Eagle Point Income: 15% return on common stock, 8% on preferred stock (NYSE:EIC)

Introduction

Eagle Point Income (NYSE:EIC) is an investment company that focuses on CLO debt and as explained in a previous article, Steven Bavaria is an authority on this sector and I would highly recommend you re-read his October article 2022 which I think gives one of the best explanations of how you should look at CLO debt. I have a long position in EIC common stock, but I have a much larger position in the 2026 preferred stock (NYSE:EICA) where the yield to maturity is quite attractive given the additional layer of safety. I’m also looking to establish a long position in Eagle Income’s other preferred stocks, which all have a firm maturity date. This article follows up on previous coverage of Eagle Income, as my previous article discussed FY2023 results.

A strong one the net investment income result means that preferred dividends are very well covered

Unlike Eagle Point Income, which I discussed in another article a few weeks ago, the majority of Eagle Point Income’s portfolio consists of CLO debt. As you can see below, nearly 80% of Eagle Income’s portfolio consisted of BB-rated CLO Debt, and this obviously tops positions in CLO Equity. Of course, the risk/reward ratio takes this into account, as EIC reports an effective return of 11.9% for debt CLOs and nearly 17% for CLO Equity.

Since I hold a fairly large position in the preferred stock issued by Eagle Point Income, I will focus primarily on performance from a preferred investor perspective. That said, I also have a small long position in Eagle Point Income common equity, but my preferred stock position is about 20x larger and therefore more important in my decision making.

Reviewing Eagle Point Income’s financial results for the first half of this year, CEF reported total investment income of just over $20 million. As you can see below, total operating expenses were $7.6 million, resulting in a net investment income of $12.5 million.

There are two items I would like to draw your attention to. First, all “interest expense” is related to preferred equity. Because Eagle Income issued term preferred shares (with a firm maturity date), the term preferred shares are considered a liability and this also means that preferred dividend payments are seen as an “interest expense”. So, taking into account the investment income of $12.5 million, this already includes preferred dividends of $3.1 million based on the Q1 result.

This means that net investment income, excluding preferred dividends, was about $15.6 million, and that really means that CEF only needed about 20% of net investment income to cover preferred dividend payments. This is a good report. Note, however, that EIC issued the Series C preferred shares in the first half of the year, which means that the full impact of these preferred dividends will be felt in the second half of the year (but of course interest income should increase as well proceeds from the offering were put to work throughout the second quarter).

The impact will be noticeable, but not alarming. If we look at the Q2 results, we see a total investment income of almost $11 million and a net investment income of almost $6 million. Although this is lower than in the first quarter of this year, note that there was an additional fee expense of $1.1 million related to the newly issued preferred stock. So excluding the impact of those fees, net investment income would likely have increased by nearly 10% on a quarterly basis.

Meanwhile, adjusted for fee expenses, the preferred dividend payout ratio remains fine, with about 27% of net investment income needed to cover preferred dividend payments. Common stock currently yields about 15.4% as CEF pays a monthly dividend of $0.20, but I expect dividend payments to stagnate or even decline again as interest rates in the financial markets starts to decrease.

There are currently three series of term preferred shares outstanding, trading under the symbols (EICA), (EICB) and (EICC).

All preference shares yield roughly the same yield of 7.75%-8% and even EICA yields in the high 7% range given that it trades at a discount to parity.

As the EICA is the first series of preferred stock to mature (October 2026 to be exact), it offers the lowest risk due to “OLD That said, given that CEF rules require CEF to provide at least a 200% coverage ratio on preferred shares, I’m fairly confident that Eagle Point Income will be able to meet its commitments. As you can see below, at the end of June, the coverage rate stood at a very healthy 311%.

And as CEF continues to issue common stock (it issued 4.6 million shares for total proceeds of $71 million in the first half of the year), I expect the asset coverage ratio to remain very robust.

investment thesis

My focus on EICA is based purely on tax reasons, as my tax rate on capital gains is lower than on preferred dividend payments. This, of course, is a personal situation and will not be applicable to all investors. That said, as we get closer to EICA’s maturity date, I will (have to) start adding duration to my portfolio and I think EICC best meets my criteria. Preferred dividends are slightly higher than those offered by EICB, while the maturity date is further away.

I currently have a very large position in EICA and a small position in EIC common stock. I will probably add EICC to my portfolio, but that probably won’t happen in the next 72 hours.