Through a $1.2 billion deal, a Seattle company and a Honolulu company are combining to join the ranks of publicly-traded mortgage REITs.
The Seattle-based Broadmark Group, a privately-held real estate lender for commercial and residential projects, plans to merge with Honolulu-based Trinity Merger Corp., a special-purpose acquisition company that went public in May 2018, to form a $1.5 billion publicly-traded commercial mortgage REIT. The merger, announced in August, is expected to close in November.
The mortgage REIT will extend construction, development and land loans to regional builders and developers—as the existing Broadmark business has done for nine years in a bid to capitalize on banks tightening the reins on real estate lending. Since 2010, Broadmark has originated $1.8 billion in loans and has raised more than $820 million in equity capital. Broadmark’s four private non-listed commercial mortgage REITs, currently operating in 14 states, will be folded into the new REIT.
Jeff Pyatt, co-founder and president of Seattle-based real estate lender Pyatt Broadmark Management LLC, will become CEO of the combined company, Broadmark Realty Capital Inc. Pyatt Broadmark Management is part of the Broadmark family of companies. Pyatt says the new internally-managed REIT will likely be listed on the New York Stock Exchange and will keep paying monthly dividends.
In a Q&A with NREI, Pyatt discusses the outlook for home and apartment construction, the threat of a recession and Broadmark’s cautious approach to lending.
This Q&A has been edited for length, style and clarity.
NREI: What do you gain from creating Broadmark Realty Capital?
Jeff Pyatt: It gives us a little more flexibility in allocating capital, so that if we see a good deal in the D.C. market that would be too big for a stand-alone regional fund, we can spread the risk. It also gives us access to permanent capital; it makes it easier to raise additional capital if we’re raising it for one REIT instead of saying we’re raising money only for the Northeast, the Southeast, the Northwest or the Southwest.
And it allows us to continue to look at new markets that are strong in states that have non-judicial foreclosure laws. We want to stay out of states that aren’t going to fit well with our model of taking care of our investors. Principal preservation while trying to get a good return has been our primary focus since our inception nine years ago.
NREI: How might the current interest rate environment affect the new REIT?
Jeff Pyatt: We are not an interest-rate-sensitive business. Our average yield is 16.7 percent on our loans, and that has barely moved up or down. The yield is driven a little bit by competitive pressures.
Where interest rates can affect us is on home mortgage rates. If you are a homebuyer and your mortgage rate goes up a half-percent, what you can afford for a payment goes less to principal and more to interest, and so it affects the price of the house that you can buy. That would affect our borrowers who are homebuilders. If interest rates go up, it also affects cap rates for commercial properties.
We’re not immune to interest rates, but we factor them in as appropriate.
NREI: What’s your sense of the direction of home and apartment construction?
Jeff Pyatt: I think we’ve got a nice, strong market at least through the election cycle. Are we going to have a recession? Yes. Do I know when? No. That’s why we [Broadmark] pay attention to our loan-to-value ratios. Our maximum loan-to-value ratio is 65 percent. A big loan for us is $30 million, so we’re not going to be doing 40-story condo projects.
There will always be homebuilders, there will always be apartment builders, and there will always be a need for financing. We have filled a nice gap in this run-up following the post-Great Recession pullback by commercial banks.
We don’t loan to national homebuilders; Richmond American Homes and KB Homes and the other big national builders are kind of their own ecosystem. But there is not enough housing to meet demand, and much of that is due to a lack of the ability for other builders to finance other projects.
We’ve always been very capital-constrained, so we have the luxury of being able to allocate resources where we think they fit best. Five or six years ago, we were very much an infill lender in cities, but then sellers got a little too optimistic about the value of their land, so we couldn’t make projects work from our standpoint. So we pivoted to being more suburban in many of our markets. In metro areas like Denver, Salt Lake City and Seattle, we’re doing a little bit more multifamily because there’s a demand for it there. But in markets like San Antonio and Atlanta, we’re doing more single-family.
NREI: How confident are you of the REIT’s financial position once the next recession hits?
Jeff Pyatt: There will be fewer lenders out there, so that will give us the opportunity to have more market share. Plus, 65 percent of our business is repeat business, so once we get a borrower, we tend to keep them.
NREI: How have you been able to grow without taking on leverage?
Jeff Pyatt: We [Broadmark] haven’t grown as quickly as maybe we could have. Growth started slowly and then picked up nicely. Capital has been our scarce resource. We can’t always fund all the deals we see; we’ve got a pipeline of about $200 million in loans that we can’t fund currently.
We are a rules-based company. It’s served us well for nine years. We don’t bend on our 65 percent loan-to-value ratio. We don’t bend on getting an appraisal and then verifying that appraisal on every deal that we write. We want to maintain good returns for our investors, but never at the risk of principal.
