Trinity Capital Inc.

Good afternoon. My name is Raisa, and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital's second quarter 2022 earnings conference call. Our hosts for today's call are Steve Brown, Chairman and Chief Executive Officer, Kyle Brown, President and Chief Investment Officer, David Lund, Chief Financial Officer, Michael Testa, Chief Accounting Officer, and Sarah Stanton, General Counsel, Jerry Harder, Chief Operating Officer, and Ron Kundich, Chief Credit Officer are also present. Today's call is being recorded and will be made available for replay at 8 p.m. Eastern time. A replay of the webcast is available on Trinity Capital's Investor Relations website. At this time, all participants have been placed in a listen-only mode, and the floor will open for your questions following the presentation. If you would like to ask a question at that time, please press the star and one on your telephone keypad. If at any point your question has been answered, You may remove yourself from the queue by pressing the pound key. If you should require operator assistance, please press star zero. We ask that you please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead. Thank you, Raisa, and welcome everyone to Trinity Capital's Earnings Conference call for the second quarter of 2022. Trinity's second quarter 2022 financial results were released just after today's market close and can be accessed from Trinity's investor relations website at ir.trinitycap.com. A replay of the call is available on Trinity's webpage 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 fact made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities law. 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 filing 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 4, 2022. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Now, allow me to introduce Trinity Capital's Chairman and CEO, Steve Brown. Steve?

Thank you, Sarah, and thank you to everyone joining us today. As you saw in our earnings release this afternoon, we generated solid second quarter results despite the recent turmoil in the capital markets. Trinity has been a public reporting BDC for 10 quarters now. And during this time, we continue to build our team, our track record, and our operations through leveraging the platform we built over the previous 13 years. We stated before going public in January of 2020 that we plan to scale the business by investing in best-in-class talent, growing our revenues, and expanding our NAI, which would contribute to our dividends. We are now navigating our second market downturn in two and a half years as a publicly reporting company, as we continue to deliver on our promises to shareholders. In the short time since our first quarter as a public reporting BDC, our team has grown from 29 to 52 employees. Our total assets have more than doubled from under $500 million to over $1 billion, a major milestone for Trinity. Our quarterly investment income has more than tripled from $10.9 million to $33.5 million. Our NII per share has grown from $0.24 to $0.51 in this second quarter. And our core dividend has grown from $0.22 to $0.42, with our core dividend increasing now for the sixth consecutive quarter, in addition to our supplemental $0.15 dividend that we paid for the last two quarters. Trinity's estimated spillover income is $2 per share, which will allow us to continue supplementing our growing core dividend or reinvest off the balance sheet to further grow investment income for our shareholders. As I mentioned, we have weathered two economic storms since becoming a public reporting BDC, and while still in the midst of the second downturn, Trinity has absolutely delivered for our shareholders. We pride ourselves on consistent and thoughtful growth, as well as dependable performance, and we've done just that. Turning to some additional key highlights, we achieved another strong quarter for commitments and fundings leading to a record investment portfolio. Our origination team delivered steady deal flow, allowing us to grow our investment portfolio during the quarter, which we expect will lead to earnings growth in the second half of 2022. This performance positions us to capitalize on market trends, even as we closely monitor recessionary pressures and the volatile macro environment. We have the right team and strategy in place heading into the second half of 2022, and I am confident in our industry-leading position as we enter into what looks to be a broader challenging credit and rate environment in the coming months. Our credit quality in the portfolio remains strong with 98% of our debt investments at cost performing. During the quarter, we strengthened our liquidity position by selling 57.5 million of our common stock, and we upsized our key bank credit facility and availability under the facility by 100 million to a total capacity of 400 million and availability of 300 million. Subsequent to quarter end, we reopened our 7% bond and issued an additional 57.5 million of fixed rate long-term debt due in January of 2025. Kyle will dive deeper into the trends we are seeing in the venture capital landscape, but I can speak for our entire team when I say Trinity is poised to capture opportunity in this