InPoint Commercial Real Estate Income, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Dollar amounts below are in millions unless stated otherwise. The company is an externally managed REIT focused primarily on commercial real estate debt; it also owns a Chicago hotel acquired through a deed-in-lieu of foreclosure.
Key financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total income | $6.7 | $6.1 | $12.2 | $12.5 |
| Net interest income | $5.0 | $6.1 | $9.5 | $12.5 |
| Operating expenses | $3.4 | $3.4 | $7.5 | $5.0 |
| Net income (loss) | $3.3 | $1.0 | $4.7 | $(36.9) |
| Basic and diluted EPS | $0.28 | $0.09 | $0.40 | $(3.21) |
| Operating cash flow | Not presented by quarter | $4.7 | $8.5 |
- At June 30, assets were $648.9, including $555.6 of commercial mortgage loans, $32.0 of real estate owned and $51.9 of cash. Stockholders’ equity was $238.3; NAV was $235.2, or $20.1991 per share.
- Debt comprised $371.8 of mortgage-loan repurchase agreements and $14.4 drawn on a credit facility, totaling $386.2, plus a $16.9 finance lease liability. Total liabilities were $410.6. The company reported compliance with applicable financing covenants.
- Six-month average asset yield was 5.6%, average borrowing cost 2.6%, net interest spread 3.0% and weighted average levered yield 11.6%. These are portfolio yield measures, not GAAP profit margins.
- Six-month investing cash outflow was $113.0, largely reflecting $138.0 of loan originations; financing provided $88.1. Cash declined $20.2 from year-end 2020. Cash distributions paid were $5.7, with another $0.3 reinvested; declared distributions totaled $6.3.
Material changes versus comparable periods
- Q2 net income rose to $3.3 from $1.0, mainly because prior-year loan-loss provision and commercial-loan sale losses did not recur, and advisory and professional fees were lower. Lower net interest income partly offset the improvement.
- Six-month net income improved from a $36.9 loss to $4.7 profit. The 2020 comparison included $19.3 of realized and $18.9 of unrealized losses on real estate securities, plus $5.8 of loan-loss provision; the securities were sold in 2020.
- Six-month net interest income fell to $9.5 from $12.5, reflecting lower average interest-earning assets after the securities sale and loan payoffs. Operating expenses increased to $7.5 from $5.0, principally due to the hotel’s operating costs and depreciation.
- The loan portfolio grew to 36 loans with $554.8 principal balance from 29 loans and $441.7 at year-end. Nine loans were originated in the first half. The reported all-in yield was 5.2%, down from 5.5% at year-end.
- Repurchase-agreement and credit-facility debt increased to $386.2 from $290.7 at year-end, supporting loan growth. The first-half average borrowing cost declined to 2.6% from 3.0% in the comparable 2020 period.
Outlook, risks and unusual items
- Management gave no specific earnings or financial guidance. It reported continued demand and competition for loans, selective term-sheet activity, and a focus on office, industrial and multifamily lending. Management said all borrowers had made scheduled payments after quarter-end through the filing date and no loan risk-rating changes had been identified.
- COVID-19 remains a material uncertainty, particularly for hospitality and retail exposures. Those property types represented about 9% of loan principal. At June 30, six loans were rated 3 and two rated 4; none were rated 5. A separate loan had passed its maturity without repayment; the company had issued a default notice and was discussing repayment from a contracted property sale.
- The 362-room Renaissance O’Hare hotel generated $2.6 of first-half revenue but recorded an approximately $0.8 net loss. Management estimated a $1.8 hotel loss for 2021 and intends to sell the hotel, while weighing potential sale proceeds against further operating losses and uncertain travel recovery. Hotel occupancy improved to 48% in Q2 2021 from 28% in Q1 2021. Forgiveness of its $1.1 Paycheck Protection Program loan is not assured.
- The company had $72.8 of remaining future loan-funding commitments across 28 loans, subject to borrower conditions. Liquidity also depends on asset-backed financing; the Column Financial repurchase facility had a December 2021 maturity. Management reported $30.5 of unencumbered assets in addition to cash.
- Distributions resumed in August 2020 and increased during the first half of 2021. First-half cash flow from operations covered 79.2% of distributions; the balance was attributed to operating cash flows generated in 2020. Management cautioned that distributions may again be funded from sources other than current operating cash flow. The share repurchase program, suspended in 2020, was reinstated for all investors July 1, 2021, but repurchases are capped, may be reduced or stopped, and the Board may suspend the program.
- After quarter-end, the advisory fee was changed to 1.25% annually of average NAV, replacing a fee based on gross assets subject to a NAV-based cap. A new expense limitation agreement caps specified ordinary operating expenses at 1.5% of average monthly class NAV, with exclusions and potential reimbursement of previously waived expenses. Sponsor and sub-advisor affiliates also committed up to $20.0 in revolving liquidity loans for borrowing-arrangement cash requirements at 6.0% interest; these are related-party arrangements.
- Management reported effective disclosure controls and no material litigation known to it. Interest-rate, credit, refinancing, collateral/margin-call, illiquidity, REIT-qualification and related-party conflict risks remain relevant. The filing notes the common stock has no public trading market.
Important facts for investors to verify
- Whether operating cash flow can sustainably cover distributions, and the extent to which distributions rely on prior-period cash or other sources.
- Hotel operating losses, PPP loan forgiveness status, and the timing and price of any hotel sale.
- Performance and collateral values for the two loans rated 4, the matured loan in default, and hospitality or retail exposures affected by COVID-19.
- Availability and renewal terms of repurchase financing, the December 2021 facility maturity, borrowing-base and collateral requirements, and capacity to fund $72.8 of conditional loan commitments.
- Actual repurchase-program demand and execution against limits, plus the effect of the revised advisory fee, expense reimbursements and $20.0 related-party liquidity commitments.