UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

~~Washington, D.C.~~WASHINGTON, DC 20549

FORM ~~10-Q~~10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021


☐
	~~For the quarterly period ended~~ ~~September 30, 2020~~

	or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~___________~~ to ~~___________~~

Commission ~~file number~~ File Number: 001-39134

~~BROADMARK REALTY CAPITAL INC.~~

Broadmark Realty Capital Inc.

(Exact Name of Registrant as Specified in ~~Its~~its Charter)


Maryland	84-2620891
State or Other Jurisdiction of Incorporation or Organization	~~I.R.S. Employer Identification No.~~
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1420 Fifth Avenue, Suite 2000 Seattle, WA	98101
(Address of ~~Principal Executive Offices~~principal executive offices)	(Zip ~~Code~~Code)

Registrant’s telephone number, including area ~~code~~code: ( (206) 971-0800

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, par value $0.001 per share	BRMK	New York Stock Exchange

Warrants, each exercisable for one fourth (1/4th) share of Common Stock at an exercise price of $2.875 per one fourth (1/4th) share	BRMK WS	NYSE American LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ~~Yes~~ ☒Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ~~Yes~~ ☒Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer		☒		Accelerated filer		☐

Non-accelerated filer		☐	~~Accelerated filer~~ ☒	~~Non-accelerated filer~~ ☐	Smaller reporting company		☐

Emerging growth company	☒	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As ofof November ~~6, 2020,~~1, 2021, there were ~~132,236,307 shares~~132,691,843 shares of common stock outstanding.

Table of Contents

Broadmark Realty Capital Inc.

As used in this Quarterly Report on Form 10-Q, the terms ~~“Broadmark~~“Broadmark Realty,” “the Company,~~” “Successor,~~” “we,” “us” and “our” refer to Broadmark Realty Capital Inc., unless the context indicates otherwise.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this ~~“Report”~~“Quarterly Report”) ~~and the exhibits hereto contain~~contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange of Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations of future operations, are forward-looking statements. Forward-looking statements reflect ~~our~~the Company’s current views with respect to, among other things, capital resources, portfolio performance and projected results of operations. Likewise, ~~our~~the Company’s statements regarding anticipated growth in its operations, anticipated market conditions, demographics and results of operations are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of terminology such as “outlook,” “believes,” “expects,” “projects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words or phrases.

The forward-looking statements contained in this Quarterly Report ~~and the exhibits hereto~~ are based on our current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting usthe Company will be those that ~~we have~~it has anticipated. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause ~~our~~the Company’s actual results to differ include, but are not limited to:

●

risks described under the heading “Risk Factors” in Part II, Item 1A of this Report, and in our Annual Report on Form 10-K for the year ended on December 31, 2019, including those set forth under the “Risk Factors” and “Business” sections;

●



the magnitude, duration and severity of the novel coronavirus (“COVID-19”) pandemic;

●

~~disruptions in our business operations, including construction lending activity, relating to COVID-19;~~

●

~~adverse impact of COVID-19 on the value of our goodwill established in the Business Combination (as defined in this Report);~~

●

~~the impact of actions taken by governments, businesses, and individuals in response to the COVID-19 pandemic;~~

●

~~the current and future health and stability of the economy and residential housing market, including any extended slowdown in the real estate markets as a result of COVID-19;~~

●

changes in laws or regulations applicable to our business, employees, lending activities, including current and future laws, regulations and orders that limit our ability to operate in light of COVID-19;

●

~~defaults by borrowers in paying debt service on outstanding indebtedness;~~

●

~~the adequacy of collateral securing our loans and declines in the value of real estate property securing our loans;~~

●

~~availability of origination and acquisition opportunities acceptable to us;~~

●

~~potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;~~

●

~~increased competition from entities engaged in construction lending activities;~~

●

~~general economic uncertainty and the effect of general economic conditions on the real estate and real estate capital markets in particular;~~

●

~~general and local commercial and residential real estate property conditions;~~

●

~~changes in federal government policies;~~

●

~~changes in federal, state and local governmental laws and regulations that impact our business, assets or classification as a real estate investment trust;~~

●

~~our ability to pay, maintain or grow the dividend in the future;~~

●

~~changes in interest rates;~~

●

~~the availability of, and costs associated with, sources of liquidity;~~

●

~~the adequacy of our policies, procedures and systems for managing risk effectively;~~



disruptions in our business operations, including construction lending activity, relating to COVID-19;



~~Table~~adverse impact of ~~Contents~~

~~Broadmark Realty Capital Inc.~~

COVID-19 on the value of our goodwill;

●

~~the ability to manage future growth; and~~

●

~~changes in personnel and availability of qualified personnel.~~

the impact of actions taken by governments, businesses, and individuals in response to COVID-19;



the current and future health and stability of the economy and residential housing market, including any extended slowdown in the real estate markets as a result of COVID-19;



changes in laws or regulations applicable to our business, employees lending activities, including current and future laws, regulations and orders that limit our ability to operate in light of COVID-19;



defaults by borrowers in paying debt service on outstanding indebtedness;



the adequacy of collateral securing our loans and declines in the value of real estate property securing our loans;



availability of origination and acquisition opportunities acceptable to us;



potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;



increased competition from entities engaged in construction lending activities;



general economic uncertainty and the effect of general economic conditions on the real estate and real estate capital markets in particular;



general and local commercial and residential real estate property conditions;



changes in U.S. federal government policies;



changes in U.S. federal, state and local governmental laws and regulations that impact our business, assets or classification as a real estate investment trust;



our ability to pay, maintain or grow the dividend in the future;



changes in interest rates;



the availability of, and costs associated with, sources of liquidity;



compliance with covenants contained in our debt documents;



the adequacy of our policies, procedures and systems for managing risk effectively;



the ability to manage future growth;



changes in personnel and availability of qualified personnel; and



other factors set forth in our periodic filings with the Securities and Exchange Commission.

Table of Contents

Broadmark Realty Capital Inc.

~~Unaudited~~

Condensed Consolidated Balance Sheets

(in thousands, except share ~~data)~~

September 30, 2020

December 31, 2019
Assets




Cash and cash equivalents

$
173,602

$
238,214
Mortgage notes receivable, net

858,713

821,589
Interest and fees receivable, net

11,917

4,108
Investment in real property, net

3,743

5,837
Intangible assets, net

706

4,970
Goodwill

136,965

131,965
Other assets

4,981

2,046
Total assets

$
1,190,627

$
1,208,729

Liabilities and Equity




Accounts payable and accrued liabilities

$
3,504

$
8,415
Dividends payable

7,934

15,842
Total liabilities

$
11,438

$
24,257
Commitments and Contingencies




Common stock, $0.001 par value, 500,000,000 shares authorized, 132,236,307 and 132,015,635 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

132

132
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and December 31, 2019

—

—
Additional Paid in Capital

1,212,914

1,209,120
Accumulated deficit

(33,857)

(24,780)
Total equity

1,179,189

1,184,472
Total liabilities and equity

$
1,190,627

$
1,208,729

data, unaudited)


	September 30, 2021			December 31, 2020
Assets
Cash and cash equivalents	$	37,376		$	223,375
Mortgage notes receivable, net		923,521			798,486
Interest and fees receivable, net		14,766			14,357
Investment in real property, net		52,470			8,473
Right-of-use assets		6,114			0
Goodwill		136,965			136,965
Other assets		7,566			5,663
Total assets	$	1,178,778		$	1,187,319

Liabilities and Equity
Accounts payable and accrued liabilities	$	7,987		$	4,946
Lease liabilities		8,100			0
Dividends payable		9,289			7,952
Total liabilities	$	25,376		$	12,898
Commitments and contingencies (Note 8)
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2021 and December 31, 2020		—			—
Common stock, $0.001 par value, 500,000,000 shares authorized, 132,684,541 and 132,532,383 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		132			132
Additional paid in capital		1,216,192			1,213,987
Accumulated deficit		(62,922	)		(39,698	)
Total equity		1,153,402			1,174,421
Total liabilities and equity	$	1,178,778		$	1,187,319

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Broadmark Realty Capital Inc.

~~Unaudited~~

Condensed Consolidated Statements of Income

(in thousands, except share and per share ~~data)~~

Successor

Predecessor

Successor

Predecessor

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

2019⁽²⁾

2020

2019⁽²⁾
Revenues








Interest income

$
21,844

$
25,284

$
68,577

$
69,363
Fee income

7,139

9,297

21,244

31,574
Total Revenue

28,983

34,581

89,821

100,937
Other Income:

Change in fair value of optional subscription liabilities

1,948

—

5,094

—
Expenses




Impairment:




Loan loss (benefit) provision

(652)

2,704

3,279

2,777
Operating expenses:




Compensation and employee benefits

5,160

794

11,397

4,647
General and administrative

3,199

5,227

9,977

11,468
Total Expenses

7,707

8,725

24,653

18,892
Income before income taxes

23,224

25,856

70,262

82,045
Income tax provision

—

—

—

—
Net income

$
23,224

$
25,856

$
70,262

$
82,045
Earnings per common share: ⁽¹⁾








Basic

$
0.18

$
—

$
0.53

$
-
Diluted

$
0.18

$
—

$
0.53

$
-
Weighted-average shares of common stock outstanding, basic and diluted








Basic

132,282,252

—

132,156,844

—
Diluted

132,316,746

—

132,207,605

—

data, unaudited)


	Three Months Ended					Nine Months Ended
	September 30, 2021		September 30, 2020			September 30, 2021			September 30, 2020
Revenues:
Interest income	$	22,846	$	21,844		$	66,481		$	68,577
Fee income		7,748		7,139			22,764			21,244
Total revenue	$	30,594	$	28,983		$	89,245		$	89,821
Other income (expense):
Change in fair value of warrant liabilities		1,244		1,948			(2,490	)		5,094
Expenses:
Impairment:
Provision for (reversal of) credit losses, net		2,607		(2,932	)		5,373			5,724
Operating expenses:
Compensation and employee benefits		4,025		5,160			11,254			11,397
General and administrative		3,521		3,199			9,810			9,977
Total expenses		10,153		5,427			26,437			27,098
Income before income taxes		21,685		25,504			60,318			67,817
Income tax provision		0		0			0			0
Net income	$	21,685	$	25,504		$	60,318		$	67,817
Earnings per common share:
Basic	$	0.16	$	0.19		$	0.45		$	0.51
Diluted	$	0.16	$	0.19		$	0.45		$	0.51
Weighted-average shares of common stock outstanding, basic and diluted:
Basic		132,658,661		132,282,252			132,575,852			132,156,844
Diluted		132,752,471		132,316,746			132,663,437			132,207,605

See accompanying notes to the unaudited condensed consolidated financial statements

~~(1)~~

The Company determined that earnings per unit in the Predecessor periods would not be meaningful to the users of this filing, given the different unit holders and members’ equity structures of each individual entity in the Predecessor Company Group.

~~(2)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

Table of Contents

Broadmark Realty Capital Inc.

~~Unaudited~~

Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity

(in thousands, except share ~~data)~~

Preferred

Common stock

Additional




Shares

Amount

Shares

Amount

Paid-in Capital

Accumulated Deficit

Total
Balances as of December 31, 2019

—

$
—

132,015,635

$
132

$
1,209,120

$
(24,780)

$
1,184,472
Issuance of shares from vested RSUs

—

—

95,694

—

—

—

—
Net Income

—

—

—

—

—

27,279

27,279
Dividends

—

—

—

—

—

(31,700)

(31,700)
Stock-based compensation expense

—

—

—

—

914

—

914
Balances as of March 31, 2020

—

$
—

132,111,329

$
132

$
1,210,034

$
(29,201)

$
1,180,965
Issuance of shares from vested RSUs

—

—

119,855

—

—

—

—
Net Income

—

—

—

—

—

19,759

19,759
Dividends

—

—

—

—

—

(23,793)

(23,793)
Stock-based compensation expense

—

—

—

—

967

—

967
Balances as of June 30, 2020

—

$
—

132,231,184

$
132

$
1,211,001

$
(33,235)

$
1,177,898
Issuance of shares from vested RSUs

—

—

5,098

—

—

—

—
Issuance of shares from exercised warrants

—

—

25

—

—

—

—
Net Income

—

—

—

—

—

23,224

23,224
Dividends

—

—

—

—

—

(23,846)

(23,846)
Stock-based compensation expense

—

—

—

—

1,913

—

1,913
Balances as of September 30, 2020

—

$
—

132,236,307

$
132

$
1,212,914

$
(33,857)

$
1,179,189

data, unaudited)


	Preferred				Common stock					Additional
	Shares		Amount		Shares			Amount		Paid-in Capital			Accumulated Deficit			Total
Balances as of December 31, 2020		—	$	—		132,532,383		$	132	$	1,213,987		$	(39,698	)	$	1,174,421
Net income		—		—		—			—		—			20,381			20,381
Dividends		—		—		—			—		—			(27,838	)		(27,838	)
Issuance of shares for vested restricted stock units		—		—		34,027			—		—			—			—
Stock-based compensation expense for restricted stock units		—		—		—			—		737			—			737
Balances as of March 31, 2021		—	$	—		132,566,410		$	132	$	1,214,724		$	(47,155	)	$	1,167,701
Net income		—		—		—			—		—			18,252			18,252
Dividends		—		—		—			—		—			(27,843	)		(27,843	)
Issuance of shares for vested restricted stock units		—		—		77,766			—		—			—			—
Shares withheld for tax liability		—		—		(9,504	)		—		(135	)		—			(135	)
Stock-based compensation expense for restricted stock units		—		—		—			—		924			—			924
Balances as of June 30, 2021		—	$	—		132,634,672		$	132	$	1,215,513		$	(56,746	)	$	1,158,899
Net income		—		—		—			—		—			21,685			21,685
Dividends		—		—		—			—		—			(27,861	)		(27,861	)
Issuance of shares for vested restricted stock units		—		—		70,157			—		—			—			—
Shares withheld for tax liability		—		—		(20,288	)		—		(212	)		—			(212	)
Stock-based compensation expense for restricted stock units		—		—		—			—		891			—			891
Balances as of September 30, 2021		—	$	—		132,684,541		$	132	$	1,216,192		$	(62,922	)	$	1,153,402


	Preferred				Common stock				Additional
	Shares		Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit			Total
Balances as of December 31, 2019		—	$	—		132,015,635	$	132	$	1,209,120	$	(24,780	)		1,184,472
Adoption of ASU 2016-13		—		—		—		—		—		(1,975	)		(1,975	)
Net income		—		—		—		—		—		26,469			26,469
Dividends		—		—		—		—		—		(31,700	)		(31,700	)
Issuance of shares for vested restricted stock units		—		—		95,694		—		—		—			—
Stock-based compensation expense for restricted stock units		—		—		—		—		914		—			914
Balances as of March 31, 2020		—	$	—		132,111,329	$	132	$	1,210,034	$	(31,986	)	$	1,178,180
Net income		—		—		—		—		—		15,844			15,844
Dividends		—		—		—		—		—		(23,793	)		(23,793	)
Issuance of shares for vested restricted stock units		—		—		119,855		—		—		—			—
Stock-based compensation expense for restricted stock units		—		—		—		—		967		—			967
Balances as of June 30, 2020		—	$	—		132,231,184	$	132	$	1,211,001	$	(39,935	)	$	1,171,198
Net income		—		—		—		—		—		25,504			25,504
Dividends		—		—		—		—		—		(23,846	)		(23,846	)
Issuance of shares for vested restricted stock units		—		—		5,098		—		—		—			—
Issuance of shares from exercised warrants		—		—		25		—		—		—			—
Stock-based compensation expense for restricted stock units		—		—		—		—		1,913		—			1,913
Balances as of September 30, 2020		—	$	—		132,236,307	$	132	$	1,212,914	$	(38,277	)	$	1,174,769

See accompanying notes to the unaudited condensed consolidated financial statements

Table of Contents

Broadmark Realty Capital Inc.

~~Unaudited~~

Condensed Consolidated ~~Statement~~Statements of ~~Stockholders’ Equity~~Cash Flows

(in thousands, ~~except share data)~~

Class A Units

Class P Units

Preferred Units

Additional

Retained Earnings


Units

Amount

Units

Amount

Units ⁽¹⁾

Amount

Paid-in Capital

(Accumulated Deficit)

Total
Balances as of December 31, 2018 (Predecessor)

20,950

$
1

50

$
—

6,827,701

$
684,979

$
767

$
(637)

$
685,110
Contributions

850

200

—

—

796,028

79,535

—

—

79,735
Reinvestments

—

—

—

—

71,086

7,094

—

—

7,094
Net Income

—

—

—

—

—

—

—

24,989

24,989
Distributions

—

—

—

—

—

—

—

(24,134)

(24,134)
Redemptions

—

—

—

—

(133,513)

(13,331)

—

—

(13,331)
Compensation expense related to grant of profits interest

(100)

—

100

—

—

—

734

—

734
Grants of restricted units

150

—

—

—

—

—

134

—

134
Balances as of March 31, 2019 (Predecessor)

21,850

$
201

150

$
—

7,561,302

$
758,277

$
1,635

$
218

$
760,331
Contributions

—

—

—

—

1,441,711

122,414

—

—

122,414
Reinvestments

—

—

—

—

86,222

8,594

—

—

8,594
Net Income

—

—

—

—

—

—

—

31,200

31,200
Distributions

—

—

—

—

—

—

—

(29,125)

(29,125)
Redemptions

—

—

—

—

(227,248)

(22,927)

—

—

(22,927)
Grants of restricted units

—

—

—

—

—

—

170

—

170
Balances as of June 30, 2019 (Predecessor)

21,850

$
201

150

$
—

8,861,987

$
866,358

$
1,805

$
2,293

$
870,657
Contributions

—

—

—

—

567,905

154,437

—

—

154,437
Reinvestments

—

—

—

—

43,293

9,340

—

—

9,340
Net Income

—

—

—

—

—

—

—

25,856

25,856
Distributions

—

—

—

—

—

—

—

(29,357)

(29,357)
Redemptions

—

—

—

—

(116,613)

(19,510)

—

—

(19,510)
Grants of restricted units

—

—

—

—

—

—

170

—

170
Balances as of September 30, 2019 (Predecessor)

21,850

$
201

150

$
—

9,356,572

$
1,010,625

$
1,975

$
(1,208)

$
1,011,593

unaudited)


	Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020
Cash flows from operating activities
Net income	$	60,318		$	67,817
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred origination and amendment fees		(20,754	)		(15,273	)
Depreciation and amortization		577			(682	)
Amortization of right of use assets		284			333
Amortization of financing costs		992			—
Stock-based compensation expense for restricted stock units		2,552			3,794
Provision for credit losses, net		5,373			5,724
Change in fair value of warrant liabilities		2,490			(5,094	)
Changes in operating assets and liabilities:
Interest and fees receivable, net		(409	)		(7,809	)
Other assets		1,531			561
Accounts payable and accrued liabilities		(2,226	)		516
Lease liabilities		(257	)		(333	)
Net cash provided by operating activities		50,471			49,554
Cash flows from investing activities:
Purchases of property and equipment		(419	)		—
Proceeds from sale of real property		3,828			2,213
Improvements to investments in real property		(3,328	)		(119	)
Repurchase of participations in mortgage notes receivable		(43,498	)		—
Change in mortgage notes receivable, net		(105,376	)		(29,013	)
Net cash used in investing activities		(148,793	)		(26,919	)
Cash flows from financing activities:
Dividends paid		(82,205	)		(87,247	)
Payment of costs to obtain credit facility		(5,125	)		—
Payment of taxes on shares withheld for tax liability		(347	)		—
Net cash used in financing activities		(87,677	)		(87,247	)
Net decrease in cash and cash equivalents		(185,999	)		(64,612	)
Cash and cash equivalents, beginning of period		223,375			238,214
Cash and cash equivalents, end of period	$	37,376		$	173,602
Supplemental disclosure of non-cash investing and financing activities:
Dividends payable	$	9,289		$	7,934
Measurement period adjustment to goodwill and intangible assets		—			5,000
Mortgage notes receivable converted to investment in real property		43,497			—
Operating lease right-of-use assets		6,360			—
Lease liabilities arising from obtaining right-of-use assets		8,319			—
Property and equipment purchased through tenant improvement allowance		1,959			—

See accompanying notes to the unaudited condensed consolidated financial statements

~~(1)~~

~~(2)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

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Broadmark Realty Capital Inc.

~~Unaudited~~ ~~Condensed Consolidated Statements of Cash Flows~~

~~(in thousands)~~

Successor

Predecessor

Nine Months Ended

Nine Months Ended

September 30,

September 30,

2020

2019(1)

Cash flows from operating activities





Net income

$
70,262

$
82,045

Adjustments to reconcile net income to net cash provided by operating activities:



Accretion of deferred origination and amendment fees

(7,270)

—

Amortization of intangible assets

(736)

—

Depreciation

54

35

Compensation expense related to grant of profits interest

—

734

Stock-based compensation expense for restricted stock units

3,794

—

Grants of restricted units

—

474

Provision for loan losses

3,279

2,777

Write down of investment in real property

—

179

Change in fair value of optional subscription liabilities

(5,094)

—

Changes in operating assets and liabilities:

Interest and fees receivable, net

(7,809)

(1,419)

Change in other assets

(2,989)

(867)

Accounts payable and accrued liabilities

183

581

Net cash provided by operating activities

53,674

84,539

Cash flows from investing activities:



Investments in fixed assets

—

(63)

Proceeds from sale of real property

2,213

6,363

Improvements to investments in real property

(119)

(229)

Change in mortgage notes receivable, net

(33,133)

(220,197)

Net cash provided by (used in) investing activities

(31,039)

(214,126)

Cash flows from financing activities:



Contributions from members

—

356,386

Contributions received in advance

—

(24,507)

Dividends paid

(87,247)

—

Distributions

—

(55,619)

Redemptions of members

—

(55,768)

Net cash provided by (used in) financing activities

(87,247)

220,492

Net increase (decrease) in cash and cash equivalents

(64,612)

90,905

Cash and cash equivalents, beginning of period

238,214

112,209

Cash and cash equivalents, end of period

$
173,602

$
203,114

Supplemental disclosure of non-cash investing and financing activities



Dividends payable

7,934

—

Reinvested distributions

—

25,028

Measurement period adjustment to goodwill and intangible assets

5,000

—

Mortgage notes receivable converted to real property owned

—

2,046

~~See accompanying notes to the unaudited condensed consolidated financial statements~~

~~(1)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

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~~Broadmark Realty Capital Inc.~~

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Organization and ~~business~~Business

Broadmark Realty Capital Inc. (“Broadmark Realty,” “the Company,~~” “Successor,~~” “we,” “us” and “our”) is an internally managed commercial real estate finance company that provides secured financing to real estate investors and developers. Broadmark Realty’s objective is to preserve and protect ~~shareholder~~stockholder capital while producing attractive risk-adjusted returns primarily through dividends generated from current income from its loan portfolio. Broadmark Realty generally operates in ~~select~~ states that it believes to have favorable demographic trends and provide Broadmark Realty the ability to efficiently access the underlying collateral in the event of borrower default.