environment. Companies will continue to look for capital providers that can add value beyond the term sheet. That is exactly what Trinity team brings. Trinity's versatile financing solutions meet the evolving demands of today's challenging market. We have a platform, we have a team, and we have a strategy in place that will accelerate our business through its next phase of growth in the second half of 2022. We believe our platform is built to deliver strong returns, even in the current macro environment. I will now turn the call over to Kyle Brown, our President and Chief Investment Officer, for some further thoughts on our progress and more detail on the market. Kyle? Great. Thanks, Steve, and good afternoon, everyone. Trinity continued to build on its momentum in Q2. These efforts have put us in solid footing as we head into the second half of the year. At Trinity, culture is an important part of our strategy. We've built a unique culture of entrepreneurial spirit that attracts the best and brightest talent, and we pride ourselves on this. We continue to strengthen the roster, which has led us to a healthy increase in deal volume. Our quality reputation for working with our portfolio companies when things don't go to plan is helping us navigate a more challenging credit and rate environment now more than ever. Turning to our results, Trinity's impressive record of originations continued in Q2 with $302.3 million in new commitments, bringing total commitments for the first half of 2022 to approximately $608 million. We funded approximately $193.8 million of investments, leading our portfolio to grow to $1.1 billion on a cost basis, an increase of 15.8% over Q1 2022. We set a record of $416 million of total fundings in the first half of the year, As Steve noted, the billion-dollar mark for our portfolio is a major accomplishment and encapsulates the incredible work put in by our whole team. Our 193.8 million of deployments during the quarter reached 28 portfolio companies, including 117 million in gross deployments to 11 new portfolio companies and 76.8 million in gross deployments to 17 existing portfolio companies. Gross deployments were partially offset by 44.4 million in principal repayments, of which $16.8 million was from early repayments and $27.6 million was from normal amortization. We finished the quarter with $373 million of unfunded commitments, giving us a strong pipeline through which we can grow our portfolio in subsequent quarters. All of the outstanding commitments are subject to ongoing diligence and approval by our investment committee. The composition of our portfolio remained relatively consistent with manufacturing once again, making up approximately one quarter of our total portfolio. Professional scientific and technical services made up 24.3%, followed by information approximately around 8%. With respect to our exposure in the digital asset sector, we have made equipment loans totaling $69.6 million on a cost basis to three publicly traded digital asset mining and hosting companies, representing approximately 6.9% of debt portfolio at cost. These loans are secured by a first position lien on the underlying digital mining assets, which are mission critical to their operations, and they represent contractual obligations of the public company borrowers. As with our other equipment loans, these are not traditional equipment leases, and the assets are held on the balance sheets of the borrowers, not Trinity. It is also important to note that these are 36-month fully amortizing facilities, primarily deployed throughout 2021. We believe that our underwriting thesis on these assets remains intact, despite the recent volatility in the sector, and we are confident in our positions. Diving deeper into the portfolio composition at fair value, approximately 73.2% of our debt portfolio, or $769.7 million, is comprised of secure loans, and 21.4%, or $224.9 million, is invested in equipment financings. As we have said in the past, equipment financing deals are generally funded over subsequent periods, to the committed date and will fluctuate quarter to quarter. The remainder of our portfolio, approximately $56.5 million at fair value, is comprised of equity and warrants. While the venture capital ecosystem is still experiencing an anticipated tightening, we are well-positioned to navigate this industry correction. We saw unprecedented VC investment activity in 2021, and while overall second quarter 2022 year-over-year quarterly VC deal count was down, It still exceeded pre-2021 quarterly totals, according to PitchBook. And VC fundraising in the first half of 2022 already reached nearly 87% of all of 2021's full-year total. While deal activity remains historically high across all stages, valuations are declining as investors refine their investment criteria. The focus industry-wide will be on prioritizing existing portfolio companies and supporting them through this environment while sourcing fundamentally strong investment opportunities in sectors of innovation going forward. This presents an opportunity for Trinity as a leading financing platform in the VC ecosystem. At Trinity, we pride ourselves on our established, creative approach to investing that lends itself to discovering