Eagle Point Income Co Inc. Q1 FY2022 Earnings Call

Greetings. Welcome to the Eagle Point Income Company's First 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. Please note this conference is being recorded. I will now turn the conference over to your host Garrett Edson of ICR. You may begin.

Thank you, Shamali, 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. 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 first quarter 2022 financial statements and our financial investor presentation with the Securities and Exchange Commission. Financial statements and our first quarter investor presentation are also available within the Investor Relations section of the company's website. 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 would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.

Great. Thank you, Garrett, and welcome, everyone to Eagle Point Income Company's first quarter earnings call. We appreciate your interest in Eagle Point Income Company, or EIC as we call it. If you haven't done so already, we invite you to download our investor presentation from our website at eaglepointincome.com and I'll refer to it during a portion of my remarks. The first quarter was a great start to the year for EIC, but importantly, we want to note that the rising rate environment is setting the stage for our portfolio to generate significant additional income through our investments in floating rates CLO junior debt. For the quarter, net investment income and realized gains were about $0.33 per share. Our recurring cash flows were about $5.1 million, which is a 38% increase from the fourth quarter of 2021, driven primarily by newly purchased CLO investments and a reset payment from one of our CLO equity positions. In April, we raised our monthly common distribution by 4% to $0.125 per share per month. Due to our strong performance in 2021, we were able to pay a special distribution of $0.20 per common share back in January. We seek to raise capital from time to time through our at-the-market offering program. We issued approximately 112,000 common shares at a premium to NAV during the quarter. We also tapped the ATM to issue approximately 122,000 of our Series A preferred shares during the quarter. Together these sales generated additional net proceeds of a little less than $5 million during the quarter. Our NAV as of March 31st was $16.52 per share, a modest reduction from where it stood at the end of the year. Between January and April, three months LIBOR increased from about 20 basis points to a little over 100 basis points. Today, that rate stands at roughly 150 basis points and we believe the significant increase in LIBOR is a significant positive event for our CLO junior debt, and should continue to increase the company's net investment income beginning in the second quarter of 2022 as 100% of the CLO debt investments that we hold are floating rate. The coupon rates on our CLO debt recently reset in April at today's new higher rates. This should add to our NII on an ongoing basis and able to cover our monthly common distributions on a sustainable basis. Along with this rising rate environment, our proactive management of our portfolio allowed us to increase our allocation to CLO equity, which has further assisted the company in increasing its cash flows and net investment income. While we continue to keep a close eye on the U.S. economy given persistent inflation and supply chain concerns, we expect to continue to deploy capital at attractive levels and believe the company is positioned to do quite well over the coming months. In short, we see multiple paths to continue to grow the company's net investment income. There were no syndicated loan defaults during the first quarter and as a result, the trailing 12-month default rate remained at or near historic lows finishing March at 19 basis points. We continue to expect relatively few corporate defaults in the coming quarters. Indeed, as of recent data, less than 3% of the loan market is trading at prices below $0.80 on the dollar. We consider that an indicator of potential default and that number is quite low. As long-term focused investors, we seek to construct our portfolio to manage through periods of dislocation. In strong markets, we focus on positioning our portfolio for the next downturn and in choppier markets, we seek to reinvest and build par and build NAV for all shareholders. We continue to try lengthening our weighted average reinvestment period of our CLO debt and equity portfolios whenever possible. We'd like to remind you that CLO BB debt has historically withstood multiple economic downturns experiencing long, low default rates over the long period of time. While past performance is never a guarantee of future results, we believe the performance of our portfolio over the last few years has clearly validated CLO BB debt as an attractive and resilient asset class. I wanted to take a moment to introduce someone new to our calls. Today I'm joined by Lena Umnova. Lena joined Eagle Point back in 2015, and she is our Chief Accounting Officer. I'll now turn the call over to Lena who will walk us through the financials in a little more detail.