On November 14, 2019 (the “Closing Date”), Broadmark Realty Capital Inc., a Maryland corporation (formerly named Trinity Sub Inc.) (“Broadmark Realty”), consummated a business combination (the “Business Combination”) pursuant to an Agreement and Plan of Merger, dated August 9, 2019 (the “Merger Agreement”), by and among the Company, Trinity Merger Corp. (“Trinity”), Trinity Merger Sub I, Inc. (“Merger Sub I”), Trinity Merger Sub II, LLC (“Merger Sub II” and together with Trinity and Merger Sub I, the “Trinity Parties”), PBRELF I, LLC (“PBRELF”), BRELF II, LLC (“BRELF II”), BRELF III, LLC (“BRELF III”), BRELF IV, LLC (“BRELF IV” and, together with PBRELF, BRELF II and BRELF III, the “Predecessor Companies” and each a “Predecessor Company”), Pyatt Broadmark Management, LLC (“MgCo I”), Broadmark Real Estate Management II, LLC (“MgCo II”), Broadmark Real Estate Management III, LLC (“MgCo III”), and Broadmark Real Estate Management IV, LLC (“MgCo IV” and, together with MgCo I, MgCo II and MgCo III, the “Predecessor Management Companies” and each a “Predecessor Management Company,” and the Predecessor Management Companies, together with the Predecessor Companies and their subsidiaries, the “Predecessor Company Group”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub I merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Trinity Merger”), (ii) immediately following the Trinity Merger, each of the Predecessor Companies merged with and into Merger Sub II, with Merger Sub II being the surviving entity of such merger (the “Company Merger”), and (iii) immediately following the Company Merger, each of the Predecessor Management Companies merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Management Company Merger” and, together with the Trinity Merger and the Company Merger, the “Mergers”). As a result of the Mergers, Merger Sub II and Trinity became wholly owned subsidiaries of Broadmark Realty.

The consolidated subsidiaries of Broadmark Realty ~~after the Business Combination~~ include BRMK Lending, LLC, BRMK Management, Corp., and Broadmark Private REIT Management, LLC. BRMK Lending, LLC originates short-term loans secured by first deed of trust liens on residential and commercial real estate. BRMK Management, Corp. (the “Manager”) manages the underwriting, closing, servicing and disposition of mortgage notes, and performs all general and administrative duties for Broadmark Realty. Broadmark Private REIT Management, LLC (the “Private REIT Manager”) ~~manages the newly organized~~previously managed Broadmark Private REIT, LLC (the “Private REIT”), which was an unconsolidated affiliate of the Company that primarily ~~participates~~participated in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty. The Private REIT was liquidated during the quarter ended September 30, 2021. Refer to “Broadmark Private REIT, LLC” in Note 9 for details about the liquidation of the Private REIT.

Broadmark Realty has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax ~~purposes commencing with the tax period ending December 31, 2019.~~purposes. Broadmark Realty generally will not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. The Company also operates its business in a manner that permits it to maintain an exclusion from registration under the Investment Company Act of 1940. As a REIT, Broadmark Realty may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”), which may earn income that would not be qualifying income if earned directly by a REIT. The Manager is a TRS and this election applies to the ~~wholly owned~~wholly-owned subsidiaries of the Manager, including the Private REIT Manager.

Unless the context otherwise requires, references to “Broadmark Realty,” the “Company,” “we,” “us” and “our” in the remainder of this report refer to Broadmark Realty and its consolidated subsidiaries after the Business Combination and refer to the Predecessor Company Group for periods prior to the Business Combination.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 2 - Summary of ~~significant accounting policies~~Significant Accounting Policies

Basis of Presentation

~~For periods prior to November 15, 2019, the~~The accompanying consolidated financial statements do not represent the financial position and results of operations of one controlling legal entity, but rather a combination of the historical results of the Predecessor Company Group, which was under common management. Therefore, any reference herein to the Predecessor financial statements is made on a combined basis. For periods beginning November 15, 2019, the accompanying consolidated financial statements represent the consolidated financial statements of the Company, beginning with BRELF II as the accounting acquirer and successor entity. In addition, as a result of the Business Combination, the consolidated financial statements for periods beginning November 15, 2019 are presented on a new basis of accounting pursuant to Accounting Standards Codification (“ASC”) 805, ~~Business Combinations~~ ~~(refer to Note 3) to reflect BRELF II acquiring the other entities within the Predecessor Company Group and Trinity in the successor period.~~

~~The financial information presented in the accompanying unaudited~~ condensed consolidated financial statements ~~has~~include Broadmark Realty Capital Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in ~~accordance~~conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) ~~for complete~~and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial ~~statements. In~~reporting. Certain information and note disclosures normally included in the ~~opinion of management, the accompanying unaudited condensed consolidated~~ financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial position, results of operations and cash flows for the periods presented. These unauditedregulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the ~~annual~~ audited ~~consolidated~~ financial statements and accompanying notes ~~thereto~~included in Broadmark Realty Capital Inc.’s Annual Report on Form 10-K/A for the year ended December 31, ~~2019 included in our Annual Report on Form 10-K~~2020, which was filed ~~on March 16, 2020~~ with the SEC ~~(the “Annual Report”).~~ on March 2, 2021. The condensed consolidated balance sheet as of December 31, ~~2019,~~2020, included herein, was derived from the audited financial statements of Broadmark Realty Capital Inc. as of that date.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2021, our results of operations and stockholders’ equity for the ~~three and~~ nine months ended September 30, 2021 and 2020, ~~are~~and our cash flows for the nine months ended September 30, 2021 and 2020. The results of the nine months ended September 30, 2021 is not necessarily indicative of the results to be expected for the year ending December 31, ~~2020,~~2021 or for any interim period or for any other ~~interim periods or~~ future ~~years.~~year.

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~~The presentation of the Predecessor period has been conformed~~Broadmark Realty Capital Inc.

Notes to the current period’s presentation for the purposes of these consolidated financial statements. Additionally, certain balance sheet captions as of December 31, 2019 have been reclassified to conform to the current period's presentation.Unaudited Condensed Consolidated Financial Statements

Principles of Consolidation

For the Predecessor period, all intra-entity accounts, balances and transactions have been eliminated in the preparation of the unaudited condensed consolidated financial statements. Beginning November 15, 2019, all significant intercompany accounts, balances and transactions have been eliminated in consolidation. Broadmark Realty consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well as those entities deemed to be variable interest entities (“VIEs”), if any, in which Broadmark Realty is determined to be the primary beneficiary. Broadmark Realty is not the primary beneficiary of, and therefore does not consolidate, any ~~VIEs at September 30, 2020~~VIEs.

The Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary who previously acted as manager with no significant equity investment, did not hold a controlling interest in and, ~~December 31, 2019.~~therefore, did not consolidate. Furthermore, the Private REIT's participation in loans originated by us met the characteristics of a participating interest and the criterion for sale accounting in accordance with GAAP and therefore, was derecognized from our consolidated financial statements.

10Reclassifications

Certain amounts in our prior period condensed consolidated financial statements have been reclassified to conform to the presentation of our current period condensed consolidated financial statements. These reclassifications had no effect on our previously reported net income or stockholders’ equity. The reclassification for the separate presentation of accretion of deferred origination and amendment fees resulted in a reclassification of net cash provided by operating activities to net cash provided by investing activities, both as previously reported. The reclassifications also included the separate presentation of amortization of right of use assets and change in lease liabilities and the combined presentation of depreciation and amortization on the condensed consolidated statements of cash flows.

Correction of Immaterial Error

In the course of preparing our second quarter 2021 unaudited condensed consolidated financial statements, we revisited our previous accounting classification for warrants and identified an error related to the presentation of the Private Placement Warrants, resulting in an understatement of liabilities and change in fair value from November 14, 2019 to March 31, 2021. Refer to Note 5 for additional details about the Private Placement Warrants and Public Warrants. The Private Placement Warrants generally have the same terms as the Public Warrants, except that so long as the Private Placement Warrants are held by the original holder or its permitted transferees, (i) the original holder or its permitted transferees may exercise the warrant on a cashless basis and (ii) the Company does not have the right to redeem the Private Placement Warrants. In the case of a change of control in which less than 70 percent of the consideration received is stock listed on an exchange, the Public Warrants and Private Placement Warrants would be subject to an exercise price adjustment calculated on the basis of a capped American call option and uncapped American call option, respectively. If, however, the Private Placement Warrants are transferred to a third party, the basis for the exercise price adjustment changes and is calculated on the basis of a capped American call option, which results in the valuation change being based, in part, on the holder of the Private Placement Warrants. As a result, the Private Placement Warrants do not meet the criteria to be indexed to valuation inputs based on the Company’s own stock and must be classified as a liability measured at fair value. Based on consideration of both the quantitative and qualitative factors within the provisions of SEC Staff Accounting Bulletin No. 99, Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we determined that the error was not material to our previously issued annual and interim consolidated financial statements. Furthermore, we determined that correcting the error in the second quarter of 2021 would not materially misstate our unaudited condensed consolidated financial statements and therefore, no restatement of our prior period unaudited condensed consolidated financial statements was required.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the fair value of financial instruments, such as the expected credit losses on our loans, investments in real property, and Private Placement Warrant liabilities. Accordingly, actual results could differ from those estimates. The COVID-19 pandemic has introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact the estimates previously listed, among others.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Certain Significant Risks and Uncertainties

In the normal course of business, we encounter one primary type of economic risk in the form of credit risk. Credit risk is the risk of default on our investment in mortgage notes receivable resulting from a borrower’s inability or unwillingness to make contractually required payments. We believe that the carrying values of our ~~investments in mortgage notes receivable~~loans reasonably consider this credit risk.

In addition, we are subject to significant tax risks. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal corporate income tax, which could be material.

We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: public health crises, like the ~~novel coronavirus (“COVID-19”)~~COVID-19 pandemic; the economy in the areas we operate; competition in our market; the stability of the real estate market and the impact of interest rate changes; changes in government regulation affecting our business; natural disasters and catastrophic events; and our ability to attract and retain qualified employees and key ~~personnel; and protection of customers’ information and other privacy concerns,~~personnel, among other things.

~~Use of Estimates~~

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the fair value of financial instruments, such as impaired loans and real property, goodwill, identified intangible assets and optional subscription liabilities. Accordingly, our actual results could differ from those estimates.

Reportable Segments

We operate the business as 1 reportable ~~segment.~~segment, which originates, underwrites and services construction loans.

BALANCE SHEET MEASUREMENT

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. We have a cash management sweep account repurchase agreement, whereby our bank nightly sweeps cash in excess of ~~$750,000 nightly,~~$750,000, sells us specific U.S. ~~Government Agency~~government agency securities and then repurchases these securities the next day.

We maintain our cash and cash equivalents with financial ~~institutions. At times, such amounts may exceed federally~~institutions, which are insured ~~limits. As~~up to a maximum of $250,000 per account as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020. The balances in these accounts may exceed the ~~uninsured cash and cash equivalents balance was $172.1 million and $236.7 million, respectively.~~insured limits. There were 0 restrictions on cash as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Mortgage Notes Receivable

Mortgage notes receivable (referred to herein as “mortgage notes ~~receivable,”~~receivable”, “construction ~~loans,”~~loans”, “loans”, or “notes”) are classified as held for investment, as we have the intent and ability to hold until maturity or payoff and are carried in the condensed consolidated balance sheets at amortized cost, net of construction holdbacks, interest reserves, allowance for ~~loan~~credit losses ~~interest reserves, construction holdbacks~~ and deferred origination ~~fees. Mortgage notes receivable that are in contractual default are deemed to be non-performing~~ and are evaluated for impairment. All of our loans are considered collateral dependent, and therefore, non-performing loans are evaluated for impairment based on the fair value of the collateral less estimated costs to sell.amendment fees.

Participations in mortgage notes receivables are accounted for as sales and derecognized from the balance sheet when control over the transferred assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that ~~right)~~right, beyond a more than trivial benefit) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred ~~assets through an agreement to repurchase them before their maturity.~~assets. If the sales do not meet these criteria, the sale of the participation is treated as a secured borrowing. A transferred asset is considered to be repurchased if (1) the transfer no longer qualifies for sale accounting (transferor obtains effective control) or (2) the transferor reclaims the transferred financial assets. In either circumstance, the transferred financial assets are accounted for as if purchased new by the transferor at fair value with no gain or loss recognized on the transaction. As of September 30, ~~2020, all~~2021, there were no outstanding participations in our mortgage notes receivables.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Current Expected Credit Losses Allowance

In the fourth quarter of 2020, we adopted the current expected credit loss (“CECL Standard”) for the full year ended December 31, 2020, as we ceased to qualify as an emerging growth company effective December 31, 2020. As a result, we were no longer permitted an extended transition period for complying with new or revised accounting standards affecting public companies. The initial CECL allowance adjustment of $2.0 million was recorded effective January 1, 2020 as a cumulative-effect of change in accounting principle through a direct charge to accumulated deficit on our condensed consolidated statements of stockholders’ equity; however, subsequent changes to the CECL allowance are recognized through net income on our condensed consolidated statements of income. Our condensed consolidated statement of income for the three and nine months ended September 30, 2020 includes an additional (reversal of) and provision for credit losses of ($2.3) and $2.4 million associated with the adoption of the CECL Standard. As a result, for the three months ended September 30, 2020, our previously reported net income of $23.2 million is higher by $2.3 million and for the nine months ended September 30, 2020 our previous reported net income of $70.3 million is lower by $2.4 million.

The CECL Standard replaced the incurred loss model under existing guidance with an expected loss model for instruments measured at amortized cost. We now record an allowance for credit losses in accordance with the CECL Standard on our loan portfolio, including unfunded construction holdbacks, on a collective basis by assets with similar risk characteristics. In addition, for assets that are classified as collateral dependent based on foreclosure being probable, we continue to record loan specific allowances based on the fair value of the collateral for expected credit losses under the CECL Standard. Given the short-term nature of our loans, we evaluate the most recent external appraisal and, depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to estimate the fair value of the collateral for such loans.

The CECL Standard requires an entity to consider historical loss experience, current conditions, and a reasonable and supportable forecast of the economic environment. The Company utilizes a probability of default/loss given default (“PD/LGD”) method approach for estimating current expected credit losses.

In accordance with the PD/LGD method, an annual historical loss rate is applied to the amortized cost of an asset or pool of assets over the remaining expected life. The PD/LGD method requires consideration of the timing of expected future funding of existing commitments and repayments over each asset’s remaining life. An annual loss factor, adjusted for macroeconomic estimates, is applied over each subsequent period and aggregated to arrive at the CECL allowance.

In determining the CECL allowance, we considered various factors including (i) historical loss experience in our portfolio, (ii) historical loss experience in the commercial real estate lending market, (iii) timing of expected pay offs including prepayments and extensions where reasonably expected, and (iv) our current and future view of the macroeconomic environment. We utilize a reasonable and supportable forecast period equal to the contractual term of the loan plus short-term extensions of one to three months that are reasonably expected for construction loans.

Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. Refer to “Note 3 – Mortgage Notes Receivable” for further information regarding the CECL allowance. The CECL Allowance related to the principal outstanding is presented within mortgage notes receivable, ~~sold~~net and for unfunded commitments is within accounts payable and accrued liabilities on our condensed consolidated balance sheets.

We have made an accounting policy election to exclude accrued interest receivable, included in interest and fees receivable, net on our consolidated balance sheets, from the ~~Private REIT have achieved sale accounting. There were no participations~~amortized cost basis of the related mortgage notes receivable in determining the CECL allowance, as any uncollected accrued interest receivable is written off in a timely manner. No interest income is recognized on mortgage notes receivable that are in contractual default unless the interest is paid in cash or collectability of ~~December 31, 2019.~~all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Deferred Income

Deferred income represents the amount of our origination and amendment ~~or extension~~ fees that have been deferred and will be recognized in income over the contractual maturity of the underlying loan. Origination fees are included in the total commitment to the borrower and financed at the time of loan origination. Amendment fees are either included in the total commitment to the borrower and financed at the time of the loan amendment or are billed to the borrower when the loan is amended and not capitalized into the principal outstanding. Deferred origination and amendment fees capitalized into the principal outstanding are included within mortgage notes receivable, net on the ~~unaudited condensed~~ consolidated balance sheets. ~~Extension and~~Deferred amendment fees that are not ~~capitalized into~~included in the principal outstanding ~~and as such, these deferred fees~~ are presented within interest and fees receivable, net on the ~~unaudited~~ condensed consolidated balance sheets.

Interest and Fees Receivable

Interest on performing loans is accrued and recognized as interest income at the contractual rate of interest, or at the contractual rate of monthly minimum interest. Extension fees are charged when we agree to extend the maturity dates of loans. Amendment fees are charged when loan terms are modified, such as increases in interest reserves and construction holdbacks in line with our underwriting criteria or upon modification of a loan for the transition from horizontal development to vertical construction. Extension and amendment fees represent an outstanding fee receivable that is generally collected at loan pay off. In addition, late fees are ~~changed~~charged when borrower payments are contractually past due. We monitor each note’s outstanding interest and fee receivables and, based on historical performance, generally ~~write off~~reserve against the balance after a receivable is greater than 60 days past ~~due.~~due unless collectability of all amounts due is reasonably assured.

We have made an accounting policy election to exclude accrued interest and fee receivables from the amortized cost basis of the related mortgage notes receivable in determining the CECL allowance as any uncollected accrued interest receivable is written off in a timely manner.

Real ~~property~~Property

Real property owned by us consists of real estate acquired in settlement of loans. Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at fair market value at the time of acquisition, which generally approximates the ~~net~~ carrying value of the loan secured by such property. Costs related to acquisition, development, construction and improvements are ~~capitalized.~~capitalized to the extent the investment in the real property does not exceed the fair value less estimated costs to sell. Expenditures for repairs and maintenance are charged to expense when incurred.

As of September 30, ~~2020~~2021 and December 31, ~~2019, real~~2020, we owned 7 and 3 properties ~~owned by us consist~~or projects totaling $52.4 and $8.5 million, respectively.

Leases

Our office space in Seattle, Washington is subject to an operating lease. Our operating lease is included in right of ~~real estate acquired~~use assets and lease liabilities on our consolidated balance sheets. The lease agreement includes both lease components (e.g., fixed rent) and non-lease components (e.g., common-area maintenance). We account for the lease and non-lease components as a ~~result~~single component.

Right of ~~foreclosure proceedings~~use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments. Right of use assets and lease liabilities are recognized at the lease commencement date based on 1the present value of the total lease payments not yet paid, including lease incentives not yet received, with the right of use assets further adjusted for any prepaid or accrued lease payments, lease incentives received and/or initial direct costs incurred. Our lease arrangement also includes variable payments for costs such as common-area maintenance, utilities, taxes or other operating costs, which are based on a percentage of actual expenses incurred. These variable lease payments are excluded from the measurement of the right of use assets and ~~2 partially completed~~lease liabilities.

Our lease term is through January 2032, which includes an option to extend the lease term for an additional five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including, but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of the existing lease if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise the option to extend the lease. Examples of such events or changes include construction ~~projects, respectively.~~of significant leasehold improvements or other modifications or customizations to the underlying asset, relevant business decisions or subleases. We have concluded that the renewal option is not reasonably certain of being exercised, therefore, the renewal is not included in the right of use asset and lease liability.

1211

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As our lease did not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

We recognize lease expense for our operating lease on a straight-line basis over the lease term. Variable lease payments are generally recognized when incurred. These expenses are included in general and administrative expenses in the consolidated statements of income.

Goodwill

Goodwill was recognized as of the close of the Business Combination on November 14, 2019 and represents the excess of the ~~consideration paid~~cost of an acquired business over the fair value of ~~net~~the assets acquired ~~in connection with~~at the ~~Business Combination in November 2019. Goodwill~~date of acquisition and is not ~~amortized, but rather tested for~~amortized. We assess the impairment ~~annually~~of goodwill on an annual basis, in ~~October~~our fourth quarter, or ~~more frequently if~~whenever events or changes in circumstances indicate ~~potential impairment.~~that goodwill may be impaired. In ~~testing~~our evaluation of goodwill, ~~for impairment,~~ we ~~follow ASC 350,~~ ~~Intangibles—Goodwill and Other~~~~, which permits~~typically first perform a qualitative assessment to determine whether the carrying value of ~~whether~~each reporting unit is greater than its fair value. If it is more likely than not that the ~~fair~~carrying value of a reporting unit is ~~less~~greater than its ~~carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the~~ fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of ~~a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist~~operations for the ~~reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair~~excess of carrying value of the reporting unit ~~is less than~~over its ~~carrying value including~~fair value. Our annual assessment occurs in the fourth quarter. We continue to monitor the impact of COVID-19 and determined there were no new triggering events to warrant a quantitative assessment of our goodwill during 2021.

In the first quarter of 2020, we recorded a measurement period adjustment to reduce the preliminary fair value of that reporting units is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss equal to the amount by which the carrying value of the goodwill exceeds the implied fair value of that goodwill.

~~Intangible Assets~~

~~As a result of the Business Combination in November 2019, we identified~~ intangible assets in the form of customer ~~relationships. We recorded the~~relationships by $5.0 million and increased our preliminary value of goodwill by $5.0 million. As a result of this adjustment to preliminary values, $0.9 million of amortization of intangible assets ~~at fair value at~~recorded in 2019 was reversed in the ~~acquisition date~~first quarter of 2020.

Other Assets

Other assets primarily consist of fixed assets, deferred financing costs, intangible assets, prepaid insurance and ~~are amortizing the value of these finite lived intangibles into expense over the expected useful life.~~other operating receivables.

Fixed Assets

Fixed assets, which are included in other assets in the accompanying ~~unaudited~~ condensed consolidated balance sheets are stated at cost, less accumulated depreciation. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. Depreciation is recorded on the straight-line basis over the estimated useful life of the ~~assets, which ranges~~assets. For computer equipment, office equipment, furniture and fixtures the useful lives range from three to seven ~~years.~~years. For leasehold improvements, we depreciate over the shorter of expected useful life or lease term.

Deferred Financing Costs

~~Other Assets~~

~~Other assets primarily consist of prepaid insurance, right-of-use asset and other operating receivables. In connection~~Deferred financing costs represent direct costs associated with the ~~Business Combination, we entered into an arrangement to sublease an operating lease and have recorded a right-of-use asset and a~~ ~~lease liability~~ ~~in the amount of $0.4 million, representing the present value~~execution of the ~~remaining payments under~~revolving credit facility. As the ~~lease discounted based on our incremental borrowing rate~~revolving credit facility has no principal outstanding as ~~of November 14, 2019. As~~ of September 30, ~~2020,~~2021 and there is no recognized debt liability, the ~~remaining right-of-use asset and a lease liability~~deferred financing costs are ~~not significant to~~included in other assets on the condensed consolidated balance sheet. ~~We will record a right-of-use asset and a lease liability upon commencement~~These costs are amortized on the straight-line basis over the initial term of our ~~new ten-year lease in 2021.~~

~~Accounts Payable and Accrued Liabilities~~

~~Accounts payable and accrued liabilities primarily consist of accruals for payments of professional services fees, lease liabilities, optional subscription liabilities and other operating payables.~~revolving credit facility.

13Intangible Assets

We record the intangible assets at fair value at the acquisition date and amortize the value of these finite-lived intangibles into expense over the expected useful life. All of our intangible assets relate to the value of customer relationships. As of September 30, 2021 and December 31, 2020, intangible assets net of accumulated amortization was $0.4 and $0.6 million, respectively.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

INCOME RECOGNITION

Interest Income

Interest income on mortgage notes receivable is accrued based on contractual rates applied to the principal balance, ~~outstanding,~~ unless there is a minimum interest provision in the mortgage note. ~~Many~~Certain construction loans provide for minimum interest provisions, ~~under~~to which the contractual rate applies, towhich are typically between ~~50%~~50% and ~~70%~~70% of the face amount of the note until the actual outstanding principal exceeds the minimum threshold.

