Good afternoon. My name is Chelsea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trinity Capital third quarter 2022 earnings conference call. Our hosts for today's call are Steve Brown, Chairman and Chief Executive Officer. David Lund, Chief Financial Officer. Michael Testa, Chief Accounting Officer. Gerry Harder, Chief Operating Officer, and Sarah Stanton, General Counsel. Ron Kundich, Chief Credit Officer, is also present. Kyle Brown, President and Chief Investment Officer, is out of the country and will not be joining us on today's call. Today's call is being recorded and will be made available for replay at 8 P.M. Eastern Time. The replay dial-in number is 800-839-7410, and no conference ID is required for access.
At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. We ask that when posing your question to please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the call over to Sarah Stanton. Please go ahead.
Thank you, Chelsea, and welcome everyone to Trinity Capital's earnings conference call for the third quarter of 2022. Trinity's third quarter 2022 financial results were released just after today's market close and can be accessed from Trinity's investor relations website at ir.trinitycap.com. A replay of the call is available on Trinity's website or by using the telephone number provided in today's earnings release.
Before we begin, I would like to remind everyone that certain statements that are not based on historical facts made during this call, including any statements relating to financial guidance, may be deemed forward-looking statements under federal securities laws. Because these forward-looking statements involve known and unknown risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.
We encourage you to refer to our most recent SEC filings for information on some of these risk factors. Trinity Capital assumes no obligation or responsibility to update any forward-looking statements. Please note that the information reported on this call speaks only as of today, November third, twenty twenty-two. Therefore, you are advised that time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Now, allow me to introduce Trinity Capital's Chairman and CEO, Steve Brown.
Thank you, Sarah, and thank you to everyone joining us today. I want to begin our call by putting the current market conditions we are seeing into context. Estimated VC deal count in Q3 was the lowest since Q4 of 2020. This market volatility and investor hesitancy is impacting every sector of the private and public financial markets. Given this backdrop, it is not surprising that there have been fewer public listings and exits in 2022 after historic levels in the previous two years. We all recognize that these are tumultuous times, but this is also a period where great investment opportunity can provide strong returns to investors. Given the decline in traditional VC transactions, there is a clear and consistent market demand for financing solutions to become an attractive alternative to dilutive equity raises and down rounds as enterprise values pull back.
Trinity, with its best-in-class financing platform, has the market presence and track record needed to capitalize on this environment and identify sectors of emerging innovation. It is also important to point out that VC fundraising activity was still approximately $29 billion in the third quarter and reached a record high for the first nine months of 2022, according to PitchBook.
VC dry powder was at an all-time high at the end of the third quarter, with $290 billion of capital available to support portfolio companies and make continued investments in disruptive technologies. Although we are dealing with the complications of the current market, it is clear that investing in technology and innovation remains critical to our future. At Trinity, we have seen these markets before, going back to 2008 and 2009 and then again in 2020.
In each of these periods, the BDC sector, including those investing in venture-backed growth stage companies, proved to be resilient through the volatility. We have been assembling the team to manage growth as well as steward portfolio companies that find themselves under stress. We believe we have built a differentiated platform and have assembled a world-class team to work with our portfolio companies as they address business fundamentals in their markets.
We are committed to working with our portfolio companies to reach successful outcomes for all stakeholders, and our underwriting process remains as vigilant as ever. Now, let's turn to our performance this quarter. As you saw in our earnings release this afternoon, we generated strong NII performance, grew our portfolio, increased our dividend for the seventh consecutive quarter, and improved our liquidity.
As I mentioned, from an earnings perspective, we began to see the benefit of interest rate increases in Q3, with 62% of our debt investments at floating rate and more than 75% of our borrowings at fixed rate. As we indicated in our filings today, given our current investment mix, a 100 basis point increase in the prime rate adds an additional $4.8 million of interest income or $0.14 per share to our annual earnings. Our Q3 net investment income increased by 19% from Q2 to a record $18.6 million. NII per share of $0.56 for Q3 represents a $0.05 increase from the prior quarter and a 124% coverage on our core dividend.
