Manhattan Bridge Capital, Inc. — Q3 2015 Form 10-Q
Business context and period: The company originates and services short-term, first-mortgage loans to real estate investors, primarily in the New York metropolitan area. It elected REIT tax treatment beginning in 2014. This unaudited filing covers the quarter and nine months ended September 30, 2015; comparisons are to the same 2014 periods. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1.032 million | $766 thousand | $2.855 million | $2.005 million |
| Operating income | $641 thousand | $418 thousand | $1.662 million | $1.065 million |
| Net income | $639 thousand | $429 thousand | $1.645 million | $1.058 million |
| Basic EPS | $0.09 | $0.08 | $0.25 | $0.23 |
| Diluted EPS | $0.09 | $0.08 | $0.25 | $0.22 |
- Growth and margins: Revenue increased 34.7% in Q3 and 42.4% for the nine months. Net income rose approximately 49% and 55%, respectively. Operating margin was about 62% in Q3 and 58% for the nine months, versus about 55% and 53% in the comparable 2014 periods.
- Drivers and costs: Management attributed revenue growth to increased lending activity. Nine-month interest income was $2.392 million and origination fees were $463 thousand. Nine-month interest and debt-cost amortization rose 28.6% to $494 thousand; general and administrative expense rose 25.4% to $696 thousand, including a special officer bonus related to establishing the new credit line.
- Balance sheet and liquidity: At September 30, cash was $61 thousand; total assets were $29.773 million; loans receivable totaled $29.144 million, including $13.510 million classified as long term. Working capital was approximately $4.540 million, down from $8.849 million at December 31, 2014, primarily because loans were reclassified as long term. Equity was $18.241 million.
- Debt: The company had $10.098 million outstanding on its Webster line of credit and $1.096 million in short-term loans, all presented as current liabilities. The Webster facility allows borrowing up to $14 million through February 27, 2018; its reported rate at quarter-end was 4.943%. It is collateralized and guaranteed personally by the CEO and includes financial and lending covenants.
- Cash flow: Nine-month operating cash flow was $1.497 million, compared with $783 thousand in 2014. Investing used $5.115 million, principally reflecting loan originations net of collections. Financing provided $3.632 million, including approximately $4.237 million net offering proceeds, offset in part by $1.551 million of dividends and financing costs. Ending cash increased by $13 thousand to $61 thousand.
- Loan portfolio: The company reported no loan impairment provision and said borrowers on its extended loans were paying interest. Residential developers represented $27.527 million of the $29.144 million portfolio. Four loans were jointly funded with outside entities; the company’s share was $1.448 million. The company had $1.820 million of additional construction-loan commitments subject to conditions.
Material changes and unusual items
- The February 2015 Webster facility replaced the Sterling credit line and was also used to repay certain related-party and short-term borrowings. Webster debt outstanding was $10.098 million at quarter-end.
- A May 2015 public offering and partial over-allotment sale generated approximately $4.920 million gross and $4.237 million net proceeds. Shares issued increased the weighted-average share count, affecting per-share comparisons.
- The company recorded a $15 thousand write-down of its privately held company investment because of delays in that company’s business plan. The investment was carried at $50 thousand at September 30.
- Q3 2014 included $7 thousand of option-fee income; nine-month 2014 included $21 thousand. The underlying buy-back option was exercised in October 2014, so there was no comparable 2015 income.
Outlook, risks, and controls
- Management stated that cash balances, operating cash flow, and the Webster facility were expected to fund operations for the next 12 months, while working-capital needs were expected to increase as the company pursued growth. No specific earnings or revenue guidance was provided.
- As a REIT, the company generally must distribute at least 90% of taxable income annually to maintain qualification; the filing identifies possible tax consequences if it distributes less than 100%, as well as federal excise and minimum state taxes.
- Key disclosed risks include REIT qualification and limited REIT operating experience; dependence on available funding and the CEO; competition; borrower and collateral valuation risk; loan illiquidity and concentration; potential defaults, lender-liability claims, and due-diligence limitations. Management reported no defaults to date but gave no assurance against future defaults or uncollectible loans.
- Management concluded disclosure controls were effective as of September 30, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Repayment prospects and collateral values for extended loans, including loans originally due in 2009, 2010, 2013, 2014, and earlier in 2015; the filing reported no impairment despite these extensions.
- Availability under the Webster facility, compliance with its covenants, borrowing-base capacity, and the effect of its CEO guarantee.
- Borrower and property exposure, the $1.820 million conditional construction-loan commitments, and subsequent collections or payoffs; $642,500 of short-term loans outstanding at September 30 was paid off afterward.
- REIT qualification, taxable income, and the amount and sustainability of required shareholder distributions.
- Liquidity available to fund portfolio growth, given $61 thousand of cash and the increase in long-term loans as a share of the portfolio to 46.36% from 20.36% at year-end 2014.