UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended ~~June 30, 2020~~March 31, 2021

	or

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number 001-39134

BROADMARK REALTY CAPITAL INC.

(Exact Name of Registrant as Specified in Its Charter)


Maryland	84-2620891
State or Other Jurisdiction of Incorporation or Organization	I.R.S. Employer Identification No.

1420 Fifth Avenue, Suite 2000 Seattle, WA	98101
Address of Principal Executive Offices	Zip Code

Registrant’s telephone number, including area code (206) 971-0800

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	BRMK	New York Stock Exchange
Warrants, each exercisable for one fourth (1/4th) share of Common Stock at an exercise price of $2.875 per one fourth (1/4th) share	BRMK WS	NYSE American LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated ~~filer~~ ☐

~~Accelerated~~ filer ☒

~~Non-accelerated~~Accelerated filer ☐

Smaller reporting company ☐

Emerging growth company ☐

Non-accelerated filer ☐

~~Emerging growth company~~ ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

As of ~~August 7, 2020,~~May 5, 2021, there were ~~132,231,184~~132,573,178 shares of common stock outstanding.

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Broadmark Realty Capital Inc.

Table of Contents

			Page


PART I.		FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets	24
		Condensed Consolidated Statements of Income	35
		Condensed Consolidated Statement of Stockholders’ Equity	46
		Condensed Consolidated Statements of Cash Flows	67
		Notes to Condensed Consolidated Financial Statements	78
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	3029
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	4142
Item 4.		Controls and Procedures	43

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings	4443
Item 1a.		Risk Factors	4443
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	4543
Item 3.		Defaults Upon Senior Securities	4543
Item 4.	~~��~~	Mine Safety Disclosures	4543
Item 5.		Other Information	4543
Item 6.		Exhibits	4644

SIGNATURES			4745

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Broadmark Realty Capital Inc.

As used in this Quarterly Report on Form 10-Q, the terms “Broadmark Realty,” “the Company,” “we,” “us” and “our” refer to Broadmark Realty Capital Inc., unless the context indicates otherwise.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations of future operations, are forward-looking statements. Forward-looking statements reflect the Company’s current views with respect to, among other things, capital resources, portfolio performance and projected results of operations. Likewise, the Company’s statements regarding anticipated growth in its operations, anticipated market conditions, demographics and results of operations are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of terminology such as “outlook,” “believes,” “expects,” “projects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words or phrases.

The forward-looking statements contained in this Quarterly Report are based on our current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those that it has anticipated. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause the Company’s actual results to differ include, but are not limited to:

●

the magnitude, duration and severity of the novel coronavirus (“COVID-19”) pandemic;

●

disruptions in our business operations, including construction lending activity, relating to COVID-19;

●

adverse impact of COVID-19 on the value of our goodwill;

●

the impact of actions taken by governments, businesses, and individuals in response to COVID-19;

●

the current and future health and stability of the economy and residential housing market, including any extended slowdown in the real estate markets as a result of COVID-19;

●

changes in laws or regulations applicable to our business, employees, lending activities, including current and future laws, regulations and orders that limit our ability to operate in light of COVID-19;

●

defaults by borrowers in paying debt service on outstanding indebtedness;

●

the adequacy of collateral securing our loans and declines in the value of real estate property securing our loans;

●

availability of origination and acquisition opportunities acceptable to us;

●

potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;

●

increased competition from entities engaged in construction lending activities;

●

general economic uncertainty and the effect of general economic conditions on the real estate and real estate capital markets in particular;

●

general and local commercial and residential real estate property conditions;

●

changes in U.S. federal government policies;

●

changes in U.S. federal, state and local governmental laws and regulations that impact our business, assets or classification as a real estate investment trust;

●

our ability to pay, maintain or grow the dividend in the future;

●

changes in interest rates;

●

the availability of, and costs associated with, sources of liquidity;

●

the adequacy of our policies, procedures and systems for managing risk effectively;

●

the ability to manage future growth;

●

changes in personnel and availability of qualified personnel; and

●

other factors set forth in our periodic filings with the Securities and Exchange Commission.

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Broadmark Realty Capital Inc.

Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

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Broadmark Realty Capital Inc.

~~Unaudited~~ Condensed Consolidated Balance Sheets

(~~dollar amounts~~ in thousands, except share ~~amounts)~~data, unaudited)

June 30, 2020

December 31, 2019
Assets




Cash and cash equivalents

$
217,969

$
238,214
Mortgage notes receivable, net

817,319

821,589
Interest and fees receivable

8,986

4,108
Investment in real property, net

3,690

5,837
Intangible assets, net

791

4,970
Goodwill

136,965

131,965
Other assets

4,606

2,046
Total assets

$
1,190,326

$
1,208,729

Liabilities and Equity




Accounts payable and accrued liabilities

$
4,494

$
8,415
Dividends payable

7,934

15,842
Total liabilities

$
12,428

$
24,257
Commitments and Contingencies




Common stock, $0.001 par value, 500,000,000 shares authorized, 132,231,184 and 132,015,635 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively

132

132
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2020 and December 31, 2019

—

—
Additional Paid in Capital

1,211,001

1,209,120
Accumulated deficit

(33,235)

(24,780)
Total equity

1,177,898

1,184,472
Total liabilities and equity

$
1,190,326

$
1,208,729


	March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	204,277	$	223,375
Mortgage notes receivable, net		804,471		798,486
Interest and fees receivable, net		16,503		14,357
Investment in real property, net		13,113		8,473
Right-of-use assets		6,304		—
Goodwill		136,965		136,965
Other assets		10,263		5,663
Total assets	$	1,191,896	$	1,187,319

Liabilities and Equity
Accounts payable and accrued liabilities	$	6,568	$	4,946
Lease Liabilities		8,347		—
Dividends payable		9,280		7,952
Total liabilities	$	24,195	$	12,898
Commitments and Contingencies (Note 10)
Preferred stock, $0.001 par value, 100,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2021 and December 31, 2020		—		—
Common stock, $0.001 par value, 500,000,000 shares authorized, 132,566,410 and 132,532,383 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		132		132
Additional Paid in Capital		1,214,724		1,213,987
Accumulated deficit		(47,155)		(39,698)
Total equity		1,167,701		1,174,421
Total liabilities and equity	$	1,191,896	$	1,187,319

See accompanying notes to the ~~unaudited~~ condensed consolidated financial statements

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Broadmark Realty Capital Inc.

~~Unaudited~~ Condensed Consolidated Statements of Income

(~~dollar amounts~~ in thousands, except share and per share ~~amounts)~~data, unaudited)


	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020
Revenues
Interest income	$	22,017	$	24,553
Fee income		7,451		7,215
Total Revenue		29,468		31,768
Other Income:
Change in fair value of optional subscription liabilities		—		4,604
Expenses		��
Impairment:
Provision for credit losses, net		2,708		4,432
Operating expenses:
Compensation and employee benefits		3,560		3,193
General and administrative		2,819		2,278
Total Expenses		9,087		9,903
Income before income taxes		20,381		26,469
Income tax provision		0		0
Net income	$	20,381	$	26,469
Earnings per common share:
Basic	$	0.15	$	0.20
Diluted	$	0.15	$	0.20
Weighted-average shares of common stock outstanding, basic and diluted
Basic		132,550,227		132,111,329
Diluted		132,678,812		132,336,315

See accompanying notes to the condensed consolidated financial statements

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Broadmark Realty Capital Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands, except share data, unaudited)

Successor

Predecessor

Successor

Predecessor

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,

2020

2019⁽²⁾

2020

2019⁽²⁾
Revenues








Interest income

$
22,180

$
23,456

$
46,733

$
44,079
Fee income

6,890

13,117

14,105

22,277
Total Revenue

29,070

36,573

60,838

66,356
Other Income (Expense):

Change in fair value of optional subscription liabilities

(1,458)

—

3,146

—
Expenses




Impairment:




Loan loss provision

309

297

3,931

73
Operating expenses:




Compensation and employee benefits

3,044

1,925

6,237

3,853
General and administrative

4,500

3,151

6,778

6,241
Total Expenses

7,853

5,373

16,946

10,167
Income before income taxes

19,759

31,200

47,038

56,189
Income tax provision

—

—

—

—
Net income

$
19,759

$
31,200

$
47,038

$
56,189
Earnings per common share: ⁽¹⁾








Basic

$
0.15

$
—

$
0.36

$
—
Diluted

$
0.15

$
—

$
0.36

$
—
Weighted-average shares of common stock outstanding, basic and diluted








Basic

132,165,005

—

132,120,290

—
Diluted

132,165,005

—

132,120,290

—

~~See accompanying notes to the unaudited condensed consolidated financial statements~~

~~(1)~~

The Company determined that earnings per unit in the Predecessor periods would not be meaningful to the users of this filing, given the different unit holders and members’ equity structures of each individual entity in the Predecessor Company Group.

~~(2)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Unaudited Condensed Consolidated Statement of Stockholders’ Equity~~

~~(dollar amounts in thousands, except share amounts)~~

Preferred

Common stock

Additional




Shares

Amount

Shares

Amount

Paid-in Capital

Accumulated Deficit

Total
Balances as of December 31, 2019

—

$
—

132,015,635

$
132

$
1,209,120

$
(24,780)

$
1,184,472
Issuance of shares from vested RSUs

—

—

95,694

—

—

—

—
Net Income

—

—

—

—

—

27,279

27,279
Dividends

—

—

—

—

—

(31,700)

(31,700)
Stock-based compensation expense

—

—

—

—

914

—

914
Balances as of March 31, 2020

—

$
—

132,111,329

$
132

$
1,210,034

$
(29,201)

$
1,180,965
Issuance of shares from vested RSUs

—

—

119,855

—

—

—

—
Net Income

—

—

—

—

—

19,759

19,759
Dividends

—

—

—

—

—

(23,793)

(23,793)
Stock-based compensation expense

—

—

—

—

967

—

967
Balances as of June 30, 2020

—

$
—

132,231,184

$
132

$
1,211,001

$
(33,235)

$
1,177,898

~~See accompanying notes to the unaudited condensed consolidated financial statements.~~

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Unaudited Condensed Consolidated Statement of Stockholders’ Equity~~

~~(dollar amounts in thousands, except share amounts)~~


	Preferred			Common stock				Additional
	Shares	Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit		Total
Balances as of December 31, 2020	—	$	—		132,532,383	$	132	$	1,213,987	$	(39,698)	$	1,174,421
Net Income	—		—		—		—		—		20,381		20,381
Dividends	—		—		—		—		—		(27,838)		(27,838)
Issuance of shares for vested restricted stock units	—		—		34,027		—		—		—		—
Stock-based compensation expense for restricted stock units	—		—		—		—		737		—		737
Balances as of March 31, 2021	—	$	—		132,566,410	$	132	$	1,214,724	$	(47,155)	$	1,167,701

Class A Units

Class P Units

Preferred Units

Additional

Retained Earnings


Units

Amount

Units

Amount

Units ⁽¹⁾

Amount

Paid-in Capital

(Accumulated Deficit)

Total
Balances as of December 31, 2018 (Predecessor)

20,950

$
1

50

$
—

6,827,701

$
684,979

$
767

$
(637)

$
685,110
Contributions

850

200

—

—

796,028

79,535

—

—

79,735
Reinvestments

—

—

—

—

71,086

7,094

—

—

7,094
Net Income

—

—

—

—

—

—

—

24,989

24,989
Distributions

—

—

—

—

—

—

—

(24,134)

(24,134)
Redemptions

—

—

—

—

(133,513)

(13,331)

—

—

(13,331)
Compensation expense related to grant of profits interest

(100)

—

100

—

—

—

734

—

734
Grants of restricted units

150

—

—

—

—

—

134

—

134
Balances as of March 31, 2019 (Predecessor)

21,850

$
201

150

$
—

7,561,302

$
758,277

$
1,635

$
218

$
760,331
Contributions

—

—

—

—

1,441,711

122,414

—

—

122,414
Reinvestments

—

—

—

—

86,222

8,594

—

—

8,594
Net Income

—

—

—

—

—

—

—

31,200

31,200
Distributions

—

—

—

—

—

—

—

(29,125)

(29,125)
Redemptions

—

—

—

—

(227,248)

(22,927)

—

—

(22,927)
Grants of restricted units

—

—

—

—

—

—

170

—

170
Balances as of June 30, 2019 (Predecessor)

21,850

$
201

150

$
—

8,861,987

$
866,358

$
1,805

$
2,293

$
870,657


	Preferred			Common stock				Additional
	Shares	Amount		Shares		Amount		Paid-in Capital		Accumulated Deficit		Total
Balances as of December 31, 2019	—	$	—		132,015,635	$	132	$	1,209,120	$	(24,780)	$	1,184,472
Adoption of ASU 2016-13	—		—		—		—		—		(1,975)		(1,975)
Net Income	—		—		—		—		—		26,469		26,469
Dividends	—		—		—		—		—		(31,700)		(31,700)
Issuance of shares for vested restricted stock units	—		—		95,694		—		—		—		—
Stock-based compensation expense for restricted stock units	—		—		—		—		914		—		914
Balances as of March 31, 2020	—	$	—		132,111,329	$	132	$	1,210,034	$	(31,986)	$	1,178,180

See accompanying notes to the ~~unaudited~~ condensed consolidated financial statements

~~(1)~~

~~(2)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

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Broadmark Realty Capital Inc.

~~Unaudited~~ Condensed Consolidated Statements of Cash Flows

(~~dollar amounts~~ in ~~thousands)~~thousands, unaudited)


	Successor		Predecessor
	Six Months Ended		Six Months Ended
	June 30,		June 30,		Three Months Ended		Three Months Ended
	2020		2019(1)		March 31, 2021		March 31, 2020
Cash flows from operating activities
Net income	$	47,038	$	56,189	$	20,381	$	26,469
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization		(821)		—
Depreciation		36		34
Compensation expense related to grant of profits interest		—		734
Accretion of deferred origination and amendment fees						(6,612)		(5,422)
Depreciation and amortization						163		(904)
Amortization of right of use assets						94		110
Amortization of financing costs						142		—
Stock-based compensation expense for restricted stock units		1,881		—		737		914
Grants of restricted units		—		304
Provision for loan losses		3,931		73
Write down of investment in real property		—		519
Provision for credit losses, net						2,708		4,432
Change in fair value of optional subscription liabilities		(3,146)		—		—		(4,604)
Changes in operating assets and liabilities:
Interest and fees receivable		(4,878)		(4,284)
Deferred income		4,887		—
Change in other assets		(1,385)		(363)
Interest and fees receivable, net						(2,146)		(2,351)
Other assets						171		(163)
Accounts payable and accrued liabilities		(775)		816		713		(167)
Lease liabilities						(10)		(110)
Net cash provided by operating activities		46,768		54,022		16,341		18,204
Cash flows from investing activities:
Investments in fixed assets		—		(67)
Purchases of property and equipment						(135)		—
Proceeds from sale of real property		2,213		6,139		815		2,213
Improvements to investments in real property		(66)		(210)		(250)		(79)
Change in mortgage notes receivable		(5,759)		(132,497)
Change in mortgage notes receivable, net						(4,255)		36,856
Net cash provided by (used in) investing activities		(3,612)		(126,635)		(3,825)		38,990
Cash flows from financing activities:
Contributions from members		—		203,005
Contributions received in advance		—		15,395
Dividends paid		(63,401)		—		(26,510)		(36,973)
Distributions		—		(36,174)
Redemptions of members		—		(36,258)
Payment of costs to obtain credit facility						(5,104)		—
Net cash provided by (used in) financing activities		(63,401)		145,968		(31,614)		(36,973)
Net increase in cash and cash equivalents		(20,245)		73,355
Net increase (decrease) in cash and cash equivalents						(19,098)		20,221
Cash and cash equivalents, beginning of period		238,214		112,234		223,375		238,214
Cash and cash equivalents, end of period	$	217,969	$	185,589	$	204,277	$	258,435
Supplemental disclosure of non-cash investing and financing activities
Dividends payable		7,934		—	$	9,280	$	10,569
Reinvested distributions		—		15,688
Measurement period adjustment to goodwill and intangible assets		5,000		—		—		5,000
Mortgage notes receivable converted to real property owned						5,205		—
Operating lease right-of-use assets						6,360		—
Lease liabilities arising from obtaining right-of-use assets						8,319		—
Property and equipment purchased through tenant improvement allowance						1,959		—

See accompanying notes to the ~~unaudited~~ condensed consolidated financial statements

~~(1)~~

~~Predecessor periods are combined as disclosed in Note 1.~~

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Broadmark Realty Capital Inc.

Notes to ~~Unaudited~~ Condensed Consolidated Financial Statements

Note 1 - Organization and business

Broadmark Realty Capital Inc. (“Broadmark Realty,” “the Company,~~” “Successor,~~” “we,” “us” and “our”) is an internally managed commercial real estate finance company that provides secured financing to real estate investors and developers. Broadmark Realty’s objective is to preserve and protect shareholder capital while producing attractive risk-adjusted returns primarily through dividends generated from current income from its loan portfolio. Broadmark Realty operates in select states that it believes to have favorable demographic trends and provide Broadmark Realty the ability to efficiently access the underlying collateral in the event of borrower default.

On November 14, 2019 (the “Closing Date”), Broadmark Realty Capital Inc., a Maryland corporation (formerly named Trinity Sub Inc.) (“Broadmark Realty”), consummated a business combination (the “Business Combination”) pursuant to an Agreement and Plan of Merger, dated August 9, 2019 (the “Merger Agreement”), by and among the Company, Trinity Merger Corp. (“Trinity”), Trinity Merger Sub I, Inc. (“Merger Sub I”), Trinity Merger Sub II, LLC (“Merger Sub II” and together with Trinity and Merger Sub I, the “Trinity Parties”), PBRELF I, LLC (“PBRELF”), BRELF II, LLC (“BRELF II”), BRELF III, LLC (“BRELF III”), BRELF IV, LLC (“BRELF IV” and, together with PBRELF, BRELF II and BRELF III, the “Predecessor Companies” and each a “Predecessor Company”), Pyatt Broadmark Management, LLC (“MgCo I”), Broadmark Real Estate Management II, LLC (“MgCo II”), Broadmark Real Estate Management III, LLC (“MgCo III”), and Broadmark Real Estate Management IV, LLC (“MgCo IV” and, together with MgCo I, MgCo II and MgCo III, the “Predecessor Management Companies” and each a “Predecessor Management Company,” and the Predecessor Management Companies, together with the Predecessor Companies and their subsidiaries, the “Predecessor Company Group”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, (i) Merger Sub I merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Trinity Merger”), (ii) immediately following the Trinity Merger, each of the Predecessor Companies merged with and into Merger Sub II, with Merger Sub II being the surviving entity of such merger (the “Company Merger”), and (iii) immediately following the Company Merger, each of the Predecessor Management Companies merged with and into Trinity, with Trinity being the surviving entity of such merger (the “Management Company Merger” and, together with the Trinity Merger and the Company Merger, the “Mergers”). As a result of the Mergers, Merger Sub II and Trinity became wholly owned subsidiaries of Broadmark Realty.

The consolidated subsidiaries of Broadmark Realty ~~after the Business Combination~~ include BRMK Lending, LLC, BRMK Management, Corp., and Broadmark Private REIT Management, LLC. BRMK Lending, LLC originates short-term loans secured by first deed of trust liens on residential and commercial real estate. BRMK Management, Corp. (the “Manager”) manages the underwriting, closing, servicing and disposition of mortgage notes, and performs all general and administrative ~~duties.~~duties for Broadmark Realty. Broadmark Private REIT Management, LLC (the “Private REIT Manager”) ~~was designed to manage the newly organized~~manages Broadmark Private REIT, LLC (the “Private REIT”), an unconsolidated affiliate of the Company that primarily participates in loans originated, underwritten and serviced by a subsidiary of Broadmark Realty.

