InPoint Commercial Real Estate Income, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Dollar amounts below are in thousands unless otherwise noted. The company is an externally managed, non-traded REIT investing primarily in commercial real estate loans and securities.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $3,364 | $304 | $6,180 | $554 |
| Interest expense | $1,271 | $49 | $2,079 | $101 |
| Net interest income | $2,093 | $255 | $4,101 | $453 |
| Operating expenses | $1,125 | $185 | $2,215 | $543 |
| Net income (loss) | $1,340 | $(36) | $2,379 | $(125) |
| Basic and diluted EPS | $0.32 | $(0.04) | $0.77 | $(0.23) |
- Q3 net interest spread was 2.4%, down from 4.5% a year earlier; nine-month spread was 2.4% versus 3.6%. The company attributed the growth in net income mainly to portfolio expansion funded by offering proceeds and borrowing.
- Q3 other income included a $336 unrealized gain on real estate securities; the nine-month gain was $457. Nine-month modified funds from operations (MFFO) was $2,023, versus a $6 loss in 2017; MFFO is a non-GAAP supplemental measure.
Balance sheet, liquidity and capital
- At September 30, assets were $259,984, up from $61,142 at year-end 2017. Cash was $16,094, compared with $1,406; equity was $114,891, compared with $41,985.
- Commercial mortgage loans carried at $157,232 (12 loans; $158,570 principal) versus $32,094 at year-end. Real estate securities were $84,618 versus $25,993.
- Repurchase-agreement borrowings totaled $142,223: $87,602 against mortgage loans and $54,621 against securities, compared with $17,113 in total at year-end. The mortgage-loan facility had a $175,000 commitment, adjustable up to $250,000, and a September 30 weighted average rate of 4.41%; it matures August 13, 2019, subject to extension conditions. Securities repo borrowings had a 3.55% weighted average rate and 16 days to maturity.
- Nine-month operating cash flow was $1,616; investing cash outflow was $183,029, primarily for loan originations and securities purchases; financing cash inflow was $196,101. Cash increased by $14,688.
- The company declared $4,431 and paid $3,961 in distributions for the first nine months, while generating $1,616 of operating cash flow. It reported that 59.2% of distributions paid in the period came from offering proceeds.
- At September 30, nine loans had $21.9 million of remaining future funding commitments. The company stated it believed liquidity was sufficient for anticipated uses.
Changes, outlook and risks
- The portfolio expanded substantially: mortgage loans increased from three to 12 and CMBS holdings from three to nine. The company raised $74,952 net from share issuance during the first nine months; by November 8, 2018, gross offering proceeds since inception totaled $140,716, with $359,330 remaining under its $500 million offering limit.
- One mortgage loan was risk-rated 3 and 11 were rated 2 at September 30; the weighted-average rating was 2. No loan-loss allowance was recorded. CMBS ratings by fair value included 24% AAA, 2% AA-, 36% BB- or equivalent, and 38% unrated by at least one agency.
- The Advisor began charging its advisory fee in April 2018 after waiving it for earlier periods. The Q3 fee was $840; the nine-month fee was $1,379. The advisory arrangement also includes a performance fee tied to returns above a 7% annual threshold, subject to a cap.
- No earnings or portfolio guidance was provided. Management described the portfolio as primarily floating-rate and expects diversification to improve as capital is raised. The filing notes that the portfolio remains concentrated while small and that composition may change materially.
- Key risks include credit losses, interest-rate and market disruptions, leverage and short-term repo refinancing, and dependence on capital raising. The company has no public trading market for its shares; its repurchase program may be the only exit route and is subject to limitations. It also cautioned that distributions may be paid from share-sale proceeds if operating cash flow is insufficient. It did not hedge interest-rate risk during the periods presented; 96% of investments were variable-rate at September 30.
- The company reported no material pending or known contemplated legal or regulatory proceedings, no defaults on senior securities, and no material changes in internal control. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether recurring cash flows can cover distributions as the portfolio and expenses grow; compare distributions with operating cash flow and offering proceeds used.
- Repo facility terms, collateral requirements, refinancing and extension conditions, and the effect of rate changes on net interest income.
- Performance and collateral quality of the 12 loans, including the risk-rated 3 loan, loan-to-value figures, and the absence of a loan-loss reserve.
- CMBS credit quality, particularly the unrated and below-investment-grade portions, and the sensitivity of reported earnings to unrealized fair-value changes.
- Offering progress, related-party advisory and distribution arrangements, and the practical limits on liquidity through the share repurchase program.