Mortgage notes receivable can be placed in contractual default status for any of the following reasons: (1) an interest payment is more than 30 days past due; (2) a note matures and the borrower fails to make payment of all amounts owed or extend the loan; or (3) the collateral becomes impaired in such a way that the ultimate collection of the note is doubtful. The accrual of interest income is suspended when a loan is ~~designated non-performing~~in contractual default unless the interest is paid in cash or collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and ~~we believe, after considering collection efforts and other factors,~~ the ~~amount ultimately~~interest payment is not expected to be collected ~~will be insufficient to cover~~from the ~~additional~~borrower, we may place a current loan on non-accrual status and recognize interest ~~payments.~~income on a cash-basis. Interest previously accrued may be reversed at that time, and such reversal is offset against interest ~~income in the condensed consolidated statement of~~ income. The accrual of interest income resumes only when the suspended loan becomes contractually current ~~and~~or a credit analysis supports the ability to collect in accordance with the terms of the loan.

Fee Income

We ~~collect~~charge loan origination fees in conjunction with origination. ~~In addition, we charge extension~~Amendment fees are charged when loan terms are modified, such as increases in ~~conjunction~~interest reserves and construction holdbacks in line with our underwriting criteria or upon modification of a loan for the ~~terms of our existing loans.~~transition from horizontal development to vertical construction. We defer and amortize loan origination ~~fees, direct loan origination costs~~ and ~~loan extension~~amendment fees over the contractual terms of the loans. The Predecessor Companies did not defer origination fees, direct loan origination costs, and loan extension fees and, rather, recorded origination fees and costs at the time of origination due to the short-term nature of the loans, and the difference is not considered significant.

We charge inspection fees, which we use to hire independent inspectors to report on the status of construction projects. These fees are earned and recognized upon each construction draw request.

EXPENSE RECOGNITION

~~Impairment of Loans~~Operating Expenses

We designate loans as non-performing at such time as (1) the borrower fails to make the required monthly interest-only loan payments; (2) the loan has a maturity default; or (3) in the opinion of management, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. We evaluate loans designated as non-performing for impairment as we have some expectation that the repayment of loan, including both contractual interest and principal payments, may not be realized in full.

The allowance for loan losses reflects our estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased or decreased by recording the loan loss provision or recovery in our consolidated statements of income and is decreased by charge-offs when losses are confirmed through the receipt of assets, such as in a pre-foreclosure sale or upon ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The allowance for loan losses is determined on an asset-specific basis.

The asset-specific allowance relates to estimated losses on individual impaired loans. This assessment is made on a monthly basis based on factors such as payment status, lien position, borrower financial resources and investment collateral, collateral type, project economics and geographic location as well as national and regional economic factors. An allowance is established for an impaired loan when the estimated fair value of the collateral is lower than the carrying value of that loan.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

For impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell in comparison to the carrying value. Valuations are performed or obtained at the time a loan is determined to be impaired and designated as non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. Given the short term nature of our loans, we evaluate the most recent external “as is” appraisal and depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to estimate the fair value of the collateral for such loans. As of September 30, 2020, all of our allowance for loan losses represents an asset-specific allowance.

~~EXPENSE RECOGNITION~~

~~Operating Expenses~~

Operating expenses are expensed as incurred. General and administrative expenses primarily consist of professional services, insurance, excise taxes and amortization of intangible assets. During 2020, 0 commissions were paid to a related party and for the three and nine months ended September 30, 2019, commissions paid to a related party were $2.2 and $5.3 million, respectively, which are included in general and administrative expenses.

Share‑Based Payments

We ~~follow the accounting guidance for share-based payments which requires the measurement and recognition of~~measure compensation expense for all ~~stock-based~~share-based awards ~~made~~at fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest, which is generally three years for employees and ~~non-employee~~one year for directors. ~~Awards~~Share-based awards are issued under the Broadmark Realty Capital Inc. 2019 Stock Incentive Plan.

~~For awards~~Awards made to our employees and directors, ~~we initially value~~typically consist of restricted stock units (“RSUs”). For awards with only a service vesting condition, the fair value of the award is based on the grant date closing price of our common ~~stock.~~stock less the present value of expected dividends over the requisite service period, as the awards are not entitled to dividends. For these awards, ~~with periodic vesting,~~ we recognize ~~the related~~stock-based compensation expense on a ~~straight -line~~straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date fair value of the award that has vested through that ~~date. We~~date, and we account for forfeitures prospectively as they occur. For awards that contain both service vesting and market conditions, referred to as performance restricted stock units (“pRSUs”), we use a Monte Carlo simulation model to calculate the grant date fair value. For these market-condition awards, regardless of the outcome of the market condition, we recognize stock-based compensation expense on a straight-line basis over the longest of explicit and derived service periods, and we account for forfeitures prospectively as they occur. If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate or increase any remaining unrecognized or previously recorded stock-based compensation expense.

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~~Profit Interests (Predecessor)~~Broadmark Realty Capital Inc.

~~The Predecessor Management Companies’ profits interests were accounted for as share-based compensation. The Predecessor Management Companies’ expensed the fair value of profits interests granted~~

Notes to its employees and directors over the period each award vested. Compensation cost was measured using the Black-Scholes model. All unvested profits interests vested at the time of the Business Combination.Unaudited Condensed Consolidated Financial Statements

Income Taxes ~~(Successor)~~

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for U.S. federal income tax purposes (the “Code”). As a REIT, we generally are not subject to U.S. federal income taxes on net income we distribute to our ~~shareholders.~~stockholders. We intend to make timely distributions sufficient to satisfy the annual distribution requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at ~~regulator~~regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and U.S. federal income and excise taxes on our undistributed ~~income and our~~income. Our TRSs are subject to U.S. federal income taxes.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Income Taxes (Predecessor)~~

The Predecessor Companies were taxed as partnerships and REITs under provisions of the Code. As such, the tax attributes of the partnerships are included in the individual tax returns of its members for partnerships and not for the Predecessor Company Group and the REIT entities met the qualifications to be taxed as REITs. Accordingly, the accompanying unaudited condensed consolidated statement of income for the three and nine months ended September 30, 2019 includes 0 provision for income taxes for the Predecessor Company Group.

Earnings per Share

We ~~follow the accounting guidance in ASC 260,~~ ~~Earnings Per Share~~~~, which requires the use of the two-class method of computing~~present both basic and diluted earnings per common share ~~for all periods presented for each class of common stock~~(“EPS”) amounts in our condensed consolidated financial statements. Basic EPS excludes dilution and ~~participating securities as if all earnings for the period had been distributed. Under the two-class method, net~~is computed by dividing income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the company and an objectively determinable contractual obligation to share in net losses of the company. The remaining earnings are allocatedavailable to common stockholders ~~and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided~~ by the ~~applicable weighted average~~weighted-average number of ~~common shares outstanding during the period to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding~~ shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our outstanding warrants and ~~all potential shares of common~~restricted stock ~~assumed issued if they are dilutive.~~

~~For purposes of~~units. We utilize the ~~Predecessor period which includes the financial results of the Predecessor Company Group, we determined that~~treasury stock method to measure dilution to earnings per ~~unit~~share in calculating the net number of shares that would ~~not~~ be ~~meaningful~~issued, assuming any related proceeds are used to ~~the users of this filing, given the different unitholders and members’ equity structures of each individual entity in the Predecessor Company Group.~~buy back outstanding shares.

Recent Accounting Pronouncements

~~As an emerging growth company, the Jumpstart Our Business Startups Act (“JOBS Act”) permits us an extended transition period for complying with new or revised~~There are no recent accounting ~~standards affecting public companies. We~~pronouncements that we have ~~elected~~yet to ~~use this extended transition period and~~ adopt certain new accounting standards on the private company timeline, which means that our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis. We will cease to qualify as an emerging growth company effective December 31, 2020 unless the eligibility standards are modified. Loss of emerging growth company status will result in our losing our reporting exemptions noted above.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), and in 2019 issued ASU 2019-04, which provides codification improvements, and ASU 2019-05, which provides targeted transition relief for entities adopting ASU 2016-13.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~The financial instruments-credit losses guidance replaces the incurred loss model~~ with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in certain leases recognized by a lessor. In addition, the new guidance requires that credit losses be presented as an allowance rather than as a write-down on available-for-sale debt securities. We have formed a CECL committee that is assessing data and system needs in order to evaluate the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which we adopt the standard. At this time, the impact on our ~~consolidated~~ financial ~~statements is being evaluated. We are required to adopt the standard in the fourth quarter~~position, results of ~~2020 for the annual period as of and ending December 31, 2020 with an adoption date as of January 1, 2020.~~

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires prospective adoption. We adopted the standard on January 1, 2020 and there was no material impact on our unaudited condensed consolidated financial statements.

~~In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which (1) adds incremental requirements for entities to disclose (a) the amount of total gains~~operations or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy (b) the range and weighted average used to develop significant unobservable inputs and (c) how the weighted average was calculated for fair value measurements categorized within Level of the fair value hierarchy and (2) eliminates disclosure requirements for (a) transfers between Level 1 and Level 2 and (b) valuation processes for Level 3 fair value measurements. We adopted the standard on January 1, 2020 and there was no material impact on our unaudited condensed consolidated financial statements.cash flows.

Note 3 ~~– Business Combination~~

As discussed in Note 1, the Company entered into the Merger Agreement with Trinity, the Trinity Parties, the Predecessor Companies and the Predecessor Management Companies. The Business Combination was accounted for in accordance with ASC 805, ~~Business Combinations~~. The Company determined that BRELF II was the accounting acquirer. The Business Combination culminated in two steps: the merger of the Trinity Parties with and into BRELF II as a recapitalization and simultaneous capital issuance, and the acquisition of 100% of the remaining entities within the Predecessor Company Group by BRELF II. In accordance with ASC 805, the merger of the Trinity Parties into BRELF II was accounted for as a recapitalization and is reflected as the issuance of shares for cash. The acquisition of the remaining entities within the Predecessor Company Group by BRELF II was accounted for as a business combination in accordance with ASC 805 using the acquisition method of accounting. Cash proceeds from the recapitalization with Trinity Merger Sub I, Inc. were $327.1 million, partially offset by the consent fee paid to holders of the Company’s warrants to purchase ~~one-fourth~~ ~~(1/4~~^th) of one share of our common stock at an exercise price of $2.875 per warrant (the “Public Warrants”) in the aggregate amount of $66.7 million, for net proceeds of $260.4 million. The cash proceeds from the recapitalization with Trinity Merger Sub I, Inc. were used, in part, to pay cash consideration for the acquisition of the Predecessor Company Group and transaction costs (as further described below), leaving approximately $146.9 million remaining.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Separately, the cash and equity consideration transferred per the Merger Agreement was allocated between the legal amounts issued for the recapitalization of BRELF II and the cash and equity issued for the acquisition of the Predecessor Company Group. Given that the Merger Agreement was negotiated at arm’s length and based on the fair value of the entities, the legal consideration best depicted the relative fair value of separating the acquisitions from the recapitalization. The amount of common stock issued in the transaction that was attributable to the recapitalization of BRELF II was $495.5 million, along with $12.7 million of transaction costs, which costs were recorded as operating expenses and were settled in cash of $11.3 million and common stock of $1.4 million.

Total consideration allocated to the Business Combination under ASC 805 was $581.8 million, which was measured at its acquisition date fair value, consisting of $102.2 million in cash and $479.6 million of the Company common stock. Such amounts are inclusive of seller-transaction costs of $13.5 million, settled by the acquirer at closing in cash of $11.9 million and common stock of $1.6 million.

~~The purchase price allocation of assets acquired, and liabilities assumed have been recorded at their fair values as of the closing of~~ ~~November 14, 2019, the date of acquisition. The difference between the fair value of net assets acquired, including the value of intangible assets acquired, and the consideration was recorded as goodwill.~~

~~The fair values of assets acquired and liabilities assumed by BRELF II on~~ ~~November 14, 2019~~ ~~are as follows:~~

Consideration paid:

$ (in thousands)
Cash

$
102,245
Common stock

479,619
Total consideration paid

$
581,864

Assets acquired:


Cash and cash equivalents

88,505
Investment in real property

8,413
Mortgage notes receivable

344,837
Interest and fees receivable

2,743
Intangible assets

1,000
Other assets

174
Total Assets

445,672

Liabilities assumed:


Accounts payable and accrued liability

205
Other liabilities

568
Total Liabilities

773
Net assets acquired

444,899

Goodwill

$
136,965

In the first quarter of 2020, based on additional information obtained about facts and circumstances that existed as of November 14, 2019, we recorded a measurement period adjustment to reduce the fair value of intangible assets in the form of customer relationships from $6.0 to $1.0 million. This adjustment increased the preliminary amount of goodwill previously recorded by $5.0 million.

The purchase price for the acquisition was determined based on our expectations of future earnings and cash flows, resulting in the recognition of goodwill. Goodwill predominantly relates to the value of the assembled workforce and intangible assets that do not qualify for separate recognition at the time of the acquisition. Purchased goodwill is deductible for income tax purposes over 15 years.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

The fair value of the customer relationships was determined using the replacement cost approach. The cost provides a systematic framework for estimating the value of the intangible asset based on the economic principle of substitution. Under this approach, value is estimated by developing the cost to either replace or reproduce (replicate) the asset as if new. The preliminary useful lives for customer relationships were determined based upon the remaining useful economic lives of the assets that are expected to contribute to future cash flows and approximates between ~~two~~ to five years. Amortization expense is recorded on a straight-line method, refer to Note 6 for further information on the estimated useful lives and amortization related to the acquired intangible assets.

As described above, the Company incurred a total of $26.2 million of transaction-related costs for both the Business Combination and the recapitalization of BRELF II, of which $25.8 million was incurred and expensed in the Predecessor period and $0.4 million was incurred and expensed in the Successor period. Transaction-related expenses are comprised primarily of transaction fees, including legal, finance, consulting, professional fees and other third-party costs. These amounts were recorded as operating expenses in the consolidated statements of income in the periods incurred. At the closing of the transaction in the Successor period, the acquirer directly paid (or repaid to the sellers) the amounts owed for such expenses, settling them in a combination of cash and equity. From the perspective of the Successor entity, the settlement of these amounts by the acquirer at closing were allocated between purchase price for the business combination and recapitalization of BRELF II, using a methodology consistent with the allocation of the overall consideration transferred.

Included within the transaction-related expenses referred to above, is a termination fee of $10.0 million related to the termination of certain referral agreements the Predecessor Management Companies had in place with a related entity, which settled in $7.0 million of cash and $3.0 million of the Company common stock at closing.

~~Supplemental pro forma financial information~~

When giving effect to the Business Combination as if it closed on January 1, 2019, there are no material differences between historical revenue and earnings of the Company and results on a pro forma basis, except for the timing of transaction costs and amortization expense related to intangible assets, which would have been incurred as of an earlier date. Refer to Note 6 for the future impact of estimated amortization expense related to acquired intangible assets based on the preliminary fair values and preliminary estimated useful lives.

~~Note 4~~ - Mortgage ~~notes receivable~~Notes Receivable

The stated principal amount of ~~loans~~mortgage notes receivable in our portfolio represents our interest in loans secured by first deeds of trust, security agreements or legal title to real estate located in the United States. Our lending standards require that all mortgage notes receivable be secured by a first deed of trust lien on real estate and that the maximum loan to value ratio (“LTV”) be no greater than ~~65%~~65%. The LTV is calculated on an “as-complete” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. The lending standards also limit the initial outstanding principal balance of the loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan divided by the ~~“as-completed”~~“as-complete” appraisal. LTVs do not reflect interim loan activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. The maximum amount of a single loan may not exceed ~~10%~~10% of our total assets and the maximum amount to a single borrower may not exceed ~~15%~~15% of our total assets. We consider the maximum LTV as an indicator for the credit quality of a mortgage note receivable.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Mortgage notes receivable are recorded at cost, which represents the carrying value, and interest rates generally range from a fixed annual rate of 10% to 13%.~~ Mortgage notes receivable are considered to be short-term financings, with initial terms typically ranging from five to 18 months in duration based on the size of the project and expected timeline for completion of construction, which we often elect to extend for several months, based on our evaluation of the project. All loans require monthly interest only ~~payments.~~payments and interest rates generally range from a fixed annual rate of 8% to 13%. Most loans are structured with an interest reserve holdback that covers the interest payments for most of the initial term of the loan. Once the interest reserve is depleted, borrowers are expected to ~~make~~pay their monthly interest payment within 10 days of month end.

Mortgage notes receivable are presented net of construction holdbacks, interest reserves, allowance for ~~loans~~credit losses and deferred origination and amendment fee income in the condensed consolidated balance sheets. The construction holdback represents amounts withheld from the funding of construction loans until we deem construction to be sufficiently completed. The interest reserve represents amounts withheld from the funding of certain mortgage notes receivable for the purpose of satisfying monthly interest payments over all or part of the term of the related note. Accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. The deferred origination and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table ~~summarizes information pertaining~~reconciles outstanding mortgage loan commitments to outstanding balance of mortgage notes receivable as of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

(dollars in thousands)

September 30, 2020

December 31, 2019
Total loan commitments

$
1,220,354

$
1,101,275
Less:

Construction holdbacks ⁽¹⁾

305,410

253,708
Interest reserves ⁽¹⁾

24,988

18,601
Private REIT participation ⁽²⁾

15,597

0
Total principal outstanding for our mortgage notes receivable

874,359

828,966
Less:

Allowance for loan losses

6,143

4,096
Deferred origination fees

9,503

3,281
Mortgage notes receivable, net

$
858,713

$
821,589


(dollars in thousands)	September 30, 2021		December 31, 2020
Total loan commitments	$	1,537,122	$	1,245,963
Less:
Construction holdbacks(1)		541,144		356,026
Interest reserves(1)		45,170		29,817
Private REIT participation(2)		0		37,729
Total principal outstanding for our mortgage notes receivable		950,808		822,391
Less:
Allowance for credit losses(3)		12,719		10,590
Deferred origination and amendment fees		14,568		13,315
Mortgage notes receivable, net	$	923,521	$	798,486

(1)

~~(1)~~

~~Includes construction holdbacks of $19.8 million and interest reserves of $2.0 million on participating interests sold to the Private REIT as of September 30,~~Includes construction holdbacks of $40.4 million and interest reserves of $4.3 million on participating interests sold to the Private REIT as of December 31, 2020. As of September 30, 2021, there were no outstanding participations as a result of the retirement of the Private REIT. Refer to Note 9 for details.

~~(2)~~

The Private REIT was determined to be a voting interest entity for which we, through our wholly owned subsidiary acting as manager with 0 equity investment, do not hold a controlling interest in and do not consolidate. Furthermore, the Private REIT participation in loans originated by us meets the characteristics of a participating interest in accordance with ASC 860 and therefore, is treated as a sale of mortgage notes receivable and is derecognized from our unaudited condensed consolidated financial statements.

(2)

The Private REIT’s participations in loans originated by us met the characteristics of participating interests and the criterion for sale accounting and therefore, were derecognized from our condensed consolidated financial statements. As of September 30, 2021, there were no outstanding participations as a result of the retirement of the Private REIT. Refer to Note 9 for details.

(3)

As of September 30, 2021, $0.9 million of the CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

Non-accrual Status

As of September 30, 2021 and December 31, 2020, the principal outstanding on loans in contractual default status placed on non-accrual status was $162.6 and $126.8 million, respectively, and all non-accrual loans had an allowance for credit losses.

Current Expected Credit Losses

In assessing the CECL allowance, we consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. We derived an annual historical loss rate based on the Company’s historical loss experience in our portfolio and historical loss experience in the commercial real estate industry provided by a third party adjusted to reflect our expectations of the macroeconomic environment based on forecast data per the Federal Reserve.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

~~Non-accrual status~~

~~Mortgage notes receivable that are~~

The following tables summarize the activity in ~~contractual default are deemed to be non-performing and are evaluated for impairment. Loans can be placed in contractual default status for any of~~ the ~~following reasons: (1) an interest payment is more than 30 days past due; (2) a note matures and~~CECL allowance during the borrower fails to make payment of all amounts owed or extend the loan; or (3) the collateral becomes impaired in such a way that the ultimate collection of the note is doubtful. A loan can be removed from contractual default status if the late interest payments are brought current, the borrower complies with appropriate re-underwriting to extend the note, or additional collateral is provided for the note to provide cash flow or bring the LTV below 65%. NaN interest income is recognized on mortgage notes receivable that are in contractual default, unless the interest is paid in cash or collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis. As of September 30, 2020, and December 31, 2019, the principal outstanding on loans placed on non-accrual status were $173.5 and $32.9 million, respectively. For the three and nine months ended September 30, ~~2020,~~2021 and 2020:


	CECL Allowance
(dollars in thousands)	Funded			Unfunded (2)			Total
CECL allowance as of December 31, 2020	$	10,590		$	—		$	10,590
Provision for credit losses, net		1,761			947			2,708
Charge-offs(1)		(1,688	)		—			(1,688	)
CECL allowance as of March 31, 2021	$	10,663		$	947		$	11,610
Provision for credit losses (benefit), net		280			(222	)		58
CECL allowance as of June 30, 2021	$	10,943		$	725		$	11,668
Provision for credit losses, net		2,471			136			2,607
Charge-offs(1)		(695	)		—			(695	)
CECL allowance as of September 30, 2021	$	12,719		$	861		$	13,580


(dollars in thousands)	CECL Allowance
Loan loss reserve as of December 31, 2019	$	4,096
Adoption of ASU 2016-13(3)		1,975
Provision for credit losses, net		4,432
Charge-offs(1)		(537	)
CECL allowance as of March 31, 2020	$	9,966
Charge-offs(1)		(696	)
Provision for credit losses, net		4,224
CECL allowance as of June 30, 2020	$	13,494
Charge-offs(1)		—
Provision for credit losses, net		(2,932	)
CECL allowance as of September 30, 2020	$	10,562

(1)

Represents either loan repayments where the ~~average recorded investments in loans placed on non-accrual status were $175.3 and $133.9 million, respectively. For~~proceeds are less than the ~~three and nine months ended September 30, 2019,~~principal outstanding or transfers to real property owned upon foreclosure where the ~~average recorded investments in loans placed on non-accrual status were $9.7 and $15.5 million, respectively.~~

~~Impaired mortgage notes receivable~~

~~We evaluate each loan for impairment at least quarterly. Loans in contractual default are designated as non-performing and are considered impaired as we have some expectation that the repayment~~fair values of the ~~loan,~~underlying collateral are less than the principal outstanding.

(2)

CECL allowance relates to unfunded commitments is presented as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

(3)

Recorded as a direct charge to stockholders’ equity, effective January 1, 2020, as a cumulative-effect of change in accounting principle.

In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are construction loans secured by residential or commercial real estate and, in assessing estimated credit losses, we evaluate various metrics, including, ~~both contractual interest~~but not limited to, construction type, collateral type, LTV, market conditions of property location and ~~principal payments, may not be realized in full. Placing a loan in contractual default does not in~~borrower experience and of itself result in an impairment if we deem it probable that we will ultimately collect all amounts due. If a loan is determined to have impairment, we record an allowance through the provision for loan losses to reducefinancial strength.

