Manhattan Bridge Capital, Inc: Form 10-Q for the period ended Sep 30, 2020

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The discussion and analysis contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements.

We are a New York-based real estate finance company that specializes in originating, servicing and managing a portfolio of first mortgage loans. We offer short-term, secured, non-banking loans (sometimes referred to as “hard money” loans), which we may renew or extend on, before or after their initial term expires, to real estate investors to fund their acquisition, renovation, rehabilitation or development of residential or commercial properties located in the New York metropolitan area, including New Jersey and Connecticut, and in Florida.

The properties securing the loans are generally classified as residential or commercial real estate and, typically, are not income producing. Each loan is secured by a first mortgage lien on real estate. In addition, each loan is personally guaranteed by the principal(s) of the borrower, which guarantee may be collaterally secured by a pledge of the guarantor’s interest in the borrower. The face amount of the loans we originated in the past seven years ranged from $30,000 to a maximum of $2.5 million. Our lending policy limits the maximum amount of any loan to the lower of (i) 9.9% of the aggregate amount of our loan portfolio (not including the loan under consideration) and (ii) $3 million. Our loans typically have a maximum initial term of 12 months bearing interest at a fixed rate of 9% to 14% per year. In addition, we usually receive origination fees or “points” ranging from 0% to 2% of the original principal amount of the loan as well as other fees relating to underwriting and funding the loan. Interest is always payable monthly, in arrears. In the case of acquisition financing, the principal amount of the loan usually does not exceed 75% of the value of the property (as determined by an independent appraiser) and in the case of construction financing, it is typically up to 80% of construction costs.

Since commencing this business in 2007, we have made approximately 910 loans and never foreclosed on a property. We currently manage approximately 130 loans. In addition, none of our loans have ever gone into default although sometimes we have renewed or extended our loans to enable the borrower to avoid premature sale or refinancing of the property. When we renew or extend a loan, we generally receive additional “points” and other fees.

Our primary business objective is to grow our loan portfolio while protecting and preserving capital in a manner that provides for attractive risk-adjusted returns to our shareholders over the long term through dividends. We intend to achieve this objective by continuing to selectively originate loans and carefully manage our portfolio of first mortgage real estate loans in a manner designed to generate attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that the demand for relatively small loans secured by residential and commercial real estate held for investment around the New York metropolitan market remains relatively strong, but weakened due to the COVID-19 pandemic, and that traditional lenders, including banks and other financial institutions, that usually address this market are unable to satisfy this demand. This demand/supply imbalance has created an opportunity for non-bank “hard money” real estate lenders like us to selectively originate high-quality first mortgage loans and this condition should persist for a number of years. However, we have observed more intense competition in our industry from both small and large lenders, which has resulted in more liquidity in the real estate markets in the geographic areas in which we operate. We also believe that certain of our competitors will not survive the COVID-19 pandemic.

Since the onset of the COVID-19 pandemic, we have continued to originate loans as well as continued to service our existing loans, though we have observed lower demand for new loans. In addition, we may experience difficulties collecting the monthly interest on time, property values may decline and certain of our originated loans may need to be extended, though to date we have not experienced many borrowers requiring such accommodations. In that regard, during the second quarter of 2020, two of our long term borrowers requested forbearance agreements, due to the impact of the COVID-19 pandemic, deferring two to three months of interest payments to the scheduled payoff date, and we agreed to accommodate the request. Since the date of the forbearance agreements, such borrowers have paid monthly interest. We have also held discussions with our borrowers and they have expressed their general concern about the uncertain economic condition, yet we believe that it’s premature to determine the magnitude of the impact at this point.

We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other things, its duration, the success of efforts to contain it and the impact of actions taken in response. For instance, recent government action to provide substantial financial support to businesses has provided helpful mitigation for us and certain of our borrowers; its ultimate impact, however, is not yet clear. While we are not able at this time to estimate the future impact of the COVID-19 pandemic on our financial and operational results, it could be material.

We have built our business on a foundation of intimate knowledge of the New York metropolitan area real estate market combined with a disciplined credit and due diligence culture that is designed to protect and preserve capital. We believe that our flexibility in terms of meeting the needs of borrowers without compromising our standards on credit risk, our expertise, our intimate knowledge of the New York metropolitan area real estate market and our focus on newly originated first mortgage loans, has defined our success until now and should enable us to continue to achieve our objectives.

