InPoint Commercial Real Estate Income, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, the externally managed REIT originated and acquired commercial real estate (CRE) loans and securities, primarily floating-rate investments. The financial statements are unaudited; amounts below are in millions unless otherwise noted. The company had no publicly traded shares.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / December 31, 2018 |
|---|---|---|
| Interest income | $6.493 | $0.830 in Q1 2018 |
| Net interest income | $3.738 | $0.727 in Q1 2018 |
| Net income | $3.620; $0.54 per share | $0.496; $0.23 per share in Q1 2018 |
| Modified funds from operations (MFFO) | $1.830 | $0.530 in Q1 2018 |
| Operating cash flow | $1.661 | $0.594 in Q1 2018 |
| Total assets | $453.525 | $372.023 |
| Repurchase-agreement debt | $266.899 | $226.204 |
| Stockholders’ equity | $182.383 | $142.272 |
| Cash and cash equivalents | $29.519; restricted cash $0.471 | $27.530; restricted cash $0.967 |
Net income rose substantially year over year as the investment portfolio and associated net interest income expanded. The result also included a $1.808 unrealized gain on real estate securities, partly offset by a $0.043 realized loss. Total operating expenses increased to $1.981 from $0.262, including a $1.531 advisory fee; the Advisor had waived that fee before April 1, 2018.
Investments included 21 commercial mortgage loans with $324.593 principal balance and 11 real estate securities with $98.122 fair value. Average borrowing cost was 4.5%, net interest spread 2.4%, and average leverage 186.9% for the quarter. At March 31, 97% of the investment portfolio was variable-rate. The company reported no allowance for loan losses; 20 loans were risk-rated 2 and one was rated 3.
Material changes and cash flows
- Loan carrying value increased to $322.222 from $249.573 at year-end; first-mortgage loans increased from 16 to 19. Securities fair value increased to $98.122 from $91.218.
- Investing activities used $77.213, chiefly for loan originations and securities purchases. Financing activities provided $77.045, including $39.656 net proceeds from stock issuance and net repurchase-agreement financing.
- Distributions declared were $3.170 versus $1.661 of operating cash flow. The filing states that 43.1% of distributions paid in Q1 were funded from offering proceeds. The declared distribution rate was $1.92 per share annually, paid monthly in arrears.
- Remaining future funding commitments on CRE loans were $26.745, down from $30.343 at December 31, 2018. Advances are subject to borrower conditions and company discretion.
Outlook, risks and notable items
Management stated it believed available liquidity and capital resources were sufficient for anticipated investment, debt-service and distribution needs; the filing provides no earnings or portfolio guidance. The company cautioned that distributions may be funded from stock-sale proceeds if operating cash flow is insufficient. Other cited risks include credit losses, market disruptions, variable interest rates, leverage, conflicts involving the external manager and sub-advisor, REIT qualification, and limited share liquidity. The charter generally limits borrowing to 300% of net assets. No interest-rate hedging was used during the quarter, and no material legal proceedings were reported.
After quarter-end, the SEC declared the company’s IPO registration statement effective on May 3, 2019. On May 6, a subsidiary entered into an uncommitted JPMorgan repurchase facility providing up to $150 million, at LIBOR plus 1.75%–2.25%, with an initial maturity in May 2021. Through May 9, the company reported $219.356 million of gross offering proceeds. Management said the company remained in compliance with repurchase-agreement financial covenants at March 31. Disclosure controls were reported effective.
Important facts for investors to verify
- How much of future distributions will be covered by recurring operating cash flow rather than offering proceeds, particularly given the Q1 cash-flow shortfall versus distributions declared.
- Loan and CMBS credit performance, including the loan rated 3, the absence of a recorded loan-loss allowance, and exposure to hospitality, retail and unrated securities.
- Refinancing, collateral and covenant terms for repurchase-agreement borrowings, including the short maturities of securities financing and the company’s reliance on variable-rate funding.
- The effect of the IPO and subsequent capital raising on share classes, fees, dilution, portfolio growth and shareholder liquidity; no public trading market was available at the filing date.
- Whether growth in net income is sustained by net interest income, rather than market-driven unrealized gains; GAAP net income and MFFO were $3.620 million and $1.830 million, respectively.