams to manage our inbound opportunities and active portfolio companies.

We are very selective and follow a rigorous diligence process where only a small percentage of our deals reach the underwriting stage. This methodical approach mitigates risk and positions us to excel in all macroeconomic cycles. Underpinning our process our three core principles that are fundamental to our culture.

Exhibiting uncommon care for our employees, customers, and stakeholders, serving our clients by being partners rather than just money, and providing outsized returns for our shareholders. Continuous investment in building our teams and improving our systems is key to our growth, enabling us to further diversify our investments to create a best in class direct lending platform.

As we look ahead to 2025 and beyond, we're excited about the future and look forward to continuing to capitalize on our momentum as we grow and maximize value for our shareholders. With that, I'll turn the call over to Michael Tester, our CFO to discuss financial results in more detail.

In the fourth quarter, we achieved record total investment income of $71 million a 48% increase over the same period in 2023. Our effective yield on the portfolio for Q4 was once again an industry leading 16.4%, and our core yield, which excludes the income, remains strong at 14.7% despite industry-wide yield compression.

Net investment income for the fourth quarter was $35 million or $0.58 per basic share compared to $25 million or $0.57 per basic share in the same period of the prior year. This quarter's earnings experienced the benefit of increased fee income from higher early portfolio payoffs and fundings within our equipment financing vertical.

Our net investment income per share represents 114% coverage of our quarterly distribution. Our estimated undistributed taxable income is approximately $67 million or $1.08 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 17.4% based on net investment income over average equity and ROAA of 7.6% based on net investment income over average total assets.

As of December 31, 2024, our NAV was $823 million up from $757 million as of September 30, 2024. And our corresponding NAV per share was $13.35 at the end of Q4. An increase from $13.13 as of September 30, 2024. The increase in net assets per share was primarily due to the portfolio activity, I created ATM offerings, and net investment income exceeding the declared dividend.

During the fourth quarter, we realized net gains of approximately $9.3 million primarily from the sale of two equity and warrant positions. As a reminder, we receive warrants on a majority of our loans, especially in the tech lending and life science verticals.

During the quarter, we strengthened our balance sheet, enhanced our liquidity by raising $50 million of gross proceeds from the ATM program, further upsizing our credit facility of $600 million in total commitments across a diversified syndicate of 13 banks, and closing a $142.5 million dollar private placement debt offering.

We also continue to realize the benefits of our co-investment in our joint venture and our new vehicle under the RIA subsidiary, which in Q4 provide approximately $1.9 million or $0.03 per share of incremental net investment income to the BBC.

During the Q4, we syndicate $77 million to these vehicles. As of December 31, 2024, we had more than $302 million of assets under management in these private vehicles, providing incremental capital for growth and a creative returns to our shareholders. Our net leverage ratio, which represents principal debt outstanding with cash on hand, was 1.08 times as of December 31, 2024.

Our strong liquidity position with diverse capital sources, both from capital raised by the BDC and through our wholly owned RIA subsidiary, provide Trinity with the flexibility to manage a strong pipeline and be opportunistic in the marketplace. Subsequent quarter end, we launched a debt ATM program which provides further capital raising flexibility. As of this date, we have not issued any additional debt under this program.

Additionally, we retired all the debt outstanding under our 2025 notes of approximately $153 million and the holder of our convertible notes elected exercise their conversion rate on the $50 million of convertible notes. At our option, we elected to use cash to retire the convertible note and avoid further dilution impact of the issuing shares of our com stock. These debt obligations were fully liquidated with available proceeds received from early debt repayments, equity gains, and the use of our credit facility.

As a result of these subsequent debt extinguishments, we have no further debt obligations due until August 2026. We estimate the Q1 NAV impact from the repayment of the convertible debt will be approximately $0.27 per share based on the current outstanding shares.

While there is an impact to NAV in the first quarter, the early extinguishment of these debt obligations, which were issued prior to our IPO reflect the strong performance of the training platform and will be a long-term benefit to training shareholders. And I'll turn the call over to our COO, Gerry Harder to discuss our portfolio performance and platform in more detail.

Thank you, Michael. Since our last earnings call, Trinity has continued to focus on executing our strategies 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 cycle.

At the end of the fourth quarter on a cost basis, our total portfolio consisted of approximately 75% secured loans, 18% equipment financing, 5% 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 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 green technology, representing 9.7% and 8.3% of the portfolio at cost, respectively.

In aggregate, life sciences related industries collectively made up 25.5% of our total portfolio on a cost basis. Among our five business verticals, the approximate breakdown of our fundings in Q4 went as follows: 33% to equipment financing, 28% to sponsor finance, 27% to tech lending, 7% to life sciences, and 3% to asset-backed lending.

As of the end of Q4, our largest portfolio company debt exposure represents 3.1% of our debt portfolio and 2.9% of our total portfolio on a cost basis. Our 10 largest debt investments collectively represent 23.3% 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 99.2% of our portfolio performing on a fair value basis.

