Broadmark Realty Capital Inc.

Greetings. Welcome to Broadmark Realty Capital's second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A 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 keypad. Please note this conference is being recorded. I will now turn the conference over to Nevid Boparai, General Counsel. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Broadmark Realty Capital's second 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 filing. 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 will turn the call over to Brian.

Thank you, Nevin. and welcome to our second quarter 2022 earnings call. This afternoon, I'll begin with some remarks on the macro environment and briefly highlight our second quarter performance, and then turn the call over to David to provide additional detail on our financial results, investment activity, and portfolio. We will then open up the call for your questions. 2022 has presented unique and perhaps unprecedented challenges to the economy and financial markets. Spiraling supply side inflation in the first half of the year caused the Federal Reserve to begin a rate hike cycle that continued into July, with the target Fed funds range up 250 basis points since January. Mortgage rates rose in response, reaching over 6% in June before falling over the past few weeks. The recent drop in interest in mortgage rates, while welcome news, is most likely due to recession fears, which are now front and center with two consecutive quarters of negative real GDP growth on the books. With the cross-currents of inflation and recession, financial market volatility has hit levels not seen since the global financial crisis. While employment figures remain strong, we are carefully watching for concerning signs in both the high- and low-wage sectors of the economy. While these factors certainly impact broad markets, I want to emphasize that the foundational principles of our company position us well to perform throughout the cycle and whatever the environment. Indeed, over the last few years, as many in the industry chose to juice near-term earnings with high leverage, we did not. Yet we continued to produce steady and solid unlevered results. Now, as market dynamics have shifted and the risks and cost of higher leverage come to the fore, we can continue to execute on our growth strategy as others are forced to pull back, or in many cases, cease originations. As a result, we are in a great position to outperform as we move into the next cycle. We have a strong and experienced team of ground-level real estate investment experts that understand and can underwrite complex credit investments, and we utilize conservative underwriting standards, including significant equity committed to any project. Equally important, we have the lowest levered balance sheet in the industry among public peers. This competitive advantage provides us with the potential to take on capital to fund future originations. And with almost entirely all fixed rate debt, our balance sheet shields us from the impact of higher interest costs, affording us significant stability in today's shifting markets. While we have invested in a handful of floating rate loans, all have interest rate floors that protect our downside while allowing us to capture upside if the current interest rate trajectory continues. When I joined Broadmark as Chief Executive Officer earlier this year, my intentions were not to change what has made the company successful, but rather build on our strong foundation to expand our growth opportunities. To that end, we have built a national underwriting team that, while geographically diversified, We'll 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. Additionally, we have implemented greater rigor and focus around both our pre- and post-funding asset management capabilities, which now operate as the primary credit function for our business. From our last earnings call, we anticipated minor 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. We have now completed almost all of those hires with a few notable ones from our competitors. One part of strategy that we plan to evolve in the coming quarters is our approach to defaults and REO. Historically, our team has rightfully worked through each situation to achieve the most favorable results for shareholders. This, however, has resulted in us taking longer to cure defaults than may be optimal and has impacted our ability to expeditiously resolve challenges and redeploy capital. While we've rarely incurred a principal loss from these defaults, these extended workout periods have and will continue to cause a meaningful drag on near-term performance. Looking forward, our strategy will be to strike a more effective balance between maximizing collections, economic efficiency, and opportunity costs, recognizing that in certain instances, exiting defaulted loans and reinvesting that capital into new opportunities more quickly could prove a more profitable path. On the origination side, we will continue to be very active in the small to middle market investment space, which we define as $5 to $75 million per investment. We will continue to make smaller investments where there is an important relationship play. However, we will seek to move our average loan balance up from about $7 million today to ideally around $15 million, but would anticipate this will take more than 12 to 18 months to accommodate the normal originations and payoff cycle. We seek to move our average investment balance up because we believe there remains more market fragmentation and less capital markets efficiencies in the space that fits between the small balance, fix and flip business purpose loans, and the larger institutional loans. We also think our capital is more efficient in this space from a total profit perspective. In addition to continuing our focus on construction loans, which we think remains viable through all parts of the cycle, we're beginning to look at other investments and otherwise gearing our infrastructure to include bridge and transitional financing, asset repositioning, mezzanine loans, and participating preferred structures, which could enhance our risk-adjusted returns. On the construction side, we're starting to see better borrowers and better transactions in the high-yield space as other lenders are forced to pull back or cease origination due to the pronounced recent changes in the capital markets. Now turning to our second quarter performance. We executed on about $197 million in new originations and amendments for the quarter at an average unlevered yield of 10.1%. As a reminder, origination volumes naturally vary from quarter to quarter based on the timing of loan closings. We continue to prudently expand our geographic footprint, and we are now active in 20 states and the District of Columbia, improving the diversification of our 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 59.9%. This growth was achieved even as we remained disciplined with our investments, and we will remain prudent in our origination approach to ensure we maintain a high-quality loan book, which we believe can withstand the current uncertain macroeconomic environment. Finally, I would like to thank our strong and committed team for their hard work and contributions amid challenging times. Your diligence and expertise are the true sources of our success. With that, I'll turn it over to David to review the financials.