Thanks to a rough market, many stocks are trading well below where they were at the beginning of 2022. On top of that, if you add the downward pressure of company-specific troubles to the market's general malaise, some stocks are trading in downright distressed, deep value territory.
For patient investors willing to look beyond short-term problems to longer-term prospects, that can spell opportunity. Indeed, if you're able to see past a truly awful 2022 for the company, there are good reasons Broadmark Realty Capital (BRMK) is my top value stock to consider buying right now.
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The bad news that knocked its shares down
Broadmark Realty Capital was forced to cut its dividend in half in late 2022, slashing its payment from $0.07 per share per month to $0.035 per share per month. Nobody likes to see dividend cuts, and that one certainly didn't help Broadmark's stock, which had already been on a downtrend for much of the year.
On top of that dividend cut, Broadmark Realty Capital is in the rough-and-tumble business of hard money lending. In essence, it lends money to people and businesses needing the cash faster than traditional lending can provide or that have something keeping them from qualifying for standard loans.
Lending money is tough in normal times, but when the Federal Reserve is actively raising rates, it makes it even tougher for all parties involved. Borrowers struggle more with the same loan balances, while lenders see the value of their prior loans -- made at lower rates -- fall on the resale market. That can affect those lenders' balance sheets and their ability to raise new cash of their own.
Combine the company's own challenges with the rough environment it found itself in, and it's pretty straightforward to diagnose why its shares have fallen out of favor with the market.
Why a deeper dive can help calm fears
If you dig beneath those glaring challenges, you will find a business that looks capable of pulling through. Broadmark Realty Capital has a healthy balance sheet, with a debt-to-equity ratio of around 0.1. That means it doesn't rely heavily on borrowing money of its own to enable its lending operations, which can help it manage through the Federal Reserve's tightening cycle.
In addition, the company keeps pretty strong lending standards for its industry. Over 99% of its loans are senior secured loans, which puts it near the front of the line to collect if its borrowers run into trouble. Also, it has an average loan-to-value ratio of just under 61%. That's the equivalent of a $610,000 loan on a $1,000,000 building or project. That combination means that even if its borrowers default, the company has a very good chance of getting its money back.
The value price that makes it worth considering
Given the company's business line and dividend cuts, the market's fears have knocked the stock down to where it trades for around half its book value. Paired with that valuation, its dividend of $0.035 per share per month gives it a yield of around 10%, thanks to a recent market price of $4.19 per share.
Despite its recent cut, there are decent reasons to believe the company's dividend can be maintained. First, when it cut the dividend to $0.035 per month, its leadership indicated that the payment was aligned with its distributable earnings. That means the company believes it can earn enough to cover the payment.
In addition, the company is structured as a real estate investment trust (REIT), meaning it must pay out at least 90% of its earnings as dividends to its shareholders. That combination of a covered payment and the requirement to pay out a large portion of its earnings is a good reason to believe its current dividend rate can be continued.
Bargains don't last forever
While the company's recent past knocked its shares down for good reason, the market tries to value companies based on their futures, not their pasts. As long as Broadmark Realty Capital can deliver stable operations and a steady dividend, its stock looks to be available at a decent value today. Should it actually be able to deliver any sort of decent operating growth from this point forward, today's share price looks like an incredible bargain.
Add together the high, yet covered, dividend and the potential for share price appreciation if its operations improve, and Broadmark Realty Capital makes the cut as my top value stock right now. Of course, bargains don't last forever. As a result, now would be a great time to dig into Broadmark Realty Capital for yourself to see whether it just might deserve a spot in your portfolio.
