10-Q 1 brmk-20220331.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2022

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

As of May 2, 2022, there were 132,801,392 shares of common stock outstanding.

 

 

 


Table of Contents

Broadmark Realty Capital Inc.

Table of Contents

 

 

 

 

Page

 

 

 

 

 

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

Condensed Consolidated Statements of Income

 

4

 

 

Condensed Consolidated Statements of Stockholders’ Equity

 

5

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4.

 

Controls and Procedures

 

35

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1a.

 

Risk Factors

 

35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3.

 

Defaults Upon Senior Securities

 

35

Item 4.

 

Mine Safety Disclosures

 

35

Item 5.

 

Other Information

 

35

Item 6.

 

Exhibits

 

36

 

 

 

 

 

SIGNATURES

 

 

 

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:

mitigation of loan default rates and ability to timely resolve loans in contractual default status with positive economic outcomes;
the adequacy of collateral securing our loans and declines in the value of real estate property securing our loans;
increased competition from entities engaged in construction lending activities;
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;
disruptions in our business operations, including construction lending activity, relating to the COVID-19 pandemic;
the current and future health and stability of the economy and residential housing market, including potential impacts on the real estate markets as a result of COVID-19;
general economic uncertainty and the effect of general economic conditions on the real estate and real estate capital markets in particular;
general and local commercial and residential real estate property conditions;
changes in U.S. federal government policies;
changes in U.S. federal, state and local governmental laws and regulations that impact our business, assets or classification as a real estate investment trust;
our ability to pay, maintain or grow the dividend in the future;
changes in interest rates;
the availability of, and costs associated with, sources of liquidity;
compliance with covenants contained in our debt documents;
the adequacy of our policies, procedures and systems for managing risk effectively;
the ability to manage future growth;
changes in personnel and availability of qualified personnel; and
other factors set forth in our periodic filings with the Securities and Exchange Commission.

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)

 

 

 

March 31, 2022

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

97,407

 

 

$

132,889

 

Mortgage notes receivable, net

 

 

931,431

 

 

 

901,350

 

Interest and fees receivable, net

 

 

19,517

 

 

 

17,526

 

Investment in real property, net

 

 

63,586

 

 

 

68,067

 

Right-of-use assets

 

 

5,917

 

 

 

6,016

 

Goodwill

 

 

136,965

 

 

 

136,965

 

Other assets

 

 

8,121

 

 

 

8,342

 

Total assets

 

$

1,262,944

 

 

$

1,271,155

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

Senior unsecured notes, net

 

$

97,360

 

 

$

97,223

 

Dividends payable

 

 

9,297

 

 

 

9,291

 

Accounts payable and accrued liabilities

 

 

9,094

 

 

 

8,180

 

Lease liabilities

 

 

7,879

 

 

 

7,993

 

Total liabilities

 

$

123,630

 

 

$

122,687

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock, $0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding at March 31, 2022 and December 31, 2021

 

 

 

 

 

 

Common stock, $0.001 par value, 500,000,000 shares authorized, 132,793,442 and 132,716,338 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

132

 

 

 

132

 

Additional paid in capital

 

 

1,217,614

 

 

 

1,216,957

 

Accumulated deficit

 

 

(78,432

)

 

 

(68,621

)

Total stockholders' equity

 

 

1,139,314

 

 

 

1,148,468

 

Total liabilities and stockholders' equity

 

$

1,262,944

 

 

$

1,271,155

 

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)

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Revenues:

 

 

 

 

 

 

Interest income

 

$

24,110

 

 

$

22,017

 

Fee income

 

 

5,763

 

 

 

7,451

 

Total revenues

 

$

29,873

 

 

$

29,468

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

Compensation and employee benefits

 

 

5,078

 

 

 

3,446

 

General and administrative

 

 

2,851

 

 

 

2,653

 

Interest expense

 

 

2,115

 

 

 

280

 

Total expenses

 

 

10,044

 

 

 

6,379

 

 

 

 

 

 

 

 

Impairment:

 

 

 

 

 

 

Provision for credit losses, net

 

 

1,747

 

 

 

2,708

 

 

 

 

 

 

 

 

Other (expense) income:

 

 

 

 

 

 

Change in fair value of warrant liabilities

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

18,074

 

 

 

20,381

 

Income tax provision

 

 

 

 

 

 

Net income

 

$

18,074

 

 

$

20,381

 

Earnings per common share:

 

 

 

 

 

 

Basic

 

$

0.14

 

 

$

0.15

 

Diluted

 

$

0.14

 

 

$

0.15

 

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

 

 

 

 

 

 

Basic

 

 

132,769,876

 

 

 

132,550,227

 

Diluted

 

 

132,836,771

 

 

 

132,678,812

 

See accompanying notes to the unaudited 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, 2021

 

 

 

 

$

 

 

 

132,716,338

 

 

$

132

 

 

$

1,216,957

 

 

$

(68,621

)

 

$

1,148,468

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,074

 

 

 

18,074

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,885

)

 

 

(27,885

)

Issuance of shares for vested restricted stock units

 

 

 

 

 

 

 

 

109,355

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of shares for exercised warrants

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares withheld for tax liability

 

 

 

 

 

 

 

 

(32,276

)

 

 

 

 

 

(328

)

 

 

 

 

 

(328

)

Stock-based compensation expense for restricted stock units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

985

 

 

 

 

 

 

985

 

Balances as of March 31, 2022

 

 

 

 

$

 

 

 

132,793,442

 

 

$

132

 

 

$

1,217,614

 

 

$

(78,432

)

 

$

1,139,314

 

 

 

 

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

 

See accompanying notes to the unaudited condensed consolidated financial statements

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Broadmark Realty Capital Inc.

