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BRMK Broadmark Realty Capital

Filed: 10 May 21, 4:46pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

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 001-39134

BROADMARK REALTY CAPITAL INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

84-2620891

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

Zip Code

Registrant’s telephone number, including area 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 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 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 

Smaller reporting company

Emerging growth company 

Non-accelerated filer 

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 Act). Yes No

As of May 5, 2021, there were 132,573,178 shares of common stock outstanding.

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Broadmark Realty Capital Inc.

As used in this Quarterly Report on Form 10-Q, the terms “Broadmark Realty,” “the Company,” “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 “Quarterly Report”) 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 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 the Company’s current views with respect to, among other things, capital resources, portfolio performance and projected results of operations. Likewise, 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 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 the Company will be those that it has anticipated. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause the Company’s actual results to differ include, but are not limited to:

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;
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;
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.

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Broadmark Realty Capital Inc.

Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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Broadmark Realty Capital Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share data, unaudited)

March 31, 2021

December 31, 2020

Assets

 

  

 

  

Cash and cash equivalents

$

204,277

$

223,375

Mortgage notes receivable, net

 

804,471

 

798,486

Interest and fees receivable, net

 

16,503

 

14,357

Investment in real property, net

 

13,113

 

8,473

Right-of-use assets

 

6,304

 

Goodwill

 

136,965

 

136,965

Other assets

 

10,263

 

5,663

Total assets

$

1,191,896

$

1,187,319

Liabilities and Equity

 

  

 

  

Accounts payable and accrued liabilities

$

6,568

$

4,946

Lease Liabilities

8,347

Dividends payable

 

9,280

 

7,952

Total liabilities

$

24,195

$

12,898

Commitments and Contingencies (Note 10)

 

  

 

  

Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2021 and December 31, 2020

 

 

Common stock, $0.001 par value, 500,000,000 shares authorized, 132,566,410 and 132,532,383 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively

 

132

 

132

Additional Paid in Capital

 

1,214,724

 

1,213,987

Accumulated deficit

 

(47,155)

 

(39,698)

Total equity

 

1,167,701

 

1,174,421

Total liabilities and equity

$

1,191,896

$

1,187,319

See accompanying notes to the condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Condensed Consolidated Statements of Income

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

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

Revenues

 

  

 

  

Interest income

$

22,017

$

24,553

Fee income

 

7,451

 

7,215

Total Revenue

 

29,468

 

31,768

Other Income:

Change in fair value of optional subscription liabilities

 

4,604

Expenses

 

���

 

  

Impairment:

 

 

  

Provision for credit losses, net

 

2,708

 

4,432

Operating expenses:

 

 

  

Compensation and employee benefits

 

3,560

 

3,193

General and administrative

 

2,819

 

2,278

Total Expenses

 

9,087

 

9,903

Income before income taxes

 

20,381

 

26,469

Income tax provision

 

0

 

0

Net income

$

20,381

$

26,469

Earnings per common share:

 

  

 

  

Basic

$

0.15

$

0.20

Diluted

$

0.15

$

0.20

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

 

  

 

  

Basic

 

132,550,227

 

132,111,329

Diluted

 

132,678,812

 

132,336,315

See accompanying notes to the condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share 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

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

See accompanying notes to the condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

Cash flows from operating activities

 

  

 

  

Net income

$

20,381

$

26,469

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

 

Accretion of deferred origination and amendment fees

 

(6,612)

 

(5,422)

Depreciation and amortization

 

163

 

(904)

Amortization of right of use assets

94

110

Amortization of financing costs

 

142

 

Stock-based compensation expense for restricted stock units

 

737

 

914

Provision for credit losses, net

 

2,708

 

4,432

Change in fair value of optional subscription liabilities

 

 

(4,604)

Changes in operating assets and liabilities:

 

 

  

Interest and fees receivable, net

 

(2,146)

 

(2,351)

Other assets

 

171

 

(163)

Accounts payable and accrued liabilities

 

713

 

(167)

Lease liabilities

(10)

(110)

Net cash provided by operating activities

 

16,341

 

18,204

Cash flows from investing activities:

 

 

Purchases of property and equipment

(135)

Proceeds from sale of real property

 

815

 

2,213

Improvements to investments in real property

 

(250)

 

(79)

Change in mortgage notes receivable, net

 

(4,255)

 

36,856

Net cash provided by (used in) investing activities

 

(3,825)

 

38,990

Cash flows from financing activities:

 

 

Dividends paid

 

(26,510)

 

(36,973)

Payment of costs to obtain credit facility

(5,104)

Net cash provided by (used in) financing activities

 

(31,614)

 

(36,973)

Net increase (decrease) in cash and cash equivalents

 

(19,098)

 

20,221

Cash and cash equivalents, beginning of period

 

223,375

 

238,214

Cash and cash equivalents, end of period

$

204,277

$

258,435

Supplemental disclosure of non-cash investing and financing activities

 

 

  

Dividends payable

$

9,280

$

10,569

Measurement period adjustment to goodwill and intangible assets

5,000

Mortgage notes receivable converted to real property owned

5,205

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 condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 1 - Organization and business

Broadmark Realty Capital Inc. (“Broadmark Realty,” “the Company,” “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 capital while producing attractive risk-adjusted returns primarily through dividends generated from current income from its loan portfolio. Broadmark Realty 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.

The consolidated subsidiaries of Broadmark Realty 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 Broadmark Private REIT, LLC (the “Private REIT”), an unconsolidated affiliate of the Company that primarily participates in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty.

