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Greetings. Welcome to Eagle Point Income Company's Second Quarter 2025 Financial Results Conference Call. Please note, this conference is being recorded. I'll now turn the conference over to Darren Daugherty with Prosek Partners. Thank you. You may begin.
Thank you, operator, and good morning. Welcome to Eagle Point Income Company's Earnings Conference Call for the Second Quarter of 2025. Speaking on the call today are Thomas Majewski, Chairman and Chief Executive Officer of the company; Dan Ko, Senior Principal and Portfolio Manager for the company's Adviser; and Lena Umnova, Chief Accounting Officer for the Adviser. Before we begin, I would like 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 such projections. 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 or projection of financial information made during this call is based on the 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. Earlier today, we filed our Second Quarter 2025 Financial Statements and Investor Presentation with the Securities and Exchange Commission. These are also available in the Investor Relations section of the company's website, eaglepointincome.com. A replay of this call will also be made available later today. I will now turn the call over to Thomas Majewski, Chairman and Chief Executive Officer of Eagle Point Income Company. Tom?
Thank you, Darren. Good morning, everyone, and thank you for joining us on the call today. Our portfolio delivered solid performance in the second quarter of 2025, generating strong cash flow from investments and investment income amid the rapidly shifting market landscape. The quarter started with heightened concerns related to global trade and its impact on economic growth. However, as market concerns subsided, the stock market led a broad rebound across asset classes. The CLO market, which tends to lag other asset classes, showed a gradual recovery as well, reflecting in increased reset and refinancing activity. During the second quarter, EIC generated net investment income and realized gains of $0.39 per share. This was comprised of $0.37 of net investment income and $0.02 of realized capital gains. The company received recurring cash flows of $18 million or $0.67 per share during the quarter.
This compares to cash flows of $16 million or $0.71 per share in the first quarter. Recurring cash flows were less than our regular common distributions and total expenses as a result of the lower SOFR rates on our CLO debt portfolio, combined with some lower recurring CLO equity cash flows as a result of spread compression. That said, we expect third quarter cash flows to be roughly in line with that quarter's distributions and expenses. Our NAV as of June 30 was $14.08 a share, and this is slightly below March 31 NAV of $14.16 per share. While market volatility in April impacted CLO prices broadly, our portfolio has seen a recovery in our NAV from the April lows. And for the second quarter, the company generated a non-annualized GAAP return of 3.5%. The volatility we experienced in the latter part of the first quarter continued into April creating attractive buying opportunities for discounted CLO debt and equity securities.
During the quarter, we were able to opportunistically deploy $40 million into attractive investments, taking advantage of market-wide price dislocation. Notably, for BB-rated CLO debt, we were able to buy some securities at prices we hadn't seen since the first half of 2024. When we can purchase CLO debt at a discount, this provides the potential for convexity or pull to par as markets recover and normalize. Our strong liquidity position allowed us to remain on the offensive during the period of volatility in the second quarter. We expect these purchases to help us create realized gains in the future, similar to how our previously discounted purchases from 2023 and 2024 contributed to realized gains that we've generated in more recent quarters. Earlier in the quarter, we strengthened our balance sheet through our at-the-market program, raising about $20 million of common stock at a premium to NAV.
This generated NAV accretion of about $0.01 per share. We also raised about $11 million of preferred capital during the quarter via our ATM program. In late May, however, our stock price dropped, and we quickly announced a $50 million share repurchase program. Our stock was trading at a high single-digit discount to NAV, and we aggressively began buying back our stock. The stock closed on June 6 at an 8.4% discount to the May 31 NAV. And in part, due to our buyback program, it ended the quarter at only a 2.9% discount. In total, we repurchased $6.5 million of common stock at an average discount to NAV of 6.4%. This helped generate $0.02 of NAV accretion during the quarter. Due to regulations, we're limited to the volume we can buy on any given day, and we would have bought more if we could. Today, we declared 3 monthly distributions of $0.13 per share for the fourth quarter, maintaining the distribution level we established in the previous quarter.
We completed 2 resets of our CLO equity positions in the quarter. These actions lower debt costs within the CLOs and extended the CLO's reinvestment period, which continued to enhance our portfolio's weighted average remaining reinvestment period and our long-term earning power.
