Trinity Capital: The 14.5% Yield Could Get Fatter (NASDAQ:TRIN)

Trinity Capital (NASDAQ:TRIN) is having an incredible 2023 with the common shares up 29% on a total return basis after market fears around loans to crypto companies intertwined with the now-thawed crypto winter drove shares to post-IPO lows at $10. To generate income, the internally managed BDC provides debt and equipment financing to growth stage companies, including venture-backed firms. The BDC last declared a quarterly cash dividend of $0.48 per share, a 2.1% increase from its prior payout for a 14.5% annualized forward yield. This distribution will also see a $0.05 supplemental dividend paid out to add an incremental 1.5% yield if annualized. The prize is the income and this looks set for a strong year on the back of 9 consecutive raises.

There are risks though and bears would flag that the supplemental payout has declined markedly from 2022. The BDC’s total dividend payout declared during its fiscal 2022 fourth quarter was $0.61 per share, around $0.08 more than the last declared total payout. However, the March banking panic sparked by the collapse of Silicon Valley Bank has opened up more demand for BDC-led financing. Trinity flagged that they’re seeing an uptick in deal flow as more growth stage companies seek to source senior secured term debt from alternative lenders like Trinity. Some recent deals closed by Trinity include $30 million provided to Revelle Aesthetics and $40 million provided to dental equipment and technology company Convergent Dental to add to a portfolio that includes Lucid Group (LCID). The BDC is also ramping up its life science hires to grow its originations in the vertical. I last covered Trinity back in March before the banking crisis which has prompted another look.

Total Investment Income Ramps Up

Trinity brought in fiscal 2023 first quarter total investment income of $41.54 million, up 30.4% over its year-ago comp and a beat of $564,500 on consensus estimates. This was driven by $70.4 million in gross investments funded during the quarter, of which $60.2 million was to 11 existing portfolio companies. Another $5.2 million was into the BDC’s recently formed i40, LLC joint venture with an unnamed specialist credit manager with $5 billion of assets under management. Trinity did receive $83 million from repayments of its debt during the quarter with the largest of this being from a $42 million sale of assets to its joint venture and another $13 million from early debt repayments.

Trinity’s total investments at cost as of the end of the first quarter were $1.15 billion and held an effective yield of 15.2%. This was also set against commitments of $338.7 million with term sheets signed of $312 million as of the end of the quarter. I like that floating debt investments as a percentage of the portfolio increased by 250 basis points to 70%. This has placed Trinity in a healthier position against comments by the Fed that there will be more interest rate hikes in 2023.

First quarter net investment income was $19 million, around $0.55 per share, to provide 114.5% coverage against the most recent regular dividend declared. Critically, it meant the BDC held a spillover income of $1.64 per share which they plan to reinvest into the business, especially on the back of the greater deal flow. However, it also raises the prospect of a year-end special dividend especially as the broader US economy continues to be strong as the outlook for nonaccruals looks contained. Nonaccruals had a cumulative investment cost of $49 million, around 4.5% of the total debt portfolio. This figure was $24 million at fair value to form 2.4% of Trinity’s total portfolio at fair value.

Net Asset Value Dips Lower

Trinity’s NAV per share as of the end of the first quarter was $13.07, a sequential decrease of $0.08 over the fourth quarter. Movements in NAV were attributed to unrealized losses from interest rate changes and market volatility which drove valuation adjustments. The BDC’s common shares are currently swapping hands at $13.26, around a $0.19 premium to NAV per share. Hence, whether or not to buy Trinity will depend on whether you think NAV per share will stabilize or will be subject to further downward pressure.

Increased deal flow from the banking crisis is likely set to see Trinity report a strong through fiscal 2023 with more dividend hikes and a one-off special dividend as a possibility. Total net assets did see a 2.2% sequential growth to $469.7 million from $459.6 million in the fourth quarter. Overall, the negative $0.25 movement on the back of additional shares issued through restricted stock awards drove the bulk of the NAV decline outside of the dividend payout during the first quarter. I’d like to see how the second quarter NAV per share comes in before recommending the stock as a buy even as I hold a large position.