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 endedDecember 31, 2021 filed with theSEC onFebruary 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 six months endedJune 30, 2022 are not necessarily indicative of the results that may be expected for the full year endedDecember 31, 2022 or for any other period. Unless the context otherwise requires, references to "Broadmark Realty ," the "Company," "we," "us" and "our" refer toBroadmark Realty Capital Inc. , aMaryland 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 forU.S. federal income tax purposes. Based inSeattle, Washington , we specialize in underwriting, funding, servicing and managing a portfolio of short-term, first deed of trust loans to fund the construction and development of, or investment in, residential or commercial properties. We categorize our loans into the following distinct purposes:
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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 ofJune 30, 2022 , our portfolio of 234 active loans had approximately$1.6 billion of total commitments and$978.5 million of principal outstanding across 185 borrowers in 20 states and theDistrict 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 committed amounts for future draws and interest reserves on our loans. Historically, our loan portfolio was 100% equity funded, and we had no outstanding debt. OnNovember 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. OnFebruary 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. 23
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Table of ContentsBroadmark Realty Capital Inc. Properties securing our loans are generally classified as residential properties, commercial properties or undeveloped land, and are typically not income producing. Each loan is secured by a first deed of trust lien on real estate. Our lending policy 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 ofJune 30, 2022 , the weighted average LTV was 59.9% 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 ofJune 30, 2022 , the weighted average LTV was approximately 85.1%, 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 typically 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 ofJune 30, 2022 , a total of 37 loans were in contractual default, totaling$248.4 million in total commitment. As ofJune 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 18 months at origination, which we often elect to extend for several months based on our evaluation of the expected timeline for completion of construction. We usually receive loan origination fees, or "points," which, as ofJune 30, 2022 , had a weighted average fee of 2.9% 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. As a result of the COVID-19 pandemic, we experienced an adverse impact on our loan portfolio, primarily in the form of a significant increase in defaulted loans and a slow-down in construction progress. For example, delays in local government permitting and inspections arising from measures to limit the spread of COVID-19 delayed some projects, adversely affecting the ability of borrowers to complete the projects in accordance with the terms of the loans. We experienced an increase in delinquencies and requests for extensions or forbearance. In addition, market conditions have increased the timeline to resolve non-performing loans. Delays in repayment of our outstanding loans or sales of foreclosed properties reduce the capital available for future loan originations. TheU.S. and global economy began reopening in 2021 and wider distribution of effective vaccines for COVID-19 encouraged greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness in preventing the spread of COVID-19, including its new variant strains. There remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on economic and market conditions. There remain shortages in raw materials, manufactured products and labor across industries that are resulting in longer construction timelines and rising prices, which are dampening a full economic recovery within the construction industry. The prolonged duration and impact of the COVID-19 pandemic could continue to negatively impact our business, financial performance and operating results. 24
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Table of ContentsBroadmark Realty Capital Inc. As a result of limited residential housing supply, net migration trends and a low interest rate environment, we have seen an increase in new parties entering the real estate lending market as economic conditions have stabilized from the impact of the COVID-19 pandemic. Such new entrants, as well as existing lenders, have been aggressively pursuing yields. This has resulted in increased competition and pricing pressure on our business, which has driven, and we expect will continue to drive, increased variability in the amount of our loan originations from quarter-to-quarter and the yields we are able to achieve on new loans. Historically, we primarily competed on the basis of borrower relationships, loan structure, terms and service rather than on price; however, competitive conditions have led us in some cases to originate loans with terms that deviate from our historical practice, such as absence of minimum interest provisions in our mortgage notes, which in turn reduce the interest income we earn on those loans. Starting in the second quarter of 2021, we adopted a dynamic pricing model, in which we determine credit risk for prospective loans utilizing categories such as experience of the borrower, amount of new capital being contributed by the borrower or guarantors to the project and strength of the underlying collateral. Under the dynamic pricing model, originated loans that we underwrite as lower credit risk receive lower annual rates or loan origination fees than loans that we deem as higher credit risk. To the extent that competitive conditions lead us to originate a greater percentage of loans containing annual fees or loan origination fees at the lower end of our historic ranges, our interest and fee income and financial performance could continue to be adversely affected. Beginning in the second quarter of 2022, as a result of rising interest rates and associated pressures to service or refinance their debt capital, we have started to see 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 trend will continue and the ultimate impact on the amount of loan originations and the yields we are able to receive on our loan originations is difficult to predict.