opportunities in challenging markets. While we remain vigilant in these times, we are also focused on the future and scaling our business with a rigorous investment approach. There's clear and consistent market demand for financing solutions, which become an attractive alternative to dilutive equity as enterprise values pull back in the current market. We believe we have a platform that is well-suited to support management teams as they execute on their next phase of growth. Our vision remains the same, to build a preeminent lending platform with a suite of solutions for emerging growth-stage companies, and to be the partner of choice when there is a need for financing. We are well on our way to fulfilling that objective, and our disciplined strategy and continued leadership team will accelerate our business through these turbulent times, positioning us to emerge stronger. With that, I'm going to turn the call over to David Lund to discuss our financial performance in more detail. David. Thank you, Kyle, and thank you to everyone listening in today. I opened my remarks last quarter by noting that our financial discipline and strong balance sheet have been key contributors to our strong financial performance in these volatile markets. After another quarter of similar macro challenges, we have stayed the course. Our ability to combine strong originations with a disciplined investment approach and financial foresight has enabled us to continue growing in this market. Our debt portfolio continues to be well positioned ahead of future anticipated rate hikes with 64.4% of our loans at floating rates compared to 59.6% at the end of Q1 and 49.3% a year ago. While on the borrowing side, approximately 63% of our outstanding debt at the end of the second quarter was at fixed rates. As we disclosed in our 10Q file today, A 100 basis point increase in the prime rate would have the net effect of adding $4.1 million or approximately 13 cents per share to our annual net investment income. The steps we have taken to grow our floating rate loan portfolio have positioned us to benefit from Federal Reserve's recent rate increases as well as future rate increases while improving our returns. I will now discuss our second quarter financial and operational results. We recorded total investment income of $33.5 million, a 5.3% increase over $31.8 million of total investment income recorded during the first quarter of 2022, and an increase of 71.8% compared to the same period of 2021. This increase from the prior quarter was attributable to higher interest income of $4.1 million on a larger loan portfolio coupled with the higher average interest rates on our floating rate investments. We experienced significantly lower early repayments during Q2, which led to a decrease of $2.5 million in fee income compared to Q1. Our effective yield on the portfolio for Q2 was 13.8 percent, a decrease from 16.3 percent in the first quarter, primarily driven by a decrease in non-recurring fee income. which fluctuates based on the investment activity and early repayment activity, while our core yield, which excludes non-recurring fee income, remained steady with the prior quarter at 12.9%. We incurred a total of $7.8 million of total interest expense and amortization of deferred financing costs on our various debt facilities as compared to $6.8 million in Q1. This increase was primarily due to increased borrowings under our key bank facility. For Q2, our weighted average cost of debt, including interest and fee amortization, was 5.6%, compared to 5.9% in Q1. The slight decrease was due to borrowings under our key bank facility, which has a lower cost of capital at SOFR, plus 285 basis points. Our operating expenses, which are comprised of compensation, professional expenses, general and administrative expenses, and estimated excise taxes, for approximately $10 million during Q2 as compared to approximately $9.4 million during Q1. The increase of approximately $546,000 or 5.8% is primarily driven by increased compensation expenses related to higher headcount and restricted stock award expense. Our strong team in which we continue to prudently invest has been a major driver of our success and they continue to maintain a strong pipeline of investment opportunities. As a result of this operating activity, net investment income for the second quarter was $15.7 million, or 51 cents per basic share, as compared to $15.6 million, or 57 cents per basic share, in the preceding quarter. We recorded net unrealized depreciation of $13.8 million during the quarter. We recognize unrealized depreciation of $13.1 million in our loan portfolio, primarily attributed to marks on three portfolio companies due to underperformance, and $11.2 million on our equity and warrant portfolio related to mark-to-market adjustments as a result of general market volatility. We also recognize unrealized appreciation of $10.5 million on the flip from unrealized appreciation to realized losses of $9.6 million primarily related to one legacy portfolio company that had been previously written down on an unrealized basis. We experienced moderate adjustments to our equipment loans as they are fixed rate instruments. I would like to point out that the future draws under