Eagle Point Income Company Inc. (NYSE:EIC) Q2 2022 Earnings Conference Call August 16, 2022 11:30 AM ET
Company Participants
Peter Sceusa – IR Associate, ICR
Tom Majewski – Chairman and CEO
Lena Umnova – Chief Accounting Officer
Conference Call Participants
Operator
Greetings. Welcome to the Eagle Point Income Company’s Second Quarter 2022 Financial Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded.
I would now like to turn the conference over to your host, Peter Sceusa at ICR. Thank you, you may begin.
Peter Sceusa
Thank you, operator 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 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 2022 financial statements and our second quarter investor presentation, the Securities and Exchange Commission. The financial statements in 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 now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.
Tom Majewski
Great. 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, which is www.eaglepointincome.com. And I’ll refer to that during a portion of my remarks.
EIC had a strong second quarter with NII and realized gains above our monthly distribution level. And with a rising rate environment, our portfolio we believe is very well positioned to generate significant additional income through our investments in floating rate CLO junior debt.
For the quarter, our net investment income and realized gains were $0.41 per share. Our recurring cash flows were $5.7 million, which is a 12% increase from the first quarter and exceeded our regular common distributions and expenses by $0.21 per share. Recurring cash flows were aided in the quarter by newly purchased CLO investments, and a reset payment from one of our existing CLO equity positions.
Our NAV as of June 30 was $13.66 per share with the reduction during the quarter principally due to mark-to-market drawdowns in the portfolio. Due to our confidence in the portfolio and EIC’s outlook, we raised our monthly common distribution by 12% to $0.14 per common share beginning in October.
Between April and July, three month LIBOR increased from about 1% to nearly 3%. This will factor quite favorably into our October cash flows. Quite simply, the rapid increase in LIBOR has been materially positive for our junior CLO debt portfolio, and should further increase the Company’s net investment income in the third quarter of 2022.
As the LIBOR rates for all CLO debt tranches reset at meaningfully higher levels and 100% of the CLO debt investments in our portfolio are floating rate.
Frankly, it is an exciting time for our portfolio, and the rising rate environment increasing cash flows and our confidence in our future outlook drove last week’s announcement of a 12% increase in our monthly common distribution.
Along with the rising rate environment, our proactive management of our portfolio mix to increase its allocation to CLO equity has further assisted the company to increase its cash flows and net investment income. While we continue to keep a close eye on the U.S. economy, we expect to continue deploy capital at attractive levels and believe the Company is positioned to do quite well over the coming quarters. In short, we see a number of paths to continuing to grow the Company’s net investment income.
Looking at the market overall, there were mere two syndicated loan defaults in the second quarter, and as a result of the 12-month trailing default rate remain near historic lows ending June at 28 basis points. We do expect defaults to gradually rise in the months and quarters ahead, but certainly not to the level that the loan market was pricing in towards the end of the quarter. Indeed, at quarter end, the loan index was around $0.92 on the dollar.
As such, we believe there remains significant buying opportunities in the market. And we will continue to take advantage of this adding to our portfolio where we see pockets of value. As long-term focused investors, we seek to construct our portfolio to manage through periods of dislocation. And frankly, that’s evidenced by our recent performance in the face of an unusual market environment, we’re accomplishing exactly what we said out to.
We’re also continuing to length — seek to lengthen the weighted average reinvestment periods of our CLO debt and equity portfolios. We believe this will give our portfolio additional resilience should market conditions turn worse.
We would remind you that CLO BB debt has historically withstood multiple economic downturns experiencing very low, long-term default rates. While past performance is certainly not a guarantee of future results, we believe the performance of our portfolio over the last few years has further validated CLO BB is an attractive and resilience asset class.
With that, I’ll now turn the call over to Eagle Point’s Chief Accounting Officer, Lena Umnova, who will walk us through the numbers in more detail.
Lena Umnova
Thanks, Tom. For the second quarter of 2022, the company recorded net investment income and realized capital gains of approximately $2.9 million or $0.41 per share. When unrealized portfolio depreciation is included, the Company recorded the GAAP net loss of approximately $17.9 million or $2.56 per share. The Company’s second quarter net loss was comprised of total investment income of $4.4 million and de minimis net realized gain upset by unrealized depreciation of $20.8 million and total expenses of $1.5 million.
During the second quarter, we paid three monthly distributions of $12.5 per share, and they will also pay that amount monthly till September. Last week, we were pleased to announce a 12% increase in our common distribution to $0.14 per month, which will commence in October.
As of June 30 2022, the company had outstanding warrants from revolving credit facilities, and preferred equity which total approximately 39% of total assets, less current liabilities. Due to lower portfolio valuations at the end of the quarter, the leverage ratio was above our target leverage ratio range of 25% to 35%, at which we expect to operate the Company under normal market conditions. The improved valuations at the end of July have since significantly reduced that figure.
The Company’s asset coverage ratios at the end of the quarter for preferred stock and the credit facility calculated in accordance with Investment Company Act requirements were 257% and 711% respectively. This measures of comfortably above the statutory requirements of 200% and 300%. As of June month end, the Company’s net assets volume was approximately $95.6 million or $13.66 per share.
Moving on to our portfolio activity in the third quarter to July month end, management and audited estimate of the Company’s NAV as of July 31 was between $14.18 and $14.22 per share, with the midpoint of the range up 4% from our NAV as of June 30.
As in July month end, net of pending investment transactions, the Company had approximately $7.0 million of cash and revolver capacity available for investment.
I will now turn the call back over to Tom.
Tom Majewski
Thanks, Lena. That was very helpful. It was certainly a solid first half for EIC with our portfolios, current construction and the rising rate environment that we’re in, EIC is poised to generate increased cash flows moving forward, which will be directly beneficial to our NII and our ability to continue disturbing large amounts of cash to our shareholders.
Further due to our principally fixed rate financing, the benefit of the increases in interest rates is actually magnified somewhat for the company bringing in additional benefit for shareholders. The three key attributes as to why we remain excited to be managing a BB Rated CLO debt focused fund rings true today, just as they did three years ago when we brought EIC public.
The potential for lower credit expense as reflected by the low default rates of BB’s rated CLO debt over the past 20 plus years. The potential for higher returns compared to similarly rated corporate securities, and then the benefits CLO debt offers in markets with rising rate environments and indeed today we are seeing significantly rising interest rates.
Along with the locked in nature of the financing of CLO’s that is longer than a CLO’s assets, we believe our portfolio construction and the rising rate environment position us well and remain confident that EIC is well positioned to continue generating compelling risk adjusted returns and value for our shareholders.
We thank you for your time and interest in Eagle Point Income Company. Lena, and I now we’ll open the call to your questions. Operator.
Question-and-Answer Session
Operator
[Operator Instructions]. There are no questions at this time. At this point, I’d like to turn the call back over to Tom Majewski for closing comments.
Tom Majewski
Great. Thank you, Rob. Lena and I appreciate everyone’s time and interest in Eagle Point Income Company today will be available in the office later today should anyone have any follow up questions. Thank you and have a good afternoon.
Operator
This concludes today’s conference. You may disconnect your lines at this time. And we thank you for your participation.
Be the first to comment