Trinity Capital Inc.

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to Trinity Capital's third quarter 2023 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 Ben Malcolmson, Director of Investor Relations. Jerry Harder, Chief Operating Officer, Ron Kundich, Chief Credit Officer, and Sarah Stanton, Chief Compliance Officer and General Counsel are also on the call. This call is being recorded and will be available for replay beginning at approximately 3 p.m. Eastern Time. The replay dial-in number is 888-214-9523 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 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, please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance again, please press star 0. It is now my pleasure to turn the call over to Trinity Capital's Director of Investor Relations, Ben Malcolmson. Please go ahead.

Thank you, Mike, and welcome everyone to Trinity Capital's earnings conference call for the third quarter of 2023. Trinity's third quarter financial results were released earlier this morning and can be accessed from Trinity's investor relations website at ir.trinitycap.com. A replay of the call will be 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 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 create 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, November 1st, 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, Ben, and thanks everyone for joining us today. As you have seen in the earnings release, we generated strong third quarter results with record net investment income fueled by a robust originations pipeline. Net investment income for the quarter was $23.4 million, or NII per share of $0.58, providing 118% coverage on our regular dividend. NAV increased by $0.02 to $13.17 per share, due in part to a healthy balance sheet and the stability of our portfolio, which out-earned our distributions. We further strengthened our liquidity during the quarter by accretive stock issuances under our ATM program. as well as our $82 million equity raise in August. I'm especially pleased that we have increased our quarterly dividend by 2.1%, marking the 11th consecutive quarter of dividend increases. Last month, we increased our quarterly regular dividend to 49 cents per share, in addition to a supplemental dividend of 5 cents per share to comply with tax regulations. The board will further evaluate our tax position in Q4 and determine if additional supplemental dividends are required. As we previously announced, effective January 1, 2024, and consistent with the company's long-term succession plan, I will become executive chairman of the board of directors while continuing to serve on the company's investment committee, and Kyle Brown will become chief executive officer. As CEO of Trinity for the past 15 years, I have had the privilege of leading a best-in-class team And together, we took the platform public, creating significant returns for our investors. Since our IPO in 2021, Trinity has delivered more than $169 million in cumulative distributions. Also, we have been approved to launch an RIA and have successfully started a JV, both of which provide off-balance sheet growth opportunities that give us the ability to generate accretive returns for our BDC investors. I look forward to transitioning into this new role and partnering with Kyle as he leads this team toward our next phase of growth. Since joining the firm in 2015, Kyle has played an important role in his capacity as President and Chief Investment Officer, where he has overseen the company's lending policies and investment strategy. He has been a driving force in building this team and our business, and he is in a prime position to lead us to even better places. This is an exciting next chapter for Trinity, and with that, I'll turn the call over to Kyle.

