Trinity Capital Inc.

Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinity Capital's fourth quarter and full year 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 Kundit, 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. The replay dial number is 1-800-934-3336, and no conference ID is required for access. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. We ask that when posing your question, you please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star 0. It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead.

Thank you, Kelsey, and welcome everyone to Trinity Capital's earnings conference call for the fourth quarter and full year 2022. Trinity's fourth quarter and full year 2022 financial results were released just after today's market closed and can be accessed from Trinity's investor relations website at ir.trinitycap.com. A replay of the call is available on Trinity's 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 fact 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 2, 2023. 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 introduce Trinity Capital's Chairman and CEO, Steve Brown.

Thank you, Sarah. Thank you to everyone joining us today. As you saw in our earnings release this afternoon, we generated strong fourth quarter results to finish an incredible year, exceeding expectations and breaking records on many financial metrics. Our talented team delivered an exceptional performance in 2022 for our shareholders, and I'd like to start by recapping just a few of our many achievements. First, our originations and fundings brought us to $1.1 billion in total assets, growing our total asset position by 20% as compared to the end of 2021. Second, Our investment portfolio at cost grew by 45%, which generated a $145.5 million in total investment income. Third, our net investment income came in at $21.6 million for the fourth quarter and $71.6 million for the year, representing increases of 104% and 83% over the prior year periods. This outstanding performance allowed us to deliver NII of $0.62 and $2.26 per share for the quarter and the year. We just delivered our eighth straight quarter of dividend increases. For 2022, we declared combined regular and supplemental dividends totaling $2.33 per share for our shareholders, an 85% increase over the 2021 dividends. Our NII per share of $0.62 for Q4 represents a $0.06 increase from the prior quarter and 135% coverage on our core dividend. Our return on average equity based on NII increased to 17.9%. Fourth, in the first quarter, we realized gains from the sale of our investment positions in Lucid and Matterport that contributed to the $33 million or $0.94 per share of realized gains on the ending share basis. Lastly, we ended 2022 with approximately $60 million, or $1.73 of undistributed income. As a reminder, the undistributed income from 2021 of approximately $19 million was distributed through the $0.60 supplemental dividends we declared and paid in 2022. Shifting to our capitalization and liquidity, we remained very active during the year despite a challenging market. We raised additional accretive capital, upsized our credit facility, and reopened our 7% notes in order to maintain strong liquidity for our growing investment portfolio. The successful completion of two publicly underwritten offerings in 2022 and the use of our ATM program supported the continued long-term growth of Trinity. All of these capital-raising activities allowed us to deliver a record year for both commitments and deployments. We originated 976 million in new commitments and funded 631 million across 66 portfolio companies. Throughout the course of 2022, we continued to invest in the company's platform, infrastructure, and people. To that end, we added talent to all levels of our organization and have grown the team by almost 40% this year to 57 employees. We also expanded our platform with the addition of an experienced life science team adding originations in this important market vertical. Our results in Q4 and 2022 demonstrate the strength of our team, our ability to meaningfully grow our portfolio, generate significant yields, manage credits, even in a volatile market. I will now hand it over to Kyle Brown, our President and Chief Investment Officer, to provide updates on our portfolio composition and investment performance. Kyle? Ray, thanks, Steve. We are truly pleased with the performance of our originations and credit teams during 2022, having originated $976 million in commitments and $631 million in investments. Our portfolio grew to $1.1 billion on a fair value basis, an increase of 25% on a fair value basis. The investment activity led to the addition of 34 new portfolio companies during 2022. During the fourth quarter, we entered into commitments of $239.5 million and funded $121.4 million, including $71 million in deployments to seven new portfolio companies and $15.4 million in gross deployments to nine existing portfolio companies. We finished the quarter with $393 million of unfunded commitments, which provides us with a strong pipeline for continued funding leading into 2023. And as a reminder, our unfunded commitments are subject to ongoing diligence. and approval by our investment committee. Our pipeline activity remains solid for Q1, despite narrowing our funnel and tightening our investment criteria. To meet this growing opportunity, we completed two transformative initiatives in 2022 with the close of our joint venture and SEC exempted relief for our RIA. We are encouraged by the multiple growth levers we have in place, which are differentiating ourselves in the BDC industry. Our JV structure not only allowed us to expand the portfolio, but also generate predictable fee income while keeping the balance sheet healthy and nimble. The RIA structure will allow us to raise funds off the