Broadmark Realty Capital Inc. - Quarter Report: 2022 September (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 September 30, 2022


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

For the transition period from to

Commission File Number: 001-39134

Broadmark Realty Capital Inc.

(Exact Name of Registrant as Specified in its Charter)


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

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

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


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

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

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

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

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

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

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 October 31, 2022, there were 132,922,075 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 Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1a.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

SIGNATURES		44

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Broadmark Realty Capital Inc.

CAUTIONARY STATEMENT REGARDING FORWARD -LOOKING STATEMENTS

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

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

•

mitigation of loan default rates and ability to timely resolve loans in contractual default status with positive economic outcomes;

•

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

•

the current and future health and stability of the economy and residential housing market;

•

availability of origination and acquisition opportunities acceptable to us;

•

increased competition from entities engaged in construction lending activities;

•

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

•

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

•

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

•

general and local commercial and residential real estate property conditions;

•

changes in U.S. federal government policies;

•

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

•

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

•

changes in interest rates;

•

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

•

compliance with covenants contained in our debt documents;

•

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

•

the ability to manage future growth;

•

changes in personnel and availability of qualified personnel; and

•

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

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

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Broadmark Realty Capital Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share data, unaudited)


	September 30, 2022			December 31, 2021
Assets
Cash and cash equivalents	$	61,141		$	132,889
Mortgage notes receivable, net		911,664			901,350
Interest and fees receivable, net		17,184			17,526
Investment in real property, net		93,506			68,067
Right-of-use assets		5,714			6,016
Goodwill		136,965			136,965
Other assets		6,301			8,342
Total assets	$	1,232,475		$	1,271,155

Liabilities and stockholders' equity
Senior unsecured notes, net	$	97,646		$	97,223
Dividends payable		9,305			9,291
Accounts payable and accrued liabilities		13,671			8,180
Lease liabilities		7,643			7,993
Total liabilities	$	128,265		$	122,687
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $0.001 par value, 100,000,000 shares authorized, no shares issued and outstanding at September 30, 2022 and December 31, 2021		—			—
Common stock, $0.001 par value, 500,000,000 shares authorized, 132,914,051 and 132,716,338 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		132			132
Additional paid in capital		1,219,754			1,216,957
Accumulated deficit		(115,676	)		(68,621	)
Total stockholders' equity		1,104,210			1,148,468
Total liabilities and stockholders' equity	$	1,232,475		$	1,271,155

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					Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Revenues:
Interest income	$	20,685		$	22,846	$	66,927		$	66,481
Fee income		6,443			7,748		18,590			22,764
Total revenues	$	27,128		$	30,594	$	85,517		$	89,245

Expenses:
Compensation and employee benefits		3,972			3,920		12,970			10,916
General and administrative		3,429			2,905		9,832			8,321
Real property management expenses, net		1,542			—		2,625			108
Interest expense		2,242			721		6,477			1,719
Total expenses		11,185			7,546		31,904			21,064

Impairment:
Provision for credit losses, net		12,288			2,607		16,729			5,373

Other (expense) income:
Change in fair value of warrant liabilities		415			1,244		593			(2,490	)
Gain on sale of real property		25			—		984			—
Impairment on real property		(1,485	)		—		(1,831	)		—
Total other (expense) income		(1,045	)		1,244		(254	)		(2,490	)

Income before provision for income taxes		2,610			21,685		36,630			60,318
Income tax provision		—			—		—			—
Net income	$	2,610		$	21,685	$	36,630		$	60,318
Earnings per common share:
Basic	$	0.02		$	0.16	$	0.28		$	0.45
Diluted	$	0.02		$	0.16	$	0.28		$	0.45
Weighted-average shares of common stock outstanding, basic and diluted:
Basic		132,884,407			132,658,661		132,867,288			132,575,852
Diluted		132,906,780			132,752,471		132,936,411			132,663,437

See accompanying notes to the unaudited condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data, unaudited)


	Preferred				Common Stock					Additional
	Shares		Amount		Shares			Amount		Paid-in Capital			Accumulated Deficit			Total
Balances as of December 31, 2021		—	$	—		132,716,338		$	132	$	1,216,957		$	(68,621	)	$	1,148,468
Net income		—		—		—			—		—			18,074			18,074
Dividends		—		—		—			—		—			(27,885	)		(27,885	)
Issuance of shares for vested restricted stock units		—		—		109,355			—		—			—			—
Issuance of shares for exercised warrants		—		—		25			—		—			—			—
Shares withheld for tax liability		—		—		(32,276	)		—		(328	)		—			(328	)
Stock-based compensation expense for restricted stock units		—		—		—			—		985			—			985
Balances as of March 31, 2022		—	$	—		132,793,442		$	132	$	1,217,614		$	(78,432	)	$	1,139,314
Net income		—		—		—			—		—			15,946			15,946
Dividends		—		—		—			—		—			(27,892	)		(27,892	)
Issuance of shares for vested restricted stock units		—		—		71,036			—		—			—			—
Issuance of shares for exercised warrants		—		—		—			—		—			—			—
Shares withheld for tax liability		—		—		(5,891	)		—		(43	)		—			(43	)
Stock-based compensation expense for restricted stock units		—		—		—			—		1,019			—			1,019
Balances as of June 30, 2022		—	$	—		132,858,587		$	132	$	1,218,590		$	(90,378	)	$	1,128,344
Net income		—		—		—			—		—			2,610			2,610
Dividends		—		—		—			—		—			(27,908	)		(27,908	)
Issuance of shares for vested restricted stock units		—		—		69,528			—		—			—			—
Issuance of shares for exercised warrants		—		—		—			—		—			—			—
Shares withheld for tax liability		—		—		(14,064	)		—		(95	)		—			(95	)
Stock-based compensation expense for restricted stock units		—		—		—			—		1,259			—			1,259
Balances as of September 30, 2022		—	$	—		132,914,051		$	132	$	1,219,754		$	(115,676	)	$	1,104,210


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

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)


	Nine Months Ended
	September 30, 2022			September 30, 2021
Cash flows from operating activities
Net income	$	36,630		$	60,318
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred origination and amendment fees		(16,926	)		(20,754	)
Depreciation and amortization		752			577
Amortization of right of use assets		302			284
Amortization of debt issuance costs		429			—
Amortization of credit facility costs		1,133			879
Stock-based compensation expense for restricted stock units		3,263			2,552
Provision for credit losses, net		16,729			5,373
Gain on sale of real property		(984	)		—
Impairment on real property		1,831			—
Change in fair value of warrant liabilities		(593	)		2,490
Changes in operating assets and liabilities:
Interest and fees receivable, net		342			(409	)
Other assets		511			1,644
Accounts payable and accrued liabilities		5,562			(2,226	)
Lease liabilities		(350	)		(257	)
Net cash provided by operating activities		48,631			50,471
Cash flows from investing activities:
Fundings of mortgage notes receivable		(436,946	)		(449,685	)
Principal collections		386,648			338,358
Origination and amendment fees received on mortgage notes receivable		11,009			5,951
Purchases of property and equipment		(128	)		(419	)
Proceeds from sale of real property		8,360			3,828
Improvements in real property		(5,185	)		(3,328	)
Repurchase of participations in mortgage notes receivable		—			(43,498	)
Net cash used in investing activities		(36,242	)		(148,793	)
Cash flows from financing activities:
Dividends paid		(83,671	)		(82,205	)
Payment of costs to obtain financing		—			(5,125	)
Proceeds from borrowings on credit facilities		45,000			—
Repayment of borrowings on credit facilities		(45,000	)		—
Payment of taxes on shares withheld for tax liability		(466	)		(347	)
Net cash used in financing activities		(84,137	)		(87,677	)
Net decrease in cash and cash equivalents		(71,748	)		(185,999	)
Cash and cash equivalents, beginning of period		132,889			223,375
Cash and cash equivalents, end of period	$	61,141		$	37,376
Supplemental disclosure of cash flow information:
Interest paid		2,693			—
Supplemental disclosure of non-cash investing and financing activities:
Dividends payable		9,305			9,289
Mortgage notes receivable converted to investment in real property		54,350			43,497
Investments in real property converted to mortgage notes receivable		25,900			—
Interest and fee receivables converted to investments in real property		1,244			—
Operating lease right-of-use assets		—			6,360
Lease liabilities arising from obtaining right-of-use assets		—			8,319
Property and equipment purchased through tenant improvement allowance		—			1,959

See accompanying notes to the unaudited condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Organization and Business

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

The consolidated subsidiaries of Broadmark Realty include BRMK Lending, LLC, BRMK Management, Corp., and Broadmark Private REIT Management, LLC. BRMK Lending, LLC originates short-term loans generally secured by first deed of trust liens on residential and commercial real estate. BRMK Management, Corp. (the “Manager”) manages the underwriting, closing, servicing and disposition of mortgage notes, and performs all general and administrative duties for Broadmark Realty. Broadmark Private REIT Management, LLC (the “Private REIT Manager”) previously managed Broadmark Private REIT, LLC (the “Private REIT”), which was an unconsolidated affiliate of the Company that primarily participated in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty. The Private REIT was liquidated during the quarter ended September 30, 2021. Refer to Note 12 for details about the liquidation of the Private REIT.

Broadmark Realty has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. Broadmark Realty generally will not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it annually distributes dividends equal to at least 90% of its REIT taxable income to its stockholders (determined without regard to the dividends-paid deduction and excluding net capital gains) by prescribed dates and complies with various other requirements. Broadmark Realty also operates its business in a manner that permits it to maintain an exclusion from registration under the Investment Company Act of 1940. As a REIT, Broadmark Realty may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”), which may earn income that would not be qualifying income if earned directly by a REIT. The Manager is a TRS and this election applies to the wholly-owned subsidiaries of the Manager, including the Private REIT Manager.

