Earnings Call Transcript - EIC Q2 2025

Operator, Operator

Greetings. Welcome to Eagle Point Income Company's Second Quarter 2025 Financial Results Conference Call. Please note, this conference is being recorded. I'll now turn the conference over to Darren Daugherty with Prosek Partners. Thank you. You may begin.

Darren Daugherty, Investor Relations

Thank you, operator, and good morning. Welcome to Eagle Point Income Company's Earnings Conference Call for the Second Quarter of 2025. Speaking on the call today are Thomas Majewski, Chairman and Chief Executive Officer of the company; Dan Ko, Senior Principal and Portfolio Manager for the company's Adviser; and Lena Umnova, Chief Accounting Officer for the Adviser. 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 involve 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 with the Securities and Exchange Commission. 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 Second Quarter 2025 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. I will now turn the call over to Thomas Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company. Tom?

Thomas Philip Majewski, CEO

Thank you, Darren. Good morning, everyone, and thank you for joining us on the call today. Our portfolio delivered solid performance in the second quarter of 2025, generating strong cash flow from investments and investment income amid the rapidly shifting market landscape. The quarter started with heightened concerns related to global trade and its impact on economic growth. However, as market concerns subsided, the stock market led a broad rebound across asset classes. The CLO market, which tends to lag other asset classes, showed a gradual recovery as well, reflecting in increased reset and refinancing activity. During the second quarter, EIC generated net investment income and realized gains of $0.39 per share. This was comprised of $0.37 of net investment income and $0.02 of realized capital gains. The company received recurring cash flows of $18 million or $0.67 per share during the quarter. This compares to cash flows of $16 million or $0.71 per share in the first quarter. Recurring cash flows were less than our regular common distributions and total expenses as a result of the lower SOFR rates on our CLO debt portfolio, combined with some lower recurring CLO equity cash flows as a result of spread compression. That said, we expect third quarter cash flows to be roughly in line with that quarter's distributions and expenses. Our NAV as of June 30 was $14.08 a share, and this is slightly below March 31 NAV of $14.16 per share. While market volatility in April impacted CLO prices broadly, our portfolio has seen a recovery in our NAV from the April lows. And for the second quarter, the company generated a non-annualized GAAP return of 3.5%. The volatility we experienced in the latter part of the first quarter continued into April creating attractive buying opportunities for discounted CLO debt and equity securities. During the quarter, we were able to opportunistically deploy $40 million into attractive investments, taking advantage of market-wide price dislocation. Notably, for BB-rated CLO debt, we were able to buy some securities at prices we hadn't seen since the first half of 2024. When we can purchase CLO debt at a discount, this provides the potential for convexity or pull to par as markets recover and normalize. Our strong liquidity position allowed us to remain on the offensive during the period of volatility in the second quarter. We expect these purchases to help us create realized gains in the future, similar to how our previously discounted purchases from 2023 and 2024 contributed to realized gains that we've generated in more recent quarters. Earlier in the quarter, we strengthened our balance sheet through our at-the-market program, raising about $20 million of common stock at a premium to NAV. This generated NAV accretion of about $0.01 per share. We also raised about $11 million of preferred capital during the quarter via our ATM program. In late May, however, our stock price dropped, and we quickly announced a $50 million share repurchase program. Our stock was trading at a high single-digit discount to NAV, and we aggressively began buying back our stock. The stock closed on June 6 at an 8.4% discount to the May 31 NAV. And in part, due to our buyback program, it ended the quarter at only a 2.9% discount. In total, we repurchased $6.5 million of common stock at an average discount to NAV of 6.4%. This helped generate $0.02 of NAV accretion during the quarter. Due to regulations, we're limited to the volume we can buy on any given day, and we would have bought more if we could. Today, we declared three monthly distributions of $0.13 per share for the fourth quarter, maintaining the distribution level we established in the previous quarter. We completed two resets of our CLO equity positions in the quarter. These actions lower debt costs within the CLOs and extended the CLO's reinvestment period, which continued to enhance our portfolio's weighted average remaining reinvestment period and our long-term earning power.

