Skip to content

Newsletters

In a Yield-Starved Environment, Income-Oriented Investors Look to Alternatives

Real estate investment vehicles such as Broadmark Private REIT can provide stable income generation.

2020 has been uniquely difficult in a number of ways. When it comes to investing, this year has created much uncertainty pertaining to where and how to structure a portfolio that is capable of withstanding disruptions like those created by the COVID-19 pandemic.

However, even before the pandemic, we were in a historically low interest rate environment that made it tougher to find yield. Regardless of when a vaccine is developed, the Federal Reserve has indicated that interest rates will likely remain close to 0% for the next several years, leaving income-oriented investors to explore non-traditional asset classes as their typical sources of income – such as bonds – are unlikely to yield much in the near future.

The search for yield has led many investors and their financial advisors to take a closer look at alternatives. One such alternative that has a history of providing stable yield in low interest rate environments is real estate. This is one of the reasons why institutions such as pension funds and endowments have historically increased their allocations to the real estate asset class in prolonged periods of low rates.

When it comes to real estate investing, some of the most well-known vehicles include publicly traded REITs and private equity funds. Publicly traded REITs have the benefit of offering tax-efficient income streams that dovetail with the strategies of income-oriented investors. However, they are more susceptible to volatility in the public markets, and not all investors are open to this level of volatility.

Another option to consider is a private REIT, which can offer many of the same income-related benefits while insulating investors from public market volatility. However, not all private REITs are created equal, and it’s imperative to place your capital with a fund manager that has a sound strategy and a track record of generating attractive risk-adjusted returns. If you and your financial advisor are examining real estate to generate returns and diversify your portfolio, consider Broadmark Private REIT as an adjunct to or replacement for traditional high-yield investments.

Broadmark Private REIT’s investment objective is to provide attractive risk-adjusted returns primarily through the origination fees and income generated from Broadmark Realty Capital’s (NYSE: BRMK) conservatively underwritten loan portfolio. Broadmark Realty Capital makes first-position, personally guaranteed, maximum 65% loan-to-value loans without leverage to a variety of small and mid-size real estate projects.

As compared with the Merrill Lynch US High-Yield Index as of September 30 – which yielded 5.76% – Broadmark Private REIT targets an unlevered low double-digit yield. Between August 2010 and September 2019, which was the final period of reporting prior to Broadmark’s public offering, the company’s legacy funds generated annual returns in the 11% range, demonstrating the effectiveness of this strategy over time.

Importantly, Broadmark Realty Capital is primarily investing in residential construction in high-growth millennial- and tech-driven markets across 14 states and Washington, D.C.  The company is answering a real need, as the market for construction loans is extraordinarily fragmented with little institutional capital available for this type of lending.

Moreover, the current macroeconomic environment strongly supports home building. A recent Freddie Mac survey found that the U.S. has been underbuilding for well over a decade, with a cumulative deficit of around 2.5 million housing units. Combine that with shifting consumer preferences for single-family housing and a low interest rate environment spurring an unprecedented number of millennials to transition to homeownership, and the tailwinds supporting Broadmark Realty Capital’s lending strategy become even more compelling.

In today’s environment, finding yield is difficult but not impossible, and investors must carefully calculate the risks involved with alternatives. A well-constructed portfolio of real estate investments that directly correlates to positive macroeconomic trends can provide stable income generation as compared to more traditional income-focused investments.

 

IMPORTANT INFORMATION

Broadmark Private REIT Management, LLC (the “Manager”) provides this presentation to prospective investors on a confidential basis for informational and discussion purposes only. This presentation is not an offer to sell or a solicitation to buy preferred units of Broadmark Private REIT, LLC (the “Private REIT”). We will only make any such offering to qualified purchasers through the Private REIT’s current Confidential Private Placement Memorandum (the “Memorandum”). The Private REIT’s preferred units may not be eligible for sale in some U.S. states or countries, nor are they suitable for all investors.

The Private REIT is a private real estate finance company that primarily participates in short-term, first deed of trust loans secured by real estate that are originated, underwritten and serviced by Broadmark Realty Capital Inc., a publicly-traded REIT (“Broadmark Realty,” Ticker: BRMK). The Private REIT’s allocations of income, fees, and other amounts from participating in Broadmark Realty’s loans will vary based on applicable participation percentages.