We delivered on both strong commitments and deployments in the quarter, originating $128 million in new commitments and funding $94 million across 22 portfolio companies. Our credit quality in the portfolio remains stable, with 97% of our debt investments at cost performing. This is a key demonstration of the strength of our investment criteria, as well as the granularity and diversification of our portfolio.
Our growing portfolio contributed to our solid operating performance, allowing us to increase our regular quarterly dividend from $0.42 to $0.45 per share. This is the seventh consecutive quarter that we have increased our dividend, and this quarter's regular dividend was 36% higher than one year ago. In addition, we delivered against our promise to provide a supplemental dividend of $0.15 per share for the third consecutive quarter.
Year- to- date, we have paid out $0.45 per share in supplemental dividends, and we previously expressed the intent to declare a supplemental cash dividend in the fourth quarter of 2022, subject to our board approval. While our portfolio benefited from public listings and exits over the last year, we are not dependent on that dynamic to generate returns for our shareholders.
Our thesis has always been that we deliver strong yields from our portfolio and that capital gains can be used to deliver supplemental dividends or absorb realized losses. Trinity's estimated spillover income is $67 million, primarily generated from our capital gains earlier in the year. Our NAV per share declined by $0.88, or 6%, to $13.74 per share compared to Q2.
The decline in NAV was driven by our unrealized appreciation, which was primarily attributed to fair value marks on two portfolio companies, as well as general market volatility and interest rate changes. During the quarter, we strengthened our liquidity position by reopening our 7% notes and issuing an additional $57.5 million of these notes. We also sold $57 million of our common stock and upsized our KeyBank credit facility by $50 million to a total of $350 million. At Trinity, culture continues to be a critical part of our strategy. Over the last 14 years, we have intentionally created an environment that fosters individual talent and encourages an entrepreneurial mindset. This unique spirit has allowed us to source and hire the talent needed to continue our growth. Accordingly, we are focused on building out our new life sciences team.
To that end, we further expanded our origination team with the addition of Lauren Constantino, a managing director located in Raleigh, North Carolina, who has over a decade of experience in the venture ecosystem, primarily in the life sciences vertical. As we move into the last quarter of 2022, we will continue to execute our strategies to meet the evolving needs of the venture debt ecosystem while working to support our existing portfolio companies. Our differentiated platform is positioned for profitable growth, and we remain squarely focused on driving shareholder returns. I will now hand it over to Gerry Harder, our Chief Operating Officer, to provide updates on our portfolio composition and investment performance. Gerry?
Thanks, Steve. I'd like to start my remarks today by reminding our investors that Trinity employs a rigorous and time-tested underwriting process. We maintain a dedicated portfolio management staff whose sole function is to monitor our credit risk and stay in constant communication with our portfolio companies and their equity stakeholders. These processes have served us well and have been the driving forces behind our successful investment track record, and we will continue to follow them as we scale our business and expand our portfolio. Building on the record total fundings in the first half of the year, Trinity originated $128 million in new commitments in Q3. We funded $94 million, including $29 million in deployments to seven new portfolio companies and $65 million in gross deployments to 15 existing portfolio companies.
Gross deployments were partially offset by $80 million in principal repayments, of which $49 million was from early repayments and $31 million was from normal amortization. We finished the quarter with $350 million of unfunded commitments, substantially all of which are subject to ongoing diligence and approval by our investment committee. Our pipeline remains strong despite the challenging macro environment.
The composition of our portfolio remains relatively consistent with prior quarters and represents strong diversification across 21 different industries. Our debt investments are split between venture debt and equipment financings. At fair value, 75% of our debt portfolio, or $751 million, is comprised of secured loans, while 25%, or $246 million, is invested in equipment financings. The remainder of our portfolio, $45 million at fair value, is comprised of equity and warrants.
I'd like to directly address some recent developments with one of our portfolio companies in the digital asset sector. On October 27th, Core Scientific, one of the largest publicly traded crypto mining companies in the U.S., filed an 8-K announcing that its operating performance and liquidity had been severely impacted, and that its board had made the decision to not make payments coming due in late October and early November with respect to several of its equipment and other financings. The release further went on to state that Core Scientific has been exploring a number of potential strategic alternatives. Core Scientific was current on its payments to Trinity through October. We have placed the financing to Core Scientific on non-accrual effective November one, pending the outcome of future developments at the company.
