BROADMARK REALTY CAPITAL INC. The following discussion and analysis of our financial condition and results of operations should be read together with the "Business" section, as well as the consolidated financial statements and related notes in Part II, Item 8 of this Annual Report on Form 10-K. In addition, 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 and involves numerous risks and uncertainties, including those described under the heading "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements. You should read this discussion and analysis together with the consolidated financial statements and related notes included elsewhere in this Report for the Company. In this "Management Discussion and Analysis of Financial Condition and Results of Operations" 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 generally consisting of short-term, first deed of trust loans to fund the construction and development of, or investment in, residential or commercial properties. We categorize our loans into the following distinct purposes:
•
•
•
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 cash flows 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 ofDecember 31, 2022 , our portfolio of 202 active loans had approximately$1.4 billion of total commitments and$931.0 million of principal outstanding across 162 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, interest reserves and construction holdbacks which includes capital expenditures required to complete construction for defaulted loans that we are no longer required to pay. Historically, our loan portfolio was 100% equity funded, and we had no outstanding debt. 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. We may 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. OnNovember 12, 2021 , we closed the private placement of$100.0 million aggregate principal amount of 5.0% senior unsecured notes due 2026. 42
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Broadmark 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 generally secured by a first deed of trust lien
on real estate. Our lending policy typically limits the committed amount and
initial outstanding principal balance 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. At the time of origination, the difference between the
initial outstanding principal and the total commitment is the amount held back
for future release, subject to property inspections, progress reports and other
conditions in accordance with the loan documents. Unless otherwise indicated,
LTV is measured by the total commitment amount of the loan at origination
divided by the "as-complete" appraisal. LTVs do not reflect interim activity
such as construction draws or interest payments capitalized to loans, or partial
repayments of the loan. As of December 31, 2022 , the weighted average LTV was
60.6% across our active loan portfolio based on the total commitment of the loan
and "as-complete" appraisals as of origination or latest amendment. For our
loans in contractual default status as of December 31, 2022 , the weighted
average LTV was approximately 124.8%, when measured by the sum of the principal
outstanding, the estimated cost to complete and the accounts receivable for
which collectability is reasonably assured, divided by the most recent
"as-complete" appraisal. This resulted in significant additions to our allowance
for credit losses, resulting in a weighted average LTV net of our allowance for
credit losses of approximately 84.9% for our loans in contractual default. In
addition, our loans are often personally guaranteed on a recourse basis by the
principals of the borrower or others at our discretion to provide further credit
support for the loan. The personal guarantee may also be secured by collateral
through a pledge of the guarantor's interest in other real estate or assets
owned by the guarantor. As of December 31, 2022 , a total of 40 loans were in
contractual default, totaling $250.4 million in principal outstanding, or 26.9%
of our aggregate principal outstanding. We are actively identifying resolutions
for our non-performing loans but continue to face challenges in the current
environment. We expect our non-performing loans to negatively affect our
near-term financial performance.
As of December 31, 2022 , the average total commitment of our active loans was
$7.0 million , with a weighted average interest rate of 10.2%. The weighted
average term outstanding of our active loans was 22 months, which we often elect
to extend for several months based on our evaluation of the expected timeline
for completion of construction. We usually receive loan origination fees, or
"points," which, as of December 31, 2022 , had a weighted average fee of 2.7% 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.
We primarily compete on the basis of borrower relationships, loan structure,
terms and service rather than on price. Additionally, starting in 2021,
competitive pressures have led us in many cases to originate loans with terms
that deviate from our historical practice. Increased competition and readily
available sources of capital through 2021 and into mid 2022 led to lower
interest rates on our originated loans in those vintages, lower loan origination
fees, absence of minimum interest provisions in our mortgage notes, and a change
in our general requirement that all of our loans be secured by personal
guarantees on a recourse basis.
In the later part of third quarter of 2022 and continuing into the fourth
quarter of 2022, market interest rates rose markedly and rapidly primarily as a
result of the Federal Reserve's actions to curb rapidly rising inflation. This
led to a significant slowdown in real estate transactions and less capital
available in the marketplace to finance real estate projects. Rising interest
rates and macroeconomic uncertainties in the capital markets have led to a
decrease in the availability of capital from traditional lenders for longer-term
financing of completed construction and development projects, which may
negatively affect our borrowers' ability to sell or refinance their loan
collateral and repay our loans.
We have begun tightening our lending standards and, in some instances, we are
not originating loans that would have previously met our lending policy. We are
focused on capital preservation and ensuring we are positioned to capture
opportunities that emerge from this rapidly changing economic environment.
As a result of rising interest rates and associated pressures to service or refinance their debt capital, we have started to see many of our competitors slow or pause their loan origination activities. This may lead to decreased competition and pricing pressure on our business, although there are no assurances that this will take place.
