TRIN - Trinity Capital: 14% Yield Robust Earnings Estimates Rising

2023-09-08 09:15:00 ET

Summary

• Investing in certain Business Development Companies (BDCs) can benefit retail investors from rising interest rates.
• Trinity Capital Inc. is a BDC that focuses on companies backed by venture capital firms and benefits from rising rates.
• TRIN's management has been increasing its floating rate investments, resulting in a rise in core yield.
• TRIN has strong dividend coverage for its 14%-plus yield.

Are you benefiting from rising rates? An interesting way for retail investors to do that is to invest in certain Business Development Companies, known as BDCs.

BDCs offer retail investors high yield exposure to private companies, and some of them, like Trinity Capital Inc. ( TRIN ), focus on companies which are already backed by venture capital firms. Like certain other BDCs, TRIN benefits from rising interest rates.

TRIN's management estimates that the company gains an additional $.15/share for every 100 basis point increase in interest rates:

BDCs' strategy is to have a much lower amount of fixed debt, with a high % of floating rate investments. TRIN's management has been increasing the amount of floating rate investments - it has risen from 64.4% to 72.1% over the past 5 quarters.

Meanwhile, TRIN only had 34.9% floating rate borrowings as of June 30, 2023.

With interest rates rising, this has resulted in TRIN's core yield rising from 12.9% to 14.8% during this period:

Company Profile:

Trinity Capital Inc. is an internally managed BDC which specializes in venture debt to growth stage companies looking for loans and/or equipment financing. Trinity Capital Inc. was founded in 2019 and is based in Phoenix, Arizona, with additional offices in Lutherville-Timonium, Maryland, San Diego, California, and Austin, Texas. It IPO'd in January 2021, but had a longer prior history dating back to ~2008 in its predecessor funds.

Over the past 15 years, Trinity Capital has done $2.6B of funding in 298 investments, with 171 exits.

Holdings:

TRIN has $1.2B in assets under management, as of 6/30/23.

74.5% of its investments are loans, valued at $856M. A differentiating feature vs. other BDCs is that TRIN also does a lot of equipment financing, which comprised 21.3% of its portfolio, at $244M.

It also gains upside potential via 136 warrant positions in 84 companies, valued at ~$28.7M, with a cost basis of $23.7M. Although management reckons that 50% of these warrants won't pan out, the upside can be significant, with potential multiples of over 2X.

TRIN has more exposure to Manufacturing than other BDCs, due to its equipment financing investments.

Its top 5 industry exposures comprise ~52% of its portfolio, with Green Tech, at 12.6%; Finance/Insurance, 11.9%, (up from 10.4% in Q4 '22); Life Sciences, at 10.1%, vs 7.3% in Q4 '22; Consumer Products/Services, at 8.7%; and Food & Agri-Tech, 8.4%.

Its holdings have become more diversified in Q1-2 '23 - 24% of its holdings are less than 4%, way up from 18% in Q4 '22.

TRIN also has a direct lending JV, which invests in loans and equipment financings originated by Trinity, with an initial equity capital commitment of up to $171M. The JV closed on a credit facility from KeyBank in Q2 '23.

Portfolio Company Ratings:

Like other BDCs, TRIN's management grades its company holdings each quarter, with a 4-5 rating being its top tier, and 1-1.5 rating being its lowest.

In Q2 '23, 1.4% of the portfolio was rated in the lowest tier, vs. 1.6% in Q1 '23. The next lowest tier, "Watch", increased to $34.4M, 3.1%, vs. $19.27M in Q1 '23.

As of 6/30/23, a loan to 1 portfolio company and equipment financings to 2 portfolio companies were on non-accrual status, with a total fair value of ~$22.5M, or 2.0% of the Company's debt investment portfolio at fair value.

