Updated on June 24th, 2021 by Bob Ciura
In general, income investors tend to focus on a high current yield, a safe dividend with rising payouts over time, or a combination of these qualities, depending upon their specific investment needs and goals.
The problem is that most dividend stocks don’t provide all three, so investors have to make choices about what is more important to them. Real Estate Investment Trusts – or REITs – are often a source of high current yield, safety, and growth for dividend investors.
Broadmark Realty Capital (BRMK) is a REIT with a high current yield of 7.8%, and it pays its dividends on a monthly basis, which is rare in a world where the vast majority of dividend stocks make quarterly or semi-annual payouts.
With this in mind, we created a list of 53 stocks that pay dividends each month.
You can download our full list of monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
Broadmark’s high current yield and monthly payment make it attractive purely from an income perspective, but the future outlook is uncertain.
This article will analyze the investment prospects of Broadmark Realty in further detail.
Broadmark Realty offers short-term, first deed of trust loans that are secured by real estate. These loans are used by customers to fund the acquisition, renovation, rehabilitation, and development of residential and commercial properties in the US.
The trust was formed in 2010 and has originated more than a thousand loans in the decade since with an aggregate face value of nearly $3 billion. Broadmark has been public for a relatively short time, having completed its IPO in November 2019.
Source: Investor Presentation
An interesting fact about Broadmark that is highly unusual for a REIT is that it has no outstanding debt. REITs quite commonly load up on huge amounts of debt to fund portfolio expansion, but Broadmark hasn’t done that. All of its loans are funded from cash on the balance sheet, which is extraordinary.
The advantage of this is that Broadmark has superior lending margins – because it has no interest expense to pay – and it provides an additional margin of safety. Broadmark isn’t subject to margin calls or other covenants from its own creditors because it doesn’t have any.
In addition, Broadmark’s weighted average loan-to-value is just 60%, meaning its loans have a significant margin of safety should payments stop. The trust can take possession of the properties with significant equity built in, and recover its losses for the most part.
The trust’s portfolio consists of a decent mix of residential and commercial properties, although Broadmark is still primarily a residential lending story. About 78% of Q1 originations were in residential loans, and about 92% of the total is concentrated in the Pacific Northwest and Mountain West combined.
This lack of diversification, both in geography and loan type, make us cautious on Broadmark’s ability to handle the current recession, and recessions that are to come.
Broadmark has managed to grow its loan portfolio in the past couple of years, driving interest income and fee generation higher. Since the trust has no funding costs, its lending margins are exceptional. That means that when Broadmark grows its lending portfolio, the additional operating income that is derived from the revenue gains is significant.
Source: Investor Presentation
We see this trait continuing as the trust had more than $200 million of cash on its balance sheet at the end of the first quarter, so it has plenty of capital to continue to boost its lending activity. On the other hand, Broadmark is seeing significant weakness from its lending portfolio thanks to impacts from COVID-19.
Broadmark Realty announced weak earnings results for the 2021 first quarter. Revenue decreased 7.3% to $29.5 million, missing estimates by $2.8 million. Adjusted earnings–per–share of $0.19 was 9.5% lower than the prior year.
Broadmark Realty originated $191.9 million of loans and amendments for the quarter. First-quarter origination was a 1.5% decline sequentially, and at a weighted average loan to value of 63%.
As of3/5/2021, Broadmark Realty had 29 loans in contractual default, which does not include five loans with forbearance agreements. Provisions for credit losses was $2.7 million, or 2.1% of the total loan portfolio. Broadmark Realty is expected to earn $0.88 per share in 2021.
Broadmark maintains a positive growth outlook, with a strong balance sheet. Indeed, it has essentially no limitations on how much it can continue to grow its lending portfolio, particularly if it decides to take on debt to expand the portfolio.
However, we are still wary of its reliance upon two relatively narrow geographical areas, as well as its reliance upon residential construction loans. We believe Broadmark can grow FFO by 3% per year, but caution investors that a high number of defaults were present at the end of Q1, and that there is very little history on Broadmark since it has been public only for a short time. This means risks are somewhat higher for Broadmark than some other REITs.
Broadmark’s dividend payment stood at $0.12 per share in December 2019. Since then, the monthly dividend was subsequently reduced on two separate occasions, to $0.08 per share, then to $0.06 per share. In January 2021, Broadmark increased its monthly dividend to $0.07 per share where it currently sits.
Still, at an annualized payout of $0.84 per share, Broadmark stock has a current yield of 7.8%, which is more than five times the average dividend yield of the S&P 500 Index. With a high dividend yield, along with monthly payments, Broadmark stock is attractive from an income perspective.
However, Broadmark’s dividend sustainability is a persistent concern. The company has a history of dividend cuts, and the coverage remains tight. We expect Broadmark to produce between $0.88 in FFO-per-share this year, or “core earnings” as the trust referred to it as in the Q1 release, which means that its dividend coverage is relatively poor.
We expect Broadmark to pay out essentially all of its FFO this year, which means that if a downturn in the lending market worsens, the distribution may be at risk of yet another cut.
Broadmark can likely afford the current annual payout of $0.84 annually due to the high level of cash on its balance sheet, which it can use to fund any deficits between FFO and declared dividends. Of course, this is not sustainable over the long-term.
This also means that the prospect of dividend growth isn’t particularly strong with Broadmark. Sustainable dividend growth will likely be an issue for a long time to come.
While Broadmark’s high dividend yield and monthly payment schedule are appealing, investors should be cautious. The company’s first-quarter performance was relatively weak, and its payout ratio is fairly high. The dividend payout is at risk due to this.
Given these factors, we do not see Broadmark as a safe dividend stock, and would recommend investors pass on it until the prospects for its portfolio improve. Overall, Broadmark’s inherent risk is much higher than other REITs.