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Broadmark Realty Capital Inc. 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 ofDecember 31, 2022 , our loans bear a weighted average interest rate of 10.2%, paid monthly, primarily from interest reserves and, to a much lesser extent, cash payments. Our loans originated since the second quarter of 2021 typically do not provide for minimum interest provisions in our mortgage notes. A reduction in or absence of minimum interest provisions in our mortgage notes and an increase in the amount of our loans in non-accrual status as a result of being deemed collateral dependent or high risk 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 ofDecember 31, 2022 and 2021, the effective interest-bearing principal net of non-accrual principal was$716.3 and$840.1 million , respectively. This represents the principal balance outstanding of$931.0 and$924.7 million plus the excess of minimum interest provisions over the actual principal outstanding of$2.5 and$17.3 million less the non-accrual principal of$217.2 and$101.9 million as ofDecember 31, 2022 and 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 elevated level of loans in non-accrual status. Fees and other revenue recognized from originating and servicing our loans. Fee income is comprised of loan origination, loan servicing 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 ofDecember 31, 2022 , had a weighted average fee of 2.7% of the total commitment at origination. In addition to origination fees, we earn loan extension fees when maturing loans are renewed or extended and amendment fees when loan terms are modified, such as increases in interest reserves and construction holdbacks in line with our underwriting criteria or upon modification of a loan for the transition from horizontal development to vertical construction. Loans are generally only renewed or extended if the loan is not in default and satisfies our underwriting criteria, including our typical maximum LTV ratio of up to 65% of the appraised value, as determined by an independent appraiser at the time of loan origination, or based on an updated appraisal, if required. Loan origination and renewal fees are deferred and recognized in income over the contractual maturity of the underlying loan. Loan originations. Our operating performance is heavily dependent upon our ability to originate new loans to invest new capital and re-invest returning capital from the repayment of loans. The dollar amounts of loan originations reflect the total commitment at origination and loan repayments reflect the total commitment at payoff. Given the short-term nature of our loans, loan principal on our loans is generally repaid on a faster basis than other types of loans, making redeployment of capital through our originations process an important factor in our success.
The following tables contains the total amount of our loan originations and repayments for the periods indicated:
Year Ended
(dollars in millions) December 31, 2022 December 31, 2021
Loans originated(1) $ 488.3 $ 873.0
Loans repaid(2) $ 511.7 $ 483.3
(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 current expected credit
losses ("CECL"), we evaluate external and internal credit quality indicators.
Our internal credit quality indicators include, but are not limited to,
construction type, collateral type, LTV, market conditions of property location
and borrower experience and financial strength.
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Broadmark Realty Capital Inc.
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:
December 31, 2022 Year Originated(1)
(dollars in thousands) Carrying Value % of Portfolio 2022
2021 2020 2019 Prior
Construction Type
Vertical Construction $ 552,468 59.8 % $ 352,355 $ 128,130 $ 33,895 $ 1,928 $ 36,160
Horizontal Development 221,078 24.1 144,082 68,201 8,795 - -
Investment 46,536 5.0 46,536 - - - -
Rehabilitation 39,422 4.3 12,936 15,009 11,477 - -
Land Entitlement 26,132 2.8 4,146 21,986 - - -
Bridge 22,611 2.4 19,450 937 - 2,224 -
Acquisition 15,195 1.6 13,454 1,741 - - -
Total 923,442 100.0 % $ 592,959 $ 236,004 $ 54,167 $ 4,152 $ 36,160
CECL allowance(2) (41,492 )
Carrying value, net $ 881,950
(1)
Represents the year of either origination or amendment where the loan incurred a
full re-underwriting in connection with the amendment.
(2)
Includes $35.0 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, $1.5 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
consolidated balance sheet.
December 31, 2022 Year Originated(1)
(dollars in thousands) Carrying Value % of Portfolio 2022
2021 2020 2019 Prior
Collateral Type
Apartments $ 191,708 20.8 % $ 134,816 $ 49,944 $ 5,020 $ 1,928 $ -
Single Family Housing 133,702 14.5 124,218 9,245 239 - -
Townhomes 106,888 11.6 81,393 24,701 794 - -
Residential Lots 104,100 11.3 56,675 38,630 8,795 - -
Entitled Land 76,251 8.3 54,265 21,986 - - -
Condos 71,975 7.8 29,738 2,515 3,562 - 36,160
Commercial 58,515 6.3 13,838 44,677 - - -
Mixed Use 50,127 5.4 6,209 30,217 11,477 2,224 -
Hotel 30,221 3.3 14,116 - 16,105 - -
Offices 18,467 2.0 12,179 - 6,288 - -
Unentitled Land 17,262 1.9 16,325 937 - - -
Senior Housing 16,595 1.8 16,595 - - - -
Duplex 13,639 1.5 13,639 - - - -
Commercial Other 11,411 1.2 - 11,411 - - -
Retail 9,071 1.0 5,443 1,741 1,887 - -
Quadplex 8,932 1.0 8,932 - - - -
Commercial Lots 4,018 0.4 4,018 - - - -
Triplex 560 0.1 560 - - - -
Total 923,442 100.0 % $ 592,959 $ 236,004 $ 54,167 $ 4,152 $ 36,160
CECL allowance(2) (41,492 )
Carrying value, net $ 881,950
(1)
Represents the year of either origination or amendment where the loan incurred a
full re-underwriting in connection with the amendment.
(2)
Includes $35.0 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, $1.5 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
consolidated balance sheet.
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Broadmark Realty Capital Inc.
December 31, 2022 Year Originated(1)(dollars in thousands) Carrying Value % of Portfolio 2022
2021 2020 2019 Prior
LTV (2)
0 - 40% $ 26,053 2.8 % $ 22,544 $ 3,509 $ - $ - $ -
41 - 45% 29,025 3.1 7,039 21,986 - - -
46 - 50% 42,267 4.6 22,524 13,455 6,288 - -
51 - 55% 144,649 15.7 76,978 58,876 8,795 - -
56 - 60% 107,098 11.6 98,691 8,407 - - -
61 - 65% 456,743 49.5 284,722 112,569 21,364 1,928 36,160
66 - 70% 93,104 10.1 71,638 16,561 2,681 2,224 -
71 - 75% 4,280 0.5 4,280 - - - -
76- 80% 2,540 0.3 2,540 - - - -
Above 80% 17,683 1.9 2,003 641 15,039 - -
Total 923,442 100.0 % $ 592,959 $ 236,004 $ 54,167 $ 4,152 $ 36,160
CECL allowance(3) (41,492 )
Carrying value, net $ 881,950
(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 $35.0 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, $1.5 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
consolidated balance sheet.
December 31, 2021 Year Originated(1)
(dollars in thousands) Carrying Value % of Portfolio 2021
2020 2019 2018 2017 Prior
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
(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. In addition,$0.9 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our consolidated balance sheet.December 31, 2021 Year Originated(1)
(dollars in thousands) Carrying Value % of Portfolio 2021
2020 2019 2018 2017 Prior
Collateral Type
Residential Lots $ 111,644 12.2 % $ 85,219 $ 26,425 $ - $ - $ - $ -
Apartments 107,765 11.8 38,232 68,356 1,177 - - -
Townhomes 93,300 10.2 51,240 28,979 - 1,017 11,803 261
Mixed Use 85,929 9.5 53,530 30,474 1,925 - - -
Single Family Housing 87,902 9.6 84,703 3,049 - - 150 -
Condos 64,492 7.1 8,805 18,227 - 1,474 35,986 -
Commercial 61,592 6.8 61,592 - - - - -
Senior Housing 61,236 6.7 35,899 25,337 - - - -
Storage 56,481 6.2 56,481 - - - - -
Unentitled Land 46,019 5.0 42,411 - - 3,608 - -
Entitled Land 45,098 4.9 27,763 - - - 17,335 -
Hotel 31,665 3.5 4,886 26,779 - - - -
Offices 15,348 1.7 8,280 7,068 - - - -
Commercial Lots 10,227 1.1 6,670 3,557 - - - -
Quadplex 9,769 1.1 9,769 - - - - -
Commercial Other 9,080 1.0 9,080 - - - - -
Retail 7,873 0.9 6,385 1,488 - - - -
Duplex 6,324 0.7 6,324 - - - - -
Total 911,744 100.0 % $ 597,269 $ 239,739 $ 3,102 $ 6,099 $ 65,274 $ 261
CECL allowance(2) (10,394 )
Carrying value, net $ 901,350
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Broadmark Realty Capital Inc.
(1)
Represents the year of either origination or amendment where the loan incurred a
full re-underwriting in connection with the amendment.
(2)
Includes $0.7 million in loan specific allowances for loans deemed collateral
dependent based on the excess amortized cost over the fair value of the
underlying collateral. In addition, $0.9 million of the CECL allowance is
excluded from this table because it relates to unfunded commitments and has been
recorded as a liability under accounts payable and accrued liabilities in our
consolidated balance sheet.
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
(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) 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. In addition,$0.9 million of the CECL allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our consolidated balance sheet.
Dividends Declared. The following table summarizes the declared cash dividends
per common share for the years ended
Year Ended
December 31, 2022 December 31 , 2021
Dividends declared per common share $ 0.77 $
0.84
Earnings per Common Share. The following table summarizes the earnings (GAAP) and distributable earnings (non-GAAP) per common share activity for the years endedDecember 31, 2022 and 2021: Year
Ended
December 31, 2022 December 31, 2021
Basic weighted-average shares of common stock
outstanding 132,841,196 132,579,289
Diluted weighted-average shares of common stock
outstanding 132,841,196 132,666,502
Earnings (loss) per common share, basic $ (0.88 ) $ 0.62
Earnings (loss) per common share, diluted (0.88 ) 0.62
Distributable earnings (loss) per diluted share of common stock
0.52 0.71
Distributable earnings (loss) per diluted share of common stock prior to realized loss on investments
0.55 0.73
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 loans, investments in real property
and goodwill; (ii) unrealized gains or losses on our investments (including
provision for credit losses) and warrant liabilities; (iii) new public company
transition expenses; (iv) non-capitalized transaction-related and other one-time
expenses; (v) non-cash stock-based compensation; (vi) depreciation and
amortization including amortization of our intangible assets; and (vii) deferred
taxes, which are subject to variability and generally not indicative of future
economic performance or representative of current operations.
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Broadmark Realty Capital Inc.
