MANHATTAN BRIDGE CAPITAL, INC quarterly report, Q2 FY2016

Business context and reporting period

Manhattan Bridge Capital, Inc. is a New York metropolitan-area real estate finance company that originates and services short-term, first-mortgage loans to real estate investors. The company operates as a REIT. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.

Key financial metrics

• For the first half, operating cash flow was $1.541 million, investing cash outflow was $1.231 million, and financing cash outflow was $0.289 million. Cash and cash equivalents ended at $127,500; an additional $1.409 million was restricted, primarily for reducing the credit line.
• At June 30, total assets were $34.166 million, total liabilities $15.528 million, and stockholders’ equity $18.638 million. Working capital was approximately $14.940 million.
• Loans receivable totaled $32.134 million: $23.294 million short term and $8.840 million long term. The portfolio was reported as performing, with no impairment provision. The company had $3.115 million of additional construction-loan commitments available subject to conditions.
• Debt included $9.470 million outstanding on a $14 million Webster line of credit, at a stated June 30 rate of 5.2103%, and $6 million principal of 6% senior secured notes due April 22, 2026. The notes were reported net of $0.721 million in deferred financing costs. The company guarantees the notes and pledged its shares in MBC Funding II as security.
• The company paid $1.236 million in dividends during the first half. As a REIT, it generally must distribute at least 90% of taxable income annually.

Material changes versus prior periods

• Q2 revenue rose 27.9% and net income rose 34.0% year over year. First-half revenue increased 24.5% and net income increased 39.7%, which management attributed primarily to increased lending activity.
• First-half loan originations were $14.870 million versus $8.825 million in 2015; collections were $13.640 million versus $6.950 million.
• Interest and debt-service-cost amortization rose 38.4% in Q2 and 16.2% for the first half, mainly reflecting financing costs, including the senior notes and Webster credit line.
• The April 2016 senior-note offering generated approximately $5.3 million net proceeds. MBC Funding II used the proceeds to buy mortgage loans from the parent, which used the funds to pay down the Webster line.
• Working capital increased from approximately $6.808 million at December 31, 2015 to $14.940 million at June 30, 2016, primarily due to lower line-of-credit and short-term-loan balances and no dividends payable at quarter-end.

Outlook, risks, contingencies, and unusual items

• Management expects cash balances, the Webster line, and operating cash flows to fund operations for the next 12 months, while anticipating higher working-capital needs as the loan business grows. This is forward-looking and not a guarantee.
• The company cited risks including limited operating history as a REIT, funding constraints on loan growth, competition, dependence on its CEO, illiquid loans, borrower and collateral valuation risks, concentration risk, and potential lender-liability claims. Management reported no loan defaults to date, but cautioned that future loans may default or become uncollectible.
• Several loans classified as long term were originally due between 2009 and 2015. Management said borrowers were paying interest and that collateral had been reevaluated before extensions; subsequent to quarter-end, $1.160 million of loans outstanding at June 30 was repaid.
• The company recorded a $10,000 write-down of its privately held-company investment, reducing its carrying value to $40,000, due to delays in that investee’s business plan.
• On July 21, 2016, the company extended its headquarters lease through September 30, 2021, with monthly rent scheduled to increase from approximately $3,500 to $3,900 over the extension term.
• Webster facility covenants restrict borrowing relative to collateral, require financial ratios, and constrain certain lending, dividends, repurchases, and other actions. The CEO personally guarantees the facility.
• Management concluded disclosure controls were effective as of June 30, 2016 and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. Loan portfolio performance, collateral values, borrower concentration, and repayment status—particularly for long-extended loans and construction commitments.
2. Availability and covenant compliance under the Webster line, its variable borrowing rate, and the company’s ability to service both the line and 6% senior notes.
3. Whether projected loan growth and higher working-capital needs can be funded while maintaining liquidity and REIT distributions.
4. The terms, security, guarantees, and cash-flow implications of the senior notes and the related mortgage-loan transfer to MBC Funding II.
5. Future recoverability of the privately held-company investment and any material changes in the company’s no-default and no-impairment assessments.