Broadmark Realty Capital Inc.

Good afternoon. Thank you for joining us today for Broadmark Realty Capital's fourth quarter and full year 2020 earnings conference call.

In addition to the press release issued this afternoon, we have filed a supplemental package with additional detail on our results, which is available in the Investors Section on our website at www.broadmark.com.

Thank you, Nevin, and welcome to our fourth quarter and full year 2020 earnings call. We hope that all of you and your families have remained safe and healthy.

This afternoon, I'll begin by discussing our 2020 performance and share some thoughts on our exciting opportunities for growth as we look ahead, then I'll turn the call over to David to provide additional detail on our financial results, and the loan portfolio, and some key updates on enhancements to our balance sheet and funding sources. We will then open up the call for your questions.

We just concluded our first full year as a public company, while it was not the year any of us expected. We feel it provided a significant validation of our lending platform, primarily focused on residential construction, which has served us so well for the last 10-plus years.

Through a combination of disciplined underwriting, balance sheet strength, and the excellent work of our team members, we overcame the challenges presented by COVID. And we believe we emerged stronger than ever.

In the fourth quarter, we generated over $190 million of originations and risk reducing amendments, surpassing the level of many of our pre-COVID quarters. In addition, we accomplished this in a quarter when originations are typically slower due to the holiday season.

This was primarily due to an acceleration in the second half of 2020, as construction holds were lifted, market activity began to normalize.

Thanks, Jeff and good afternoon, everyone. Before we begin, I'd like to call your attention to a change in our non-GAAP earnings measure, core earnings, which we have replaced with distributable earnings.

This change aligns us with our mortgage REIT peers, and with recent SEC guidance. We will be addressing distributable earnings on this call, but please note that except for one item that I will explain shortly, our calculation has not changed from prior quarters when we presented core earnings.

Our operating results are detailed on Slide 12 of our earnings presentation. For the fourth quarter of 2020, we reported total revenue of $32.5 million, a net income of $22.4 million.

On a per share basis, this reflects a GAAP net income of approximately $0.17 per diluted common share. Adjusting for the impact of non-recurring costs and other non-cash items, our distributable earnings for the fourth quarter were $26.2 million, or $0.20 per diluted common share.

To recap, we are proud of our achievements and that a challenging environment in 2020. We want to extend our deepest gratitude to our team members, shareholders and other partners for your continued support.

Over the past year, we've made significant progress and continuing to enhance our capital structure to provide optimal flexibility, leaving us well positioned to execute as we look ahead into 2021 and beyond. We are very excited about the opportunities that lie ahead as we continue to focus on origination activity, and meet the demand for much needed housing construction.

This completes our prepared remarks, and we will now open up the line for questions. Operator?

Hi, this is Colin Johnson from B. Riley, on for Randy this evening.

Thanks for taking my questions. Pretty solid.

I just wanted to ask on the new credit facility. I think you mentioned you might reduce your cash balance by about $100 million in the coming quarters.

Does that kind of imply relying on the revolver for a similar amount of liquidity to replace that? Or is it thinking kind of take that balance sheet cash down but then draw smaller amount on that revolver?

Yes, sure. Thanks, Colin.

It's a great question. And yes, so first, we are very excited to have that credit facility in place announced earlier today.

And consistent with our messaging in the past, for now and in the near-term, that is a straight $100 million off of our current $223 million. As of December 31, we had about $223 million on the balance sheet.

So, that we kind of view it as a working capital solution. It allows us to hold less of that cash on our balance sheet, and then we'll re-evaluate kind of how we use that facility going forward.

But I think, in 2021, we've got about $100 million cash on the balance sheet that we can deploy into new originations without drawing on the credit facility.

Okay, thanks. That makes sense.

And then just want to ask on the -- I noticed that the weighted average LTV in the new origination picked up a little bit in the quarter. Do you think that reflects maybe just a slightly higher risk appetite?

Or should we not really read into it that much yet?

Colin, I'll take a stab, and I'll let Jeff jump in if he has any additional comments. I mean, we haven't changed any of our underwriting.

I think that might just be a, this quarter, maybe a little bit of an uptick. But we're standing by our 65% LTVs.

We feel confident about the loans we originated in Q4 and weren't really any differences versus the previous quarters when we were originating loans. We felt good though, that we were able to put about over $190 million in the fourth quarter, which usually impacted by seasonality.

So, we felt good, but no change in risk appetite.