Broadmark Realty has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax 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 subsidiaries of the Manager, including the Private REIT Manager.

Note 2 - Summary of significant accounting policies

Basis of Presentation

The accompanying condensed consolidated financial statements 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 conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes included in Broadmark Realty Capital Inc.’s Annual Report on Form 10-K/A for the year ended December 31, 2020, which was filed with the SEC on March 2, 2021. The condensed consolidated balance sheet as of December 31, 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 March 31, 2021, our results of operations and stockholders’ equity for the three month periods ended March 31, 2021 and 2020, and our cash flows for the three month periods ended March 31, 2021 and 2020. The results of the three month period ended March 31, 2021 is not necessarily indicative of the results to be expected for the year ending December 31, 2021 or for any interim period or for any other future year.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Principles of 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.

The Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary acting as manager with no significant 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 GAAP and therefore, is treated as a sale of mortgage notes receivable and is derecognized from our consolidated financial statements.

Reclassifications

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.

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 expected credit losses on our loans and the fair value of financial instruments and investments in real property. 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.

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 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 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; our ability to attract and retain qualified employees and key personnel; and protection of customers’ information and other privacy concerns, among other things.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Reportable Segments

We operate the business as 1 reportable 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, sells us specific U.S. Government Agency securities and then repurchases these securities the next day.

We maintain our cash and cash equivalents with financial institutions, which are insured up to a maximum of $250,000 per account as of March 31, 2021 and December 31, 2020. The balances in these accounts may exceed the insured limits. There were 0 restrictions on cash as of March 31, 2021 or December 31, 2020.

Mortgage Notes Receivable

Mortgage notes receivable (referred to herein as “mortgage notes receivable”, “construction 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 credit losses and deferred origination and 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, 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. If the sales do not meet these criteria, the sale of the participation is treated as a secured borrowing. As of March 31, 2021, all participations in mortgage notes receivable sold to the Private REIT have achieved sale accounting.

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 on 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 months ended March 31, 2020 includes an additional provision for credit losses of $0.8 million associated with the adoption of the CECL Standard, as a result, our previously reported net income of $27.3 million for this period is lower by $0.8 million.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

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, 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 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 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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Notes to Condensed Consolidated Financial Statements

Deferred Income

Deferred income represents the amount of our origination and amendment 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 consolidated balance sheets. Deferred amendment fees that are not included in the principal outstanding are presented within interest and fees receivable, net on the 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. In addition, late fees are changed when borrower payments are contractually past due. We monitor each note’s outstanding interest and fee receivables and, based on historical performance, generally reserve against the balance after a receivable is greater than 60 days past 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

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 carrying value of the loan secured by such property. Costs related to acquisition, development, construction and improvements are 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 March 31, 2021 and December 31, 2020, we owned 4 and 3 properties or projects, respectively.

Leases

Our office space in Seattle, Washington is subject to an operating lease. Our operating lease is included in right of 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 single component.

Right of 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 the 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 lease liabilities.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

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 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.

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 represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. In our evaluation of goodwill, we typically first perform a qualitative assessment to determine whether the carrying value of each reporting unit is greater than its fair value. If it is more likely than not that the carrying value of a reporting unit is greater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value of the reporting unit over its fair value. We reevaluated the fair value of the reporting unit during our annual assessment in the fourth quarter of 2020 and the fair value of the reporting unit exceeded the carrying value and there was 0 goodwill impairment. During the first quarter of 2021, we continued to monitor the impact of COVID-19 and determined there were no new triggering events to warrant a quantitative assessment of our goodwill.

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. 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.

Other Assets

Other assets primarily consist of fixed assets, deferred financing costs, intangible assets, prepaid insurance and other operating receivables.

Fixed Assets

Fixed assets, which are included in other assets in the accompanying 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. For computer equipment, office equipment, furniture and fixtures the useful lives range from three to seven years. For leasehold improvements, we depreciate over the shorter of expected useful life or lease term.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Deferred Financing Costs

Deferred financing costs represent direct costs associated with the execution of the revolving credit facility. As the revolving credit facility has no principal outstanding and there is no recognized debt liability, the deferred financing costs are included in other assets on the condensed consolidated balance sheet. These costs are amortized on the straight-line basis over the initial term of our credit facility.

Intangible Assets

We record the intangible assets at fair value at the acquisition date and are amortizing 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 March 31, 2021 and December 31, 2020, intangible assets net of accumulated amortization was $0.5 and $0.6 million, respectively.

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 construction loans provide for minimum interest provisions, under which the contractual rate applies to, which are typically between 50% and 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 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. Interest previously accrued may be reversed at that time, and such reversal is offset against interest income. The accrual of interest income resumes only when the suspended loan becomes contractually current or a credit analysis supports the ability to collect in accordance with the terms of the loan.

Fee Income

We charge loan origination fees in conjunction with origination. 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. We defer and amortize loan origination and amendment fees over the contractual terms of the loans.

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.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

EXPENSE RECOGNITION

Operating Expenses

Share‑Based Payments

We measure compensation expense for all share-based awards 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 one year for directors. Share-based awards are issued under the Broadmark Realty Capital Inc. 2019 Stock Incentive Plan.

Awards made to our employees and directors, 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 less the present value of expected dividends over the requisite service period as the awards are not entitled to dividends. For these awards, we recognize stock-based compensation expense on a 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, 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.

