Good morning. My name is Michele and I will be your conference operator today. At this time I would like to welcome everyone to the Eagle Point Credit Company Fourth Quarter and Year End 2018. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Garrett Edson.

Please go ahead..

Thank you, Michele and good morning. By now everyone should have access to our earnings announcement and investor presentation which was released prior to this call which may also be found on our website at eaglepointcreditcompany.com.

Before we begin our formal remarks, we need to remind everyone that the matters discussed in 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 or projected financial information 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 eaglepointcreditcompany.com. Earlier today, we filed our Form N-CSR our full year 2018 audited financial statements and our fourth quarter investor presentation with the Securities and Exchange Commission.

Financial statements and our fourth quarter investor presentation are also available on the company's website. Financial statements can be found by following the Financial Statements and Reports quick link on our website. Investor presentation can be found by following the Investor Presentation and Portfolio Information quick link.

I would now like to introduce Tom Majewski, Chief Executive Officer of Eagle Point Credit Company..

Great. Thank you. And welcome everyone to Eagle Point Credit Company's fourth quarter earnings call.

If you haven't done so already we invite you to download our investor presentation from our website which provides additional information about the company, including information about our portfolio on a line by line basis and underlying corporate loan obligors.

As we've done previously, I'll provide some high level commentary on the fourth quarter and we'll turn the call over to Ken who will walk us through the fourth quarter financials in more detail. I'll then return to talk about the macro environment, our strategy for the company, and provide updates on our recent activity.

And then as always we'll open the call to your questions. The fourth quarter delivered a market reminder of the potential for loan price volatility both in the price of loans as well as CLO securities and the potential for this to manifest itself quickly.

Importantly, we believe the price movement during the quarter in loans and CLO securities was principally driven by a technical factor not a fundamental issue with the loan market or any security in the company's portfolio.

Specifically, the technical factor that I made reference to was forced selling of loans, principally by retail loan mutual funds due to a surge in redemptions. During the quarter, these funds which control roughly 20% of the total loan market faced outflows of over $20 billion over a three month timeframe.

When these funds which typically offered daily liquidity to investors face large outflows, they are forced to sell and sell very quickly loans in their portfolios to fund their redemptions.

What we observed was that many of the highest quality and typically most liquid loans faced significant price pressure as these are often the easiest loans to sell in the short time needed by these mutual fund investors. Notably, despite the drop in loan prices, there were very few corporate defaults underlying this volatility.

Indeed of the over 1400 leveraged loan issuers tracked by S&P, only six actually defaulted during the fourth quarter.

As Eagle Point has always been a long term oriented investor in CLO equity, we were excited to see the short term price volatility as it provides us greater opportunities to invest and for our existing CLOs to reinvest prepayments they receive on their loans and for relative value trades to be made within our CLO loan portfolios.

However periods like what the market went through in the fourth quarter also keenly underscore an advantage offered by CLOs in such a volatile environment, they're locked in long term non mark-to-market financing.

The locked in financing of CLOs provides them with stability and allows many CLOs to profit by reinvesting principal proceeds and sale proceeds in their portfolios into additional loans typically at lower prices in the secondary market and/or with wider spreads.

In other words, we view our CLOs long term debt to actually be more in the money in volatile markets like those at the end of 2018. We believe that the CLOs financing was a more valuable asset at the end of the quarter versus the beginning.

While our NAV certainly was impacted in the quarter from the loan price dislocation, we've already recovered a significant amount of the December decline as of the end of January 2019. Many long term followers of Eagle Point will recognize that short term changes in NAV typically don't signal a drop in cash flow the way such moves could with a BDC.

Rather, we expect that short term drops in NAV may in some cases augur well for higher near term cash flows as our CLOs are able to reinvest in what quickly became a buyer's market for loans. We believe the company remains well positioned to generate long term value for stockholders, particularly in markets like these.

In terms of our portfolio in the fourth quarter, we continue to actively manage the portfolio in all facets.

During the quarter, we deployed approximately $58 million of gross capital into new investments and as in recent quarters, the new CLO equity we purchased had a higher weighted average effective yield than the overall weighted average yield in our portfolio.

We also continued to leverage our adviser's competitive strength and priced four resets during the quarter. For the fourth quarter, we generated net investment income and realized capital losses of $0.38 per common share and that's a $0.03 reduction from the prior quarter.

Looking at the components of this however net investment income actually increased by a penny on a quarter-over-quarter basis, but we had a small amount of losses realized principally associated with the final liquidations of four CLOs that had been called sometime ago. A quick reminder regarding our GAAP net investment income.

We remain mindful that we have been generating net investment income below our common distribution level and this is principally been driven by lower GAAP portfolio yields on our CLO equity.

However, when determining our common distribution in addition to GAAP yields we also evaluate the cash flow we receive from the investments in our portfolio and our estimates for taxable income during each fiscal year. Indeed to maintain our RIC status it, is taxable income that sets a floor on our common distribution.

2018 was another year of significant reset and refinancing activity at Eagle Point. While these actions bring a number of benefits that we have long discussed, they also allow a beneficial acceleration of certain deductions for tax purposes.

This acceleration relates to unamortized issuance cost and OID from the original CLO debt that was retired as part of these actions.

The significant amount of reset and refinancing activity during the year meant that a meaningful portion of our 2018 common stock distributions were treated as a return of capital for our shareholders and not as taxable income.

We estimate our ordinary taxable income would have been roughly $1 per share higher had we actually not completed any of these refis or resets during the year and that all of our 2018 common stock distributions would likely have been taxable to shareholders.

So an additional benefit of the refis and resets is that we were able to shelter some of the taxable income in 2018. This would have been reflected on your 1099-DIVs.

As we've already reset and refinanced now a majority of our portfolio and given the current softer debt markets, we expect the pace of resets and refis in 2019 to slow from the prior two years. As a result all else being equal, we expect cash flows from investments and taxable income to increase from 2018.

Based on current market conditions and assuming limited resets of CLOs, in which the company has invested, the company currently estimates its taxable income for the year ended November 2019, which is our current tax year to be approximately $2.40 per common share.

