InPoint Commercial Real Estate Income, Inc. — Q2 2017 Form 10-Q
Business context and period. This is the unaudited quarterly report for the three and six months ended June 30, 2017. The company, formed in September 2016 and operating since October 2016, is an externally managed commercial real estate investment company. It was in an early portfolio-building phase; the 2016 comparative periods had no operations. Its registration statement became effective July 1, 2017.
Financial performance and position
| Metric | Q2 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Interest income | $148,305 | $250,044 |
| Interest expense | $41,323 | $51,738 |
| Net interest income | $106,982 | $198,306 |
| Operating expenses | $265,379 | $358,243 |
| Unrealized securities gain (loss) | $(18,520) | $70,913 |
| Net loss | $(176,917) | $(89,024) |
| Basic and diluted loss per share | $(0.40) | $(0.25) |
- At June 30, assets were $23.10 million, including $10.92 million cash and $10.58 million in real estate securities. Liabilities were $8.15 million, including $6.37 million under repurchase agreements; stockholders’ equity was $14.94 million.
- For the first half, operating cash flow was negative $43,758, investing cash flow was negative $5.13 million, and financing cash flow was positive $15.57 million. Cash increased to $10.92 million from $511,854 at year-end 2016.
- The company held two CMBS positions, versus one at year-end 2016. Their fair value was $10.58 million; both were floating-rate investments. The portfolio’s weighted-average coupon was 6.9%, remaining life 1.2 years, and 52% of fair value was rated Ba3.
- Average financing cost on repurchase agreements was 2.9% in Q2 and 2.8% for the six-month period. The quarter’s net interest spread was 2.6%; reported weighted-average levered yield was 8.5% for Q2 and 7.1% for the six-month period.
Changes, distributions, and outlook
- Compared with December 31, 2016, cash, securities, equity, and liabilities increased as the company raised capital and began using repurchase financing. The 2016 operating comparisons are not like-for-like because the company had not yet begun operations.
- In the first half, the company issued 377,159 shares and received $9.50 million net of selling costs. By August 9, 2017, it had issued 892,674 shares and raised $23.58 million gross since inception under its $500 million private offering.
- It declared $346,411 in distributions and paid $297,462 during the first half; $82,179 was payable at June 30. The declared daily distribution rate was $0.005260274 per share. Management cautions that distributions may be funded from sources other than operating cash flow, including share-sale proceeds.
- Management said it believed liquidity and capital resources were sufficient for anticipated needs. No specific earnings or portfolio guidance was provided. The company intends to qualify as a REIT beginning with tax year 2017 and generally must distribute at least 90% of annual REIT taxable income.
- The Advisor waived its advisory fee for the first half of 2017. The company reported no material pending or contemplated litigation, no off-balance-sheet arrangements, and effective disclosure controls.
Risks and unusual items
- The portfolio was concentrated in only two CMBS investments, and management expected concentration to remain higher until fundraising permitted broader diversification. Securities were valued using Level II inputs and were subject to market-value fluctuations.
- Repurchase agreements are short-term secured borrowings; the outstanding balance was $6.37 million, collateral was $10.4 million, and the reported maturity was 13 days. A decline in collateral value may trigger margin calls. The company reported covenant compliance at quarter-end.
- Management identified credit and interest-rate risk, potential market disruption, limited liquidity for shares (no public trading market expected), conflicts of interest with the external manager and affiliates, and the risk of failing to qualify as a REIT.
- GAAP net loss was $89,024 for the first half despite positive net interest income, reflecting operating costs and the timing of unrealized valuation changes. The filing’s supplemental MFFO reconciliation reports $(114,404); MFFO is non-GAAP and is not a substitute for cash flow or a measure of distribution capacity.
Investor facts to verify
- Whether operating income and cash flow grow enough to support distributions without reliance on capital-raising proceeds.
- Portfolio expansion, credit quality, concentration, valuation assumptions, and performance of the two CMBS positions.
- Repurchase-agreement renewals, refinancing terms, covenant compliance, and capacity to meet collateral margin calls.
- Offering progress, share issuance costs, related-party reimbursements, and the effects of the share repurchase limits.
- Progress toward REIT qualification and the sustainability and source of declared distributions.