InPoint Commercial Real Estate Income, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; the filing does not provide standalone fourth-quarter results. Dollar figures below are in millions unless otherwise stated.
Business context
InPoint is an externally managed, non-traded mortgage REIT formed in 2016. It originates and holds commercial real estate loans—primarily floating-rate first mortgages—and invests in commercial mortgage-backed securities (CMBS). It has no employees and relies on affiliated advisors. Its Class P shares are privately offered, with no public trading market expected.
Financial and portfolio highlights
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $11.033 | $0.979 |
| Interest expense | $4.091 | $0.156 |
| Net interest income | $6.942 | $0.823 |
| Net income | $2.069 | $0.081 |
| Basic and diluted earnings per share | $0.57 | $0.11 |
| Cash provided by operating activities | $3.607 | $0.307 |
| Cash, cash equivalents and restricted cash at year-end | $28.497 | $1.406 |
| Total assets at year-end | $372.023 | $61.142 |
| Total liabilities at year-end | $229.751 | $19.157 |
| Stockholders’ equity at year-end | $142.272 | $41.985 |
- Net interest spread was 2.3% in 2018 versus 2.8% in 2017; weighted average asset yield was 6.4% and average borrowing cost was 4.1%. Average leverage was 140.8%.
- At year-end, commercial mortgage loans had a carrying value of $249.573 across 18 loans; CMBS had fair value of $91.218 across 10 positions. The loan portfolio’s weighted average coupon was 6.5%, and weighted average loan-to-value at origination was 69%.
- Total repurchase-agreement borrowings were approximately $226.2 at year-end: $164.3 secured by mortgage loans and $61.9 secured by securities. Debt to year-end equity was approximately 1.6x.
- The company reported no loan-loss allowance. Of 18 loans, 17 had internal risk rating 2 and one had rating 3. CMBS included $32.7 of unrated positions and $38.5 rated BB-.
Changes versus 2017
- The portfolio expanded substantially, with mortgage-loan carrying value rising from $32.1 to $249.6 and CMBS fair value from $26.0 to $91.2. Management attributed growth chiefly to offering proceeds invested with leverage.
- Net income increased to $2.069 from $0.081, while unrealized CMBS losses of $1.279 in 2018 contrasted with a $0.041 unrealized gain in 2017.
- Borrowings increased from $17.1 to $226.2. Weighted average borrowing costs rose from 2.6% to 4.1%, while net interest spread narrowed.
- Operating expenses rose to $3.679 from $0.725, including a $2.540 advisory fee that began accruing in April 2018 after the Advisor waived fees for earlier periods.
Distributions, liquidity and outlook
- The declared annual distribution rate was $1.92 per Class P share. In 2018, distributions declared were $7.008, compared with $3.607 of operating cash flow; 43.0% of distributions paid were funded from offering proceeds. The filing cautions that distributions are discretionary and may be funded from sources other than operations.
- Investing activities used $283.469 in 2018, funded primarily by $306.953 of financing cash flow, including equity issuance and repurchase-agreement financing. The company reported $28.497 of cash and restricted cash at year-end.
- Thirteen loans carried aggregate future funding commitments of $30.343, subject to borrower conditions and company discretion.
- The mortgage-loan repurchase facility had a $175 commitment and $164.410 outstanding at year-end, with a November 2019 maturity and a LIBOR-plus-2.25% rate. A January 2019 amendment increased its maximum advance amount to $250. The company reported compliance with financing covenants at year-end.
- Management described market conditions as favorable for CRE lending and cited expected loan maturities and refinancing needs as potential opportunities. This is not quantified earnings or distribution guidance. The filing identifies LIBOR transition after 2021 as a risk for contracts indexed to USD-LIBOR; the company had no interest-rate hedges in 2018.
Key risks and unusual items
- Shareholders have no established trading market; before the planned NAV pricing date, repurchases were generally limited to death or disability. The company expected to determine its initial NAV no later than November 16, 2019; future NAV-based repurchases could be limited and may not recover the purchase price.
- Leverage, short-term secured financing, collateral valuation and margin-call provisions expose liquidity and results to market declines, refinancing constraints and higher rates. The filing reports 97% of the investment portfolio was variable-rate at year-end.
- CRE borrower defaults, collateral-value declines, concentration in a relatively small portfolio, CMBS credit and valuation risk, and potential future funding needs could impair income or principal. Loan values are carried at cost, and the absence of an allowance reflects management’s estimate that losses were not probable at year-end.
- Advisory and offering arrangements involve affiliates and potential conflicts, including investment allocation and fees. Distributions exceeded operating cash flow and were partly funded from offering proceeds.
- The company is a REIT and relies on continued compliance with REIT and Investment Company Act requirements. Management reported effective disclosure controls and internal control over financial reporting; the independent auditor issued an unqualified opinion on the financial statements.
Investor facts to verify
- Review distribution coverage from recurring operating cash flow and the extent to which future distributions depend on equity proceeds or borrowing.
- Check subsequent performance and credit status of the loan rated 3, CMBS positions, and the portfolio’s unrated and below-investment-grade securities.
- Confirm facility renewals, borrowing capacity, covenant headroom, collateral requirements and the impact of the LIBOR-to-SOFR transition.
- Assess the $30.343 of future funding commitments against available liquidity and expected loan performance.
- Verify offering costs, related-party fees and conflicts, and understand the valuation methods and limitations underlying any future NAV and repurchase price.