Eagle Point Income Company Inc. (NYSE:EIC) Q4 2023 Earnings Call Transcript February 22, 2024
Eagle Point Income Company Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome, everyone, to Eagle Point Income Company’s Fourth Quarter Earnings Call. I will now turn the call over to Peter Sceusa at ICR. Please begin.
Peter Sceusa: 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. 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, our full year 2023 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 and Events link. I will now turn it over to Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.
Tom Majewski: 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 in a portion of my remarks. I’d like to start off by saying that the fourth quarter capped off a great 2023 for the company. We had another quarter-over-quarter increase in our portfolio cash flows, our NAV increased and our net investment income, again, comfortably exceeded the monthly common distributions that we paid. Frankly, our portfolio is doing exactly what it’s designed to do in an elevated rate environment, generate more cash for our shareholders.
This all translates directly into strong returns for our shareholders. Our GAAP return on equity for 2023 was 25.93% and the total return on our common stock, assuming reinvestment of distributions, was 21.37% for the year, good returns by any measure. Given our confidence in our portfolio and our overall outlook, beginning last month, we increased our regular monthly common distribution by another 11% to $0.20 per share per month. This is the highest monthly common distribution per share in our history and represents our eighth increase since the beginning of 2021. Among our other highlights for the fourth quarter, our net investment income, less some de minimis realized capital losses, was $0.56 per share, which does exclude $0.02 per share of nonrecurring expenses related to excise tax estimates.
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We received recurring cash flows of $9.3 million or $0.91 per share, comfortably in excess of our regular common distributions and operating expenses. We paid three monthly common distributions of $0.18 per share during the fourth quarter. And as I mentioned before, increased our monthly common distribution by 11% to $0.20 per common share beginning in January. Our NAV as of December 31 was $14.39 per share, and this is an increase of 2% from September and our NAV grew by 11% in total during the year. This is in addition to the cash distributions that we paid to our shareholders throughout the year. Along with our strong portfolio performance, we also opportunistically raised capital through our at-the-market program, issuing just over 1 million common shares at a premium to NAV, generating NAV accretion of $0.03 per share during the quarter.
We also issued nearly 57,000 shares of our Series B term preferred stock. Importantly, we believe our usage of the ATM program is helping to drive additional liquidity in our common shares. And indeed, our average daily trading volume in 2023 was more than double that measure in 2022. Additionally, the company had a number of meaningful subsequent events, which we’d like to share. We’ve declared common distributions of $0.20 per share now through the end of June 2024. Since the end of 2023, we estimated our NAV at January month end to be between $14.94 and $15.04 per share, a further 4.2% increase at the midpoint from year-end. And as of February 15, we have over $26 million of cash and revolver borrowing capacity available to us, ample dry powder with which to invest as we further expand our portfolio.
Our portfolio continues to benefit from the floating rate nature of CLOs, given that 100% of our CLO debt investments that we hold are floating rate. All of our CLO BBs have coupons that are in the double digits at this point, with some CLO BBs having the potential to yield north of 20% in early call scenarios. As long-term focused investors, we seek to construct our portfolio to weather multiple economic cycles and our consistently strong performance with respect to cash flow and income is validation that we’re executing on that playbook. We remain excited for our portfolio’s potential as we start the new year. 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.
Dan Ko: Thank you, Tom. We remain excited about the investment opportunities within the CLO market, in particular, the junior debt and equity portions of the capital structure. EIC has continued to successfully capitalize on the elevated rate environment with the floating rate nature of our underlying portfolio, and our shareholders have been very well rewarded compared to other fixed income asset classes. Our shareholders’ total return, including reinvestment of distributions of 21.37% far exceeded the Merrill Lynch high yield index return of 13.46%. We also handsomely outperformed the Credit Suisse Leveraged Loan Index, which generated its best performance in nearly 15 years and the second best performance on record with a total return of 13.04% for the full year.
During the fourth quarter, we selectively deployed over $26 million in net capital into attractive CLO junior debt, CLO equity and other related investments. The weighted average effective yield of our CLO purchases during the quarter was a robust 17.3%. We continue to see attractive return profiles in the secondary market. Our CLO collateral managers continue to be able to build par through relative value trading or by reinvesting part prepayments into discounted loans. During the fourth quarter, approximately 5% of leveraged loans were roughly 21% annualized repaid at par. This represents a modest quarter-over-quarter increase and provides our CLOs with valuable par dollars to reinvest in today’s discounted loan market. Most loan issuers remain very proactive in tackling their near-term maturities in an effort to further extend the maturity profile of their debt.
Many borrowers continue to offer lenders a higher spread and OID in order to lengthen out their maturities on their newly refinanced loans. In terms of CLO new issuance, we saw $32 billion in the fourth quarter of 2023 and $116 billion for all of 2023, as the market once again eclipsed the $100 billion mark for the full year. We continue to believe over 80% of the volume was backed by captive CLO funds, which are generally far less return sensitive. So far in the new year, there has been a notable increase in demand for CLO AAAs. We are seeing a pickup in new issue as well as reset and refinancing activity. So we expect to be active in refinancing and resets for our CLO equity positions in order to lower our financing costs and to further enhance our portfolio’s weighted average remaining reinvestment period.
We also expect that refinancings, resets and calls will lead to some of our discounted CLO BB purchases from last year being paid off at par, achieving the pull to par and convexity in our investments sooner than anticipated. There were a total of 4 syndicated loan defaults in the fourth quarter down from 6 in the prior quarter as senior secured loans and thus CLOs continue to be resilient. As a result, the trailing 12-month default rate of 1.5% as of December 31, remaining well below the historic average of 2.7%. EIC’s portfolios default exposure as of December 31 stood at 0.6%, well below the market rate. Even if default should rise from these levels, we continue to believe our portfolio is well positioned for 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.
The floating rate nature also helps insulate the investments from interest rate volatility. We believe we 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. While past performance is obviously not a guarantee of future results, we believe the performance of our portfolio over the past few years has certainly validated the company’s investment strategy. As we move to 2024, we remain in a very strong position with ample dry powder to deploy into new investments. We will continue to be opportunistic and we’ll act where we believe we can achieve compelling risk-adjusted returns for the company’s portfolio. With that, I will now turn the call over to our advisers’ Chief Accounting Officer, Lena Umnova.