A principal source of new transactions has been repeat business from prior customers and their referral of new business. We also receive leads for new business from banks, brokers and from a limited amount of advertising. Finally, our Chief Executive Officer also spends a significant portion of his time on new business development. We rely on our own employees, independent legal counsel, and other independent professionals to verify titles and ownership, to file liens and to consummate the transactions. Outside appraisers are used to assist us in evaluating the worth of collateral, when deemed necessary by management. We also use construction inspectors.

For the nine months ended September 30, 2020 and 2019, the total amounts of $35,410,076 and $38,246,965, respectively, have been lent, offset by collections received from borrowers, under our commercial loans in the amount of $31,041,693 and $33,375,420, respectively.

At September 30, 2020, we were committed to $5,191,959 in construction loans that can be drawn by the borrowers when certain conditions are met.

To date, we have not experienced any defaults and none of the loans previously made have been non-collectable, although no assurances can be given that existing or future loans may not go into default or prove to be non-collectible in the future.

We satisfied all of the requirements to be taxed as a REIT and elected to be taxed as a REIT commencing with our taxable year ended December 31, 2014. In order to maintain our qualification for taxation as a REIT and avoid any excise tax on our net taxable income, we are required to distribute each year at least 90% of our REIT taxable income. If we distribute less than 100% of our taxable income (but more than 90%), the undistributed portion will be taxed at the regular corporate income tax rates. As a REIT, we may also be subject to federal excise taxes and minimum state taxes.

Results of Operations

Three months ended September 30, 2020 compared to three months ended September 30, 2019

Revenue

Total revenues for the three months ended September 30, 2020 were approximately $1,786,000 compared to approximately $1,917,000 for the three months ended September 30, 2019, a decrease of $131,000 or 6.8%. The decrease in revenue was primarily attributable to lower interest rates and origination fees charged on loans due to market conditions and intense competition from other lenders, as well as lower demand for new loans resulting from the COVID-19 pandemic. For the three months ended September 30, 2020 and 2019, approximately $1,521,000 and $1,619,000, respectively, of our revenues were attributable to interest income on secured commercial loans that we offer to small businesses, and approximately $265,000 and $298,000, respectively, of our revenues were attributable to origination fees on such loans. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the borrowers.

Interest and amortization of debt service costs

Interest and amortization of debt service costs for the three months ended September 30, 2020 were approximately $338,000 compared to approximately $454,000 for the three months ended September 30, 2019, a decrease of $116,000, or 25.6%. The decrease was primarily attributable to decreased interest expense due to lower LIBOR rates (See Note 4 to the consolidated financial statements included elsewhere in this quarterly report).

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2020 were approximately $305,000 compared to approximately $315,000 for the three months ended September 30, 2019, a decrease of $10,000, or 3.2%. The decrease is primarily attributable to decreases in travel expenses and in legal fees, partially offset by an increase in payroll expense.

Net income

Net income for the three months ended September 30, 2020 was approximately $1,151,000 compared to approximately $1,150,000 for the three months ended September 30, 2019.

Nine months ended September 30, 2020 compared to nine months ended September 30, 2019

Revenue

Total revenues for the nine months ended September 30, 2020 were approximately $5,239,000 compared to approximately $5,484,000 for the nine months ended September 30, 2019, a decrease of $245,000, or 4.5%. The decrease in revenue was primarily attributable to lower interest rates and origination fees charged on loans due to market conditions and intense competition from other lenders, as well as lower demand for new loans resulting from the COVID-19 pandemic. For the nine months ended September 30, 2020 and 2019, revenues of approximately $4,485,000 and $4,609,000, respectively, were attributable to interest income on the secured commercial loans that we offer to small businesses, and approximately $753,000 and $875,000, respectively, of our revenues were attributable to origination fees on such loans. The loans are principally secured by collateral consisting of real estate and, generally, accompanied by personal guarantees from the principals of the borrowers.

Interest and amortization of debt service costs

Interest and amortization of debt service costs for the nine months ended September 30, 2020 were approximately $1,017,000 compared to approximately $1,221,000 for the nine months ended September 30, 2019, a decrease of $204,000, or 16.7%. The decrease was primarily attributable to decreased interest expense due to lower LIBOR rates (See Note 4 to the consolidated financial statements included elsewhere in this quarterly report).

