UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Large accelerated filer |
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Accelerated filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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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
As of August 11, 2022, the Registrant had the following shares of common stock outstanding:
TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
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Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021 |
2 |
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3 |
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4 |
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5 |
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Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 |
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7 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
43 |
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Item 4. |
44 |
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PART II OTHER INFORMATION |
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Item 1. |
44 |
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Item 1A. |
44 |
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Item 2. |
45 |
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Item 3. |
47 |
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Item 4. |
47 |
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Item 5. |
47 |
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Item 6. |
48 |
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49 |
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1
INPOINT COMMERCIAL REAL ESTATE INCOME, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
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June 30, 2022 (unaudited) |
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December 31, 2021 |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Commercial mortgage loans at cost, net of allowance for loan loss of $ |
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Real estate owned, net of depreciation |
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Finance lease right of use asset, net of amortization |
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Deferred debt finance costs |
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Accrued interest receivable |
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Prepaid expenses and other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Repurchase agreements |
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Credit facility payable |
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— |
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Loan participations sold, net |
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Finance lease liability |
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Due to related parties |
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Interest payable |
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Distributions payable |
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Accrued expenses |
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Total liabilities |
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Stockholders’ Equity: |
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Preferred stock, $ |
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shares authorized and 2022 and December 31, 2021 |
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Class P common stock, $ 2022 and December 31, 2021, respectively |
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Class A common stock, $ and 2021, respectively |
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Class T common stock, $ and 2021, respectively |
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Class S common stock, $ issued and outstanding as of June 30, 2022 and December 31, 2021, respectively |
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Class D common stock, $ respectively |
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Class I common stock, $ respectively |
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Additional paid in capital (net of offering costs of $ 2022 and December 31, 2021, respectively) |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements
2
INPOINT COMMERCIAL REAL ESTATE INCOME, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, dollar amounts in thousands, except share data)
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Three months ended June 30, |
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Six months ended June 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Income: |
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Interest income |
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$ |
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$ |
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$ |
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$ |
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Less: Interest expense |
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Net interest income |
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Revenue from real estate owned |
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Total income |
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Operating expenses: |
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Advisory fee |
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Debt finance costs |
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Directors compensation |
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Professional service fees |
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Real estate owned operating expenses |
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Depreciation and amortization |
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Other expenses |
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Net operating expenses |
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Net income |
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Series A Preferred Stock dividends |
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— |
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— |
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Net income attributable to common stockholders |
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$ |
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$ |
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$ |
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$ |
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Net income attributable to common stockholders per share basic and diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of shares of common stock |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements
3
INPOINT COMMERCIAL REAL ESTATE INCOME, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, dollar amounts in thousands)
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For the three months ended June 30, 2022 |
Par Value Preferred Stock |
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Par Value Common Stock |
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Series A |
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Class P |
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Class A |
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Class T |
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Class S |
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Class D |
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Class I |
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Additional Paid in Capital |
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Accumulated Deficit |
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Total Stockholders’ Equity |
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Balance as of March 31, 2022 |
$ |
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$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Proceeds from issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Offering costs |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Preferred stock distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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Distribution reinvestment |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Redemptions |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance as of June 30, 2022 |
$ |
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$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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For the three months ended June 30, 2021 |
Par Value Common Stock |
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Class P |
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Class A |
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Class T |
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Class S |
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Class D |
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Class I |
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Additional Paid in Capital |
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Accumulated Deficit |
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Total Stockholders’ Equity |
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Balance as of March 31, 2021 |
$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Proceeds from issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Offering costs |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Distribution reinvestment |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Redemptions |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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( |
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Equity-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Balance as of June 30, 2021 |
$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these consolidated financial statements
4
INPOINT COMMERCIAL REAL ESTATE INCOME, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited, dollar amounts in thousands)
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For the six months ended June 30, 2022 |
Par Value Preferred Stock |
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Par Value Common Stock |
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Series A |
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Class P |
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Class A |
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Class T |
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Class S |
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Class D |
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Class I |
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Additional Paid in Capital |
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Accumulated Deficit |
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Total Stockholders’ Equity |
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Balance as of December 31, 2021 |
$ |
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$ |
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$ |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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$ |
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$ |
( |
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$ |
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Proceeds from issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Offering costs |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net income |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Preferred stock distributions declared |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
|
|
|
( |
) |
|
|
( |
) |
|
Distribution reinvestment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Redemptions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Equity-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Balance as of June 30, 2022 |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
For the six months ended June 30, 2021 |
Par Value Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
|
Additional Paid in Capital |
|
|
Accumulated Deficit |
|
|
Total Stockholders’ Equity |
|
|||||||||
|
Balance as of December 31, 2020 |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
Proceeds from issuance of common stock |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Offering costs |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Common stock distributions declared |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Distribution reinvestment |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Redemptions |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Equity-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Balance as of June 30, 2021 |
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements
5
INPOINT COMMERCIAL REAL ESTATE INCOME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, dollar amounts in thousands)
|
|
|
For the six months ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
|
|
|
$ |
|
|
|
Adjustments to reconcile net income to cash provided by operations: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
|
|
|
|
|
|
|
Reduction in the carrying amount of the right-of-use asset |
|
|
|
|
|
|
|
|
|
Amortization of equity-based compensation |
|
|
|
|
|
|
|
|
|
Amortization of debt finance costs to operating expense |
|
|
|
|
|
|
|
|
|
Amortization of debt finance costs to interest expense |
|
|
|
|
|
|
|
|
|
Amortization of origination fees |
|
|
( |
) |
|
|
( |
) |
|
Amortization of deferred exit fees |
|
|
— |
|
|
|
|
|
|
Amortization of loan extension fees |
|
|
( |
) |
|
|
( |
) |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
( |
) |
|
|
( |
) |
|
Accrued expenses |
|
|
|
|
|
|
( |
) |
|
Loan fees payable |
|
|
— |
|
|
|
( |
) |
|
Accrued interest payable |
|
|
|
|
|
|
|
|
|
Due to related parties |
|
|
( |
) |
|
|
|
|
|
Prepaid expenses and other assets |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Origination of commercial loans |
|
|
( |
) |
|
|
( |
) |
|
Loan extension fees received on commercial loans |
|
|
|
|
|
|
|
|
|
Principal repayments of commercial loans |
|
|
|
|
|
|
|
|
|
Acquisition of real estate owned and capital expenditures |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
|
|
|
|
|
|
|
|
Redemptions of common stock |
|
|
( |
) |
|
|
( |
) |
|
Payment of offering costs |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from repurchase agreements |
|
|
|
|
|
|
|
|
|
Principal repayments of repurchase agreements |
|
|
( |
) |
|
|
( |
) |
|
Proceeds from credit facility |
|
|
— |
|
|
|
|
|
|
Principal repayments of credit facility |
|
|
( |
) |
|
|
— |
|
|
Proceeds from sale of loan participations |
|
|
|
|
|
|
— |
|
|
Principal repayments of loan participations |
|
|
( |
) |
|
|
— |
|
|
Debt finance costs |
|
|
( |
) |
|
|
( |
) |
|
Distributions paid to common stockholders |
|
|
( |
) |
|
|
( |
) |
|
Distributions paid to preferred stockholders |
|
|
( |
) |
|
|
— |
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash |
|
|
|
|
|
|
( |
) |
|
Cash, cash equivalents and restricted cash at beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period |
|
$ |
|
|
|
$ |
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Amortization of deferred exit fees due to related party |
|
$ |
( |
) |
|
$ |
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
|
Accrued stockholder servicing fee due to related party |
|
$ |
|
|
|
$ |
( |
) |
|
Distribution reinvestment |
|
$ |
|
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements
6
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(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 floating-rate CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, and participations in such loans. The Company may also invest in floating-rate CRE securities, such as commercial mortgage-backed securities (“CMBS”), and senior unsecured debt of publicly traded real estate investment trusts (“REITs”), and 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 “Operating Partnership”), a Delaware limited partnership. The Company is the sole general partner and directly or indirectly holds all limited partner interests in the Operating Partnership. The Company has elected to be taxed as a REIT for U.S. federal income tax purposes.
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 (“IREIC”), 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 “Board”). The Advisor performs its duties and responsibilities as the Company’s fiduciary pursuant to a second amended and restated advisory agreement dated July 1, 2021 among the Company, the Operating Partnership and the Advisor (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 second amended and restated sub-advisory agreement between the Advisor and the Sub-Advisor dated July 1, 2021. 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, the Advisor retains ultimate responsibility for the performance of all the matters entrusted to it under the Advisory Agreement, including those duties that 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 (“NAV”); (ii) management of the Company’s day-to-day operations; (iii) preparation of stockholder reports and communications and arrangement of the Company’s annual stockholder meeting; and (iv) monitoring the Company’s ongoing compliance with the REIT qualification requirements.
On October 25, 2016, the Company commenced a private offering (the “Private Offering”) of up to $
On March 22, 2019, the Company filed a Registration Statement on Form S-11 (File No. 333-230465) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) to register up to $
On May 3, 2019, the SEC declared effective the Registration Statement and the Company commenced the IPO. The purchase price per share for each class of common stock in the IPO (Class A, Class I, Class D, Class S and Class T) varies and generally equals the prior month’s NAV per share, as determined monthly, plus applicable upfront selling commissions and dealer manager fees. Inland Securities Corporation (the “Dealer Manager”), an affiliate of the Advisor, serves as the Company’s exclusive dealer manager for the IPO on a best efforts basis. On April 28, 2022, the Company filed a Registration Statement on Form S-11 (File No. 333-264540) with the SEC to register up to $
On March 24, 2020, the Board suspended (i) the sale of shares in the IPO, (ii) the operation of the share repurchase program (the “SRP”), (iii) the payment of distributions to the Company’s stockholders, and (iv) the operation of the distribution reinvestment plan (the “DRP”), effective as of April 6, 2020. In determining to take these actions, the Board considered various factors, including the impact of the COVID-19 pandemic on the economy, the inability to accurately calculate the Company’s NAV per share due to uncertainty, volatility and lack of liquidity in the market, the Company’s need for liquidity due to financing challenges related to additional collateral required by the banks that regularly finance the Company’s assets and these uncertain and rapidly changing economic conditions.
Though the Company did not calculate the NAV for the months of March through May 2020, the Advisor resumed calculating the NAV beginning as of June 30, 2020 following its determination that volatility in the market for the Company’s investments had declined and the U.S. economic outlook had improved. In August 2020, the Company resumed paying distributions monthly to
7
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
stockholders of record for all classes of its common stock. On October 1, 2020, the SEC declared effective the Company’s post-effective amendment to the Registration Statement, thereby permitting the Company to resume offers and sales of shares of common stock in the IPO, including through the DRP.
On March 1, 2021, the SRP was reinstated for the Company’s stockholders requesting repurchase of shares as a result of the death or qualified disability of the holder, and on July 1, 2021, the SRP was reinstated for all stockholders. In accordance with the terms of the SRP that allow the Company to repurchase fewer shares than the maximum amount permitted under the SRP, the Company repurchased fewer shares than the maximum amount permitted for the months of July, August and September 2021 as directed by the Board. Beginning on October 1, 2021, the total amount of aggregate repurchases of shares was limited as set forth in the SRP (no more than
On September 22, 2021, the Company completed an underwritten public offering of
Please refer to “Note 15 – Subsequent Events” for updates to the Company’s business after June 30, 2022.
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, 2021, as filed with the SEC on March 11, 2022 (the “Annual Report), under the heading “Note 2 – Summary of Significant Accounting Policies.” There have been no changes to the Company’s significant accounting policies for the six months ended June 30, 2022.
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.
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are normal and recurring in nature, necessary for fair financial statement presentation.
Credit Facility Payable
The Company has a credit facility to finance the acquisition or origination of commercial mortgage loans. This credit facility, when drawn upon, is accounted for as debt. The fees paid for this credit facility are recorded in deferred debt finance costs on the consolidated balance sheet and are amortized straight line over the period of the agreement to debt finance costs on the consolidated statement of operations. For further information on the credit facility, see “Note 4 – Repurchase Agreements and Credit Facilities.”
8
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
Cash, Cash Equivalents and Restricted Cash
Restricted cash represents cash the Company is required to hold in a segregated account as additional collateral on real estate securities repurchase agreements. As of June 30, 2022 and December 31, 2021,
Accounting Pronouncements Recently Issued but Not Yet Effective
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which changed how entities measure credit losses for financial assets carried at amortized cost. ASU 2016-13 eliminated the requirement that a credit loss must be probable before it can be recognized and instead required an entity to recognize the current estimate of all expected credit losses. ASU 2016-13 became effective for SEC filers for reporting periods beginning after December 15, 2019.
In November 2019, the FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates,” which grants smaller reporting companies (as defined by the SEC) until reporting periods commencing after December 15, 2022 to implement ASU 2016-13. As a smaller reporting company, the Company will continue to evaluate the future impact ASU 2016-13, once implemented, will have on its allowance for loan losses estimate.
Note 3 – Commercial Mortgage Loans Held for Investment
The tables below show the Company’s commercial mortgage loans held for investment as of June 30, 2022 and December 31, 2021:
June 30, 2022
|
Loan Type (1) |
|
Number of Loans |
|
|
Principal Balance |
|
|
Unamortized (fees)/costs, net |
|
|
Carrying Value |
|
|
Weighted Average Interest Rate |
|
|
Weighted Average Years to Maturity |
|
||||||
|
First mortgage loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
Credit loans |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
Total and average |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
December 31, 2021
|
Loan Type (1) |
|
Number of Loans |
|
|
Principal Balance |
|
|
Unamortized (fees)/costs, net |
|
|
Carrying Value |
|
|
Weighted Average Interest Rate |
|
|
Weighted Average Years to Maturity |
|
||||||
|
First mortgage loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
Credit loans |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
Total and average |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
(1) |
First mortgage loans are first position mortgage loans and credit loans are mezzanine and subordinated loans. |
9
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
For the six months ended June 30, 2022 and the year ended December 31, 2021, the activity in the Company’s commercial mortgage loans, held-for-investment portfolio was as follows:
|
|
|
Six Months Ended June 30, 2022 |
|
|
Year Ended December 31, 2021 |
|
||
|
Balance at Beginning of Year |
|
$ |
|
|
|
$ |
|
|
|
Loan originations |
|
|
|
|
|
|
|
|
|
Principal repayments |
|
|
( |
) |
|
|
( |
) |
|
Amortization of loan origination, loan extension and deferred exit fees |
|
|
|
|
|
|
|
|
|
Extension fees received on commercial loans |
|
|
( |
) |
|
|
( |
) |
|
Balance at End of Period |
|
$ |
|
|
|
$ |
|
|
Allowance for Loan Losses
During the six-month periods ended June 30, 2022 and 2021, the Company determined that no loan losses were probable and, therefore, did
Credit Characteristics
As part of the Company’s process for monitoring the credit quality of its investments, it performs a quarterly asset review of the investment portfolio and assigns risk ratings to each of its loans and certain securities it may own, such as CMBS. 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 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
5 |
|
All investments are assigned an initial risk rating of 2 at origination or acquisition.
