Eagle Point Income Co Inc. Q3 FY2024 earnings call

Key Highlights

• EIC has generated strong net investment income and realized gains, and is strengthening its balance sheet, with CLO junior debt in robust demand and active portfolio management to maximize shareholder returns.
• Third quarter cash flows were $13.1 million or $0.76 per share, down due to new investments made after third quarter payment dates, with first payments from those investments received in the fourth quarter.
• Net investment income and realized gains for the quarter were $0.57 per share, with $0.08 per share realized gains from sales and par repayments of portfolio positions, realizing convexity of discounted purchases sooner than expected.
• Paid three monthly common distributions of $0.20 per share in the third quarter and declared the same through March 2025.
• NAV at September 30 was $14.90 per share, down 2% from June 30; issued ~2.8 million common shares via ATM and Committed Equity Finance programs, generating $0.05 per share NAV accretion.
• Daily average trading volume of common stock increased, 29% higher in Q3 than Q2 and more than tripling year-over-year.

Investment Strategy and Portfolio Activity

• Continues to find attractive opportunities in junior CLO debt and CLO equity, capitalizing on elevated rate environment; floating rate CLO debt remains attractive, and CLO equity is relatively insulated from rate movements.
• Deployed ~$90 million of net capital into new investments in Q3, with weighted average effective yield of new CLO purchases at 12%.
• 6% of leveraged loans market wide repaid at par in Q3; $142 billion of new CLO issuance in first nine months of 2024, on pace to break 2021's record.
• Completed four refinancings and one reset of CLO equity positions in 2024, lowering debt costs by average 32 basis points in refinancings and extending reinvestment period in reset.
• Defaults improved in 2024, with trailing 12-month default rate at 80 basis points as of quarter end, EIC's default exposure at 0.6%.

In the third quarter, Eagle Point Income Company (EIC) recorded net investment income and realized gains of $9.9 million or $0.57 per share. Cash flows for the quarter were $13.1 million or $0.76 per share, down from the prior quarter's $12.4 million or $0.87 per share due to new investments made after the third quarter payment dates. The net asset value (NAV) as of September 30 was $14.90 per share, a 2% decrease from June 30. EIC strengthened its balance sheet via the ATM and Committed Equity Finance programs, issuing approximately 2.8 million common shares at a premium to NAV, generating NAV accretion of $0.05 per share. Daily average trading volume of common stock tripled year-over-year. CLO coupons remain in double digits, and the portfolio's closing equity exposure enhances earning ability.

• Continues to believe the portfolio is well positioned to succeed in any rate or economic environment.
• Maintains view that CLO BBs are one of the most resilient risk asset classes due to structural protections and underlying collateral.
• Expect to deploy new capital into additional investments offering compelling risk-adjusted returns.
• NAV estimate as of October 31 was between $14.99 and $15.09 per share, with midpoint up from September 30.

• Forward-looking statements involve risks and uncertainties, actual results may differ materially from projections,需参考公司向SEC提交的文件。
• Default risk remains low currently, but a significant number of loan defaults well above historical average coupled with limited loan price volatility could permanently impact the portfolio.

Q: Hi Tom, thanks for taking my question. Hey look, congrats on first quarter covering a just terrific results here. And I want to talk about the BB market because you are really a unique vehicle out there. What are you seeing? So on acquisitions, can you go over primary and secondary on the prior call, you said this ECC call, you said there was a big difference on spreads on the equity side. I want to hear about the BB side. And I want to hear about hearing. I mean what's going on with the tiering among the managers? Is there much of a difference these days?

A: Hey Matt, this is Dan Ko here. In terms of spreads, I'd say that despite the recent Fed rate cuts, CLO BB has actually held in pretty well in terms of kind of prices. We've actually seen prices rally despite the Fed rate cuts and these being floating rate CLO debt securities. Now the current cash yields certainly are falling as the base rates are falling. But you have to remember that, I guess, the spread on CLO BB is a larger chunk of kind of the yield than other kind of, I guess, other floating rate securities a -- little less impacted there, certainly on the overall yield. And then to your question about tiering. We are certainly seeing tiering compress within the Tier 1 and Tier 3 collateral managers out there. But then we're also seeing tiering between new issue and resets as well. So for a new issue portfolio that's being issued today, you have much cleaner portfolio, no tail in the portfolio, less stressed assets, whereas resets while obviously, it is nice to have a portfolio in place that already ramped. There are some stressed assets that are in the portfolio. So we do see potentially even 100 basis points of difference in terms of kind of the spreads that we're seeing on new issue versus resets.

Q: Matthew Howlett: That's huge. And what about primary or secondary just in general on the double business if it's not a reset if it's a new issue or something?

A: Yes. So primary versus secondary, a lot of the -- and I think we mentioned earlier in the call, a lot of the convexity that we saw within CLO BBs over the past year kind of has disappeared in that most of the CLO BB asset class has rallied back up to par. Now there are obviously some that are at a discount, but those are the ones that you might not want to be touching at a discount in fairness. And so I think that there's still opportunities to buy some stuff that are discounted or even there's some interesting opportunities at a premium but new issue -- there's a better balance in value between new issue and secondary today as secondary has rallied a bunch.

Q: Matthew Howlett: Great. And then these discounts that you do own, I mean, as a prepay part, I mean, how much -- this is -- it's sort of a -- I almost look at it as like a double sort, you'd love to have the yields on them, but you get these gains as they pay off at par. I mean, how much is left in the portfolio of those and how we should think about like the contribution going forward of those prepays.

