Broadmark Realty Capital Inc. - Quarter Report: 2021 June (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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 June 30, 2021


☐	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	BMRK	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	BMRK 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.

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 August 2, 2021, there were 132,641,935 shares of common stock outstanding.

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Broadmark Realty Capital Inc.

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		Page


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statement 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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	39
Item 1a.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	40

SIGNATURES		41

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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.

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)


	June 30, 2021			December 31, 2020
Assets
Cash and cash equivalents	$	164,023		$	223,375
Mortgage notes receivable, net		814,454			798,486
Interest and fees receivable, net		12,229			14,357
Investment in real property, net		41,725			8,473
Right-of-use assets		6,209			—
Goodwill		136,965			136,965
Other assets		9,391			5,663
Total assets	$	1,184,996		$	1,187,319

Liabilities and Equity
Accounts payable and accrued liabilities	$	8,542		$	4,946
Lease Liabilities		8,271			—
Dividends payable		9,284			7,952
Total liabilities	$	26,097		$	12,898
Commitments and Contingencies (Note 10)
Preferred stock, $0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding at June 30, 2021 and December 31, 2020		—			—
Common stock, $0.001 par value, 500,000,000 shares authorized, 132,634,672 and 132,532,383 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		132			132
Additional Paid in Capital		1,215,513			1,213,987
Accumulated deficit		(56,746	)		(39,698	)
Total equity		1,158,899			1,174,421
Total liabilities and equity	$	1,184,996		$	1,187,319

See accompanying notes to the unaudited 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						Six Months Ended
	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Revenues
Interest income	$	21,618		$	22,180		$	43,635		$	46,733
Fee income		7,565			6,890			15,016			14,105
Total Revenue	$	29,183		$	29,070		$	58,651		$	60,838
Other Income (Expense):
Change in fair value of warrant liabilities		(3,734	)		(1,458	)		(3,734	)		3,146
Expenses
Impairment:
Provision for credit losses, net		58			4,224			2,766			8,656
Operating expenses:
Compensation and employee benefits		3,669			3,044			7,229			6,237
General and administrative		3,470			4,500			6,289			6,778
Total Expenses		7,197			11,768			16,284			21,671
Income before income taxes		18,252			15,844			38,633			42,313
Income tax provision		—			—			—			—
Net income	$	18,252		$	15,844		$	38,633		$	42,313
Earnings per common share:
Basic	$	0.14		$	0.12		$	0.29		$	0.32
Diluted	$	0.14		$	0.12		$	0.29		$	0.32
Weighted-average shares of common stock outstanding, basic and diluted
Basic		132,585,116			132,165,005			132,567,768			132,120,290
Diluted		132,646,389			132,165,005			132,636,425			132,120,290

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, 2020		—	$	—		132,532,383		$	132	$	1,213,987		$	(39,698	)	$	1,174,421
Net Income		—		—		—			—		—			20,381			20,381
Dividends		—		—		—			—		—			(27,838	)		(27,838	)
Issuance of shares for vested restricted stock units		—		—		34,027			—		—			—			—
Stock-based compensation expense for restricted stock units		—		—		—			—		737			—			737
Balances as of March 31, 2021		—	$	—		132,566,410		$	132	$	1,214,724		$	(47,155	)	$	1,167,701
Net Income		—		—		—			—		—			18,252			18,252
Dividends		—		—		—			—		—			(27,843	)		(27,843	)
Issuance of shares for vested restricted stock units		—		—		77,766			—		—			—			—
Restricted stock units withheld for tax liability		—		—		(9,504	)		—		(135	)		—			(135	)
Stock-based compensation expense for restricted stock units		—		—		—			—		924			—			924
Balances as of June 30, 2021		—	$	—		132,634,672		$	132	$	1,215,513		$	(56,746	)	$	1,158,899


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

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)


	Six Months Ended			Six Months Ended
	June 30, 2021			June 30, 2020
Cash flows from operating activities
Net income	$	38,633		$	42,313
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred origination and amendment fees		(13,823	)		(10,909	)
Depreciation and amortization		431			(785	)
Amortization of right of use assets		189			221
Amortization of financing costs		567			—
Stock-based compensation expense for restricted stock units		1,661			1,881
Provision for credit losses, net		2,766			8,656
Change in fair value of warrant liabilities		3,734			(3,146	)
Changes in operating assets and liabilities:
Interest and fees receivable, net		2,128			(4,878	)
Other assets		933			(1,606	)
Accounts payable and accrued liabilities		(1,826	)		(554	)
Lease liabilities		(86	)		(221	)
Net cash provided by operating activities		35,307			30,972
Cash flows from investing activities:
Purchases of property and equipment		(249	)		—
Proceeds from sale of real property		878			2,213
Improvements to investments in real property		(1,711	)		(66	)
Change in mortgage notes receivable, net		(33,968	)		10,037
Net cash provided by (used in) investing activities		(35,050	)		12,184
Cash flows from financing activities:
Dividends paid		(54,349	)		(63,401	)
Payment of costs to obtain credit facility		(5,125	)		—
Payment of taxes on vested restricted stock units		(135	)		—
Net cash used in financing activities		(59,609	)		(63,401	)
Net decrease in cash and cash equivalents		(59,352	)		(20,245	)
Cash and cash equivalents, beginning of period		223,375			238,214
Cash and cash equivalents, end of period	$	164,023		$	217,969
Supplemental disclosure of non-cash investing and financing activities
Dividends payable	$	9,284		$	7,934
Measurement period adjustment to goodwill and intangible assets		—			5,000
Mortgage notes receivable converted to investment in real property		32,419			—
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,” “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 generally operates 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”) 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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 June 30, 2021, our results of operations and stockholders’ equity for the six month periods ended June 30, 2021 and 2020, and our cash flows for the six month periods ended June 30, 2021 and 2020. The results of the six month period ended June 30, 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.