As of June 30, 2022,
Note 4 – Repurchase Agreements and Credit Facilities
Commercial Mortgage Loans
On February 15, 2018, the Company, through a wholly owned subsidiary, entered into a master repurchase agreement (the “CF Repo Facility”) with Column Financial, Inc. as administrative agent for certain of its affiliates. As the Company’s business has grown, it has increased the borrowing limit and extended the maturity. The most recent extension was in June 2022 for a twelve-month term and the maximum advance amount was increased to $
10
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
On May 6, 2019, the Company, through a wholly owned subsidiary, entered into an uncommitted master repurchase agreement (the “JPM Repo Facility”) with JPMorgan Chase Bank, National Association. The JPM Repo Facility provides up to $
On March 10, 2021, the Company, through a wholly owned subsidiary, entered into a loan and security agreement and a promissory note (collectively, the “WA Credit Facility”) with Western Alliance Bank (“Western Alliance”). The WA Credit Facility provides for loan advances up to the lesser of $
The JPM Repo Facility, CF Repo Facility and WA Credit Facility (collectively, the “Facilities”) are used to finance eligible loans and each act 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.
The tables below show the Facilities as of June 30, 2022 and December 31, 2021:
|
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|||||
|
|
Committed Financing |
|
|
Amount Outstanding (1) |
|
|
Accrued Interest Payable |
|
|
Collateral Pledged |
|
|
Interest Rate |
|
|
Days to Maturity |
|
||||||
|
CF Repo Facility |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
JPM Repo Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
Total Repurchase Facilities - commercial mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
WA Credit Facility |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
% |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|||||
|
|
Committed Financing |
|
|
Amount Outstanding (1) |
|
|
Accrued Interest Payable |
|
|
Collateral Pledged |
|
|
Interest Rate |
|
|
Days to Maturity |
|
||||||
|
CF Repo Facility |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
|
JPM Repo Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
Total Repurchase Facilities - commercial mortgage loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
WA Credit Facility |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
% |
|
|
|
|
11
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
|
(1) |
Excludes $ |
Note 5 – Loan Participations Sold, Net
On November 15, 2021, the Company sold a non-recourse senior participation interest in
The third party, as the senior participation interest holder, receives interest and principal payments from the borrower until they receive the amounts to which they are entitled. All expenses or losses on the underlying mortgages are allocated first to the Company and then to the third party. If the underlying mortgage is in default, the Company will have the option to purchase the third party’s participation interest and remove it from the loan participation agreement.
The financing or transfer of a portion of a loan by the non-recourse sale of a senior interest in the loan through a participation agreement generally does not qualify as a sale under GAAP. Therefore, in this instance, the Company presents the whole loan as an asset and the loan participation sold as a liability on the consolidated balance sheet until the loan is repaid. The obligation to pay principal and interest on these liabilities is generally based on the performance of the related loan obligation. The gross presentation of loan participations sold does not impact stockholders’ equity or net income.
12
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
The following table details the Company’s loan participations sold as of June 30, 2022 and December 31, 2021:
|
|
|
June 30, 2022 |
|
|||||||||||||||
|
Loan Participations Sold |
|
Count |
|
|
Principal Balance |
|
|
Book Value |
|
|
Weighted Average Yield/Cost (1) |
|
Weighted Average Maximum Maturity |
|
||||
|
Total Loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Senior participations (2)(3) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|||||||||||||||
|
Loan Participations Sold |
|
Count |
|
|
Principal Balance |
|
|
Book Value |
|
|
Weighted Average Yield/Cost (1) |
|
Weighted Average Maximum Maturity |
|
||||
|
Total Loans |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Senior participations (2)(3) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The yield/cost is the present value of all future principal and interest payments on the loan or participation interest and does not include any origination fees or deferred commitment fees. |
|
(2) |
As of June 30, 2022 and December 31, 2021, the loan participations sold were non-recourse to the Company. |
|
(3) |
During the six-months ended June 30, 2022, the Company recorded $ |
Note 6 – Stockholders’ Equity
Preferred Stock Offering
On September 22, 2021, the Company issued and sold
Dividends on the Series A Preferred Stock are cumulative and payable quarterly in arrears at a rate per annum equal to
The Company may not redeem the Series A Preferred Stock prior to
The Series A Preferred Stock is listed on the New York Stock Exchange under the symbol ICR PR A.
13
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
Share Activity for Common Stock and Preferred Stock
The following tables detail the change in the Company’s outstanding shares of all classes of common and preferred stock, including restricted common stock:
|
|
|
Preferred Stock |
|
|
Common Stock |
|
||||||||||||||||||||||
|
Six months ended June 30, 2022 |
|
Series A |
|
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
|||||||
|
Beginning balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Issuance of shares |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Distribution reinvestment |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Redemptions |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|||||||||||||||||||||
|
Six months ended June 30, 2021 |
|
|
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
||||||
|
Beginning balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Issuance of shares |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Distribution reinvestment |
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Issuance of restricted shares |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Redemptions |
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Ending balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
Distributions – Common Stock
The table below presents the aggregate annualized and monthly distributions declared on common stock by record date for all classes of shares.
|
Record date |
|
Aggregate annualized gross distribution declared per share |
|
|
Aggregate monthly gross distribution declared per share |
|
||
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
The gross distribution was reduced each month for Class D and Class T of the Company’s common stock for applicable class-specific stockholder servicing fees to arrive at a lower net distribution amount paid to those classes. For a description of the stockholder servicing fees applicable to Class D, Class S and Class T shares of the Company’s common stock, please see “Note 10 – Transactions with Related Parties” below. Since the IPO and through June 30, 2022, the Company has
14
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
The following table shows the monthly net distribution per share for shares of Class D and Class T common stock.
|
Record date |
|
Monthly net distribution declared per share of Class D common stock |
|
|
Monthly net distribution declared per share of Class T common stock |
|
||
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
The table below presents the aggregate and net distributions declared for each applicable class of common stock during the six months ended June 30, 2022 and 2021. The table excludes distributions declared for any month for a class of shares of stock when there were no shares of that class outstanding on the applicable record date.
|
|
|
Common Stock |
|
|||||||||||||||||||||
|
Six months ended June 30, 2022 |
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
||||||
|
Aggregate gross distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Stockholder servicing fee per share |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
N/A |
|
|||
|
Net distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|||||||||||||||||||||
|
Six months ended June 30, 2021 |
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
||||||
|
Aggregate gross distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Stockholder servicing fee per share |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
N/A |
|
|||
|
Net distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
As of June 30, 2022, and December 31, 2021, distributions declared but not yet paid amounted to $
Dividends – Series A Preferred Stock
Series A Preferred Stock dividends are paid quarterly in arrears based on an annualized distribution rate of
15
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
Note 7 – Net Income Per Share Attributable to Common Stockholders
Basic earnings per share attributable to common stockholders (“EPS”) is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income attributable to common stockholders by the common shares plus common share equivalents. The Company’s common share equivalents are unvested restricted shares. The Company excludes antidilutive restricted shares from the calculation of weighted-average shares for diluted earnings per share. There were
The following table is a summary of the basic and diluted net income per share computation for the three and six months ended June 30, 2022 and 2021:
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Net income attributable to common stockholders |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Weighted average shares outstanding, basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per share, basic and diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Note 8 – Commitments and Contingencies
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.
The Company has made a commitment to advance additional funds under certain of its CRE loans if the borrower meets certain conditions. As of June 30, 2022, the Company had
Note 9 – Segment Reporting
The Company has
Note 10 – Transactions with Related Parties
As of June 30, 2022, the Advisor had invested $
As of June 30, 2022, Sound Point Capital Management, LP (“Sound Point”), an affiliate of the Sub-Advisor, had invested $
16
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
The following table summarizes the Company’s related party transactions for the three and six months ended June 30, 2022 and 2021 and the amount due to related parties at June 30, 2022 and December 31, 2021:
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
Payable as of June 30, |
|
|
Payable as of December 31, |
|
||||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||||
|
Organization and offering expense reimbursement (1) |
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
Selling commissions and dealer manager fee (2) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Advisory fee (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan fees(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued stockholder servicing fee (5) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Operating expense reimbursement to advisor (6) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
The Company reimburses the Advisor, the Sub-Advisor and their respective affiliates for costs and other expenses related to the IPO, provided the Advisor has agreed to reimburse the Company to the extent that the organization and offering expenses that the Company incurs exceeds |
|
(2) |
For the IPO, the Dealer Manager is entitled to receive (a) upfront selling commissions of up to |
|
(3) |
The Advisor is entitled to receive an advisory fee comprised of two separate components: (1) a fixed component payable monthly and (2) a performance component payable annually. Prior to July 1, 2021, the fixed component of the advisory fee was paid in an amount equal to 1/12th of % per annum of the gross value of the Company’s assets, paid monthly in arrears, provided that any such monthly payment could not exceed 1/12th of % of the Company’s NAV. Effective July 1, 2021, the fixed component of the advisory fee is paid in an amount equal to 1/12th of % of the Company’s average NAV for each month, paid monthly in arrears. The performance component of the advisory fee is calculated and paid annually, such that for any year in which the Company’s total return per share exceeds |
|
(4) |
The Company pays the Advisor all new loan origination and administrative fees related to CRE loans held for investment, to the extent that such fees are paid by the borrower. Pursuant to the Sub-Advisory Agreement, the Advisor generally will reallow a portion of loan fees and all administrative fees to the Sub-Advisor. |
17
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
|
(5) |
Subject to the Financial Industry Regulatory Authority, Inc. limitations on underwriting compensation, the Company pays the Dealer Manager selling commissions over time as stockholder servicing fees for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing stockholders’ accounts as follows: (a) for Class T shares only, |
|
(6) |
Prior to July 1, 2021, the Company reimbursed the Advisor for expenses that it (or the Sub-Advisor acting on the Advisor’s behalf) incurs in connection with providing services to the Company, provided that the Company did not reimburse overhead costs, including rent and utilities or personnel costs (including salaries, bonuses, benefits and severance payments) and the Company only reimbursed the Advisor for fees payable to its affiliates if they are incurred for legal or marketing services rendered on the Company’s behalf. Effective July 1, 2021, the Company is obligated to reimburse for all of the expenses attributable to the Company or its subsidiaries, including the Operating Partnership, and paid or incurred and submitted to the Company for reimbursement by the Advisor, the Sub-Advisor or their respective affiliates in providing services to the Company under the Advisory Agreement, including personnel and related employment costs. |
Expense Limitation Agreement
Pursuant to an expense limitation agreement (the “Expense Limitation Agreement”) dated July 1, 2021, the Advisor and Sub-Advisor agree to
Separately from the limitation on ordinary operating expenses under the Expense Limitation Agreement, the Advisor and Sub-Advisor voluntarily chose not to seek reimbursement for certain expenses that they incurred or paid on behalf of the Company during the six months ended June 30, 2022, and for which they may have been entitled to be reimbursed. The Advisory Agreement and Sub-Advisory Agreement provide that expenses will be submitted monthly to the Company for reimbursement, and the amount of expenses submitted for reimbursement in any particular month is not necessarily indicative of the total amount of expenses actually incurred by the Advisor and the Sub-Advisor in providing services to the Company and for which reimbursement could have been received by the Advisor or Sub-Advisor.
Revolving Credit Liquidity Letter Agreements
IREIC, the Company’s sponsor, and Sound Point have agreed under separate letter agreements dated July 20, 2021, and July 15, 2021, respectively, to make revolving credit loans to the Company in an aggregate principal amount outstanding at any one time not to exceed $
18
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
of the following constitutes an “Event of Default” under the letter agreements: (y) the Company fails to perform or observe any covenant or condition to be performed or observed under the letter agreement (including the obligation to repay a loan in full on the Termination Date) and such failure is not remedied within three business days of its receipt of notice thereof; or (z) the Company becomes insolvent or the subject of any bankruptcy proceeding.
Note 11 – Equity-Based Compensation
With each stock grant, the Company awards each of its
|
Grant Date |
|
Class of common stock granted |
|
Total number of shares granted |
|
|
Grant Date Fair Value Per Share |
|
|
Total Fair Value of Grant |
|
|
Proportion of total shares that vest annually |
|
Vesting Date Year 1 |
|
Vesting Date Year 2 |
|
Vesting Date Year 3 |
|||
|
March 1, 2018 |
|
Class P |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
January 7, 2019 |
|
Class P |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
December 2, 2019 |
|
Class I |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
December 1, 2020 |
|
Class I |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
October 14, 2021 |
|
Class I |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Under the Company’s Independent Director Restricted Share Plan, restricted shares generally vest over a 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 grant date. 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 $
A summary table of the status of the restricted shares is presented below:
|
|
|
Restricted Shares |
|
|
Weighted Average Grant Date Fair Value Per Share |
|
||
|
Outstanding at December 31, 2021 |
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
Vested |
|
|
( |
) |
|
|
|
|
|
Converted |
|
|
— |
|
|
|
— |
|
|
Forfeited |
|
|
— |
|
|
|
— |
|
|
Outstanding at June 30, 2022 |
|
|
|
|
|
$ |
|
|
19
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
Note 12 – Fair Value of Financial Instruments
GAAP requires the disclosure of fair value information about financial instruments, whether or not they are recognized at fair value in the consolidated balance sheets, for which it is practicable to estimate that value.
|
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
|
Carrying Amount |
|
|
Estimated Fair Value |
|
||||
|
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Commercial mortgage loans, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements - commercial mortgage loans |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Credit facility payable |
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Loan participations - sold |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following describes the Company’s methods for estimating the fair value for financial instruments:
|
• |
The estimated fair values of restricted cash, cash and cash equivalents were 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. During the second quarter of 2022, the Company changed the method for calculating the fair value of the commercial mortgage loan portfolio. Since the loans have a short duration to maturity ( |
|
• |
The estimated fair values of the repurchase agreements – commercial mortgage loans, credit facility payable and loan participations sold are Level 3 fair value measurements based on expected present value techniques. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for repurchase agreements, credit facilities and loan participations sold with similar characteristics and credit quality. |
Note 13 – Real Estate Owned
The following table summarizes the Company’s real estate owned assets as of June 30, 2022:
|
Acquisition Date |
|
Property Type |
|
Primary Location(s) |
|
Building and Improvements |
|
|
Furniture, Fixtures and Equipment |
|
|
Accumulated Depreciation |
|
|
Real Estate Owned, Net |
|
||||
|
|
Hotel |
|
Chicago, IL |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
(1) |
Refer to “Note 2 – Summary of Significant Accounting Policies” in the Annual Report for useful life of the above assets. |
|
(2) |
Represents assets acquired by the Company by completing a deed-in-lieu of foreclosure transaction. |
During February 2021, the Company received a loan under the Paycheck Protection Program (“PPP”) related to the operations of the Company’s
20
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
The Company was granted loan forgiveness by the U.S. Small Business Administration in December 2021. The Company accounted for this PPP loan using a government grant accounting approach. The grant proceeds were initially recorded in accrued expenses on the consolidated balance sheet. Each month, those proceeds were applied as a reduction to payroll-related costs within real estate owned operating expenses on the consolidated statement of operations until the proceeds have been fully absorbed by the payroll-related expenses. As of June 30, 2022,
Note 14 – Leases
Upon assumption of the lease, the Company recorded a lease liability of $
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
Amortization of right-of-use assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finance lease cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The table below shows the Company’s finance lease right of use asset, net of amortization as of June 30, 2022 and December 31, 2021:
|
|
|
June 30, |
|
|
December 31, |
|
||
|
|
|
2022 |
|
|
2021 |
|
||
|
Finance lease right of use asset, gross |
|
$ |
|
|
|
$ |
|
|
|
Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
|
Finance lease right of use asset, net of amortization |
|
$ |
|
|
|
$ |
|
|
Remaining lease payments for the ground lease as of June 30, 2022 for each of the five succeeding years and thereafter is as follows:
|
|
|
Lease Payments |
|
|
|
2022 (remaining) |
|
$ |
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total undiscounted lease payments |
|
$ |
|
|
|
Less: Amount representing interest |
|
|
( |
) |
|
Present value of lease liability |
|
$ |
|
|
21
InPoint Commercial Real Estate Income, Inc.