Kyle? Thank you, Steve. I'm looking forward to stepping into the role of CEO and continue to work with our record-setting team and building this platform for our portfolio companies and shareholders. As Steve mentioned, this planned transition is a result of a long-term strategy and extensive preparation to position the company for tremendous opportunities ahead. Our vision and mission remain the same, to build the world's leading credit platform for the global growth economy. We'll continue to maximize Trinity's track record and trajectory, as we expand the portfolio to add value for our shareholders. We focus on doing three things exceptionally well here at Trinity, exhibiting uncommon care for our employees and partners, being more than money for our clients, and providing outside returns for our investors. Looking at the macro environment, the VC industry remains an attractive place to make debt investments, given the mismatch between supply and demand for lending. High-quality growth companies are going to continue to need to raise capital, and debt will be a preferred avenue over heavily dilutive equity down rounds. Interest from investors seeking to partner with company founders to build positions in companies remains high, and the dry powder in the VC industry remains at record numbers. The level of opportunity can be gauged by looking at the volume of deals in the market. Including the latest data from Q3, the estimated number of deals in each quarter of 2023 continues to surpass all previous years, except for the unusual activity in 21 and 22. We have Exceptional relationships with our portfolio companies and the breadth of our relationships with sponsors and investors allows us to see even more opportunities as we've worked with more than 900 different equity sponsors in our history. Despite a somewhat challenging fundraising environment, our portfolio continued to get funded and to see opportunities to raise additional capital. Year-to-date, 45 of our portfolio companies have raised an aggregate of more than $2.4 billion in new capital to drive their next phase of growth. Volatility in the banking industry and a more conservative approach toward lending continue to drive additional opportunities for Trinity's direct lending solutions. We finished the quarter with a strong pipeline of $348 million in unfunded commitments, all of which are subject to milestones, ongoing diligence, and approval by our investment committee. We remain very selective and committed to adhering to our rigorous diligence process, with a smaller percentage of deals reaching the underwriting stage. Our distinct structure and collaborative origination credit and portfolio teams takes a proactive approach to managing our inbound opportunities in active portfolio companies, which greatly mitigate risk and position us to excel in all cycles. Most fundings in Q3 were approximately $149 million, and proceeds received from repayments of the company's debt investments during Q3 totaled approximately $177 million. Our Q3 fundings were comprised of $81 million to five new portfolio companies, and 66 million to 10 existing portfolio companies, and 2 million of capital calls to our joint venture. The composition of our portfolio remains consistent with prior quarters, shows diversification across 19 different industries. We've intentionally constructed that portfolio with varied industry segmentation, with our large industry exposure representing only 13% of the portfolio at cost. As announced earlier this year, we have further built out our life science vertical by making key hires and opening a new office in San Diego, which places us in the heart of a major life science research and innovation hub. We continue to be enthusiastic about the prospects of our life science vertical and believe the industry holds immense potential for growth. Our team is built in an attractive platform to support the financing needs of growth stage companies. Our people are Trinity's biggest asset, and as we continue to build and grow the organization, We never forget that our culture is built on humility, trust, integrity, uncommon care, and continuous learning, and an entrepreneurial spirit as we serve our customers and partners. We believe this mindset makes us a destination for the best talent in the industry, and we continue to make strategic hires to bolster our team for the exciting road ahead. In the third quarter, we also continue to realize the benefits of our direct lending joint venture. The soft balance sheet growth provides incremental returns that flow to our shareholders. Our RIA is positioned to be an opportunistic off-balance sheet growth lever. Our team is engaging with several potential investment partners, and we expect to have more progress to share in the coming quarters. We're focused on building a platform both on and off-balance sheet that is creative for investors. As a reminder, we are an internally managed BDC, and the fees charged to our off-balance sheet entities will directly benefit shareholders. Looking ahead, we believe companies will need to seek lending solutions that offer strategic partnership and less dilutive growth capital. We want to be the go-to lender for growth-oriented companies, providing a wide range of financing solutions. And we are well-positioned to profitably grow the balance sheet, and as we increase our off-balance sheet activity, we'll seek new ways to improve returns for our shareholders. Our CFO, David Lund, will now discuss our operating performance in more detail.

Dave? Thank you, Kyle, and welcome to everyone joining us today. We generated strong operational performance in the third quarter, underscored by the strength of our balance sheets and the ability to execute our strategic vision. In Q3, we recorded total investment income of $46.4 million, a 20% increase over the same period in 2022. This growth was attributable to interest earned on the higher average loan balances in our investment portfolio, the benefit of increases in the prime rate since Q3 of 2022, and OID acceleration. Our effective yield on the portfolio for Q3 was 16.7% compared to 16.2% in the second quarter. Our core yield, which excludes non-recurring fee income, increased to 15.5% from 14.8% in the prior quarter. This yield growth was contributed to our solid NII performance in the quarter. Our debt portfolio remains well positioned against interest rate increases with 74% of our debt investments at floating rates, while on the borrowing side, 19% of our outstanding debt at the end of the third quarter was at a variable SOFR rate, contributing to a solid net interest margin, or NIM, of 12.9% for the quarter. Net investment income for the third quarter was a record $23.4 million, or 58 cents per basic share, an increase of 25.6% compared to $18.6 million, or 56 cents per basic share in the same period of the prior year. Our operating activities generated strong returns for our shareholders, with ROAE based on NII over average equity of 17.6%, and ROAA based on NII over average total assets of 8%. Lastly, as of September 30, 2023, NAV increased 18.1% to $569.5 million, and NAV per share increased to $13.17 compared to $13.15 in Q2. The increase in NAV per share was primarily the result of net investment income that exceeded the company's declared dividend and accreted stock issuances. I will now hand the call over to Mike Testa, our Chief Accounting Officer, who will discuss our credit performance, liquidity, and capital allocation.