Income Taxes

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. 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 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. Our TRSs are subject to U.S. federal income taxes.

Earnings per Share

We present both basic and diluted earnings per common 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 utilize the treasury stock method to measure dilution to earnings per share in calculating the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that we have yet to adopt with an expected impact on our financial position, results of operations or cash flows.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 3 - Mortgage notes receivable

The stated principal amount of 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%. 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-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% of our total assets and the maximum amount to a single borrower may not exceed 15% of our total assets. We consider the maximum LTV as an indicator for the credit quality of a mortgage note receivable.

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 and interest rates generally range from a fixed annual rate of 10% 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 pay their monthly interest payment within 10 days of month end.

Mortgage notes receivable are presented net of construction holdbacks, interest reserves, allowance for 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 Condensed Consolidated Financial Statements

The following table reconciles outstanding mortgage loan commitments to outstanding balance of mortgage notes receivable as of March 31, 2021 and December 31, 2020:

(dollars in thousands)

 

March 31, 2021

 

December 31, 2020

Total loan commitments

$

1,280,964

$

1,245,963

Less:

 

Construction holdbacks(1)

379,069

356,026

Interest reserves(1)

30,369

29,817

Private REIT participation(2)

42,740

37,729

Total principal outstanding for our mortgage notes receivable

828,786

822,391

Less:

Allowance for credit losses(3)

10,663

10,590

Deferred origination and amendment fees

13,652

13,315

Mortgage notes receivable, net

$

804,471

$

798,486

(1)Includes construction holdbacks of $42.1 and $40.4 million and interest reserves of $3.6 and $4.3 million on participating interests sold to the Private REIT as of March 31, 2021 and December 31, 2020, respectively.
(2)The Private REIT’s participations in loans originated by us meet the characteristics of participating interests and, therefore, are treated as sales of mortgage notes receivable and are derecognized from our condensed consolidated financial statements.
(3)$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 March 31, 2021 and December 31, 2020, the principal outstanding on loans in contractual default status placed on non-accrual status was $177.7 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 Condensed Consolidated Financial Statements

The following tables summarize the activity in the CECL Allowance during the three months ended March 31, 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

(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

(1)Represents either loan repayments where the proceeds are less than the principal outstanding or transfers to real property owned upon foreclosure where the fair values of the 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 as a cumulative-effect of change in accounting principle.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

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, 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 loan portfolio based on our internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:

At March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

Construction Type

 

Vertical Construction

 

$

505,347

62.0

%

 

$

118,678

$

252,275

$

37,051

$

3,080

$

88,973

$

5,290

Horizontal Development

 

 

143,405

17.6

 

 

60,361

 

63,180

 

15,453

 

283

 

 

4,128

Investment

 

 

166,382

20.4

 

 

46,769

 

72,987

 

18,917

 

3,809

 

17,953

 

5,947

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(2)

 

 

(10,663)

Carrying value, net

 

$

804,471

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.
(2)$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 March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

Collateral Type

 

Apartments

 

$

149,936

18.4

%

 

$

44,920

$

54,135

$

19,952

$

$

25,897

$

5,032

Residential Lots

 

 

125,808

15.4

 

 

57,579

 

49,003

 

9,874

 

 

 

9,352

Condos

 

 

85,240

10.5

 

 

9,269

 

39,408

 

200

 

1,326

 

35,037

 

Single family housing

73,990

9.1

16,047

45,079

5,579

1,078

5,484

723

Land

73,237

9.0

40,678

12,321

3,052

17,186

Townhomes

80,611

9.9

12,348

43,735

1,716

22,554

258

Mixed Use

40,429

5.0

9,884

28,622

1,923

Hotel

53,253

6.5

1,192

42,990

9,071

Senior Housing

38,149

4.7

38,149

Offices

31,525

3.9

9,480

22,045

Commercial Lots

15,259

1.9

15,259

Retail

11,838

1.5

5,594

4,346

1,898

Industrial

15,403

1.9

15,403

Quadplex

5,915

0.7

5,915

Commercial

6,524

0.8

5,645

879

Duplex

3,821

0.5

3,053

768

Commercial other

4,196

0.3

4,196

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(2)

 

 

(10,663)

Carrying value, net

 

$

804,471

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.
(2)$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.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

At March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

LTV (2)

 

0 - 40%

 

$

45,090

5.5

%

 

$

21,356

$

20,369

$

$

3,052

$

313

$

41 - 45%

29,256

3.6

27,489

1,767

46 - 50%

 

 

46,420

5.7

 

 

15,507

 

15,460

 

15,453

 

 

 

51 - 55%

 

 

77,277

9.5

 

 

27,310

 

29,594

 

2,777

 

 

16,873

 

723

56 - 60%

54,992

6.7

15,073

25,769

200

13,950

61 - 65%

532,281

65.3

118,559

270,307

52,991

4,120

75,790

10,514

66 - 70%

17,582

2.2

514

17,068

71 - 75%

0.0

76 - 80%

0.0

Above 80%

12,236

1.5

8,108

4,128

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(3)

 

 

(10,663)

Carrying value, net

 

$

804,471

(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)$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 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

 

 

(10,590)

Carrying value, net

 

$

798,486

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

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

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

Land

72,913

9.0

48,844

7,259

16,444

366

Townhomes

72,773

9.0

47,391

1,061

1,703

21,564

1,054

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

��

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

 

 

(10,590)

Carrying value, net

 

$

798,486

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

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

 

 

(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.

