Broadmark Realty Capital Inc.

Good afternoon. Thank you for joining us today for Broadmark Realty Capital's Third Quarter 2021 Earnings Conference Call.

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

As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

We do not undertake any obligation to update our forward-looking statement in light of new information or future events. For a more detailed discussion of the factors that may affect the Company's results.

Please refer to our earnings release for this quarter and to our most recent SEC filings. During this call, we will also be discussing certain non-GAAP financial measures.

More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings. This afternoon's conference call is hosted by Broadmark's Chief Executive Officer, Jeff Pyatt, and Chief Financial Officer, David Schneider.

Management will make some prepared comments after which we will open up the call to your questions. Now, I'll turn the call over to Jeff.

Thank you, Nevin. And welcome to our third quarter earnings call.

This afternoon. I will begin with a discussion of our quarterly performance and market overview.

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.

In the third quarter, we generated $337 million of new originations and amendments. This is the largest origination volume in our 11 year history and reflects our efforts to scale our operations and reach new and repeat borrowers amid sustained demand for new construction.

We have also continued our targeted geographic expansion, making our first loans in Arizona, Nevada, and Minnesota. We now operate in 17 states plus the District of Columbia, providing greater access to excellent borrowers and projects.

As of September 30, our portfolio consisted of $1.5 billion of loans secured by high-quality real estate with a weighted average loan-to-value at the time of origination of 59%. We are diversified across property types and geographies with single-family and multi-family residential making up the majority of our portfolio.

We favor the residential sector because of the powerful demand drivers resulting from population growth in our target markets, as well as a pervasive shortage of housing, which should continue to drive construction well into the future. We also pursue select commercial real estate investments which benefit from some of the same long-term tailwinds.

We've also continued to expand our opportunity set through our dynamic pricing system, which we have implemented this year, as we have previously discussed, this has allowed us to not only stay competitive in the midst of a highly active lending market, but also to effectively reach a pool of borrowers that tend to be better capitalized and more experienced with larger projects and superior credit and collateral. One constant is that our disciplined underwriting standards have not changed, particularly our maximum 65% loan-to-value, which gives us a significant value buffer in the event of cost overruns or other impacts.

We continue to maintain our relationships with smaller builders even as we unlock opportunities with it progressively wider pool of borrowers and broader range of projects. Our increasing size and scale have enabled us to grow our average loan size while keeping our percentage exposure to any individual borrower or alone very low.

In the third quarter, we originated 43 new loans with an average loan size of $7.5 million up from an average of $6.7 million a year-ago. Additionally, although we are funding larger and more complex projects, our loans remained short-term in duration with a weighted average term of 12.6 months at the time of origination or our active loans.

The short-term duration of our loans means that we have limited exposure to changes in the interest rates. It also means that our loan portfolio turns over relatively frequently, providing us with a steady stream of payoffs to fund new projects, as well as allowing us to be nimble and pivot quickly as we allocate capital across our markets.

As we previously noted, under our new pricing model and a mid a competitive environment, we do expect that the weighted average all-in yield on our portfolio will be reduced over time. As of September 30th, our portfolio yield was 15% down from 16.6% a year ago.

And over the coming quarters, we expect the portfolio yield to stabilize in a range of 11% to 12% However, by increasing our loan origination volume while still utilizing our disciplined underwriting approach, we expect to grow the business assertively but at a wider range of risk adjusted yields. In the third quarter, we again demonstrated the power of our platform and originated in a record amount of loans after coming off an already strong second quarter.

One of the benefits of our platform is that we can continue to build on this origination growth over time without needing to add significant cost as we scale. Year-to-date, we have hired 6 sales and originations personnel to support our expansion into new states, as well as in our existing states.

And we feel confident that we are well staffed to scale our operations with our current headcount. The macro environment remains highly supportive of our lending activities driven by supply and demand fundamentals that seem likely to persist well into the future.

On the residential side, demand for new housing continues to far outstrip supply with a deficit of units, both single and multi-family. That is actually widening underlining the demand for new construction.

In addition, household balance sheets remain very strong, And given the fundamental shift in working arrangements that results from COVID, many Americans are free to move, to upsize and to relocate to the high-growth states where we operate. All of these demographic trends continue to drive new single-family and multi-family construction, which flows through as demand for our loans.

Taken together, these factors give us confidence that the housing market is well supported by strong supply and demand fundamentals and consumer credit. We continue to monitor inflation, supply chain disruptions in labor shortages, which could potentially impact the cost and timeline of our projects.

The short-term nature of our loans means that we can respond quickly to changing environment. We continuously assess changing input costs as part of our underwriting process and our contracts include guaranteed ceilings on construction costs, which helps to protect us from overruns.

In our conversations with borrowers, we are hearing that they have generally been able to source supplies without major issues with the majority of pressure coming from the tight labor market. While we feel better protected than most in the current environment.

We remind you that these factors can translate into delays requirements to modify our loans are placed them into maturity default. The vast majority of such cases are typically resolved without issue.

But the length of the loan is extended as are the interest payments and fees that we receive. Our portfolio also benefits from diversification across geographies and property types beyond residential.

Approximately 33% of our portfolio at the end of the third quarter, consisted of commercial projects, including retail, storage, senior housing, hotels and land. We are focused on locations and real estate uses that have remained resilient during COVID.

To conclude, we are very excited with our third quarter progress generating record origination's, and continuing our expansion into new markets. We have an excellent record of repeat customers and every new borrowers represents additional future revenue opportunities as we continue to scale our platform to be the leading lender of choice for construction loans.

With our highly experienced team, best-in-class balance sheet, we have all the tools in place to continue to build upon this pace of activity to drive further shareholder value. Lastly, as part of our ongoing efforts to expand and enhance our ESG disclosures, we have included 2 new slides in our earnings presentation.

These slides cover the principles that are at the core of Broadmark's organization and also provide some metrics on our ESG performance. With that, I will turn it over to David.

To review the financials.

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

For the third quarter of 2021, we reported total revenue of $30.6 million and net income of $21.7 million. On a per-share basis, this reflects a GAAP net income of approximately $0.16 per diluted common share, adjusting for the impact of non-recurring costs and other non-cash items.

Our distributable earnings prior to realize loss on investments for the third quarter were $24.6 million or $0.19 per diluted common share. Interest income on our loans in the third quarter was $22.8 million and fee income was $7.7 million.

On the expense side, we continue to balance our G&A reduction efforts with modest headcount expansion to support our growth as Jeff mentioned. For the third quarter, we had cash compensation expense of $3.1 million and G&A expense of $3.4 million with $18.1 million of cash compensation and G&A expense year-to-date.

We remain in line with our previously estimated $24 million for 2021, an expected decrease of $5 million from 2020. In addition, we expect to further reduce our G&A expense as a percentage of revenue as we grow our operations with our in-place team.

With regards to origination volumes, which are presented on Slide ten of the earnings presentation, we achieved a record $337 million of originations and amendments. This pace will likely moderate as we enter the winter season, which is traditionally slower for construction.

We reiterate that origination volumes may vary from quarter-to-quarter based on the timing of loan closings. Now, turning to our balance sheet as detailed on Slide 18 of our earnings presentation, we had $37.4 million of cash and no debt outstanding as of September 30th, the lower than usual cash balance reflects two developments in the third quarter in October.

First, in addition to record high originations in the third quarter, as previously announced, we repurchased $42 million of loan participations at carrying value from our Private REIT as a part of the funds retiring. Second, in October, we made our first use of our revolving credit facility.

With the credit facility in place, We had the flexibility in September to bring down our cash levels to $37 million without needing to tap the facility during the quarter. Subsequent to quarter-end, we drew $50 million on the facility to support borrower draws and new originations while we awaited several large loan payouts, we then paid off the balance in full by October 31st following the receipt of loan repayments.

This demonstrates the value of our credit line as a cash management tool. It gave us the ability to take advantage of the opportunities in our pipeline while maintaining operating liquidity.

Whereas historically, we would have been constrained by the timing of loan payoffs. As of October 31st, we remain fully undrawn with $135 million of capacity on the credit facility.

We continue to target a cash balance of approximately $50 to $100 million and note that timing considerations as we saw this past quarter, may result in a lower level of cash at quarter-end. We did not issue any shares under our ATM program in the third quarter.

And in the future, we would access capital only when we believe that it is the long-term interest of Broadmark shareholders. As we have discussed previously, we are assessing multiple sources of capital, including a conservative amount of long-term debt, which is very attractively priced in today's low interest rate environment, and will be a credit to our shareholders.

Even at the levels we are contemplating, our leverage would remain very low by industry standards. And we will continue to be patient and deliberate as we work to optimize our capital structure.

Maintaining a fortress balance sheet has always been part of our DNA. And this will not change.

But we believe this approach will support future growth as it will help to lower our overall cost of capital and make us even more competitive in the marketplace. As Jeff mentioned, we expect that our pricing adjustments will result in our overall portfolio yield being reduced to approximately 11% to 12% from their current levels of 15% to 16%.

As seen on Slide 11, these reduced asset yields remain higher than our peers. And a conservative amount of leverage in tandem with the increased origination volumes that we are already realizing should help to offset the effect of those lower yields and set us up to drive earnings growth over time.

During the quarter, we retired our private REIT and repurchase its loan participations for approximately $42 million. The repurchase price was equal to the loan's carrying value and therefore did not have a significant impact to our earnings.

Turning to our portfolio managing. As of September 30th, we had 32 loans, in contractual default representing $226 million in total commitments, or 14.7% of the total portfolio value.

This was up slightly from the second quarter and primarily reflects some new maturity defaults, which have been normal course for us historically and are expected to be resolved quickly. More importantly, subsequent to quarter-end, we are pleased to announce the resolution of one of our larger legacy, COVID related defaults, which had a total commitment of $41 million and which we resolved with zero loss of principal.

Let me take a moment to discuss this default resolution in detail as it reflects both the delays associated with defaults and the success of Broadmark 's default management capabilities. More specifically, I would highlight the following.

The default consisted of three loans with one borrower located in Portland, Oregon, including one loan collateralized by an incomplete office building that entered default in April 2020. The valuation of offices deteriorated during the pandemic, making refinancing unavailable, and we were unable to start foreclosure given the foreclosure moratorium in Oregon, Broadmark remained patient, taking steps to cross - collateralized the borrowers loans.

And worked with the borrower to identify refinancing. And finally, with the moratorium lifted and for closure available, the borrow rig was further incentivized and found refinancing with two banks, resulting in a full payoff of loans with no principal loss.

As Jeff often says, it's easy to make construction loans and a lot harder to collect on them. These actions are proof of our strong underwriting model and resolute default management.

As a result, we reduced our default pool to $188 million or 12% total commitment as of October 31st, down meaningfully from September. Ultimately, there's still work left to be done and clearing defaults.

But this recent resolution of a large loan gives us added confidence and we expect to make further progress on reducing our default pool over the coming quarters. As a reminder, loans.

on accrual status continued to have a drag on earnings. For the third quarter, the earnings drag was approximately $0.04 per share.

At quarter end, we own seven foreclosed properties with $52.4 million in carrying value. During the third quarter, we foreclosed on two loans and received total payoffs on seven loans in default, representing a total commitment of $50.5 million.

Finally, I would like to provide an update on the four principles for growth that we have previously outlined. 1.

Maximize earnings on our currently deployed capital to be continued resolution of defaults. As just discussed, we made meaningful progress after quarter-end reducing our default pool by 7% since March 31st, 2021 and 10% from a high as of August 2020, 2.

maximum deployment of existing capital with the credit facility now in place. We took advantage of the enhanced balance sheet flexibility given to us by our credit facility by deploying existing cash in September drawing on our credit line in early October, and then repaying it in tandem with October loan payoffs.

As discussed, we are now seeing the tangible benefits of having this cash management tool in place, which means we are less constrained by the short-term timing of loan payoffs and better able to take advantage of opportunities to funding zones, 3. Ensures sufficient operating capital available for deployment through our various sources.

We are evaluating available sources of capital for the focus on the lowest available weighted average cost of capital for the Company. And the most accretive to our shareholders.

This will likely include raising a modest amount of long-term debt in the fourth quarter. And finally, 4.

Identify opportunities for new earnings, power and growth. In the third quarter, we made great progress in expanding our operations and proving the increased originations capacity of our platform.

We have a large opportunity set with both new and existing customers and all the tools in place to capitalize on it. Now, I will turn the call back to Jeff for a few closing comments.

Thank you, David. As we close out the year and look ahead to 2022, we have made progress on many different fronts, positioning us well for the new year and beyond.

The third quarter demonstrated the power of our platform with record originations and expansion into new markets. We have fortified our balance sheet and given ourselves more flexibility to operate and we have multiple capital sources in place to fund our growth as opportunities arise.

We've also made additional progress on our portfolio credit, reducing our population of non-accrual loans. In light of these milestones, our fundamental approach to our business remains the same.

And we will continue to apply the same prudent underwriting standards and practices that have supported us so well and allow us to deliver attractive, risk-adjusted returns. This completes our prepared remarks.

We will now open up the line for questions. Operator.

Hey, good evening, guys. Thanks for taking my questions.

My first 1 on the liquidity position here. So nice to see you guys start using the credit line.

And that certainly has proven to be fruitful when cash has come down quite a bit nice cash management tool for you, but you're at $37 million of cash at the end of the quarter, less than 10% of construction holdbacks. Can you just touch on -- I know you have capacity on the line.

You talked about some of the options to you in the capital markets in the fourth quarter and the ATM. Just maybe give us an idea of how you see liquidity position trending over the coming quarters?

Maybe where leverage is going, what type of corporate debt or any other options you are considering right now, just so we have an idea of how the balance sheet should evolve over the coming quarters.

Sure. And thanks for joining Tim and take question.

So yes, liquidity position. We talked a little bit about in the prepared remarks, but as of September 30, we've got down to $37 million.

We draw on the line for $50 million. One of the things that we'll see, and this is the whole reason we've got the credit facility as a cash management tool, predicting when exactly we're going to get a large payoffs, particularly in this case, the $40 million and defaults that we got paid off in full post 930.

It's very difficult. So being able to draw on the line, pay it back when the payoffs come in, was exactly the intent behind us achieving and why it was such a focus for us strategically from a cash management perspective.

As of today, we have about $79 million of cash. We're expecting some good movement from the origination pipeline over the next couple of weeks.

As we think about raising capital, as we mentioned in the -- Eric marks in the fourth quarter, we're focused on. I think the same things we've said in the last couple of earnings calls, flexibility in sizing, where we're not putting out -- we're not going to put out $300, $400 million in the quarter.

So something around $75 to $100 million in capital makes sense. We can put that out in 1.5 to 2 quarters, which is important to us.

We don't want to increase the drag on earnings from interest expense. And then 2, obviously, as we said, we're really strategically focused on overtime, bringing down our cost of capital and introducing some leverage onto the Balance Sheet.

So going out the EBTIDA to lower the cost of capital through something like an unsecured bond issuance that would allow us to slowly overtime, introduce very reasonable amounts of leverage to the Balance Sheet in conjunction with increased origination volume that will help offset any reductions we're seeing in the asset yields. And that's something that we think we can do on kind of a recurring basis as needed.

Being able to tap into those markets, get

Chief coupons from our perspective, the debt markets are incredibly attractive right now. And slowly over time, have our capital structure revolve responsibly and still be at levels that are really, really reasonable compared to our peers.

That makes sense. I appreciate the comments there, David.

I mean, but do you have a target leverage ratio in mind? Clearly the asset side of the balance sheet is evolving to some new loan types which I wanted to ask about.

So I know it's kind of a moving target, but just any preliminary thoughts on where you could see leverage migrate to and then just wanted -- a follow-up to that would be just the equity ATM, right? I mean, you trade at a premium to book value, so it's accretive as you issue stock and helps manage your leverage levels.

Just curious how you think about using that in tandem with some type of corporate debt issuance and the credit line.

Sure. Yeah.

That's a pretty question, Tim. So debt-to-equity ratio, again, when we have over $1.2 billion of equity to debt the equity ratio is going to mean low, very low by industry standards for the next several years.

If we were to go out, hypothetically, we go out and we do $100 million this year. Let's say we do $200 million next year.

We're still looking at somewhere around 10%, 15% of debt-to-equity ratio. So over time, I think that will evolve.

I think it will be somewhat driven by our capital needs and pricing out there. The ATM remains very attractive to us as well but at this point in time the primary focus is being able to source the right amount of capital that we can put out quickly while simultaneously achieving our focus of over time, bringing down that cost of capital.

Do I see us -- We've got a factory model, do I see us being over one-times levered? Absolutely not.

That's not what we're targeting at this moment. I think it's going to be a slow, reasonable, responsible approach to the introduction of debt and balancing of our capital structure over time.

So I think we will still have a competitive advantage years from now from a low leverage relative to our peers.

Yes, that's great. And then just one more for me and I'll hop back in queue.

But just on the new types of loans that you originated this quarter, I think rehab and bridging to be the 2 categories we saw in the supplement. When you say rehab, is that ready fixed and flip, any other types -- maybe just give us some examples of the type of collateral you're working with here.

So we get a feel for what these new loan types are.

Sure. Yes.

I think that was just us really refining. It wasn't necessarily a Q3 new origination.

I think there's some loans that we've done in the past. That really look more like a bridge loan and we can argue over what the definition of a bridge loan is, but no construction risk.

Maybe certificate of occupancy is available. You can begin to get a lower coupon and fee on something like that.

So there is a little bit of that, but I'd say for Q3, it looks a lot like what we've seen in the past. I think we did about 35% for rent residential, about 24% for sale residential.

We get a little bit in the commercial space between mixed-use and hotel. We probably had about 35% of the new originations.

But it didn't look terribly different than the existing portfolio still continue to focus on let's call it 60% residential focus or slightly more than that, while still taking the time to look at opportunistic deals in the commercial space. We do think things like hotels, definitely not our primary focus.

But if there's a good deal for a hotel where it's a great borrower, that could be sub collateral, then we're going to look at that. And I think that's 1 of the benefits of our operating model is that we can pivot, we do all types of collateral were primarily residential focus, but depending on what the market is looking like, we can certainly shift our focus to different collateral types.

So I would say Q3 looked a lot like the existing portfolio. I think what you're seeing in the supplement is just refinement of some of our categorizations, but not necessarily us going out and doing different loans in Q3.

Got it. Well, thanks for all the color, David, I appreciate it.

Thanks, Tim.

Thank you. Hello, Jeff and David good to be on with you.

Thank you. Thanks, Steve

First thing -- thanks, Jeff. The first thing that I would like to ask about is you had realized losses this year and that took your gap down a penny to $0.18.

So that's $695,000. Was that primarily fair value write-downs on the $10 million addition to real estate owned, I guess you had a foreclosure.

And is that where that particular realized loss came from?

Great. Thanks for joining Steve and great question.

It actually, it does not relate to REO that most from a legacy loan 2017 loan, single-family loan in the Seattle area. It was -- lot of times you will ask is, what are your -- when we talked about high-touch defaults, what drives such high-touch default?

