Description

Highlights

1. Broadmark Realty Capital (BRMK) is a conservatively financed REIT with a 7.3% yield, great exposure to the housing market, and a history of significant loan growth.

2. Earnings on 11/9/20 should show a continued path to recovery and a reiteration of the targeted $20 million per month origination volume translating to incremental EPS of $0.10 (13%).  The stock should re-rate to a 13X multiple on $1.00 in core EPS for 30% upside.  This would translate to a dividend yield of 5.5%.

3. The company has $218M of unrestricted cash which should fund its $200 million pipeline of lending opportunities earmarked towards geographic areas with favorable demographics.

Background:

Broadmark Realty Capital Inc (BRMK) is a residential and commercial mortgage REIT that went public through a special purpose acquisition company (SPAC) in November 2019 and is focused on construction, redevelopment, and land development loans.  Since its founding in 2010, it has originated over 1,000 loans with an aggregate face amount of approximately $2.4 billion.  

Investment Drivers:

Best-in-Class Balance Sheet: Broadmark is the only publicly traded finance REIT that doesn’t use leverage, as shown in the chart below.  This is almost unheard of in real estate financing.

The company is sitting on $218 million in excess cash and a pipeline of over $200 million in lending opportunities.  

Conservative Underwriting Standards: Over its ten-year history, Broadmark has had losses of less than 0.1% on the $2.4 billion in originated loans.  The company has achieved this feat by adhering to a strict underwriting process, holding first position deeds of trust on each loan, requiring personal guarantees from each borrower, and limiting its maximum loan-to-value (LTV) to 65.0%.  With two-thirds of its customers as repeat borrowers, Broadmark has a very loyal customer base.  The weighted average LTV of the 216 loans in its $1.1B active loan portfolio is 59.9%.  There is currently a $6.8 million allowance for loan losses, less than 1% of total commitments.  

Diversified Loan Book: The company has recently expanded from its core Pacific Northwest and Mountain West footprint to the Southeast and Mid-Atlantic, focusing its expansion on markets with favorable demographic trends and non-judicial foreclosure statutes.  In the event of a default, it can foreclose and take control of the asset without going through the court system, and this is a key reason why most contractual defaults are resolved without issues and the company ends up collecting all contractual interest and fees.  

The active portfolio is now far more diversified with no state making up more than 23% of the active loan portfolio, as shown in the map below.  The loan portfolio is also well diversified across collateral types.  Broadmark is bullish on single-family and multi-family housing, which we can expect will make up a larger part of the pie going forward.

Strong Growth: With its focus on faster growing markets, Broadmark has been able to grow its loan portfolio significantly.  The chart below shows the historical growth of the active loan portfolio (53% CAGR since December 2014).  With $218 million of cash and a $200 million pipeline of loan opportunities, the company is in a good position to continue to grow that portfolio.

Good Exposure to the Housing Market: With almost 70% exposure to the residential real estate market, Broadmark offers great exposure to the strong housing market.  Freddie Mac recently estimated that 2.5 million additional homes would be needed to make up the shortage in housing inventory in the United States.  When only considering the 29 states where housing demand exceeds supply, this deficit increases to 3.3 million.  "We are in the midst of a demographic tailwind, and we expect home purchase demand will remain strong well into the next decade as the peak cohorts of millennials turn 30 years of age in 2020 and beyond," said Sam Khater, chief economist at Freddie Mac. "Simply put, new housing supply is not keeping up with rising demand.  As shown in the chart below, sales of single family homes in the U.S. are surging, with sales in September 2020 up 32% year-over-year.  

Inventory of unsold homes is at the lowest point in the past 30 years at 3.6 months of supply.  The market is generally viewed as “balanced” at or below 6 months supply, so the current level indicates a severe shortage.  

Reasonable Valuation: 

With a 7.3% yield and a P/E ‘21E of 10.9X, BRMK is not the cheapest finance REIT out there, but it is the only one with an unlevered balance sheet and among the only few expected to grow EPS from ‘19 to ‘21E.  It also has a history of loan growth that suggests estimates could be conservative if and when the pandemic is over.

Shareholder Friendly Structure: Another differentiating aspect of Broadmark is its internalized management platform.  The company is structured as an internally managed REIT available to accept and manage private capital.  Such REITs are more aligned with shareholders as they incentivize managers to drive shareholder returns and dividends instead of just gathering assets with fees that accrue to external managers.  Under this structure, public shareholders will own the management fee stream from any privately raised capital.  Prior to the pandemic, the company guided the private REIT to raise $20.0 million per month in FY20.  They only raised $6 million in the most recent June quarter due to the tough fundraising market but they’ve already seen a stabilization since then and will likely get back to that $20 million run-rate soon.  Management estimated that each $100 million of capital raised would generate $5.0 million ($0.04 per share) of incremental earnings.  With consensus earnings at $0.79 in 2020, a $20 million run-rate would imply incremental EPS of $0.10, or +13%.  Note also that the $0.79 is down from $0.86 in 2019, so a good near term target would be about $1.00, putting the P/E at around 10X.  

Key Risks

1)      Interest rate sensitivity. As with all mortgage REITs, Broadmark will get hit if interest rates spike due to fears of a budget-busting stimulus bill or runaway inflation.

2)      COVID-19 sensitivity. While the company is among the more conservatively financed and managed REITs in existence, another wave of infections could lead to defaults, impacting profitability and capital.

3)      SPAC technicals. While the company has successfully “de-SPACed” it is still lumped into this asset class, which brings with it a unique supply/demand dynamic that can cause volatility in the stock.

Catalyst

1) Earnings 11/9/20, looking for $0.20 in EPS in 3Q20 with outlook for targeted $0.25 per quarter in the next couple quarters, internally funded.

2) Housing market strength plays well here, this is a good indirect play, less well recognized.

3) Valuation re-rating - this stock should not be lumped in with other mortgage REITs, it is a unique animal.