TRIN - Trinity Capital: I'm Aggressively Buying The Fat 12.6% Regular Yield

2023-03-06 12:22:53 ET

Summary

• Trinity Capital is paying out a 12.6% regular yield which comes with a 4.2% supplemental payout.
• The BDC recorded dual beats for its last reported fiscal 2022 fourth quarter on the back of $121.4 million in funded commitments.
• With net investment income per share at $0.62 per share during the fourth quarter, Trinity's payout ratio remains healthy at 74.2%.

Trinity Capital ( TRIN ) last declared a quarterly cash dividend of $0.61 per share , a 2% increase from the prior payout for a 17.1% aggregate yield. This was formed from a regular dividend payment of $0.46 per share and a $0.15 per share supplemental payout. This yield at first looks seemingly outsized but is fundamentally a reflection of two dichotomies that have opened up over the last 12 months. The first is a stock price under pressure from broader stock market angst as the rising Fed funds rate continues to form a specter against bullish animal spirits. This has come against a business that continues to outperform with Trinity recording dual beats on total and net investment income for its last reported fiscal 2022 fourth quarter.

Hence, this yield is transitory in the sense that the market could eventually bid Trinity's commons back up to a level where the fat yield looks more moderate. This highlights the potential opportunity available to common shareholders of the BDC. The solidly double-digit payout stands to be backstopped by what could be strong price returns in the years ahead. To be clear here, I do not view Trinity as a sucker yield and my long-term position in its commons is built on what remains a sustainable payout ratio, a steadfast investment portfolio, and future growth opportunities.

The payout has been on an upward ramp since the company went public in 2021 with the last payout being the eighth straight quarter of the dividend being increased. Will there be more near-term raises? Potentially. However, I think the market has currently reached an impasse where increased safety and growing NAV especially for 2023 will deliver comparatively greater shareholder returns than another increase.

A Growing Floating Rate Debt Portfolio

Trinity's recently reported earnings for its fiscal 2022 fourth quarter saw a total investment income of $41.51 million , an increase of 75.83% over the year-ago figure and a beat by $3.29 million on consensus estimates. The BDC's investment portfolio at fair value was $1.09 billion, up 5% sequentially from the third quarter and 25% on the year-ago comp on the back of funded fourth quarter commitments of $121.4 million. For the full year, Trinity originated $976 million in commitments and $631 million in investments. The BDC entered 2023 with $393 of unfunded commitments to form a strong pipeline for the current fiscal 2023 first quarter and beyond.

Critically, growth has coalesced around a new $171.4 million joint venture between Trinity and an unnamed specialist credit manager. The co-managed JV will invest in loans and equipment financing to companies that have been originated by Trinity with the BDC contributing $21.4 million of the total funds. This will allow Trinity to expand its portfolio and generate predictable fee income. Further, Trinity received exemptive relief for a registered investment adviser, a structure that will allow it to raise funds off its balance sheet to continue to provide growth and net investment income in a shareholder-friendly way.

Management stressed the healthy diversification of the portfolio during their earnings call, with green technology, finance and insurance, and food and agriculture technologies forming the largest three industries. This is a portfolio that includes Bowery Farming, a New York-based vertical farming startup and space infrastructure developer Axiom Space.

Trinity also provides further granularity on its portfolio by investment type. As of the end of the fourth quarter, around 67.5% was formed from floating-rate debt investments. Loans accounted for 73.4% of the portfolio with equipment finance and equity at 22.5% and 4.1% respectively. The core takeaway was more growth is coming on the back of the rising Fed funds rate and the RIA initiative.

Net Investment Income And The Payout Ratio

Trinity recorded a net investment income of $21.6 million, around $0.62 per share and an increase of 103.8% over the year-ago quarter. On a fully diluted basis, NII was $0.57 per share and was a $0.11 beat on consensus estimates. Hence, the BDC's payout ratio stands at 74.2% when the regular dividend is set against basic NII and 80.7% against fully diluted NII. This comes as NAV per share fell sequentially to $13.15 from $13.74 in the prior third quarter.

An unrealized loss of around $0.69 per share was the core driver of this fall with FemTec Health and Core Scientific accounting for around 75% of the unrealized depreciation. It's important to note that the supplemental dividends are paid out from undistributed earnings spill over. This stood at $60.4 million, or $1.73 per share, as of the end of the quarter. Whilst the BDC is in a good position to raise its payout, I think management should keep the regular payout at its current level and focus on the stabilization of NAV. Trinity remains a core holding against its safe payout ratio and healthy growth initiatives.

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