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, therefore, do not consolidate. Furthermore, the Private REIT participation in loans originated by us meets the characteristics of a participating interest and the criterion for sale accounting in accordance with GAAP and therefore, 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.

Correction of Immaterial Error

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

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Use of Estimates

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

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.

Reportable Segments

We operate the business as one 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 June 30, 2021 and December 31, 2020. The balances in these accounts may exceed the insured limits. There were no restrictions on cash as of June 30, 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. If the sales do not meet these criteria, the sale of the participation is treated as a secured borrowing. As of June 30, 2021, all participations in mortgage notes receivable sold to the Private REIT have achieved sale accounting.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Current Expected Credit Losses Allowance

In the fourth quarter of 2020, we adopted the current expected credit loss (“CECL Standard”) for the full year ended December 31, 2020 as we ceased to qualify as an emerging growth company effective December 31, 2020. As a result, we were no longer permitted an extended transition period for complying with new or revised accounting standards affecting public companies. The initial CECL allowance adjustment of $2.0 million was recorded 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 and six months ended June 30, 2020 includes an additional provision for credit losses of $3.9 and $4.7 million associated with the adoption of the CECL Standard, as a result, our previously reported net income of $19.8 and $47.0 million for this period is lower by $3.9 and $4.7 million.

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

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

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

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

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

Notes to Unaudited 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 charged 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 June 30, 2021 and December 31, 2020, we owned five and three properties or projects totaling $41.7 and $8.5 million, respectively.

Leases

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

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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

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

Goodwill

Goodwill 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. Our annual assessment occurs in the fourth quarter. During the first and second 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.

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 amortize the value of these finite-lived intangibles into expense over the expected useful life. All of our intangible assets relate to the value of customer relationships. As of June 30, 2021 and December 31, 2020, intangible assets net of accumulated amortization was $0.5 and $0.6 million, respectively.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

INCOME RECOGNITION

Interest Income

Interest income on mortgage notes receivable is accrued based on contractual rates applied to the principal balance unless there is a minimum interest provision in the mortgage note. Certain 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.

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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

The following table reconciles outstanding mortgage loan commitments to outstanding balance of mortgage notes receivable as of June 30, 2021 and December 31, 2020:


(dollars in thousands)	June 30, 2021		December 31, 2020
Total loan commitments	$	1,328,556	$	1,245,963
Less:
Construction holdbacks(1)		412,751		356,026
Interest reserves(1)		35,600		29,817
Private REIT participation(2)		41,427		37,729
Total principal outstanding for our mortgage notes receivable		838,778		822,391
Less:
Allowance for credit losses(3)		10,943		10,590
Deferred origination and amendment fees		13,381		13,315
Mortgage notes receivable, net	$	814,454	$	798,486

(1)

Includes construction holdbacks of $34.7 and $40.4 million and interest reserves of $2.6 and $4.3 million on participating interests sold to the Private REIT as of June 30, 2021 and December 31, 2020, respectively.

(2)

The Private REIT’s participations in loans originated by us meet the characteristics of participating interests and the criterion for sale accounting and therefore, are derecognized from our condensed consolidated financial statements.

(3)

As of June 30, 2021, $0.7 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 June 30, 2021 and December 31, 2020, the principal outstanding on loans in contractual default status placed on non-accrual status was $155.3 and $126.8 million, respectively, and all non-accrual loans had an allowance for credit losses.

Current Expected Credit Losses

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

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables summarize the activity in the CECL Allowance during the six months ended June 30, 2021 and 2020:


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


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

(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.

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 June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	519,791			63.0	%	$	196,664	$	194,366	$	31,142	$	1,731	$	90,598	$	5,290
Investment		159,089			19.2			68,500		44,474		18,456		4,027		18,193		5,439
Horizontal Development		146,517			17.8			102,106		39,548		—		181		—		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)

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

(2)

$0.7 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 Unaudited Condensed Consolidated Financial Statements


	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	178,457			21.6	%	$	55,399	$	68,339	$	23,020	$	—	$	26,667	$	5,032
Residential Lots		88,976			10.8			51,790		27,065		—		—		—		10,121
Single family housing		77,416			9.5			53,171		19,071		—		181		4,993		—
Townhomes		75,268			9.1			23,307		26,667		—		1,384		23,652		258
Unentitled Land		70,960			8.6			50,492		—		—		3,200		17,268		—
Condos		64,359			7.8			9,628		18,271		—		1,174		35,286		—
Senior Housing		53,056			6.4			28,423		24,633		—		—		—		—
Hotel		47,188			5.7			6,325		40,863		—		—		—		—
Mixed Use		39,976			4.8			11,795		26,258		1,923		—		—		—
Offices		33,550			4.1			4,560		6,292		22,698		—		—		—
Entitled Land		29,070			3.5			27,719		1,351		—		—		—		—
Industrial		17,377			2.1			17,377		—		—		—		—		—
Commercial Lots		15,453			1.9			—		15,453		—		—		—		—
Commercial		12,649			1.5			12,649		—		—		—		—		—
Retail		6,668			0.8			3,508		1,203		1,957		—		—		—
Quadplex		6,013			0.7			3,091		2,922		—		—		—		—
Duplex		4,634			0.6			3,709		—		—		—		925		—
Commercial other		4,327			0.5			4,327		—		—		—		—		—
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)

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

(2)


	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	34,973			4.2	%	$	24,053	$	7,375	$	—	$	3,200	$	345	$	—
41 - 45%		40,800			5.0			35,046		5,754		—		—		—		—
46 - 50%		56,451			6.8			30,013		26,438		—		—		—		—
51 - 55%		84,695			10.3			32,781		33,035		1,957		—		16,922		—
56 - 60%		81,261			9.8			15,854		44,656		—		—		15,312		5,439
61 - 65%		501,182			60.7			228,970		141,255		47,641		2,739		75,287		5,290
66 - 70%		11,300			1.4			553		10,747		—		—		—		—
71 - 75%		—			0.0			—		—		—		—		—		—
76 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		14,735			1.8			—		9,128		—		—		925		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(3)		(10,943	)
Carrying value, net	$	814,454

(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)


	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 Unaudited Condensed Consolidated Financial Statements


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

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Broadmark Realty Capital Inc.

Notes to Unaudited 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:


	June 30, 2021				Fair Value Measurements Using
	Carrying		Estimated
(dollars in thousands)	Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	164,023	$	164,023	$	164,023	$	—	$	—
Mortgage notes receivable, net		814,454		814,454		—		—		814,454
Financial Liabilities
Accounts payable and accrued liabilities (1)		8,542		8,542		—		4,808		3,734

(1)

As of June 30, 2021, includes the level 3 valuation of the private placement warrant liability derivative measured at fair value on a recurring basis.


	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 June 30, 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 June 30, 2021 and December 31, 2020:


	Level 3				Valuation	Unobservable	Range of
(dollars in thousands)	June 30, 2021		December 31, 2020		technique	inputs	inputs
Private Placement Warrants(1)	$	3,734	$	-	Valuation model	Equity volatility of underlying stock price	0 - 25%
Real property(2)		41,725		8,473	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10%
Collateral dependent loans, net of allowance for credit losses(3)		37,242		30,920	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10%
Total	$	82,701	$	39,393

(1)

Private placement warrant liability derivative measured at fair value on a recurring basis.

(2)

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

(3)

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 Unaudited Condensed Consolidated Financial Statements

Fair Value on a Recurring Basis

The Private Placement Warrant Liability is valued using a lattice model that primarily incorporates observable inputs such as our common stock price, exercise price, term of the warrant, dividend yield and the risk-free rate, however, it also incorporates an assumption for equity volatility based on the volatility of the common stock of comparable public companies. As we utilize unobservable inputs in the valuation, we classify the Private Placement Warrant Liability as Level 3 within the fair value hierarchy. Refer to Note 5 for description of inputs utilized at June 30, 2021.

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 we utilize unobservable inputs, including third-party appraisals for estimating as-complete appraised values, we classify mortgage notes receivable as Level 3 within the fair value hierarchy.

Note 5 - Stockholders’ Equity and Earnings per Share

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 one vote for each share. As of June 30, 2021 and December 31, 2020, there were 132,634,672 and 132,532,383 shares of common stock issued and outstanding, respectively, and no shares of preferred stock issued and outstanding.

As of June 30, 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 one share of our common stock at a price of $11.50 per share (the “Private Placement Warrants”). In the aggregate, we have outstanding warrants to purchase approximately 15.6 million shares of common stock at a price of $11.50 per whole share. Settlement of outstanding warrants will be in shares of our common stock unless we elect solely in our discretion to settle warrants we have called for redemption in cash, and subject to customary adjustment in the event of business combinations and certain tender offers.

The liability for the Private Placement Warrants was $3.7 million as of June 30, 2021 and is included in accounts payable and accrued liabilities in the condensed consolidated balance sheet. Refer to "Correction of Immaterial Error" in Note 2 for additional details on the accounting classification of the Private Placement Warrants.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The fair value of the Private Placement Warrant Liability was estimated using a lattice model in accordance with ASC 820, Fair Value, using the assumptions noted below in the following table. Expected volatility is based on the historical volatility of traded prices of Public Warrants. The risk-free interest rate is based on the US Treasury Constant Maturity curve, commensurate with the time to expiry of warrants.