As of September 30th, Trinity holds an investment in Core Scientific collateralized by critical computing equipment with a cost basis of $24 million and a fair value of $19.4 million, which is approximately 81% cost. In subsequent conversations following the announcement, the company indicated that they are working toward a more detailed proposal that will be shared with their lenders.
While the specifics and viability of such plans that may be proposed by the company remain to be seen, our portfolio team continues to be in close communication with the company and is exploring all available options to obtain the best possible return for the benefit of our shareholders. In aggregate, Trinity holds equipment finance facilities with three public companies in the digital asset space, Core Scientific, Hut 8 Mining, and CleanSpark.
As of September 30th, these financings represent $65 million, or less than 6% of our total investments on a cost basis, and $60 million on a fair value basis, for an overall fair value to cost ratio of 92.3%. There are certainly challenges being faced by all companies in the digital asset sector, including the prolonged decrease in the price of Bitcoin and an increase in electricity costs. However, as Core Scientific indicated in their recent filings, liquidity and overextension of debt are the central issues in their operations, issues that did not exist at the time of our underwriting. Based on the most current available public data, our other two digital asset clients, Hut 8 and CleanSpark, have materially less debt and dramatically better debt-to-equity ratios as compared to Core Scientific.
In addition to the challenges at Core Scientific, our financing to FemTec Health was placed on non-accrual in the third quarter. FemTec Health is a legacy asset that's not part of our new life sciences business. FemTec entered the Trinity portfolio in July 2021, when they acquired a Trinity portfolio company, which we originally financed in 2017. As of September 30th, our loan to FemTec Health carried a cost of $15.7 million and a fair value of $8.9 million, representing 56.5% fair value to cost. Our portfolio team is working closely with the company to obtain the best outcome for our shareholders. Notwithstanding the issues with Core Scientific and FemTec Health, our overall credit quality remains stable, with 97% of our portfolio performing as of September 30th.
Our weighted average risk rating of the portfolio was 2.9, down slightly compared to the 2.9 in the prior quarter, with the change primarily driven by the two credits that we've discussed today. I'm gonna pass the call to David Lund to discuss our operating performance in more detail. Dave?
Thank you, Gerry, and thank you to everyone listening in today. Our differentiated investment approach, financial discipline, and strong balance sheet are proving out the strength of our investment strategy as we delivered strong results for the third quarter, even in a disrupted market. Turning to our third quarter financial results, we delivered record total investment income of $38.7 million, a 15.5% increase over the $33.5 million of total investment income recorded during the second quarter of 2022, and an increase of 77.5% compared to the same period of 2021. This increase from the prior quarter was attributable to higher interest and fee income of $3.1 million on a larger loan portfolio, coupled with a higher average interest rate.
The increase was also driven by $2.1 million of higher fee and accelerated income from early loan repayments. Our effective yield on the portfolio for Q3 was 15.2%, an increase from 13.8% in the second quarter, primarily driven by the increase in fee income, which fluctuates based on the investment activity and early repayment activity. Our core yield, which excludes non-recurring fee income, increased to 13.5% from 12.9% in the prior quarter due to the rise in base rates on our floating rate loans. Our debt portfolio continues to be well-positioned ahead of the anticipated rate hikes, with 61.9% of our debt investments at floating rates. On the borrowing side, approximately 75.9% of our outstanding debt at the end of the third quarter was at fixed rates.
As we disclosed in our 10-Q filed today, a 100 basis point increase in the prime rate would have the net effect of increasing our income by $4.8 million. We incurred a total of $9.3 million of total interest expense and amortization of deferred financing costs on our various debt facilities as compared to $7.8 million in Q2. For Q3, our weighted average cost of debt, including interest and fee amortization, was 6.3% compared to 5.6% in Q2. The increase in interest expense was primarily due to the $57.5 million of additional debt issued under our existing 7% notes, and an increase in the interest rate and weighted average borrowings outstanding under the KeyBank credit facility.
