InPoint Commercial Real Estate Income, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts below are in millions unless noted. The company is an externally managed mortgage REIT focused primarily on commercial real estate loans and securities.
Financial results and position
- Q3 income: Total income was $6.0 million, compared with $5.7 million in Q3 2019. Net interest income was $5.7 million versus $5.7 million; hotel revenue contributed $0.4 million.
- Q3 earnings: Net income was $6.1 million, or $0.52 per share, compared with $3.3 million, or $0.32 per share. Results included a $13.4 million unrealized gain on real estate securities, partly offset by a $9.9 million realized loss on securities sales.
- Year-to-date results: Total income was $18.5 million versus $14.5 million in 2019. Net interest income increased to $18.2 million from $14.5 million, but the company recorded a net loss of $30.8 million, or $2.67 per share, compared with net income of $9.4 million, or $1.11 per share. Major items included $29.2 million of realized securities losses, $5.5 million of unrealized securities losses, a $5.7 million loan-loss provision and a $0.4 million loss on a commercial loan sale.
- Margins and expenses: For the nine months, the reported net interest spread was 2.8% versus 2.4% in 2019; weighted-average levered yield was 10.8% versus 11.3%. Operating expenses were $8.5 million versus $6.7 million, or 1.4% of average invested assets for 2020. The advisor waived $0.9 million of fees. Higher professional fees included write-off of costs for a collateralized loan obligation that was not completed.
- Balance sheet at September 30: Assets were $565.8 million, down from $703.3 million at year-end 2019; stockholders’ equity was $240.8 million versus $256.2 million. Cash was $52.8 million, compared with $37.2 million. Commercial mortgage loans had a carrying value of $446.7 million; real estate securities were $12.8 million, down from $157.9 million.
- Debt and liquidity: Commercial-loan repurchase borrowings were approximately $301.4 million, down from $335.8 million at year-end; securities repurchase borrowings were fully repaid. The loan repo facilities had $400 million of total committed capacity and a 2.12% weighted-average rate at quarter-end. The company reported $35.0 million of unencumbered assets. It was in compliance with facility covenants and reported no additional margin posted through November 12.
- Cash flow, nine months: Operating activities provided $10.3 million versus $6.6 million. Investing activities provided $132.7 million, mainly reflecting securities sales, loan repayments and lower originations. Financing activities used $127.8 million, largely due to net repurchase-agreement paydowns.
- NAV: Reported NAV was $250.8 million, or $21.5655 per share, at September 30. GAAP stockholders’ equity was $240.8 million; the NAV reconciliation included a $5.7 million fair-value adjustment to loans and other adjustments.
Material changes versus comparable periods
- Year-to-date net income moved from a $9.4 million profit in 2019 to a $30.8 million loss in 2020, primarily reflecting pandemic-related securities losses and the loan impairment, partly offset by higher net interest income.
- The loan portfolio declined to 29 loans with $447.1 million in principal from 32 loans and $506.4 million at December 31, 2019. Weighted-average loan interest rate was 5.5%, versus 5.7% at year-end.
- CMBS holdings fell from 17 positions worth $157.9 million at year-end to two positions with a $12.8 million fair value. Their $5.7 million net unrealized loss reflected market deterioration, particularly in hospitality-backed securities.
- Commercial-loan repurchase debt decreased, while the average borrowing cost for the first nine months declined to 2.8% from 4.4% in 2019. Average leverage was 184.3%, compared with 182.3%.
Outlook, risks and unusual items
- COVID-19 and operations: Management said all borrowers had made scheduled loan payments through the filing date and no loan credit ratings had changed since September 30. It continued to monitor borrowers and reported demand for new loans, while selectively pursuing opportunities.
- Hotel foreclosure: In August, the company took a ground-lease interest in the 362-room Renaissance Chicago O’Hare Suites Hotel through a deed-in-lieu of foreclosure after the borrower defaulted. The hotel had an appraised value of $21.6 million; the company estimated a quarterly operating loss of approximately $1.5 million in the fourth quarter and potentially thereafter until travel recovers. The ground lease runs through 2098 and has substantial long-term payment obligations.
- Loan and property exposure: Management estimated 11% of the loan portfolio was in retail and hospitality, with the balance largely in multifamily, office and industrial properties. One hospitality loan had modified, partially deferred interest payments through December 2020. Three loans were risk-rated 4 at quarter-end, compared with two at year-end 2019; one of two remaining CMBS positions was risk-rated 5.
- Capital and distributions: The company suspended its IPO, share repurchase program, distributions and distribution reinvestment plan in spring 2020 amid market volatility, NAV uncertainty and financing-related collateral needs. It resumed monthly distributions in August and the SEC permitted the IPO and reinvestment plan to resume on October 1. The share repurchase program remained suspended, with no resumption date provided.
- Guidance: No formal earnings or financial guidance was provided. Management said the hotel’s operating outlook depended on recovery in travel and that it would continue monitoring pandemic, economic and market conditions.
- Other risks: The filing highlights illiquidity of the shares, potential limits on repurchases, reliance on short-term repurchase financing, margin-call and refinancing risks, variable-rate exposure, hospitality and retail weakness, and REIT qualification risks associated with owning and operating a hotel.
Important facts for investors to verify
- Performance and cash needs of the Chicago hotel, including actual operating losses and the ground-lease obligations.
- Whether loan borrowers continue making payments, and any further modifications, impairments, defaults or changes to internal risk ratings.
- CMBS valuations, realized sale losses and exposure to hospitality-backed securities.
- Availability, terms and renewal of repo financing, collateral requirements, and the company’s ability to fund $53.9 million of conditional future loan advances.
- Whether distributions are supported by recurring cash flow, and the timing and terms of any share repurchase program resumption.
- Progress of the resumed offering and its effects on liquidity, NAV per share and shareholder dilution.