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2020 were approximately $969,000 compared to approximately $913,000 for the nine months ended September 30, 2019, an increase of $56,000, or 6.1%. The increase is primarily attributable to increases in payroll expense, bank fees and compensation to members of our board of directors, as well as a special bonus paid to our Chief Financial Officer in the first quarter of 2020, partially offset by decreases in travel and meal expenses, and decreases in appraisal fees.

Net Income

Net income for the nine months ended September 30, 2020 was approximately $3,264,000 compared to approximately $3,355,000 for the nine months ended September 30, 2019, a decrease of $91,000, or 2.7%. This decrease is primarily attributable to the decrease in revenue, partially offset by the decrease in interest expense.

Liquidity and Capital Resources

At September 30, 2020, we had cash of approximately $157,000 compared to cash of approximately $118,000 at December 31, 2019.

For the nine months ended September 30, 2020, net cash provided by operating activities was approximately $3,263,000, compared to approximately $3,224,000 for the nine months ended September 30, 2019. The increase in net cash provided by operating activities primarily resulted from an increase in deferred origination fees, offset by a decrease in net income.

For the nine months ended September 30, 2020, net cash used in investing activities was approximately $4,384,000, compared to approximately $4,872,000 for the nine months ended September 30, 2019. Net cash used in investing activities for the nine months ended September 30, 2020 mainly consisted of the issuance of commercial loans of approximately $35,410,000, offset by collection of our commercial loans of approximately $31,042,000. In the period ended September 30, 2019, net cash used in investing activities consisted of the issuance of commercial loans of approximately $38,247,000, offset by collection of our commercial loans of approximately $33,375,000.

For the nine months ended September 30, 2020, net cash provided by financing activities was approximately $1,159,000, compared to approximately $1,756,000 for the nine months ended September 30, 2019. Net cash provided by financing activities for the nine months ended September 30, 2020 reflects the net proceeds from the Webster Credit Line of an aggregate of approximately $4,547,000, offset by the dividend payments of approximately $3,181,000, the purchase of treasury shares of approximately $179,000 and deferred financing costs of approximately $27,000. Net cash provided by financing activities for the nine months ended September 30, 2019 reflects the net proceeds from the Webster Credit Line of approximately $5,242,000 and proceeds from the exercise of options of approximately $20,000, offset by the dividend payments of approximately $3,477,000 and the purchase of treasury shares of approximately $29,000.

We maintain the Webster Credit Line which currently provides us with a credit line of $32.5 million in the aggregate secured by assignments of mortgages and other collateral. On August 8, 2017, we entered into the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement established the Webster Credit Line.

Effective July 11, 2018, we entered into a Waiver and Amendment No. 1 to the Amended and Restated Credit Agreement (“Amendment No. 1”) with Webster, Flushing and Mr. Ran, as guarantor. In conjunction with the execution of Amendment No. 1, we also entered into an Amended and Restated Revolving Credit Note in the principal aggregate amount of $10,000,000 with Flushing (the “Amended Flushing Note”) and a Second Amended and Restated Fee Letter with Webster and Flushing, each dated July 11, 2018. Pursuant to the terms of Amendment No. 1, the Company’s existing Webster Credit Line was increased by $5 million to $25 million in the aggregate. In addition, the interest rates relating to Webster Credit Line were amended such that the interest rates now equal (i) LIBOR plus a premium, which rate aggregated approximately 4.15%, including a 0.5% agency fee, as of September 30, 2020, or (ii) a Base Rate (as defined in the Amended and Restated Credit Agreement) plus 2.25% plus a 0.5% agency fee, as chosen by the Company for each drawdown. Amendment No. 1 also permits the Company to repurchase, redeem or otherwise retire its equity securities in an amount not to exceed ten percent of our annual net income from the prior fiscal year. In addition, Mr. Ran has provided a personal guaranty to the Webster Credit Line, which shall not exceed the sum of $500,000 plus any costs relating to the enforcement of the personal guaranty. Furthermore, on December 31, 2019, we entered into Amendment No. 2 to the Amended and Restated Credit and Security Agreement (“Amendment No. 2”) with Webster and Flushing to amend certain required fixed charge coverage requirements.

