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

Ladies and gentlemen, greetings, and welcome to the Eagle Point Income Company Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Peter Sceusa with ICR. Please go ahead.

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

Thank you, Peter, 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 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. 2024 was another excellent year for EIC, capped off by a solid fourth quarter. For the year, we generated a GAAP return on equity of 21% and the total return on our common stock was 24.8%, assuming you reinvested your distributions. We paid $2.40 per share in cash distributions to our common stockholders or about 15.2% of our average stock price during the year. We received strong and consistent recurring cash flows from the company's investment portfolio totaling $3.30 per share for the year and this is in line with the common stock distributions and expenses, excluding certain nonrecurring items. Among our highlights for the quarter, the company received recurring cash flows of $16.1 million or $0.82 per share. This compares to cash flows from the prior quarter of $13.1 million or $0.76 per share. We saw strong cash flows from our CLO debt investments in the quarter, bolstered by first payments on new investments purchased in prior quarters. We continue to deploy significant capital into new CLO investments, which will make their first cash payments to us in 2025. The company generated net investment income and realized gains of $0.54 per share in the fourth quarter. For the second consecutive quarter, we realized $0.08 per share of realized gains as we fully realized discounts on many of the purchases over the past quarters sooner than anticipated. Our NAV as of December 31 stood at $14.99 per share, which is a 1% increase from September 30 and a 4% increase from where it stood at the beginning of 2024. In line with prior quarters, we paid 3 monthly common distributions of $0.20 per share during the fourth quarter and we've declared those same monthly distributions through June 2025. We continue to strengthen our balance sheet through our at-the-market program, or ATM, and our NAV concluded, committed equity finance program. We issued approximately 2.5 million common shares at a premium to NAV, generating NAV accretion of $0.05 per share during the quarter. We also received about $12 million in proceeds from additional issuances of our Series B and Series C term preferred stock. Daily average trading volume for our common stock also continues to increase with volume in the fourth quarter about 18% higher than the third quarter. Fourth quarter volume was nearly triple the average trading volume that we saw 1 year ago. While many of our BB coupons remain in the double digits today, they do float based on short-term interest rates. As many of you are aware, the short end of the curve has come down by about 1% over the past few months as the Fed cut rates. This will lower interest rates on our CLO BBs and could impact our NII in the coming quarters. That said, we are actively managing our portfolio towards maximizing yields and the portfolio of CLO equity exposure continues to enhance our portfolio's earnings ability. As investors focused on long-term earnings, we remain consistent in our approach to construct a portfolio that we believe can weather any economic cycle. 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.

Thank you, Tom. We continue to find attractive investment opportunities across the CLO market and junior CLO debt and CLO equity. With ample dry powder, EIC capitalized on the market opportunity in the fourth quarter by investing in high-yielding CLO debt and CLO equity. We continue to believe floating rate CLO debt offers an attractive return profile compared to other fixed income securities, even if rates come down a bit more. Furthermore, CLO equity is relatively insulated from rate movements because it is principally a spread arbitrage product. Also, all things equal, lower rates should lead to a lower loan default rate in our underlying CLO portfolios. During the fourth quarter, we found attractive return profiles in both the primary and secondary markets. We deployed approximately $91 million of gross capital into new investments. The weighted average effective yield of the new CLO purchases during the quarter was a robust 11%. The S&P UBS Leveraged Loan Index, formerly the Credit Suisse Leveraged Loan Index finished the year strong, generating a total return of 2.3% for the quarter and 9.1% for 2024. The index continued its positive trajectory into the new year with loans up 70 basis points in January. During the fourth quarter, approximately 7% of leveraged loans market-wide, are roughly 26% annualized repaid at par. The prepayments were once again driven by loan issuers, focused on refinancing their near-term maturities in an effort to further extend the maturity profile of their debt. Regarding new CLO issuance, we saw $59 billion of new issuance in the fourth quarter of 2024, leading to a record $202 billion for the full year, exceeding the previous record of $187 billion set in 2021. Despite the record level of new CLO issuance, net issuance of CLOs was a more modest $70 billion in 2024. As expected, we continue to see a large increase in resets and refinancings of CLOs driven in large part by tightening CLO debt spreads. Similarly, breaking 2021 records, total issuance volume, including refinancings and resets, reached $509 billion for the year, exceeding $438 billion from a few years ago. For 2024, we completed 5 refinancings of our CLO equity positions, which lowered the debt cost by an average of 28 basis points. We also completed 4 resets, which extended the reinvestment period of each CLO to 5 years and thereby increased our CLO equities portfolio's weighted average remaining reinvestment period or WARP to 3.0 years. Increasing WARP remains our focus for the CLO equity portion of EIC's portfolio. We continue to expect that refinancings, resets and calls will lead to some of our previous discounted CLO BB purchases being repaid at par, crystallizing the convexity in certain of our investments sooner than anticipated and realizing gains in the portfolio. There were only 9 leveraged loan defaults in the fourth quarter with the trailing 12-month default rate rising slightly to 0.9% as of year-end still remaining well below the historical average of 2.6%. EIC's portfolio's default exposure as of December 31 stood at 0.4%. We expect default risk to remain low for the foreseeable future. As we've consistently noted, CLO BBs have performed well through numerous economic cycles 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's portfolio to be permanently impacted by a default wave. 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 adviser's Chief Accounting Officer, Lena Umnova to walk through our financial results.

