UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Common Stock at an exercise price of $2.875 per one fourth (1/4th) share |
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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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 2, 2022, there were
Table of Contents
Broadmark Realty Capital Inc.
Table of Contents
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PART I. |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements (Unaudited) |
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3 |
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4 |
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5 |
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6 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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22 |
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34 |
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PART II. |
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OTHER INFORMATION |
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37 |
1
Table of Contents
Broadmark Realty Capital Inc.
CAUTIONARY STATEMENT 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 the Company’s 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:
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.
2
Table of Contents
Broadmark Realty Capital Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share data, unaudited)
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March 31, 2022 |
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December 31, 2021 |
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Assets |
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Cash and cash equivalents |
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$ |
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$ |
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Mortgage notes receivable, net |
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Interest and fees receivable, net |
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Investment in real property, net |
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Right-of-use assets |
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Goodwill |
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Other assets |
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Total assets |
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$ |
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$ |
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Liabilities and stockholders' equity |
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Senior unsecured notes, net |
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$ |
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$ |
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Dividends payable |
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Accounts payable and accrued liabilities |
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Lease liabilities |
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Total liabilities |
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$ |
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$ |
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Stockholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid in capital |
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Accumulated deficit |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements
3
Table of Contents
Broadmark Realty Capital Inc.
Condensed Consolidated Statements of Income
(in thousands, except share and per share data, unaudited)
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Three Months Ended |
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March 31, 2022 |
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March 31, 2021 |
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Revenues: |
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Interest income |
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$ |
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$ |
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Fee income |
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Total revenues |
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$ |
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$ |
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Expenses: |
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Compensation and employee benefits |
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General and administrative |
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Interest expense |
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Total expenses |
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Impairment: |
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Provision for credit losses, net |
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Other (expense) income: |
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Change in fair value of warrant liabilities |
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Income before provision for income taxes |
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Income tax provision |
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Net income |
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$ |
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$ |
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Earnings per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Weighted-average shares of common stock outstanding, basic and diluted: |
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Basic |
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Diluted |
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See accompanying notes to the unaudited condensed consolidated financial statements
4
Table of Contents
Broadmark Realty Capital Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data, unaudited)
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Preferred |
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Common Stock |
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Additional |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in Capital |
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Accumulated Deficit |
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Total |
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Balances as of December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Dividends |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Issuance of shares for vested restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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Issuance of shares for exercised warrants |
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— |
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— |
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— |
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— |
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— |
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— |
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Shares withheld for tax liability |
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— |
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— |
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( |
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— |
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( |
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— |
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( |
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Stock-based compensation expense for restricted stock units |
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— |
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— |
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— |
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— |
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— |
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Balances as of March 31, 2022 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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Preferred |
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Common Stock |
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Additional |
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Shares |
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Amount |
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Shares |
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Amount |
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Paid-in Capital |
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Accumulated Deficit |
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Total |
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Balances as of December 31, 2020 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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— |
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Dividends |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
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Issuance of shares for vested restricted stock units |
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— |
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— |
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— |
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— |
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— |
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— |
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Stock-based compensation expense for restricted stock units |
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— |
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— |
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— |
