Eagle Point Income Q2 2024 Earnings Call Transcript

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August 6, 2024

Key Takeaways

  • The company generated recurring cash flows of $12.4 million (≈$0.87/share) in Q2, comfortably exceeding common distributions and operating expenses.
  • Net asset value rose to $15.24 per share at June 30, up ≈1% quarter-over-quarter, supported by ATM issuance accreting $0.07/share.
  • Balance sheet was bolstered with $33.6 million net proceeds from Series C preferred issuance and ATM sales, leaving $41 million of cash and revolver capacity.
  • The portfolio maintained a robust deployment yield of 11.6% on CLO purchases, while loan default exposure remains low at 0.60%, well below historical averages.
  • Adjusted net investment income plus realized gains were $0.54 per share, slightly below Q1’s $0.56 due to timing of preferred and ATM deployment.
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Earnings Conference Call
Eagle Point Income Q2 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Eagle Point Income Company Second Quarter 20 24 Financial Results Conference. At this time, all participants are in a listen only mode. A brief 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, Peter Skuza of ICR.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning. As a reminder, before we begin our formal remarks, 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.

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 NCSR Half Year twenty twenty four Financial Statements in our 2nd quarter investor presentation with the Securities and Exchange Commission. The financial statements in our 2nd quarter investor presentation 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, and the investor presentation can be found by following the Presentations and Events link. I will now turn the call over to 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. This presentation contains detailed information about the company and our investment portfolio. The company's strong momentum from the Q1 continued into the 2nd quarter.

Speaker 2

We had yet another quarter over quarter increase in gross portfolio cash flows. We grew our NAV from the prior quarter end and continued to strengthen our balance sheet. Our portfolio designed specifically for elevated rate environments continues to generate robust cash flows. Among our highlights, recurring cash flows were again comfortably in excess of our regular common distributions and operating expenses. The company received recurring cash flows of $12,400,000 or $0.87 per share during the quarter.

Speaker 2

This compares to cash flows in the prior quarter of $10,700,000 or $0.88 per share. A driver of the $0.01 decline in the per share amount was that many of the securities we purchased during the quarter using the preferred issuance proceeds and ATM proceeds didn't make payments until the Q3. The company generated net investment income plus realized gains, excluding non recurring expenses related to our 8% Erie C term preferred offering in April of $0.54 per share. Similar to the Q1, we paid 3 monthly common distributions of $0.20 per share in the 2nd quarter. Our NAV as of June 30 was $15.24 and that's an increase of about 1% from March 31.

Speaker 2

We continue to strengthen our balance sheet. As I mentioned earlier, in April, we issued our Series C term preferred and received net proceeds of about $33,600,000 during the Q2. Through our At the Market program or ATM, we issued approximately 2,700,000 common shares at a premium to NAV generating NAV accretion of $0.07 per share during the quarter. We also realized about $100,000 of additional proceeds from sales of Series B and Series C term preferred stock via the ATM. Daily average trading volume for our common stock continued to increase with volumes in the Q2 15% higher than the Q1 and nearly quintupling the average trading volume on a year over year basis.

Speaker 2

We're very happy to see the increased volume for our shareholders. I'd quickly like to add some highlights before I turn the call over to Dan Coe for his market commentary. Subsequent to the end of the quarter, we declared monthly common distributions of $0.20 per share through the end of 20 July 31, we have over $41,000,000 of cash and revolver borrowing capacity available to us, ample dry powder with which to invest and further expand our portfolio. All of our CLO BB coupons are in the double digits with some CLOBBs having the potential to yield even more if the CLOs are called early. Further, the portfolio exposure continues to further enhance our portfolio's earnings ability.

Speaker 2

You've heard us reiterate our long term focus as investors. We remain consistent in our approach to construct the portfolio to weather any economic cycle and believe the portfolio is strongly positioned for continued performance. 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. There continues to be attractive investment opportunities across CLO market, in particular, the junior debt and equity portions of the capital structure. We believe EIC successfully capitalized on the elevated rate environment by investing in floating rate CLO debt, but is still well positioned to succeed, good rates begin to be lowered later this year. The Credit Suisse Leveraged Loan Index continued to perform well, generating a total return of 1.86% for the quarter and 4.44% for the first half of twenty twenty four. The index continued its trajectory in July with loans up 5.21% year to date as of July 31.

Speaker 3

Over the past few days, there has been some softness in loan prices in line with the broader market volatility, but the impact on loan prices has so far been relatively modest. We continue to see attractive return profiles in the primary and secondary markets. In the second quarter, we deployed effective yield of the CLO purchases during the quarter was a robust 11.6%. Our CLO collateral managers remain focused on building par through relative value trading or by reinvesting par prepayments into discounted loans. During the Q2 approximately 9% of leverage loans market wide or roughly 35% annualized repaid at par.