Earnings:

Q2 '23: TRIN had robust growth, with $46M in total Investment Income, up 37.3%, and $22.1M in NII, up 41% vs. Q2 '22. There was a net increase in net assets resulting from operations of ~$20M, $.55/share, with NAV/Share rising from $13.07 at 3/31/23, to $13.15 as of 6/30/23.

Q1-2 '23: Strong Revenue growth of 34%, and NII growth of 32%. With the share count up 20% vs. Q2 '22, NII/Share grew 7.8%, with NAV/Share down 10%. Interest expense rose 10%.

2022: Earnings benefited greatly in 2022 from higher interest rates, and from TRIN having a higher % of its portfolio in floating rates. Interest expense rose over 67% in 2022, but was outpaced by earnings. NII rose over 83% in full year 2022, with Total Investment Income rising 77%. Diluted NII/Share jumped 47.6%, even with a 20% rise in the share count.

TRIN did a $75.0 million of common shares at a public offering price of $14.45/share in August '23.

New Business:

In Q2 '23, TRIN had total gross investments funded of $154.9M, comprised of $103.1M in 5 new portfolio companies, $48.3M across 7 existing portfolio companies, and $3.5 million into the recently formed joint venture.

Debt principal repayments totaled $103.5M, including $13.7M from early repayments, $31M from scheduled/amortizing repayments and $58.8M of assets sold to the JV.

Dividends:

TRIN's most recent dividends were a regular payout of $.48/share, plus a supplemental distribution of $.05/share. The regular dividend yield is currently ~13.56%, with the supplemental distribution adding 1.41%, for a total yield of ~15%.

NII/ Regular Dividend coverage was strong, at 1.27X in Q2 '23, and has averaged 1.2X over the past 4 quarters.

Since Q2 '20, TRIN has paid out $4.97/share in regular dividends, and $.65/share in supplemental dividends. The regular dividend has increased from $.22 to $.48/share during this period. NOTE: Some financial websites inaccurately list the 2022 dividends as being $.55 - $.61. They ran from $.40 to $.46.

Insiders:

In June and August, insiders bought ~440 shares at a range of $13.25 to $14.16.

Profitability & Leverage:

ROE, ROA, and EBIT Margin all increased over the past 4 quarters, and remained above BDC industry averages. Management increased leverage somewhat, but it's in line with the industry average.

TRIN's Assets/Debt ratio remained stable, at 1.81X, while EBIT/Interest coverage, at 2.97X, was a bit lower than the Q4 '22 3.17X figure.

Debt:

TRIN's earliest debt maturity is January 2025, when its 2025 Unsecured Notes $182.5M principal comes due. Its credit facility matures in October 2026:

Performance:

TRIN's price performance has outperformed the BDC industry, the broad Financial sector, and the S&P 500 by wide margins so far in 2023. It has also outperformed its industry, and the Financial sector on a total return basis over the past year.

Analysts' Upgrades & Price Targets:

TRIN received an upgrade to Buy, with a $15.50 price target, from Compass Point in late August. Keefe Bruyette as raised it from underperform to market perform, with a $15.00 target in August. Jefferies initiated coverage in July, with a Buy rating, and a $15.00 target:

Since late June '23, Wall Street analysts have raised their lowest price target by 27%, from $11.00 to $14.00. They've also raised their average target by 20%, from $12.93 to $15.56.

Valuations:

At its 9/7/23 intraday price of $14.16, TRIN was selling at a 7.68% premium vs. its 6/30/23 NAV of $13.15/share, vs. the BDCs average 3% discount to NAV. TRIN's premium to NAV peaked at ~1.5X in 2022.

However, TRIN's earnings multiple, P/NII, at 6.38X, is much cheaper than the 8.82X BDC average, as is its forward P/E of 6.35X, vs. the industry's 7.74X average. It's around 8% below its 52-week high of $15.37.

Parting Thoughts:

We rate TRIN a long term Buy, but you may want to wait until the Fed's next rate announcement on 9/20/23. The treacherous month of September may offer some cheaper prices.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

For further details see: