Broadmark Realty Capital Inc.

Good afternoon. Thank you for joining us today for Broadmark Realty Capital's first quarter 2021 earnings conference call.

In addition to the press release issued this afternoon, we've 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 first quarter earnings call. This afternoon, I'll begin with a market overview and the discussion of our first quarter performance, and then I'll turn the call over to David to provide additional detail on our financial results and loan portfolio.

We will then open up the call for your questions. We've completed another quarter with strong originations and we continue to be encouraged by the exceptional strength we see in the housing and construction markets.

Fundamentally, it is one of the best markets we've seen in years. Housing availability remains near multi-decade lows.

Home price appreciation in the past year alone has been in the double digits across much of the country. We're experiencing a Goldilocks environment of low interest rates, combined with expectations for stable economic growth as we continue to navigate through COVID-19.

The fact is we are in the middle of a long-term housing shortage that is the result of many years of under supply. And our current pace of building is not even enough to keep up with existing demand.

Even with a heightened pace of activity, this housing shortage will take many years to resolve, particularly in markets that are experiencing strong in migration. This implies there are meaningful sustained growth opportunities for Broadmark as we move ahead.

All else equal, we are expecting these market conditions to remain highly supportive of our lending activities for the foreseeable future. While we lend across a variety of property types, our focus is predominantly on residential construction, which represented most of our first quarter originations.

In the first quarter, we generated $149 million of originations and amendments. This was shy of our fourth quarter volume, which was truly an exceptionally productive quarter.

But this first quarter rate is one that we feel we can maintain and improve on overtime.

Thanks, Jeff and good afternoon, everyone. Our operating results are detailed on Slide 9 of our earnings presentation.

For the first quarter of 2021, we reported total revenue of $29.5 million and net income of $20.4 million. On a per share basis this reflects a GAAP net income of approximately $0.15 per diluted common share.

Adjusting for the impact of non-recurring costs and other non-cash items, our distributable earnings for the first quarter were $23.3 million, or $0.18 per diluted common share. Interest income on our loans in the first quarter was $22 million, and fee income was $7.5 million.

On the expense side, as we've previously stated, we're making substantial progress on bringing in house our legal and other corporate functions. For the first quarter, we had cash compensation expense of $2.9 million, and G&A expense of $2.8 million together totaling $5.7 million.

This is a reduction from our $6.7 million run rate in 2020. And in the coming quarters, we expect to continue to see a run rate below $6 million per quarter as a result of these efforts.

With regard to origination volumes, which are presented on Page 10 of the earnings presentation, in the first quarter, our origination and amendments totaled $149 million in line with our historical pace. We reiterate that origination volumes may vary from quarter-to-quarter, based on the timing of loan closing.

Now, turning to our balance sheet, as detailed on Slide 15 of our earnings presentation, we had $204.3 million of cash and no debt outstanding as of March 31. As previously announced, in the first quarter, we closed on a $135 million revolving credit facility.

Although we remain fully undrawn on the facility, and do not intend to use it as a source of leverage, it enables us to reduce the balance of cash that we require to carry on our balance sheet to match our unfunded commitments. As a result, we have freed up significant existing capital, which we can now deploy to fund new loans.

In the first quarter, we reduced our cash balance by approximately $20 million. And we aim to reduce it by another $80 million or so over the coming quarters for a run rate of $100 million to $120 million in cash balances.

We also previously announced that in the first quarter, we filed a $200 million at the market or ATM program that further enhances our toolkit of capital sources. To be clear, we did not issue any shares in the first quarter and do not presently have a need for capital with ample cash and liquidity on our balance sheet.

In the event that we raise additional capital in the future, we are fully aligned with the interests of our shareholders and would access only when we believe that it's in the long-term interest for Broadmark shareholders.

Thanks David. We are very pleased with our pace of activity in the first quarter.

The exceptionally strong fundamentals of the housing market remain highly supportive of our business, and we are excited for the opportunities ahead. As we continue to grow our platform as a lender of choice, our focus remains on consistent execution.

