Tom Majewski; Chairman & CEO; Eagle Point Income Company Inc.
Dan Ko; Senior Principal & Portfolio Manager; Eagle Point Income Company Inc.
Lena Umnova; CAO; Eagle Capital Income Company Inc.
Presentation
Operator
Good morning and welcome, everyone, to Eagle Point Income Company's third-quarter earnings call. I will now turn the call over to Peter Sceusa at ICR.
Peter Sceusa
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 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 2023 financial statements and our third-quarter investor presentation with the Securities and Exchange Commission. Financial statements in our third-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 & Events link. I would now like to introduce Tom Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company.
Tom Majewski
Thank you, Peter, 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 eaglepointincome.com, which I will refer to in a portion of my remarks. The company continued its strong momentum from the first half of the year as it generated another quarter-over-quarter increase in portfolio cash flows. Our portfolio is doing what we designed it to do in a rising rate environment, generate more cash for our investors. Given our continued confidence in the portfolio, we were pleased last week to again increase our regular common distribution for monthly distribution and beginning in January 2024. This time, we increased our monthly distribution by 11% to $0.20 per share per month. This is the highest monthly common distribution per share in our history. To share a few highlights from the quarter, net investment income was $0.51 per share, which is excluding $0.13 per share of nonrecurring expenses. Our recurring cash flows were $7.1 million or $0.76 per share, comfortably in excess of our regular common distributions and operating expenses excluding nonrecurring items. We paid three monthly common distributions of $0.16 per share during the third quarter and are paying three monthly common distributions of $0.18 per share in the fourth quarter. And as I just noticed, we declared another increase in our monthly common distributions to $0.20 per common share for the first quarter beginning in January. Our NAV as of September 30 was $14.08 per share, and this is an increase of 8% from June 30. Our NAV came down a bit in October due to spread widening in the market, and the $13.65 midpoint of our NAV range as of October 31 reflects approximately a 3% decrease from our September 30 figure, but still significantly ahead of where it stood on June 30. We further strengthened our capital position with our 7.75% Series B term preferred stock offering that we completed in July. We raised $31.2 million of additional capital from this offering and have been deploying the proceeds into new CLO junior debt and equity investments. We believe this deployed capital will further help increase our net investment income. We also opportunistically raised capital through our at-the-market program issuing nearly 1 million common shares at a premium to NAV generating NAV accretion of about $0.02 per share during the quarter. We also raised about 15,000 shares of additional Series B term preferred stock. Together, these sales generated about 14 million of net proceeds to the company. As of October 31, we have over $17 million of cash and revolver borrowing capacity available to us. This is ample dry powder with which to invest as we further expand our portfolio. As is evident, our portfolio continues to benefit from the floating rate nature of CLOs, given that 100% of the CLO debt investments in our portfolio are floating rate. All of our CLO BB coupons are in the double digits, and some CLO BBs have the potential to yield north of 20% in an early call scenario. As long-term focused investors, we seek to construct our portfolio to manage through periods of dislocation and our consistently strong performance with respect to cash flow and income is validation that we're executing on that playbook. We remain excited for our portfolio's potential as we head into 2024. 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.
Dan Ko
Thank you, Tom. We continue to be excited about the investment opportunities within the CLO market, in particular, the junior debt and equity portions of the capital structure. EIC has been able to successfully capitalize on the elevated rate environment due to the floating rate nature of our underlying portfolio. During the quarter, we fully deployed the proceeds from our ATM issuance and EICB preferred offering. and in total, deployed nearly $51 million in gross capital into attractive CLO junior debt and CLO equity purchases. The weighted average effective yield of the CLO purchases during the quarter was a robust 15%. We continue to see attractive return profiles in the secondary market. Our CLO collateral managers continue to be able to build par through relative value credit selection or by reinvesting prepayments into discounted loans. Loan issuers remain proactive in seeking to push out their near-term loan maturities in order to extend the runway on their financing despite the lower spreads they have locked in currently. As a result, many loan issuers are offering lenders higher spreads along with OID, which ultimately benefits CLOs through power bill and Nexus spread. The Credit Suisse Leveraged Loan Index continued its momentum from the first half of the year and is up 10% year to date as of September 30, 2023. And thanks to the loan market rallying this year at JPM CLO BB index is up 16% year to date as of September 30, and the company's GAAP ROE is up nearly 20% year to date as of September 30 as well. In the CLO market, we saw $28 billion of new CLO issuance in the third quarter of 2023 as the market remains on pace to once again eclipsed $100 billion mark. As in the first half of the year, we believe a significant portion of the volume was backed by captive CLO funds, which are generally far less return sensitive. CLO refinancing and reset activity has picked up slightly for some specific second-half 2022 vintage CLOs with one-year non-call periods, but otherwise remains basically shut. There were a total of five syndicated loan defaults in the third quarter, down from 15 in the prior quarter. In fact, there were no defaults in the month of September. Again, evidence of the resilience of senior secured loans and thus CLOs, despite various macro concerns. As a result, the trailing 12- month default rate declined to 1.3% as of September 30, well below historical averages. We continue to believe our portfolio is well-positioned for environments like these, 100% of our portfolio of CLO debt and CLO equities paying current distributions. As we've consistently noted, CLO BB debt has withstood multiple economic downturns in the past, experiencing very low long-term default rates. We believe it will take a significant amount of loan defaults well above the historical average, coupled with limited-loan price volatility for EIC to be materially impacted by a default wave. Our past performance is obviously not guarantee of future results, we believe the performance of our portfolio over the past few years has demonstrated the resilience of the company's investment strategy. Entering the tail end of the year, we remain in a very strong position with material dry powder to deploy into new investments via cash and our revolver capacity. We will continue to be opportunistic and will act where we believe we can achieve compelling risk adjusted returns for the company's portfolio. With that, I will now turn the call over to our advisers, Chief Accounting Officer. Lena Umnova.
