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EX-32.2 - EX-32.2 - InPoint Commercial Real Estate Income, Inc.ck0001690012-ex322_8.htm
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EX-31.2 - EX-31.2 - InPoint Commercial Real Estate Income, Inc.ck0001690012-ex312_6.htm
EX-31.1 - EX-31.1 - InPoint Commercial Real Estate Income, Inc.ck0001690012-ex311_7.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

OR

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission file number 000-55782

 

INPOINT COMMERCIAL REAL ESTATE INCOME, INC.

(Exact name of registrant as specified in its charter)

 

 

Maryland

32-0506267

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

2901 Butterfield Road

Oak Brook, Illinois

60523

(Address of principal executive offices)

(Zip Code)

 

(800) 826-8228

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes     No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

 

Smaller Reporting Company

 

 

 

 

Emerging Growth Company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes     No 

As of November 8, 2018, there were 5,209,957 shares of the Registrant’s Class P Common Stock outstanding.

 

 

 

 


 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017

1

 

 

 

 

Unaudited Consolidated Statements of Operations for the three and nine-months ended September 30, 2018 and 2017

2

 

 

 

 

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine-months ended September 30, 2018 

3

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the nine-months ended September 30, 2018 and 2017

4

 

 

 

 

Notes to Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

Item 3.

Defaults Upon Senior Securities

27

 

 

 

Item 4.

Mine Safety Disclosures

27

 

 

 

Item 5.

Other Information

27

 

 

 

Item 6.

Exhibits

28

 

 

Signatures

29

 

 


 

INPOINT COMMERCIAL REAL ESTATE INCOME, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands, except share data)

 

 

 

September 30, 2018

(unaudited)

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

16,094

 

 

$

1,406

 

Real estate securities at fair value

 

 

84,618

 

 

 

25,993

 

Commercial mortgage loans at cost, net of allowance for loan loss of $0

 

 

157,232

 

 

 

32,094

 

Deferred debt finance costs

 

 

634

 

 

 

 

Deferred offering costs

 

 

772

 

 

 

1,503

 

Accrued interest receivable

 

 

624

 

 

 

142

 

Prepaid expenses and other assets

 

 

10

 

 

 

4

 

Total assets

 

$

259,984

 

 

$

61,142

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Repurchase agreements—real estate securities

 

$

54,621

 

 

$

17,113

 

Repurchase agreements—commercial mortgage loans

 

 

87,602

 

 

 

 

Due to related parties

 

 

1,615

 

 

 

1,512

 

Loan fees payable

 

 

150

 

 

 

40

 

Interest payable

 

 

206

 

 

 

24

 

Distributions payable

 

 

728

 

 

 

258

 

Accrued expenses

 

 

171

 

 

 

210

 

Total liabilities

 

 

145,093

 

 

 

19,157

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Class P common stock, $0.001 par value, 450,000,000 shares authorized, 4,730,950 and 1,733,392 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

5

 

 

 

2

 

Additional paid in capital (net of offering costs of $9,318 and $2,919 at September 30, 2018 and December 31, 2017, respectively)

 

 

118,383

 

 

 

43,428

 

Distributions in excess of earnings

 

 

(3,497

)

 

 

(1,445

)

Total stockholders’ equity

 

 

114,891

 

 

 

41,985

 

Total liabilities and stockholders’ equity

 

$

259,984

 

 

$

61,142

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements 

 

1


 

INPOINT COMMERCIAL REAL ESTATE INCOME, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, dollar amounts in thousands, except share data)

 

 

 

Three-months ended September 30,

 

 

Nine-months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

3,364

 

 

$

304

 

 

$

6,180

 

 

$

554

 

Less: Interest expense

 

 

(1,271

)

 

 

(49

)

 

 

(2,079

)

 

 

(101

)

Net interest income

 

 

2,093

 

 

 

255

 

 

 

4,101

 

 

 

453

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory fee

 

 

840

 

 

 

 

 

 

1,379

 

 

 

 

Debt finance costs

 

 

122

 

 

 

 

 

 

309

 

 

 

 

Administration expense

 

 

 

 

 

28

 

 

 

 

 

 

86

 

Directors compensation

 

 

21

 

 

 

21

 

 

 

63

 

 

 

61

 

Professional service fees

 

 

69

 

 

 

98

 

 

 

276

 

 

 

328

 

Other expenses

 

 

73

 

 

 

38

 

 

 

188

 

 

 

68

 

Total operating expenses

 