For over 10 years we have provided reliable service to our borrowers and steady cash flow growth to our investors. Today we are better capitalized than ever.

We see plenty of opportunities in the market. And we are well prepared to go out and continue to execute.

Hi, good afternoon. I guess kind of you touched on - the follow up on some comments in your prepared remarks, builders supply chain and issues with getting material is certainly seeing some impact on the portfolio.

But can you talk about how that's impacting your pipeline if at all? Is it muting demand for new loans because of those issues they may be having with other projects?

Hi, Stephen. Jeff Pyatt.

Nice to hear from you. The short answer in a word is no.

Our borrowers remain optimistic about the market they're in. Sure they're frustrated by supply chain issues.

They're frustrated by the cost of lumber that we all read about, but they are bullish about the markets ahead of them the housing market just broadly. And so I - it's not affecting our pipeline at all.

Great and speaking of the pipeline and then when you think about the expected repayments, maybe you have visibility the next few months. What's the timeline you expect to reach kind of at 100 million to 120 million normalized cash level?

Is that achievable in three months? Or is it more of a six-to-nine-month target?

Hey, Stephen. David Schneider here.

Thanks for that question. So I think we made some good progress in the first quarter, reduced - decreased our cash balance by about $20 million, and continue to kind of focus on the point as much capital as possible.

We had, I think, you recall, we had significant payoffs in the fourth quarter. I think we are at about 169 million, which is kind of record high for us.

That normalized a bit in the first quarter, we had about 114 million in payoffs, which is kind of a normal quarter for us. If we continue at that run rate of somewhere around 110 million, 120 million in quarterly payoffs we expect to continue to make similar progress, if not potentially greater than that 20 million drop that we had in Q1.

So it's not going to be one quarter to answer your question. It's probably closer to the six-to-nine-month timeframe and that will largely be driven by know how payoffs turn out.

But if the payoffs are kind of normalized, I think we can probably closer to the six months. But as long as we combine that with good origination activities similar to what we did in Q1, six months is probably a good target.

Thanks Dave. Great.

And last question for me, I think Illinois was a new state. I think that popped up on your geographic diversification slides.

Can you talk about the demand there? I mean, 3%, it seems to have leapfrogged a number of states.

But can you talk about Illinois specifically, and then just other efforts to diversify geographically in the southeast and Mid Atlantic?

Sure. Illinois, the loan that came to us in Illinois, we weren't seeking out Illinois as a state.

But this opportunity came to us. Tom Gunnison from our Mountain West Region looked at it.

As we do with any loan and especially in a new area, got down to the - really the neighborhood as well as the product type, we looked at the borrower, their history, the guarantors all the things that we look at. And then of course, looked at the foreclosure laws and the usury laws and all those things that we looked at whenever we go into a new market.

And just thought it was a very sound deal. And so that's really what drove that one in particular.

We are looking to new markets. We always have.

Remember, we started out in Washington, Oregon and Idaho. And so we continue to take our disciplined approach.

I expect we will continue to expand. And again, we look at the state for growth opportunities, for placement opportunities, the ability to get repaid.

And as I said, we focus on foreclosure loan to make sure that we can get out of a loan. We look at usury laws, we look at pricing.

And then we'll tackle states and more importantly, within those states, cities and the micro regions. You mentioned the southeast.

Jordan Siao, SVP down there and his team are - they're a great group of folks. You look at the size of that market, and they should be growing.

And I think will continue to grow at an outsize pace for themselves compared to other regions. And I expect the same in the Mid Atlantic region.

Again, we've got a great team and we've got a good market up there.

Great appreciate comments Jeff. Have a good evening.

Thank you.

Thanks Stephen.

Sure, thanks. Hi, Jeff.

Hi, David, how are you?

Steve, good. How are you?

Hey, thanks Steve.

Good. I'm just trying to look ahead for the year and kind of tie together your comments.