Broadmark Realty ~~intends to elect~~has elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax ~~purposes commencing with the tax period ending December 31, 2019.~~purposes. Broadmark Realty generally will not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. The Company also operates its business in a manner that permits it to maintain an exclusion from registration under the Investment Company Act of 1940. As a REIT, Broadmark Realty may own up to 100% of the stock of one or more taxable REIT subsidiaries (“TRSs”), which may earn income that would not be qualifying income if earned directly by a REIT. ~~Broadmark Realty has~~ The Manager is a TRS ~~being the Manager~~ and this election applies to the ~~wholly owned~~wholly-owned subsidiaries of the ~~Company,~~Manager, including the Private REIT Manager.

Unless the context otherwise requires, references to “Broadmark Realty,” the “Company,” “we,” “us” and “our” in the remainder of this report refer to Broadmark Realty and its consolidated subsidiaries after the Business Combination and refer to the Predecessor Company Group for periods prior to the Business Combination.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 2 - Summary of significant accounting policies

Basis of Presentation

~~For periods prior to November 15, 2019, the~~The accompanying consolidated financial statements do not represent the financial position and results of operations of one controlling legal entity, but rather a combination of the historical results of the Predecessor Company Group, which was under common management. Therefore, any reference herein to the Predecessor financial statements is made on a combined basis. For periods from November 15, 2019 on, the accompanying consolidated financial statements represent the consolidated financial statements of the Company, beginning with BRELF II as the accounting acquirer and Successor entity. In addition, as a result of the Business Combination, the consolidated financial statements for periods from November 15, 2019 on, are presented on a new basis of accounting pursuant to Accounting Standards Codification (“ASC”) 805, ~~Business Combinations~~ ~~(refer to Note 3) to reflect BRELF II acquiring the other entities within the Predecessor Company Group and Trinity in the successor period.~~

~~The financial information presented in the accompanying unaudited~~ condensed consolidated financial statements ~~has~~include Broadmark Realty Capital Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in ~~accordance~~conformity with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) ~~for complete~~and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial ~~statements. In~~reporting. Certain information and note disclosures normally included in the ~~opinion of management, the accompanying unaudited condensed consolidated~~ financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial position, results of operations and cash flows for the periods presented. These unauditedregulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the ~~annual~~ audited ~~consolidated~~ financial statements and accompanying notes ~~thereto~~included in Broadmark Realty Capital Inc.’s Annual Report on Form 10-K/A for the year ended December 31, ~~2019 included in our Annual Report on Form 10-K~~2020, which was filed ~~on March 16, 2020~~ with the SEC ~~(the “Annual Report”).~~ on March 2, 2021. The condensed consolidated balance sheet as of December 31, ~~2019,~~2020, included herein, was derived from the audited financial statements of Broadmark Realty Capital Inc. as of that date.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of March 31, 2021, our results of operations and stockholders’ equity for the three month periods ended March 31, 2021 and 2020, and our cash flows for the three month periods ended March 31, 2021 and 2020. The results of the three ~~and six months~~month period ended ~~June 30, 2020 are~~March 31, 2021 is not necessarily indicative of the results to be expected for the year ending December 31, ~~2020,~~2021 or for any interim period or for any other ~~interim periods or~~ future ~~years.~~year.

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~~The presentation of the Predecessor period has been conformed~~Broadmark Realty Capital Inc.

Notes to the current period’s presentation for the purposes of these consolidated financial statements. Additionally, certain balance sheet captions as of December 31, 2019 have been reclassified to conform to the current period's presentation.Condensed Consolidated Financial Statements

Principles of Consolidation

For Predecessor period, all intra-entity accounts, balances and transactions have been eliminated in the preparation of the unaudited condensed consolidated financial statements. Beginning November 15, 2019, all significant intercompany accounts, balances and transactions have been eliminated in consolidation. Broadmark Realty consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well as those entities deemed to be variable interest entities (“VIEs”), if any, in which Broadmark Realty is determined to be the primary beneficiary. ~~As of June 30, 2020,~~ Broadmark Realty is not the primary beneficiary of, and therefore does not consolidate, any VIEs.

~~Table~~The Private REIT was determined to be a voting interest entity for which we, through our wholly-owned subsidiary acting as manager with no significant equity investment, do not hold a controlling interest in and do not consolidate. Furthermore, the Private REIT participation in loans originated by us meets the characteristics of ~~Contents~~a participating interest in accordance with GAAP and therefore, is treated as a sale of mortgage notes receivable and is derecognized from our consolidated financial statements.

~~Broadmark Realty Capital Inc.~~Reclassifications

~~Notes~~Certain amounts in our prior period condensed consolidated financial statements have been reclassified to ~~Consolidated Financial Statements~~conform to the presentation of our current period condensed consolidated financial statements. These reclassifications had no effect on our previously reported net income or stockholders’ equity. The reclassification for the separate presentation of accretion of deferred origination and amendment fees resulted in a reclassification of net cash provided by operating activities to net cash provided by investing activities, both as previously reported. The reclassifications also included the separate presentation of amortization of right of use assets and change in lease liabilities and the combined presentation of depreciation and amortization on the condensed consolidated statements of cash flows.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the expected credit losses on our loans and the fair value of financial instruments and investments in real property. Accordingly, actual results could differ from those estimates. The COVID-19 pandemic has introduced significant additional uncertainty with respect to estimates, judgments and assumptions, which may materially impact the estimates previously listed, among others.

Certain Significant Risks and Uncertainties

In the normal course of business, we encounter one primary type of economic risk in the form of credit risk. Credit risk is the risk of default on our investment in mortgage notes receivable resulting from a borrower’s inability or unwillingness to make contractually required payments. We believe that the carrying values of our ~~investments~~loans reasonably consider this credit risk.

In addition, we are subject to significant tax risks. If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal corporate income tax, which could be material.

~~Broadmark Realty operates~~We operate in a dynamic industry and, accordingly, can be affected by a variety of factors. For example, we believe that changes in any of the following areas could have a significant negative effect on us in terms of our future financial position, results of operations or cash flows: public health crises, like the ~~novel coronavirus (“COVID-19”)~~COVID-19 pandemic; the economy in the areas we operate; competition in our market; the stability of the real estate market and the impact of interest rate changes; changes in government regulation affecting our business; natural disasters and catastrophic events; our ability to attract and retain qualified employees and key personnel; and protection of customers’ information and other privacy concerns, among other things.

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~~The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management~~Broadmark Realty Capital Inc.

Notes to make estimates and assumptions that affect reported amounts and disclosures at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates relate to the fair value of financial instruments, such as impaired loans and real property, goodwill and identified intangibles, and warrant liabilities. Accordingly, actual results could differ from those estimates.Condensed Consolidated Financial Statements

Reportable Segments

We operate the business as 1 reportable ~~segment.~~segment, which originates, underwrites and services construction loans.

BALANCE SHEET MEASUREMENT

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of 90 days or less at the date of purchase to be cash equivalents. We have a cash management sweep account repurchase agreement whereby our bank nightly sweeps cash in excess of $750,000, sells us specific U.S. Government Agency securities and then repurchases ~~them~~these securities the next day.

We maintain our cash and cash equivalents with financial ~~institutions. At times, such amounts may exceed federally~~institutions, which are insured ~~limits. As~~up to a maximum of ~~June 30, 2020~~$250,000 per account as of March 31, 2021 and December 31, ~~2019,~~2020. The balances in these accounts may exceed the ~~uninsured cash and cash equivalents balance was $216.4 million and $236.7 million, respectively.~~insured limits. There were 0 restrictions on cash as of ~~June 30, 2020~~March 31, 2021 or December 31, ~~2019.~~2020.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Mortgage Notes Receivable

Mortgage notes receivable (referred to herein as “mortgage notes ~~receivable,”~~receivable”, “construction ~~loans,”~~loans”, “loans”, or “notes”) are classified as held for investment as we have the intent and ability to hold until maturity or payoff and are carried in the condensed consolidated balance sheets at amortized cost, net of construction holdbacks, interest reserves, allowance for ~~loan~~credit losses ~~interest reserve, construction holdbacks,~~and deferred origination and ~~extension~~amendment fees. Mortgage notes receivable that are in contractual default are deemed to be non-performing and are evaluated for impairment. All of our loans are considered collateral dependent, and therefore, non-performing loans are evaluated for impairment based on the fair value of the collateral less estimated costs to sell.

~~Deferred income represents the amount of our origination and amendment or extension fees that have been deferred and will be recognized in income over the contractual maturity of the underlying loan.~~

Participations in mortgage notes receivables are accounted for as sales and derecognized from the balance sheet when control over the transferred assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) a group of financial assets or a participating interest in an entire financial asset has been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that ~~right)~~right, beyond a more than trivial benefit) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. If the sales do not meet these criteria, the sale of the participation is treated as a secured borrowing. As of ~~June 30, 2020,~~March 31, 2021, all participations in mortgage notes receivable sold to the Private REIT have achieved sale accounting. ~~There~~

Current Expected Credit Losses Allowance

In the fourth quarter of 2020, we adopted the current expected credit loss (“CECL Standard”) for the full year ended December 31, 2020 as we ceased to qualify as an emerging growth company effective December 31, 2020. As a result, we were no ~~participations~~longer permitted an extended transition period for complying with new or revised accounting standards affecting public companies. The initial CECL allowance adjustment of $2.0 million was recorded on January 1, 2020 as a cumulative-effect of ~~December~~change in accounting principle through a direct charge to accumulated deficit on our condensed consolidated statements of stockholders’ equity; however subsequent changes to the CECL allowance are recognized through net income on our condensed consolidated statements of income. Our condensed consolidated statement of income for the three months ended March 31, ~~2019.~~2020 includes an additional provision for credit losses of $0.8 million associated with the adoption of the CECL Standard, as a result, our previously reported net income of $27.3 million for this period is lower by $0.8 million.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

The CECL Standard replaced the incurred loss model under existing guidance with an expected loss model for instruments measured at amortized cost. We now record an allowance for credit losses in accordance with the CECL Standard on our loan portfolio, including unfunded construction holdbacks, on a collective basis by assets with similar risk characteristics. In addition, for assets that are classified as collateral dependent based on foreclosure being probable, we continue to record loan specific allowances based on the fair value of the collateral for expected credit losses under the CECL Standard. Given the short-term nature of our loans, we evaluate the most recent external appraisal and depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to estimate the fair value of the collateral for such loans.

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 approach 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 (i) historical loss experience in our portfolio, (ii) historical loss experience in the commercial real estate lending market, (iii) timing of expected pay offs including prepayments and extensions where reasonably expected, and (iv) 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.

Management estimates the allowance for credit losses using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is maintained at a level sufficient to provide for expected credit losses over the life of the loan based on evaluating historical credit loss experience and making adjustments to historical loss information for differences in the specific risk characteristics in the current loan portfolio. Refer to “Note 3 – Mortgage Notes Receivable” for further information regarding the CECL allowance.The CECL Allowance related to the principal outstanding is presented within mortgage notes receivable, net and for unfunded commitments is within accounts payable and accrued liabilities on our condensed consolidated balance sheets.

We have made an accounting policy election to exclude accrued interest receivable, included in interest and fees receivable, net on our consolidated balance sheets, from the amortized cost basis of the related mortgage notes receivable in determining the CECL allowance as any uncollected accrued interest receivable is written off in a timely manner. No interest income is recognized on mortgage notes receivable that are in contractual default unless the interest is paid in cash or collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Deferred Income

Deferred income represents the amount of our origination and amendment fees that have been deferred and will be recognized in income over the contractual maturity of the underlying loan. Origination fees are included in the total commitment to the borrower and financed at the time of loan origination. Amendment fees are either included in the total commitment to the borrower and financed at the time of the loan amendment or are billed to the borrower when the loan is amended and not capitalized into the principal outstanding. Deferred origination and amendment fees capitalized into the principal outstanding are included within mortgage notes receivable, net on the consolidated balance sheets. Deferred amendment fees that are not included in the principal outstanding are presented within interest and fees receivable, net on the condensed consolidated balance sheets.

Interest and Fees Receivable

Interest on performing loans is accrued and recognized as interest income at the contractual rate of interest, or at the contractual rate of monthly minimum interest. Extension fees are charged when we agree to extend the maturity dates of loans. In addition, late fees are changed when borrower payments are contractually past due. We monitor each note’s outstanding interest and fee receivables and, based on historical performance, generally reserve against the balance after a receivable is greater than 60 days past due unless collectability of all amounts due is reasonably assured.

We have made an accounting policy election to exclude accrued interest and fee receivables from the amortized cost basis of the related mortgage notes receivable in determining the CECL allowance as any uncollected accrued interest receivable is written off in a timely manner.

Real property

Real property owned by us consists of real estate acquired in settlement of loans. Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at fair market value at the time of acquisition, which generally approximates the ~~net~~ carrying value of the loan secured by such property. Costs related to acquisition, development, construction and improvements are ~~capitalized.~~capitalized to the extent the investment in the real property does not exceed the fair value less estimated costs to sell. Expenditures for repairs and maintenance are charged to expense when incurred.

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019, real~~2020, we owned 4 and 3 properties ~~owned by us consist~~or projects, respectively.

Leases

Our office space in Seattle, Washington is subject to an operating lease. Our operating lease is included in right of ~~real estate acquired~~use assets and lease liabilities on our consolidated balance sheets. The lease agreement includes both lease components (e.g., fixed rent) and non-lease components (e.g., common area maintenance). We account for the lease and non-lease components as a ~~result~~single component.

Right of ~~foreclosure proceedings~~use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments. Right of use assets and lease liabilities are recognized at the lease commencement date based on ~~1 and 2 partially completed construction projects, respectively.~~

~~Goodwill~~

~~Goodwill represents~~ the excess of the consideration paid over the fair value of net assets acquired in connection with the Business Combination in November 2019. Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in circumstances indicate potential impairment. In testing goodwill for impairment, we follow ASC 350, ~~Intangibles—Goodwill and Other~~, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fairpresent value of the ~~reporting unit is less than its carrying value~~total lease payments not yet paid, including goodwill, the fair value of that reporting units is compared with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impairedlease incentives not yet received, with the ~~impairment loss equal to~~right of use assets further adjusted for any prepaid or accrued lease payments, lease incentives received and/or initial direct costs incurred. Our lease arrangement also includes variable payments for costs such as common-area maintenance, utilities, taxes or other operating costs, which are based on a percentage of actual expenses incurred. These variable lease payments are excluded from the ~~amount by which the carrying value~~measurement of the ~~goodwill exceeds the implied fair value~~right of ~~that goodwill.~~use assets and lease liabilities.

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Notes to Condensed Consolidated Financial Statements

Our lease term is through January 2032, which includes an option to extend the lease term for an additional five years. When determining if a renewal option is reasonably certain of being exercised at lease commencement, we consider several factors, including but not limited to, contract-based, asset-based and entity-based factors. We reassess the term of the existing lease if there is a significant event or change in circumstances within our control that affects whether we are reasonably certain to exercise the option to extend the lease. Examples of such events or changes include construction of significant leasehold improvements or other modifications or customizations to the underlying asset, relevant business decisions or subleases. We have concluded that the renewal option is not reasonably certain of being exercised, therefore, the renewal is not included in the right of use asset and lease liability.

As our lease did not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

We recognize lease expense for our operating lease on a straight-line basis over the lease term. Variable lease payments are generally recognized when incurred. These expenses are included in general and administrative expenses in the consolidated statements of income.

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the assets acquired at the date of acquisition and is not amortized. We assess the impairment of goodwill on an annual basis, in our fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. In our evaluation of goodwill, we typically first perform a qualitative assessment to determine whether the carrying value of each reporting unit is greater than its fair value. If it is more likely than not that the carrying value of a reporting unit is greater than its fair value, we perform a quantitative assessment and an impairment charge is recorded in our statements of operations for the excess of carrying value of the reporting unit over its fair value. We reevaluated the fair value of the reporting unit during our annual assessment in the fourth quarter of 2020 and the fair value of the reporting unit exceeded the carrying value and there was 0 goodwill impairment. During the first quarter of 2021, we continued to monitor the impact of COVID-19 and determined there were no new triggering events to warrant a quantitative assessment of our goodwill.

In the first quarter of 2020, we recorded a measurement period adjustment to reduce the preliminary fair value of intangible assets in the form of customer relationships by $5.0 million and increased our preliminary value of goodwill by $5.0 million. As a result of this adjustment to preliminary values, $0.9 million of amortization of intangible assets recorded in 2019 was reversed in the first quarter of 2020.

Other Assets

Other assets primarily consist of fixed assets, deferred financing costs, intangible assets, prepaid insurance and other operating receivables.

Fixed Assets

Fixed assets, which are included in other assets in the accompanying condensed consolidated balance sheets are stated at cost, less accumulated depreciation. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. Depreciation is recorded on the straight-line basis over the estimated useful life of the assets. For computer equipment, office equipment, furniture and fixtures the useful lives range from three to seven years. For leasehold improvements, we depreciate over the shorter of expected useful life or lease term.

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Notes to Condensed Consolidated Financial Statements

Deferred Financing Costs

Deferred financing costs represent direct costs associated with the execution of the revolving credit facility. As the revolving credit facility has no principal outstanding and there is no recognized debt liability, the deferred financing costs are included in other assets on the condensed consolidated balance sheet. These costs are amortized on the straight-line basis over the initial term of our credit facility.

Intangible Assets

~~As a result of the Business Combination in November 2019, we identified intangible assets in the form of customer relationships.~~ We ~~recorded~~record the intangible assets at fair value at the acquisition date and are amortizing the value of these ~~finite lived~~finite-lived intangibles into expense over the expected useful life. ~~Our~~All of our intangible assets ~~have estimated useful lives of three years.~~

~~Fixed Assets~~

~~Fixed assets, which are included in other assets in~~relate to the accompanying unaudited condensed consolidated balance sheets are stated at cost, less accumulated depreciation. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. Depreciation is recorded on the straight-line basis over the estimated useful life of the assets, which ranges from ~~three~~ ~~to seven years.~~

~~Other Assets~~

Other assets primarily consist of prepaid insurance, right-of-use asset and other operating receivables. In connection with the Business Combination, we entered into an arrangement to sublease an operating lease and have recorded a right-of-use asset and a ~~lease liability~~ ~~in the amount of $0.4 million, representing the present~~ value of ~~the remaining payments under the lease discounted based on our incremental borrowing rate as of November 14, 2019.~~customer relationships. As of ~~June 30,~~March 31, 2021 and December 31, 2020, ~~the right-of-use asset~~intangible assets net of accumulated amortization was $0.5 and ~~a lease liability are not significant to the condensed consolidated balance sheet.~~

~~Accounts Payable and Accrued Liabilities~~

~~Accounts payable and accrued liabilities primarily consist of accruals for payments of professional services fees, lease liabilities, warrant liabilities and other operating payables.~~$0.6 million, respectively.

INCOME RECOGNITION

Interest Income

Interest income on mortgage notes receivable is accrued based on contractual rates applied to the principal balance outstanding, unless there is a minimum interest provision in the mortgage note. Many construction loans provide for minimum interest provisions, under which the contractual rate applies to, which are typically between 50% and 70% of the face amount of the note until the actual outstanding principal exceeds the minimum threshold.