 

1,125

 

 

 

185

 

 

 

2,215

 

 

 

543

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) in value of real estate securities

 

 

336

 

 

 

(50

)

 

 

457

 

 

 

21

 

Other interest income

 

 

36

 

 

 

 

 

 

36

 

 

 

 

Total other income (loss)

 

 

372

 

 

 

(50

)

 

 

493

 

 

 

21

 

Net income (loss) before income taxes

 

 

1,340

 

 

 

20

 

 

 

2,379

 

 

 

(69

)

Income tax provision

 

 

 

 

 

56

 

 

 

 

 

 

56

 

Net income (loss)

 

$

1,340

 

 

$

(36

)

 

$

2,379

 

 

$

(125

)

Net income (loss) per share basic and diluted

 

$

0.32

 

 

$

(0.04

)

 

$

0.77

 

 

$

(0.23

)

Weighted average number of shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

4,159,656

 

 

 

910,390

 

 

 

3,074,194

 

 

 

546,430

 

Diluted

 

 

4,159,839

 

 

 

910,390

 

 

 

3,074,311

 

 

 

546,430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements  

 

2


 

INPOINT COMMERCIAL REAL ESTATE INCOME, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine-months ended September 30, 2018

(Unaudited, dollar amounts in thousands)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Par Value

 

 

Additional

Paid in Capital

 

 

Distributions in

Excess of

Earnings

 

 

Total

Stockholders’

Equity

 

Balance as of December 31, 2017

 

 

1,733,392

 

 

$

2

 

 

$

43,428

 

 

$

(1,445

)

 

$

41,985

 

Proceeds from issuance of common stock

 

 

2,997,558

 

 

 

3

 

 

 

81,348

 

 

 

 

 

 

81,351

 

Offering costs

 

 

 

 

 

 

 

 

(6,399

)

 

 

 

 

 

(6,399

)

Net income

 

 

 

 

 

 

 

 

 

 

 

2,379

 

 

 

2,379

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

(4,431

)

 

 

(4,431

)

Equity based compensation

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

6

 

Balance as of September 30, 2018

 

 

4,730,950

 

 

$

5

 

 

$

118,383

 

 

$

(3,497

)

 

$

114,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

3


 

INPOINT COMMERCIAL REAL ESTATE INCOME, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, dollar amounts in thousands)

 

 

 

For the Nine-months ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,379

 

 

$

(125

)

Adjustments to reconcile net income (loss) to cash provided by operations:

 

 

 

 

 

 

 

 

Net unrealized gain on real estate securities

 

 

(457

)

 

 

(21

)

Amortization of equity based compensation

 

 

6

 

 

 

 

Amortization of debt finance costs

 

 

309

 

 

 

 

Amortization of bond (discount) premium

 

 

(208

)

 

 

140

 

Amortization of deferred exit fees

 

 

(69

)

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

(482

)

 

 

(26

)

Deferred debt finance costs

 

 

(943

)

 

 

 

Accrued expenses

 

 

254

 

 

 

243

 

Due to related parties

 

 

833

 

 

 

(28

)

Prepaid expenses and other assets

 

 

(6

)

 

 

(11

)

Net cash provided by operating activities

 

 

1,616

 

 

 

172

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

     Origination of commercial loans

 

 

(125,069

)

 

 

(7,500

)

Purchase of real estate securities

 

 

(61,341

)

 

 

(26,204

)

Real estate securities sold

 

 

2,996

 

 

 

5,000

 

Real estate securities principal pay-down

 

 

385

 

 

 

 

Net cash used in investing activities

 

 

(183,029

)

 

 

(28,704

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

81,351

 

 

 

24,057

 

Payment of offering costs

 

 

(6,399

)

 

 

(1,708

)

Proceeds from repurchase agreements

 

 

412,617

 

 

 

54,228

 

Principal repayments of repurchase agreements

 

 

(287,507

)

 

 

(45,292

)

Distributions paid

 

 

(3,961

)

 

 

(653

)

Net cash provided by financing activities

 

 

196,101

 

 

 

30,632

 

Net change in cash and cash equivalents

 

 

14,688

 

 

 

2,100

 

Cash and cash equivalents beginning of period

 

 

1,406

 

 

 

512

 

Cash and cash equivalents end of period

 

$

16,094

 

 

$

2,612

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Change in deferred offering costs and accrued offering expenses, included in due to related parties

 

$

(730

)

 

$

543

 

Cash paid for interest

 