Thanks, Dave. The credit quality of our portfolio companies remains strong and stable with approximately 97% of our portfolio performing at fair value. Our average internal credit rating for the third quarter stood at 2.8 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. We currently have four portfolio companies on non-accrual with a total fair value of approximately $28 million, representing just 2.6% of the total debt portfolio. Moving to liquidity, as of September 30, 2023, we had total liquidity of approximately $257 million. comprised of approximately $250 million of undroined capacity under our credit facility and $7 million in unrestricted cash and cash flow. Additionally, we've continued to co-invest with our joint venture, which provides additional investment equity and as of Q3, had $134 million of assets under management. Our net leverage ratio, which represents principal debt outstanding with cash on hand, improved to 0.92 times this quarter as a result of $82 million follow-on equity offering and increased portfolio repayments. We also utilized our ATM program during the quarter, raising approximately $13 million in gross proceeds at a premium to NAV, further supporting long-term growth of Trinity. The health of our capital structure and balance sheet remains the top priority for Trinity. As Kyle mentioned, this commitment is underscored further by the successful execution of the joint venture and potential investment partner discussions under the RIA. These vehicles provide accretive earnings to the BDC while providing additional liquidity to the platform, and we'll look forward to providing additional updates as appropriate. At this time, we'd like to open up the line for questions. Operator?

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your telephone keypad. You may remove yourself from the queue at any time by pressing star 2. And once again, that is star 1 if you would like to ask a question. We'll pause for just a moment to allow questions to queue. And we have our first question from Kyle Joseph with Jefferies.

Good morning, guys. Thanks for taking my questions and congrats on a good quarter. I just want to get your take, you know, we're six plus months out since the Silicon Valley fallout and just Give us a sense for how the market's evolved in those six months and whether you guys have seen some stabilization and how that's impacted competition as well.

Sure. Hey, Kyle. This is Kyle. So a couple things, and maybe just start with some of the data we've seen internally. We have seen this year a pretty significant uptick in senior loan, the percentage of loans and opportunities that are senior secured, and I'd say that's primarily for even later stage companies where we might have seen the bank providing some term debt or maybe some of the debt need there. We just internally have seen a really significant uptick in senior loan opportunities. Now, we primarily lend on senior secured loans, but that data alone for more mature companies was really interesting. It just shows that they're lending less money to us. opportunities have significantly increased top of funnel. But I would say that banks are kind of doing what banks have traditionally done, which is focus on receivable financing. So we're seeing banks kind of focus in on what they do best. And we think that that trend probably continues going forward.

Got it. Very helpful. And so, yeah, that's a good segue. Next one is just the investment in the pipeline really going forward. Obviously, you guys did a De-levered a lot, some from repayments, some from the equity raise. But with your balance sheet where it is, should we take that as a sign that the pipeline is really strong? And then how do you guys think about managing leverage going forward?

Yeah, I'll touch on it, Mike. You can also touch on it. But we really want to make sure that we keep that leverage in a place where we have liquidity. We can take advantage of the market and opportunities in front of us. The combination of on and off balance sheet capital gives us some additional levers there to keep leverage low, but also continue to drive up earnings. And so we're really focused on continuing to increase earnings per share, ROE, and increase that dividend. And so the ability for us to offload deals to some of our off-balance sheet entities, yet drive up new income while decreasing our leverage ratio, those are really interesting tools that we're going to continue to use going forward.

