Eagle Point Income Q1 2025 Earnings Call Transcript

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May 28, 2025

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Eagle Point Income Company First Quarter twenty twenty five Financial Results Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce Darren Dougherty with Prosec Partners. Please go ahead.

Speaker 1

Thank you, operator, and good morning. Welcome to Eagle Point Income Company's earnings conference call for the first quarter of twenty twenty five. Speaking on the call today are Thomas Bujewski, Chairman and Chief Executive Officer of the company Dan Ko, Senior Principal and Portfolio Manager for the company's advisor and Lina Umnova, Chief Accounting Officer for the advisor. Before we begin, I would like to remind everyone that the matters discussed on this call include forward looking statements or projected financial information that involves risks and uncertainties that may cause the company's actual results to differ materially from such projections. For further information on factors that could impact the company and the statements and projections contained herein, please refer to the company's filings the Securities and Exchange Commission.

Speaker 1

Each forward looking statement or projection of financial information made during this call is based on the 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. Earlier today, we filed our first quarter twenty twenty five financial statements and investor presentation with the Securities and Exchange Commission. These are also available in the Investor Relations section of the company's website, eaglepointincome.com. A replay of this call will also be made available later today.

Speaker 1

I will now turn the call over to Thomas Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company. Tom?

Speaker 2

Thank you, Darren, and welcome everyone to Eagle Point Income Company's first quarter earnings call. We appreciate your interest in Eagle Point Income Company or EIC. During the first quarter, the company generated net investment income and realized gains of $0.44 per share. This was comprised of $0.40 of net investment income and $0.04 of realized capital gains. This measure is down from $0.54 per share in the fourth quarter.

Speaker 2

The fourth quarter's total was comprised of $0.46 of NII and $08 of realized gains. The quarter over quarter decline in NII was principally driven by two factors. First, over the past year, SOFR, which largely tracks short term interest rates, fell significantly as the Fed cut rates multiple times last year. This principally impacts our CLO debt portfolio as the coupons on our CLO debt positions are directly linked to the SOFR rate. Second, the spreads on many syndicated loans have fallen, something the market refers to as spread compression.

Speaker 2

This adversely impacted the earnings on our CLO equity portfolio. As of March 31, our NAV per share stood at $14.16 This compares to $14.99 as of December 31. While our NAV may decline in volatile environments like these, it's important to remember that the prices of CLO securities will generally move more than the middle market loans held by many BDCs. We view the drawdown in our NAV as a short term market price fluctuation and not indicative of concerns specific to our portfolio. During the first quarter of twenty twenty five, the company received recurring cash flows of $16,500,000 or $0.71 per share.

Speaker 2

This compares to cash flows of $16,100,000 or $0.82 per share in the fourth quarter and $10,700,000 or $0.88 per share in the first quarter of twenty twenty four. Let me also highlight that a number of securities we purchased during the first quarter won't make payments until the second quarter. Earlier today, we declared three monthly distributions of $0.13 per share on our common stock for the third quarter. This is a decline from our previous distribution, and we believe is more closely in line with the company's near term earnings potential in today's lower interest rate environment. Of course, could SOFR increase in the future, that could lead to higher earnings for the company.

Speaker 2

At the same time, could SOFR fall further, that could reduce our earnings potential. The company's board considers numerous factors when setting the monthly distribution level, including cash flows generated from the company's investment portfolio, GAAP earnings, and the company's requirement to distribute substantially all of its taxable income among other considerations. Turning to our investment activity. During the volatility in the latter part of the first quarter, we were able to opportunistically deploy capital into discounted BB CLO debt purchases. In many cases, we were buying at prices that we hadn't seen since the first half of twenty twenty four.

Speaker 2

When we can buy CLO debt at discounts, this gives the potential for what is called convexity, or pull to par, when markets eventually normalize. While the market wide decline in most CLO security prices wasn't helpful for our NAV, our strong liquidity position allowed us to capitalize on the price volatility. Indeed, it was our previous purchases at discounts in 2023 and 2024 that gave rise to the $0.12 per share of gains that we realized over the last two quarters. The first quarter was a strong quarter for capital raising, and through our At the Market Program, or ATM, we raised approximately $64,000,000 of common stock at a handsome premium to NAV. This generated NAV accretion of $08 per share.