Colin, when we go vertical, building a home, building an apartment, we usually get closer to that 65% maximum of ours. When we are doing land loans, we drop that down quite a bit, and the portion of our portfolio that has been land we've been working to bring down.

And my guess is that if you did the math, that's where a lot of that would come out. Hope it makes sense.

Yes. Thanks for taking my questions.

Thanks, Colin.

Hi, good afternoon. I guess first, Jeff, as I think about or maybe, David, if you talk maybe from a modeling standpoint.

As I think about the pace of near-term repayments versus your origination pipeline, how should we think about growth going up and cash balance down in the coming quarters? And I guess, coupled with that, the mix of Mid Atlantic and southeast loans has increased a little bit in the last couple of quarters.

But I'm a little surprised that it hasn't increased more. So, can you talk about expanding into those markets?

Is it just having limited capital deploy there as you recycle capital within other regions? Or how should we think about those two new regions growing as a mix of the portfolio this year?

Thanks, Stephen, for joining. Jeff, how about I'll talk a little bit about liquidity, Stephen, and I'll let Jeff talk a little bit more about the regions.

So yes, I mean, we had $223 million in cash on the balance sheet as of December 31. That's obviously a little bit higher than we would have liked to have seen.

And I think the driver of that to your point, I think you mentioned prepayments. We saw almost higher than pre-COVID levels of payoffs.

We saw that $169 million in the fourth quarter, which is a little bit higher than our run rate that we would expect. So that kind of offset the significant originations that we did in the quarter.

But we feel really good about Q1 and the upcoming quarters, knowing that, we basically got free rein to go out and do as much as we want with that significant liquidity. And now that we have the credit facility in place, so I don't think there's any necessary changes, it's just continuing to attack that pipeline, put out good loans, and take the loans that are in front of us.

Residential, single family residential is very hot right now, there's a lot of competition there. We continue to see competitors enter the market and we're going to pick our spots and do the best collateral that's in front of us.

And ultimately, ensure that we deploy as much capital as possible in the upcoming quarters.

And I think, Steven, by the way, nice to hear your voice. Thanks for joining us.

I think that, I certainly expect to see both the southeast and the Mid Atlantic to continue to grow over the course of this year, and in the future. The four regional guys are very close, and very competitive.

And I think they all have each other in their sights. So, so keep an eye on them and I think you'll see that picks up.

Great. And yes, good to be on the call.

Jeff, I appreciate the comments. When I think about the timing and resolving the remaining $158 million or defaults, they're typically short-term loans.

So, I'd imagine if they get resolved fairly quickly, compared to maybe some other possible loans. But can you talk about the timing of resolutions here, and kind of where do you think that it'll get to kind of back to a more normalized level?

Where's that from where we are today at $158 million?

Sure. Yes.

And I would say, Stephen, so I think in Q4 we reduced our total defaults outstanding by about 10% from Q3. So, we'd love to be doing 20% a quarter, I think 10% was a good run rate for Q4.

We're trying to attack this similar rate in Q1. But I think, to your point, yes, I think 70% of the loans in the current default portfolio are complete or nearly complete, 67% of that is collateralized by residential properties.

So, we feel good about those numbers. We're still catching up on some of those.

So, it will take a little bit more time. I think our goal is to get it to a normalized run rate in 2021.

It's not going to be the first quarter, obviously, if we're at -- I think we're at a 13% default rate right now. That's not where we want it.

We want to keep bringing that down with a goal of kind of having a normalized rate by the end of 2021. But I think, we made good progress.

You saw the pickup in earnings. Based off of the default resolution, I think we dropped our loans on not accrual status, pretty significantly, probably by about $30 million or $40 million, and that's the driver for the pickup and some of the interest income.

So, we're working on that $0.03 drag. We dropped it from $174 million in non-accrual at September 30, to about $127 million as of December 31.

So, it's not happening as quickly as we'd like, but we're continuing to get some defaults that we did for total defaults in Q4, plus three that were in default status, we bought back current. So, we're just chipping away, continuing to bring that drag on earnings down, and just finding the best economic outcome that we can for each individual loan at default, which has been successful today.

We continue to get principal and interest on most, if not all loans on resolution. So, there's always going to be some hairier loans, that takes a little bit more time.

And those are the ones that you'll see us working through in 2021.

Great. Last question, I want to touch on the private REIT, it looks like another good month to growth from the newsletter a few days ago.

