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spk00: Greetings and welcome to the Broadmark Realty Capital's first quarter 2022 earnings conference call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Thank you, Nevin. You may now begin.
spk03: Good afternoon. Thank you for joining us today for Broadmark Realty Capital's first quarter 2022 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 investor 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 statements 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 filing. This afternoon's conference call is hosted by Broadmark's Chief Executive Officer, Brian Ward, 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 Brian.
spk02: Thank you, Nevin, and welcome to our first quarter 2022 earnings call. This afternoon, I'll begin with some remarks on the macro environment and how I believe broad markets position for success. I'll also briefly highlight our first quarter 2022 performance and then turn the call over to David to provide additional detail on our financial results, investment activity, and portfolio. We'll then open up the call for your questions. I joined Braunbark as the Chief Executive Officer on March 1st, 2022, completing a leadership transition that began last year. As I've yet to meet many of you, I want to begin with a little background on my experience. I've spent the majority of my career originating and overseeing institutional debt and equity investments across a wide range of commercial real estate assets, most recently as Chief Executive Officer of Trimont Real Estate Advisors, a credit management and servicing company with more than $165 billion of their clients' assets under management. I joined Broadmark because I see tremendous opportunities with this platform. Personally, in addition to my work, I'm passionate about education, professional development, and the science of organizational excellence. And I deepen those interests by serving on alumni boards at Harvard Business School, Harvard University, and the NYU Stern Real Estate Board of Advisors. My hands-on understanding and experience of complex credit, underwriting, asset management, and requirements for successfully executing and realizing strong returns on commercial real estate investments, has allowed me to dig in quickly to plan and expand on Broadmark's growth opportunities. Fortunately, we have a fantastic foundation on which to build, a credit to my predecessor in this role, Jeff Pyatt, his founding partner, Joe Schocken, and our deep, experienced, and diverse board of directors. Under their leadership, Broadmark grew into a force in the small-to-medium-balanced commercial real estate finance sector. This business has grown considerably over the last decade and is now set for the company's next phase of growth. As we navigate current macroeconomic trends and look towards the future, I believe Broadmark holds a strong position to expand our geographic footprint to a national scale, grow our market share, and drive consistent and strong returns for our shareholders. Importantly, Broadmark is unique among its peers, being internally managed and notably possessing a low leverage Fortress balance sheet to support our disciplined, targeted investment strategy focused in the $2 to $50 million origination range across both residential and commercial real estate investment opportunities in all major asset classes. Throughout our industry, many real estate capital providers are taking on greater leverage and pursuing more aggressive investment strategies, even as inflationary pressures accelerate and central banks around the world become more defensive. Global uncertainty is elevated, the yield curve is flattened, and mortgage rates are at a 10-year high. Setting this apart, Broadmark is positioned to thrive as markets evolve and opportunities appear. We have a deep and experienced team of ground-level real estate investment experts that understand and can underwrite complex credit in rapidly changing capital markets. We have a low-leverage balance sheet with fixed-rate debt that not only shields us from the impact of higher interest costs, but also makes our pricing more competitive when compared with the other index-based lenders who must raise their prices in response to rapidly escalating rates and market uncertainties. And our loans are generally short-term in nature, allowing us to quickly revise our target yields and credit standards, as well as reprice our book with relative speed. In fact, we believe we can succeed and thrive in any environment or any phase of the cycle, as we've proven over the last 11 years. Broadmark has a long history of successfully deploying capital into complex real estate investment opportunities. Our prudent approach to underwriting grew out of the foundation immediately following the global financial crisis. We grew when rates were relatively elevated and when they were historically low. We grew when credit was widely available and when it was not. We grew when there was little competition and when there were many competitors. Through it all, we became the trusted lender of choice in our market sector. We'll continue to evolve our credit standards and investment strategies as we move ahead. Turning to our first quarter performance, we achieved about $190 million in new originations and amendments for the quarter, at an average unleveraged yield of 10.4%. We continue to prudently expand our geographic footprint, and we are now active in 20 states, providing strong access to loan opportunities that result in a highly diversified portfolio. and we will look to add more states as we grow our national platform. As a result, we grew our portfolio to $1.6 billion of loans, secured by high-quality real estate, with a weighted average loan-to-value ratio at origination of approximately 59.2%. This growth was achieved even as we remain highly selective with our investments as global macroeconomic risks escalate. We will remain disciplined and thoughtful in our origination approach to ensure we maintain a high quality loan book, which we believe can withstand rapidly evolving conditions. In that regard, I should note that we are making some tactical changes to both our pre and post investment underwriting and asset management processes as we move forward. We have implemented a national underwriting team that, while geographically diversified, will focus greater attention on uniform underwriting standards for complex real estate credit and provide better opportunity to scale our financial analysis in relation to our growing originations efforts. Underwriting, while supporting our originations efforts, will sit outside of the production team, and our national head of