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 ofJune 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. Certain of our mortgage notes provide for minimum interest provisions, to which the contractual rate applies, which is typically between 50% and 70% of the face amount of the note until the outstanding principal under the note exceeds a minimum threshold. A reduction in or absence of minimum interest provisions in our mortgage notes and an increase in the amount of our loans in non-accrual status as a result of being in contractual default reduce our effective interest-bearing principal and the interest income we earn on our loans. 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 ofJune 30, 2022 andDecember 31, 2021 , the effective interest-bearing principal net of non-accrual principal was$887.9 and$840.1 million , respectively. This represents the principal balance outstanding of$978.5 and$924.7 million plus the excess of minimum interest provisions over the actual principal outstanding of$1.1 and$17.3 million less the non-accrual principal of$91.7 and$101.9 million as ofJune 30, 2022 andDecember 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 ofJune 30, 2022 , had a weighted average fee of 2.9% 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. 25
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Table of ContentsBroadmark Realty Capital Inc.
The following tables contains the total amount of our loan originations and repayments for the periods indicated:
Three Months Ended Six Months Ended (dollars in millions) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Loans originated(1) $ 144.4 $ 197.4 $ 311.9 $ 315.0 Loans repaid(2) $ 100.5 $ 111.2 $ 165.6 $ 182.4 (1)
Based on original total loan commitment amounts and excluding amendments. (2) Based on fully repaid loans during the period and excluding partial repayments.
Credit quality of our loan portfolio. All of our loans are secured by residential or commercial real estate and, in assessing estimated credit losses, 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: June 30, 2022 Year Originated (1) Carrying (dollars in thousands) Value % of Portfolio 2022 2021 2020 2019 2018 Prior Construction Type Vertical Construction$ 490,054 50.7 %$ 189,305 $ 184,441 $ 76,976 $ 1,582 $ 1,296 $ 36,454 Horizontal Development 242,332 25.2 92,490 131,680 18,162 - - - Acquisition 108,277 11.2 12,247 96,030 - - - - Investment 51,984 5.4 37,336 14,648 - - - - Rehabilitation 33,036 3.4 12,480 10,846 9,710 - - - Land Entitlement 25,691 2.7 1,757 23,934 - - - - Bridge 15,378 1.6 - 13,438 - 1,940 - - Total$ 966,752 100.0 %$ 345,615 $ 475,017 $ 104,848 $ 3,522 $ 1,296 $ 36,454 CECL allowance(2) (9,526 ) Carrying value, net$ 957,226 (1) Represents the year of either origination or amendment where the loan incurred a full re-underwriting in connection with the amendment. (2) Includes$1.0 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,$1.4 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet. 26
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Table of Contents Broadmark Realty Capital Inc. June 30, 2022 Year Originated (1) Carrying (dollars in thousands) Value % of Portfolio 2022 2021 2020 2019 2018 Prior Collateral Type Apartments$ 140,899 14.6 %$ 76,665 $ 37,709 $ 24,943 $ 1,582 $ - $ - Residential Lots 134,405 13.9 40,296 75,947 18,162 - - - Single Family Housing 116,164 12.1 72,439 41,382 2,343 - - - Townhomes 99,851 10.3 52,180 46,067 1,242 - - 362 Mixed Use 73,109 7.6 4,434 57,025 9,710 1,940 - - Commercial 71,457 7.4 7,489 63,968 - - - - Condos 70,526 7.3 2,759 7,130 23,249 - 1,296 36,092 Storage 56,730 5.9 - 56,730 - - - - Entitled Land 46,070 4.8 18,765 27,305 - - - - Unentitled Land 43,329 4.5 32,912 10,417 - - - - Hotel 29,839 3.1 13,926 - 15,913 - - - Offices 18,581 1.9 - 10,783 7,798 - - - Senior Housing 14,306 1.5 - 14,306 - - - - Quadplex 12,680 1.3 6,211 6,469 - - - - Commercial Other 11,092 1.1 - 11,092 - - - - Commercial Lots 9,340 1.0 2,376 6,964 - - - - Duplex 8,894 0.9 8,894 - - - - - Retail 8,422 0.9 5,211 1,723 1,488 - - - Triplex 1,058 0.1 1,058 - - - - - Total$ 966,752 100.0 %$ 345,615 $ 475,017 $ 104,848 $ 3,522 $ 1,296 $ 36,454 CECL allowance(2) (9,526 ) Carrying value, net$ 957,226 (1) Represents the year of either origination or amendment where the loan incurred a full re-underwriting in connection with the amendment. (2) Includes$1.0 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,$1.4 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet. June 30, 2022 Year