21

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 – Fair 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:

March 31, 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

$

204,277

$

204,277

$

204,277

$

$

Mortgage notes receivable, net

 

804,471

 

804,471

 

 

 

804,471

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

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.

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 March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020:

Level 3

Valuation 

Unobservable

Range of

 

(dollars in thousands)

March 31, 2021

 

December 31, 2020

technique

 inputs

 inputs

Real property(1)

 

13,113

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)

60,634

30,920

Collateral valuations

Discount to appraised value based on comparable market prices

0 - 10

%

Total

 

$

73,747

$

39,393

 

 

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

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Fair value on a 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% to 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 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 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% to 10%. As the result of using unobservable inputs in the valuation, we classify collateral dependent as Level 3 within the fair value hierarchy.

Fair value disclosure only

For certain of our financial instruments, including cash equivalents, which are classified under Level 1 within the fair value hierarchy, the carrying amounts approximate fair value due to their short-term maturities.

Our loans in mortgage notes receivable are evaluated for expected credit losses and mortgage notes receivable are presented net of an allowance for credit losses. Due to the short-term maturity of the mortgage notes receivable, a premium or discount is not material and the carrying value approximates fair value. We believe that our mortgage notes receivable net of the CECL allowance approximates fair value of the portfolio. As a result of the use of 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 5 - Stockholders’ Equity and Members’ Equity

Stockholders’ Equity

The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.001 per share and 100,000,000 shares of preferred stock with a par value of $0.001 per share. Holders of our common stock are entitled to 1 vote for each share. As of March 31, 2021 and December 31, 2020, there were 132,566,410 and 132,532,383 shares of common stock issued and outstanding, respectively, and 0 shares of preferred stock issued and outstanding.

As of March 31, 2021 and December 31, 2020 there were 41.7 million 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 per share (the “Private Warrants”). In the aggregate, we have outstanding warrants to purchase approximately 15.6 million shares of common stock at a price of $11.50 per whole share. Settlement of outstanding warrants, if exercised, will be either in shares of our common stock or, solely at our discretion, in cash.

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Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Earnings per Share

The table below presents the computation of basic and diluted net income per share of common stock for the periods presented:

    

    

Three Months Ended

Three Months Ended

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

March 31, 2021

March 31, 2020

Net income

$

20,381

$

26,469

Basic weighted-average shares of common stock outstanding

132,550,227

132,111,329

Dilutive effect of share-based compensation

 

128,585

 

224,986

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

132,678,812

132,336,315

Basic earnings per share

$

0.15

$

0.20

Diluted earnings per share

$

0.15

$

0.20

(1)We exclude anti-dilutive shares from calculation of weighted-average shares for diluted earnings per share. For the three months ended March 31, 2021, there were 15.6 million shares related to the Public Warrants and Private Warrants and 371,318 shares of unvested restricted stock unit awards, which are not included in the above calculation of diluted earnings per share because in doing so they would be anti-dilutive. For the three months ended March 31, 2020, only the 15.6 million shares related to the Public Warrants and Private Warrants were anti-dilutive and not included in the above calculation of diluted earnings per share.

Note 6 - Income Taxes

The Manager has elected to be treated as a TRS and this election applies to the 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.

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 March 31, 2021 and December 31, 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 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 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

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Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

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 7 - Equity Incentive Plan

Stock Incentive Plan

The Broadmark Realty 2019 Stock Incentive Plan (the “Plan”) 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 March 31, 2021, 3,624,268 share awards were available to be issued under the Plan. The restricted stock units granted under the Plan generally vest from one to three years depending on the terms of the specific award. In 2021, pRSUs were granted to our executive officers that will be earned at the end of 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.

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.

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.

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Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

The following table summarizes the activity related to RSUs during the three months ended March 31, 2021:

    

    

Weighted Average  

Grant Date Fair

Shares

Market Value

Unvested RSUs outstanding as of December 31, 2020

 

434,143

Granted

 

424,866

$

8.68

Vested

 

(37,227)

$

11.08

Unvested RSUs outstanding as of March 31, 2021

 

821,782

For the three months ended March 31, 2021 and 2020, we recognized compensation expense related to RSUs of $0.7 and $0.9 million, respectively, based on amortizing the fair value of the awards over the service (vesting) period. As of March 31, 2021, there was $7.1 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on a straight-line basis over a weighted-average recognition period of 2.3 years.

Note 8 - Commitments and Contingencies

The following table illustrates our contractual obligations and commercial commitments by due date as of March 31, 2021:

    

    

Less than 1

    

    

    

More than

(dollars in thousands)

Total

year

1-3 years

3-5 years

5 years

Construction holdbacks (1)

 

379,069

 

237,632

 

141,437

 

 

Operating lease obligations

$

11,527

$

812

$

1,916

$

2,033

$

6,766

Total

$

390,596

$

238,444

$

143,353

$

2,033

$

6,766

(1)Includes construction holdbacks of $42.1 million on participating interests sold to the Private REIT as of March 31, 2021. 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.

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 3.

Lease Commitments

On March 18, 2020, we entered into a non-cancelable operating lease agreement for our office space in Seattle with an original lease period expiring in 2032. The lease commencement date was in the first quarter of 2021. The total cash payments included in the 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 operation lease was 6.0%, resulting in an imputed interest amount of $3.3 million.

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Table of Contents

Broadmark Realty Capital Inc.