$

1,897

 

 

$

100

 

Distributions payable

 

$

728

 

 

$

170

 

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements

 

4


 

InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

Note 1 – Organization and Business Operations

InPoint Commercial Real Estate Income, Inc. (the “Company”) was incorporated in Maryland on September 13, 2016 to originate, acquire and manage a diversified portfolio of commercial real estate (“CRE”) investments primarily comprised of (i) CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans (“Credit Loans”), and participations in such loans and (ii) CRE securities, such as commercial mortgage-backed securities, senior unsecured debt of publicly traded real estate investment trusts (“REITs”), and collateralized debt obligation notes. The Company may also invest in select equity investments in single-tenant, net leased properties. Substantially all of the Company’s business is conducted through InPoint REIT Operating Partnership, LP (the “OP”), a Delaware limited partnership. The Company is the sole general partner and directly or indirectly holds all of the limited partner interests in the OP.

The Company is externally managed by Inland InPoint Advisor, LLC (the “Advisor”), a Delaware limited liability company formed in August 2016 that is a wholly-owned indirect subsidiary of Inland Real Estate Investment Corporation, a member of The Inland Real Estate Group of Companies, Inc. The Advisor is responsible for coordinating the management of the day-to-day operations and originating, acquiring and managing the Company’s CRE investment portfolio, subject to the supervision of the Company’s board of directors. The Advisor performs its duties and responsibilities as the Company’s fiduciary pursuant to an advisory agreement dated October 25, 2016 among the Company, the Advisor and the OP (the “Advisory Agreement”).

The Advisor has delegated certain of its duties to SPCRE InPoint Advisors, LLC (the “Sub-Advisor”), a Delaware limited liability company formed in September 2016 that is a wholly-owned subsidiary of Sound Point CRE Management, LP, pursuant to a sub-advisory agreement between the Advisor and the Sub-Advisor. Among other duties, the Sub-Advisor has the authority to identify, negotiate, acquire and originate the Company’s investments and provide portfolio management, disposition, property management and leasing services to the Company. Notwithstanding such delegation to the Sub-Advisor or affiliates of the Sub-Advisor or Advisor, the Advisor retains ultimate responsibility for the performance of all the matters entrusted to it under the Advisory Agreement, including those duties which the Advisor has not delegated to the Sub-Advisor such as (i) valuation of the Company’s assets and calculation of the Company’s net asset value; (ii) management of the Company’s day-to-day operations, including the hiring and supervising of its employees, if any; (iii) preparation of stockholder reports and communications and arrangement of the Company’s annual stockholder meeting; and (iv) advising the Company regarding its qualification as a REIT for U.S. federal income tax purposes and monitoring its ongoing compliance with the REIT qualification requirements thereafter.

 

 

Note 2 – Summary of Significant Accounting Policies

 

Disclosures discussing all significant accounting policies are set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”), as filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2018, under the heading Note 2 - Summary of Significant Accounting Policies. There have been no changes to the Company’s significant accounting policies for the three and nine-months ended September 30, 2018, except as noted below.

 

Basis of Accounting

The accompanying consolidated financial statements and related footnotes have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reported periods. Actual results could differ from such estimates.

Commercial Mortgage Loans Held for Investment and Allowance for Loan Losses

Commercial mortgage loans are held for investment purposes and are anticipated to be held until maturity. Accordingly, they are carried at cost, net of unamortized loan fees and origination costs, and premiums or discounts. Commercial mortgage loans that are deemed to be impaired will be carried at amortized cost less a specific allowance for loan losses. Interest income is recorded on the accrual basis and related discounts, premiums and net deferred fees or costs on investments are amortized over the life of the investment using the effective interest method. Amortization is reflected as an adjustment to interest income in the Company’s consolidated statements of operations. Upon measurement of impairment, the Company records an allowance for loan losses to reduce

 

5


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

the carrying value of the loan with a corresponding charge through the provision for loan losses on the Company’s consolidated statements of operations.

The allowance for loan losses reflects management's estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The Company uses a uniform process for determining its allowance for loan losses. The allowance for loan losses includes an asset-specific component and may include a general, formula-based component when the portfolio is determined to be of sufficient size to warrant such a reserve.

The asset-specific reserve component relates to reserves for losses on individual impaired loans. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. This assessment is made on an individual loan basis each quarter based on such factors as payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location, as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of payments expected to be received, observable market prices or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan.