Based on this estimate, the company intends to maintain the $0.20 per common share monthly distribution for the current fiscal year.

As mentioned earlier, during the fourth quarter we deployed approximately $58 million of capital on a gross basis in both the primary and secondary markets and received $27.9 million in proceeds from the sale of investments.

We made four primary CLO equity purchases, five strategic CLO debt purchases and funded four existing and two new loan accumulation facilities. The new CLO equity investments that we made had a weighted average effective yield of 14.75% at the time of investment once again well above the weighted average effective yield of our overall portfolio.

This continues to demonstrate our ability to source accretive investments through our adviser's investment process and access to the markets.

On the monetization side, we sold $3.7 million of CLO equity where we saw unique selling opportunities as well as $18.2 million of CLO debt securities as we are generally seeking to lower our holdings of CLO debt tranches over time.

However, our modest losses associated with the finalization of several called CLOs more than offset any gain and led us to recognize a $0.03 per common share realized loss in the quarter. Despite the loss in the quarter, we were pleased that we had realized net gains on our investments in eight of the last 11 quarters.

The net gain realization across these 11 quarters total $0.35 per share. The four resets that we priced, during the quarter brought the total number of resets and refinancings that the company has been involved in since the beginning of 2017 through the end of 2018 to 27 and 28, respectively.

That's a grand total of 55 different actions that were taken. As in prior quarters, the resets completed and created new reinvestment periods of up to five years for those CLOs and typically reduced those CLOs' weighted average cost of debt.

The value of our adviser's investment process and its resetting activity can clearly be seen in the extension of our weighted average remaining reinvestment period. Thanks to significant reset activity and other portfolio management undertakings during the year.

At the end of 2018, the weighted average reinvestment period of our CLO equity portfolio was 3.41 years. This is an increase from 2.81 years at the end of 2017. Had our portfolio been static, our weighted average remaining reinvestment period would have decreased by approximately a year. Instead, it increased by more than half a year.

Extending our portfolios reinvestment period is a very important of the Eagle Point portfolio management strategy. As of December 2018, the weighted average effective yield on our CLO equity portfolio was 13.3%. That compares to 13.99% last quarter and 14.42% as of prior year end.

As noted previously, the weighted average effective yields include an allowance for future credit losses. A summary of the investment-by-investment, changes and expected yields are included in our quarterly investor presentation.

In January and so far through February 14, we've deployed $21.1 million of gross capital and received $16.7 million in proceeds from sales of investments. We've converted one of our loan accumulation facilities into a new CLO. We remain opportunistic in resetting existing investments and active in pursuing new primary and secondary investments.

Overall, despite the loan price volatility at the end of the year, given the minimum number -- minimal number of defaults we've seen in the market and continued favorable economic performance in the United States, we remain quite favorable on the overall market and our portfolio.

Frankly, we believe this is an attractive time for CLO equity investors. After Ken's remarks, I'll take you through the current state of the corporate loan and CLO markets and our outlook for the balance of 2019..

Thanks, Tom. Let's go through the fourth quarter in a bit more detail. For the fourth quarter of 2018, the Company recorded net investment income and realized capital losses of approximately $8.8 million or $0.38 per common share.

This was comprised of net investment income of $0.41 per share and net realized capital losses from the Company's portfolio of $0.03 per share.

This compares to net investment income and realized capital gains of $0.41 per share in the third quarter of 2018 and net investment income and realized capital gains of $0.49 per share in the fourth quarter of 2017.

When unrealized portfolio depreciation is included, the Company reported a GAAP net loss of approximately $83.7 million or $3.62 per common share for the fourth quarter of 2018. This compares to net income of $0.50 per share in the third quarter of 2018 and net income of $0.68 per share in the fourth quarter of 2017.

Just a reminder that our cash flow generation is completely unaffected by the unrealized appreciation or depreciation we record at the end of each quarter.

The Company's fourth quarter net loss was comprised of total investment income of $17.7 million, offset by net unrealized depreciation or mark-to-market losses of $92.4 million, net realized losses of $0.7 million and total expenses of $8.3 million.

At the beginning of the fourth quarter, the company held $24.3 million of cash, net of pending investment transactions. As of December 31, that amount was $1.5 million reflecting the deployment of capital during the quarter.

As a result of deploying $58.2 million in gross capital during the fourth quarter, there was an additional amount of capital that only generated income from a portion of the quarter, which we expect to generate full income going forward. As of December 31, the company's net asset value was approximately $287 million, or $12.40 per common share.

Each month, we published on our website an unaudited management estimate of the company's monthly NAV as well as quarterly net investment income and realized capital gains or losses. Management's unaudited estimate of the range of the company's NAV as of January 31 is between $13.66 and $13.76 per common share.

Based on the range of midpoint, this is an increase of approximately 10.6% since year end, which could be attributed in part to an increase in demand for investments, such as the company held during the month of January.

Non-annualized net GAAP return on common equity in the fourth quarter was a loss of 22% primarily due to the drawn down in portfolio prices. Of course, any increase to our NAV as we have estimated for January 2019 would result in a partial reversal of that number.

The company's asset coverage ratios at December 31 for preferred stock and debt as calculated pursuant to Investment Company Act requirements were 246% and 477% respectively. These measures are above the statutory minimum requirements of 200% and 300% respectively and have risen from those levels in January as loan price volatility subsided.

As of December 31, the company had debt and preferred securities outstanding totaling approximately 40.6% of the company's total assets less current liabilities. This is outside of our normal range, driven predominantly by the NAV decline experienced during the quarter.

We've previously communicated management's expectations under current market conditions of generally operating the company with leverage in the form of debt and/or preferred stock within a range of 25% to 35% of total assets. By the end of January, given our estimated increase in NAV, we are now closer to that range.

Earlier this month, the company issued its 1099-DIV for the 2018 tax year, reporting ordinary taxable income of 63% and return of capital of 37%. Measured against the company's full year common distribution of $2.40 per share, this equates to $1.51 per share of ordinary taxable income and $0.89 per share return of capital.

The impact of participating in 31 resets and refis associated with the company's CLO equity investment portfolio is reflected in the company's 2018 tax year results.

