Trinity Capital - Q2 2024

Executive Summary

• Record quarter: total investment income $54.6M (+18.7% YoY), NII $26.7M ($0.53 per basic share), ROAE 16.3%, ROAA 7.4%; NAV rose to $13.12 per share on $680.0M net assets.
• Strong origination and funding: $289.3M in new commitments and $230.6M funded; equipment financing drove 52% of deployments; non‑accruals improved to 1.8% of debt portfolio fair value.
• Liquidity bolstered post‑quarter: KeyBank facility expanded to $440M with accordion to $690M and maturity extended to July 2029; issued $115M of 7.875% notes due 2029 (TRINI).
• Dividend covered: $0.51 regular dividend with 103.9% NII coverage; 18th consecutive quarter of consistent or increased regular dividend.
• Catalyst: Platform expansion across five verticals and RIA co‑investment vehicle increases fee income and capital flexibility; management highlights floor rates protecting asset yields if rates decline.

What Went Well and What Went Wrong

• What Went Well

  • Record investment income and NII: “We achieved record investment income… Platform AUM reached a record $1.7 billion”.
  • Diversified verticals scaling: “Five distinct business verticals… tech lending, equipment financing, life sciences, warehouse financing, and sponsor finance”.
  • Strengthened capital: “Raised $115 million of unsecured notes maturing in 2029 and… upsize to our revolving credit facility”.

• What Went Wrong

  • Realized losses: Net realized loss of ~$6.5M due to restructuring/exit of three loans, partially offset by Core Scientific equity gains.
  • Higher expenses and interest: Operating expenses ex-interest rose to $14.0M; interest expense climbed to $13.9M YoY on higher borrowings/base rates.
  • Equity dilution impact on per‑share NII YoY: NII per basic share was $0.53 vs $0.61 in Q2 2023 amid higher average shares outstanding.

Transcript

Operator (participant)

Please stand by. Your program is about to begin. If you need assistance during your conference today, please press star zero. 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. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Lastly, if you should require operator assistance, please press star zero. 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 to Trinity Capital's earnings conference call for the second quarter of 2024. Today, I am 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. 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 7, 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, 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 includes 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 had a focus on venture debt, we've evolved into 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 at-the-market 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 is the advisor 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 than externally managed BDCs in that when you buy our stock, you're buying into a pool of diversified assets across our various verticals, yes, and you are buying into a management company. We are 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've begun 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 and 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 origination 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 30th, 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 money, and then 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?

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 continue to and maintain a consistent and meaningful distribution to our shareholders. Our platform continues to generate strong returns for our shareholders, with ROAE 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 24 cents from $12.88 per share as of March 31, 2024. The increase in NAV per share this quarter was primarily attributable to outearning 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 at 7.6%, and we continue to benefit from the low fixed-rate debt, having accessed 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're operating within the targeted leverage ratio, provide 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 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 journey. At the end of the second quarter, on a cost basis, our total portfolio consisted of approximately 71% secured loans, 23% equipment financings, 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 healthcare 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 10 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 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. 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 overlevered 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 (participant)

At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. We'll take our first question from Doug Harter with UBS. Please go ahead.

Douglas Harter (Equity Research Analyst)

Hi, this is Doug. Can you talk about you saw a decline in one in non-accrual assets. Talk about the pace of resolution on the other four and what you're seeing more broadly in terms of credit quality.

Ron Kundich (Chief Credit Officer)

Hey, Doug, this is Ron Kundich, Chief Credit Officer. 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 is now a portfolio-performing asset. The remaining four companies are holdovers from Q1. You know, they're in various stages of workout, 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, you know, as a subsequent event, has reconstituted itself. Part of our debt has rolled forward. Another portion of our debt has converted to equity. The remaining three companies remain in the same status of last quarter. Can get into a little more detail if you'd like.

Douglas Harter (Equity Research Analyst)

I appreciate that answer. Thank you.

Ben Malcolmson (Head of Investor Relations)

Thanks, Doug.

Operator (participant)

As a reminder, if you would like to ask a question today, please press star and one on your telephone keypad. We'll take our next question from Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan (SVP)

Hey, guys, can you hear me?

Kyle Brown (CEO)

Hey, Chris.

Christopher Nolan (SVP)

Great. Multi-sector holdings. I thought, given the new venture with Eagle Point, should we expect triple, excuse me, Trinity to carry debt for any debt for that entity, similar that you do for Senior Credit Corp?

Michael Testa (CFO)

Hey, Chris, this is Michael. At the current time, it's just an equity investment. We'll look at that investment, you know, grows, we start to scale, whether it does make sense from a tax perspective as well as, you know, an income earning perspective to bifurcate our investments.

Christopher Nolan (SVP)

Great. And then, should we look at Senior Credit Corp sort of like a senior loan fund?

Kyle Brown (CEO)

It's a co-investment vehicle. It invests ratably alongside the BDC, and which is really how the co-investment vehicles that we now manage are set up.

Christopher Nolan (SVP)

Is there an outside partner for that one?

Kyle Brown (CEO)

Are you speaking about the senior credit fund, or are you talking about the new fund we just launched? I'm sorry.

Christopher Nolan (SVP)

Oh, I'm just speaking about Senior Credit Corp, specifically.

Kyle Brown (CEO)

Yeah, we don't disclose who that is, but we do have an institutional investor that we partner with there.

