InPoint Commercial Real Estate Income, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are against December 31, 2016. The company began operations in October 2016, so the 2016 comparative operating periods had no activity. It is an externally managed commercial real estate investment company pursuing a portfolio of CRE debt and securities, with an intention to qualify as a REIT for 2017.
Financial results and position
| Metric | Q3 / September 30, 2017 | Nine months / change |
|---|---|---|
| Interest income | $303,636 | $553,680 |
| Interest expense; net interest income | $49,302; $254,334 | $101,039; $452,641 |
| Operating expenses | $184,945 | $543,189 |
| Unrealized securities gain (loss) | ($49,612) | $21,301 gain |
| Net income (loss) | ($35,900) | ($124,924) |
| Basic and diluted loss per share | ($0.04) | ($0.23) |
| Net cash from operating activities | — | $171,187 |
| Cash and cash equivalents | $2,612,271 | Up from $511,854 at year-end 2016 |
For Q3, management reported a 7.9% weighted-average asset yield, 3.5% average financing cost, 4.5% net interest spread, and 10.6% weighted-average levered yield. For the nine-month period, those measures were 6.5%, 3.0%, 3.6%, and 8.9%, respectively. These are portfolio yield measures, not company-wide profit margins.
Total assets were $38.2 million, including $26.5 million of CMBS and a $7.5 million mezzanine loan. The portfolio held three CMBS positions, versus one at year-end 2016; one loan was rated risk category 2, and no loan-loss allowance was recorded. Total liabilities were $10.9 million, including $8.936 million of repurchase-agreement borrowings and $1.511 million due to related parties. Equity was $27.3 million. Repurchase borrowings were secured by $11.4 million of securities, carried a weighted rate of 2.29113%, and had 27 days to maturity; the company reported compliance with covenants.
Cash flows reflected $28.7 million used in investing, principally securities purchases and loan origination, and $30.6 million provided by financing. Financing included $24.1 million of stock proceeds, $8.936 million of net repurchase-agreement proceeds, and $1.708 million of offering-cost payments.
Material changes and distributions
- CMBS fair value increased from $5.4 million at year-end 2016 to $26.5 million at September 30, 2017, and the company originated its first commercial mortgage loan.
- The company issued 892,377 shares during the first nine months, with $24.1 million of gross proceeds and $1.708 million of offering costs. By November 8, 2017, it had issued 1,328,175 shares and raised $35.4 million gross under its $500 million private offering.
- The CMBS portfolio’s reported ratings mix at September 30 was 60% AAA and 40% BB-, compared with 100% BB at year-end 2016. Management cautioned that agency ratings may change and are not relied upon as a substitute for its own credit review.
- The company declared $789,337 of distributions during the nine months and paid $652,550; $170,017 remained payable at quarter-end. Distributions in excess of earnings were $978,440. The declared daily distribution rate was $0.005260274 per share.
- FFO was a loss of $124,924 and modified FFO (MFFO) was a loss of $6,404 for the nine months. Distributions therefore exceeded reported MFFO; the filing warns distributions may be funded from sources other than operating cash flow, including offering proceeds.
Outlook, risks, and unusual items
- Management said it believed available liquidity and capital resources were sufficient for anticipated investments, debt service, and distributions. No numerical earnings or portfolio guidance was provided. The company anticipated lower portfolio diversification until its capital raise grows.
- The $55,677 income-tax provision was recorded in a consolidated taxable REIT subsidiary; the filing says most related to a one-time prepayment-penalty interest receipt on an investment payoff. The company intended to qualify as a REIT beginning with the tax year ending December 31, 2017; failure to qualify could adversely affect operations and distributions.
- Repurchase financing exposes the company to collateral mark-downs and margin calls, and the agreements generally mature in 30–90 days. The company stated it intended to maintain liquidity to meet margin calls. Its charter generally limits borrowings to 300% of net assets.
- Other stated risks include CRE credit and interest-rate exposure, market disruption, conflicts of interest and non-arm’s-length arrangements with the external Advisor and Sub-Advisor, and the lack of a public trading market for Class P shares. Share repurchases may be the only route to liquidity and may be limited.
- The Advisor waived its advisory fee for the nine-month period. No material pending or known contemplated legal or regulatory proceedings were reported; no off-balance-sheet arrangements were reported. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether distributions are supported by recurring operating cash flow and future MFFO, rather than stock-sale proceeds or borrowing.
- The credit quality, collateral performance, valuation assumptions, and concentration risks of the three CMBS positions and the single mezzanine loan.
- Repurchase-agreement renewal, refinancing, margin-call, and covenant risks, including the short remaining maturity disclosed at quarter-end.
- Progress toward REIT qualification and the effect of taxable-subsidiary income and taxes.
- Offering economics and related-party costs, including offering-cost reimbursements, selling commissions, dealer-manager fees, and the restricted liquidity of shares.
- The filing reports a nine-month pretax loss of $69,247 and a $55,677 tax provision, resulting in a net loss of $124,924; verify the tax and earnings presentation in the financial statements and notes.