As mentioned previously, reset and refi activity typically reduces taxable income as it permits for tax purposes, expense acceleration of unamortized issuance cost and the original issue discount. Management estimates, the reduction of ordinary taxable income for the 2018 tax year resulting from such expense acceleration to be roughly $1 per share.

In other words, if the company did not participate in any Resets or Refis this past year, 2018 ordinary taxable income would have been in line with the company's current annual distribution rate of $2.40 per share and as Tom mentioned earlier, all shareholder distributions would have been taxable.

As a reminder the company is a RIC and is required to distribute effectively all of its taxable income to shareholders on an annual basis.

We've provided the aforementioned tax information to help illustrate that the company's ordinary taxable income in 2018 once normalized for Reset and Refi activity was generally in line with its current annual common distribution rate.

Moving on to our portfolio activity in the first quarter through February 14, investments that have reached their first payment date are generating cash flows in line with our expectations.

In the first quarter of 2019, as of February 14, the company received total cash flows on its investment portfolio, excluding proceeds from called investments totaling $24.3 million or $1.05 per common share. This compares to $22.5 million or $0.97 per share received during the fourth quarter of 2018.

Consistent with prior periods, we want to highlight some of our investments are expected to make payments later in the quarter. During the fourth quarter, we paid three monthly distributions of $0.20 per common share as scheduled. On January 2, we declared monthly distributions of $0.20 per common share for each of January, February and March.

Also during the quarter, our board approved the issuance of additional shares of common stock and Series B term preferred stock under our ATM offering program.

In the fourth quarter, the company issued approximately 36000 shares of its common stock at a premium to NAV and approximately 17000 shares of Series B term preferred stock for total net proceeds to the company of approximately $0.9 million. I will now hand the call back over to Tom..

Great. Thanks Ken. Let me first take everyone through some macro loan and CLO market observations and we can discuss how they may impact the company. I'll also touch on our recent portfolio activity.

For 2018, the Credit Suisse Leveraged Loan index generated a total return of 1.14% and it was really one of the few asset classes that generated a positive return in 2018. Loans as you know are the engine that drive the company's cash flow and 2018 marked the 25th year of positive returns out of the index's 27 years of existence.

This long term consistent performance in our view is truly remarkable. As touched on before, we saw record loan fund outflows in December. During the fourth quarter in total according to JPMorgan the loan funds experienced outflows of over $20 billion. Outflows have since moderated in January, but still have continued.

Outflows often bring same day forced selling for these mutual funds. Indeed, we believe the technical from this forced selling of loans to be the primary driver of the loan -- of drop in loan prices and our NAV during the quarter. Forced selling by others can be opportunities for those with steady hands like CLOs.

The total amount of institutional corporate loans outstanding was $1.15 trillion as of year-end, that's a 5% increase from the third quarter according to data from S&P.

Although 2018 was a strong year overall for loan issuance, our net volume declined in the fourth quarter including only about $4 billion of loans issued in December, the lowest level since Q1 of 2016. Despite the volatility, as noted before, defaults remain well below historic averages.

The long-term -- the one year default rate sits at 1.63% at the end of December according to S&P Capital IQ and that lagging 12 month default rate remains low and in fact decreased from the end of the third quarter. By further comparison, at the end of 2017, the lagging 12 month default rate was 2.1%, but we keep heading in the same direction.

We continue to expect default rates to remain below the average over the near to medium term. This is due to minimal impending loan maturities prior to 2022, a growing U.S. economy, a large majority of the loan market consisting of covenant light loans. The company's overall credit expense remains well below long-term averages.

As loan price volatility presents itself as it did in the fourth quarter, we believe the company and its investments are well-positioned to go on the offence and take advantage of lower loan prices given the benefit of our long-term locked in place non-mark-to-market financing in our CLOs.

From our perspective, as long-term CLO equity investors, the environment of technically-driven loan price volatility often driven by forced sellers by others without an increase in defaults over the near to medium term is an extremely attractive situation.

In the CLO market, in 2018, we saw issuance of $129 billion of new CLOs along with $122 billion of resets and $34 billion of refinancings. Looking forward into 2019, we do expect lower volumes, but will be still significant.

Overall, we're expecting about $100 billion of primary CLO issuance, $70 billions of resets, and potentially $40 billions of refinancings. We expect to opportunistically direct additional resets and refinancings in 2019.

Although based on the portfolio activity we've done in current market conditions, we think it will be at a lower level than we have over the prior years. As a result, we'd expect our overall CLO equity cash flows to increase without the constant impact of reductions on a one-time basis associated with the costs of refis and resets.

And as Ken mentioned, cash flow per share went from $1.05 to $0.97 Q1 so far versus all of Q4 with more to go in Q1. As always our advisor's deep CLO investing experience provides us with a notable advantage as we seek to generate additional value for our portfolio and our stockholders.

We've deployed $4.4 million in capital across CLO equity and debt and loan accumulation facilities so far in the first quarter of 2019, putting cash on the balance sheet to use as opportunistically as possible.

Beyond seeking to maximize the value of our existing investments and opportunistically taking advantage of the loan price dislocation we've seen we continue to maintain solid visibility on our new pipeline for the next few quarters.

To sum-up, the loan price volatility that transpired in the fourth quarter, while impacting our NAV in the short term was actually a very good thing for long term CLO equity investors in our view. The dislocation was technically driven by forced sellers and not caused by defaults. To the contrary, defaults in 2018 were lower than they were in 2017.

As a result, we have a strong opportunity to utilize our adviser's strength to create additional value for our portfolio over the longer term.

We continue to invest in CLOs with effective yields above the portfolio's current weighted average effective yield and when the opportunity arises we'll continue to use our adviser's strength to proactively direct additional resets, which we expect to generate -- to help improve future cash flows to our CLO equity securities.

And as spreads widen on loans and prices fall, we believe our effective yields on our CLO equity positions will begin to rise. We'll continue to be proactive in our management of the company in order to create long term additional value for all of our stockholders. We thank you for your time and interest in Eagle Point.

Ken and I will now open the call to your questions..

[Operator Instructions] Your first question comes from Mickey Schleien from Ladenburg. Your line is open..