 

Condensed Consolidated Statements of Cash Flows

(in thousands, unaudited)

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

Cash flows from operating activities

 

 

 

 

 

 

Net income

 

$

18,074

 

 

$

20,381

 

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

 

 

 

 

 

 

Accretion of deferred origination and amendment fees

 

 

(5,318

)

 

 

(6,612

)

Depreciation and amortization

 

 

219

 

 

 

163

 

Amortization of right of use assets

 

 

99

 

 

 

94

 

Amortization of debt issuance costs

 

 

143

 

 

 

 

Amortization of credit facility costs

 

 

379

 

 

 

142

 

Stock-based compensation expense for restricted stock units

 

 

985

 

 

 

737

 

Provision for credit losses, net

 

 

1,747

 

 

 

2,708

 

Gain on sale of real property

 

 

(257

)

 

 

 

Change in fair value of warrant liabilities

 

 

8

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Interest and fees receivable, net

 

 

(1,991

)

 

 

(2,146

)

Other assets

 

 

(135

)

 

 

171

 

Accounts payable and accrued liabilities

 

 

714

 

 

 

713

 

Lease liabilities

 

 

(114

)

 

 

(10

)

Net cash provided by operating activities

 

 

14,553

 

 

 

16,341

 

Cash flows from investing activities:

 

 

 

 

 

 

Origination and fundings of mortgage notes receivable

 

 

(123,802

)

 

 

(121,316

)

Principal collections and proceeds from mortgage notes receivable

 

 

96,366

 

 

 

114,792

 

Origination and amendment fees received on mortgage notes receivable

 

 

1,968

 

 

 

2,269

 

Purchases of property and equipment

 

 

(198

)

 

 

(135

)

Proceeds from sale of real property

 

 

5,288

 

 

 

815

 

Improvements in real property

 

 

(1,450

)

 

 

(250

)

Net cash provided by (used in) investing activities

 

 

(21,828

)

 

 

(3,825

)

Cash flows from financing activities:

 

 

 

 

 

 

Dividends paid

 

 

(27,879

)

 

 

(26,510

)

Payment of costs to obtain financing

 

 

 

 

 

(5,104

)

Payment of taxes on shares withheld for tax liability

 

 

(328

)

 

 

 

Net cash provided by (used in) financing activities

 

 

(28,207

)

 

 

(31,614

)

Net decrease in cash and cash equivalents

 

 

(35,482

)

 

 

(19,098

)

Cash and cash equivalents, beginning of period

 

 

132,889

 

 

 

223,375

 

Cash and cash equivalents, end of period

 

$

97,407

 

 

$

204,277

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Dividends payable

 

 

9,297

 

 

 

9,280

 

Mortgage notes receivable converted to investment in real property

 

 

 

 

 

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 unaudited condensed consolidated financial statements

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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.

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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 one reportable segment, which originates, underwrites and services construction loans.

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 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 at origination 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. As of March 31, 2022, the weighted average term of our active loans was 18 months at origination, which we often elect to extend for several months, based on our evaluation of the expected timeline for completion of construction. All loans require monthly interest only payments, with our weighted average interest rate on our portfolio being 10.4% as of March 31, 2022. 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.

 

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

 

 

December 31, 2021

 

Total loan commitments

 

$

1,586,295

 

 

$

1,489,055

 

Less:

 

 

 

 

 

 

Construction holdbacks

 

 

591,876

 

 

 

524,462

 

Interest reserves

 

 

41,709

 

 

 

39,880

 

Total principal outstanding for our mortgage notes receivable

 

 

952,710

 

 

 

924,713

 

Less:

 

 

 

 

 

 

Allowance for credit losses(1)

 

 

8,647

 

 

 

10,394

 

Deferred origination and amendment fees

 

 

12,632

 

 

 

12,969

 

Mortgage notes receivable, net

 

$

931,431

 

 

$

901,350

 

 

 

(1)
As of March 31, 2022, $1.1 million of the 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.

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 $66.8 and $101.9 million, respectively, and all non-accrual loans had an allowance for credit losses.

As of March 31, 2022 and December 31, 2021, the total commitment on loans in contractual default was $187.8 and $191.4 million, respectively.

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

 

$

10,394

 

 

$

904

 

 

$

11,298

 

Provision for credit losses, net

 

 

1,554

 

 

 

193

 

 

 

1,747

 

Charge-offs(1)

 

 

(3,301

)

 

 

 

 

 

(3,301

)

CECL allowance as of March 31, 2022

 

$

8,647

 

 

$

1,097

 

 

$

9,744

 

 

 

 

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

 

 

 

(1)
Charge-offs result from either loan repayments where the proceeds are less than the principal outstanding or transfers to investment in real property owned upon foreclosure where the fair values of the underlying collateral are less than the principal outstanding.
(2)
CECL allowance related to unfunded commitments is presented as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

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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:

 

 

 

At March 31, 2022

 

 

Year Originated (1)

 

(dollars in thousands)

 

Carrying Value

 

 

% of Portfolio

 

 

2022