Notes to Consolidated Financial Statements
June 30, 2022
(Unaudited, dollar amounts in thousands, except share data)
Note 15 – Subsequent Events
The Company has evaluated subsequent events through August 12, 2022, the date the financial statements were issued. The following are updates on the Company’s operations since June 30, 2022.
Common Stock Distributions
On
|
|
|
Common Stock |
|
|||||||||||||||||||||
|
|
|
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
||||||
|
Aggregate gross distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
|
Stockholder servicing fee per share |
|
N/A |
|
|
N/A |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
N/A |
|
|||
|
Net distributions declared per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
|
|
|
$ |
|
|
Series A Preferred Stock Repurchase Program
On August 11, 2022, the Board authorized and approved a share repurchase program (the “Series A Preferred Repurchase Program”) pursuant to which the Company may repurchase up to the lesser of
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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 listed and described under “Risk Factors” in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, as filed with the SEC on May 10, 2022 and in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 11, 2022 (the “Annual Report”), and the factors described below:
|
• |
Market disruptions caused by the economic effects of, or uncertainties surrounding the future effects of, the COVID-19 pandemic have adversely impacted aspects of our operating results and operating condition, particularly the operating results of the Renaissance O’Hare, and may continue to do so, and these effects may become more severe, e.g., if COVID-19 cases increase nationally or in markets that affect the value of our investments; |
|
• |
We have paid past distributions from sources other than cash flows from operating activities, including from offering proceeds, which reduces the amount of cash we ultimately have to invest in assets, and some of our distributions have not been covered by net income; if we cannot generate sufficient cash flow from operations to fully fund distributions, some or all of our distributions may again be paid from these other sources, and if our net income does not cover our distributions, those distributions will dilute our stockholders’ equity; |
|
• |
There is no current public trading market for our common stock, 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 our SRP was suspended and may be suspended again in the future; |
|
• |
Even if our stockholders are able to sell their shares pursuant to our SRP, or otherwise, they may not be able to recover the amount of their investment in our shares; |
|
• |
Under our charter, we may borrow to 300% of our net assets, equivalent to 75% of the costs of our assets and may exceed this limitation with the approval of a majority of our independent directors; |
|
• |
Our Advisor and our Sub-Advisor may face conflicts of interest in allocating personnel and resources between their affiliates; |
|
• |
None of our agreements with our Advisor, our Sub-Advisor or any affiliates of our Advisor or Sub-Advisor were negotiated at arm’s-length; and |
|
• |
If we fail to continue to qualify as a REIT, our operations and distributions to stockholders will be adversely affected. |
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Quarterly Report on Form 10-Q and may ultimately prove to be incorrect or false. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results except as required by applicable law. We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.
The following discussion and analysis relate to the three and six months ended June 30, 2022 and 2021 and as of June 30, 2022 and December 31, 2021. You should read the following discussion and analysis along with our unaudited consolidated financial statements and the related notes included in this Quarterly Report on Form 10-Q.
Unless otherwise stated, all dollar amounts are stated in thousands, except share data.
23
Overview
We are a Maryland corporation formed on September 13, 2016 to originate, acquire and manage an investment portfolio of CRE investments primarily comprised of floating-rate CRE debt, including first mortgage loans, subordinate mortgage and mezzanine loans, and participations in such loans. We may also invest in floating-rate CRE securities such as CMBS and senior unsecured debt of publicly traded REITs, and select equity investments in single-tenant, net leased properties. Substantially all of our business is conducted through our Operating Partnership, of which we are the sole general partner. We are externally managed by our Advisor, an indirect subsidiary of IREIC. Our Advisor has engaged the Sub-Advisor, a subsidiary of Sound Point CRE Management, LP, to perform certain services on behalf of the Advisor for us.
We have operated in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2017. Among other requirements, REITs are required to distribute to stockholders at least 90% of their annual REIT taxable income (computed without regard to the dividends-paid deduction and excluding net capital gain).
For a discussion of the history of the Company and its Private Offering, the IPO and the Preferred Stock Offering, please see “Note 1 – Organization and Business Operations” in the notes to our consolidated financial statements above.
Q2 2022 Highlights
Operating Results:
|
|
• |
Net income attributable to common stockholders was $1.8 million, or $0.16 per share during the three months ended June 30, 2022. |
|
|
• |
During the second quarter of 2022, we paid an annual gross distribution rate of $1.25 per common share, which represents an annualized rate of 6.4% on our aggregate NAV of $19.6320 as of June 30, 2022. Holders of Class D and Class T shares of common stock received less than the gross distribution amount after the deduction of class-specific fees. |
Loan Portfolio:
|
|
• |
We originated three floating-rate loans totaling $88.7 million with initial funding of $74.2 million during the three months ended June 30, 2022. |
|
|
• |
We had $78.2 million in advances on loans and loan repayments of $5.2 million resulting in a 10% increase in our loan portfolio to $803.3 million during the three months ended June 30, 2022. |
|
|
• |
All 43 of our loans were current on their contractual interest payments with no interest deferrals during the three months ended June 30, 2022. |
Capital Markets and Financing Activity:
|
|
• |
We had net drawings of $64.3 million on our repurchase agreements during the three months ended June 30, 2022. |
Significant Accounting Policies and Use of Estimates
Disclosures discussing all significant accounting policies are set forth in our Annual Report under the heading “Note 2 – Summary of Significant Accounting Policies.” There have been no additions to our significant accounting policies for the three months ended June 30, 2022.
Portfolio
Our strategy is to originate, acquire and manage an investment portfolio of CRE debt that is primarily floating rate and diversified based on the type and location of collateral securing the underlying CRE debt.
The charts below summarize our debt investments portfolio as a percentage of par value by type of rate, our total investment portfolio by investment type, including real estate owned (“REO”), and our loan portfolio by collateral type and geographical region as of June 30, 2022 and December 31, 2021:
24
Floating vs. Fixed Rate Debt Investments:
|
June 30, 2022 |
December 31, 2021 |
|
|
|
All Investments by Type:
|
June 30, 2022
|
December 31, 2021
|
|
|
|
25
Loans by Property Type:
|
|
|
|
|
|
Loans by Region:
|
June 30, 2022 |
December 31, 2021
|
|
|
|
26
An investment’s region is defined according to the below map based on the location of property underlying loans in our portfolio.
The changes in our loan portfolio by property type and by region as of June 30, 2022 compared to December 31, 2021 were primarily due to loans being repaid and new loans originated during the six months ended June 30, 2022. Due to the small number of investments in our portfolio, the changes in the portfolio composition may be significant from one period to another. We anticipate that these changes will become less significant as our portfolio increases in size.
Commercial Mortgage Loans Held for Investment
|
|
As of June 30, 2022 |
|
|
As of December 31, 2021 |
|
||
|
|
|
|
|
|
|
|
|
|
Principal balance of first mortgage loans |
$ |
788,323 |
|
|
$ |
650,670 |
|
|
Number of first mortgage loans |
|
41 |
|
|
|
36 |
|
|
Principal balance of credit loans |
$ |
13,500 |
|
|
$ |
13,500 |
|
|
Number of credit loans |
|
2 |
|
|
|
2 |
|
|
Total balance of loans |
$ |
801,823 |
|
|
$ |
664,170 |
|
|
Total number of loans |
|
43 |
|
|
|
38 |
|
|
All-in yield (1) |
|
5.2 |
% |
|
|
4.6 |
% |
|
Weighted average years to maximum maturity |
|
3.6 |
|
|
|
3.6 |
|
|
____________ |
|
|
|
|
|
|
|
|
(1) |
All-in yield is the present value of all future principal and interest payments on the loan and does not include any origination fees or deferred commitment fees. |
The increase in the size of our portfolio is primarily due to loan originations during the six months ended June 30, 2022. The change in the all-in yield was primarily driven by increases in the LIBOR and SOFR rates.
27
The table below presents information for each of our commercial mortgage loans as of June 30, 2022:
|
|
|
Origination Date |
|
Loan Type (1) |
|
Principal Balance (2) |
|
|
Cash Coupon (2)(3) |
|
|
All-in Yield (2)(3) |
|
|
Maximum Maturity (4) |
|
State |
|
Property Type |
|
LTV (5) |
|
|
Risk Rating (6) |
|
||||
|
1 |
|
12/12/17 |
|
First mortgage |
|
$ |
14,650 |
|
|
L+4.70% |
|
|
6.5% |
|
|
1/9/23 |
|
HI |
|
Office |
|
|
67 |
% |
|
|
2 |
|
|
|
2 |
|
12/13/17 |
|
First mortgage |
|
|
16,860 |
|
|
L+4.50% |
|
|
6.3% |
|
|
7/9/23 |
|
VA |
|
Office |
|
|
55 |
% |
|
|
3 |
|
|
|
3 |
|
9/7/18 |
|
First mortgage |
|
|
24,411 |
|
|
L+3.75% |
|
|
5.6% |
|
|
9/9/23 |
|
TX |
|
Office |
|
|
73 |
% |
|
|
2 |
|
|
|
4 |
|
12/20/18 |
|
First mortgage |
|
|
16,150 |
|
|
L+4.20% |
|
|
6.2% |
|
|
6/9/25 |
|
AL |
|
Hospitality |
|
|
64 |
% |
|
|
2 |
|
|
|
5 |
|
5/31/19 |
|
First mortgage |
|
|
13,409 |
|
|
L+3.25% |
|
|
5.6% |
|
|
6/9/24 |
|
CA |
|
Multifamily |
|
|
70 |
% |
|
|
3 |
|
|
|
6 |
|
6/18/19 |
|
First mortgage |
|
|
47,746 |
|
|
L+2.75% |
|
|
4.7% |
|
|
7/9/24 |
|
TX |
|
Office |
|
|
72 |
% |
|
|
2 |
|
|
|
7 |
|
6/18/19 |
|
First mortgage |
|
|
6,631 |
|
|
L+3.60% |
|
|
5.7% |
|
|
7/9/24 |
|
CA |
|
Mixed Use |
|
|
54 |
% |
|
|
2 |
|
|
|
8 |
|
8/15/19 |
|
First mortgage |
|
|
8,752 |
|
|
L+4.20% |
|
|
6.6% |
|
|
9/9/24 |
|
TN |
|
Office |
|
|
45 |
% |
|
|
3 |
|
|
|
9 |
|
9/27/19 |
|
First mortgage |
|
|
15,626 |
|
|
L+3.10% |
|
|
4.9% |
|
|
10/9/24 |
|
CA |
|
Office |
|
|
75 |
% |
|
|
2 |
|
|
|
10 |
|
10/4/19 |
|
First mortgage |
|
|
21,716 |
|
|
L+2.90% |
|
|
4.7% |
|
|
10/9/24 |
|
NC |
|
Office |
|
|
61 |
% |
|
|
3 |
|
|
|
11 |
|
10/30/19 |
|
First mortgage |
|
|
13,959 |
|
|
L+3.00% |
|
|
4.9% |
|
|
11/9/24 |
|
CA |
|
Multifamily |
|
|
80 |
% |
|
|
2 |
|
|
|
12 |
|
2/6/20 |
|
First mortgage |
|
|
21,189 |
|
|
L+3.30% |
|
|
5.1% |
|
|
2/9/25 |
|
NJ |
|
Office |
|
|
69 |
% |
|
|
2 |
|
|
|
13 |
|
2/20/20 |
|
First mortgage |
|
|
10,320 |
|
|
L+3.85% |
|
|
5.6% |
|
|
3/9/25 |
|
CA |
|
Retail |
|
|
57 |
% |
|
|
2 |
|
|
|
14 |
|
2/28/20 |
|
First mortgage |
|
|
9,704 |
|
|
L+3.50% |
|
|
5.3% |
|
|
3/9/25 |
|
FL |
|
Retail |
|
|
78 |
% |
|
|
2 |
|
|
|
15 |
|
10/13/20 |
|
First mortgage |
|
|
7,210 |
|
|
L+4.00% |
|
|
5.8% |
|
|
10/9/25 |
|
CA |
|
Multifamily |
|
|
70 |
% |
|
|
2 |
|
|
|
16 |
|
3/5/21 |
|
First mortgage |
|
|
13,568 |
|
|
L+5.00% |
|
|
6.8% |
|
|
3/9/26 |
|
VA |
|
Office |
|
|
57 |
% |
|
|
2 |
|
|
|
17 |
|
3/12/21 |
|
First mortgage |
|
|
20,135 |
|
|
L+4.00% |
|
|
5.8% |
|
|
3/9/26 |
|
MS |
|
Industrial |
|
|
64 |
% |
|
|
2 |
|
|
|
18 |
|
4/6/21 |
|
First mortgage |
|
|
12,830 |
|
|
L+3.50% |
|
|
5.3% |
|
|
4/9/26 |
|
AL |
|
Multifamily |
|
|
69 |
% |
|
|
2 |
|
|
|
19 |
|
4/6/21 |
|
First mortgage |
|
|
10,261 |
|
|
L+3.50% |
|
|
5.3% |
|
|
4/9/26 |
|
AL |
|
Multifamily |
|
|
78 |
% |
|
|
2 |
|
|
|
20 |
|
4/15/21 |
|
First mortgage |
|
|
9,090 |
|
|
L+4.00% |
|
|
5.8% |
|
|
5/9/26 |
|
NJ |
|
Industrial |
|
|
69 |
% |
|
|
2 |
|
|
|
21 |
|
5/12/21 |
|
First mortgage |
|
|
27,892 |
|
|
L+3.15% |
|
|
4.9% |
|
|
5/9/26 |
|
CT |
|
Multifamily |
|
|
77 |
% |
|
|
2 |
|
|
|
22 |
|
5/25/21 |
|
First mortgage |
|
|
11,200 |
|
|
L+3.20% |
|
|
5.0% |
|
|
6/9/26 |
|
TN |
|
Multifamily |
|
|
80 |
% |
|
|
2 |
|
|
|
23 |
|
5/26/21 |
|
First mortgage |
|
|
15,327 |
|
|
L+3.10% |
|
|
4.9% |
|
|
6/9/26 |
|
NV |
|
Multifamily |
|
|
80 |
% |
|
|
2 |
|
|
|
24 |
|
7/1/21 |
|
First mortgage |
|
|
6,430 |
|
|
L+4.50% |
|
|
6.3% |
|
|
7/9/26 |
|
OH |
|
Mixed Use |
|
|
79 |
% |
|
|
2 |
|
|
|
25 |
|
10/8/21 |
|
First mortgage |
|
|
29,550 |
|
|
L+3.20% |
|