During the years ended December 31, 2022 and 2021, provision for credit losses,
net was $38.3 and $6.2 million , respectively, which has been excluded from
distributable earnings consistent with other unrealized gains (losses) pursuant
to our policy for reporting distributable earnings. We expect to recognize such
potential credit losses in distributable earnings if and when such amounts are
deemed nonrecoverable upon a realization event. This is generally upon
charge-off of principal at the time of loan repayment or upon sale of real
property owned by us and the amount of proceeds is less than the principal
outstanding at the time of foreclosure.
Management believes that the adjustments to compute "distributable earnings"
specified above allow investors and analysts to readily identify and track the
operating performance of our assets, assist in comparing the operating results
between periods, and enable investors to evaluate our current performance using
the same measure that management uses to operate the business. Distributable
earnings excludes certain recurring items, such as unrealized gains and losses
(including provision for credit losses) and non-capitalized transaction-related
expenses, because they are not considered by management to be part of our
primary operations for the reasons described herein. However, management has
elected to also present distributable earnings prior to realized loss on
investments because it believes the Company's investors use such measure to
evaluate and compare the performance of the Company and its peers. As such,
distributable earnings and distributable earnings prior to realized loss on
investments are not intended to reflect all of our activity and should be
considered as only one of the factors used by management in assessing our
performance, along with GAAP net income which is inclusive of all of our
activities.
As a REIT, we are required to distribute annually to our stockholders at least
90% of our "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:
Year Ended
(dollars in thousands, except share and per share
data) December 31, 2022 December 31, 2021
Net (loss) income attributable to common
stockholders $ (116,391 ) $ 82,488
Adjustments for non-distributable earnings:
Stock-based compensation expense 3,779 3,455
New public company expenses(1) - 953
Non-capitalized transaction and other transition
expenses(2) 3,229 987
Change in fair value of warrant liabilities (1,813 ) 1,838
Depreciation and amortization 1,314 741
Impairment on real property 7,596 -
Provision for credit losses, net 38,266 6,179
Goodwill impairment 136,965 -
Distributable earnings prior to realized loss
on investments: $ 72,945 $ 96,641
Realized credit losses(3) (4,207 ) (2,672 )
Distributable earnings: $ 68,738 $ 93,969Distributable earnings per diluted share of common stock prior to realized loss on investments $
0.55 $ 0.73
Distributable earnings per diluted share of common stock
$ 0.52 $ 0.71
Weighted-average number of shares of common stock
outstanding, basic and diluted
Basic 132,841,196 132,579,289
Diluted 132,841,196 132,666,502
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Broadmark Realty Capital Inc.
(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 expenses primarily related to the various costs associated with
management succession, including executive search and severance costs, as well
as certain unusual repair and legal expenses incurred on held-for-sale real
properties no longer under construction.
(3)
Represents credit losses recorded in the provision for credit losses and
recognized in distributable earnings upon charge-off of principal at the time of
loan repayment or upon sale of real property where proceeds received are less
than the principal outstanding.
Segment Reporting
We operate the business as one reportable segment, which originates, underwrites and services mortgage loans.
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):
Year Ended
Statements of Operations Data: December 31, 2022 December 31, 2021 December 31, 2020
Revenues:
Interest income $ 83,410 $ 89,957 $ 93,869
Fee income 22,668 30,587 28,489
Total interest and fee income 106,078 120,544 122,358
Real property revenue from operations 2,799 - -
Total revenues 108,877 120,544 122,358
Expenses:
Compensation and employee benefits 16,935 15,093 15,646
General and administrative 13,300 11,518 15,083
Real property operating expenses and
depreciation 6,365 108 168
Interest expense 8,638 3,320 -
Total expenses 45,238 30,039 30,897
Impairment:
Provision for credit losses, net 38,266 6,179 6,722
Goodwill impairment 136,965 - -
Total impairment 175,231 6,179 6,722
Other (expense) income:
Change in fair value of warrant
liabilities 1,813 (1,838 ) 5,492
Gain on sale of real property 984 - -
Impairment on real property (7,596 ) - -
Total other (expense) income (4,799 ) (1,838 ) 5,492
(Loss) income before provision for
income taxes (116,391 ) 82,488 90,231
Income tax provision - - -
Net (loss) income $ (116,391 ) $ 82,488 $ 90,231
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Year Ended
Percentage of Revenue: December 31, 2022 December 31, 2021 December 31, 2020
Revenues:
Interest income 77 % 75 % 77 %
Fee income 20 25 23
Total interest and fee income 97 100 100
Real property revenue from operations 3 - -
Total revenue 100 100 100
Expenses:
Compensation and employee benefits 16 13 13
General and administrative 12 10 12
Real property operating expenses and
depreciation 6 - -
Interest expense 8 3 -
Total expenses 42 26 25
Impairment:
Provision for credit losses, net 35 5 5
Goodwill impairment 126 - -
Total impairment 161 5 5
Other (expense) income:
Change in fair value of warrant
liabilities 2 (2 ) 4
Gain on sale of real property 1 - -
Impairment on real property (7 ) - -
Total other (expense) income (4 ) (2 ) 4
(Loss) income before provision for
income taxes (107 ) 67 74
Income tax provision - - -
Net (loss) income (107 )% 67 % 74 %
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 year endedDecember 31, 2022 andDecember 31, 2021 .
