Eagle Point Income Company Inc. (NYSE:EIC) Q3 2023 Earnings Call Transcript

Eagle Point Income Company Inc. (NYSE:EIC) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning. And welcome everyone to Eagle Point Income Company’s Third Quarter Earnings Call. I will now turn the call over to Peter Sceusa at ICR.

Peter Sceusa: Thank you and good morning. Before we begin our formal remarks, we need to remind everyone that the matters discussed in 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 third quarter 2023 financial statements and our third quarter investor presentation with the Securities and Exchange Commission. The financial statements and our third 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 Presentations and Events link. I would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.

Tom Majewski: Thank you, Peter. And welcome everyone to Eagle Point Income Company’s third 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, which I will refer to in a portion of my remarks. The company continued its strong momentum from the first half of the year, as it generated another quarter-over-quarter increase in portfolio cash flows. Our portfolio is doing what we designed it to do in a rising rate environment generate more cash for our investors. Given our continued confidence in the portfolio, we were pleased last week to again increase our regular common distribution, the monthly distribution and beginning in January 2024.

This time, we increased our monthly distribution by 11% to $0.20 per share per month. This is the highest monthly common distribution per share in our history. To share a few highlights from the quarter, net investment income was $0.51 per share, which is excluding $0.13 per share of non-recurring expenses. Our recurring cash flows were $7.1 million or $0.76 per share comfortably in excess of our regular common distributions and operating expenses, excluding non-recurring items. We paid three monthly common distributions of $0.16 per share during the third quarter and are paying three monthly common distributions of $0.18 per share in the fourth quarter. And as I just noticed, we declared another increase in our monthly common distributions to $0.20 per common share for the first quarter beginning in January.

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Q&A Session

Our NAV as of September 30 was $14.08 per share, and this is an increase of 8% from June 30. Our NAV came down a bit in October due to spread widening in the market and the $13.65 midpoint of our NAV range as of October 31 reflects approximately a 3% decrease from our September 30 figure, but still significantly ahead of where it stood on June 30. We further strengthened our capital position with our 7.75% Series B term preferred stock offering that we completed in July. We raised $31.2 million of additional capital from this offering and have been deploying the proceeds into new CLO junior debt and equity investments. We believe this deployed capital will further help increase our net investment income. We also opportunistically raised capital through our at-the-market program, issuing nearly 1 million common shares at a premium to NAV generating NAV accretion of about $0.02 per share during the quarter.

We also raised about 15,000 shares of additional Series B term preferred stock. Together, these sales generated about $14 million of net proceeds to the company. As of October 31, we have over $17 million of cash and revolver borrowing capacity available to us, this is ample dry powder with which to invest as we further expand our portfolio. As is evident, our portfolio continues to benefit from the floating rate nature of CLOs given that 100% of the CLO debt investments in our portfolio are floating rate. All of our CLO BB coupons are in the double-digits, and some CLO BBs have the potential to yield 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 remain excited for our portfolio’s potential as we head into 2024. For additional commentary on the overall market and our recent portfolio activity, I’d like to turn the call over to Senior Principal and Portfolio Manager, Dan Ko.

Dan Ko: Thank you, Tom. We continue to be excited about the investment opportunities within the CLO market, in particular, the junior debt and equity portions of the capital structure. EIC has been able to successfully capitalize on the elevated rate environment due to the floating rate nature of our underlying portfolio. During the quarter, we fully deployed the proceeds from our ATM issuance and EICB preferred offering and in total deployed nearly $51 million in gross capital into attractive CLO junior debt and CLO equity purchases. The weighted average effective yield of the CLO purchases during the quarter was a robust 15%. We continue to see attractive return profiles in the secondary market. Our CLO collateral managers continue to be able to build par through relative value credit suction or by reinvesting prepayments into discounted loans.

Loan issuers remain proactive in seeking to push out their near-term loan maturities in order to extend the runway on their financing despite the lower spreads they have locked in currently. As a result, many loan issuers are offering lenders higher spreads along with OID, which ultimately benefits CLOs through car build and increasing excess spread. The Credit Suisse Leveraged Loan Index continued its momentum from the first half of the year and is up 10% year-to-date as of September 30, 2023. And thanks to the loan market rallying this year, the JPM CLO BB Index is up 16% year-to-date as of September 30, and the company’s GAAP ROE is up nearly 20% year-to-date as of September 30 as well. In the CLO market, we saw $28 billion of new CLO issuance in the third quarter of 2023 as the market remains on pace to once again eclipse the $100 billion mark.

As in the first half of the year, we believe a significant portion of the volume was backed by captive CLO funds, which are generally far less return sensitive. CLO refinancing and reset activity has picked up slightly for some specific second half 2022 vintage CLOs with one-year non-call periods but otherwise remains basically shut. There were a total of five syndicated loan defaults in the third quarter down from 15% in the prior quarter. In fact, there were no defaults in the month of September, again, evidence of the resilience of senior secured loans and thus, CLOs despite various macro concerns. As a result, the trailing 12-month default rate declined to 1.3% as of September 30, well below historical averages. We continue to believe our portfolio is well positioned for environments like these, a 100% of our portfolio of CLO debt and CLO equity is paying current distributions.

As we’ve consistently noted, 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 historical average, coupled with limited loan price volatility 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 few years has demonstrate the resilience of the company’s investment strategy. Entering the tail end of the year, we remain in a very strong position with material dry powder to deploy into new investments via cash and our revolver capacity. We will continue to be opportunistic and will act where we believe we can achieve compelling 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.