Ready Capital, a New York-based mortgage real estate investment trust, sees its recent merger with Broadmark Realty Capital as a sign of the times – and a chance to deploy capital in an accretive way in a year where loan originations are expected to be lower.
The terms of the deal valued Broadmark’s stock at $5.90 per share, which was a 41 percent premium to the Seattle-based mortgage REIT’s closing price on December 31, 2022. The firm’s share price reflected adverse market conditions that also presented an accretive and nuanced acquisition opportunity, Tom Capasse, chief executive officer, told Real Estate Capital USA.
“The merger has merits on a number of fronts, including timing that is accretive to shareholders,” Capasse said. “Given the shock in the residential market from the gapping out of rates and spreads in the first half of 2022, [Broadmark experienced] a situation in which a number of their borrowers experienced delays on their payments and business plans.”
While these loans were still good loans originated on behalf of good borrowers, many of the loans were structured with a one-year maturity. “This led to maturity defaults,” Capasse said. “While Broadmark had a good handle on this from an asset management standpoint, it created a decline in the value of their shares well beyond what you know is cyclically happening in the mortgage REIT space as we potentially enter a recession.”
The transaction means Ready Capital has grown in size and geographic reach. “We will be the fourth-largest commercial mortgage REIT, and the possibility for a credit re-rating gives us both access to a lot more capital,” Capasse said.
Pieces of the puzzle
In addition to Broadmark’s larger story, Capasse noted that Ready Capital has a track record in accretive mergers and cited its acquisition of Mosaic Real Estate Investors in 2022. “We acquired a private lending fund focused on construction lending and integrated them into our company as a new product that is very closely aligned to our bridge lending strategy,” he said.
Strategically, Ready Capital saw a logical connection between its existing business and Broadmark’s. While Broadmark focuses on smaller-balance residential, multifamily and mixed-use loans, with a loan size of roughly $7 million compared to Ready Capital’s average of about $14 million, both firms focus primarily on the multifamily sector.
The merger also represented a geographic expansion to markets that included the Pacific Northwest, Colorado, Utah and parts of Texas to complement Ready Capital’s focus on the so-called SMILE states. “Broadmark’s balance sheet is comprised of high-yielding, unlevered loans with a yield of about 13 percent,” Capasse added.
The plan is to integrate Broadmark’s platform into Ready Capital’s business, which aims to provide a full life cycle for lending products for commercial real estate sponsors in the lower and middle markets. “We can provide ground-up construction, heavy or light transitional and then take out financing in a stabilized market via an agency or fixed-rate permanent loan execution,” he said.
The deal comes as Ready Capital is preparing for what it is projecting could be a mild to medium recession in the fourth quarter of this year.
“The recession likely will be delayed by the strength of recent economic data that will leave rates higher for longer,” Capasse said. “You will see a traditional recession that will be very idiosyncratic and sector-specific.”
While Ready Capital believes its originations will be down as much as 25 percent this year, it will in part shift its strategy to acquisitions. Part of the firm’s business also includes buying and acquiring non-performing or non-accrual small-balance commercial loans from banks, which will be supported by Waterfall Asset Management.
“We will focus on acquiring scratch and dent or other small balance portfolios from banks that will allow us to opportunistically deploy capital,” Capasse said. “There is going to be a rapid consolidation in the space and you’re going to see growth in market share of alternative lenders.”