Speaker 2

We also raised an additional $14,000,000 from ATM issuance of preferred stock. Daily average trading volume for our common stock continues to increase, with volumes in the first quarter of twenty twenty five more than double the volume of the first quarter of twenty twenty four. I'd now like to turn the call over to Senior Principal and Portfolio Manager, Dan Ko.

Speaker 3

Thank you, Tom. We continue to find attractive investment opportunities across CLO market in junior CLO debt and CLO equity. The recent market volatility that began in the latter part of the first quarter created buying opportunities for EIC, which capitalized on this by investing in both high yielding CLO debt and equity. During the first quarter, we deployed approximately $120,000,000 of gross capital across 27 CLO debt purchases and nine CLO equity purchases. As the market turned in the second half of the quarter, we observed convexity returning to the CLO BB market with the drawdown in CLO BB prices, making the secondary market more attractive.

Speaker 3

As we've consistently noted, CLO BBs have performed well through numerous economic cycles in the past, experiencing very low long term default rates. We believe it would take a significant amount of loan defaults well above the long term average, coupled with limited loan price volatility for EIC's portfolio to be significantly impacted by a default wave. The S and P UBS Leveraged Loan Index generated a total return of 60 basis points during the first quarter. After two positive months during March, the index experienced its first negative monthly return since 2023. Along with broader markets, the decline in the leveraged loan index reversed and as of May 23, the index is now up 1.8% for the year.

Speaker 3

During the first quarter, approximately 5% of leveraged loans are roughly 20% annualized prepaid at par. Many loan issuers have been proactively tackling their near term maturities and the maturity wall of the market continues to get pushed out further and further. As part of many of these repayments, borrowers issued new loans at tighter spreads. This has been driving the spread compression in our CLO equity portfolio. Spread compression has been a meaningful headwind to CLO equity over the past year.

Speaker 3

While a significant majority of the loan market was trading at a premium to par on 01/31/2025, as of May 23, only 19.6% of the loan market is trading at a premium. While spread compression will likely return at some point in the future, for now, spread compression is largely behind us. Indeed, we are starting to see increases in the weighted average loan spreads of some of our CLO equity portfolios. The trailing twelve month default rate decreased slightly to 80 basis points as of March 31, remaining well below the historical average of 2.6% and below most dealer forecasts. EIC's portfolio default exposure as of March 31 stood at 50 basis points.

Speaker 3

From a CLO issuance standpoint, 2025 started strong with $49,000,000,000 of new issuance in the first quarter, mostly in the beginning of the quarter, down slightly from the $59,000,000,000 of volume in the fourth quarter of twenty twenty four, but still healthy by historical standards. This new issue volume in the first quarter was complemented by $64,000,000,000 of reset activity and $41,000,000,000 of refinancing for a total issuance volume of $153,000,000,000 again mostly in the beginning of the quarter before the drawdown in loan prices and widening of CLO debt spreads. During the first quarter of twenty twenty five, EIC completed one refinancing and three resets of our CLO equity positions, lowering its debt costs by 45 basis points in the refinancing and extending the reinvestment to five years in the resets. We continue to remain focused on extending the weighted average remaining reinvestment period of our CLO equity portfolio as much as possible and we'll continue to seek longer reinvestment period new issues, secondary and reset opportunities across our portfolio. Moving forward, the company has ample liquidity to capitalize in volatile market.

Speaker 3

With $33,000,000 of cash and undrawn revolver capacity as of April 30, we will continue deploying capital into additional investments that offer compelling risk adjusted returns. With that, I will now turn the call over to our advisor's Chief Accounting Officer, Lina Mnova to walk through our financial results.