Notes to 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. By providing backup liquidity for future draws on our construction loans, we expect the availability of the revolving credit facility will 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.

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

Our portfolio of active loans is primarily secured by first deed of trust liens on residential and commercial real estate located in 14 states and the District of Columbia. Our loan portfolio is also concentrated within 10 counties, the largest being Utah county in Utah. As of March 31, 2021 and December 31, 2020, the top 10 counties make up 44.5% and 43.2% of the total committed amount of loans in our total portfolio.

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Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 9 - Related 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 the execution of the Merger Agreement, 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 our shares of common stock, pursuant to which, immediately prior to the consummation of the Business Combination, 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 million at a price per share equal to $10.45352229 (the “Reference Price”). In connection with the PIPE Investment, 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 per warrant. As a result of the PIPE Investment, the Farallon Entities own more than 5% of our outstanding common stock.

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 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 a peer group of public companies.

Broadmark Private REIT, LLC

The Private REIT is a private real estate finance company that primarily participates in short-term, first deed of trust loans secured by real estate that are originated, underwritten and serviced by Broadmark Realty Capital Inc. The Private REIT is managed by our subsidiary in accordance with a market-based arrangement and was determined to be a voting interest entity. We do not directly or indirectly control the Private REIT and own only a nominal interest in the Private REIT’s common units and, therefore, we do not consolidate the Private REIT. Furthermore, the Private REIT’s participations in loans originated by us meet the characteristics of participating interests and therefore, are treated as sales of mortgage notes receivable and are derecognized from our condensed consolidated financial statements.

Note 10 - Subsequent events

Dividend Declaration

On April 16, 2021, our board of directors declared a cash dividend of $0.07 per common share payable on May 14, 2021 to stockholders of record as of April 30, 2021.

28

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 condensed consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2020 filed with the SEC on March 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 months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ended December 31, 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.

Broadmark Realty, a Maryland corporation, is an internally managed commercial real estate finance company that has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax 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, or commercial properties. We operate in select states that we believe to have favorable demographic trends and that provide more efficient and quicker access to collateral in the event of borrower default. As of March 31, 2021, our portfolio of 200 active loans had approximately $1.3 billion of total commitments and $871.5 million of principal outstanding across 137 borrowers in 14 states and the District of Columbia, of which $88.4 million and $42.7 million, respectively, were sold to the Private REIT. 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 outstanding principal balances, construction holdbacks and committed amounts for future draws and interest reserves on our loans. To date our loan portfolio has been 100% equity funded, and as of March 31, 2021, we have no outstanding debt. We plan to opportunistically raise capital in the public market from time to time 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 revolving credit facility, which we expect will 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.

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 March 31, 2021, the weighted average LTV was 59.9% across our active loan portfolio based on the total commitment of the loan and “as-complete” appraisals. In addition, 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 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.

29

Our loans typically range from $0.1 to $40 million in total commitment at origination, generally bear interest at a fixed annual rate of 10% 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 March 31, 2021, the average total commitment of our active loans was $6.4 million and the weighted average remaining term to contractual maturity of our active loans was approximately seven months. We usually receive loan origination fees, or “points,” typically ranging from 2% 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, we charge fees on past due receivables and receive 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.

In March 2020, we launched the Private REIT to provide access to an additional source of capital and fund participations in loans originated by Broadmark Realty. We believe the Private REIT enhances our ability to increase originations and grow our asset base, subject to market conditions.

As of March 31, 2021, the COVID-19 pandemic is ongoing. As a result of the pandemic, 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. For example, delays in local government permitting and inspections arising from measures to limit the spread of COVID-19 delayed some projects in 2020, adversely affecting the ability of borrowers to complete the projects in accordance with the terms of the loans. During the first half of 2020, we saw an increase in delinquencies and requests for extensions or forbearance, which began to stabilize in the third quarter of 2020. 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 sales of foreclosed properties reduce the capital available for future loan originations.

In 2021, the U.S. and global economy has begun reopening and wider distribution of effective vaccines for COVID-19 will likely encourage greater economic activity. Nonetheless, the recovery could 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. 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 for the year ending 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 begun to stabilize 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 we expect will continue to drive, increased variability in the amount of our loan originations from quarter-to-quarter. In addition, since we primarily compete on the basis of borrower relationships, loan structure, terms and service rather than on price, 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. We expect these trends related to the competitive environment to continue.

30

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% to 13%, paid monthly, primarily from interest reserves and, to a lesser extent, cash payments. Many of our 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.  For the three months ended March 31, 2021, there was an increase in our loans in contractual default status compared to historic levels, as delays in completion of projects or costs in excess of the original budget led to us placing a great amount of loans in default, primary as a mechanism to ultimately protect against incurred losses of principal on such loans. 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.

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 2% 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 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 originations. Our operating performance is heavily dependent upon our ability to originate new loans to invest new capital and re-invest returning capital from 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 process an important factor in our success.

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

Three Months Ended

Three Months Ended

(dollars in millions)

March 31, 2021

March 31, 2020

Loans originated(1)

$

117.6

$

108.5

Loans repaid

$

71.2

$

96.4

(1)Based on total loan commitment amounts and excluding amendments.