Good morning, Mickey..

Good morning, Tom.

Can you hear me okay?.

Yes, good morning..

Can you walk us through the factors that caused the portfolio's weighted average spread and it's effective yield to decline in a quarter when loan market spreads were widening?.

So, on a quarterly basis. Mickey, we recalibrate our effective yields.

A good deal of our recalibration in the fourth quarter were anniversary resets, and you can see on page 27 on investment by investment basis that the overall Q4 anniversary resets have declined, which was a significant part of the overall resets, while the other items related to more real time portfolio information have either not declined as much, stayed static or actually increased..

So in recall we do resets on a -- we recast the yields on CLOs at least once a year on the anniversary day or more frequently if we do a reset refi by ourselves. So if you looked at to page 27, you'll see $99 million of fair value of securities went through resets -- went through recalibrations. A handful of the yields went up frankly.

Overall that portion dropped about 3%. And that's manifesting itself, of those in many cases were CLOs that we hadn't reopened in the last year. So that's what's driving the decline. At the same time, the weighted average spread of the overall portfolio was relatively flat.

If you look at the underlying loans spreads was relatively static, maybe up or down a basis point or two. And that's driven by the fact that loan spread compression really didn't exist in the fourth quarter..

Okay.

So if I understand correctly, it's basically a mechanical sort of lag from the methodology that you do for recasting the effective yields, right?.

That's correct, yes..

Okay. Looking at NAV, Tom, in the fourth quarter loan prices fell about 6% give or take and Eagle Point's NAV declined 25%. But in January, loan prices rebounded at about 4%, but estimated NAV only increased 10%. In other words, just mathematically you would have expected a larger increase in NAV for January.

I know it's an estimate, but what factors kept the January estimated NAV from increasing more than the number you announced?.

So, I guess a couple of things. If you just look at the Credit Suisse Leveraged Loan Index the price of that index on the last day of Q3 was 98.52. As of year end was 94.09. So that would suggest a drop of little less than 4.5 points. Different indices may have moved differently, but we typically look at the CS Leveraged Loan index.

And as of today, it's up to 96.34 or as of yesterday. And that's roughly where it would have been at the end of January. There’s couple of things that go into the valuation of CLO equity. The price of loans is merely one of them, but by no means the only driver.

The other factors that play in are outlook for default and frankly the discount rate that the market applies. When prices of loans fall as they did in the fourth quarter, not only does the terminal value of a CLO fall, but typically the market demands a wider discount rate in that -- it's a risk-off world.

So you might have used a 15% discount rate PV a portfolio at -- payment in the future at 98. By the end of the year you might have been using a 20% discount rate to PV and payment of 94.

So those two things actually kind of compound together against that, it's not just taking the change in loan price 1 times, 10 times leverage to come up with the change in NAV.

On the way back up, we're up about a little over 10% to the midpoint of management estimate in January and that reflects certainly an increase in the price of loans and a little bit of a tightening in yields, but maybe not as strong yet as the widening of yields for CLO equity that we saw in the fourth quarter..

So Tom, if I could paraphrase the -- your assumptions for the discount rate in terms of defaults and everything else that goes into calculating that rate didn't rebound as much in January as the prices of loans rebounded. Is that default? Tom Majewski The default rate didn't change substantially on the way down or the way up really if at all.

The market yield that investors would demand to buy our securities is something that we set on a security by security basis. And different shelves or different collateral manager platforms are going to trade at wider or tighter yields holding -- once you run out the assumptions, we didn't -- we saw an improvement in yields.

And kind of the market would take a lower and lower yield, but it didn't rebound all the way which suggests potentially there could be more upside to go or obviously yields could widen the other way. But it's not just a simple of a task that takes change in price times leverage. There's any number of factors that that go into it.

We've seen a rebound in yield demands and that investors are demanding lower and lower yields for CLO equity, but we're nowhere near back to the levels we would have been as of September 30..

So Tom has CLO equity prices moved meaningfully upward in February so far?.

Without addressing our specific portfolio, I think in general demand for CLO equity securities has remained positive and the trends have been positive. Any given security could have good or bad things happening to it. But the trend has not -- certainly hasn't moved the wrong way and probably has moved the right way..

Okay. My last question. I wanted to -- I understand that in the current year, 2019 you expect taxable income to track the dividend more closely and you don't at least for now intend to change the dividend. But as you know on a GAAP basis, the dividend is causing a meaningful drag on NAV.

Looking back at the beginning of 2016, the company's NII per share was covering the dividend and through the beginning of 2017, NII plus realized gains were covering it. But they haven't covered it since then.

So I want to understand what your thesis is on trends for estimated yields and NII and realized gains looking at today's market environment and the stage of the credit cycle?.

Sure. The biggest driver in NII is the weighted average effective yield in our portfolio. Two, three years ago that number was 17 and change percent. Now it's 13% roughly.

And that drop has not has principally been driven by spread compression on loans, loans coming at tighter and tighter spreads over LIBOR while we have been able to offset a fair bit of that with refi and reset activity.

Frankly we chose more resets -- or anytime we chose a reset versus a refi, reset is where you reopen the docs and by yourself a new reinvestment period. We could have lowered our costs further, which likely would have gotten us higher yields had we done refis, but without the benefit of lengthening the reinvestment period.

And I'd rather sit here and tell you, we increased the weighted average reinvestment period by half a year plus this past year than we saved even more cost on a reset.

So we make a conscious decision, which way we're going, and buying runway cost us a little bit of current yield but I'm -- in my belief that's absolutely the most defensive long-term way to be managing our portfolio.

With the state of the loan market and most loans trading at discounts to par, re-pricing of loans is substantially off the table in current market conditions. That can come back quite quickly.

But where we sit today loans in the 95 to 97 area with the index at 96.34 with very, very few companies defaulting again six out of -- 1,400 companies defaulted in the fourth quarter is a very attractive situation -- scenario for CLOs.

And frankly what we're seeing within our portfolios and as we work with the collateral managers, we seek to help them increase spread in the portfolios, build par and/or reduce risk. Ideally they can do all three, a few of them can do that. Typically they get one or two of them done. But these markets are the situations where they're able to do that.