Thank you, Tom. We continue to find attractive investment opportunities across the CLO market in both junior CLO debt and CLO equity. The market volatility that began in the latter part of the first quarter and continued into April created significant buying opportunities for EIC. We capitalized on the market disruption by buying BB-rated CLO debt and equity at discounted levels. The S&P UBS Leveraged Loan Index experienced volatility during the second quarter, with the April decline being offset by recovery through May and June. During the second quarter, the loan index had a total return of 2.3% and is up almost 3% year-to-date as of June 30. The index continued to perform well through July and is up 3.8% as of July 31. The recovery in loan prices from the April lows has been encouraging, although CLO debt and equity have not yet fully participated in this recovery, presenting continued upside potential for EIC.
The trailing 12-month default rate increased to 1.1% as of June 30, remaining well below the historical average of 2.6%. The quarter included a notable default by Altice, representing approximately 38 basis points of the CLO market, though the event was largely anticipated by market participants. EIC's portfolio default exposure as of June 30 stood at 41 basis points. Our portfolio is well positioned, even if defaults were to rise in the future. During the second quarter, approximately 3.3% of leveraged loans or roughly 13% annualized were prepaid at par. Many loan issuers continue to be proactive in tackling their near-term maturities and the maturity wall of the market continues to get pushed out further. In terms of CLO new issuance, we saw a $51 billion issued during the second quarter with most of the activity concentrated in the second half of the quarter as markets stabilized. Reset and refinancing activity for the second quarter was $44 billion and $9 billion, respectively.
Our CLO debt portfolio benefits from its floating rate nature, although the impact of lower benchmark rates since last year has lowered our earnings. I'd like to note that the CLO equity exposure in the company's portfolio provides some insulation from rate movements and benefits from the reinvestment optionality during periods of market stress. As of June 30, we had over $20 million of cash and undrawn revolver capacity available for investment and common stock repurchases, providing ample liquidity to capitalize on opportunities. We believe the recent market volatility has created attractive entry points, and we remain well positioned to deploy capital into investments that offer compelling risk-adjusted returns for our shareholders in the long run. 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 second quarter of 2025, the company recorded net investment income and realized gains of $10 million or $0.39 per share. This compares to NII and realized gains of $0.44 per share recorded for both the first quarter of 2025 and the second quarter of 2024. When unrealized portfolio gains are included, the company recorded GAAP net income of $13 million or $0.49 per share. The company's second quarter net income was comprised of investment income of $15 million, realized gains of $0.5 million and unrealized gains on investments of $4 million, partially offset by unrealized losses on certain liabilities recorded at fair value of $1 million and financing and operating expenses of $6 million. Additionally, other comprehensive income was less than $0.5 million for the second quarter. During the second quarter, we paid 3 monthly distributions of $0.20 per share. Earlier today, we declared 3 monthly distributions of $0.13 per share for the fourth quarter of 2025, in line with the level of distributions previously declared for the third quarter.
As of June month end, the company had outstanding preferred equity securities and borrowings from our credit facility, which totaled 31% of total assets less current liabilities. This 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 the quarter end for preferred stock and debt calculated in accordance with Investment Company Act requirements were 325% and over 6,300%, respectively. These measures are well above the statutory requirements of 200% and 300% for preferred stock and debt. As of June month end, the company's NAV was $373 million or $14.08 per share, a slight decrease compared to $14.16 per share as of March month end. During the second quarter, we repurchased over 488,000 shares of our common stock on the share repurchase program for total proceeds of $6.5 million.
The shares were repurchased at the average discount to NAV of 6.4% per share, resulting in a NAV accretion of $0.02 per share. We would like to highlight that all repurchased shares were retired. Moving on to portfolio activity during the month of July, the company received recurring cash flows on its investment portfolio of $17 million. Note that some of the company's investments are still expected to make payments later in the quarter. As of July month end, net of pending investment transactions and settlements, the company had $51 million of cash and revolver capacity available for investment and other purposes. Management's unaudited estimate of the company's NAV as of July month end was between $14.34 per share and $14.44 per share. This is an increase from June's month end and above where we stood on March 31 NAV. I will now turn the call back over to Tom to provide closing remarks before we open the call up for questions.