Credit quality of our loan portfolio. 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, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

31

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

At March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

Construction Type

 

Vertical Construction

 

$

505,347

62.0

%

 

$

118,678

$

252,275

$

37,051

$

3,080

$

88,973

$

5,290

Horizontal Development

 

 

143,405

17.6

 

 

60,361

 

63,180

 

15,453

 

283

 

 

4,128

Investment

 

 

166,382

20.4

 

 

46,769

 

72,987

 

18,917

 

3,809

 

17,953

 

5,947

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(2)

 

 

(10,663)

Carrying value, net

 

$

804,471

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.
(2)$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 March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

Collateral Type

 

Apartments

 

$

149,936

18.4

%

 

$

44,920

$

54,135

$

19,952

$

$

25,897

$

5,032

Residential Lots

 

 

125,808

15.4

 

 

57,579

 

49,003

 

9,874

 

 

 

9,352

Condos

 

 

85,240

10.5

 

 

9,269

 

39,408

 

200

 

1,326

 

35,037

 

Single family housing

73,990

9.1

16,047

45,079

5,579

1,078

5,484

723

Land

73,237

9.0

40,678

12,321

3,052

17,186

Townhomes

80,611

9.9

12,348

43,735

1,716

22,554

258

Mixed Use

40,429

5.0

9,884

28,622

1,923

Hotel

53,253

6.5

1,192

42,990

9,071

Senior Housing

38,149

4.7

38,149

Offices

31,525

3.9

9,480

22,045

Commercial Lots

15,259

1.9

15,259

Retail

11,838

1.5

5,594

4,346

1,898

Industrial

15,403

1.9

15,403

Quadplex

5,915

0.7

5,915

Commercial

6,524

0.8

5,645

879

Duplex

3,821

0.5

3,053

768

Commercial other

4,196

0.3

4,196

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(2)

 

 

(10,663)

Carrying value, net

 

$

804,471

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.
(2)$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.

32

At March 31, 2021

Year Originated (1)

(dollars in thousands)

    

Carrying Value

    

% of Portfolio

    

2021

    

2020

2019

    

2018

    

2017

    

Prior

LTV (2)

 

0 - 40%

 

$

45,090

5.5

%

 

$

21,356

$

20,369

$

$

3,052

$

313

$

41 - 45%

29,256

3.6

27,489

1,767

46 - 50%

 

 

46,420

5.7

 

 

15,507

 

15,460

 

15,453

 

 

 

51 - 55%

 

 

77,277

9.5

 

 

27,310

 

29,594

 

2,777

 

 

16,873

 

723

56 - 60%

54,992

6.7

15,073

25,769

200

13,950

61 - 65%

532,281

65.3

118,559

270,307

52,991

4,120

75,790

10,514

66 - 70%

17,582

2.2

514

17,068

71 - 75%

0.0

76 - 80%

0.0

Above 80%

12,236

1.5

8,108

4,128

Total

 

$

815,134

100.0

%

 

$

225,808

 

$

388,442

 

$

71,421

 

$

7,172

 

$

106,926

 

$

15,365

CECL allowance(3)

 

 

(10,663)

Carrying value, net

 

$

804,471

(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)$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 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

 

 

(10,590)

Carrying value, net

 

$

798,486

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

33

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

Land

72,913

9.0

48,844

7,259

16,444

366

Townhomes

72,773

9.0

47,391

1,061

1,703

21,564

1,054

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

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

 

 

(10,590)

Carrying value, net

 

$

798,486

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

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

 

 

(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.

Dividends Declared. The following table summarizes the declared cash dividends per common share activity for the three months ended March 31, 2021 and 2020:

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

Dividends declared per common share

$

0.21

$

0.24

34

Earnings per Common Share. The following table summarizes the earnings (GAAP) and distributable earnings (non-GAAP) per common share activity for the three months ended March 31, 2021 and 2020:

Three Months Ended

Three Months Ended

March 31, 2021

March 31, 2020

Earnings per common share, basic

$

0.15

$

0.20

Earnings per common share, diluted

0.15

0.20

Distributable earnings per diluted share of common stock prior to realized loss on investments

0.19

0.21

Distributable earnings per diluted share of common stock

$

0.18

$

0.20

Non-GAAP Financial Measures

Distributable Earnings

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

During the three months ended March 31, 2021 and 2020, provision for credit losses, net was $2.7 and $4.4 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 “distributable earnings” specified above allow investors and analysts to readily identify and track the operating performance of our assets, assist in comparing the operating results between periods, and enable investors to evaluate our current performance using the same measure that management uses to operate the business. Distributable earnings excludes certain recurring items, such as unrealized gains and losses (including provision for credit losses) and non-capitalized transaction-related expenses, because they are not considered by management to be part of our primary operations for the reasons described herein. As such, 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.

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.

35

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 entitled measures reported by other companies.

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

Three Months Ended

Three Months Ended

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

March 31, 2021

March 31, 2020

Net income attributable to common stockholders

$

20,381

$

26,469

Adjustments for non-distributable earnings:

 

  

 

  

Stock-based compensation expense

 

737

 

914

New public company expenses (1)

664

1,232

Change in fair value of optional subscription liabilities

(4,604)

Depreciation and amortization

163

(904)

Provision for credit losses, net

 

2,708

 

4,432

Distributable earnings prior to realized loss on investments

$

24,653

$

27,539

Realized credit losses (2)

(1,401)

(537)

Distributable earnings

$

23,252

$

27,002

Distributable earnings per diluted share of common stock prior to realized loss on investments

$

0.19

$

0.21

Distributable earnings per diluted share of common stock

$

0.18

$

0.20

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

Basic

 

132,550,227

 

132,111,329

Diluted

132,678,812

132,336,315

(1)Expenses directly related to professional fees in connection with our first year of 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)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 our business as one reportable segment.