~~Income recognition~~Mortgage notes receivable can be placed in contractual default status for any of the following reasons: (1) an interest payment is more than 30 days past due; (2) a note matures and the borrower fails to make payment of all amounts owed or extend the loan; or (3) the collateral becomes impaired in such a way that the ultimate collection of the note is doubtful. The accrual of interest income is suspended when a loan is ~~designated non-performing and resumes only when~~in contractual default unless the suspended loan becomes contractually current and performance is demonstrated to have resumed, which generally requires consecutive cash payments accompanied by a credit analysis that supports an ability to pay in accordance with the terms of the loan. The accrual of interest is ~~discontinued when we believe, after considering collection efforts~~paid in cash or collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and ~~other factors,~~ the ~~amount ultimately~~interest payment is not expected to be collected ~~will be insufficient to cover~~from the ~~additional~~borrower, we may place a current loan on non-accrual status and recognize interest ~~payments.~~income on a cash-basis. Interest previously accrued may be reversed at that time, and such reversal is offset against interest income. The accrual of interest income resumes only when the suspended loan becomes contractually current or a credit analysis supports the ability to collect in accordance with the ~~condensed consolidated statement~~terms of ~~income.~~the loan.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Fee Income

We ~~collect~~charge loan origination fees in conjunction with origination. ~~In addition, we charge extension~~Amendment fees are charged when loan terms are modified, such as increases in ~~conjunction~~interest reserves and construction holdbacks in line with our underwriting criteria or upon modification of a loan for the ~~terms of our existing loans.~~transition from horizontal development to vertical construction. We defer and amortize loan origination ~~fees, direct loan origination costs~~ and ~~loan extension~~amendment fees over the contractual terms of the loans. The Predecessor Companies did not defer origination fees, direct loan origination costs, and loan extension fees and, rather, recorded origination fees and costs at the time of origination due to the short-term nature of the loans, and the difference is not considered significant.

We charge inspection fees, which we use to hire independent inspectors to report on the status of construction projects. These fees are earned and recognized upon each construction draw request.

~~Interest and Fees Receivable~~

Interest on performing loans is accrued and recognized as interest income at the contractual rate of interest, or at the contractual rate of monthly minimum interest. In addition, we charge late fees on borrower payments. We monitor each note’s outstanding interest and fee receivables and, based on historical performance, generally write off the balance after a receivable is greater than 60 days past due.

~~Impairment of Loans~~

We designate loans as non-performing at such time as (1) the borrower fails to make the required monthly interest-only loan payments; (2) the loan has a maturity default; or (3) in the opinion of management, it is probable we will be unable to collect all amounts due according to the contractual terms of the loan. Loans are charged off to the allowance for loan losses when the contractual amount is no longer collectible.

The allowance for loan losses reflects our estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The allowance is increased or decreased by recording the loan loss provision or recovery in our consolidated statements of income and is decreased by charge-offs when losses are confirmed through the receipt of assets, such as in a pre-foreclosure sale or upon ownership control of the underlying collateral in full satisfaction of the loan upon foreclosure or when significant collection efforts have ceased. The allowance for loan losses is determined on an asset-specific basis.

The asset-specific allowance relates to estimated losses on individual impaired loans. We consider a loan to be impaired when, based upon current information and events, we believe that it is probable that we will be unable to collect all amounts due under the contractual terms of the loan agreement. This assessment is made on a monthly basis on factors such as payment status, lien position, borrower financial resources and investment collateral, collateral type, project economics and geographical location as well as national and regional economic factors. An allowance is established for an impaired loan when the estimated fair value of the collateral is lower than the carrying value of that loan.

For collateral dependent impaired loans, impairment is measured using the estimated fair value of collateral less the estimated cost to sell in comparison to the carrying value. Valuations are performed or obtained at the time a loan is determined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. Given the short term nature of our loans, we evaluate the most recent external “as is” appraisal and depending on the age of the appraisal, may order a new appraisal or, where available, will evaluate against existing comparable sales or other pertinent information to estimate the fair value of the collateral for such loans. As of June 30, 2020, all of our allowance for loan losses represents an asset-specific allowance.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

EXPENSE RECOGNITION

Operating Expenses

Operating expenses are expensed as incurred. General and administrative expenses primarily consist of professional services, insurance, excise taxes and amortization of intangible assets. During 2020, 0 commissions were paid to a related party and for the three and six months ended June 30, 2019, commissions paid to a related party were $1.8 and $3.1 million, respectively, which are included in general and administrative expenses.

Share‑Based Payments

We ~~follow the accounting guidance for share-based payments which requires the measurement and recognition of~~measure compensation expense for all ~~stock-based~~share-based awards ~~made~~at fair value on the date of grant and recognize compensation expense over the service period on a straight-line basis for awards expected to vest, which is generally three years for employees and ~~non-employee~~one year for directors. ~~Awards~~Share-based awards are issued under the Broadmark Realty Capital Inc. 2019 Stock Incentive Plan.

~~For awards~~Awards made to our employees and directors, ~~we initially value~~typically consist of restricted stock units (“RSUs”). For awards with only a service vesting condition, the fair value of the award is based on the grant date closing price of our common ~~stock.~~stock less the present value of expected dividends over the requisite service period as the awards are not entitled to dividends. For these awards, ~~with periodic vesting,~~ we recognize ~~the related~~stock-based compensation expense on a ~~straight -line~~straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date fair value of the award that has vested through that ~~date. We~~date, and we account for forfeitures prospectively as they occur. For awards that contain both service vesting and market conditions, referred to as performance restricted stock units (“pRSUs”), we use a Monte Carlo simulation model to calculate the grant date fair value. For these market-condition awards, regardless of the outcome of the market condition, we recognize stock-based compensation expense on a straight-line basis over the longest of explicit and derived service periods, and we account for forfeitures prospectively as they occur. If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate ~~increase~~ or ~~cancel~~increase any remaining unrecognized or previously recorded stock-based compensation expense.

~~Profit Interests (Predecessor)~~

The Predecessor Management Companies’ profits interests were accounted for as share-based compensation. The Predecessor Management Companies’ expensed the fair value of profits interests granted to its employees and directors over the period each award vested. Compensation cost was measured using the Black-Scholes model. All unvested profits interests vested at the time of the Business Combination.

Income Taxes ~~(Successor)~~

We ~~intend to elect~~have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for U.S. federal income tax purposes (the “Code”). As a REIT, we generally are not subject to U.S. federal income taxes on net income we distribute to our shareholders. We intend to make timely distributions sufficient to satisfy the annual distribution requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at ~~regulator~~regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and U.S. federal income and excise taxes on our undistributed ~~income and our~~income. Our TRSs are subject to U.S. federal income taxes.

~~Income Taxes (Predecessor)~~Earnings per Share

~~The Predecessor Companies were taxed as partnerships~~We present both basic and ~~REITs under provisions of the Code. As such, the tax attributes of the partnerships are included~~diluted earnings per common share (“EPS”) amounts in the individual tax returns of its members for partnerships and not for the Predecessor Company Group and the REIT entities met the qualifications to be taxed as REITs. Accordingly, the accompanying unauditedour condensed consolidated ~~statement of~~financial statements. Basic EPS excludes dilution and is computed by dividing income ~~for the three and six months ended June 30, 2019 includes 0 provision for income taxes for the Predecessor Company Group.~~

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Earnings per Share~~

~~We follow the accounting guidance in ASC 260,~~ ~~Earnings Per Share~~, which requires the use of the two-class method of computing earnings per share for all periods presented for each class of common stock and participating security as if all earnings for the period had been distributed. Under the two-class method, net income is first reduced for dividends declared on all classes of securities to arrive at undistributed earnings. During periods of net losses, the net loss is reduced for dividends declared on participating securities only if the security has the right to participate in the earnings of the company and an objectively determinable contractual obligation to share in net losses of the company. The remaining earnings are allocatedavailable to common stockholders ~~and participating securities to the extent that each security shares in earnings as if all of the earnings for the period had been distributed. Each total is then divided~~ by the ~~applicable weighted average~~weighted-average number of ~~common shares outstanding during the period to arrive at basic earnings per share. For the diluted earnings, the denominator includes all outstanding~~ shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our outstanding warrants and ~~all potential shares of common~~restricted stock ~~assumed issued if they are dilutive.~~

~~For purposes of~~units. We utilize the ~~Predecessor period which includes the financial results of the Predecessor Company Group, we determined that~~treasury stock method to measure dilution to earnings per ~~unit~~share in calculating the net number of shares that would ~~not~~ be ~~meaningful~~issued assuming any related proceeds are used to ~~the users of this filing, given the different unitholders and members’ equity structures of each individual entity in the Predecessor Company Group.~~buy back outstanding shares.

Recent Accounting Pronouncements

~~As an emerging growth company, the Jumpstart Our Business Startups Act (“JOBS Act”) permits us an extended transition period for complying with new or revised~~There are no recent accounting ~~standards affecting public companies. We~~pronouncements that we have ~~elected~~yet to ~~use this extended transition period and~~ adopt certain new accounting standards on the private company timeline, which means that our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards on a non-delayed basis. We will cease to qualify as an emerging growth company effective December 31, 2020 unless the eligibility standards are modified. Loss of emerging growth company status will result in our losing our reporting exemptions noted above.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326), and in 2019 issued ASU 2019-04, which provides codification improvements, and ASU 2019-05, which provides targeted transition relief for entities adopting ASU 2016-13.

~~The financial instruments-credit losses guidance replaces the incurred loss model~~ with an expected loss model, which is referred to as the current expected credit loss (“CECL”) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, and net investments in certain leases recognized by a lessor. In addition, the amendments in this update require that credit losses be presented as an allowance rather than as a write-down on available-for-sale debt securities. We have formed a CECL committee that is assessing data and system needs in order to evaluate the impact of adopting the new guidance. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which we adopt the standard. At this time, the impact on our ~~consolidated~~ financial ~~statements is being evaluated. We are required to adopt the standard in the fourth quarter~~position, results of ~~2020 for the annual period ending December 31, 2020 unless the requirements are modified.~~

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the amendments in

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance requires prospective adoption. We adopted the standard on January 1, 2020 and there was no material impact on our unaudited condensed consolidated financial statements.

~~In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which (1) adds incremental requirements for entities to disclose (a) the amount of total gains~~operations or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy (b) the range and weighted average used to develop significant unobservable inputs and (c) how the weighted average was calculated for fair value measurements categorized within Level of the fair value hierarchy and (2) eliminates disclosure requirements for (a) transfers between Level 1 and Level 2 and (b) valuation processes for Level 3 fair value measurements. We adopted the standard on January 1, 2020 and there was no material impact on our unaudited condensed consolidated financial statements.

~~Note 3 – Business Combination~~

As discussed in Note 1, the Company entered into the Merger Agreement with Trinity, the Trinity Parties, the Predecessor Companies and the Predecessor Management Companies. The Business Combination was accounted for in accordance with ASC 805, ~~Business Combinations~~. The Company determined that BRELF II was the accounting acquirer. As such, the Business Combination culminated in two steps: the merger of the Trinity Parties with and into BRELF II as a recapitalization and simultaneous capital issuance, and the acquisition of 100% of the remaining entities within the Predecessor Company Group by BRELF II. In accordance with ASC 805, the merger of the Trinity Parties into BRELF II was accounted for as a recapitalization and is reflected as the issuance of shares for cash. The acquisition of the remaining entities within the Predecessor Company Group by BRELF II was accounted for as a business combination in accordance with ASC 805 using the acquisition method of accounting. Cash proceeds from the recapitalization with Trinity Merger Sub I, Inc. were $327.1 million, partially offset by the consent fee paid to holders of the Company’s warrants to purchase ~~one-fourth~~ ~~(1/4~~^th~~) of one share of our common stock at an exercise price of $2.875 per warrant (the “Public Warrants”) in the aggregate amount of $66.7 million, for net proceeds of $260.4 million. The~~ cash proceeds from the recapitalization with Trinity Merger Sub I, Inc. were used, in part, to pay cash consideration for the acquisition of the Predecessor Company Group and transaction costs (as further described below), leaving approximately $146.9 million remaining.

Separately, the cash and equity consideration transferred per the Merger Agreement was allocated between the legal amounts issued for the recapitalization of BRELF II and the cash and equity issued for the acquisition of the Predecessor Company Group. Given that the Merger Agreement was negotiated at arm’s length and based on the fair value of the entities, the legal consideration best depicted the relative fair value of separating the acquisitions from the recapitalization. The amount of common stock issued in the transaction that was attributable to the recapitalization of BRELF II was $495.5 million, along with $12.7 million of transaction costs, which were recorded as operating expenses and were settled in cash of $11.3 million and common stock of $1.4 million.

Total consideration allocated to the Business Combination under ASC 805 is $581.8 million, which was measured at its acquisition date fair value, consisting of $102.2 million in cash and $479.6 million of the Company common stock. Such amounts are inclusive of seller-transaction costs of $13.5 million, settled by the acquirer at closing in cash of $11.9 million and common stock of $1.6 million.

~~The purchase price allocation of assets acquired, and liabilities assumed have been recorded at their fair values as of the closing of~~ ~~November 14, 2019, the date of acquisition. The difference between the fair value of net assets acquired, including the value of intangible assets acquired, and the consideration was recorded as goodwill.~~flows.

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Broadmark Realty Capital Inc.

Notes to ~~Consolidated Financial Statements~~

~~The fair values of assets acquired and liabilities assumed by BRELF II on~~ ~~November 14, 2019~~ ~~are as follows:~~

Consideration paid:

$ (in thousands)
Cash

$
102,245
Common stock

479,619
Total consideration paid

$
581,864

Assets acquired:


Cash and cash equivalents

88,505
Investment in real property

8,413
Mortgage notes receivable

344,837
Interest and fees receivable

2,743
Intangible assets

1,000
Other assets

174
Total Assets

445,672

Liabilities assumed:


Accounts payable and accrued liability

205
Other liabilities

568
Total Liabilities

773
Net assets acquired

444,899

Goodwill

$
136,965

In the first quarter of 2020, based on additional information obtained about facts and circumstances that existed as of November 14, 2019, we recorded a measurement period adjustment to reduce the fair value of intangible assets in the form of customer relationships from $6.0 to $1.0 million. This adjustment increased the preliminary amount of goodwill previously recorded by $5.0 million.

The purchase price for the acquisition was determined based on our expectations of future earnings and cash flows, resulting in the recognition of goodwill. Goodwill predominantly relates to the value of the assembled workforce and intangible assets that do not qualify for separate recognition at the time of the acquisition. Purchased goodwill is deductible for income tax purposes over 15 years.

The fair value of the customer relationships was determined using the replacement cost approach. The cost provides a systematic framework for estimating the value of the intangible asset based on the economic principle of substitution. Under this approach, value is estimated by developing the cost to either replace or reproduce (replicate) the asset as if new. The preliminary useful lives for customer relationships were determined based upon the remaining useful economic lives of the assets that are expected to contribute to future cash flows and approximates between ~~two~~ to five years. Amortization expense is recorded on a straight-line method, refer to Note 6 for further information on the estimated useful lives and amortization related to the acquired intangible assets.

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~~Broadmark Realty Capital Inc.~~Condensed

~~Notes to~~ Consolidated Financial Statements

As described above, the Company incurred a total of $26.2 million of transaction-related costs for both the Business Combination and the recapitalization of BRELF II, of which $25.8 million was incurred and expensed in the Predecessor period and $0.4 million was incurred and expensed in the Successor period. Transaction-related expenses are comprised primarily of transaction fees, including legal, finance, consulting, professional fees and other third-party costs. These amounts were recorded as operating expenses in the consolidated statements of income in the periods incurred. At the closing of the transaction in the Successor period, the acquirer directly paid (or repaid to the sellers) the amounts owed for such expenses, settling them in a combination of cash and equity. From the perspective of the Successor entity, the settlement of these amounts by the acquirer at closing were allocated between purchase price for the business combination and recapitalization of BRELF II, using a methodology consistent with the allocation of the overall consideration transferred.

Included within the transaction-related expenses referred to above, is a termination fee of $10.0 million related to the termination of certain referral agreements the Predecessor Management Companies had in place with a related entity, which settled in $7.0 million of cash and $3.0 million of the Company common stock at closing.

~~Supplemental pro forma financial information~~

When giving effect to the Business Combination as if it closed on January 1, 2019, there are no material differences between historical revenue and earnings of the Company and results on a pro forma basis, except for the timing of transaction costs and amortization expense related to intangible assets, which would have been incurred as of an earlier date. Refer to Note ~~6 for the future impact of estimated amortization expense related to acquired intangible assets based on the preliminary fair values and preliminary estimated useful lives.~~

~~Note 4~~3 - Mortgage notes receivable

The stated principal amount of ~~loans~~mortgage notes receivable in our portfolio represents our interest in loans secured by first deeds of trust, security agreements or legal title to real estate located in the United States. Our lending standards require that all mortgage notes receivable be secured by a first deed of trust lien on real estate and that the maximum loan to value ratio (“LTV”) be no greater than 65%. The LTV is calculated on an “as-complete” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. The lending standards also limit the initial outstanding principal balance of the loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan divided by the ~~“as-completed”~~“as-complete” appraisal. LTVs do not reflect interim loan activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. The maximum amount of a single loan may not exceed 10% of our total assets and the maximum amount to a single borrower may not exceed 15% of our total assets. We consider the maximum LTV ~~a credit quality~~as an indicator for the credit quality of a mortgage note receivable.

Mortgage notes receivable are ~~recorded at cost, which represents the carrying value, and interest rates generally range from a fixed annual rate of 10% to 13%. Mortgage notes receivable are~~ considered to be short-term financings, with initial terms typically ranging from five to 18 months in duration based on the size of the project and expected timeline for completion of construction, which we often elect to extend for several months based on our evaluation of the project. All loans require monthly interest only ~~payments.~~payments and interest rates generally range from a fixed annual rate of 10% to 13%. Most loans are structured with an interest reserve holdback that covers the interest payments for most of the initial term of the loan. Once the interest reserve is depleted, borrowers are expected to ~~make~~pay their monthly interest payment within 10 days of month end.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Mortgage notes receivable are presented net of construction holdbacks, interest reserves, allowance for ~~loans~~credit losses and deferred origination and ~~extension~~amendment fee income in the condensed consolidated balance sheets. The construction holdback represents amounts withheld from the funding of construction loans until we deem construction to be sufficiently completed. The interest reserve represents amounts withheld from the funding of certain mortgage notes receivable for the purpose of satisfying monthly interest payments over all or part of the term of the related note. Accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. The deferred origination and ~~extension~~amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.

~~The following table summarizes information pertaining to mortgage notes receivable as of June 30, 2020 and December 31, 2019:~~

(dollars in thousands)

June 30, 2020

December 31, 2019
Total loan commitments

$
1,121,521

$
1,101,275
Less:

Construction holdbacks ⁽¹⁾

260,401

253,708
Interest reserves ⁽¹⁾

21,907

18,601
Private REIT participation ⁽²⁾

6,931

—
Total principal outstanding for our mortgage notes receivable

832,282

828,966
Less:

Allowance for loan losses

6,795

4,096
Deferred fees

8,168

3,281
Mortgage notes receivable, net

$
817,319

$
821,589

~~(1)~~

~~Includes construction holdbacks of $7.1 million and interest reserves of $0.7 million on participating interests sold to the Private REIT as of June 30, 2020.~~

~~(2)~~

The Private REIT was determined to be a voting interest entity for which we, through our wholly owned subsidiary acting as manager with 0 equity investment, do not hold a controlling interest in and do not consolidate the Private REIT. Furthermore, the Private REIT participation in loans originated by us meets the characteristics of a participating interest in accordance with ASC 860 and therefore, is treated as a sale of mortgage notes receivable and is derecognized from our unaudited condensed consolidated financial statements.

