Broadmark: Great Passive Income Idea

Broadmark Realty Capital Inc. (NYSE: BRMK) offers short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. Broadmark Realty Capital manages and services its loan portfolio across a variety of market conditions and economic cycles. Since its inception in 2010 through June 30, 2019, Broadmark Realty Capital has originated over 1,000 loans with an aggregate face amount of approximately $2.0 billion.

Broadmark deals in several different types of short term secured real estate loans, including construction loans, land development loans, bridge financing loans and heavy rehab / redevelopment loans.  They have originated loans in 15 states and Washington D.C.

Recently only available to accredited investors through private placement, the family of privately-held Broadmark Real Estate Lending Funds merged with a public shell company to form Broadmark Realty Capital (BRMK) and its first day of trading was last week Friday (11/15).  The merger had many benefits, including public market liquidity for the private equity owners, diversification for shareholders across a much larger portfolio of loans with broader geographic diversity, additional capital to grow the loan portfolio, ability to expand lending to other states, and self-management (eliminated loan origination and management fees previously paid to the management company).  

Broadmark has a 10 year track record of success and has been providing yields of between 9% and 11% to its investors, paid on a monthly basis, without the use of leverage.  The lack of leverage is significant, since many mortgage REIT's borrow money to improve shareholder returns, which can significantly increase risk depending on the leverage ratio.  All of Broadmark's loans are conservatively underwritten, funded with investor equity, secured with 60% or lower loan to value ratios and are for very short terms, typically a year or less, which significantly lowers the risk of default.  The company has had very few defaults in its history - most recently, $1.8M for the year ended December 31, 2018 and $73K for the six months ended June 30, 2019.  This is notable for a loan portfolio of over $700M. 

Short term real estate lending was once the domain of regional banks, but since the Great Recession and with all the changes in the banking regulatory environment, this part of the real estate market was essentially left behind and created the opportunity for Broadmark.  That situation has not changed even now, and there is still substantial demand for short term real estate financing that is not being met by banks, so the outlook for continued loan demand and growth looks promising. 

The numbers are pretty compelling, based on the registration statement filed with the SEC.  The company has assets at book value of over $1.2B, including $722M of loans and $283M of cash based on the unaudited pro forma condensed combined balance sheet as of June 30, 2019.  Assuming results for June 30, 2019 are annualized, the new combined company will earn almost $120M, which translates into between $0.94 and $1.04 per share on a fully diluted basis (depending on how many shareholders of the old shell company redeem their shares).  Based on the first day closing price of $10.89, that's a yield of 8.6% to 9.5%.  Since the company is a REIT, it's required to distribute at least 90% of taxable income to shareholders, but for simplicity I assumed all of the net income is distributed.

In summary, Broadmark is a great passive income idea for someone looking for a strong yield with less risk than a typical leveraged mortgage REIT.

Disclosure:  my family and I own shares in Broadmark.  

I hope you find this post useful as you chart your investing course and Build a Financial Fortress this year.  If you are interested in other passive income ideas, see my post here.  
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