Christopher Nolan (SVP)

Okay, great. Then, the move into Europe, I presume all these, that's come from activities, which is gonna be outside the BDCs, 'cause so I understand that the 1940 Act limits the amount of non-U.S. investments. Is that a fair way to look at, or am I misinterpreting that?

Sarah Stanton (Chief Compliance Officer and General Counsel)

Hi, Chris, this is Sarah. I'll take this one. So, you know, we will continue to reevaluate how we make those investments in Europe on a go-forward basis. At this time, as you know, we have, you know, the 30%, quote-unquote, "bad asset bucket," which we have plenty of room in. I think it's under 10% full at this point, and obviously continues to grow as, you know, the platform grows as well. So we'll continue to optimize that as time continues, but for the time being, we will be making some investments at the BDC level.

Christopher Nolan (SVP)

Great. Final question, any consideration of getting an SBA license?

Kyle Brown (CEO)

Yes. There is definitely consideration. That's a process. We're working through it, and more to come there.

Christopher Nolan (SVP)

Okay. That's it for me. Thanks, guys.

Operator (participant)

Our next question comes from Bryce Rowe with B. Riley. Please go ahead.

Bryce Rowe (Senior Equity Research Analyst)

Thanks. Good afternoon from the East Coast. Wanted to maybe just start with the co-investment vehicles. Obviously, good to see more progress there. You know, Mike or Kyle, can you talk about, you know, the leverage that you expect to use in this, you know, in the maybe the newer vehicle and, you know, any guidance or color on kind of ultimate leverage at the original JV, would be helpful.

Kyle Brown (CEO)

Yeah, I think we're, you know, we're focused on 1:1 leverage for the co-investment vehicle. It really will mirror what we do at the publicly traded BDC. So, you know, we've got, we've got some new liquidity available to us with that in mind.

Bryce Rowe (Senior Equity Research Analyst)

Okay, okay. Maybe next question here, you know, it looks like unfunded commitments continue to grow in size. And, you know, you've got, you know, the five verticals now and, you know, having added a couple, you know, as of relatively recently. Can you talk about kind of what the mix of the unfunded looks like, and then maybe talk about, you know, how the pipeline is starting to build from a mix perspective between the multiple verticals?

Kyle Brown (CEO)

Sure. You know, I think, you know, we broke this business into verticals a couple of years ago. We did that intentionally, so it could really scale. We brought in 20-plus-year veterans to run each of those businesses, both on the management side and the credit side, and we're seeing the results of, of that now. We're seeing the scale begin now, and the pipeline has been continued to increase there. You saw the mix of deployment this quarter. That's not too different than kinda how we see this, these verticals continuing to grow.

Our venture debt business is a little bit more at scale, and so it's growing at a little bit slower on a percentage basis, whereas sponsor finance, life science, equipment are all growing at a higher percentage as those businesses get up to scale. And so you, you know, that diversification that you saw this quarter, that's. I think you can expect that going forward across our verticals.

We're seeing, you know, as we see, you know, one vertical maybe have a little bit less activity in one quarter, another one is picking up the slack. So being more diversified that way, having products focused on different industries and stages, really gives us the ability to continue to scale, regardless of what's going on.

Bryce Rowe (Senior Equity Research Analyst)

Okay. Okay. Maybe last one from me. In terms of kind of asset sensitivity, we're, you know, we're starting to see some talk of rate cuts, and lower short-term interest rates. Just maybe remind us what the asset sensitivity position is of the BDC and how that may change, you know, as you know, as different verticals take more weight within the portfolio.

Kyle Brown (CEO)

Yeah, I think maybe the first thing I'll point out, and you can just confirm this on our schedule of investments, anybody can. We've got floor rates on almost all of our deals. Floor rates that across the board are exceeding 12%+. And so we've got this really interesting, and I think this is different than most BDCs. We have an interesting dynamic where we can either see some offset to the lowering of rates, where our floor rate remains with our borrowers, and we're not making less revenue, but our cost of debt at the corporate level and our revolver goes down. And so, you know, it'll be interesting to see how that plays out. I think we're probably protected more than most BDCs in the event of a, you know, rate decreasing environment.

Bryce Rowe (Senior Equity Research Analyst)

Kyle, when you say the, you know, that maybe a little... If you guys have a kind of a weighted average floor for the portfolio, I mean, is that relative to, I guess, on slide 15 of your deck, you've got a, you know, you've got a weighted average coupon rate line in that, in one of the charts. Would that weighted average floor kind of compare to that weighted average coupon rate that you show on that slide?

Kyle Brown (CEO)

That's fair. I think we can follow up with you on the exact number.

Bryce Rowe (Senior Equity Research Analyst)

Okay.

Kyle Brown (CEO)

- when we have it, but that's, you know, that's, that's definitely the ballpark.

Bryce Rowe (Senior Equity Research Analyst)

Okay. Thanks a lot.

Kyle Brown (CEO)

Sure. Thanks, Bryce.

Operator (participant)

It appears we have no further questions at this time. I will now turn the floor back over to Kyle Brown, Chief Executive Officer, for closing remarks.

Kyle Brown (CEO)

Great, thanks. Yeah, we're proud of the second quarter results, and we're looking forward to updating you on our next call in three months. I'd like to thank everybody for participating in the call today, and appreciate your interest and investment in Trinity Capital. Have a great rest of your day. Thanks, bye.