Our other operating expenses consisting of compensation, professional expenses, general and administrative expenses, and estimated excise taxes were approximately $10.8 million during Q3 as compared to $10 million during Q2. The increase of approximately $800,000 or 7.7% was primarily driven by increased compensation expenses related to higher headcount and restricted stock awards. As a result of this operating activity, net investment income for the third quarter was $18.6 million or $0.56 per basic share, as compared to $15.7 million or $0.51 per basic share in the preceding quarter on a higher average weighted share count. We recorded net unrealized appreciation of $30 million during the quarter.
We recognized unrealized appreciation of $17.8 million in our debt portfolio and $12.2 million on our equity and warrant portfolio. Approximately $18.6 million of the unrealized appreciation was related to the performance of issues on two portfolio companies that Gerry discussed previously. The remainder of the unrealized appreciation was primarily related to mark-to-market adjustments due to general market volatility and interest rate changes. Our operating activities generated strong returns for our shareholders with our ROAE based on NII over average equity of 15.4% and our ROAA based on NII over average total assets of 6.8%. Net assets per share decreased to $13.74 per share compared to Q2 of $14.62 per share.
The quarter-over-quarter decrease of $0.88 per share was primarily the result of the unrealized appreciation, the combined core and supplemental distributions to shareholders that exceeded our NII by $0.04, offset by our accretive equity issuance.
Lastly, our estimated spillover from realized gains remains strong at approximately $67 million, and we will continue to judiciously realize gains in the portfolio as we navigate these challenging market conditions. I'm encouraged by the results we've generated from the financial discipline we've shown as we've executed on our strategy.
Trinity is well-positioned to capitalize on rising rates and to identify quality investment opportunities in a challenging environment. I will now hand the call over to Michael Testa, our Chief Accounting Officer, who will discuss our credit performance, liquidity, and capital allocation.
Thanks, Dave. Starting with credit quality, our portfolio companies continued to perform well in the third quarter of 2022, with approximately 97% of our portfolio performing at cost. At the end of the third quarter, we had five portfolio companies on non-accrual with a cost basis of $35.9 million and a fair value of $13.9 million, representing just 1.3% of the fair value of investment portfolio. Our average credit rating for the third quarter stood at 2.9 based on our one to five rating scale, with five indicating strong performance. This remains consistent with our average credit rating of 3.0 in Q2 and reflects the relatively stable performance of our portfolio companies that we continue to closely monitor. Moving to liquidity.
During Q3, we expanded the availability under our credit facility to $350 million, enabling us to strengthen our liquidity position. As of September 30th, we had total liquidity of approximately $247 million, comprised of approximately $213 million of undrawn capacity under our credit facility and $34 million in unrestricted cash and cash equivalents. We continue to be active in the capital markets, completing an accretive equity offering in August, which generated $57 million in gross proceeds. We reopened our 7% notes due 2025 and successfully sold $57.5 million of additional notes. As a reminder, the 7% notes, including this recent addition, are callable by Trinity beginning on January 2023 and are traded on Nasdaq under trading symbol TRIN.
As of September 30th, 76% of our debt was at fixed rates, with the majority of our investments at floating rates. We expect further base rate increases to positively impact our net interest margin. Our net leverage ratio, which represents principal debt outstanding with cash on hand, decreased to 1.1 x from 1.3 x. Our strong balance sheet with leverage on the lower end of our target range provides greater financial flexibility in uncertain capital markets. We continue to believe that our modest leverage, strong liquidity, and continued access to capital are important components of our strategy. We are actively managing our liquidity and continue to explore all capital options that will be accretive to our shareholders, such as investments under our planned RIA.
On September 15th, our board declared a cash dividend of $0.45 per share for the third quarter of 2022, representing a 7% increase from Q2. This is the seventh quarter in a row that we have increased our quarter dividend. Our GAAP NII generated coverage of approximately 124% of our regular dividend for the quarter. Additionally, the board approved $0.15 per share supplemental dividend. Both dividends were paid on October 14th, 2022.
We anticipate declaring a dividend for the fourth quarter in December, subject to the board's approval. Our accumulated undistributed earnings spillover at the end of Q3 of approximately $67 million, or $1.91 per share, continues to afford us the opportunity to further invest the capital for the benefit of our investors and maintain a consistent and meaningful distribution to our shareholders. We look forward to closing out the year strong. I'd like to turn the call back over to Steve for final comments.
