December 10, 2019

Broadmark Realty Capital Inc. | BRMK

Broadmark Realty Capital, Inc. (BRMK) offers immediate upside as a temporary market inefficiency dissipates. We are long BRMK.

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Prescience Point Research Opinions:

  • Shares trade at an unwarranted discount to peer group: Discount primarily due to (1) unfamiliarity with business as it recently/quietly went public through a SPAC on 11/14/19, (2) available historical financial information is difficult to query, cumbersome to analyze, and only a limited amount is accessible from financial data service providers, (3) there is minimal sell-side coverage, and (4) many have a misperception about its dividend yield. BRMK formally announced its initial dividend on 12/09/19 but many brokerage firms and financial data service providers show and will continue to show BRMK has zero yield until the first dividend is actually paid.
  • All returns are unlevered as BRMK uses zero debt, a rarity amongst its peers: A core tenant of BRMK’s structure is that it uses zero leverage, which is almost unheard of in real estate financing. Of the fifteen internally and externally managed finance REIT peers, BRMK is the only one that doesn’t use leverage.
  • Accretive management fees from privately raised capital provides optionality for additional earnings/dividend growth: BRMK is an internally managed REIT but has the capacity to raise private capital with a management fee that will accrue to the public shareholders. Historically, BRMK raised private capital on a monthly basis and anticipates raising ~$20.0 million per month in FY 20. This could prove conservative as the twelve-month average as of Q2 19 was $35.0 million per month. Importantly, every $100.0 million of private capital raised will generate $0.04 per share of incremental earnings.
  • Very low default and loss rates due to ultra-conservative underwriting standards: Since inception in 2010, BRMK has made 1,005 loans of which only 33 (~3.0%) have been placed into default. Only 3 of those loans resulted in actual principal loss for a total of ~0.4 million (0.02% of all loans). • Excess cash, pipeline of lending opportunities, and new markets will propel near and long-term growth: BRMK estimated it has ~$229.0 million of cash ready to be deployed over the next two quarters as it has a $200.0 million pipeline of lending opportunities. In addition, the Company is expanding into new markets (e.g. Southeast) with favorable demographic trends and non-judicial foreclosure laws which will provide additional growth over the long-term.
  • Shares have +20.0% immediate upside with ~10.0% dividend yield: Despite many of the favorable characteristics above, BRMK trades at a discount to its peers. If BRMK traded near the high-end of its peer group, we estimate fair value at $15.26. We believe this is conservative and shares could trade meaningfully higher given BRMK uses no leverage.

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