Eagle Point Income Company Inc. Q1 FY2025 earnings call

• NII decline in Q1 2025 was driven by SOFR drop and spread compression in syndicated loans.
• The company opportunistically deployed capital into discounted double B CLO debt during market volatility, with strong liquidity allowing this.
• Raised approximately $64 million of common stock via at-the-market program and $14 million of preferred stock.
• Dan Ko discussed investing in CLO debt and equity during volatility, CLO BB performance, loan market trends (e.g., S&P UBS Leveraged Loan Index performance, prepayments), and portfolio activity like refinances and resets.
• Lena Umnova walked through financial results, including GAAP net loss, distributions, leverage ratio, and NAV details.

In the first quarter of 2025, the company generated net investment income and realized gains of $0.44 per share, consisting of $0.40 of net investment income and $0.04 of realized capital gains. This was down from $0.54 per share in the fourth quarter of 2024. Recurring cash flows for the first quarter were $16.5 million or $0.71 per share. The company's NAV per share stood at $14.16 as of March 31st, compared to $14.99 at year-end. The portfolio includes CLO debt and equity, with deployments of gross capital into these segments during the quarter.

• Declared three monthly distributions of $0.13 per share for the third quarter.
• Believes the recent market volatility provides buying opportunities for CLO debt and equity, and the company is well-positioned to generate strong returns for shareholders in the future.
• Distribution rate reflects current earnings potential in the lower interest rate environment, with potential for higher earnings if SOFR increases.

• SOFR fluctuations can impact the company's earnings as CLO debt coupons are linked to SOFR.
• Spread compression in the CLO equity portfolio was a past headwind, though largely behind.
• Market volatility can cause NAV fluctuations, but management views drawdowns as short-term price fluctuations.

Q: Hey. Good morning. Good morning again. So I just wanted to ask a quick one about the reduction in the dividend distribution. And I guess in light of the recurring cash flows continuing to be kind of adequate to cover the prior $0.60 per quarter versus $0.39 now. And is it a stated policy that, you know, kind of the core earnings need to cover it? Is we think of the cash flows as kind of coming down commensurate with where we're modeling the core earnings. Just still want to understand that dynamic a little bit better.

A: Hey, Randy. Good morning again. Let me just this is Tom addressed that kind of high-level thought. Indeed, the cash has been covering stuff with no problem. The recurring cash flow. The vast majority of that's driven somewhat by the nuances that we have a little bit of CLO equity in the portfolio about a quarter give or take. The vast majority of the portfolio is CLO double B's, which does fluctuate kind of directly in line with SOFR. So back when we went public in 2019, oddly, our distribution rate, I look back as roughly as a quarter penny less than the original distribution rate in 2019. What we said was as rates move up and down, the distribution rate on EIC is gonna move around. Yep. If we were all CLO debt, let's just take it to the extreme, and rates moved down a hundred basis points, it's just we'd be in a shortfall situation. So here we have the benefit of the CLO equity generating some excess cash for us, which has let us be on the offense. But in general, you should expect the I think we've largely communicated that the NII to move around as rates move up. Rates move up a hundred bips tomorrow, short-term rates three-month rates move a hundred bips tomorrow, you know, we'll proverbially open champagne. If they drop another hundred basis points tomorrow, it would be, you know, an unfortunate day for the company, but our securities just float up and down with rates. So that's the broad thought. So what we said here is let's if we're not of the view, rates are gonna go down a hundred basis points anytime soon. They may. Stranger things have happened. We think this is reflective, however, of the company's, you know, near to medium-term earnings power. We were able to kind of bridge it a little bit with all the gains we are realizing. That kind of helps some of it. We have about $0.12 of gains, I think, over the last two quarters. So that's you know, that's a nontrivial amount of collection. But where we look on a run rate basis, this kind of feels about in line. Well, it could be a little higher or lower, but it feels in line with where the GAAP earnings the company will be. As we talked about on the last call, there is a little bit of variability of taxable. And taxable income from CLO debt is very straightforward. It's what's your coupon, you know, plus a little amortization of the discount if you bought it at a discount. But the vast majority of the income is coupon-driven, so it's much less complicated than CLO debt. From a tax perspective. That said, having about a quarter of the portfolio in CLO equity, introduce one quarter of the tax uncertainty that we talked about on the ECC call earlier. So there could be some vagaries of taxable income moving up and down related to that portion of the portfolio. If we had a tax a bunch more taxable income than the distribution covered, we'd have spillover, but we could tackle handling that. Next year. I'm not necessarily predicting that, but as we thought about those variables, that was one thing we did think about. Generically, with this distribution, to the extent rates short-term rates were to go down a bunch more, you'd expect the earnings power of the company to go down at the same time short-term rate move up a bunch. You'd expect our earning power to go back up.

Q: Hello again, Tom. Just to clarify something that I think is obvious to a lot of people, but maybe not to every one of your retail investors. So I'll just ask it. We think of CLOs in general as being kind of bets on default rates, on credit loss over time. And, you know, the lower the default rate, the lower the credit loss after principal repayments and everything, you know, the safer you are. When you move up in the balance sheet to the double B's and, you know, the other debt, nothing that's happened to your dividend reflects any kind of capital losses at all. You're I mean, with equity is doing as well as it is and default rates as low as they are, there's no no threat on the horizon to say EIC's principle of CLO's its own. It owns this drop in dividend rate is solely due to just interest rate movements. Right?

A: --- Indeed, the change in the distribution rate is related to the change in principally driven by the change in SOFR. Short-term rates have come down a hundred plus basis points, give or take, over the last year, less little less than a year. And this reflects that. The long-term default rate on CLO, double B securities over the last thirty years is about four basis points per annum. And we feel very confident in every CLO double B security in our portfolio. This is not a credit-related move on our part. Whatsoever. Purely when rates go down, these bonds earn less because they're floating rate bonds. And when rates go up, they earn more.