It's typically borrower, either borrower error, borrower over the budgeting, something like that. So we don't obviously don't like to see those and we always like to learn from any of those type of defaults that we have.

But that was specific to one large single-family housing layout in the Seattle area that has been in default for a while, even pre -COVID. We were able to resolve it.

We took a small loss on the overall value of the portfolio, but more so good to get it off the books, were able to redeploy that capital from the payoff of that during the third quarter and into new loans that are generating interest and fees.

So that resolution was one of the $88 million or forgive me if I didn't get the exact amount, but you've had a nice heavy resolutions. Some of them you got out whole or close to whole, I think you suggested but in this one case, you did take -- there was a deficiency, so you had a little write-off at the [Indiscernible]

Yes. That's correct.

And I would say out of getting $88 million and having a 695, we never want principal losses, we have a history of avoiding them, but if we can fix just under $700,000, and off of $88 million of it was all defaults. I think that's generally a win for us.

You can live with that. That's a win.

And then Jeff, looking forward, record quarter, you're not going to have that every quarter. For sure and you got -- as David said, you've got the winter months approaching, but 5 or 6 new hires, a couple of new states, maybe some more states, I mean, realistically, when you look out to 2022 and I intentionally want this to be vague enough so that it's nowhere near that phrase, guidance or anything, but is -- and I don't, forgive me, but I don't have the 2018, 2019 pre - COVID numbers, right and in front of me in terms of originations.

But around number like a billion dollars a year. Is that something that would be -- if you were to set out goals for 2022.

Is that a realistic figure or at least in a range of what your expectations might be for a full-year.

And so, that one might get perilously close to giving guidance, Steve.

Okay. All right.

I was trying to paint it.

So, let's go with this. We have historically been a market leader since we were big enough for people to notice us.

Since we've introduced our dynamic pricing model and candidly brought our pricing down, We have -- in my opinion, reemerged as a market leader. People know that we deliver when we say we're going to and that we do what we say we're going to do, that if we make you a promise, we're not going to switch loan documents at the closing table that we're going to have funds available to close loans.

And all that is why we have such sticky repeat borrowers and why last quarter we had a lot of new borrowers. And I expect that to continue and I think there's so much demand out there.

And if you look at us as our segment of the construction lending market, we're just -- all of us are just a tiny fraction. And so I expect, and we're certainly setting ourselves up to grow so that breaking a record in the third quarter is not an anomaly and that we continue to grow in a nice healthy pace.

Is that close enough for an answer?

That was very elegant. And then I got it.

I'm clear. Thanks.

And David, just one comment to echo Tim's comment. I think just looking at your balance sheet and how you're positioned.

I think unsecured corporate debt. 5 to 7 years, whatever, you and your board and bankers pick -- I just think that would be an ideal complement to your capital base at this time, given the coupons on those securities.

Thanks, I appreciate your comments.

Thanks, Steve.

Hi. Good afternoon, hope, you guys are both doing well.

To follow up on Tim's question, the bridge and rehab. I know it didn't go from 0 to 5%, David, as you mentioned, an answer, but how much do you think the mix will change as you continue to offer the expanded pricing sheets and other products, how big of a percentage of the portfolio do you see the bridge and rehab becoming over the next 12 months or so?

Great question. Thanks for joining Stephen.

I think we'll pick our spots. It's certainly not a focus.

I think we talked a little bit probably last quarter or the quarter before when we talked about what are you guys going to do with the privately, what are you looking at? And we said well, we're looking at complimentary products to our construction loans that our borrowers want, and we're not currently offering.

So bridge loan is definitely is probably the top of that list. We do see a lot of them.

We haven't put a kind of focused effort on doing bridge loan. Sometimes it just makes sense to alone that maybe looks like a bridge loan, but it fits all of our criteria, primarily the 65% LTV, which often does not happen.