Importantly what they're not facing is a barrage of spread compression and that was something that really hurt the yields over the past few years.

Where we sit today if current market conditions were to remain unchanged, we'd expect an increase in the spreads of our underlying loans, which all else equal would suggest an increase in our weighted average effective yield.

Obviously, there's a lot of additional things that go into that simply beyond the spread of loans, but the spread of loans going up would be something that we actually see a pretty credible path happening right now..

All right. I agree with that and that's been my thesis as well. Those are all my questions for this morning. I thank you for taking them..

Thanks so much, Mickey.

Operator can we move on to the next call?.

Your next question comes from Chris Kotowski. Your line is open..

Good morning. Your response to Mickey confused me a little bit. You referenced page 27. What I see on page 27 is a taxable income exhibit that I was going to ask you about.

Is there any different page?.

Yes. So in the investor -- quarterly investor presentation page 24, 25 and 23 gets you the information that you need. Just to orient 25 shows the changes quarter-on-quarter and 24 and 23 give you the detail to the type of change to effective yield. So using those pages can get you to what we referred to earlier..

Sorry about that. I had the board deck out that shows a couple of it -- the couple of introductory pages..

Okay. I was momentarily confused. But actually I did want to ask you about page 27..

Well I'm glad I drew it to your attention then. Perfect..

Well no actually I was -- that was the first one that jumped out at me.

And I guess the thing is like just as a RIC just technically speaking for 2018 you really only needed to distribute $1.51 right?.

You got it..

That's correct..

Okay.

And what you're saying is just if you don't do any resets but hold everything else the same theoretically your ordinary taxable income would be $2.61 for 2019?.

Yes on this analysis, correct..

Okay. And let me expand upon that. So we kind of hinted through the -- or said through the year kind of midway through last year that we thought we were going to come out below $2.40 for taxable income in 2018.

You could take the theoretic argument we should have lowered the distribution for two quarters, but we had already done the kind of 2019 outlook and we believe we would have had to increase it right back up. So we kind of thought that would be a little more whiplash than the market would like and didn't make sense to do.

All else equal we view it as a tax benefit to the extent people can get cash and not have to pay tax on it in the current year albeit it does adjust their bases down the road. Net acceleration of deductions is -- in any corporate scenario is always a good thing.

Where we look into 2009, so had we not done any of those refi or resets you see we would have actually been over distributed and had to pay $0.20 special which our experience shows the market doesn't give us any credit for. Where we look in 2019? We've had our tax accountants prepare preliminary estimates.

Frankly because of our non-calendar year tax year we actually have a lot of information already related to our November 2019 ending tax year because a lot of CLOs give us K-1s or PFIC statements on December 31, 2018. So we've already got a pretty good insight as to what our taxable income is going to be for this coming year.

And where we sit today it looks like it's around $2.40, the share. Obviously, that can move up or down a little bit and lots of things can change in the market.

But based on where we sit, based on the activity we've done and the smaller number of CLOs that haven't yet reported, their income to us for tax year 2019, we feel pretty good on this $2.40 number, which means that's what we're going to need to pay to keep our RIC status. So quite a result.

But we remain very confident that the company will continue the distribution at the current rate, certainly, for the balance of the year..

Okay.

And is there any kind of rational methodology by which we could use the information in this exhibit and kind of think about what it would imply for GAAP NII? Or is that just an exercise you can't do at home?.

GAAP, tax and cash. Tax sets the rule of the minimum we have to distribute. GAAP is the number everyone likes to see, although includes a big reserve for losses. And then cash is an interesting one, kind of, that's what we're all here for. And if you look back on -- I think we have that other page, Ken. This is on….

Page 22. I was just going to go there. Yes..

21 I believe, right?.

No, 22..

If you go back to 21. Go back one page.

What this shows, just from an overall sustainability of the company, mindful that GAAP has a meaningful reserve for loan losses, if you were to kind of comp us to a BDC, for example, where no such reserve exists -- if you look at the Q4 2018 column, a little bit down you'll see, we received $1.21 in distributions on our portfolio.

$0.24 of that was related to calls, so that's not recurring. Means we got down to $0.97 of recurring portfolio cash flows. Common distributions, expenses, including preferred and dividends, interests, fees and other legal costs, got us to $0.96 of outflows.

So just raw interest in, minus money out, for dividends, distributions, interest, costs, the company was positive, and then obviously the calls helped as well. As Ken mentioned, our cash flows to-date in the first quarter, which is not yet the first -- full first quarter, actually are up. We're up to $1.05 versus $0.97.

Our expenses, all else equal, will stay about the same, maybe $0.01 or $0.02 difference on accruals. And we still have more cash flow expected to come in during the first quarter. So when you think about -- unfortunately, we've got these three different things that are three different calculations.

The way I think people would look at a BDC is they would say, what's the interest that came in on the loans? Which, in this case, is $0.97. What's the cost and payout? In this case, it was $0.96. So that we think is pretty darn good.

And as we foreshadowed for Q1, we're even in better shape so far than where Q4 shook out and the quarter is not yet over in terms of cash flow..

Yes.

Though presumably the $1.21 in cash distributions received isn't just interest income, it also includes principal repayment, right?.

And that's why we -- correct, that includes $0.24 of repayment. So that's why we net it to get the $0.97. The $0.97 we were saying....

Okay.

So the $0.97 is really reflective of interest?.

Correct..

Interest? Okay..

Yes. $0.97 is reflective of interest. And that number is up to $1.05 so far this quarter and the quarter is not over..

Okay. And then if I go to the next page, page 22 and just look at the total portfolio cash received the $27.97. I mean, obviously, it seems to bounce around all over the place on a quarterly basis. But you look year-over-year, it's down even though obviously, you've raised capital and made investments all through the year.

Is there any guidance you can give us on kind of what to expect during the course of 2019?.

Well, certainly for Q1, we can say recurring cash flows will be up because we're up $1.05 versus $0.97. If you flip back to 21 for a minute, I think we will add this on 22 going forward. If you look at the $0.24 that we netted out for cash related to calls the $1.21 minus $0.24 to $0.97..