A: Yes. No, it's a good point. We certainly see the benefits of being able to realize the convexity sooner, and so we take those kind of realized gains, but then you're right. I mean you were losing out on some of the wider yielding stuff. I'd say that a large chunk of the portfolio still was purchases that we made at discounts that we do still see potential for, I guess, the gains to come through. But in terms of kind of the mark in terms of the NAV, I guess we've already marked those positions kind of at par. So it's really more of a when those, I guess, unrealized gains will be moved to realized.

Q: Matthew Howlett: Right. Exactly. Got you. Okay. And then moving towards -- I mean, just the portfolio, it's doubled basically in you're the only real vehicle out there that does these BBs. Talk a little bit about -- I mean, just 4 bps of losses, I mean, it's just so low. I mean, it's just incredible. It's like almost like why aren't more people doing this, but you guys have the efficiency in this vehicle, your cost of capital is going lower, you get more efficient as you grow. Tom, what is the right kind of yield requirement? If I can kind of ask you to put your equity analyst cap on me, what should this vehicle be compared to? Maybe I'll ask you that out there and other kind of risk type vehicles because it just doesn't seem like you're exposed too much losses in these BBs.

A: Thomas Majewski: Certainly, the historic data that you cite is spot on. The -- I just pulled up on Bloomberg right here, the distribution rate kind of pencils out to a high 14s yield right now, which, in our opinion, certainly is way cheap compared to private credit is probably the closest comp. And there -- I don't know what you have a view on a generic dividend yield right now. I'm just pulling up. BDC. 9%, give or take, 10%. The thing that's forgotten and while many private credit managers are pretty darn good at what they do, there's always going to be a few problems. There's always a handful of names on non-accrual. We have nothing in our BB book that's nonaccrual -- that just that concept doesn't exist coupled with our capital structure is really quite attractive as well. I mean, we still have some 5% paper outstanding sadly, that matures in 2026, but -- but we've got a very attractive letter -- right side of our balance sheet as well. And then frankly, the fee structure in EIC is far more favorable than a typical BDC. And when you think about the fees charge on many of the large public BDCs, we're making investments here in higher-yielding assets with lower instance of historic loss and charging less to do it. Yet there's still a very material difference between the distribution return -- distribution yield on EIC versus many of the BDCs, that's supposed to compress. One of the things we're really pleased with, with the company has been the increase in volume. I mean we talked about that, I think it roughly tripled on a year-over-year basis. So just getting the company a little more to scale as it's grown. Volume begets volume, we want our stockholders to have a liquid stock that they can hopefully buy more themselves, but actively trade no matter what. And we've got to keep getting this message out about the resilience of the underlying asset class, the high cash flows that it generates. And in our opinion, the premium distribution yield on our stock versus BDCs is supposed to compress. It takes time to do it. ECC has been in the market for a decade. We're slowly getting there. This one obviously has a head start because people knew us to begin with, in our opinion, the distribution opportunity that you get for buying a EIC is mispriced in the investors' favor.

Q: Matthew Howlett: Yes, I think it's one of the most overlooked yield vehicles out there, like it's re-rated a little bit, but I mean it's got a long ways to go, and you guys are doing a great job. And on just like the asset class itself, I mean it's only 4% to 6% of a typical CLO, but it's big enough. I mean, it big enough, you could still double, triple the size of EIC. It's big enough for you guys to grow out.

A: Thomas Majewski: Yes. And just -- yes, is the short answer. To throw some generic numbers, if you think of the U.S. CLO market as about a $1 trillion market, the BB class is about 4%. So that's about $40 billion. Our assets are about $400 million, give or take. So we're 1% of the market in this vehicle. Now at Eagle Point, we do manage other accounts and vehicles that have CLO BB. So collectively, we own in the billions of dollars of CLO BBs, this is not our only vehicle that invested in the strategy. Against that, what makes it stay so attractive, in my opinion, you think of the vastness of like the corporate BB market, where you buy high-yield bonds, BBs in the hundreds of billions of dollars for the average kind of rating-sensitive insurance company or something like that, who might want to buy. This is just too small of a market to get that excited about. On the investment grade side, the tranches are bigger and bigger and they can put bigger sums of money to work. But if you're running a general account with $100 billion, $500 billion like some of the large life companies have, they're very active in the single A and AA part of their capital structure in CLOs. And while they buy lots of BB-rated bonds on their balance sheet as well, I'm sure just getting involved in the $40 billion market just is too small of a piece of the opportunity for their pie chart. So for EIC, we see a lot of room for growth in terms of the investment opportunity set is tremendous. And because of that structural imbalance of it while it's an important part of a big $1 trillion market financing a roughly $1.4 trillion leverage loan market in the United States. This little slug is only $40 billion which then gets overlooked by a lot of large institutional investors. Not due to the quality just due to the scale of the opportunity. And again, if you're running a large life insurance company，that's just too small of a market to get involved in, for EIC as we're long way about capacity in terms of the market.

Q: Matthew Howlett: And needless to say, we can over the math. But as you grow, there's going to be some operating leverage at the company and your cost of capital just keep -- it's going -- it's ticking down. The stock is shaking a little bit more above NAV or your bonds are above par a little bit. I mean this is all positive stuff going forward. Am I thinking about it the right way?

A: Thomas Majewski: We agree completely.