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— |
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— |
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Balances as of March 31, 2021 |
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— |
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$ |
— |
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$ |
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$ |
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$ |
( |
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$ |
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See accompanying notes to the unaudited condensed consolidated financial statements
5
Table of Contents
Broadmark Realty Capital Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
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Three Months Ended |
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March 31, 2022 |
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March 31, 2021 |
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Cash flows from operating activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Accretion of deferred origination and amendment fees |
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Depreciation and amortization |
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Amortization of right of use assets |
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Amortization of debt issuance costs |
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Amortization of credit facility costs |
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Stock-based compensation expense for restricted stock units |
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Provision for credit losses, net |
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Gain on sale of real property |
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Change in fair value of warrant liabilities |
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Changes in operating assets and liabilities: |
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Interest and fees receivable, net |
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( |
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Other assets |
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( |
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Accounts payable and accrued liabilities |
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Lease liabilities |
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( |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Origination and fundings of mortgage notes receivable |
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Principal collections and proceeds from mortgage notes receivable |
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Origination and amendment fees received on mortgage notes receivable |
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Purchases of property and equipment |
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Proceeds from sale of real property |
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Improvements in real property |
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( |
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Net cash provided by (used in) investing activities |
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( |
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Cash flows from financing activities: |
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Dividends paid |
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( |
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Payment of costs to obtain financing |
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( |
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Payment of taxes on shares withheld for tax liability |
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( |
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Net cash provided by (used in) financing activities |
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( |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period |
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$ |
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$ |
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Supplemental disclosure of non-cash investing and financing activities: |
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Dividends payable |
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Mortgage notes receivable converted to investment in real property |
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Operating lease right-of-use assets |
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Lease liabilities arising from obtaining right-of-use assets |
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Property and equipment purchased through tenant improvement allowance |
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See accompanying notes to the unaudited condensed consolidated financial statements
6
Table of Contents
Broadmark Realty Capital Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Organization and Business
Broadmark Realty Capital Inc. (“Broadmark Realty,” “the Company,” “Successor,” “we,” “us” and “our”) is an internally managed commercial real estate finance company that provides secured financing to real estate investors and developers. Broadmark Realty’s objective is to preserve and protect stockholder capital while producing attractive risk-adjusted returns primarily through dividends generated from current income from its loan portfolio. Broadmark Realty has historically operated in 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”) previously managed Broadmark Private REIT, LLC (the “Private REIT”), which was an unconsolidated affiliate of the Company that primarily participated in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty. The Private REIT was liquidated during the quarter ended September 30, 2021. Refer to Note 12 for details about the liquidation of the Private REIT.
Broadmark Realty has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. 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 unaudited condensed consolidated interim financial statements include Broadmark Realty Capital Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated interim 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 unaudited condensed consolidated interim financial statements have been prepared in accordance with the accounting policies described in the audited consolidated financial statements and should be read in conjunction with the accompanying notes included in Broadmark Realty Capital Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022. The condensed consolidated balance sheet as of December 31, 2021, 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, 2022, our results of operations and stockholders’ equity for the three months ended March 31, 2022 and 2021, and our cash flows for the three months ended March 31, 2022 and 2021. The results of the three months ended March 31, 2022 is not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any interim period or for any other future year.
7
Table of Contents
Broadmark Realty Capital Inc.
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 in the accompanying unaudited condensed consolidated financial statements.
The Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary who previously acted as manager with no significant equity investment, did not hold a controlling interest in and, therefore, did not consolidate. Furthermore, the Private REIT's participation in loans originated by us met the characteristics of a participating interest and the criterion for sale accounting in accordance with GAAP and therefore, was derecognized from our unaudited condensed consolidated financial statements. The Private REIT was liquidated in August 2021 and all participations in mortgage notes receivable held by the Private REIT were purchased for cash by the Company at the settlement value which approximated fair value.
Reclassifications
Certain amounts in our unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021 have been reclassified to conform to the presentation of our current period unaudited condensed consolidated financial statements. These reclassifications had no effect on our previously reported net income or stockholders’ equity. The reclassifications include reclassifying certain board member expenses from compensation expense into general and administrative expense and separately presenting interest expense on the unaudited condensed consolidated statements of income. The reclassifications also included the separate presentation of origination and fundings of mortgage notes receivable, principal collections and proceeds from mortgage notes receivable and origination and amendment fees received on mortgage notes receivable on the unaudited condensed consolidated statements of cash flows.
Use of Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the expected credit losses on our loans and the fair value of financial instruments and exit prices for collateral dependent loans and investments in real property. Accordingly, actual results could differ from those estimates.
For certain real properties, where a recent appraisal is either unavailable or not most representative of fair value, the fair value is based on a broker opinion of value including a capitalized income analysis and replacement cost analysis considering historical operating results, market rents, vacancy rates, capitalization rates, land cost comparisons, market trends and economic conditions. The assessment of fair value of real property is subject to uncertainty and, in certain cases, sensitive to the selection of comparable properties.