Year Ended
Revenue
Total revenue for the years endedDecember 31, 2022 and 2021 was$108.9 and$120.5 million , respectively, a decrease of$11.6 million . The decrease resulted from a decrease in in fee income and interest income of$7.9 and$6.5 million , respectively, partially offset by an increase in real property revenue from operations of$2.8 million , which are discussed in more detail below.
Expenses
Total expenses for the years endedDecember 31, 2022 and 2021 were$45.2 and$30.0 million , respectively, an increase of$15.2 million . The increase resulted from increases in real property operating expenses and depreciation, interest expense, compensation and employee benefits and general and administrative expenses of$6.3 ,$5.3 ,$1.8 and$1.8 million , respectively, which are discussed in more detail below. 50
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Interest Income
Interest income decreased by $6.5 million , or 7.3%, for the year ended December
31, 2022 from the year ended December 31, 2021 , due to a lower average effective
interest-bearing principal outstanding during 2022 compared to 2021 resulting
from (1) a 12.3% increase in loans on non-accrual over the course of 2022
compared to 2021 and (2) an increase in the number of loans originated during
2022 with lower fixed rate interest and no minimum interest provisions;
partially offset by the effects of an increase of 8% in the average size of our
loan portfolio.
Fee Income
Fee income decreased by $7.9 million , or 25.9%, for the year ended December 31,
2022 from the year ended December 31, 2021 , primarily due to (1) a 44.9%
decrease in the volume of loan originations during 2022 compared to 2021 along
with a decrease in weighted average origination fees on loans recently
originated due to increased competition in the marketplace and (2) a lower
volume of amendment and extension fees during 2022 as fewer loans were extended
beyond their maturity date due to construction delays.
Real Property Revenue from Operations
Real property revenue from operations increased by$2.8 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2022 , resulting from an increase in real properties held for use and in service during 2022 with an insignificant amount in 2021.
Compensation and Employee Benefits
Compensation and employee benefits expense increased by$1.8 million , or 12.2%, for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 . The increase is primarily due to (1)$1.3 million executive severance and relocation expenses associated with hiring a new chief executive officer during 2022 and (2) increases in cash compensation resulting from higher employee headcount and increased wages in 2022 compared to 2021.
General and Administrative
General and administrative expense increased by$1.8 million , or 15.5%, for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 . The increase was primarily due to increases of (1)$1.1 million in board member RSU expense and retainers during 2022 primarily resulting from additional directors being added to the board, (2)$0.5 million in advertising and marketing expenses associated with our rebranding during 2022 and (3)$0.3 million in computer and internet expenses primarily related to new system costs during 2022.
Real Property Operating Expenses and Depreciation
Real property operating expenses and depreciation increased by$6.3 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 . The increase is due to increases of (1)$3.3 million repair and maintenance expenses, (2)$1.7 million of property taxes, (3)$0.7 million of depreciation expenses and (4)$0.6 million of management and legal expenses. These increases relate to the increase in the number of real properties owned and completion of construction resulting in expenses no longer capitalized and the commencement of depreciation. Interest Expense Interest expense increased by$5.3 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 , primarily due to (1) and increase of$4.8 million in interest and amortization of deferred financing costs for our senior unsecured notes as the notes were issued during the fourth quarter of 2021 and (2) a$0.5 million increase in the sum of undrawn fees, interest on draws and amortization of deferred financing costs for our revolving credit facility during 2022, resulting from making draws on the facility during 2022 and the facility being in place for the full year in 2022 as compared to a partial year for 2021. 51
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Broadmark Realty Capital Inc. Other Income (Expense)
Other expense increased by$3.0 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 . This increase primarily relates to$7.6 million of impairment on real property in the 2022 period with no corresponding impairment in 2021. This increase in other expense was partially offset by (1) a$1.8 million decline in the fair value of the private placement warrant liability recorded during 2022 versus a$1.8 million increase in the fair value during 2021 and (2) a$1.0 million gain on the 2022 sale of real property with no corresponding sale in 2021.
Provision for Credit Losses, Net
The provision for credit losses increased$32.1 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 . This increase primarily resulted from (1) 29 loans classified as collateral dependent during 2022 compared to 7 during 2021, resulting in increased loan specific allowances based on property value declines and (2) increase to our forecasted losses due to our experience of principal losses realized on paid off loans and loans transferred to real estate owned during 2022.
Goodwill Impairment
Goodwill impairment increased by$137.0 million for the year endedDecember 31, 2022 from the year endedDecember 31, 2021 resulting from the fair value of the reporting unit being less than the carrying value. In the later part of the third quarter of 2022 and continuing into the fourth quarter of 2022, market interest rates rose markedly and rapidly primarily as a result of theFederal Reserve's actions to curb rapidly rising inflation. This led to a significant slowdown in real estate transactions and less capital available in the marketplace to finance real estate projects. During the fourth quarter, rising interest rates and macroeconomic uncertainties in the capital markets have led to a significant decrease in real estate sales in the marketplace and in the availability of capital from traditional lenders for longer-term financing of completed construction and development projects, which negatively affected our borrowers' ability to sell or refinance our collateral and repay our loans. As a result, this led the Company to have a higher percentage of defaults go into non-accrual, additional properties foreclosed or start the foreclosure process and the Company prudently slowed origination pace to preserve liquidity. We expect that this situation will likely continue for at least a portion of 2023. These market conditions led us to perform a quantitative goodwill analysis during the fourth quarter of 2022. Our quantitative analysis resulted in recognizing$137.0 million of goodwill impairment.