Note 2 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements include Broadmark Realty Capital Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These unaudited condensed consolidated interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited condensed consolidated interim financial statements have been prepared in accordance with the accounting policies described in the audited consolidated financial statements and should be read in conjunction with the accompanying notes included in Broadmark Realty Capital Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28, 2022. The condensed consolidated balance sheet as of December 31, 2021, included herein, was derived from the audited financial statements of Broadmark Realty Capital Inc. as of that date.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2022, our results of operations and stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and our cash flows for the nine months ended September 30, 2022 and 2021. The results of the three and nine months ended September 30, 2022 is not necessarily indicative of the results to be expected for the year ending December 31, 2022 or for any interim period or for any other future year.

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Broadmark Realty Capital Inc.

Principles of Consolidation

Broadmark Realty consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well as those entities deemed to be variable interest entities (“VIEs”), if any, in which Broadmark Realty is determined to be the primary beneficiary. Broadmark Realty is not the primary beneficiary of, and therefore does not consolidate, any VIEs in the accompanying unaudited condensed consolidated financial statements.

The Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary who previously acted as manager with no significant equity investment, did not hold a controlling interest in and, therefore, did not consolidate. Furthermore, the Private REIT's participation in loans originated by us met the characteristics of a participating interest and the criterion for sale accounting in accordance with GAAP and therefore, the loans were derecognized from our unaudited condensed consolidated financial statements. The Private REIT was liquidated in August 2021 and all participations in mortgage notes receivable held by the Private REIT were purchased for cash by the Company at the settlement value which approximated fair value.

Reclassifications

Certain amounts in our unaudited condensed consolidated financial statements as of and for the three and nine months ended September 30, 2021 have been reclassified to conform to the presentation of our current period unaudited condensed consolidated financial statements. These reclassifications had no effect on our previously reported net income or stockholders’ equity. The reclassifications include reclassifying certain board member expenses from compensation expense into general and administrative expense and separately presenting real property management expenses, net and interest expense on the unaudited condensed consolidated statements of income. The reclassification within the condensed consolidated statement of cash flows for the change in amortization of credit facility costs to the change in other assets resulted in no change to the cash provided by operating activities. The reclassifications also included the separate presentation of origination and fundings of mortgage notes receivable, principal collections and proceeds from mortgage notes receivable and origination and amendment fees received on mortgage notes receivable on the unaudited condensed consolidated statements of cash flows.

Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the expected credit losses on our loans, the fair value of financial instruments, exit prices for collateral dependent loans and the fair value of investments in real property. Accordingly, actual results could differ from those estimates.

For certain real properties, where a recent appraisal is either unavailable or not most representative of fair value, the fair value of the “as complete” property is based on a broker opinion of value including a capitalized income analysis and replacement cost analysis considering market rents, vacancy rates, capitalization rates, land cost comparisons, market trends and economic conditions. Depending on the stage of the underlying property, we also consider estimated costs to complete remaining construction and to lease up the finished property. The assessment of fair value of real property is subject to uncertainty and, in certain cases, sensitive to the selection of comparable properties.

Certain Significant Risks and Uncertainties

In the normal course of business, we encounter two primary types of economic risk in the form of credit and market risks. Credit risk is the risk of default on our investment in mortgage notes receivable resulting from a borrower's inability or unwillingness to make contractually required payments. Market risk is the risk of declining real estate values for the collateral underlying our loans which may make it more difficult for existing borrowers to remain current on their payment obligations, reduce the speed or ability for our loans to be repaid through the sale or refinance of the collateral and increase the likelihood that we will incur losses on our loans in the event of default as the value of collateral may be insufficient to cover our investment in the loan. We believe that the carrying values of our loans reasonably consider these risks.

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

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Broadmark Realty Capital Inc.

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

Reportable Segments

We operate the business as one reportable segment, which originates, underwrites and services loans secured by real estate.

Recently Issued Accounting Pronouncements Not Yet Adopted

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings (“TDR”) for creditors that have adopted the current expected credit losses (“CECL” or “CECL allowance” or “allowance for credit losses”) standard and requires enhanced disclosures for loan modifications made to borrowers experiencing financial difficulty in the form of interest rate reductions, principal forgiveness, other-than-insignificant payment delays, or term extensions. In addition, the new guidance requires presentation in the vintage disclosures of current-period gross write-offs by year of origination. The guidance is effective for the Company in the first quarter of 2023. Entities are able to early adopt the guidance and have the ability to early adopt the TDR enhancements separately from the vintage disclosures. We have not yet adopted this ASU. While the guidance will result in expanded disclosures, we do not believe the adoption of this guidance will have a material impact on our financial position, results of operation or cash flows.

Note 3 - Mortgage Notes Receivable

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 consolidated balance sheets at amortized cost, net of construction holdbacks, interest reserves, allowance for credit losses and deferred origination and amendment fees. Loans are classified as held for sale in the period when we commit to a plan and have the authority to sell the asset in its current condition, have initiated an active marketing plan to sell the asset at a price that is reflective of its current fair value and the sale of the asset is both probable and expected to qualify for full sales recognition within a period of 12 months. Loans classified as held for sale are carried at the lower of amortized cost or fair value less costs to sell, thus are not subject to the CECL allowance. As of September 30, 2022 all mortgage notes receivable were classified as held for investment.

The stated principal amount of mortgage notes receivable in our portfolio represents our interest in loans generally secured by first deeds of trust, security agreements or legal title to real estate located in the United States. Our lending standards typically 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 typically limit the initial outstanding principal balance of the loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral, as determined by an independent appraiser at the time of the loan origination. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan at origination divided by the “as-complete” appraisal. LTVs do not reflect interim loan activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. The maximum amount of a single loan may not exceed 10% of our total assets and the maximum amount to a single borrower may not exceed 15% of our total assets. We consider the maximum LTV as an indicator for the credit quality of a mortgage note receivable.

Mortgage notes receivable are considered to be short-term financings. As of September 30, 2022, the weighted average term of our active loans was 20 months at origination, which we often elect to extend for several months, based on our evaluation of the expected timeline for completion of construction. All loans require monthly interest only payments, with our weighted average interest rate on our portfolio being 10.2% as of September 30, 2022. Most loans are structured with an interest reserve holdback that covers the interest payments for 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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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 the outstanding balance of mortgage notes receivable as of September 30, 2022 and December 31, 2021:


(dollars in thousands)	September 30, 2022		December 31, 2021
Total loan commitments	$	1,512,889	$	1,489,055
Less:
Construction holdbacks		530,425		524,462
Interest reserves		41,108		39,880
Total principal outstanding for our mortgage notes receivable		941,356		924,713
Less:
Allowance for credit losses(1)		19,997		10,394
Deferred origination and amendment fees		9,695		12,969
Mortgage notes receivable, net	$	911,664	$	901,350

(1)

As of September 30, 2022, $1.4 million of the allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

In certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis where principal collection is not in doubt. As of September 30, 2022 and December 31, 2021, the principal outstanding on loans in contractual default status placed on non-accrual status was $115.4 and $101.9 million, respectively. In accordance with our CECL methodology, all loans including those on non-accrual status have an allowance for credit losses.

As of September 30, 2022 and December 31, 2021, the total commitment on loans in contractual default was $286.1 and $191.4 million, respectively.

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 its portfolio and the historical loss experience in the commercial real estate industry provided by a third party adjusted to incorporate the risks of construction lending and to reflect our expectations of the macroeconomic environment based on forecast data per the Federal Reserve.

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The following tables summarize the activity in the CECL allowance during the nine months ended September 30, 2022 and 2021:


	CECL Allowance
(dollars in thousands)	Funded			Unfunded (2)		Total
CECL allowance as of December 31, 2021	$	10,394		$	904	$	11,298
Provision for credit losses, net		1,554			193		1,747
Charge-offs(1)		(3,301	)		—		(3,301	)
CECL allowance as of March 31, 2022	$	8,647		$	1,097	$	9,744
Provision for credit losses, net		2,381			313		2,694
Charge-offs(1)		(1,502	)		—		(1,502	)
CECL allowance as of June 30, 2022	$	9,526		$	1,410	$	10,936
Provision for credit losses, net		12,267			21		12,288
Charge-offs(1)		(1,796	)		—		(1,796	)
CECL allowance as of September 30, 2022	$	19,997		$	1,431	$	21,428


	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, net		280			(222	)		58
CECL allowance as of June 30, 2021	$	10,943		$	725		$	11,668
Provision for credit losses, net		2,471			136			2,607
Charge-offs(1)		(695	)		—			(695	)
CECL allowance as of September 30, 2021	$	12,719		$	861		$	13,580

(1)

Charge-offs result from either loan repayments where the proceeds are less than the principal outstanding or transfers to investment in real property at the time that we take ownership of the property where the fair values of the underlying collateral are less than the principal outstanding.

(2)

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

In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are secured by residential or commercial real estate and, in assessing estimated credit losses, we evaluate various metrics, including, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

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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:


	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Construction Type
Vertical Construction	$	535,737			57.5	%	$	309,763	$	135,257	$	52,678	$	1,903	$	—	$	36,136
Horizontal Development		213,666			22.9			109,260		95,615		8,791		—		—		—
Acquisition		49,449			5.3			15,137		34,312		—		—		—		—
Investment		48,560			5.2			44,230		4,330		—		—		—		—
Rehabilitation		36,397			3.9			11,471		13,793		11,133		—		—		—
Land Entitlement		25,891			2.8			1,806		24,085		—		—		—		—
Bridge		21,961			2.4			8,958		10,874		—		2,129		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	—	$	36,136
CECL allowance(2)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(2)

Includes $12.1 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. In addition, $1.4 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.