Thank you, Lena. The second quarter demonstrated our proactive approach to investing and managing the company. While the market volatility in April created short-term pressure on NAV, it largely recovered by the end of the quarter and as of July is above where we stood at the end of March. Volatility provides us with attractive investment opportunities allowing us to buy securities at discounted prices that we hadn't seen in some time. While we are disappointed with our share price move in May, it also presented the opportunity for us to buy back stock cheaply. We are generally limited to a percentage of the daily volume, so we can't buy as much as I'd like, but I know this is one of the best investments we can make. We plan to continue buying back our stock as market opportunities present themselves. The recent market volatility reinforced our views that periods of dislocation can create opportunities for patient well-capitalized investors like EIC.
We believe our strong liquidity position and experienced team allow us to capitalize on these opportunities while maintaining focus on generating attractive long-term risk-adjusted returns for our shareholders. We remain confident that EIC is well positioned to continue generating strong returns, and we appreciate your continued support. We'd like to thank you for your time and interest in Eagle Point Income Company. Lena, Dan, and I will now open the call to your questions.
分析師問答
The first question comes from Randy Binner with B. Riley.
Yes, I believe that was addressed thoroughly. The results were stable, perhaps even more so than some of the equity-focused companies. Regarding the net interest income and overall yield, has there been any additional discussion on how we should interpret the all-in yield from the debt segment of your CLO portfolio? I am particularly interested in the Fed's influence and how a potential drop in rates or a widening of spreads might impact that all-in yield into the latter half of this year and into next year.
Sure. Let me explain and perhaps Dan will add a few more points. CLO equity is significantly less sensitive to interest rate changes compared to typical fixed income investments, while CLO debt, which involves receiving interest and principal back at maturity based on rates usually tied to SOFR, does fluctuate with short-term rates. CLOs generally adjust their rates around the 10th day of each quarter, give or take a few days. If the Federal Reserve were to take action in September, we would likely see lower SOFR rates in October following the bond resets. Thus, a change in Fed rates in September could lead to slightly reduced income at EIC in the fall. However, the CLO equity portion of the portfolio is unlikely to be meaningfully impacted by any rate changes. Regarding your question about the possibility of spread widening in CLO BBs if rates were cut, that’s possible but not guaranteed. At some point, there are levels of returns that investors look for when considering CLO BBs. Lower rates, all else being equal, may not necessarily lead to tighter spreads and could result in widening instead. Dan, what do you think about the implications we’ve seen as rates have fluctuated?
Yes. Historically, we've seen kind of CLO BBs in kind of normal course markets hovering in the kind of high single-digit yields. So if spreads were to come in, it's possible that spreads kind of widen and we haven't historically seen CLO BBs least kind of in the 2.0 era inside of, let's say, a 7% yield for very long and probably closer to kind of 8%, maybe 9-ish percent sort of yields. So while obviously, these are floating rate instruments, I guess there is a kind of a relative value versus kind of high-yield bonds where a lot of people look at high-yield corporates or CLO BBs kind of yielding a higher amount than high-yield corporates. So you probably continue to see a higher yield for CLO BBs despite kind of rates going down, at least that's what we've experienced historically, but I guess who knows what happens in the future.
Okay. Great. That was helpful. I appreciate it.
To get straight to the point, a 0.25 point change is not significant if we see rates decrease by 100 basis points. That would become noteworthy in terms of its effect on earnings, and rates could also increase. It really works both ways in this situation, but you should consider this primarily as a floating rate portfolio.
Our next question is from the line of Christopher Nolan with Ladenburg Thalmann.
Dan had his market comments earlier indicated recovery in leveraged loan pricing from the UBS index. And then immediately afterwards, talked about pushing out of loan maturities. Wouldn't the push out of loan maturities sort of indicate some credit distress at the bank level?
No, not necessarily. These issuers are refinancing their debt due to a strong market, allowing them to extend the maturities by paying off old debt and gaining more time. We have observed a significant amount of refinancing activity, with all transactions being settled at par. This is not a restructuring situation, as the maturities are simply being extended. Holders have the option to take par and invest elsewhere, or they can choose to reinvest in the refinancing of the loan.
Okay. As a follow-up, I want to know where you stand on the risk assessment for EIC. Are you in a holding pattern regarding whether to take risks or play it safe? There seems to be a lot of conflicting information from the macroeconomic news.
Yes. No. I mean we think that CLO BBs as well as CLO equity behave as a resilient asset class and kind of performs through the cycles. So we're constantly kind of evaluating relative value between the 2 within our portfolio and are staying active in kind of trading the portfolio around. We have had, as noted kind of during the call that we've had several positions kind of being paid down at par because the CLOs are being refinanced and reset as well, which leads to kind of debt being paid off at par and so kind of looking to redeploy those proceeds to earn income.