But I think they will remain pretty small percentage in the near-term. But I think longer term.

I think Jeff and I, we both said that we imagine ultimately having more than 1 product, right? I think there's other products that are complementary that our borrowers want beyond construction loans that will make sense for us to add to the portfolio and have additional segments in our portfolio that will add.

So I think that's something that there will be opportunities for that when we talk about growth potential, offering different products to the same borrower set, as well as continue to bring in new borrowers.

[Indiscernible] (ph). I appreciate those comments, David.

On the geographic kind of expansion you moved into two new states, I guess kind of two-part question. Are there -- there are other states you've identified that you'd like to be on and that you're not yet, and what are those?

Conversely, as you look back two years ago, let's say, are there other states now that you are more active and then that you've looked at it and decide you want to be less active going forward?

Yes. I will take that and I'll let Jeff jump into the expense of the additional comments.

It seems so. I think we're being very strategic and focused when we enter states, but we're also mindful that opportunities come up and maybe a state that was lower on the list.

Maybe you actually has really attractive opportunity. So I think it's constantly evolving quarter-over-quarter.

There's a long list of states that we've been looking at our Chief Credit Officer has done pretty significant analysis of both from a legal perspective, still focused on lender-friendly states. Our preference is always going to be non-judicial foreclosures.

Sometimes, there's traditional foreclosures but ultimately it looks a lot like non-judicial foreclosure from a timeline perspective. So we're open-minded to that as well, focused on migration rates.

But ultimately in the business that we're in, we have borrowers that sometimes do business in multiple states. So existing borrowers will come to us and are looking to expand into a new state and want to continue doing business with us.

So that's something that we'll have in mind and as we pick additional states, that the 2 that we were entered, or the 3 we entered this quarter, Nevada, Arizona, and Minnesota. This is a great example.

Nevada and Arizona are 2 states we've been looking at for a while. There -- I think Arizona was slightly more complicated from a licensing and lending perspective, but those are two that we had our eyes on for a while.

Whereas Minnesota, there's obviously a gap in the Midwest that we historically have not done much lending and there's a lot of opportunities there. So a deal came to us in Minnesota that was just a great piece of collateral, great borrower.

And it just made sense from an opportunistic investments to do that loan. And then I think that will ultimately you're not going to see any one of these new states become a large portion of our portfolio in the near-term, it takes time.

We enter these new markets. We find a local market experts.

We start to develop the relationships. We get some new borrowers, they become repeat borrowers and then word of mouth travel.

So you'll start to see more expansion. I would say Stephen, that I think right now we're at 17 states in the District of Columbia.

I would say a year from now, I would expect it to be significantly more than stepping states. But each of those states are going to take time to grow beyond a handful of loans right here.

Nevada and Minnesota, this -- and Arizona, I think 1 or 2 loans each in those states. We're continuing to focus on those, continuing to look to build out the relationships.

But there will be more states in 2022, probably significantly more new states. And I think longer-term, there is always going to be states that just don't make sense for us to look at.

But I think as we look to grow the portfolio, state expansion will continue to be a focus.

Great. Last question from me, tied to the couple of ads, but compensation was up a little bit sequentially.

I know you talked about adding a little bit on headcount especially that you've identified the markets. Is this the right run rate from the third quarter to think about going forward or more headcount additions plan where we should think about that increasing slightly as we move ahead?

Yeah. So it's always a little bit difficult.

So I like to always focus as we did in the prepared remarks around cash compensation. So, once you back out, RSU expense since the amortization you have on tangible assets.

So I think we ended up at about 6.5 million of what I'll call total cash expense between cash -- between compensation and G&A. For the year that puts us just around $18 million.

So still kind of in line with that target of $24 million of cash and compensation. So I think we'll probably be -- Q4 will probably look similar to Q3, somewhere between 6 and 6.5 and will probably come in either just that or just slightly above kind of that $24 million cash expense target in terms of 2022 and beyond, I think there will be there might be slight headcount increases, but nothing significant.