	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Collateral Type
Apartments	$	169,067			18.1	%	$	111,941	$	39,609	$	15,614	$	1,903	$	—	$	—
Residential lots		123,055			13.2	%		49,947		64,317		8,791		—		—		—
Single Family Housing		121,810			13.1	%		112,919		8,659		232		—		—		—
Townhomes		107,515			11.5	%		80,277		26,445		793		—		—		—
Commercial		87,779			9.4	%		12,750		75,029		—		—		—		—
Entitled Land		75,103			8.1	%		46,741		28,362		—		—		—		—
Condos		63,690			6.8	%		10,900		6,579		10,075		—		—		36,136
Mixed Use		53,409			5.7	%		10,288		29,859		11,133		2,129		—		—
Hotel		30,036			3.2	%		14,007		—		16,029		—		—		—
Unentitled Land		19,981			2.1	%		16,621		3,360		—		—		—		—
Offices		19,372			2.1	%		11,294		—		8,078		—		—		—
Senior Housing		15,538			1.7	%		—		15,538		—		—		—		—
Commercial other		12,845			1.4	%		—		12,845		—		—		—		—
Duplex		11,089			1.2	%		11,089		—		—		—		—		—
Retail		8,818			0.9	%		6,961		—		1,857		—		—		—
Quadplex		7,664			0.8	%		—		7,664		—		—		—		—
Commercial Lots		3,196			0.3	%		3,196		—		—		—		—		—
Triplex		1,694			0.2	%		1,694		—		—		—		—		—
Storage		—			0.0	%		—		—		—		—		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	—	$	36,136
CECL allowance(2)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(2)

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	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
LTV (2)
0 - 40%	$	25,348			2.7	%	$	18,231	$	7,117	$	—	$	—	$	—
41 - 45%		29,546			3.2			7,567		21,979		—		—		—
46 - 50%		39,085			4.2			20,899		10,108		8,078		—		—
51 - 55%		141,842			15.1			75,656		57,395		8,791		—		—
56 - 60%		97,218			10.4			84,016		13,202		—		—		—
61 - 65%		481,317			51.7			224,147		187,256		31,875		1,903		36,136
66 - 70%		89,229			9.6			64,248		20,202		2,650		2,129		—
71 - 75%		3,518			0.4			3,518		—		—		—		—
76- 80%		2,343			0.3			2,343		—		—		—		—
Above 80%		22,215			2.4			—		1,007		21,208		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	36,136
CECL allowance(3)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(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)


	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	478,475			52.5	%	$	234,861	$	191,896	$	1,177	$	2,491	$	47,789	$	261
Horizontal Development		196,543			21.5			169,041		27,502		—		—		—		—
Acquisition		96,937			10.6			96,937		—		—		—		—		—
Investment		65,703			7.2			42,509		2,101		—		3,608		17,485		—
Rehabilitation		27,023			3.0			11,320		15,703		—		—		—		—
Land Entitlement		24,529			2.7			24,529		—		—		—		—		—
Bridge		22,534			2.5			18,072		2,537		1,925		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(2)

Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. In addition, $0.9 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

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	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Residential Lots	$	111,644			12.2	%	$	85,219	$	26,425	$	—	$	—	$	—	$	—
Apartments		107,765			11.8			38,232		68,356		1,177		—		—		—
Townhomes		93,300			10.2			51,240		28,979		—		1,017		11,803		261
Mixed Use		85,929			9.5			53,530		30,474		1,925		—		—		—
Single Family Housing		87,902			9.6			84,703		3,049		—		—		150		—
Condos		64,492			7.1			8,805		18,227		—		1,474		35,986		—
Commercial		61,592			6.8			61,592		—		—		—		—		—
Senior Housing		61,236			6.7			35,899		25,337		—		—		—		—
Storage		56,481			6.2			56,481		—		—		—		—		—
Unentitled Land		46,019			5.0			42,411		—		—		3,608		—		—
Entitled Land		45,098			4.9			27,763		—		—		—		17,335		—
Hotel		31,665			3.5			4,886		26,779		—		—		—		—
Offices		15,348			1.7			8,280		7,068		—		—		—		—
Commercial Lots		10,227			1.1			6,670		3,557		—		—		—		—
Quadplex		9,769			1.1			9,769		—		—		—		—		—
Commercial Other		9,080			1.0			9,080		—		—		—		—		—
Retail		7,873			0.9			6,385		1,488		—		—		—		—
Duplex		6,324			0.7			6,324		—		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(2)


	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	53,907			5.9	%	$	32,634	$	—	$	—	$	3,608	$	17,665	$	—
41 - 45%		48,431			5.3			44,380		4,051		—		—		—		—
46 - 50%		63,690			7.0			41,356		21,317		—		1,017		—		—
51 - 55%		92,238			10.1			74,978		17,260		—		—		—		—
56 - 60%		79,039			8.7			27,115		40,190		—		—		11,473		261
61 - 65%		559,997			61.4			372,645		146,640		3,102		1,474		36,136		—
66 - 70%		645			0.1			645		—		—		—		—		—
71 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		13,797			1.5			3,516		10,281		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(3)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(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)

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


	September 30, 2022
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Residential Lots	$	34,276	$	(2,242	)	$	32,034
Hotel		16,029		(9,113	)		6,916
Condos		10,075		(917	)		9,158
Offices		8,078		(76	)		8,002
Townhomes		3,945		(29	)		3,916
Single Family Housing		3,761		(18	)		3,743
Commercial Other		2,997		(38	)		2,959
Mixed Use		2,764		(408	)		2,356
Retail		1,857		(58	)		1,799
Total	$	83,782	$	(12,899	)	$	70,883

(1)

Includes $12.1 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral.


	December 31, 2021
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Senior Housing	$	25,337	$	(1,103	)	$	24,234
Entitled Land		17,335		(42	)		17,293
Single Family Housing		1,730		(15	)		1,715
Condos		1,109		(673	)		436
Townhomes		261		(1	)		260
Total	$	45,772	$	(1,834	)	$	43,938

(1)

Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral.

Note 4 – Investment in Real Property

As of September 30, 2022 and December 31, 2021, we owned 11 and nine properties or projects, with aggregate carrying value of $93.5 and $68.1 million, respectively.

Real property is classified as held for sale in the period when we commit to a plan and have the authority to sell the asset in its current condition, have initiated an active marketing plan to sell the asset at a price that is reflective of its current fair value and the sale of the asset is both probable and expected to qualify for full sales recognition within a period of 12 months. Real property, held for sale is held at the lower of cost or fair value, less estimated costs to sell, which is evaluated on a quarterly basis. Real property that does not qualify as held for sale is classified as held for use. Once construction is complete, real property, held for use is depreciated using the straight-line method over the estimated useful life of the property and depreciation expense is no longer recorded once the real property is classified as held for sale. Costs related to acquisition, development, construction and improvements are capitalized and expenditures for repairs and maintenance are charged to expense when incurred.

In April 2022, the Company executed an agreement with an unrelated party to sell a real property with a carrying value of $28.4 million for a sales price of $29.0 million. As part of the sale, the Company executed a promissory note with the purchaser in the principal amount of $25.9 million. The note was amended to extend the financing term, resulting in an extension of the maturity date to December 31, 2022 after receiving partial payments on July 1, 2022 and August 31, 2022. This seller-financed sale of real property was evaluated for derecognition of the transferred assets and income recognition based on whether a sales contract existed and effective control was transferred to the purchaser and it was determined that the transaction met all of the criterion to be recognized as a sale.

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The following tables provide information about the carrying value of our owned real property at the dates indicated:


(dollars in thousands)	September 30, 2022		December 31, 2021
Collateral Type
Senior Housing	$	49,916	$	—
Offices		18,316		19,388
Townhomes		8,937		9,281
Single Family Housing		7,831		4,134
Apartments		5,453		—
Residential Lots		3,053		3,012
Condos		—		28,441
Retail		—		3,811
Total	$	93,506	$	68,067


(dollars in thousands)	September 30, 2022		December 31, 2021
Held for sale	$	66,103	$	52,531
Held for use		27,403		15,536
Total	$	93,506	$	68,067

Note 5 – Fair Value Measurements

The accounting guidance on fair value measurements and disclosures 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.

Our development of fair value estimates, particularly Level 3 fair value assets and liabilities with significant unobservable inputs, involves judgment and a high degree of subjectivity. While we anticipate that our valuation methods are appropriate and consistent with valuation methods used by other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

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


	September 30, 2022				Fair Value Measurements Using
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	61,141	$	61,141	$	61,141	$	—	$	—
Mortgage notes receivable, net		911,664		911,664		—		—		911,664
Interest and fees receivable, net		17,184		17,184		—		17,184		—
Financial Liabilities
Senior unsecured notes, net		97,646		86,230		—		86,230		—
Private placement warrant liability		1,245		1,245		—		1,245		—

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	December 31, 2021				Fair Value Measurements Using
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	132,889	$	132,889	$	132,889	$	—	$	—
Mortgage notes receivable, net		901,350		901,350		—		—		901,350
Interest and fees receivable, net		17,526		17,526		—		17,526		—
Financial Liabilities
Senior unsecured notes, net		97,223		100,000		—		100,000		—
Private placement warrant liability		1,838		1,838		—		1,838		—

The following table sets forth assets measured and reported at fair value on a nonrecurring basis as of September 30, 2022 and December 31, 2021. All of these values are categorized as Level 3. The table also contains information about valuation methodologies and inputs.


	Carrying Value				Fair Value
(dollars in thousands)	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		Valuation technique	Unobservable inputs	Range of inputs
Investment in real property	$	29,615	$	—	$	30,226	$	—	Collateral valuations	Discount to appraised value based on comparable market prices, broker opinion of value, discounted cash flows or capitalization rate applied to estimate net operating income	0 - 10%
Collateral dependent loans, net of allowance for credit losses(1)		20,266		436		20,980		835	Collateral valuations	Discount to appraised value based on comparable market prices or broker opinion of value	0 - 10%
Total	$	49,881	$	436	$	51,206	$	835

(1)

Previously reported amounts included all real properties and collateral dependent loans regardless of whether a mark to fair value occurred in the reporting period. The current disclosure represents only those measured at fair value on a nonrecurring basis during the reporting periods.