Okay. So the read into that is really just opportunistically trying to add on to your positions.
Yes.
The next question is from the line of Erik Zwick with Lucid Capital Markets.
I jumped on a little bit late, so apologies if you address something that I asked here. But wondering if you could just kind of characterize your pipeline for new investments today? How that's shaping up at this point?
Yes. I mean we look at both on the CLO BB side, we're looking at both new issue and secondary, all things equal, we prefer seeing discount, and there are opportunities to kind of buy CLO BBs at a discount in the secondary market. And even in primary, we were able to kind of source that just given the size of our orders, we're able to kind of drive some OID and primary transactions as well. So looking across various different opportunities. There's again, it's relative value between secondary, between primary new issue, primary refis, primary resets and there's been a lot of activity in the first half of the year, it was about $100 billion of new issuance, a little more of refis and resets. And we've seen that kind of pace continue through July and into August. So plenty of opportunities and lots of things to look at. So the pipeline kind of remains strong. On CLO equity side, we've erred towards secondary, although primary can present some opportunities with some of our structuring and our ways that we can kind of originate transactions. But both the debt and equity side, we see as reasonably attractive in adding to our portfolio today.
And then just following up on Tom, your comments about the share buyback that you did in the quarter and kind of given the discount where the stock is trading relative to NAV now, potentially wanting to buyback more. Just curious, do you find it more beneficial from your seat to manage that program manually or with a program kind of put in place? And then kind of maybe a bit of a follow-up to that when I would assume then if the price action were to become more constructive and you're trading at a premium, again, you kind of flip the switch and potentially go back to issuing shares by the ATM.
Yes, that's a great question. We're about two months into our buyback program. When we initiated it, our stock was around an 8.5% discount. Through our buying efforts, we managed to bring that down to about a 2% or 3% discount. That's the goal of the program. Looking at it, if I can acquire shares at a 7% discount, it's difficult for Dan to find a quality investment at 93 right now. We might find quality investments at 99, but that's about it due to market availability. Overall, buying back our stock seems like the most cost-effective approach. As we approach low single digits NAV, we usually reduce our purchases slightly since we want to avoid exceeding NAV. If our stock were at 93% of NAV and CLO BBs were at 80, I'd likely choose to buy CLO BBs if that presented a better pricing opportunity. However, relative to other choices, repurchasing our stock remains the cheapest option. That being said, we have a limit of around 20% of the volume or trailing volume for these purchases.
There are guidelines in place that we have to follow, and we want to avoid deploying all our capital at once, as that could lead to challenges if someone decides to sell the next day. We do aim to come close to that limit on softer trading days. Concerning the ATM, we're fortunate to have ample capacity on our revolver, which we use comfortably given the scale of the company. Currently, our asset coverage ratio is quite high. The revolver is relatively small compared to the company's overall size, allowing us to adjust it without significantly impacting our leverage. Moving forward, I don't anticipate issuing stock even if we return to a premium; instead, we would likely utilize the revolver for investments when we see attractive opportunities. In the past, when the stock was at a premium, we often kept the revolver partially drawn while issuing stock through the ATM, using those proceeds to pay down the revolver and reinvest, rather than holding cash. If we hit a premium tomorrow, I believe we would continue making investments through the revolver for the foreseeable future.
The next question is from the line of Shalabh Mehrish with VinsonCap Advisors.
Just a couple of quick questions. The first one was on recurring cash flow. So I noticed that recurring cash flow is below distribution and operating costs in the quarter, but those were the old distributions of $0.20 and they're now $0.13. So is it fair to say that there's quite a bit of excess once you've taken operating costs and distributions into account. So there's some chance of a special distribution perhaps at the end of the year?
I appreciate your perspective. Regarding the specials, there are a few important points to consider. In the second quarter, recurring cash flow fell short of covering distributions and expenses. We adjusted the distribution rate starting in the third quarter. If we take last quarter's recurring cash flows and apply them to this quarter's expected recurring expenses and distributions, they are about equal. While we prefer it to exceed this amount, we are starting from an equal basis. We've also shared that the cash received so far this quarter is slightly less than last quarter, but it remains within a similar range. Most of the cash for this quarter is already in the bank, which is positive. To summarize, recurring cash flow was below distributions and expenses, which is not ideal, but it appears we're on track to align with those expectations this quarter based on the cash numbers disclosed.
