Eagle Point Income (EIC) 14 Nov 242024 Q3 Earnings call transcript

Ladies and gentlemen, greetings, and welcome to the Eagle Point Income Company Third Quarter 2024 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you. Please go ahead.

Thank you, and good morning.

As a reminder, before we begin our formal remarks, 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 2024 financial statements and our third quarter investor presentation with the Securities and Exchange Commission. The financial statements in our third quarter 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, 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.

Thank you, Garrett, 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. This presentation contains detailed information about the company and our investment portfolio.

It has been a solid year so far for EIC. We've generated strong net investment income and realized gains and continue to strengthen our balance sheet. CLO junior debt remains in robust demand and we're actively managing our portfolio towards maximizing shareholder returns. Among our highlights for the quarter, the company received recurring cash flows of $13.1 million or $0.76 per share. This compares to cash flows from the prior quarter of $12.4 million or $0.87 per share. The decrease in cash flows per share during the quarter was a result of a significant number of new investments made after their third quarter payment dates.

We are now seeing our first payments from those investments in the fourth quarter. The company generated net investment income and realized gains of $0.57 per share during the quarter, realized gains of $0.08 per share were generated from a number of sales and repayments at par on positions in our portfolio during the third quarter as we were able to realize the convexity of our discounted purchases over the past quarters sooner than expected. In line with the previous 2 quarters, we paid 3 monthly common distributions of $0.20 per share during the third quarter and have declared the same monthly distributions through March 2025.

Our NAV as of September 30 was $14.90 per share, a 2% decrease from the level at June 30.

We continue to strengthen our balance sheet as well. Through our at-the-market program, or ATM, and committed equity finance programs, we issued approximately 2.8 million common shares of stock at a premium to NAV. This generated NAV accretion of $0.05 per share during the quarter.

We also realized proceeds of $7.1 million from additional issuances of Series B and Series C term preferred stock via the ATM. Daily average trading volume for our common stock continues to increase with volumes in the third quarter, 29% higher than the second quarter and more than tripling the average trading volume on a year-over-year basis.

All of our CLO coupons remain in the double digits and some CLOs have the potential for higher returns if those CLOs are called early. Further, the portfolio of CLO equity exposure continues to enhance our portfolio's earnings ability.

As investors focused on the long term, we remain consistent in our approach to construct a portfolio to weather any economic and rate cycle. We believe the portfolio is strongly positioned for continued future 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 Ko.

Thank you, Tom.

We continue to find attractive investment opportunities in junior CLO debt and CLO equity. EIC continued to capitalize on the elevated rate environment in the third quarter by investing in high-yielding CLO debt and CLO equity. Despite the Federal Reserve's recent rate cuts, we believe floating rate CLO debt still offers an attractive return profile compared to other fixed income securities. Furthermore, CLO equity is relatively insulated from rate movements because it is principally a spread arbitrage product. All things equal, lower rates should lead to lower defaults of the loans in our underlying CLO portfolios. The Credit Suisse Leveraged Loan Index continued to perform well, generating a total return of 2.1% for the quarter and 6.6% year-to-date through September 30.

The index continued its trajectory in October with loans up 7.5% year-to-date as of October 31.

We continue to see attractive return profiles in both the primary and secondary markets. In the third quarter, we deployed approximately $90 million of net capital into new investments.

The weighted average effective yield of the new CLO purchases during the quarter was a robust 12%.

During the third quarter, approximately 6% of leveraged loans market-wide or roughly 23% annualized repaid at par. 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 $40 billion of new issuance in the third quarter of 2024 and $142 billion for the first 9 months of 2024, still on pace to break the previous record of $187 billion set in 2021.

As noted on our prior calls, third-party CLO equity investors, including us, have returned to the primary market as CLO debt spreads have tightened.

We continue to see a large increase in resets and refinancings of CLOs, driven in large part by tighter CLO debt spreads.

Year-to-date, through September 30, we completed 4 refinancings and 1 reset of our CLO equity positions lowering their debt costs and the refinancings by an average of 32 basis points. The reset extended the reinvestment period to 5 years, thus increasing our portfolio's weighted average remaining reinvestment period, which remains our focus for the CLO equity portion of the EIC's portfolio.

