Friday, April 16, 2004 | 10:36 a.m.
Facing questions about a falling stock price and a disappointing financial performance in 2003, Vestin Group Inc. Chief Executive Michael Shustek is blaming those problems on economic conditions and is vowing that Vestin's finances will soon improve.
In announcing losses for the year-end and fourth quarter of 2003, Shustek said the real estate lender is turning the corner. In an interview Monday, he pointed to a higher rate of return for investors this year and his goal of restoring the $10 unit value in Vestin's real estate lending funds I and II, both of which slipped last year.
Shustek also restated that Vestin is expecting a return to profitability when its first-quarter numbers are released in the coming weeks.
Still, the Las Vegas company will have to mount a comeback while dealing with the fallout of a series of unsettling announcements made over the past several weeks.
On March 5, the hard-money lender, which makes loans backed by real estate collateral, confirmed a Securities and Exchange Commission inquiry into the company. Vestin also has announced its third change in auditors in as many years and the probable move from the Nasdaq National Market to the Small Cap market.
Shustek said the company has still not been informed by the SEC what the SEC is investigating. As of Monday afternoon, he said he still had not been questioned by SEC representatives.
"I haven't been asked one question," Shustek said, emphasizing that during the inquiry no restrictions have been placed on the company. "If it had been something real, real serious I think they would have stopped us from raising money, making loans, doing seminars ... But they haven't. It's business as usual."
While Shustek said the auditor changes could be perceived as a troubling issue, he said the decision to move away from Ernst & Young, a major national auditing firm, was a cost-saving measure.
"Vestin wasn't ready for a Big Four auditing firm," Shustek said, emphasizing that no auditor has ever issued a qualifying statement against the company.
Shustek and other corporate finance experts also have said that the move to the Small Cap market is probably better suited for a company that is so thinly traded. Shustek owns more than three million of Vestin's five million outstanding shares.
Robert Lawless is a professor of corporate law at the University of Nevada, Las Vegas' Boyd School of Law. He said the Small Cap market should be a good fit.
"It's perfectly legitimate," he said. "It is the perfect place for some companies to be listed."
While not speaking specifically about Vestin, Lawless cautioned that a series of issues like the ones facing Vestin could be a cause a concern when considered collectively.
"Individually you can explain away each one of these," he said. "But cumulatively, there's a lot of smoke."
The news hasn't helped the company's stock price.
Vestin stock, which was trading around $1.70 this week, is well off its 52-week high of $5.99. The stock traded as high as $9.75 on May 20, 2002.
While Vestin has pointed to the economy in explaining its weak revenue, other Las Vegas-based hard-money lenders appear to have fared better in 2003.
Steve Brockman, president of Las Vegas-based Builder's Capital Inc., manages a $70 million loan portfolio and has a pool of about 700 investors. He recently said his loan volume was up about 30 percent last year, making 2003 the best in the company's history.
SEC filings for Las Vegas-based OneCap, which also provides hard-money loans, said that company produced 90 transactions worth $71 million in the fourth quarter of 2003. That was up from the 88 transactions worth $51 million reported for the same 2002 quarter.
In 2002, Vestin reported the origination of 79 loans with a total value of $478 million, SEC documents said. Placement fees for those loans totaled $20.7 million.
In 2003, total loans fell to 65 with a value of $267 million and placement fees of $13.2 million, documents said.
Vestin also has had mixed results with its non-performing loans -- those loans more than 90 days past due on interest payments. The company's smaller Fund I reported 10 non-performing loans worth $24.6 million in 2002. That total improved to seven non-performing loans worth $15.4 million in 2003.
The larger Fund II, however, saw non-performing loans jump from seven worth $25.7 million to 11 worth $77.2 million between 2002 and 2003.
The slump was apparent in Vestin's recent earnings announcement.
The commercial lender said it expected to post a $2.4 million, or 50 cents a share, fourth-quarter loss, compared with a $1 million, or 23 cents a share, loss for the same 2002 quarter. For the year, Vestin said it expected to lose $5.2 million, or $1.16 per share, compared with net income of $3.8 million, or 54 cents a share, in 2002.