	As of June 30, 2021
Expected volatility		23.0	%
Expected dividend yield		7.4	%
Expected life (in years)		3.38
Risk-free interest rate		0.5	%

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				Six Months Ended
(dollars in thousands, except share and per share data):	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Net income	$	18,252	$	15,844	$	38,633	$	42,313
Basic weighted-average shares of common stock outstanding		132,585,116		132,165,005		132,567,768		132,120,290
Dilutive effect of share-based compensation		61,273		—		68,656		—
Diluted weighted-average shares of common stock outstanding		132,646,389		132,165,005		132,636,425		132,120,290
Basic earnings per share	$	0.14	$	0.12	$	0.29	$	0.32
Diluted earnings per share	$	0.14	$	0.12	$	0.29	$	0.32

For the periods presented, the following table reconciles the denominators used in the basic and diluted earnings per share calculations:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Denominator for basic earnings per share calculation		132,585,116		132,165,005		132,567,768	$	132,120,290
Effect of dilutive securities:
Unvested restricted stock units		61,273		—		68,656		—
Denominator for diluted earnings per share calculation		132,646,389		132,165,005		132,636,424		132,120,290

For the periods presented, the following stock equivalents were excluded from the calculations of diluted earnings per share because their effect would have been antidilutive:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Weighted-average restricted stock units outstanding		596,978		792,480		539,645		642,185
Effect of dilutive securities:
Unexercised public and private warrants		15,604,304		15,604,329		15,604,304		15,604,329
Total stock equivalents		16,201,282		16,396,809		16,143,949		16,246,514

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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 June 30, 2021 and December 31, 2020, we were in compliance with all REIT requirements.

Based on our evaluation, we concluded that there are no significant uncertain tax positions requiring recognition in our condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no 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 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 June 30, 2021, 3,597,199 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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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.

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


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

For the three and six months ended June 30, 2021, we recognized compensation expense related to RSUs of $0.9 and $1.7 million, respectively, based on amortizing the fair value of the awards over the service (vesting) period. As of June 30, 2021, there was $6.6 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 2.1 years.

Note 8 - Commitments and Contingencies

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


			Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years
Construction holdbacks (1)		412,751		292,787		119,964		—		—
Operating lease obligations	$	11,327	$	926	$	1,852	$	2,048	$	6,501
Total	$	424,078	$	293,713	$	121,816	$	2,048	$	6,501

(1)

Includes construction holdbacks of $34.7 million on participating interests sold to the Private REIT as of June 30, 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 operating lease was 6.0%, resulting in an imputed interest amount of $3.3 million.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Credit Facility

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

Legal Proceedings

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

Concentration Risk

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 ten counties, the largest being Utah county in Utah. As of June 30, 2021 and December 31, 2020, the top ten counties make up 42.0% and 43.2% of the total committed amount of loans in our total portfolio.

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.

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

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

Broadmark Private REIT, LLC

The Private REIT 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 the criterion for sale accounting and therefore, are derecognized from our condensed consolidated financial statements.

Note 10 - Subsequent Events

Dividend Declaration

On July 13, 2021, our board of directors declared a cash dividend of $0.07 per common share payable on August 13, 2021 to stockholders of record as of July 30, 2021.

Private REIT

On July 13, 2021, the Company announced that the Private REIT will be liquidated. The Private REIT Manager, acting as liquidator of the Private REIT, will sell the Private REIT’s assets, discharge its liabilities and wind up its affairs. The Private REIT’s outstanding participations in loans originated and sold by the Company to the Private REIT will be purchased by the Company for a cash payment by the Company equal to the fair value of the Private REIT’s loan participations as of August 1, 2021 (the "Liquidation Date"), which is projected to be approximately $42 million. The Private REIT will distribute 100% of its assets in excess of cash required to discharge liabilities (including accrued liabilities for liquidation costs) to its investors based on their relative percentage interests as of the Liquidation Date. The liquidation of the Private REIT and distribution of its assets is scheduled to be completed by the end of the third quarter 2021. Upon completion of the purchase, the Company will hold 100% of the participation interests in its outstanding loans.

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

The following discussion and analysis of our financial condition and results of operations should be read together with the 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 and six months ended June 30, 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, commercial properties. We generally operate in 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. Beginning in early 2021, we have increased the number of states in which we operate in order to expand our potential lending markets. As of June 30, 2021, our portfolio of 199 active loans had approximately $1.3 billion of total commitments and $880.2 million of principal outstanding across 137 borrowers in 14 states and the District of Columbia, of which $78.8 million and $41.4 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 June 30, 2021, we have no outstanding debt. We plan to opportunistically raise capital in the public and private markets 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. As of June 30, 2021, we have not drawn on our revolving credit facility.

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 June 30, 2021, the weighted average LTV was 59.7% across our active loan portfolio based on the total commitment of the loan and “as-complete” appraisals. For our loans in contractual default status as of June 30, 2021, the weighted average LTV was approximately 87.7% when measured by the sum of the principal outstanding net of the provision for credit losses, the estimated costs to complete and the accounts receivable for which collectability is reasonably assured, divided by the most recent “as-complete” appraisal. In addition, 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.

Our loans typically range from $0.2 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 June 30, 2021, the average total commitment of our active loans was $6.7 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.

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As of June 30, 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 second 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. There remain shortages in raw materials, manufactured products and labor across industries that are resulting in longer construction timelines and rising prices, which are dampening a full economic recovery within the construction industry. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results 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. Starting in the second quarter of 2021, we adopted a dynamic pricing model, in which we determine credit risk for prospective loans utilizing categories such as experience of the borrower, amount of new capital being contributed by the borrower or guarantors to the project and strength of the underlying collateral. Under the dynamic pricing model, originated loans that we underwrite as lower credit risk could potentially receive lower annual rates or loan origination fees than loans that we deem as higher credit risk. To the extent that competitive conditions lead us to originate a greater percentage of loans containing annual fees or loan origination fees at the lower end of our historic ranges, our interest and fee income and financial performance could be adversely affected. We expect these trends related to the competitive environment to continue.

Key Indicators of Financial Condition and Operating Performance

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

Interest income earned on our loans. A primary source of our revenue is interest income earned on our loan portfolio. Our loans typically bear interest at a fixed annual rate of 10% to 13%, paid monthly, primarily from interest reserves and, to a lesser extent, cash payments. Certain mortgage notes provide for minimum interest provisions, to which the contractual rate applies, which is typically between 50% and 70% of the face amount of the note until the outstanding principal under the note exceeds a minimum threshold. A reduction in or absence of minimum interest provisions in our mortgage notes and an increase in the amount of our loans in non-accrual status as a result of being in contractual default reduce our effective interest-bearing principal and the interest income we earn on our loans. The effective interest-bearing principal represents the principal balance outstanding plus the excess of minimum interest provisions over the actual principal outstanding. As of June 30, 2021 and December 31, 2020, the effective interest-bearing principal was $989.9 and $998.6 million, respectively. With consideration of loans in non-accrual status, the effective interest-bearing principal as of June 30, 2021 and December 31, 2020 decreased to $776.2 and $786.4 million, respectively. We expect the trend of lower effective interest-bearing principal than historic levels to continue in subsequent quarters as a result of competitive conditions in the market and our default resolution strategy. In addition, as we have historically had no debt outstanding, we have had no borrowing costs and accordingly our gross interest income earned on our loans has been equivalent to net interest income.

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Fees and other revenue recognized from originating and servicing our loans. Fee income is comprised of loan origination fees, loan renewal fees and inspection fees. The majority of fee income is comprised of loan origination fees, or “points,” which typically range from 2% to 5% 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 origination and renewal fees are deferred and recognized in income over the contractual maturity of the underlying loan.

Loan originations. Our operating performance is heavily dependent upon our ability to originate new loans to invest new capital and re-invest returning capital from 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		Six Months Ended
(dollars in millions)	June 30, 2021		June 30, 2021
Loans originated(1)	$	197.4	$	315.0
Loans repaid	$	111.2	$	182.4

(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.

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 June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	519,791			63.0	%	$	196,664	$	194,366	$	31,142	$	1,731	$	90,598	$	5,290
Investment		159,089			19.2			68,500		44,474		18,456		4,027		18,193		5,439
Horizontal Development		146,517			17.8			102,106		39,548		—		181		—		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)

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

(2)

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	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	178,457			21.6	%	$	55,399	$	68,339	$	23,020	$	—	$	26,667	$	5,032
Residential Lots		88,976			10.8			51,790		27,065		—		—		—		10,121
Single family housing		77,416			9.5			53,171		19,071		—		181		4,993		—
Townhomes		75,268			9.1			23,307		26,667		—		1,384		23,652		258
Unentitled Land		70,960			8.6			50,492		—		—		3,200		17,268		—
Condos		64,359			7.8			9,628		18,271		—		1,174		35,286		—
Senior Housing		53,056			6.4			28,423		24,633		—		—		—		—
Hotel		47,188			5.7			6,325		40,863		—		—		—		—
Mixed Use		39,976			4.8			11,795		26,258		1,923		—		—		—
Offices		33,550			4.1			4,560		6,292		22,698		—		—		—
Entitled Land		29,070			3.5			27,719		1,351		—		—		—		—
Industrial		17,377			2.1			17,377		—		—		—		—		—
Commercial Lots		15,453			1.9			—		15,453		—		—		—		—
Commercial		12,649			1.5			12,649		—		—		—		—		—
Retail		6,668			0.8			3,508		1,203		1,957		—		—		—
Quadplex		6,013			0.7			3,091		2,922		—		—		—		—
Duplex		4,634			0.6			3,709		—		—		—		925		—
Commercial other		4,327			0.5			4,327		—		—		—		—		—
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)

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

(2)


	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	34,973			4.2	%	$	24,053	$	7,375	$	—	$	3,200	$	345	$	—
41 - 45%		40,800			5.0			35,046		5,754		—		—		—		—
46 - 50%		56,451			6.8			30,013		26,438		—		—		—		—
51 - 55%		84,695			10.3			32,781		33,035		1,957		—		16,922		—
56 - 60%		81,261			9.8			15,854		44,656		—		—		15,312		5,439
61 - 65%		501,182			60.7			228,970		141,255		47,641		2,739		75,287		5,290
66 - 70%		11,300			1.4			553		10,747		—		—		—		—
71 - 75%		—			0.0			—		—		—		—		—		—
76 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		14,735			1.8			—		9,128		—		—		925		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(3)		(10,943	)
Carrying value, net	$	814,454