We continue to expect that refinancing, resets and calls will lead to some of our discounted CLO BB purchases over the past quarters being repaid at par, crystallizing the convexity in certain of our investments sooner than anticipated. Defaults continue to improve during the year with only 3 leveraged loan defaults in the third quarter and the trailing 12-month default rate declining to 80 basis points as of quarter end, remaining well below the historical average of 2.6%. EIC's default exposure as of September 30 stood at 0.6%.

We expect default risk to remain low for some time.

As we've consistently noted, CLO BBs have 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 and importantly, coupled with limited loan price volatility for EIC's portfolio to be permanently impacted by 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 adviser's Chief Accounting Officer, Lena Umnova to walk through our financial results.

Thank you, Dan.

During the third quarter, the company recorded NII and realized gains of $9.9 million or $0.57 per share. This compares to NII and realized gains of $0.44 per share recorded for the second quarter of 2024, and NII of $0.38 per share for the third quarter of 2023. When unrealized portfolio depreciation is included, the company recorded GAAP net income of $1 million or $0.06 per share. The company's third quarter net income was comprised of total investment income of $12.5 million and net realized gain on investment of $1.3 million.

This was partially offset by unrealized appreciation on certain liabilities held at fair value of $3.6 million, net unrealized depreciation on investments of $5.3 million and financing costs and operating expenses of $3.9 million.

Additionally, for the third quarter, the company recorded other comprehensive income of $2.4 million, representing the change in fair value on the company's financial liabilities attributed to instrument specific credit risk.

During the third quarter, we paid 3 monthly distributions of $0.20 per share, and last week, we declared continued monthly common distributions of $0.20 per share through March 2025.

As of quarter end, the company had outstanding borrowings from the revolving credit facility and preferred equities, 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. The company's asset coverage ratio at the quarter end for preferred stock and debt calculated in accordance with investment company at requirements were 316% and 4,965%, respectively. These measures are comfortably above the statutory requirements of 200% and 300% of preferred stock and debt.

As of September month end, the company's net asset value was $277 million or $14.90 per share compared to $15.24 per share as of June month end.

Moving on to our portfolio activity for the month of October, the company received recurring cash flows on its investment of $15.2 million. Note that some of the company's investments are still expected to make payments later in the quarter.

As of October month end, net of pending investment transactions and settlements, the company had over $21 million of cash and revolver capacity available for investment. Management's unaudited estimate of the company's NAV as of October 31 was between $14.99 and $15.09 per share. At the midpoint, NAV is up where we stood at September 30.

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

Thanks, Lena. EIC continues to perform quite well, and our proactive investment strategy continues to generate significant net investment income. Despite the rate cuts in mid-September and early November, we continue to believe our portfolio is well positioned to succeed in any rate or economic environment. We maintain our view that CLO BBs are one of the most resilient risk asset classes in the market.

This is attributable both to their structural protections and underlying collateral. 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 Company.

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

[Operator Instructions]

The first question is from Matthew Howlett with B. Riley Securities.

Look, congrats on first quarter covering on and just terrific results here. And I want to talk about the BB market because -- a unique vehicle out there. What are you seeing? So on acquisitions, can you go over primary and secondary on the prior call, you said on this ECC call, you said there was a big difference on spreads on the equity side. I want to hear about the BB side. And I want to hear about tiering. I mean what's going on with the tiers among the managers? Is there much of a difference these days?

Matt, this is Dan Ko here.

In terms of spreads, I'd say that despite the recent Fed rate cuts, CLO BB has actually held in pretty well in terms of kind of prices. We've actually seen prices rally despite the Fed rate cuts and these being floating rate CLO debt securities.

Now the current cash yields certainly are falling as the base rates are falling. But you have to remember that, I guess, the spread on CLO BB is a larger chunk of kind of the yield or return than other kind of, I guess, other floating rate securities -- little less impacted there, certainly on the overall yield. And then to your question about tiering.

We are certainly seeing tiering compress within the Tier 1 and Tier 3 collateral managers out there. But then we're also seeing tiering between new issue and resets as well.

