Eagle Point Income Company Inc. (EIC) Earnings Call Transcript & Summary

Greetings, and welcome to the Eagle Point Income Company, Inc. Fourth Quarter and Full Year 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garrett Edson of ICR. Thank you, sir. You may begin.

Thank you, Donna, 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 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 information available to us as of the day 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 2019 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission. Financial statements and our fourth 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 and portfolio updates link, and the investor presentation can be found by following the presentation 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 fourth annual -- or 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 will refer to in a portion of my remarks. The presentation includes an introduction to EIC as well as additional information about the company, including information about our portfolio as of December 31, 2019. On the call, I'll provide some high-level commentary on the fourth quarter and recent activity as well as give a brief refresher on EIC's value proposition and strategy. Then I'll turn the call over to Ken, who will take us through the fourth quarter financials. We'll then open up the call to questions from any call participants. Overall, we continue to be very active in the fourth quarter, and our portfolio is generating more interest income as it continues to ramp up. During the fourth quarter, we deployed $23.9 million in gross capital into 9 debt investments and 1 CLO equity investment. As of December 31, we had 52 different CLO securities in our portfolio, the vast majority of which are debt tranches rated BB or its equivalent. We believe our CLO debt investments are able to generate strong current income while benefiting from the equity subordination provided by CLO equity tranches. We recorded net investment income of $0.31 per common share during the fourth quarter. Our net investment income reflects some degree of cash drag, while the remaining portion of our revolving credit facility is being deployed. At the end of the year, we had drawn $13.7 million on our credit facility and have continued to draw on the facility during the first quarter. Moving ahead, we expect net investment income and recurring cash flow to further increase in the quarter -- in the first quarter of 2020 as we accrue additional income from newly acquired investment. Our portfolio and the CLO BB market broadly saw some spread widening during the first half of the fourth quarter, but then ended the quarter at levels which were actually slightly tighter than the prior quarter end. The discount margin on the JPMorgan CLOIE BB index tightened from 731 basis points as of September 30, down to 722 basis points as of December 31. While there were some mark-to-market changes in our portfolio during the quarter, these price changes are unrealized, and we do not impact any -- expect any impact on our portfolio or cash flows as a result. We believe that EIC is a very compelling, high-yield investment strategy. As a reminder, EIC is focused on BB-rated CLO debt, which is typically the junior most debt tranche of a CLO, but senior to the equity tranche. While EIC will principally invest in junior debt, it also has the ability to invest up to 20% of its assets in CLO equity as measured by the time of investment and other related investment. The company had 4 CLO equity investments as of the end of 2019. We believe this added flexibility will be accretive and enhances our ability to generate attractive returns for shareholders. We believe investors are becoming more attractive to BB-rated CLO debt for 3 key reasons. First, the potential for lower credit expense. According to S&P, from 1996 through June of 2018, a period spanning 22.5 years, the cumulative default rate on CLO BB-rated debt is approximately 1.5%. I stress the word, cumulative, to differentiate it from an annual default rate. On an annual basis, that's actually 7 basis points per annum, in our opinion, a minuscule total per year. More specifically, of the 1,347 BB-rated debt tranches that were issued in the 22.5-year period measured by S&P, only 20 of them experienced events of default. This includes hundreds of BB-rated CLO tranches that were launched immediately prior to the 2008 and '09 financial crises. Second, the potential for higher returns. The spread on BB-rated CLO debt has consistently exceeded the spread on similarly rated leveraged loans and high-yield bonds. As of December 31, 2019, the spread premium over loans was 454 basis points, and the spread premium over high-yield bonds was 487 basis points. The asset class demonstrates a history of very limited instances of default while achieving superior returns. Third, the expected protection BB-rated CLO debt offers against rising interest rates. Similar to senior secured loans that serve as the underlying collateral for CLOs, BB-rated CLO debt is floating rate security that pays interest based on 3-month LIBOR plus a spread. As a result, it is expected to have less rate-based volatility when compared to high-yield bonds and other fixed rate securities in a rising rate environment. Even with the downward pressure on rates caused by the Fed's activity in 2019, nearly all CLOs -- BBs still mean -- yield meaningfully higher rates than the market today for loans or bonds. We are excited to further grow and diversify EIC in 2020 and the years ahead. And we're happy to make BB-rated CLO debt accessible to both retail and institutional investors via a convenient exchange-traded vehicle. I'll now turn the call over to Ken, who will walk us through the quarterly financials.

Thanks, Tom. For the fourth quarter of 2019, the company recorded net investment income of approximately $1.9 million or $0.31 per weighted average common share. When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $2.8 million or $0.47 per common share for the fourth quarter. Please note, our short-term cash flow generation is largely unaffected by the unrealized changes at fair value recorded at the end of this quarter. The company's fourth quarter net income was comprised of total investment income of $2.8 million and net unrealized appreciation or unrealized mark-to-market gains on investments of $0.9 million, which was partially offset by total expenses of $0.9 million. As of December 31, the company had approximately $10.5 million of cash available for investment, net of pending investment transactions, and inclusive of the undrawn amount of the revolving credit facility. As of December 31, the company had borrowed $13.7 million on the revolving credit facility. As a result of deploying $23.9 million in gross capital during the fourth quarter, a number of our investments only generated income for a portion of the quarter. We expect these investments to generate a full period of income during the first quarter. As of December 31, the company's net asset value was approximately $116.4 million or $19.34 per common share. Each month, we publish on our website an unaudited management estimate of the company's monthly NAV as well as quarterly net investment income and realized capital gains or losses. Management's unaudited estimate of the company's NAV as of January 31 was between $19.57 and $19.67 per share of common stock, reflecting an increase from year-end. Non-annualized net GAAP return on common equity for the fourth quarter was approximately 2.5%. During the fourth quarter, we paid 3 monthly distributions totaling approximately $0.40 per share of common stock. On January 2, we declared monthly distributions of approximately $0.13 per share of common stock for each of January, February and March. As one of the requirements for the company to maintain its ability to be taxed as a regulated investment company, the company is required to pay distributions to holders of its common stock in an amount equal to substantially all of the company's taxable income. The company has determined its estimated taxable income for this tax year ending December 31, 2019, will exceed the aggregate amount of distributions fee to common stockholders with respect to such tax year. As a result, and based on the current number of common stock shares outstanding, the company will be required to distribute an estimated $2.3 million or $0.39 per common share in one or more special distributions during the second half of 2020. The actual amount of this special distribution will not be known until the company files its tax returns for its tax year ending December 31, 2019. The amount of the special distribution per share of common stock will be determined based on the actual shares of common stock outstanding as of the applicable record date. Management will provide further information on the amount and timing of the special distribution in future communications. I will now hand the call back over to Tom.