~~Non-accrual status~~

Mortgage notes receivable that are in contractual default are deemed to be non-performing and are evaluated for impairment. Loans can be placed in contractual default status for any of the following reasons: (1) an interest payment is more than 30 days past due; (2) a note matures and the borrower fails to make payment of all amounts owed or extend the loan; or (3) the collateral becomes impaired in such a way that the ultimate collection of the note is doubtful. A loan can be removed from contractual default status if the late interest payments are brought current, the borrower complies with appropriate re-underwriting to extend the note, or additional collateral is provided for the note to provide cash flow or bring the loan to collateral value ratio below 65%. NaN interest income is recognized on mortgage notes receivable that are in contractual default, unless the interest is paid in cash and collectability of all amounts due is reasonably assured. In addition, in certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis. As of June 30, 2020 and December 31, 2019, the principal outstanding on loans placed on non-accrual status were $177.0 and $32.9 million, respectively. For the three and six months ended June 30, 2020, the average recorded investments in loans placed on non-accrual status were $164.6 and $120.7 million, respectively. For the three and six months ended June 30, 2019, the average recorded investments in loans placed on non-accrual status were $11.0 and $11.1 million, respectively.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

The following table reconciles outstanding mortgage loan commitments to outstanding balance of mortgage notes receivable as of March 31, 2021 and December 31, 2020:



(dollars in thousands)	March 31, 2021		December 31, 2020
Total loan commitments	$	1,280,964	$	1,245,963
Less:
Construction holdbacks⁽¹⁾		379,069		356,026
Interest reserves⁽¹⁾		30,369		29,817
Private REIT participation⁽²⁾		42,740		37,729
Total principal outstanding for our mortgage notes receivable		828,786		822,391
Less:
Allowance for credit losses⁽³⁾		10,663		10,590
Deferred origination and amendment fees		13,652		13,315
Mortgage notes receivable, net	$	804,471	$	798,486

(1)	Includes construction holdbacks of $42.1 and $40.4 million and interest reserves of $3.6 and $4.3 million on participating interests sold to the Private REIT as of March 31, 2021 and December 31, 2020, respectively.

(2)	The Private REIT’s participations in loans originated by us meet the characteristics of participating interests and, therefore, are treated as sales of mortgage notes receivable and are derecognized from our condensed consolidated financial statements.

(3)	$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 condensed consolidated balance sheet.

Non-accrual status

As of March 31, 2021 and December 31, 2020, the principal outstanding on loans in contractual default status placed on non-accrual status was $177.7 and $126.8 million, respectively, and all non-accrual loans had an allowance for credit losses.

Current Expected Credit Losses

In assessing the CECL allowance, we consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. We derived an annual historical loss rate based on the Company’s historical loss experience in our portfolio and historical loss experience in the commercial real estate industry provided by a third party adjusted to reflect our expectations of the macroeconomic environment based on forecast data per the Federal Reserve.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

~~Impaired mortgage notes receivable~~

We evaluate each loan for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan, at which time, the loan is deemed to be impaired. Placing a loan in contractual default does not in and of itself result in an impairment if we deem it probable that we will ultimately collect all amounts due. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the fair value of the collateral less estimated costs to sell, as all of our loans are classified as collateral dependent as repayment is expected solely from the collateral. As of June 30, 2020 and December 31, 2019, the principal outstanding on loans with impairment were $49.5 and $19.8 million, respectively. For the three and six months ended June 30, 2020, the average recorded investments in loans with impairment were $43.8 and $35.8 million, respectively. For the three and six months ended June 30, 2019, the average recorded investments in loans with impairment were $5.2 and $3.4 million, respectively.

The following ~~table summarizes~~tables summarize the activity in the ~~allowance for loan losses for~~CECL Allowance during the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~June 30, 2019. All of the allowance for loan losses relates to loans deemed to be impaired.~~

Three Months Ended

Three Months Ended

Six Months Ended

Six Months Ended
(dollars in thousands)

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019
Beginning

$
7,182

$
1,480

$
4,096

$
1,704
Provision for loan losses (benefits)

309

297

3,931

73
Charge offs

(696)

—

(1,232)

—
Ending

$
6,795

$
1,777

$
6,795

$
1,777

2020:

~~Note 5 – Fair value measurements~~

The following tables present estimated fair values of our financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:


	CECL Allowance
(dollars in thousands)	Funded		Unfunded ⁽²⁾		Total
CECL allowance as of December 31, 2020	$	10,590	$	—	$	10,590
Provision for credit losses, net		1,761		947		2,708
Charge-offs⁽¹⁾		(1,688)		—		(1,688)
CECL allowance as of March 31, 2021	$	10,663	$	947	$	11,610

June 30, 2020

Fair Value Measurements Using

Carrying

Estimated

(dollars in thousands)

Value

Fair Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
217,969

$
217,969

$
217,969

$
—

$
—
Mortgage notes receivable, net

817,319

817,319

—

—

817,319
Interest and fees receivable

8,986

8,986

—

8,986

—
Investment in real property, net

3,690

3,690

—

—

3,690
Financial Liabilities










Accounts payable and accrued liabilities ⁽¹⁾

$
4,494

$
4,494

$
—

$
2,148

$
2,346


(dollars in thousands)	CECL Allowance
Loan loss reserve as of December 31, 2019	$	4,096
Adoption of ASU 2016-13⁽³⁾		1,975
Provision for credit losses, net		4,432
Charge-offs⁽¹⁾		(537)
CECL allowance as of March 31, 2020	$	9,966

(1)	Represents either loan repayments where the proceeds are less than the principal outstanding or transfers to real property owned upon foreclosure where the fair values of the underlying collateral are less than the principal outstanding.

(2)	CECL Allowance relates to unfunded commitments is presented as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

(3)	Recorded as a direct charge to stockholders’ equity as a cumulative-effect of change in accounting principle.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

December 31, 2019

Fair Value Measurements Using

Carrying

Estimated

(dollars in thousands)

Value

Fair Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
238,214

$
238,214

$
238,214

$
—

$
—
Mortgage notes receivable, net

821,589

821,589

—

—

821,589
Interest and fees receivable

4,108

4,108

—

4,108

—
Investment in real property, net

5,837

5,837

—

—

5,837
Financial Liabilities










Accounts payable and accrued liabilities ⁽¹⁾

$
8,415

$
8,415

$
—

$
2,923

$
5,492

In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are construction loans secured by residential or commercial real estate and, in assessing estimated credit losses, we evaluate various metrics, including, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

The following tables allocate the carrying value of our loan portfolio based on our internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	505,347	62.0	%	$	118,678	$	252,275	$	37,051	$	3,080	$	88,973	$	5,290
Horizontal Development		143,405	17.6			60,361		63,180		15,453		283		—		4,128
Investment		166,382	20.4			46,769		72,987		18,917		3,809		17,953		5,947
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽²⁾		(10,663)
Carrying value, net	$	804,471

(1)	~~Includes~~Represents the ~~level 3 valuation~~year of origination or amendment where the loan incurred a full re-underwriting.

(2)

$0.9 million of the ~~optional subscription~~CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability ~~derivative measured at fair value on a recurring basis.~~under accounts payable and accrued liabilities in our condensed consolidated balance sheet.


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	149,936	18.4	%	$	44,920	$	54,135	$	19,952	$	—	$	25,897	$	5,032
Residential Lots		125,808	15.4			57,579		49,003		9,874		—		—		9,352
Condos		85,240	10.5			9,269		39,408		200		1,326		35,037		—
Single family housing		73,990	9.1			16,047		45,079		5,579		1,078		5,484		723
Land		73,237	9.0			40,678		12,321		—		3,052		17,186		—
Townhomes		80,611	9.9			12,348		43,735		—		1,716		22,554		258
Mixed Use		40,429	5.0			9,884		28,622		1,923		—		—		—
Hotel		53,253	6.5			1,192		42,990		9,071		—		—		—
Senior Housing		38,149	4.7			—		38,149		—		—		—		—
Offices		31,525	3.9			—		9,480		22,045		—		—		—
Commercial Lots		15,259	1.9			—		15,259		—		—		—		—
Retail		11,838	1.5			5,594		4,346		1,898		—		—		—
Industrial		15,403	1.9			15,403		—		—		—		—		—
Quadplex		5,915	0.7			—		5,915		—		—		—		—
Commercial		6,524	0.8			5,645		—		879		—		—		—
Duplex		3,821	0.5			3,053		—		—		—		768		—
Commercial other		4,196	0.3			4,196		—		—		—		—		—
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽²⁾		(10,663)
Carrying value, net	$	804,471

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)	$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 condensed consolidated balance sheet.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
LTV ⁽²⁾
0 - 40%	$	45,090	5.5	%	$	21,356	$	20,369	$	—	$	3,052	$	313	$	—
41 - 45%		29,256	3.6			27,489		1,767		—		—		—		—
46 - 50%		46,420	5.7			15,507		15,460		15,453		—		—		—
51 - 55%		77,277	9.5			27,310		29,594		2,777		—		16,873		723
56 - 60%		54,992	6.7			15,073		25,769		200		—		13,950		—
61 - 65%		532,281	65.3			118,559		270,307		52,991		4,120		75,790		10,514
66 - 70%		17,582	2.2			514		17,068		—		—		—		—
71 - 75%		—	0.0			—		—		—		—		—		—
76 - 80%		—	0.0			—		—		—		—		—		—
Above 80%		12,236	1.5			—		8,108		—		—		—		4,128
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽³⁾		(10,663)
Carrying value, net	$	804,471

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(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 facilitate successful completion of the construction and return of capital.

(3)	$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 condensed consolidated balance sheet.


	At December 31, 2020				Year Originated⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2020		2019		2018		2017		2016		Prior
Construction Type
Vertical Construction	$	514,136	63.5	%	$	354,012	$	57,090	$	6,853	$	88,655	$	7,526	$	—
Horizontal Development		153,345	19.0			129,607		15,028		283		—		8,427		—
Investment		141,595	17.5			98,146		18,657		7,259		16,444		—		1,089
Total	$	809,076	100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements


	At December 31, 2020				Year Originated⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2020		2019		2018			2017		2016		Prior
Collateral Type
Apartments	$	129,588	16.0	%	$	79,931	$	18,953	$	—		$	24,232	$	6,472	$	—
Residential Lots		124,548	15.4			105,830		10,291		—			—		8,427		—
Condos		92,245	11.4			52,714		3,106		4,405			32,020		—		—
Single family housing		90,131	11.1			69,438		8,839		1,028			10,103		—		723
Land		72,913	9.0			48,844		—		7,259			16,444		—		366
Townhomes		72,773	9.0			47,391		1,061		1,703			21,564		1,054		—
Mixed Use		66,092	8.2			60,232		5,860		—			—		—		—
Hotel		51,115	6.3			42,874		8,241		—			—		—		—
Senior Housing		34,283	4.2			34,283		—		—			—		—		—
Offices		29,540	3.7			8,495		21,045		—			—		—		—
Commercial Lots		15,683	1.9			15,683		—		—			—		—		—
Retail		11,397	1.4			9,500		1,897		—			—		—		—
Industrial		11,309	1.4			704		10,605		—			—		—		—
Quadplex		5,592	0.7			5,592		—		—	��		—		—		—
Commercial		877	0.1			—		877		—			—		—		—
Duplex		736	0.1			—		—		—			736		—		—
Commercial other		254	0.1			254		—		—			—		—		—
Total	$	809,076	100.0	%	$	581,765	$	90,775	$	14,395		$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.


	At December 31, 2020					Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value			% of Portfolio		2020		2019		2018		2017		2016		Prior
LTV⁽²⁾
0 - 40%	$	22,601		2.8	%	$	18,112	$	—	$	3,862	$	261	$	—	$	366
41 - 45%		68,263		8.4			44,683		20,183		3,397		—		—		—
46 - 50%		23,864		2.9			15,917		7,224		—		—		—		723
51 - 55%		76,539		9.5			57,583		2,774		—		16,182		—		—
56 - 60%		135,170		16.7			117,309		3,106		—		9,639		5,116		—
61 - 65%		450,253		55.7			301,964		57,488		7,136		76,139		7,526		—
66 - 70%		9,416		1.2			9,416		—		—		—		—		—
71 - 75%		1,983		0.2			1,983		—		—		—		—		—
76 - 80%		14,544		1.8			14,544		—		—		—		—		—
Above 80%		6,443		0.8			254		—		—		2,878		3,311		—
Total	$	809,076		100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)	��
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(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.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 4 – Fair value measurements


	March 31, 2021				Fair Value Measurements Using
		Carrying		Estimated
(dollars in thousands)		Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	204,277	$	204,277	$	204,277	$	—	$	—
Mortgage notes receivable, net		804,471		804,471		—		—		804,471


	December 31, 2020				Fair Value Measurements Using
		Carrying		Estimated
(dollars in thousands)		Value		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	223,375	$	223,375	$	223,375	$	—	$	—
Mortgage notes receivable, net		798,486		798,486		—		—		798,486

We follow the accounting guidance in ASC 820, Fair Value Measurements and Disclosures, which requires the categorization of fair value measurement into three broad levels of the fair value hierarchy as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following table sets forth assets and liabilities measured and reported at fair value on a recurring and nonrecurring basis, as well as for which fair value is only disclosed, as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. All of these fair values are categorized as Level 3. The table also contains information about valuation methodologies and inputs used for assets that are measured at fair value and categorized within Level 3 as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	Level 3				Valuation	Unobservable	Range of		Level 3				Valuation	Unobservable	Range of
(dollars in thousands)		June 30, 2020		December 31, 2019	technique	inputs	inputs			March 31, 2021		December 31, 2020	technique	inputs	inputs
Optional subscription liability ⁽¹⁾	$	2,346	$	5,492	Valuation model	Refer to Note 7 for assumptions	0 - 5	%
Real property ⁽²⁾		3,690		5,837	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Non-performing and impaired loans, net of allowance for loan losses ⁽³⁾		211,467		28,853	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Real property⁽¹⁾										13,113		8,473	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Collateral dependent loans, net of allowance for credit losses⁽²⁾										60,634		30,920	Collateral valuations	Discount to appraised value based on comparable market prices	0 - 10	%
Total	$	217,503	$	40,182					$	73,747	$	39,393

(1)	~~Optional subscription liability derivative measured at fair value on a recurring basis.~~

~~(2)~~

Real ~~estate~~ property is stated at lower of cost or fair value, a non-recurring measurement of fair value.

~~(3)~~(2)

~~Includes non-accrual and impaired loans, net~~Loans meeting the definition of ~~allowance for loss on loans deemed to be impaired. For our~~ collateral dependent ~~loans, the fair value is based on~~are measured at the fair value less the costs to sell the underlying property. The carrying value of the ~~non-performing and impaired~~collateral dependent loans, net of the allowance for ~~loan~~credit losses, ~~which~~ approximates fair value.

2022

Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

~~Fair value on a recurring basis~~

In connection with the Mergers, Trinity Merger Corp. issued $75 million of common stock, along with 7.2 million warrants and an optional subscription of up to $25 million of additional common stock (the “Optional Subscription Liability”) in a private placement transaction with certain entities affiliated with Farallon Capital Management, LLC (“Farallon”), which transaction is described in further detail in Note 11. We account for the Optional Subscription Liability as a derivative and, in accordance with ASC 815, we measure at fair value on a recurring basis. The value of this Optional Subscription Liability is included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets. The $3.1 million decrease in value for the six months ended June 30, 2020 was recorded as other income in the accompanying unaudited condensed consolidated statement of income for that period. The Optional Subscription Liability is valued using a lattice model that primarily incorporates observable inputs such as our common stock price, exercise price term of the option and the risk-free rate, however, it also incorporates an assumption for equity volatility based on the volatility of the common stock of comparable public companies. As the result of using unobservable inputs in the valuation, we classify the Optional Subscription Liability as Level 3 within the fair value hierarchy.

Fair value on a nonrecurring basis

Investments in real properties are initially recorded at the acquisition cost less estimated costs to sell, which approximates fair value. Upon transfer from mortgage notes receivable to investment in real estate property, the fair value less costs to sell becomes the new cost for the property. Costs related to acquisition, development, construction and improvements are capitalized. At each reporting date, the fair value of real properties is based upon the most recent independent third-party appraisals of value discounted based upon our experience with actual liquidation values. These discounts to the appraisals generally range from 0% to 10%. As the result of using unobservable inputs in the valuation, we classify investments in real properties as Level 3 within the fair value hierarchy.

For ~~mortgage notes receivable in contractual default status,~~collateral dependent loans, the fair values are based on the value of the underlying collateral less the costs to sell. At each reporting date, these loans ~~in contractual default status~~ are evaluated based upon the most recent independent third-party appraisals of value discounted based upon our experience with actual liquidation values. These discounts to the appraisals generally range from 0% to 10%. As the result of using unobservable inputs in the valuation, we classify ~~investments in real properties~~collateral dependent as Level 3 within the fair value hierarchy.

Fair value disclosure only

For certain of our financial instruments, including cash equivalents, ~~interest and fees receivable, other receivables, accounts payable, and accrued liabilities,~~ which are classified under Level 1 within the fair value hierarchy, the carrying amounts approximate fair value due to their short-term maturities.

~~For mortgage notes receivable~~Our loans in ~~current status, fair values are based on discounted cash flows considering interest rate risk and creditworthiness of the borrower. The~~ mortgage notes receivable are ~~secured by first deeds of trust, security agreements or legal title to real estate located in the United States. The~~evaluated for expected credit losses and mortgage notes receivable ~~generally have initial terms ranging between~~ ~~five~~ ~~and 18 months based on the size~~are presented net of ~~the project and expected timeline~~an allowance for ~~completion of construction and may be extended by paying additional fees.~~credit losses. Due to the short-term maturity of the mortgage notes receivable, a premium or discount is not ~~relevant~~material and the carrying value approximates fair value. We believe that our mortgage notes receivable net of the CECL allowance approximates fair value of the portfolio. As a result of the use of unobservable inputs, including ~~discount rates and~~ third-party appraisals for estimating as-complete appraised values, we classify mortgage notes receivable as Level 3 within the fair value hierarchy.

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note ~~6 – Goodwill and Intangible Assets~~

~~Goodwill~~

All of our goodwill relates to the Business Combination. As discussed in Note 3, in the first quarter of 2020, we recorded a measurement period adjustment to reduce the preliminary fair value of intangible assets in the form of customer relationships by $5.0 million and increased our preliminary value of goodwill by $5.0 million resulting in $137.0 million of goodwill as of June 30, 2020. As a result of this adjustment to preliminary values, $0.9 million of amortization of intangible assets recorded in 2019 was reversed in the first quarter of 2020.

In accordance with ASC Topic 350, we continuously evaluate the presence of triggering events that require an impairment test. In the first quarter of 2020, we determined that COVID-19 was a triggering event based on the adverse impact on our business and results of operations. Specifically, we noted that COVID-19 and containment measures have contributed to, among other things, adverse impacts on the progress of construction on our borrowers’ projects, the demand for and value of commercial and residential real estate that our borrowers have developed, the creditworthiness of our borrowers and other counterparties, the capital and credit market conditions and potential delays in foreclosure proceedings. We performed a quantitative assessment of our goodwill based on both the market and income approach and determined that, as of March 31, 2020, the fair value of the reporting unit exceeded the carrying value and there was 0 goodwill impairment. During the second quarter of 2020, we continued to monitor the impact of COVID-19 and determined there were no new triggering events to warrant updating our quantitative assessment of goodwill performed as of March 31, 2020. We will continue to monitor the impact of COVID-19 and will reevaluate the fair value of the reporting unit during our annual assessment in October 2020 or earlier in the case of another triggering event.

~~Intangible Assets~~

~~All of our intangible assets relate to the Business Combination, specifically the value of customer relationships. The following table summarizes the balances of intangible assets as of June 30, 2020:~~

Acquired
(dollars in thousands)

Intangibles
Asset Type

Customer relationships

$
1,000
Less: Accumulated amortization

209
Intangible assets, net

$
791

The weighted average life remaining of the intangible assets is approximately 2.4 years. Amortization expense for the next three years, based on preliminary valuations and determinations of useful lives, is expected to be as follows:

Year ended December 31,
(dollars in thousands)

2020

2021

2022
Estimated future intangible amortization expense

$
168

$
333

$
290

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Note 7~~5 - Stockholders’ Equity and Members’ Equity

Stockholders’ Equity

The Company is authorized to issue 500,000,000 shares of common stock with a par value of $0.001 per share and 100,000,000 shares of preferred stock with a par value of $0.001 per share. Holders of our common stock are entitled to 1 vote for each share. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, there were ~~132,231,184~~132,566,410 and ~~132,015,635~~132,532,383 shares of common stock issued and outstanding, respectively, and 0 shares of preferred stock issued and outstanding.

