InPoint Commercial Real Estate Income, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Financial amounts below are in U.S. dollars; unless noted, filing tables present amounts in thousands. The filing was signed March 11, 2020.
Business context
InPoint is an externally managed REIT focused primarily on floating-rate commercial mortgage loans and commercial mortgage-backed securities (CMBS), with authority to make select single-tenant net-lease investments. It has no employees and conducts substantially all business through its operating partnership. In 2019 it ended its private offering and began a best-efforts IPO; its shares are not listed, and the company does not expect a public trading market.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Interest income | $34.290 million | $11.105 million |
| Interest expense | $14.035 million | $4.091 million |
| Net interest income | $20.255 million | $7.014 million |
| Net income | $13.705 million | $2.069 million |
| Basic and diluted earnings per share | $1.53 | $0.57 |
| Net cash from operating activities | $10.078 million | $3.228 million |
| Cash used in investing activities | $317.580 million | $283.090 million |
| Cash from financing activities | $316.644 million | $306.953 million |
- At year-end, total assets were $703.319 million, total liabilities $447.153 million, and GAAP stockholders’ equity $256.166 million. Cash, cash equivalents and restricted cash totaled $37.639 million.
- Investment portfolio carrying values were $504.702 million in commercial mortgage loans and $157.869 million in real estate securities, versus $249.573 million and $91.218 million, respectively, in 2018. The loan portfolio grew to 32 loans from 18; weighted-average all-in loan yield declined to 5.7% from 6.6%.
- CMBS portfolio fair value grew to $157.869 million from $91.218 million; weighted-average yield was 6.2% versus 5.6%. At year-end, 46% of the portfolio was rated BB- and 35% was unrated.
- Year-end repurchase-agreement borrowings were $443.294 million, compared with $226.204 million in 2018. Average borrowings rose to $329.037 million from $99.221 million; average borrowing cost was 4.2% versus 4.1%. Average leverage, as defined by the company, was 189.3% versus 140.8%.
- Average yield on interest-earning assets was 6.6%, and net interest spread was 2.4%, compared with 6.4% and 2.3% in 2018. Operating expenses were $7.539 million, or 1.5% of average invested assets and 55.0% of net income.
- The company recorded no loan-loss allowance at year-end. Its internal review rated 30 loans risk rating 2 and two loans risk rating 3; none were rated 4 or 5.
Material changes versus 2018
Net income increased substantially as the company invested offering proceeds and increased leverage, expanding interest-earning assets. Net interest income rose nearly threefold, while interest expense and advisory fees also increased. Operating cash flow increased, but remained below cash distributions paid. Securities produced a $1.032 million unrealized gain in 2019, compared with a $1.279 million unrealized loss in 2018; 2019 also included a $43,000 realized securities loss.
The company raised $130.164 million from stock issuance in 2019, compared with $114.070 million in 2018, and expanded its loan repo financing capacity through a new JPMorgan facility. Its reported loan all-in yield fell as the portfolio composition and LIBOR changed.
Distributions, liquidity, outlook and risks
- Cash distributions paid in 2019 were $16.333 million, compared with $6.326 million in 2018; an additional $37,000 was reinvested. The filing states that 38.3% of 2019 distributions were funded from net offering proceeds. Distributions therefore exceeded operating cash flow of $10.078 million.
- Class P distributions were set at an annualized $1.92 per share in 2019; IPO classes generally received $1.62 annualized from August through December, before applicable servicing fees. The board controls future distributions; there is no guaranteed minimum or formal earnings guidance.
- Remaining future funding commitments on loans were $54.620 million at year-end. Repo financing is variable-rate and collateralized; the company disclosed mark-to-market, margin-call, refinancing, covenant and short-term funding risks. It reported compliance with financing covenants at year-end.
- All 2019 investments were reported as 97% variable-rate overall, primarily indexed to LIBOR. The company had no interest-rate hedges during 2017–2019 and warned that the planned LIBOR transition could affect financing costs, investment income and contracts.
- Management described CRE lending conditions as attractive, citing expected loan maturities and refinancing demand, but acknowledged intense lender competition. This is commentary, not quantified guidance.
- The filing discusses the COVID-19 outbreak as a potential risk to hospitality, retail, office, multifamily and industrial collateral and to distributions. This was a forward-looking concern disclosed after year-end, not a reported 2019 operating impact.
- Share repurchases are limited to 2% of aggregate NAV monthly and 5% quarterly, require at least a one-year holding period, and may be reduced, suspended or stopped. In 2019, the company repurchased 76,363 shares at an average $25.02 per share.
- Other notable items: the Advisor reimbursed $359,000 of expenses in 2019 and waived specified advisory fees, including the performance component. The company disclosed material conflicts involving affiliated management, fees and allocation of investment opportunities. No material legal proceedings were reported.
Investor facts to verify
- Whether earnings and distributions remain supportable from recurring operating cash flow, given distributions exceeded operating cash flow in 2019 and were partly funded from offering proceeds.
- Current borrowing balances, collateral haircuts, facility maturities, covenant headroom and ability to meet the $54.620 million of potential loan advances.
- Loan-level credit performance and collateral concentrations, including the two risk-rating-3 loans and the CMBS portfolio’s BB- and unrated exposures.
- How management’s NAV valuations compare with realizable values: year-end NAV was $267.845 million, or approximately $25.04 per share, and loan fair value estimates use Level 3 inputs.
- Current share repurchase availability and terms, since there is no public market and repurchases are discretionary and capped.
- Progress on LIBOR replacement and the potential effect of COVID-19 and subsequent economic conditions on borrowers, collateral, liquidity and distributions.
KPMG issued an unqualified opinion on the consolidated financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.