Speaker 4

Thank you, Dan. During the first quarter of twenty twenty five, the company recorded NII and realized gains of $10,200,000 or $0.44 per share. This compares to NII and realized gains of $0.54 per share recorded for the fourth quarter of twenty twenty four and NII unrealized gains of $0.56 per share for the first quarter of twenty twenty four. When unrealized portfolio depreciation is included for the first quarter of twenty twenty five, the company recorded a GAAP net loss of $10,600,000 or $0.46 per share. The company's first quarter net loss was comprised of total investment income of $14,100,000 and a net realized gain on investments of $1,000,000 This was offset by financing costs and operating expenses of $4,900,000 net unrealized depreciation on investments of 18,900,000.0 and net unrealized appreciation on certain liabilities recorded at the fair value of $1,900,000 Additionally, the company recorded other comprehensive income of $1,300,000 for the first quarter.

Speaker 4

During the first quarter of twenty twenty five, we paid three monthly distributions of $0.20 per share. Earlier today, we declared three separate monthly distributions of $0.13 per share for the third quarter of twenty twenty five. As of March 31, the company had outstanding preferred equity securities which totaled 29% 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 upgrade 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 345%, comfortably above the required minimum of 200%.

Speaker 4

As of quarter end, our revolving credit facility was fully undrawn. As of March month end, the company's NAV was $260,000,000 or $14.16 per share, a 5.5% decrease compared to $14.99 per share as of year end. Moving on to our portfolio activity for the month of April, the company received recurring cash flows on its investments of $16,700,000 Note that some of the company's investments are still expected to make payments later in the quarter. As of April month end, net of pending investment transactions and settlements, the company had over $33,000,000 of cash and revolver capacity available for investment. Management's unaudited estimate of the company's NAV as of April month end was between $13.73 and $13.83 per share.

Speaker 4

I will now turn the call back over to Tom to provide closing remarks before we open the call up for questions.

Speaker 2

Thank you, Lina. The company's decline in net investment income was driven in large part by the drop in short term rates over the past year. While we were able to offset some of the decline through realizing gains on our portfolio for a period of time, the company's new distribution rate reflects our current view of the company's earnings potential in the current rate environment. We believe the recent market volatility will prove to be our friend over time, as we've been able to buy CLO debt and equity at discounted prices. Further, our CLO equity strategy has typically done well over the medium term during periods of volatility, as the CLO's ability to reinvest par paydowns into new loans, in our view, is significantly undervalued by the market.

Speaker 2

Looking forward, we believe the company is well positioned to continue generating strong 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 call to your questions. Operator?

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is from Randy Binner with B. Riley Securities.

Speaker 5

Hey, good morning. Good morning, again. So I just wanted to ask a quick one about the reduction in dividend distribution. And I guess in light of the recurring cash flows continuing to be kind of adequate to cover the prior $0.60 per quarter versus $0.39 now. Is it a state of policy that the core earnings need to cover it?

Speaker 5

Should we think of the cash flows as kind of coming down commensurate with where we're modeling the core earnings? Just to understand that dynamic a little bit better.

Speaker 2

Hey, Randy. Good morning again. Let me this is Tom address that of high level thought. Indeed, the cash has been covering stuff with no problem, recurring cash flow. The vast majority and that's driven some of the nuances that we have a little bit of CLO equity in the portfolio about a quarter, give or take.

Speaker 2

The vast majority of the portfolio is CLO BBs, which does fluctuate kind of directly in line with SOFR. So back when we went public in 2019, oddly our distribution rate, I look back as roughly as a quarter penny less than the original distribution rate in 2019. What we said was as rates move up and down, the distribution rate on EIC is going to move around. If we were all CLO debt, let's just take it to the extreme, and rates move down 100 basis points, we'd be in a shortfall situation. So here we have the benefit of the CLO equity generating some excess cash for us, which has let us be on the offense.

Speaker 2

But in general, you should expect the and I think we've largely communicated that the NII to move around as rates move. If rates move up 100 bps tomorrow, short term rates, three month rates move 100 bps tomorrow, we'll proverbially open champagne. If they drop another 100 basis points tomorrow, it would be an unfortunate day for the company, but our securities just float up and down with rates. That's the broad thought. So what we said here is we're not of the view rates are going to go down 100 basis points anytime soon, they may, stranger things have happened.

