Broadmark Realty Capital Inc.

BRMK Details

Broadmark Realty Capital Inc. (NYSE: BRMK) is a commercial real estate finance company that provides underwriting and servicing of the short-term, first deed of trust loans to real estate investors and developers in the US. As of March 31, 2021, the company has a portfolio of 200 active loans with approximately USD 1.3 billion of total commitments and USD 871.50 million principal outstanding across 137 borrowers in 14 states, excluding the District of Columbia. The company generates revenue from interest income earned on its loan portfolio and fees earned from loan origination activities. The loan provided by BRMK generally ranges from USD 0.10 million to USD 40 million in total commitments at origination, bears interest at a fixed annual rate of 10% to 13%, ranging from 5 to 18 months in duration based on the size of the real estate project and the timeline for its completion. As of May 24, 2021, the company’s market capitalization stood at USD 1.36 billion.

Growth in Loan Portfolio (Source: Earnings report, Q1FY21)

Equity Offering Program: On March 3, 2021, the company announced that it might sell its common stock having an aggregate gross sales price of up to USD 200 million, from time to time, through an at-the-market (ATM) equity offering program. However, the company has not sold any shares during Q1FY21. The company intends to use net proceeds from this program to fund its lending activities.

Q1FY21 Results: The company reported a slight decrease of 7.23% in total revenue to USD 29.46 million in Q1FY21 (ending March 31, 2021) compared to USD 31.76 million in Q1FY20 (ending March 31, 2020), primarily due to a 10.32% decline in Interest income, resulting from lower effective interest-bearing principal during Q1FY21. The Interest income contributed 74.71%, while the Fee income contributed 25.29% of the total sales during the quarter. BRMK recorded a significant decline in net provision for credit losses to USD 2.70 million in Q1FY21 compared to USD 4.43 million in Q1FY20. Net income declined 23.00% to USD 20.38 million in Q1FY21 compared to USD 26.46 million in Q1FY20. As of March 31, 2021, the company had cash and cash equivalents of USD 204.27 million with no debt outstanding.

Key Risks: The company’s loan portfolio is concentrated within 12 states in the US. Washington and Colorado contribute 46.70% of the company's total loan portfolio. Any decline in the real estate value, changes in zoning laws, rise in unemployment rates, or any environmental events in the above-mentioned states could cause a decline in the value of properties securing the BRMK’s loan, which would reduce the value of the collateral and the potential proceeds available to borrowers to repay their loans.

Valuation Methodology: Price/Earnings Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

BRMK Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: BRMK has declined by 3.61% in the past one month and is currently leaning towards the higher band of the 52-week range of USD 8.00 to USD 11.00. The stock is currently trading around its 200 DMA levels. We have valued the stock using the Price/Earnings-based relative valuation methodology and arrived at a target price of USD 11.73. On the technical chart, the next support level is USD 9.50. Considering the slight correction in the stock price in the past one months, strong balance sheet, no long-term debt, and associated risks, we recommend a “Speculative Buy” rating on the stock at the closing price of USD 10.41, up by 1.07% as of May 24, 2021.

* Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

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