InPoint Commercial Real Estate Income, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited; dollar amounts below are in millions unless stated otherwise. The company is an externally managed REIT focused primarily on commercial real estate debt, especially floating-rate mortgage loans.
Financial performance and position
- Q3 results: Total income was $7.636 million, up from $6.049 million in Q3 2020. Net income was $2.462 million, or $0.22 per share, versus $6.056 million, or $0.52 per share. Net interest income declined to $4.920 million from $5.684 million; the reported net interest spread was 2.8%, versus 3.2%.
- Nine-month results: Total income was $19.797 million, compared with $18.519 million in 2020. Net income was $7.125 million, or $0.62 per share, versus a net loss of $30.796 million, or $2.67 per share. Net interest income fell to $14.469 million from $18.154 million.
- Drivers and unusual comparison: The 2020 periods included substantial real estate securities valuation and sale losses, as well as a loan-loss provision; these items did not recur in 2021. Q3 2020 also included a $13.404 million unrealized gain on securities, partly offset by a $9.930 million realized sale loss. In 2021, hotel revenue increased, but hotel operating costs also rose.
- Cash flow: Nine-month operating cash flow was $10.501 million, versus $10.250 million. Investing activities used $79.404 million, mainly reflecting $149.068 million of loan originations, partly offset by $69.500 million in principal repayments. Financing provided $131.633 million. Cash increased $62.730 million to $134.837 million.
- Balance sheet and liquidity: At September 30, total assets were $698.436 million and stockholders’ equity was $313.042 million. Cash was $134.837 million. Commercial mortgage loans were $522.342 million; net real estate owned was $31.724 million. Repurchase agreements and credit-facility debt totaled $357.530 million. Management also reported $30.5 million of unencumbered assets.
- Loan portfolio: The company held 34 loans with $521.264 million in principal balance, up from 29 loans and $441.696 million at year-end 2020. Weighted-average interest rate was 5.2%, down from 5.5%; weighted-average years to maturity were 1.5. Management reported 28 loans rated 2 and six rated 3, with none rated 4 or 5.
- Distributions and capital: Common distributions were at a gross annualized rate of $1.25 per share, or $0.1042 monthly, by September 2021. The company paid $9.079 million in cash distributions and reinvested $0.421 million during the first nine months. It raised $87.5 million gross, approximately $84.046 million net, through a September Series A preferred offering carrying a 6.75% cumulative dividend. Common-stock NAV was $227.419 million, or $20.2168 per share, at September 30.
Material changes versus prior periods
- The loan portfolio grew by $80.5 million during the first nine months as the company originated $149.1 million of loans and received repayments of $69.5 million.
- Debt outstanding rose from $290.7 million at December 31, 2020 to $357.5 million at September 30, 2021, including a new Western Alliance credit facility with $14.35 million drawn.
- The company completed its Series A preferred offering in September. After quarter-end, underwriters purchased an additional 100,000 preferred shares, generating approximately $2.421 million net.
- Compared with 2020, 2021 results no longer included the significant securities-related losses and loan-loss provision. However, Q3 2021 net income was lower because the prior-year quarter included a large unrealized securities gain.
- The fixed advisory fee changed effective July 1, 2021 to a calculation based on average NAV. The Advisor also waived $1.475 million of fixed advisory fees for the first nine months, representing 50% of the fixed fee before July 1.
Outlook, risks and contingencies
- Management cited continued demand in its target loan markets and had executed term sheets for approximately $136.4 million of first-mortgage loans, most expected to close in Q4 2021. It reported that all borrowers had made scheduled payments through the filing date and that it had identified no post-quarter changes to loan risk ratings.
- The 362-room Renaissance O’Hare hotel remains affected by the pandemic. Management estimated a $2.4 million 2021 operating loss before depreciation and amortization; occupancy improved to 57% in Q3 2021 from 16% in Q4 2020. The company intends to sell the hotel but cautioned that timing, sale proceeds and further operating losses are uncertain. It also reported that forgiveness of the hotel’s $1.093 million PPP loan was not assured.
- Hospitality and retail represented approximately 9.6% of the loan portfolio. The filing identifies pandemic-related borrower stress, loan defaults, collateral-value declines, and financing or margin-call risks as material concerns.
- The share repurchase program was reinstated for all stockholders on July 1, 2021, but the company repurchased fewer shares than the permitted maximum in July, August and September. Beginning October 1, repurchases are capped at 2% of aggregate NAV monthly and 5% quarterly; the Board may repurchase less, suspend or terminate the program. Common stock has no public trading market.
- Remaining future loan-funding commitments were $67.563 million across 26 loans. The company also disclosed ongoing ground-lease obligations for the hotel and warned that distributions may not be maintained or fully supported by operating earnings. It has previously paid distributions from sources other than operating cash flow.
- Nearly all investments and relevant borrowings are variable-rate and LIBOR-linked. The company said loan and facility agreements permit replacement of LIBOR but that it and lenders had not selected an alternative. Management reported compliance with applicable financial covenants at quarter-end. No material legal proceedings were known to be pending.
- No specific earnings guidance was provided. Management’s stated outlook and expectations are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether the $136.4 million of loan term sheets closed, and the resulting portfolio yields, funding needs and credit quality.
- Hotel operating performance, expected sale timing and proceeds, future losses, and the status of the PPP-loan forgiveness application.
- Debt maturities, collateral requirements, covenant compliance and refinancing conditions, particularly around the CF repo facility maturity in December 2021.
- Actual repurchase requests and fulfillment under the program’s caps, and whether common distributions remain supported by operating cash flow.
- The LIBOR replacement terms ultimately adopted and the potential effects on asset yields and borrowing costs.
- The preferred stock’s cumulative dividend obligations, including any terms that could increase its dividend rate under specified events.