Thanks, Mike. I wanna leave you with four points that highlight why Trinity represents an attractive investment opportunity for current and prospective investors. First, Trinity stock is trading at a meaningful discount to our NAV per share. Based on where Trinity is trading and based on our most recently stated regular dividend, Trinity stock is currently yielding nearly 16%. When including our supplemental dividend of $0.15, our stock is yielding over 21%. Second, our regular dividend is fully supported by consistent net investment income coverage. Third, as mentioned previously, we have approximately $67 million of capital gains spillover that allows us to offset potential capital losses, continue to invest for the benefit of our shareholders, or distribute the gains as supplemental dividends.
Finally, with 97% of our portfolio performing, with our current liquidity position, we believe we are in a strong position to continue to grow revenues and earnings. This is something we have delivered on consistently since going public. Trinity is strong. Our portfolio is healthy. We're excited to continue to execute our investment strategy going forward. Our team will maintain the highest standards in the last few months of 2022 and into the new year. With that, operator, we would be happy to open the line for questions.
Thank you, sir. At this time, if you would like to ask a question, please press the star and one keys on your touch tone phone. If at any time you find your question has been addressed, you may remove yourself from the queue by pressing star two. As a reminder, we do ask that when posing your question, you pick up your handset for optimal sound quality. That is star one to ask a question. Our first question will come from Christopher Nolan with Ladenburg Thalmann. Your line is open.
Was there a non-accrual investment which left the portfolio this quarter?
No, I don't believe so.
Okay. I guess we're coming in, you know, with this Core Scientific. We may see a situation where you might actually have to take possession of the assets. Are you prepared to do that? Is that something which you think you can get a recovery on if it gets to that?
You know, as with all our equipment financings, you know, our collateral is the financed equipment. You know, in the case of Core Scientific, we completed audits earlier this year, within the last several months. The equipment's tagged. It's in four locations. We know where those are. You know, if that becomes the best outcome for our shareholders, then we're certainly prepared to do that.
Okay. That's it for me. Thanks.
Thanks, Chris.
Thank you. Our next question will come from Ryan Lynch with KBW. Your line is open.
Hey, good afternoon. I just want to make sure I understood this correctly. It looked like you guys had about $18 million of unrealized losses on your debt portfolio. How much was from FemTec and Core Scientific? Then, what was the nature of the remaining write-downs in the debt portfolio? Were they credit related, mark-to-market related, or what was kinda the breakdown, if you had to kinda estimate for the remaining write-downs outside of Core and FemTec?
Yeah, Ryan, this is Gerry. Thanks for the question. I think the FemTec markdown is approximately $7 million, I think.
On the loan.
I'm sorry? On the loan. Yeah. We also have an equity position with FemTec. You know, that was a complicated transaction. They actually acquired the former portfolio company that we had underwritten in 2017. We took $7 million unrealized on the loan, and I think approximately the same amount on the equity for FemTec. Then Core Scientific was about a $4 million unrealized.
Ryan, this is Dave. The other portion really was related to interest rate impact on our fixed rate loans that are the equipment, because, you know, those are fixed rates, and we did have rising rates. It's not really performance related to the rest of the portfolio. From a practical standpoint, we believe we will get that back over time as the market recovers.
Okay. You know, on Core Scientific, I understand this is a tough question to try to answer 'cause I know it's a very fluid process. You know, it sounds like you guys are still waiting on some more information from that company, but how did you guys arrive at your guys' current fair value mark?
Yeah. You know, for the September 30th, you know, we're keeping in mind you know, their announcement was October 27th. You know, the 9/30 mark was using a discounted cash flow. You know, it was clear at September 30th that you know, the company was going to be liquidity challenged through at least the first quarter of 2023. You know, that was a known. We had the company on our watch list and increased the discount rate accordingly. You know, that's how we did the mark-to-market. That was appropriate from a GAAP standpoint.
I would also say that we discussed the valuation with our third-party valuation firm and our approach to it, and they felt that was the appropriate manner to approach the valuation as well.
Okay, understood. That's all for me. Thanks for taking my questions.
Thanks, Ryan.