Thank you, Dan. During the fourth quarter, the company recorded NII and realized gains of $10.6 million or $0.54 per share. This compares to NII and realized gains of $0.57 per share recorded for the third quarter of 2024, and NII less realized losses of $0.54 per share for the fourth quarter of 2023. When unrealized portfolio appreciation is included, the company recorded GAAP net income of $15 million or $0.76 per share. The company's fourth quarter net income was comprised of total investment income of $13.6 million, net realized gain on investments of $1.6 million, net unrealized appreciation on investments of $2.0 million and unrealized depreciation of foreign liabilities held at fair value of $2.5 million. This was partially offset by financing costs and operating expenses of $4.7 million. Additionally, for the fourth quarter, the company recorded other comprehensive losses of $2.4 million, representing the change in fair value on the company's financial liabilities attributed to instrument specific credit risk. During the fourth quarter, we paid 3 monthly distributions of $0.20 per share and last week, we also declared monthly distributions of $0.20 per share through June of 2025. As of year-end, the company had outstanding borrowings from the revolving credit facility and preferred equity, which totaled 30% of total assets less current liabilities. This measure 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 quarter end for preferred stock and debt calculated in accordance with investment Company Act requirements were 336% and 22,429%, comfortably above the statutory requirements of 200% and 300% for preferred stock and debt. As of December month end, the company's net asset value was $317 million or $14.99 per share, a 1% increase compared to $14.90 per share as of September month end. Moving on to our portfolio activity so far this year through January 31, the company received recurring cash flows on its investment portfolio of $15.1 million. Note that some of the company's investments are still expect to make their first payments later in the quarter. As of January 31, net of pending investment transactions and settlements, the company had over $30 million of cash and revolver capacity available for investment. Management's unaudited estimate of the company's NAV as of January 31 was between $14.96 and $15.06 per share. At the midpoint, it's up from where it stood at the end of 2024. I will now turn the call back over to Tom to provide closing remarks before we open it up for questions.

Thanks, Lena. EIC had a great 2024 and is positioned well for 2025. We continue to believe our portfolio is constructed to succeed in any rate or economic environment. We will continue to closely monitor changes in short-term rates. And indeed, we are considering deploying additional capital into CLO equity, which is generally less rate sensitive than CLO BBs. We maintain the view that CLO BBs and CLO equity are some of the most resilient asset classes in the market attributable to both their structural protections and underlying collateral. And we remain confident that EIC is well positioned to continue generating compelling risk-adjusted returns for our fellow 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?

[Operator Instructions]. The first question comes from the line of Mickey Schleien from Ladenburg Thalmann.

Tom, CLO liability spreads have tightened dramatically with a lack of M&A sort of limiting new CLO creation. As you've been involved in this market through many cycles, how do you see CLO debt liability spreads trending over the next couple of years?