Fair Value on a Recurring Basis

The private placement warrants are carried at fair value. Initially, the fair value of the private placement warrants was classified as Level 3 within the fair value hierarchy as it was valued using a lattice model, which 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. For the unobservable volatility input, we solved for the volatility of the public warrants using the lattice model that captures the redemption right and analyzed the calculated equity volatility based on the volatility of the common stock of comparable public companies. This valuation methodology resulted in the same value per share for both the public warrants and private placement warrants, indicating the redemption right, a feature excluded from private placement warrants, did not change the valuation; and therefore, the quoted price per share of the public warrants was used to value the private placement warrants on a recurring basis beginning September 30, 2021. As we utilized observable inputs in the valuation, specifically a quoted price for a similar item in an active market, we re-classified the private placement warrant liability from a Level 3 to a Level 2 within the fair value hierarchy as of September 30, 2021. The fair value of the 5.2 million private placement warrants, estimated using the quoted share price of the public warrants (BRMK.WS), was approximately $0.06 per warrant or $0.24 per share to arrive at $1.2 million as of September 30, 2022. Refer to Note 7 for additional details on the private placement warrants.

Fair Value on a Nonrecurring Basis

Investments in real properties are initially recorded at the fair value less estimated costs to sell, which becomes the new cost basis for the real property. Costs related to acquisition, development, construction and improvements are capitalized to the extent the fair value less costs to sell is greater than the investment in real property. At each reporting date, the cost basis is compared to the fair value of real properties 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% and are considered unobservable inputs in Level 3 within the fair value hierarchy. Any decline in the fair value of real property held for sale will be recorded in a valuation account to offset the cost basis and carry at fair value on a non-recurring basis.

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For collateral dependent loans, the fair values are based on the value of the underlying collateral less the estimated 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 our financial instruments, including cash equivalents, which are classified under Level 1 within the fair value hierarchy as well as interest and fees receivable, accounts payable and accrued liabilities which are classified under Level 2 within the fair value hierarchy, the carrying amounts approximate fair value due to their short-term maturities.

Our 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.

Our senior unsecured notes were purchased at par by investors in a private placement, but trade in the secondary market. Fair value is estimated using current market quotes received from active markets and we classify as Level 2 within the fair value hierarchy.

Note 6 - Debt

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 maturing on February 19, 2024. Advances under the revolving credit facility bear interest at prime rate plus 2.75% and the facility has a commitment fee of 1.0% of unfunded commitment per annum. We incurred fees of approximately $4.5 million in relation to the revolving credit facility, which were capitalized as deferred financing costs on the condensed consolidated balance sheets and are being amortized over the three-year term. As of September 30, 2022 and December 31, 2021, the revolving credit facility has no principal outstanding.

Our obligations under the revolving credit facility are secured by substantially all of the 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 compliance with leverage and coverage ratios and maintenance of minimum tangible net worth. 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.

On November 12, 2021, we completed a private offering of $100.0 million of senior unsecured notes. Interest on the notes accrues at the fixed rate of 5.0% per annum, which is payable semi-annually on May 15 and November 15. The notes may be prepaid prior to their maturity date, subject to the payment of applicable premiums. The note purchase agreement governing the notes contains financial covenants that require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as other affirmative and negative covenants that may limit, among other things, our ability to incur liens and enter into mergers or transfer all or substantially all of our assets. The note purchase agreement also includes customary representations and warranties and customary events of default. The amounts outstanding under the notes will be due on November 15, 2026. We incurred fees of approximately $2.9 million in relation to the issuance of the notes, which are amortized to interest expense over the remaining life of the respective loan term.

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The following table presents the carrying values of our senior unsecured notes as of the periods indicated:


(dollars in thousands)	September 30, 2022			December 31, 2021
Principal	$	100,000		$	100,000
Debt issuance costs		(2,861	)		(2,855	)
Amortization of debt issuance costs		507			78
Total notes, net	$	97,646		$	97,223

The following tables summarize the interest expense related to our senior unsecured notes and revolving credit facility for the periods indicated:


	Three Months Ended
	September 30, 2022						September 30, 2021
(in thousands)	Amortization of Deferred Debt Costs		Interest Expense		Undrawn Fees		Amortization of Deferred Debt Costs		Interest Accrued		Undrawn Fees
5.0% senior unsecured notes	$	143	$	1,236	$	—	$	—	$	—	$	—
Revolving credit facility		377		151		335		377		—		344
Total	$	520	$	1,387	$	335	$	377	$	—	$	344


	Nine Months Ended
	September 30, 2022						September 30, 2021
(in thousands)	Amortization of Deferred Debt Costs		Interest Expense		Undrawn Fees		Amortization of Deferred Debt Costs		Interest Accrued		Undrawn Fees
5.0% senior unsecured notes	$	429	$	3,736	$	—	$	—	$	—	$	—
Revolving credit facility		1,133		151		1,028		879		—		840
Total	$	1,562	$	3,887	$	1,028	$	879	$	—	$	840

Note 7 - Stockholders’ Equity and Earnings per Common Share

Stockholders’ Equity

Holders of our common stock are entitled to one vote for each share.

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 three and nine months ended September 30, 2022 and 2021.

As of September 30, 2022 and December 31, 2021 there were 41.7 million public warrants outstanding and 5.2 million private placement warrants outstanding. 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 $1.2 million as of September 30, 2022 and is included in accounts payable and accrued liabilities in the condensed consolidated balance sheet.

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Earnings per Common 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				Nine Months Ended
(dollars in thousands, except share and per share data):	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Net income	$	2,610	$	21,685	$	36,630	$	60,318
Basic weighted-average shares of common stock outstanding		132,884,407		132,658,661		132,867,288		132,575,852
Dilutive effect of share-based compensation – unvested restricted stock units		22,373		93,810		69,122		87,585
Diluted weighted-average shares of common stock outstanding		132,906,780		132,752,471		132,936,411		132,663,437
Basic earnings per share	$	0.02	$	0.16	$	0.28	$	0.45
Diluted earnings per share	$	0.02	$	0.16	$	0.28	$	0.45

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


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Weighted-average restricted stock units outstanding		637,597		186,492		241,097		218,227
Unexercised public warrants and private placement warrants		15,604,279		15,604,304		15,604,279		15,604,304
Total stock equivalents excluded		16,241,876		15,790,796		15,845,376		15,822,531

Note 8 - 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 Internal Revenue Code of 1986, as amended (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 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 September 30, 2022 and December 31, 2021, 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 unaudited 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 unaudited condensed consolidated financial statements.

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

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Note 9 - 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.

Awards made to our employees and directors typically consist of restricted stock units (“RSUs”) with only a service vesting condition. Awards to certain of our employees contain both service vesting and market conditions and are referred to as performance restricted stock units (“pRSUs”).

The RSUs granted under the Plan generally vest from one to three years depending on the terms of the specific award. All RSUs awarded will be settled upon vesting in shares of our common stock.

For the Company's pRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of market-based performance conditions. The market-based performance conditions are based on the Company's achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over three year performance periods, or contingent upon achieving specific stock price milestones over a five year performance period.

The Company uses a Monte Carlo simulation model to determine the grant-date fair value of awards with market-based performance conditions. The weighted average fair value and assumptions used to value the pRSU awards granted with market-based performance conditions are as follows:


	Nine Months Ended
	September 30, 2022			September 30, 2021
Performance share fair value	$	6.74		$	8.20
Risk-free interest rate		1.74	%		0.27	%
Expected volatility		30.48	%		25.71	%
Expected life (in years)		2.85			2.77
Expected dividend yield		9.82	%		8.13	%

Dividend equivalents are not accrued or paid on unvested equity awards granted to employees, executive officers and directors and accordingly those unvested equity awards 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.

As of September 30, 2022, there were 3,166,727 shares available to be awarded under the Plan.

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The following tables summarize the activity related to RSUs and pRSUs during 2022:


	Shares			Weighted Average Grant Date Fair Market Value
Unvested RSUs outstanding as of December 31, 2021		541,296
Granted		419,101		$	6.90
Vested		(109,355	)	$	9.50
Forfeited		(5,691	)	$	8.82
Unvested RSUs outstanding as of March 31, 2022		845,351
Granted		105,773		$	6.49
Vested		(71,036	)	$	10.52
Forfeited		(40,862	)	$	8.84
Unvested RSUs outstanding as of June 30, 2022		839,226
Vested		(69,528	)	$	10.30
Forfeited		(8,224	)	$	7.52
Unvested RSUs outstanding as of September 30, 2022		761,474


	Shares			Weighted Average Grant Date Fair Market Value
Unvested pRSUs outstanding as of December 31, 2021		56,978
Granted		276,679		$	6.74
Unvested pRSUs outstanding as of March 31, 2022		333,657
Forfeited		(39,084	)	$	7.35
Unvested pRSUs outstanding as of June 30, 2022		294,573
Unvested pRSUs outstanding as of September 30, 2022		294,573

As of September 30, 2022, there was $5.7 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation will be recognized on a straight-line basis over a weighted-average recognition period of 1.8 years.

Note 10 - Commitments and Contingencies

The following table illustrates our contractual obligations and commercial commitments by due date as of September 30, 2022:


(dollars in thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Construction holdbacks (1)	$	530,425	$	353,051	$	177,374	$	—	$	—
Operating lease obligations (2)		10,166		880		2,003		2,125		5,158
Total	$	540,591	$	353,931	$	179,377	$	2,125	$	5,158

(1)

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

(2)

The total operating lease obligation includes $2.5 million of imputed interest.

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.

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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 January 2032, which includes an option to extend the lease term for an additional five years. 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. The lease commencement date was in the first quarter of 2021. The total future cash payments included in the measurement of our operating lease liabilities, net of lease incentives, was $11.7 million at inception of the lease. 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%, resulting in an initial imputed interest amount of $3.3 million.

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 loan portfolio as of September 30, 2022 is generally secured by first deed of trust liens on residential and commercial real estate located in 20 states and the District of Columbia. Our loan portfolio is also concentrated within ten counties, the largest being King County in Washington. As of September 30, 2022 and December 31, 2021, the top ten counties make up 45.5% and 46.6% of the total committed amount of loans in our total portfolio.