So for a new issue portfolio that's being issued today, you have much cleaner portfolios, no tail in the portfolio, less stressed assets, whereas resets while obviously, it is nice to have a portfolio in place that already ramped. There are some stressed assets that are in the portfolio.

So we do see potentially even 100 basis points of difference in terms of kind of the spreads that we're seeing on new issue versus resets.

That's huge. And what about primary versus secondary just in general on the BB's, I mean if it's not a reset, if it's a new issue or something?

Yes.

So primary versus secondary, a lot of the -- and I think we mentioned earlier in the call that a lot of the convexity that we saw within CLO BBs over the past year kind of has disappeared and that most of the CLO BB asset class has rallied back up to par.

Now there are obviously some that are at a discount, but those are the ones that you might not want to be touching at a discount in fairness.

And so I think that there's still opportunities to buy some stuff that are discounted or even there's some interesting opportunities at a premium but new issue -- there's a better balance in value between new issue and secondary today as secondary has rallied a bunch.

Great. And then these discounts that you do own, I mean, as a prepay at par, I mean, how much -- this is -- it's sort of a -- I almost look at it as like a double-edged sword. I mean, you love to have the yields on them, but you get these gains as they pay off at par. I mean, how much is left in the portfolio of those and how we should think about like the contribution going forward of those prepays.

Yes. No, it's a good point. We certainly see the benefits of being able to realize the convexity sooner, and so we take those kind of realized gains, but then you're right. I mean you were losing out on some of the wider yielding stuff. I'd say that a large chunk of the portfolio still was purchases that we made at discounts that we do still see potential for, I guess, the gains to come through.

But in terms of kind of the mark -- in terms of the NAV, I guess we've already marked those positions kind of at par.

So it's really more of a when those, I guess, unrealized gains will be moved to realized.

Right. Exactly. Got you.

Okay. And then moving towards -- I mean, just the portfolio, it's doubled basically in a year.

You're the only real vehicle out there that goes -- that does these BBs. Talk a little bit about -- I mean, just 4 bps annual losses, I mean, it's just so low. I mean, it's just incredible. It's like almost like why aren't more people doing this, but you guys have the efficiency in this vehicle, your cost of capital is going lower, you get more efficient as you grow.

Tom, what is the right kind of yield requirement? If I can kind of ask you to put your equity analyst cap on me, what should this vehicle be compared to? Maybe I'll ask you that out there and other kind of risk type vehicles because it just doesn't seem like you're exposed to much losses in these BBs.

Certainly, the historic data that you cite is spot on. The -- I just pulled up on Bloomberg right here that the distribution rate kind of pencils out to a high 14s yield right now, which, in our opinion, certainly is way cheap compared to private credit is probably the closest comp. And there -- I don't know what you have a view on a generic BDC dividend yield right now, you're pulling up...

Right now this year BDC...

Right now this year BDC is 9%, give or take, 10%. The thing that's forgotten and while many private credit managers are pretty darn good at what they do, there's always going to be a few problems. There's always a handful of names on nonaccrual.

We have nothing in our BB book that's nonaccrual -- that just that concept doesn't exist coupled with our capital structure is really quite attractive as well. I mean, we still have some 5% paper outstanding sadly, that matures in 2026, but -- but we've got a very attractive left -- right side of our balance sheet as well.

And then frankly, the fee structuring in EIC is far more favorable than a typical BDC. And when you think about the fees charge on many of the large public BDCs, we're making investments here in higher-yielding assets with lower instance of historic loss and charging less to do it. Yet there's still a very material difference between the distribution return -- distribution yield on EIC versus many of the BDCs, that's supposed to compress.

One of the things we're really pleased with, with the company has been the increase in volume. I mean we talked about that, I think it roughly tripled on a year-over-year basis.

So just getting the company a little more to scale as it's grown. Volume begets volume, we want our stockholders to have a liquid stock that they can hopefully buy more themselves, but you have actively trade no matter what. And we've got to keep getting this message out about the resilience of the underlying asset class, the high cash flows that it generates. And in our opinion, the premium distribution yield on our stock versus BDCs is supposed to compress. It takes time to do it. ECC has been in the market for a decade. We're slowly getting there. This one obviously has a head start because people knew us to begin with, but in our opinion, the distribution opportunity that you get from buying at EIC is mispriced in the investors' favor.

