Mortgage real estate investment trusts (mREITs) are generally designed to produce income, and Broadmark Realty Capital (NYSE: BRMK) definitely does that. However, the company operates a rather unique lending operation that allows it to take a different approach to the mortgage REIT formula. In this article, we'll take a closer look at Broadmark, what it does, its loan portfolio, recent developments, performance history, and much more.
Broadmark Realty Capital company profile
Broadmark Realty Capital is a hard money lender that is structured as a mortgage REIT. If you aren't familiar with the term, a hard money lender is a specialized type of real estate finance company that loans money for shorter-term purposes and in situations where traditional mortgage financing doesn't make sense.
For example, construction loans that need quick closings are often made through hard money lenders, and this is the exact type of hard money lending Broadmark specializes in.
Specifically, Broadmark provides construction loans on a variety of commercial property types, as well as land development loans, rehab/redevelopment loans, bridge loans, and construction completion loans to cover the gap between when initial construction loans come due and long-term financing can be obtained. The company makes loans ranging from $200,000 to $40 million (the average is $6.7 million) at a maximum loan-to-value (LTV) ratio of 65%.
Broadmark currently lends in 19 states and Washington, D.C., and claims some big advantages over the competition. For example, Broadmark lends based on the completed value of clients' projects and has no loan-to-cost requirements when it comes to the maximum amount of financing it will provide.
The company can close loans in as fast as five days (try doing that through a traditional bank) and can wire funds within a day or two after final approval. Underwriting and loan servicing both are done in-house, making the loan process far more efficient.
Since the company's inception (2010), Broadmark has funded $3.1 billion worth of loans, and the company currently has $1.3 billion of active loans in its portfolio. The average loan on its books has an LTV ratio of just under 60%, and all are senior secured loans. Fifty-six percent of the loan portfolio is backed by residential properties, 26% are commercial in nature, and the rest comprise horizontal development projects or land loans.
Here's one particularly interesting differentiating factor: Unlike most mortgage REITs, Broadmark has no debt whatsoever. This is in sharp contrast to many other mortgage REITs, some of which employ leverage ratios of five times their assets or more. Because hard money loans have much higher yields than traditional mortgages, Broadmark doesn't need to use leverage to produce the kind of income that mortgage REIT investors want.
And while hard money loans are indeed riskier than, say, agency-backed residential mortgages, the complete absence of debt is a big mortgage REIT risk factor that Broadmark doesn't have.
Broadmark has a total of $299 million in liquidity to grow its business (for context, recall that the loan portfolio is currently $1.3 billion in size), and $164 million of this is cash on hand, meaning that Broadmark could deploy this much while remaining debt-free. The company also has an at-the-market equity offering program that allows management to sell as much as $200 million worth of new shares to raise more capital.
I briefly mentioned that hard money loans have much higher yields. To put some context behind this, consider that Broadmark's average loan has an 11.6% interest rate and 4.4% in average fees, for a total yield of 16%. It's not that the company's borrowers have bad credit -- these types of rates are actually quite standard for shorter-term non-bank financing. Unlike typical mortgage loans, Broadmark's loans have terms ranging from just five to 21 months.
Broadmark Realty Capital news
One of the most notable recent news items is that Broadmark Realty Capital is new to the public markets. Although the company has been in business for more than a decade, it was a private investment vehicle for most of its history.
Specifically, Broadmark went public in late 2019 through a merger with a special purpose acquisition company (SPAC) known as Trinity Merger Corp. SPACs have been a major part of the initial public offering (IPO) market for the past couple of years. If you're not familiar, the basic idea is that a SPAC is formed for no other reason than to take a private business public -- for this reason, SPACs are often referred to as "blank check" companies.
Broadmark's SPAC merger was announced in August 2019 and was finalized in November of that same year, at which time, the company started trading on the NYSE under the BRMK ticker symbol.
Another significant recent news item impacting Broadmark (and virtually every other mortgage REIT) is the COVID-19 pandemic. While Broadmark's stock price plunged by more than 50% at the start of the pandemic, it has since rebounded nicely. But it's important for investors to understand how the actual business was impacted.
For one thing, origination volume plunged. Prior to the company's SPAC merger in 2019, Broadmark had been originating $100 million to $200 million in loans per quarter -- this quickly dropped to about $50 million in the second quarter of 2020.
Default rates ticked up significantly as well, as you would probably expect given the environment of 2020. However, the company's debt-free approach allowed it to navigate the pandemic without being forced to sell assets at fire-sale prices to satisfy margin calls, as many other mortgage REITs had to do.
Broadmark Realty Capital stock price
Since Broadmark has only been a publicly traded company for about two years, we have limited data with which to evaluate its performance history. But here's what we can say so far.
As a SPAC IPO, Broadmark's initial stock price was about $10 per share, and that's right around where it sits today. As of Oct, 1, 2021, Broadmark stock trades for $9.96 per share, so we can say that the stock has been roughly flat over its two-year history.
Having said that, don't forget to take dividends into account. Like most other mortgage REITs, Broadmark pays a relatively high dividend yield -- after all, mortgage REITs are generally designed to produce strong income, with share price appreciation being a secondary concern.
With that in mind, Broadmark Realty Capital pays a monthly dividend, and although its publicly traded history is not very long, it's worth noting that the company has paid monthly dividends to shareholders since 2010. As of October 2021, Broadmark pays $0.84 annually per share in monthly installments (i.e., $0.07 per month), which translates to a yield of approximately 8.4% -- a yield that is rather typical of a mortgage REIT.
The bottom line on Broadmark Realty Capital
Mortgage REITs have a certain assortment of risk factors and potential downsides that investors need to be aware of, and Broadmark Realty Capital is certainly no exception. For example, in a recession or other tough economic climate, loan volumes could dry up, and defaults could spike, as we saw temporarily when the COVID-19 pandemic started.
On the other hand, the debt-free nature of Broadmark's loan portfolio takes several mortgage REIT risk factors off the table. The company will never face a margin call due to a market panic, and profitability isn't nearly as sensitive to interest rate fluctuations as it is with other mortgage REITs, just to name a couple examples.
While this certainly isn't a low-risk stock by any means, Broadmark Realty Capital could be worth a look for income-seeking investors who are a bit wary of the high-leverage nature of mortgage REIT investments.