Eagle Point Income Company Inc. (NYSE:EIC) Q4 2022 Earnings Call Transcript

Eagle Point Income Company Inc. (NYSE:EIC) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Greetings, and welcome to the Eagle Point Income Company’s Fourth Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . As a reminder, this conference is being recorded. I will now like to turn the conference over to your host, Peter Sceusa with ICR. Please go ahead.

Peter Sceusa: 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. A replay of this call can be accessed for 30 days via the Company’s website at www.eaglepointincome.com. Earlier today, we filed our Form N-CSR, our full-year 2022 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission. The financial statements and our fourth 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. The investor presentation can be found by following the Presentations & Events link. I would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.

Tom Majewski: Great. Thank you, Peter, and welcome everyone to Eagle Point Income Company’s fourth 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 during a portion of my remarks. The fourth quarter of 2022 capped off a very strong year for EIC. Throughout the year, our portfolio performed as we intended it to in a rising rate environment. Thanks to significant increases on the floating coupons of many of our investments. We were able to increase our common distributions multiple times during 2022. In the fourth quarter, net investment income excluding non-recurring expenses was once again well above our monthly distribution level.

Given the continued rising interest rate environment, we believe our portfolio remains very well-positioned to generate significant additional income through our investments in CLO junior debt. To share a few specific highlights from the quarter, net investment income was $0.52 per common share on before recurring expense — non-recurring expenses. Our recurring cash flows were $5 million comfortably in excess of our regular common distribution and expenses. Our NAV as of December 31 was $12.91 per common share. This came down a bit from Q3 due to a bit of spread widening in the market going into the end of the year. However, our NAV rallied nicely in January, up about 6.3% from year-end based on the mid-point of the range that we published earlier this month.

With the continued confidence in our portfolio, we raised our monthly common distribution in January by 14% to $0.16 per month per share. We also opportunistically raised capital through our at-the-market program issuing nearly 900,000 common shares at a premium to NAV, generating NAV accretion of about $0.11 per common share during the quarter. These sales generated net proceeds of approximately $12.4 million for us during the quarter and we have selectively continued to raise capital during the first quarter. Short-term interest rates continued to gradually rise during the fourth quarter, which should factor favorably into our April cash flows. Our portfolio continues to clearly benefit from the floating rate nature of CLO BBs. To put it into further context, we’re seeing some CLO BBs with double-digit or even mid-teens yields today and this is a market difference from where the market stood one year ago.

As we’ve consistently noted, our portfolio has been positioned for some time and positioned for some time for this type of rising rate environment, given that 100% of our CLO debt investments we hold are floating rate. And as a result of our portfolios strong performance, our common distribution is now double what it was during the first quarter of 2021. As long-term focused investors, we seek to construct our portfolio that’s well-positioned through periods of dislocation as evidenced by our excellent continued performance in the challenging economic environment that we’re in today, and we’re clearly executing on that playbook. We’re also continuing to seek to lengthen the weighted average remaining reinvestment period of our CLO debt and equity portfolios, which we believe will continue to position the company well should markets, remain choppy.

We’re excited for our portfolios potential in 2023 and beyond. For additional commentary on the overall market and our recent portfolio activity, I’d like to introduce and turn the call over to one of Eagle Point’s Principals and Portfolio Manager, Dan Ko.

Dan Ko: Thank you, Tom. Indeed it remains an exciting time for CLO junior debt and the CLO market in general, with the vast majority of loans continuing to trade below par, CLO collateral managers can continue to improve their underlying loan portfolios by finding high quality loans through relative value swaps in the secondary market. The floating rate loan asset class is one of the most resilient asset classes in existence. While the Credit Suisse leverage loan index was down 1.06% for 2022 only the 30-year in its 31-year existence that is finished in the negative. Competing risk assets generally saw double-digit declines for 2022. Further, there has never been consecutive years where the CS leverage loan index declined, and in fact, the years following down years have historically been quite good years.

This is a testament to the robust nature of the loan asset class. In the CLO market, we saw $23 billion of new CLO issuance in the fourth quarter of 2022, as new issuance edged over $129 billion in 2022, the second largest year of CLO issuance on record. Despite many negative headlines about credit, when we actually look at the performance, it paints a very different picture. There were no loan defaults zero in the fourth quarter. News like this doesn’t really grab a lot of headlines, but it is actually what happened. As a result, the trailing 12-month default rate fell to 72 basis points at the end of the year well below the historic average of approximately 3% for the loan market. Along with most research desks, we expect defaults to gradually rise during 2023 back toward historic averages, given the increase in rates and certain stress companies inability to access the capital markets.

