Eagle Point Income Company Inc. (NYSE:EIC) Q1 2023 Earnings Call Transcript May 26, 2023
Operator: Greetings, and welcome to Eagle Point Income Company First Quarter 2023 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you. You may begin.
Garrett Edson: Thank you, Doug, and good morning. Before we begin our formal remarks, we need to remind everyone that the matters discussed on this call include forward-looking statements or projected financial information that involve risks and uncertainties that may cause the company’s actual results to differ materially from those projected in such forward-looking statements and projected financial information. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company’s filings with the Securities and Exchange Commission. Each forward-looking statement and projection of financial information made during this call is based on information available to us as of the date of this call.
We disclaim any obligation to update our forward-looking statements unless required by law. A replay of this call can be accessed for 30 days via the company’s website, www.eaglepointincome.com. Earlier today, we filed our first quarter 2023 financial statements and our first quarter investor presentation with the Securities and Exchange Commission. Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company’s website. Financial statements can be found by following the Financial Statements and Reports link and the investor presentation can be found by following the Presentation & Events link. I would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.
Tom Majewski: Thank you, Garrett, and welcome, everyone, to Eagle Point Income Company’s first quarter earnings call. We appreciate your interest in Eagle Point Income Company, or EIC. If you haven’t done so already, we invite you to download our investor presentation from our website at eaglepointincome.com. I’ll refer to this presentation during a portion of my remarks. Despite the turmoil in the banking world, the company did very well during the first quarter. EIC’s investment portfolio generated increased cash flows, thanks to the rising rate environment and the floating rate nature of our CLO junior debt. In the first quarter, NII was above our increased monthly common distribution level of $0.16 per share per month. Given rates are still elevated and will likely remain so for the near future, we believe our portfolio remains very well positioned to continue generating significant income and cash flow for the benefit of our investors.
To share a few highlights from the quarter, net investment income was $0.49 per common share, exceeding our newly increased regular level of common distributions. Our recurring cash flows were $5.6 million or $0.67 per common share in excess of our regular common distributions and expenses. Our NAV as of March 31 was $13.20 per share, an increase of 2.2% from year-end 2020. Our NAV midpoint as of April 30, which is an estimate, was essentially unchanged from that March 31 figure. We paid three monthly common distributions at our new level of $0.16 per share and have declared monthly common distributions of $0.16 per share through September 2023. This monthly distribution rate reflects a 14% increase from our distribution rate in the fourth quarter.
We also opportunistically raised capital through our at-the-market and committed equity programs, issuing over 500,000 common shares at a premium to NAV, generating NAV accretion of $0.05 per share during the quarter. These sales generated net proceeds of approximately $7.4 million during the first quarter. We also continued to raise capital selectively during the second quarter. April cash flows were further favorably impacted by increases in LIBOR and SOFR. As clearly evident, our portfolio continues to benefit from the floating rate nature of CLOs given that 100% of our CLO debt investments are floating rate. In fact, many CLO BB yields are now comfortably into the double digits with some CLOs yielding north of 20% in an early call scenario.
As long-term focused investors, we seek to construct our portfolio to manage through periods of dislocation. And our consistently strong performance with respect to cash flow and income is validation that we’re executing on that playbook. We also continue to seek to lengthen the weighted average remaining reinvestment periods of our CLO debt and equity portfolios through vintage diversification. We continue to have a significant amount of dry powder available on our revolver where we see investment opportunities. We’re excited for our portfolio’s potential for the remainder of 2023 and beyond. For additional commentary on the overall markets and recent portfolio activity, I’d like to turn the call over to one of Eagle Point’s Senior Principals and our Portfolio Manager, Dan Ko.
Dan Ko: Thank you, Tom. Despite the turmoil related to regional banks and the general macro uncertainty, it remains an exciting time to be investing in CLOs, especially at the junior debt and equity portion of the capital structure. While we saw overall liquidity affected in the markets, we have not seen much of an impact with respect to actual credit expense. Loans and CLOs continue to have little to no direct exposure to the regional banks in the news. This allowed our CLO collateral managers to build par through relative value swaps or by reinvesting prepayments with nearly all loans continue to trade below par, repricing activity is effectively non-existent. Rather, we’ve seen refinancing activity pick up. CFOs and many loan issuers have sought to refinance their 2024 and 2025 loan maturities despite the lower spreads they have locked in currently.
In order to extend the runway on their financing, loan issuers have offered lenders higher spreads along with OID, which ultimately benefits the CLO par build and excess spread. The floating rate asset class is one of the most resilient asset classes in existence. Indeed, the Credit Suisse Leveraged Loan Index has posted a 3.11% gain for the first quarter, and its positive momentum continued further into April. While it’s still early in the year, it is a good sign that 2023 may follow precedent, whereby a down year in terms of performance was followed by a strong rebound in the next year. This is a testament to the robust nature of the loan asset class. In the CLO market, we saw $34 billion of new issue CLOs in the first quarter of 2023, a strong start to the year, especially considering the volatility in the broader economy.