Year Ended
A discussion regarding the results of operations for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 can be found under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 28, 2022 , which is available on theSEC's website at www.sec.gov.
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 12 - Commitment and Contingencies of our consolidated financial statements included in this Report. As ofDecember 31, 2022 and 2021, our cash and cash equivalents totaled$55.0 and$132.9 million , respectively. As ofDecember 31, 2022 , 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 ofDecember 31, 2022 , we had$1.4 billion of total loan commitments outstanding, of which we funded$931.0 million . Of the unfunded commitments,$22.8 million relates to holdbacks that we are not required to fund as the related loans are in default. 52
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Debt-to-Equity Ratio
The following table presents our debt-to-equity ratio, based on the amounts presented in our consolidated balance sheets included in this Report, as of the dates presented:
December 31, 2022 December 31, 2021
Debt-to-Equity Ratio 0.105 0.085
Revolving Credit Facility
On February 19, 2021 , we entered into a credit agreement with a syndicate of
lenders and JPMorgan Chase Bank, N.A ., as administrative agent for the lenders,
providing for a $135.0 million revolving credit facility with a three-year term
and bearing interest at the prime rate plus 275 basis points. As a source of
backup liquidity for future draws, the availability of the revolving credit
facility has enabled us to use a larger percentage of our cash balances for
lending activities. In October 2021 , we made our first use of our revolving
credit facility, with a draw of $50.0 million to support the funding of borrower
draws and new loan originations while we awaited several large loan repayments.
We then repaid the outstanding balance on our revolving credit facility in full
by October 31, 2021 following the receipt of such loan repayments, minimizing
the cost of such borrowing while earning fee income on the new borrower draws
and loan originations. In July and August 2022 , we made our second and third use
of our revolving credit facility, with draws of $20.0 and $25.0 million ,
respectively, which we repaid in full by September 30, 2022 .
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, stock repurchases 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.
On
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 years endedDecember 31, 2022 and 2021. 53
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Broadmark Realty Capital Inc. Stock Repurchase Program
OnNovember 7, 2022 , the Board of Directors authorized the repurchase of up to$75.0 million of its common stock thereof (the "Stock Repurchase Program"). Repurchases may be made in open-market transactions or privately negotiated transactions, or in such other manner as deemed appropriate by the Company and may be made from time to time as determined by the Company depending on market conditions, share price, trading volume, cash needs and other business factors, in each case as permitted by securities laws and other legal requirements. We reserve the right to terminate or suspend the Stock Repurchase Program at any time, and it does not have an expiration date. During the year endedDecember 31, 2022 , we repurchased 1,295,273 of common stock at an average price of$3.86 per share for an aggregate purchase price of$5.0 million . As ofDecember 31, 2022 ,$70.0 million remained available for future repurchases pursuant to the Stock Repurchase Program, which repurchases decrease our liquidity and capital resources, when effected. For additional information on our Stock Repurchase Program, see Note 9 in our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. As a REIT, we are required to distribute annually to our stockholders at least 90% of our "REIT taxable income" (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. 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. We also may 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%.
Sources and Uses of Cash
The following table sets forth changes in cash and cash equivalents for the
periods indicated:
Year Ended
(dollars in thousands) December 31, 2022 December 31, 2021
Cash provided by (used in):
Operating activities $ 57,218 $ 64,130
Investing activities (22,703 ) (136,079 )
Financing activities (112,440 ) (18,537 )
Net decrease in cash & cash equivalents $ (77,925 ) $ (90,486 )
Comparison of Results of Cash Flows for the Year Ended
Net cash provided by operating activities for the years endedDecember 31, 2022 and 2021 were$57.2 and$64.1 million , respectively, a decline of$6.9 million or 10.8%. Net cash provided by operating activities is driven by our net (loss) income adjusted for non-cash items and changes in operating assets and liabilities. The$6.9 million decrease in cash provided by operating activities in 2022 compared to 2021 was primarily due to (1) an increase in net losses from real property operations during 2022 compared to 2021, (2) increased interest on the senior unsecured notes as these notes were outstanding for the full year in 2022 versus approximately six weeks in 2021 and (3) an increase in cash paid for compensation and employee benefits, along with the increase in general and administrative expenses, the reasons for which are discussed in more detail above in the "Comparison of Results of Operations." The decreases in cash provided by operating activities are partially offset by increases in cash provided by operating activities resulting from the higher amount of accounts payable and accrued liabilities as ofDecember 31, 2022 compared toDecember 31, 2021 . The reconciliations between net (loss) income and cash provided by operating activities in the consolidated statement of cash flows include adjustments to net (loss) 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$22.7 and$136.1 million , respectively for the years endedDecember 31, 2022 and 2021. The decrease in cash used in investing activities of$113.4 million was primarily due to a$65.8 million decrease in fundings for mortgage notes receivable net of principal collections during 2022 and$43.5 million paid for repurchase of loan participations from the Private REIT during 2021 with no corresponding amount in 2022. 54
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Net cash used in financing activities was $112.4 and $18.5 million , respectively
for the years ended December 31, 2022 and 2021. The increase in cash used in
financing activities of $93.9 million was primarily due to $100.0 million in
proceeds from the issuance of the senior unsecured notes during 2021 and $5.0
million used for the repurchase of our common stock in 2022. These increases
were partially offset by (1) $5.1 million payment of costs to obtain our
revolving credit facility in 2021, (2) $3.1 million decrease in dividends paid
in 2022 compared to 2021 and (3) a $2.9 million payment of debt issuance costs
in 2021.