Right..

You can see that $0.24 was $0.15, it was $0.47, $0.06, $0.60 which kind of lines up to as you put the cash flows have moved all over the place quarter-to-quarter..

Right..

Maybe one of the things we can do going forward on page 22 is we'll break out an additional line item in future quarters of cash flow from call deals..

Yes. Okay. All right..

Just to make that clearer for you. But you can kind of see the pattern. If you look back on 21, the recurring portfolio cash flows, they have come down a little bit. It was $1.23 a year ago kind of bounced around the $0.97. It has moved $1.04, $1.18, $1.97. We're back up to $1.05 with probably a little more gas in the tank for this quarter.

That's kind of where we've been bouncing around. And in all periods, let me check my math here, the recurring cash flows have exceeded the distributions and fees and expenses out..

Okay..

If I just move to one other item?.

Ken wants to supplement. He's got a -- he's yes….

Page 22 as we note in footnote 5 at the bottom of the page are the impact to our refi and resets affecting current cash flows. That's also taking out anywhere from $0.05 to $0.15 per quarter throughout each quarter of the year. That's something to note.

And as our refi and reset activity subsides in 2019 that would be accretive to cash flow recurrent cash flow..

Okay..

Does that make sense to you Chris?.

Yes. Yes. It does. It's -- gosh, you'd just die for it two or three or four quarters of stability where it doesn't move around like that..

Well, but, and I think -- let me address that. I think if you add back the footnote on page 5 to the quarterly numbers on page 21 -- the footnote on page 22, footnote 5 to the recurring cash flows on page 21 paints a reasonably stable picture in my view. Obviously, beauty is in the eye of the beholder. But the cash has been bouncing around.

It's going to move around a little bit. And these things they are complicated living breathing beasts. But we've been consistently generating well over $1 per share, per quarter in recurring cash flows and paying out that or less..

Okay. All right. And presumably the reason ....

So that's good..

Yeah, and the reason why it's down from $1.23 last fourth quarter to $0.90, that's just the tightening spreads?.

That's the spread..

Or primarily?.

Yeah. Principally, yeah..

All right. That's it for me. Thank you..

Appreciate it. Thanks so much..

The next question comes from Christopher Testa from National Securities. Your line is open..

Good morning, Chris..

Hi. Good morning, Tom. Thanks for taking my questions today. So, I'll start off by badgering you more on what you've already answered with Chris and Mickey a bit. Just -- if we look at tax versus GAAP versus cash, now obviously over time these things are all supposed to be equal. We understand how this works.

So since the inception of ECC, obviously you guys have paid a certain amount of distribution and the GAAP NII which is the GAAP income has been underneath this.

So given that pretty wide differential, is there ever a point where there has to be sort of a catch up? Like does GAAP ever have to, I guess, increase to catch up with this so that's equal over time, so to speak? Or does taxable income go down? I'm just wondering if you could just speak to the timing aspect and how these are supposed to be equal and how this plays out with the public vehicle and distributions..

Sure. Yes, they do have to be equal. If you look at our website back in 2015, we did publish a GAAP/tax/cash comparison for a single investment. We did take the simplifying approach of showing a single investment not a portfolio of 75-plus securities coming and going at different times. But indeed they will all equal over time.

Some of the differences that you're hitting on -- when we look at 2018 taxable income was less than GAAP income because we were able to take a lot of deduction acceleration which is a benefit in 2018 tax year.

To be kind of pure -- academically pure again in theory Ken and I should have said we're going to cut the distribution for two quarters, but then increase it back in 2019. We think the market doesn't really -- we think the market would have been more confused by that and we did not do that.

And indeed the company remains committed to a $0.20 distribution per month certainly for the balance of the 2019 tax year.

In that case, we did end up leaking out a little more money than we would have otherwise done to the point of it's going to equal, but we paid out a little extra in those periods because taxable income will need to -- would be lower or GAAP income higher or those two net out. The flipside against all of that -- we are prudent.

We have continued to issue stock at a premium to NAV. And while that doesn't close all of the excess distribution frankly we picked up, and I think we disclosed an amount ....

$0.17 yeah..

In last year?.

Yeah, so net $0.17..

So, $0.17 net pickup in NAV for all shareholders through use of the ATM and one overnight deal last year. Well, that's not the -- doesn't bridge the entire difference. And that's an extra input into the stability of the NAV of the company. Overall, what we encourage people to look at is what the recurring cash flows are versus our operating expenses.

That's really kind of the BDC comparison. Our effective yields are baking in reserves for future losses. Where we sit right now we expect credit quality to remain reasonably quite strong. The economy is growing. Loans are covenant light which suggests there's going to be few defaults.

And overall we actually saw NII ignoring the gain and loss move up in the quarter-over-quarter basis. And we're doing everything we can to get that NII number back up.

And then further hopefully we can trickle in -- we've been eight out of 11 quarters with gains and those gains totaling $0.35 trying to make sure we get a few pennies of those every quarter. Obviously, no one knows what's going to happen in any given quarter, but where possible harvesting some gains is another input..

Got it. Okay. No, that's helpful Tom.

The thing is -- the question that I get frequently is given that these three are supposed to be equal over a period of time is there ever a situation that arises where again either taxable has to come down or you have to recalibrate the GAAP yields up like -- which -- if taxable income comes down to meet GAAP so to speak, obviously, there's pressure on the distribution at that point.

So, are you basically saying that's not a concern because there's different timing of different CLOs? Sorry to be a pain. I'm just trying to get like a -- as concrete of an answer as I can with that because I get asked that pretty frequently..

Yes. And it did happen. Frankly, tax was I think below GAAP, NII, and gains last year. And we knew that happening because of all the refi and reset activity and the acceleration of deductions. We made the conscious decision not to temporarily lower the distribution just to re-increase it for this year.

So, there's an example where we've accepted a difference. But indeed overall our objective is getting the weighted average effective yield on the portfolio up. These are the type of markets we believe we can do that. Obviously, markets can change between today and tomorrow. But, in general, these numbers will equal.