Daniel W Ko, Senior Principal and Portfolio Manager

Thank you, Tom. We continue to find attractive investment opportunities across the CLO market in both junior CLO debt and CLO equity. The market volatility that began in the latter part of the first quarter and continued into April created significant buying opportunities for EIC. We capitalized on the market disruption by buying BB-rated CLO debt and equity at discounted levels. The S&P UBS Leveraged Loan Index experienced volatility during the second quarter, with the April decline being offset by recovery through May and June. During the second quarter, the loan index had a total return of 2.3% and is up almost 3% year-to-date as of June 30. The index continued to perform well through July and is up 3.8% as of July 31. The recovery in loan prices from the April lows has been encouraging, although CLO debt and equity have not yet fully participated in this recovery, presenting continued upside potential for EIC. The trailing 12-month default rate increased to 1.1% as of June 30, remaining well below the historical average of 2.6%. The quarter included a notable default by Altice, representing approximately 38 basis points of the CLO market, though the event was largely anticipated by market participants. EIC's portfolio default exposure as of June 30 stood at 41 basis points. Our portfolio is well positioned, even if defaults were to rise in the future. During the second quarter, approximately 3.3% of leveraged loans or roughly 13% annualized were prepaid at par. Many loan issuers continue to be proactive in tackling their near-term maturities, and the maturity wall of the market continues to get pushed out further. In terms of CLO new issuance, we saw a $51 billion issued during the second quarter with most of the activity concentrated in the second half of the quarter as markets stabilized. Reset and refinancing activity for the second quarter was $44 billion and $9 billion, respectively. Our CLO debt portfolio benefits from its floating rate nature, although the impact of lower benchmark rates since last year has lowered our earnings. I'd like to note that the CLO equity exposure in the company's portfolio provides some insulation from rate movements and benefits from the reinvestment optionality during periods of market stress. As of June 30, we had over $20 million of cash and undrawn revolver capacity available for investment and common stock repurchases, providing ample liquidity to capitalize on opportunities. We believe the recent market volatility has created attractive entry points, and we remain well positioned to deploy capital into investments that offer compelling risk-adjusted returns for our shareholders in the long run.

Lena Umnova, Chief Accounting Officer

Thank you, Dan. During the second quarter of 2025, the company recorded net investment income and realized gains of $10 million or $0.39 per share. This compares to NII and realized gains of $0.44 per share recorded for both the first quarter of 2025 and the second quarter of 2024. When unrealized portfolio gains are included, the company recorded GAAP net income of $13 million or $0.49 per share. The company's second quarter net income was comprised of investment income of $15 million, realized gains of $0.5 million and unrealized gains on investments of $4 million, partially offset by unrealized losses on certain liabilities recorded at fair value of $1 million and financing and operating expenses of $6 million. Additionally, other comprehensive income was less than $0.5 million for the second quarter. During the second quarter, we paid three monthly distributions of $0.20 per share. Earlier today, we declared three monthly distributions of $0.13 per share for the fourth quarter of 2025, in line with the level of distributions previously declared for the third quarter. As of June month end, the company had outstanding preferred equity securities and borrowings from our credit facility, which totaled 31% 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 ratios at the quarter end for preferred stock and debt calculated in accordance with Investment Company Act requirements were 325% and over 6,300%, respectively. These measures are well above the statutory requirements of 200% and 300% for preferred stock and debt. As of June month end, the company's NAV was $373 million or $14.08 per share, a slight decrease compared to $14.16 per share as of March month end. During the second quarter, we repurchased over 488,000 shares of our common stock on the share repurchase program for total proceeds of $6.5 million. The shares were repurchased at the average discount to NAV of 6.4% per share, resulting in a NAV accretion of $0.02 per share. We would like to highlight that all repurchased shares were retired. Moving on to portfolio activity during the month of July, the company received recurring cash flows on its investment portfolio of $17 million. Note that some of the company's investments are still expected to make payments later in the quarter. As of July month end, net of pending investment transactions and settlements, the company had $51 million of cash and revolver capacity available for investment and other purposes. Management's unaudited estimate of the company's NAV as of July month end was between $14.34 per share and $14.44 per share. This is an increase from June's month end and above where we stood on March 31 NAV. I will now turn the call back over to Tom to provide closing remarks before we open the call up for questions.

Thomas Philip Majewski, CEO

Thank you, Lena. The second quarter demonstrated our proactive approach to investing and managing the company. While the market volatility in April created short-term pressure on NAV it largely recovered by the end of the quarter and as of July is above where we stood at the end of March. Volatility provides us with attractive investment opportunities allowing us to buy securities at discounted prices that we hadn't seen in some time. While we are disappointed with our share price move in May, it also presented the opportunity for us to buy back stock cheaply. We are generally limited to a percentage of the daily volume, so we can't buy as much as I'd like, but I know this is one of the best investments we can make. We plan to continue buying back our stock as market opportunities present themselves. The recent market volatility reinforced our views that periods of dislocation can create opportunities for patient well-capitalized investors like EIC. We believe our strong liquidity position and experienced team allows us to capitalize on these opportunities while maintaining focus on generating attractive long-term risk-adjusted returns for our shareholders. We remain confident that EIC is well positioned to continue generating strong returns, and we appreciate your continued support. We'd like to thank you for your time and interest in Eagle Point Income Company. Lena, Dan and I will now open the call to your questions.