Jeff, I mean, you characterized the 149 million as a strong quarter. So let's just round that and call it 150.

David, you were talking about repayments and that they were a little higher this quarter, but something 100, 120. So just really oversimplifying it, but you've got to think about an extra 100 million of cash you would describe as excess.

So I mean, in an oversimplified fashion over the balance of this year, if you could originate 150 and only get 100 net of 150, you would not only be fully deployed, but you could be in a position where you're looking to acquire some additional capital is that - that would put you close to 600 in originations. And that scenario that I laid out, is that a viable or realistic scenario for where you're positioned and where you see the market currently?

Sure. Thanks, Steve.

Great question. I would say 140 - 150 of originations, it's a good quarter.

It's not a great quarter. I think we can probably increase that.

I think we're already closer to 200 and Q4. So I think that we -

Yeah, 195.

Yeah, 195 with originations and amendments. We are seeing competition.

We talked about that in our prepared remarks, but we still think we're getting our share. So 150, I think is possible.

We'll be content with 150. But we think we can potentially get higher.

The payoffs are a little bit harder to project. We certainly weren't expecting 170 ish in Q4.

So a couple of quarters of those will certainly impact the ability to bring down that cash balance. But yeah, I think we threw out six months in response to Stephen's question.

I still think that's a good period, but there is –we are a hard business to project sometimes - some of these - whether its payoffs, originations, the timing does matter. And they do get lumpy at sometimes - at some points in time.

So it's a little bit harder project. But I still think it's probably going to take us about six months to get through there and have a net drop in our cash of 100 million and get to that run rate that we're looking for.

Okay, that's helpful. And Jeff, as you see the pipeline, a lot of your comments were strength of, housing and the residential market, would you describe the pipeline as heavily weighted towards residential and housing at this time?

I might avoid the word heavily. But let's go with weighted forward.

And it ebbs and flows. But we have always been known as a residential, one with both single family and multifamily and I think we continue to be.

We certainly see some opportunities on the commercial side. And like a little bit of commercial.

We try to keep our land percentage low. And having said that, we also know that there's a dearth of building lots for single family builders - single family home built, they have got some inventory.

So with what's going on in the residential market, and the backlog of housing, I think we're pretty content to stay focused on single family.

Got it, music to my ears. You commented on the defaults and supply chain that - labor conflicts et cetera - labor issues in the past year.

When you look at your defaulted loans, I guess 192 million, is there anything in there that represents finished product that's been slow to sell - been slow to liquidate, but 90% plus completed? Or would you characterize it is - that's - you don't have like challenging or product that's not moving at the cost basis?

Is it really more just this getting it built kind of issue?

I would say generally, Steve, it's getting it built. I think we have I think 70% though of the existing portfolio defaults is construction complete or construction near complete, when they're ready collateral, we typically are able to move through those pretty quickly.

I would say that we do have a couple. And I would actually probably not label it as challenging.

I mean, we feel pretty good about - we have a couple of hotels that are in default, that have been there for a little while. The hotel markets are coming back, they're eventually going to come back.

We're not going to ever be forced to rush out of a project. So something like hotels, we feel like the value is going to be much greater, six months, nine months from now than it is today.

And as that kind of value picks up, well, then it looks a lot more attractive for us to exit. I think we'd have the benefit of being unlevered that we don't get forced into moving quickly on projects like hotels and offices where we think the values are going to go up over time.

And if we need to - for us we've said it many times, foreclosure is kind of a last resources for us. But if we need to foreclose, we've done it in the past and we need to take over a hotel and have it - operate it for a little while to get occupancy rates up and then ultimately exit at a better economic outcome.

We're happy to do that.

Got it. Well, thank you both for your comments.

They were helpful.

You're welcome. Thanks Steve.

Your next question comes from line of Tim Hayes with BTIG. Please proceed with your question.

Hey, good evening, guys. Hope you're doing well.

My first question here, just a follow up on kind of your comments on the commercial side of things, I think 20% of originations were in the commercial realm this quarter. Can you give an idea what kind of assets you're lending on the commercial side?

