InPoint Commercial Real Estate Income, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 12, 2020. Financial statements are unaudited. The company is an externally managed mortgage REIT investing mainly in commercial real estate loans and securities.
Financial position and performance
| Metric | Q2 / June 30, 2020 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $8.8 million for Q2; $19.1 million for six months | Q2 2019: $8.5 million; six months 2019: $15.0 million |
| Net interest income | $6.1 million for Q2; $12.5 million for six months | Q2 2019: $4.9 million; six months 2019: $8.8 million |
| Net income (loss) | $1.0 million for Q2; loss of $36.9 million for six months | Q2 2019: $2.5 million; six months 2019: $6.1 million income |
| Net income (loss) per share | $0.09 for Q2; $(3.21) for six months | Q2 2019: $0.30; six months 2019: $0.82 |
| Operating cash flow | $8.5 million for six months | Six months 2019: $3.4 million |
| Cash and restricted cash | $39.9 million | $37.6 million at December 31, 2019 |
| Total assets / stockholders’ equity | $614.7 million / $237.5 million | $703.3 million / $256.2 million at December 31, 2019 |
| Repurchase-agreement borrowings | $373.3 million net of debt costs | $443.3 million at December 31, 2019 |
| Net asset value | $249.4 million; $21.4439 per share | Company reported the June NAV was approximately 14% below its last published NAV |
Q2 net interest spread was 2.9%, compared with 2.5% in Q2 2019; the six-month spread was 2.7%, versus 2.4%. Six-month weighted average borrowing cost fell to 3.0% from 4.5%, while average interest-earning assets grew. These spread measures are not equivalent to a company-wide operating margin.
Portfolio, changes, and unusual items
- At June 30, the loan portfolio comprised 33 loans with $504.5 million principal outstanding; carrying value after a $5.8 million loan-loss allowance was $498.1 million. Weighted-average loan interest rate was 5.6% and average remaining maturity was 1.9 years.
- CMBS holdings declined to 11 positions with $73.9 million fair value from 17 positions and $157.9 million at year-end. Six-month net unrealized securities losses were $18.9 million, and securities sales generated $19.3 million realized losses. The company attributed the valuation deterioration primarily to COVID-19, especially hospitality exposure.
- The six-month net loss also included a $5.8 million loan-loss provision and a $0.4 million loss on sale of a commercial loan. The provision covered a hotel-secured first mortgage and a hotel credit loan. Q2 results included a $19.3 million unrealized securities gain that was substantially offset by the $19.3 million realized loss on securities sold.
- Six-month operating expenses rose to $5.0 million from $4.4 million, including higher professional fees partly due to writing off costs for a collateralized loan obligation that was not completed. The advisor waived $0.9 million of fixed advisory fees during the six-month period.
- Cash flow from investing activities was positive $47.7 million, compared with negative $199.5 million in the first half of 2019, reflecting lower loan originations, no CMBS purchases, and asset sales. Financing activities used $53.9 million, principally reflecting net repurchase-agreement paydowns.
Liquidity, outlook, and risks
- On March 24, the board suspended the IPO, share repurchase program, distributions, and distribution reinvestment plan, effective April 6, citing pandemic-related uncertainty, difficulty valuing assets, and financing and collateral needs. NAV calculations resumed as of June 30; the IPO, repurchase program, and reinvestment plan remained suspended at quarter-end.
- After quarter-end, the board authorized a distribution of approximately $0.0715 per share, payable around August 18 to July 31 record holders. The amended reinvestment plan became effective August 7, but the plan itself remained suspended. As of July 31, cash and restricted cash were $33.8 million and $0.4 million, respectively.
- Management reported one hotel loan in default and was pursuing remedies, expecting the outcome could be ownership of the Renaissance Chicago O’Hare Suites Hotel through a deed-in-lieu of foreclosure. Management estimated the property’s value at approximately $20.2 million and projected initial pandemic-period operations would produce a quarterly net operating loss of about $0.75 million. These are management estimates, not guarantees.
- One additional hospitality loan was temporarily modified to defer part of interest payments. The company had $59.3 million of remaining future-funding commitments on 22 loans, subject to borrower conditions.
- Repo financing creates collateral and refinancing risk. The company reported covenant compliance through the filing date, but lenders may require additional collateral or repayment if asset values fall. The company had $0.4 million of restricted cash posted as additional collateral at quarter-end and $41.0 million of unencumbered assets.
- Management gave no earnings or investment guidance. Key uncertainties include COVID-19 effects on hospitality and retail collateral, loan defaults and recoveries, CMBS valuations, margin calls, limited access to liquidity, and the suspended share repurchase program. The company also noted that shares have no public trading market and may be difficult to sell.
Most important facts for investors to verify
- Subsequent performance and resolution of the defaulted Chicago hotel loan, including recovery value, foreclosure outcome, operating costs, and any REIT-tax implications.
- Current borrower payment status, loan risk ratings, hotel and retail exposure, and adequacy of the $5.8 million loan-loss allowance.
- CMBS marks, realized and unrealized losses, lender collateral requirements, and availability and terms of short-term repurchase financing.
- Current status of the IPO, share repurchase program, distributions, and reinvestment plan, and whether available liquidity can meet commitments and financing needs.
- Basis and sensitivity of the June 30 NAV, reported at $21.4439 per share, and the assumptions behind management’s hotel valuation and operating estimates.