Originated (1) Carrying (dollars in thousands) Value % of Portfolio 2022 2021 2020 2019 2018 Prior LTV (2) 0 - 40%$ 34,963 3.6 %$ 5,077 $ 29,886 $ - $ -$ 0 $ - 41 - 45% 45,971 4.8 14,769 29,329 1,873 - - - 46 - 50% 47,033 4.9 17,475 13,424 16,134 - - - 51 - 55% 130,342 13.5 54,426 66,778 8,776 - - 362 56 - 60% 99,739 10.3 67,971 31,319 449 - - - 61 - 65% 543,820 56.3 142,917 302,052 57,941 3,522 1,296 36,092 66 - 70% 41,067 4.2 39,736 1,331 - - - - 71 - 75% 1,092 0.1 1,092 - - - - - 76- 80% 2,152 0.2 2,152 - - - - - Above 80% 20,573 2.1 - 898 19,675 - - - Total$ 966,752 100.0 %$ 345,615 $ 475,017 $ 104,848 $ 3,522 $ 1,296 $ 36,454 CECL allowance(3) (9,526 ) Carrying value, net$ 957,226 (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) Includes$1.0 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,$1.4 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet. 27
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Table of Contents Broadmark Realty Capital Inc. December 31, 2021 Year Originated (1) (dollars in thousands) Carrying Value % of Portfolio 2021 2020 2019 2018 2017 Prior Construction Type Vertical Construction$ 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$0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. December 31, 2021 Year Originated (1)
(dollars in thousands) Carrying Value % of Portfolio 2021
2020 2019 2018 2017 Prior Collateral Type Residential Lots$ 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
(10,394 )
Carrying value, net
(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. 28
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Table of ContentsBroadmark Realty Capital Inc. 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) 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.
Dividends Declared. The following table summarizes the declared cash dividends per common share activity for the periods indicated:
Three Months Ended Six Months EndedJune 30, 2022 June 30 ,
2021
Earnings per Common Share. The following table summarizes the earnings (GAAP) and distributable earnings (non-GAAP) per common share activity for the periods indicated: Three Months Ended Six Months Ended June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Earnings per common share, basic $ 0.12 $ 0.14 $ 0.26 $ 0.29 Earnings per common share, diluted 0.12 0.14 0.26 0.29 Distributable earnings per diluted share of common stock prior to realized loss on investments 0.16 0.18 0.32 0.36 Distributable earnings per diluted share of common stock 0.16 0.18 0.30 0.35 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. During the six months endedJune 30, 2022 and 2021, provision for credit losses, net was$4.4 and$2.8 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. 29
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Table of Contents Broadmark Realty Capital Inc. 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. 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 Six Months Ended (dollars in thousands, except share and per share data) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Net income attributable to common stockholders$ 15,946 $ 18,252 $ 34,020 $ 38,633 Adjustments for non-distributable earnings: Stock-based compensation expense 1,019 924 2,004 1,661 New public company expenses(1) - 289 - 953 Non-capitalized transaction and other one-time expenses(2) 577 - 1,604 - Change in fair value of warrant liabilities (186 ) 3,734 (178 ) 3,734 Depreciation and amortization 268 268 487 431 Impairment on real property 346 - 346 - Provision for credit losses, net 2,694 58 4,441 2,766 Distributable earnings prior to realized loss on investments:$ 20,664 $ 23,525 $ 42,724 $ 48,178 Realized credit losses(3) 40 - (2,411 ) (1,401 ) Distributable earnings:$ 20,704 $ 23,525 $ 40,313 $ 46,777 Distributable earnings per diluted share of common stock prior to realized loss on investments $ 0.16 $ 0.18 $ 0.32 $ 0.36 Distributable earnings per diluted share of common stock $ 0.16 $ 0.18 $ 0.30 $ 0.35 Weighted-average number of shares of common stock outstanding, basic and diluted Basic 132,812,622 132,585,116 132,803,085 132,567,768 Diluted 132,930,721 132,646,389 132,895,582 132,636,425 (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 property taxes accrued 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. 30
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Table of ContentsBroadmark Realty Capital Inc. Segment Reporting
We operate the business as one reportable segment, which originates, underwrites and services construction loans.
