Eagle Point Income Q2 2023 Earnings Call Transcript

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August 15, 2023

Key Takeaways

  • Distribution Increase: Declared a 13% boost in monthly common distributions to $0.18 per share from October, up from $0.16 during Q2.
  • Strong Q2 Financials: Reported net investment income of $0.49 per share and recurring cash flows of $0.81 per share, both exceeding the regular distribution.
  • Capital Raises & Balance Sheet: Issued 545,000 common shares for $7.3 million net proceeds, and raised $31.2 million from a 7.75% Series B preferred offering, leaving over $48 million of dry powder as of July 31.
  • Portfolio Positioning: Maintains a 100% floating-rate CLO debt portfolio with many double-digit coupons, designed to benefit from high interest rates and low default environment.
  • NAV Trends: NAV was $13.00 per share as of June 30 with a midpoint estimate of $13.44 on July 31, marking a 3.4% increase month-over-month.
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Earnings Conference Call
Eagle Point Income Q2 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Skousa at ICR. Thank you, Peter. You may begin.

Speaker 1

Thank you, and good morning. Before we begin our formal remarks, we need to remind everyone that 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 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 Form N CSR Half Year twenty twenty three Financial Statements Our Q2 investor presentation with the Securities and Exchange Commission. The financial statements in our Q2 investor presentation Are also available within the Investor Relations section of the company's website. The financial statements can be found by following the Financial Statements and Reports link An 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.

Speaker 2

Thank you, Peter, and welcome everyone to Eagle Point Income Company's 2nd 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'll refer to in a portion of my remarks. The company continued to perform very well during the Q2, Doing exactly what its investment portfolio was designed to do, generate increased cash flows in a high rate environment Due to the floating rate nature of our CLO Junior Debt Investments, given our confidence and our outlook for our portfolio, We are very pleased last week to again increase our regular common distribution, this time by 13%, moving to $0.18 per share beginning in October. We believe our portfolio remains very well positioned to generate significant income and cash flow going forward.

Speaker 2

I'll share a few specific highlights from the quarter. Net investment income was $0.49 per share, Once again exceeding our regular common distributions, our recurring cash flows were $6,900,000 or $0.81 per share, Well in excess of our regular common distributions and expenses. Our NAV as of June 30 was $13 per share, A modest decline from March 31 and our NAV midpoint as of July 31 was $13.44 An increase of 3.4 percent from our June 30 NAV. We paid 3 monthly common distributions of $0.16 per share During the quarter end, as I just noted, we've declared an increase in our monthly common distributions to $0.18 per share beginning in October. We also opportunistically raised capital through our at the market and committed equity finance programs, issuing nearly 545,000 common shares at a premium to NAV, generating NAV accretion of about $0.03 per share during the quarter.

Speaker 2

These sales generated net proceeds of approximately $7,300,000 during the Q2. We continue to selectively raise capital during the Q3. Last month, in July, we further strengthened our capital position with our 7.75 Percent Series B term preferred stock offering. The new preferred stock is due in 2028 And we received net proceeds from the offering of $31,200,000 which includes the full exercise in closing of the underwriters over allotment or green shoe option. As of July 31, we have over $48,000,000 of cash and revolving capacity available to us, Which is ample dry powder to invest and further expand our investment portfolio.

Speaker 2

As is clearly evident, Our portfolio continues to benefit from the floating rate nature of CLOBBs and given that 100% of CLO debt investments we hold are floating rate. Many CLO BB coupons are in the double digits and some CLOs have the potential to yield north of 20% in some early call scenarios. 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 Low and income is validation that we're executing on that playbook. We continue to seek to lengthen the weighted average remaining reinvestment periods Our CLO debt and equity portfolios through vintage diversification. We are excited for our portfolio's potential for the second half of twenty twenty three and beyond.

Speaker 2

For additional commentary on the overall market and some more detail on our recent portfolio activity, I'd like to turn the call over to Senior Principal and Portfolio Manager, Dan Coe.

Speaker 3

Thanks, Tom. It remains a very exciting time to be investing in CLOs, especially at the junior debt and equity portion of the capital structure And EIC has certainly been a beneficiary of the high rate environment. We have been actively deploying the proceeds from the EICB preferred And continue to see attractive opportunities to invest the remaining proceeds over the coming weeks. Our CLO cloud managers continue to be able to Build par through relative value swaps or by reinvesting prepayments into discounted loans. Loan refinancing activity Continues at a good clip as CFOs and many loan issuers seek to push out their 2024 2025 loan maturities in order to extend their runway On their financing, despite the lower spreads that they have locked in currently.