Note 11 - Employee Benefit Plan

In 2022, we adopted a defined contribution 401(k) retirement plan covering Broadmark employees who have met certain eligibility requirements (the “Broadmark 401(k) Plan”). Eligible employees may contribute pre-tax compensation up to a maximum amount allowable under Internal Revenue Service limitations. Employee contributions and earnings thereon vest immediately. We currently match 3.5% on employee contributions of up to 6% of their annual compensation. The total expense related to the Broadmark 401(k) Plan was $0.1 and $0.3 million, respectively for the three and nine months ended September 30, 2022.

Note 12 - Related Party Transactions

There are no related party transactions at September 30, 2022. The Private REIT was a private real estate finance company that primarily participated in short-term, first deed of trust loans secured by real estate that were originated, underwritten and serviced by the Company. The Private REIT was managed by our subsidiary in accordance with a market-based arrangement and was determined to be a voting interest entity. We did not directly or indirectly control the Private REIT and owned only a nominal interest in the Private REIT’s common units and, therefore, we did not consolidate the Private REIT.

In August 2021, in connection with the liquidation of the Private REIT, all participations in mortgage notes receivable held by the Private REIT were offered to and purchased for cash by the Company at the settlement value which approximated fair value of $43.5 million. As of September 30, 2021, the Private REIT had distributed the net assets in excess of cash required to discharge liabilities (including accrued liabilities for liquidation costs) to its investors based on their relative percentage interests. The Private REIT Manager, acting as liquidator, was responsible for discharging the Private REIT’s remaining liabilities and winding up its affairs, which was completed in the fourth quarter of 2021.

Note 13 - Subsequent Events

Dividend Declaration

On September 15, 2022, our board of directors declared a monthly cash dividend of $0.07 per common share payable on October 17, 2022 to stockholders of record as of September 30, 2022, and on October 17, 2022, our board of directors declared a cash dividend of $0.07 per common share payable on November 15, 2022 to stockholders of record as of October 31, 2022.

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

The following discussion and analysis of our financial condition and results of operations should be read together with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022 including the “Risk Factors” section and consolidated financial statements and notes included therein. The following discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties. Actual results may differ materially from those contained in any forward-looking statements. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2022 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., a Maryland corporation, and its consolidated subsidiaries.

Broadmark Realty is an internally managed commercial real estate finance company that has elected to be taxed as a real estate investment trust for U.S. federal income tax purposes. Based in Seattle, Washington, we specialize in underwriting, funding, servicing and managing a portfolio generally consisting of short-term, first deed of trust loans to fund the construction and development of, or investment in, residential or commercial properties. We categorize our loans into the following distinct purposes:

•

Vertical Construction: Loans which fund the building or installing of vertical improvements on real property.

•

Horizontal Development: Loans which fund the building or installing of horizontal improvements on real property including initial site preparation, ground clearing, installing utilities, and road, sidewalk and gutter paving.

•

Acquisition: Loans which fund the acquisition of a property where the intent is generally subsequent financing.

•

Land Entitlement: Loans which fund the entitlement of land and to obtain zoning, permitting or legal use to further develop the property.

•

Rehabilitation: Loans which fund the renovation or improvement of the physical existence of a real property.

•

Bridge: Loans collateralized by completed properties used by borrowers to lease and stabilize an asset with sufficient cashflows to obtain permanent financing.

•

Investment: Loans which do not fit into the other purposes described above, such as a cash out refinance or partnership buyout.

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 and we plan to be a nationwide lender in the future. As of September 30, 2022, our portfolio of 224 active loans had approximately $1.5 billion of total commitments and $941.4 million of principal outstanding across 174 borrowers in 20 states and the District of Columbia. We refer to loans that have outstanding commitments or principal balances that have not been repaid or retired, including by foreclosure, as “active loans.” Total commitments refer to the aggregate sum of outstanding principal balances, construction holdbacks and interest reserves on our loans. Historically, our loan portfolio was 100% equity funded, and we had no outstanding debt. On November 12, 2021, we closed the private placement of $100.0 million aggregate principal amount of 5.0% senior unsecured notes due 2026. We plan to opportunistically issue debt and 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 has enabled us to use a larger percentage of our cash balances for lending activities.

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Properties securing our loans are generally classified as residential properties, commercial properties or undeveloped land, and are typically not income producing. Each loan is generally secured by a first deed of trust lien on real estate. Our lending policy typically 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 typically limits the initial outstanding principal balance of each loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. At the time of origination, the difference between the initial outstanding principal and the total commitment is the amount held back for future release, subject to property inspections, progress reports and other conditions in accordance with the loan documents. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan at origination divided by the “as-complete” appraisal. LTVs do not reflect interim activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. As of September 30, 2022, the weighted average LTV was 60.6% across our active loan portfolio, based on the total commitment of the loan and “as-complete” appraisals. For our loans in contractual default status as of September 30, 2022, the weighted average LTV was approximately 95.9%, when measured by the sum of the principal outstanding, 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 often personally guaranteed on a recourse basis by the principals of the borrower or others at our discretion to provide further credit support for the loan. The personal guarantee may also be secured by collateral through a pledge of the guarantor’s interest in other real estate or assets owned by the guarantor. As of September 30, 2022, a total of 40 loans were in contractual default, totaling $286.1 million in total commitment, or 18.9%. We are actively identifying resolutions for our non-performing loans but continue to face challenges in the current environment. We expect our non-performing loans to negatively affect our near-term financial performance.

As of September 30, 2022, the weighted average total commitment of our active loans was $6.8 million, with a weighted average interest rate of 10.2%. The weighted average term of our active loans was 20 months at origination, which we often elect to extend for several months based on our evaluation of the expected timeline for completion of construction. We usually receive loan origination fees, or “points,” which, as of September 30, 2022, had a weighted average fee of 2.8% of total commitment at origination, along with loan amendment and extension fees, each of which varies in amount based upon the term of the loan, the credit quality of the borrower and the loan otherwise satisfying our underwriting criteria. In addition, we charge late 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.

Historically, we primarily competed on the basis of borrower relationships, loan structure, terms and service rather than on price; however, competitive conditions starting in 2021 have led us in many cases to originate loans with terms that deviate from our historical practice. Increased competition and readily available sources of capital led to lower interest rates on our newly originated loans, lower loan origination fees, absence of minimum interest provisions in our mortgage notes, and a change in our general requirement that all of our loans be secured by personal guarantees on a recourse basis. During the second quarter of 2021, we adopted a dynamic pricing model, in which we determine credit risk for prospective loans utilizing categories such as experience of the borrower, amount of new capital being contributed by the borrower or guarantors to the project and strength of the underlying collateral. Under the dynamic pricing model, originated loans that we underwrite as lower credit risk receive lower annual rates or loan origination fees than loans that we deem as higher credit risk.

In the later part of third quarter of 2022, market interest rates have risen markedly and rapidly primarily as a result of the Federal Reserve's actions to curb rapidly rising inflation. This led to a significant slowdown in real estate transactions and less capital available in the marketplace to finance real estate projects. Rising interest rates and macroeconomic uncertainties in the capital markets have started to lead to a decrease in the availability of capital from traditional lenders for longer-term financing of completed construction and development projects, which may negatively affect our borrowers' ability to sell or refinance our collateral and repay our loans.

We have begun tightening our lending standards and, in some instances, we are not originating loans that would otherwise meet our lending policy. We are focused on capital preservation and ensuring we are positioned to capture opportunities that emerge from this rapidly changing economic environment.

As a result of rising interest rates and associated pressures to service or refinance their debt capital, we have started to see many of our competitors slow or pause their loan origination activities. This may lead to decreased competition and pricing pressure on our business, although there are no assurances that this will take place.

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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. As of September 30, 2022, our loans bear a weighted average interest rate of 10.2%, paid monthly, primarily from interest reserves and, to a much lesser extent, cash payments. Our loans originated since the second quarter of 2021 typically do not provide for minimum interest provisions in our mortgage notes. 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 and minus the principal balance outstanding on non-accrual status. As of September 30, 2022 and December 31, 2021, the effective interest-bearing principal net of non-accrual principal was $826.3 and $840.1 million, respectively. This represents the principal balance outstanding of $941.4 and $924.7 million plus the excess of minimum interest provisions over the actual principal outstanding of $0.3 and $17.3 million less the non-accrual principal of $115.4 and $101.9 million as of September 30, 2022 and December 31, 2021, respectively. We expect the trend of lower effective interest-bearing principal than historic levels to continue in subsequent quarters as a result of the absence of minimum interest provisions in new originations and loans in non-accrual status.

Fees and other revenue recognized from originating and servicing our loans. Fee income is comprised of loan origination and amendment fees, loan renewal and extension fees, late fees, inspection fees and exit fees. The majority of fee income is comprised of loan origination fees, or “points,” which as of September 30, 2022, had a weighted average fee of 2.8% 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 typical 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 on our loans is generally repaid on a faster basis than other types of loans, 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				Nine Months Ended
(dollars in millions)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Loans originated(1)	$	123.4	$	306.7	$	435.3	$	621.7
Loans repaid(2)	$	200.0	$	56.4	$	365.6	$	238.8

(1)

Based on original total loan commitment amounts and excluding amendments.

(2)

Based on fully repaid loans during the period and excluding partial repayments.