Our average internal credit rating for the fourth quarter stood at 2.9% based on our one to five rating system, with five indicating very strong performance. This rating is consistent with the average credit rating in each of the last two quarters and is attributable to a combination of credit upgrades to existing portfolio companies, as well as strong originations of new credits within the fourth quarter.

As a percentage of the debt portfolio on a cost basis, credits within the lowest two tiers remained virtually unchanged from Q3. Quarter over quarter, the number of portfolio companies on non-accrual remained at 5%, while our non-accrual credits decreased on both a cost and fair value basis. One portfolio company, Sun Basket, was removed from non-accrual and was fully realized in Q4 at a very slight decrease relative to our Q3 fair value.

One additional credit from our tech lending portfolio with a cost basis of approximately $3 million was added to non-accrual within the quarter. At the end of Q4, our non-accrual credits had a total fair value of approximately $12.7 million representing 0.8% of the total debt portfolio, a slight improvement from Q3.

At quarter end, 77% of our total principal outstanding was backed by first position liens on enterprise, equipment, or both for financings covered by all asset liens, the weighted average loan to value as of the end of Q4 was 23%. While 65% of these companies have a loan to value of less than 15%. These statistics demonstrate that our portfolio companies are generally not over leverage and are in a healthy position to service the debt, even in instances when our loan may not be in first position.

In Q4, our portfolio companies collectively raised $1.9 billion of equity. In full year 2024, our portfolio companies collectively raised $4.7 billion a 69% increase from 2023. These encouraging stats speak to our portfolio's quality and ability to secure funding in an ever-changing 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. Before we conclude our call we'd like to open the line for questions operator.

(Operator instructions)

We'll take our first question from Casey Alexander, Compass Point.

Actually my question was answered so I'm fine.

We'll take our next question then from Matthew Hurwitt, Jefferies.

Hi everyone, congrats on the results. Hope you're well. My first question is just on, how you've made low, maintained low non accruals. Can you share with us what practices or borrower characteristics are helping keep non-accruals so low, and are there any early warning signs, as we head into 2025 in terms of credit deterioration or anything you're watching?

Matthew, this is Ron, Chief Credit Officer. Good to talk to you today. Yeah, we've shared with the street on a quarterly basis, discussion around our underwriting rigor and more importantly, our five vertical strategy. Within each vertical, we don't just have underwriters, but we have underwriters that are experts within that vertical. We have portfolio managers that have experience within that vertical and so forth.

So, As you might imagine, each vertical is different. Equipment lending is different than, venture debt in the life science space, for example. So it's really important for us to have that expertise within each vertical, and we believe that structure with the rigor that we bring at the front end of the pipeline has led to, the results we've shown on credit quality.

Great, thank you. And then on leverage, how are you approaching leverage in the current environment? Is your goal to maintain it around the current level, or do you see room to increase, leverage for growth or just how are your thoughts on leverage currently?

So we've messaged, this is Kyle. Hey Matthew, we've, messaged this in the past and this is how we think about it. We really do want to continue over time to decrease leverage. Our ability to raise money off balance sheet and and create new liquidity, gives us the ability to downstream some of those assets and to managed accounts and keep a really healthy.

Level of leverage around kind of one to one we'll ramp it up sometimes when it makes sense too because we have, more deals to fund, more opportunities, but then the idea is to make sure that we, downstream those as assets into managed accounts. That leverage back down. So over time as we build out the RIA and build out earnings there, we'll see and have the ability to have less leverage at the BDC level which will create of course more liquidity for us to be opportunistic along the way.

So that's how we think about it. We, intend over time to continue to decrease that as the RIA generates new earnings and we can decrease it while also increasing earnings per share.

Great, thanks very much and congrats on the results.

We'll take our next question from Doug Harter, UBS.

Thanks, somewhat piggybacking off the last question, how do you think about, kind of the appetite to continue to raise capital off of the ATM and kind of, how do you see the the pace of of deployment to in order to maintain leverage, kind of at that one time target you just mentioned Kyle.

Sure we you know we think of the ATM is just in time financing. It's less expensive. It's really the most efficient way to raise equity. But, when we think about raising equity or debt at the BDC level, we're doing it in a way, and we've historically done in a way that's accretive to investors. And so what we have with the RIA is the ability and liquidity there now to where, we will.

As we build deployment, we'll build those manage accounts and to the extent, we need additional capital, we'll tap into the ATM as needed, but not in a way that will be dilutive, to shareholders and that's how we think about it, so. Yeah, Mike, you want to add anything to that? Yeah, I would say.

That again we're being thoughtful trying to diversify our capital sources just like we're diversifying the asset side of our balance sheet. So we're looking, we launched a dead ATM subsequent to quarter and, have more flexibility with raising just in time debt capital. We had inaugural, private placement issuance, debt issuance. So looking beyond institutional retail, beyond just the balance sheet, but also, in through the RIA and private vehicles, through the RIA. So all different channels, providing additional flexibility as we grow and scale, more opportunities will open up to us.

