Eagle Point Income Company Inc. (NYSE:EIC) Q3 2022 Results Conference Call November 15, 2022 11:30 AM ET
Company Participants
Garrett Edson – IR Associate, ICR
Tom Majewski – Chairman and CEO
Lena Umnova – Chief Accounting Officer
Operator
Greetings. Welcome to the Eagle Point Income Company’s Third 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] Please note this conference is being recorded.
I will now like to turn the conference over to your host, Garrett Edson of ICR. You may begin.
Garrett Edson
Thank you, [Jamali] 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 third quarter 2022 financial statements and our third quarter investor presentation with Securities and Exchange Commission. The financial statements in our third 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 would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.
Tom Majewski
Thank you, Garrett, and welcome everyone to Eagle Point Income Company’s third 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 www.eaglepointincome.com, which I’ll refer to in a portion of my remarks.
EIC had another excellent quarter with net investment income excluding non-recurring expenses once again well above our monthly distribution level. As interest rates continue to rapidly rise, our portfolio is very well positioned to generate significant additional income through our investments in CLO junior debt.
For the quarter, net investment income was $0.47 per share excluding $0.07 per share of non-recurring expenses. Our recurring cash flows were $5.2 million exceeding our regular common distributions and expenses. Our NAV as of September 30 was $13.05 a share with a quarter-over-quarter reduction principally due to unrealized mark-to-market draw downs in the portfolio.
And with our continued confidence in the portfolio and its future earnings potential, last week, we once again raised our monthly common distribution. This time it went up by another 14% to $0.16 per share per month, beginning in January.
Between July and October, three months LIBOR increased by over 2%, which will factor favorably into our Q4 net investment income and January 2023 cash flows. To put this into further context, three months LIBOR at the end of October is more than 4% higher than where it started the year.
We haven’t seen this sort of rapid increase in interest rates in over 40 years. Our portfolio was has been positioned for some time for a rising rate environment, and this rapid increase has been materially positive for a CLO junior debt portfolio throughout the year.
All else equal, we expect the Company’s net investment income to increase from the third quarter levels into the fourth quarter as the LIBOR rates for all of the CLO debt tranches in our portfolio reset at meaningfully higher levels and 100% of the CLO debt investments in our portfolio are floating rate.
It remains an exciting time for our portfolio and thanks to the continued rising interest rate environment and the increasing cash flows in our portfolio. Our common distribution beginning in January will be double what it was at the beginning of 2021.
Our investment portfolio performed well during the quarter. We saw some price volatility in September, but we believe the market overreacted and was not giving enough credit to the potential potency of the continued increase in interest rates.
As expected and as for shattered on previous calls, leveraged loan defaults began to pick up in the third quarter, and as a result, the trailing 12-month default rate for corporate loans finished at 90 basis points as of the end of September.
Notably, there were no loan defaults in the month of October. While we do expect loan defaults to continue gradually rising in the coming months and certain companies have had stress and been unable to access the capital markets, we believe there remain significant buying opportunities in the market for us and will continue to take advantage of these to add to our portfolio. None of the investments in our portfolio are on nonaccrual and we believe our portfolio is well positioned for the current credit environment.
As long term focused investors we seek to construct our portfolio to manage through periods of dislocation, and as evidenced by our continued strong performance in the face of a current challenging environment, we’re executing that playbook exactly as we planned. We are also continuing to seek to lengthen the weighted average remaining reinvestment periods of our CLO debt and equity portfolios.
We would remind you that CLO BB debt has historically withstood multiple economic downturns experiencing low long-term default rates. While past performance is obviously not a guarantee of future results. We believe the performance of our portfolio over the past several years has further validated CLO BB’s as a very attractive and resilient asset class.
I’ll now turn the call over to Eagle Point’s Chief Accounting Officer, Lena Umnova, who can walk us through the financials in a little more detail.
Lena Umnova
Thanks, Tom. For the third quarter of 2022, the Company recorded net investment income of approximately $3.3 million or $0.47 per share before nonrecurring items. During the quarter, we incur the non-reoccurring expense of $0.07 per share, which represents certain fees paid in connection with the new committed equity financing arrangement that companies entered into.
When unrealized portfolio depreciation is encoded, the Company recorded GAAP net loss of approximately $3.6 million or $0.51 per share. The Company’s third quarter net loss what comprise a total investment income of $5 million, offset by unrealized depreciation of $6.4 million and total expenses of $2.2 million.
During the quarter, we paid three monthly distributions of $0.125 per share. Beginning in October, we began paying monthly distribution of $0.14 per share through December. As some noted, last week, we were pleased to announce an additional 14% increase in our monthly common distribution to $0.16 per share, which will take effect in January.
As of September month end, the Company had approximately of outstanding borings from revolving credit facility and preferred equity, which totaled approximately 40% of total assets, less current liabilities. This is above our target leverage ratio range of 25% to 35%, at which we expect that to lead the Company under normal market conditions and is due to lower portfolio valuations at the end of the quarter.
Overtime, we will seek to move the portfolio back within all our long-term targets leverage spend. The Company’s assets coverage ratios at the end of the quarter for preferred stock and the credit facility calculated in accordance with Investment Company Act requirements were 247% and 688%, respectively. This measures of comfortably above the statutory requirements of 200% and 300%.
As of September 30, the Company’s net assets value was approximately $91.4 million or $13.05 per share. Moving on to our performed activity in the fourth quarter through October month end, management unaudited estimates on the Company’s NAV as of October 31 was between $12.81 and $12.91 per share with the midpoint of the range 1.5% lower than our NAV as of September 30.
As of October month end, net of pending investment transactions, the Company had approximately 6.3 million of cash and revolver capacity available for investments.
And now, I will turn the call back over to Tom.
Tom Majewski
Great, thank you, Lena. It was another strong quarter for EIC despite the short term mark-to-market moves in September. The rising rate environment has continued to help us grow NII significantly. Loans have continued to meaningfully outperform nearly all other risk asset classes this year. We believe this is attributable to the senior secured nature of loans and their floating rate structure.
Further due to EIC’s entirely fixed rate preferred stock, the benefit of increases in interest rates is actually amplified for the Company in that part of our financing is fixed and does not move up as rates move up. The three key attributes as to why we remain excited to be managed as a BB rated CLO debt focused company continue to ring true today.
The potential for lower credit expense reflected by the low default rates of BB rated CLO debt over the past 20 plus years, the potential for higher returns compared to similarly rated corporate securities, and finally, the benefits that CLO BB debt offers in markets with rising interest rates like today.
Along with the locked in nature of financing of CLO that is longer than a CLO’s assets, our portfolio construction and the ongoing rising rate environment, we remain very confident that EIC is well positioned to generate compelling risk adjusted returns for our shareholders.
We thank you for your time and interest in Eagle Point Income Company. Lena and I will now open the call to questions. Operator, would you mind polling for questions?
Question-and-Answer Session
Operator
Tom Majewski
Great. Thank you very much for joining the call today. Lena and I appreciate your interest and Eagle Point Income Company. We’re both available for calls later today, if anyone has any follow up questions.
Thank you.
Operator
And this concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.
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