And just to provide color on the backlog, in Kyle's prepared marks, he covered $348 million of unfunded commitments. We also have quite a bit of term sheets accepted, so over $600 million in our backlog. And a good portion of that is to our equipment financing products. Got it. Very helpful.

Thanks for answering my questions.

And our next question comes from Christopher Nolan with Leidenberg Thalmann.

Steve, congratulations on your transition, and Kyle, congratulations on your transition. I guess going forward, given the common dividend yield is roughly 14% right now, where do you stand in terms of cost of capital for further equity raises?

It's a little tough here, Chris. I think you said, how do you feel about future equity raises? Is that right? Cost of capital. for future equity raises?

Yeah, the dividend yield is 14%. And, you know, are you comfortable with, you know, raising equity, you know, where you're paying out a 14% dividend yield on that new equity?

Yeah, so, you know, on future equity raises, we are really dedicated to making sure we do not dilute investors. We're really dedicated on increasing our ROE, We are very dedicated to increasing that earnings per share. And so to the extent that we go and we raise additional equity, those things are front of mind. We do have a significant pipeline. We have great opportunities in front of us. But increasing AUM for the sake of AUM growth, we're not structured to focus on that first. And so we'll raise additional equity as we need to, but not for the sake of diluting shares and decreasing returns for investors.

Yeah, please go ahead.

Yeah, the only thing to add is we have some good flexibility and opportunities to raise capital through the ATM or equity offerings, but also from a debt perspective, we have a good amount of liquidity in our credit facility and at the lower end of our leverage ratio have some flexibility there.

I know you guys have raised the dividend consistently for the last 11 quarters, and congratulations, but what are you thinking in terms of incremental raises? Are they really needed to support the stock price or anything? What's the thoughts around that, please?

As our off-balance sheet income continues to increase and those earnings flow to the BDC, we will continue to have new earnings to share with investors. So, you know, we're not a traditional BDC. Our story is not going to replicate traditional BDCs. We are going to be very consistent with the dividend, and then we're trying to create a growth story for our shareholders.

And I would also point to our dividend coverage, 118%. Okay.

That's it for me. Thank you. Yep.

And our next question comes from Ryan Lynch with KBW.

Hey, good morning. Kind of following up on Kyle's earlier question about leverage, obviously with the equity raise and kind of the minimal growth this quarter in the portfolio, you guys are in a really good leverage spot. I understand that you guys are looking at ways to increase the operating ROE you guys have different tools out there like the jv that can increase the operating roe by growing that but at this point um do you guys foresee is it the kind of the the expectation that leverage will move back up into kind of that that targeted range uh in the one point you know kind of uh two ish area 1.2 1.3 ish area or the expectation that it will kind of hover around these levels and you will continue to enhance the ROE by investing in the JV and potentially the RIA at some point?

Hey, Ryan. It's a combination of everything you said there, right? We've got some really interesting levers in place so that we don't have to increase our leverage to generate new returns and higher returns for investors. And so, keeping it in that range of kind of one-to-one to one-three. I mean, that gives us some real flex on a quarterly basis to satisfy and make sure we close the deals we need to close, and also utilizing our off-balance sheet activity there to decrease the leverage ratio. And so we've got some really great flex with our leverage, but long-term, less leverage and higher returns, we actually have the ability to do that with our off-balance sheet activity.

Okay. Yeah, it makes sense. I would just say, yeah, if you have the ability to do that, I think that makes a lot of sense, just given the ROE is already very, very high today, and having some balance sheet flexibility, I think, is valuable, given the current market backdrop. The other question I had was, can you provide any update on where the situation was with Core Scientific stands. Obviously, we know what's going on there with that investment, at least from the backdrop. It looks like it was maybe written up slightly in the quarter, but still remains at a heavy discount. There's been a big move in Bitcoin prices. I'm not sure what the equipment has done, but just can you give an update on that investment and Have you seen any changes in the underlying market recently, given the big move higher in Bitcoin over the last several months?

