Manhattan Bridge Capital, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company is a real estate finance company originating short-term, first-mortgage loans to real estate investors, principally in the New York metropolitan area. It reported as a REIT.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.401 million | $1.166 million | $2.731 million | $2.270 million |
| Operating income | $852,000 | $722,000 | $1.643 million | $1.418 million |
| Net income | $840,000 | $710,000 | $1.631 million | $1.405 million |
| Basic and diluted EPS | $0.10 | $0.10 | $0.20 | $0.19 |
| Net margin | 60.0% | 60.9% | 59.7% | 61.9% |
Q2 revenue increased 20.2% and net income increased 18.3% year over year. For the first half, revenue increased 20.3% and net income increased 16.1%. Growth reflected increased lending activity. Higher debt costs and general and administrative expenses partly offset the revenue gains. First-half G&A rose 24.9%, including a special officer bonus and higher payroll and travel expenses.
Interest income was $1.189 million in Q2 and $2.295 million for the first half; origination-fee revenue was $212,000 and $436,000, respectively. The company recorded a $10,000 write-down of its privately held investment in each reported 2017 period, reducing its carrying value to $25,000.
Balance sheet, cash flow and lending
- At June 30, 2017, loans receivable were $41.242 million, up from $34.755 million at December 31, 2016. Cash was $125,000; total assets were $41.960 million.
- Total liabilities were $18.994 million and stockholders’ equity was $22.966 million. Debt included $13.166 million drawn on the Webster line and senior secured notes with a $6.0 million principal amount, carried at $5.340 million net of financing costs.
- First-half operating cash flow was $1.633 million; investing cash use was $6.488 million, primarily net loan originations; financing cash flow was $4.884 million, mainly line-of-credit borrowings, offset by dividends and share repurchases. Cash increased by $29,000.
- The loan portfolio consisted of $37.797 million in residential, $500,000 in commercial and $2.945 million in mixed-use loans. No borrower represented more than 10% of loans outstanding. The company reported no impaired loans or loan-loss provision, and said borrowers on loans originally due in 2014–2016 were paying interest, with extensions generally subject to collateral review.
- Borrowers had access to a further $3.831 million of construction-loan commitments if specified conditions were met. After quarter-end, $1.610 million of loans outstanding at June 30 was paid off.
Financing, outlook and risks
At June 30, the Webster line carried a 5.97611% rate and had a $13.166 million balance. On July 7, 2017, the company amended the facility: capacity increased to $15 million, with Webster discretion to increase it to $20 million; maturity was extended to February 2021, with a further extension option subject to Webster consent. Pricing was amended to LIBOR plus 3.75% or the applicable base rate plus 2.25%, plus a 0.5% agency fee. The amendment also limits loans outstanding more than 24 months to 17.5% of the portfolio. The CEO’s personal guarantee was capped at $500,000 plus enforcement costs. The company said it complied with line covenants at June 30.
The company expected cash, operating cash flow and the Webster facility to fund operations for the next 12 months, while anticipating higher working-capital needs as it grows. Its lending model generally involves one-year loans with fixed rates of 11%–14%, monthly interest, and collateral and personal guarantees. Management described demand for smaller real-estate loans as an opportunity, but cautioned that performance is not assured. Risks include borrower credit and collateral valuation, loan-portfolio illiquidity and concentration, competition, reliance on the CEO, limited REIT-management experience, and dependence on available funding. The company reported no historical defaults or foreclosures but warned that future loans could default or become uncollectible.
As a REIT, the company generally must distribute at least 90% of taxable income annually to maintain qualification. It repurchased 33,102 shares for $172,156 during the quarter under a program authorizing up to 100,000 shares. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Loan-level credit quality, collateral values, extension history and repayment performance, particularly for loans originally due in 2014–2016.
- Availability of line-of-credit capacity under collateral and covenant requirements, and the costs and terms of the July 2017 amendment.
- Funding and timing of the $3.831 million construction-loan commitments, and the effect of loan growth on liquidity and leverage.
- Ability to sustain earnings and dividends as borrowing costs, operating expenses and required REIT distributions change.
- Progress and valuation of the privately held investment, which was written down again during the quarter.