these loans are adjusted to current market rates at the time of the draw. Our variable rate loans did not incur significant adjustments as the rates under these loans are adjusted with the change in prime rates. Our net realized gains for the year to date remain strong at approximately $43 million. As we continue to realize investments, our goal is to capture upside opportunistically, as we did earlier this year with our investments in the city of Matterport, while making judicious decisions to limit downside. Our operating activities generated strong returns for our shareholders, with our ROAE, or NII over average equity, of 13.5%, and our NII over average total assets of 5.9%. Net assets increased by approximately 8% to $458 million or NAV of $14.62 per share compared to Q1 net assets of $424 million or NAV of $15.15 per share. Quarter over quarter Decrease of 53 cents per share, or 3.5% in MEV, was primarily the result of the unrealized depreciation and realized losses I just discussed, and the 15-cent supplemental distribution to shareholders, offset by our investment income, which exceeded our standard dividend by 9 cents per share, and our accretive common stock offerings. Our talented team and disciplined investment process continues to forge forward, growing our portfolio and positioning us to continue this growth as rates rise. I will now hand the call over to Mike Chester, our Chief Accounting Officer, who will discuss our credit performance, liquidity, and capital allocation. Thanks, Dave. Starting with the credit quality, our portfolio companies continue to perform well in the second quarter of 2022, with approximately 98% of our portfolio performing at cost. We currently have four portfolio companies on non-accrual, with a cost basis of $20.5 million and a fair value of $5.9 million, representing just 0.6% of the fair value of the debt investment portfolio. Our average credit rating for the second quarter stood at 3.0, based on our 125 rating system, with 5 indicating very strong performance. This remains relatively consistent with our average credit rating of 3.1 in Q1, and reflects the stable performance of our portfolio companies. that we continue to closely monitor. Moving to liquidity and capital resources. Available liquidity as of June 30, 2022, was approximately 93.2 million, including approximately 13.2 million in unrestricted cash and cash equivalents in a borrowing capacity of approximately 80 million under our key bank credit facility, subject to existing terms and conditions. We continue to be active in the capital markets, completing an accreted equity offering in April, which generated $50 million in proceeds, as well as an additional $7.5 million from exercise of our underwriters over allotment option. We utilized our ATM offering program during the quarter, raising approximately $3 million. Subject to the end of the second quarter, we announced that we reopened those 7% unsecured notes due in January 2025. and raised $57.5 million, which we used to pay down our key bank facility. As a reminder, the 7% notes, including the recent addition, are callable by Trinity beginning in January 2023 and are traded on NASDAQ under the trading symbol PRIML. Our leverage increased approximately 130% from 120% in the prior quarter. This remains within our long-term target leverage ratio of between 115% and 135%, depending on the timing of investment activity. We are actively managing our liquidity and continue to explore all capital options that will be accretive to our shareholders, such as investments under the RIA once approved. With regards to the RIA progress, the review process is still within our expected timeline And we continue to work with the SEC to complete the review of our application. On June 15, 2022, our board declared a cash dividend of 42 cents per share for the second quarter of 2022, representing a 5% increase from Q1 2022. This is the sixth quarter in a row that we have increased our core dividend. Additionally, the board approved a 15 cent per share supplemental dividend. Both dividends were paid on July 15, 2022. Our GAAP NMI generated coverage of approximately 121% of our core dividend for the quarter. We anticipate declaring a dividend for the third quarter of 2022 in September, subject to our board's approval. Our accumulated undistributed earnings spillover at the end of Q2 of approximately $67 million, or $2.15 per share, continues to afford us the opportunity to invest the capital for the benefit of our investors and maintain a consistent and meaningful distribution to our shareholders. Moving into the second half of 2022, Trinity continues to be front-footed on its approach to portfolio growth, adapting to the changing market, positioning our portfolio and bonds to capitalize on rising rates, and to build a team that will enable us to power through market hedging. That concludes our prayer marks. I will now open the line up for questions.

At this time, if you would like to ask a question, please press the star and one on your telephone keypad. If your final question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, that is star and one to ask a question. And we'll take our first question from Finian O'Shea with Wells Fargo. Your line is open.