Operator, Operator

The first question comes from Randy Binner with B. Riley.

Randy Binner, Analyst

Yes, I believe that was thoroughly addressed. The results were stable, perhaps even more so than some of the more equity-focused companies regarding NII and overall NII and yield. Could you elaborate a bit more on how we should consider the all-in yield coming from the debt portion of your CLO portfolio? I’m particularly interested in the Fed's influence and how, if rates decline or spreads widen, we should evaluate the all-in yield for the latter half of this year and into next year.

Thomas Philip Majewski, CEO

Sure. Let me start and maybe Dan will add a few more points. CLO equity is much less sensitive to rate changes compared to typical fixed income investments, while CLO debt behaves more like a bond where you receive both interest and principal at maturity, with rates generally tied to SOFR and influenced by short-term rates. CLOs usually adjust their rates around the 10th day of a quarter, plus or minus a few days. Thus, if the Federal Reserve took action in September, you would likely observe lower SOFR rates in October when the bonds are readjusted. Therefore, a Fed rate change in September might lead to slightly lower income at EIC in the fall. However, the CLO equity part of that portfolio is unlikely to fluctuate significantly based on rate changes. Regarding your question about potential spread widening in CLO BBs if rates were reduced, it could happen, but it's not a certain outcome. At a certain point, there are minimum returns that investors look for when buying CLO BBs. So, decreasing rates, all else being equal, might not result in narrower spreads; it could even lead to widening. Dan, what are your thoughts on how we've seen rates fluctuate between 0 and 5 percent?

Daniel W Ko, Senior Principal and Portfolio Manager

Yes. Historically, we've seen kind of CLO BBs in kind of normal course markets hovering in the kind of high single-digit yields. So if spreads were to come in, it's possible that spreads kind of widen and we haven't historically seen CLO BBs at least kind of in the 2.0 era inside of, let's say, a 7% yield for very long and probably closer to kind of 8%, maybe 9-ish percent sort of yields. So while obviously, these are floating rate instruments, I guess there is a kind of a relative value versus kind of high-yield bonds where a lot of people look at high-yield corporates or CLO BBs kind of yielding a higher amount than high-yield corporates. So you probably continue to see a higher yield for CLO BBs despite kind of rates going down, at least that's what we've experienced historically, but I guess who knows what happens in the future.

Randy Binner, Analyst

Okay. Great. That was helpful. I appreciate it.

Thomas Philip Majewski, CEO

A 0.25 point move is not significant if we see rates decrease by 100 basis points. That would start to have an interesting impact on earnings, though rates could also increase. This situation goes both ways, but it is important to view this as primarily a floating rate portfolio.

Operator, Operator

Our next question is from the line of Christopher Nolan with Ladenburg Thalmann.

Christopher Nolan, Analyst

Dan had his market comments earlier indicated recovery in leveraged loan pricing from the UBS index. And then immediately afterwards, talked about pushing out of loan maturities. Wouldn't the push out of loan maturities sort of indicate some credit distress at the bank level?

Daniel W Ko, Senior Principal and Portfolio Manager

No, not necessarily. These issuers are refinancing their debt because the market is strong, allowing them to extend the maturities by replacing the old debt and creating more flexibility. We have observed a significant amount of refinancing activity, all being settled at par. This isn't a restructuring; the maturities are simply being extended. The holders can either take par and invest elsewhere or decide to roll into the loan refinancing.

Christopher Nolan, Analyst

Okay. As a follow-up on that note, where do you see yourselves in terms of the risk on or risk off for EIC? What are your thoughts on that? There seems to be a lot of conflicting signals with the macro news.

Daniel W Ko, Senior Principal and Portfolio Manager

Yes. No. I mean we think that CLO BBs as well as CLO equity behaves as a resilient asset class and kind of performs through the cycles. So we're constantly kind of evaluating relative value between the two within our portfolio and are staying active in kind of trading the portfolio around. We have had, as noted kind of during the call that we've had several positions kind of being paid down at par because the CLOs are being refinanced and reset as well, which leads to kind of debt being paid off at par and looking to redeploy those proceeds to earn income.

Christopher Nolan, Analyst

Okay. So the read into that is really just opportunistically trying to add to your positions.

Daniel W Ko, Senior Principal and Portfolio Manager

Yes.

