New house open interior construction with 2 x 4s showing
Getty
Excerpts of this article appeared in the December 2019 edition of the Forbes Real Estate Investor.
We recently initiated coverage on a new commercial mortgage REIT that pays monthly dividends. What’s interesting about this “new kid on the black” is that this company invests in single family residential and multi-family construction loans.
Broadmark Realty (BRMK) focuses on residential lending that capitalizes on the kind of significant demand for construction financing that was provided by commercial banks once upon a time. We recently reached out to the company to ask a few questions about the company’s differentiated investment strategy:
- An alternative, unlevered, credit-focused strategy that generates a double-digit yield with limited correlation to broader equity capital markets
- A successful track record of raising capital privately for real estate lending, providing significant growth opportunity to generate additional fee income
- A high-quality, unlevered, double-digit-yielding portfolio that supports book value
- An attractive 16% average unlevered fixed-rate yield that provides earnings stability
- Targeted loans with short-term maturities that provide multiple benefits, such as mitigating interest rate risk due to faster repricing ability for shifts in market interest rates.
On November 14, the company announced its unification with Trinity Merger – a move that made it a public company listed on the New York Stock Exchange. This change will allow customers across all markets to access a full range of loan products and loan amounts of up to $50 million.
What else is there to know? Let’s ask Broadmark itself…
An Interview With Broadmark
Brad Thomas: What happens to shares of TMCX? Do investors need to take any action to convert to BRMK?
Broadmark Management: Investors in Trinity common stock received shares of Broadmark Realty Capital common stock in exchange for their shares. And investors in Trinity public warrants received Broadmark Realty Capital warrants in exchange for their warrants – in each case, on a one-for-one basis.
Investors in Trinity units received one share of Broadmark Realty Capital common stock and one Broadmark Realty Capital warrant in exchange for each Trinity unit held.
Thomas: Can you explain the management structure?
Broadmark: Broadmark is internally managed, which we believe provides strong alignment between management and shareholders. We have not yet provided guidance for 2020, but [we] believe we have capacity to leverage our lending platform to grow by raising additional private real estate lending companies where it would receive management fee income.
Thomas: What are the target markets?
Broadmark: The company operates in 14 states, plus the District of Columbia. Those states are Washington, Oregon, Idaho, Colorado, Utah, Texas, Georgia, Tennessee, North Carolina, South Carolina, Florida, Maryland, Virginia, and Pennsylvania.
Thomas: What are your thoughts on the business climate today and demand for new construction?
Broadmark: Real estate investment is a capital-intensive business that relies heavily on debt capital to acquire, develop, improve, construct, renovate and maintain properties. Broadmark focuses on providing construction, development and investment loans, which is a vital segment of the U.S. housing and real estate industries.
Due to structural changes in banking, regulation, and monetary policies over the last decade, there has been a reduction in the number of lenders servicing this segment. Broadmark believes there is a significant market opportunity for a well-capitalized real estate finance company to originate attractively priced real estate loans secured by the underlying real estate as collateral.
Broadmark also believes that the demand for relatively small real estate loans to construct, develop, or invest in residential or commercial real estate held for investment[s] located in states with favorable demographic trends presents a compelling opportunity to generate attractive risk-adjusted returns for an established, well-financed, non-bank lender.
Historically, regional and community banks were the primary providers of construction financing to smaller, private builders. Over the past several decades, there has been significant consolidation within the commercial banking industry, with the number of commercial and savings institutions having decreased by 59% and 71%, respectively, since 1992, as reported by the FDIC.
In addition, many traditional commercial real estate lenders that have competed for loans within Broadmark’s target markets are facing tighter capital constraints due to changing banking regulations following the 2008 financial crisis.
Thomas: How is the company capitalized today?
Broadmark: Historically, it has not utilized debt financing. Currently, it is 100% financed with equity and has zero leverage.
Thomas: Does BRMK offer a dividend reinvestment plan (DRIP)?
Broadmark: Not at this time.
Our Recommendation on Broadmark
Broadmark expects core EPS growth from new investments in balance sheet loans and assets under management growth in the private REIT funds. The company pays a monthly dividend, and we estimate 2020 dividends totaling $1.14 per share.
We’re establishing a price target of $12 per share, which is based on shares trading at 130% of book value. BMK will be added to our commercial mortgage REIT coverage and is officially a Buy.
I own shares in BRMK.