Is this a pretty good pace that you feel good about? It seems like the last four or five months have been pretty, pretty solid growth there that have picked up over the first five or six months of the fund?

Yes, we've seen a lot of interest. We've really picked up the pace in the last three or four months.

I think we were at $74 million of assets under management as of January. So obviously, that's a long time coming from March when we launched the private REIT in the middle of the pandemic.

So, definitely positive pick up there. At the current state that we're at in the current environment, where we've got a ton of cash on balance sheet and we're working through that, we're going to evaluate each month how much capital we want to bring in from the private REIT.

We've got a lot of interest. We've got some folks in the pipeline looking to get involved in private REIT.

So we'll continue to evaluate what's the best source of capital. I think we have the luxury now between the registration statement, the credit facility that allows us to free up cash.

We've got kind of a giant toolbox of different tools, finally, that we can use to source capital when we need it. But I think right now the top priority is just making as many loans and dropping that cash balance down, now that we've got the credit facility in place.

But we'll continue to monitor the private REIT. And we're happy to say that there's significant interest and it's come a long way.

Great. Well, Jeff, David, thank you both for the comments this evening.

Thank you, Stephen. Appreciate it.

Hi, Jeff and David, nice to be with you this evening. And thanks for let me take a question here, even though I'm not official yet.

David, if I may start with you on the new revolver, nice accomplishment on that. It's referred to as a secured facility.

Can you just comment on generally on how it might be secured with respect to either specific assets? Or is it more of a blanket lean type of a thing?

Thanks.

Sure. Great question, Steve, and thanks for joining.

Yes, it's the latter. It's more of a blanket lean on the equity in the company.

So there's not individual leans being taken on our loans, and it's covered in the equity of the company. And that was important to us.

And I think our lenders were incredibly supportive and helpful in finding a solution that made sense for us. There aren't a ton of mortgage REITs out there that have credit facilities that are kind of a revolving credit facility like this.

And this was optimal for us. It just made sense, because we carry so much cash on our balance sheets to get something that's flexible, that allows us to draw as needed and really just use it as that working capital solution where we can just free up significant cash and put that out with new loans.

Great. It sounds like it's a lot of flexibility, you're not having to move assets around and pledge assets, seems so.

Basically they're just standing and not that in a disaster situation or you guys voluntarily decided for whatever reason you were going to liquidate, they would just stand ahead of your common shareholders. And that would be paid in full and then the shareholders get everything else.

So that's great. Thank you.

And Jeff one for you. I noticed, I don't read everything comes across my desk.

I just wish I could. But I finally found something to read on Tuesday FHFA, put out the home price increases for February for year-over-year.

This was for the fourth quarter. And four of the top four states in terms of HPA, all with year-over-year home price improvement in fourth quarter were Idaho, Montana, Utah and Arizona.

So you guys are in three your mountain region. You're in three of those four except for Montana, obviously not a large state population.

But is the situation there one of where is it a judicial state? Or is there simply just not enough population density, in any one particular market to support a presence?

Thanks.

You're referring to Montana?

Yes, I'm referring to Montana, yes.

So, Montana is a state that we have on our radar, and it is small. And it's pretty easy for Montana to grow quickly because it's starting with this -- it depends on the size of the numerator as well as the denominator.

And so…

Yes, yes.

But it's a good state. It sort of reminds me of Idaho, when we went in there.

And we will look at it. We'll look at other markets and we'll do it cautiously.

And in home prices all over, Steve, have just been strong. There’s one way to use.

Well, and it just shows, there are multiple investors, I'm sure when you get a defaulted or troubled property. There are people looking for that.

They don't want to pay full freight by the property. And if they can do a little private buy something that's 80% done and improve it, that's great value for a potential homeowner.

Yes, the tough part, Steve, is that, there's every month, every quarter, there's another headline about one place or another. And we tend to stay focused on what we do.

And it's served us pretty well for the last decade or so. And so, before we just jump on whatever the next hot spot is, we want to make sure that we do it methodically, and we do it with the same rigor that we always have.

Well, it served you well. Thank you both for your comments tonight.

Thanks, Steve.

Thank you, all for being part of this call. It's exciting to have our first full year under our belts.

We couldn't have done it without all of you. And on behalf of all of us at Broadmark, I'm grateful.

I hope that you all stay healthy. And I look forward to speaking with you again, if not before at the end of next quarter.

Thank you.