Trinity Capital: Buy The Dip, It Yields 13.6% (NASDAQ:TRIN)

Trinity Capital’s (NASDAQ:TRIN) fiscal 2023 second-quarter earnings saw the business development company record dual beats on total and net investment income. However, whilst the results reaffirmed the long-term investment pitch of the venture-focused BDC, shareholder cheer turned sour with Trinity announcing a $75 million share offering at a price of $14.45 per share, around 85 cents lower than its pre-earnings price per share. However, it’s important to note that Trinity’s net asset value came in at $482 million, around $13.15 per share as of the end of its second quarter. Hence, the proceeds from an offering conducted above NAV can be deployed within its capital stack in lieu of more expensive debt to provide future investment income. The income is the prize here and the capital raise could end up being accretive to overall earnings.

The BDC last declared a quarterly cash dividend of $0.48 per share, a 2.1% hike over the prior, to form a 13.6% annualized forward yield. This will also include a 5 cents per share supplemental. The second quarter reverses what had been five consecutive quarters of NAV per share declining. This peaked at $16.40 per share as of the end of the BDC’s fiscal 2021 fourth quarter. Critically, Trinity was able to expand NAV per share by 8 cents over its prior quarter whilst raising its dividend and paying out a supplemental. This is the trifecta of positive shareholder value creation and the dip needs to be contextualized against this.

Investment Income Sees Strong Growth

Trinity saw total investment income come in at $46 million, an increase of 37.5% over its year-ago comp and a beat by $4.65 million on consensus estimates. The internally-managed BDC funded $154.9 million of gross investments with 66.5% of this gross, around $103.1 million, going to five new portfolio companies. Total debt principal repayments was $103.5 million during the first quarter with $58.8 million of this being assets sold to the JV. Trinity’s portfolio had an aggregate fair value of $1.1 billion as of the end of the second quarter and was spread across 117 portfolio companies including the BDC’s investment in its JV. This included the monthly beauty subscription service Birchbox and automotive semiconductor company Indie Semiconductor.

Its $856 million debt portfolio comprised its largest investment segment and moved up 210 basis points sequentially to become 72.1% floating rate loans as of the end of the second quarter. Further, around 77.6% of this were first-lien loans, a more defensive positioning versus the first quarter when 65.6% of its debt portfolio were first lien. It’s this aggregate of higher income against a fundamentally safer portfolio that has driven the common shares to gain 37.4% on a total return basis since the start of 2023. Bears, who form the 4.7% short interest, would be right to flag that a loan to one portfolio company and equipment financings to two portfolio companies were on non-accrual status as of the end of the second quarter. However, these had a fair value of $22.5 million, roughly 2% of the fair value of Trinity’s debt portfolio.

There Will Be More Dividend Raises

Underwriting standards have been relatively strong with second quarter net investment income coming in at $22.1 million, around $0.61 per share. This was an increase of 40.8% over the year-ago comp and meant the quarterly dividend was 127% covered. The BDC is set to continue to benefit from a Fed funds rate that was hiked 25 basis points at the last July FOMC meeting to a 22-year high. The market is currently pricing in an 85.5% chance that the Fed will keep rates unchanged at their upcoming FOMC meeting on the 20th of September, likely also signaling that the monetary tightening cycle has come to an end. This is set against a US economy that remains robust. JPMorgan (JPM) has pulled back forecasts for a recession this year as employment figures continue to come in strong to indicate a possible soft landing.

Whether the increase in NAV per share will repeat in the third quarter will depend on several factors. The share offering likely won’t help in the short term but future performance will be highly driven by the direction of interest rates. The BDC’s floating rate exposure means interest rates remaining higher for longer forms a tailwind. This would come against an incredible 18.4% return on average equity and a net debt-to-equity ratio of 1.37x. The dip is a buy against this as the outlook for another dividend raise this year looks strong. NAV will likely continue to be volatile but the BDC’s overall investability looks good.