Manhattan Bridge Capital, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited and consolidated with wholly owned subsidiary DAG Funding Solutions, Inc. Amounts below are in U.S. dollars unless stated otherwise.
Business context
The company originates and services short-term, secured real estate loans to investors in the New York metropolitan area. Loans are generally first-mortgage loans, typically carry interest rates of 12%–15%, and are generally supported by personal guarantees. The company intends to qualify as a REIT and reported that it intended to elect REIT status for its 2014 tax year; REIT qualification and compliance remain important considerations.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $911,954 | $630,082 | $1,823,715 | $1,238,992 |
| Operating income | $545,439 | $331,089 | $1,021,035 | $647,471 |
| Net income | $530,439 | $420,976 | $1,006,035 | $629,245 |
| Basic and diluted EPS | $0.08 | $0.10 | $0.16 | $0.15 |
| Operating margin | 59.8% | 52.5% | 56.0% | 52.3% |
| Net margin | 58.2% | 66.8% | 55.1% | 50.8% |
Quarterly revenue rose 44.8%, and six-month revenue rose 47.2%, primarily reflecting increased lending activity. Interest income and origination fees both increased. Q2 net income grew more slowly than operating income, in part because the prior-year quarter included an $83,000 tax benefit and 2015 included a $15,000 investment write-down. Six-month 2014 included a $32,000 tax expense. No income tax benefit or expense was recorded in 2015 periods.
- Cash flow, six months: Operating activities provided $759,712, compared with $367,654 in 2014. Investing activities used $1,875,466, principally net loan originations; financing activities provided $1,113,439. Cash decreased $2,315 to $45,361.
- Liquidity: Working capital was approximately $6.914 million, down from $8.849 million at December 31, 2014. Current assets were $15.266 million and current liabilities $8.352 million.
- Loans: Receivables totaled $25.907 million: $14.839 million short term and $11.069 million long term. Long-term loans were 42.72% of the portfolio, versus 20.36% at year-end. The filing reported no loan impairments or impairment provisions; six loans were jointly funded, with the company’s share totaling $2.018 million. A further $715,000 of construction lending was committed subject to conditions.
- Debt: At quarter-end, the company had $6.994 million outstanding on its Webster credit line and $1.096 million in short-term loans, totaling approximately $8.089 million in reported borrowings. The Webster facility permits borrowing up to $14 million and bore 4.9366% interest at June 30, 2015. The CEO personally guaranteed it. The company replaced its Sterling credit facility in February 2015 and used the Webster facility to repay the former facility and certain other loans.
- Equity and distributions: A May 2015 offering, including partial over-allotment exercise, generated approximately $4.92 million gross and $4.25 million net proceeds. The company paid $973,822 in dividends during the first half. Shares outstanding were 7,217,489 at June 30; 7,224,489 were reported outstanding as of July 31.
Changes, outlook and notable matters
- Revenue and operating income increased substantially year over year, while operating costs also rose. Six-month interest and debt-service costs increased 39.7% and general and administrative expenses increased 32.7%; management cited borrowing costs, a special officer bonus related to establishing the Webster line, and higher payroll and other expenses.
- The loan portfolio shifted toward extended-maturity loans. Some loans outstanding at June 30 had original due dates in 2009, 2010, 2013 and 2014. The company stated borrowers were paying interest and that it reevaluated collateral before extensions. It also reported that $1.08 million of loans outstanding at June 30 were paid off subsequently.
- Management expected cash, operating cash flows and the Webster credit line to be sufficient for operations over the next 12 months, while anticipating higher working-capital needs as it pursued growth. This outlook depends in part on available credit, collateral values and continued loan collections.
- The company wrote down its privately held-company investment by $15,000, reducing its carrying value to $50,000, citing delays in that investee’s business plan.
- Purchasers in the July 2014 offering may have had rescission rights related to prospectus delivery. The filing stated that no notice had been received as of July 30, 2015. The described notice deadline was July 28, 2015; the filing does not clarify whether any later claims arose.
- Principal risks include maintaining REIT qualification and making required distributions, reliance on the CEO, borrower and property concentration, loan illiquidity, valuation and credit risk, competition, lender-liability claims, and Webster facility covenants. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Current performance and collectability of the substantial long-term loan balance, including loans extended beyond original maturity and subsequent repayments.
- Webster line availability, covenant compliance, collateral borrowing limits, interest-rate exposure and the CEO’s guarantee.
- REIT election and ongoing qualification, taxable income and distribution requirements, and the sustainability of cash dividends.
- Any rescission claims or other developments relating to the July 2014 offering after the filing’s stated July 30, 2015 status.
- Portfolio concentration, collateral valuations and the status of the $715,000 conditional construction-loan commitment.