And it sounds like you're constructive on hotel, but I don't know if that's an asset class that you're looking to put capital into at this point.

Sure. Yeah.

I'll take a stab at that Tim and let Jeff come in if needed as well. We've done some - we've had a lot of good loans related to storage.

So we've done some storage. I think we did a little bit more storage this quarter.

We're not looking to put a ton of our investments in hotels, but if good hotel comes around, we're also not going to scoff at it. So we're not scared of commercial.

I think we're open to commercial. It's a case-by-case basis, if there's a really good piece of collateral and a really good borrower, potentially a new borrower that we haven't worked with before, we're going to be open to different types of collateral outside of residential and kind of a strategic type loans sometimes really worked out well for us.

Okay, so I guess - yeah, Jeff storage seems like it might have taken up the bulk of the originations this quarter.

Yeah.

Yeah. I would say storage was - go ahead Jeff.

I'm reluctant to get into too much loan level detail. So David, go ahead and get into more if you'd like.

But, Tim, yeah, so storage has been something we - we've looked at hotels, we've looked at - we've got a - we've had opportunities. We have a repeat borrower, another guy in the commercial space.

And I really would rather not get into it. But it's a nice asset.

We built one out for him or financed one for him that worked well. And he wanted to do another one.

And so we said, yes, a borrower in Utah. So it's like everything we do.

It's sort of a case-by-case basis. And then really trying to keep our focus on the residential.

All right. No, that's a good color there.

Appreciate it, Jeff. And then on the private REIT AUM, I think it ticked up only slightly this quarter after seeing some healthier growth.

Maybe in the first quarter markets are getting healthier. And I think the outlook for real estate in general, has improved over the past three to six months.

So I would think that interest on the private fund would also be getting stronger as well as people get more confidence in the outlook. So I'm just curious how demand has been there?

Why you think growth may pull back a little bit on the private side of things and any expectations for pace going forward?

Sure. Thanks.

Thanks, Tim. So I think we raised about 26 million in the first quarter of 2021.

And we had about 88.4 million of AUM as of March 31. We have a big pipeline.

We continue to have a big pipeline of interest in the lending platform. We view the private REIT as a source of capital.

And I think that's an important node. We've made great strides, I think, since we initially launched it and being able to grow it to 88.

We think there's room to grow with significantly more than that. But I would say right now, we're in a situation where we've got a great cash position.

We're making a very conscious effort to reduce our cash on balance sheet at PubCo. And we're not going to go - we're not going to raise capital simply to raise capital.

And with this current focus on continue to deploy as much capital as we can in the upcoming quarters to again, bring that cash, balance the run rate to somewhere around 100 million to 120 million. We're limiting the amount of capital that we take into the private REIT until we can bring that cash balance down, and then really ramp it up going forward when we need the capital again.

Okay, got it. So it's not really a demand issue.

It's more just about a capital allocation that's, I guess what you -

That's correct.

Okay. And then my last one here just should you - until you guys deployed 80 million or so of cash, should we expect the credit facility to remain at zero?

Or do you expect you might put on a little bit of leverage, as you put some of that equity to work?

No, I think expectation should be in the near term. It's going to remain undrawn.

We continue to view it as a cash management tool, as a kind of a backstop for us. We've kind of shifted our thinking, we think about our total liquidity.

So we think about that plus our cash balance on hand, as long as we've got somewhere around three months of working capital in that combined liquidity then we feel pretty good, so no plans to draw on that in the near term.

Got it. That's helpful.

Well, thanks again, guys for taking my questions.

You're welcome. Thanks Tim.

Thanks Tim.

Hey, guys, thanks for taking my question. I might have missed this earlier, but just go over again, with the increased competition coming in.

How you're maintaining your share? How you're defending pricing?

Is it the relationships, the speeds, the structures, the certainty of capital execute, just go our again and - how you're defending the market share?

Can I go with all of the above?

Yes.