(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)


	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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	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Collateral Type
Apartments	$	129,588			16.0	%	$	79,931	$	18,953	$	—	$	24,232	$	6,472	$	—
Residential Lots		124,548			15.4			105,830		10,291		—		—		8,427		—
Condos		92,245			11.4			52,714		3,106		4,405		32,020		—		—
Single family housing		90,131			11.1			69,438		8,839		1,028		10,103		—		723
Townhomes		72,773			9.0			47,391		1,061		1,703		21,564		1,054		—
Unentitled Land		71,796			8.9			47,727		—		7,259		16,444		—		366
Mixed Use		66,092			8.2			60,232		5,860		—		—		—		—
Hotel		51,115			6.3			42,874		8,241		—		—		—		—
Senior Housing		34,283			4.2			34,283		—		—		—		—		—
Offices		29,540			3.7			8,495		21,045		—		—		—		—
Commercial Lots		15,683			1.9			15,683		—		—		—		—		—
Retail		11,397			1.4			9,500		1,897		—		—		—		—
Industrial		11,309			1.4			704		10,605		—		—		—		—
Quadplex		5,592			0.7			5,592		—		—		—		—		—
Entitled Land		1,116			0.1			1,116		—		—		—		—		—
Commercial		877			0.1			—		877		—		—		—		—
Duplex		736			0.1			—		—		—		736		—		—
Commercial other		254			0.1			254		—		—		—		—		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(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 and six months ended June 30, 2021 and 2020:


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Dividends declared per common share	$	0.21	$	0.18	$	0.42	$	0.42

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


	Three Months Ended				Six Months Ended
	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020
Earnings per common share, basic	$	0.14	$	0.12	$	0.29	$	0.32
Earnings per common share, diluted		0.14		0.12		0.29		0.32
Distributable earnings per diluted share of common stock prior to realized loss on investments		0.18		0.18		0.36		0.39
Distributable earnings per diluted share of common stock	$	0.18		0.17		0.35		0.38

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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) and warrant liabilities; (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 six months ended June 30, 2021 and 2020, provision for credit losses, net was $2.8 and $8.7 million, respectively, which has been excluded from distributable earnings consistent with other unrealized gains (losses) pursuant to our policy for reporting distributable earnings. We expect to recognize such potential credit losses in distributable earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally upon charge-off of principal at the time of loan repayment or upon sale of real property owned by us and the amount of proceeds is less than the principal outstanding at the time of foreclosure.

Management believes that the adjustments to compute “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.

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.

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


	Three Months Ended					Six Months Ended
(dollars in thousands, except share and per share data)	June 30, 2021		June 30, 2020			June 30, 2021			June 30, 2020
Net income attributable to common stockholders	$	18,252	$	15,844		$	38,633		$	42,313
Adjustments for non-distributable earnings:
Stock-based compensation expense		924		967			1,661			1,881
New public company expenses (1)		289		834			953			2,066
Change in fair value of warrant liabilities		3,734		1,458			3,734			(3,146	)
Depreciation and amortization		268		119			431			(785	)
Provision for credit losses, net		58		4,224			2,766			8,656
Distributable earnings prior to realized loss on investments	$	23,525	$	23,446		$	48,178		$	50,985
Realized credit losses (2)		—		(696	)		(1,401	)		(1,233	)
Distributable earnings	$	23,525	$	22,750		$	46,777		$	49,752
Distributable earnings per diluted share of common stock prior to realized loss on investments	$	0.18	$	0.18		$	0.36		$	0.39
Distributable earnings per diluted share of common stock	$	0.18	$	0.17		$	0.35		$	0.38
Weighted-average number of shares of common stock outstanding, basic and diluted
Basic		132,585,116		132,165,005			132,567,768			132,120,290
Diluted		132,646,389		132,165,005			132,636,425			132,120,290

(1)

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

(2)

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.

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						Six Months Ended
Statements of Operations Data:	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Revenues
Interest income	$	21,618		$	22,180		$	43,635		$	46,733
Fee income		7,565			6,890			15,016			14,105
Total Revenue		29,183			29,070			58,651			60,838
Other Income (Expense):
Change in fair value of warrant liabilities		(3,734	)		(1,458	)		(3,734	)		3,146
Expenses
Impairment:
Provision for credit losses, net		58			4,224			2,766			8,656
Operating expenses:
Compensation and employee benefits		3,669			3,044			7,229			6,237
General and administrative		3,470			4,500			6,289			6,778
Total Expenses		7,197			11,768			16,284			21,671
Income before income taxes		18,252			15,844			38,633			42,313
Income tax provision		—			—			—			—
Net income	$	18,252		$	15,844		$	38,633		$	42,313

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	Three Months Ended						Six Months Ended
Percentage of Revenue:	June 30, 2021			June 30, 2020			June 30, 2021			June 30, 2020
Revenues
Interest income		74	%		76	%		74	%		77	%
Fee income		26			24			26			23
Total Revenue		100			100			100			100
Other Income (Expense):
Change in fair value of warrant liabilities		(13	)		(5	)		(6	)		5
Expenses
Impairment:
Provision for credit losses, net		0			15			5			14
Operating expenses:
Compensation and employee benefits		13			10			12			10
General and administrative		12			15			11			11
Total Expenses		25			40			28			36
Income before income taxes		63			55			66			70
Income tax provision		—			—			—			—
Net income		63	%		55	%		66	%		70	%

Comparison of Results of Operations

Unless otherwise stated, for purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the comparison of the results of operations is for the three and six months ended June 30, 2021 and June 30, 2020.