We did make an exception in the fourth quarter and paid out higher than we thought the taxable income would be but hopefully that's not -- we don't expect that situation to reoccur in the near-term. And then finally, we've also been able to pick up some degree of NAV capture through premium issuance..

Got it. Okay, that's helpful. Again, sorry to beat a dead horse. Just want to get the details there..

And as we talked about it on every call ever Chris. So, don't hesitate. We're prepared..

Yes, I'm sure it will be. Now, in the fourth quarter AAA spreads I think widened by about 36 bps.

I'm just wondering what if any affect that had on your ability or inclination rather to do loan accumulation facilities and primary issuance versus just picking up certain CLOs in the secondary market?.

It certainly -- as I mentioned we converted so far this year one accumulation facility into a new CLO that played out in the portfolio. That one we were able to get one of the tight prints of the year. And frankly the deal was somewhat ramped, but a significant portion was un-ramped and we were able to buy loans really very, very cheap.

And the objective with the collateral managers, okay let's price the deal and proverbially, the second after the deal was priced, go buy the rest of the loans cheaply in the secondary market. So, we will continue to do that from time-to-time. We have other deals in various stages of marketing process.

We do also continue to look at secondary opportunities. I've never said there's more secondary opportunities than we like. I always say there's not enough secondary opportunities for us. We continue to have dry powder available to go after things.

And what I'll say also is the AAA spread on a newly issued CLO does not necessarily correlate with what the overall equity IRR will be. And that one thing we know for certain is that AAA spreads will very likely -- compliance is probably going crazy that I said certain.

What we believe is very likely is that AAA spreads will be different two years from now either wider or tighter. If they are tighter, you can be assured we'll continue our usual track record of trying to reset or refinance that deal tighter. And if it's wider we'll look back at January 2019 and say, boy we'll gladly lock that in.

So it's a vintage diversification. It's a very important part of our investment strategy. And as you look through our portfolio, we have a wide variety of AAA spreads. Obviously we like them as low as possible.

But that we have a continued pipeline of things coming off of non-call period six months from now, a year from now, two years from now is an important part of our long term investment strategy..

Got it. Okay that's helpful Tom. And definitely appreciate the remarks on the vintage staggering up. That's definitely important. And looking at -- obviously I think BB spread is back up something like 140 bps or something like that.

Just wondering how this could potentially fit in with your strategy where if we see sustained volatility for a long time yes it might be more beneficial for you to simply just pick up some CLO equity on the secondary market or convert more LAFs. But you could potentially improve the Sharpe ratio of the portfolio and buy BB or B extremely cheap.

I'm just curious how you think about that against the backdrop of obviously being a more CLO equity focused vehicle?.

they don't generate quite enough earnings to they are a drawback they help weigh down our earnings in that the effective yield or the blended yield on our portfolio of debt is lower than the effective yield on our CLO equity.

So we buy them in many cases anticipating that there could be some strategic benefit from it against that it is a lower yielding opportunity.

Now if we were to see a significant selloff and if you kind of look you can kind of look at the fair value versus the principal amounts? Many of these are going to be marked in the 90s, maybe one or two of them has an eight handle mark.

If you start seeing this stuff fall to the 60s or 70s not that we're forecasting that, but if that were to happen frankly those are the kind of investments we'd consider very keenly for the company whether or not there was a strategic benefit just the bonds are so cheap.

Overall we've said in general, we would like to actually lighten up some of our CLO debt exposure just to help improve NII for the company. But everyone of the debt bonds in the portfolio is here for a reason. You will be able to figure it out if you just line it up next to the equity positions..

Got it. Okay that's helpful. And last one from me if I may. Just looking at the balance sheet, obviously, you have a pretty good structure with termed out debt and you have the preferred obviously, which are PIK-ables, god forbid you ever need to.

Just how are you looking right now, obviously, spreads have widened now to come back in since the beginning of the year kind of been all over the place.

What are your thoughts on potentially terming up the debt more or maybe more unsecured note issuance, or are the potential IRRs that you're looking at on CLO equity high enough that ATM issuance just make the most sense for kind of near term?.

Yes. No, a very good question. If you look at the ECC's balance sheet the only security that we can even do anything with are the As. Those are callable and they're due in 2022 if memory serves correct. The 7.75 monthly pay.

As we look at the balance -- this is unscientific, but you can see our debt versus preferred is roughly 50:50, it looks like it's a hair more debt than preferred right now, 92 and 98 roughly. But I think of it roughly as half and half between the 2. And mindful we have two different limits on them.

And the debt, of course, is not PIK-able and indeed the debt doesn't attract management fees in our shareholder friendly fee structure. So that's doubly potent for investors. Against that the preferreds do give us a greater degree of flexibility, so we kind of balance between the two of them.

Whereas when we had issued the Xs, the market was red hot for securities like that and we were able to get the lowest cost of financing on a 10 year non-call three paper that we've ever achieved at 6 and 11.16. I don't think we could re-achieve that today.

At some point -- obviously between now and 2022 we have to deal with but that's really the only thing on the balance sheet that's even up for review. We talk about maintaining the company between 25% and 35% leverage between the two. With the draw down in NAV as of the fourth quarter, we obviously went outside that band.

The recovery in January, we're closer to that band. Overall, I'd expect us to stay -- our continued goal of wanting to be within that band is certainly how we plan on managing the company over the medium to long term. In terms of equity issuance, as you talk about, it's probably been about a year since we did a common deal on an overnight basis.

We have used the ATM selectively. It was pretty light in the fourth quarter. But you can see every quarter we disclose it and that is an important tool that we will use when it makes sense and investments present themselves..

Got it. Okay, those are all for me. Thanks for your time today..

Great. We appreciate it. Thanks so much..

Your next question comes from the line of Ryan Lynch from KBW. Your line is open..

Hey, Ryan, good morning..

Good morning, guys. This is actually -- this is Paul Johnson stepping in for Ryan. He had to hop on the other line. Real quick..

Hey, Paul..

Sure I just had one question for you guys. You guys focused on, it looks like several loan accumulation facilities primaries and just a few secondaries so far here in 2019.

I just -- we're curious is there sort of -- any sort of concerted effort to focus more on the secondary market just given the weakness in December? And it sounds like it's rebounded a little bit in January but although not quite to the level before the volatility last year..