underwriting will report directly to me. We don't anticipate material increases in headcount or costs to achieve this objective, as we'll primarily reallocate and develop existing resources. We've implemented greater rigor and focus around both our pre- and post-funding asset management capabilities, which will now operate as the primary credit function for our business. This team will take a more active approach to independent, pre-funding credit review, with the entire asset management team supporting the credit checks and balances objective. Post-funding, the asset management team will take a more robust approach to borrower and business plan oversight. And in the event a Broadmark loan does go off plan, and enhanced non-performing loan team to either get the loan back on plan or more proactively through our workout and REO process. We do anticipate increases in headcount in both our pre and post funding asset management roles with a smaller reallocation of existing resources when compared to our underwriting team. In connection with these tactical actions and in order to prioritize our investments in the human capital necessary to implement these changes, we have eliminated the position of Chief Operating Officer as of April 29, 2022. I would now like to address our commitment to ESG, including my personal commitment to the principles of corporate and individual responsibility. Our ESG practices start first with an absolute, unwavering commitment to diversity, equity, and inclusion. Like most companies, we have work to do here, but we're committed to measurable progress as an integral part of our culture. To that end, I'm delighted to welcome Pinky Mayfield to our board of directors. Pinky brings a wealth of experience in public relations, corporate affairs, and communications. She's a seasoned finance and banking executive with experience in multiple sectors, which adds an important diverse perspective to our board. Furthermore, Broadmark is committed to supporting all stakeholders, including our employees and communities, and strong corporate governance has always been a core principle for Broadmark. This will not change. Finally, I'd like to leave you by once again conveying the excitement I feel to join Broadmark. I'm thrilled with the opportunity we have ahead. Our employees have warmly welcomed me to the team, and I'm grateful for their continued hard work and commitment to excellence as we move forward. With that, I'll turn it over to David to review the financials.
spk04: Thanks, Brian, and good afternoon, everyone.
spk05: Our operating results are detailed on slide six, of our earnings presentation. For the first quarter of 2022, we reported total revenue of $29.9 million and net income of $18.1 million. On a per share basis, this reflects a GAAP net income of approximately 14 cents per diluted common share. Adjusting for the impact of non-recurring costs and other non-cash items, our distributable earnings prior to realized loss on investments for the first quarter were $22.1 million, or 17 cents per diluted common share. Interest income on our loans in the first quarter was $24.1 million, and fee income was $5.8 million. On the expense side, for the first quarter, we had cash compensation and employee benefits expense of $4.1 million, and G&A expense of $2.6 million. Our total cash compensation and G&A expense is up 24% from the first quarter of 2021 due primarily to the various one-time costs associated with the search for and hiring of our new CEO. Despite this year-over-year increase, we maintain our expectation of approximately $24 million in total cash expenses for the full year 2022. With regard to origination volumes, which are presented on slide seven of the earnings presentation, we achieved $190 million of originations and amendments, up 27% from the first quarter of 2021. As a reminder, origination volumes naturally vary from quarter to quarter based on the timing of loan closings. We continue to benefit from our increasing size and scale, which has enabled us to grow our average loan size while keeping our percentage exposure to any individual loan very low. In the first quarter, we executed on 27 originations and risk-reducing amendments with an average loan size of $6.2 million. As we have said before, we believe that as we increase our ability to underwrite larger loans, we achieve greater efficiency from an expense perspective while reaching a borrower cohort that typically has better credit metrics. As of March 31st, our portfolio yield was 13.7%, down from 16.5% a year ago, and over the coming quarters, we expect the portfolio yield to stabilize in a range of 10 to 12%. Additionally, our loans remain short-term, with a weighted average term of 16 months at origination for the first quarter. The short-term nature of our loans reduces our exposure to interest rate fluctuations. It also allows us to be nimble and to pivot quickly as the environment evolves. Turning to portfolio management, as of March 31st, we had a contractual default rate of 11.8% of the total portfolio buy value. As a percent, this was down slightly from the fourth quarter. And as a reminder, these are not monetary defaults, but rather represent proactive asset management focused on early identification of potential problems to ensure protection of our investments. During the first quarter, we resolved eight loans in contractual default, representing $36 million in total commitment. And at quarter end, we own nine foreclosed properties with $68 million in carrying value. From an earnings perspective, as of March 31st, we had $67 million in principal outstanding on loans in non-accrual status, down 34% from December 31st, but partially offset by an increase in foreclosed properties post-quarter end. For the first quarter, loans in non-accrual status and foreclosed properties continued to result in a drag on earnings of approximately 4 cents per share. We continue to work diligently to resolve these issues to achieve the best result for Broadmark shareholders. And while we expect the tactical changes described by Brian earlier will ultimately reduce new defaults and enhance default management, This is likely to take time. Now turning to our balance sheet, as detailed on slide 15 of our earnings presentation, we had $97 million of cash as of March 31st. We had $100 million of five-year, 5% fixed coupon, senior unsecured notes outstanding, and we remain fully undrawn on our $135 million revolving credit facility. Maintaining a Fortress balance sheet has always been a foundational principle for Broadmark, which provides a significant competitive advantage that will enable execution on opportunities in a down market. This completes our prepared remarks.