Three Months Ended June 30, 2021 Compared to June 30, 2020

Revenue

Total revenue for the three months ended June 30, 2021 and 2020 was $29.2 and $29.1 million, respectively, remaining relatively flat with an increase of $0.1 million as the decrease in interest income was fully offset by an increase in fee income, which are discussed in more detail below.

Expenses

Total expenses for the three months ended June 30, 2021 and 2020 were $7.2 and $11.8 million, respectively. The decrease in total expenses from the prior period was due to a decrease in the provision for credit losses, net, and in general and administrative expenses of $4.2 and $1.0 million, respectively, partially offset by an increase in compensation and employee benefits of $0.6 million, which are discussed in more detail below.

Interest Income

Interest income decreased by $0.6 million, or 2.5%, for the three months ended June 30, 2021 from the three months ended June 30, 2020 due to a lower effective interest-bearing principal during the three months ended June 30, 2021 primarily as a result of a reduction in the minimum interest provisions included in mortgage notes for new loan originations and an increase in the loans in non-accrual status; partially offset by an increase of 2% in the average size of our loan portfolio in the 2021 period compared to the 2020 period.

Fee Income

Fee income increased by $0.7 million, or 9.8%, for the three months ended June 30, 2021 from the three months ended June 30, 2020 due to a higher volume of loan originations in the 2021 period compared to the 2020 period.

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Other Income (Expense)

The unrealized gain or loss for the change in fair value of warrant liabilities includes (1) the Private Placement Warrant Liability that was recorded as a correction to an immaterial error during the three months ended June 30, 2021 (refer to "Correction of Immaterial Error" in Note 2 to the unaudited condensed consolidated financial statements included in Part I, Item I of this Report for additional details on the accounting classification of the Private Placement Warrants) and (2) the Optional Subscription Liability that expired unexercised in the fourth quarter of 2020. For the three months ended June 30, 2020, $1.5 million of other expense was due to an increase in the fair value of the Optional Subscription Liability primarily due to an increase in our stock price during the period. During the three months ended June 30, 2021, $3.7 million of other expense was recognized to record the Private Placement Warrant Liability at fair value.

Provision for Credit Losses, Net

The provision for credit losses decreased $4.2 million for the three months ended June 30, 2021 from the three months ended June 30, 2020. For the 2020 period, the higher expense 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.

Compensation and Employee Benefits

Compensation and employee benefits expense increased by $0.6 million, or 20.5%, for the three months ended June 30, 2021 from the three months ended June 30, 2020, primarily attributable to an increase in the average employee headcount for the 2021 period compared to the 2020 period.

General and Administrative

General and administrative expense decreased by $1.0 million, or 22.9%, for the three months ended June 30, 2021 from the three months ended June 30, 2020. The decrease is primarily due to a decline of $1.5 million in professional fees from the prior period, primarily as a result of the costs incurred in 2020 associated with public company reporting and the design and implementation of internal controls under Section 404 of the Sarbanes-Oxley Act. The decrease was partially offset by an increase of $0.3 million in undrawn fees and $0.4 million in amortization of finance costs incurred during the 2021 period associated with our credit facility which closed in February 2021.

Six Months Ended June 30, 2021 Compared to June 30, 2020

Revenue

Total revenue for the six months ended June 30, 2021 and 2020 was $58.7 and $60.8 million, respectively, a decrease of $2.1 million. The decrease primarily relates to a decrease in interest income of $3.1 million, partially offset by an increase in fee income of $0.9 million, which are discussed in more detail below.

Expenses

Total expenses for the six months ended June 30, 2021 and 2020 were $16.3 and $21.7 million, respectively. The decrease in total expenses from the prior period was due to a decrease in the provision for credit losses, net and general and administrative expenses of $5.9 and $0.5 million, respectively, offset by an increase in compensation and employee benefits of $1.0 million, which are discussed in more detail below.

Interest Income

Interest income decreased by $3.1 million, or 6.6%, for the six months ended June 30, 2021 from the six months ended June 30, 2020, due to a lower average effective interest-bearing principal outstanding during the 2021 period as a result of a reduction in the minimum interest provisions included in mortgage notes for new loan originations and an increase in the loans in non-accrual status; partially offset by an increase of 1% in the average size of our loan portfolio in the 2021 period compared to the 2020 period.

Fee Income

Fee income increased by $0.9 million, or 6.5%, for the six months ended June 30, 2021 from the six months ended June 30, 2020, primarily due to an increase in loan origination volume.

