Long-time readers of this site will recognize Manhattan Bridge Capital (LOAN) as a name that has been brought up here many times. This first-lien (up to 65% of collateral value) real-estate lender traded at a fraction of book value just a few years ago. Since then, the company's shares have catapulted upwards, and now trade at a premium to book. The company recently became a REIT, and as such it nows pays out most of its income to shareholders, and currently yields over 10%! I recently spoke with the company's CEO, Assaf Ran, and got his thoughts on where the company goes from here.
Me: What are your thoughts on the "efficiency" of the market in how its view of your company has changed? Has your opinion of the per-share intrinsic value of the company changed as much as the share price has?
Ran: When we started this line of business, almost eight years ago, we faced doubts in the market place relating to our ability to underwrite, manage and control a portfolio of "hard Money Loans". Therefore, the market expected us to experience write offs and defaults, and evaluated us below book. During the years we have demonstrated unprecedented performance, experienced no defaults and had no write offs or write downs whatsoever. In addition we have managed to consistently grow revenue and net earnings, and that allowed a constant increase in cash dividends to shareholders. Further, we managed to increase leverage, while still being considered a low leveraged lender.
Saj: What do you think is the best way for investors to value Manhattan Bridge Capital? (e.g. P/B, P/E, something else? what multiple seems appropriate to you, if applicable?)
Ran: I believe that we are undervalued. Given our track record, the quality of our loans and our leverage ratio, I believe that we should be valued at 5% yield -- $5.60 Stock price x 5% = $0.28.
(The current share price is $2.74)
Me: My understanding was that you didn't want to pay dividends or buy back shares because you were looking to grow the company. But now that the company is a REIT, it has to pay out most of its income. How do you plan to grow the company under this organization?
Ran: The company organically grew from $6.7 Million of capital to over $9 Million. At that point, market conditions allowed for a non-dilutive stock offering, so we increased our capital to about $14 Million. As a REIT our future growth is expected to be: 10% retained earnings, additional leverage, and at an appropriate price level - stock offerings.
Me: Why do you think a REIT structure is a good idea for Manhattan Bridge?
Ran: Our operation qualifies as a REIT. Therefore, in order to avoid double taxation, and in order to maximize cash dividends to shareholders, after we have reached current scale I just think that this move is for the benefit of the shareholder.
Me: As recovery from the banking crisis continues, are you experiencing interest rate pressure due to competition, or do you feel the company operates in a niche which is relatively unattractive to commercial banks and other financial lenders?
Ran: Our borrowers agree to pay higher rates because we approve loans and close deals faster than banks. The need to close fast is customary within the types of real estate deals we finance. The competition has increased but there is also increased demand. We have a stable customer base and a great reputation. During the crises we charged slightly higher rates; I don't feel a significant pressure on our rates.
Me: How do you think a rising interest rate environment would affect the company?
Ran: Since our loans are structured for up to one year, we'll have the luxury of modifying our standards in accordance with changing market conditions. In addition, our notes determine a specific interest rate, or prime + X %, whichever is higher, so, we're protected from a sudden interest rate increase.
Me: You have provided personal guarantees to the company's lenders in order to secure better terms, but Manhattan Bridge is still paying interest as high as 10% on some of its loans. Are there steps you can take to reduce your overall cost of funds and thereby increase the spread between interest earned and interest paid?
Ran: We pay 6% interest rate on the vast majority of the debt, that's on the $7 Million to Sterling National Bank. The 8-10% relates to much smaller loans. Obviously, the company seeks to lower the cost of money to a minimum. Trust that I take every possible measure (including offering my personal guaranty) to achieve that goal.
Me: The company's profits have increased as financial leverage has been employed. But this adds to the company's risk. What should shareholders expect in terms of the company's capital structure going forward? Is there an ideal capital structure you have in mind that you expect to move towards?
Ran: I'm restrained from providing projections. However, our capital was just increased by close to $5 Million without increasing leverage. Therefore we are safer now. Yet, we're looking to increase our leverage responsibly. Some mortgage REIT's are leveraged 1,000-5,000%; at only 60% we are a much safer investment, even if we double or triple our leverage.
Ran had additional comments as follows:
"Unlike some other 'Hard Money Lenders' we are not 'loan to own'. Rather, we help real estate developers and investors to execute their business plan and earn money. Therefore, we make sure that the deals we finance make sense, that the investors are capable of completing the deal, that there is a compelling exit strategy within one year, and that the borrower has the financial capacity to pay the monthly interest bill. In addition, we stay away from the over-leveraged borrowers and we make sure that the LTV in not higher than 65%. Yet, regardless of how low LTV is, we insist on borrowers' equity in the deal. Being disciplined on our conservative policies helped us stay out of trouble, even through rough times."
If readers have additional questions, feel free to comment or send them to me and I will pass them along. Note that Ran may be restricted from answering some questions.