As a reminder, that is star one to ask a question. Our next question will come from Casey Alexander with Compass Point. Your line is open.
Yeah, just to clarify that last point. If you valued it as of September 30th using a discounted cash flow analysis and now it's on non-accrual, would that lead us to suspect that there's a further markdown coming on the Core Scientific loan in the fourth quarter, all things being equal, how they stand right now?
Yeah, I think it's a little early to say that, Casey, right? You know, we're exploring, you know, all possible options. You know, with respect to that financing, you know, the company has indicated that they expect to communicate a plan to all their lenders. You know, we don't know what that is yet or what that looks like. You know, it's a little too early to call what's going to happen. We don't wanna give that forward-looking statement, right? You know, there's a forced liquidation value out there, we know that. You know, we hope that that's not the outcome, but we're gonna work toward the best outcome that we can.
Yeah. We just felt it was prudent to put it on non-accrual given the uncertainty with regards to that particular investment.
Yeah, I'd certainly understand that and agree with your decision there. I mean, these machine prices are generally fungible. There's transactions that take place in the market. Where do you think that your loan to value on that stands right now?
Yeah. If it comes to a forced liquidation, you know, based on the latest market transaction data that we've seen, the value of that equipment in an FLV is probably in the $9 million-$11 million range.
Okay, great. Thank you. That's my only question. Thanks. I appreciate you taking my question.
Thanks, Casey.
You're welcome.
Thank you. Our next question will come from Bryce Rowe with B. Riley. Your line is open.
Thanks. Good evening. Appreciate you taking the question here. Guess I wanted to start just on the balance sheet and leverage. Obviously you saw leverage come down quarter-over-quarter, and just wanted to get a feel for how you expect to manage balance sheet leverage, especially now that we see the valuation below NAV and really probably limits your ability to raise equity capital here. If you could just speak to how we should expect balance sheet leverage to kind of play out over the next several quarters and how you expect to manage it.
Yes, this is David. We've always indicated that we would be comfortable operating in a 1.2-1.35 range on our debt-to-equity. I think we're still within that bound, very comfortably. We are taking on other initiatives that we, you know, are in process right now that we will discuss at a later date. We are, you know, coming up with the alternatives to that funding mechanism.
Okay. Thanks, Dave. You know, maybe wanted to just hit on the expense side. Any kind of forward look from an expense perspective in terms of, you know, new hires? I think you guys have ramped the team, you know, fairly aggressively over the last 12 to 18 months, and just wanted to get a feel for where you stand now. Obviously, being internally managed, you've got a huge competitive advantage to try to capture operating leverage as you do grow the balance sheet.
Yeah, this is Steve. We're gonna continue to judiciously, you know, add to the team. We've been doing that, and it has paid dividends, literally, but it's certainly helped us continue to grow revenues. We'll do that judiciously. We're excited to do that. I mentioned in the prepared remarks we added a new personnel to our life sciences team there in the Raleigh-Durham area, and we're excited about that. We will continue to do that judiciously.
Maybe one more from me, and this is more of a modeling question. David, was there any reversed interest in the quarter tied to the addition of the non-accruals?
No. No.
Okay. I think that's it for me. Appreciate it.
Thanks, Bryce.
Thank you. Our next question will come from Jordan Wasson with Wells Fargo Securities. Your line is open.
Hi, guys. Just one question to follow up on Core Scientific. Can you tell us if that equipment when it was purchased was purchased new in new condition?
Yes, it was. Yeah.
Okay, thank you.
Thank you. Once again, that is star one to ask a question. We have no further questions in the queue at this time, so I would like to turn the floor back to Steve Brown, Chief Executive Officer, for closing remarks.
Thank you, Chelsea, and thanks to everyone for joining the call again today. One final note, we will be participating with both the Jefferies BDC Summit on November 16th and the KBW Midtown March on December 14th, both of which are taking place in New York. If you'd like to arrange a meeting with Trinity management team, please contact each of the financial institutions mentioned directly or through Prosek, our investment relations firm. We look forward to reporting fourth quarter and year-end results in 2023. Thank you.
Thank you, ladies and gentlemen. This does conclude Trinity Capital third quarter 2022 earnings conference call. We appreciate your participation, and you may disconnect at any time.