For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. The Advisor generally will use the income approach through internally developed valuation models to estimate the fair value of the collateral for such loans. In more limited cases, the Advisor will obtain external “as is” appraisals for loan collateral, generally when third party participations exist.

General reserves are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reasonably estimated. The Company’s policy is to estimate loss rates based on actual losses experienced, if any, or based on historical realized losses experienced in the industry if the Company has not experienced any losses. Current collateral and economic conditions affecting the probability and severity of losses are taken into account when establishing the allowance for loan losses.

The Company performs a comprehensive analysis of its loan portfolio and assigns risk ratings to loans that incorporate management's current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. The Company considers, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location, as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from “1” to “5” with “1” representing the lowest risk of loss and “5” representing the highest risk of loss.

Loans are generally placed on non-accrual status when principal or interest payments are past due 90 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed against interest income in the period the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding the borrower's ability to make pending principal and interest payments. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management's judgment, are likely to remain current. The Company may make exceptions to placing a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.

 

6


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

As of September 30, 2018 and December 31, 2017, the Company has not recorded any allowance for loan losses as the Company did not consider a loan loss to be probable.

 

Equity-Based Compensation

 

In accordance with the Company’s Independent Director Restricted Share Plan (the “RSP”), restricted shares are issued to independent directors as compensation. The Company recognizes expense related to the fair value of equity-based compensation awards as operating expense in the consolidated statements of operations. The Company recognizes expense based on the fair value at the grant date on a straight-line basis over the vesting period representing the requisite service period. See Note 10 – "Equity-Based Compensation" for further information.

Income Taxes

The Company operated in a manner that allowed the Company to qualify as a REIT for U.S. federal income tax purposes commencing with the tax year ending December 31, 2017. As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes its REIT taxable income, subject to certain adjustments, to its stockholders. Subsequently, if the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and federal income and excise taxes on its undistributed income.

The Company had no uncertain tax positions as of September 30, 2018 or December 31, 2017. The Company expects no significant increases or decreases in uncertain tax positions due to changes in tax positions within one year of September 30, 2018. The Company had no interest or penalties relating to income taxes recognized in the consolidated statements of operations for the three and nine-months ended September 30, 2018 or 2017. As of September 30, 2018, returns for the calendar years 2016 and 2017 remain subject to examination by U.S. and various state and local tax jurisdictions. For the three and nine-months ended September 30, 2018, the Company incurred no current income tax expense. For the three and nine months ended September 30, 2017, the Company incurred $56 in current income tax expense. 

 

Accounting Pronouncements Recently Issued but Not Yet Effective

In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changes how entities measure credit losses for financial assets carried at amortized cost. ASU 2016-13 eliminates the requirement that a credit loss must be probable before it can be recognized and instead requires an entity to recognize the current estimate of all expected credit losses. ASU 2016-13 is effective for SEC filers for reporting periods beginning after December 15, 2019. The amendments may be adopted early for reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact ASU 2016-13 will have on its allowance for loan losses estimate.

Note 3 – Real Estate Securities

 

The Company classified its real estate securities as available-for-sale. These investments are reported at fair value in the consolidated balance sheets with changes in fair value recorded in other income or loss in the consolidated statements of operations. The following table summarizes the Company’s real estate securities as of September 30, 2018 and December 31, 2017:

 

 

As of

 

Weighted Average Coupon

 

 

Weighted Average Years to Maturity

 

Par Value

 

 

Amortized Cost

 

 

Unrealized Gains

 

 

Unrealized Losses

 

 

Fair Value

 

September 30, 2018

 

 

5.3

%

 

1.5

 

$

85,273

 

 

$

84,126

 

 

$

492

 

 

$

 

 

$

84,618

 

December 31, 2017

 

 

2.9

%

 

1.7

 

$

25,958

 

 

$

25,958

 

 

$

36

 

 

$

(1

)

 

$

25,993

 

 

 

7


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

As of September 30, 2018, the amortized cost was less than par value due to three real estate securities purchased at a discount. There were no real estate securities in an unrealized loss position for greater than one year as of September 30, 2018 or December 31, 2017. The Company did not have any realized gains or losses during the three and nine-months ended September 30, 2018 and 2017.