Operator, Operator

The next question is from the line of Erik Zwick with Lucid Capital Markets.

Erik Zwick, Analyst

I jumped on a little bit late, so apologies if you address something that I asked here. But wondering if you could just kind of characterize your pipeline for new investments today? How that's shaping up at this point?

Daniel W Ko, Senior Principal and Portfolio Manager

Yes. I mean we look at both on the CLO BB side, we're looking at both new issue and secondary. All things equal, we prefer seeing discount, and there are opportunities to kind of buy CLO BBs at a discount in the secondary market. And even in primary, we were able to kind of source that just given the size of our orders, we're able to kind of drive some OID and primary transactions as well. So looking across various different opportunities. There's, again, it's relative value between secondary, between primary new issue, primary refis, primary resets and there's been a lot of activity in the first half of the year. It was about $100 billion of new issuance, a little more of refis and resets. And we've seen that kind of pace continue through July and into August. So plenty of opportunities and lots of things to look at. So the pipeline kind of remains strong. On CLO equity side, we've erred towards secondary, although primary can present some opportunities with some of our structuring and our ways that we can kind of originate transactions. But both the debt and equity side, we see as reasonably attractive in adding to our portfolio today.

Erik Zwick, Analyst

And then just following up on Tom, your comments about the share buyback that you did in the quarter and kind of given the discount where the stock is trading relative to NAV now, potentially wanting to buy back more. Just curious, do you find it more beneficial from your seat to manage that program manually or with a program kind of put in place? And then kind of maybe a bit of a follow-up to that when I would assume then if the price action were to become more constructive and you're trading at a premium, again, you kind of flip the switch and potentially go back to issuing shares by the ATM.

Thomas Philip Majewski, CEO

Yes, that's a great question. We are a couple of months into our buyback program. Initially, when we started the buyback, our stock was about an 8.5% discount. Through purchasing our own shares and others, that discount has narrowed to around 2%. This is the aim of our program. If I can acquire our stock at a 7% discount, Dan Ko can't find quality BBs at a price of 93 right now. While we might find decent quality BBs at about 99, that's the limit. Given the market situation, this buyback is the most economical option for us. However, as the discount approaches single digits, we do take a step back. Generally, we want to avoid exceeding NAV, and a little margin is acceptable. For example, if our stock were at 93% of NAV and CLO BBs were at 80, I would likely invest in CLO BBs if that presented a better opportunity. That said, we are limited to about 20% of the trailing volume for our buyback due to various regulations. We must also be cautious not to deploy all our capital in one day, as that could lead to issues if there are sudden sales the next day. While I would prefer to buy more, the volume limit is a reasonable constraint. We do aim to get close to that limit on quieter days. Regarding the ATM, we are fortunate to have considerable flexibility with our revolver, which we use comfortably. Given our company's size, the asset coverage ratio is extremely high, around 6,000%. This allows us to adjust the revolver without significantly impacting our leverage. From what I understand currently, we likely wouldn't issue stock even if we return to a premium; instead, we would utilize the revolver for investments when opportunities arise. When our stock was at a premium, we often kept the revolver partially drawn while issuing stock through the ATM, using the proceeds to pay down the revolver rather than holding cash. If we find ourselves at a premium tomorrow, I believe we would primarily continue investing through the revolver for the foreseeable future.

Operator, Operator

The next question is from the line of Shalabh Mehrish with VinsonCap Advisors.

Shalabh Mehrish, Analyst

Just a couple of quick questions. The first one was on recurring cash flow. So I noticed that recurring cash flow is below distribution and operating costs in the quarter, but those were the old distributions of $0.20 and they're now $0.13. So is it fair to say that there's quite a bit of excess once you've taken operating costs and distributions into account? So there's some chance of a special distribution perhaps at the end of the year?

