InPoint Commercial Real Estate Income, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts are in millions unless stated otherwise. The company is an externally managed REIT focused primarily on floating-rate commercial real estate (CRE) loans.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Interest income | $11.835 | $7.321 | $29.443 | $20.995 |
| Interest expense | $6.151 | $2.401 | $12.512 | $6.526 |
| Net interest income | $5.684 | $4.920 | $16.931 | $14.469 |
| Total income, including hotel revenue | $10.472 | $7.636 | $27.509 | $19.797 |
| Net income | $3.976 | $2.462 | $9.615 | $7.125 |
| Net income attributable to common stockholders | $2.482 | $2.462 | $5.083 | $7.125 |
| Basic and diluted EPS | $0.24 | $0.22 | $0.47 | $0.62 |
| Net cash provided by operating activities | — | $13.136 | $10.501 |
- At September 30, total assets were $907.315 million, total liabilities $616.744 million, and stockholders’ equity $290.571 million. Cash was $47.067 million.
- Commercial mortgage loans had a carrying value of $817.094 million across 42 loans; the portfolio’s weighted-average interest rate was 6.3%, versus 4.6% at year-end 2021. All loans were current on contractual interest payments, and the company recorded no loan-loss allowance under its then-current accounting method.
- Repurchase agreements were $489.757 million and loan participations sold were $96.950 million. The WA credit facility had no balance outstanding. Management reported $185.2 million of available borrowing-facility capacity and $20 million of available sponsor/sub-advisor revolving commitments, subject to their terms.
- Net cash used in investing was $151.853 million, reflecting $269.107 million of loan originations and $117.576 million of loan principal repayments. Financing activities provided $128.516 million; cash decreased by $10.201 million during the nine months.
- Reported net interest spread narrowed: 1.6% in Q3 2022 versus 2.8% in Q3 2021, and 2.0% for the 2022 nine-month period versus 3.0% in 2021. The company’s common-stock NAV was $203.145 million, or $19.4976 per share, at September 30; NAV is a non-GAAP valuation measure.
Changes and management commentary
- Loan carrying value grew from $665.498 million at December 31, 2021 to $817.094 million at September 30, 2022, mainly from originations. Average borrowing costs rose with market rates; management said borrowing costs had increased faster than loan yields, pressuring the spread. All loans and borrowings were above their rate floors at quarter-end.
- Common-stockholder net income rose in Q3, but nine-month common EPS fell to $0.47 from $0.62. The company attributed higher overall net income to portfolio growth and increased net interest income, partly offset by higher advisory fees and financing costs. Series A preferred dividends reduced income attributable to common stockholders by $4.556 million for the 2022 nine-month period.
- The Chicago Renaissance O’Hare hotel generated $10.578 million of revenue in the first nine months, but had a $0.6 million net operating loss before depreciation and amortization. Hotel occupancy and room-rate measures improved year over year in Q3, but had not returned to pre-pandemic levels. Management is weighing potential sale proceeds against continued operating losses and uncertainty about the hotel market.
- Common distributions remained at a gross annualized rate of $1.25 per share, equivalent to a stated 6% of aggregate NAV; applicable servicing fees reduce net distributions for Class T and Class D. The company reported that nine-month common distributions were funded by operating cash flows. The filing cautions that past distributions have sometimes come from sources other than operating cash flow and may not be covered by net income.
Outlook, risks, and unusual items
- No specific earnings, portfolio-growth, or distribution guidance is provided. Management expects continued rate uncertainty: higher rates can increase floating-rate loan income but also raise borrowing costs and potentially slow repayments or prompt loan extensions.
- The JPM facility’s trailing-four-quarter EBITDA-to-fixed-charges ratio was 144%, below its 150% covenant threshold; JPM waived the covenant as of September 30, and the company reported covenant compliance. The filing also reports compliance with other facility covenants.
- After quarter-end, on November 9, the CF repo facility was extended to November 9, 2023, its maximum advance amount was reduced from $450 million to $375 million, and spreads on existing loans under the facility increased by 0.75 percentage points.
- The company expects to adopt CECL on January 1, 2023 and estimated an initial allowance of less than 1% of outstanding loan balances, including future funding commitments. It had $70.106 million of remaining commitments to advance funds on qualifying loans at September 30.
- Other material risks include CRE borrower defaults and collateral-value declines, reliance on short-term secured financing, rising interest costs, hotel operating weakness, limited liquidity in common shares, and the company’s ability to maintain REIT qualification. Common-share repurchases are capped and may be reduced, suspended, or stopped. LIBOR transition risk remains for legacy loans and borrowings, although agreements provide for replacement-rate provisions.
- Subsequent items include a November 10 extension of the Series A preferred repurchase program through December 31, 2023; 37,251 preferred shares repurchased for $0.662 million between October 1 and November 14; and a November 11 advisory-agreement amendment changing provisions governing NAV thresholds used in the performance fee.
Important facts for investors to verify
- Whether the November reduction in CF repo capacity and higher spreads affect available liquidity, funding costs, or loan growth.
- Performance and sale prospects for the Renaissance O’Hare, including its operating losses and the April 2023 ground-lease rent increase.
- How the JPM covenant waiver and the 144% coverage ratio develop in subsequent reporting periods.
- The realized CECL allowance at adoption and subsequent changes, including treatment of unfunded loan commitments.
- Whether common distributions remain supported by operating cash flow and how share-repurchase limits affect investor liquidity.
- Changes in portfolio credit ratings, loan extensions or repayments, and borrower performance amid higher rates and CRE market stress.