The following tables allocate the carrying value of our loan portfolio based on our internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:


	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	550,228			58.8	%	$	229,840	$	222,094	$	9,170	$	1,358	$	87,507	$	259
Horizontal Development		196,125			20.9			149,101		41,805		—		181		—		5,038
Investment		189,887			20.3			102,055		49,261		10,174		4,297		18,506		5,594
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(2)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of origination or amendment where the loan toincurred a full re-underwriting.

(2)

Includes $4.3 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the ~~collateral less estimated costs to sell, as all of our loans are classified as collateral dependent as repayment is expected solely from the~~underlying collateral.

~~As of September 30, 2020 and December 31, 2019, the principal outstanding on impaired loans was $217.7 and $32.9~~ In addition, $0.9 million respectively. As of September 30, 2020 and December 31, 2019, the principal outstanding on loans with impairment was $63.0 and $20.8 million, respectively. For the three and nine months ended September 30, 2020, the average recorded investments in loans with impairment was $227.3 and $159.9 million, respectively. For the three and nine months ended September 30, 2019, the average recorded investments in loans with impairment was $14.5 and $11.9 million, respectively.

~~The following table summarizes the activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and September 30, 2019. All~~ of the CECL allowance ~~for loan losses~~is excluded from this table because it relates to ~~loans deemed to be impaired.~~

unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended
(dollars in thousands)

September 30, 2020

September 30, 2019

September 30, 2020

September 30, 2019
Beginning

$
6,795

$
1,777

$
4,096

$
1,704
Provision for loan losses (benefits)

(652)

2,704

3,279

2,777
Charge offs

—

(453)

(1,232)

(453)
Ending

$
6,143

$
4,028

$
6,143

$
4,028

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	193,046			20.6	%	$	66,766	$	98,508	$	1,042	$	—	$	26,730	$	0
Residential Lots		117,356			12.5			72,953		33,771		—		—		—		10,632
Townhomes		100,903			10.9			45,480		29,519		—		1,011		24,634		259
Single Family Housing		88,921			9.5			77,235		11,355		—		181		150		—
Mixed Use		87,456			9.3			56,045		29,488		1,923		—		—		—
Condos		66,581			7.1			5,479		23,824		—		1,286		35,992		—
Senior Housing		58,083			6.2			32,815		25,268		—		—		—		—
Entitled Land		53,616			5.7			36,308		—		—		—		17,308		—
Hotel		41,609			4.4			1,212		40,397		—		—		—		—
Unentitled Land		38,395			4.1			35,037		0		—		3,358		—		—
Offices		27,128			2.9			5,975		6,731		14,422		—		—		—
Commercial		22,354			2.4			22,354		—		—		—		—		—
Commercial Lots		10,449			1.1			—		10,449		—		—		—		—
Quadplex		8,212			0.9			5,828		2,384		—		—		—		—
Commercial other		7,463			0.8			7,463		—		—		—		—		—
Retail		7,325			0.8			3,902		1,466		1,957		—		—		—
Duplex		5,613			0.6			4,414		—		—		—		1,199		—
Industrial		1,730			0.2			1,730		—		—		—		—		—
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(2)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $4.3 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral. In addition, $0.9 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.


	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	52,443			5.6	%	$	25,756	$	6,021	$	—	$	3,358	$	17,308	$	—
41 - 45%		46,389			5.0			34,326		12,063		—		—		—		—
46 - 50%		53,082			5.7			32,435		20,647		—		—		—		—
51 - 55%		125,012			13.3			81,231		41,565		1,957		—		—		259
56 - 60%		100,736			10.8			12,283		69,361		—		—		13,498		5,594
61 - 65%		541,679			57.8			294,322		153,484		17,387		2,478		74,008		0
66 - 70%		643			0.1			643		—		—		—		—		—
71 - 75%		—			0.0			—		—		—		—		—		—
76 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		16,256			1.7			—		10,019		—		—		1,199		5,038
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(3)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in contractual default status where we have agreed to extend funds to the borrower above 65% in order to facilitate successful completion of the construction and return of capital.

(3)

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Construction Type
Vertical Construction	$	514,136			63.5	%	$	354,012	$	57,090	$	6,853	$	88,655	$	7,526	$	—
Horizontal Development		153,345			19.0			129,607		15,028		283		—		8,427		—
Investment		141,595			17.5			98,146		18,657		7,259		16,444		—		1,089
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(2)		(10,590	)
Carrying value, net	$	798,486

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.


	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Collateral Type
Apartments	$	129,588			16.0	%	$	79,931	$	18,953	$	—	$	24,232	$	6,472	$	—
Residential Lots		124,548			15.4			105,830		10,291		—		—		8,427		—
Condos		92,245			11.4			52,714		3,106		4,405		32,020		—		—
Single family housing		90,131			11.1			69,438		8,839		1,028		10,103		—		723
Townhomes		72,773			9.0			47,391		1,061		1,703		21,564		1,054		—
Unentitled Land		71,796			8.9			47,727		—		7,259		16,444		—		366
Mixed Use		66,092			8.2			60,232		5,860		—		—		—		—
Hotel		51,115			6.3			42,874		8,241		—		—		—		—
Senior Housing		34,283			4.2			34,283		—		—		—		—		—
Offices		29,540			3.7			8,495		21,045		—		—		—		—
Commercial Lots		15,683			1.9			15,683		—		—		—		—		—
Retail		11,397			1.4			9,500		1,897		—		—		—		—
Industrial		11,309			1.4			704		10,605		—		—		—		—
Quadplex		5,592			0.7			5,592		—		—		—		—		—
Entitled Land		1,116			0.1			1,116		—		—		—		—		—
Commercial		877			0.1			—		877		—		—		—		—
Duplex		736			0.1			—		—		—		736		—		—
Commercial other		254			0.1			254		—		—		—		—		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(2)		(10,590	)
Carrying value, net	$	798,486

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.


	At December 31, 2020							Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			��	2020		2019		2018		2017		2016		Prior
LTV (2)
0 - 40%	$	22,601			2.8	%		$	18,112	$	—	$	3,862	$	261	$	—	$	366
41 - 45%		68,263			8.4				44,683		20,183		3,397		—		—		—
46 - 50%		23,864			2.9				15,917		7,224		—		—		—		723
51 - 55%		76,539			9.5				57,583		2,774		—		16,182		—		—
56 - 60%		135,170			16.7				117,309		3,106		—		9,639		5,116		—
61 - 65%		450,253			55.7				301,964		57,488		7,136		76,139		7,526		—
66 - 70%		9,416			1.2				9,416		—		—		—		—		—
71 - 75%		1,983			0.2				1,983		—		—		—		—		—
76 - 80%		14,544			1.8				14,544		—		—		—		—		—
Above 80%		6,443			0.8				254		—		—		2,878		3,311		—
Total	$	809,076			100.0	%		$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(3)		(10,590	)
Carrying value, net	$	798,486

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in contractual default status where we have agreed to extend funds to the borrower above 65% in order to ensure successful completion of the construction and return of capital.

(3)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables allocate the carrying value of collateral dependent loans in our loan portfolio to the collateral type at the dates indicated:


	At September 30, 2021
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Entitled Land	$	17,308	$	(645	)	$	16,663
Hotel		14,494		(143	)		14,351
Townhomes		10,805		(1,783	)		9,022
Offices		6,294		(817	)		5,477
Apartments		5,090		(44	)		5,046
Mixed Use		2,525		(28	)		2,498
Single Family Housing		2,080		(16	)		2,063
Duplex		1,199		(641	)		558
Condos		939		(502	)		436
Total	$	60,733	$	(4,619	)	$	56,114

(1)

Includes $4.3 million in specific allowances based on the excess amortized cost over the fair value of the underlying collateral and $0.3 million where the fair value was greater and the allowance is based on the standard CECL methodology.


	At December 31, 2020
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Hotel	$	16,215	$	(202	)	$	16,013
Single Family Housing		9,953		(1,542	)		8,411
Offices		5,541		(305	)		5,236
Residential Lots		713		-			713
Total		32,422		(2,049	)		30,373

(1)

Includes $1.5 million in specific allowances based on the excess amortized cost over the fair value of the underlying collateral and $0.5 million where the fair value was greater and the allowance is based on the standard CECL methodology.

Note 54 – Fair ~~value measurements~~Value Measurements

The following tables present estimated fair values of our financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

September 30, 2020

Fair Value Measurements Using

Carrying

Estimated

(dollars in thousands)

Value

Fair Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
173,602

$
173,602

$
173,602

$
—

$
—
Mortgage notes receivable, net

858,713

858,713

—

—

858,713
Interest and fees receivable

11,917

11,917

—

11,917

—
Investment in real property, net

3,743

3,743

—

—

3,743
Financial Liabilities










Accounts payable and accrued liabilities ⁽¹⁾

$
3,504

$
3,504

$
—

$
3,106

$
398


	September 30, 2021				Fair Value Measurements Using
	Carrying		Estimated
(dollars in thousands)	Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	37,376	$	37,376	$	37,376	$	—	$	—
Mortgage notes receivable, net		923,521		923,521		—		—		923,521
Financial Liabilities
Private placement warrant liability(1)		2,490		2,490		—		2,490		0

December 31, 2019

Fair Value Measurements Using

Carrying

Estimated

(dollars in thousands)

Value

Fair Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
238,214

$
238,214

$
238,214

$
—

$
—
Mortgage notes receivable, net

821,589

821,589

—

—

821,589
Interest and fees receivable

4,108

4,108

—

4,108

—
Investment in real property, net

5,837

5,837

—

—

5,837
Financial Liabilities










Accounts payable and accrued liabilities ⁽¹⁾

$
8,415

$
8,415

$
—

$
2,923

$
5,492

~~(1)~~

~~Includes the level 3 valuation of the optional subscription liability derivative measured at fair value on a recurring basis.~~

(1)

As of September 30, 2021, the Private Placement Warrant liability derivative was measured at fair value using the quoted price per share of the Public Warrants on that date making it a level 2 valuation.


	December 31, 2020				Fair Value Measurements Using
	Carrying		Estimated
(dollars in thousands)	Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	223,375	$	223,375	$	223,375	$	—	$	—
Mortgage notes receivable, net		798,486		798,486		—		—		798,486

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

We follow the accounting guidance in ASC 820, Fair Value Measurements and Disclosures, which requires the categorization of fair value measurement into three broad levels of the fair value hierarchy as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

The following table sets forth assets and liabilities measured and reported at fair value on a recurring and nonrecurring basis, as well as for which fair value is only disclosed, as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. All of these fair values are categorized as Level 3. The table also contains information about valuation methodologies and inputs used for assets that are measured at fair value and categorized within Level 3 as of September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

Level 3

Valuation

Unobservable

Range of

(dollars in thousands)

September 30, 2020

December 31, 2019

technique

inputs

inputs

Optional subscription liability ⁽¹⁾

$
398

$
5,492

Valuation model

Refer to Note 7 for assumptions

0 - 5
%
Real property ⁽²⁾

3,743

5,837

Collateral valuations

Discount to appraised value based on comparable market prices

0 - 10
%
Impaired loans, net of allowance for loan losses ⁽³⁾

211,575

28,853

Collateral valuations

Discount to appraised value based on comparable market prices

0 - 10
%
Total

$
215,716

$
40,182


	Level 3				Valuation	Unobservable	Range of
(dollars in thousands)	September 30, 2021		December 31, 2020		technique	inputs	inputs
Real property(1)	$	52,470	$	8,473	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10%
Collateral dependent loans, net of allowance for credit losses(2)		56,114		30,373	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10%
Total	$	108,584	$	38,846

(1)

Real property is stated at lower of cost or fair value, a non-recurring measurement of fair value.

~~(1)~~

(2)

Loans meeting the definition of collateral dependent are measured at the fair value less the costs to sell the underlying property. The carrying value of the collateral dependent loans, net of the allowance for credit losses, approximates fair value.

~~Optional subscription liability derivative measured at fair value on a recurring basis.~~

~~(2)~~

~~Real estate property is stated at lower of cost or fair value, a non-recurring measurement of fair value.~~

~~(3)~~

For impaired loans, the fair value is based on the fair value less the costs to sell the underlying property. The carrying value of the impaired loans, net of the allowance for loan losses, approximates fair value.

Fair ~~value~~Value on a ~~recurring basis~~Recurring Basis

~~In connection with~~Prior to September 30, 2021, the Mergers, Trinity Merger Corp. issued $75 million of common stock, along with 7.2 million warrants and an optional subscription of up to $25 million of additional common stock (the “Optional Subscription Liability”) in a private placement transaction with certain entities affiliated with Farallon Capital Management, LLC (“Farallon”), which transaction is described in further detail in Note 11. We account forPrivate Placement Warrant liability was classified as Level 3 within the ~~Optional Subscription Liability as a derivative and, in accordance with ASC 815, we measure at~~ fair value on a recurring basis. The value of this Optional Subscription Liability is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The $5.1 million decrease in value for the nine months ended September 30, 2020hierarchy as it was ~~recorded as other income in the accompanying unaudited condensed consolidated statement of income for that period. The Optional Subscription Liability is~~ valued using a lattice model, ~~that~~which primarily incorporates observable inputs such as our common stock price, exercise price, term of the ~~option~~warrant, dividend yield and the risk-free ~~rate,~~rate; however, it also incorporates an assumption for equity volatility. For the unobservable volatility input, we solved for the volatility of the Public Warrants using the lattice model that captures the redemption right and analyzed the calculated equity volatility based on the volatility of the common stock of comparable public companies. The valuation methodology as of June 30, 2021 resulted in the same value per share for both the Public Warrants and Private Placement Warrants, indicating the redemption right, a feature excluded from Private Placement Warrants, did not change the valuation; and therefore, the quoted price per share of the Public Warrants was used to value the Private Placement Warrants on a recurring basis at September 30, 2021. As ~~the result of using unobservable~~we utilized observable inputs in the valuation, specifically a quoted price for a similar item in an active market, we ~~classify~~re-classified the ~~Optional Subscription Liability as~~Private Placement Warrant liability from a Level 3 to a Level 2 within the fair value ~~hierarchy.~~hierarchy as of September 30, 2021. The fair value of the 5.2 million Private Placement Warrants, estimated using the quoted share price of the Public Warrants (BRMK.WS), was approximately $0.12 or $0.48 per share to arrive at $2.5 million. Refer to Note 5 for additional details on the Private Placement Warrants.

The following table contains information about the transfers between hierarchy levels for recurring fair value measurements as of September 30, 2021:


	Level 3 Fair Value
(dollars in thousands)	on a Recurring Basis
Fair value as of June 30, 2021	$	3,734
Transfers out(1)		(3,734	)
Fair value as of September 30, 2021	$	0

(1)

We recognize transfers between hierarchy levels at the beginning of the reporting period in which a change in valuation technique or methodology occurs.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Fair ~~value~~Value on a ~~nonrecurring basis~~Nonrecurring Basis

Investments in real properties are initially recorded at the acquisition cost less estimated costs to sell, which approximates fair value. Upon transfer from mortgage notes receivable to investment in real estate property, the fair value less costs to sell becomes the new cost for the property. Costs related to acquisition, development, construction and improvements are capitalized. At each reporting date, the fair value of real properties is based upon the most recent independent third-party appraisals of value discounted based upon our experience with actual liquidation values. These discounts to the appraisals generally range from 0%0% to ~~10%~~10%. As the result of using unobservable inputs in the valuation, we classify investments in real properties as Level 3 within the fair value hierarchy.

For ~~impaired~~collateral dependent loans, the fair values are based on the value of the underlying collateral less the costs to sell. At each reporting date, these loans ~~in contractual default status~~ are evaluated based upon the most recent independent third-party appraisals of value discounted based upon our experience with actual liquidation values. These discounts to the appraisals generally range from 0%0% to ~~10%~~10%. As the result of using unobservable inputs in the valuation, we classify ~~impaired loans~~collateral dependent as Level 3 within the fair value hierarchy.

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~Fair Value Disclosure Only

~~Notes to Consolidated Financial Statements~~

~~Fair value disclosure only~~

For certain of our financial instruments, including cash equivalents, ~~interest and fees receivable, other receivables, accounts payable, and accrued liabilities,~~ which are classified under Level 1 within the fair value hierarchy, the carrying amounts approximate fair value due to their short-term maturities.

~~The~~Our mortgage notes receivable are ~~secured by first deeds of trust, security agreements or legal title to real estate located in the United States. The~~evaluated for expected credit losses and mortgage notes receivable ~~generally have initial terms ranging between~~ ~~five~~ ~~and 18 months based on the size~~are presented net of ~~the project and expected timeline~~an allowance for ~~completion of construction and may be extended by paying additional fees.~~credit losses. Due to the short-term maturity of the mortgage notes receivable, ~~in current status,~~ a premium or discount is not ~~relevant~~material and the carrying value approximates fair value. ~~As a result~~We believe that our mortgage notes receivable net of the ~~use~~CECL allowance approximates fair value of the portfolio. As we utilize unobservable inputs, including third-party appraisals for estimating as-complete appraised values, we classify mortgage notes receivable as Level 3 within the fair value hierarchy.

~~Note 6 – Goodwill and Intangible Assets~~

~~Goodwill~~

All of our goodwill relates to the Business Combination. As discussed in Note 3, in the first quarter of 2020, we recorded a measurement period adjustment to reduce the preliminary fair value of intangible assets in the form of customer relationships by $5.0 million and increased our preliminary value of goodwill by $5.0 million resulting in $137.0 million of goodwill as of September 30, 2020. As a result of this adjustment to preliminary values, $0.9 million of amortization of intangible assets recorded in 2019 was reversed in the first quarter of 2020.

In accordance with ASC Topic 350, we continuously evaluate the presence of triggering events that require an impairment test. In the first quarter of 2020, we determined that COVID-19 was a triggering event based on the adverse impact on our business and results of operations. Specifically, we noted that COVID-19 and containment measures have contributed to, among other things, adverse impacts on the progress of construction on our borrowers’ projects, the demand for and value of commercial and residential real estate that our borrowers have developed, the creditworthiness of our borrowers and other counterparties, the capital and credit market conditions and potential delays in foreclosure proceedings. We performed a quantitative assessment of our goodwill based on both the market and income approach and determined that, as of March 31, 2020, the fair value of the reporting unit exceeded the carrying value and there was 0 goodwill impairment. During the second and third quarters of 2020, we continued to monitor the impact of COVID-19 and determined there were no new triggering events to warrant updating our quantitative assessment of goodwill performed as of March 31, 2020. We continue to monitor the impact of COVID-19 and reevaluated the fair value of the reporting unit during our annual assessment in October 2020 and the fair value of the reporting unit exceeded the carrying value and there was 0 ~~goodwill impairment.~~

~~Intangible Assets~~

All of our intangible assets relate to the Business Combination, specifically the value of customer relationships. The following table summarizes the balances of intangible assets as of September 30, 2020:

Acquired
(dollars in thousands)

Intangibles
Asset Type

Customer relationships

$
1,000
Less: Accumulated amortization

294
Intangible assets, net

$
706

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~The weighted average life remaining of the intangible assets is approximately 2.1 years. Amortization expense is expected to be as follows:~~

Year ended December 31,
(dollars in thousands)

2020

2021

2022
Estimated future intangible amortization expense

$
85

$
339

$
282

Note 75 - Stockholders’ Equity and ~~Members’ Equity~~Earnings per Common Share

Stockholders’ Equity

The Company is authorized to issue 500,000,000 shares of common stock with a par value of ~~$0.001~~$0.001 per share and 100,000,000 shares of preferred stock with a par value of ~~$0.001~~$0.001 per share. Holders of our common stock are entitled to 1 vote for each share. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were ~~132,236,307~~132,684,541 and ~~132,015,635~~132,532,383 shares of common stock issued and outstanding,, respectively, and 0 shares of preferred stock issued and outstanding.

As of September 30, ~~2020~~2021 and December 31, ~~2019~~2020there were 41.7 million ~~Public Warrants~~public warrants outstanding to acquire one-fourth of a share of common stock at a price of $2.875 (the “Public Warrants”), and 5.2 million warrants outstanding to acquire 1 share of our common stock at a price of ~~$11.50~~$11.50 per share ~~outstanding~~ (the “Private Placement Warrants”). In the aggregate, we have outstanding warrants to purchase approximately 15.6 million shares of common stock at a price of ~~$11.50~~$11.50 per whole share.

~~As part~~ Settlement of ~~the PIPE Investment (for further details, refer to Note 11), the Farallon Entities have an option to purchase up to $25 million of additional~~outstanding warrants will be in shares of our common stock, ~~which will be exercisable during the 365-day period following the consummation of the Business Combination at the Reference Price (the “Optional Subscription”). The Farallon Entities are entitled~~unless we elect solely in our discretion to ~~cash~~ settle ~~in whole or in part, the exercise of the Optional Subscription, and therefore, the Optional Subscription does not meet the requirements~~warrants we have called for ~~equity classification and is assumed to be settled~~redemption in cash, and ~~classified as a liability~~subject to customary adjustment in ~~our consolidated balance sheet.~~ the event of business combinations and certain tender offers.

The liability for the ~~Optional Subscription~~Private Placement Warrants was ~~$0.4~~$2.5 million as of September 30, ~~2020 and $5.5 million as of December 31, 2019~~2021 and is included in accounts payable and accrued ~~liabilities.~~

~~The fair value~~liabilities in the condensed consolidated balance sheet. Refer to "Correction of Immaterial Error" in Note 2 for additional details on the accounting classification of the Optional Subscription Liability was estimated using a lattice model in accordance with ASC 820, Fair Value, using the assumptions noted below in the following table. Expected volatility is based on the historical volatility of a peer group of public companies. The risk-free interest rate is based on the US Treasury Constant Maturity curve, commensurate with the time to expiry of warrants.Private Placement Warrants.

As of September 30, 2020


As of  December 31, 2019

Expected volatility

30.0
%

13.0
%
Expected dividend yield

7.3
%

7.3
%
Expected life (in years)

0.1

0.9

Risk-free interest rate

0.1
%

1.6
%

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Earnings per Common Share

We present both basic and diluted earnings per share (“EPS”) amounts in our condensed consolidated financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our outstanding warrants and restricted stock units. We consider the two-class method to measure dilution to earnings per share: (a) calculate the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares (the treasury stock method), or (b) assume the gross number of shares are issued and calculate any related effects on net income available for shareholders, considering participating securities, such as certain unvested restricted stock units which are entitled to nonforfeitable dividends rights (the two-class method). For the period presented within these unaudited condensed consolidated financial statements, the two-class method was deemed to be insignificant. In accordance with GAAP, our policy is to apply the more dilutive methodology upon issuance of such instruments. The table below presents the computation of basic and diluted net income per share of common stock for the ~~three~~periods presented:


	Three Months Ended				Nine Months Ended
(dollars in thousands, except share and per share data):	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Net income	$	21,685	$	25,504	$	60,318	$	67,817
Basic weighted-average shares of common stock outstanding		132,658,661		132,282,252		132,575,852		132,156,844
Dilutive effect of share-based compensation		93,810		34,494		87,585		50,761
Diluted weighted-average shares of common stock outstanding		132,752,471		132,316,746		132,663,437		132,207,605
Basic earnings per share	$	0.16	$	0.19	$	0.45	$	0.51
Diluted earnings per share	$	0.16	$	0.19	$	0.45	$	0.51

For the periods presented, the following table reconciles the denominators used in the basic and ~~nine months ended September 30, 2020.~~diluted earnings per share calculations:

Three Months Ended

Nine Months Ended
(dollars in thousands, except share and per share data):

September 30, 2020

September 30, 2020
Net income

$
23,224

$
70,262
Basic weighted-average shares of common stock outstanding

132,282,252

132,156,844
Dilutive effect of share-based compensation

34,494

50,761
Diluted weighted-average shares of common stock outstanding ⁽¹⁾

132,316,746

132,207,605
Basic earnings per share

$
0.18

$
0.53
Diluted earnings per share

$
0.18

$
0.53


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Denominator for basic earnings per share calculation		132,658,661		132,282,252		132,575,852	$	132,156,844
Effect of dilutive securities:
Unvested restricted stock units		93,810		34,494		87,585		50,761
Denominator for diluted earnings per share calculation		132,752,471		132,316,746		132,663,437		132,207,605

~~(1)~~

We exclude anti-dilutive shares from calculation of weighted-average shares for diluted earnings per share. There were 15.6 million shares related to the Public Warrants and Private Warrants, 2.4 million shares of optional subscription warrants and 662,400 and 615,715 shares of unvested restricted stock unit awards for the three and nine months ended September 30, 2020, respectively, which are not included in the above calculation of diluted earnings per share because in doing so they would be anti-dilutive.