|
5.0% |
|
|
10/9/26 |
|
OR |
|
Multifamily |
|
|
72 |
% |
|
|
2 |
|
|
|
26 |
|
10/15/21 |
|
First mortgage |
|
|
22,439 |
|
|
L+2.95% |
|
|
4.7% |
|
|
11/9/26 |
|
VA |
|
Multifamily |
|
|
77 |
% |
|
|
2 |
|
|
|
27 |
|
11/12/21 |
|
First mortgage |
|
|
24,810 |
|
|
L+2.90% |
|
|
4.7% |
|
|
11/9/26 |
|
TX |
|
Multifamily |
|
|
73 |
% |
|
|
2 |
|
|
|
28 |
|
11/16/21 |
|
First mortgage |
|
|
22,042 |
|
|
L+3.05% |
|
|
4.8% |
|
|
12/9/26 |
|
TX |
|
Multifamily |
|
|
74 |
% |
|
|
2 |
|
|
|
29 |
|
11/17/21 |
|
First mortgage |
|
|
22,650 |
|
|
L+2.85% |
|
|
4.6% |
|
|
12/9/26 |
|
SC |
|
Multifamily |
|
|
71 |
% |
|
|
2 |
|
|
|
30 |
|
12/9/21 |
|
First mortgage |
|
|
39,350 |
|
|
L+3.05% |
|
|
4.8% |
|
|
12/9/26 |
|
GA |
|
Multifamily |
|
|
72 |
% |
|
|
2 |
|
|
|
31 |
|
12/15/21 |
|
First mortgage |
|
|
25,210 |
|
|
L+3.20% |
|
|
5.0% |
|
|
1/9/27 |
|
OR |
|
Multifamily |
|
|
70 |
% |
|
|
2 |
|
|
|
32 |
|
1/14/22 |
|
First mortgage |
|
|
36,800 |
|
|
S+3.40% |
|
|
5.1% |
|
|
1/9/27 |
|
MO |
|
Multifamily |
|
|
80 |
% |
|
|
2 |
|
|
|
33 |
|
1/20/22 |
|
First mortgage |
|
|
16,153 |
|
|
S+3.65% |
|
|
5.3% |
|
|
2/9/27 |
|
NC |
|
Retail |
|
|
63 |
% |
|
|
2 |
|
|
|
34 |
|
1/26/22 |
|
First mortgage |
|
|
14,000 |
|
|
S+3.55% |
|
|
5.2% |
|
|
2/9/27 |
|
NJ |
|
Industrial |
|
|
63 |
% |
|
|
2 |
|
|
|
35 |
|
1/28/22 |
|
First mortgage |
|
|
13,220 |
|
|
S+3.30% |
|
|
5.0% |
|
|
2/9/27 |
|
NC |
|
Multifamily |
|
|
70 |
% |
|
|
2 |
|
|
|
36 |
|
2/25/22 |
|
First mortgage |
|
|
30,000 |
|
|
S+3.04% |
|
|
4.7% |
|
|
3/9/27 |
|
NY |
|
Mixed Use |
|
|
67 |
% |
|
|
2 |
|
|
|
37 |
|
3/1/22 |
|
First mortgage |
|
|
26,185 |
|
|
S+3.40% |
|
|
5.1% |
|
|
3/9/27 |
|
TX |
|
Multifamily |
|
|
78 |
% |
|
|
2 |
|
|
|
38 |
|
3/25/22 |
|
First mortgage |
|
|
16,668 |
|
|
S+3.30% |
|
|
5.0% |
|
|
4/9/27 |
|
FL |
|
Industrial |
|
|
70 |
% |
|
|
2 |
|
|
|
39 |
|
4/7/22 |
|
First mortgage |
|
|
12,700 |
|
|
S+3.25% |
|
|
4.9% |
|
|
4/9/27 |
|
SC |
|
Multifamily |
|
|
69 |
% |
|
|
2 |
|
|
|
40 |
|
4/19/22 |
|
First mortgage |
|
|
18,230 |
|
|
S+3.40% |
|
|
5.1% |
|
|
5/9/26 |
|
TX |
|
Multifamily |
|
|
76 |
% |
|
|
2 |
|
|
|
41 |
|
6/13/22 |
|
First mortgage |
|
|
43,250 |
|
|
S+3.45% |
|
|
5.1% |
|
|
6/9/27 |
|
TX |
|
Multifamily |
|
|
73 |
% |
|
|
2 |
|
|
|
42 |
|
9/29/17 |
|
Credit |
|
|
7,500 |
|
|
9.20% |
|
|
9.2% |
|
|
10/11/27 |
|
NJ |
|
Office |
|
|
80 |
% |
|
|
2 |
|
|
|
43 |
|
10/4/19 |
|
Credit |
|
|
6,000 |
|
|
10.00% |
|
|
10.0% |
|
|
10/6/24 |
|
NV |
|
Office |
|
|
75 |
% |
|
|
2 |
|
|
|
|
|
|
|
|
|
$ |
801,823 |
|
|
|
|
|
|
5.2% |
|
|
|
|
|
|
|
|
|
71 |
% |
|
|
|
|
|
(1) |
First mortgage loans are first position mortgage loans and credit loans are mezzanine and subordinated loans. |
|
(2) |
An 80% undivided senior interest in each of loan numbers 1, 2, 3, 5, 7, 10, 11, and 12, which includes the right to receive priority interest payments at a rate of L+2.00%, was sold by our Operating Partnership pursuant to a Loan Participation Agreement dated November 15, 2021. Our Operating Partnership has retained a 20% undivided subordinate interest in each of these loans. |
|
(3) |
Cash coupon is the stated rate on the loan. All-in yield is the present value of all future principal and interest payments on the loan and does not include any origination fees or deferred commitment fees. The total is the weighted average rate as of June 30, 2022. Our first mortgage loans are all floating rate and each contains a minimum LIBOR or SOFR floor. As of June 30, 2022, the weighted average LIBOR floor was 0.86% and the weighted average SOFR floor was 0.22%. |
28
|
(4) |
Maximum maturity assumes all extension options are exercised by the borrower, however loans may be repaid prior to such date. |
|
(5) |
Loan-to-value (“LTV”) was determined at loan origination and is not updated for subsequent property valuations or loan modifications. The total is the weighted average LTV. |
|
(6) |
Risk rating is the internal risk rating assigned by the Sub-Advisor. See “Note 3 – Commercial Mortgage Loans Held for Investment,” which is included in our notes to consolidated financial statements included in this Quarterly Report on Form 10-Q. |
We entered into master repurchase agreements to fund our loan portfolio. As of June 30, 2022 and December 31, 2021, we had total borrowings of $474,568 (which is net of $63 of unamortized debt issuance costs) and $307,083 (which is net of $41 of unamortized debt issuance costs), respectively. During the six months ended June 30, 2022 and the year ended December 31, 2021, we had weighted average borrowings of $518,378 and $348,639 and weighted average borrowing costs of 2.4% and 2.5%, respectively. The increase in borrowings was due to financing of the new loans originated during the period.
Real Property
We own the Renaissance O’Hare, a 362-room hotel located in Chicago, Illinois. More specifically, we own a ground lease interest in the Renaissance O’Hare and currently pay annual rent of $1.6 million on a net basis, with us as the tenant responsible for all operating expenses, including property taxes. The lease has a 10% rental increase every five years with the next increase scheduled to occur in April 2023. This ground lease runs through March 2098.
The Renaissance O’Hare has been, and continues to be, negatively impacted by the COVID-19 pandemic. We recognized a net operating loss before depreciation and amortization from the hotel of $1.2 million in the six months ended June 30, 2022. Although travel is increasing, there are numerous risks and uncertainties still surrounding the continuing and possible future effects of the pandemic, including whether and when a resumption of pre-pandemic levels of travel and in-person meetings and events might happen. Reduced demand for corporate and government travel and in-person meetings, reduced travel from individuals, and uncertainties surrounding the duration and effects of the pandemic persist.
We continue to balance the potential increase in the price of a future sale against the potential for continued operating losses in the face of the uncertainty surrounding the pandemic. Whether we achieve a sale price that is worth waiting for will likely depend in large part on how the aforementioned uncertainties surrounding the pandemic and the return of leisure and business travel and in-person large group events unfolds, which could result in a favorable sale price or future operating losses even beyond what we are expecting or a loss on sale, any of which could be material to our future results of operations. We will monitor the market for hotel sales while considering, among other things, the performance of the Renaissance O’Hare, relevant market factors and our expected total return weighing current potential disposition prices and redeployment of the sales proceeds into our core investment strategy against the potential disposition prices expected later upon the stabilization of the performance of the hotel. Until the market improves, a third-party management company has been engaged and will continue to manage it.
The following table shows the Renaissance’s O’Hare’s performance trend over the past six quarters.
|
Period |
|
Average Occupancy Per Night |
|
|
Revenue Per Available Room |
|
|
Average Daily Rate |
|
|||
|
First Quarter 2021 |
|
|
28 |
% |
|
$ |
23 |
|
|
$ |
80 |
|
|
Second Quarter 2021 |
|
|
48 |
% |
|
$ |
43 |
|
|
$ |
89 |
|
|
Third Quarter 2021 |
|
|
57 |
% |
|
$ |
65 |
|
|
$ |
114 |
|
|
Fourth Quarter 2021 |
|
|
47 |
% |
|
$ |
54 |
|
|
$ |
113 |
|
|
First Quarter 2022 |
|
|
48 |
% |
|
$ |
48 |
|
|
$ |
100 |
|
|
Second Quarter 2022 |
|
|
59 |
% |
|
$ |
87 |
|
|
$ |
146 |
|
The hotel’s performance improved during the second quarter of 2022 relative to the same time period in 2021 primarily due to a return to more normal seasonal activity with travel and group events increasing as the COVID-19 pandemic restrictions have been lifted. Although performance has not returned to pre-pandemic levels, the second quarter 2022 results show significant improvement in operating metrics.
29
Results of Operations
Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021
Net Interest Income
Net interest income is generated on our interest-earning assets less related interest-bearing liabilities. The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the periods indicated.
|
|
|
Three Months Ended June 30, |
|||||||||||||||||||||||
|
|
|
2022 |
|
|
2021 |
||||||||||||||||||||
|
|
|
Average Carrying Value (1) |
|
|
Interest Income/ Expense (2) |
|
|
Weighted Average Yield/Financing Cost (3) |
|
|
Average Carrying Value (1) |
|
|
Interest Income/ Expense (2) |
|
|
Weighted Average Yield/Financing Cost (3) |
|
|
||||||
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
|
$ |
765,906 |
|
|
$ |
9,037 |
|
|
4.7% |
|
|
$ |
516,671 |
|
|
$ |
7,223 |
|
|
5.5% |
|
|
||
|
Total/Weighted Average |
|
$ |
765,906 |
|
|
$ |
9,037 |
|
|
4.7% |
|
|
$ |
516,671 |
|
|
$ |
7,223 |
|
|
5.5% |
|
|
||
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements—commercial mortgage loans |
|
$ |
419,522 |
|
|
$ |
2,813 |
|
|
2.7% |
|
|
$ |
343,944 |
|
|
$ |
2,211 |
|
|
2.5% |
|
|
||
|
Credit facility—loans |
|
|
— |
|
|
|
5 |
|
|
0.0% |
|
|
|
2,208 |
|
|
|
21 |
|
|
3.8% |
|
|
||
|
Loan participations sold, net |
|
|
110,342 |
|
|
|
802 |
|
|
2.9% |
|
|
|
— |
|
|
|
— |
|
|
0.0% |
|
|
||
|
Total/Weighted Average |
|
$ |
529,864 |
|
|
$ |
3,620 |
|
|
2.7% |
|
|
$ |
346,152 |
|
|
$ |
2,232 |
|
|
2.5% |
|
|
||
|
Net interest income/spread |
|
|
|
|
|
$ |
5,417 |
|
|
2.0% |
|
|
|
|
|
|
$ |
4,991 |
|
|
3.0% |
|
|
||
|
Average leverage % (4) |
|
|
224.5 |
% |
|
|
|
|
|
|
|
|
|
|
203.0 |
% |
|
|
|
|
|
|
|
|
|
|
Weighted average levered yield (5) |
|
|
|
|
|
|
|
|
|
9.1% |
|
|
|
|
|
|
|
|
|
|
11.6% |
|
|
||
|
(1) |
Based on amortized cost for real estate securities and principal amount for repurchase agreements. Amounts are calculated based on the average daily balance. |
|
(2) |
Includes the effect of amortization of premium or accretion of discount. |
|
(3) |
Calculated as annualized interest income or expense divided by average carrying value. |
|
(4) |
Calculated by dividing total average interest-bearing liabilities by total average equity (total average interest-earning assets less total average liabilities). |
|
(5) |
Calculated by taking the sum of (i) the net interest spread multiplied by the average leverage and (ii) the weighted average yield on interest-earning assets. |
The change in our average interest-earning assets and interest-bearing liabilities was due to the change in the composition of our investment portfolio as we invested proceeds from the IPO, the Preferred Stock Offering, and the sale of loan participations to execute our business strategy. The change in the weighted average levered yield was primarily due to a decrease in our net interest income/spread as new loans were originated with lower spreads based on market conditions that was only partially offset by higher leverage on our portfolio.
Revenue from Real Estate Owned
During the three months ended June 30, 2022 and 2021, the Renaissance O’Hare generated $4,030 and $1,744, respectively, in revenue. We believe the increase in revenue was most likely primarily due to increased travel because of the easing of pandemic related travel restrictions and increased willingness and desire to travel.
30
Net Operating Expenses
Net operating expenses for the three months ended June 30, 2022 and 2021 consisted of the following:
|
|
|
Three Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Advisory fee |
|
$ |
931 |
|
|
$ |
737 |
|
|
Debt finance costs |
|
|
395 |
|
|
|
380 |
|
|
Directors compensation |
|
|
20 |
|
|
|
13 |
|
|
Professional service fees |
|
|
235 |
|
|
|
282 |
|
|
Real estate owned operating expenses |
|
|
3,949 |
|
|
|
1,457 |
|
|
Depreciation and amortization |
|
|
277 |
|
|
|
273 |
|
|
Other expenses |
|
|
363 |
|
|
|
296 |
|
|
Net operating expenses |
|
$ |
6,170 |
|
|
$ |
3,438 |
|
Net operating expenses for the three months ended June 30, 2022 and 2021 were $6,170 and $3,438, respectively. The primary driver of the increase in net operating expenses was related to the real estate operating expenses. As hotel operations improved during the quarter due to the easement of travel restrictions, the variable operating costs increased as well. Additionally, advisory fees increased as the loan portfolio grew.
Net Income
For the three months ended June 30, 2022 and 2021, our net income was $3,277 and $3,298, respectively. While net income was relatively the same during each period, the composition of the income changed. The small decrease in net income was due to a slight decrease in operating margin at the Renaissance O’Hare combined with an increase in advisory fees. This was partially offset by a $500 increase in net interest income that resulted from the growth of the loan portfolio as we invested the proceeds of our Preferred Stock Offering and interest rates began to rise.