spk04: We will now open the line for questions. Operator?
spk06: Thank you.
spk00: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation time will indicate your line is in the questioner queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
spk06: One moment please while we poll for questions.
spk00: Your first question comes from Steve Delaney from JMP Securities. Please go ahead.
spk01: Hello, everyone. Thanks for taking my question. I'm curious because I've heard the word national footprint mentioned, and I'd like to ask a little bit about the infrastructure there. When we launched back in April of 2021, your structure had four regions and then four regional senior VPs, Brian Thomas Jordan and Brian. Just curious if that structure remains in place today or if it's been expanded already or do you have near-term plans to add new regions and also, importantly, new leadership to expand the four-person oversight for origination? Thank you.
spk02: Thanks, Steve. This is Brian Ward. I'll take this first question. Hi, Brian. Hi. Our plans have changed a little bit. We have consolidated into three regions, namely West, Central, and East. The West is under the oversight of Brian Graf, Central under the oversight of Tom Gunnison, and East under the oversight of Jordan Chow. And we have Now it's taken our originators, including, for example, you mentioned Brian Dubin, who reports into Georgia in the east. And the goal here is to have a more sort of consolidated, robust approach to how we're originating in each of the regions. But we're taking a little more of a proactive approach in terms of how we're going about it in the future.
spk01: Got it. So with technology and other tools, It sounds like this is not necessarily the origination expansion is not really sort of an old school boots on the ground type of a thing, but broadening your network of broker relationships, realtor relationships, et cetera. Am I thinking correctly about how you intend to approach these new markets and access borrowers that previously you didn't have access to?
spk02: Right. You're exactly correct in terms of how we're going to go about it. If you look at the business and its originations platform, we've had a lot of success with this combination of direct origination and broker origination, and there will be a heightened focus on broker originations going forward and a more sub-regional focus inside of the three main regions under the respective leaders that I've mentioned.
spk01: Great. That's very helpful, and I'm sure there are other questions in the queue, so I'll drop back. Thank you.
spk07: Thank you. Once again, if you would like to ask a question, please press star 1 on your telephone.
spk06: There are no further questions.
spk00: Sorry, your next question is a follow-up question from Steve Delaney from JMP Securities. Please go ahead.
spk01: Hi, everyone. Sorry, I just wanted to give others a chance, but since no one beeped in, I thought I would hop back on. Brian, the decision to flatten the management structure and have credit report directly to you makes great sense. I mean, that's what your career has been in credit. At this point, are you planning to use the existing credit personnel within the company, or are there any plans to recruit a new chief credit officer for the organization?
spk02: There are not plans to recruit a new chief credit officer. To be clear, Daniel Hurstie will now lead our national asset management practice, which we can discuss in connection with your question. With respect to underwriting, however, we do have a solid bench of very strong underwriters out in the region. We nationalized the underwriting team and basically centralized it, if you will, to provide more bandwidth to the originations effort. If you recall, those positions previously sat inside of the regions underneath the originations, and by stripping it out the way that we've done it, We're hoping that we've now freed up the bandwidth for our originators to go do what they're best at. But that's a different question than the credit function, which sits inside the asset management side of the house. Got it.
spk01: Okay. Thank you for that clarification. Appreciate it.
spk07: There are no further questions at this time. I would now like to turn the floor back over to Brian for closing remarks.
spk02: Thank you, Operator. I have no further concluding remarks other than to say I'm honored to be in the position of Chief Executive Officer, committed to this business and to driving returns for shareholders in the future. It's a very exciting time to be the Chief Executive Officer of Broadmark. I think there are great opportunities in front of us, and I'm looking forward to working with the team and realizing on those as we go.
spk07: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for participating.
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