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Other Income (Expense)

The unrealized gain or loss for the change in fair value of warrant liabilities includes (1) the Private Placement Warrant Liability that was record as a correction to an immaterial error during the three months ended June 30, 2021 (refer to "Correction of Immaterial Error" in Note 2 to the unaudited condensed consolidated financial statements included in this Report for additional details on the accounting classification of the Private Placement Warrants) and (2) the Optional Subscription Liability that expired unexercised in the fourth quarter of 2020. For the six months ended June 30, 2020, $3.1 million of other income was due to a decline in the fair value of the Optional Subscription Liability primarily due to a decline in our stock price during the period. During the six months ended June 30, 2021, $3.7 million of other expense was recognized to record the Private Placement Warrant Liability.

Provision for Credit Losses, Net

The provision for credit losses decreased $5.9 million for the six months ended June 30, 2021 from the six months ended June 30, 2020. For the 2020 period, the higher expense 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.

Compensation and Employee Benefits

Compensation and employee benefits expense increased by $1.0 million, or 15.9%, for the six months ended June 30, 2021 from the six months ended June 30, 2020 primarily attributable to an increase in average employee headcount and to a lesser extent due to the $0.2 million decline in stock compensation expense during the 2021 period.

General and Administrative

General and administrative expense decreased by $0.5 million, or 7.2%, for the six months ended June 30, 2021 from the six months ended June 30, 2020. The decrease is primarily due to a $2.4 million decrease in professional fees from the prior period, primarily as a result of the costs incurred in 2020 for first year of public company reporting and the design and implementation of internal controls under Section 404 of the Sarbanes-Oxley Act. The decrease was partially offset by an increase in depreciation and amortization expense of $1.2 million during the 2021 period, primarily as a result of a reversal of intangible asset amortization of $0.9 million during the six months ended June 30, 2020, which resulted from a purchase accounting measurement period adjustment in 2020, and an increase of $0.5 million in undrawn fees and $0.6 million of amortization of financing costs incurred during the six months ended June 30, 2021 associated with our credit facility which closed in February 2021.

Liquidity and Capital Resources

Overview

Our primary liquidity needs include ongoing commitments to fund our lending activities and future funding obligations for our existing loan portfolio, paying dividends and funding other general business needs. As of June 30, 2021, our cash and cash equivalents totaled $164.0 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 opportunistically raising capital in the public and private markets from time to time based on market conditions. As of June 30, 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 $839.0 million and $41.4 million, respectively. As discussed in Note 10 to the condensed consolidated financial statements included in this Report, on July 13, 2021, we announced that the Private REIT will be liquidated and we will be purchasing the Private REIT's loan participations for a cash payment equal to fair value as determined as of August 1, 2021, which is projected to be approximately $42.0 million.

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.

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

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

We believe our existing sources of liquidity are sufficient to fund our existing commitments. However, we are continuing to monitor the COVID-19 pandemic and its impact on us, our borrowers and the economy as a whole. 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 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 June 30, 2021 and 2020:


	Six Months Ended			Six Months Ended
(dollars in thousands)	June 30, 2021			June 30, 2020
Cash provided by (used in):
Operating activities	$	35,307		$	30,972
Investing activities		(35,050	)		12,184
Financing activities		(59,609	)		(63,401	)
Net decrease in cash & cash equivalents	$	(59,352	)	$	(20,245	)

Comparison of Results of Cash Flows for the Six Months Ended June 30, 2021 and June 30, 2020

Net cash provided by operating activities for the six months ended June 30, 2021 and 2020 were $35.3 and $31.0 million, respectively. The increase of $4.3 million in cash provided by operating activities for the six months ended June 30, 2021 from the six months ended June 30, 2020 was primarily due to the increase of cash flow from changes in interest receivable in the 2021 period compared to the 2020 period; partially offset by lower interest income 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.

Net cash used in investing activities was $35.1 for the six months ended June 30, 2021 and net cash provided by investing activities was $12.2 million for the six months ended June 30, 2020. The increase in cash used in investing activities of $47.3 million was primarily due to the $44.0 million difference for the change in mortgage notes receivable, net amounts between the 2021 and 2020 periods. 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. Additionally, new originations were slowed in the six months ended June 30, 2020 due to the uncertainty associated with the impacts of COVID-19.

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Net cash used in financing activities was $59.6 and $63.4 million, respectively for the six months ended June 30, 2021 and 2020, an increase of $3.8 million resulting from the $9.1 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 June 30, 2021:


			Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years
Construction holdbacks (1)		412,751		292,787		119,964		—		—
Operating lease obligations	$	11,327	$	926	$	1,852	$	2,048	$	6,501
Total	$	424,078	$	293,713	$	121,816	$	2,048	$	6,501

(1)

Includes construction holdbacks of $34.7 million on participating interests sold to the Private REIT as of June 30, 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 June 30, 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.

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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 30, 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.

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 June 30, 2021, the Company’s disclosure controls and procedures were effective as of June 30, 2021.

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Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 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 June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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


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:
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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: August 9, 2021	By:	/s/ Jeffrey B. Pyatt
	Name:	Jeffrey B. Pyatt
	Title:	President and Chief Executive Officer (Principal Executive Officer)

Date: August 9, 2021	By:	/s/ David Schneider
	Name:	David Schneider
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)