I don't know whether they're going to be tomorrow. Tomorrow, they're probably around the same and maybe a little tighter. So over time, CLO debt tranches of which EIC invests in, have performed exceptionally well from a total return perspective, certainly relative to the ratings and an absolute instance of loss. CLO BBs, that I think, it's a 4 basis point default rate annually over the last 30 years. Tranches above that generally have even lower default rates, obviously. You get paid very well. So AAAs today generically are 115 over. That's a 5.5% return, give or take. That's pretty darn attractive for an asset class that's never had a pick, let alone the default. That spread has always been wider than other -- most other widespread broadly accepted structured products. Even going back to the pre-financial crisis days, CLO is always wide to the CMBS and things like that. It should continue to trend tighter an option that CLO debt investors write is a little bit of a spread option if historic credit expense is very low. The one thing that's less certain compared to other forms of structured products is the call right. And while we're very happy at EIC and that generated $0.08 of realized gains for us this quarter, the vast majority of that were CLOs that were called and paid off at par when we had bought the BBs at a discount proverbially yesterday. The bad news is now we have to go reinvest, and in general, we're reinvesting those might have been 700 over bonds or 600 over bonds, we're reinvesting in a 500 over market. So on one hand, relative to the credit expense, CLO debt spreads are very, very wide, in my opinion, even at today's tight levels. That said, we're facing reinvestment risk or we're having to reinvest tighter than the stuff that's getting called out. And it's because equity investors are calling deals and refinancing them tighter, resetting them or refinancing them or calling them. So it should continue to grow grind tighter over time based on credit experience in the asset class. The one variability is the call right which is not embedded in a lot of other ABS or CMBS type products, not the way it is in CLOs. So holders of CLO debt are writing some degree of spread option. But in our view, we're getting very, very well compensated for it.

Yes. I agree with that view, Tom. And I suppose that's sort of the backdrop in your prepared remarks of why you're looking at increasing your allocation to CLO equity. And you've also increased your allocation to CFO debt and equity. So those are generating very nice yields for you. Could you just highlight the risks and CFOs compared to CLOs and how high are you willing to go with your allocation to CFO and CLO equity?

Sure. So for CLO equity, I think we -- hang on one second I'm looking at 30, 35 -- yes. CLO equity, we do state in our materials, I wanted to make sure I had the number right. For everything, we kind of target no more than 35%. So it's 65% BB sort of minimum in our management. You never want to go all the way to the extremes on these things. Could we see CLO equity get to 30% of the portfolio? That doesn't strike me as crazy. Obviously, it's all market-dependent, but that's something I would see going -- potentially going up a little bit. But certainly, overall, we have the hard minimum of 65% CLO debt, which I would -- obviously, we don't plan to tinker with that. So broadly, could we see CLO equity going up a bit, I think, would be the one change if you had to think what could happen depending on market conditions in our portfolio. Let's talk about CFOs, and we have just a small number of positions in here, these are investments that popped up. We've got 3 different vehicles, and we have different tranches of them, some debt and some equity. This kind of comes from -- Eagle Point as a firm, we have a large and robust CFO investment program. We have certainly hundreds of millions of dollars, maybe even probably it's well over $0.5 billion, not $1 billion of invested in this market. Here, EIC has $13 million, give or take, of fair value, plus or minus $0.01bit. The -- it's a relatively very, very small portion of the portfolio, and these investments presented particularly attractive opportunities. And you can see by the yields on the CFO debt and then the expected yield -- effective yields on the CFO equity. We hope every investment yields that well. Obviously, those are kind of real pieces to find those when they do. In general, we're not a big buyer of CFO equity, but there are a few special exceptions, particularly the secondaries funds, which we think have a real upside potential. In many cases, the borrowers, the companies in these underlying vehicles are the same companies that are the borrowers and CLOs. So where the underlying credits in these are principally corporate credit, just the same that we've seen in CLOs. In some cases, though, this is the equity of those companies owned through funds, we move a little bit down in the capital structure with them. The flip side, these are very, very attractive risk-adjusted yields for sure. The amount of subordination below the average CFO debt tranche is much greater than in a CLO debt tranche. Order of magnitude could be 2x the amount of subordination generically, if you think of a CFO, a CLO is having 8% par subordination to a BB tranche, a CFO, in many cases, would have 20% subordination. Some may be higher, some may be lower, but generically, that's where I think. So you have a bunch more subordination coming in. And then with the secondaries ones, one of the things that make secondary investing in LP markets, so attractive is these folks are generically able to buy LP interest at $0.80 to $0.90 of fair value, providing liquidity for someone who's in a locked-up vehicle, but they have to take a discount to get it. It's always a good idea to buy. I'll take the midpoint of that 85. So it was a good thing to buy 100 at 85, if you have the wherewithal to hold it, and certainly, these CFOs do and EIC does. That said, there's risk, the underlying and most of this is equity of the same companies, but not necessarily credit of the same companies. That said, CFO debt is a credit instrument against that portfolio. And these folks all have great track records doing what they do. A little bit of a long answer. I wouldn't expect this portion of the portfolio to grow significantly. Could it grow a little bit? Possibly. Highly, highly selective when EIC participates in investments like these. But you can see from the yields, we always like buying $100 bills for $0.85 on the dollar. We're getting locked up to hold it for a while, but that's the thing that makes these attractive. And then the debt, I wish all our CLO BBs yielded with these CFO debt tranches are yielding a little bit different risk profile, but a lot more equity subordination.