As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 there were 41.7 million ~~Public Warrants~~public warrants outstanding to acquire one-fourth of a share of common stock at a price of $2.875 (the “Public Warrants”), and 5.2 million warrants outstanding to acquire 1 share of our common stock at a price of $11.50 per share ~~outstanding~~ (the “Private Warrants”). In the aggregate, we have outstanding warrants to purchase approximately 15.6 million shares of common stock at a price of $11.50 per whole share.

~~The liability for the Optional Subscription was $2.3 million as~~ Settlement of ~~June 30, 2020 and $5.5 million as of December 31, 2019 and is included~~outstanding warrants, if exercised, will be either in ~~accounts payable and accrued liabilities. Descriptions of the warrants and the Optional Subscription Liability can be found in Note 7~~shares of our ~~audited consolidated financial statements included~~common stock or, solely at our discretion, in ~~our Annual Report on Form 10-K filed on March 16, 2020 with the SEC.~~

The fair value of the Optional Subscription Liability was estimated using a lattice model in accordance with ASC 820, Fair Value, using the assumptions noted below in the following table. Expected volatility is based on the historical volatility of a peer group of public companies. The risk-free interest rate is based on the US Treasury Constant Maturity curve, commensurate with the time to expiry of warrants.

As of June 30, 2020


As of  December 31, 2019

Expected volatility

64.0
%

13.0
%
Expected dividend yield

7.6
%

7.3
%
Expected life (in years)

0.4

0.9

Risk-free interest rate

0.2
%

1.6
%

cash.

Table of Contents

Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Earnings per Share

We present both basic and diluted earnings per share (“EPS”) amounts in our condensed consolidated financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from our outstanding warrants and restricted stock units. We consider two ways to measure dilution to earnings per share: (a) calculate the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares (the treasury stock method), or (b) assume the gross number of shares are issued and calculate any related effects on net income available for shareholders, considering participating securities, such as certain unvested restricted stock units which are entitled to nonforfeitable dividends rights (the two-class method). For the period presented within these unaudited condensed consolidated financial statements, the two-class method was deemed to be insignificant. In accordance with GAAP, our policy is to apply the more dilutive methodology upon issuance of such instruments. The table below presents the computation of basic and diluted net income per share of common stock for the ~~three and six months ended June 30, 2020.~~periods presented:

Three Months Ended

Six Months Ended
(dollars in thousands, except share and per share data):

June 30, 2020

June 30, 2020
Basic Earnings




Net income and Basic Earnings

$
19,759

$
47,038

Diluted Earnings

Net income and Diluted Earnings

$
19,759

$
47,038
Number of Shares:


Basic weighted-average shares of common stock outstanding

132,165,005

132,120,290
Shares for warrants and restricted stock units

—

—
Diluted weighted-average shares of common stock outstanding ⁽¹⁾

132,165,005

132,120,290
Earnings Per Share Attributable to common stockholders




Basic

$
0.15

$
0.36
Diluted

$
0.15

$
0.36



	Three Months Ended		Three Months Ended
(dollars in thousands, except share and per share data):	March 31, 2021		March 31, 2020
Net income	$	20,381	$	26,469
Basic weighted-average shares of common stock outstanding		132,550,227		132,111,329
Dilutive effect of share-based compensation		128,585		224,986
Diluted weighted-average shares of common stock outstanding ⁽¹⁾		132,678,812		132,336,315
Basic earnings per share	$	0.15	$	0.20
Diluted earnings per share	$	0.15	$	0.20

(1)

We exclude anti-dilutive shares from calculation of weighted-average shares for diluted earnings per share. ~~There~~For the three months ended March 31, 2021, there were 15.6 million shares related to the Public Warrants and Private Warrants and ~~353,364~~371,318 shares of unvested restricted stock unit awards, which are not included in the above calculation of diluted earnings per share because in doing so they would be anti-dilutive. For the three months ended March 31, 2020, only the 15.6 million shares related to the Public Warrants and Private Warrants were anti-dilutive and not included in the above calculation of diluted earnings per share.

~~Members’ Equity (Predecessor)~~

Members’ Equity is presented on a consolidated basis for the Predecessor Company Group, which includes the consolidated preferred units for the Predecessor Companies and the total consolidated Class A and Class P units for the Predecessor Management Companies. The applicable Predecessor Management Company was the sole common unit holder of the Predecessor Company it managed, and, therefore all common units have been eliminated in the preparation of the condensed consolidated Predecessor Company Group financial statements, as they represent intra-entity balances between entities within the consolidated Predecessor Company Group.

~~Earnings Per Unit (Predecessor)~~

~~We determined that earnings per unit would not be meaningful to the users of these financial statements for the Predecessor period.~~

~~Table of Contents~~

~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 86 - Income Taxes

~~For the Successor period, the~~The Manager has elected to be treated as a TRS and this election applies to the ~~wholly owned~~wholly-owned subsidiaries of the Manager, including the Private ~~Manager, refer to Note 1 for further discussion.~~REIT Manager. Having TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain the qualification as a REIT.

We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Code, which relate to organizational structure, diversity of stock ownership, and certain restrictions with regard to the nature of assets and the sources of income. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state, and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, we were in compliance with all REIT requirements.

Based on our evaluation, we concluded that there are 0 significant uncertain tax positions requiring recognition in our ~~unaudited~~ condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were 0 amounts accrued for penalties or interest as of or during the periods presented in the accompanying ~~unaudited~~ condensed consolidated financial statements.

The state and local tax jurisdictions for which we are subject to tax-filing obligations recognize our status as a REIT, and therefore, we generally do not pay income tax in such jurisdictions. We may, however, be subject to certain

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

minimum state and local tax filing fees as well as certain excise or business taxes. Our TRSs are subject to U.S. federal, state and local income taxes.

Note 97 - Equity Incentive Plan

Stock Incentive Plan

~~On November 14, 2019, we established the~~The Broadmark Realty 2019 Stock Incentive Plan (the “Plan”)~~, which~~ allows for the issuance of up to 5,000,000 stock options, stock appreciation rights, restricted stock awards, restricted stock units or other equity-based awards or any combination thereof to the directors, employees, consultants or any other party providing services to us. The Plan is administered by the compensation committee of our board of directors.

As of ~~June 30, 2020 and December~~March 31, ~~2019, respectively, 4,431,087 and 4,569,378~~2021, 3,624,268 share awards were available to be issued under the Plan. ~~We awarded 568,913~~The restricted stock units ~~(RSUs) to employees and directors with grant dates during~~granted under the ~~Successor period for financial reporting purposes. The RSUs~~Plan generally vest from one to three years depending on the terms of the specific ~~award other than 1 RSU grant which vested immediately.~~

~~Table~~award. In 2021, pRSUs were granted to our executive officers that will be earned at the end of ~~Contents~~the three

~~Broadmark Realty Capital Inc.~~

~~Notes~~ fiscal year period ending December 31, 2023 based on the Company’s level of achievement of total stockholder return relative to ~~Consolidated Financial Statements~~the total stockholder return (“Relative TSR”) of a selected group of industry peer companies for the three-year performance period. A variable level of shares of our common stock, ranging from 0% to 150% of target level, will be earned based on the level of achievement of the Relative TSR goals. The earned pRSUs will be paid in the form of common stock promptly following the end of the three-year performance period. The pRSUs are each measured at fair value based on Monte Carlo simulation models.

All RSUs awarded will be settled upon vesting in shares of our common stock. If (1) the recipient becomes disabled and the recipient’s employment or service is terminated as a result, (2) the recipient dies during the vesting period, or (3) ~~solely with respect to our Chief Executive Officer and Chief Financial Officer,~~ the recipient’s employment is terminated without cause (as defined in the Plan) in connection with, or in certain cases within ~~24 months~~a specified period following a change in control (as defined in the Plan), then the vesting of the RSUs will fully accelerate as of the date of termination of employment.

Dividend equivalents are not accrued or paid on RSUs granted to employees, executive officers and directors ~~until settlement of~~and accordingly those RSUs ~~in shares of our common stock and these~~ are not considered participating securities.

The RSUs granted to non-executive officer employees are considered participating or entitled to receive all dividends and other distributions paid with respect to those unvested shares of common stock, unless determined otherwise by the Compensation Committee.

If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid will again become available for the issuance of additional awards.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

The following table summarizes the activity related to RSUs during ~~2020:~~the three months ended March 31, 2021:


		Weighted Average			Weighted Average
		Grant Date Fair			Grant Date Fair
	Shares	Market Value		Shares	Market Value
Unvested RSUs outstanding as of January 1, 2020	334,928	$	11.08
Unvested RSUs outstanding as of December 31, 2020				434,143
Granted	186,759		11.77	424,866	$	8.68
Vested	(95,694)		11.08	(37,227)	$	11.08
Unvested RSUs outstanding as of March 31, 2020	425,993
Granted	47,226		9.64
Vested	(119,855)	$	11.08
Unvested RSUs outstanding as of June 30, 2020	353,364
Unvested RSUs outstanding as of March 31, 2021				821,782

For the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020, we recognized compensation expense related to RSUs of ~~$1.0~~$0.7 and ~~$1.9~~$0.9 million, respectively, based on amortizing the fair value of the awards over the service (vesting) period. As of ~~June 30, 2020,~~March 31, 2021, there was ~~$3.1~~$7.1 million of net unrecognized compensation cost related to unvested stock-based compensation arrangements. This compensation is recognized on a straight-line basis ~~with~~ over ~~half of the compensation expected to be expensed in the next six months and has~~ a weighted-average recognition period of ~~1.3~~2.3 years.

~~Profits Interests and Equity Compensation (Predecessor)~~

The Predecessor Company Group expensed the fair value of share-based compensation awards granted to employees and directors over the period each award vests. Compensation cost was measured using the Black-Scholes model. The Predecessor Company Group expensed the fair value of restricted unit awards granted to employees over the period each award vested. There were ~~150 units granted during the six months ended June 30, 2019 at $11,717 per unit, which were to vest ratably over 48 months~~. The fair value of restricted unit awards was equal to the fair value of the Predecessor Company’s units at the date of grant. The units were valued using an internal model with market inputs available on the date of grant. The restricted units were settled as part of the Business Combination and, accordingly, ~~0 share-based compensation related to the unit awards was recognized during the three and six months ended June 30, 2020.~~

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

Note 108 - Commitments and ~~contingencies~~Contingencies

The following table illustrates our contractual obligations and commercial commitments by due date as of ~~June 30, 2020:~~March 31, 2021:


			Less than 1						More than				Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years		Total		year		1-3 years		3-5 years		5 years
Construction holdbacks⁽¹⁾												379,069		237,632		141,437		—		—
Operating lease obligations	$	12,076	$	647	$	1,879	$	1,993	$	7,557	$	11,527	$	812	$	1,916	$	2,033	$	6,766
Construction holdbacks		260,401		230,435		29,966		—		—
Total	$	272,477	$	231,082	$	31,845	$	1,993	$	7,557	$	390,596	$	238,444	$	143,353	$	2,033	$	6,766

(1)

Includes construction holdbacks of $42.1 million on participating interests sold to the Private REIT as of March 31, 2021. The funding timing and amounts of construction holdbacks are uncertain as these commitments relate to loans for construction costs and depend on the progress and performance of the underlying projects.

Construction Loans

Our commitments and contingencies include usual obligations incurred by real estate lending companies in the normal course of ~~business. These include interest reserves and~~business, including construction holdbacks as disclosed in Note ~~4. In addition, on~~3.

Lease Commitments

On March 18, 2020, we ~~signed~~entered into a ~~new ten-year~~non-cancelable operating lease agreement for our office space in Seattle ~~headquarters which is expected to commence~~with an original lease period expiring in 2032. The lease commencement date was in the first ~~or second~~ quarter of 2021. The total cash payments included in the measurement of our operating lease liabilities, net of lease incentives was $11.7 million. The right-of-use assets obtained in exchange for the new operating lease obligation and the tenant improvements were $6.4 and $2.0 million, respectively. The discount rate for the operation lease was 6.0%, resulting in an imputed interest amount of $3.3 million.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Credit Facility

On February 19, 2021, ~~upon completion~~we entered into a credit agreement with a syndicate of ~~tenant improvements.~~lenders and JPMorgan Chase Bank, N.A., as administrative agent for the lenders, providing for a $135.0 million revolving credit facility. By providing backup liquidity for future draws on our construction loans, we expect the availability of the revolving credit facility will enable us to use a larger percentage of our cash balances for lending activities without planning to incur debt in the ordinary course of business.

Our obligations under the revolving credit facility are secured by substantially all of our Company’s 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 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 and a total debt to equity 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 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.

Legal Proceedings

From time to time, we are named as a defendant in legal actions relating to transactions conducted in the ordinary course of business. Although there can be no assurance of the outcome of such legal actions, in the opinion of management, we do not have a potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially affect our results of operations, financial condition or cash flows.

Concentration Risk

~~We originate~~Our portfolio of active loans is primarily ~~short-term loans~~ secured by first deed of trust liens on residential and commercial real estate located in 1314 states and the District of Columbia. Our loan portfolio is also concentrated within 10 counties, the largest being ~~Wasatch~~Utah county in Utah. As of ~~June 30,~~March 31, 2021 and December 31, 2020, the top 10 counties make up ~~46.7%~~44.5% and 43.2% of the total committed amount of loans in our total portfolio.

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Broadmark Realty Capital Inc.

Notes to Condensed Consolidated Financial Statements

Note 119 - Related party transactions

Private Placement with Farallon

On November 14, 2019, Broadmark Realty consummated a business combination (the “Business Combination”) pursuant to an Agreement and Plan of Merger, dated August 9, 2019 (the “Merger Agreement”). In connection with the Business Combination and ~~concurrently with~~ the execution of the Merger Agreement, ~~the Company~~we entered into certain subscription agreements with affiliates of Farallon Capital Management, L.L.C. (the “Farallon Entities”) for a private placement (the “PIPE Investment”) of ~~the Company’s~~our shares of common stock, pursuant to which, immediately prior to the ~~Company~~consummation of the Business Combination, we issued and sold to the Farallon Entities an aggregate of 7,174,163 shares of common stock for an aggregate purchase price of approximately $75.0 million ~~immediately prior to the consummation of the Business Combination~~ at a price per share equal to $10.45352229 (the “Reference Price”). In addition, pursuant to the subscription agreements, the Farallon Entities have an option to purchase up to $25.0 million of additional shares of common stock, exercisable at the Reference Price during the 365-day period following the consummation of the Business Combination. In connection with the PIPE Investment, ~~the Company~~we issued to the Farallon Entities an aggregate of 7,174,163 Public Warrants. The Farallon Entities received a fee for each warrant equal to the cash payable per each warrant held by unaffiliated Public Warrant holders in connection with the warrant amendment proposal approved as part of the Business Combination, in an amount equal to $1.60. In addition, the Farallon Entities are entitled to cash settle, in whole or in part, the exercise of their option to purchase up to $25.0 million of additional shares of common stock to the extent the delivery of the additional shares to the Farallon Entities would result, together with their affiliates and any other persons whose beneficial ownership of shares of common stock would be aggregated with the Farallon Entities or their affiliates for purpose of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in beneficial ownership in excess of 9.9% of the shares of common stock outstanding immediately after giving effect to such issuance of the shares of common stock.$1.60 per warrant. As a result of the PIPE Investment, the Farallon Entities own more than 5% of our outstanding common stock.

~~The Company~~We also provided the Farallon Entities with certain registration rights in connection with the PIPE Investment, pursuant to which we registered in December 2019 the shares of our common stock, Public Warrants and shares issuable upon exercise of the ~~option and~~ Public Warrants under the Securities Act. As part of the PIPE Investment, the Farallon Entities had an option (the “Optional Subscription”) to purchase up to $25 million of additional shares of common stock, which were exercisable during the 365-day period following the consummation of the Business Combination at $10.45352229 (the “Reference Price”). The Farallon Entities were entitled to cash settle, in whole or in part, the exercise of the Optional Subscription, and therefore, the Optional Subscription did not meet the requirements for equity classification and was assumed to be settled in cash and classified as a liability in our consolidated balance sheet. The Optional Subscription expired unexercised on November 14, 2020, and therefore the liability was $0 as of December 31, 2020. The change is fair value of the Optional Subscription Liability was included in the condensed consolidated statements of income and was estimated using a lattice model and the expected volatility was based on the historical volatility of a peer group of public companies.

Broadmark Private REIT, LLC

The Private REIT is a private real estate finance company that primarily participates in short-term, first deed of trust loans secured by real estate that are originated, underwritten and serviced by Broadmark Realty Capital Inc. The Private REIT is managed by our subsidiary in accordance with a market-based arrangement and was determined to be a voting interest ~~entity for which we, through our wholly owned subsidiary acting as manager with 0 equity investment,~~entity. We do not ~~hold~~directly or indirectly control the Private REIT and own only a ~~controlling~~nominal interest in the Private REIT’s common units and, therefore, we do not consolidate the Private REIT. Furthermore, the Private ~~REIT participation~~REIT’s participations in loans originated by us ~~meets~~meet the characteristics of a participating ~~interest in accordance with ASC 860~~interests and therefore, isare treated as ~~a sale~~sales of mortgage notes receivable and isare derecognized from our ~~unaudited~~ condensed consolidated financial statements. ~~As of June 30, 2020, the Private REIT’s assets under management were approximately $12.4 million.~~

Note 1210 - Subsequent events

Dividend Declaration

On ~~July 13, 2020,~~April 16, 2021, our board of directors declared a ~~common stock~~cash dividend of ~~$0.06~~$0.07 per common share ~~for the month of July 2020, which is~~ payable on ~~August~~May 14, ~~2020~~2021 to stockholders of record as of July 31, 2020. On August 10, 2020, our board of directors declared a common stock dividend of $0.06 per share for the month of August 2020, which is payable on September 15, 2020 to stockholders of record as of August 31, 2020.

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~~Broadmark Realty Capital Inc.~~

~~Notes to Consolidated Financial Statements~~

~~Loan Portfolio~~

~~Subsequent to June~~April 30, ~~2020, through August 7, 2020, we originated $88.0 million in face amounts of mortgage notes receivable.~~2021.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with the ~~unaudited~~ condensed consolidated financial statements and related notes in Part I, Item 1 ~~and the “Risk Factors” section in Part II, Item 1A~~ of this Quarterly Report on Form 10-Q and in conjunction with our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019~~2020 filed with the SEC on March ~~16, 2020~~2, 2021 including the “Risk Factors” section and consolidated financial statements and notes included therein. 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. The results of operations for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 are not necessarily indicative of the results that may be expected for the full year ended December 31, ~~2020~~2021 or for any other period. Unless the context otherwise requires, references to “Broadmark Realty,” the “Company,” “we,” “us” and “our” refer to Broadmark Realty Capital Inc. and its consolidated ~~subsidiaries after the Business Combination and refer to the Predecessor Company Group for periods prior to the Business Combination.~~subsidiaries.

Broadmark Realty, a Maryland corporation, is an internally managed commercial real estate finance company that ~~provides secured financing to real estate investors and developers. We intend to elect~~has elected to be taxed as a ~~REIT~~real estate investment trust (“REIT”) for U.S. federal income tax ~~purposes commencing with our taxable year ending December 31, 2019.~~purposes. Based in Seattle, Washington, we specialize in underwriting, funding, servicing and managing a portfolio of short-term, first deed of trust loans to fund the construction and development of, or investment in, ~~residential~~ or commercial properties. We operate in select states that we believe to have favorable demographic trends and that provide ~~us the ability~~more efficient and quicker access to ~~efficiently access the underlying~~ collateral in the event of borrower default. As of ~~June 30, 2020,~~March 31, 2021, our portfolio of 200 active loans had approximately ~~$1.1~~$1.3 billion of total commitments and $871.5 million of principal outstanding across 137 borrowers in 1114 states and the District of Columbia, of which ~~approximately $832.3~~$88.4 million ~~of total principal balance~~and $42.7 million, respectively, were ~~funded and outstanding by us and $6.9 million by~~sold to the Private REIT. We ~~operate~~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, construction holdbacks and committed amounts for future draws and interest reserves on our ~~business~~loans. To date our loan portfolio has been 100% equity funded, and as ~~one reportable segment.~~of March 31, 2021, we have no outstanding debt. We plan to opportunistically raise capital in the public market from time to time based on market conditions to fund the growth of our portfolio and produce attractive returns for our stockholders. On February 19, 2021, we closed on a $135.0 million revolving credit facility, which we expect will enable us to use a larger percentage of our cash balances for lending activities without planning to incur debt in the ordinary course of business.