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Credit quality of our loan portfolio. All of our loans are secured by residential or commercial real estate and, in assessing current expected credit losses (“CECL”), we evaluate our internal credit quality indicators, 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 construction type, collateral type and LTV used in assessing estimated credit losses and vintage of origination at the dates indicated:


	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Construction Type
Vertical Construction	$	535,737			57.5	%	$	309,763	$	135,257	$	52,678	$	1,903	$	—	$	36,136
Horizontal Development		213,666			22.9			109,260		95,615		8,791		—		—		—
Acquisition		49,449			5.3			15,137		34,312		—		—		—		—
Investment		48,560			5.2			44,230		4,330		—		—		—		—
Rehabilitation		36,397			3.9			11,471		13,793		11,133		—		—		—
Land Entitlement		25,891			2.8			1,806		24,085		—		—		—		—
Bridge		21,961			2.4			8,958		10,874		—		2,129		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	—	$	36,136
CECL allowance(2)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(2)


	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Collateral Type
Apartments	$	169,067			18.1	%	$	111,941	$	39,609	$	15,614	$	1,903	$	—	$	—
Residential lots		123,055			13.2	%		49,947		64,317		8,791		—		—		—
Single Family Housing		121,810			13.1	%		112,919		8,659		232		—		—		—
Townhomes		107,515			11.5	%		80,277		26,445		793		—		—		—
Commercial		87,779			9.4	%		12,750		75,029		—		—		—		—
Entitled Land		75,103			8.1	%		46,741		28,362		—		—		—		—
Condos		63,690			6.8	%		10,900		6,579		10,075		—		—		36,136
Mixed Use		53,409			5.7	%		10,288		29,859		11,133		2,129		—		—
Hotel		30,036			3.2	%		14,007		—		16,029		—		—		—
Unentitled Land		19,981			2.1	%		16,621		3,360		—		—		—		—
Offices		19,372			2.1	%		11,294		—		8,078		—		—		—
Senior Housing		15,538			1.7	%		—		15,538		—		—		—		—
Commercial other		12,845			1.4	%		—		12,845		—		—		—		—
Duplex		11,089			1.2	%		11,089		—		—		—		—		—
Retail		8,818			0.9	%		6,961		—		1,857		—		—		—
Quadplex		7,664			0.8	%		—		7,664		—		—		—		—
Commercial Lots		3,196			0.3	%		3,196		—		—		—		—		—
Triplex		1,694			0.2	%		1,694		—		—		—		—		—
Storage		—			0.0	%		—		—		—		—		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	—	$	36,136
CECL allowance(2)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(2)

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	September 30, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
LTV (2)
0 - 40%	$	25,348			2.7	%	$	18,231	$	7,117	$	—	$	—	$	—
41 - 45%		29,546			3.2			7,567		21,979		—		—		—
46 - 50%		39,085			4.2			20,899		10,108		8,078		—		—
51 - 55%		141,842			15.1			75,656		57,395		8,791		—		—
56 - 60%		97,218			10.4			84,016		13,202		—		—		—
61 - 65%		481,317			51.7			224,147		187,256		31,875		1,903		36,136
66 - 70%		89,229			9.6			64,248		20,202		2,650		2,129		—
71 - 75%		3,518			0.4			3,518		—		—		—		—
76- 80%		2,343			0.3			2,343		—		—		—		—
Above 80%		22,215			2.4			—		1,007		21,208		—		—
Total	$	931,661			100.0	%	$	500,625	$	318,266	$	72,602	$	4,032	$	36,136
CECL allowance(3)		(19,997	)
Carrying value, net	$	911,664

(1)

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

(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)


	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	478,475			52.5	%	$	234,861	$	191,896	$	1,177	$	2,491	$	47,789	$	261
Horizontal Development		196,543			21.5			169,041		27,502		—		—		—		—
Acquisition		96,937			10.6			96,937		—		—		—		—		—
Investment		65,703			7.2			42,509		2,101		—		3,608		17,485		—
Rehabilitation		27,023			3.0			11,320		15,703		—		—		—		—
Land Entitlement		24,529			2.7			24,529		—		—		—		—		—
Bridge		22,534			2.5			18,072		2,537		1,925		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(2)

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	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Residential Lots	$	111,644			12.2	%	$	85,219	$	26,425	$	—	$	—	$	—	$	—
Apartments		107,765			11.8			38,232		68,356		1,177		—		—		—
Townhomes		93,300			10.2			51,240		28,979		—		1,017		11,803		261
Mixed Use		85,929			9.5			53,530		30,474		1,925		—		—		—
Single Family Housing		87,902			9.6			84,703		3,049		—		—		150		—
Condos		64,492			7.1			8,805		18,227		—		1,474		35,986		—
Commercial		61,592			6.8			61,592		—		—		—		—		—
Senior Housing		61,236			6.7			35,899		25,337		—		—		—		—
Storage		56,481			6.2			56,481		—		—		—		—		—
Unentitled Land		46,019			5.0			42,411		—		—		3,608		—		—
Entitled Land		45,098			4.9			27,763		—		—		—		17,335		—
Hotel		31,665			3.5			4,886		26,779		—		—		—		—
Offices		15,348			1.7			8,280		7,068		—		—		—		—
Commercial Lots		10,227			1.1			6,670		3,557		—		—		—		—
Quadplex		9,769			1.1			9,769		—		—		—		—		—
Commercial Other		9,080			1.0			9,080		—		—		—		—		—
Retail		7,873			0.9			6,385		1,488		—		—		—		—
Duplex		6,324			0.7			6,324		—		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(2)

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	December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	53,907			5.9	%	$	32,634	$	—	$	—	$	3,608	$	17,665	$	—
41 - 45%		48,431			5.3			44,380		4,051		—		—		—		—
46 - 50%		63,690			7.0			41,356		21,317		—		1,017		—		—
51 - 55%		92,238			10.1			74,978		17,260		—		—		—		—
56 - 60%		79,039			8.7			27,115		40,190		—		—		11,473		261
61 - 65%		559,997			61.4			372,645		146,640		3,102		1,474		36,136		—
66 - 70%		645			0.1			645		—		—		—		—		—
71 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		13,797			1.5			3,516		10,281		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(3)		(10,394	)
Carrying value, net	$	901,350

(1)

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

(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)

Dividends Declared. The following table summarizes the declared cash dividends per common share for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Dividends declared per common share	$	0.21	$	0.21	$	0.63	$	0.63

Earnings per Common Share. The following table summarizes the earnings (GAAP) and distributable earnings (non-GAAP) per common share for the periods indicated:


	Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Earnings per common share, basic	$	0.02	$	0.16	$	0.28	$	0.45
Earnings per common share, diluted		0.02		0.16		0.28		0.45
Distributable earnings per diluted share of common stock prior to realized loss on investments		0.14		0.19		0.46		0.55
Distributable earnings per diluted share of common stock		0.12		0.18		0.42		0.53

Non-GAAP Financial Measures

Distributable Earnings

We have elected to present “distributable earnings” and “distributable earnings prior to realized loss on investments” as supplemental non-GAAP financial measures 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) new public company transition expenses; (iv) non-capitalized transaction-related and other one-time expenses; (v) non-cash stock-based compensation; (vi) depreciation and amortization including amortization of our intangible assets; and (vii) deferred taxes, which are subject to variability and generally not indicative of future economic performance or representative of current operations.

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During the nine months ended September 30, 2022 and 2021, provision for credit losses, net was $16.7 and $5.4 million, respectively, which has been excluded from distributable earnings consistent with other unrealized gains (losses) pursuant to our policy for reporting distributable earnings. We expect to recognize such potential credit losses in distributable earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally upon charge-off of principal at the time of loan repayment or upon sale of real property owned by us and the amount of proceeds is less than the principal outstanding at the time of foreclosure.

Management believes that the adjustments to compute “distributable earnings” specified above allow investors and analysts to readily identify and track the operating performance of our assets, assist in comparing the operating results between periods, and enable investors to evaluate our current performance using the same measure that management uses to operate the business. Distributable earnings excludes certain recurring items, such as unrealized gains and losses (including provision for credit losses) and non-capitalized transaction-related expenses, because they are not considered by management to be part of our primary operations for the reasons described herein. However, management has elected to also present distributable earnings prior to realized loss on investments because it believes the Company’s investors use such measure to evaluate and compare the performance of the Company and its peers. As such, distributable earnings and distributable earnings prior to realized loss on investments are 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 annually to our stockholders dividends equal to at least 90% of our annual REIT taxable income (determined without regard to the dividends-paid deduction and excluding net capital gains) 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 and distributable earnings prior to realized loss on investments are one of many factors considered by our board of directors in declaring dividends and, while not direct measures of taxable income, over time, the measures can be considered useful indicators of our dividends.

Distributable earnings and distributable earnings prior to realized loss on investments do 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 these measures 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 and distributable earnings prior to realized loss on investments to the most directly comparable GAAP financial measure:


	Three Months Ended						Nine Months Ended
(dollars in thousands, except share and per share data)	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Net income attributable to common stockholders	$	2,610		$	21,685		$	36,630		$	60,318
Adjustments for non-distributable earnings:
Stock-based compensation expense		1,259			891			3,263			2,552
New public company expenses(1)		—			—			—			953
Non-capitalized transaction and other one-time expenses(2)		462			489			2,066			489
Change in fair value of warrant liabilities		(415	)		(1,244	)		(593	)		2,490
Depreciation and amortization		265			146			752			577
Impairment on real property		1,485			—			1,831			—
Provision for credit losses, net		12,288			2,607			16,729			5,373
Distributable earnings prior to realized loss on investments:	$	17,954		$	24,574		$	60,678		$	72,752
Realized credit losses(3)		(1,796	)		(695	)		(4,207	)		(2,096	)
Distributable earnings:	$	16,158		$	23,879		$	56,471		$	70,656
Distributable earnings per diluted share of common stock prior to realized loss on investments	$	0.14		$	0.19		$	0.46		$	0.55
Distributable earnings per diluted share of common stock	$	0.12		$	0.18		$	0.42		$	0.53
Weighted-average number of shares of common stock outstanding, basic and diluted
Basic		132,884,407			132,658,661			132,867,288			132,575,852
Diluted		132,906,780			132,752,471			132,936,411			132,663,437

(1)

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

(2)

Includes other one-time expenses primarily related to the various costs associated with the search for and hiring of our new chief executive officer as well as non-capitalized expenses incurred on held-for-sale real properties no longer under construction.