The Manager calculates the Private REIT’s Monthly Return based on based on cash distributed to investors from loan origination fees and other fee-based income, less expenses and reserves, divided by total paid in capital, as of the end of each month. The Manager has broad discretion to determine distributable cash on a monthly basis. Assets Under Management are based on total paid in capital, less any permanent capital losses from loan participations.

Certain Risks. Real estate lending is speculative and entails substantial risks. As a real estate finance company, the Private REIT’s revenue and net income is limited to interest and fees received from participations in Broadmark Realty’s loans. The Private REIT’s ability to invest in additional loan participations is limited by the cash available to lend from new capital contributed by investors on a monthly basis. An investment in the Private REIT is speculative, involves substantial risk, and is suitable only for investors who can bear the economic risk of the loss of part or all of their investment. There can be no assurance that the Private REIT will achieve its investment objective or avoid substantial losses. The Manager does not guarantee the return of an investment or the performance of the Private REIT. Please carefully review the Memorandum, including “Certain Risk Factors,” for a general description of certain risks potentially applicable to an investment in the Private REIT. In making a decision to invest in the Private REIT, potential subscribers must rely on their own legal, tax and financial advisors in reviewing the proposed offering.

Historical performance data of Broadmark Realty is provided for illustrative purposes only. References to Broadmark Realty include its consolidated subsidiaries after a business combination which occurred on November 2019, and refers to the Pyatt Broadmark Real Estate Lending Companies I-IV for all periods prior to that date. The Private REIT was recently organized and has a limited operating history of its own upon which prospective investors may base an evaluation of its performance.  Any loan data or performance information presented for Broadmark Realty is not the past performance of the Private REIT, and is not indicative of possible future results of the Private REIT.  There is no assurance nor should it be assumed that the future performance of the Private REIT will achieve results comparable to the past performance of Broadmark Realty. PAST PERFORMANCE IS NO INDICATION OF FUTURE RESULTS.

The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and are expected to continue to have, a material adverse impact on the real estate lending business and results of operations of Broadmark Realty and the Private REIT, including the ability of borrowers to complete real estate projects and make timely payments of principal and interest on loans.

Certain Conflicts of Interest. Potential investors should be mindful of the important differences between Broadmark Realty and the Private REIT as outlined in the Memorandum. The Private REIT will largely be dependent on Broadmark Realty to source, negotiate, and originate mortgage loans, and to foreclose on defaulting borrowers. The success of the Private REIT is largely dependent on Broadmark Realty offering sufficient attractive loan participations, and Broadmark Realty could elect to offer a higher (or lower) participation interest in any loan for any reason, which could result in conflicts of interest. It is possible that the interests of Broadmark Realty will at times conflict with those of the Private REIT, which could negatively affect its performance. There is no guarantee that the Private REIT will achieve results that will allow it to pay a specified level of cash dividends or to increase the level of such dividends in the future similar to Broadmark Realty. The Manager may be delayed in reporting performance or other information relating to Broadmark Realty’s loan portfolio until after certain financial information has been publicly filed by Broadmark Realty. The Private REIT’s preferred units are subject to substantial restrictions on redemptions, including a one-year initial lock-up period and quarterly limit on the total amount redeemed, and are not eligible to be transferred or resold to the general public.

Herald Investment Marketing, LLC (“HIM”), SEC-registered broker-dealer and FINRA member, serves as placement agent with respect to the offer and sale of the Private REIT’s preferred units.  The Manager has elected to pay HIM’s fees for the initial year of the Private REIT’s operations. Certain of the Manager’s personnel are HIM-registered representatives who market the Private REIT’s preferred units.  The Manager’s personnel are also employees of Broadmark Realty. Broadmark Realty has adopted a bonus policy for eligible employees based on various performance factors, including contributions to the growth of the Manager.  The Private REIT and the Manager have engaged independent selling broker-dealers and web-based platforms to market the Private REIT’s preferred units. The Manager (not the Private REIT) pays platform fees and expenses, and also pays to any independent broker an upfront fee equal to 1.00% of a subscriber’s invested capital and, after the first anniversary thereof, an annual fee equal to 0.50% of the subscriber’s invested capital.  Due to the compensation paid, these persons have a conflict of interest in recommending the Private REIT to potential investors.