Properties securing our loans are generally classified as residential properties, commercial properties or undeveloped land, and are typically not income producing. Each loan is secured by a first deed of trust lien on real estate. Our lending policy limits the committed amount 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. Our lending policy also limits the initial outstanding principal balance of each loan to a maximum LTV of up to 65% of the “as-is” 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 ~~June 30, 2020,~~March 31, 2021, the weighted average LTV was 59.9% across our active loan portfolio based on the total commitment of the loan and “as-complete” appraisals. In addition, ~~each loan is also~~our loans are typically personally guaranteed on a recourse basis by the principals of the borrower and/or others at our discretion to provide further credit support for the loan. The ~~guaranty~~personal guarantee may be collaterally secured by a pledge of the guarantor’s interest in the borrower or other real estate or assets owned by the guarantor.

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Our loans typically range from $0.1 to ~~$35~~$40 million in total commitment at origination, generally bear interest at a fixed annual rate of 10% to 13% and have initial terms typically ranging from five to 18 months in duration based on the size of the project and expected timeline for completion of construction, which we often elect to extend for several months based on our evaluation of the project. As of ~~June 30, 2020,~~March 31, 2021, the average total commitment of our active loans was ~~$5.2~~$6.4 million and the weighted average remaining term to contractual maturity of our active loans was approximately seven months. We usually receive loan origination fees, or “points,” typically ranging from 4%2% to 5% of the total commitment at origination, along with loan amendment and extension fees, each of which varies in amount based upon the term of the loan and the quality of the borrower and the underlying collateral. In addition, ~~to loan origination~~we charge fees weon past due receivables and receive ~~late fees paid by borrowers and/or are reimbursed by~~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.

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In addition to the natural seasonality inherent in our business whereby winter months are typically less favorable to construction, restrictions related to the Business Combination decreased the amount of our loan originations for the second half of 2019 and early 2020. After August 2019, the pending Business Combination required us to essentially pause our ability to raise capital and in turn originate new loans. In the first quarter ofMarch 2020, we focused on rebuilding our pipeline and began to strategically deploy the proceeds from the Business Combination; these rebuilding efforts began to slow in March due to the uncertainty associated with the impacts of COVID-19. We believe that the launch oflaunched the Private REIT ~~in March 2020 will~~to provide access to an additional source of capital ~~in the future to participate~~and fund participations in loans originated by Broadmark ~~which we expect to position us~~Realty. We believe the Private REIT enhances our ability to increase originations and grow our asset base, subject to market conditions.

As of ~~June 30, 2020,~~March 31, 2021, the ~~Private REIT’s assets under management were approximately $12.4 million.~~

~~The~~ COVID-19 pandemic is ~~significantly affecting, and can be expected to continue to impact,~~ongoing. As a result of the ~~capital markets and the construction lending market, at least in the near term. While~~pandemic, we have implemented a variety of business continuity initiatives, restrictions imposed in connection with COVID-19 or the impact on key employees could create significant challenges for our operations. We have experienced an adverse impact on our loan portfolio primarily in the form of a significant increase in defaulted loans and a slow-down in construction ~~progress and an expected reduction in demand for and the value of commercial and residential real estate properties.~~progress. For example, delays in local government permitting and inspections arising from measures to limit the spread of COVID-19 ~~have~~ delayed some projects in 2020, adversely affecting the ability of borrowers to complete the projects in accordance with the terms of the loans. ~~Similarly,~~During the ~~COVID-19 pandemic and containment measures have contributed to, among other things, adverse impacts on demand for and the value~~first half of commercial and residential real estate that our borrowers have developed that make it less likely that a borrower can sell or lease the property it is developing in an amount sufficient to repay the borrower’s loan, or that a developer, who would be our borrower, will elect to go forward with a new project. As a result,2020, we ~~are seeing~~saw an increase in delinquencies and requests for extensions or ~~forbearance.~~forbearance, which began to stabilize in the third quarter of 2020. In addition, market conditions, and in some cases moratoriums on the foreclosure process, have increased the timeline to resolve non-performing loans. Delays in repayment of our outstanding loans or sales of foreclosed properties reduce the capital available for future loan originations. If

In 2021, the ~~pandemic is prolonged, it~~U.S. and global economy has begun reopening and wider distribution of effective vaccines for COVID-19 will likely encourage greater economic activity. Nonetheless, the recovery could ~~increase~~remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness in preventing the spread of COVID-19, including its new variant strains. There remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic on economic and market conditions. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results for the year ending December 31, 2021 and potentially longer.

As a result of limited residential housing supply, net migration trends and a low interest rate environment, we have seen an increase in new parties entering the real estate lending market as economic conditions have begun to stabilize from the impact of the COVID-19 pandemic. Such new entrants, as well as existing lenders, have been aggressively pursuing yields. This has resulted in increased competition and pricing pressure on our business, which has driven, and ~~results~~we expect will continue to drive, increased variability in the amount of ~~operations.~~our loan originations from quarter-to-quarter. In addition, since we primarily compete on the basis of borrower relationships, loan structure, terms and service rather than on price, competitive conditions have led us in some cases to originate loans with terms that deviate from our historical practice, such as a reduction in or absence of minimum interest provisions in our mortgage notes, which in turn reduce the interest income we earn on those loans. We expect these trends related to the competitive environment to continue.

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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. Our loans typically bear interest at a fixed annual rate of 10% to 13%, paid monthly, primarily from interest reserves and, to a lesser extent, cash payments. AsMany of our mortgage notes provide for minimum interest provisions, to which the contractual rate applies, which is typically between 50% and 70% of the face amount of the note until the outstanding principal under the note exceeds a minimum threshold. 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 in contractual default reduce our effective interest-bearing principal and the interest income we earn on our loans. For the three months ended March 31, 2021, there was an increase in our loans in contractual default status compared to historic levels, as delays in completion of projects or costs in excess of the original budget led to us placing a great amount of loans in default, primary as a mechanism to ultimately protect against incurred losses of principal on such loans. We expect the trend of lower effective interest-bearing principal than historic levels to continue in subsequent quarters as a result of competitive conditions in the market and our default resolution strategy. In addition, as we have historically had no debt outstanding, we have had no borrowing costs and accordingly our gross interest income earned on our loans has been equivalent to net interest income.

Fees and other revenue recognized from originating and servicing our loans. Fee income is comprised of loan origination fees, loan renewal fees and inspection fees. The majority of fee income is comprised of loan origination fees, or “points,” which typically range from 4%2% to 5%, on an annualized basis, of the total commitment at origination. In addition to origination fees, we earn loan extension fees when maturing loans are renewed or ~~extended.~~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 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. ~~We also earn inspection fees when an inspection of work progress is required to fund a loan draw, although inspection fees are typically passed on to pay third party inspectors.~~

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 ~~loans being repaid.~~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 is generally repaid on a faster basis than to other types of lenders, making redeployment of capital through our originations ~~function~~process an important factor in our success.

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The following tables contains the total amount of our loan originations and repayments for the periods indicated:


	Three Months Ended		Six Months Ended
	June 30,		June 30,		Three Months Ended		Three Months Ended
(dollars in millions)	2020		2020		March 31, 2021		March 31, 2020
Loans originated	$	50.5	$	158.6
Loans originated⁽¹⁾					$	117.6	$	108.5
Loans repaid	$	53.8	$	148.9	$	71.2	$	96.4

(1)	Based on total loan commitment amounts and excluding amendments.

Credit quality of our loan portfolio.~~Maintaining~~ All of our loans are construction loans secured by residential or commercial real estate and, in assessing estimated credit losses, we evaluate various metrics, including, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

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The following tables allocate the carrying value of our loan portfolio based on our internal credit quality indicators used in assessing estimated credit losses and vintage of origination at the ~~loans in our portfolio~~dates indicated:


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	505,347	62.0	%	$	118,678	$	252,275	$	37,051	$	3,080	$	88,973	$	5,290
Horizontal Development		143,405	17.6			60,361		63,180		15,453		283		—		4,128
Investment		166,382	20.4			46,769		72,987		18,917		3,809		17,953		5,947
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽²⁾		(10,663)
Carrying value, net	$	804,471

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)	$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 condensed consolidated balance sheet.


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	149,936	18.4	%	$	44,920	$	54,135	$	19,952	$	—	$	25,897	$	5,032
Residential Lots		125,808	15.4			57,579		49,003		9,874		—		—		9,352
Condos		85,240	10.5			9,269		39,408		200		1,326		35,037		—
Single family housing		73,990	9.1			16,047		45,079		5,579		1,078		5,484		723
Land		73,237	9.0			40,678		12,321		—		3,052		17,186		—
Townhomes		80,611	9.9			12,348		43,735		—		1,716		22,554		258
Mixed Use		40,429	5.0			9,884		28,622		1,923		—		—		—
Hotel		53,253	6.5			1,192		42,990		9,071		—		—		—
Senior Housing		38,149	4.7			—		38,149		—		—		—		—
Offices		31,525	3.9			—		9,480		22,045		—		—		—
Commercial Lots		15,259	1.9			—		15,259		—		—		—		—
Retail		11,838	1.5			5,594		4,346		1,898		—		—		—
Industrial		15,403	1.9			15,403		—		—		—		—		—
Quadplex		5,915	0.7			—		5,915		—		—		—		—
Commercial		6,524	0.8			5,645		—		879		—		—		—
Duplex		3,821	0.5			3,053		—		—		—		768		—
Commercial other		4,196	0.3			4,196		—		—		—		—		—
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽²⁾		(10,663)
Carrying value, net	$	804,471

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)	$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 condensed consolidated balance sheet.

Table of ~~critical importance as loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity. As~~Contents


	At March 31, 2021				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2021		2020		2019		2018		2017		Prior
LTV ⁽²⁾
0 - 40%	$	45,090	5.5	%	$	21,356	$	20,369	$	—	$	3,052	$	313	$	—
41 - 45%		29,256	3.6			27,489		1,767		—		—		—		—
46 - 50%		46,420	5.7			15,507		15,460		15,453		—		—		—
51 - 55%		77,277	9.5			27,310		29,594		2,777		—		16,873		723
56 - 60%		54,992	6.7			15,073		25,769		200		—		13,950		—
61 - 65%		532,281	65.3			118,559		270,307		52,991		4,120		75,790		10,514
66 - 70%		17,582	2.2			514		17,068		—		—		—		—
71 - 75%		—	0.0			—		—		—		—		—		—
76 - 80%		—	0.0			—		—		—		—		—		—
Above 80%		12,236	1.5			—		8,108		—		—		—		4,128
Total	$	815,134	100.0	%	$	225,808	$	388,442	$	71,421	$	7,172	$	106,926	$	15,365
CECL allowance⁽³⁾		(10,663)
Carrying value, net	$	804,471

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(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)	$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 condensed consolidated balance sheet.


	At December 31, 2020				Year Originated⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2020		2019		2018		2017		2016		Prior
Construction Type
Vertical Construction	$	514,136	63.5	%	$	354,012	$	57,090	$	6,853	$	88,655	$	7,526	$	—
Horizontal Development		153,345	19.0			129,607		15,028		283		—		8,427		—
Investment		141,595	17.5			98,146		18,657		7,259		16,444		—		1,089
Total	$	809,076	100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

Table of ~~June 30, 2020, a total of 30 loans are in contractual default totaling $177.0 million in principal balance outstanding, which excluding ten~~Contents


	At December 31, 2020				Year Originated⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2020		2019		2018		2017		2016		Prior
Collateral Type
Apartments	$	129,588	16.0	%	$	79,931	$	18,953	$	—	$	24,232	$	6,472	$	—
Residential Lots		124,548	15.4			105,830		10,291		—		—		8,427		—
Condos		92,245	11.4			52,714		3,106		4,405		32,020		—		—
Single family housing		90,131	11.1			69,438		8,839		1,028		10,103		—		723
Land		72,913	9.0			48,844		—		7,259		16,444		—		366
Townhomes		72,773	9.0			47,391		1,061		1,703		21,564		1,054		—
Mixed Use		66,092	8.2			60,232		5,860		—		—		—		—
Hotel		51,115	6.3			42,874		8,241		—		—		—		—
Senior Housing		34,283	4.2			34,283		—		—		—		—		—
Offices		29,540	3.7			8,495		21,045		—		—		—		—
Commercial Lots		15,683	1.9			15,683		—		—		—		—		—
Retail		11,397	1.4			9,500		1,897		—		—		—		—
Industrial		11,309	1.4			704		10,605		—		—		—		—
Quadplex		5,592	0.7			5,592		—		—		—		—		—
Commercial		877	0.1			—		877		—		—		—		—
Duplex		736	0.1			—		—		—		736		—		—
Commercial other		254	0.1			254		—		—		—		—		—
Total	$	809,076	100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.


	At December 31, 2020				Year Originated ⁽¹⁾
(dollars in thousands)	Carrying Value		% of Portfolio		2020		2019		2018		2017		2016		Prior
LTV⁽²⁾
0 - 40%	$	22,601	2.8	%	$	18,112	$	—	$	3,862	$	261	$	—	$	366
41 - 45%		68,263	8.4			44,683		20,183		3,397		—		—		—
46 - 50%		23,864	2.9			15,917		7,224		—		—		—		723
51 - 55%		76,539	9.5			57,583		2,774		—		16,182		—		—
56 - 60%		135,170	16.7			117,309		3,106		—		9,639		5,116		—
61 - 65%		450,253	55.7			301,964		57,488		7,136		76,139		7,526		—
66 - 70%		9,416	1.2			9,416		—		—		—		—		—
71 - 75%		1,983	0.2			1,983		—		—		—		—		—
76 - 80%		14,544	1.8			14,544		—		—		—		—		—
Above 80%		6,443	0.8			254		—		—		2,878		3,311		—
Total	$	809,076	100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590)
Carrying value, net	$	798,486

(1)	Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(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.

Dividends Declared. The following table summarizes the declared cash dividends per common share activity for which forbearance agreements were executed totaling $41.3 million in principal outstanding. Of the loans in contractual default, 13 loans had impairment as of June 30, 2020 with our estimated losses reflected in our allowance for loan losses of $6.8 million. As a result of economic conditions and uncertainty from the COVID-19 pandemic, we had an increase in contractual defaults of 17 loans during the three months ended March 31, ~~2020 with three~~2021 and 2020:


	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020
Dividends declared per common share	$	0.21	$	0.24

Table of ~~these contractual defaults being resolved during~~Contents

Earnings per Common Share. The following table summarizes the earnings (GAAP) and distributable earnings (non-GAAP) per common share activity for the three months ended ~~June 30, 2020. Our new contractual defaults decreased~~March 31, 2021 and 2020:


	Three Months Ended		Three Months Ended
	March 31, 2021		March 31, 2020
Earnings per common share, basic	$	0.15	$	0.20
Earnings per common share, diluted		0.15		0.20
Distributable earnings per diluted share of common stock prior to realized loss on investments		0.19		0.21
Distributable earnings per diluted share of common stock	$	0.18	$	0.20

Non-GAAP Financial Measures

Distributable Earnings

We have elected to ~~eight loans during the three months ended June 30, 2020 with only two new contractual defaults in the month of June 2020 evidencing~~present “distributable earnings,” a ~~positive trend in contractual defaults.~~

~~Core Earnings~~

~~Core earnings is a~~supplemental non-GAAP financial measure used by management ~~as a supplemental measure~~ to evaluate our operating performance. We define ~~core~~distributable earnings as net income attributable to common stockholders adjusted for: (i) impairment recorded on our ~~investments in mortgage notes receivable;~~investments; (ii) ~~realized and~~ unrealized gains or losses on ~~both~~ our investments ~~and optional subscription liabilities;~~(including provision for credit losses); (iii) non-capitalized transaction-related ~~expenses~~ and ~~first year~~new public company transition expenses; (iv) non-cash stock-based compensation; (v) depreciation and amortization of our intangible assets; and (vi) deferred taxes, which are subject to variability and generally not indicative of future economic performance or representative of current operations.

During the three months ended March 31, 2021 and 2020, provision for credit losses, net was $2.7 and $4.4 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 ~~“core~~“distributable earnings” specified above allow investors and analysts to readily identify and track the operating performance of ~~the~~our assets, ~~that form the core of our activity,~~ assist in comparing the ~~core~~ operating results between periods, and enable investors to evaluate our current ~~core~~ performance using the same measure that management uses to operate the business. ~~Core~~Distributable earnings excludes certain recurring items, such as unrealized gains and losses (including provision for ~~loan~~credit losses) and non-capitalized transaction-related expenses, because they are not considered by management to be part of our ~~core~~primary operations for the reasons described herein. As such, ~~core~~distributable earnings is 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 at least 90% of our annual REIT taxable income 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 is one of many factors considered by our board of directors in declaring dividends and, while not a direct measure of taxable income, over time, the measure can be considered a useful indicator of our dividends.

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~~Core~~Distributable earnings does 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 this measure may not be comparable to similarly entitled measures reported by other companies. ~~Set forth~~

The table below is a reconciliation of ~~core~~distributable earnings to the most directly comparable GAAP financial measure:



	Three Months Ended		Six Months Ended
	June 30,		June 30,		Three Months Ended		Three Months Ended
(dollars in thousands, except share and per share data)	2020		2020		March 31, 2021		March 31, 2020
Net income attributable to common stockholders	$	19,759	$	47,038	$	20,381	$	26,469
Adjustments for non-core earnings:
Adjustments for non-distributable earnings:
Stock-based compensation expense		967		1,881		737		914
First year public company transition expenses ⁽¹⁾		834		2,066
New public company expenses ⁽¹⁾						664		1,232
Change in fair value of optional subscription liabilities		1,458		(3,146)		—		(4,604)
Amortization of intangible assets		119		(785)
Loan loss provision		309		3,931
Core earnings	$	23,446	$	50,985

Earnings per share, basic	$	0.15	$	0.36
Earnings per share, diluted	$	0.15	$	0.36
Core earnings per share, basic	$	0.18	$	0.39
Core earnings per share, diluted	$	0.18	$	0.39
Depreciation and amortization						163		(904)
Provision for credit losses, net						2,708		4,432
Distributable earnings prior to realized loss on investments					$	24,653	$	27,539
Realized credit losses ⁽²⁾						(1,401)		(537)
Distributable earnings					$	23,252	$	27,002
Distributable earnings per diluted share of common stock prior to realized loss on investments					$	0.19	$	0.21
Distributable earnings per diluted share of common stock					$	0.18	$	0.20
Weighted-average number of shares of common stock outstanding, basic and diluted
Basic		132,165,005		132,120,290		132,550,227		132,111,329
Diluted		132,165,005		132,120,290		132,678,812		132,336,315

(1)

Expenses directly related to professional fees in connection with our first year of public company reporting ~~and compliance, primarily professional fees in connection with~~procedures, the design and implementation of internal controls ~~and procedures~~ under Section 404 of the Sarbanes-Oxley ~~Act.~~Act and the implementation of the CECL standard.

(2)	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.

~~Principal Factors Affecting the Comparability of~~Segment Reporting

We operate our ~~Results of Operations~~

~~As a commercial real estate finance company, our results are affected by factors such~~business as changes in economic climate, demand for housing, population trends, construction costs and the availability of real estate financing from other lenders. These factors may have an impact on our ability to originate new loans or the performance of our existing loan portfolio.