(3)

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

Segment Reporting

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

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Results from Operations

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


	Three Months Ended					Nine Months Ended
Statements of Operations Data:	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Revenues:
Interest income	$	20,685		$	22,846	$	66,927		$	66,481
Fee income		6,443			7,748		18,590			22,764
Total revenue		27,128			30,594		85,517			89,245

Expenses:
Compensation and employee benefits		3,972			3,920		12,970			10,916
General and administrative		3,429			2,905		9,832			8,321
Real property management expenses, net		1,542			—		2,625			108
Interest expense		2,242			721		6,477			1,719
Total expenses		11,185			7,546		31,904			21,064

Impairment:
Provision for credit losses, net		12,288			2,607		16,729			5,373

Other (expense) income:
Change in fair value of warrant liabilities		415			1,244		593			(2,490	)
Gain on sale of real property		25			—		984			—
Impairment on real property		(1,485	)		—		(1,831	)		—
Total other (expense) income		(1,045	)		1,244		(254	)		(2,490	)

Income before provision for income taxes		2,610			21,685		36,630			60,318
Income tax provision		—			—		—			—
Net income	$	2,610		$	21,685	$	36,630		$	60,318

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	Three Months Ended						Nine Months Ended
Percentage of Revenue:	September 30, 2022			September 30, 2021			September 30, 2022			September 30, 2021
Revenues:
Interest income		76	%		75	%		78	%		74	%
Fee income		24			25			22			26
Total revenue		100			100			100			100

Expenses:
Compensation and employee benefits		15			13			15			12
General and administrative		13			9			11			9
Real property management expenses, net		6			—			3			0
Interest expense		8			2			8			2
Total expenses		42			25			37			24

Impairment:
Provision for credit losses, net		45			9			20			6

Other (expense) income:
Change in fair value of warrant liabilities		2			4			1			(3	)
Gain on sale of real property		—			—			1			—
Impairment on real property		(5	)		—			(2	)		—
Total other (expense) income		(3	)		4			(0	)		(3	)

Income before provision for income taxes		10			71			43			68
Income tax provision		—			—			—			—
Net income		10	%		71	%		43	%		68	%

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 nine months ended September 30, 2022 and September 30, 2021.

Three Months Ended September 30, 2022 Compared to September 30, 2021

Revenue

Total revenue for the three months ended September 30, 2022 and 2021 was $27.1 and $30.6 million, respectively, a decrease of $3.5 million. The decrease primarily relates to decreases in interest income and fee income of $2.2 and $1.3 million, respectively, which are discussed in more detail below.

Expenses

Total expenses for the three months ended September 30, 2022 and 2021 were $11.2 and $7.5 million, respectively. The increase primarily relates to increases in real property management expenses, net, interest expense, general and administrative expenses and compensation and employee benefits of $1.5, $1.5, $0.5, and $0.1 million, respectively, which are discussed in more detail below.

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Interest Income

Interest income decreased by $2.2 million, or 9.5%, for the three months ended September 30, 2022 from the three months ended September 30, 2021, primarily due to (1) a lower average effective interest-bearing principal outstanding during the 2022 period compared to the 2021 period as a result of a higher percentage of the loan portfolio being on non-accrual status and a write-off of accrued interest on cross-collateralized loans in default status and (2) lower fixed interest rates and no minimum interest provisions on loans recently originated due to increased competition. These decreases were partially offset by an increase of 7% in the size of our loan portfolio in the 2022 period compared to the 2021 period as a result of the increase in the amount of capital deployed into new originations.

Fee Income

Fee income decreased by $1.3 million, or 16.8%, for the three months ended September 30, 2022 from the three months ended September 30, 2021, primarily due to lower weighted average origination fees on loans recently originated due to increased competition in the marketplace along with a lower volume of amendment and extension fees during the 2022 period compared to the 2021 period as fewer loans were extended beyond their maturity date due to construction delays.

Compensation and Employee Benefits

Compensation and employee benefits expense remained relatively flat with an increase of $0.1 million, or 1.3%, for the three months ended September 30, 2022 from the three months ended September 30, 2021.

General and Administrative

General and administrative expense increased by $0.5 million, or 18.0%, for the three months ended September 30, 2022 from the three months ended September 30, 2021. The increase was primarily due to increases of (1) $0.3 million in board member RSU expense primarily resulting from adding directors to the board and (2) $0.2 million in advertising and marketing expenses associated with the Company rebranding during the 2022 period compared to the 2021 period.

Real Property Management Expense, net

Real property management expense, net increased by $1.5 million for the three months ended September 30, 2022 from the three months ended September 30, 2021 as a result of operating and holding costs expensed for investments in real property once construction was completed during the 2022 period with no corresponding amounts for the 2021 period.

Interest Expense

Interest expense increased by $1.5 million for the three months ended September 30, 2022 from the three months ended September 30, 2021, primarily due to (1) $1.3 million in interest and amortization of deferred financing costs for our senior unsecured notes during the 2022 period with no corresponding amounts for the 2021 period as these notes were issued during the fourth quarter of 2021 and (2) $0.2 million in interest on our credit facility draws during the 2022 period with no corresponding amounts for the 2021 period as there were no draws during the 2021 period.

Other Income (Expense)

Other income (expense) was an expense of $1.0 million for the three months ended September 30, 2022 compared to income of $1.2 million for the three months ended September 30, 2021, a change of $2.2 million. This change primarily relates to $1.5 million of impairment of investments in real property during the 2022 period with no corresponding impairment in the 2021 period and a decrease of $0.8 million in other income between the two periods resulting from $0.4 million of income recognized for the change in the fair value of warrant liabilities during the 2022 period compared to $1.2 million in the 2021 period.

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Provision for Credit Losses, Net

The provision for credit losses increased $9.7 million for the three months ended September 30, 2022 from the three months ended September 30, 2021. This increase primarily resulted from (1) loan specific allowances for loans deemed collateral dependent based on property value declines during the 2022 period and (2) increase to our forecasted losses due to our experience of principal losses realized on paid off loans and loans transferred to real estate owned during the 2022 period.

Nine Months Ended September 30, 2022 Compared to September 30, 2021

Revenue

Total revenue for the nine months ended September 30, 2022 and 2021 was $85.5 and $89.2 million, respectively, a decrease of $3.7 million. The decrease primarily relates to a decrease in fee income of $4.2 million, partially offset by an increase in interest income of $0.4 million, which are discussed in more detail below.

Expenses

Total expenses for the nine months ended September 30, 2022 and 2021 were $31.9 and $21.1 million, respectively. The increase primarily relates to increases in interest expense, real property management expenses, net, compensation and employee benefits, and general and administrative expenses of $4.8, $2.5, $2.1 and $1.5 million, respectively, which are discussed in more detail below.

Interest Income

Interest income increased by $0.4 million, or 0.7%, for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, primarily due to an increase of 10% in the average size of our loan portfolio in the 2022 period compared to the 2021 period as a result of (1) the increase in the amount of capital deployed into new originations and (2) the increase in the size of our loan portfolio resulting from our purchase of loan participations in August 2021 in connection with the liquidation of the Private REIT. These increases in interest income resulting from our larger portfolio of loans was partially offset by a lower average effective interest-bearing principal outstanding during the 2022 period compared to the 2021 period as a result of (1) a higher percentage of the loan portfolio being on non-accrual status, (2) lower fixed interest rates on new loans due to market changes and (3) no minimum interest provisions on loans recently originated due to increased competition.

Fee Income

Fee income decreased by $4.2 million, or 18.3%, for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, primarily due to lower weighted average origination fees on loans recently originated due to increased competition in the marketplace along with a lower volume of amendment and extension fees during the 2022 period compared to the 2021 period as fewer loans were extended beyond their maturity date due to construction delays. The decreases were partially offset by increases resulting from increases in our loan portfolio for the reasons discussed above in “Interest Income”.

Compensation and Employee Benefits

Compensation and employee benefits expense increased by $2.1 million, or 18.8%, for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, primarily due to an increase of (1) $1.9 million resulting from higher employee headcount and wages and relocation expenses associated with hiring the new chief executive officer during the 2022 period and (2) $0.2 million resulting from higher stock-based compensation expense during the 2022 period compared to the 2021 period.

General and Administrative

General and administrative expense increased by $1.5 million, or 18.2%, for the nine months ended September 30, 2022 from the nine months ended September 30, 2021. The increase was primarily due to increases of (1) $0.5 million in increased board member RSU expense during the 2022 period primarily resulting from adding directors to the board, (2) $0.4 million in recruiting expenses associated with hiring the new chief executive officer during the 2022 period, (3) $0.4 million in increased advertising and marketing expenses associated with the Company rebranding during the 2022 period and (4) $0.2 million in increased computer and internet expenses primarily related to new system costs during the 2022 period compared to the 2021 period.

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Real Property Management Expense, net

Real property management expense, net increased by $2.5 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, as a result of $2.6 million of operating and holding costs expensed for investments in real property once construction was completed during the 2022 period with a minor corresponding amount in the 2021 period.

Interest Expense

Interest expense increased by $4.8 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021, primarily due to (1) $4.2 million in interest and amortization of deferred financing costs for our senior unsecured notes during the 2022 period with no corresponding amounts for the 2021 period as these notes were issued during the fourth quarter of 2021 and (2) a $0.6 million increase in undrawn fees, interest on draws and amortization of deferred financing costs for our revolving credit facility during the 2022 period compared to the 2021 period resulting from making draws in the 2022 period and the facility being in place for a longer period of time in 2022 compared to the 2021 period.

Other Income (Expense)

Other expense decreased by $2.2 million for the nine months ended September 30, 2022 to an expense of $0.3 million for the 2022 period compared to an expense of $2.5 million for the 2021 period. This decrease primarily relates to the $2.5 million change in the fair value of warrant liabilities recorded during the 2021 period. For the 2021 period, the other expense of $2.5 million was recognized to record the private placement warrant liability in the second quarter of 2021 of $3.7 million, partially offset by the decline in the fair value of $1.2 million during the three months ended September 30, 2021. For the 2022 period, income of $0.6 million was recognized for the change in fair value of the warrant liabilities, resulting in a period over period decrease in other expense of $3.1 million related to the warrant liabilities. Other expense also decreased due to the $1.0 million gain on the 2022 sale of real property with no corresponding sale in the 2021 period. These decreases in other expense were partially offset by an increase in other expense resulting from $1.8 million of impairment on real property in the 2022 period with no corresponding impairment in the 2021 period.