36

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

Three Months Ended

Statements of Operations Data:

    

March 31, 2021

March 31, 2020

    

Revenues

    

  

    

  

    

Interest income

$

22,017

$

24,553

Fee income

 

7,451

 

7,215

Total Revenue

 

29,468

 

31,768

Other Income:

Change in fair value of optional subscription liabilities

 

4,604

Expenses

 

  

 

  

Impairment:

 

  

 

  

Provision for credit losses, net

 

2,708

 

4,432

Operating expenses:

 

  

 

  

Compensation and employee benefits

 

3,560

 

3,193

General and administrative

 

2,819

 

2,278

Total Expenses

 

9,087

 

9,903

Income before income taxes

 

20,381

 

26,469

Income tax provision

 

 

Net income

$

20,381

$

26,469

Three Months Ended

Three Months Ended

Percentage of Revenue:

March 31, 2021

March 31, 2020

Revenues

    

  

  

    

  

  

Interest income

75

%

77

%

Fee income

25

23

Total Revenue

100

100

Other Income:

Change in fair value of optional subscription liabilities

14

Expenses

  

  

Impairment:

  

  

Provision for credit losses, net

9

14

Operating expenses:

  

  

Compensation and employee benefits

12

10

General and administrative

10

7

Total Expenses

31

31

Income before income taxes

69

83

Income tax provision

0

0

Net income

69

%

83

%

37

Comparison of Results of Operations

Unless otherwise stated, for purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the comparison of the results of operations for the three months ended March 31, 2021 and March 31, 2020,

Three Months Ended March 31, 2021 Compared to March 31, 2020

Revenue

Total revenue for the three months ended March 31, 2021 and 2020 was $29.5 and $31.8 million, respectively, a decrease of $2.3 million. The decrease primarily relates to a decrease in interest income of $2.5 million, which is discussed below.

Expenses

Total expenses for the three months ended March 31, 2021 and 2020 were $9.1 and $9.9 million, respectively. The decrease in total expenses from the prior period was due to a decrease in the provision for credit losses, net of $1.7 million; partially offset by an increase in general and administrative and compensation and employee benefits of $0.5 and $0.4 million, respectively, which are discussed below.

Interest Income

Interest income decreased by $2.5 million or 10.3% for the three months ended March 31, 2021 from the three months ended March 31, 2020 due to a lower effective interest-bearing principal during the three months ended March 31, 2021 as a result of: (1) most originations occurring in the last month of the three months ended March 31, 2021 and a reduction in the minimum interest provisions included in mortgage notes for new loan originations; and (2) an increase in the loans in non-accrual status for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

Fee Income

Fee income was relatively flat with an increase of $0.2 million or 3.3% for the three months ended March 31, 2021 from the three months ended March 31, 2020.

Other Income

The change in fair value of the Optional Subscription Liability is an unrealized gain or loss based on the fair value of an optional subscription that expired unexercised in the fourth quarter of 2020. For the three months ended March 31, 2020, $4.6 million of other income was recognized due to the decline in the fair value of the Optional Subscription Liability primarily due to the decline in our stock price during the three months ended March 31, 2020.

Provision for credit losses, net

The provision for credit losses decreased $1.7 million for the three months ended March 31, 2021 from the three months ended March 31, 2020. The provision for credit losses in the 2020 period was the result of an increase in the required CECL Allowance due to a significant increase in loans in contractual default associated with COVID-19; whereas, for the 2021 period, it represents maintenance activity on a similarly sized portfolio of loans in contractual default status with a previously established CECL Allowance.

38

Compensation and Employee Benefits

Compensation and employee benefits expense increased by $0.4 million or 11.5% for the three months ended March 31, 2021 from the three months ended March 31, 2020 primarily attributable to $0.6 million related to an increase in employee headcount partially offset by a $0.2 million reduction of stock-based compensation expense during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

General and Administrative

General and administrative expense increased by $0.5 million or 23.7% for the three months ended March 31, 2021 from the three months ended March 31, 2020. The increase is due to an increase in amortization expense of $1.1 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily as a result of a reversal of intangible asset amortization of $0.9 million during the three months ended March 31, 2020. The increase was partially offset by a decrease of $0.4 million in professional fees during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily as a result of the costs incurred in 2020 for first year of public company reporting procedures and in connection with the design and implementation of internal controls under Section 404 of the Sarbanes-Oxley Act.

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. As of March 31, 2021, our cash and cash equivalents totaled $204.3 million.

 

We seek to meet our long-term liquidity requirements, such as real estate lending needs, including future construction draw commitments through our existing cash resources and return of capital from investments, including loan repayments. Additionally, going forward, we intend to fund our growth in part through use of our existing cash and cash equivalents now that we have obtained a revolving credit facility as a cash management tool, as well as potentially issuing additional common stock. As of March 31, 2021, we had $1.3 billion of total loan commitments outstanding, of which our portion and the Private REIT’s portion of the total principal balance funded and outstanding were $828.8 million and $42.7 million, respectively.

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. 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 without planning to incur debt in the ordinary course of business.

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 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, 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.

39

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 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 three months ended March 31, 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. 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 from time to time as a key component of our growth strategy, subject to market conditions.

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.