While there may be a pickup in defaults this year, we believe our portfolio is well-positioned for environments like these. No asset in our portfolio is on non-accrual, and we don’t foresee any portfolio level issues this year. We remind you that CLO BB debt has withstood multiple economic downturns in the past, experiencing very low long-term default rates. We believe it will take a significant amount of defaults well above the historic average for EIC to be materially impacted by a default wave. While past performance is obviously not a guarantee of future results, we believe the performance of our portfolio over the past couple of years has demonstrated the resilience of the company’s investment strategy. We remain highly selective when evaluating investment opportunities given today’s market environment.

During the fourth quarter, we were able to deploy capital at a low $80s price and an expected yield of approximately 15%. We believe there will continue to be significant buying opportunities in the market, and we will continue to take advantage of them to add to our portfolio. With that, I will now turn the call over to Eagle Point’s Chief Accounting Officer, Lena Umnova.

Lena Umnova: Thank you, Dan. For the fourth quarter of 2022, the company recorded net investment income of approximately $3.6 million or $0.49 per share, net of non-recurring expenses. This compares to net investment income of $0.40 per share in the third quarter of 2022 and net investment income and realized gains of $0.14 per share for the quarter ended December 31, 2021. Fourth quarter NII is net of non-recurring expense of $0.03 per share for an excise tax related to 2022 spillover income. When unrealized portfolio depreciation is included, the company recorded GAAP net income of approximately $6.4 million or $0.88 per share. The company’s fourth quarter net income was comprised of total investment income of $5.5 million, net unrealized depreciation on current liabilities held at fair value of $3.1 million, partially offset by unrealized depreciation of investments of $0.3 million and total expenses of $1.9 million.

Additionally, the company recorded other comprehensive loss of $5.2 million during the quarter. During the fourth quarter, we paid three monthly distributions of $0.14 per share. As Tom noted, beginning in January, we began paying monthly distributions of $0.16 per share, which represents a 14% increase from our prior monthly common distribution. This distribution have been now declared through June 2023. As of December 31, 2022, the company had outstanding borrowings from the revolving credit facility and preferred equity, which total approximately 32% of total assets less current liabilities. This has given 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 ratios at the quarter end of the preferred stock and the credit facility calculated in accordance with Investment Company Act requirements were 313% and 1,630%, respectively.

These measures are comfortably above the required minimum of 200% and 300%. As of December 31, the company’s net asset value was approximately $102 million or $12.91 per share. Moving on to our portfolio activity in the first quarter through February 15, management’s unaudited estimate of the company now as of January 31, was between $13.67 and $13.77 per share, reflecting a 6% increase at the mid-point of December 31. As of February 15, net of pending investment transactions, the company had approximately $26 million of cash and revolver capacity available for investments. I will now turn the call back over to Tom.

Q&A Session

Tom Majewski: Great. Thank you, Lena. It was another excellent quarter for EIC and capped off a very strong 2022. The rising rate environment has continued to help us grow net investment income significantly. Loans have continued to meaningfully outperform nearly all of the risk asset classes, and we believe this is attributable to the senior secured nature of the asset class and their floating rate structure. Further, due to our entirely fixed rate preferred stock, frankly, the benefit of the increases in interest rates is magnified for the company. Our portfolio as well as the right side of our balance sheet were designed for markets like these and our shareholders are reaping the rewards of the strategy that we laid out through increased cash distributions.

The three key attributes as to why we remain excited to be managing a BB-rated CLO debt-focused fund continue to ring true. Certainly, the potential for lower credit expense as reflected by the low historic default rates of BB-rated CLOs debt over the past 20 years, the potential for higher returns compared to similarly rated corporate securities, and the benefits of owning floating rate debt in markets with rising interest rates. Along with the locked-in nature of the financing of CLOs that is longer than CLOs assets, our portfolio construction and the ongoing rising rate environment, we remain very 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.

Lena, Dan and I will now open the call to questions if there are any. Operator?

Operator: Thank you. . Mr. Majewski, it seems like there are no questions. I’ll turn the floor back to you for any final comments.

Tom Majewski: Great. Thank you very much. Lena, Dan and I appreciate your interest in Eagle Point Income Company. We will be available later today if anyone has any questions they’d like to pose. Thank you so much.

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