Thanks, Tom. For the first quarter, the company recorded net investment income and realized capital gains of approximately $2.3 million or $0.33 per share. When unrealized portfolio depreciation is included, the company recorded a GAAP net loss of approximately $0.8 million or $0.12 per share. The company's first quarter net loss was comprised of total investment income of $4.1 million and de minimis net realized gains offset by unrealized depreciation of $3.2 million and total expenses of $1.7 million. During the first quarter, we paid three monthly distributions of $0.12 per share. Additionally, the company paid the previously declared special distribution of $0.20 per share on January 24th, 2022 to stockholders of record as of December 23rd, 2021. This special distribution was related to the estimated excess of the company's net taxable income over the company's aggregate regular distributions made during the 2021 tax year. Earlier this year, we were also pleased to announce a 4% increase in our common distribution to $0.125 per month, which commenced in April. Last week, we declared monthly distributions of $0.125 to all common stockholders through the end of September. As of March 31st, the company had outstanding warrants from the revolving credit facility and preferred stock, which totaled approximately 34% of total assets less current liabilities. This is within our target leverage ratio range of 25% to 35%, which we expect to operate the company under normal market conditions. The company's asset coverage ratios at the quarter end for preferred stock and credit facility, calculated in accordance with Investment Company Act requirements were 292% and 116%, respectively. These measures are comfortably above the statutory requirements of 200% and 100%. As of March 31st, the company's net asset value was approximately $115.6 million or $16.52 per share. Moving on to our portfolio activity in the second quarter to April month end, management's unaudited estimate of the company's NAV as of April 30th was between $16.19 and $16.23 per share, with the midpoint of the range down 1.9% from our NAV as of March 31st. As of April month end, net of pending investment transactions, the company had approximately $8.5 million of cash and revolver capacity available for investments. I will now turn the call back over to Tom.

Thank you, Lena. We have had a strong start to 2022, and our portfolio is well-constructed for the current environment of rising interest rates. We believe we are in an excellent position to generate increasing cash flow moving forward, which will benefit our net interest income and our ability to continue delivering significant cash distributions to our shareholders. Our primarily fixed-rate financing with the EIC A preferred stock means that the advantages of rising interest rates are heightened for us, as we lend at a floating rate while borrowing at a fixed rate. There are three key reasons we remain excited about managing a CLO-rated debt-focused fund today, just as we were three years ago when EIC went public. These include the potential for lower credit expenses, as shown by the historically low default rates of BB rated CLO debt over the past 20 years, the opportunity for higher returns compared to similarly rated corporate securities, and the benefits BB rated CLO debt provides in a rising interest rate environment like we are experiencing now. Our current portfolio construction, which includes more exposure to CLO equity and takes advantage of the rising rate landscape, gives us confidence that EIC is well-positioned to deliver attractive risk-adjusted returns and value for our shareholders. Since late March, the prices of many risk assets, including equities and junk bonds, have declined significantly, and even investment-grade bonds are down for the year. While loans and CLOs held up relatively well in price for most of April, by May 20th, the year-to-date return on the Credit Suisse Leveraged Loan Index was negative 2.6%, reflecting a 2.7% drop in loan prices since the start of May. Historically, CLO security valuations have shown some connection to the Credit Suisse Leveraged Loan Index, as the value of underlying loan portfolios influences CLO valuations and trading behavior. However, we believe the CLO market does not fully recognize the attractive reinvestment opportunities available during declining loan price periods. This is a characteristic of the market that we observe, and while results will vary from one investment to another and past performance does not predict future results, many investments in our portfolio are typically correlated to movements in the Credit Suisse Leveraged Loan Index. Even though loan prices and many CLO securities may have dropped in May, the locked-in financing nature of CLOs often leads to very appealing medium-term returns for CLO security investors during such periods. Thank you for your time and interest in Eagle Point Income Company. Lena and I will now take any questions.

And there are no questions at this time. Therefore, I will now turn the call back over to Thomas Majewski for closing remarks.

Great, thank you very much. We appreciate everyone's time and interest in Eagle Point Income Company. We certainly believe that the rising rate environment, all of our CLO debt securities, our floating rate investments, we believe the company is well-positioned to continue to grow its net investment income over the coming months and quarters. To the extent anyone has follow-up questions, Lena and I will be available throughout the afternoon to field your calls. Thank you so much for your interest and time today.

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