We believe a significant majority of this volume was backed by captive CLO funds, which are generally far less return sensitive. CLO refinancing and reset activity has been negligible as CLO financing spreads have widened. As expected, we began to see defaults gradually rise during the first quarter. There were a total of 10 defaults in the first quarter. As a result, the trailing 12-month default rate stood at 1.32% as of March 31, up from year-end 2022, but still well below the historic average of approximately 3%. Given the volatility with respect to regional banks and the overall macro economy, most bank research stacks now expect defaults to end up around 3% by the end of 2023 due to the higher rate environment and certain stress companies’ inability to access the capital markets.
That said, we continue to believe our portfolio is well positioned for environments like these. No asset in our portfolio is on non-accrual, and we currently don’t foresee any issues with securities in our portfolio this year. As we noted on our prior call, CLO BB debt has withstood multiple economic downturns in the past, experiencing very low long-term default rates. We believe it would take a significant amount of loan defaults, well above the historic average, for EIC to be materially impacted by a default wave. While past performance is obviously not a guarantee of future results, we believe the performance of our portfolio over the past couple of years has demonstrated the resilience of the company’s investment strategy. We are currently in a strong position with plenty of dry powder to deploy into new investments via our revolver capacity.
Given the uncertainty ahead, we will remain highly selective when evaluating investment opportunities, which we ultimately believe will lead to attractive, risk-adjusted returns for the company’s portfolio. With that, I will now turn the call over to our Adviser’s Chief Accounting Officer, Lena Umnova.
Lena Umnova: Thanks, Dan. For the first quarter, the company reported net investment income, or NII, of $4.1 million or $0.49 per share. This is consistent with NII of $0.49 per share recorded for the fourth quarter of 2022 and compares favorably to NII and realized gains of $0.33 per share for the quarter ended March 2022. When unrealized portfolio appreciation is included, the company recorded GAAP net income of $4.6 million or $0.56 per share. The company’s first quarter net income was comprised of total investment income of $5.5 million, unrealized appreciation of investments of $1.2 million, partially offset by net unrealized appreciation on certain liabilities held at fair value of $0.7 million and financing costs and operating expenses of $1.4 million.
During the first quarter, we paid three monthly distributions of $0.16 per share and declared additional monthly distribution of $0.16 per share through September 2023. As of March 31, the company had outstanding borrowings from the revolving credit facility and preferred equity, which totaled 27% of total assets less current liabilities. This is within our long-term target leverage ratio range of 25% to 35%, at which we expect to operate the company under normal market conditions. The company’s asset coverage ratios at the quarter-end for preferred stock and the credit facility, calculated in accordance with Investment Company Act requirements, were 366% and 5,155%, respectively. These measures are comfortably above the statutory requirements of 200% and 300%.
As of March month-end, the company’s net asset value was $111 million or $13.20 per share, a 2.2% increase from the year-end 2022. Moving on to our portfolio activity in the second quarter through April month-end. The company received recurring cash flows on its investment portfolio of $6.6 million. This reflects an increase of 19% from the first quarter. Note that some of the company’s investments are still expected to make payments later in the quarter. As of April month-end, net of pending investment transactions, the company has over $23 million of cash and revolver capacity available for investments. Management’s unaudited estimate of the company NAV as of April month-end was between $13.11 and $13.21 per share. I will now turn the call back over to Tom.
Q&A Session
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Tom Majewski: Great. Thank you, Lena. It was definitely another very strong quarter for EIC, and the rising rate environment has helped us to continue to grow and maintain NII at a high level. Loans continue to (ph) outperform nearly all other risk classes, attributable to the senior secured nature of their structure as well as their floating rates. Our portfolio as well as the right side of our balance sheet were intentionally designed for markets like these, and this is clearly benefiting our shareholders through increasing cash distributions. The three attributes as to why we remain excited to be managing a BB-rated CLO debt-focused fund continue to ring true today as they did back at our IPO a bunch of years ago: the potential for low credit expense, as reflected by the low default rates of BB-rated CLO debt over the last 20-plus years; the potential for high returns compared to similarly rated corporate securities; and the benefits of BB-rated CLO debt in markets with high interest rates.
Along with the locked-in nature of the CLO financing that is longer than its assets, we remain very confident that EIC is well positioned to generate compelling risk-adjusted returns for our shareholders. We thank you for your time and interest in Eagle Point Credit — Eagle Point Income Company. Lena, Dan and I will now open the call to your questions.
Operator: There are no questions in the queue at this time. I’d like to turn the call back to Thomas Majewski for closing remarks.
Tom Majewski: Great. Thank you very much for your time and interest in Eagle Point Income Company. Dan, Lena and I will be available later today should anyone have any follow-up questions. Thank you.
Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