Speaker 3

As a result, many loan issuers are offering lenders higher spreads along with OID, Which ultimately benefits the CLO par bill and Nexa spread. The Credit Suisse Leveraged Loan Index continued its momentum from the Q1 and ultimately posted 6.3% gain for the first half of twenty twenty three and its positive momentum continued further into July as it remains on pace to potentially generate Double digit gains and have its best year since the global financial crisis. In the CLO market, we saw $22,000,000,000 of new CLO issuance in the Q2 of 2023 as the market remains on pace to once again eclipse the $100,000,000,000 mark. We believe a significant majority of the volume in the first half of the year was backed by captive CLO funds, which are generally far less return sensitive. CLO refinancing and reset activity has picked up slightly.

Speaker 3

There were a total of 15 syndicated loan defaults in the 2nd quarter. As a result, the trailing 12 month default rates stood at 1.7% as of June 30th, up from March 31st, but still well below historic averages. Given the ongoing macro volatility, most bank research desks now expect defaults to end up between 3% 4% by the end of 2023 Due to the higher rate environment and the inability for certain stressed companies to access the capital markets. That said, we continue to believe our portfolio is well positioned for environments just like these. 100% of our portfolio of CLO debt and CLO equity is And current distributions.

Speaker 3

As we've previously noted, CLOBB 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 averages For EIC to be materially impacted by a default wave, while past performance is obviously not a guarantee of future results, believe the performance of our portfolio over the past few years has demonstrated the resilience of the company's investment strategy. We remain in a very strong position with plenty of dry powder to deploy into new investments via our cash position and revolver capacity. We will continue to be selective when evaluating investment opportunities and will act on attractive opportunities when we ultimately believe Will lead to compelling risk adjusted returns for the company's portfolio. With that, I will now turn over the call to our advisors' Chief Accounting Officer, Lina Amnova.

Speaker 4

Thank you, Dan. For the Q2, the company recorded net investment income or NII of $4,200,000 or $0.49 per share. This is consistent with NII of $0.49 per share recorded for the Q1 of 2023 and compares favorably To NII, unrealized gains of $0.41 per share for the quarter ended June 30, 2022. When unrealized portfolio depreciation is included, the company recorded GAAP net income of $3,000,000 or $0.35 per share. The company's 2nd quarter net income was comprised of total investment income of $5,800,000 and Unrealized depreciation on stolen liabilities held at fair value of $600,000 partially offset by net unrealized depreciation on investments of $1,800,000 and total expenses of $1,500,000 Additionally, for the Q2, the company recorded Other comprehensive loss of $800,000 representing the change in fair value on the company's financial liabilities attributable to Instrument specific credit risk.

Speaker 4

During the Q2, we paid 3 monthly distributions of $0.16 per share, Declared additional monthly distribution of $0.16 per share through September. And last week, we were pleased to announce a 13% increase in monthly Common distribution to $0.18 per share beginning in October. As of June month end, the company had outstanding borrowings from the revolving credit target leverage ratio range of 25% to 35%, at which we expect to operate the company under normal market conditions. The company's assets coverage ratio at the quarter end for preferred stock calculated in accordance with Investment Company Act requirements Was 401%. This measure is comfortably above the statutory requirement of 200%.

Speaker 4

As of June month end, the company's net asset value was $117,000,000 or $13 per share, a modest decrease from March 31, 2023. Moving on to our portfolio activity in the Q3 through July month end, the company received recurring cash flows On its portfolio of $6,700,000 Note that some of the company's investments are still expected to make payments later in the quarter. The company also deployed $10,200,000 of the net capital into CLO debt and other investments. As of July month end, net of pending investment transactions, the company had over $48,000,000 of cash and revolver capacity available for investment. That includes the net proceeds of $27,100,000 received in July from issuance of our new 7.75% Series B preferred stock, but not the proceeds from the green show that the company received in August.

Speaker 4

Management's unaudited estimate of the company's NAV as of July month end was between $13.39 13.49 Leverage ratio as of the same period end accounting for the new preferred stock stood at 36%. I will now turn the call back over to Tom.

Speaker 2

Thank you, Lina. EIC continues to perform exceedingly well in the elevated rate environment And help us grow and maintain NII at a high level. Loans continue to be one of the most resilient risk asset classes out there Attributable to their senior secured nature 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, which is clearly benefiting our shareholders through increased cash distribution. The three attributes as to why we remain excited to be managing a BB rated CLO debt focused fund ring as true as ever today.

Speaker 2

The potential for low credit experience, low credit expenses as reflected by the low default rates of BB rated CLO debt over the past 20 plus years, The potential for high returns compared to similarly rated corporate securities and the benefits that BB rated CLO debt offer in markets with High interest rates. Along with the locked in nature of the CLO financing that is longer than its assets, We remain 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 Income Puneet, Lena, Dan and I will now open the call to your questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. One moment please while we poll for questions. Thank you. There are no questions at this time.

Operator

I'd like to hand the floor back over to Thomas Majewski for any closing comments.

Speaker 2

Great. Thank you very much, Dan, Lina and I appreciate your time this morning and your interest in Eagle Point Income Company. Should everyone anyone have follow-up questions, please feel free to reach out to us directly during the day today. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your

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