InPoint Commercial Real Estate Income, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited; dollar amounts are in thousands except per-share data. The company is an externally managed mortgage REIT investing primarily in commercial real estate loans and securities.
Financial results and position
- Q2 revenue and earnings: Interest income was $8,456, interest expense was $3,509, and net interest income was $4,947. Net income was $2,484, or $0.30 per diluted share.
- Six-month results: Interest income was $15,047, interest expense was $6,264, and net interest income was $8,783. Net income was $6,105, or $0.82 per diluted share. The six-month net interest spread was 2.4%.
- Cash flow: Six-month operating cash flow was $3,426; investing activities used $199,471; financing activities provided $215,464. Cash, cash equivalents and restricted cash totaled $47,916 at June 30.
- Assets and equity: Total assets were $614,239 and stockholders’ equity was $229,144, compared with $372,023 and $142,272, respectively, at December 31, 2018.
- Portfolio: The company held 27 commercial mortgage loans with $430,804 principal balance and $427,627 carrying value, plus 14 real estate securities valued at $133,691. The loan portfolio’s weighted-average rate was 6.3% and average maturity was 2.1 years.
- Debt and liquidity: Repurchase agreement borrowings totaled $361,772 net of deferred debt costs: $279,016 for mortgage loans and $82,756 for securities. Cash and restricted cash were $47,916. Management said it believed liquidity and capital resources were sufficient for anticipated needs.
- Distributions: The company declared $7,148 for the first half, or $0.96 per share, and paid $6,684. Operating cash flow was below declared distributions; 48.7% of distributions paid during the period were funded from Private Offering proceeds.
Changes versus the prior comparable period
- Q2 net income rose to $2,484 from $543; six-month net income increased to $6,105 from $1,039. Management attributed the increase primarily to higher net interest income as the portfolio expanded with equity proceeds and borrowing.
- Six-month interest income increased to $15,047 from $2,816, while interest expense increased to $6,264 from $808. Operating expenses rose to $4,425 from $1,090, mainly reflecting higher advisory fees as assets grew and increased debt financing costs.
- Portfolio growth was funded by new equity and greater leverage. Mortgage-loan carrying value increased from $249,573 at year-end to $427,627; securities fair value increased from $91,218 to $133,691.
- Borrowings increased from $226,204 to $361,772. The company reported a 4.5% weighted-average borrowing cost for the first half, versus 3.5% for the 2018 comparable period; management cited LIBOR and portfolio changes.
- Six-month securities valuation gains were $1,790, versus $121 in the prior period; Q2 alone recorded an $18 unrealized loss, versus a $90 gain.
Outlook, risks and notable items
- No quantified earnings or investment guidance was provided. The company began its IPO in May 2019, offering up to $2.35 billion of common stock. The Private Offering ended June 28; as of August 13, gross proceeds from it were $276,681. IPO proceeds reported as of that date were $590.
- The company entered a new, uncommitted JPMorgan repurchase facility with up to $150 million of advances and extended the Column Financial facility maturity to May 2020. The facilities carry variable LIBOR-based rates; the company reported compliance with financial covenants at June 30.
- Interest-rate exposure is significant: 98% of investments were variable-rate, and the company had no interest-rate hedges during the periods reported. A 50-basis-point increase was estimated to increase net interest income by 5.14%, assuming the balance sheet stayed constant; rate-change scenarios are estimates, not forecasts.
- Credit and liquidity risks include potential loan defaults, reliance on repurchase financing, and $45,352 of remaining conditional future funding commitments on 19 loans. No loan-loss allowance was recorded; one loan was rated 3 and the remaining 26 were rated 2.
- The company cautioned that distributions may be funded from sources other than operating cash flow. Its share repurchase plan is capped at 2% of NAV monthly and 5% quarterly, and repurchases may be limited or suspended; no public trading market is expected.
- Other noted risks include potential conflicts with the external Advisor and Sub-Advisor, dependence on continued REIT qualification, and a charter borrowing limit of 300% of net assets. Management reported no known material legal proceedings and effective disclosure controls.
Important facts for investors to verify
- Whether operating cash flow can support distributions without recurring reliance on offering proceeds, and how distributions compare with taxable income.
- Loan and CMBS credit quality, concentration by property type and geography, the loan rated 3, and the absence of a recorded loan-loss allowance.
- Repurchase financing availability, collateral and covenant terms, refinancing exposure, and sensitivity to LIBOR and other rate changes.
- Funding and performance of the $45,352 in loan commitments, and the terms and execution of the IPO and monthly NAV pricing.
- Share-repurchase limits and liquidity, including the lack of a public trading market and the potential for the plan to be modified or suspended.