Q2 2024 Eagle Point Income Company Inc Earnings Call

Participants

Peter Sceusa; ICR; Eagle Point Income Company Inc

Tom Majewski; Chairman and Chief Executive Officer; Eagle Point Income Company Inc

Dan Ko; Senior Principal and Portfolio Manager; Eagle Point Income Company Inc

Lena Umnova; Chief Accounting Officer; Eagle Point Income Company Inc

Presentation

Operator

Greetings, and welcome to the Eagle Point Income company's second quarter 2024, financial results conference. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Peter Sceusa at ICR. Please go ahead.

Peter Sceusa

Thank you, and good morning. As a reminder, before we begin our formal remarks, the matters discussed in this call includes 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 half year 2024 financial statements and our second quarter investor presentation with the Securities and Exchange Commission.
The financial statements and our second 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.

Tom Majewski

Thank you, Peter, and welcome, everyone, to Eagle Point Income Company's second 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. The company's strong momentum from the first quarter continued into the second quarter.
We had yet another quarter-over-quarter increase in gross portfolio cash flows. We grew our NAV from the prior quarter end and continued to strengthen our balance sheet. Our portfolio designed specifically for elevated rate environments continues to generate robust cash flows.
Among our highlights, recurring cash flows were again comfortably in excess of our regular common distributions and operating expenses. The company received recurring cash flows of $12.4 million, or $0.87 per share, during the quarter. This compares to cash flows in the prior quarter of $10.7 million, or $0.88 per share.
A driver of the $0.01 decline in the per share amount was that many of the securities we purchased during the quarter using the preferred issuance proceeds and ATM proceeds didn't make payments until the third quarter.
The company generated net investment income plus realized gains, excluding non-recurring expenses related to our 8% Series C term preferred offering in April of $0.54 per share. Similar to the first quarter, we paid three monthly common distributions of $0.20 per share in the second quarter.
Our NAV as of June 30 was $15.24 and that's an increase of about 1% from March 31. We continue to strengthen our balance sheet. As I mentioned earlier, in April, we issued our Series C term preferred and received net proceeds of about $33.6 million during the second quarter. Through our at-the-market program, or ATM.
We issued approximately 2.7 million common shares at a premium to NAV, generating NAV accretion of $0.07 per share during the quarter. We also realized about $100,000 of additional proceeds from sales of Series B and Series C term preferred stock via the ATM.
Daily average trading volume for our common stock continued to increase with volumes in the second quarter, 15% higher than the first quarter and nearly quintupling the average trading volume on a year-over-year basis. We’re very happy to see the increased volume for our shareholders.
I would quickly like to add some highlights before I turn the call over to Dan Ko for his market commentary. Subsequent to the end of the quarter, we declared monthly common distributions of $0.20 per share through the end of 2024. As of July 31, we have over $41 million of cash and revolver borrowing capacity available to us, ample dry powder with which to invest and further expand our portfolio.
All of our CLO BB coupons are in the double digits, with some CLO BBs having the potential to yield even more if the CLOs are called early. Further, the portfolio of CLO equity exposure continues to further enhance our portfolio’s earnings ability.
You’ve heard us reiterate our long-term focus as investors. We remain consistent in our approach to construct the portfolio to weather any economic cycle and believe the portfolio is strongly positioned for continued 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.

