Business context and reporting period
Manhattan Bridge Capital, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016. It originates, services and manages short-term, first-mortgage loans to real estate investors, primarily in the New York metropolitan area, and has elected REIT tax treatment since 2014. The filing provides annual results, not separate fourth-quarter results.
Financial and operating performance
- Revenue: $4.649 million, up 16.2% from $4.001 million in 2015. Interest income was $3.845 million and origination fees were $803,000.
- Profit: Operating income was $2.854 million versus $2.268 million; net income was $2.837 million versus $2.238 million, up 26.8%. Diluted EPS was $0.37 versus $0.33. Net margin was approximately 61% in both years.
- Costs: Interest and deferred financing cost amortization rose 12.9% to $780,000; general and administrative expense declined to $1.006 million from $1.039 million. The 2016 result included a $15,000 write-down of a private-company investment; 2015 also included a $13,863 software impairment.
- Cash flow: Operating cash flow was $3.052 million, investing cash flow was negative $3.854 million, and financing cash flow was positive $792,000. Cash declined by $10,537 to $96,299.
- Loans: Year-end loan receivables totaled $34.755 million, up from $30.904 million; 97 loans were outstanding. Originations were $36.657 million versus $21.609 million, and repayments were $32.806 million versus $14.737 million. The weighted-average contractual rate was 12.5%, compared with 12.3%.
- Assets, debt and equity: Total assets were $35.334 million and stockholders’ equity was $22.314 million. Webster line borrowings were $6.483 million; senior secured notes had $6.0 million principal outstanding, reported net of financing costs at $5.302 million. Total debt principal was approximately $12.483 million; total debt carrying value was $11.785 million.
- Liquidity: Working capital was approximately $20.3 million versus $6.8 million in 2015, largely reflecting short-term loans receivable and debt paydown. Cash was only $96,299. The company reported $7.5 million of availability under its $14 million Webster facility at year-end.
Changes versus 2015
- Loan originations and the year-end loan balance increased, alongside higher revenue and net income; operating cash flow also rose to $3.052 million from $2.122 million.
- Long-term loans declined to $7.260 million from $10.705 million, or 20.9% of total loans versus 34.6%. Unfunded construction-loan commitments increased to approximately $4.103 million from $2.160 million.
- In 2016, the subsidiary MBC Funding II issued $6 million of 6% senior secured notes due 2026. Net proceeds of approximately $5.2 million funded its purchase of mortgage loans from the parent, which used the proceeds to reduce Webster borrowings. The company also raised approximately $4.2 million net through an August common-stock offering.
- Quarterly cash dividends increased to $0.10 per share in 2016 from $0.085 earlier in the year. Approximately $2.704 million of dividends were paid during 2016.
Outlook, risks and unusual items
- Management expected cash balances, operating cash flows and the Webster facility to fund operations for the next 12 months, while anticipating higher working-capital needs as the business grows. No quantified earnings or revenue guidance was provided.
- The Webster facility expires February 27, 2018, has variable-rate pricing and restrictive covenants, and includes cross-default provisions. The company’s CEO personally guarantees it. The notes carry a 6% coupon, are secured by subsidiary assets and guaranteed by the parent; noteholders may require redemption in 2021, subject to the indenture terms.
- The portfolio is concentrated in one asset type and geography: all loans are secured by New York-area properties. Loans are generally short-term, interest-only, and often secured by properties that produce little or no cash flow. The company depends on refinancing or property sales for repayment and reported no loan-loss reserves.
- Management reported no historical loan defaults or foreclosures, and stated that all loans were performing at year-end. This history does not eliminate credit, collateral-valuation, extension, liquidity or local-market risks. The company disclosed that $6.432 million of year-end loans were repaid after the balance-sheet date.
- REIT qualification requires ongoing tax, asset and distribution tests; the company generally must distribute at least 90% of REIT taxable income. It also relies on an Investment Company Act exemption. Failure to meet applicable tests could materially affect taxes, operations or distributions.
- The company reported effective disclosure controls and effective internal control over financial reporting as of year-end; the auditor did not provide an attestation on internal controls. The financial-statement audit opinion was unqualified. No legal proceedings or unresolved SEC staff comments were reported.
Important facts for investors to verify
- Reconcile the reported working capital with the very low cash balance and assess the liquidity of loan receivables and the availability of borrowing under Webster’s collateral and covenant tests.
- Review loan-level maturity extensions, collateral values, borrower repayment sources, and subsequent collections, including the reported $6.432 million in post-year-end repayments; confirm the implications of having no loan-loss reserve.
- Review the Webster facility’s February 2018 maturity, variable-rate exposure, covenants and cross-default provisions, alongside the notes’ collateral coverage, 2021 holder redemption right and restrictions on recourse.
- Assess whether dividends are supported by recurring cash generation and remain compatible with REIT distribution requirements and debt covenants.
- Consider concentration and governance: all lending is in the New York area, the CEO is central to origination and held approximately 30.9% of common shares as of March 15, 2017, and he and the CFO purchased notes issued by the subsidiary.