Results from Operations
The period-to-period comparison of results is not necessarily indicative of results for future periods. The tables below set forth the results of our operations for the periods indicated, both in dollars and as a percentage of revenue (amounts in thousands, except percentage data):
Three Months Ended Six Months Ended Statements of Operations Data: June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021 Revenues: Interest income$ 22,132 $ 21,618 $ 46,242 $ 43,635 Fee income 6,384 7,565 12,147 15,016 Total revenue 28,516 29,183 58,389 58,651 Expenses: Compensation and employee benefits 3,920 3,550 8,998 6,996 General and administrative 3,309 2,816 6,545 5,416 Real property management expenses, net 1,074 55 941 108 Interest expense 2,120 718 4,235 998 Total expenses 10,423 7,139 20,719 13,518 Impairment: Provision for credit losses, net 2,694 58 4,441 2,766 Other (expense) income: Change in fair value of warrant liabilities 186 (3,734 ) 178 (3,734 ) Gain on sale of real property 707 - 959 - Impairment on real property (346 ) - (346 ) - Total other (expense) income 547 (3,734 ) 791 (3,734 ) Income before provision for income taxes 15,946 18,252 34,020 38,633 Income tax provision - - - - Net income$ 15,946 $ 18,252 $ 34,020 $ 38,633 31
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Table of Contents Broadmark Realty Capital Inc. Three Months Ended Six Months Ended Percentage of Revenue: June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2022 Revenues: Interest income 78 % 74 % 79 % 74 % Fee income 22 26 21 26 Total revenue 100 100 100 100 Expenses: Compensation and employee benefits 14 12 15 12 General and administrative 12 10 11 9 Real property management expenses, net 4 0 2 0 Interest expense 7 2 7 2 Total expenses 37 24 35 23 Impairment: Provision for credit losses, net 9 0 8 5 Other (expense) income: Change in fair value of warrant liabilities 1 (13 ) 0 (6 ) Gain on sale of real property 2 - 2 - Impairment on real property (1 ) - (1 ) - Total other (expense) income 2 (13 ) 1 (6 ) Income before provision for income taxes 56 63 58 66 Income tax provision - - - - Net income 56 % 63 % 58 % 66 %
Comparison of Results of Operations
Unless otherwise stated, for purposes of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the comparison of the results of operations is for the three and six months endedJune 30, 2022 andJune 30, 2021 .
Three Months Ended
Revenue
Total revenue for the three months endedJune 30, 2022 and 2021 was$28.5 and$29.2 million , respectively, a decrease of$0.7 million . The decrease primarily relates to a decrease in fee income of$1.2 million , partially offset by an increase in interest income of$0.5 million , which are discussed in more detail below. Expenses Total expenses for the three months endedJune 30, 2022 and 2021 were$10.4 and$7.1 million , respectively. The increase primarily relates to increases in interest expense, real property management expenses, net, general and administrative expenses and compensation and employee benefits of$1.4 ,$1.0 ,$0.5 , and$0.4 million , respectively, which are discussed in more detail below.
Interest Income
Interest income increased by$0.5 million , or 2.4%, for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 , primarily due to an increase of 16% 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, (2) the increase in the size of our loan portfolio resulting from our purchase of loan participations inAugust 2021 in connection with the liquidation of the Private REIT and (3) a higher average effective interest-bearing principal outstanding during the 2022 period compared to the 2021 period as a result of a lower percentage of the loan portfolio being on non-accrual status. These increases were partially offset by the effect of lower fixed interest rates and no minimum interest provisions on loans recently originated due to increased competition. 32
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Table of ContentsBroadmark Realty Capital Inc. Fee Income Fee income decreased by$1.2 million , or 15.6%, for the three months endedJune 30, 2022 from the three months endedJune 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$0.4 million , or 10.4%, for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 , primarily due to an increase of$0.5 million resulting from higher employee headcount and wages during the 2022 period compared to the 2021 period.
General and Administrative
General and administrative expense increased by$0.5 million , or 17.5%, for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 . The increase was primarily due to increases of (1)$0.2 million in board member RSU expense and (3)$0.2 million in recruiting expenses associated with increased hiring during the 2022 period compared to the 2021 period.
