InPoint Commercial Real Estate Income, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. The company is an externally managed, non-listed mortgage REIT investing mainly in commercial real estate loans and securities. Comparisons are with Q1 2017 for operating and cash-flow results, and December 31, 2017 for balance-sheet measures.
Financial results and position
- Income: Interest income was $830,204, versus $101,738 in Q1 2017. Net interest income rose to $727,260 from $91,323; the reported net interest spread was 2.8% in both periods.
- Profit: Net income increased to $495,791 from $87,892. Basic and diluted earnings per share were $0.23 versus $0.31, as weighted-average shares rose to 2,119,814 from 280,856. Unrealized gains on real estate securities were $30,828, down from $89,433.
- Expenses and supplemental measure: Operating expenses were $262,297, compared with $92,864. Modified funds from operations (MFFO), a non-GAAP measure, was $529,947 versus $13,972; GAAP net income was $495,791 and $87,892, respectively.
- Cash flow: Operating activities provided $88,244, versus $89,990. Investing activities used $24,378,620, mainly for loan originations and securities purchases; financing activities provided $28,649,462. Cash increased to $5,765,417 from $1,406,331 at year-end.
- Assets and portfolio: Total assets were $90.3 million, up from $61.1 million. The portfolio included five commercial mortgage loans with $52.0 million principal balance and four CMBS positions valued at $30.9 million. All loans had a risk rating of 2; no loan-loss allowance was recorded.
- Debt and liquidity: Repurchase-agreement borrowings totaled $28.1 million, versus $17.1 million at year-end, and were classified as due in less than one year. This comprised $18.8 million secured by real estate securities and $9.3 million under a new loan repo facility. Management stated it believed available liquidity and capital resources were sufficient for anticipated needs.
- Equity and distributions: Stockholders’ equity was $60.0 million, compared with $42.0 million at year-end. The company issued 742,853 shares during the quarter, generating $20.1 million gross proceeds. It declared $1,007,676 of distributions and paid $881,578; $384,568 remained payable at quarter-end.
Material changes versus comparable periods
- Growth in interest income and net income primarily reflected investment of offering proceeds and increased borrowings. Mortgage-loan principal grew from $32.5 million at year-end to $52.0 million, and the company added a fourth CMBS investment.
- Operating expenses increased by $169,433, including $64,984 of debt-finance-cost amortization and higher professional-service and other costs.
- Net income per share declined despite higher total net income because the share base expanded substantially.
- Distributions declared in Q1 exceeded GAAP net income by approximately $511,885. The filing cautions that if operating cash flow is insufficient, distributions may be funded from other sources, including share-sale proceeds.
Outlook, commentary, risks, and unusual items
- No specific earnings, portfolio-growth, or other quantitative guidance was provided. The company’s stated objective is to build a diversified, primarily floating-rate CRE debt and securities portfolio; it noted that concentration may remain high while the capital raise and portfolio are relatively small.
- The private offering allowed up to $500 million of Class P shares. By May 9, 2018, the company had issued 2,851,844 shares and raised $76.7 million gross, with $423.3 million remaining under the offering.
- The loan repo facility provides up to $100 million in advances, subject to adjustment to $250 million, at LIBOR plus 2.25%; its initial maturity is February 15, 2019, with conditional extensions. The company also had short-term securities repos. These financings expose it to refinancing, collateral and interest-rate risks.
- Approximately 87% of the investment portfolio was variable rate. Management estimated that a 50-basis-point increase in rates would raise net interest income by 5.91%, while a 25-basis-point decrease would reduce it by 2.95%, assuming the balance sheet remained unchanged. No hedging was used during either comparative quarter.
- Key disclosed risks include credit losses, market disruption, distributions exceeding operating cash generation, lack of a public trading market and limited share liquidity, borrowing limits, conflicts with the external Advisor and Sub-Advisor, and possible loss of REIT status. The company reported no material pending or known contemplated litigation, no off-balance-sheet arrangements likely to have a material effect, and effective disclosure controls.
- The company qualified as a REIT beginning in 2017 and reported no current income tax expense. It was evaluating the impact of the forthcoming expected-credit-loss accounting standard.
Important facts for investors to verify
- How distributions are funded over time, given that Q1 declared distributions exceeded GAAP earnings and operating cash flow was only $88,244.
- Loan-level collateral, borrower performance and concentration risks; all five loans were rated 2, but no allowance was recorded.
- Repo terms, collateral coverage, maturities and refinancing capacity, including the short-dated securities repos and the loan facility’s 2019 initial maturity.
- Whether portfolio growth and future capital raising improve diversification and support recurring earnings, and how the expanding share count affects per-share results.
- Offering costs, related-party arrangements and the effects of the Advisor’s fee waiver; the Advisor waived advisory fees for both comparative quarters.