TRIN - Trinity Capital: 14% Yield Undervalued Insiders Buying 8 Straight Hikes

2023-03-10 09:15:00 ET

Summary

• Trinity Capital Inc.'s regular dividend yield is 13.6%, with steady supplemental dividends adding another 4.4%.
• Management has made 8 straight quarterly dividend hikes and paid 4 straight supplemental dividends.
• Dividend coverage was 1.28x in 2022.
• Trinity Capital looks undervalued on an earnings basis.

Is your portfolio benefiting from rising rates? One 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 BDC's, TRIN benefits from rising interest rates.

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 $2.4B in fundings, in 284 investments, with 159 exits, and has $1.1B in Assets under management ("AUM"). As of 9/30/22, Secured Loans made up ~72% of TRIN's portfolio, followed by Equipment Financings, at ~23%, Equity, at 3.4%, and Warrants, at ~1.8%.

As of December 31, 2022, TRIN's investment portfolio had an aggregate fair value of ~$1,094.4M, an increase of 5.0% vs. Q3 2022. It was comprised of ~$802.9M in secured loans, $246M in equipment financings, and $45.5M in equity and warrants, across 116 portfolio companies.

Management has decreased the Equity & Warrants segment of its portfolio, from 15.7% in Q4 '21, down to just 4.1% as of 12/30/22. The difference has mainly been allocated to Loans, which have expanded from 63.2% to 73.4% over the past year:

Rising Rates Are A Tailwind For TRIN:

TRIN's debt investment portfolio was 67.5% floating rate; and its Debt was 69.8% fixed rate, as of December 31, 2022. Management has increased the % of floating rate debt investments from 56.8% to 67.5% over the past year.

Management reckons that, for every 100 basis point increase in the prime rate adds an additional $5.14M of interest income, or $0.15/share to TRIN's annual earnings.

TRIN'S portfolio core yield has risen from 13.2% in Q4 '21, to 14.2% in Q4 '22, while its effective yield went from 15.2% to 15.5%. Meanwhile, its Debt portfolio rose from below $800M to over $1B:

The main difference in TRIN's holdings vs. other BDCs' is that it has more exposure to Manufacturing, due to its equipment financing investments.

Its top 5 industry exposures comprise 49% of its portfolio, with Green Tech, at 14%, Finance/Insurance, 10.4%, Food & Agri-Tech, 9.3%, Real Estate Tech, 8.8%, and Space Tech, at 6.5%. 22% of its holdings are less than 5% of the whole:

Its biggest geographical exposures are in the eastern U.S., at 28.4%, with ~40% exposure to the West Coast. It also has ~7% international exposure.

Earnings:

Trinity Capital's earnings benefited greatly in 2022 from the rise in interest rates, and having a higher % of its portfolio in floating rates. Interest expense rose over 67% in 2022, but was outpaced by earnings.

Net Investment Income, 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.

Q4 '22, saw Total Investment Income up ~76%, with NII rising 103%, and Diluted NII/Share up 50%, despite a 27% jump in the share count, and a 65% rise in Interest expense.

During January 2023, the Company repurchased 91,691 of its outstanding common stock at a weighted average price of $10.91.

New Business:

In Q4 '22 , Trinity Capital management made aggregate debt and equity investment commitments of $239.5M, with total gross investments funded of $120.8M, comprised of $70.4M across 7 new portfolio companies, and $50.4M across 9 existing portfolio companies.

On December 6, 2022, Trinity announced an agreement to co-manage a newly formed joint venture with certain funds and accounts managed by a specialty credit manager. The JV will invest in loans and equipment with an initial capital commitment of up to $171M to continue growing deployments.

On December 14, 2022, Trinity received exemptive relief for a registered investment adviser ("RIA") entity, and is now permitted to organize, acquire and wholly own a portfolio company that intends to operate as an investment adviser registered with the SEC. This allows Trinity to execute with a unique growth lever to pursue accretive investment opportunities.

Portfolio Company Ratings:

Like other BDCs, TRIN's management reevaluates the financial performance of its invested companies each quarter. As of 12/31/22, 95.3% of TRIN's holdings were in the top 3 tiers, similar to Q3 '22. However, there was an increase to 72% of its companies in the 3rd tier, vs. ~54% in Q3 '22:

Dividends:

TRIN most recently paid a $.46 regular dividend, (up $0.01/share vs. Q3 '22), and a $.15 supplemental dividend in January.

At its 3/9/23 closing price of $13.53, TRIN yields 13.6% for its regular yield. The $0.15 supplemental dividend adds another 4.4%, for a total yield of ~18%, if management continues to pay supplemental $.15 payouts in 2023. Its trailing dividend yield is 19.44%:

TRIN covered its regular quarterly payouts by a factor of 1.28X in 2022. It also had $1.73/share in Undistributed Net Investment Income, NII, as of 12/31/22:

TRIN has had 8 straight quarterly dividend hikes, raising the regular payout from $.27 to $.46/share in 2021-2022. They also paid 4 consecutive $.15 quarterly supplemental distributions in 2022.

Taxes:

2022 distributions were comprised of $1.78 in Ordinary Income Dividends and $.5478 in long term capital gains. Ordinary Income dividends are from the TRIN's ordinary NII and net short-term capital gains for the year.

Profitability & Leverage:

The -$135M in Unrealized Gains in 2022 put TRIN's ROE and ROA in the red, due to a negative Net Income of -$30M. EBIT Margin rose again, to 74.3%, slightly higher than the BDC industry's 73% average.

Debt/NAV rose to 1.33X, roughly in line with the industry average. As a BDC, TRIN's leverage is limited to ~2:1 Debt/Equity, so it was well below that figure, as of 12/31/22.

Debt & Liquidity:

TRIN finished 2022 with $171M in liquidity, comprised of $10.5M in Cash and $162.5M in available credit on its KeyBank Credit Facility.

TRTN's debt ladder looks manageable, with no maturities until January 2025, when $182.5M in unsecured notes come due. Its $400M Credit facility matures in October 2026, giving management plenty of time to refinance.

TRIN has a BBB investment rating from Egan-Jones.

Insiders:

Insiders bought ~50,000 TRIN shares in December '22, at prices ranging from $10.38 - $10.50/share.

Performance:

Looks like they were onto something. Since our last article on TRIN, in mid-December, it has delivered a total return of 37% in under 3 months.

Indeed, TRIN has trounced the S&P 500 (SP500) and the BDC industry over the last quarter, and so far in 2023. Its ~total 1-year return was also a bit higher - even though it lagged in price, its high dividend yield gave it a better overall return:

Analysts' Targets:

That price surge has lifted TRIN to within 4.8% of analysts' $14.21 average price target, whereas it's still 15.4% below the $16.00 highest price target.

Valuations:

At $13.53, TRIN is selling at a 2.89% premium to its NAV, vs. the overall BDC industry average 5% discount to NAV.

Looking back over the past year shows that TRIN has mostly been selling at a premium to book value since May '22.

However, TRIN looks a lot cheaper on earnings multiple bases.

Its Price/NII of 6.32X is much cheaper than the 8.89X BDC average , while its Forward P/E of 6.57 is also lower than the 8.23X BDC average . Meanwhile, its 13.6% yield on regular dividends is much higher than the industry's 10.58% average yield:

Parting Thoughts:

In BDC Land, there's sometimes a "get what you pay for" effect - there are some BDCs that typically sell at a premium to NAV, due to their proven track records and dependable dividends. Trinity Capital Inc. appears to be developing into one of those well-regarded BDCs that investors are willing to pay a premium for.

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

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