 

Note 4 – Commercial Mortgage Loans Held for Investment

The following is a summary of the Company’s commercial mortgage loans held for investment as of September 30, 2018:  

 

 

 

Number of

Loans

 

 

Principal Balance

 

 

Unamortized (fees)/costs, net

 

 

Carrying Value

 

 

Weighted Average Coupon

 

 

Weighted Average Years to Maturity

 

First mortgage loans

 

 

10

 

 

$

148,070

 

 

$

(1,338

)

 

$

146,732

 

 

 

6.0

%

 

 

2.5

 

Credit loans

 

 

2

 

 

 

10,500

 

 

 

 

 

 

10,500

 

 

 

9.2

%

 

 

7.7

 

Total and average

 

 

12

 

 

$

158,570

 

 

$

(1,338

)

 

$

157,232

 

 

 

6.2

%

 

 

2.8

 

 

The following is a summary of the Company’s commercial mortgage loans held for investment as of December 31, 2017:  

 

 

 

Number of

Loans

 

 

Principal Balance

 

 

Unamortized (fees)/costs, net

 

 

Carrying Value

 

 

Weighted Average Coupon

 

 

Weighted Average Years to Maturity

 

First mortgage loans

 

 

2

 

 

$

24,951

 

 

$

(357

)

 

$

24,594

 

 

 

6.1

%

 

 

3.0

 

Credit loans

 

 

1

 

 

 

7,500

 

 

 

 

 

 

7,500

 

 

 

9.2

%

 

 

9.8

 

Total and average

 

 

3

 

 

$

32,451

 

 

$

(357

)

 

$

32,094

 

 

 

6.8

%

 

 

4.6

 

 

 

8


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

Credit Characteristics

As part of the Company’s process for monitoring the credit quality of its loans, it performs a quarterly asset review of the loan portfolio and assigns risk ratings to each of its loans. Risk factors include payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location, as well as national and regional economic factors. To determine the likelihood of loss, the loans are rated on a 5-point scale as follows:

 

Investment Grade

Investment Grade Definition

1

Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable.

2

Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable.

3

Performing loan requiring closer monitoring.  Trends and risk factors show some deterioration. Collection of principal and interest is still expected.

4

Underperforming investment with the potential of some interest loss but still expecting a positive return on investment. Trends and risk factors are negative.

5

Underperforming investment with expected loss of interest and some principal.

 

All commercial mortgage loans are assigned an initial risk rating of 2 at origination. The Company reviews all loans on a quarterly basis and updates the ratings based on current performance information.  The weighted average risk rating for the loan portfolio was a 2 as of September 30, 2018 and December 31, 2017.  As of September 30, 2018, eleven loans were risk rated 2 and one was risk rated 3.  As of December 31, 2017, all loans were risk rated 2. The Company has not recorded any allowance for loan losses as the Company did not consider a loan loss to be probable.

Note 5 – Repurchase Agreements

Commercial Mortgage Loans

On February 15, 2018, a wholly-owned subsidiary of the Company entered into a master repurchase agreement (the “Repo Facility”) with Column Financial, Inc. as administrative agent for certain of its affiliates.  In August 2018, the Repo Facility increased from a $100,000 maximum advance amount to a $175,000 maximum advance amount, subject to adjustment up to $250,000, which the Company expects to use to finance the acquisition or origination of eligible loans. The Repo Facility acts in the manner of a revolving credit facility that can be repaid as the Company's assets are paid off and re-drawn as advances against new assets.  Advances under the Repo Facility accrue interest at a per annum rate equal to LIBOR plus 2.25%. In August 2018, the maturity date of the Repo Facility was extended to August 13, 2019 and remains subject to further extensions which may be exercised upon the satisfaction of certain conditions.

 

The details of the Repo Facility as of September 30, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

Committed Financing

 

 

Amount

Outstanding

 

 

Accrued

Interest

Payable

 

 

Collateral

Pledged

 

 

Interest

Rate

 

 

Days to

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

175,000

 

 

$

87,602

 

 

$

139

 

 

$

118,650

 

 

 

4.41

%

 

 

317

 

 

The Company had not entered into the Repo Facility or any master repurchase agreement for commercial mortgage loans as of December 31, 2017.