Ended June 30, 2022 to the Six Months Ended June 30, 2021
Net Interest Income
Net interest income is generated on our interest-earning assets less related interest-bearing liabilities. The following table presents the average balance of interest-earning assets less related interest-bearing liabilities, associated interest income and expense and corresponding yield earned and incurred for the periods indicated.
|
|
|
Six Months Ended June 30, |
|
|||||||||||||||||||||
|
|
|
2022 |
|
|
2021 |
|
||||||||||||||||||
|
|
|
Average Carrying Value (1) |
|
|
Interest Income/ Expense (2) |
|
|
Weighted Average Yield/Financing Cost (3) |
|
|
Average Carrying Value (1) |
|
|
Interest Income/ Expense (2) |
|
|
Weighted Average Yield/Financing Cost (3) |
|
||||||
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage loans |
|
$ |
749,694 |
|
|
$ |
17,608 |
|
|
4.7% |
|
|
$ |
483,653 |
|
|
$ |
13,674 |
|
|
5.6% |
|
||
|
Total/Weighted Average |
|
$ |
749,694 |
|
|
$ |
17,608 |
|
|
4.7% |
|
|
$ |
483,653 |
|
|
$ |
13,674 |
|
|
5.6% |
|
||
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements—commercial mortgage loans |
|
$ |
401,398 |
|
|
$ |
4,818 |
|
|
2.4% |
|
|
$ |
318,612 |
|
|
$ |
4,104 |
|
|
2.6% |
|
||
|
Credit facility - loans |
|
|
6,818 |
|
|
|
142 |
|
|
4.1% |
|
|
|
1,110 |
|
|
|
21 |
|
|
3.8% |
|
||
|
Loan participations sold, net |
|
|
110,162 |
|
|
|
1,401 |
|
|
2.5% |
|
|
|
— |
|
|
|
— |
|
|
0.0% |
|
||
|
Total/Weighted Average |
|
$ |
518,378 |
|
|
$ |
6,361 |
|
|
2.4% |
|
|
$ |
319,722 |
|
|
$ |
4,125 |
|
|
2.6% |
|
||
|
Net interest income/spread |
|
|
|
|
|
$ |
11,247 |
|
|
2.2% |
|
|
|
|
|
|
$ |
9,549 |
|
|
3.0% |
|
||
|
Average leverage % (4) |
|
|
224.1 |
% |
|
|
|
|
|
|
|
|
|
|
195.0 |
% |
|
|
|
|
|
|
|
|
|
Weighted average levered yield (5) |
|
|
|
|
|
|
|
|
|
9.7% |
|
|
|
|
|
|
|
|
|
|
11.6% |
|
||
|
(1) |
Based on amortized cost for real estate securities and principal amount for repurchase agreements. Amounts are calculated based on the average daily balance. |
|
(2) |
Includes the effect of amortization of premium or accretion of discount. |
|
(3) |
Calculated as annualized interest income or expense divided by average carrying value. |
31
|
(4) |
Calculated by dividing total average interest-bearing liabilities by total average equity (total average interest-earning assets less total average liabilities). |
|
(5) |
Calculated by taking the sum of (i) the net interest spread multiplied by the average leverage and (ii) the weighted average yield on interest-earning assets. |
The change in our average interest-earning assets and interest-bearing liabilities was due to the change in the composition of our investment portfolio as we invested proceeds from the IPO, Preferred Stock Offering, and the sale of loan participations to execute our business strategy. The change in the weighted average levered yield was primarily due to a decrease in our net interest income/spread as new loans were originated with lower spreads based on market conditions that was only partially offset by higher leverage on our portfolio.
Revenue from Real Estate Owned
During the six months ended June 30, 2022 and 2021, the Renaissance O’Hare generated $5,790 and $2,612, respectively, in revenue. We believe the increase in revenue was most likely primarily due to increased travel because of the easing of pandemic related travel restrictions and increased willingness and desire to travel.
Net Operating Expenses
Net operating expenses for the six months ended June 30, 2022 and 2021 consisted of the following:
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Advisory fee |
|
$ |
1,881 |
|
|
$ |
1,474 |
|
|
Debt finance costs |
|
|
771 |
|
|
|
811 |
|
|
Directors compensation |
|
|
41 |
|
|
|
34 |
|
|
Professional service fees |
|
|
483 |
|
|
|
506 |
|
|
Real estate owned operating expenses |
|
|
7,000 |
|
|
|
3,612 |
|
|
Depreciation and amortization |
|
|
559 |
|
|
|
545 |
|
|
Other expenses |
|
|
663 |
|
|
|
516 |
|
|
Net operating expenses |
|
$ |
11,398 |
|
|
$ |
7,498 |
|
Net operating expenses for the six months ended June 30, 2022 and 2021 were $11,398 and $7,498, respectively. The primary driver of the increase in net operating expenses was related to the real estate operating expenses as hotel operations improved in the first half of the year due to the easement of travel restrictions. In addition, advisory fees increased as a result of the Preferred Stock Offering completed in September 2021.
Net Income
For the six months ended June 30, 2022 and 2021, our net income was $5,639 and $4,663, or $0.24 and $0.40 per share (basic and diluted), respectively. The increase in net income was primarily due to a $1,697 increase in net interest income that resulted from the growth in the loan portfolio. This growth also led to higher advisory fees that partially offset the increase in net interest income.
Non-GAAP Financial Measures
Funds from Operations and Modified Funds from Operations
We use Funds from Operations (“FFO”), a widely accepted metric, to evaluate our performance. FFO provides a supplemental measure to compare our performance and operations to other REITs. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts (“NAREIT”) has promulgated a standard known as FFO, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO means net income (loss) attributable to common stockholders computed in accordance with GAAP, excluding gains (or losses) from sales of operating property, plus depreciation and amortization and after adjustments for unconsolidated entities. In addition, NAREIT has further clarified the FFO definition to add-back impairment write-downs of depreciable real estate or of investments in unconsolidated entities that are driven by measurable decreases in the fair value of depreciable real estate and to exclude the earnings impacts of cumulative effects of accounting changes. We have adopted the NAREIT definition for computing FFO.
Due to the unique features of publicly registered, non-listed REITs, the Institute for Portfolio Alternatives (“IPA”), an industry trade group, published a standardized measure known as Modified Funds from Operations (“MFFO”), which the IPA has promulgated as a supplemental measure for publicly registered non-listed REITs and which may be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT.
32
The IPA defines MFFO as FFO adjusted for acquisition fees and expenses, amounts relating to straight line rents and amortization of premiums on debt investments, non-recurring impairments of real estate-related investments, mark-to-market adjustments included in net income, non-recurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures.
We define MFFO in accordance with the concepts established by the IPA and adjust FFO for certain items, such as amortization of premium and discounts on real estate securities. We purchase real estate securities at a premium or discount to par value, and in accordance with GAAP, record the amortization of premium/accretion of the discount to interest income. We believe that excluding the amortization of premiums and discounts provides better insight to the expected contractual cash flows. In addition, we adjust FFO for unrealized gains or losses on real estate securities. Any mark-to-market or fair value adjustments are based on general market or overall industry conditions and may be temporary in nature.
Because MFFO may be a recognized measure of operating performance within the non-listed REIT industry, MFFO and the adjustments used to calculate it may be useful in order to evaluate our performance against other non-listed REITs. Like FFO, MFFO is not equivalent to our net income or loss as determined under GAAP, as detailed in the table below, and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to acquire a significant amount of investments.
Our presentation of FFO and MFFO may not be comparable to other similarly titled measures presented by other REITs. We believe that the use of FFO and MFFO provides a more complete understanding of our operating performance to stockholders and to management, and when compared year over year, reflects the impact on our operations from trends in operating costs, general and administrative expenses, and interest costs. Neither FFO nor MFFO is intended to be an alternative to “net income” or to “cash flows from operating activities” as determined by GAAP as a measure of our capacity to pay distributions. Management uses FFO and MFFO to compare our operating performance to that of other REITs and to assess our operating performance.
Neither the SEC, any other regulatory body nor NAREIT has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, the SEC, another regulatory body or NAREIT may decide to standardize the allowable adjustments across the non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.
Our FFO and MFFO are calculated as follows:
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
|
GAAP net income attributable to common stockholders |
$ |
1,758 |
|
|
$ |
3,298 |
|
|
$ |
2,601 |
|
|
$ |
4,663 |
|
|
Depreciation and amortization |
|
277 |
|
|
|
273 |
|
|
|
559 |
|
|
|
545 |
|
|
Funds from operations attributable to common stockholders |
$ |
2,035 |
|
|
$ |
3,571 |
|
|
$ |
3,160 |
|
|
$ |
5,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt financing costs |
|
395 |
|
|
|
380 |
|
|
|
771 |
|
|
|
811 |
|
|
Non-cash adjustment for ground lease |
|
105 |
|
|
|
95 |
|
|
|
207 |
|
|
|
189 |
|
|
Modified funds from operations attributable to common stockholders |
$ |
2,535 |
|
|
$ |
4,046 |
|
|
$ |
4,138 |
|
|
$ |
6,208 |
|
Net Asset Value
The purchase price per share for each class of our common stock in our IPO generally equals our prior month’s NAV per share, as determined monthly, plus applicable selling commissions and dealer manager fees. Our NAV for each class of shares is based on the net asset values of our investments, the addition of any other assets (such as cash on hand) and the deduction of any liabilities, including the allocation/accrual of any performance participation and any stockholder servicing fees applicable to such class of shares. The Advisor is responsible for reviewing and confirming our NAV, as well as overseeing the process around the calculation of our NAV, in each case, as calculated by the independent valuation advisor. See “Valuation Guidelines” below for further information regarding our valuation policies used to determine our NAV.
On March 24, 2020, our Board suspended (i) the sale of shares in our IPO, (ii) the operation of the SRP, (iii) the payment of distributions to our stockholders, and (iv) the operation of the DRP, effective as of April 6, 2020. These changes were made to allow us to maintain fiscal responsibility and respond accordingly to the unprecedented economic disruption resulting from the COVID-19 pandemic. In determining to suspend our IPO, the SRP, the payment of distributions and the DRP, our Board considered various factors, including the impact of the COVID-19 pandemic on the economy, the inability to accurately calculate our NAV per share due
33
to uncertainty, volatility and lack of liquidity in the market, our need for liquidity due to financing challenges related to additional collateral required by the banks that regularly finance our assets and these uncertain and rapidly changing economic conditions.
As a result of these factors, we did not calculate our NAV for the months of March through May 2020. We resumed calculation of our NAV beginning as of June 30, 2020 following the Advisor’s determination that volatility in the market for our investments had declined and the U.S. economic outlook had improved. In August 2020, we resumed paying distributions monthly to stockholders of record for all classes of shares. On October 1, 2020, the SEC declared effective our post-effective amendment to our registration statement on Form S-11, thereby permitting us to resume offers and sales of shares of common stock in our IPO, including through the DRP.
On March 1, 2021, our SRP was reinstated for our stockholders requesting repurchase of shares as a result of the death or qualified disability of the holder.
On July 1, 2021, our SRP was reinstated for all stockholders. In accordance with the terms of the SRP that allow us to repurchase fewer shares than the maximum amount permitted under the SRP, we repurchased fewer shares than the maximum amount permitted for the months of July, August and September 2021. Beginning on October 1, 2021, the total amount of aggregate repurchases of shares is limited as set forth in the SRP (no more than 2% of our aggregate NAV per month as of the last day of the previous calendar month and no more than 5% of our aggregate NAV per calendar quarter with NAV measured as of the last day of the previous calendar quarter). Notwithstanding the foregoing, we may repurchase fewer shares than these limits in any month, or none. Further, our Board may modify, suspend or terminate our SRP if it deems such action to be in our best interest and the best interest of our stockholders.
The following table provides a breakdown of the major components of our net asset value attributable to common stock:
|
Components of NAV |
As of June 30, 2022 |
|
|
|
Commercial mortgage loans |
$ |
803,267 |
|
|
Real estate owned, net |
|
17,100 |
|
|
Cash and cash equivalents and restricted cash |
|
57,969 |
|
|
Other assets |
|
7,637 |
|
|
Repurchase agreements - commercial mortgage loans |
|
(474,568 |
) |
|
Loan participations sold |
|
(106,260 |
) |
|
Reserve for negative impact of COVID on real estate owned (1) |
|
(399 |
) |
|
Due to related parties |
|
(2,727 |
) |
|
Distributions payable |
|
(1,097 |
) |
|
Accrued interest payable |
|
(585 |
) |
|
Accrued stockholder servicing fees (2) |
|
(135 |
) |
|
Other liabilities |
|
(5,765 |
) |
|
Preferred stock |
|
(86,946 |
) |
|
Net asset value attributable to common stock |
$ |
207,491 |
|
|
Number of outstanding shares |
|
10,569 |
|
|
(1) |
As of December 31, 2020, we established as a component of the NAV calculation a $2,250 reserve for the estimated negative impact of the COVID-19 pandemic during 2021 on REO. We increased this reserve by an additional $1,000 as of December 31, 2021, for expected losses during 2022 for the REO related to the continuing COVID-19 pandemic. Because we had already established a reserve for losses, the loss on REO for the six months ended June 30, 2022 set forth below reduces the reserve but has no negative effect on the NAV. Below is a reconciliation of the reserve: |
|
Beginning reserve balance as of December 31, 2021 |
|
$ |
(1,402 |
) |
|
Less: Net loss on real estate owned for the six months ended June 30, 2022: |
|
|
|
|
|
Revenue from real estate owned |
|
|
5,790 |
|
|
Real estate owned operating expense |
|
|
(7,000 |
) |
|
Non-cash adjustment for ground lease |
|
|
207 |
|
|
Net loss from real estate owned |
|
|
(1,003 |
) |
|
Reserve balance as of June 30, 2022 |
|
$ |
(399 |
) |
|
(2) |
Stockholder servicing fees only apply to Class T, Class S, and Class D shares. For purposes of NAV, we recognize the stockholder servicing fee as a reduction of NAV on a monthly basis as such fee is paid. Under GAAP, we accrue the full cost of the stockholder servicing fee as an offering cost at the time we sell Class T, Class S, and Class D shares. As of June 30, 2022, |
34
|
we have accrued under GAAP $732 of stockholder servicing fees payable to the Dealer Manager related to the Class T and Class D shares sold. As of June 30, 2022, we have not sold any Class S shares and, therefore, we have not accrued any stockholder servicing fees payable to the Dealer Manager related to Class S shares. The Dealer Manager does not retain any of these fees, all of which are retained by, or reallowed (paid) to, participating broker-dealers and servicing broker-dealers for ongoing stockholder services performed by such broker-dealers. |
The table below outlines our total NAV and NAV per share by share class as of June 30, 2022:
|
|
Common Stock |
|
|||||||||||||||||||||||||
|
NAV Per Share |
Class P |
|
|
Class A |
|
|
Class T |
|
|
Class S |
|
|
Class D |
|
|
Class I |
|
|
Total |
|
|||||||
|
Monthly NAV |
$ |
177,480 |
|
|
$ |
13,396 |
|
|
$ |
8,121 |
|
|
$ |
— |
|
|
$ |
927 |
|
|
$ |
7,559 |
|
|
$ |
207,491 |
|
|
Number of outstanding shares |
|
9,045 |
|
|
|
681 |
|
|
|
412 |
|
|
|
— |
|
|
|
47 |
|
|
|
384 |
|
|
|
10,569 |
|
|
NAV per share as of June 30, 2022 |
$ |
19.6223 |
|
|
$ |
19.6714 |
|
|
$ |
19.7096 |
|
|
$ |
— |
|
|
$ |
19.6639 |
|
|
$ |
19.6679 |
|
|
$ |
19.6320 |
|
The following table reconciles stockholders’ equity per our consolidated balance sheet to our NAV:
|
Reconciliation of Stockholders’ Equity to NAV |
As of June 30, 2022 |
|
|
|
Stockholders' equity per GAAP |
$ |
294,514 |
|
|
Adjustments: |
|
|
|
|
Unamortized stockholder servicing fee |
|
596 |
|
|
Unamortized offering costs |
|
1,935 |
|
|
Real estate owned non-cash adjustments |
|
2,630 |
|
|
Fair value real estate owned adjustment |
|
(5,238 |
) |
|
Net asset value |
$ |
294,437 |
|
|
Preferred Stock Adjustments: |
|
|
|
|
Preferred stock liquidation value |
|
(90,000 |
) |
|
Unamortized preferred stock offering costs |
|
3,054 |
|
|
Net asset value attributable to common stock |
$ |
207,491 |
|
Valuation Guidelines
Our Board, including a majority of our independent directors, has adopted valuation guidelines that contain a comprehensive set of methodologies to be used by the Advisor, with the assistance of the Sub-Advisor, and our independent valuation advisor in connection with estimating the values of our assets and liabilities for purposes of our NAV calculation. From time to time, our Board, including a majority of our independent directors, may adopt changes to the valuation guidelines if it (1) determines that such changes are likely to result in a more accurate reflection of NAV or a more efficient or less costly procedure for the determination of NAV without having a material adverse effect on the accuracy of such determination or (2) otherwise reasonably believes a change is appropriate for the determination of NAV. In connection with carrying out its responsibility to determine our NAV, the Advisor may delegate certain tasks to the Sub-Advisor. The Advisor, however, is ultimately responsible for the NAV determination process.