Revenue fell to $23.1 million from the $31.9 million reported in 2002.
Shustek said the comparison between Vestin and smaller lending operations is not valid. Vestin, he contended, is responsible for hundreds of millions more dollars than most of its competitors, making the task of finding suitable loans more challenging.
"Managing $748 million versus another smaller company, it's more difficult," Shustek said, adding that the company places a premium on quality loans instead of piling up placement fees on ill-fated transactions.
"We are being very conservative with (investors') money," he said.
Vestin said the $748 million total includes real estate funds managed by Vestin as well as loans involving the Vestin funds and outside investors.
Vestin had 60 loan requests in February and accepted just one, Shustek said.
He also said that non-performing loans, through foreclosure and subsequent sale, will generate returns. He added, however, that the process is sometimes slow. To illustrate the point, Shustek said the recent settlement reached on a loan for a residential development in Mesquite will cover the $10 million investors had in the deal. The process of clearing the loan, which was completed in February, took a year.
He also said the new investment announced this week in a New York racino operation -- Vernon Downs -- brought in additional interest and principal payments and added four new guarantors to a Vestin loan to the track.
Still, the recent developments at Vestin illustrate the need for caution on the part of participants in any mortgage lending investment, said Nevada Assemblyman David Goldwater, D-Las Vegas.
Goldwater has pressed for increased regulation of the trust-deed lending industry.
"There is a definite need for understanding of the relationship between risk and return," he said. "And these are high-risk investments."
At least some of Vestin's investors are getting restless. A Las Vegas attorney, Troy A. Baker, has formed the Vestin Trust Deed Investors' Protection Committee.
Baker said an undisclosed number of individuals representing about $10 million in Vestin investments have joined the committee.
Vestin's two lending funds held capital investments of about $470 million on Jan. 1, 2004, SEC filings said. Baker went public with the committee shortly after the SEC inquiry was acknowledged.
Baker said the committee was formed to protect fund investors concerned by the federal inquiry as well as by the company's recent financial losses. He said -- unlike stockholders who have voting rights -- investors have no voice and limited access to information.
Shustek said, however, that no one from the committee has contacted the company about any concerns.
Some investors have been upset since the value of the fund units they purchased slipped from the $10 level at which they were bought. The most recent SEC filings show Fund I's unit value was listed at $9.43. Fund II's unit value was listed at $9.72.
On Monday, Shustek said Fund I was valued at $9.59 per unit and he has set a goal of having that fund back to $10 by April 30. His goal for Fund II is a return to $10 by the end of October.
Funds I and II are currently paying investors between 6.5 and 6.75 percent, Shustek said, adding that the goal for the year is a return of between 8 percent and 9 percent.
Shustek said the current interest-rate environment has put downward pressure on the interest rates Vestin can charge, particularly as traditional banks become more aggressive competitors.
"Maybe we're a victim of our own success," he said. "In today's economy, 6.75 percent is a great return."
It is, however, below the double-digit returns Vestin investors have received in past years.
Investors also can't cash out at will. Vestin cautions in its filings that no more than 10 percent of the capital in each fund can be redeemed by investors in order to comply with the company's operating agreement and Internal Revenue Service tax statutes.
All of those concerns, Shustek said, will likely be eased as profitability, fund value and higher rates of return are restored.
"At the end of the day, Vestin Fund I and Vestin Fund II will be back at $10. We will get a higher rate of return for investors and everybody will be happy," Shustek said.
Shustek also said that former New York Jets football star Joe Namath will no longer be featured in advertisements for Vestin.
"You're not going to see Joe anymore," he said.
The company said more details about Namath's relationship with Vestin would be announced later.
Namath signed on as Vestin's pitchman in 2001 under a contract paying him $1 million per year. But last year, Namath business manager and New York attorney James Walsh left the Vestin board of directors as the size of the board was trimmed from 10 to five.
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