Provision for Credit Losses, Net

The provision for credit losses increased $11.4 million for the nine months ended September 30, 2022 from the nine months ended September 30, 2021. This increase primarily resulted from (1) loan specific allowances for loans deemed collateral dependent based on property value declines during the 2022 period and (2) increase to our forecasted losses due to our experience of principal losses realized on paid off loans and loans transferred to real estate owned during the 2022 period.

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, repaying borrowings and funding other general business needs. Our material cash requirements from known contractual and other obligations are set forth in Note 10 - Commitment and Contingencies of our unaudited condensed consolidated financial statements included in this Report. As of September 30, 2022 and December 31, 2021, our cash and cash equivalents totaled $61.1 and $132.9 million, respectively. As of September 30, 2022 and 2021, our total liquidity includes not only cash and cash equivalents, but our entire undrawn revolving credit facility of $135.0 million.

We seek to meet our long-term liquidity requirements, such as real estate lending needs, including future construction draw commitments, primarily through our existing cash resources and return of capital from investments, including loan repayments. Additionally, we intend to use borrowings under our revolving credit facility from time to time as a cash management tool in between collecting loan repayments. We expect to opportunistically issue debt and raise capital in the public and private markets from time to time based on market conditions. As of September 30, 2022, we had $1.5 billion of total loan commitments outstanding, of which we have funded $941.4 million.

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Debt-to-Equity Ratio

The following table presents our debt-to-equity ratio, based on the amounts presented in our condensed consolidated balance sheets included in this Report, as of the dates presented:


	September 30, 2022		December 31, 2021
Debt–to–Equity Ratio		0.088		0.085

Revolving Credit Facility

On February 19, 2021, we entered into a credit agreement with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent for the lenders, providing for a $135.0 million revolving credit facility with a three-year term and bearing interest at the prime rate plus 275 basis points. As a source of backup liquidity for future draws, the availability of the revolving credit facility has enabled us to use a larger percentage of our cash balances for lending activities. In October 2021, we made our first use of our revolving credit facility, with a draw of $50.0 million to support the funding of borrower draws and new loan originations while we awaited several large loan repayments. We then repaid the outstanding balance on our revolving credit facility in full by October 31, 2021 following the receipt of such loan repayments, minimizing the cost of such borrowing while earning fee income on the new borrower draws and loan originations. In July and August 2022, we made our second and third use of our revolving credit facility, with a draw of $20.0 and $25.0 million, respectively, which we repaid in full by September 30, 2022. These events demonstrate the value of our revolving credit facility as a cash management tool.

Our obligations under the revolving credit facility are secured by substantially all of our assets. The revolving credit facility contains covenants customary for financings of this type, including limitations on the incurrence of indebtedness, liens, asset dispositions, acquisitions, mergers and consolidations, certain dividends, distributions and other payments, advances and investments, payments to affiliates, optional prepayments and other modifications of certain other indebtedness, and amendments, terminations and waivers of certain material agreements, as well as a minimum tangible net worth, a total debt to equity ratio and a minimum debt service coverage 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.

Senior Unsecured Notes

On November 12, 2021, we completed a private offering of $100.0 million of senior unsecured notes. Interest on the notes accrues at the fixed rate of 5.00% per annum, payable semi-annually in arrears. The notes may be prepaid prior to their maturity date, subject to the payment of applicable premiums. The note purchase agreement contains financial covenants that require compliance with leverage and coverage ratios and maintenance of minimum tangible net worth, as well as other affirmative and negative covenants that may limit, among other things, our ability to incur liens and enter into mergers or transfer all or substantially all of our assets. The note purchase agreement governing the notes also includes customary representations and warranties and customary events of default.

Equity Offering Program

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We believe our existing sources of liquidity are sufficient to fund our existing commitments. To the extent funds available for new loans are limited, we will manage our capital deployment based on the receipt of payoffs and may from time-to-time use borrowings under our revolving credit facility. As a key component of our growth strategy going forward, we plan to raise capital from time to time subject to market conditions, which may include additional debt financing. We intend to maintain a conservative balance sheet and debt to equity ratio. Under our credit agreement for our revolving credit facility, we must maintain a total debt to equity ratio that does not exceed 30%.

As a REIT, we are required to distribute annually dividends equal to at least 90% of our annual REIT taxable income to our stockholders (determined without regard to the dividends-paid deduction and excluding net capital gains), 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 periods indicated:


	Nine Months Ended
(dollars in thousands)	September 30, 2022			September 30, 2021
Cash provided by (used in):
Operating activities	$	48,631		$	50,471
Investing activities		(36,242	)		(148,793	)
Financing activities		(84,137	)		(87,677	)
Net decrease in cash & cash equivalents	$	(71,748	)	$	(185,999	)

Comparison of Results of Cash Flows for the Nine Months Ended September 30, 2022 and September 30, 2021

Net cash provided by operating activities for the nine months ended September 30, 2022 and 2021 were $48.6 and $50.5 million, respectively. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in operating assets and liabilities. The $1.9 million decrease in cash provided by operating activities in the 2022 period compared to the 2021 period was primarily due to the $3.7 million of interest on the senior unsecured notes obtained during the 2022 period and an increase in cash paid for compensation and employee benefits, along with the increase in real property management expenses, the reasons for which are discussed in more detail above in the “Comparison of Results of Operations.” The decreases in cash provided by operating activities are partially offset by increases in cash provided by operating activities resulting from the higher amount of accounts payable and accrued liabilities as of September 30, 2022 compared to September 30, 2021. The reconciliations between net income and cash provided by operating activities in the consolidated statement of cash flows include adjustments to net income for non-cash items that, while fluctuating between the 2022 and 2021 periods, have no effect on cash that was provided by operating activities.

Net cash used in investing activities was $36.2 and $148.8 million, respectively for the nine months ended September 30, 2022 and 2021. The decrease in cash used in investing activities was $112.6 million. This was primarily due to (1) $48.3 million higher principal collections for our mortgage notes receivable in the 2022 period compared to the 2021 period, (2) a $12.7 million decrease in fundings for mortgage notes receivable during the 2022 period compared to the 2021 period and (3) $43.5 million paid for repurchase of loan participations from the Private REIT during the 2021 period with no corresponding amount in the 2022 period.

Net cash used in financing activities was $84.1 and $87.7 million, respectively for the nine months ended September 30, 2022 and 2021. The decrease in cash used in financing activities of $3.6 million was primarily due to the $5.1 million payment of costs to obtain our revolving credit facility in the 2021 period, partially offset by a $1.5 million increase in dividends paid in the 2022 period compared to the 2021 period.

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Critical Accounting Policies and Estimates

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 estimating credit losses for our mortgage notes receivable, valuation of investments in real property and valuation of our goodwill.

Estimated Credit Losses

We measure and record expected credit losses related to our loan portfolio in accordance with the Current Expected Credit Losses (“CECL”) Standard. 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 for estimating current expected credit losses. Please see “Note 2 – Summary of Significant Accounting Policies” and “Note 4 Mortgage Notes Receivable” of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 28,2022. For further discussion regarding CECL along with “Note 3 Mortgage Notes Receivable” included in the notes to out unaudited condensed consolidated financial statements included in Part I, Item 1. of this report.

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. 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 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 where principal collection is not in doubt.

Valuation of Investments in Real Property

To maximize recovery against a defaulted loan, we may assume legal title or physical possession of the underlying collateral through foreclosure or the execution of a deed in lieu of foreclosure. Foreclosed properties are recorded at fair market value at the time of acquisition, which generally approximates the carrying value of the loan secured by such property, net of the related allowance for estimated credit loss. The fair value of real property is based upon the most recent independent third-party appraisal of value, discounted between 0% to 10% based upon our experience with actual liquidation values. For certain real properties, where a recent appraisal is either unavailable or not most representative of fair value, the fair value is based on a broker opinion of value including a capitalized income analysis and replacement cost analysis considering historical operating results, market rents, vacancy rates, capitalization rates, land cost comparisons, market trends and economic conditions. The assessment of fair value of real property is subject to uncertainty and, in certain cases, sensitive to the selection of comparable properties.

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Valuation of Goodwill

Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events occur or circumstances change that indicate an impairment may exist. Our assessment begins with an evaluation of qualitative factors including macroeconomic conditions, industry and market considerations, current and projected financial performance, changes in strategy and market capitalization to determine whether it is more likely than not that the fair value of our single reporting unit exceeds the carrying value. A high degree of judgement is required in evaluating the qualitative factors. If we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative test is then performed. The quantitative test consists of comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill. If the estimated fair value of the reporting unit is less than the carrying value including goodwill, an impairment write-down of goodwill would be required for the excess of carrying value over the estimated fair value. Estimating the fair value of our reporting unit requires the use of inputs and assumptions including projected earnings of the company in future years for which there is inherent uncertainty.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At September 30, 2022, 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 for the year ended December 31, 2021.

Interest Rate Risk

While we recently began investing in certain floating rate loans with interest rate floors, nearly all our loans bear a fixed rate of interest and we have very limited interest-rate sensitive obligations outstanding. However, 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 most of 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 to a certain possibility of default. We seek to mitigate credit risk by originating loans which are generally 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 stockholders.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2022, 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) 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 for the year ended December 31, 2021.

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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*Exhibits that are filed or furnished herewith.

**This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

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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: November 7, 2022	By:	/s/ Brian P. Ward
	Name:	Brian P. Ward
	Title:	Chief Executive Officer (Principal Executive Officer)

Date: November 7, 2022	By:	/s/ David Schneider
	Name:	David Schneider
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)