Dan Ko

Thank you, Tom. There continues to be attractive investment opportunities across the CLO market, in particular, the junior debt and equity portions of the capital structure. We believe EIC successfully capitalized on the elevated rate environment by investing in floating rate CLO debt, but are still well positioned to succeed good rates begin to be lowered later this year.
The Credit Suisse Leveraged Loan Index continued to perform well, generating a total return of 1.86% for the quarter and 4.44% for the first half of 2024. Debt index continued its trajectory in July with loans of 5.21% year-to-date as of July 31.
Over the past few days, there has been some softness in loan prices in line with the broader market volatility, but the impact on loan prices has so far been relatively modest. We continue to see attractive return profiles in the primary and secondary markets.
In the second quarter, we deployed approximately $61 million in net capital into attractive CLO junior debt and CLO equity investments. The weighted average effective yield of the CLO purchases during the quarter was a robust 11.6%. Our CLO collateral managers remain focused on building par through relative value trading or by reinvesting part prepayments into discounted loans. During the second quarter, approximately 9% of leveraged loans market-wide or roughly 35% annualized repaid at par. The prepayments were driven by loan issuers focused on refinancing the near-term maturities in an effort to further extend the maturity profile of their debt.
Regarding new CLO issuance, we saw $53 billion of new issuance in the second quarter of 2024 and $102 billion for the first half of 2024, the fastest pace ever and approximately 82% higher than the prior year period.
As noted on our Q1 call, third-party CLO equity investors, including us, have returned to the primary market as CLO debt spreads have tightened. We continue to see a significant uptick in resets and refinancings, driven by tighter CLO debt spreads.
In the first half of 2024, we completed three refinancings and one reset of our CLO equity positions, lowering their debt cost by an average of 32 basis points in the refinancings and extending the reinvestment period to five years in the case of the reset, increasing our portfolio’s weighted average remaining reinvestment period.
We expect that refinancings, resets and calls will lead to some of our previously discounted CLO BB purchases being repaid at par, crystallizing the convexity in certain of our investments sooner than anticipated. There were only six leveraged loan defaults in the second quarter and the trailing 12-month default rate declined to 0.92% as of quarter end, remaining well below the historical average of 2.65%.
EIC’s portfolio’s default exposure as of June 30 stood at 60 basis points. Even if defaults 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.
We believe it 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. 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 advisers’ Chief Accounting Officer, Lena Umnova to walk through our financial results.

Lena Umnova

Thank you, Dan. During the second quarter, the company recorded net investment income or NII and realized gains of $6.3 million or $0.44 per share. When excluding non-recurring expenses related to the issuance of the company’s 8% Series C Term Preferred Stock, NII and realized gains were $0.54 per share.
This compares to NII and realized gains of $0.56 per share recorded for the first quarter of 2024 and NII of $0.49 per share for the second quarter of 2023.
As Tom mentioned earlier, the second quarter decline in NII was driven in part by taking a bit of time to deploy the proceeds from the Series C Preferred Stock and ATM issuances. When unrealized portfolio appreciation is included, the company recorded GAAP net income of $8.5 million or $0.60 per share.
The company’s second quarter net income was comprised of total investment income of $10.9 million, net unrealized appreciation on investments of $2 million, net realized gains on investments of $0.3 million and unrealized depreciation on certain liabilities held at fair value of $0.2 million, all of which were partially offset by financing costs and operating expenses of $4.9 million.
Additionally, for the second quarter, the company recorded other comprehensive income of $0.6 million representing the change in fair value on the company’s financial liabilities attributed to instrument specific credit risk. During the second quarter, we paid three monthly distributions of $0.20 per share. And last week, we declared continued monthly distributions of $0.20 per share through the end of the year.
As of quarter end, the company had outstanding preferred equity, 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. At the end of the quarter, we had nothing drawn on our revolver.
The company’s asset coverage ratio at the quarter end for preferred stock calculated in accordance with Investment Company Act requirements were 311%, this is comfortably above the statutory requirement of 200% for preferred stock. As of June month end, the company's net asset value was $240 million or $15.24 per share. This is approximately 1% decrease from March 31.
Moving on to our portfolio activity for the month of July, the company received recurring cash flows on its investment portfolio of $12.4 million. Note that some of the company's investments are still expected to make payments later in the quarter. As of July 31, net of pending investment transactions, the company had over $41 million of cash and revolver capacity available for investment.
I will now turn the call back over to Tom to provide the closing remarks before we open it up for questions.

Tom Majewski

Thanks, Lena. EIC continues to perform quite strongly and our proactive investment strategy continues to generate significant net investment income. Throughout the quarter, we focused on strengthening our balance sheet and believe our portfolio is well positioned to succeed in any rate or economic environment.
We maintain the view that CLO BBs are one of the most resilient risk asset classes attributable to their structural protection and floating rate nature and 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 Income company. Lena, Dan and I will now open the call to your questions. Operator?

Question and Answer Session

Operator

Ladies and gentlemen, the floor is now open for questions. (Operator Instructions).
We're showing no questions in queue at this time. I'd like to turn it over to Mr. Majewski for closing comments.

Tom Majewski

Great. Thank you very much, everyone, for dialing in today, each of Lina, Dan and I appreciate your time and interest in Eagle Point Income Company. We are available in the office later today. Should anyone have any follow-up questions. Thank you.

Operator

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.