Real Property Management Expense, net
Real property management expense, net increased by$1.0 million for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 , primarily due to a net increase of$1.0 million in non-capitalized operating costs, primarily property maintenance and property taxes on real property owned during the 2022 period compared to the 2021 period as a result of the higher amount of properties no longer under construction in 2022 compared to 2021.
Interest Expense
Interest expense increased by$1.4 million for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 , primarily due to$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.
Other Income (Expense)
Other income increased$4.3 million for the three months endedJune 30, 2022 to income of$0.5 million from the three months endedJune 30, 2021 expense of$3.7 million . This increase primarily relates to the increase in unrealized gain or loss for the change in fair value of warrant liabilities. The private placement warrant liability of$3.7 million and corresponding unrealized loss was initially recorded in the second quarter of 2021 as a correction to an immaterial error. In addition, there was an increase in the 2022 period of$0.7 million related to a gain on sale of real property. The increases in other income were partially offset by an increase in other expense of$0.3 resulting from impairment on real property during the 2022 period compared to the 2021 period.
Provision for Credit Losses, Net
The provision for credit losses increased$2.6 million for the three months endedJune 30, 2022 from the three months endedJune 30, 2021 . This increase primarily resulted from principal losses for paid off loans or loans transferred to real estate owned during the 2022 period, an increase in loans in contractual default and an increase in the average size of our loan portfolio in the 2022 period compared to the 2021 period.
Six Months Ended
Revenue
Total revenue for the six months endedJune 30, 2022 and 2021 was$58.4 and$58.7 million , respectively, a decrease of$0.3 million . The decrease primarily relates to a decrease in fee income of$2.9 million , partially offset by an increase in interest income of$2.6 million , which are discussed in more detail below. 33
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Table of ContentsBroadmark Realty Capital Inc. Expenses Total expenses for the six months endedJune 30, 2022 and 2021 were$20.7 and$13.5 million , respectively. The increase primarily relates to increases in interest expense, compensation and employee benefits, general and administrative expenses and real property management expenses, net of$3.2 ,$2.0 ,$1.1 and$0.8 million , respectively, which are discussed in more detail below.
Interest Income
Interest income increased by$2.6 million , or 6.0%, for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 , primarily due to an increase of 11% 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 inAugust 2021 in connection with the liquidation of the Private REIT. These increases were partially offset by 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 due to lower fixed interest rates and no minimum interest provisions on loans recently originated due to increased competition.
Fee Income
Fee income decreased by$2.9 million , or 19.1%, for the six months endedJune 30, 2022 from the six months endedJune 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$2.0 million , or 28.6%, for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 , primarily due to an increase of$1.9 million resulting from higher employee headcount and wages, relocation expenses associated with hiring the new chief executive officer, and increased incentive compensation during the 2022 period compared to the 2021 period. General and Administrative General and administrative expense increased by$1.1 million , or 20.8%, for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 . The increase was primarily due to an increases of (1)$0.5 million in recruiting expenses associated with hiring the new chief executive officer during the 2022 period, (2)$0.2 million in increased board member RSU expense during the 2022 period and (3)$0.2 million in increased computer and internet expenses primarily related to new system costs during the 2022 period compared to the 2021 period.
Real Property Management Expense, net
Real property management expense, net increased by$0.8 million for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 , primarily due to a net increase of$0.8 million in operating costs, primarily property maintenance and property taxes on real property owned during the 2022 period compared to the 2021 period as a result of the higher amount of properties no longer under construction in 2022 compared to 2021.
Interest Expense
Interest expense increased by$3.2 million for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 , primarily due to$2.8 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. 34
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Table of ContentsBroadmark Realty Capital Inc. Other Income (Expense) Other income increased by$4.5 million for the six months endedJune 30, 2022 to income of$0.8 million from the six months endedJune 30, 2021 expense of$3.7 million . This increase primarily relates to the increase in unrealized gain or loss for the change in fair value of warrant liabilities. The private placement warrant liability of$3.7 million and corresponding unrealized loss was initially recorded in the second quarter of 2021 as a correction to an immaterial error. In addition, there was an increase of$1.0 million related to a gain on sale of real property during the 2022 period. The increases in other income were partially offset by an increase in other expense of$0.3 resulting from impairment on real property during the 2022 period compared to the 2021 period.
