InPoint Commercial Real Estate Income, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 13, 2020. Unless stated otherwise, financial amounts below are in millions of dollars. The company is an externally managed mortgage REIT investing primarily in commercial real estate loans and commercial mortgage-backed securities (CMBS).
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Prior comparable period / December 31, 2019 |
|---|---|---|
| Interest income | $10.356 | $6.591 |
| Interest expense | $3.962 | $2.755 |
| Net interest income | $6.394 | $3.836 |
| Operating expenses | $1.565 | $1.981 |
| Net income (loss) | $(37.858); $(3.34) per share | $3.620; $0.54 per share |
| Cash provided by operating activities | $4.982 | $1.661 |
| Cash, cash equivalents and restricted cash | $46.675 | $37.639 |
| Total assets | $719.935 | $703.319 |
| Total liabilities | $483.084 | $447.153 |
| Stockholders’ equity | $236.851 | $256.166 |
| Repurchase-agreement borrowings, net of debt issuance costs | $478.754 | $443.294 |
The company reported a $38.187 million unrealized loss on real estate securities and a $4.500 million loan-loss provision, driving the quarterly net loss. Modified funds from operations (MFFO), a non-GAAP measure, was $4.862 million, versus $1.830 million in Q1 2019. The filing does not present a conventional operating margin.
Portfolio, liquidity and material changes
- Commercial mortgage loans totaled $556.945 million principal across 36 loans, up from $506.402 million across 32 loans at year-end. The portfolio’s weighted-average interest rate was 5.7%; reported all-in yield was also 5.7%.
- The company recorded $4.5 million in reserves on two hotel-backed loans: a first mortgage loan and a credit loan. Both were current on monthly payments at March 31, but COVID-19-related hospitality concerns drove the impairment assessments. Loan risk ratings deteriorated: three loans were rated 3, one rated 4 and two rated 5, compared with two rated 3 at year-end.
- CMBS fair value fell to $117.814 million from $157.869 million, while net unrealized losses rose to $38.398 million from $0.211 million. Hospitality-backed securities were particularly affected. The portfolio comprised 17 positions; 13 were internally rated 3, versus none at year-end.
- Cash, cash equivalents and restricted cash totaled $46.675 million, including $19.033 million restricted as collateral. The company reported $35.8 million of unencumbered assets at March 31.
- Borrowings rose to $478.754 million. The average borrowing cost declined to 3.4% from 4.5% in Q1 2019; average leverage was 203.7%, versus 186.9%. All disclosed financing covenants were met at March 31.
- Future loan-funding commitments were $65.527 million across 24 loans, subject to borrower conditions. Cash distributions paid were $5.098 million; $0.127 million was reinvested. Q1 operating cash flow was below total distributions of $5.225 million.
Outlook, risks and unusual items
- On March 24, the board suspended the IPO, share repurchase program, stockholder distributions and, effective April 6, the distribution reinvestment plan. They remain suspended until the board approves resumption. The board cited COVID-19 market disruption, uncertainty in calculating NAV, volatility and illiquidity, and financing-related collateral demands. No NAV was available as of March 31; the company gave no resumption date or financial guidance.
- From March 31 through April 30, the company sold six CMBS positions with $63.291 million par value, realizing approximately $19.288 million in losses, including $17.158 million previously recognized as unrealized. It used proceeds to repay $33.3 million of securities repurchase borrowings. At April 30, cash and cash equivalents were $34.514 million, restricted cash was $9.903 million, and CMBS repurchase borrowings were $57.8 million.
- Management reported that all loan borrowers made April debt-service payments; in May, all but one did so. The company said it had established a reserve for the loan in default, sent a default notice and intended to pursue its remedies. It reported no new investment closings after March 31 through the filing date.
- Key risks include further COVID-19 effects on hospitality and retail collateral, falling asset values and additional margin calls that could force asset sales into weak markets; borrower defaults; reliance on repurchase financing; and the lack of a public trading market for shares. Management stated it had posted required margin and remained covenant-compliant through May 13.
- The advisor waived $0.874 million of fixed advisory fees in Q1 2020. The company’s share offering, repurchase and distribution suspensions limit access to capital and shareholder liquidity. The filing reports no material pending legal proceedings.
Most important facts for investors to verify
- Subsequent loan performance, especially the hotel loan in default, reserve adequacy and any changes to borrower payments or loan commitments.
- Updated CMBS valuations, realized losses and any further asset sales or collateral requirements.
- Cash availability after restrictions, debt maturities and terms, covenant compliance, and capacity to meet $65.527 million of conditional future funding commitments.
- Whether and when the board resumes the IPO, share repurchases, distributions and reinvestment plan; no timetable or current NAV is provided.
- The effect of continued market disruption on portfolio credit quality, liquidity, financing access and distributions.