Thomas Philip Majewski, CEO

I appreciate your thought process. The situation with the specials is complex. First, in the second quarter, our recurring cash flow was less than our distributions and expenses. We did adjust the distribution rate starting in the third quarter. If you compare last quarter's recurring cash flows to this quarter's expected recurring expenses and distributions, they appear to be about equal. While we prefer it to be higher, starting at equal is acceptable. We mentioned that the cash collected so far this quarter is slightly below last quarter, but it remains within a narrow range. Most of the cash for this quarter is already secured, which is positive. Overall, recurring cash was below distributions and expenses, which isn't ideal, but it seems we'll be roughly on track this quarter based on the cash figures we've provided. Regarding special dividends or distributions, these occur when our taxable income surpasses the distributions we've made. There are some considerations about using spillover income from the first few distributions that could apply to the previous tax year. One complicating factor is that while taxable income from CLO debt is straightforward to calculate, CLO equity taxable income can fluctuate significantly. Our sister entity ECC has seen years where a considerable part of distributions was classified as a return of capital due to low income from CLOs, despite substantial cash payouts. In contrast, there have been times when CLOs generated more taxable income than cash. For instance, if loans were acquired at low prices during 2020 and then were repaid at full value in 2021, the capital gain is taxable income, but cash isn't received at that point. ECC had a special program that concluded last year, emphasizing the volatility of equity income. In our case, we have roughly 70% debt and 30% equity. The debt is easier to forecast, while predicting equity income is more challenging. Even an ideal model would struggle if a CLO manager has a significant gain or loss on the last day of the tax year, throwing off our projections. Currently, it looks like our recurring cash flows align with operational expenses and distributions, which is a positive sign. If our taxable income were to significantly exceed our distributions—which isn't something we can predict at this moment—we would consider appropriate plans. However, it doesn’t seem highly probable, but with five months left in the year, many variables could come into play.

Shalabh Mehrish, Analyst

Okay. That's very helpful. My second question is about the coupon on the BB CLO debt as reported in your monthly updates. I noticed that from June to July, or even from May to June, the coupon didn't change much. In fact, it increased from May to June and remained largely unchanged since March. Is that due to the tightening spreads and the refinancing deals, or are you finding more attractive opportunities in the secondary market, as you mentioned?

Thomas Philip Majewski, CEO

So the question relates to how our CLO debt coupon hasn't changed much. The market is certainly tightening in general, but over the last few months, spreads haven't moved. The overall yield or coupon on CLO BBs hasn't changed significantly.

Daniel W Ko, Senior Principal and Portfolio Manager

Yes, SOFR has actually increased slightly. As rates have reset, we’ve seen coupons rise slightly, while spreads have widened modestly since the end of Q2. There are various opportunities with new issue pricing in the high 400s to low 500s spread for Tier 1 resets. Specifically, for Tier 1 collateral managers, some clean resets are pricing in the low 500s to mid-500s, while even the more distressed resets are pricing over 600 for Tier 1 collateral managers. There’s a wide variety of options available, and our aim is to find the right mix of different profiles within the portfolio. There are still opportunities at some of the wider levels for slightly riskier Tier 1 sales of BBs.

Shalabh Mehrish, Analyst

Got it. That's very helpful. And finally, my last question was on the OC cushion. So I noticed the OC cushion, actually, this is really going from June to July. So it's not as relevant to the quarter end numbers. But going from June to July, the OC cushion declined by about 28 basis points. Is that because the rating agencies, especially Moody's has been very aggressive with the CCC downgrades?

Daniel W Ko, Senior Principal and Portfolio Manager

Not really. We haven't seen the CCCs pick up. In July, we actually saw more upgrades than downgrades. If anything, the situation was influenced by a credit called Altice that was included in many CLO portfolios, with around 38 basis points of exposure across the market. That credit went into default, which was widely anticipated, as it was priced as a loan undergoing default and restructuring. This is likely the main reason behind the current scenario. However, there is still a significant cushion within the OC test, with an OC cushion of 460 basis points. To put that into perspective regarding the erosion of this cushion, approximately 16.5% CCCs would be needed to diminish it, as there is a 7.5% allowance for CCCs and considering a $50 price on the CCCs, you could have about 9.2% more CCCs before the OC cushion is affected. Alternatively, regarding default rates that might impact this cushion, assuming a 50% value for the default, it corresponds to about 9.2% of the portfolio.

Shalabh Mehrish, Analyst

Right. Appreciate it. And I guess, finally, I mean, you've already talked about this that the stock is trading at a substantial discount to the latest reported NAV. I think it's like double digits now, maybe like 11% or 12% discount. So I guess it's still pretty attractive from a repurchase standpoint, right?

Thomas Philip Majewski, CEO

That's our opinion. I think I mentioned the term cheap earlier. The share price and the midpoint of our NAV indicate it's currently at a discount of just over 10%, possibly close to 12%. This situation is similar to the CLO BB market for quality BBs, which is around par. It feels like buying quality CLO BBs at 88. While we may not be only 0.25 points smart, we are likely about 12 points smart. Great. Lena, Dan and I appreciate your interest in Eagle Point Income Company. We are going to be around today. If anyone else has follow-up questions, please feel free to reach out directly. Thank you for your time and interest.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Please disconnect your lines at this time, and have a wonderful day.