Provision for Credit Losses, Net
The provision for credit losses increased$1.7 million for the six months endedJune 30, 2022 from the six months endedJune 30, 2021 . This increase primarily resulted from principal losses on paid off loans or loans transferred to real estate owned during the 2022 period; partially offset by a decrease in our CECL allowance resulting from an increase in acquisition and investment type loans with lower construction risk in the 2022 period compared to the 2021 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 ofJune 30, 2022 andDecember 31, 2021 , our cash and cash equivalents totaled$36.0 and$132.9 million , respectively. As ofJune 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 ofJune 30, 2022 , we had$1.6 billion of total loan commitments outstanding, of which we have funded$978.5 million .
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:
June 30, 2022 December 31, 2021 Debt-to-Equity Ratio 0.086 0.085 Revolving Credit Facility OnFebruary 19, 2021 , we entered into a credit agreement with a syndicate of lenders andJPMorgan 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. InOctober 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 byOctober 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. Subsequent toJune 30, 2022 , inJuly 2022 , we made our second use of our revolving credit facility, with a draw of$20.0 million . These events demonstrate the value of our revolving credit facility as a cash management tool. 35
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Table of ContentsBroadmark Realty Capital Inc. 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
OnNovember 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 OnMarch 2, 2021 , we entered into a distribution agreement withJ.P. Morgan Securities LLC ,Barclays Capital Inc. ,B. Riley Securities, Inc. ,JMP Securities LLC andRaymond James & Associates, Inc. as sales agents, to sell shares of our common stock having an aggregate gross sales price of up to$200,000,000 , from time to time, through an "at-the-market" equity offering program (the "ATM Program"). We have no obligation to sell any shares under the ATM Program and sold no shares under the ATM Program during the three and six months endedJune 30, 2022 . We believe our existing sources of liquidity are sufficient to fund our existing commitments. To the extent funds available for new loans are limited, we will manage our capital deployment based on the receipt of payoffs and may from time-to-time use borrowings under our revolving credit facility. As a key component of our growth strategy going forward, we plan to raise capital from time to time subject to market conditions, which may include additional debt financing. We intend to maintain a conservative balance sheet and debt to equity ratio. Under our credit agreement for our revolving credit facility, we must maintain a total debt to equity ratio that does not exceed 30%. As a REIT, we are required to distribute annually dividends equal to at least 90% of our annual REIT taxable income to our stockholders (determined without regard to the dividends-paid deduction and excluding net capital gains), including taxable income whereBroadmark Realty does not receive corresponding cash. We intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Code and to avoidU.S. federal income tax and the non-deductible excise tax.
Sources and Uses of Cash
The following table sets forth changes in cash and cash equivalents for the periods indicated: Six Months Ended (dollars in thousands) June 30, 2022 June 30, 2021 Cash provided by (used in): Operating activities$ 32,982 $ 35,307 Investing activities (73,775 ) (35,050 ) Financing activities (56,138 )
(59,609 )
Net decrease in cash & cash equivalents
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Table of ContentsBroadmark Realty Capital Inc.
Comparison of Results of Cash Flows for the Six Months Ended
Net cash provided by operating activities for the six months endedJune 30, 2022 and 2021 were$33.0 and$35.3 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$2.3 million decrease in cash provided by operating activities in the 2022 period compared to the 2021 period was primarily due to the$2.5 million of interest on the senior unsecured notes obtained during the 2022 period and an increase in cash paid for compensation and employee benefits, the reasons for which are discussed in more detail above in the "Comparison of Results of Operations." 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$73.8 and$35.1 million , respectively for the six months endedJune 30, 2022 and 2021. The increase in cash used in investing activities of$38.7 million was primarily due to lower principal collections under our mortgage notes receivable totaling$34.2 million in the 2022 period compared to the 2021 period. This was partially offset by an$11.6 million increase in fundings for mortgage notes receivable and a$7.5 million increase in proceeds from sale of real property during the 2022 period compared to the 2021 period. Net cash used in financing activities was$56.1 and$59.6 million , respectively for the six months endedJune 30, 2022 and 2021. The decrease in cash used in financing activities of$3.5 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$1.4 million increase in dividends paid in the 2022 period compared to the 2021 period.
Critical Accounting Policies and Estimates
For information on our critical accounting policies and estimates, see Part II "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Use of Estimates" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . There have been no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 . 37
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Broadmark Realty Capital Inc.
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