InPoint Commercial Real Estate Income, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Dollar amounts are in thousands unless otherwise stated. InPoint is an externally managed mortgage REIT investing primarily in commercial real estate loans and securities; its common stock had no public trading market.
Financial performance and position
- Interest income and earnings: Q3 interest income was $9,464, interest expense $3,734, and net interest income $5,730, compared with $3,400, $1,271, and $2,129, respectively, in Q3 2018. Nine-month net interest income rose to $14,513 from $4,137.
- Profit: Q3 net income was $3,256 versus $1,340; basic and diluted earnings per share were $0.32 in both periods. Nine-month net income was $9,361 versus $2,379, and earnings per share were $1.11 versus $0.77.
- Margins and costs: Reported net interest spread was 2.4% for both comparable periods in the quarter and nine-month analysis. Nine-month average asset yield increased to 6.8% from 6.2%, while average borrowing cost rose to 4.4% from 3.9%. Average leverage increased to 182.3% from 119.1%. Operating expenses were $6,694 for the first nine months, up from $2,215, primarily reflecting higher advisory fees as assets grew.
- Portfolio: At September 30, the company held 28 commercial mortgage loans with $431,972 principal balance, up from 18 loans and $251,725 at year-end 2018. The portfolio’s weighted-average loan interest rate was 5.9%, versus 6.5%. It also held 15 real estate securities valued at $134,888, versus 10 securities valued at $91,218. One loan was risk-rated 3 among the 28 loans; the other 26 first mortgages and one credit loan were rated 2. No loan-loss allowance was recorded.
- Cash flow and liquidity: Nine-month operating cash flow was $6,649, investing cash outflow $218,329, and financing cash inflow $230,698. Cash and restricted cash totaled $47,515, versus $28,497 at December 31, 2018. Management stated it believed liquidity and capital resources were sufficient for anticipated investments, debt service, distributions, and expenses.
- Debt: Repurchase-agreement borrowings were $361,528 net of unamortized financing costs, compared with $226,204 at year-end. The company reported $400,000 of committed loan-financing capacity across two facilities, of which $270,646 was outstanding before unamortized costs. Securities repurchase borrowings were $90,964. The company reported covenant compliance at quarter-end. Its charter generally limits borrowing to 300% of net assets.
- NAV: September 30 NAV was $258,452, or approximately $25.05 per share for the IPO share classes shown. GAAP stockholders’ equity was $247,711; the NAV reconciliation included a $6,063 fair-value adjustment to loans and $4,597 of unamortized offering costs.
Changes, outlook, and risks
- Portfolio expansion drove the substantial year-over-year increase in interest income and net income. Q3 earnings per share remained $0.32 despite higher net income, alongside a marked increase in weighted-average shares.
- The private offering ended in June 2019, with subscriptions accepted through July 16. The IPO began in May; by September 30 it had generated $2,541 gross proceeds and $2,367 net proceeds. The company reported $286,326 total gross proceeds from common-stock issuance as of November 13, including the private offering and IPO.
- Management provided no specific earnings or portfolio guidance. Its outlook described continued investing and portfolio growth, while noting that the portfolio could remain concentrated until capital raising allows greater diversification.
- Distributions declared for the first nine months totaled $12,084, while cash distributions paid were $11,373. Operating cash flow was below distributions paid; the filing says 41.5% of distributions were funded from combined offering proceeds. Class P distributions were stated at an annualized $1.92 per share; IPO classes at $1.62, subject to applicable servicing fees.
- Key risks include credit losses, changing interest rates and LIBOR-linked financing, collateral and market-value volatility, leverage and refinancing needs, related-party conflicts, REIT qualification, and possible inability to fund distributions from operating cash flow. The company said 98% of its investment portfolio was variable-rate and reported no hedging activity during the periods presented.
- Future funding commitments on 19 loans totaled $46,982, up from $30,343 on 13 loans at year-end; advances depend on borrower conditions and are at the company’s discretion. The filing reported no known material pending or contemplated legal proceedings.
- There was no established public market for the shares. Repurchases are subject to monthly and quarterly NAV-based caps and company discretion. During Q3, 17,989 shares were repurchased at an average $25.08 per share.
- Subsequent events: the board renewed the advisory agreement for one year beginning December 31, 2019; October distributions were declared. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Assess whether operating cash generation can support distributions, given reported distribution funding from offering proceeds.
- Review repo financing terms, collateral requirements, maturity and refinancing exposure, and sensitivity to interest-rate changes.
- Examine loan-level credit quality, the two risk-rated-3 loans, portfolio concentrations, and the $46,982 of conditional future funding commitments.
- Verify NAV assumptions and the fair-value adjustment to loans, and understand that share repurchases are limited and there is no public trading market.
- Review advisory and sub-advisory fees, including the transfer of borrower-paid loan origination and administrative fees to the Advisor, and related-party governance arrangements.