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

Greetings. Welcome to Eagle Point Income Company's Fourth Quarter and Year-End 2020 Financial Results Call. [Operator Instructions] Please note, this call is being recorded. At this time, I'll turn the conference over to Garrett Edson of ICR. Garrett, you may begin.

Thank you, 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, 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, our full year 2020 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 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.

Thank you, Garrett, and welcome, everyone, to Eagle Point Income Company's Fourth Quarter Earnings Call. We appreciate your interest in Eagle Point Income Company, or EIC. If you haven't already done so, we invite you to download our investor presentation from our website at eaglepointincome.com, which I will refer to during a portion of my remarks. On the call, I will provide a little bit of high-level commentary on the fourth quarter and recent activity. Ken will walk us through the financials, and then we'll, of course, open the call to any questions you might have. When we first brought Eagle Point Income Company to the public markets in July of 2019, we've highlighted 3 key attributes as to why we are excited to be managing a BB-rated CLO debt-focused fund: the potential for lower credit expense due to minimal default rates historically a BB-rated CLO debt over the past 20 years; the potential for higher returns compared to similarly rated corporate securities; and the protection of BB-rated CLO debt offered against rising interest rates. We were truly put to the test in 2020 in terms of the first attribute, credit risks, and given the fears of -- certainly given the fears of corporate defaults perhaps exceeding 10%, an outlook held by some in the depths of the market last year. I'm very pleased to say that while we're not 100% out of the woods, we believe the CLO asset class broadly, and CLO junior debt in particular, passed the test with flying colors. The net asset value of our portfolio at the end of 2020 increased 88% from its low at the end of March of 2020. All of the investments in our portfolio paid as scheduled in full during the fourth quarter, and we recorded net investment income and realized gains of $0.29 per share, once again comfortably in excess of our distribution rate. Due to our financial performance since the lows of the pandemic and the confidence management has in the company's future prospects, we were pleased to increase our monthly distribution to $0.085 per share of common stock effective April 2021. We're mindful, even at this increased distribution rate, it's still below our initial distribution rate. Back at the time of our IPO in July of 2019, 3-month LIBOR was about 2.3%. Today, it's around 0.2%. As all of our CLO debt securities are floating rate off of 3-month LIBOR, its rapid move downward in the first half of 2020 did hurt our near-term earnings. That said, with rates so low, we believe there's far much more room on the upside for rates versus downside on our CLO debt. As we look into 2021, most research desks are now projecting defaults of between 3% and 3.5%, which is much more optimistic than where they stood even just 6 months ago. With less than 2% of the loan market trading below 80 today, frankly, there could be further upside in these projections. 3% or 3.5% default rate assumes all of those default and then a bunch of others do, perhaps that's a little too conservative of a view. The economy is growing, and the Fed continues to be accommodative. As long-term investors, we've constructed our portfolio to be able to manage through periods of dislocation and believe we're well positioned to grow the portfolio and generate attractive returns for our investors. Our positive momentum from the fourth quarter continued in January with 100% of our portfolio positions that were scheduled to make payments having done so. For a while in 2020, we had one position that was deferring interest. That security paid all the back interest, plus interest on the interest, and is now current on its payments as well. Our management estimate of January NAV points to another roughly 2% increase in NAV from the end of December. We remain optimistic about our outlook and continued cash flow generation. If the market continues to tighten, we believe we have room for further portfolio appreciation -- and indeed, we still have $2.2 million of unrealized markdowns on our CLO debt portfolio. This represents about $0.36 per share. To the extent these securities ultimately pay off at par, which is what we expect that would further accrue to NAV. As we've noted previously, we're long-term focused and we would like to remind you that CLO BBs have managed on multiple occasions to withstand very severe economic cycles, yet still experiencing very low long-term default rates. While past performance is, of course, not a guarantee of future results, we believe 2020 has again validated CLO BBs and attracted -- as an attractive and resilient asset class. I'll now turn the call over to Ken, maybe to walk us through the fourth quarter financials.

Sure. Thanks, Tom. For the fourth quarter of 2020, the company recorded net investment income and realized gains on investments of approximately $1.8 million or $0.29 per share. When unrealized portfolio appreciation is included, the company recorded GAAP net income of approximately $15.1 million or $2.48 per share. The company's fourth quarter net income was comprised of total investment income of $2.5 million, net realized gains on investments of $0.1 million and unrealized mark-to-market gains on investments of $13.3 million, partially offset by total expenses of $0.8 million. As of February 9, net of pending investment transactions, the company has approximately $11 million of cash and revolver capacity available for investment. As of December 31, the company's net asset value was approximately $103.1 million or $16.89 per share, which is $2.05 higher per share than our net asset value as of September 30. Management's unaudited estimate of the company's NAV as of January 31 was between $17.22 and $17.26 per share, reflecting a further 2% increase in NAV. During the fourth quarter, we paid 3 regular monthly distributions of $0.08 per share and declared monthly distributions for the first quarter of 2021 in the same amount. Earlier in February, we increased our monthly distribution effective April 2021 to $0.085 per share. 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. On October 30, the company paid its second of 2 special distributions of $0.19 per share related to 2019 spillover income. We've just finalized 2020 to [ 99s ] and reported 12% of the company's distributions from 2020 will be treated as a return of capital for tax purposes. Our lower taxable income is primarily attributable to our CLO equity investments. While these investments paid without interruption during 2020, they were able to shelter a portion of their ordinary income last year for tax purposes. I will now turn the call back over to Tom.

Great. Thank you, Ken. We're certainly very pleased with the portfolio's continued cash flow generation and appreciation over the past 10 months. We believe 2020 has validated everything we've talked about with respect to the CLO asset class. We've once again comfortably outearned our distributions for the quarter and even outearned our new increased distribution rate. Positive momentum continues in 2021 with 100% of our CLO debt and equity holdings that were scheduled to make payments paying currently. We have plenty of capital available to seek where we see opportunity, yet remain very disciplined in our deployment. We thank you for your time and interest in Eagle Point Income Company. To the extent there are any, Ken and I would be happy to field questions from audience.