~~From November 15, 2019, our consolidated financial statements reflect BRELF II,~~ one of the Predecessor Companies, as the accounting acquirer and Successor entity, acquiring the other three Predecessor Companies, the four Predecessor Management Companies, and Trinity in the Successor period. The Business Combination transaction reflects a change in accounting basis for the Predecessor Company Group (other than BRELF II). As Trinity was a special purpose acquisition company, its acquisition is reflected as the issuance of shares for cash. For periods prior to November 15, 2019, in lieu of presenting separate financial statements of each of the Predecessor Companies and Predecessor Management Companies, consolidated financial statements have been presented, as these entities were under common management. Broadmark Realty is the successor issuer to Trinity.

As a result of the Business Combination, beginning from November 15, 2019, our consolidated financial statements are presented on a new basis of accounting pursuant to ASC 805, Business Combinations to reflect BRELF II acquiring the other entities within the Predecessor Company Group and Trinity, for more information refer to Note 3 to the unaudited condensed consolidated financial statements included in this quarterly report.reportable segment.

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Table of Contents

Results offrom Operations

~~The tables below set forth the results of our operations and the results of the operations of our Predecessor for the periods presented, both in dollars and as a percentage of revenue.~~ 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):



	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019		Three Months Ended		Three Months Ended
Statements of Operations Data:	(Successor)		(Predecessor)		(Successor)		(Predecessor)		March 31, 2021		March 31, 2020
Revenues
Interest income	$	22,180	$	23,456	$	46,733	$	44,079	$	22,017	$	24,553
Fee income		6,890		13,117		14,105		22,277		7,451		7,215
Total Revenue		29,070		36,573		60,838		66,356		29,468		31,768
Other Income (Expense):
Other Income:
Change in fair value of optional subscription liabilities		(1,458)		—		3,146		—		—		4,604
Expenses
Impairment:
Loan loss provision		309		297		3,931		73
Provision for credit losses, net										2,708		4,432
Operating expenses:
Compensation and employee benefits		3,044		1,925		6,237		3,853		3,560		3,193
General and administrative		4,500		3,151		6,778		6,241		2,819		2,278
Total Expenses		7,853		5,373		16,946		10,167		9,087		9,903
Income before income taxes		19,759		31,200		47,038		56,189		20,381		26,469
Income tax provision		—		—		—		—		—		—
Net income	$	19,759	$	31,200	$	47,038	$	56,189	$	20,381	$	26,469


	Three Months Ended		Three Months Ended
Percentage of Revenue:	March 31, 2021		March 31, 2020
Revenues
Interest income	75	%	77	%
Fee income	25		23
Total Revenue	100		100
Other Income:
Change in fair value of optional subscription liabilities	—		14
Expenses
Impairment:
Provision for credit losses, net	9		14
Operating expenses:
Compensation and employee benefits	12		10
General and administrative	10		7
Total Expenses	31		31
Income before income taxes	69		83
Income tax provision	0		0
Net income	69	%	83	%

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Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,

2020

2019

2020

2019

Percentage of Revenue:

(Successor)

(Predecessor)

(Successor)

(Predecessor)

Revenues:












Interest income

76
%

64
%

77
%

66
%
Fee income

24

36

23

34

Total Revenue

100

100

100

100

Other Income:

Change in fair value of optional subscription liability

(5)

0

5

0

Expenses

Impairment:

Loss provision (recovery)

1

1

7

0

Operating expenses:

Compensation and employee benefits

11

5

10

6

General and administrative

15

9

11

9

Total Expenses

27

15

28

15

Income before income taxes

68

85

77

85

Income tax provision

0

0

0

0

Net income

68
%

85
%

77
%

85
%

Comparison of Results of Operations

Unless otherwise stated, for purposes of this Management’s Discussion and Analysis of Financial Condition and Results Ofof Operations, in the comparison of the results of operations for the three months ended ~~June 30,~~March 31, 2021 and March 31, 2020, and June 30, 2019, Successor period refers to the three months ended June 30, 2020, and references to Predecessor period refer to the three months ended June 30, 2019, and for the discussion of the results of operations for the six months ended June 30, 2020 and June 30, 2019, Successor period refers to the six months ended June 30, 2020, and references to Predecessor period refer to the six months ended June 30, 2019.

~~Comparison of Results of Operations for the~~ Three Months Ended ~~June 30,2020 and June 30, 2019~~March 31, 2021 Compared to March 31, 2020

Revenue

Total revenue for the three months ended ~~June 30,~~March 31, 2021 and 2020 was $29.5 and ~~2019 were $29.1 and $36.6~~$31.8 million, respectively, a decrease of ~~$7.5~~$2.3 million. The decrease primarily relates to a decrease in ~~origination and extension fee~~interest income ~~relative to the Predecessor period,~~of $2.5 million, which ~~are~~is discussed below.

Expenses

Total expenses for the three months ended ~~June 30,~~March 31, 2021 and 2020 were $9.1 and ~~2019 were $7.9 and $5.4~~$9.9 million, ~~respectively, an increase of $2.5 million.~~respectively. The ~~increase~~decrease in total expenses from the prior period was ~~primarily~~ due to a decrease in the provision for credit losses, net of $1.7 million; partially offset by an increase in ~~the~~ general and administrative ~~expenses resulting from an increase in accounting~~ and ~~legal fees associated with being a public company, including certain non-recurring expenses, and an increase in~~ compensation and employee benefits ~~primarily associated with stock-based compensation expense from equity awards.~~of $0.5 and $0.4 million, respectively, which are discussed below.

Interest Income

Interest income ~~decrease~~decreased by ~~$1.3~~$2.5 million or ~~5.4%~~10.3% for the three months ended ~~June 30, 2020~~March 31, 2021 from the three months ended ~~June 30, 2019 primarily attributable~~March 31, 2020 due to a lower effective interest-bearing principal during the three months ended March 31, 2021 as a result of: (1) most originations occurring in the last month of the three months ended March 31, 2021 and a reduction in the minimum interest provisions included in mortgage notes for new loan originations; and (2) an increase in the loans in non-accrual status for the three months ended March 31, 2021 compared to the ~~increase in loans designated as non-performing and placed on non-accrual status primarily attributable to the impact of the COVID-19 pandemic on the current economic environment~~.three months ended March 31, 2020.

~~Table of Contents~~

Fee Income

Fee income ~~decreased by $6.2~~was relatively flat with an increase of $0.2 million or ~~47.5%~~3.3% for the three months ended ~~June 30, 2020~~March 31, 2021 from the three months ended June 30, 2019 primarily attributable to a decrease in origination and extension fee income relative to the Predecessor period primarily as a result of (1) us beginning to defer and amortize these fees on November 15, 2019 whereas in the past, the Predecessor’s policy was to record the fees when received and (2) decrease in new originations during the three months ended June 30, 2020 due to disruptions in our construction lending activity associated with the COVID-19 pandemic.March 31, 2020.

~~Provision for loan losses~~

~~There was no significant change in the amount of the provision for loan losses for the three months ended June 30, 2020 from the three months ended June 30, 2019.~~

Other Income

The change in fair value of the Optional Subscription Liability is an unrealized gain or loss based on the fair value of an optional subscription that expired unexercised in the fourth quarter of ~~up to $25~~2020. For the three months ended March 31, 2020, $4.6 million of ~~additional common stock issued as a part of~~other income was recognized due to the ~~Business Combination. The Optional Subscription Liability warrants contain a cash settlement feature, which requires accounting for~~decline in the fair value of the ~~liability at each reporting period. Other expense of $1.5 million was recognized~~Optional Subscription Liability primarily due to the decline in our stock price during the ~~Successor period resulting~~three months ended March 31, 2020.

Provision for credit losses, net

The provision for credit losses decreased $1.7 million for the three months ended March 31, 2021 from the ~~increase~~three months ended March 31, 2020. The provision for credit losses in ~~value~~the 2020 period was the result of ~~the optional subscription warrants during the period which resulted from the~~an increase in the ~~market price~~required CECL Allowance due to a significant increase in loans in contractual default associated with COVID-19; whereas, for the 2021 period, it represents maintenance activity on a similarly sized portfolio of ~~our common stock.~~loans in contractual default status with a previously established CECL Allowance.

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Compensation and Employee Benefits

Compensation and employee benefits expense increased by ~~$1.1~~$0.4 million or ~~58.1%~~11.5% for the three months ended ~~June 30, 2020~~March 31, 2021 from the three months ended ~~June 30, 2019~~March 31, 2020 primarily attributable to ~~$1.0 million of stock-based compensation expense recorded for the three months ended June 30, 2020 and $0.3~~$0.6 million related to an increase in employee ~~headcount. The stock-based compensation expenses resulted from grants of RSUs at fair value, which are being amortized over the respective vesting periods. These increases were~~headcount partially offset by a ~~decrease of~~ $0.2 million ~~in expenses related to grants~~reduction of ~~restricted units in the Predecessor period.~~

~~General and Administrative~~

~~General and administrative~~stock-based compensation expense increased by $1.3 million or 42.8% for the three months ended June 30, 2020 from the three months ended June 30, 2019 primarily as a result of an increase in accounting and legal fees of $3.1 million associated with being a new public company including certain first year public company expenses. These increases were partially offset by a decrease of $1.8 million of non-recurring broker commissions associated with growth in the loan portfolio during the three months ended ~~June 30, 2019.~~

~~Comparison of Results of Operations for the Six Months Ended June 30,2020 and June 30, 2019~~

~~Revenue~~

Total revenue for the six months ended June 30, 2020 and the six months ended June 30, 2019 were $60.8 and $66.4 million, respectively, a decrease of $5.6 million. The decrease primarily relates to a decrease in origination and extension fee income relative to the Predecessor period primarily as a result of us beginning to defer and amortize these fees on November 15, 2019 whereas in the past, the Predecessor’s policy was to record the fees when received. These decreases were partially offset by incremental interest income from a net increase in the size of our loan portfolio during the six months ended June 30, 2020March 31, 2021 compared to the ~~six~~three months ended ~~June 30, 2019.~~

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~~Expenses~~

~~Total expenses for the six months ended June 30, 2020 and the six months ended June 30, 2019~~were $16.9 and $10.2 million, respectively, an increase of $6.7 million. The increase was primarily due to an increase of $3.9 million in the loan loss provision expense resulting from an increase in non-performing loans and an increase in compensation and benefits of $2.4 million primarily associated with stock-based compensation expense under our new employee stock incentive plan.

~~Interest Income~~

Interest income increased by $2.7 million or 6.0% for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily attributable to incremental interest income from a net increase in the size of our loan portfolio of approximately 15% from June 30, 2019 to June 30, 2020, partially offset by the result of placing loans on non-accrual status primarily attributable to the impact of the COVID-19 pandemic on the current economic environment.

~~Fee Income~~

Fee income decreased by $8.2 million or 36.7% for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily attributable to a decrease in origination and extension fee income relative to the Predecessor period primarily as a result of (1) us beginning to defer and amortize these fees on November 15, 2019 whereas in the past, the Predecessor’s policy was to record the fees when received and (2) decrease in new originations during the six months ended June 30, 2020 due to disruptions in our construction lending activity associated with the COVID-19 pandemic.

~~Provision for loan losses~~

Provision for loan losses increased by $3.9 million for the six months ended June 30, 2020 from the six months ended June 30, 2019 as a result of an increase in non-performing loans associated with the current economic environment primarily related to the impact of the COVID-19 pandemic.

~~Other Income~~

The change in fair value of the Optional Subscription Liability is an unrealized gain or loss based on the fair value of an optional subscription of up to $25 million of additional common stock issued as a part of the Business Combination. The Optional Subscription Liability warrants contain a cash settlement feature, which requires accounting for the fair value of the liability at each reporting period. Other income of $3.1 million was recognized during the Successor period resulting from the decline in value of the optional subscription warrants during the period which resulted from the decrease in the market price of our common stock.

~~Compensation and Employee Benefits~~

Compensation and employee benefits expense increased by $2.4 million or 61.9% for the six months ended June 30, 2020 from the six months ended June 30, 2019 primarily attributable to $1.9 million of stock-based compensation expense recorded for the six months ended June 30, 2020 and $0.8 million related to an increase in employee headcount. The stock-based compensation expenses resulted from grants of RSUs. The fair values of the RSUs are being amortized over the vesting periods. These increases were partially offset by a decrease of $0.3 million in expenses related to grants of restricted units in the Predecessor period.March 31, 2020.

General and Administrative

General and administrative expense increased by $0.5 million or ~~8.6%~~23.7% for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 from the ~~six~~three months ended ~~June 30, 2019. This~~March 31, 2020. The increase is due to an increase in amortization expense of $1.1 million during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily as a result of an increase in accounting and legal fees of $4.4 million associated with being a new public company, partially offset by (1) $3.1 million of non-recurring broker commissions associated with growth in the loan portfolio during the six months ended June 30, 2019 and (2) a reversal

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of intangible asset amortization of ~~$0.8~~$0.9 million ~~that~~during the three months ended March 31, 2020. The increase was ~~originally recognized~~partially offset by a decrease of $0.4 million in ~~2019 but was~~professional fees during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 primarily as a ~~measurement period adjustment~~result of the costs incurred in 2020 ~~when~~for first year of public company reporting procedures and in connection with the ~~preliminary valuation~~design and implementation of ~~intangible assets was decreased.~~internal controls under Section 404 of the Sarbanes-Oxley Act.

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 and funding other general business needs. Our primary sources of liquidity and capital resources to date have been derived from the capital contributions from members of the Predecessor Companies, cash flow from operations and payoffs of loans in our existing portfolio. Neither the Successor nor the Predecessor, has utilized any borrowings since inception. As of ~~June 30, 2020,~~March 31, 2021, our cash and cash equivalents totaled ~~$218.0~~$204.3 million.

We seek to meet our long-term liquidity requirements, such as real estate lending needs, including future construction draw commitments through our existing cash resources and return of capital from investments, including loan repayments. Additionally, going forward, we intend to fund our growth in part through ~~the issuance of common stock, potential~~ use of our existing cash and cash equivalents now that we have obtained a revolving credit facility as a cash management ~~tools such~~tool, as ~~a credit facility, and the sale of participation interests in loans we originate to the Private REIT, and fee income from the Private REIT.~~well as potentially issuing additional common stock. As of ~~June 30, 2020,~~March 31, 2021, we had ~~$1.1~~$1.3 billion of total loan commitments outstanding, of which our portion and the Private REIT’s portion of the total principal balance funded and outstanding were ~~$832.3~~$828.8 million and ~~$6.9~~$42.7 million, respectively.

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. By providing backup liquidity for future draws, we expect the availability of the revolving credit facility will enable us to use a larger percentage of our cash balances for lending activities without planning to incur debt in the ordinary course of business.

Our obligations under the revolving credit facility are secured by substantially all of our Company’s 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 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 and a total debt to equity 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.

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On March 2, 2021, we entered into a distribution agreement with J.P. Morgan Securities LLC, Barclays Capital Inc., B. Riley Securities, Inc., JMP Securities LLC and Raymond James & Associates, Inc. as sales 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 three months ended March 31, 2021.

We believe our existing sources of liquidity are sufficient to fund our existing commitments. ~~We anticipate~~However, we are continuing to monitor the COVID-19 pandemic ~~may continue to result in some delays in~~and its impact on us, our borrowers and the ~~payoff of our outstanding loans, which would reduce the capital available to fund new loans. As~~economy as a result, we plan to seek to fund growth in the near term through the sale of participation interests in new mortgage loans to the Private REIT, which will depend on the ability of the Private REIT to raise capital. whole. To the extent funds available for new loans are limited, we will manage our capital deployment based on the receipt of payoffs. In the longer term, we plan to raise equity capital from time to time as a key component of our growth strategy, subject to market conditions. In addition, we are seeking to obtain a working capital credit facility to increase our available cash for deployment. By providing backup liquidity for future draws, a working capital credit facility would enable us to use a larger percentage of our cash balances for lending activities without planning to incur debt in the ordinary course of business. We cannot assure whether will be available to obtain a credit facility on favorable terms or at all.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where Broadmark 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 avoid U.S. federal income tax and the non-deductible excise tax.

Sources and Uses of Cash

The following table sets forth changes in cash and cash equivalents for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~June 30, 2019:~~2020:


	Successor		Predecessor
	Six Months Ended		Six Months Ended		Three Months Ended		Three Months Ended
	June 30,		June 30,		March 31,		March 31,
(dollars in thousands)	2020		2019		2021		2020
Cash provided by (used in):
Operating activities		46,768		54,022	$	16,341	$	18,204
Investing activities		(3,612)		(126,635)		(3,825)		38,990
Financing activities		(63,401)		145,968		(31,614)		(36,973)
Net increase / (decrease) in cash & cash equivalents		(20,245)		73,355	$	(19,098)	$	20,221

Comparison of Results of Cash Flows for the Three Months Ended March 31, 2021 and March 31, 2020

Net cash provided by operating activities for the three months ended March 31, 2021 and 2020 were $16.3 and $18.2 million, respectively. The decrease of $1.9 million in cash provided by operating activities for the three months ended March 31, 2021 from the three months ended March 31, 2020 was primarily due to lower revenue and increased expenses, which are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Comparison of Results of Operations – Three Months Ended March 31, 2021 Compared to March 31, 2020. The aggregate amount of changes in operating assets and liabilities, which are presented in the condensed consolidated statement of cash flows as reconciling items between net income and cash provided by operating activities were comparable for the 2021 and 2020 periods. Accordingly, the decrease in net cash provided by operating activities was not the result of timing of cash receipts and payments for operating activities; rather it was primarily due to lower revenues and higher expenses in the 2021 period compared to the 2020 period. The reconciliation between net income and cash provided by operating activities in the condensed consolidated statement of cash flows also include adjustments to net income for non-cash items that, while fluctuating between the 2021 and 2020 periods, have no effect on cash that was provided by operating activities.

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~~Comparison of Results of Cash Flows for the Six Months Ended June 30, 2020 and June 30, 2019~~

Net cash provided by operating activities for the six months ended June 30, 2020 and 2019 were $46.8 and $54.0 million, respectively. The results of operating activities were affected by an increase in the loan portfolio since June 30, 2019, the effects of the COVID-19 pandemic in 2020 and an increase in expenses resulting from our growth and associated costs with being a public company.

Net cash used in investing activities was $3.8 for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 and ~~2019 were $3.6 and $126.6~~net cash provided by investing activities was $39.0 million ~~respectively.~~for the three months ended March 31, 2020. The ~~decrease~~increase in cash used in ~~2020~~investing activities of ~~$123.0~~$42.8 million was primarily due to the $41.1 million difference for the change in mortgage notes receivable, net amounts between the 2021 and 2020 periods. We experienced a ~~slowing~~modest increase in the size of ~~new~~our loan ~~originations resulting from (1)~~portfolio during the ~~need~~2021 period compared to ~~ramp up lending after~~ the ~~suspension~~2020 period despite the impact of ~~fundraising mandated by~~COVID-19. In the ~~guidelines~~2020 period, which followed the November 2019 completion of the Business Combination ~~(2) the disruption of~~that required us to essentially pause our ~~construction lending pace by the COVID-19 pandemic~~ability to raise capital and ~~(3)~~in turn originate new loans, we experienced a surge in ~~pay-offs~~loan payoffs that were not offset by new originations. New originations were slowed in March 2020 due to the ~~first quarter~~uncertainty associated with the impacts of ~~2020.~~COVID-19.

Net cash used in financing activities was $31.6 and $37.0 million, respectively for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020, ~~was $63.4~~a decrease of $5.4 million ~~which entirely consists~~resulting from the $10.5 million decrease in dividends paid in the 2021 period compared to the 2020 period; partially offset by the $5.1 million payment of ~~dividends paid. Net cash provided by financing activities for~~costs to obtain our credit facility in the ~~six months ended June 30, 2019 was $144.9 million primarily related to member contributions net of distributions.~~2021 period.