Yes, so we -- and roughly if you use our estimate of NAV that would suggest marks are up about 10% for the month on our portfolio. Obviously any individual security can vary. We continue to look actively in the primary and secondary market. We converted one accumulation facility into a new CLO.

And everything else we've done, I think has been in the secondary market though. I know we only did one new one so everything else by definition had to be secondary. And we do look actively at slews of secondary offerings.

We do have a number of accumulation facilities, which are all of sufficient tenure and allow us to opportunistically accumulate loans for the formation of new CLOs. In December, I regret to say there was not a lot of forced selling by others in the CLO equity arena. So while marks were down, it was not due to panic selling of CLO securities.

There was forced selling of loans by mutual funds. But I wish I could say we sat here just shooting fish in a barrel buying stuff cheap left right and center. That wasn't the case unfortunately. We did pick up some attractive pieces, but it's never as much as you like.

My experience in past selloffs is you need to see things down for three to five months consistently before we can start really manifesting themselves and offering out large quantities of secondary CLO equity at very cheap levels. With the rebound, we've seen in January frankly we haven't seen too much of that happening.

So we do remain active in both primary and secondary markets. There's never enough cheap secondary period..

Sure. No that's very interesting and understandable. I apologize. I may have had some of the numbers misconstrued from last year, but thanks for taking my question..

No worries. Thank you..

Your next question comes from the line of Troy Ward from Ares Management. Your line is open..

Great Thank you. Tom back to slide 21. I just want to go back to cash distributions received and less cash received on CLOs called. So the $1.21, you keep comparing it to BDCs.

But if I'm thinking about this correctly, obviously, when a BDC makes a loan at the end of that loan they're going to get their full principal back if they made the credit call correctly.

And you -- what we're seeing here in cash distributions unlike straight interest while you got $1.21 of cash distributions that includes a portion of that, because you take an effective yield, you're going to use a portion of that to basically takedown the cost basis of the original investment.

So at the end of that CLO investment, you don't have a large realized loss.

Is that -- am I thinking about that correctly?.

No that's correct..

Okay. So the $0.97 you point to as available to -- you're way over earning on a taxable basis I get that. But the higher number that you pay out relative to GAAP eventually that's either going to show up in a loss -- a realized loss on the investment or tax and GAAP have to come together.

Is that correct?.

Well, GAAP and tax do ultimately come together on every investment. The number to focus on -- the BDC comparable number is the $0.97 not the $1.21. And indeed….

But that also includes capital that you need to reduce your cost basis with correct?.

Correct. What we've also though by virtue of having roughly $0.35 in realized gains over the past 11 quarters, I guess, what we're showing is, we've been able on average to harvest -- that our loan loss reserve assumptions have been too darn conservative and we've been able to pick up gains in excess of that amortized cost..

Okay. So during that time those 11 quarters where you had a realized gain book value has come down. So is the rest of it -- well tell me what percentage of the decline in book value during just say those 11 quarters, and you can be approximate to the penny.

Just trying to feel for how much of that is capital paid out in excess of earnings so return of capital through the dividend or unrealized losses that are still on the balance sheet?.

Tray, it's Ken. I'll make sure I answer your question because there's a couple of things out there. So the first point you've raised is that, our nonrecurring cash flows the $0.97 in the recent quarter....

That is the recurring cash flows..

Yeah recurring cash flow is covering from a cash perspective our distribution and expenses. So from an operational perspective the company is covering all of its commitments whether they are distribution related or expense related.

I think your point is more along the lines of our effective yield calculation which takes into account interest income and return of capital. So the cash that comes in and this might be better illustrated on page 22, a portion of that cash is applied to let's say relieving our interest income i.e.

effective yield; and the residual amount the extra cash that we receive is reducing the amortized cost. That return of capital is reflected in the cash flow treated as return of capital line item $10.27 per share....

Or....

Sorry..

That's in millions right?.

Sorry $10.270 million in the fourth quarter. And in our effective yield calculation the control check we have is that at the end of that effective yield we run it through versus expected cash flows and terminal value that's going to equal 0. So we do take it into account. And I would look at cash having two purposes.

One is to on an operational basis to cover all commitments; and two from a GAAP accounting i.e. effective yield basis to relieve any interest income that we record as well as reduce our cost bases i.e. return of capital to ensure at the end of the day that cash and effective yield and GAAP and everything equals.

Did I answer your question?.

Yes you have. One last thing, so as you think about the yields have come down again the comparisons to the BDCs I think here is the most important. So you've seen the yields come down over the last couple of years.

And obviously since you went to the monthly dividend in 2017, early 2017 I believe, during that time the yields have come down and the dividends stayed dead flat and GAAP and tax eventually equal 0.

So something has to give, right? So it appears that based on GAAP earnings you're overpaying the dividend and you said in the last couple of quarters that was the case.

You think that may reverse in 2019? But at the end of the day, just the investment decisions that have made you're getting less the yields are coming down and the dividend stays the same. At some point something has to give. We saw it in the BDC space over the last two years. We saw a lot of dividend reductions.

And it just seems to us that the concern over the dividend and your ability to earn it, is not going to lessen in 2019?.

what happens if the effective yield falls by those amounts or it goes up by those amounts? And what if we make some debt shifts, what does that do to the overall NII number? You can see it's pretty darn powerful..

Okay. Great. Yes..

Right now, there's a little bit of decay. We don't think that's indicative of where we'll be over the longer-term.

And then on the very near term just to reiterate based on our outlook for taxable income, which is the floor for what we distribute the company remains -- you've talked about other people cutting their dividend or distribution in the last year.

Eagle Point remains very -- outlook for tax that the distribution will remain unchanged for the balance of this tax year..

At this time, I have no further questions. Thank you. I'll turn the call back over to Tom Majewski for closing remarks..

Great. Thank you very much everyone. We truly appreciate the questions and active dialogue with all of our investors. Ken and I are around today, if there's any follow up questions. And we thank you for your continued interest in Eagle Point..

Thank you everyone. This will conclude today's conference call. You may now disconnect..