Great appreciate it. Thank you.

(Operator instructions)

We'll take our next question from Paul Johnson, KBW.

Good afternoon, thanks for taking my question. On the, bond conversion next quarter, sounds like you guys are settling that via cash so there won't be any dilutive impact, but is there any way to to quantify the retirement expense for next quarter?

Yeah, in my premier marks I noted an estimate of $0.27 per share on NAV impact as a result of that. The conversion rate in current where it's at $66 million of a cost to extinguish that debt.

Got it thanks for that. I miss missed that that detail. Thanks for that. Switching over to the portfolio, I'm just curious, in terms of the fintech exposure in the portfolio, how many of the companies would you say are dependent on bank partnerships for business?

I don't know this is Gerry, that's a great question.

It's not uncommon for some of those business models to require such partnerships. So, but in our underwriting we're thinking that through, right, and making sure that there's multiple banks in those partnerships. And so. Much like we wouldn't underwrite a life sciences company with, one shot on goal from a from a drug approval standpoint. Similarly, we're deeply considering that in the underwriting. So if there are bank partnerships, there have to be multiple on board, with additional IQs. So it's a great question and something we talk about as we underwrite, but we limit our exposure.

Hey, this is Kyle. I'll add something else. We are, our ABL group that does warehouse loans is, primarily focused on fintech, and we are really in many of those cases when we're senior, we are the replacement for the bank, so we're providing that advance against receivables there and then for more mature companies we're partnering with a bank.

So a lot of the fintech exposure that we have and a lot of it that'll that we'll have going forward is really more asset back lending where we're doing receivable type financing, at a nice, loan to value or loan to cost against those receivables so we like that we like that position with fintech companies.

Got it, appreciate it. That's helpful, details there, and then, on just one investment, one of the non-accruals this quarter, I just wanted to ask, I know it's a small loan looks like a, small tranche of space perspective was placed on non-accrual, this quarter, but, I just wondering, just because that's such a novel industry, I mean. Again, understanding that the one small loan, is there anything to read into that in terms of trends within that industry or is this more of an idiosyncratic issue issue related to space Perspective?

This is Ron Kunddi, Chief Credit Officer. I think it's company specific. Paul, I don't think there's anything industry-wide, that we're concerned with. This is a company, as you alluded to, it was a small, venture debt term loan situation.

The bulk, I shouldn't say the bulk, a large part of our space, portfolio is, related to our equipment finance vertical. As in the equipment finance vertical, we are lending against new equipment, specific equipment. We have an asset that's tangible that we can liquidate if we needed to in a distress situation. So when you think about us and you think about space, keep that in mind. Again, space perspective, our loan to them did not fall into that category. It was, as you alluded to, a small loan, venture term that the company is still attempting to raise some capital, so we're monitoring it closely.

Appreciate it that's all for me thank you.

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

Hey guys. Kyle, what are you targeting for the EPS contribution from these outside RIA entities for 2025?

Hey Chris, it's Mike. As we're going through our AOP and our model for 2025, you'd see immediately we've had, expense allocations, reimbursement for expenses. They get pushed down to the RIA, we haven't given any forward-looking, information on any dividends, but we do anticipate in 2025 as well as expense allocation, you'll see dividends coming back up from the RAA from those fees and income manage under the RIA.

Yeah, it's going to be it's a big part of our future, I'd say the, we have 22 accounts we're managing, we're working on others, regulators don't move as fast as we do and so, we are, kind of poised and ready to execute and, we're looking at this year as more of execution of the RIA and then it really start building.

Got you, second question. The Trump administration is making make America healthy again a focus. How does everything happening in that space affect your life science exposure?

We obviously think about that, and we don't see any immediate impact. We don't do a ton of Bio or Pharma. It's just not what we focus on primarily, so we're focused on primarily Med device companies that scale host FDA approved products. I mean that's primarily where we focus and so far we just don't see a lot of exposure there.

Great, final question on the date ATM, would this be for unsecured notes?

That's right, Chris. We have two debt issuances from the past year, training at TRINI and TRINZ, that are eligible for that debt ATM program.

Okay, and so the general idea would be utilize the facility less, but the the ATM is sort of an alternative to the facility, right?

Yeah, I mean, we're going to look at all options, based on what makes financial sense and the ATM program for the debt is the same as the equity. It's efficient, you can raise it over time. It's at the prevailing price of the debt at the time, so the prevailing falling yield will measure that against, all the other market activities or secured debt that we have.

Okay, that's it for me thanks guys.

And there are no further questions on the line at this time. I'll now turn the call back to the CEO, Kyle Brown, for any closing remarks.

Well, we'd like to thank everybody for participating in our call today. We appreciate your interest and investment in Trinity Capital, and we look forward to updating you on Q1 results during our next earnings call on May 7th. Have a great rest of your day. Thanks.

This does conclude today's program. Thank you for your participation and you may now disconnect.