Critical Accounting Policies and Estimates
The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include those made in connection with estimating credit losses for our mortgage notes receivable, valuation of investments in real property and valuation of our goodwill.
Estimated Credit Losses
We measure and record expected credit losses related to our loan portfolio in
accordance with the Current Expected Credit Losses ("CECL") standard. The CECL
standard requires an entity to consider historical loss experience, current
conditions, and a reasonable and supportable forecast of the economic
environment. The Company utilizes a probability of default/loss given default
("PD/LGD") method for estimating current expected credit losses.
In accordance with the PD/LGD method, an annual historical loss rate is applied
to the amortized cost of an asset or pool of assets over the remaining expected
life. The PD/LGD method requires consideration of the timing of expected future
funding of existing commitments and repayments over each asset's remaining life.
An annual loss factor, adjusted for macroeconomic estimates, is applied over
each subsequent period and aggregated to arrive at the CECL allowance.
In determining the CECL allowance, we considered various factors including (1)
historical loss experience in our portfolio, (2) historical loss experience in
the commercial real estate lending market, (3) loan specific losses for loans
deemed collateral dependent based on excess amortized cost over the fair value
of the underlying collateral, (4) timing of expected pay offs including
prepayments and extensions where reasonably expected and (5) our current and
future view of the macroeconomic environment. We utilize a reasonable and
supportable forecast period equal to the contractual term of the loan plus
short-term extensions of one to three months that are reasonably expected for
construction loans.
Our provision for credit losses increased $32.1 million during 2022 over the
provision for 2021 primarily due to the $34.9 million increase in the CECL
allowance as of December 31, 2022 for collateral dependent loans compared to the
CECL allowance as of December 31, 2021 for collateral dependent loans based on
the excess of amortized cost over the fair value of the underlying collateral.
The fair value of collateral dependent loans is based upon the most recent
independent third-party appraisal of value, discounted between 0% to 10% based
upon our experience with actual liquidation values. For certain collateral
dependent loans, where a recent appraisal is either unavailable or not most
representative of fair value, the fair value is based on a broker opinion of
value including a capitalized income analysis and replacement cost analysis
considering historical operating results, market rents, vacancy rates,
capitalization rates, land cost comparisons, market trends and economic
conditions. The assessment of fair value of real property is subject to
uncertainty and, in certain cases, sensitive to the selection of comparable
properties.
Valuation of Investments in Real Property
To maximize recovery against a defaulted loan, we may assume legal title or
physical possession of the underlying collateral through foreclosure or the
execution of a deed in lieu of foreclosure. Foreclosed properties are recorded
at fair market value at the time of acquisition, which generally approximates
the carrying value of the loan secured by such property, net of the related
allowance for estimated credit loss.
Foreclosed properties classified as held for sale are carried at the lower of
cost or fair value and are evaluated for subsequent decreases in fair value on a
quarterly basis. Any subsequent decreases in value are recorded as impairment in
real property in our consolidated statements of operations.
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Foreclosed properties that are classified as held for use are carried at cost
less accumulated depreciation. We evaluate our real property held for use for
impairment at time of acquisition and whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. If an
impairment indicator exists, we evaluate the undiscounted net cash flows that
are expected to be generated by the property, including any estimated proceeds
from the eventual disposition of the property. Based upon the analysis, if the
carrying value of a property exceeds its undiscounted net cash flows, an
impairment loss is recognized for the excess of the carrying value of the
property over the estimated fair value of the property.
The fair value of real property is based upon the most recent independent
third-party appraisal of value, discounted between 0% to 10% based upon our
experience with actual liquidation values. For certain real properties, where a
recent appraisal is either unavailable or not most representative of fair value,
the fair value is based on a broker opinion of value including a capitalized
income analysis and replacement cost analysis considering historical operating
results, market rents, vacancy rates, capitalization rates, land cost
comparisons, market trends and economic conditions. The assessment of fair value
of real property is subject to uncertainty and, in certain cases, sensitive to
the selection of comparable properties.
