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

Greetings, and welcome to the Eagle Point Income Company Second Quarter 2020 Financial Results 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. You may begin.

Thank you, Doug, 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. 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 2020 financial statements and second quarter investor presentation with the Securities and Exchange Commission. Financial statements in our second 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 & Portfolio Updates link, and the investor presentation can be found by following the Presentation & Events link. I would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.

Thank you, Garrett, 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, which is located at eaglepointincome.com, and I'll refer to it in a portion of my remarks. On the call, I'll provide some high-level commentary on the second quarter and recent activity, then we'll turn the call over to Ken, who will take us through second quarter financials. We'll then open the call up to your questions. Back in May, on our last call, we were beginning to see economic green shoots as the world was digesting the realities of the COVID-19 pandemic. States were starting to reopen their economies and lifting stay-at-home orders. While there was significant economic uncertainty throughout the quarter, and despite a significant drop in loan prices going into the second quarter, our portfolio continued to perform well. During the second quarter, every investment in our portfolio paid as scheduled. Our NAV was up by 57%, and we opportunistically traded investments, harvesting gain. Rolling forward today, while COVID-19 continues to have a major impact on the global economy, we see a continued gradual economic recovery. The pace of corporate loan downgrades, which felt like a torrent back in April, has slowed significantly. Market fears of a large default spike, which were prevalent and held by many market participants at the turn of the quarter, have subsided. That said, we do anticipate a slow continued upward trend in the corporate default rate over the coming months. During the second quarter, we deployed $4.1 million into new CLO debt investments, which we've subsequently sold, real -- recording gains. At present, we have over $23 million of undrawn availability on our revolving credit facility, allowing us to be on the offense, where we see opportunity. We recorded net investment income and realized gains of $0.34 per share during the second quarter, well in excess of the distributions that we paid. Giving investors additional visibility, the company has declared $0.08 per share per month distributions for the rest of the year. The momentum we saw in the second quarter has continued in July, and we recently published an updated estimate of NAV as of July, which was up nicely from June's level. That said, our NAV recovery and the broader CLO BB market has continued to lag other risk assets. Compared to stock market and high-yield bonds, which are at or near record highs, our market remains below where it started at the end of the year. As of July 31, the JPMorgan CLOIE BB Index discount margin stood at 990 basis points, roughly 10% over LIBOR. This is still meaningfully wide of the 722 basis points where the index stood at the beginning of the year. We believe this may offer a path to future upside. Members of our team have been through difficult market environments before, the '02 -- 2000 to 2002 tech -- telecom cycle, the '08, '09 financial crisis, among others. And while past performance is obviously not a guarantee of future results and there are important distinctions between the situations then and now, when we look back on what occurred during those cycles, CLO securities saw significant rating downgrade actions and price decline. But when the dust settled, the long-term default rate for CLO BBs remained very, very low. Indeed, according to data from Standard & Poor's, of the 1,347 CLO BB tranches issued between 1996 and the second quarter of 2018, a mere 20 failed to return full principal and interest. And for CLO equity investors like EIC, as we invest up to 20% of our portfolio in CLO equity, history is on your side as well. Had you invested in CLO equity generically at the beginning of 2009, according to research from Citibank, your IRR over the next 3 years was nearly 80%, well above the returns from many other asset classes. Overall, I believe we remain well positioned from a liquidity standpoint as we head into an election season, and we will remain highly opportunistic with the deployment of capital and trading within our portfolio. I'll now turn the call over to Ken, who can walk us through the financials in a little more detail.

Thanks, Tom. For the second quarter of 2020, the company recorded net investment income and realized gains of approximately $2.1 million or $0.34 per share. When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $33 million or $5.40 per share. Please note, our short-term cash flow generation is largely unaffected by the unrealized changes in fair value that we record at the end of each quarter. The company's second quarter net income was comprised of total investment income of $2.7 million, unrealized mark-to-market gains on investments of $30.7 million and realized capital gains of $0.4 million, partially offset by total expenses of $1 million. As of August 7, net of pending investment transactions, the company has approximately $23 million of cash and revolver capacity available for investment. As of June 30, the company's net asset value was approximately $86 million or $14.14 per share, which is $5.15 higher than our net asset value per share as of March 31. The second quarter's upward trajectory continued in July. Management's unaudited estimate of the company's NAV as of July 31 was between $14.28 and $14.32 per share, reflecting an increase of 2.5% compared to the NAV per share as of June 30 before giving effect to the special distribution we paid on July 31. During the second quarter, we paid 3 monthly distributions of $0.08 per share of common stock and are paying the same amount in each month of the third quarter. Last week, we declared common distributions for the balance of the year in the same amount. As one of the requirements to maintain its ability to be taxed as a regulated investment company, the company is required to pay distributions to holders of its stock in an amount equal to substantially all of its taxable income within 1 year of its tax year-end. As previously announced, the company determined that its taxable income for the tax year ending December 31, 2019, exceeded the aggregate amount of distributions paid to stockholders during 2019. As a result, the company declared 2 special distributions of $0.19 per share. The company paid the first special distribution on July 31 and will pay the second special distribution on October 30 to stockholders of record as of October 13. During the second quarter, the company sold approximately 88,000 shares of its stock at a premium to NAV under our ATM program for total net proceeds of approximately $0.9 million. I will now turn the call back over to Tom.

Great. Thank you, Ken. We're certainly pleased with the portfolio's continued cash flow generation and appreciation during the second quarter. We're very pleased to have comfortably outearned our distributions for the quarter, and that momentum from the second quarter has continued in July. With most of the payments on our portfolio in, at this point, all of our CLO equity holdings paid in July as scheduled and all but one of our CLO debt holdings that were scheduled to pay paid in full in July as well. So we're pleased with where the portfolio continues to shape up and generate cash. As, of course, the company -- and we walked through the liquidity. We have plenty of liquidity through availability on our revolver to capitalize where we see opportunities. We thank you very much for your time and interest in Eagle Point Income Company. Ken and I will open the call to questions if there are any.

[Operator Instructions] There are no questions in the queue at this time. I'd like to hand the call back over to Thomas Majewski for closing remarks.

Great. Thank you very much, everyone, for joining the call. Ken and I appreciate your continued interest in Eagle Point Income Company. To the extent you have any further questions, Ken and I will be available throughout the day today. Thank you for joining.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.