TRIN - Trinity Capital: Waiting For The Premium To Come Down

2023-12-26 04:29:00 ET

Summary

• Trinity Capital operates as a BDC and venture capital firm, focusing on providing venture debt to growth-stage companies.
• The company has a diversified portfolio, with a majority of its investments in the healthcare and pharma sectors.
• Trinity Capital has reported solid financials, with a strong return on average equity and an increase in net asset value. However, shares are currently trading at a premium to net asset value.

Overview

Trinity Capital (TRIN) operates as a business development company and venture capital firm with a focus on providing venture debt to growth-stage companies seeking loans and equipment financing. Established in 2019, the company is headquartered in Phoenix, Arizona, and maintains additional offices across the United States. We can see an example of how they inject themselves into different businesses to profit below:

This BDC (business development company) is highly diversified with solid financials and good credit ratings. A majority of their portfolio consists of floating rate loans so as a result, they've greatly benefit from a higher interest rate environment. Even as interest rates come down, TRIN has the proper setup to still remain profitable and provide value to shareholders.

TRIN currently has a dividend yield sitting slightly above 13%. Surprisingly, the dividend growth has also been quite strong. This is especially true when you take into account all of the supplemental payments they've issued over the last year and a half. However, the price is trading at a higher premium than average when compared against the NAV. For this reason, I am on the sidelines and awaiting a better entry opportunity.

Portfolio

As you can see, TRIN's portfolio is quite diversified throughout different sectors. The majority coming it 12.3% is the healthcare and pharma sector. TRIN is pretty evenly spread with most sectors accounting for 7% - 10% of their total portfolio. Something I like about their portfolio is that roughly 75% of it is made up of 1st lien / senior secured loans.

TRINs allocation of 75% of its portfolio to 1st lien senior secured loans is strategically beneficial for several reasons. Firstly, these loans grant them a senior secured position, ensuring a higher claim on the assets of borrowing companies in case of default or bankruptcy. While there's obviously still risk, this priority in repayment enhances the safety of investments. Additionally, the fixed interest payments on these loans provide a reliable cash flow, contributing to the stability of Trinity's financial performance.

TRIN demonstrated a proactive approach to managing its debt portfolio, with debt principal repayments totaling $176.7 million. This repayment features $101.1 million attributed to early repayments and refinancing. This strategic move not only underscores the company's financial agility but also suggests an active stance in optimizing its debt structure which is always reassuring for me.

Scheduled and amortizing repayments contributed an additional $42.1 million to the overall debt principal repayments. This component reflects the disciplined management of scheduled payment obligations. Lastly, TRIN successfully navigated asset sales, generating $33.5 million through the sale of assets to a joint venture. This highlights the company's capacity to leverage partnerships and unlock value from its asset portfolio, contributing to the overall reduction in debt principal.

Financials

TRIN has reported solid financials in its latest earnings , with a total investment income of $46.4 million. This reflects a 20.0% increase year-over-year. The company's NII (net investment income) reached $23.4 million, or $0.58 per basic share, marking a 25.6% year-over-year growth. This translated into an increase in net assets resulting from operations of $16.8 million. Something that stood out to me is that TRIN had a strong Return on Average Equity of 17.6%. This highlights its efficiency in utilization of equity in generating income.

In addition, TRIN experienced an increase in Net Asset Value to $13.17 per share. The company also made significant strides in its investment commitments, with aggregate debt and equity investment commitments reaching $228.3 million. The allocation of funds to debt and equity investments may signify the pursuit of income generation through interest payments and capital appreciation. This is always good to see in my opinion because it may indicate the company's focus on expanding upon a diverse range of businesses, industries, or stages of growth.

Talking of expansion, TRIN funded a total of $149.1 million in gross investments. This comprised $81.2 million across five new portfolio companies, $65.9 million distributed among ten existing portfolio companies, and an additional $2.0 million allocated to a joint venture. These strategic investments reflect the company's commitment to diversification and expansion, positioning itself for sustained growth in the market.

Dividend

As of the latest declared quarterly dividend of $0.50/share, the current starting dividend yield is about 13.1%. This declared dividend is actually a raise of 2% over the prior dividend of $0.49/share. The growth story here is actually quite impressive for a stock already offering shareholders a high yield. Since Q1 of 2020, the dividend has grown impressively alongside a plethora of supplemental payments over the last year and a half.

NII per share represents the income generated from the company's investment activities on a per-share basis. TRIN reported NII per share of $0.58. This means there was 118.4% of regular distribution coverage. In this case, the robust NII per share of $0.58 indicates that TRIN's earnings are not only sufficient to cover the regular distributions to shareholders but also provide a substantial coverage. This is where the supplemental distributions come in.

I like this healthy level of coverage. This additional coverage can serve as a buffer against unforeseen challenges or fluctuations in the investment environment. This helps for the anticipated interest rate cuts over the course of 2024. If it continues, this may also provide the company with the flexibility to consider additional special dividends. With this in mind, I do not worry about any distribution cuts.

Valuation

If you weren't aware, debt based BDCs like TRIN, are capable of trading at either a premium or discount to what their value is actually worth. Concerns about the company's future performance, the credit quality of its portfolio, or broader economic conditions can lead investors to be less willing to pay a premium for shares. Trading at a premium often reflects confidence in the BDC's performance. Factors such as strong financial results, high dividend yields supported by a stable portfolio, and trust in competent management can contribute to shares trading at a premium.

In the case of TRIN, shares currently trade at a higher premium to NAV (Net Asset Value) than I find comfortable. For this reason, I am rating the stock as a hold and I'm prepared to wait on the sidelines until a better entry opportunity arises. The current premium is about 15.5% and this relationship has quite a wide range. Only looking back over the last 3 year period, we've seen TRIN trade at as high of a premium of 28% and as low of a discount as 25%.

Takeaway

Trinity Capital Inc stands out as a resilient and strategically diversified BDC, effectively navigating the complexities of venture debt and growth-stage financing. The emphasis on senior secured 1st lien loans, constituting 75% of the portfolio, reflects a prudent approach, offering a higher claim on assets and stable cash flows.

The proactive management of the debt portfolio, as highlighted in the Q3 presentation, underscores TRIN's financial agility and commitment to optimizing its debt structure. The impressive dividend yield of 13.1%, coupled with consistent dividend growth and a healthy NII per share coverage of 118.4%, reflects TRIN's commitment to providing value to shareholders.

However, cautious consideration is warranted as shares currently trade at a 15.5% premium to Net Asset Value, prompting a hold rating. While this premium has historical variability, it underscores the importance of evaluating entry points for potential investors.

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