Certain Significant Risks and Uncertainties
In the normal course of business, we encounter two primary types of economic risk in the form of credit and market risks. 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. Market risk is the risk of declining real estate values for the collateral underlying our loans which may make it more difficult for existing borrowers to remain current on their payment obligations, reduce the speed or ability for our loans to be repaid through the sale or refinance of the collateral and increase the likelihood that we will incur losses on our loans in the event of default as the value of collateral may be insufficient to cover our investment in the loan. We believe that the carrying values of our loans reasonably consider these risks.
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.
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Broadmark Realty Capital Inc.
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: 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; public health crises, like the COVID-19 pandemic; natural disasters and catastrophic events; and our ability to attract and retain qualified employees and key personnel, among other things.
Reportable Segments
We operate the business as
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings (“TDR”) for creditors that have adopted the current expected credit losses standard and requires enhanced disclosures for loan modifications made to borrowers experiencing financial difficulty in the form of interest rate reductions, principal forgiveness, other-than-insignificant payment delays, or term extensions. In addition, the new guidance requires presentation in the vintage disclosures of current-period gross write-offs by year of origination. The guidance is effective for the Company in the first quarter of 2023. Entities are able to early adopt the guidance and have the ability to early adopt the TDR enhancements separately from the vintage disclosures. We have not yet adopted this ASU. While the guidance will result in expanded disclosures, we do not believe the adoption of this guidance will have a material impact on our financial position, results of operation or cash flows.
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
Mortgage notes receivable are considered to be short-term financings. As of March 31, 2022, the weighted average term of our active loans was
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.
The following table reconciles outstanding mortgage loan commitments to the outstanding balance of mortgage notes receivable as of March 31, 2022 and December 31, 2021:
(dollars in thousands) |
|
March 31, 2022 |
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|
December 31, 2021 |
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||
Total loan commitments |
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$ |
|
|
$ |
|
||
Less: |
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|
|
|
|
|
||
Construction holdbacks |
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|
|
|
|
|
||
Interest reserves |
|
|
|
|
|
|
||
Total principal outstanding for our mortgage notes receivable |
|
|
|
|
|
|
||
Less: |
|
|
|
|
|
|
||
Allowance for credit losses(1) |
|
|
|
|
|
|
||
Deferred origination and amendment fees |
|
|
|
|
|
|
||
Mortgage notes receivable, net |
|
$ |
|
|
$ |
|
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 where principal collection is not in doubt. As of March 31, 2022 and December 31, 2021, the principal outstanding on loans in contractual default status placed on non-accrual status was $
As of March 31, 2022 and December 31, 2021, the total commitment on loans in contractual default was $
Current Expected Credit Losses
In assessing the current expected credit loss (“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, historical loss experience in the commercial real estate industry provided by a third party adjusted to incorporate the risks of construction lending and to reflect our expectations of the macroeconomic environment based on forecast data per the Federal Reserve.
The following tables summarize the activity in the CECL allowance during the three months ended March 31, 2022 and 2021:
|
|
CECL Allowance |
|
|||||||||
(dollars in thousands) |
|
Funded |
|
|
Unfunded (2) |
|
|
Total |
|
|||
CECL allowance as of December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Provision for credit losses, net |
|
|
|
|
|
|
|
|
|
|||
Charge-offs(1) |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
CECL allowance as of March 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|
|
CECL Allowance |
|
|||||||||
(dollars in thousands) |
|
Funded |
|
|
Unfunded (2) |
|
|
Total |
|
|||
CECL allowance as of December 31, 2020 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Provision for credit losses, net |
|
|
|
|
|
|
|
|
|
|||
Charge-offs(1) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
CECL allowance as of March 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
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Broadmark Realty Capital Inc.
In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are 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:
|
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At March 31, 2022 |
|
|
Year Originated (1) |
|
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(dollars in thousands) |
|
Carrying Value |
|
|
% of Portfolio |
|
|
2022 |