~~Members’ Equity (Predecessor)~~

~~Members’ Equity is~~For the periods presented, ~~on a consolidated basis for~~ the ~~Predecessor Company Group, which includes~~following stock equivalents were excluded from the consolidated preferred units for the Predecessor Companies and the total consolidated Class A and Class P units for the Predecessor Management Companies. The applicable Predecessor Management Company was the sole common unit holdercalculations of ~~the Predecessor Company it managed, and, therefore all common units~~diluted earnings per share because their effect would have been eliminated in the preparation of the condensed consolidated Predecessor Company Group financial statements, as they represent intra-entity balances between entities within the consolidated Predecessor Company Group.antidilutive:

~~Earnings Per Unit (Predecessor)~~

~~We determined that earnings per unit would not be meaningful to the users of these financial statements for the Predecessor period.~~


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Weighted-average restricted stock units outstanding		186,492		877,949		218,227		691,543
Unexercised public warrants and private placement warrants		15,604,304		15,604,304		15,604,304		15,604,304
Total stock equivalents		15,790,796		16,482,253		15,822,531		16,295,847

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 86 - Income Taxes

~~For the Successor period, the~~The Manager has elected to be treated as a TRS and this election applies to the ~~wholly owned~~wholly-owned subsidiaries of the Manager, including the Private REIT Manager. Having TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain the qualification as a REIT.

We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to ~~our~~ earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Code, which relate to organizational structure, diversity of stock ownership, and certain restrictions with regard to the nature of assets and the sources of income. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state, and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, we were in compliance with all REIT requirements.

Based on our evaluation, we concluded that there are 0 significant uncertain tax positions requiring recognition in our ~~unaudited~~ condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were 0 amounts accrued for penalties or interest as of or during the periods presented in the accompanying ~~unaudited~~ condensed consolidated financial statements.

The state and local tax jurisdictions for which we are subject to tax-filing obligations recognize our status as a REIT, and therefore, we generally do not pay income tax in such jurisdictions. We may, however, be subject to certain minimum state and local tax filing fees as well as certain excise or business taxes. Our TRSs are subject to U.S. federal, state and local income taxes.

Note 97 - Equity Incentive Plan

Stock Incentive Plan

~~On November 14, 2019, we established the~~The Broadmark Realty 2019 Stock Incentive Plan (the “Plan”)~~, which~~ allows for the issuance of up to 5,000,000 stock options, stock appreciation rights, restricted stock awards, restricted stock units or other equity-based awards or any combination thereof to the directors, employees, consultants or any other party providing services to us. The Plan is administered by the compensation committee of our board of directors.

As of September 30, ~~2020 and December 31, 2019, respectively, 4,049,134 and 4,569,378~~2021, there were 3,629,962 ~~share awards were~~shares available to be ~~issued~~awarded under the Plan. The restricted stock units ~~(“RSUs”)~~granted under the Plan generally vest from one to three years depending on the terms of the specific award.

~~Table~~ In 2021, pRSUs were granted to our executive officers that will be earned at the end of ~~Contents~~the three fiscal year period ending December 31, 2023 based on the Company’s level of achievement of total stockholder return relative to the total stockholder return (“Relative TSR”) of a selected group of industry peer companies for the three-year performance period. A variable level of shares of our common stock, ranging from 0% to 150% of target level, will be earned based on the level of achievement of the Relative TSR goals. The earned pRSUs will be paid in the form of common stock promptly following the end of the three-year performance period. The pRSUs are each measured at fair value based on Monte Carlo simulation models.

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

All RSUs awarded will be settled upon vesting in shares of our common stock. If (1) the recipient becomes disabled and the recipient’s employment or service is terminated as a result, (2) the recipient dies during the vesting period, or (3) the recipient’s employment is terminated without cause (as defined in the Plan) in connection with, or in certain cases within a specified period following a change in control (as defined in the Plan), then the vesting of the RSUs will fully accelerate as of the date of termination of employment.

Dividend equivalents are not accrued or paid on RSUs granted to employees, executive officers and directors and accordingly those RSUs are not considered participating securities.

The RSUs granted to non-executive officer employees are considered participating or entitled to receive all dividends and other distributions paid with respect to those unvested shares of common stock, unless determined otherwise by the Compensation Committee.

If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid will again become available for the issuance of additional awards.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the activity related to RSUs during ~~2020:~~2021:

Weighted Average

Grant Date Fair

Shares

Market Value
Unvested RSUs outstanding as of January 1, 2020

334,928

$
11.08
Granted

186,759

11.77
Vested

(95,694)

11.08
Unvested RSUs outstanding as of March 31, 2020

425,993

Granted

47,226

9.64
Vested

(119,855)

$
11.08
Unvested RSUs outstanding as of June 30, 2020

353,364

Granted

382,041

10.64
Vested

(5,098)

$
11.08
Unvested RSUs outstanding as of September 30, 2020

730,307


				Weighted Average
				Grant Date Fair
	Shares			Market Value
Unvested RSUs outstanding as of December 31, 2020		434,143
Granted		424,866		$	10.39
Vested		(37,227	)	$	11.08
Unvested RSUs outstanding as of March 31, 2021		821,782
Granted		41,135		$	10.93
Vested		(77,766	)	$	10.34
Forfeited		(1,362	)	$	10.58
Unvested RSUs outstanding as of June 30, 2021		783,789
Granted		—		$	—
Vested		(70,157	)	$	10.21
Forfeited		(12,475	)	$	10.53
Unvested RSUs outstanding as of September 30, 2021		701,157

For the three and nine months ended September 30, ~~2020,~~2021, we recognized compensation expense related to RSUs of ~~$1.9~~$0.9 and ~~$3.8~~$2.5 million, respectively, based on amortizing the fair value of the awards over the service (vesting) period. As of September 30, ~~2020,~~2021, there was ~~$5.2~~$5.6 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on a straight-line basis ~~has~~over a weighted-average recognition period of ~~1.7~~1.9 years.

~~Profits Interests and Equity Compensation (Predecessor)~~

The Predecessor Company Group expensed the fair value of share-based compensation awards granted to employees and directors over the period each award vests. Compensation cost was measured using the Black-Scholes model. The Predecessor Company Group expensed the fair value of restricted unit awards granted to employees over the period each award vested. There were ~~150 units granted during the nine months ended September 30, 2019 at $11,717 per unit, which were to vest ratably over 48 months~~. The fair value of restricted unit awards was equal to the fair value of the Predecessor Company’s units at the date of grant. The units were valued using an internal model with market inputs available on the date of grant. The restricted units were settled as part of the Business Combination and, accordingly, ~~0 share-based compensation related to the unit awards was recognized during the three and nine months ended September 30, 2020.~~

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 108 - Commitments and ~~contingencies~~Contingencies

The following table illustrates our contractual obligations and commercial commitments by due date as of September 30, ~~2020:~~2021:


			Less than 1						More than

													Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years		Total		year		1-3 years		3-5 years		5 years
Construction holdbacks⁽¹⁾		305,410		234,845		70,565		—		—		541,144		317,863		223,281		0		0
Operating lease obligations	$	11,962	$	761	$	1,893	$	2,008	$	7,300	$	11,098	$	932	$	1,950	$	2,068	$	6,148
Total	$	317,372	$	235,606	$	72,458	$	2,008	$	7,300	$	552,242	$	318,795	$	225,231	$	2,068	$	6,148

(1)

The funding timing and amounts of construction holdbacks are uncertain as these commitments relate to loans for construction costs and depend on the progress and performance of the underlying projects.

~~(1)~~

~~Includes construction holdbacks of $19.8 million on participating interests sold to the Private REIT as of September 30, 2020.~~

Construction Loans

Our commitments and contingencies include usual obligations incurred by real estate lending companies in the normal course of business, including construction holdbacks as disclosed in Note 4.3.

~~In addition, on~~Lease Commitments

On March 18, 2020, we ~~signed~~entered into a ~~new ten-year~~non-cancelable operating lease agreement for our office space in Seattle ~~headquarters which is expected to commence~~with an original lease period expiring in 2032. The lease commencement date was in the first quarter of ~~2021 upon completion of tenant improvements, which is~~2021. The total cash payments included in the ~~above table.~~measurement of our operating lease liabilities, net of lease incentives, was $11.7 million. The right-of-use assets obtained in exchange for the new operating lease obligation and the tenant improvements were $6.4 and $2.0 million, respectively. The discount rate for the operating lease was 6.0%, resulting in an imputed interest amount of $3.3 million.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Facility

On February 19, 2021, we entered into a credit agreement with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for the lenders, providing for a $135.0 million revolving credit facility.

Our obligations under the revolving credit facility are secured by substantially all of our Company’s assets. The revolving credit facility contains covenants customary for financings of this type, including limitations on the incurrence of indebtedness, liens, asset dispositions, acquisitions, mergers and consolidations, certain dividends, distributions and other payments, advances and investments, payments to affiliates, optional prepayments and other modifications of certain other indebtedness, and amendments, terminations and waivers of certain material agreements, as well as a minimum tangible net worth and a total debt to equity ratio requirement. Among other things, the credit agreement provides that we may not pay cash dividends that would result in non-compliance with the financial covenants under the credit agreement or during an event of default under the credit agreement, except in the case of defaults other than payment defaults, for dividends in amounts necessary to maintain our REIT status. The revolving credit facility contains events of default customary for financings of this type, including failure to pay principal, interest and other amounts, materially incorrect representations or warranties, failure to observe covenants and other terms of the revolving credit facility, cross-defaults to other indebtedness, bankruptcy, insolvency, material judgments, certain ERISA violations, changes in control and failure to maintain REIT status, in some cases subject to customary grace periods.

Legal Proceedings

From time to time, we are named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. Although there can be no assurance of the outcome of such legal actions, in the opinion of management, we do not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially affect our results of operations, financial condition or cash flows.

Concentration Risk

~~We originate~~Our loan portfolio is primarily ~~short-term loans~~ secured by first deed of trust liens on residential and commercial real estate located in 1317 states and the District of Columbia. Our loan portfolio is also concentrated within 10 counties, the largest being ~~Wasatch~~Utah County in Utah. As of September 30, 2021 and December 31, 2020, the top 10ten counties make up ~~50.0%~~48.0% and 43.2% of the total committed amount of loans in our total portfolio.

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 119 - Related ~~party transactions~~Party Transactions

Private Placement with Farallon

On November 14, 2019, Broadmark Realty consummated a business combination (the “Business Combination”) pursuant to an Agreement and Plan of Merger, dated August 9, 2019 (the “Merger Agreement”). In connection with the Business Combination and ~~concurrently with~~ the execution of the Merger Agreement, ~~the Company~~we entered into certain subscription agreements with affiliates of Farallon Capital Management, L.L.C. (the “Farallon Entities”) for a private placement (the “PIPE Investment”) of ~~the Company’s~~our shares of common stock, pursuant to which, immediately prior to the consummation of the Business Combination, ~~the Company~~we issued and sold to the Farallon Entities an aggregate of 7,174,163 shares of common stock for an aggregate purchase price of approximately ~~$75.0~~$75.0 million at a price per share equal to ~~$10.45352229~~$10.45352229 (the “Reference Price”). In addition, pursuant to the subscription agreements, the Farallon Entities have an option to purchase up to $25.0 million of additional shares of common stock, exercisable at the Reference Price. This option expires on November 14, 2020. In connection with the PIPE Investment, ~~the Company~~we issued to the Farallon Entities an aggregate of 7,174,163 Public Warrants. The Farallon Entities received a fee for each warrant equal to the cash payable per each warrant held by unaffiliated Public Warrant holders in connection with the warrant amendment proposal approved as part of the Business Combination, in an amount equal to ~~$1.60~~$1.60 per warrant. In addition, the Farallon Entities are entitled to cash settle, in whole or in part, the exercise of their option to purchase up to $25.0 million of additional shares of common stock to the extent the delivery of the additional shares to the Farallon Entities would result, together with their affiliates and any other persons whose beneficial ownership of shares of common stock would be aggregated with the Farallon Entities or their affiliates for purpose of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in beneficial ownership in excess of 9.9% of the shares of common stock outstanding immediately after giving effect to such issuance of the shares of common stock. As a result of the PIPE Investment, theThe Farallon Entities own ~~more~~less than 5% of our outstanding common ~~stock.~~stock; however, their beneficial ownership exceeds 5% of our common stock when including the shares issuable upon exercise of the Public Warrants held by them.

~~The Company~~25

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

We also provided the Farallon Entities with certain registration rights in connection with the PIPE Investment, pursuant to which we registered in December 2019 the shares of our common stock, Public Warrants and shares issuable upon exercise of the ~~option and~~ Public Warrants under the Securities Act. As part of the PIPE Investment, the Farallon Entities had an option (the “Optional Subscription”) to purchase up to $25 million of additional shares of common stock, which were exercisable during the 365-day period following the consummation of the Business Combination at $10.45352229 (the “Reference Price”). The Farallon Entities were entitled to cash settle, in whole or in part, the exercise of the Optional Subscription, and therefore, the Optional Subscription did not meet the requirements for equity classification and was assumed to be settled in cash and classified as a liability in our consolidated balance sheet. The Optional Subscription expired unexercised on November 14, 2020, and therefore the liability was $0 as of December 31, 2020. The change is fair value of the Optional Subscription Liability was included in the condensed consolidated statements of income and was estimated using a lattice model, and the expected volatility was based on the historical volatility of comparable public companies.

Broadmark Private REIT, LLC

The Private REIT iswas a private real estate finance company that primarily ~~participates~~participated in short-term, first deed of trust loans secured by real estate that ~~are~~were originated, underwritten and serviced by Broadmark Realty Capital Inc. The Private REIT was managed by our subsidiary in accordance with a market-based arrangement and was determined to be a voting interest ~~entity for which we, through our wholly owned subsidiary acting as manager with 0 equity investment, do~~entity. We did not ~~hold a controlling interest in and do not consolidate. Furthermore,~~directly or indirectly control the Private REIT ~~participation in loans originated by us meets the characteristics of~~and owned only a ~~participating~~nominal interest in ~~accordance with ASC 860~~the Private REIT’s common units and, therefore, ~~is treated as a sale~~we did not consolidate the Private REIT.

In August 2021, in connection with the liquidation of the Private REIT, all participations in mortgage notes receivable ~~and is derecognized from our unaudited condensed consolidated financial statements.~~held by the Private REIT were purchased for cash by the Company at the settlement value which approximates fair value of $43.5 million. As of September 30, ~~2020,~~2021, the Private REIT had distributed the net assets in excess of cash required to discharge liabilities (including accrued liabilities for liquidation costs) to its investors based on their relative percentage interests. The Private REIT Manager, acting as liquidator, is responsible for discharging the Private REIT’s ~~assets under management were approximately $15.6 million.~~remaining liabilities and winding up its affairs, which are scheduled to be completed by the end of the fourth quarter of 2021.

Note 10 - Subsequent Events

Dividend Declaration

~~Note 12 - Subsequent events~~

~~Dividend Declaration~~

On October ~~13, 2020,~~14, 2021, our board of directors declared a monthly cash dividend of ~~$0.06~~$0.07 per common share payable on November ~~13, 2020~~15, 2021 to stockholders of record as of October ~~30, 2020, and on November 9, 2020, the board of directors declared a cash dividend of $0.06 per common share payable on December 15, 2020 to stockholders of record as of November 30, 2020.~~29, 2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the ~~unaudited~~ condensed consolidated financial statements and related notes in Part I, Item 1 ~~and the “Risk Factors” section in Part II, Item 1A~~ of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019~~2020 filed with the SEC on March ~~16, 2020~~2, 2021 including the “Risk Factors” section and consolidated financial statements and notes included therein. The following discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. The results of operations for the three and nine months ended September 30, ~~2020~~2021 are not necessarily indicative of the results that may be expected for the full year ended December 31, ~~2020~~2021 or for any other period. Unless the context otherwise requires, references to “Broadmark Realty,” the “Company,” “we,” “us” and “our” refer to Broadmark Realty Capital Inc. and its consolidated ~~subsidiaries after the Business Combination and refer to the Predecessor Company Group for periods prior to the Business Combination.~~subsidiaries.

Broadmark Realty, a Maryland corporation, is an internally managed commercial real estate finance company that ~~provides secured financing to real estate investors and developers. We have~~has elected to be taxed as a ~~REIT~~real estate investment trust (“REIT”) for U.S. federal income tax ~~purposes commencing with our taxable year ending December 31, 2019.~~purposes. Based in Seattle, Washington, we specialize in underwriting, funding, servicing and managing a portfolio of short-term, first deed of trust loans to fund the construction and development of, or investment in, ~~primarily residential and, to a lesser extent,~~ commercial properties. We generally operate in ~~select~~ states that we believe to have favorable demographic trends and that provide ~~us the ability~~more efficient and quicker access to ~~efficiently access the underlying~~ collateral in the event of borrower default. Beginning in early 2021, we have increased the number of states in which we operate in order to expand our potential lending markets. As of September 30, ~~2020,~~2021, our portfolio of 217 active loans had approximately ~~$1.2~~$1.5 billion of total commitments and $950.8 million of principal outstanding across 137 borrowers in 1317 states and the District of ~~Columbia,~~Columbia. We refer to loans that have outstanding commitments or principal balances that have not been repaid or retired, including by foreclosure, as “active loans.” Total commitments refer to the aggregate sum of ~~which~~outstanding principal balances, construction holdbacks and committed amounts for future draws and interest reserves on our ~~portion and the Private REIT’s portion~~loans. As of ~~the total principal balance~~September 30, 2021, our loan portfolio has been 100% equity funded and we had no outstanding ~~was $874.4~~debt. We plan to opportunistically raise capital in the public and ~~$15.6~~private markets from time to time, including the potential issuance of debt, based on market conditions to fund the growth of our portfolio and produce attractive returns for our stockholders. On February 19, 2021, we closed on a $135.0 million ~~respectively. We operate~~revolving credit facility, which has enabled us to use a larger percentage of our ~~business as one reportable segment.~~cash balances for lending activities.

Properties securing our loans are generally classified as residential properties, commercial properties or undeveloped land, and are typically not income producing. Each loan is secured by a first deed of trust lien on real estate. Our lending policy limits the committed amount of each loan to a maximum loan-to-value (“LTV”) ratio of up to 65% of the “as-complete” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. Our lending policy also limits the initial outstanding principal balance of each loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. At the time of origination, the difference between the initial outstanding principal and the total commitment is the amount held back for future release, subject to property inspections, progress reports and other conditions in accordance with the loan documents. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan at origination divided by the “as-complete” appraisal. LTVs do not reflect interim activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. As of September 30, ~~2020,~~2021, the weighted average LTV was ~~60.4%~~59.3% across our active loan portfolio based on the total commitment of the loan and “as-complete” appraisals. For our loans in contractual default status as of September 30, 2021, the weighted average LTV was approximately 88.9%, when measured by the sum of the principal outstanding net of the provision for credit losses, the estimated costs to complete and the accounts receivable for which collectability is reasonably assured, divided by the most recent “as-complete” appraisal. In addition, ~~each loan is also~~our loans are typically personally guaranteed on a recourse basis by the principals of the borrower and/or others at our discretion to provide further credit support for the loan. The ~~guaranty~~personal guarantee may be collaterally secured by a pledge of the guarantor’s interest in the borrower or other real estate or assets owned by the guarantor.

Our loans typically range from ~~$0.1~~$0.2 to ~~$42~~$40 million in total commitment at origination, generally bear interest at a fixed annual rate of ~~10%~~8% to 13% and have initial terms typically ranging from five to 18 months in duration based on the size of the project and expected timeline for completion of construction, which we often elect to extend for several months based on our evaluation of the project. As of September 30, ~~2020,~~2021, the average total commitment of our active loans was ~~$5.7~~$7.1 million and the weighted average remaining term to contractual maturity of our active loans was approximately ~~seven~~eight months. We usually receive loan origination fees, or “points,” typically ranging from 4%1% to 5% of the total commitment at origination, along with loan amendment and extension fees, each of which varies in amount based upon the term of the loan and the quality of the borrower and the underlying collateral. In addition, ~~to loan origination~~we charge fees weon past due receivables and receive ~~late fees paid by borrowers and/or are reimbursed by~~reimbursements from borrowers for costs associated with services provided by us, such as closing costs, collection costs on defaulted loans and construction draw inspection fees.

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In addition to the natural seasonality inherent in our business whereby winter months are typically less favorable to construction, restrictions related to the Business Combination decreased the amount of our loan originations for the second half of 2019 and early 2020. The pending Business Combination required us to essentially pause our ability to raise capital and in turn originate new loans for most

As a result of the second half of 2019. In the first quarter of 2020, we focused on rebuilding our pipeline and began to strategically deploy the proceeds from the Business Combination; these rebuilding efforts began to slow in March due to the uncertainty associated with the impacts of COVID-19. We believe that the launch of the Private REIT in March 2020 will provide access to additional capital in the future to participate in loans originated by Broadmark Realty, which we expect to position us to increase originations and grow our asset base, subject to market conditions. As of September 30, 2020, the Private REIT’s assets under management were approximately $15.6 million.

~~The~~ COVID-19 pandemic, ~~is significantly affecting, and can be expected to continue to impact, the capital markets and the construction lending market, at least in the near term. While~~ we have implemented a variety of business continuity initiatives, restrictions imposed in connection with COVID-19 or the impact on key employees could create significant challenges for our operations. We have experienced an adverse impact on our loan portfolio, primarily in the form of a significant increase in defaulted loans and a slow-down in construction ~~progress and an expected reduction in demand for and the value of commercial and residential real estate properties.~~progress. For example, delays in local government permitting and inspections arising from measures to limit the spread of COVID-19 ~~have~~ delayed some projects, adversely affecting the ability of borrowers to complete the projects in accordance with the terms of the loans. ~~Similarly, the COVID-19 pandemic and containment measures~~We have contributed to, among other things, adverse impacts on demand for and the value of commercial and residential real estate that our borrowers have developed that make it less likely that a borrower can sell or lease the property it is developing in an amount sufficient to repay the borrower’s loan, or that a developer, who would be our borrower, will elect to go forward with a new project. As a result, during the first half of 2020, we sawexperienced an increase in delinquencies and requests for extensions or ~~forbearance, which have since stabilized or declined during the three months ended September 30, 2020.~~forbearance. In addition, market conditions, and in some cases moratoriums on the foreclosure process, have increased the timeline to resolve non-performing loans. Delays in repayment of our outstanding loans or ~~resales~~sales of foreclosed properties reduce the capital available for future loan originations. If

In 2021, the ~~pandemic is prolonged, it~~U.S. and global economy has begun reopening and wider distribution of effective vaccines for COVID-19 encouraged greater economic activity. Nonetheless, the recovery could ~~increase~~remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness in preventing the spread of COVID-19, including its new variant strains. There remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on economic and market conditions. There remain shortages in raw materials, manufactured products and labor across industries that are resulting in longer construction timelines and rising prices, which are dampening a full economic recovery within the construction industry. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results through December 31, 2021 and potentially longer.