The calculation of our NAV is intended to be a calculation of the value of our assets less our outstanding liabilities for the purpose of establishing a purchase and repurchase price for our shares of common stock and may differ from our financial statements. NAV is not a measure used under GAAP and the valuations of and certain adjustments made to our assets and liabilities used in the determination of NAV will differ from GAAP.
The Advisor calculates the fair value of our assets in accordance with our valuation guidelines with the support of the independent valuation advisor. Because these fair value calculations involve significant professional judgment in the application of both observable and unobservable attributes, the calculated fair value of our assets may differ from their actual realizable value or future fair value. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. While we believe our NAV calculation methodologies are consistent with standard industry principles, there is no established practice among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and repurchase price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.
35
Our Independent Valuation Advisor
With the approval of our Board, including a majority of our independent directors, we have engaged BDO USA, LLP to serve as our independent valuation advisor. The Advisor, with the approval of our Board, including a majority of our independent directors, may engage additional independent valuation advisors in the future as our portfolio grows. At the end of each month, the independent valuation advisor calculates our monthly NAV. While the independent valuation advisor performs an important role with respect to the valuation of our assets, the independent valuation advisor is not responsible for our NAV, and performs its services based solely on information received from us, the Advisor and the Sub-Advisor. The Advisor, and not the independent valuation advisor, is ultimately responsible for the determination of our NAV.
Our independent valuation advisor may be replaced at any time, in accordance with agreed-upon notice requirements, by a majority vote of our Board, including a majority of our independent directors. We will promptly disclose any changes to the identity or role of the independent valuation advisor in reports we publicly file with the SEC. Our independent valuation advisor discharges its responsibilities in accordance with our valuation guidelines. Our Board is not involved in the monthly valuation of our assets and liabilities, but periodically receives and reviews such information about the valuation of our assets and liabilities as it deems necessary to exercise its oversight responsibility.
We have agreed to pay fees to our independent valuation advisor upon its delivery to us of its review reports. We have also agreed to indemnify our independent valuation advisor against certain liabilities arising out of this engagement. The compensation we pay to our independent valuation advisor is not based on the estimated values of our loans or our NAV.
Our independent valuation advisor may from time to time in the future perform other commercial real estate and financial advisory services for the Advisor or Sub-Advisor and their affiliates, so long as such other services do not adversely affect the independence of the independent valuation advisor.
Valuation of Investments
The majority of our investments consist of CRE debt intended to be held to maturity. We may also invest in real estate and other real estate-related assets and liquid non-real estate-related assets. Real estate-related assets include CRE securities, such as CMBS and CRE CLOs, and unsecured debt of publicly traded REITs. Our liquid non-real estate-related assets may include credit rated government and corporate debt securities, publicly traded equity securities and cash and cash equivalents.
The Advisor seeks to determine the fair value of investments as of the last day of each month. Fair value determinations are based upon all available inputs that the Advisor deems relevant, including, but not limited to, indicative dealer quotes, values of like securities, discounted cash flow analysis, and valuations prepared by third-party valuation services. However, determination of fair value involves subjective judgments and estimates. The independent valuation advisor will review these evaluations at each quarter end.
|
|
• |
Mortgage Loans, Participations in Mortgage Loans and Mezzanine Loans. The Advisor estimates the fair value of our loan portfolio in accordance with the methodologies contained in our valuation guidelines approved by our Board. In general, the loan portfolio will be valued at amortized cost, subject to impairment testing. Beginning December 31, 2022, we will be required under GAAP to record a Current Expected Credit Loss (CECL) reserve on the CRE debt portfolio that will be adjusted at least quarterly. The CECL reserve is not considered an impairment and, therefore, the value of the loans will exclude the CECL reserve amount. We believe this methodology is consistent with institutional valuation practices and provides an appropriate valuation for purposes of establishing a purchase and repurchase price for our shares of common stock as it relates to assets that are intended to be held to maturity. |
|
|
• |
Real Estate-Related Securities and Derivatives. Our real estate-related securities investments will generally focus on non-distressed public and private real estate debt, including, but not limited to, CMBS and other forms of debt. Additionally, we may make open market purchases of common stock in public equity REITs. We may also invest in derivatives. Our principal investments in derivative instruments may include investments in interest rate swaps, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our real estate-related securities and derivative investments are recorded at fair market value in our financial statements, in accordance with ASC Topic 820. The valuation of these assets is obtained from market quotations obtained from third-party pricing service providers or broker-dealers. Pursuant to the valuation guidelines adopted by our Board, if market quotations are not readily available (or are otherwise not reliable for a particular investment), the fair value is determined in good faith by the Advisor. Due to the inherent uncertainty of these estimates, estimates of fair value may differ from the values that would have been used had a ready market for these investments existed and the differences could be material. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, or broker-dealer quotations). Our Board has delegated to the Advisor the responsibility for monitoring significant events that |
36
|
|
may materially affect the values of our real estate-related securities and derivative investments and for determining whether the value of the applicable investments should be reevaluated in light of such significant events. |
|
|
• |
Valuation of Liquid Non-Real Estate-Related Assets. Our liquid non-real estate-related assets are recorded at fair market value in our financial statements, in accordance with ASC Topic 820. The valuation of these assets is based on market prices obtained from third-party pricing services or as published in nationally recognized sources such as Bloomberg. |
Valuation of Properties
|
|
• |
Wholly Owned Properties. For real properties we own, the Advisor has developed a valuation plan with the objective of having each of our wholly owned properties valued at least annually by an appraisal, except for newly acquired properties as described below, with appraisals scheduled over the course of a year. We rely on property-level information provided by the Advisor, including but not limited to (1) historical and projected operating revenues and expenses of the property, (2) lease agreements with respect to the property and (3) information regarding recent or planned capital expenditures. Appraisals will be performed in accordance with the Internal Revenue Code of Ethics and the Uniform Standards of Professional Appraisal Practices, the real estate appraisal industry standards created by The Appraisal Foundation. Each appraisal must be reviewed, approved and signed by an individual with the professional designation of MAI (Member of the Appraisal Institute). Newly acquired wholly owned properties will initially be valued at cost and thereafter will join the annual appraisal cycle during the year following the first full calendar year in which we own the property. Development assets, if any, will be valued at cost plus capital expenditures and will join the annual appraisal cycle upon stabilization. Acquisition costs and expenses incurred in connection with the acquisition of multiple wholly owned properties that are not directly related to any single wholly owned property generally will be allocated among the applicable wholly owned properties pro rata based on relative values. Properties purchased as a portfolio or held in a joint venture that acquires properties over time may be valued as a single asset. Each individual appraisal report for our assets will be addressed solely to our company to assist in providing our monthly portfolio valuation. |
Our valuation reports will not be addressed to the public and may not be relied upon by any other person to establish an estimated value of our common stock and will not constitute a recommendation to any person to purchase or sell any shares of our common stock. In preparing our NAV calculation, the Advisor will not solicit third-party indications of interest for our common stock in connection with possible purchases thereof or the acquisition of all or any part of our company. Real estate appraisals are reported on a free and clear basis (for example no mortgage), irrespective of any property-level financing that may be in place. The primary methodology used to value properties is the income approach, whereby value is derived by determining the present value of an asset’s stream of future cash flows (for example, discounted cash flow analysis). Consistent with industry practices, the income approach incorporates subjective judgments regarding comparable rental and operating expense data, the capitalization or discount rate, and projections of future rent and expenses based on appropriate evidence. Other methodologies that may also be used to value properties include sales comparisons and replacement cost approaches. Because the appraisals involve subjective judgments, the fair value of our assets, which is included in our NAV, may not reflect the liquidation value or net realizable value of our properties.
|
|
• |
Properties Held Through Joint Ventures. Properties held through joint ventures will be valued in a manner that is consistent with the guidelines described above for wholly owned properties. Once the value of a property held by the joint venture is determined by an independent appraisal, the value of our interest in the joint venture is then determined by applying the distribution provisions of the applicable joint venture agreements to the value of the underlying property held by the joint venture. |
Liabilities
We include the fair value of our liabilities as part of our NAV calculation. Our liabilities generally include portfolio-level credit facilities, the fees payable to the Advisor and the Dealer Manager, accounts payable, accrued operating expenses, property-level mortgages, reserves for future liabilities and other liabilities. All liabilities are valued using widely accepted methodologies specific to each type of liability. Our debt is typically valued at fair value in accordance with GAAP. Our aggregate monthly NAV will be reduced to reflect the accrual of the liability to pay any declared (and unpaid) distributions for all classes of common stock. Liabilities allocable to a specific class of shares will only be included in the NAV calculation for that class.
NAV and NAV Per Share Calculation
Each class of our common stock, including Class P common stock that we are not offering to the public, have an undivided interest in our assets and liabilities, other than class-specific liabilities. Our NAV is calculated by the independent valuation advisor for each of these classes. The Advisor is responsible for reviewing and confirming our NAV, and overseeing the process around the calculation of
37
our NAV, in each case, as calculated by the independent valuation advisor. Because stockholder servicing fees allocable to a specific class of shares will only be included in the NAV calculation for that class, the NAV per share for our share classes may differ.
At the end of each month, before taking into consideration class-specific expense accruals for that month, any change in our aggregate NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate NAV plus issuances of shares that were effective on the first business day of such month and issuances of shares under our DRP and less repurchases under our SRP during such month. The NAV calculation is generally available within 15 calendar days after the end of the applicable month. Changes in our monthly NAV include, without limitation, accruals of our net portfolio income, interest expense, the management fee, any accrued performance fee, distributions, unrealized/realized gains and losses on assets, any applicable organization and offering costs and any expense reimbursements. Changes in our monthly NAV also include material non-recurring events, such as capital expenditures and material property acquisitions and dispositions occurring during the month. On an ongoing basis, the Advisor will adjust the accruals to reflect actual operating results and the outstanding receivable, payable and other account balances resulting from the accumulation of monthly accruals for which financial information is available.
For the purpose of calculating our NAV, offering costs are expenses we incur as we raise proceeds in our public and private offerings. For GAAP purposes, these costs are deducted from equity when incurred. For the NAV calculation, all of the offering costs from our public and private offerings incurred through July 17, 2019 (the “NAV Pricing Date”) were added back to equity and amortized into equity monthly over the 60 months beginning with the first full month that follows the NAV Pricing Date. Following the NAV Pricing Date, offering costs are included in the NAV calculation as and when incurred.
Following the aggregation of the NAV of our investments, the addition of any other assets (such as cash on hand) and the deduction of any other liabilities, the independent valuation advisor will incorporate any class-specific adjustments to our NAV, including additional issuances and repurchases of our common stock and accruals of class-specific stockholder servicing fees. For each applicable class of shares, the stockholder servicing fees will be calculated as a percentage of the aggregate NAV for such class of shares. NAV per share for each class is calculated by dividing such class’s NAV at the end of each month by the number of shares outstanding for that class at the end of such month.
The combination of the Class A NAV, Class T NAV, Class S NAV, Class D NAV, Class I NAV and Class P NAV equals the value of our assets less our liabilities, which include certain class-specific liabilities. The Advisor calculates the value of our investments as directed by our valuation guidelines based upon values received from various sources, including independent valuation services. The Advisor, with assistance from the Sub-Advisor, is responsible for information received from third parties that is used in calculating our NAV.
Limits on the Calculation of Our Per Share NAV
The overarching principle of our valuation guidelines is to produce reasonable estimated values for each of our investments (and other assets and liabilities). However, the majority of our assets will consist of real estate loans and, as with any real estate valuation protocol and as described above, the valuation of our loans (and other assets and liabilities) will be based on a number of judgments, assumptions and opinions about future events that may or may not prove to be correct. The use of different judgments, assumptions or opinions would likely result in a different estimate of the value of our real estate loans (and other assets and liabilities). Any resulting potential disparity in our NAV per share may be in favor of stockholders whose shares are repurchased, existing stockholders or new purchasers of our common stock, as the case may be, depending on the circumstances at the time (for cases in which our transaction price is based on NAV).
Additionally, while the methodologies contained in our valuation guidelines are designed to operate reliably within a wide variety of circumstances, it is possible that in certain unanticipated situations or after the occurrence of certain extraordinary events (such as a significant disruption in relevant markets, a terrorist attack or an act of nature), our ability to calculate NAV may be impaired or delayed, including, without limitation, circumstances where there is a delay in accessing or receiving information from vendors or other reporting agents upon which we may rely upon in determining the monthly value of our NAV. In these circumstances, a more accurate valuation of our NAV could be obtained by using different assumptions or methodologies. Accordingly, in special situations when, in the Advisor’s reasonable judgment, the administration of the valuation guidelines would result in a valuation that does not represent a fair and accurate estimate of the value of our investment, alternative methodologies may be applied, provided that the Advisor must notify our Board at the next scheduled board meeting of any alternative methodologies utilized and their impact on the overall valuation of our investment. Notwithstanding the foregoing, our Board may suspend the IPO and/or our SRP if it determines that the calculation of NAV is materially incorrect or unreliable or there is a condition that restricts the valuation of a material portion of our assets. We include no discounts to our NAV for the illiquid nature of our shares, including the limitations under our SRP and our ability to suspend or terminate our SRP at any time. Our NAV generally does not consider exit costs that would likely be incurred if our assets and liabilities were liquidated or sold. While we may use market pricing concepts to value individual components of our NAV, our per share NAV is not derived from the market pricing information of open-end real estate funds listed on stock exchanges. Our NAV does not represent the fair value of our assets less liabilities under GAAP.
38
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay distributions to our stockholders, fund investments, originate loans, repay borrowings, and other general business needs including the payment of our operating and administrative expenses. Our primary sources of funds for liquidity consist of the net proceeds from our IPO, Preferred Stock Offering and any follow-on public offerings of common stock, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
Our primary sources of liquidity include $57.9 million in cash, $200.4 million in available capacity on our borrowing facilities, and $20.0 million in available borrowing capacity from our revolving credit letter agreements with IREIC and Sound Point. We may seek additional sources of liquidity from syndicated financing in the form of collateralized loan obligations, sale of loan participations, other borrowings, including additional repurchase agreement facilities and borrowings not related to a specific investment and future offerings of equity and debt securities.
Our primary liquidity needs include originating new loans and acquiring assets in accordance with our investment objectives, our commitments to repay the principal and interest on our borrowings and pay other financing costs, financing our assets, making advances on our future funding obligations, making distributions to our stockholders, funding our operations which includes paying fees and expenses to our Advisor and Sub-Advisor, payment of offering costs in connection with public offerings of common stock, and other general business needs.