Sources and Uses of Cash

The following table sets forth changes in cash and cash equivalents for the three months ended March 31, 2021 and 2020:

Three Months Ended

Three Months Ended

March 31, 

March 31, 

(dollars in thousands)

2021

2020

Cash provided by (used in):

 

  

 

  

Operating activities

$

16,341

$

18,204

Investing activities

 

(3,825)

 

38,990

Financing activities

 

(31,614)

 

(36,973)

Net increase / (decrease) in cash & cash equivalents

$

(19,098)

$

20,221

Comparison of Results of Cash Flows for the Three Months Ended March 31, 2021 and March 31, 2020

Net cash provided by operating activities for the three months ended March 31, 2021 and 2020 were $16.3 and $18.2 million, respectively. The decrease of $1.9 million in cash provided by operating activities for the three months ended March 31, 2021 from the three months ended March 31, 2020 was primarily due to lower revenue and increased expenses, which are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Results of Operations – Three Months Ended March 31, 2021 Compared to March 31, 2020. The aggregate amount of changes in operating assets and liabilities, which are presented in the condensed consolidated statement of cash flows as reconciling items between net income and cash provided by operating activities were comparable for the 2021 and 2020 periods. Accordingly, the decrease in net cash provided by operating activities was not the result of timing of cash receipts and payments for operating activities; rather it was primarily due to lower revenues and higher expenses in the 2021 period compared to the 2020 period. The reconciliation between net income and cash provided by operating activities in the condensed consolidated statement of cash flows also 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.

40

Net cash used in investing activities was $3.8 for the three months ended March 31, 2021 and net cash provided by investing activities was $39.0 million for the three months ended March 31, 2020. The increase in cash used in investing activities of $42.8 million was primarily due to the $41.1 million difference for the change in mortgage notes receivable, net amounts between the 2021 and 2020 periods. We experienced a modest increase in the size of our loan portfolio during the 2021 period compared to the 2020 period despite the impact of COVID-19. In the 2020 period, which followed the November 2019 completion of the Business Combination that required us to essentially pause our ability to raise capital and in turn originate new loans, we experienced a surge in loan payoffs that were not offset by new originations. New originations were slowed in March 2020 due to the uncertainty associated with the impacts of COVID-19.

Net cash used in financing activities was $31.6 and $37.0 million, respectively for the three months ended March 31, 2021 and 2020, a decrease of $5.4 million resulting from the $10.5 million decrease in dividends paid in the 2021 period compared to the 2020 period; partially offset by the $5.1 million payment of costs to obtain our credit facility in the 2021 period.

Contractual Obligations

The following table illustrates our contractual obligations and commercial commitments by due date as of March 31, 2021:

    

    

Less than 1

    

    

    

More than

(dollars in thousands)

Total

year

1-3 years

3-5 years

5 years

Construction holdbacks (1)

 

379,069

 

237,632

 

141,437

 

 

Operating lease obligations

$

11,527

$

812

$

1,916

$

2,033

$

6,766

Total

$

390,596

$

238,444

$

143,353

$

2,033

$

6,766

(1)Includes construction holdbacks of $42.1 million on participating interests sold to the Private REIT as of March 31, 2021. 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.

Off-Balance Sheet Arrangements

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. Finally, 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 March 31, 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 condensed consolidated financial statements included in this Report.

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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 condensed consolidated financial statements included in this Report.

ITEM 3.            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 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, 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/A for the year ended December 31, 2020.

Interest Rate Risk

While all our loans bear a fixed rate of interest and we do not have any interest-rate sensitive instruments obligations outstanding, the nature of our business exposes us 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 our control. An increase or decrease in interest rates would not impact the interest charged on our then existing loan portfolio, as our loans bear fixed rates of interest. However, a rapid significant increase in interest rates may reduce the demand for 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 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 existing loans, which may also result in the redeployment of capital in new loans bearing lower interest rates.

Credit Risk

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, and other factors beyond our control. All loans are subject a certain possibility of default. 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%. We also undertake extensive due diligence of the property that will be mortgaged to secure the loans, including review of third-party appraisals on the property.

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, 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 us to suffer losses. These factors could adversely affect our business, financial condition, results of operations and ability to pay dividends to our stockholders.

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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. 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 March 31, 2021, the Company’s disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 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 quarter ended March 31, 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

There have been no material changes to the risk factors previously disclosed under Part I, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2020.

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.

ITEM 5.               OTHER INFORMATION

None.

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ITEM 6.             EXHIBITS

10.1

Form of Restricted Stock Unit Award Agreement (Executive Officers).*

10.2

Form of Performance Restricted Stock Unit Agreement.*

10.3

Broadmark Realty Capital Inc. Executive Officer Annual Cash Bonus Plan (incorporated by reference to Broadmark Realty Capital Inc.’s Form 8-K (File No. 001-39134), filed with the SEC on January 27, 2021).

10.4

Credit Agreement, dated February 19, 2021, by and among Broadmark Realty Capital Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to Broadmark Realty Capital Inc.’s Form 8-K (File No. 001-39134), filed with the SEC on February 25, 2021).

22.1

Subsidiary Guarantors and Issuers (incorporated by reference to Exhibit 22.1 to Broadmark Realty Capital Inc.’s Form 10-K/A (File No. 333-251075), filed with the SEC on January 4, 2021).

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.

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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: May 10, 2021

By:

/s/ Jeffrey B. Pyatt

Name:

Jeffrey B. Pyatt

Title:

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 10, 2021

By:

/s/ David Schneider

Name:

David Schneider

Title:

Chief Financial Officer

(Principal Financial and Accounting Officer)

45