Lena Umnova
Thank you, Dan. For the third quarter, the company recorded net investment income, or NII, of $3.5 million or $0.38 per share compared to NII of $0.49 per share recorded for the second quarter of 2023 and NII of $0.40 per share for the third quarter of 2022. NII for the quarter is net of $0.14 per share of nonrecurring expenses related to the issuance of the company's 7.75% Series B term preferred stock, partially offset by a cent per share excise tax refund. Excluding these nonrecurring items, NII would have been $0.51 per share above our distribution level for the quarter. When unrealized portfolio appreciation is included, the company recorded GAAP net income of $14.1 million or $1.51 per share. The company's third-quarter net income was comprised of total investment income of $7.0 million, net unrealized depreciation of investments of $9.8 million, and unrealized depreciation on certain liabilities held at fair value of $0.7 million, partially offset by financing costs and operating expenses of $3.4 million. Additionally, for the third quarter, the company recorded other comprehensive income of $0.4 million, representing the change in fair value of the company's financial liabilities attributed to instrument-specific credit risk. During the third quarter, we paid three monthly distributions of $0.16 per share declared additional market distributions of $0.18 per share to December year end. And last week, we declared another 11% increase in monthly common distribution to $0.20 per share beginning in January 2024 through March 2024. As of September month end, the company had outstanding borrowings from the revolving credit facility and preferred equity, which totaled 35% of total assets, less current liabilities at the upper end of our long-term target leverage ratio range of 25% to 35%, at which we expect to operate the company under normal market conditions. This ratio moved higher with the EICB issuance back in the summer, and we have been seeking to lower this level by issuing common stock through our ATM program. The company's asset coverage ratios at the quarter end for preferred stock and debt calculated in accordance with the Investment Company Act requirements were 282% and 5,146%, respectively. This measures is comfortably above the minimum requirements of 200% and 300%. As of September month end, the company's net asset value was $140 million or $14.08 per share, an 8% increase from June month end of 2023. Moving on to our portfolio activity in the fourth quarter through October month end, the company received recurring cash on its investment portfolio of $8.6 million. Note that some of the company's investments are expected to make payments later in the quarter. As of October month end, net of pending investment transactions, the company had over $70 million of cash and revolver capacity available for investments. Management and audited estimate of the company's NAV as of October 31 was between $13.60 and $13.70 per share. I will now turn the call back over to Tom.
Tom Majewski
Great. Thank you, Lena. EIC has had a banner 2023 so far, and the elevated rate environment has continued to help us grow and maintain net investment income at a high level. In our view, loans and CLOs continue to be two of the most resilient risk asset classes out there attributable to the senior secured nature of loans and their floating rate structure. Our investment portfolio, as well as the right side of our balance sheet, were intentionally designed for markets like these. And indeed, both are clearly benefiting our shareholders through our ability to continue increasing our cash distributions. The three key attributes why we remain excited to be managing a BB-rated CLO debt-focused fund ring today as true as ever, the potential for low credit expense as reflected by the low default rates of BB-rated CLO debt over the past 20 years, the potential for high returns compared to similarly rated corporate securities, the benefits of floating rate BB-rated CLO debt offer in markets with high interest rates. Along with the locked-in nature of CLO financing that is longer than its assets, we remain confident that EIC is well-positioned to continue generating compelling risk-adjusted returns for our 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?
Question and Answer Session
Operator
(Operator Instructions) And there are no questions at this time. Therefore, I will now turn the call back over to Tom Majewski for closing remarks.
Tom Majewski
Great. Thank you very much, everyone, for joining the call. Dan, Lena, and I appreciate your time and attention. We're available later today should anyone have any follow-up questions? Thank you.
Operator
And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.