 

9


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

 

Real Estate Securities

As of September 30, 2018 and December 31, 2017, the Company had entered into one master repurchase agreement for real estate securities with a counterparty (the “CRE Securities MRA”) and had ten and two transactions under the CRE Securities MRA outstanding, respectively, as described in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

Amount

Outstanding

 

 

Accrued

Interest

Payable

 

 

Collateral

Pledged

 

 

Interest

Rate

 

 

Days to

Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2018

 

$

54,621

 

 

$

66

 

 

$

74,646

 

 

 

3.55

%

 

 

16

 

As of December 31, 2017

 

$

17,113

 

 

$

24

 

 

$

19,946

 

 

 

2.27

%

 

 

7

 

 

Note 6 – Stockholders’ Equity

During the nine-months ended September 30, 2018, pursuant to a private offering (the “Offering”), the Company issued 2,997,558 shares of Class P common stock (“Class P Shares”) at an average price of $27.14 per share with total net proceeds of $74,952 after offering costs of $6,399. In addition, the Company incurred $389 in reimbursable deferred offering costs that are payable to the Advisor and Sub-Advisor from future stock issuances.

 

Distributions

The Company currently pays distributions based on daily record dates, payable in arrears the following month, equal to a daily amount of $0.005260274 per Class P Share based on a 365-day year. The table below presents the distributions paid and declared during the three and nine-months ended September 30, 2018 and 2017. As of September 30, 2018, distributions declared but not yet paid amounted to $728.

 

 

 

 

Three-months ended September 30,

 

 

Nine-months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Distributions paid

 

$

1,808

 

 

$

356

 

 

$

3,961

 

 

$

653

 

Distributions declared

 

$

2,020

 

 

$

441

 

 

$

4,431

 

 

$

789

 

 

Note 7 – Net Income (Loss) Per Share

The following table is a summary of the basic and diluted net income (loss) per share computation for the three and nine-months ended September 30, 2018 and 2017:

 

 

 

Three-months ended September 30,

 

 

Nine-months ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

1,340

 

 

$

(36

)

 

$

2,379

 

 

$

(125

)

Weighted average shares outstanding, basic

 

 

4,159,656

 

 

 

910,390

 

 

 

3,074,194

 

 

 

546,430

 

Weighted average shares outstanding, diluted

 

 

4,159,839

 

 

 

910,390

 

 

 

3,074,311

 

 

 

546,430

 

Net income (loss) per share, basic and diluted

 

$

0.32

 

 

$

(0.04

)

 

$

0.77

 

 

$

(0.23

)

 

 

10


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

Note 8 – Commitments and Contingencies

Litigation and Regulatory Matters

In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. The Company has no knowledge of material legal or regulatory proceedings pending or known to be contemplated against the Company at this time.

Note 9 – Transactions with Related Parties

As of September 30, 2018, the Advisor had invested $1,000 in the Company through the purchase of 40,040 Class P Shares. The purchase price per Class P Share for the Advisor’s investment was $25.00 (the “Transaction Price”), with no payment of selling commissions, dealer manager fees or organization and offering expenses. The Advisor has agreed pursuant to its subscription agreement that, for so long as it or its affiliate is serving as the Advisor, (i) it will not sell or transfer at least 8,000 of the Class P Shares that it has purchased, accounting for $200 of its investment, to an unaffiliated third party; (ii) it will not be eligible to submit a request for these 40,040 Class P Shares pursuant to the Company’s share repurchase program prior to the fifth anniversary of the date on which such shares were purchased; and (iii) repurchase requests made for these shares will only be accepted (a) on the last business day of a calendar quarter, (b) after all repurchase requests from all other stockholders for such quarter have been accepted and (c) to the extent that such repurchases do not cause total repurchases in the quarter in which they are being repurchased to exceed that quarter’s repurchase cap.

As of September 30, 2018, Sound Point Capital Management, LP (“Sound Point”), an affiliate of the Sub-Advisor, had invested $3,000 in the Company through the purchase of 120,000 Class P Shares. The purchase price per Class P Share for this investment was the Transaction Price, with no payment of selling commissions, dealer manager fees or organization and offering expenses. Sound Point has agreed pursuant to its subscription agreement that, for so long as the Sub-Advisor or its affiliate is serving as the Sub-Advisor, (i) it will not be eligible to submit a request for the repurchase of these 120,000 shares pursuant to the Company’s share repurchase program prior to the fifth anniversary of the date on which such shares were purchased; and (ii) repurchase requests made for these shares will only be accepted (a) on the last business day of a calendar quarter, (b) after all repurchase requests from all other stockholders for such quarter have been accepted and (c) to the extent that such repurchases do not cause total repurchases in the quarter in which they are being repurchased to exceed that quarter’s repurchase cap.