Valuation of
Goodwill is assessed for impairment annually in the fourth quarter or more frequently if events occur or circumstances change that indicate an impairment may exist. Our assessment begins with an evaluation of qualitative factors including macroeconomic conditions, industry and market considerations, current and projected financial performance, changes in strategy and market capitalization to determine whether it is more likely than not that the fair value of our single reporting unit exceeds the carrying value. A high degree of judgement is required in evaluating the qualitative factors. If we conclude that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a quantitative test is then performed. The quantitative test consists of comparing the estimated fair value of the reporting unit to its carrying amount, including goodwill, using income or market approaches. If the estimated fair value of the reporting unit is less than the carrying value including goodwill, an impairment write-down of goodwill would be required for the excess of carrying value over the estimated fair value. Under the income approach, the Company estimates the fair value of a reporting unit based on the present value of estimated future cash flows covering discrete forecast periods as well as terminal value determinations. The Company prepares cash flow projections based on management's estimates of long-term growth rates, pre-tax return on earnings, earning asset growth and return on tangible equity, taking into consideration industry and market conditions. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, the Company estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The Company weights the fair value derived from the market approach commensurate with the level of comparability of these publicly traded companies to the reporting unit, as well as observable market values of our reporting unit based on any third-party attributions of value to such unit in the context of potential transactions with the Company. When market comparables or observable market values are not meaningful or not available, the Company estimates the fair value of a reporting unit using only the income approach. Estimating the fair value of our reporting unit requires the use of inputs and assumptions for which there is inherent uncertainty. Our 2022 annual goodwill impairment analysis resulted in impairment charges for goodwill related to the Broadmark lending business which is our only reporting unit. The decline in fair value of the reporting unit below its carrying value resulted in changes from expected future cash flows as compared to prior year projections which is more broadly a result of macroeconomic factors and other operational challenges as well as an increase in cost of capital. As a result, we recorded a goodwill impairment charge of$137.0 million in the fourth quarter of 2022. The reporting unit has no remaining goodwill as ofDecember 31, 2022 and an excess of fair value over carrying value of net assets of 0% as of the annual test date. The business is facing challenges reflected in the results for the year endedDecember 31, 2022 . In the later part of the third quarter of 2022 and continuing into the fourth quarter of 2022, market interest rates rose markedly and rapidly primarily as a result of theFederal Reserve's actions to curb rapidly rising inflation. This led to a significant slowdown in real estate transactions and less capital available in the marketplace to finance real estate projects. During the fourth quarter, rising interest rates and macroeconomic uncertainties in the capital markets have led to a significant decrease in real estate sales in the marketplace and in the availability of capital from traditional lenders for longer-term financing of completed construction and development projects, which negatively affected our borrowers' ability to sell or refinance our collateral and repay our loans. As a result, this led the Company to have a higher percentage of defaults go into non-accrual, additional properties foreclose or start the foreclosure process and the Company prudently slowed origination pace to preserve liquidity. 56
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For a complete listing and description of our significant accounting policies
and description of our adoption of new accounting pronouncements and the impact
thereof on our business, see "Note 2 - Summary of Significant Accounting
Policies" of our consolidated financial statements included in this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AtDecember 31, 2022 , we did not have any outstanding "market risk sensitive instruments," as such term is used within the meaning of Item 305 ofSEC Regulation S-K. However, we are subject to other types of business risk described below and under "Market Risks Related to Real Estate Loans" in Item 1A. Risk Factors above. Interest Rate Risk While we recently began originating certain floating rate loans with interest rate floors, most of our loans bear a fixed rate of interest and we have very limited interest-rate sensitive obligations outstanding. However, the nature of our business exposes us to business risk arising from changes in interest rates. Interest rates are highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. An increase or decrease in interest rates would not impact the interest charged on our then existing loan portfolio, as most of our loans bear fixed rates of interest. However, a rapid significant increase in interest rates may reduce the demand for mortgage loans due to the higher cost of borrowing, potentially resulting in a reduced demand for real estate, declining real estate values and higher default rates. Alternatively, a significant rapid decline in interest rates may negatively affect the amount of interest that we may charge on new loans, including those that are made with capital received as outstanding loans mature. Additionally, declining interest rates may also result in prepayments of existing loans, which may also result in the redeployment of capital in new loans bearing lower interest rates. See Item 1A above, "Risk Factors," for additional information regarding interest rate risk. Credit Risk Our loans are subject to credit risk. Credit risk is the exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply and demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of theU.S. economy and other factors beyond our control. All loans are subject to a certain possibility of default. We seek to mitigate credit risk by originating loans which are generally secured by first deed of trust position liens on real estate with a maximum loan-to-value ratio of 65%. We also undertake extensive due diligence of the property that will be mortgaged to secure the loans, including review of third-party appraisals on the property.
Risks Related to Real Estate
Residential and commercial property values are subject to volatility and may be
affected adversely by a number of factors, including, but not limited to, events
such as natural disasters, including hurricanes and earthquakes, acts of war and
terrorism, national, regional and local economic conditions (which may be
adversely affected by industry slowdowns and other factors)? local real estate
conditions (such as an oversupply of housing, retail, industrial, office or
other commercial space)? changes or continued weakness in specific industry
segments? construction quality, construction cost, age and design? demographic
factors? retroactive changes to building or similar codes? and increases in
operating expenses (such as energy costs). In addition, decreases in property
values reduce the value of the collateral and the potential proceeds available
to a borrower to repay the loans, which could also cause us to suffer losses.
These factors could adversely affect our business, financial condition, results
of operations and ability to pay dividends to stockholders.
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