On February 25, 2020, we entered into Amendment No. 3 to the Amended and Restated Credit and Security Agreement (“Amendment No. 3”) with Webster, Flushing, Mizrahi, and Mr. Ran, as guarantor. In conjunction with the execution of Amendment No. 3, we also entered into an Amended and Restated Revolving Credit Note in the principal aggregate amount of $7,500,000 with Mizrahi and a Third Amended and Restated Fee Letter with Webster each dated February 25, 2020. Pursuant to the terms of Amendment No. 3, our existing Webster Credit Line was increased by $7.5 million to $32.5 million in the aggregate and the term of the Webster Credit Line was extended to February 28, 2023. Amendment No. 3 also provides that the Company may issue up to $20 million in bonds through its subsidiary, of which not more than $10 million of such notes may be secured by mortgage notes receivable, and provided that the terms and conditions of such bonds are approved by Webster, subject to its reasonable discretion.

We were in compliance with all covenants of the Webster Credit Line, as amended, as of September 30, 2020. At September 30, 2020, the outstanding amount under the Amended and Restated Credit Agreement was $19,779,851. The interest rate on the amount outstanding fluctuates daily. The rate, including a 0.5% agency fee, at September 30, 2020 was approximately 4.15%.

On February 26, 2020, our Board of Directors authorized a share buy back program, pursuant to which we may, from time to time, purchase up to 100,000 of our common shares. This program does not obligate the Company to purchase any shares and expires on February 25, 2021. The authorization for the program is able to be terminated, increased or decreased by the Company’s Board of Directors in its discretion at any time. As of September 30, 2020, the Company has purchased a total of 38,899 common shares pursuant to the share buy back program, at an aggregate cost of approximately $179,000.

We anticipate that our current cash balances and the Amended and Restated Credit Agreement, as described above, together with our cash flows from operations will be sufficient to fund our operations for the next 12 months. In addition, from time to time, we receive short term unsecured loans from our executive officers and others in order to provide us with the flexibility necessary to maintain a steady deployment of capital.

As a result of the COVID-19 pandemic, we have experienced a slow down in the deployment of capital and lower demand for new loans. In addition, during the second quarter of 2020, two of our long-term borrowers requested forbearance agreements, due to the impact of the COVID-19 pandemic, deferring two to three months of interest payments to the scheduled payoff date, and we agreed to accommodate the request. Since the date of the forbearance agreements, such borrowers have paid monthly interest. However, to date, we have not been materially impacted by the COVID-19 pandemic and have not experienced any material disruptions in our business operations. We will continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. If the COVID-19 pandemic worsens in the New York area in which we operate, the pandemic could materially affect our financial and operational results.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of our requirements for capital resources.

Changes to Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

(a) Evaluation and Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2020 (the “Evaluation Date”). Based upon that evaluation, the chief executive officer and the chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) are recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms and (ii) are accumulated and communicated to our management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Other than the addition of the text below, there have been no material changes from risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K. See the discussion of the Company’s risk factors under Part I, Item 1A in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The COVID-19 pandemic may adversely affect our business.

In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This virus continues to spread globally including in the United States. As a result of the COVID-19 pandemic, we have experienced a slow down in the deployment of capital and lower demand for new loans. In addition, during the second quarter of 2020, two of our long term borrowers requested forbearance agreements, due to the impact of the COVID-19 pandemic, deferring two to three months of interest payments to the scheduled payoff date, and we agreed to accommodate the request. Since the date of the forbearance agreements, such borrowers have paid monthly interest. To date, we have not been materially impacted by the COVID-19 pandemic, but we will continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business. If the COVID-19 pandemic worsens in the New York area in which we operate, the pandemic could materially affect our financial and operational results.

The extent to which the coronavirus impacts our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. While the New York area in which we primarily operate has begun to roll back its “stay-at-home” orders and reopen certain businesses, the current outlook remains uncertain and it is possible the spread of COVID-19 may re-emerge in the New York area. We expect the significance of the COVID-19 pandemic, including the extent of its effect on our financial and operational results, to be dictated by, among other things, its duration, the success of efforts to contain it and the impact of actions taken in response. For instance, recent government action to provide substantial financial support to businesses could provide helpful mitigation for us and certain of our borrowers; its ultimate impact, however, is not yet clear. While we are not able at this time to estimate the future impact of the COVID-19 pandemic on our financial and operational results, it could be material.