PMC Commercial Poised to Pop

PMC Commercial (PCC) is one mortgage REIT that's flying way under the radar - no analyst coverage, no quarterly earnings calls. The micro-cap (~$80 million market cap) commercial originator has seen its stock sink 30% in the past two months, falling from $10 in March to just $7 in May. But has PMC's pounding been overly punitive?

Before I get into the first quarter earnings, let's take a look at PMC's business model. The Company that primarily originates first-lien, real estate-collateralized loans to small businesses, primarily in the limited service hospitality industry. PMC has two subsidiaries that act as non-bank Small Business Administration 7(a) Program lenders, which means that the Company is able to originate loans that are guaranteed up to 75% by the SBA. It also means that portions of 7(a) loans guaranteed by the agency can be transformed into AAA rated government bonds and sold on the secondary market.

Obviously, in the current economic environment, PMC's business would be expected to decline, so secular pressure on the stock is not surprising. PMC's fundamentals, however, are telling a different tale.

During the first quarter, the Company originated approximately $17.1 million of loans, but funded $8.9 million in April -- an increase of 56% over the first-quarter run rate. Impairments and provisions ticked up just $10,000 over the prior quarter, so credit metrics on the retained portfolio showed no deterioration. Most importantly, the Company earns taxable income of $0.31/share -- versus a $0.20/share dividend. Since management has indicated that it intends to maintain the $0.20/share payout throughout the year, PMC may end the year with excess taxable income if loan fundings remain strong. If I had to guess, I believe PMC will be able to declare a special dividend of $0.20 - $0.25/share. Such a distribution would lift the annual forward yield to over 13%.

PMC is a small-cap stock and thinly traded, so buyers beware. For those with some money to play with, however, this stock could prove to be an untapped gold mine.

PMC Plans Ahead

Update: PMC seems committed to trying to do a securitization deal. It's the only mREIT presenting at the American Securitization Forum 2008 Conference this weekend.

As a bit of a follow-up to yesterday's post about Quadra Realty's (QRR) lack of a back-up plan regarding the use of securitization funding to support its portfolio, I'd like to contrast that with one of the most forthright 8-K filings I have read in a while, courtesy of PMC Commercial Trust (PCC) late yesterday. PMC, a Dallas-based small business lender and REIT had the following to say:

On January 28, 2008, PMC Commercial Trust amended its (i) revolving credit facility to increase the amount available under the facility from $20 million to $45 million and (ii) warehouse facility (the "Conduit Facility") which, among other things, extended the Conduit Facility’s maturity date from February 2008 to May 2, 2008.

The interest rate spread on our Conduit Facility will remain the same during the extended period. The Conduit Facility cost of funds is the pass-through rate as defined in the facility documents plus 0.85%. The "pass-through" rate is the rate that the Conduit Facility pays for its commercial paper and historically has approximated LIBOR.

The Conduit Facility allows for advances based on the amount of eligible collateral sold and has minimum collateral requirements. In addition to the extension, the amendment increased the amount of collateral required under the Conduit Facility. Due to PMC Commercial Trust having excess collateral that meets eligibility requirements of the Conduit Facility, we do not expect this change in collateral requirements to have a material impact on us.

The funds to repay principal under our Conduit Facility are typically obtained through securitizations of the loans collateralizing advances under the Conduit Facility. As a result of current market conditions, we expect that the interest rate spread would be at or above the spread on our prior variable-rate structured transaction of LIBOR plus 1.25%. Therefore, we may delay completion of a securitization until market conditions are more favorable.

While we can give no assurances, prior to May 2, 2008, we anticipate that we will either extend the maturity date of the Conduit Facility by as much as a year and/or complete a securitization. Accordingly, to allow us to continue our loan origination platform without disruption, we have increased the amount available under our revolving credit facility, hich matures December 31, 2009, from $20 million to $45 million. We currently have approximately $24 million of Conduit Facility borrowings outstanding and have no borrowings outstanding under our revolving credit facility.

PMC is honestly acknowledging that securitization is not an economically viable option right now and it stating its plans to increase its warehouse facilities on reasonably favorable terms in order to continue growing the portfolio going forward. It's all subject to the usual boilerplate risk, but it beats the evasive (and annoying) "we're reviewing all available financing options". Review time is over. Test time is here. On the funding question, PMC seems to be passing.