InPoint Commercial Real Estate Income, Inc. — 2020 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2020, filed March 19, 2021. InPoint is an externally managed REIT focused primarily on commercial real estate debt, including floating-rate mortgage loans; it also held CMBS during the year. Shares are not listed, and the company does not expect a public trading market to develop.
Financial and portfolio highlights
| Metric | 2020 | 2019 |
|---|---|---|
| Interest income | $33.5 million | $34.3 million |
| Interest expense | $10.3 million | $14.0 million |
| Net interest income | $23.2 million | $20.3 million |
| Total income, including hotel revenue | $24.1 million | $20.3 million |
| Operating expenses | $13.0 million | $7.5 million |
| Net income (loss) | $(28.8) million | $13.7 million |
| Basic and diluted earnings (loss) per share | $(2.49) | $1.53 |
| Cash from operating activities | $12.0 million | $10.1 million |
| Cash, cash equivalents and restricted cash at year-end | $72.1 million | $37.6 million |
| Total assets / stockholders’ equity | $555.0 million / $240.3 million | $703.3 million / $256.2 million |
- Loan portfolio: 29 commercial mortgage loans with $441.7 million principal balance and $441.8 million carrying value, versus 32 loans and $506.4 million principal in 2019. Weighted-average all-in yield was 5.5%, compared with 5.7%; weighted-average LTV at origination was 70%. First mortgages were floating rate.
- Debt and liquidity: Year-end repurchase-agreement borrowings for mortgage loans were $290.7 million, down from $335.8 million. Weighted-average borrowing cost for the year declined to 2.7% from 4.2%; average leverage was 186%. The company reported compliance with its financing covenants at year-end. It also had a $16.8 million finance lease liability related to the hotel ground lease.
- Distributions: $9.5 million declared in 2020, including $9.3 million paid in cash and $0.2 million reinvested. Distributions were suspended in spring 2020 and resumed in August. For 2020, gross distributions per share were $0.7648 for Class P and $0.7148 for Classes A, T, D and I. The filing cautions that future distributions are not assured.
- NAV: The company’s non-GAAP NAV was $234.3 million, or $20.1348 per share, at December 31, 2020. This compares with GAAP stockholders’ equity of $240.3 million; NAV includes valuation adjustments and a $2.25 million reserve for expected 2021 hotel losses.
Material changes versus the prior comparable period
- Net loss replaced 2019 net income, primarily due to $35.0 million of realized losses on CMBS sales, a $4.7 million loan-loss provision associated with the hotel foreclosure, and higher operating expenses. The reported loss on the hotel loan was charged off when the company took the collateral.
- In response to COVID-19 market disruption, the company sold all CMBS during 2020 for $121.2 million in proceeds. At year-end 2019, CMBS fair value was $157.9 million. Borrowings against CMBS were fully repaid by year-end.
- Net interest income increased despite lower interest income, as borrowing costs fell. Cash from operations rose to $12.0 million from $10.1 million; investing activities generated $163.9 million, chiefly reflecting security-sale proceeds, while financing activities used $141.5 million.
- Operating expenses rose $5.5 million, mainly from hotel operations and professional fees, including costs to write off expenses for an uncompleted CLO transaction and increased legal expenses.
- The company originated $69.1 million of loans in 2020, versus $329.2 million in 2019, and collected $99.7 million of loan principal. Management attributed slower portfolio growth to liquidity preservation and the temporary IPO suspension.
Outlook, risks and unusual items
- COVID-19 and hotel exposure: The borrower on a $24.5 million loan defaulted; InPoint acquired the Renaissance Chicago O’Hare Suites Hotel through a deed-in-lieu of foreclosure in August 2020. Hotel occupancy fell to 25.3% in 2020 from 72.3% in 2019, and revenue per available room declined to $26.88 from $105.85. A third-party appraisal valued the hotel at $14 million at year-end, down from $21.6 million in June. Management expects $2.25 million of hotel losses in 2021 and intends ultimately to sell the property, but timing and proceeds are uncertain. The balance sheet reports the hotel at $32.5 million net; that GAAP carrying value is not the same as the lower NAV valuation.
- Management said the loan portfolio, other than the hotel loan, made scheduled debt-service payments during 2020, including loans modified to assist borrowers: one hospitality, one retail and two office loans. Seven loans had internal risk rating 3 and three had rating 4 at year-end; the remaining 19 were rated 2.
- Liquidity and investor access: The IPO, share repurchase plan, distributions and distribution reinvestment plan were suspended in March/April 2020 amid valuation uncertainty and lender collateral demands. NAV calculations resumed from June, distributions resumed in August, and the IPO and reinvestment plan resumed in October. No public market exists for the shares. The repurchase plan was to reopen for death or qualified-disability requests from March 2021 and generally for holders from July 2021, subject to reduced initial repurchase caps and the company’s discretion to meet fewer requests or none.
- Financing and commitments: The company had $50.9 million of remaining potential loan-funding commitments on 20 loans at year-end. A new Western Alliance revolving facility of up to $75 million was entered into in March 2021, with a 4.0% interest-rate floor, collateral borrowing-base limits, a required $3.75 million average deposit balance and a company guarantee covering up to 30% of specified obligations plus certain additional amounts.
- Other risks: Leverage, short-term secured financing and margin calls can pressure liquidity; loan and asset values are difficult to estimate; the hotel and loans face continuing pandemic risks; and most debt investments and borrowings are LIBOR-linked, exposing the company to benchmark-transition risk. The company is externally managed, with disclosed conflicts over fees, investment allocation and personnel.
- No formal earnings or distribution guidance is provided. The Advisor agreed to waive 50% of its management fee beginning January 2021 until it gives notice ending the waiver; it may revoke the waiver at its discretion.
Important facts for investors to verify
- Review the full audited statements and notes for the CMBS disposal losses, hotel loan impairment and the difference between the hotel’s GAAP carrying value and NAV appraisal.
- Check subsequent disclosures on hotel occupancy, operating losses, appraisal values and any sale process or sale proceeds.
- Confirm the latest borrowing balances, facility maturities and extensions, collateral requirements, covenant headroom, and the terms and actual availability of the Western Alliance facility.
- Assess loan-level performance, modifications, internal risk ratings, the $50.9 million of potential future funding, and whether the $2.25 million hotel-loss reserve proves adequate.
- Verify current distribution coverage and source of distributions, and the actual availability and limits of share repurchases; shares have no established trading market.
- Consider the reliability and subjectivity of the monthly NAV: the filing says it is not GAAP-based, is unaudited, and may not represent realizable value. The financial statements received an unqualified KPMG audit opinion; management reported effective disclosure controls and internal control over financial reporting.