Broadmark Realty Capital: 10.6% Yield On This Monthly Payer

Mar. 08, 2022 3:11 PM ETBroadmark Realty Capital Inc. (BRMK)29 Comments
BeanKounter Capital profile picture
BeanKounter Capital
4.15K Followers

Summary

  • Broadmark has sold off with the rest of the market in the last couple months, driving the yield up to 10.6%.
  • Shares currently trade at 11x earnings, which is below the average multiple of 13.9x.
  • Broadmark will have to grow the loan portfolio to avoid a dividend cut in 2022, but the company has a consistent history of portfolio growth going back to 2014.
  • Shares are a steal near $8 and the risk/reward is skewed to the upside.

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Investment Thesis

Broadmark Realty (NYSE:BRMK) is a hard money lender with a juicy dividend yield of 10.6%. The company has an impressive balance sheet compared to the competitors and has prioritized states with good demographics and regulatory environments. The company currently trades at 11x earnings, which is below its average multiple since going public about two years ago. There is some risk of a dividend cut, but I think the company will be able to grow its bottom line to maintain the current $0.07 monthly dividend. Investors should do their own due diligence, but I think the risk/reward is skewed to the upside for Broadmark.

Business Overview

For those that aren't already familiar with Broadmark, the company is a hard money lender. They make short term loans (typically 5-21 months) on construction projects across the US. They currently have a portfolio yield of 10.5%, which is much higher than mREIT competitors, and have a solid balance sheet. They recently had their first debt issuance as a public company in November. The $100M in senior unsecured notes carry a 5% interest rate and mature in 2026. When you compare to the leverage on some of the other mREITs, Broadmark is very conservatively run and I expect that to continue.

Broadmark Portfolio

BRMK Portfolio (broadmark.com)

The company has prioritized certain states based on demographics and lending laws. They have focused primarily on four markets that management finds attractive: Colorado, Texas, Utah, and their home state of Washington. They did add a couple of states to the portfolio in Q4 with West Virginia and Montana, but here is a breakout of the overall portfolio at year end:

  • Colorado - $337M / 22.6%

  • Texas - $266.1M / 17.9%

  • Washington - $260.8M / 17.5%

  • Utah - $234.9M / 15.8%

  • Other - $390.3M / 26.2%

Source: 10-K, sec.gov

Valuation

Broadmark has only been a public company for a couple of years, so we don't have a long operating history to examine. Hindsight is 20/20, but the company chose a poor time to go public. The company began trading only a couple months before the COVID crash. Things have stabilized since then, but I think now is an opportune time to start a position or add to an existing one in the company. Broadmark currently trades at an earnings multiple of 11x which is a couple turns lower than the average valuation. The average multiple since going public has been 13.9x.

BRMK P/E

Price/Earnings (fastgraphs.com)

Again, Broadmark doesn't have a long operating history as a public company, but I think shares have become pretty cheap over the last couple months. As long as the company can continue to grow as planned, I think buying shares around $8 is going to prove to be profitable. Shares have sold off and I will be looking to add shares in my Roth account in the coming weeks. I think part of this is due to broader market weakness, but a potential red flag for investors to be aware of is the sustainability of the large dividend.

Dividends

The company was forced to cut the monthly dividend in 2020, from $0.08 to $0.06. This was due to a complete freeze in activity and issues with broader markets due to COVID in the spring of 2020. They have since raised it a penny to $0.07 at the beginning of 2021. After the recent price drop, Broadmark sports a yield of 10.6%. This on its own should make investors cautious, but I think with a little digging, you might find that the risk/reward is still skewed to the upside. The company paid out $0.07 dividends each month for a total of $0.84 in 2021. This is in excess of their full year distributable earnings of $0.71.

Management will have to make a decision at some point regarding the dividend if they aren't able to grow the earnings to continue to payout the current dividend. They can start using some of their $133M cash pile to cover the difference for a time being, or they can choose to cut the dividend.

I think that the company will be able to grow distributable earnings in a meaningful way in 2022, but I will be keeping a close eye on things to see if that starts to play out in the quarterly reports. The company has a history of portfolio growth (including their time as a private company), so I'm optimistic that the company will be able to grow their bottom line to cover the dividend payout in 2022 without having to cut into their cash reserves.

Conclusion

Broadmark is the only mREIT worth owning on a long-term basis in my opinion. I might be biased as a shareholder, but the conservative balance sheet and focused strategy make it a diamond in the rough in the mREIT sector. The company has picked states with favorable tailwinds and regulatory situations. I like the valuation currently and the double-digit yield means that investors are being paid handsomely to wait. Investors should be aware of the payout being greater than earnings for 2021 and decide for themselves what they think of the potential risk of a dividend cut.

I'm still bullish and I think that the company will be able to continue the growth of its loan portfolio to increase earnings enough to cover the dividend payout. I plan to add shares in the next couple weeks, and I think shares are a steal right now near $8. If the company can avoid a dividend cut, I think it's only a matter of time before shares head towards $10 or $11 all while paying out a juicy dividend.

I would be fascinated to hear your thoughts. Feel free to leave a comment below.

This article was written by

BeanKounter Capital profile picture
4.15K Followers
CPA and former Big 4 auditor. I break down investments in qualitative and quantitative terms, and I look for investments that will compound my money over the long term.

Disclosure: I/we have a beneficial long position in the shares of BRMK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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