Special dividends or distributions typically occur when taxable income exceeds the distributions we've made. There is also a concept where spillover income from one tax year can be applied to the previous year’s distributions. The calculation of taxable income for CLO debt is straightforward, but equity taxable income can vary significantly. In our similar entity, ECC, there have been times when much of the distributions were classified as a return of capital because the CLOs did not generate much income for equity holders, despite substantial cash payments. There have also been years when CLOs reported more taxable income than cash received. For instance, if a lot of loans were purchased at low prices during COVID in 2020 and then paid off at par in 2021, the realized gains would count as taxable income without the corresponding cash flow. ECC previously had a special program that concluded last year.
In our situation, we have a balance of approximately 70% debt and 30% equity. The debt component is easier to manage, while predicting the equity component is more challenging. Even with a precise model today, any sudden gain or loss recognized by a CLO collateral manager on the last day of the tax year can disrupt our projections. Currently, our analysis indicates that the company's recurring cash flows are aligned with operational expenses and distributions, which is encouraging. If taxable income significantly surpasses our distributions, which is uncertain at this point and will depend on developments towards year-end, we will consider the necessary actions. While it doesn’t seem very likely right now, there are still five months left in the year, and many factors could influence the situation.
Okay. That's very helpful. My second question is about the coupon on the BB CLO debt that you report in your monthly updates. I noticed that from June to July, or even from May to June, the coupon didn't change significantly. In fact, it increased from May to June and remained stable since March. Is this due to the tightening of spreads and the refinancing of deals, or are you finding more attractive opportunities in the secondary market, as you mentioned?
The question is about why our CLO debt coupon has remained relatively stable. While the market is tightening overall, the spreads have not shifted much in the past few months. The yield or coupon on CLO BBs has not changed significantly either.
Yes, SOFR has actually increased slightly. As rates have reset, we've observed coupons go up a bit, and spreads have become somewhat wider since the end of Q2. There are various opportunities with new issue pricing in the high 400s to low 500s spreads for Tier 1 resets, specifically for Tier 1 collateral managers. Some clean resets are pricing in the low to mid-500s, while even the more distressed resets are pricing above 600 for Tier 1 collateral managers. There's a wide variety, and our goal is to find the right mix of different profiles within the portfolio. There are still opportunities at the wider levels for some more distressed Tier 1 sales of BBs.
Got it. That's very helpful. And finally, my last question was on the OC cushion. So I noticed the OC cushion, actually, this is really going from June to July. So it's not as relevant to the quarter end numbers. But going from June to July, the OC cushion declined by about 28 basis points. Is that because the rating agencies, especially Moody's, has been very aggressive with the CCC downgrades?
Not really. We haven't seen the CCCs increase. In July, we actually had more upgrades than downgrades for that month. If anything, I believe it's related to a credit called Altice, which was included in many CLO portfolios, with around 38 basis points of market exposure. That credit went into default, and most people anticipated this default, as it was already priced as a loan undergoing default and restructuring. This was likely the main factor behind the situation. Despite that, there is ample cushion within the OC test, with an OC cushion of 460 basis points. To put this in perspective, to erode that cushion, you would need roughly 16.5% CCCs, considering you are allowed 7.5% CCCs and if we assume a $50 price on the CCCs, that translates to an additional 9.2% of CCCs before the OC cushion is affected. Another way to evaluate it is by examining what default rate would eliminate the cushion, assuming a 50% carrying value for the default, which still equates to about 9.2% of the portfolio.
Right. Okay. Appreciate it. And I guess, finally, I mean, you've already talked about this that the stock is trading at substantial discount to the latest reported NAV. I think it's like double digits now, maybe like 11% or 12% discount. So I guess it's still pretty attractive from a repurchase standpoint, right?
That's our opinion. I mentioned the term cheap in the prepared remarks. Looking at the share price and the midpoint of our net asset value, it appears to be around a little more than a 10% discount right now, possibly close to 12%. This is similar to the CLO BB market for quality BBs, which is around par. Essentially, it's like purchasing quality CLO BBs at 88. While we may not be 0.25 points smart, we are likely 12 points smart. Great. Lena, Dan, and I appreciate your interest in Eagle Point Income Company. We are going to be around today. If anyone else has follow-up questions, please feel free to reach out directly. Thank you for your time and interest.
Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Please disconnect your lines at this time, and have a wonderful day.