Cash Flow Analysis
|
|
|
Six months ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Net cash provided by operating activities |
|
$ |
7,802 |
|
|
$ |
4,694 |
|
|
Net cash used in investing activities |
|
|
(137,729 |
) |
|
|
(112,992 |
) |
|
Net cash provided by financing activities |
|
|
130,628 |
|
|
|
88,134 |
|
|
Net increase (decrease) in cash and cash equivalents |
|
$ |
701 |
|
|
$ |
(20,164 |
) |
We experienced a net increase in cash and cash equivalents of $701 for the six months ended June 30, 2022 compared to a net decrease of $20,164 for the six months ended June 30, 2021. During the six months ended June 30, 2022, we funded $234,019 in mortgage loans and we received $96,366 in principal payments from our loans and $167,507 in net advances on our borrowing facilities.
Repurchase Agreements and Credit Facilities
On February 15, 2018, we, through our wholly owned subsidiary, entered into a master repurchase agreement (the “CF Repo Facility”) with Column Financial, Inc. as administrative agent for certain of its affiliates. As our business has grown, we have increased the borrowing limit and extended the maturity. The most recent extension was in June 2022 for a twelve-month term and the maximum advance amount was increased to $450,000. Advances under the CF Repo Facility for current loans accrue interest at a per annum rate equal to SOFR plus 1.75% to 2.50% with a 0.15% to 0.75% floor. The CF Repo Facility is generally subject to certain financial covenants. We were in compliance with all financial covenant requirements as of June 30, 2022 and December 31, 2021.
On May 6, 2019, we, through our wholly owned subsidiary, entered into an uncommitted master repurchase agreement (the “JPM Repo Facility”) with JPMorgan Chase Bank, National Association. The JPM Repo Facility provides up to $150,000 in advances that we expect to use to finance the acquisition or origination of eligible loans and participation interests therein. Advances made prior to December 2021 under the JPM Repo Facility accrue interest at per annum rates equal to the sum of (i) the applicable LIBOR index rate plus (ii) a margin of between 1.75% to 2.50% with a 0.00% to 0.25% floor, depending on the attributes of the purchased assets. Advances made subsequent to December 2021 under the JPM Repo Facility accrue interest at per annum rates equal to the sum of SOFR plus an agreed upon margin. As of June 30, 2022, 37% of the advances made under the JPM Repo Facility were indexed to SOFR and have margins between 1.85% and 2.50%. In May 2022, the maturity date of the JPM Repo Facility was extended to May 6, 2023. The JPM Repo Facility is subject to certain financial covenants. We were in compliance with all financial covenant requirements as of June 30, 2022 and December 31, 2021.
On March 10, 2021, we, through our wholly owned subsidiary, entered into a credit facility with Western Alliance Bank (the “WA Credit Facility,” together with the CF Repo Facility and the JPM Repo Facility, the “Facilities”). The WA Credit Facility provides for loan advances up to the lesser of $75,000 or the borrowing base. The borrowing base consists of eligible assets pledged to and accepted by Western Alliance in its discretion up to the lower of (i) 60% to 70% of loan-to-unpaid balance or (ii) 45% to 50% of the loan-to-appraised value (depending on the property type underlying the asset, for both (i) and (ii)). Assets that would otherwise be eligible become ineligible after being pledged as part of the borrowing base for 36 months. Advances under the WA Credit Facility
39
accrue interest at an annual rate equal to one-month LIBOR plus 3.25% with a floor of 4.0%. The initial maturity date of the WA Credit Facility is March 10, 2023. We have an option to convert the loan made pursuant to the WA Credit Facility upon its initial maturity to a term loan with the same interest rate and floor and a maturity of two years in exchange for, among other things, a conversion fee of 0.25% of the outstanding amount at the time of conversion. The WA Credit Facility requires maintenance of an average unrestricted aggregate deposit account balance with Western Alliance of not less than $3,750. Failure to meet the minimum deposit balance will result in, among other things, the interest rate of the WA Credit Facility increasing by 0.25% per annum for each quarter in which the compensating balances are not maintained. We were in compliance with all financial covenant requirements as of June 30, 2022.
The Facilities are used to finance eligible loans and act in the manner of a revolving credit facility that can be repaid as our assets are paid off and re-drawn as advances against new assets.
The tables below show our Facilities as of June 30, 2022 and December 31, 2021:
|
June 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|||||
|
|
Committed Financing |
|
|
Amount Outstanding (1) |
|
|
Accrued Interest Payable |
|
|
Collateral Pledged |
|
|
Interest Rate |
|
|
Days to Maturity |
|
||||||
|
CF Repo Facility |
$ |
450,000 |
|
|
$ |
352,408 |
|
|
$ |
309 |
|
|
$ |
487,361 |
|
|
|
3.44 |
% |
|
|
133 |
|
|
JPM Repo Facility |
|
150,000 |
|
|
|
122,223 |
|
|
|
120 |
|
|
|
168,138 |
|
|
|
3.52 |
% |
|
|
310 |
|
|
Total Repurchase Facilities - commercial mortgage loans |
|
600,000 |
|
|
|
474,631 |
|
|
|
429 |
|
|
|
655,499 |
|
|
|
3.46 |
% |
|
|
179 |
|
|
WA Credit Facility |
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4.57 |
% |
|
|
253 |
|
|
|
$ |
675,000 |
|
|
$ |
474,631 |
|
|
$ |
429 |
|
|
$ |
655,499 |
|
|
|
3.46 |
% |
|
|
179 |
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|||||
|
|
Committed Financing |
|
|
Amount Outstanding (1) |
|
|
Accrued Interest Payable |
|
|
Collateral Pledged |
|
|
Interest Rate |
|
|
Days to Maturity |
|
||||||
|
CF Repo Facility |
$ |
350,000 |
|
|
$ |
189,654 |
|
|
$ |
159 |
|
|
$ |
260,691 |
|
|
|
2.16 |
% |
|
|
314 |
|
|
JPM Repo Facility |
|
150,000 |
|
|
|
117,470 |
|
|
|
92 |
|
|
|
167,704 |
|
|
|
2.02 |
% |
|
|
126 |
|
|
Total Repurchase Facilities - commercial mortgage loans |
|
500,000 |
|
|
|
307,124 |
|
|
|
251 |
|
|
|
428,395 |
|
|
|
2.11 |
% |
|
|
242 |
|
|
WA Credit Facility |
|
75,000 |
|
|
|
14,350 |
|
|
|
22 |
|
|
|
20,500 |
|
|
|
4.00 |
% |
|
|
434 |
|
|
|
$ |
575,000 |
|
|
$ |
321,474 |
|
|
$ |
273 |
|
|
$ |
448,895 |
|
|
|
2.19 |
% |
|
|
251 |
|
|
(1) |
Excludes $63 and $41 of unamortized debt issuance costs at June 30, 2022 and December 31, 2021, respectively. |
Loan Participations Sold
On November 15, 2021, we sold a non-recourse senior participation interest in nine first mortgage loans to a third party. Under the loan participation agreement, in the event of default by the underlying mortgagor, any amounts paid are first allocated to the third party before any amounts are allocated to our subordinate interest. As the directing participant in the loan participation agreement, we are entitled to exercise, without the consent of the third party, each of the consent approval and control rights under the applicable underlying mortgage loan documents with a few exceptions. We require the third party’s approval for any modification or amendment to the loan, a bankruptcy plan for an underlying mortgagor where the third party would incur an out-of-pocket loss, or any transfer of the underlying mortgaged property if our approval is required by the underlying mortgage documents. We remain the directing participant unless certain conditions are met related to losses on the property or if the mortgagor is one of our affiliates. In the former case, we may post cash or short-term U.S. government securities as collateral to retain the rights of the directing participant.
The third party, as the senior participation interest holder, receives interest and principal payments from the borrower until they receive the amounts to which they are entitled. All expenses or losses on the underlying mortgages are allocated first to us and then to the third party. If the underlying mortgage is in default, we will have the option to purchase the third party’s participation interest and remove it from the loan participation agreement.
40
The following table details our loan participations sold as of June 30, 2022 and December 31, 2021:
|
|
|
June 30, 2022 |
|
|||||||||||||||
|
Loan Participations Sold |
|
Count |
|
|
Principal Balance |
|
|
Book Value |
|
|
Weighted Average Yield/Cost (1) |
|
Weighted Average Maximum Maturity |
|
||||
|
Total Loans |
|
|
8 |
|
|
$ |
132,824 |
|
|
$ |
133,593 |
|
|
L+3.6% |
|
|
1.74 |
|
|
Senior participations (2)(3) |
|
|
8 |
|
|
$ |
106,260 |
|
|
$ |
106,260 |
|
|
L+2.0% |
|
|
1.74 |
|
|
|
|
December 31, 2021 |
|
|||||||||||||||
|
Loan Participations Sold |
|
Count |
|
|
Principal Balance |
|
|
Book Value |
|
|
Weighted Average Yield/Cost (1) |
|
Weighted Average Maximum Maturity |
|
||||
|
Total Loans |
|
|
9 |
|
|
$ |
137,215 |
|
|
$ |
137,931 |
|
|
L+3.6% |
|
|
2.22 |
|
|
Senior participations (2)(3) |
|
|
9 |
|
|
$ |
109,772 |
|
|
$ |
109,772 |
|
|
L+2.0% |
|
|
2.22 |
|
|
____________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The yield/cost is the present value of all future principal and interest payments on the loan or participation interest and does not include any origination fees or deferred commitment fees. |
|
(2) |
As of June 30, 2022 and December 31, 2021, the loan participations sold were non-recourse to us. |
|
(3) |
During the six months ended June 30, 2022, we recorded $1.4 million of interest expense related to loan participations sold. |
Revolving Credit Liquidity Letter Agreements
IREIC, our sponsor, and Sound Point have agreed under separate letter agreements dated July 20, 2021, and July 15, 2021, respectively, to make revolving credit loans to us in an aggregate principal amount outstanding at any one time not to exceed $5,000 and $15,000, respectively (the “IREIC-Sound Point Commitments”) from time to time. Use of the IREIC-Sound Point Commitments is limited to satisfying requirements to maintain cash or cash equivalents under our repurchase and other borrowing arrangements.
Distributions
Common Stock
The table below presents the aggregate annualized and monthly distributions declared by record date for all classes of shares of common stock since January 1, 2021.
|
Record date |
|
Aggregate annualized gross distribution declared per share |
|
|
Aggregate monthly gross distribution declared per share |
|
||
|
January 31, 2021 |
|
$ |
0.9500 |
|
|
$ |
0.0792 |
|
|
February 28, 2021 |
|
$ |
1.0000 |
|
|
$ |
0.0833 |
|
|
March 31, 2021 |
|
$ |
1.0500 |
|
|
$ |
0.0875 |
|
|
April 30, 2021 |
|
$ |
1.1000 |
|
|
$ |
0.0917 |
|
|
May 31, 2021 |
|
$ |
1.1500 |
|
|
$ |
0.0958 |
|
|
June 30, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
July 31, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
August 31, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
September 30, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
October 31, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
November 30, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
December 31, 2021 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
January 31, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
February 28, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
March 31, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
April 30, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
May 31, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
|
June 30, 2022 |
|
$ |
1.2500 |
|
|
$ |
0.1042 |
|
The gross distribution was reduced for Class D and Class T of our common stock for applicable class-specific stockholder servicing fees to arrive at the net distribution amount for those classes. For a description of the stockholder servicing fees applicable to Class D,
41
Class S and Class T shares of our common stock, please see “Note 10 – Transactions with Related Parties” in the notes to our consolidated financial statements included in this Quarterly Report on Form 10-Q. Since the IPO and through June 30, 2022, we have not issued any shares of Class S common stock.
The following table shows our monthly net distribution per share for shares of Class D and Class T common stock since January 1, 2021.
|
Record date |
|
Monthly net distribution declared per share of Class D common stock |
|
|
Monthly net distribution declared per share of Class T common stock |
|
||
|
January 31, 2021 |
|
$ |
0.0749 |
|
|
$ |
0.0646 |
|
|
February 28, 2021 |
|
$ |
0.0794 |
|
|
$ |
0.0701 |
|
|
March 31, 2021 |
|
$ |
0.0832 |
|
|
$ |
0.0729 |
|
|
April 30, 2021 |
|
$ |
0.0876 |
|
|
$ |
0.0776 |
|
|
May 31, 2021 |
|
$ |
0.0915 |
|
|
$ |
0.0813 |
|
|
June 30, 2021 |
|
$ |
0.1000 |
|
|
$ |
0.0900 |
|
|
July 31, 2021 |
|
$ |
0.0999 |
|
|
$ |
0.0896 |
|
|
August 31, 2021 |
|
$ |
0.0999 |
|
|
$ |
0.0895 |
|
|
September 30, 2021 |
|
$ |
0.1000 |
|
|
$ |
0.0900 |
|
|
October 31, 2021 |
|
$ |
0.0999 |
|
|
$ |
0.0895 |
|
|
November 30, 2021 |
|
$ |
0.1000 |
|
|
$ |
0.0901 |
|
|
December 31, 2021 |
|
$ |
0.0999 |
|
|
$ |
0.0897 |
|
|
January 31, 2022 |
|
$ |
0.0999 |
|
|
$ |
0.0896 |
|
|
February 28, 2022 |
|
$ |
0.1003 |
|
|
$ |
0.0910 |
|
|
March 31, 2022 |
|
$ |
0.0999 |
|
|
$ |
0.0898 |
|
|
April 30, 2022 |
|
$ |
0.1001 |
|
|
$ |
0.0903 |
|
|
May 31, 2022 |
|
$ |
0.1000 |
|
|
$ |
0.0899 |
|
|
June 30, 2022 |
|
$ |
0.1001 |
|
|
$ |
0.0904 |
|
Series A Preferred Stock
Series A Preferred Stock dividends are paid quarterly in arrears based on an annualized distribution rate of 6.75% of the $25.00 per share liquidation preference, or $1.6875 per share per annum. During December 2021, our Board declared a quarterly dividend on the Series A Preferred Stock in the amount of $0.459375 per share, which was paid on December 30, 2021 to holders of record on December 15, 2021 for the period beginning September 22, 2021 to, but not including, December 30, 2021. During March 2022, our Board declared a quarterly dividend on the Series A Preferred Stock in the amount of $0.421875 per share, which was paid on March 30, 2022 to holders of record on March 15, 2022. During June 2022, our Board declared a quarterly dividend on the Series A Preferred Stock in the amount of $0.421875 per share, which was paid on June 30, 2022 to holders of record on June 15, 2022.
Sources of Distributions to Common Stockholders
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2022 |
|
|
2021 |
|
||
|
Distributions to Holders of Common Stock |
|
|
|
|
|
|
|
|
|
Paid in cash |
|
$ |
6,381 |
|
|
$ |
5,670 |
|
|
Reinvested in shares |
|
|
318 |
|
|
|
260 |
|
|
Total distributions |
|
$ |
6,699 |
|
|
$ |
5,930 |
|
|
Cash flows from operating activities |
|
$ |
7,802 |
|
|
$ |
4,694 |
|
For the six months ended June 30, 2022, all of our distributions were paid from cash flows from operating activities generated during the period. For the six months ended June 30, 2021, 79.2% of our distributions were paid from cash flow from operating activities during the six month period, and 20.8% of our distributions were paid from cash flows from operating activities generated during the year ended December 31, 2020.
Critical Accounting Policies
Disclosures discussing all critical accounting policies are set forth in our Annual Report under the heading “Summary of Critical Accounting Policies.” There have been no changes to our critical accounting policies during the six months ended June 30, 2022.