There is competition. And there always has been and it comes and goes.

And a lot of those newcomers don't have much to compete on except price and so they compete on price. We have had to be more flexible or creative on - it's probably not the right word, but flexible on pricing.

But we rely heavily and we continue to rely heavily on our certainty of execution. On working with borrowers who know what they're going to get.

Many of our borrowers experienced problems with other lenders or saw others experience problems with other lenders a year ago. And but there is competition there, there will be.

The one thing I'd asked you to remember is our size is compared to the size of the overall housing market and so for us to do a good job and take good care of our borrowers. Well, we lose some once in a while sure.

We get new ones sure. So all we - we try to do the best we can on pricing, keep the pricing as high as we can to stay - and still stay competitive.

And we seem to be getting our share

Got it and when you say it comes in goes, I mean this is - is this something you've just seen through the cycles? And is this something that at some point, it will be shaken out over time?

Sure. Yeah.

So those of you who've been on calls with me before have heard me say that it's easy to loan money out and it's hard to get paid back. And I will argue that there - with housing being as fashionable in the news as it is that there are a lot of people interested in the housing market.

There are a lot of people who hold themselves out there as lenders and then they'll turn around and sell their notes to a third party. And when that third party may start to have some troubles with some of the loans that are on their books - if I'm writing a loan and then selling it off, I don't have as much risk as Broadmark does who writes loans and keeps them in our portfolio.

And so we underwrite very carefully. And then when we have defaults, which we do, we manage through them.

And so I think as things get tougher, some of those third parties will back out. That's what's happened in the past.

And then there'll be other newcomers that come in. And all we really can do is focus on being - it sounds a little trite, but just focus on being really good at what we do and it's worked for us.

Got you, no, makes complete sense. And then on that sort of topic and you look at - I know you got a lot of luck to work with the cash management and put that to work.

But you look at longer term, let's just say 18 months out, and you look at where the assets or portfolio could go or where you think it could go. I know you want to get - I know you have the private REIT, I know you'd love to get those warrants exercised if you could.

I know you got the ATM now that could be really efficient. But when you think about how big the portfolio goes and now that you're going to - it can be a year as a public company.

How do we think about funding future growth? Would you think about tapping the public debt markets, preferred markets, longer term, something else?

Or could you get up to 2 billion in size? Would you want to be that size?

Just look over when you make a long-term trajectory with that portfolio growth? And how you're going to get there?

Sure. Yeah.

And I think the initial answer is we want to grow as big as possible. I think that's a long-term view.

I don't know that we have a specific number in mind right now. But we definitely want everyone to be thinking about this as a long-term growth investment enough.

In terms of how we think about growing the size of the portfolio, I think we're always going to look for the most efficient sources of capital, right, I think we're in a really good position where we've got multiple tools in our toolbox. Now, whether it's the private REIT, we've got the ATM out there.

We think there's other potential sources of capital that we could use. We're going to do whatever's in the best interest of our shareholders and whatever's most accretive, when it gets time for us to start thinking about raising additional capital.

So we don't say no to anything. I think when it gets to that time hopefully later in this year we'll be in a position where we have access to all different sources of capital.

And as those sources change over time and become cheaper or more expensive or harder to access, we'll be in a great position where we can pivot and adapt to whatever is the best source at that time.

Got you, so am I right to presume that your bankers are calling and reaching - talking about access the preferred markets, term loan markets, unsecured markets, but all the above that you could look at long - something not long term you may consider.

Yes, absolutely lots of calls and we're always going to take those calls and explore different opportunities. I mean, that's the real benefit of us now being a public company, access to all these different capital sources.

And we're going to explore all of them and see what makes the most sense for our capital structure long term.

Great, thanks a lot.

Thanks Matthew.

Thank you all for joining us today, for being part of our call, for your continued confidence in Broadmark and our platform. On behalf of everyone in our company, I'm grateful and appreciate it.

Stay safe, stay healthy, and we will talk to you in a quarter if not soon. Back to you, operator.