Looks really interesting, Tom. My last question is following. I calculate the weighted average cash yield in EIC's CLO equity investments to remain in the mid-20s. But the weighted average effective yield keeps ticking down as the arbitrage has been challenged with such tight loan spreads. We've talked about this many times over the years. But over time, those yields need to track each other. So how do you see that relationship developing given that cash yields remain so attractive?

Mickey, it's Danko here. And so we see -- certainly, as you mentioned, the cash yields remaining very, very attractive. But CLO equity, when we kind of calculate it in an effective yield, we are factoring in that we're not going to get necessarily $0.00 on the dollar back kind of at the end. CLO equity, typically does not get that amount. Obviously, if we do, that's great. But I guess, our base case is that we get somewhere between kind of $0.40 to $0.60 on the dollar back at the end. So that kind of I guess, explains why the cash yields are so high, but then the effective yields are much lower than that. I guess the effective yields also have been somewhat affected by some of the spread compression that we've been seeing in the market on the loan side, but we've also been kind of counteracting that with some of the refinancing and reset activity that we've been doing to cut the liability costs on the CLO debt side of the equation to kind of balance that out.

So on one hand, I'm complaining that our bonds are getting ripped out of us and paid off at par. We love the gains that we're realizing. We hope we can't forecast it, but we love $0.08 of gains. That's great. Bad news, we're reinvesting on lower spreads. That's for our CLO BB portfolio. Good news for our CLO equity portfolio as we can reset those BBs tighter, which we did a number in the CLO. This fund had a number of resets and we'll continue to do them whenever possible. So what our weighted average spread on the loans was down, but our weighted average AAA, every time we do a reset, we're usually lowering our costs there, too. So we want to keep it as low as possible on the right side and one really nice thing, loan spreads will move up and down over time if spreads gap out tomorrow, which is not what we're predicting, but if it were to happen, the new CLO debt spreads that we're locking in today as an equity -- for our equity book, last for 5 or 7 years. So if loan spreads widen, we've still got today's cheap AAAs locked in.

I understand everything you and Dan have explained, but I'm not sure I understand how you expect sort of the delta between the cash yields and the effective yields to progress. because over time, they need to trend in the same direction, but that's not happening now. Are you implying that you think effective yields have sort of bottomed out?

Not specifically. I guess the one thing, when we -- and we lay out all our assumptions and the footnotes of the financials and painstaking detail, we assume loan spreads in our effective yields. We assume loan spreads continue to tighten by a certain amount, but we don't assume any resets or refinancings on the CLOs. We do assume a call at an optimal call date, some period of time after the reinvestment period. But -- so one of the things going on is loan spreads are coming down right now. And we're in our models assuming loan spreads will go down further, but we're not taking any credit on the liability side of the CLOs. That's one thing that will certainly exacerbate some of this to the extent you watch the broader loan market and see loan spreads keep coming down. That comes down in all of our CLOs, even if we reset a handful this quarter, we're going to have more pain on the asset side by a few basis points, then we'll have benefit on our liability side within any given CLO. So that's going to probably -- I could see that moving the wrong way for a little while. Against that, we continue to go in and rip out costs on the right side of CLOs whenever it makes economic sense to do so.

As there are no further questions, I will now hand the conference over to Thomas Majewski for his closing comments.

Great. Thank you very much. Lena, Dan and I appreciate everyone's interest in Eagle Point Income Company. A great 2024, 2025 off to a good start. We're around later today if folks have any questions, happy to follow up with further details. Thank you, and have a great day.

Thank you. Ladies and gentlemen, the conference of Eagle Point Income Company has now concluded. Thank you for your participation. You may now disconnect your lines.