42
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Subsequent Events
For information related to subsequent events, reference is made to “Note 15 – Subsequent Events,” which is included in our notes to consolidated financial statements included in this Quarterly Report on Form 10-Q.
Our Corporate Information
Our principal executive offices are located at 2901 Butterfield Rd., Oak Brook, Illinois 60523, our telephone number is (800) 826-8228 and our website is www.inland-investments.com/inpoint. From time to time, we may use our website as a distribution channel for material company information, including, for example, our position on any third-party tender offers for our securities. Our website is not incorporated by reference in or otherwise a part of this Quarterly Report on Form 10-Q. We will provide without charge a copy of this Quarterly Report on Form 10-Q upon written request delivered to our principal executive offices. We electronically file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those reports with the SEC. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Credit Risk
Our investments are subject to a high degree of credit risk. Credit risk is the exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply/demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S. economy, and other factors beyond our control. All loans are subject to some risk of default. We manage credit risk through the underwriting process and investment structuring process, acquiring our investments at the appropriate discount to face value, if any, and establishing loss assumptions. We also carefully monitor the performance of the loans, as well as external factors that may affect their value.
Adverse economic conditions could negatively impact hotels or tenants at commercial properties underlying our investments resulting in potential borrower delinquencies or defaults or declines in the values of properties that secure our investments, which could in turn impact the fundamental performance of mortgage-backed securities. If we fail to repay the lender at maturity, the lender has the right to immediately sell the collateral and pursue us for any shortfall if the sales proceeds are inadequate to cover the repurchase agreement financing.
Interest Rate Risk
Our market risk arises primarily from interest rate risk relating to interest rate fluctuations. Many factors including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control contribute to interest rate risk. To meet our short and long-term liquidity requirements, we may borrow funds at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates. During the six months ended June 30, 2022 and 2021, we did not engage in interest rate hedging activities. We do not hold or issue derivative contracts for trading or speculative purposes. We do not have any foreign denominated investments, and thus, we are not exposed to foreign currency fluctuations.
As of both June 30, 2022 and December 31, 2021, 98% of our investment portfolio was comprised of variable rate investments based on LIBOR or SOFR for various terms. Borrowings under our master repurchase agreements were short-term and at a variable rate. Both our investment portfolio and borrowings have minimum levels for LIBOR or SOFR known as interest rate floors. The floors were established when the loans and borrowings were originated based on market conditions. The following table below quantifies the potential changes in interest income net of interest expense should interest rates increase or decrease by 25 or 50 basis points, assuming that our current balance sheet was to remain constant and no actions were taken to alter our existing interest rate sensitivity.
43
The change from December 31, 2021 to June 30, 2022 was primarily due to the Federal Reserve increasing interest rates and LIBOR and SOFR increasing above the minimum interest rate floors for our investment portfolio and borrowings.
|
|
|
Estimated Percentage Change in Interest Income Net of Interest Expense |
|
|||||
|
Change in Rates |
|
June 30, 2022 |
|
|
December 31, 2021 |
|
||
|
(-) 50 Basis Points |
|
|
(0.59 |
)% |
|
|
1.06 |
% |
|
(-) 25 Basis Points |
|
|
(0.59 |
)% |
|
|
1.06 |
% |
|
Base Interest Rate |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
(+) 25 Basis Points |
|
|
1.25 |
% |
|
|
(1.21 |
)% |
|
(+) 50 Basis Points |
|
|
3.44 |
% |
|
|
(1.91 |
)% |
For this analysis, LIBOR and SOFR were assumed to not fall below zero.
LIBOR Transition
It appears highly likely that LIBOR will be discontinued by June 30, 2023. Specifically, on March 5, 2021, the ICE Benchmark Administration (“IBA”) confirmed its intention to cease publication of (i) one week and two month U.S. Dollar LIBOR settings after December 31, 2021 and (ii) the remaining U.S. Dollar LIBOR settings after June 30, 2023. On September 29, 2021, the Financial Conduct Authority announced that under its new powers, it will compel IBA to publish one, three and six month LIBOR under a synthetic methodology, which will no longer be representative of the underlying market or economic reality the setting is intended to measure, for the duration of 2022. The United States Federal Reserve has also advised banks to cease entering into new contracts that use LIBOR as a reference rate. The Federal Reserve, in conjunction with the Alternative Reference Rate Committee, a committee convened by the Federal Reserve that includes major market participants, has identified the SOFR, a new index calculated by short-term repurchase agreements, backed by U. S. Treasury securities, as its preferred alternative rate for LIBOR. At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from the LIBOR benchmarks is anticipated in coming years. Accordingly, the outcome of these reforms is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR’s phaseout could cause LIBOR to perform differently than in the past. As of June 30, 2022, all of our commercial mortgage loan agreements and our Facilities include language that allows a change to an alternative reference rate to replace LIBOR. We and our lenders have concluded that SOFR will be used as the alternative reference rate. Beginning January 1, 2022, all new loans we originate are based on SOFR. In March 2022, the reference rate for our CF Repo Facility converted from LIBOR to SOFR. We do not anticipate making changes to the index on our loans or borrowings originated prior to January 1, 2022 until the earlier of their maturity dates or June 30, 2023, whichever comes first.
Item 4. Controls and Procedures
Controls and Procedures
Our management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the principal executive and principal financial officers have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) or Rule 15d-15(f)) during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
In the ordinary course of business, we may become subject to litigation. We have no knowledge of material legal proceedings pending or known to be contemplated against us at this time.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Part I, Item 1A of the Company’s annual report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 11, 2022.
44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Equity Securities
We have not sold any securities that were not registered under the Securities Act during the period covered by this report.
Use of Proceeds (dollar amounts in thousands, except share data)
On May 3, 2019, our Registration Statement on Form S-11 (File No. 333-230465) for our IPO of common stock of up to $2,350,000 in shares of Class A, Class T, Class S, Class D and Class I common stock, was declared effective under the Securities Act. Inland Securities Corporation serves as our dealer manager for the common stock IPO. On April 28, 2022, the Company filed a Registration Statement on Form S-11 (File No. 333-264540) with the SEC to register up to $2,200,000 in shares of common stock, which has not yet been declared effective.
The offering price for each class of our common stock is determined monthly and is made available on our website and in prospectus supplement filings. As of June 30, 2022, we had received net offering proceeds of $38.9 million from the common stock IPO. The following table summarizes certain information about the IPO proceeds:
|
|
|
Class A Shares |
|
|
Class T Shares |
|
|
Class S Shares |
|
|
Class D Shares |
|
|
Class I Shares |
|
|
Total |
|
||||||
|
Primary shares sold |
|
|
708,451 |
|
|
|
439,421 |
|
|
|
— |
|
|
|
52,945 |
|
|
|
406,761 |
|
|
|
1,607,578 |
|
|
Gross proceeds from primary offering |
|
$ |
18,070 |
|
|
$ |
10,868 |
|
|
$ |
— |
|
|
$ |
1,237 |
|
|
$ |
9,635 |
|
|
$ |
39,810 |
|
|
Reinvestments of distributions |
|
|
464 |
|
|
|
230 |
|
|
|
— |
|
|
|
76 |
|
|
|
413 |
|
|
|
1,183 |
|
|
Total gross proceeds |
|
|
18,534 |
|
|
|
11,098 |
|
|
|
— |
|
|
|
1,313 |
|
|
|
10,048 |
|
|
|
40,993 |
|
|
Selling commissions and dealer manager fees |
|
|
1,053 |
|
|
|
298 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,351 |
|
|
Stockholder servicing fees |
|
|
— |
|
|
|
634 |
|
|
|
— |
|
|
|
98 |
|
|
|
— |
|
|
|
732 |
|
|
Total expenses |
|
|
1,053 |
|
|
|
932 |
|
|
|
— |
|
|
|
98 |
|
|
|
— |
|
|
|
2,083 |
|
|
Net offering proceeds (1) |
|
$ |
17,481 |
|
|
$ |
10,166 |
|
|
$ |
— |
|
|
$ |
1,215 |
|
|
$ |
10,048 |
|
|
$ |
38,910 |
|
|
(1) |
Excludes company-level offering costs of $5,194. |
We primarily used the net offering proceeds from the IPO to originate commercial real estate loans and purchase real estate securities on a levered basis, subject to our investment guidelines and to the extent consistent with maintaining our REIT qualification, and other general corporate purposes.
On March 24, 2020, our Board suspended our IPO, effective immediately, and the DRP, effective April 6, 2020. In determining to suspend the IPO and the DRP, our Board considered various factors, including the impact of the COVID-19 pandemic on the economy, the inability to accurately calculate our NAV per share due to uncertainty, volatility and lack of liquidity in the market, our need for liquidity due to financing challenges related to additional collateral required by the banks that regularly finance our assets and these uncertain and rapidly changing economic conditions. After determining that volatility in the market for the Company’s investments had declined and the U.S. economic outlook had improved, our Advisor resumed calculation of the NAV beginning as of June 30, 2020, and on October 1, 2020, the SEC declared effective the post-effective amendment to the Company’s registration statement on Form S-11 thereby permitting the Company to resume offers and sales of shares of common stock in the IPO, including through the DRP.
On September 15, 2021, our Registration Statement on Form S-11 (File No. 333-258802) for our Preferred Stock Offering of up to 3,500,000 shares of Series A Preferred Stock was declared effective under the Securities Act. Raymond James & Associates acted as representative of the underwriters. On September 22, 2021, the Company issued and sold 3,500,000 shares of its Series A Preferred Stock at a public offering price of $25.00 per share. In addition, on October 15, 2021, the underwriters partially exercised their over-allotment option and purchased an additional 100,000 shares of Series A Preferred Stock. The Series A Preferred Stock is listed on the New York Stock Exchange with the ticker symbol ICR PR A.
45
As of June 30, 2022, we received net offering proceeds of $86.3 million from our Preferred Stock Offering. The following table summarizes certain information about the proceeds from our Preferred Stock Offering:
|
|
|
Series A Preferred Stock |
|
|
|
Primary shares sold |
|
|
3,600,000 |
|
|
Gross proceeds from primary offering |
|
$ |
90,000 |
|
|
Underwriting discounts and commissions |
|
|
2,835 |
|
|
Other expenses |
|
|
855 |
|
|
Total expenses |
|
|
3,690 |
|
|
Net offering proceeds |
|
$ |
86,310 |
|
We contributed the net proceeds from the Preferred Stock Offering to our Operating Partnership, which in turn used the net proceeds to originate first mortgage loans and acquire other targeted assets in a manner consistent with its investment strategies and investment guidelines and for general corporate purposes.
Repurchases of Common Stock
We have adopted the SRP, whereby on a monthly basis, common stockholders may request that we repurchase all or any portion of their shares. The total amount of aggregate repurchases of shares will be limited to no more than 2% of our aggregate NAV per month as of the last day of the previous calendar month and no more than 5% of our aggregate NAV per calendar quarter with NAV measured as of the last day of the previous calendar quarter. Common stockholders may not request that we repurchase their shares for at least one year, provided we can waive the holding period in the event of death.
Due to the illiquid nature of investments in real estate, we may not have sufficient liquid resources to fund repurchase requests. We may choose to repurchase all, some or none of the shares that have been requested to be repurchased at the end of any particular month, in our discretion, subject to any limitations in the SRP. Further, our Board may modify, suspend or terminate the SRP.
On March 24, 2020, our Board suspended our SRP. In determining to suspend the SRP, our Board considered various factors, including the impact of the COVID-19 pandemic on the economy, the inability to accurately calculate our NAV per share due to uncertainty, volatility and lack of liquidity in the market, our need for liquidity due to financing challenges related to additional collateral required by the banks that regularly finance our assets and uncertain and rapidly changing economic conditions. As a result of these factors, we did not calculate our NAV for the months of March through May 2020. We resumed calculation of our NAV beginning as of June 30, 2020 following the Advisor’s determination that volatility in the market for our investments had declined and the U.S. economic outlook had improved.
On March 1, 2021, our SRP was reinstated for our common stockholders requesting repurchase of shares as a result of the death or qualified disability of the holder, and on July 1, 2021, our SRP was reinstated for all common stockholders. The first settlement of permitted repurchase requests was on July 30, 2021, the last business day of the month. In accordance with the terms of the SRP that allow us to repurchase fewer shares than the maximum amount permitted under the SRP, we repurchased fewer shares than the maximum amount permitted for the months of July, August and September 2021. Beginning on October 1, 2021, the total amount of aggregate repurchases of shares is limited as set forth in the SRP (no more than 2% of our aggregate NAV per month as of the last day of the previous calendar month and no more than 5% of our aggregate NAV per calendar quarter with NAV measured as of the last day of the previous calendar quarter). Notwithstanding the foregoing, we may repurchase fewer shares than the limits in the SRP in any month or quarter, or none. Further, our Board may modify, suspend or terminate our SRP if it deems such action to be in our best interest and the best interest of our stockholders.
46
During the three months ended June 30, 2022, we repurchased shares of our common stock in the following amounts:
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
|
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
|
||||
|
April 1 - April 30, 2022 |
|
|
59,723 |
|
|
$ |
19.82 |
|
|
|
59,723 |
|
|
|
— |
|
|
May 1 - May 31, 2022 |
|
|
104,531 |
|
|
$ |
19.75 |
|
|
|
104,531 |
|
|
|
— |
|
|
June 1 - June 30, 2022 |
|
|
53,256 |
|
|
$ |
19.69 |
|
|
|
53,256 |
|
|
|
— |
|
|
|
|
|
217,510 |
|
|
|
19.76 |
|
|
|
217,510 |
|
|
|
— |
|
|
________________ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Repurchases are limited as described above. |
|
|
|
|
|
|||||||||||
Repurchases of Preferred Stock
Subject to certain exceptions, we may not redeem our Series A Preferred Stock until on or after September 22, 2026. Preferred stockholders may only convert their Series A Preferred Shares into Class I common stock if there is a change in control and we do not redeem the shares within 120 days of the change in control event. For the three months ended June 30, 2022, there were no repurchases of our Series A Preferred Stock or conversions of our Series A Preferred Stock to common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
47
Item 6. Exhibits
The representations, warranties and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties or covenants to, or with, you. Moreover, these representations, warranties and covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.
The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto and are incorporated herein by reference.
|
Exhibit No. |
|
Description |
|
|
|
|
|
3.1 |
|
|
|
3.2 |
|
|
|
3.3 |
|
|
|
3.4 |
|
|
|
3.5 |
|
|
|
3.6 |
|
|
|
4.1 |
|
|
|
4.2 |
|
|
|
10.1 |
|
|
|
31.1* |
|
|
|
31.2* |
|
|
|
32.1* |
|
|
|
32.2* |
|
|
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|
* |
Filed as part of this Quarterly Report on Form 10-Q |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
INPOINT COMMERCIAL REAL ESTATE INCOME, INC. |
||
|
|
|
||
|
|
By: |
/s/ Mitchell A. Sabshon |
|
|
|
Name: |
Mitchell A. Sabshon |
|
|
|
Title: |
Chief Executive Officer and Chairman |
|
|
|
|
(principal executive officer) |
|
|
|
Date: |
August 12, 2022 |
|
|
|
|
||
|
|
By: |
/s/ Catherine L. Lynch |
|
|
|
Name: |
Catherine L. Lynch |
|
|
|
Title: |
Chief Financial Officer |
|
|
|
|
(principal financial officer) |
|
|
|
Date: |
|
August 12, 2022 |
49