Inpoint Commercial Real Estate Income, Inc. quarterly report, Q3 FY2023

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InPoint Commercial Real Estate Income, Inc. — Q3 2023 Form 10-Q

Reporting period: Three and nine months ended September 30, 2023. Dollar amounts below are in millions unless otherwise noted. The company is an externally managed REIT focused primarily on floating-rate commercial real estate loans.

Financial performance and position

  • Q3 income and earnings: Interest income was $17.4 million and interest expense $10.8 million, producing net interest income of $6.6 million. Total income was $11.1 million; net income was $5.0 million and net income attributable to common stockholders was $3.5 million, or $0.35 per share. The comparable 2022 quarter reported $4.0 million net income and $0.24 per share to common stockholders.
  • Year-to-date results: Interest income was $51.6 million, interest expense $31.7 million and net interest income $19.9 million. The company recorded a net loss of $5.7 million, or $10.2 million attributable to common stockholders ($1.01 loss per share), versus net income of $9.6 million and $0.47 per share in the first nine months of 2022.
  • Cash flow: Nine-month operating cash flow was $12.3 million, compared with $13.1 million in 2022. Investing activities provided $70.5 million, largely reflecting loan repayments and the $11.9 million property sale; financing activities used $58.5 million. Cash increased $24.3 million to $53.7 million.
  • Margins and funding costs: For Q3, the reported net interest spread was 1.1%, down from 1.6% a year earlier; the nine-month spread was also 1.1%, versus 2.0%. Average borrowing cost rose to 7.3% for the first nine months from 3.1% in 2022, while loan yields rose to 8.5% from 5.1%. Management said funding costs increased faster than asset yields as rates rose.
  • Balance sheet and liquidity: Total assets were $809.5 million and stockholders’ equity $254.0 million at September 30, down from $914.5 million and $278.6 million at year-end 2022. Cash was $53.7 million; mortgage loans, net of a $18.6 million allowance, were $751.3 million. Repurchase agreements were $473.3 million, the credit facility $18.4 million and loan participations sold $57.2 million. Management reported $449 million of available borrowing capacity and $20 million of sponsor/sub-advisor liquidity commitments, subject to their terms.
  • Portfolio and NAV: The portfolio comprised 38 loans with $768.7 million principal balance, down from 43 loans and $844.5 million at year-end. Weighted-average all-in yield was 8.8%; weighted-average LTV was 71.0%. Common-stock NAV was $175.3 million, or $17.3317 per share, at September 30.

Material changes versus comparable periods

  • Q3 net income increased by about $1.0 million year over year, principally from higher net interest income and improved hotel results, partly offset by a $0.7 million credit-loss provision.
  • The nine-month net loss reflects a $13.7 million provision for credit losses and a $6.9 million impairment charge on the Renaissance O’Hare, partly offset by a $2.9 million increase in net interest income. The company adopted CECL accounting in January 2023, recording a $5.1 million opening adjustment to equity; prior-year results were not restated.
  • Loan interest income and borrowing costs both rose with higher rates, but the spread narrowed. Loan principal and the number of loans declined, with no new originations during the third quarter.
  • The Renaissance O’Hare was sold in September for $11.9 million net proceeds, with a $0.2 million gain on sale. Including the earlier impairment, the reported total net loss on the property was $6.7 million. The sale also extinguished its ground lease.

Outlook, management commentary and risks

  • The company gave no quantitative earnings or portfolio guidance. Management said the ultimate effects of higher rates on the economy, CRE fundamentals, repayments and borrowers remain uncertain. Floating-rate assets may benefit from higher rates, but financing expense also rises and can offset that benefit.
  • The primary offering, common-stock repurchase program and distribution reinvestment plan remained suspended. The board was evaluating strategic alternatives, with a potential institutional-investor recapitalization among its current focus areas; no transaction is assured.
  • One $29.6 million Portland multifamily loan was placed on nonaccrual in September and risk-rated 5; the borrower faced occupancy and retail-leasing challenges. Cash collected is applied to principal. Four loans were risk-rated 4 and one risk-rated 5. The filing also identifies matured office loans, including one in maturity default and another for which an extension was being negotiated.
  • The company’s $18.6 million loan allowance increased substantially; management attributes asset-specific reserve increases mainly to three office loans and one multifamily loan, reflecting lower estimated collateral values. These estimates rely on subjective Level 3 assumptions and may change.
  • Common distributions remained at an annualized gross rate of $1.25 per share. The company said 100% of distributions in the first nine months were paid from operating cash flow, although distributions exceeded GAAP net income for that period. Class T and D net distributions are reduced by servicing fees. The Series A preferred stock carries a 6.75% cumulative dividend.
  • Risks include CRE property and borrower credit deterioration, refinancing and maturity-extension challenges, rising or volatile interest rates, leverage and collateral requirements, limited common-share liquidity, suspended repurchases, and potential conflicts involving the external advisor and sub-advisor. Management reported compliance with facility financial covenants at quarter-end; the JPM facility’s trailing-four-quarter EBITDA-to-fixed-charges ratio was 154%.
  • After quarter-end, the company declared an October common distribution at the same gross monthly rate. On November 9, 2023, the Atlas repo facility was extended to November 7, 2024, with its maximum advance amount reduced to $100 million.

Most important facts for investors to verify

  • Performance and collateral updates for the nonaccrual Portland loan, the maturity-default office loan, and other loans with elevated risk ratings; assess whether the allowance is adequate.
  • Near-term loan maturities, extensions, repayments and refinancing outcomes, and the effect of further rate changes on the interest spread and debt service.
  • Actual available facility capacity, collateral and covenant headroom, liquidity commitments’ conditions, and the impact of the Atlas facility’s reduced limit.
  • Whether operating cash flow continues to cover common and preferred distributions, particularly given the year-to-date GAAP loss and suspended fundraising and repurchases.
  • Progress and terms, if any, of strategic alternatives; also compare NAV estimates with realizable values, noting that NAV is not a GAAP measure and common shares have no public trading market.