Eagle Point Income Q3 2023 Earnings Call Transcript

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November 14, 2023

Key Takeaways

  • Declared an 11% increase in monthly distribution to $0.20 per share starting January 2024, marking the highest monthly common distribution in company history.
  • Generated recurring cash flows of $7.1 million ($0.76 per share) in Q3, comfortably covering regular distributions and operating expenses.
  • Net asset value rose to $14.08 per share as of September 30, an 8% increase quarter-over-quarter, with an October 31 estimate of $13.65 per share.
  • Raised $31.2 million via a 7.75% Series B preferred offering and nearly $14 million through an ATM share issuance at a premium to NAV, deploying about $51 million into CLO junior debt and equity with a 15% average yield.
  • Ended Q3 with borrowings at 35% of assets—at the upper end of its 25–35% target leverage range—and is using equity issuances to manage leverage.
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Earnings Conference Call
Eagle Point Income Q3 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

Morning, and welcome everyone to Eagle Point Income Company's Third Quarter Earnings Call. I will now turn the call over to Peter Squesa at ICR.

Speaker 1

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.

Speaker 1

A replay of this call can be accessed for 30 days via the company's website, www.eaglepointincome.com. Earlier today, we filed our Q3 20 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, 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 Eagle Point Income Company.

Speaker 2

Thank you, Peter, and welcome everyone to Eagle Point Income Company's 3rd 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.

Speaker 2

Given our continued confidence in the portfolio, we were pleased last week to again increase our regular common distribution, So 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 $7,100,000 or $0.76 per share comfortably in of our regular common distributions and operating expenses excluding non recurring items.

Speaker 2

We paid 3 monthly Common distributions of $0.16 per share during the Q3 and are paying 3 monthly common distributions of $0.18 per share In the Q4. And as I just noticed, we declared another increase in our monthly common distributions to $0.20 per common share For the Q1 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 Percent Series B term preferred stock offering that we completed in July, We raised $31,200,000 of additional capital from this offering and have been deploying the proceeds into new CLO Junior Debt and Equity Investments.

Speaker 2

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 1,000,000 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 $14,000,000 of net proceeds to the company. As of October 31, As of October 31, we have over $17,000,000 of cash and revolver borrowing capacity available to us.

Speaker 2

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.

Speaker 2

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 Coe.

Speaker 3

Thank you, Tom. We continue to be excited about the investment We will now turn the call over to Peter Squeeza at ICR. Opportunities within the CLO market, in particular the junior debt and equity portions of the capital structure. EIC has been able to successfully capitalize 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 CB preferred offering and in total deployed nearly $51,000,000 in gross capital into attractive CLO junior debt and CLO equity purchases.

Speaker 3

The weighted average effective yield of the CLO purchases during the quarter was a robust 15%. We continue to see 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 par build and increasing excess spread. The Credit Suisse Leveraged Loan Index continued It's momentum from the first half of the year and is up 10% year to date as of September 30, 2023.

Speaker 3

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 $20,000,000,000 of new CLO issuance in the Q3 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 twenty twenty two vintage CLOs with 1 year non call periods, But otherwise remains basically shut. There were a total of 5 syndicated loan defaults in the 3rd 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.

Speaker 3

We continue to believe our portfolio is well positioned for environments like these, 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 performance is obviously not a 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 deploy into new investments via cash and our revolver capacity.

Speaker 3

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 advisors' Chief Accounting Officer, Lina Umnova.

Speaker 4

Thank you, Dan. For the Q3, the company recorded net investment income or NII of $3,500,000 or $0.38 per share Compared to NII of $0.49 per share recorded for the Q2 of 2023 and NII of $0.40 per share for the Q3 of 2020 NII for the quarter is net of $0.14 per share of non recurring expenses related to the issuance of the company's 7.75 Percent Series B term preferred stock, partially offset by $0.01 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 $14,100,000 or 1.51 of investments of $9,800,000 and unrealized depreciation on certain liabilities held at fair value of 700,000 Partially offset by financing costs and operating expenses of $3,400,000 Additionally, for the 3rd quarter, The company recorded other comprehensive income of $400,000 representing the change in fair value of the company's financial liabilities Attributed to instrument specific credit risk. During the Q3, we paid 3 monthly distributions of $0.16 per share, Declared additional monthly distributions of $0.18 per share through December year end.

Speaker 4

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 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 ECB issuance back in this summer, and we have been seeking to lower this level by issuing common stock to our ATM program. The company's asset coverage ratios at the quarter end for preferred stock and debt calculated in accordance with Investment Company Act requirements We're 283% and 5,146%, respectively.

Speaker 4

These measures are comfortably above the minimum Requirements of 203 100 percent. As of September month end, the company's net asset value was 140,000,000 of $14.08 per share, an 8% increase from June month end of 2023. Moving on to our portfolio activity in the Q4 through October month end, the company received recurring cash on its investment portfolio of 8,600,000 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 $17,000,000 of cash and revolver capacity available for investments. Management's unaudited estimate of the company's NAV As of October 31, it was between $13.60 $13.70 per share.

Speaker 4

I will now turn the call back over to Tom.

Speaker 2

Great. Thank you, Lino. EIC has had a banner 2023 so far and the elevated rate environment has 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 3 key attributes why we remain excited to be managing a BB rated CLO debt focused fund bring today as true as ever.

Speaker 2

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 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. Lina, Dan and I will now open the calls to your questions. Operator?

Operator

Thank you. And at this time, we will be conducting a question and answer session. ICR. And there are no questions at this Therefore, I will now turn the call back over to Tom Majewski for closing remarks.

Speaker 2

Great. Thank you very much everyone for joining the call. Dan, Lena and I appreciate your

Operator

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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