Yes, I think it's one of the most overlooked yield vehicles out there, like I said, it's re-rated a little bit, but I mean it's got a long ways to go. And you guys are doing a great job. And on just like the asset class itself, I mean it's only 4% to 6% of a typical CLO, but it's big enough. I mean, it big enough for you could still double, triple the size of EIC. It's big enough for you guys to grow out.

Yes. And just to throw -- yes, is the short answer. To throw some generic numbers, if you think of the U.S. CLO market as about a $1 trillion market, the BB class is about 4%.

So that's about $40 billion.

Our assets are about $400 million, give or take.

So we're 1% of the market in this vehicle.

Now at Eagle Point, we do manage other accounts and vehicles that have CLO BB.

So collectively, we own in the billions of dollars of CLO BBs, this is not our only vehicle that invested in the strategy. Against that, what makes it stay so attractive, in my opinion, you think of the vastness of like the corporate BB market, where you buy high-yield bonds, BB's in the hundreds of billions of dollars for the average kind of rating-sensitive insurance company or something like that, who might want to buy.

This is just too small of a market to get that excited about.

On the investment grade side, the tranches are bigger and bigger and they can put bigger sums of money to work. But if you're running a general account with $100 billion, $500 billion like some of the large life companies have, they're very active in the single A and AA part of their capital structure in CLOs.

And while they buy lots of BB-rated bonds on their balance sheet as well, I'm sure just getting involved in the $40 billion market just is too small of a piece of the opportunity for their pie chart.

So for EIC, we see a lot of room for growth in terms of the investment opportunity set is tremendous. And because of that structural imbalance of it while it's an important part of a big $1 trillion market financing a roughly $1.4 trillion leveraged loan market in the United States. This little slug is only $40 billion which then gets overlooked by a lot of large institutional investors, not due to the quality just due to the scale of the opportunity. And again, if you're running a large life insurance company, that's just too small of a market to get involved in, for EIC, as we're long way from worried about capacity in terms of the market.

And needless to say, we can all do the math. But as you grow, there's going to be some operating leverage at the company. An your cost of capital just keep -- it's going -- it's ticking down. The stock is trading a little bit more above NAV.

Your bonds are above par a little bit. I mean this is all positive stuff going forward. Am I thinking about that the right way?

We agree completely.

Yes. It's just an incredible vehicle you've set up.

Yes, we're at with this one, what we've done, we have the revolver outstanding.

So that makes it even a little more efficient.

We have a revolver that we have which makes it a little more efficient.

So we have the preferred stock and then we have the revolver.

So we can kind of -- the way we like to run it never gets -- sometimes it doesn't happen perfectly like this, keep the revolver a little bit drawn if we're able to issue anything on the ATM, be it or any comments I could just use that to pay down the revolver, keep investing.

So the vehicle ideally is nearly always fully invested. We were -- only had a very little bit drawn for the -- at the time when we cited, I guess, as of October 30th just because of the 31st just because of the payments that came in, but we're doing our part to keep getting capital deployed as quickly as possible.

So -- we see a lot of gas in the tank for the vehicle. We're really pleased with the increase in volume. I mean, it was a year ago, the volume on the stock was too low. We'd still like to get it even higher. We're doing what we can there and the investment opportunity. Even with rates coming down a little bit, still very, very attractive. And every BB in our portfolio has a double-digit yield at this point.

Obviously, there's a little bit of CLO equity as well, which helps further.

So we feel quite good for the prospects here.

Okay. Look forward to -- as the market gets more educated on EIC, they're going to certainly see the relative value.

So look forward to continued success, Tom.

Appreciate it. Thank you, Matt.

[Operator Instructions]

As there are no further questions, I would like to hand the conference over to Thomas Majewski for closing comments.

Great. Thank you very much for joining the call today. Lena, Dan and I appreciate your interest in Eagle Point Income Company. We're all around in the office later today if anyone has any follow-up questions. Thank you, and have a good day.

Thank you. This concludes today's teleconference.

You may disconnect your lines at this time. Thank you for your participation.