balance sheet, providing outsized returns for investors in a complimentary way. We can now raise co-investment type vehicles to grow the platform with the ability to raise capital from multiple channels, all to the benefit of the BDC, which owns 100% of this RIA. At Trinity, we believe our internal management structure enhances our shareholder alignment and ability to think outside the box. This off-balance sheet growth is one example of that. As we enter 2023, we are proceeding with caution as we review our investment opportunities. The number of growth-stage companies looking for structured debt has increased, while pressure persists on the revaluation of these companies. We believe this is a time for opportunity, but it must be navigated with sound judgment. Continuous, diligent monitoring of our portfolio companies is an essential component to our successful credit management. We maintain a dedicated portfolio management staff whose sole function it is to monitor our credit risk keep a watchful eye on the market impact, and stay in constant communication with management teams and their equity stakeholders. Our focus is on building a trusted partnership supported by ongoing two-way communication. This combination has proven to be successful, as demonstrated by our solid investment track record and reputation in partnering with our portfolio companies. To that end, during 2022, we added to our credit team to ensure that we remain attentive to the performance of our portfolio companies. The composition of our portfolio remains relatively consistent with prior quarters, and represents diversification across 19 industries. This quarter, we revised our industry breakdown to further underscore the granularity and diversification of our portfolio. Our debt investments are primarily split between venture debt and equipment financings. At fair value, 73% of our debt portfolio, or $802.9 million, is comprised of secure loans, while 23%, or $246 million, is invested in equipment financings. The remainder of our portfolio, $45.5 million in fair value, is comprised of equity and warrants. Our credit quality in the portfolio remains stable, with 95% of our debt investments at cost performing. I'd like to address one investment in the industry in particular that has been an area of concern for our investors, that being digital asset technologies. We continue to reduce our exposure to these investments. These are fully amortizing payments on 36-month schedules, which is resulting in a decrease in balance of 3% per month. Two of our three investments in the space are in the performing category as of year-end. Our investment with Core Scientific remains in default, but the loan is collateralized by critical computing equipment with a cost basis of $23 million and a fair value of $8.2 million, which is approximately 36% of cost. The fair value of the note at year-end was based on the estimated value of TerraHash pricing for the underlying equipment, which fluctuates with the value of Bitcoins. We believe the recent recovery of Bitcoin prices, up 40% since this mark, should benefit Core's operating performance and liquidity position. We remain in close communication with the company and are exploring all available options to obtain the best possible outcomes to the benefit of our shareholders. Subsequent to the end of the fourth quarter, another of our publicly traded digital asset portfolio companies, HUD-8 Mining, announced a merger with U.S. Bitcoin Corp. According to the companies, that transaction is expected to close in the second quarter of 2023. That would trigger a payoff event and further reduce our investments in digital asset technologies. We continue to monitor the progress of the closing and expect to have more to share over the next couple quarters. In Q4, the number of loans on non-accrual remains the same, with four debt investments with a cumulative investment cost and fair value of approximately $49.2 million and $17.8 million, respectively, or 4.3% and 1.6%. as a percentage of the company's total investment portfolio at cost and value, respectively. Lastly, as of December 31, 2022, NAV per share decreased to $13.15 compared to $13.74. The decrease in NAV per share was primarily the result of net investment income that exceeded the company's declared dividend by $0.01 per share, offset by the unrealized depreciation and realized losses recognized during the fourth quarter. Approximately 75% of the unrealized depreciation was related to two portfolio companies, Demtech Health and Core Scientific, previously identified as troubled credits in prior quarters. I'm going to pass the call to Dave to discuss our operating performance in more detail. Dave? Thank you, Kyle. As Steve and Kyle mentioned, this was an outstanding quarter and year for Trinity across multiple performance fronts. Turning specifically to our fourth quarter financial performance, our portfolio growth of 45% during 2022 and the increase in benchmark rates contributed to our total investment income of $41.5 million, a 75.8% increase over the same period in 2021, and a 7.3% increase over the third quarter of 2022. Fee income decreased to $909,000, as our early loan repayments totaled only $14.8 million in the quarter. Our effective yield on the portfolio for Q4 was 15.5%, an increase from 15.2% in the third quarter. Our core yield, which excludes non-recurring fee income, increased to 14.2% from 13.5% in the prior quarter. Both our effective yield and core yield primarily decreased due to the rise in benchmark rates. Year over year, total investment income increased by 77% to a record $145.5 million in 2022 from $82.2 million in 2021. Our consistent originations help drive this increase while we maintain a consistently high effective yield across the portfolio. Our debt portfolio continues to be well positioned