That's going to make the numbers in 2022 looks significantly different than 2021. I think the beauty of our platform is its scalability.

We added some headcount in sales for state expansion. I think we're not expecting any new sales headcount for 2022.

I think there might be a little bit of back-office operations functions which are not going. We'll have a marginal impact on our total cash compensation number, so I think you can probably continue running with that.

Would call that $24 to $25 million of cash expense for the near-term and we're hoping to keep it at that number as long as we can.

Great. Appreciate [Indiscernible]

Hi, David and Jeff. Thank you for taking my question.

Just on the earnings reconciliation for the quarter. When I look at the growth of the portfolio.

The comments we're up over $12 million, I recognized a $0.04 drag. But just could you just with the closings that were back in with the quarter just would have thought it would've been a bigger pickup in a penny sequentially given the growth in the portfolio, just curious if there was a timing issue, in case there's an issue.

Yes. Sure.

Great question and thanks for joining, Matt. So from a total production perspective for the quarter, it was heavily weighted towards September, I think about a $180 million out of our $337 million was in September.

So you probably lost that a little bit on fees and interest income from that. It tends to happen.

We worked on deals throughout the quarter, they tend to close towards quarter-end. So I think that's probably driver and then to your point, I think the non-accrual, we saw a nice -- a lot -- the comments we talked about in the prepared remarks around the $40 million or $41 million that we felt that we got fully paid off on that happened in October so that won't be reflected in the Q3 numbers.

We're hoping 1.5 to $0.02 pick up potentially in Q4, just based off default resolutions and continued elevated origination numbers as well as a full quarter on these Q3 originations in Q4 is what we're hoping for. So, weighted towards the end of the quarter still had a full quarter of, let's call it a $0.04 drag from the non-accrual, We took about $40 million off that non-accrual post-quarter-end.

So hopefully that will lead to a nice pickup of earnings in Q4.

Got it. Great.

So it looks like you got to look security, get the dividend covered here, it's just a timing issue. And then what just -- to help us out with a modeling when you think about the yield guidance with the introduction of the debt, the leverage.

I mean, can you just tell us generally the ROE profile of the Company? Do you expect it to increase?

I mean, do you think the ROEs with the capital structure in place and the new platform will be higher versus the old Broadmark. Just curious, we talked about our trajectory, how do you tell investors or what do you think about the trends with ROE s as you begin to rotate the capital structure?

Yeah. Absolutely.

Great question, Matt. So yes, we -- so short answer is yes, we definitely expect a significant increase in ROE over time.

We think as weighted average cost of capital comes down, which we expect. Again, it will be slowly.

It's a marathon, not a sprint, but we think over the next 3 to 5 years, weighted average cost of capital will come down. Our origination volumes will continue to increase.

Again, we're not going to give guidance, but I think what we did in the third quarter is something that can be definitely replicated. Obviously Q4, which as I mentioned in prepared remarks, there's some seasonality issues.

Steve had mentioned to the billion-dollars. The billion dollars is something that should be expect in the future, and we are targeting those types of numbers as well as -- so this year I think we've grown -- year-to-date, we've grown the portfolio about 23%.

We think we'll grow it a little bit more in Q4 and then targeting 20% growth in the upcoming years is something that is definitely achievable from our perspective. So lowering the weighted average cost of capital, continue to increase growth to offset any impact of the lower asset yields, continuing to be focused on default resolution.

I think all of those things are going to lead to what I would like to believe significant increase in return on equity over time. It's not going to happen overnight, but I'd like to think every year we're going to pick up a little bit, and then we're going to be a really good place in the relatively near-term.

Thanks a lot, David.

Thanks, Matt.

Thank you, everyone for being part of Broadmark Realty Capital and thanks for taking part in our third quarter earnings call. I hope you all stay safe and healthy and we look forward to seeing you after the New Year.

Bye.