Q3 2023 Eagle Point Income Company Inc Earnings Call
Participants
Peter Sceusa; IR; ICR Capital LLC
Tom Majewski; Chairman & CEO; Eagle Point Income Company Inc.
Dan Ko; Senior Principal & Portfolio Manager; Eagle Point Income Company Inc.
Lena Umnova; CAO; Eagle Capital Income Company Inc.
Presentation
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 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 third-quarter 2023 financial statements and
our third-quarter investor presentation with the Securities and Exchange Commission. Financial
statements in 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 & 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 for 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 nonrecurring 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 nonrecurring 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.
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 selection 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 power bill and Nexus 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 at
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 eclipsed $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, 100% of our portfolio of CLO
debt and CLO equities 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 will 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. Our past performance is obviously not guarantee of future
results, we believe the performance of our portfolio over the past few years has demonstrated 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 advisers, Chief Accounting Officer. Lena Umnova.
Lena Umnova
Thank you, Dan. For the third quarter, the company recorded net investment income,
or NII, of $3.5 million or $0.38 per share compared to NII of $0.49 per share recorded for the second
quarter of 2023 and NII of $0.40 per share for the third quarter of 2022. NII for the quarter is net of
$0.14 per share of nonrecurring expenses related to the issuance of the company's 7.75% Series B
term preferred stock, partially offset by a cent per share excise tax refund. Excluding these
nonrecurring items, NII would have been $0.51 per share above our distribution level for the quarter.
When unrealized portfolio appreciation is included, the company recorded GAAP net income of
$14.1 million or $1.51 per share.
The company's third-quarter net income was comprised of total investment income of $7.0 million,
net unrealized depreciation of investments of $9.8 million, and unrealized depreciation on certain
liabilities held at fair value of $0.7 million, partially offset by financing costs and operating expenses
of $3.4 million. Additionally, for the third quarter, the company recorded other comprehensive
income of $0.4 million, representing the change in fair value of the company's financial liabilities
attributed to instrument-specific credit risk.
During the third quarter, we paid three monthly distributions of $0.16 per share declared additional
market distributions of $0.18 per share to December year end. And last week, we declared another
11% increase in monthly common distribution to $0.20 per share beginning in January 2024 through
March 2024.
As of September month end, the company had outstanding borrowings from the revolving credit
facility and preferred equity, which totaled 35% of total assets, less current liabilities at the upper
end of our long-term target leverage ratio range of 25% to 35%, at which we expect to operate the
company under normal market conditions. This ratio moved higher with the EICB issuance back in
the summer, and we have been seeking to lower this level by issuing common stock through our ATM
program.
The company's asset coverage ratios at the quarter end for preferred stock and debt calculated in
accordance with the Investment Company Act requirements were 282% and 5,146%, respectively.
This measures is comfortably above the minimum requirements of 200% and 300%. As of September
month end, the company's net asset value was $140 million or $14.08 per share, an 8% increase
from June month end of 2023.
Moving on to our portfolio activity in the fourth quarter through October month end, the company
received recurring cash on its investment portfolio of $8.6 million. Note that some of the company's
investments are expected to make payments later in the quarter. As of October month end, net of
pending investment transactions, the company had over $70 million of cash and revolver capacity
available for investments. Management and audited estimate of the company's NAV as of October 31
was between $13.60 and $13.70 per share.
I will now turn the call back over to Tom.
Tom Majewski
Great. Thank you, Lena. EIC has had a banner 2023 so far, and the elevated rate
environment has continued to help us grow and maintain net investment income at a high level. In
our view, loans and CLOs continue to be two of the most resilient risk asset classes out there
attributable to the senior secured nature of loans and their floating rate structure. Our investment
portfolio, as well as the right side of our balance sheet, were intentionally designed for markets like
these. And indeed, both are clearly benefiting our shareholders through our ability to continue
increasing our cash distributions.
The three key attributes why we remain excited to be managing a BB-rated CLO debt-focused fund
ring today as true as ever, the potential for low credit expense as reflected by the low default rates of
BB-rated CLO debt over the past 20 years, the potential for high returns compared to similarly rated
corporate securities, the benefits of floating rate BB-rated CLO debt offer in markets with high
interest rates.
Along with the locked-in nature of CLO financing that is longer than its assets, we remain confident
that EIC is well-positioned to continue generating compelling risk-adjusted returns for our
shareholders.
We thank you for your time and interest in Eagle Point Income Company. Lena, Dan, and I will now
open the call to your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) And there are no questions at this time. Therefore, I will now turn
the call back over to Tom Majewski for closing remarks.
Tom Majewski
Great. Thank you very much, everyone, for joining the call. Dan, Lena, and I
appreciate your time and attention. We're available later today should anyone have any follow-up
questions? Thank you.
Operator
And this concludes today's conference, and you may disconnect your line at this time.
Thank you for your participation.