ahead of anticipated future rate hikes with 68% of our debt investments at floating rates, while on the borrowing side, only 30% of our outstanding debt at the end of the fourth quarter, what is a variable rate at SOFR. We incurred a total of $10.3 million in interest expense and amortization and deferred financing costs on various debt facilities as compared to $9.3 million in Q3. The increase in interest expense was primarily due to the full quarter of expense incurred under the $57.5 million of additional 7% notes issued in Q3 and an increase in the interest rate and weighted average borrowings outstanding during the quarter under our key bank credit facility. Our other operating expenses were approximately $9.6 million during Q4 as compared to approximately $10.8 million during Q3. The decrease of approximately 11% was primarily driven by a decrease in variable compensation expense and lower excise tax expense. As a result of this operating activity, net investment income for the fourth quarter was $21.6 million or 62 cents per basic share, an increase of 16% compared to $18.6 million or 56 cents per basic share in Q3. For the full year of 2022, Net investment income increased to $71.5 million as compared with $39 million in 2021, an increase of 83% year-over-year. We recorded net unrealized depreciation of $13.6 million during the quarter. We recognized unrealized depreciation of $23.2 million in our debt portfolio and $885,000 in our equity and warrant portfolio. offset by the flip of $10.5 million to realize losses on portfolio investment previously depreciated on an unrealized basis. Approximately $18.2 million of the unrealized depreciation in the debt portfolio was related to the performance issues with the two portfolio companies that Kyle previously reviewed. The remainder of the unrealized depreciation was primarily attributed to mark-to-market adjustments due to general market volatility and interest rate changes. Our operating activities generated strong returns for our shareholders with our ROAE based on NII over average equity of 17.9% and our ROAA based on NII over average total asset of 7.7%. I will now hand the call over to Mike Tester, our Chief Accounting Officer, who will discuss our credit performance, liquidity, and capital allocation. Mike? Thanks, Dave. Starting with credit quality, our portfolio companies continue to perform well in the fourth quarter of 2022, with approximately 95% of our portfolio performing at cost. As Kyle mentioned at the end of the quarter, we had four investments on non-accrual, representing just 1.7% of the fair value of the investment performance. Our average credit rating for the fourth quarter stood at 2.8, based on our 1 to 5 rating system, with 5 indicating very strong performance. This rating is just slightly lower than our average credit rating of 2.9 and 2.3. While our overall credit quality has remained solid, we have taken a practical approach to all loans in our portfolio. We continue to diligently monitor our portfolio company's performance, being mindful of the macro environments that could impact our operations. Moving to equity, as of December 31st, 2022, we had total equity of approximately $173 million comprised of approximately $162 million of undrawn capacity under our credit facility and $11 million in unrestricted cash and cash equivalent. Our net leverage ratio, which represents debt outstanding, less cash on hand, increased to 1.33 times this quarter as a result of our borrowings on our credit facility, which contributed to our portfolio growth. As of December 31st, total debt principal outstanding was $620 million, and had a weighted average cost of debt of 6.8% up from 6.3% at September 30th due to the higher base rates on their credit system. Unsecured debt represented 70% of the total debt at quarter end, down slightly from their prior quarter as we borrowed under our credit system. With the majority of our investment portfolio and floating rate investments compared to the majority of our outstanding borrowings at fixed rates, we expect that further increases in the base rates in 2023 would positively impact our net interest margin and NII margin. Our leverage position, liquidity strength, and access to the capital continue to be at the forefront of our strategy. Continue to explore all capital options that will be accreted to our shareholders. This includes funding investments under our recent announced JV and the RIA that we are looking to launch in 2023. which will allow for complimentary off balance sheet growth and additional fee income to Trinity. In Q4, we announced our stock repurchase program that will allow us to repurchase up to 25 million of our common stock. We believe that stock buybacks are an accretive use of shareholder capital when the stock is trading at a meaningful discount in that. To that end, we repurchased approximately 186,000 shares at an average price of $10.77 per share. for an aggregate repurchase price of $2 million. The program demonstrates our commitment to creating value for our shareholders as a repurchase had a creative impact of 2 cents per share on NAD. In conclusion, on December 15, 2022, our board declared a cash dividend of 46 cents per share for the fourth quarter of 2022, representing a 2% increase from Q3 2022. This is the eighth quarter in a row that we have increased our core dividends. Our GAAP NNI generated coverage of approximately 135% of our regular dividend for the quarter. Additionally, the Board approved a 15 cent per share supplemental dividend. Both dividends were paid on January 13, 2023. Our Board of Directors generally makes a determination of our dividend distributions on a quarterly basis, and we anticipate making an announcement of our Q1 2023 dividend in the second half of March. With that, I'll now open the line up for questions. Operator.