On Monday, Feb. 27, real estate lender Broadmark Realty Capital (BRMK) announced plans to merge with Ready Capital (RC 2.47%). Under the terms of the deal, Broadmark's shareholders will see each share of its stock that they own converted into 0.47233 shares of Ready Capital's stock.
Broadmark's shares shot up over 18% on the day, reflecting the substantial premium to its prior share price that Ready Capital was willing to pay. Despite that premium to the Broadmark's previous market price, Ready Capital is still arguably getting a decent deal with this merger. After all, the merger price is estimated to be around 0.85x Broadmark's tangible book value. In accounting terms, that basically means it's making the acquisition for less than it would take to build the business from scratch.
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Broadmark was a bargain hiding in plain sight
Although the deal came as a surprise to me, the fact that Broadmark's shares were available at a clear bargain certainly made it an attractive acquisition candidate. How clear of a bargain was it? Well, in December, I said its shares were oversold. In early January, I explained why I believed its shares deserved a spot on your watch list. Then I followed that up a week later calling it my top value stock to buy right now.
Broadmark's clean balance sheet, high (though cut to a supportable level) dividend, and dirt cheap valuation were behind my assessments as to why I felt the stock was worth owning. Apparently, Ready Capital shared a similar perspective -- and had the financial wherewithal to actually do something about it and make the acquisition offer.
Legitimate bargains rarely last long
Ultimately, after a stumble late in 2022 knocked its shares down, Broadmark Realty Capital's valuation represented a bargain that was simply too good to last. Now that it's being acquired, its shares don't look like quite the deal they were before. Instead, potential investors should consider both any merger premium that may still exist in this stock-for-stock deal as well as what they will own, assuming the merger completes.
On that front, Ready Capital shares a similar business model to Broadmark Realty Capital, as both are involved in funding otherwise tough-to-fund real estate loan products. A key difference between the two, however, comes from their balance sheets. While Broadmark carried virtually no debt at all, Ready Capital has a debt-to-equity ratio around 4.8 and carries over $6 billion in debt on its balance sheet.
It's tough to be in the hard-money lending business in ordinary times. In a rising rate environment with a generally uncertain economic outlook, it doesn't get easier. That makes Ready Capital's financial structure riskier than Broadmark's is. Broadmark's shareholders looking to hold on to the combined company after the acquisition closes should recognize that key capitalization difference between the two companies.
The good news is that since the deal is a stock-for-stock acquisition, Ready Capital won't have to take on more debt to fund it. In addition, since the acquisition looks to be for less than Broadmark's tangible book value, the merger should make the combined entity's balance sheet look stronger than Ready Capital's alone does.
Either way, while the market offered a clear bargain on Broadmark Realty Capital's stock for a few months, with the acquisition news, that obvious value price no longer exists. That's why it's so important to keep your eyes open for companies potentially trading at value prices. When there really is a clear bargain to be had, it's not likely to last a long time.
Start looking now for the next potential stock market bargain
If there's an upside to a rough market, it's that those types of value investing deals are more likely to come around when there's panic in the streets than when the outlook appears rosy. After a rough 2022 and a roller coaster start to 2023, it's quite possible that other deep values exist today or will soon be available. That makes now a great time to look for the next decent company trading at clearly bargain basement prices.
And if you find it, consider making an investment once you do. After all, as the Broadmark Realty Capital story shows, such legitimate bargains don't tend to last long.