As a result of limited residential housing supply, net migration trends and a low interest rate environment, we have seen an increase in new parties entering the real estate lending market as economic conditions have stabilized from the impact of the COVID-19 pandemic. Such new entrants, as well as existing lenders, have been aggressively pursuing yields. This has resulted in increased competition and pricing pressure on our business, which has driven, and ~~results~~we expect will continue to drive, increased variability in the amount of ~~operations.~~our loan originations from quarter-to-quarter and the yields we are able to achieve on new loans. Historically, we primarily competed on the basis of borrower relationships, loan structure, terms and service rather than on price; however, competitive conditions have led us in some cases to originate loans with terms that deviate from our historical practice, such as a reduction in or absence of minimum interest provisions in our mortgage notes, which in turn reduce the interest income we earn on those loans. Starting in the second quarter of 2021, we adopted a dynamic pricing model, in which we determine credit risk for prospective loans utilizing categories such as experience of the borrower, amount of new capital being contributed by the borrower or guarantors to the project and strength of the underlying collateral. Under the dynamic pricing model, originated loans that we underwrite as lower credit risk receive lower annual rates or loan origination fees than loans that we deem as higher credit risk. To the extent that competitive conditions lead us to originate a greater percentage of loans containing annual fees or loan origination fees at the lower end of our historic ranges, our interest and fee income and financial performance could be adversely affected. We expect these trends related to the competitive environment to continue.

Key Indicators of Financial Condition and Operating Performance

In assessing the performance of our business, we consider a variety of financial and operating metrics, which include both GAAP and non-GAAP metrics, including the following:

Interest income earned on our loans. A primary source of our revenue is interest income earned on our loan portfolio. Our loans typically bear interest at a fixed annual rate of ~~10%~~8% to 13%, paid monthly, primarily from interest reserves and, to a much lesser extent, cash payments. Certain mortgage notes provide for minimum interest provisions, to which the contractual rate applies, which is typically between 50% and 70% of the face amount of the note until the outstanding principal under the note exceeds a minimum threshold. A reduction in or absence of minimum interest provisions in our mortgage notes and an increase in the amount of our loans in non-accrual status as a result of being in contractual default reduce our effective interest-bearing principal and the interest income we earn on our loans. The effective interest-bearing principal represents the principal balance outstanding plus the excess of minimum interest provisions over the actual principal outstanding. As of September 30, 2021 and December 31, 2020, the effective interest-bearing principal was $1.1 billion and $998.6 million, respectively. With consideration of loans in non-accrual status, the effective interest-bearing principal net of non-accrual principal as of September 30, 2021 and December 31, 2020 decreased to $842.2 and $786.4 million, respectively. We expect the trend of lower effective interest-bearing principal than historic levels to continue in subsequent quarters as a result of competitive conditions in the market and our default resolution strategy. In addition, as we have historically had no debt outstanding, we have had no borrowing costs and accordingly our gross interest income earned on our loans has been equivalent to net interest income.

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Fees and other revenue recognized from originating and servicing our loans. Fee income is comprised of loan origination fees, loan renewal fees and inspection fees. The majority of fee income is comprised of loan origination fees, or “points,” which typically range from 4%1% to 5%~~, on an annualized basis,~~ of the total commitment at origination. In addition to origination fees, we earn loan extension fees when maturing loans are renewed or ~~extended.~~extended and amendment fees when loan terms are modified, such as increases in interest reserves and construction holdbacks in line with our underwriting criteria or upon modification of a loan for the transition from horizontal development to vertical construction. Loans are generally only renewed or extended if the loan is not in default and satisfies our underwriting criteria, including our maximum LTV ratio of up to 65% of the appraised value as determined by an independent appraiser at the time of loan origination, or based on an updated appraisal, if required. Loan origination and renewal fees are deferred and recognized in income over the contractual maturity of the underlying loan.

Loan originations. Our operating performance is heavily dependent upon our ability to originate new loans to invest new capital and re-invest returning capital from ~~loans being repaid.~~the repayment of loans. The dollar amounts of loan originations reflect the total commitment at origination and loan repayments reflect the total commitment at payoff. Given the short-term nature of our loans, loan principal is generally repaid on a faster basis than to other types of lenders, making redeployment of capital through our originations ~~function~~process an important factor in our success.

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The following tables contains the total amount of our loan originations and repayments for the periods indicated:

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in millions)

2020

2020
Loans originated

$
153.4

$
312.6
Loans repaid

$
52.2

$
225.8


	Three Months Ended		Nine Months Ended
(dollars in millions)	September 30, 2021		September 30, 2021
Loans originated(1)	$	306.7	$	621.7
Loans repaid	$	56.4	$	238.8

(1)

Based on total loan commitment amounts and excluding amendments.

Credit quality of our loan portfolio.The credit quality of the loans in our portfolio is of critical importance as loans that do not perform in accordance with their terms may have a negative impact on our earnings and liquidity. As of September 30, 2020, a total of 30 loans were in contractual default totaling $194.4 million in principal balance outstanding, which excludes five loans for which forbearance agreements were executed totaling $23.3 million in principal outstanding. Of the loans in contractual default, 13 loans had impairment as of September 30, 2020 with our estimated losses reflected in our allowance for loan losses of $6.1 million. During the three months ended September 30, 2020, we resolved six loans in contractual default and limited new contractual defaults to one compared to eight and 17 new contractual defaults during the three months ended June 30, 2020 and March 31, 2020, respectively.

~~Principal Factors Affecting the Comparability~~ All of our ~~Results of Operations~~

~~As a~~loans are construction loans secured by residential or commercial real estate ~~finance company,~~and, in assessing estimated credit losses, we evaluate various metrics, including, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

The following tables allocate the carrying value of our results are affected by factors such as changes in economic climate, demand for housing, population trends, construction costs and the availability of alternative real estate financing from other lenders. These factors may have an impactloan portfolio based on our ~~ability to originate new~~internal credit quality indicators used in assessing estimated credit losses and vintage of origination at the dates indicated:


	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	550,228			58.8	%	$	229,840	$	222,094	$	9,170	$	1,358	$	87,507	$	259
Horizontal Development		196,125			20.9			149,101		41,805		—		181		—		5,038
Investment		189,887			20.3			102,055		49,261		10,174		4,297		18,506		5,594
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(2)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $4.3 million in loan specific allowances for loans ordeemed collateral dependent based on the ~~performance of our existing loan portfolio.~~

~~From November 15, 2019, our consolidated financial statements reflect BRELF II, one~~fair value of the Predecessor Companies, as the accounting acquirer and Successor entity, acquiring the other three Predecessor Companies, the four Predecessor Management Companies, and Trinity in the Successor period. The Business Combination transaction reflects a change in accounting basis for the Predecessor Company Group (other than BRELF II). As Trinity was a special purpose acquisition company, its acquisition is reflected as the issuance of shares for cash. For periods prior to November 15, 2019, in lieu of presenting separate financial statements of eachunderlying collateral. In addition, $0.9 million of the ~~Predecessor Companies~~CECL allowance is excluded from this table because it relates to unfunded commitments and ~~Predecessor Management Companies, consolidated financial statements have~~has been ~~presented,~~recorded as ~~these entities were~~a liability under ~~common management. Broadmark Realty is the successor issuer to Trinity.~~

~~As a result of the Business Combination, beginning from November 15, 2019,~~accounts payable and accrued liabilities in our consolidated financial statements are presented on a new basis of accounting pursuant to ASC 805, Business Combinations to reflect BRELF II acquiring the other entities within the Predecessor Company Group and Trinity. For more information refer to “Note 3 – Business Combination” to the unaudited condensed consolidated ~~financial statements included in this Report.~~

balance sheet.

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	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	193,046			20.6	%	$	66,766	$	98,508	$	1,042	$	—	$	26,730	$	—
Residential Lots		117,356			12.5			72,953		33,771		—		—		—		10,632
Townhomes		100,903			10.9			45,480		29,519		—		1,011		24,634		259
Single Family Housing		88,921			9.5			77,235		11,355		—		181		150		—
Mixed Use		87,456			9.3			56,045		29,488		1,923		—		—		—
Condos		66,581			7.1			5,479		23,824		—		1,286		35,992		—
Senior Housing		58,083			6.2			32,815		25,268		—		—		—		—
Entitled Land		53,616			5.7			36,308		—		—		—		17,308		—
Hotel		41,609			4.4			1,212		40,397		—		—		—		—
Unentitled Land		38,395			4.1			35,037		—		—		3,358		—		—
Offices		27,128			2.9			5,975		6,731		14,422		—		—		—
Commercial		22,354			2.4			22,354		—		—		—		—		—
Commercial Lots		10,449			1.1			—		10,449		—		—		—		—
Quadplex		8,212			0.9			5,828		2,384		—		—		—		—
Commercial other		7,463			0.8			7,463		—		—		—		—		—
Retail		7,325			0.8			3,902		1,466		1,957		—		—		—
Duplex		5,613			0.6			4,414		—		—		—		1,199		—
Industrial		1,730			0.2			1,730		—		—		—		—		—
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(2)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

~~Results of Operations~~

~~The period-to-period comparison of results is not necessarily indicative of results~~(2)

Includes $4.3 million in loan specific allowances for ~~future periods. The tables below set forth~~loans deemed collateral dependent based on the ~~results of our operations and the results~~fair value of the ~~operations~~underlying collateral. In addition, $0.9 million of ~~our Predecessor for~~ the ~~periods presented, both in dollars~~CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a ~~percentage~~liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.


	At September 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	52,443			5.6	%	$	25,756	$	6,021	$	—	$	3,358	$	17,308	$	—
41 - 45%		46,389			5.0			34,326		12,063		—		—		—		—
46 - 50%		53,082			5.7			32,435		20,647		—		—		—		—
51 - 55%		125,012			13.3			81,231		41,565		1,957		—		—		259
56 - 60%		100,736			10.8			12,283		69,361		—		—		13,498		5,594
61 - 65%		541,679			57.8			294,322		153,484		17,387		2,478		74,008		—
66 - 70%		643			0.1			643		—		—		—		—		—
71 - 75%		—			0.0			—		—		—		—		—		—
76 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		16,256			1.7			—		10,019		—		—		1,199		5,038
Total	$	936,240			100.0	%	$	480,996	$	313,160	$	19,344	$	5,836	$	106,013	$	10,891
CECL allowance(3)		(12,719	)
Carrying value, net	$	923,521

(1)

Represents the year of ~~revenue~~ origination or amendment where the loan incurred a full re-underwriting.

~~(dollars~~(2)

Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in ~~thousands, except percentage data)~~:

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

2019

2020

2019

Statements of Operations Data:

(Successor)

(Predecessor)

(Successor)

(Predecessor)

Revenues













Interest income

$
21,844

$
25,284

$
68,577

$
69,363

Fee income

7,139

9,297

21,244

31,574

Total Revenue

28,983

34,581

89,821

100,937

Other Income:

Change in fair value of optional subscription liabilities

1,948

—

5,094

—

Expenses









Impairment:









Loan loss (benefit) provision

(652)

2,704

3,279

2,777

Operating expenses:









Compensation and employee benefits

5,160

794

11,397

4,647

General and administrative

3,199

5,227

9,977

11,468

Total Expenses

7,707

8,725

24,653

18,892

Income before income taxes

23,224

25,856

70,262

82,045

Income tax provision

—

—

—

—

Net income

$
23,224

$
25,856

$
70,262

$
82,045

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

2019

2020

2019
Percentage of Revenue:

(Successor)

(Predecessor)

(Successor)

(Predecessor)
Revenues:












Interest income

75
%

73
%

76
%

69
%
Fee income

25

27

24

31

Total Revenue

100

100

100

100

Other Income:

Change in fair value of optional subscription liability

7

0

6

0

Expenses

Impairment:

Loan loss (benefit) provision

(2)

8

4

3

Operating expenses:

Compensation and employee benefits

18

2

13

5

General and administrative

11

15

11

11

Total Expenses

27

25

28

19

Income before income taxes

80

75

78

81

Income tax provision

0

0

0

0

Net income

80
%

75
%

78
%

81
%

contractual default status where we have agreed to extend funds to the borrower above 65% in order to ensure successful completion of the construction and return of capital.

(3)


	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Construction Type
Vertical Construction	$	514,136			63.5	%	$	354,012	$	57,090	$	6,853	$	88,655	$	7,526	$	—
Horizontal Development		153,345			19.0			129,607		15,028		283		—		8,427		—
Investment		141,595			17.5			98,146		18,657		7,259		16,444		—		1,089
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(2)		(10,590	)
Carrying value, net	$	798,486

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.

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	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Collateral Type
Apartments	$	129,588			16.0	%	$	79,931	$	18,953	$	—	$	24,232	$	6,472	$	—
Residential Lots		124,548			15.4			105,830		10,291		—		—		8,427		—
Condos		92,245			11.4			52,714		3,106		4,405		32,020		—		—
Single family housing		90,131			11.1			69,438		8,839		1,028		10,103		—		723
Townhomes		72,773			9.0			47,391		1,061		1,703		21,564		1,054		—
Unentitled Land		71,796			8.9			47,727		—		7,259		16,444		—		366
Mixed Use		66,092			8.2			60,232		5,860		—		—		—		—
Hotel		51,115			6.3			42,874		8,241		—		—		—		—
Senior Housing		34,283			4.2			34,283		—		—		—		—		—
Offices		29,540			3.7			8,495		21,045		—		—		—		—
Commercial Lots		15,683			1.9			15,683		—		—		—		—		—
Retail		11,397			1.4			9,500		1,897		—		—		—		—
Industrial		11,309			1.4			704		10,605		—		—		—		—
Quadplex		5,592			0.7			5,592		—		—		—		—		—
Entitled Land		1,116			0.1			1,116		—		—		—		—		—
Commercial		877			0.1			—		877		—		—		—		—
Duplex		736			0.1			—		—		—		736		—		—
Commercial other		254			0.1			254		—		—		—		—		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(2)		(10,590	)
Carrying value, net	$	798,486

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.

~~Core Earnings~~


	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
LTV (2)
0 - 40%	$	22,601			2.8	%	$	18,112	$	—	$	3,862	$	261	$	—	$	366
41 - 45%		68,263			8.4			44,683		20,183		3,397		—		—		—
46 - 50%		23,864			2.9			15,917		7,224		—		—		—		723
51 - 55%		76,539			9.5			57,583		2,774		—		16,182		—		—
56 - 60%		135,170			16.7			117,309		3,106		—		9,639		5,116		—
61 - 65%		450,253			55.7			301,964		57,488		7,136		76,139		7,526		—
66 - 70%		9,416			1.2			9,416		—		—		—		—		—
71 - 75%		1,983			0.2			1,983		—		—		—		—		—
76 - 80%		14,544			1.8			14,544		—		—		—		—		—
Above 80%		6,443			0.8			254		—		—		2,878		3,311		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance(3)		(10,590	)
Carrying value, net	$	798,486

~~Core~~

(1)

Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)

Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in contractual default status where we have agreed to extend funds to the borrower above 65% in order to ensure successful completion of the construction and return of capital.

(3)

Includes $1.5 million in loan specific allowances for loans deemed collateral dependent based on the fair value of the underlying collateral.

Dividends Declared. The following table summarizes the declared cash dividends per common share activity for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Dividends declared per common share	$	0.21	$	0.18	$	0.63	$	0.60

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Earnings per Common Share. The following table summarizes the earnings is(GAAP) and distributable earnings (non-GAAP) per common share activity for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Earnings per common share, basic	$	0.16	$	0.19	$	0.45	$	0.51
Earnings per common share, diluted		0.16		0.19		0.45		0.51
Distributable earnings per diluted share of common stock prior to realized loss on investments		0.19		0.18		0.55		0.56
Distributable earnings per diluted share of common stock	$	0.18		0.18		0.53		0.55

Non-GAAP Financial Measures

Distributable Earnings

We have elected to present “distributable earnings,” a supplemental non-GAAP financial measure used by management ~~as a supplemental measure~~ to evaluate our operating performance. We define ~~core~~distributable earnings as net income attributable to common stockholders adjusted for: (i) impairment recorded on our ~~investments in mortgage notes receivable;~~investments; (ii) ~~realized and~~ unrealized gains or losses on ~~both~~ our investments (including provision for credit losses) and ~~optional subscription~~warrant liabilities; (iii) ~~non-capitalized transaction-related expenses and first year~~new public company transition expenses; (iv) non-capitalized transaction-related and other one-time expenses; (v) non-cash stock-based compensation; ~~(v)~~(vi) depreciation and amortization including amortization of our intangible assets; and ~~(vi)~~(vii) deferred taxes, which are subject to variability and generally not indicative of future economic performance or representative of current operations.

During the nine months ended September 30, 2021 and 2020, provision for credit losses, net was $5.4 and $5.7 million, respectively, which has been excluded from distributable earnings consistent with other unrealized gains (losses) pursuant to our policy for reporting distributable earnings. We expect to recognize such potential credit losses in distributable earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally upon charge-off of principal at the time of loan repayment or upon sale of real property owned by us and the amount of proceeds is less than the principal outstanding at the time of foreclosure.

Management believes that the adjustments to compute ~~“core~~“distributable earnings” specified above allow investors and analysts to readily identify and track the operating performance of ~~the~~our assets, ~~that form the core of our activity,~~ assist in comparing the ~~core~~ operating results between periods, and enable investors to evaluate our current ~~core~~ performance using the same measure that management uses to operate the business. ~~Core~~Distributable earnings excludes certain recurring items, such as unrealized gains and losses (including provision for ~~loan~~credit losses) and non-capitalized transaction-related expenses, because they are not considered by management to be part of our ~~core~~primary operations for the reasons described herein. As such, ~~core~~distributable earnings is not intended to reflect all of our activity and should be considered as only one of the factors used by management in assessing our performance, along with GAAP net income which is inclusive of all of our activities.

~~Core~~As a REIT, we are required to distribute at least 90% of our annual REIT taxable income and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of such taxable income. Given these requirements and our belief that dividends are generally one of the principal reasons that stockholders invest in our common stock, we generally intend to attempt to pay dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Distributable earnings is one of many factors considered by our board of directors in declaring dividends and, while not a direct measure of taxable income, over time, the measure can be considered a useful indicator of our dividends.

Distributable earnings does not represent, and should not be considered as a substitute for, or superior to, net income or as a substitute for, or superior to, cash flows from operating activities, each as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly ~~titled~~entitled measures reported by other companies. ~~Set forth~~

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The table below is a reconciliation of ~~core~~distributable earnings to the most directly comparable GAAP financial measure:

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands, except share and per share data)

2020

2020
Net income attributable to common stockholders

$
23,224

$
70,262
Adjustments for non-core earnings:

Stock-based compensation expense

1,913

3,794
First year public company transition expenses ⁽¹⁾

684

2,750
Change in fair value of optional subscription liabilities

(1,948)

(5,094)
Amortization of intangible assets

103

(682)
Loan loss (benefit) provision

(652)

3,279
Core earnings

$
23,324

$
74,309

Earnings per share, basic

$
0.18

$
0.53
Earnings per share, diluted

$
0.18

$
0.53
Core earnings per share, basic

$
0.18

$
0.56
Core earnings per share, diluted

$
0.18

$
0.56
Weighted-average number of shares of common stock outstanding, basic and diluted

Basic

132,282,252

132,156,844
Diluted

132,316,746

132,207,605

~~(1)~~

Expenses directly related to first year of public company reporting and compliance, primarily professional fees in connection with the design and implementation of internal controls and procedures under Section 404 of the Sarbanes-Oxley Act.


	Three Months Ended						Nine Months Ended
(dollars in thousands, except share and per share data)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Net income attributable to common stockholders	$	21,685		$	25,504		$	60,318		$	67,817
Adjustments for non-distributable earnings:
Stock-based compensation expense		891			1,913			2,552			3,794
New public company expenses(1)		—			684			953			2,750
Non-capitalized transaction and other one-time expenses(2)		489			—			489			—
Change in fair value of warrant liabilities		(1,244	)		(1,948	)		2,490			(5,094	)
Depreciation and amortization		146			103			577			(682	)
Provision for (reversal of) credit losses, net		2,607			(2,932	)		5,373			5,724
Distributable earnings prior to realized loss on investments	$	24,574		$	23,324		$	72,752		$	74,309
Realized credit losses(3)		(695	)		—			(2,096	)		(1,233	)
Distributable earnings	$	23,879		$	23,324		$	70,656		$	73,076
Distributable earnings per diluted share of common stock prior to realized loss on investments	$	0.19		$	0.18		$	0.55		$	0.56
Distributable earnings per diluted share of common stock	$	0.18		$	0.18		$	0.53		$	0.55
Weighted-average number of shares of common stock outstanding, basic and diluted
Basic		132,658,661			132,282,252			132,575,852			132,156,844
Diluted		132,752,471			132,316,746			132,663,437			132,207,605

(1)

Expenses directly related to professional fees in connection with our new public company reporting procedures, the design and implementation of internal controls under Section 404 of the Sarbanes-Oxley Act and the implementation of the CECL standard.

(2)

Includes other one-time expenses primarily related to the liquidation of the Private REIT.

(3)

Represents credit losses recorded in the provision for credit losses and recognized in distributable earnings upon charge-off of principal at the time of loan repayment or upon sale of real property where proceeds received are less than the principal outstanding.

Segment Reporting

We operate the business as one reportable segment, which originates, underwrites and services construction loans.

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Results from Operations

The period-to-period comparison of results is not necessarily indicative of results for future periods. The tables below set forth the results of our operations for the periods indicated, both in dollars and as a percentage of revenue (amounts in thousands, except percentage data):

Three Months Ended

Nine Months Ended

Statements of Operations Data:

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Revenues:

Interest income

$
22,846

$
21,844

$
66,481

$
68,577

Fee income

7,748

7,139

22,764

21,244

Total revenue

30,594

28,983

89,245

89,821

Other income (expense):

Change in fair value of warrant liabilities

1,244

1,948

(2,490
)

5,094

Expenses:

Impairment:

Provision for (reversal of) credit losses, net

2,607

(2,932
)

5,373

5,724

Operating expenses:

Compensation and employee benefits

4,025

5,160

11,254

11,397

General and administrative

3,521

3,199

9,810

9,977

Total expenses

10,153

5,427

26,437

27,098

Income before income taxes

21,685

25,504

60,318

67,817

Income tax provision

—

—

—

—

Net income

$
21,685

$
25,504

$
60,318

$
67,817

Three Months Ended

Nine Months Ended

Percentage of Revenue:

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

Revenues:

Interest income

75
%

75
%

74
%

76
%
Fee income

25

25

26

24

Total revenue

100

100

100

100

Other income (expense):

Change in fair value of warrant liabilities

4

7

(3
)

6

Expenses:

Impairment:

Provision for (reversal of) credit losses, net

9

(10
)

6

6

Operating expenses:

Compensation and employee benefits

13

18

13

13

General and administrative

12

11

11

11

Total expenses

33

19

30

30

Income before income taxes

71

88

68

76

Income tax provision

—

—

—

—

Net income

71
%

88
%

68
%

76
%

Comparison of Results of Operations

Unless otherwise stated, for purposes of this Management’s Discussion and Analysis of Financial Condition and Results Ofof Operations, in the comparison of the results of operations is for the three ~~months ended September 30, 2020~~ and September 30, 2019, Successor period refers to the three months ended September 30, 2020, and references to Predecessor period refer to the three months ended September 30, 2019, and for the discussion of the results of operations for the nine months ended September 30, ~~2020~~2021 and ~~2019, Successor period refers to the nine months ended~~ September 30, ~~2020, and references to Predecessor period refer to the nine months ended September 30, 2019.~~2020.

