TRIN - Join The 1% By Earning 10%

2023-09-19 07:35:00 ET

Summary

• The Occupy Wall Street movement highlighted what so many of us already knew.
• Retirees and investors frequently fail themselves by failing to adjust their portfolios to meet their needs.
• Income investing can solve many of your income problems.

Co-authored by Treading Softly.

Do you know where the Occupy Wall Street movement went? I frequently feel like this movement has been lost to the pages of history, largely because it was unable to coalesce around a single idea and kept poking off in different directions. One concept that remained true, though, was that there was 99% of the population who did not have as much wealth as the wealthiest 1% of the population.

This concept continues to be true to this day. There is a vast range of what's considered wealth disparity within the United States, and yet, so many people don't realize that the choices they make day-to-day lock them into this level of disparity. The wealthiest among us make specific choices to gain more wealth or grow their wealth, while many of us make foolish choices on a daily basis that diminish or destroy our wealth. I'm not saying it's an even playing field, but many of us make it more uneven than it has to be - through poor decisions.

When it comes to retirement, many of us decide to lock ourselves into a poverty-driven retirement, slowly eroding our wealth instead of enjoying a strong income and adding to it. Instead of building a legacy for their heirs to thrive from, they sell off their assets, making their portfolio weaker for each year they survive.

I developed my Income Method as one that allows a retiree to enjoy a strong, consistent level of income without having to dismantle everything that they've taken decades to build. Instead of selling stocks to fund your lifestyle, buy investments that provide you with a recurring income stream. Live off that income stream and earmark a portion of it to reinvest. This way, every year you are buying more assets, rather than selling assets. That is what the top 1% do - they buy more assets every year.

To reach the top 1%, you would need a portfolio that is about $3 million and produces an income of $300,000/year. That might or might not be within your reach. I can't promise you that. What I can say is that if you build a diversified portfolio of income-producing investments, and reinvest at least 25% of that income, you will find that your income stream is growing as you become a net buyer of stocks every year. You will own more assets; a larger piece of the economy and you will find that your income grows.

You can achieve a comfortable retirement, without selling off all the assets you worked your whole life to accumulate. You can enjoy the golden years of your retirement with confidence that your income is enough to suit your needs. And you will leave a legacy for your heirs, providing them the platform to build on, adding assets from their efforts rather than tearing it down and selling everything.

Let's take a look at two great investments that can help you on that journey today.

Let's dive in!

Pick #1: BRSP - Yield 11.5%

BrightSpire Capital, Inc. ( BRSP ) is a mortgage real estate investment trust, or REIT, that focuses on investing in commercial mortgages. BRSP has a troubled past. Formerly known as CLNC, BRSP's former manager Colony Capital created an eclectic portfolio that had no direction and a lot of risk. It didn't work out well for the company or for the shareholders.

In 2020, Mike Mazzei, one of the founders of Ladder Capital ( LADR ), was brought in as CEO. Then management was internalized and the company changed its name in 2021. What is important is that the company changed a lot more than just its name.

Here is CLNC's portfolio in March of 2019: Source .

For a company that was supposed to be a "commercial mortgage REIT," 39% in senior mortgages is a rather small concentration. CLNC had net-lease real estate, operating real estate, mezzanine loans, debt securities, preferred equity, and private equity. Aside from the net-lease properties, all of these have a higher risk profile than senior mortgages.

Here is a look at BRSP today: Source .

BRSP still holds the net lease portfolio and literally one private debt security for $3 million. Other than that, its portfolio is all loans. Among its loans, 97% of them are senior mortgages. They continue to have a handful of legacy mezzanine loans and one preferred position.

In 2019, CLNC's largest property types were hotels and offices at 31% and 28%, respectively, while multifamily was only 15% of loans. Today, BRSP prioritizes the multi-family space.

The company has changed a lot. It has become a lot more defensive and a lot more liquid. The largest portions of BRSP's book value are senior mortgages, net lease real estate, and cash.

BRSP has seen its share price climb up from May 2023 lows but still is trading at approximately 40% discount to book value. If BRSP still had large allocations to risky mezzanine loans and equity positions, that might make sense. But with a portfolio concentrated in secured mortgages and net lease real estate, such a large discount is unjustifiable.