Hey, this is Ron Ryan. I'll go first, and maybe Jerry will tack on. You know where it's at, but there's been a couple significant updates within the quarter. The claim amount and our collateral amount has been finalized with the company, which is fantastic. obviously a positive thing. And the company has also come to agreement with the equipment lenders under three different restructuring options. So it continues to move forward through the process. You asked a question about Bitcoin. Maybe, Jerry, if you want to tackle that one. I think you tagged that on at the end of your question, right?

Yeah, I think, you know, so here's what I'd say, right? The collateral amount and the... collateral and the claim amount were finalized with the company. That's what they're bringing into court. We understand the company is very close to reaching agreement with convertible note holders, but as of right now, we haven't heard that that's finalized. The judge in the case needed to recuse themselves. There's a new judge. We think the judgment date is at or around the end of the year. We can't really say what will happen, what the court judgment will make, but as Ron alluded to, The agreement that Trinity and the company have reached, as well as all the other equipment lenders, the company has three debt repayment options, A, B, C. They can choose which suits them best. So we considered those three options to discount cash flow analysis to value our holdings and still maintained a relatively high discount rate just to account for the overall risk. We will have an equitization option as well to consider moving forward. The valuation and the exact terms of that are not completely clear at this time, so it's impossible for us to say what we might pick. We expect to make that election within Q4, and we're going to do what we believe is in the best interest of our shareholders when we make that decision.

Okay. Understood. I appreciate the time today.

Thanks, Ryan. And we have our next question from Bryce Rowe with B. Riley.

Thanks. Good afternoon from the East Coast. Kyle, I wanted to ask, you made the comment, and you made the same comment last quarter about your portfolio companies continuing to attract new capital. I think last quarter it was 30 companies. This time it's 45 companies. and the new capital is up 1.4 to 2.4 billion. Can you just speak to kind of what's driving that and maybe speak to the message that might be counter to what we're hearing or what you might hear more broadly with the venture capital ecosystem? Thanks.

Sure. So listen, I think that certain industries raising capital is challenging right now. And though what we have seen in our own portfolio and across the board, there is a lot of equity flowing. It's just coming at damaging down rounds for investors to the tune of 20% to 75%. I mean, we've seen that with our own portfolio. Even companies doing well and still growing, they're going to have a correction in their valuation, many of which have been delaying what has become kind of the inevitable. And we're seeing that pipeline just kind of push through and companies are trying, they're having to take the pain and move forward. And so majority of our investments are relatively mature companies who have real technology, real businesses that are worth something. And they have technology that has real value and somebody is going to pay something for it. And so we've just seen that play out over and over again within our portfolio. And, You know, there's the market and our own portfolio. There's always going to be a handful of deals we're working on. It has to be. That's our industry, right? And since we founded Trinity, we've seen that our warrants and upside potential, they cover our losses and provide some incremental upside to investors. And so we've got a very dedicated portfolio team. We've got one individual for every 12 to 15 portfolio companies. That's all they do. And we're being incredibly proactive and to renegotiate and provide incremental upside within our own portfolio. It's easy right now. New deals, you can see it. They're priced higher. We're getting more warrants. They're very exciting. It's an interesting time to be investing, making new investments. But we're actually, within our own portfolio, as new equity flows in, we're being very proactive on making sure we create that upside potential. so that what we can cover any outside or losses we might have in the future and create some additional upside for investors. So we're trying to be really consistent there.