The following table summarizes the Company’s related party transactions for the three and nine-months ended September 30, 2018 and 2017:

 

 

 

Three-months ended

September 30,

 

 

Nine-months ended

September 30,

 

 

Payable as of

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

September 30, 2018

 

 

December 31, 2017

 

Organization and offering expense reimbursement(1)

 

$

113

 

 

$

191

 

 

$

389

 

 

$

837

 

 

$

772

 

 

$

1,503

 

Selling commissions and dealer manager fee(2)

 

 

2,236

 

 

 

802

 

 

 

5,280

 

 

 

1,414

 

 

 

 

 

 

 

Advisory fee(3)

 

 

840

 

 

 

 

 

 

1,379

 

 

 

 

 

 

840

 

 

 

 

Operating expense reimbursement(4)

 

 

3

 

 

 

2

 

 

 

8

 

 

 

215

 

 

 

3

 

 

 

9

 

Total

 

$

3,192

 

 

$

995

 

 

$

7,056

 

 

$

2,466

 

 

$

1,615

 

 

$

1,512

 

 

(1)

The Company reimburses the Advisor, the Sub-Advisor and their respective affiliates for costs and other expenses related to the Offering, provided that aggregate reimbursements of such costs and expenses shall not exceed the organization and offering expenses paid by investors in connection with the sale of Class P Shares in the Offering. Offering costs are offset against stockholders’ equity when paid. Unpaid amounts are recorded as deferred offering costs and included in due to related parties in these consolidated balance sheets.

(2)

Inland Securities Corporation, the Company’s dealer manager and an affiliate of the Advisor, receives selling commissions up to 5%, and a dealer manager fee up to 3%, of the Transaction Price for each Class P Share sold in the Offering, the majority of which is paid to third-party broker-dealers.

(3)

The Company pays the Advisor an advisory fee comprised of (1) a fixed component and (2) a performance component. The fixed component of the advisory fee is paid quarterly in arrears in an amount equal to 1/4th of 1.5% of the average aggregate

 

11


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

value of the Company’s assets over such quarter, where the value of each asset shall be the value determined in accordance with the Company’s valuation policies or, if such value has not yet been determined, the book value of the asset. The performance component of the advisory fee is calculated and paid annually with respect to the Class P Shares, such that for any year in which the Company’s total return per Class P Share exceeds 7% per annum, the Advisor will receive 20% of the excess total return allocable to the Class P Shares; provided that in no event will the performance component of the advisory fee exceed 15% of the aggregate total return allocable to Class P Shares for such year. The Advisor waived the advisory fee for all periods prior to April 1, 2018.  As a result, there was no advisory fee for the three and nine months ended September 30, 2017.

(4)

The Company reimburses the Advisor or its affiliates for out-of-pocket expenses that it incurs in connection with providing services to the Company, provided that the Company does not reimburse overhead costs, including rent and utilities or personnel costs (including salaries, bonuses, benefits and severance payments).

 

Note 10 – Equity-Based Compensation

On March 1, 2018, the Company granted each of its three independent directors 400 restricted Class P Shares for a total of 1,200 Class P Shares with a total value of $30.  The restricted Class P Shares will vest in equal one-third increments on March 1, 2019, 2020 and 2021.  

Under the RSP, restricted shares generally vest over a three year vesting period from the date of the grant, subject to the specific terms of the grant. Restricted shares are included in common stock outstanding on the date of vesting. The grant-date value of the restricted shares is amortized over the vesting period representing the requisite service period. Compensation expense associated with the restricted shares issued to the independent directors was $3 and $6, in the aggregate, for the three and nine-months ended September 30, 2018, respectively. As of September 30, 2018, the Company had $24 of unrecognized compensation expense related to the unvested restricted shares, in the aggregate. The weighted average remaining period that compensation expense related to unvested restricted shares will be recognized is 2.42 years.

Note 11 – Fair Value of Financial Instruments

The following table presents the Company’s financial instruments carried at fair value in the consolidated balance sheets by its level in the fair value hierarchy (see Note 2 – Summary of Significant Accounting Policies included in the Annual Report) as of September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Total

 

 

Level I

 

 

Level II

 

 

Level III

 

 

Total

 

 

Level I

 

 

Level II

 

 

Level III

 

Real estate securities

 

$

84,618

 

 

 

 

 

$

84,618

 

 

 

 

 

$

25,993

 

 

 

 

 

$

25,993

 

 

 

 

 

The Company did not transfer any assets within fair value levels during the nine months ended September 30, 2018 or during the year ended December 31, 2017.