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Three Months Ended September ~~30,2020~~30, 2021 Compared to September 30, ~~2019~~

2020

Revenue

Total revenue for the three months ended September 30, 2021 and 2020 was $30.6 and ~~2019 were~~ $29.0 ~~and $34.6~~ million, respectively, ~~a decrease~~an increase of ~~$5.6~~$1.6 million. The ~~decrease~~increase relates to ~~a decrease~~an increase in interest income and fee income ~~relative to the Predecessor period,~~of $1.0 million and $0.6 million, respectively, which are discussed in more detail below.

Expenses

Total expenses for the three months ended September 30, 2021 and 2020 were $10.2 and ~~2019 were $7.7 and $8.7~~$5.4 million, respectively. The ~~decrease~~increase in total expenses from the prior period primarily was due to ~~decreases~~an increase in the provision for ~~loan~~credit losses ~~and general and administrative;~~of $5.5 million, partially offset by ~~an increase~~a decrease in compensation and employee benefits ~~compared to the three months ended September 30, 2020,~~of $1.1 million, which are discussed in more detail below.

Interest Income

Interest income ~~decreased~~increased by ~~$3.4~~$1.0 million, or ~~13.6%~~4.6%, for the three months ended September 30, ~~2020~~2021 from the three months ended September 30, ~~2019,~~2020 primarily due to an increase ~~in loans placed in non-accrual status largely as a result~~ of ~~the impact of the COVID-19 pandemic on our borrowers’ ability to complete projects in the timeframe originally contemplated. The decreases in interest income were partially offset by increase in interest income resulting from a net increase~~5% in the average size of our loan portfolio ~~of approximately 10.1% for~~in the ~~three months ended September 30, 2020~~2021 period compared to the ~~three months ended September 30, 2019.~~2020 period as a result of (1) the increase in the amount of capital deployed into new originations and (2) the repurchase by the Company of the Private REIT's participations in our loans. This increase was partially offset by a lower average effective interest-bearing principal outstanding during the 2021 period and an increase in the number of loans originated during this period with lower fixed rate interest and no minimum interest provisions.

Fee Income

Fee income ~~decreased~~increased by ~~$2.2~~$0.6 million, or ~~23.2%~~8.5%, for the three months ended September 30, ~~2020~~2021 from the three months ended September 30, 2019 primarily attributable to a decrease in origination and extension fee income relative to the Predecessor period as a result of (1) beginning to defer and amortize these fees on November 15, 2019 whereas in the past, the Predecessor’s policy was to record the fees when billed and (2) decrease in new originations during 2020 due to ~~disruptions~~a higher volume of loan originations in ~~our construction lending activity associated with~~ the ~~COVID-19 pandemic.~~2021 period compared to the 2020 period.

~~Provision for loan losses~~Other Income (Expense)

~~The provision for loan losses~~Other income decreased ~~$3.4~~$0.7 million for the three months ended September 30, ~~2020~~2021 from the three months ended September 30, ~~2019 primarily related~~2020. The unrealized gain or loss for the change in fair value of warrant liabilities includes (1) the Private Placement Warrant liability that was initially recorded in the second quarter of 2021 as a correction to ~~changes~~an immaterial error (refer to "Correction of Immaterial Error" in ~~estimates reducing~~Note 2 to the ~~allowance~~unaudited condensed consolidated financial statements included in this Report for ~~loan losses from amounts recorded earlier~~additional details on the accounting classification of the Private Placement Warrants) and (2) the Optional Subscription Liability that expired unexercised in the fourth quarter of 2020. ~~This~~For the 2021 period, $1.2 million of other income was due to a decline in the ~~result~~fair value of ~~progress or completion of construction~~the Private Placement Warrant liability during the three months ended September 30, 2021. For the 2020 ~~resulting in stabilizations or increases~~period, $1.9 million of other income was due to a decline in the ~~fair value of the collateral of the non-performing and impaired loans.~~

~~Table of Contents~~

~~Other Income~~

~~The change in~~ fair value of the Optional Subscription Liability, ~~is an unrealized gain or loss based on~~primarily due to the ~~fair value of an optional subscription of up to $25~~shorter expected term as the warrants approached the expiration date.

Provision for (Reversal of) Credit Losses, Net

The provision for credit losses increased $5.5 million ~~of additional common stock issued as a part~~for the three months ended September 30, 2021 from the three months ended September 30, 2020. For the 2021 period, the higher expense was the result of the ~~Business Combination. The Optional Subscription Liability warrants contain a cash settlement feature, which requires accounting~~growth in the size of the loan portfolio and an increase in estimated losses on loans classified as collateral dependent where foreclosure was deemed probable. For the 2020 period, the reversal of credit losses were due to our expected loss model changing from the worse-case to baseline due to normalization in the construction industry.

Compensation and Employee Benefits

Compensation and employee benefits expense decreased by $1.1 million, or 22.0%, for the ~~fair value of the liability at each reporting period. Other income of $1.9 million was recognized during~~three months ended September 30, 2021 from the three months ended September 30, 2020, ~~resulting from~~primarily attributable to the ~~decrease~~$1.0 million decline in ~~value~~stock-based compensation expense recorded for the 2021 period compared to the 2020 period, due to a longer vesting period for most of the ~~optional subscription warrants during~~RSUs in the period which primarily resulted from the shorter expected term as the warrants approach the expiration date on November 14, 2020 and the market price of our common stock remains below the exercise price.2021 period.

~~Compensation~~35

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General and ~~Employee Benefits~~Administrative

~~Compensation~~General and ~~employee benefits~~administrative expense increased by ~~$4.4~~$0.3 million, or ~~549.9%~~10.1%, for the three months ended September 30, ~~2020~~2021 from the three months ended September 30, ~~2019~~2020. The increase is primarily ~~attributable to $1.9 million of stock-based compensation expense recorded for the three months ended September 30, 2020 and $2.5 million related~~due to an increase of $0.3 million in ~~employee headcount~~undrawn fees on the credit facility and $0.4 million in amortization of finance costs incurred during the 2021 period associated with our revolving credit facility, which closed in February 2021. The increase was partially offset by a ~~change~~decline of $0.4 million in ~~the compensation structure for executives who were compensated through distribution of earnings~~legal and professional fees from the Predecessor Company during the three months ended September 30, 2019. The stock-based compensation expenses resulted from grants of RSUs at fair value, which are being amortized over the respective vesting periods. The equity-based compensation expense recorded in the Predecessor Period was $0.2 million.

~~General and Administrative~~

~~General and administrative expense decreased by $2.0 million or 38.8% for the three months ended September 30, 2020 from the three months ended September 30, 2019~~prior period, primarily as a result of ~~$2.0 million~~the costs incurred in accounting and legal fees incurred during the three months ended September 30, 2019 by the Predecessor Company in connection with the execution of the Business Combination, and $2.2 million of non-recurring broker commissions2020 associated with growth in the loan portfolio during the three months ended September 30, 2019. These decreases from the prior period were partially offset by $2.2 million in accounting and legal fees associated with being a public company ~~including certain non-recurring expenses, such as~~reporting and the design and implementation of internal controls ~~and procedures~~ under Section 404 of the Sarbanes-Oxley Act.

Nine Months Ended September ~~30,2020~~30, 2021 Compared to September 30, ~~2019~~

2020

Revenue

Total revenue for the nine months ended September 30, 2021 and 2020 was $89.2 and ~~the nine months ended September 30, 2019 were~~ $89.8 ~~and $100.9~~ million, respectively, a decrease of ~~$11.1~~$0.6 million. The decrease ~~from the prior period~~ primarily relates to a decrease in ~~origination and extension~~interest income of $2.1 million, partially offset by an increase in fee income ~~relative to the Predecessor period,~~of $1.5 million, which are discussed in more detail below.

Expenses

Total expenses for the nine months ended September 30, 2021 and 2020 were $26.4 and $27.1 million, respectively. The decrease in total expenses from the ~~nine months ended September 30, 2019 were $24.7 and $18.9 million, respectively, an increase of $5.8 million. The increase during the nine months ended September 30, 2020~~ prior periodwas ~~primarily~~ due to ~~an increase~~decreases in the provision for credit losses, general and administrative expenses and compensation and employee benefits of $0.4, $0.2 and ~~also due to an increase in the provision for loan losses; partially offset by decreases during the nine months ended September 30, 2020 in general and administrative expenses,~~$0.1 million, respectively, which are discussed in more detail below.

~~Table of Contents~~

Interest Income

Interest income decreased by ~~$0.8~~$2.1 million, or ~~1.1%~~3.1%, for the nine months ended September 30, ~~2020~~2021 from the nine months ended September 30, 2019. The decrease resulted primarily from the increase in loans designated as non-performing and placed on non-accrual status primarily as a result of the impact of the COVID-19 pandemic on our borrowers’ ability to complete projects in the timeframe originally contemplated. The decreases in interest income were partially offset by increase in interest income resulting from a net increase in the average size of our loan portfolio of approximately 17.8% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

~~Fee Income~~

Fee income decreased by $10.3 million or 32.7% for the nine months ended September 30, 2020 from the nine months ended September 30, 2019 primarily attributable to a decrease in origination and extension fee income relative to the Predecessor period as a result of (1) beginning to defer and amortize these fees on November 15, 2019 whereas in the past, the Predecessor’s policy was to record the fees when billed and (2) decrease in new originations during the nine months ended September 30, 2020, due to ~~disruptions~~a lower average effective interest-bearing principal outstanding during the 2021 period as a result of a larger percentage of the loan portfolio on non-accrual status and an increase in the number of loans originated during this period with lower fixed rate interest and no minimum interest provisions; partially offset by the effects of an increase of 3% in the average size of our loan portfolio in the 2021 period compared to the 2020 period.

Fee Income

Fee income increased by $1.5 million, or 7.2%, for the nine months ended September 30, 2021 from the nine months ended September 30, 2020, primarily due to an increase in loan origination volume.

Other Income (Expense)

Other expense increased $7.6 millionfor the nine months ended September 30, 2021 from the other income for three months ended September 30, 2020. The unrealized gain or loss for the change in fair value of warrant liabilities includes (1) the Private Placement Warrant liability that was initially record in the second quarter of 2021 as a correction to an immaterial error (refer to "Correction of Immaterial Error" in Note 2 to the unaudited condensed consolidated financial statements included in this Report for additional details on the accounting classification of the Private Placement Warrants) and (2) the Optional Subscription Liability that expired unexercised in the fourth quarter of 2020. For the 2021 period, the other expense of $2.5 million was recognized to record the Private Placement Warrant liability in the second quarter of 2021 of $3.7 million, partially offset by the decline in the fair value of $1.2 million during the three months ended September 30, 2021. For 2020 period, the other income of $5.1 million was due to a decline in the fair value of the Optional Subscription Liability primarily due to a decline in our ~~construction lending activity associated with~~stock price during the ~~COVID-19 pandemic.~~period and the shorter expected term as the warrants approached the expiration date.

Provision for ~~loan losses~~(Reversal of) Credit Losses, Net

~~Provision~~The provision for ~~loan~~credit losses ~~increased by $0.5~~decreased $0.4 million for the nine months ended September 30, ~~2020~~2021 from the nine months ended September 30, ~~2019. The increase resulted~~2020, primarily ~~from an increase in non-performing and impaired loans associated with the current economic environment primarily related~~due to the ~~impact~~amount of loans in contractual default during the 2020 period due to the delays caused by the COVID-19 ~~pandemic;~~pandemic, partially offset by the ~~$2.8 million~~growth in the ~~provision for~~size of the loan portfolio and an increase in estimated losses on loans classified as collateral dependent where foreclosure was deemed probable during the ~~nine months ended September 30, 2019.~~

2021 period.~~Other Income~~

~~The change in fair value~~36

Table of the Optional Subscription Liability is an unrealized gain or loss based on the fair value of an optional subscription of up to $25 million of additional common stock issued as a part of the Business Combination. The Optional Subscription Liability warrants contain a cash settlement feature, which requires accounting for the fair value of the liability at each reporting period. Other income of $5.1 million was recognized during the Successor period resulting from the decline in value of the optional subscription warrants during the period which resulted from the decrease in the market price of our common stock.Contents

Compensation and Employee Benefits

Compensation and employee benefits expense ~~increased by $6.8~~remained relatively flat with a decrease of $0.1 million, or ~~145.3%~~1.3%, for the nine months ended September 30, ~~2020~~2021 from the nine months ended September 30, ~~2019 due to $3.8 million of~~2020. During the 2021 period, the decline in stock-based compensation expense ~~recorded~~of $1.2 million due to a longer vesting period for most of the RSUs in the 2021 period was fully offset by an increase in salaries and benefits resulting from an increase in average employee headcount in the 2021 period compared to the 2020 period.

General and Administrative

General and administrative expense decreased by $0.2 million, or 1.7%, for the nine months ended September 30, 2020 compared to $0.5 million of equity-based compensation in the Predecessor Period. The stock-based compensation expenses resulted from grants of RSUs. The fair values of the RSUs are being amortized over the vesting periods. In addition, the increase was due to an increase of $3.5 million related to an increase in employee headcount and a change in the compensation structure for executives who were compensated through distribution of earnings from the Predecessor Company during the three months ended September 30, 2019.

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~~General and Administrative~~

~~General and administrative expense decreased by $1.5 million or 13.0% for the nine months ended September 30, 2020~~2021 from the nine months ended September 30, ~~2019. This~~2020. The decrease iswas primarily due to a $3.3 million decrease in professional fees from the prior period, primarily as a result of athe costs incurred in 2020 for first year of public company reporting and the design and implementation of internal controls under Section 404 of the Sarbanes-Oxley Act. The decrease was partially offset by an increase in depreciation and amortization expense of ~~$5.3~~$1.3 million ~~of non-recurring broker commissions associated with growth in the loan portfolio~~ during the ~~nine months ended September 30, 2019 and~~2021 period, primarily as a result of a reversal of intangible asset amortization of $0.7 million ~~that was originally recognized in 2019 but was~~during the nine months ended September 30, 2020, which resulted from a purchase accounting measurement period adjustment in 2020, ~~when the preliminary valuation of intangible assets was decreased. These decreases were partially offset by~~and an increase of $0.8 million in ~~accounting~~undrawn fees on the credit facility and ~~legal fees~~$1.0 million of ~~$4.5 million~~amortization of financing costs incurred during the nine months ended September 30, 2021 associated with ~~being a new public company, including certain non-recurring expenses, such as design and implementation of internal controls and procedures under Section 404 of the Sarbanes-Oxley Act.~~our revolving credit facility, which closed in February 2021.

Liquidity and Capital Resources

Overview

Our primary liquidity needs include ongoing commitments to fund our lending activities and future funding obligations for our existing loan portfolio, paying dividends and funding other general business needs. Our primary sources of liquidity and capital resources to date have been derived from the capital contributions from members of the Predecessor Companies, cash flow from operations and payoffs of loans in our existing portfolio. Neither the Successor nor the Predecessor, has utilized any borrowings since inception. As of September 30, ~~2020,~~2021, our cash and cash equivalents totaled ~~$173.6~~$37.4 million and our total liquidity, including a fully undrawn revolving credit facility of $135 million, was $172.4 million.

We seek to meet our long-term liquidity requirements, such as real estate lending needs, including future construction draw commitments, primarily through our existing cash resources and return of capital from investments, including loan repayments. Additionally, ~~going forward,~~ we intend to ~~fund~~use borrowings under our ~~growth through the issuance of common stock, potential use of~~revolving credit facility from time to time as a cash management ~~tools such as a credit facility,~~tool in between collecting loan repayments. We expect to opportunistically issue debt and raise capital in the ~~sale of participation interests in loans we originate~~public and private markets from time to ~~the Private REIT, and fee income from the Private REIT.~~time based on market conditions. As of September 30, ~~2020,~~2021, we had ~~$1.2~~$1.5 billion of total loan commitments outstanding, of which ~~our portion~~we have funded $950.7 million.

On February 19, 2021, we entered into a revolving credit agreement with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for the ~~Private REIT’s portion~~lenders, providing for a $135.0 million revolving credit facility. By providing backup liquidity for future draws, we expect the availability of the revolving credit facility will enable us to use a larger percentage of our cash balances for lending activities. In October 2021, we made our first use of our revolving credit facility, with a draw of $50.0 million to support the funding of borrower draws and new loan originations, while we awaited several large loan repayments. We then repaid the outstanding balance on our revolving credit facility in full by October 31, 2021, following the receipt of loan repayments. These events demonstrate the value of our revolving credit facility as a cash management tool.

Our obligations under the revolving credit facility are secured by substantially all of our assets. The revolving credit facility contains covenants customary for financings of this type, including limitations on the incurrence of indebtedness, liens, asset dispositions, acquisitions, mergers and consolidations, certain dividends, distributions and other payments, advances and investments, payments to affiliates, optional prepayments and other modifications of certain other indebtedness, and amendments, terminations and waivers of certain material agreements, as well as a minimum tangible net worth and a total debt to equity ratio requirement. Among other things, the credit agreement provides that we may not pay cash dividends that would result in non-compliance with the financial covenants under the credit agreement or during an event of default under the credit agreement, except in the case of defaults other than payment defaults, for dividends in the amounts necessary to maintain our REIT status. The revolving credit facility contains events of default customary for financings of this type, including failure to pay principal, ~~balance funded~~interest and ~~outstanding were $874.4~~other amounts, materially incorrect representations or warranties, failure to observe covenants and ~~$15.6 million, respectively.~~other terms of the revolving credit facility, cross-defaults to other indebtedness, bankruptcy, insolvency, material judgments, certain ERISA violations, changes in control and failure to maintain REIT status, in some cases subject to customary grace periods.

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On March 2, 2021, we entered into a distribution agreement with J.P. Morgan Securities LLC, Barclays Capital Inc., B. Riley Securities, Inc., JMP Securities LLC and Raymond James & Associates, Inc. as sales agents, to sell shares of our common stock having an aggregate gross sales price of up to $200,000,000, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). We have no obligation to sell any shares under the ATM Program, and sold no shares under the ATM Program during the nine months ended September 30, 2021.

We believe our existing sources of liquidity are sufficient to fund our existing commitments. However, we are continuing to monitor the COVID-19 pandemic and its impact on us, our borrowers and the economy as a whole. Because the magnitude, duration and severity of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. We anticipate the pandemic may continue to slow the pace of repayments of our outstanding loans, which would reduce the capital available to fund new loans. As a result, we seek to fund new loans in the near term through the sale of participation interests in new mortgage loans to the Private REIT, which will depend on the ability of the Private REIT to raise capital. To the extent funds available for new loans are limited, we will manage our capital deployment based on the receipt of ~~payoffs. In the longer term, we plan to raise equity capital~~payoffs and may from time to time asuse borrowings under our credit facility. As a key component of our growth strategy going forward, we plan to raise capital, which may include debt financing, from time to time subject to market conditions. ~~In addition,~~We intend to maintain a conservative balance sheet and debt to equity ratio. Under our credit agreement, we ~~are seeking~~must maintain a total debt to obtain a working capital credit facility to increase our available cash for deployment. By providing backup liquidity for future draws, a working capital credit facility would enable us to use a larger percentage of our cash balances for lending activities without planning to incur debt in the ordinary course of business. We cannot assure whether will be available to obtain a credit facility on favorable terms or at all.equity ratio that does not exceed 30%.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where Broadmark Realty does not receive corresponding cash. We intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Code and to avoid U.S. federal income tax and the non-deductible excise tax.

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Sources and Uses of Cash

The following table sets forth changes in cash and cash equivalents for the ~~nine~~three months ended September 30, ~~2020~~2021 and ~~2019:~~2020:


	Successor		Predecessor
	Nine Months Ended		Nine Months Ended
	September 30,		September 30,

					Nine Months Ended
(dollars in thousands)	2020		2019		September 30, 2021			September 30, 2020
Cash provided by (used in):
Operating activities		53,674		84,539	$	50,471		$	49,554
Investing activities		(31,039)		(214,126)		(148,793	)		(26,919	)
Financing activities		(87,247)		220,492		(87,677	)		(87,247	)
Net increase / (decrease) in cash & cash equivalents		(64,612)		90,905
Net decrease in cash & cash equivalents					$	(185,999	)	$	(64,612	)

Comparison of Results of Cash Flows for the Nine Months Ended September 30, ~~2020~~2021 and September 30, ~~2019~~2020

Net cash provided by operating activities for the nine months ended September 30, 2021 and 2020 were comparable at $50.5 and ~~2019 were $53.7 and $84.5~~$49.6 million, respectively. The $30.9 million decrease partially resulted from an $11.8 million decline in net income caused by declines in revenue and increases in expenses, which are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Results of Operations – Nine Months Ended September 30,2020 Compared to September 30, 2019. The decrease in cash flow from operations partially resulted from an $8.5 million change in the amount of increases in operating assets related to receivables and other assets and the $5.1 million of noncash other income for the change in the fair value of optional subscription liabilities with no corresponding amount for the 2019 period. The decrease also partially resulted from the subtraction of $7.3 million of accretion of deferred origination and amendment fees within the adjustments to reconcile net income to netNet cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in operating assets and liabilities. Interest received for the 2021 period did not increase by the percentage increase in our average outstanding loan portfolio for the 2021 period compared to the 2020 period due to the lower effective interest bearing principal outstanding and lower interest rates on some new loans due to market factors along with our new dynamic pricing model. The reconciliations between net income and cash provided by operating activities in the condensed consolidated statement of cash flows include adjustments to net income for non-cash items that, while fluctuating between the 2021 and 2020 periods, have no effect on cash that was provided by operating activities.

Net cash used in investing activities was $148.8 and $26.9 million, respectively for the nine months ended September 30, 2021 and 2020. The increase in cash used in investing activities of $121.9 million was primarily due to the $76.4 million decrease in cash flows from the change in mortgage notes receivable between the 2021 and 2020 ~~with no corresponding amount~~periods and the $43.5 million paid to repurchase of loan participations from the Private REIT in the 2021 period.

Net cash used in financing activities was comparable at $87.7 and $87.2 million, respectively for the nine months ended September 30, ~~2019. We began to defer~~2021 and amortize loan origination and amendment fees on November 15, 2019 upon consummation of the Business Combination for our consolidated financial reporting. Under the business model used by the Predecessor entities (whose financial results were not consolidated, but are being presented on a combined basis for the nine months ended September 30, 2019), 80% of the loan origination and amendment fees were paid to the Predecessor management entities. The Predecessor management entities classified the management fees received as cash provided by operating activities. The 20% of loan origination and amendment fees retained by the Predecessor lending entities were included in the total for cash flows provided by operating activities instead of being included in cash flows from investing activities, but the impact to the statement of cash flows of this treatment is immaterial to the statement of cash flows for the 2019 period.