Speaker 3

The prepayments were driven by loan issuers focused on refinancing their near term maturities in an effort to further extend the maturity profile of their debt. Regarding new CLO issuance, we saw $53,000,000,000 of new issuance in the Q2 of 2024 and $102,000,000,000 for the first half of twenty twenty four, the fastest pace ever and approximately 82% higher than the prior year period. As noted on our Q1 call, 3rd party CLO equity investors including us have returned to the primary market as CLO debt spreads have tightened. We continue to see a significant uptick in resets and refinancings, driven by tighter CLO debt spreads. In the first half of twenty twenty four, we completed 3 refinancings and one reset of our CLO equity positions, lowering their debt cost by an average of 32 basis points in the refinancings and extending the reinvestment period to 5 years in the case of the reset, increasing our portfolio's weighted average remaining reinvestment period.

Speaker 3

We expect that refinancings resets and calls will lead to some of our previously discounted CLOBB purchases being repaid at par, crystallizing the convexity in certain of our investments sooner than anticipated. There were only 6 leverage loan defaults in the 2nd quarter and the trailing 12 month default rate declined to 0.92% as of quarter end, remaining well below the historical average of 2.65%. EIC's portfolio's default exposure as of June 30 stood at 60 basis points. Even if defaults should rise from these levels, we continue to believe our portfolio is well positioned environments like these. As we've consistently noted, CLO BBs have withstood multiple economic downturns in the past, experiencing very low long term default rates.

Speaker 3

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. Moving forward, we remain well positioned to deploy new capital into additional investments that offer 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 Onova to walk through our financial results.

Speaker 4

Thank you, Dan. During the Q2, the company recorded net investment income, or NII, and realized gains of $6,300,000 or $0.44 per share. When excluding nonrecurring expenses related to the issuance of the company's 8% Series C term preferred stock, NII and realized gains were $0.54 per share. This compares to NII and realized gains of $0.56 per share recorded for the Q1 of 2024 and NII of $0.49 per share for the Q2 of 2023. As Tom mentioned earlier, the 2nd quarter decline in NII was driven in part by taking a bit of time to deploy the proceeds from the Series C preferred stock and ATM issuances.

Speaker 4

When unrealized portfolio appreciation is included, the company recorded GAAP net income of $8,500,000 or $0.60 per share. The company's 2nd quarter net income was comprised of total investment income of $10,900,000 net unrealized appreciation on investments of $2,000,000 net realized gains on investments of $300,000 and unrealized depreciation on certain liabilities held at fair value of $200,000 all of which were partially offset by financing cost and operating expenses of $4,900,000 Additionally, for the Q2, the company recorded other comprehensive income of $600,000 representing the change in fair value on the company's financial liabilities attributed to instrument specific credit risk. During the Q2, we paid 3 monthly distributions of $0.20 per share, and last week, we declared continued monthly distributions of $0.20 per share through the end of the year. As of quarter end, the company had outstanding preferred equity, which totaled 32% 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.

Speaker 4

At the end of the quarter, we had nothing drawn on our revolver. The company's asset coverage ratio at the quarter end for preferred stock calculated in accordance with Investment Company Act requirements were 3 11%. This is comfortably above statutory requirement of 200% for preferred stock. As of June month end, the company's net assets value was 240,000,000 dollars or $15.24 per share. This is approximately 1% decrease from March 31.

Speaker 4

Moving on to our portfolio activity for the month of July. The company received recurring cash flows on its investments portfolio of $12,400,000 Note that some of the company's investments are still expected to make payments later in the quarter. As of July 31, net of pending investment transactions, the company had over $41,000,000 of cash and revolver capacity available for investment. I will now turn the call back over to Tom to provide the closing remarks before we open it up for questions.

Speaker 2

Thanks, Leena. EIC continues to perform quite strongly and our proactive investment strategy continues to generate significant net investment income. Throughout the quarter, we focused on strengthening our balance sheet and believe our portfolio is well positioned to succeed in any rate or economic environment. We maintain the view that CLO BBs are one of the most resilient risk asset classes attributable to their structural protection and floating rate nature and 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 Company.

Speaker 2

Lena, Dan and I will now open the call to your questions. Operator?

Operator

Ladies and gentlemen, the floor is now open for questions. We're showing no questions in queue at this time. I'd like to turn it over to Mr. Majewski for closing comments.

Speaker 2

Great. Thank you very much everyone for dialing in today. Each of Lena, Dan and I appreciate your time and interest in Eagle Point Income Company. We are available in the office later today should anyone have any follow-up questions. Thank you.

Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time and enjoy the rest of your day.

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