Great. That's helpful. Um, you know, and maybe, maybe a couple of followups, um, related to those, to those, to that answer. Um, number one, you know, you talked about the top of the funnel kind of getting bigger. Um, and then you just also talked about kind of your, your team, um, How do you think about the employee base and the employee base growing with the better opportunity set that you're seeing, especially in the context of being internally managed and different from an externally managed BDC that doesn't have direct salary and benefit type of expense on the income statement? Can you talk about the opportunity there Um, you know, from an employee, you know, gay or capturing more employee perspective.

Yeah. Um, you know, we have taken a real sniper approach to new employees. We are looking for the best talents in the industry. We've got a, we've got a pipeline filled with potential people across the platform. Um, and we're, you know, we're being very opportunistic about who we bring on board and we continue to hire in advance. So we've, that's been a theme for us from the beginning. We wanted to get this, this platform to scale. We have a vision for what we want to build here, you know, five years out in the future and then some. And we're hiring according to that plan. And so, you know, we're not, you know, the BDC is not to scale yet. I think there's some real efficiencies we'll see as we continue to grow and increase assets. But, you know, we're excited about the people we're bringing on board. We're going to continue to hire in advance for the plan that we're trying to execute upon right now. all the while taking into account the fact that we want to make sure that we, what, increase earnings per share and focus on that ROE growth. And so, you know, we balance those two things, and, you know, we're going to continue to hire in advance and continue to build the platform. Got it.

Appreciate those comments. Have a good one. Yeah, thanks, Bryce.

And we have our next question from Casey Alexander with Compass Point.

Hi. Good afternoon. It might be a little bit of a rambling question, and it refers to a lot of things that you've already said, but I mean, just stepping back for a second and looking at the fact that at 0.93 or 0.94 times, you know, you're under levered on the balance sheet, which would argue two things to me. One, that you would take your foot off the gas of the ATM program, and two, even though the JV is not anywhere near scale and not really contributing much income, you would likely not contribute a lot to the JV right now until you reach a more fulsome leverage level on balance sheet, which would be the best way to maximize your earnings. And so I was just wondering if you could speak to that because that mix seems to make sense to me that things should go on balance sheet first until you're in a more fulsome leveraged then perhaps you can tap some of the ATM and start to build the JV to scale.

Thanks, Casey. This is Kyle, and I think Jerry and Michael add on to it. I think you're looking at a point in time, right? We had a pretty significant pipeline, some of which got pushed into Q4. So there's that effect a bit. You know, but I think we can do both, Casey. I think what we're trying to do is keep that leverage lower so that we have, you know, we saw this. We saw this when SEB went down. There were suddenly some pretty significant opportunities. And if you're highly leveraged at that point, you had less liquidity, you had less opportunity to take advantage of what was a difficult time. And we really want to position ourselves to be opportunistic, which I think creates, you And so I think there's this combination. If we have the pipeline, right, if we can put the money to work, there's this really interesting balance of continuing to issue some new shares, utilize our off-balance sheet funds, while keeping that leverage in a position where we've got a lot of liquidity available to us. And so if we can continue that up into the right trajectory of earnings, dividend increases, while also doing those other things, I mean, that's the sweet spot. Right.

Yeah, I guess, you know, one other point after three quarters, you know, Q4, Q1, Q2 of very low early repayments, you know, we did see a substantial uptick on that within Q3, right? And this isn't something we can predict, right? So we have to capitalize the business to be opportunistic. We can't count on those early repayments, but when they come, you know, you might see that, you know, reflected in the leverage ratio as of September 30th. And I think that's what you're seeing.

All right, thank you. That's my only question. Thanks, Casey.

And we have reached the allotted time for our Q&A session. I would like to now turn the call back to CEO Steve Brown for closing remarks.

Thank you. We'd like to thank everybody for participating today, and we look forward to being in touch with you after the holidays. One final note as a reminder, I want to highlight that members of the Trinity management team will be attending the Jeffries BDC Summit in New York on November 15th. If you're interested in meeting with us at this event, please reach out to Ben or your Jeffries representative. Thanks again. And one last note, go D-backs. Let's keep it going. Let's go.

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