Net cash used in investing activities for the nine months ended September 30, 2020 and 2019 were $31.0 and $214.1 million, respectively. The decrease in cash used of $183.1 million was primarily due to smaller increases in the size of our loan portfolio during the 2020 period compared to larger increases experienced in the 2019 period resulting from capital available for making loans from the $220.5 million of net contributions received from members in the 2019 period.

~~Net cash~~2020. Cash used in financing activities ~~for~~includes a $5.0 million decrease in dividends paid in the ~~nine months ended September 30,~~2021 period compared to the 2020 period; however this decrease was ~~$87.2~~offset by an increase resulting from the $5.1 million ~~which consists entirely~~payment of ~~dividends paid. Net cash provided by financing activities for~~costs to obtain our revolving credit facility in the ~~nine months ended September 30, 2019 was $220.5 million related to member contributions net of distributions and redemptions.~~2021 period.

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Contractual Obligations ~~and Commitments~~

The following table illustrates our contractual obligations and commercial commitments by due date as of September ~~30,2020:~~30, 2021:

Less than 1





More than
(dollars in thousands)

Total

year

1-3 years

3-5 years

5 years
Construction holdbacks⁽¹⁾

305,410

234,845

70,565

—

—
Operating lease obligations

$
11,962

$
761

$
1,893

$
2,008

$
7,300
Total

$
317,372

$
235,606

$
72,458

$
2,008

$
7,300


			Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years
Construction holdbacks (1)		541,144		317,863		223,281		—		—
Operating lease obligations	$	11,098	$	932	$	1,950	$	2,068	$	6,148
Total	$	552,242	$	318,795	$	225,231	$	2,068	$	6,148

(1)

The timings and amounts of construction holdbacks funding are uncertain as these commitments relate to loans for construction costs and depend on the progress and performance of the underlying assets of our loans.

~~(1)~~

~~Includes construction holdbacks of $19.8 million on participating interests sold to the Private REIT as of September 30, 2020.~~

Off-Balance Sheet Arrangements

~~We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of September 30, 2020.~~ We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. WeFinally, we have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets as of September 30, ~~2020.~~2021.

Critical Accounting Policies and Estimates

Use of Estimates in the Preparation of Financial Statements

The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with loan impairment and valuation of investments in real estate and taxable income. Management evaluates our policies and assumptions on an ongoing basis.

For a description of our significant accounting policies related to these accounts in the preparation of our consolidated financial statements, see “Note 2 - Summary of Significant Accounting Policies” of our ~~unaudited~~ condensed consolidated financial statements included in this Report.

Recently Issued Accounting Pronouncements

For a description of our adoption of new accounting pronouncements and the impact thereof on our business, see “Note 2 - Summary of Significant Accounting Policies” of our ~~unaudited~~ condensed consolidated financial statements included in this Report.

~~JOBS Act~~

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for public companies that qualify as “emerging growth companies” under the JOBS Act. Emerging growth companies under the JOBS Act are allowed to elect to comply with new or revised accounting pronouncements based on the effective date for private companies rather than the effective date for publicly traded companies. Broadmark Realty is currently an emerging growth company and has elected to delay the adoption of new or revised accounting standards. As a result, Broadmark Realty may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for publicly traded companies that are not emerging growth companies. As such, Broadmark Realty’s financial statements may not be comparable to companies that comply with public company effective dates.39

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We will cease to qualify as an emerging growth company effective December 31, 2020 unless the eligibility standards are modified. Loss of emerging growth company status will result in our losing our reporting exemptions noted above, and in particular require our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2020 under Section 404(b) of the Sarbanes-Oxley Act.

~~Internal Control over Financial Reporting and Disclosure Control~~

~~Management has identified certain material weaknesses in our internal control over financial reporting. See Item 4 below.~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, ~~2020, the Company~~2021, we did not have any outstanding “market risk sensitive instruments,” as such term is used within the meaning of Item 305 of SEC Regulation S-K. However, ~~the Company is~~we are subject to other types of business risk described below and under “Market Risks Related to Real Estate Loans” in Item 1A of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020.

Interest Rate Risk

While all ~~the Company’s~~our loans bear a fixed rate of interest and ~~the Company does~~we do not have any interest-rate sensitive instruments obligations outstanding, the nature of ~~the Company’s~~our business exposes itus to business risk arising from changes in interest rates. Interest rates are highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond ~~the control of the Company.~~our control. An increase or decrease in interest rates would not impact the interest charged on ~~the Company’s~~our then existing loan portfolio, as ~~the Company’s~~our loans bear fixed rates of interest. However, a rapid significant increase in interest rates may reduce the demand for ~~residential~~ mortgage loans due to the higher cost of borrowing, potentially resulting in a reduced demand for real estate, declining real estate values and higher default rates. Alternatively, a significant rapid decline in interest rates may negatively affect the amount of interest that ~~the Company~~we may charge on new loans, including those that are made with capital received as outstanding loans mature. Additionally, declining interest rates may also result in prepayments of ~~the Company’s~~ existing loans, which may also result in the redeployment of capital in new loans bearing lower interest rates.

Credit Risk

~~The Company’s~~Our loans are subject to credit risk. Credit risk is the exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply and demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S. economy, ~~epidemics and public health emergencies~~ and other factors beyond ~~the Company’s~~our control. All loans are subject ~~to the~~a certain possibility of default. ~~The Company seeks~~We seek to mitigate credit risk by originating loans which are secured by first deed of trust liens on real estate with a maximum loan-to-value ratio of 65%. ~~The Company~~We also ~~undertakes~~undertake extensive due diligence of the property that will be mortgaged to secure the loans, including review of third-party appraisals on the property. ~~Additionally, the Company requires credit support for each loan, including personal guarantees on a recourse basis by the principals of the borrowers.~~

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Risks Related to Real Estate

Residential and commercial property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, events such as natural disasters, including hurricanes and earthquakes, ~~pandemics,~~ acts of war and terrorism, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, construction cost, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the loans, which could also cause ~~Company~~us to suffer losses. These factors could adversely affect ~~the Company’s~~our business, financial condition, results of operations and ability to pay dividends to ~~its~~our stockholders.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this ~~report.~~Report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, ~~2020,~~2021, the Company’s disclosure controls and procedures were ~~not effective for the reasons described below.~~

~~Material Weakness in Internal Control over Financial Reporting~~

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As previously disclosed in the Company’s Form S-4 related to the Business Combination, the Predecessor Company Group reported certain material weaknesses in internal control over financial reporting identified in connection with the audit of the members of the Predecessor Company Groups’ financial statements at December 31, 2018. The Company reported in its Form 10-K for the year ended December 31, 2019 that the material weakness previously identified remained as of December 31, 2019.

The material weaknesses identified include (i) lack of formalized internal control policies and procedures as it relates to financial reporting and (ii) insufficient resources to provide appropriate segregation of duties related to the preparation and review of information used in financial reporting, as well as review controls over the financial statement reporting process.

The control deficiencies described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that the deficiencies represent material weaknesses in the Company’s internal control over financial reporting and our internal control over financial reporting was not effective as of ~~December 31, 2019. At this time, we do not believe such material weaknesses have been fully remediated.~~September 30, 2021.

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~~Management’s Remediation Plan~~

~~The Company plans and has begun to execute the following steps to remediate the aforementioned material weaknesses in internal control over financial reporting:~~

●

Continue to enhance internal control policies and procedures developed and implemented during 2019 and 2020 to ensure that a robust and effective internal control environment exists and persists across the organization; including ensuring effective risk assessments are performed to identify and assess necessary changes in the application of GAAP, financial reporting processes and the design and effective operation of internal controls.

●

~~Seek to attract, train and retain individuals that have the appropriate skills and experience related to complex accounting matters and financial reporting;~~

●

~~Implement enhanced accounting and financial reporting software; and~~

●

Continue to report regularly to the Company’s audit committee on the progress and results of the remediation plan, including the identification, status and resolution of internal control deficiencies.

~~There is no assurance that the material weaknesses will be fully remediated during 2020 particularly given the disruption of COVID-19 on the Company’s business and operations.~~

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2020, we successfully implemented a new general ledger accounting system commonly used by public companies to enhance their internal controls and financial reporting capabilities. In addition, we hired four new qualified accounting and finance professionals during the three months ended September 30, 2020 in addition to the hiring in June 2020 of our Chief Accountant who has extensive experience in accounting operations, SEC reporting and implementing internal controls. Presently our finance and accounting staff are working remotely as a result of COVID-19, which is requiring some adjustments to our procedures and may impact our plans to remediate the material weaknesses in internal control over financial reporting. Except as set forth above,2021, there were no changes in the Company’s internal control over financial reporting (as such terms are defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~fiscal~~ quarter ~~to which this report relates~~ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in legal proceedings which arise in the ordinary course of business. It believes that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on its business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

~~This section supplements and updates certain of~~There have been no material changes to the ~~information found~~risk factors previously disclosed under ~~the “Risk Factors” section in~~ Part I, Item 1A of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, 2019 filed with the SEC on March 16, 2020 based on information currently known to us and recent developments since the date of our 2019 Form 10-K filing. The matters discussed below should be read in conjunction with the risk factors set forth in the 2019 Form 10-K. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the 2019 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.

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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 our business and results of operations.2020.

The COVID-19 pandemic and resulting containment measures have caused economic and financial disruptions that have materially adversely affected, and are expected to continue to materially adversely affect, our business and results of operations. The extent to which the pandemic will continue to materially adversely affect our business and results of operations will depend on numerous evolving factors and future developments that we are not able to predict, including the duration, spread and severity of the pandemic; the nature, extent and effectiveness of containment measures; the extent and duration of the effect on the economy, unemployment, construction and housing prices; and how quickly and to what extent normal economic and operating conditions can resume.

~~The COVID-19 pandemic and containment measures have contributed to, among other things:~~

●

~~Significant and rapid economic contraction and a record rise in unemployment.~~

●

A significant increase in loans in default and slowdown in the rate of new loan originations, primarily as a result of the adverse impacts on the creditworthiness of our borrowers and other counterparties and their ability to pay amounts owed to us and our ability to collect such amounts.

●

~~Adverse impacts on the progress of construction on our borrowers’ projects and their ability to complete projects in accordance with the terms of their loans.~~

●

Adverse impacts on the demand for and the value of some types of commercial and residential real estate, which may delay or otherwise adversely impact our borrowers’ ability to sell or lease properties they are developing in an amount sufficient to repay their loans.

●

~~Adverse impacts on capital and credit market conditions, which may limit our access to and the cost of capital.~~

●

~~An increased risk to the value of our investment in mortgage notes receivable, which has the potential to result in impairment charges.~~

●

~~Delays in foreclosure proceedings, including moratoriums in some jurisdictions, and the enforcement of our rights with respect to loans in default.~~

●

An increased risk of an information or cyber-security incident, fraud, or a failure to maintain the uninterrupted operation of our information systems, among other things, as a result of an increase in remote work.

~~To the extent these impacts continue or intensify, or return to the extent they have diminished, we expect our business and results of operations to be adversely affected.~~

As discussed in our Results of Operations, we saw a decrease in the amount of loans in contractual default during the three months ended September 30, 2020 and we recognized a loan loss benefit of $0.7 million compared to a loan loss provision expense of $2.7 million during the three months ended September 30, 2019. During the nine months ended September 30, 2020 and 2019, we recognized a loan loss provision expense of $3.3 and $2.8 million, respectively. The implementation of moratoriums on foreclosure proceedings in additional jurisdictions, or the extension of existing foreclosure moratoriums, can be expected to delay our ability to realize the value of our collateral in the applicable jurisdictions, and thereby reduce the capital available to us for new originations.

The COVID-19 pandemic and containment measures have caused us to modify our strategic plans and business practices, including the amount of capital deployed and the property types that we lend on and may adversely affect our plans to remediate the material weaknesses in our internal control over financial reporting.

If the impact from the pandemic is prolonged, it could increase the negative impacts to our business and may also heighten many of the other risks described in the “Risk Factors” section of our 2019 Form 10-K. We do not yet know the full extent of how the COVID-19 pandemic and the containment measures will affect our business and results of operations, however, the continuing effects are expected to have an adverse impact on our business and results of operations.

~~Table of Contents~~

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

~~Not applicable.~~

Not applicable.

ITEM 5. OTHER INFORMATION

~~None.~~

None.

~~Table of Contents~~

ITEM 6. EXHIBITS


~~10.1~~		Employment Agreement, dated September 5, 2020 by and between Broadmark Realty Capital Inc. and Nevin Boparai*
31.1
~~10.2~~		~~2020 Annual Cash Bonus Program* [Certain portions of this document that constitute confidential information have been redacted in accordance with Regulation S-K, Item 601(b)(10)].~~

~~31.1~~		Rule13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Broadmark Realty Capital Inc.*

31.2		Rule13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Broadmark Realty Capital Inc.*

32.1		Section 1350 Certification of the Chief Executive Officer of Broadmark Realty Capital Inc.*

32.2		Section 1350 Certification of the Chief Financial Officer of Broadmark Realty Capital Inc.*

101:
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Taxonomy Extension Schema
101.CAL		Taxonomy Extension Calculation Linkbase
101.LAB		Taxonomy Extension Label Linkbase
101.PRE		Taxonomy Extension Presentation Linkbase
101.DEF		Taxonomy Extension Definition Document

104		Cover Page Interactive Data File––the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

*Exhibits that are filed herewith.

Table of Contents

~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BROADMARK REALTY CAPITAL INC.

Date: November ~~9, 2020~~8, 2021	By:	/s/ Jeffrey B. Pyatt
	Name:	Jeffrey B. Pyatt
	Title:	President and Chief Executive Officer (Principal Executive Officer)
~~Date: November 9, 2020~~	~~By:~~	~~/s/ David Schneider~~
Date: November 8, 2021	~~Name:~~By:	/s/ David Schneider
	~~Title:~~Name:	David Schneider
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

		~~Page~~
			Page

~~PART I.~~	~~FINANCIAL INFORMATION~~

~~Item 1.~~	~~Financial Statements (Unaudited)~~
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	43
	Condensed Consolidated Statements of Income	54
	Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity	65
	Condensed Consolidated Statements of Cash Flows	86
	Notes to Unaudited Condensed Consolidated Financial Statements	97
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3127
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4240
Item 4.	Controls and Procedures	43

~~PART II.~~	~~OTHER INFORMATION~~	40

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	4441
Item 1a.	Risk Factors	4441
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4641
Item 3.	Defaults Upon Senior Securities	4641
Item 4.	Mine Safety Disclosures	4641
Item 5.	Other Information	4641
Item 6.	Exhibits	4741

SIGNATURES		4842


	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	173,602	$	238,214
Mortgage notes receivable, net		858,713		821,589
Interest and fees receivable, net		11,917		4,108
Investment in real property, net		3,743		5,837
Intangible assets, net		706		4,970
Goodwill		136,965		131,965
Other assets		4,981		2,046
Total assets	$	1,190,627	$	1,208,729

Liabilities and Equity
Accounts payable and accrued liabilities	$	3,504	$	8,415
Dividends payable		7,934		15,842
Total liabilities	$	11,438	$	24,257
Commitments and Contingencies
Common stock, $0.001 par value, 500,000,000 shares authorized, 132,236,307 and 132,015,635 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		132		132
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2020 and December 31, 2019		—		—
Additional Paid in Capital		1,212,914		1,209,120
Accumulated deficit		(33,857)		(24,780)
Total equity		1,179,189		1,184,472
Total liabilities and equity	$	1,190,627	$	1,208,729


	Preferred			Common stock				Additional
	Shares	Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit		Total
Balances as of December 31, 2019	—	$	—		132,015,635	$	132	$	1,209,120	$	(24,780)	$	1,184,472
Issuance of shares from vested RSUs	—		—		95,694		—		—		—		—
Net Income	—		—		—		—		—		27,279		27,279
Dividends	—		—		—		—		—		(31,700)		(31,700)
Stock-based compensation expense	—		—		—		—		914		—		914
Balances as of March 31, 2020	—	$	—		132,111,329	$	132	$	1,210,034	$	(29,201)	$	1,180,965
Issuance of shares from vested RSUs	—		—		119,855		—		—		—		—
Net Income	—		—		—		—		—		19,759		19,759
Dividends	—		—		—		—		—		(23,793)		(23,793)
Stock-based compensation expense	—		—		—		—		967		—		967
Balances as of June 30, 2020	—	$	—		132,231,184	$	132	$	1,211,001	$	(33,235)	$	1,177,898
Issuance of shares from vested RSUs	—		—		5,098		—		—		—		—
Issuance of shares from exercised warrants	—		—		25		—		—		—		—
Net Income	—		—		—		—		—		23,224		23,224
Dividends	—		—		—		—		—		(23,846)		(23,846)
Stock-based compensation expense	—		—		—		—		1,913		—		1,913
Balances as of September 30, 2020	—	$	—		132,236,307	$	132	$	1,212,914	$	(33,857)	$	1,179,189


	Class A Units			Class P Units			Preferred Units			Additional		Retained Earnings
	Units	Amount		Units	Amount		Units ⁽¹⁾	Amount		Paid-in Capital		(Accumulated Deficit)		Total
Balances as of December 31, 2018 (Predecessor)	20,950	$	1	50	$	—	6,827,701	$	684,979	$	767	$	(637)	$	685,110
Contributions	850		200	—		—	796,028		79,535		—		—		79,735
Reinvestments	—		—	—		—	71,086		7,094		—		—		7,094
Net Income	—		—	—		—	—		—		—		24,989		24,989
Distributions	—		—	—		—	—		—		—		(24,134)		(24,134)
Redemptions	—		—	—		—	(133,513)		(13,331)		—		—		(13,331)
Compensation expense related to grant of profits interest	(100)		—	100		—	—		—		734		—		734
Grants of restricted units	150		—	—		—	—		—		134		—		134
Balances as of March 31, 2019 (Predecessor)	21,850	$	201	150	$	—	7,561,302	$	758,277	$	1,635	$	218	$	760,331
Contributions	—		—	—		—	1,441,711		122,414		—		—		122,414
Reinvestments	—		—	—		—	86,222		8,594		—		—		8,594
Net Income	—		—	—		—	—		—		—		31,200		31,200
Distributions	—		—	—		—	—		—		—		(29,125)		(29,125)
Redemptions	—		—	—		—	(227,248)		(22,927)		—		—		(22,927)
Grants of restricted units	—		—	—		—	—		—		170		—		170
Balances as of June 30, 2019 (Predecessor)	21,850	$	201	150	$	—	8,861,987	$	866,358	$	1,805	$	2,293	$	870,657
Contributions	—		—	—		—	567,905		154,437		—		—		154,437
Reinvestments	—		—	—		—	43,293		9,340		—		—		9,340
Net Income	—		—	—		—	—		—		—		25,856		25,856
Distributions	—		—	—		—	—		—		—		(29,357)		(29,357)
Redemptions	—		—	—		—	(116,613)		(19,510)		—		—		(19,510)
Grants of restricted units	—		—	—		—	—		—		170		—		170
Balances as of September 30, 2019 (Predecessor)	21,850	$	201	150	$	—	9,356,572	$	1,010,625	$	1,975	$	(1,208)	$	1,011,593


Consideration paid:	$ (in thousands)
Cash	$	102,245
Common stock		479,619
Total consideration paid	$	581,864

Assets acquired:
Cash and cash equivalents		88,505
Investment in real property		8,413
Mortgage notes receivable		344,837
Interest and fees receivable		2,743
Intangible assets		1,000
Other assets		174
Total Assets		445,672

Liabilities assumed:
Accounts payable and accrued liability		205
Other liabilities		568
Total Liabilities		773
Net assets acquired		444,899

Goodwill	$	136,965


	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Beginning	$	6,795	$	1,777	$	4,096	$	1,704
Provision for loan losses (benefits)		(652)		2,704		3,279		2,777
Charge offs		—		(453)		(1,232)		(453)
Ending	$	6,143	$	4,028	$	6,143	$	4,028


	September 30, 2020				Fair Value Measurements Using
		Carrying		Estimated
(dollars in thousands)		Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	173,602	$	173,602	$	173,602	$	—	$	—
Mortgage notes receivable, net		858,713		858,713		—		—		858,713
Interest and fees receivable		11,917		11,917		—		11,917		—
Investment in real property, net		3,743		3,743		—		—		3,743
Financial Liabilities
Accounts payable and accrued liabilities ⁽¹⁾	$	3,504	$	3,504	$	—	$	3,106	$	398


	Level 3				Valuation	Unobservable	Range of
(dollars in thousands)		September 30, 2020		December 31, 2019	technique	inputs	inputs
Optional subscription liability ⁽¹⁾	$	398	$	5,492	Valuation model	Refer to Note 7 for assumptions	0 - 5	%
Real property ⁽²⁾		3,743		5,837	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Impaired loans, net of allowance for loan losses ⁽³⁾		211,575		28,853	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Total	$	215,716	$	40,182


	Acquired
(dollars in thousands)	Intangibles
Asset Type
Customer relationships	$	1,000
Less: Accumulated amortization		294
Intangible assets, net	$	706


	Year ended December 31,
(dollars in thousands)	2020		2021		2022
Estimated future intangible amortization expense	$	85	$	339	$	282


	As of September 30, 2020		As of December 31, 2019
Expected volatility	30.0	%	13.0	%
Expected dividend yield	7.3	%	7.3	%
Expected life (in years)	0.1		0.9
Risk-free interest rate	0.1	%	1.6	%


		Weighted Average
		Grant Date Fair
	Shares	Market Value
Unvested RSUs outstanding as of January 1, 2020	334,928	$	11.08
Granted	186,759		11.77
Vested	(95,694)		11.08
Unvested RSUs outstanding as of March 31, 2020	425,993
Granted	47,226		9.64
Vested	(119,855)	$	11.08
Unvested RSUs outstanding as of June 30, 2020	353,364
Granted	382,041		10.64
Vested	(5,098)	$	11.08
Unvested RSUs outstanding as of September 30, 2020	730,307


	Three Months Ended					Nine Months Ended
Statements of Operations Data:	September 30, 2021		September 30, 2020			September 30, 2021			September 30, 2020
Revenues:
Interest income	$	22,846	$	21,844		$	66,481		$	68,577
Fee income		7,748		7,139			22,764			21,244
Total revenue		30,594		28,983			89,245			89,821
Other income (expense):
Change in fair value of warrant liabilities		1,244		1,948			(2,490	)		5,094
Expenses:
Impairment:
Provision for (reversal of) credit losses, net		2,607		(2,932	)		5,373			5,724
Operating expenses:
Compensation and employee benefits		4,025		5,160			11,254			11,397
General and administrative		3,521		3,199			9,810			9,977
Total expenses		10,153		5,427			26,437			27,098
Income before income taxes		21,685		25,504			60,318			67,817
Income tax provision		—		—			—			—
Net income	$	21,685	$	25,504		$	60,318		$	67,817


	Three Months Ended						Nine Months Ended
Percentage of Revenue:	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Revenues:
Interest income		75	%		75	%		74	%		76	%
Fee income		25			25			26			24
Total revenue		100			100			100			100
Other income (expense):
Change in fair value of warrant liabilities		4			7			(3	)		6
Expenses:
Impairment:
Provision for (reversal of) credit losses, net		9			(10	)		6			6
Operating expenses:
Compensation and employee benefits		13			18			13			13
General and administrative		12			11			11			11
Total expenses		33			19			30			30
Income before income taxes		71			88			68			76
Income tax provision		—			—			—			—
Net income		71	%		88	%		68	%		76	%