Speaker 2

We think this is reflective however of the company's near to medium term earnings power. We were able to bridge it a little bit with all the gains we were realizing. So that kind of helps some of it, we have about $0.12 of gains I think over the last two quarters, so that's a nontrivial amount of collection. But where we look on a run rate basis, this kind of feels about in line with it. It could be a little higher or lower, but it feels in line with where the GAAP earnings for the company will be.

Speaker 2

As we talked about on the last call, there is a little bit of variability of taxable and taxable income from CLO debt is very straightforward. It's what's your coupon, plus a little amortization of the discount if you bought it at a discount, but the vast majority of the income is coupon driven, so it's much less complicated than CLO debt from a tax perspective. That said, having about a quarter of the portfolio in CLO equity introduces one quarter of the tax uncertainty that we talked about on the ECC call earlier. So there could be some vagaries of taxable income moving up and down related to that portion of the portfolio. If we had a bunch more taxable income than the distribution covered, we'd have spillover, but we could tackle handling that next year, I'm not necessarily predicting that, but as we thought about those variables, that was one thing we could think about.

Speaker 2

But generically, with this distribution, to the extent short term rates were to go down a bunch more, you'd expect the earnings power of the company to go down, at the same time if short term rates move up a bunch, you'd expect our earning power to go back up.

Speaker 5

All right. That's helpful. Appreciate the color. Thank you.

Operator

Our next question is from Steven Bavaria with Inside The Income Factory.

Speaker 6

Hello again, Tom. Hey, Just clarify something that I think is obvious to a lot of people, but maybe not to every one of your retail investors, so I'll just ask it. We think of CLOs in general as being kind of bets on default rates, on credit loss over time. And the lower the default rate, the lower the credit loss after principal repayments and everything, the safer you are. When you move up in the balance sheet to the BBs and the other debt, nothing that's happened to your dividend reflects any kind of capital losses at all.

Speaker 6

Mean, with equity is doing as well as it is and default rates as low as they are, there's no threat on the horizon to say EIC's principle CLOs it owns. This drop in dividend rate is solely due to just interest rate movements, right?

Speaker 2

Thanks for the question. Indeed, the change in the distribution rate is principally driven by the change in SOFR. Short term rates have come down 100 plus basis points, give or take, over the last year, a little less than a year, and this reflects that. The long term default rate on CLO BB securities over the last thirty years is about four basis points per annum. We feel very confident in every CLO BB security in our portfolio.

Speaker 2

This is not a credit related move on our part whatsoever, purely when rates go down, these bonds earn less because they're floating rate bonds. And when rates go up, they earn more.

Speaker 6

Gotcha, thanks very much for clarifying Yeah,

Speaker 2

good question. Entirely Fed rate movement based, not anything else here.

Speaker 6

Great, thanks.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for any closing remarks.

Speaker 2

Great. Thank you very much, everyone, for joining the call. We have now, I think, doubled the number of questions we've had on an EIC call. We appreciate the participation. For others who have questions that we didn't get to, please feel free to give us a call.

Speaker 2

We're around most of the day today. We appreciate your interest in Eagle Point Income Company and look forward to speaking with you again. Thank you very much.

Operator

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

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Key Takeaways

  • Q1 NII and realized gains were $0.44 per share, down from $0.54 in Q4, as SOFR cuts and spread compression weighed on earnings.
  • NAV per share fell to $14.16 at quarter-end from $14.99, reflecting market-driven CLO security price moves rather than portfolio credit concerns.
  • Monthly dividend was reduced to $0.13 per share (from $0.20), aligning distributions with anticipated earnings in the lower-rate environment.
  • The firm deployed about $120 million into discounted CLO debt and equity in Q1, and raised $64 million via its ATM program at a premium, boosting NAV by $0.08 per share.
  • With $33 million of cash and undrawn credit capacity, management says it is well-positioned to capitalize on further market volatility.
AI Generated. May Contain Errors.
Earnings Conference Call
Eagle Point Income Q1 2025
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