In today's environment, with fears of mortgage defaults being real, it would be reasonable for BRSP to trade at a 20% discount, which would be slightly over $9/share until default risk declines.

While we wait for the market to come around, we can have a lot of confidence in BRSP's defensive posture.

BRSP's leverage is lower than most peers at 1.9x. It has $182 million ($1.40/share) in unrestricted cash, providing it a lot of flexibility to manage any loans that do default, and its earnings have been covering the dividend by 125%, providing ample cushion to protect shareholders from a dividend cut if defaults do happen.

BRSP bears no relation to CLNC. Mike Mazzei came on as CEO and made real, fundamental changes to the company. When the market realizes this, the discount will likely disappear. In the meantime, we will be sitting here collecting our dividends, getting a much higher yield thanks to a market that loves looking at old charts.

Pick #2: TRINL - Yield 7%

Trinity Capital Inc. ( TRIN ) is a less well-known BDC (Business Development Company) focusing on venture capital investments. Unlike others in the space, like SuRo Capital ( SSSS ), TRIN focuses primarily on making equipment or senior loans to new and growing companies vs. taking on an equity position.

This focus allows TRIN to enjoy greater levels of reliability in its income, but also to benefit from rising interest rates. Many of these venture capital startups are burning through cash and need cash. If you invest in the equity of these companies, there's a greater amount of volatility, especially as interest rates have risen, and it's harder for these small companies to get new capital. TRIN is able to benefit strictly from being a lender to many of these. They do hold warrants in various companies in their portfolio, which is a very small section of what they do.

We've highlighted in the past that this is a prime time for business development companies, or BDCs, to benefit as we're in a Goldilocks period, where many BDCs have low-interest debt that is funding high-interest loans that they are able to give out. TRIN has been no exception. Source .

TRIN has seen rising yields on their overall portfolio because of the floating rate debt that they issue out. Yet their highest fixed-rate debt currently is their soonest-to-mature bond at 7%. After this bond, all of the rate that they have to pay on their fixed income is actually lower than that 7% rate. We fully expect that TRIN will have no issue redeeming this bond and issuing a replacement in 2025, when interest rates are expected to be lower.

Trinity Capital Inc. 7.00% Notes due 1/16/2025 ( TRINL )

Currently, TRIN is strongly covering its TRINL baby bond. TRIN has over 4x coverage of their interest expenses by total investment income. Even as rates rise, TRIN has maintained this level of coverage. TRINL is callable at any time and matures in 2025.

TRINL is exceptionally low risk and yields 2% higher than commonly available CD or money market accounts with a similar duration. This makes TRINL a very attractive place to store cash in the short term.

Due to being past its call date and nearing its maturity date, TRINL is pegged near PAR value continuously, making it an easy place to store cash and not have to worry about volatility while enjoying a 7% yield. This is one massive benefit of holding various baby bonds that are close to maturity – you're insulated from interest rate shifts, but also able to collect great income from a short-term holding. For that reason, I'm going to continue to hold my shares of TRINL and add when I want a short-term holding.

Conclusion

With BRSP and TRINL, we can enjoy strong income. BRSP allows us to benefit from a highly skilled management team redeveloping a previously poorly run company. TRINL provides us with an easy place to store cash and enjoy high yields without having to pile on high levels of risk. Both play pivotal roles in an income portfolio.

Your retirement will come with expenses. Every time you turn on a light, every time you take a bite of a cookie, and every time you start your car, money is being spent that has to be replaced somehow. For so many, they feel that the way to replace this money is to liquidate assets that took decades to build. I'm here to tell you that that is not necessary.

So many people have the desire and drive to be rich, simply to have an enormous pile of assets, but they fail to understand that being wealthy is the key. Being wealthy means that you have an income that exceeds your expenses in abundance. Someone who is wealthy will eventually become rich because that excess will build and build. Someone can be rich, like winning the lottery, and never be wealthy because they never have the ability to replenish the assets after they use them.

If you want to be part of the 1%, you need to have a plan that allows you to not only grow your assets but replenish them when you have to use them against expenses. My unique Income Method can help you do exactly that – build wealth and continue to see that wealth pour in again and again.

That's the beauty of my Income Method. That's the beauty of income investing.

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