Contractual Obligations ~~and Commitments~~

The following table illustrates our contractual obligations and commercial commitments by due date as of ~~June 30,2020:~~March 31, 2021:

Less than 1





More than
(dollars in thousands)

Total

year

1-3 years

3-5 years

5 years
Operating lease obligations

$
12,076

$
647

$
1,879

$
1,993

$
7,557
Construction holdbacks

260,401

230,435

29,966

—

—
Total

$
272,477

$
231,082

$
31,845

$
1,993

$
7,557


			Less than 1						More than
(dollars in thousands)	Total		year		1-3 years		3-5 years		5 years
Construction holdbacks⁽¹⁾		379,069		237,632		141,437		—		—
Operating lease obligations	$	11,527	$	812	$	1,916	$	2,033	$	6,766
Total	$	390,596	$	238,444	$	143,353	$	2,033	$	6,766

(1)

Includes construction holdbacks of $42.1 million on participating interests sold to the Private REIT as of March 31, 2021. The timings and amounts of construction holdbacks funding are uncertain as these commitments relate to loans for construction costs and depend on the progress and performance of the underlying assets of our loans.

Off-Balance Sheet Arrangements

~~We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of June 30, 2020.~~ We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. WeFinally, we have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets as of ~~June 30, 2020.~~March 31, 2021.

Critical Accounting Policies and Estimates

Use of Estimates in the Preparation of Financial Statements

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 loan impairment and valuation of investments in real estate and ~~income taxes.~~taxable income. Management evaluates our policies and assumptions on an ongoing basis.

~~Our~~For a description of our significant accounting policies related to these accounts in the preparation of our consolidated financial statements, ~~are described under the heading “Management Discussion and Analysis~~see “Note 2 - Summary of ~~Financial Condition and Results~~Significant Accounting Policies” of ~~Operations – Critical Accounting Policies and Significant Estimates”~~our condensed consolidated financial statements included in ~~our Annual Report on Form 10-K for the year ended December 31, 2019. As of the date of~~ this ~~filing, there were no significant changes to any of the critical accounting policies and estimates previously described in our Annual Report on Form 10-K except as supplemented below.~~Report.

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~~Loan Impairment and Valuation of Investments in Real Estate~~

Because of, among other factors, the fluctuating market conditions that currently exist in the national real estate markets, and the volatility and uncertainty in the financial and credit markets, it is possible that the estimates and assumptions, most notably those related to the fair value of impaired mortgage loans and investments in real property, could change materially due to the continued volatility of the real estate and financial markets or as a result of a significant dislocation in those markets.

The fair value of impaired mortgage loans and investments in real estate is generally determined using third party appraisals, comparable sales and competitive market analyses. The valuation inputs are highly judgmental.

We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial capability of the borrower, through a personal guarantee to make this determination.

Recently Issued Accounting Pronouncements

For a 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 ~~unaudited~~ condensed consolidated financial statements included in this ~~Quarterly Report on Form 10-Q~~

~~JOBS Act~~

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for public companies that qualify as “emerging growth companies” under the JOBS Act. Emerging growth companies under the JOBS Act are allowed to elect to comply with new or revised accounting pronouncements based on the effective date for private companies rather than the effective date for publicly traded companies. Broadmark Realty is currently an emerging growth company and has elected to delay the adoption of new or revised accounting standards. As a result, Broadmark Realty may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for publicly traded companies that are not emerging growth companies. As such, Broadmark Realty’s financial statements may not be comparable to companies that comply with public company effective dates.

We will cease to qualify as an emerging growth company effective December 31, 2020 unless the eligibility standards are modified. Loss of emerging growth company status will result in our losing our reporting exemptions noted above, and in particular require our independent registered public accounting firm to provide an attestation report on the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 2020 under Section 404(b) of the Sarbanes-Oxley Act.

~~Internal Control over Financial Reporting and Disclosure Control~~

~~Management has identified certain material weaknesses in our internal control over financial reporting. See Item 4 below.~~

~~CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS~~

This Quarterly Report on Form 10-Q (this “Report”) and the exhibits hereto contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and

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Section 21E of the Securities Exchange of Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations of future operations, are forward-looking statements. Forward-looking statements reflect our current views with respect to, among other things, capital resources, portfolio performance and projected results of operations. Likewise, our statements regarding anticipated growth in its operations, anticipated market conditions, demographics and results of operations are forward-looking statements. In some cases, you can identify these forward-looking statements by the use of terminology such as “outlook,” “believes,” “expects,” “projects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words or phrases.

The forward-looking statements contained in this Report and the exhibits hereto are based on our current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause our actual results to differ include, but are not limited to:

●

Factors described under the heading “Risk Factors” in Part II, Item 1A of this Report, and in our Annual Report on Form 10-K for the year ended on December 31, 2019, including those set forth under the “Risk Factors” and “Business” sections;

●

~~disruptions in our business operations, including construction lending activity, relating to COVID-19;~~

●

~~adverse impact of COVID-19 on the value of our goodwill established in the Business Combination;~~

●

~~the magnitude, duration and severity of the COVID-19 pandemic;~~

●

~~the impact of actions taken by governments, businesses, and individuals in response to the COVID-19 pandemic;~~

●

~~the current and future health and stability of the economy and residential housing market, including any extended slowdown in the real estate markets as a result of COVID-19;~~

●

~~defaults by borrowers in paying debt service on outstanding indebtedness;~~

●

~~impairment in the value of real estate property securing our loans;~~

●

~~availability of origination and acquisition opportunities acceptable to us;~~

●

~~potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;~~

●

~~general economic uncertainty and the effect of general economic conditions on the real estate and real estate capital markets in particular;~~

●

~~general and local commercial and residential real estate property conditions;~~

●

~~changes in federal government policies;~~

●

~~changes in federal, state and local governmental laws and regulations that impact our business, assets or classification as a real estate investment trust;~~

●

~~increased competition from entities engaged in construction lending activities;~~

●

~~changes in interest rates;~~

●

~~the availability of, and costs associated with, sources of liquidity;~~

●

~~the ability to manage future growth; and~~

●

~~changes in personnel and availability of qualified personnel.~~

Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of ~~June 30, 2020, the Company~~March 31, 2021, we did not have any outstanding “market risk sensitive instruments,” as such term is used within the meaning of Item 305 of SEC Regulation S-K. However, ~~the Company is~~we are subject to other types of

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business risk described below and under “Market Risks Related to Real Estate Loans” in Item 1A of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, ~~2019.~~2020.

Interest Rate Risk

While all ~~the Company’s~~our loans bear a fixed rate of interest and ~~the Company does~~we do not have any interest-rate sensitive instruments obligations outstanding, the nature of ~~the Company’s~~our business exposes itus 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 ~~the control of the Company.~~our control. An increase or decrease in interest rates would not impact the interest charged on ~~the Company’s~~our then existing loan portfolio, as ~~the Company’s~~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 ~~the Company~~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.

Credit Risk

~~The Company’s~~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 the U.S. economy, ~~epidemics and public health emergencies~~ and other factors beyond ~~the Company’s~~our control. All loans are subject ~~to the~~a certain possibility of default. ~~The Company seeks~~We seek to mitigate credit risk by originating loans which are secured by first deed of trust liens on real estate with a maximum loan-to-value ratio of 65%. ~~The Company~~We also ~~undertakes~~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 ~~earthquakes~~ and ~~pandemics,~~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 ~~Company~~us to suffer losses. These factors could adversely affect ~~the Company’s~~our business, financial condition, results of operations and ability to ~~make distributions~~pay dividends to ~~its members.~~our stockholders.

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~June 30, 2020,~~March 31, 2021, the Company’s disclosure controls and procedures were ~~not effective for the reasons described below.~~

~~Material Weakness in Internal Control over Financial Reporting~~

We have identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

As previously disclosed in the Company’s Form S-4 related to the Business Combination, the Predecessor Company Group reported certain material weaknesses in internal control over financial reporting identified in connection with the audit of the members of the Predecessor Company Groups’ financial statements at December 31, 2018. The Company reported in its Form 10-K for the year ended December 31, 2019 that the material weakness previously identified remained as of December 31, 2019.

The material weaknesses identified include (i) lack of formalized internal control policies and procedures as it relates to financial reporting and (ii) insufficient resources to provide appropriate segregation of duties related to the preparation and review of information used in financial reporting, as well as review controls over the financial statement reporting process.

The control deficiencies described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that the deficiencies represent material weaknesses in the Company’s internal control over financial reporting and our internal control over financial reporting was not effective as of ~~December~~March 31, ~~2019. At this time, we do not believe such material weaknesses have been fully remediated.~~

~~Management’s Remediation Plan~~

~~The Company plans and has begun to execute the following steps to remediate the aforementioned material weaknesses in internal control over financial reporting:~~

●

Continue to enhance internal control policies and procedures developed and implemented during 2019 to ensure that a robust and effective internal control environment exists and persists across the organization; including ensuring effective risk assessments are performed to identify and assess necessary changes in the application of GAAP, financial reporting processes and the design and effective operation of internal controls.

●

~~Seek to attract, train and retain individuals that have the appropriate skills and experience related to complex accounting matters and financial reporting;~~

●

~~Implement enhanced accounting and financial reporting software; and~~

●

~~Continue to report regularly to the audit committee on the progress and results of the remediation plan, including the identification, status and resolution of internal control deficiencies.~~

~~Table of Contents~~

~~There is no assurance that the material weaknesses will be fully remediated during 2020 particularly given the disruption of COVID-19 on the Company’s business and operations.~~2021.

Changes in Internal Control Over Financial Reporting

During the quarter ended June 30, 2020, we augmented our finance and accounting staff by hiring a Chief Accountant with extensive experience in accounting operations, SEC reporting and implementing internal controls. Presently our finance and accounting staff are working remotely as a result of COVID-19, which is requiring some adjustments to our procedures and may impact our plans to remediate the material weaknesses in internal control over financial reporting. Except as set forth above,March 31, 2021, there were no changes in the Company’s internal control over financial reporting (as such terms are defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the ~~fiscal~~ quarter ~~to which this report relates~~ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

~~Broadmark Realty~~The Company is involved in legal proceedings which arise in the ordinary course of business. It believes that the outcome of such matters, individually and in the aggregate, will not have a material adverse effect on its business, financial condition or results of operations.

ITEM 1A. RISK FACTORS

~~This section supplements and updates certain of~~There have been no material changes to the ~~information found~~risk factors previously disclosed under ~~the “Risk Factors” section in~~ Part I, Item 1A of our Annual Report on Form ~~10-K~~10-K/A for the year ended December 31, 2019 filed with the SEC on March 16, 2020 based on information currently known to us and recent developments since the date of our 2019 Form 10-K filing. The matters discussed below should be read in conjunction with the risk factors set forth in the 2019 Form 10-K. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the 2019 Form 10-K. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures and the related impacts to economic and operating conditions.2020.

The impact of the COVID-19 pandemic and the measures implemented to contain the spread of the virus have had, and are expected to continue to have, a material adverse impact on our business and results of operations.

The COVID-19 pandemic and resulting containment measures have caused economic and financial disruptions that have materially adversely affected, and are expected to continue to materially adversely affect, our business and results of operations. The extent to which the pandemic will continue to materially adversely affect our business and results of operations will depend on numerous evolving factors and future developments that we are not able to predict, including the duration, spread and severity of the pandemic; the nature, extent and effectiveness of containment measures; the extent and duration of the effect on the economy, unemployment, construction and housing prices; and how quickly and to what extent normal economic and operating conditions can resume.

~~The COVID-19 pandemic and containment measures have contributed to, among other things:~~

●

~~Significant and rapid economic contraction and a record rise in unemployment.~~

●

~~Adverse impacts on the progress of construction on our borrowers’ projects and their ability to complete projects in accordance with the terms of their loans.~~

●

Adverse impacts on the demand for and the value of some types of commercial and residential real estate that that may delay or otherwise adversely impact our borrowers’ ability to sell or lease properties they are developing in an amount sufficient to repay their loans.

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●

A significant increase in loans in default and slowdown in the rate of new loan originations, primarily as a result of the adverse impacts on the creditworthiness of our borrowers and other counterparties and their ability to pay amounts owed to us and our ability to collect such amounts.

●

~~Adverse impacts on capital and credit market conditions, which may limit our access to and the cost of capital.~~

●

~~An increased risk to the value of our investment in mortgage notes receivable, which has the potential to result in impairment charges.~~

●

~~Delays in foreclosure proceedings, including moratoriums in some jurisdictions, and the enforcement of our rights with respect to loans in default.~~

●

An increased risk of an information or cyber-security incident, fraud, or a failure to maintain the uninterrupted operation of our information systems, among other things, as a result of an increase in remote work.

~~To the extent these impacts continue or intensify, or return to the extent they have diminished, we expect our business and results of operations to be adversely affected.~~

As discussed in our Results of Operations, we saw an increase in the amount of loans in contractual default and for the three and six months ended June 30, 2020, we recognized a loan loss provision expense of $0.3 and $3.9 million compared to negligible amounts in prior periods.

The pandemic and containment measures have caused us to modify our strategic plans and business practices, including the amount of capital deployed and the property types that we lend on and may adversely affect our plans to remediate the material weaknesses in our internal control over financial reporting.

If the impact from the pandemic is prolonged, it could increase the negative impacts to our business and may also heighten many of the other risks described in the “Risk Factors” section of our 2019 Form 10-K. We do not yet know the full extent of how COVID-19 and the containment measures will affect our business and results of operations, however, the continuing effects are expected to have an adverse impact on our business and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

On August 5, 2020, the Compensation Committee of our Board of Directors approved, and on August 6, 2020 our Board of Directors ratified, a cash bonus program for 2020 for the Company’s executive officers. Pursuant to the cash bonus program each executive officer will be eligible to receive a cash bonus for 2020 based upon a specified percentage of such officer’s annual base salary as indicated below. The amount of bonus to be paid shall be determined based upon the level of performance achieved by the Company and the executive officer of certain performance metrics during 2020.None.

The performance metrics and the relative weightings are as follows: Adjusted Core Earnings Per Share (50%), growth of our private manager subsidiary (12.5%), remedying the Company’s control deficiencies (12.5%) and achievement of certain individual performance objectives (25%).

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For purposes of the cash bonus program, Adjusted Core Earnings Per Share means Core Earnings, as defined in our Securities and Exchange Commission filings, less realized losses on investments. Realized losses on investments is defined as our realized losses on investments, including (1) loan charge-offs net of any recoveries along with write-downs taken on loans upon our taking title to the underlying real estate, and (2) losses incurred on real estate owned during the holding period and upon sale of the real estate net of any gains on the sale of real estate owned. Adjusted Cored Earnings is a non-GAAP financial measure.

The table below sets forth the future payouts that can be earned by each of our executive officers under the cash bonus program for 2020 as a percentage of their base salary at the threshold, target and high performance levels.

Threshold

Target


High

Jeffrey B. Pyatt

62.5
%

125.0
%

200.0
%
Linda Koa

50.0

100.0

150.0

David Schneider

50.0

100.0

150.0

Daniel Hirsty

37.5
%

75.0
%

125.0
%

In addition, the Compensation Committee of our Board of Directors approved, and our Board of Directors ratified, awards of restricted stock units made as of August 6, 2020 under the Broadmark Realty Capital Inc. 2019 Stock Incentive Plan to Jeffrey B. Pyatt and David Schneider in the amount of 41,667 RSUs and 31,250 RSUs, respectively. These RSUs will vest in one-third increments on each of the first three anniversaries of the grant date, subject to continued employment through each vesting date, except that the RSUs will accelerate in the event of death or disability or termination of service in connection with a change in control. Each RSU represents the right to receive one share of our common stock upon vesting.

ITEM 6. EXHIBITS


10.1		Form of Restricted Stock Unit Award Agreement (Executive Officers).*

10.2		Form of Performance Restricted Stock Unit Agreement.*

10.3		Broadmark Realty Capital Inc. Executive Officer Annual Cash Bonus Plan (incorporated by reference to Broadmark Realty Capital Inc.’s Form 8-K (File No. 001-39134), filed with the SEC on January 27, 2021).

10.4		Credit Agreement, dated February 19, 2021, by and among Broadmark Realty Capital Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to Broadmark Realty Capital Inc.’s Form 8-K (File No. 001-39134), filed with the SEC on February 25, 2021).

22.1		Subsidiary Guarantors and Issuers (incorporated by reference to Exhibit 22.1 to Broadmark Realty Capital Inc.’s Form 10-K/A (File No. 333-251075), filed with the SEC on January 4, 2021).

31.1		Rule13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Broadmark Realty Capital Inc.*

31.2		Rule13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Broadmark Realty Capital Inc.*

32.1		Section 1350 Certification of the Chief Executive Officer of Broadmark Realty Capital Inc.*

32.2		Section 1350 Certification of the Chief Financial Officer of Broadmark Realty Capital Inc.*

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*Exhibits that are filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	BROADMARK REALTY CAPITAL INC.

Date: ~~August~~May 10, ~~2020~~2021	By:	/s/ Jeffrey B. Pyatt
	Name:	Jeffrey B. Pyatt
	Title:	President and Chief Executive Officer (Principal Executive Officer)
Date: ~~August~~May 10, ~~2020~~2021	By:	/s/ David Schneider
	Name:	David Schneider
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)

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	Class A Units			Class P Units			Preferred Units			Additional		Retained Earnings
	Units	Amount		Units	Amount		Units ⁽¹⁾	Amount		Paid-in Capital		(Accumulated Deficit)		Total
Balances as of December 31, 2018 (Predecessor)	20,950	$	1	50	$	—	6,827,701	$	684,979	$	767	$	(637)	$	685,110
Contributions	850		200	—		—	796,028		79,535		—		—		79,735
Reinvestments	—		—	—		—	71,086		7,094		—		—		7,094
Net Income	—		—	—		—	—		—		—		24,989		24,989
Distributions	—		—	—		—	—		—		—		(24,134)		(24,134)
Redemptions	—		—	—		—	(133,513)		(13,331)		—		—		(13,331)
Compensation expense related to grant of profits interest	(100)		—	100		—	—		—		734		—		734
Grants of restricted units	150		—	—		—	—		—		134		—		134
Balances as of March 31, 2019 (Predecessor)	21,850	$	201	150	$	—	7,561,302	$	758,277	$	1,635	$	218	$	760,331
Contributions	—		—	—		—	1,441,711		122,414		—		—		122,414
Reinvestments	—		—	—		—	86,222		8,594		—		—		8,594
Net Income	—		—	—		—	—		—		—		31,200		31,200
Distributions	—		—	—		—	—		—		—		(29,125)		(29,125)
Redemptions	—		—	—		—	(227,248)		(22,927)		—		—		(22,927)
Grants of restricted units	—		—	—		—	—		—		170		—		170
Balances as of June 30, 2019 (Predecessor)	21,850	$	201	150	$	—	8,861,987	$	866,358	$	1,805	$	2,293	$	870,657


Consideration paid:	$ (in thousands)
Cash	$	102,245
Common stock		479,619
Total consideration paid	$	581,864

Assets acquired:
Cash and cash equivalents		88,505
Investment in real property		8,413
Mortgage notes receivable		344,837
Interest and fees receivable		2,743
Intangible assets		1,000
Other assets		174
Total Assets		445,672

Liabilities assumed:
Accounts payable and accrued liability		205
Other liabilities		568
Total Liabilities		773
Net assets acquired		444,899

Goodwill	$	136,965


	Acquired
(dollars in thousands)	Intangibles
Asset Type
Customer relationships	$	1,000
Less: Accumulated amortization		209
Intangible assets, net	$	791


	Year ended December 31,
(dollars in thousands)	2020		2021		2022
Estimated future intangible amortization expense	$	168	$	333	$	290


	As of June 30, 2020		As of December 31, 2019
Expected volatility	64.0	%	13.0	%
Expected dividend yield	7.6	%	7.3	%
Expected life (in years)	0.4		0.9
Risk-free interest rate	0.2	%	1.6	%


	Threshold		Target		High
Jeffrey B. Pyatt	62.5	%	125.0	%	200.0	%
Linda Koa	50.0		100.0		150.0
David Schneider	50.0		100.0		150.0
Daniel Hirsty	37.5	%	75.0	%	125.0	%