 

As discussed in Note 2 of the Annual Report, GAAP requires the disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value.  The following table details the carrying amount and fair value of the financial instruments described in Note 2 of the Annual Report:

 

 

12


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

 

September 30, 2018

 

 

December 31, 2017

 

 

Carrying Amount

 

 

Estimated Fair Value

 

 

Carrying Amount

 

 

Estimated Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

16,094

 

 

$

16,094

 

 

$

1,406

 

 

$

1,406

 

Commercial mortgage loans, net

 

157,232

 

 

 

159,199

 

 

 

32,094

 

 

 

32,094

 

Total

$

173,326

 

 

$

175,293

 

 

$

33,500

 

 

$

33,500

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements - real estate securities

$

54,621

 

 

$

54,621

 

 

$

17,113

 

 

$

17,113

 

Repurchase agreements - commercial mortgage loans

 

87,602

 

 

 

87,602

 

 

 

 

 

 

 

Total

$

142,223

 

 

$

142,223

 

 

$

17,113

 

 

$

17,113

 

 

The following describes our methods for estimating the fair value for financial instruments:

The estimated fair value of cash and cash equivalents was based on the bank balance and was a Level 1 fair value measurement.

The estimated fair value of commercial mortgage loans, net is a Level 3 fair value measurement.  The Sub-Advisor estimates the fair values of commercial loans by analyzing interest rate spreads on loans based on various factors including capitalization rates, occupancy rates, sponsorship, geographic concentration, collateral type, market conditions and actions of other lenders.

The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality.

 

Note 12 – Subsequent Events

The Company has evaluated subsequent events through November 9, 2018, the date the financial statements were issued, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the consolidated financial statements except for the following transactions:

Sale of Common Stock

As of November 8, 2018, the Company had 5,209,957 shares of common stock outstanding and had raised proceeds from the Offering since September 30, 2018 and since inception as follows:

 

Source of Capital

 

October 1, 2018 through

November 8, 2018

 

 

Total

 

Class P Shares

 

$

13,017

 

 

$

140,716

 

Distributions

The Company’s board of directors declared distributions payable to stockholders of record of Class P Shares each day beginning on the close of business December 1, 2018 through the close of business March 31, 2019.  Through that date distributions were declared in a daily amount equal to $0.005260274 per Class P Share, based on a 365-day period.

 

The table below sets forth the distributions paid in cash monthly in arrears:

 

 

13


InPoint Commercial Real Estate Income, Inc.

Notes to Consolidated Financial Statements (continued)

September 30, 2018

(Unaudited, dollar amounts in thousands, except share data)

 

Distribution Period

 

Month

Distribution Paid

 

Distribution Amount

 

 

September 2018

 

October 2018

 

$

728

 

 

October 2018

 

November 2018

 

$

800

 

 

 

 

 

 

 

 

 

 

 

 

14


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Words such as “may,” “could,” “should,” “expect,” “intend,” “plan,” “goal,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “variables,” “potential,” “continue,” “expand,” “maintain,” “create,” “strategies,” “likely,” “will,” “would” and variations of these terms and similar expressions, or the negative of these terms or similar expressions, are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of the management of InPoint Commercial Real Estate Income, Inc. (which we refer to herein as the “Company,” “we,” “our” or “us”) based on their knowledge and understanding of the business and industry, the economy and other future conditions. These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors described below:

 

Market disruptions may adversely impact many aspects of our operating results and operating condition;

 

If we cannot generate sufficient cash flow from operations to fully fund distributions, some or all of our distributions may be paid from other sources, including from the proceeds from sales of our Class P common stock (our “Class P Shares”), which will reduce the amount of cash we ultimately have to invest in assets;

 

There is no current public trading market for our Class P Shares, and we do not expect that such a market will ever develop. Therefore, repurchase of shares by us will likely be the only way for stockholders to dispose of their shares and even if our stockholders are able to sell their shares by our share repurchase program, or otherwise, they may not be able to recover the amount of their investment in our shares;

 

Our charter generally limits the total amount we may borrow to 300% of our net assets, equivalent to 75% of the costs of our assets;

 

Inland InPoint Advisor, LLC (our “Advisor”) and SPCRE InPoint Advisors, LLC (our “Sub-Advisor”) may face conflicts of interest in allocating personnel and resources between their affiliates;

 

We do not have arm’s-length agreements with our Advisor, our Sub-Advisor or any affiliates of our Advisor or Sub-Advisor; and

 

If we fail to continue to qualify as a real estate investment trust (“REIT”), our operations and distributions to stockholders will be adversely affected.