Q1 2020 Earnings Call
Thank you for surrounded by the conference operator.
Welcome to the Birthmark Realty copies <unk> first quarter Twentytwenty earnings Conference call.
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After the presentation, they will be an opportunity to watch question.
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I would now like to turn the conference over to Steven Sweat Investor Relations. Please go ahead Sir.
Good afternoon. Thank you for joining us today for brought my Realty Capital's first quarter 2020 earnings conference call.
In addition to the press release distributed this afternoon, we filed the supplemental package with additional detailed what our results which is available in the Investor section on our website at Www Dot brought Mark dotcom.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements forward looking statements dress matters that are subject to risks and uncertainties that may cause actual results to differ from those discuss today.
A number of factors could cause actual results could differ materially from those anticipated.
We're looking statements are based on current expectations assumptions and beliefs as well as information available to us at this time and speak only as of the date. The are made management undertakes no obligation to update publicly any of them in light of new information or future events.
During this call we will discuss certain non-GAAP financial measures more information about these non-GAAP financial measures reconciliations to comparable GAAP financial measures are contained in our earnings release and filings with the FCC.
It's after this conference call is hosted by Brad Martz, Chief Executive Officer, Jeff <unk>, and Chief Financial Officer, David Schneider.
Management will make some prepared comments after which we will open up the call to your questions.
Now I'll turn the call over to Jeff.
Thank you see and welcome to our first quarter 2020 earnings call.
This afternoon I'll begin with an overview of market conditions, and then discuss why we believe broad market is well positioned in the current environment.
Then I'll turn the call over to David to provide additional detail on our financial results in performance long portfolio and balance sheet.
When David is finished we'll open up the call for your questions.
Let me begin by saying that our thoughts are with all of those affected by the covert 19 crisis.
It's also important to thank the entire broaden our team for their efforts.
Seattle was one of the first parts of the country to be affected by the virus.
And I'm truly proud of our team's commitment dedication we perseverance.
Our first quarter 2020 results were solid largely preceding the most severe impact will be covered 19 pandemic.
Our origination volumes were more than $107 million, representing a significant acceleration from the fourth quarter.
We also launched our private weak this quarter, which has a new unique source of capital.
And the growth through our platform.
Given the extraordinary circumstances were facing as a country and as a company I don't want to give some perspective on our industry and broaden marketplace.
During the great recession, many developers and build is lost their businesses, because they're lenders lack adequate liquidity to keep their commitments.
Today like then many construction lenders are unable to find their commitments because the outside capital they rely on to fund their loan book has evaporated.
As a result.
Developers through no fault of their own.
Our unable to obtain funding to complete their projects.
Unlike many other lenders broadsmart strong cash reserves ensure that our borrowers can complete their projects and yet the to market as quickly as current circumstances allow.
In fact, we are already hearing from competitors clients asking if we can take over stalled projects because of our reputation as a lender who upholds its commitments.
Furthermore, we are actively looking at opportunities to potentially add loan portfolios at attractive rates as our peers had been forced to pare back.
Needless to say, we would ensure that any potential loans, we acquire would satisfy our proven and prudent lending standards.
We have always operated conservatively because never wanted to be in a position where a period of temporary market turmoil could permanently impair our business.
The business of construction lending will not go away but.
But we believe one of the results of this market disruption does that many of our competitors will struggle and may even go out of business.
Moving broad mark in a better competitive position.
Supported by a reputation.
Certainty of execution.
This is not say there won't be challenges there will be.
The unprecedented covert 19 crisis has impacted construction and permitting activity across the country.
Including government mandated construction halts in certain states.
As a result.
Our borrowers again through no fault of Barrow have experienced project delays and our loans, which are tied to pre approved strictly monitored construction schedules that were established pre covert 19 may experience a technical default.
At this time I think it's important to discuss with defaults mean for broad mark because it's easy to misunderstand them. If you are not familiar with the type of construction lending we do.
I'll start with what defaults or not.
Defaults are not an immediate or permanent loss of principle.
This is not the same as a person defaulting on their car loan or their home mortgage where the bank has to write it off take a steep lost by seizing and reselling the asset.
The builders that we lend to tend to be small.
On the significant equity in their projects.
Remember that we don't lend above 65% loan to value ratio period.
So the builder is picking up a substantial amount of capital.
On top of that our loans require a personal guarantee so the borrower has significant incentives and financial alignment to work with us to cure any issues.
I want to emphasize that most defaults are resolved without us ever having to take over the project.
Specifically in the past three years, we've experienced 62 incidents of default.
And only 9% resulted in foreclosure.
Well, let's go into the fall more often than not they come out of default.
Broaden our captures its principal interest in penalties just over a longer time horizon.
It's a way for us that legally exercise our right the lender to protect our claims against the collateral.
So a default for broad where there's a way to engage proactively with our borrowers and work towards the successful completion of a project.
Maybe on a slightly different timelines and when we underwrote alone as long as it continues to satisfy our underwriting criteria, we wont work with borrower.
On top of this proven approach helping to protect our capital.
It's just good business build this face obstacles and blaze all the time, especially in recent weeks when permitting and inspection offices have been close in states and municipalities have halted construction.
Our view is that if we can protect our cap now while still maintaining our good relationships with borrowers it will provide both near and longer term solutions in the future.
Borrowers will remember, which under its funded their commitments or which one is raised their rates to punitive levels at a time when many builders simply didnt have a choice whether or not to pause construction.
We want to continue to build on our nearly 10 year reputation for being the lender that help them see the project completion.
So when they get started on their next project, we're going to be the first ones they call.
This is why historically approximately two thirds of our customers have been repeat business.
So what can we give to resolve defaults when they occur.
Well, we have a tool box full of solutions.
We can differ payments and set up a plan to bring them back to current overtime.
We can help them refinance.
We can put a receiver in place.
We can work with the borrower to find options to sell the project in an incomplete state that would help satisfy their obligations to us.
We can get a deed in lieu of foreclosure.
If we've rolled out all other options than we would foreclose on a project.
For reference of the $2.2 billion of loans will be originated and our nearly 10 year history.
We have four closed on only 12 of the more than 1000 loans we have originated.
And have limited our principal losses on those loans to only $400000 over those 10 years.
For perspective.
These losses excluded the nearly $7 million in income broad mark recognized during the life of those loan.
Lastly, if we do need to take over a project can finish it we have the resources to execute on that.
Over the years, we've built relationships with numerous contractors and our strong liquidity means that we will not be forced to sell assets quickly at fire sale prices.
We believe providing this perspective on defaults demonstrates how we are different from other lenders.
Our default rate as a snapshot in time, but our ability to address defaults will ensure broad market is well positioned for success.
We have managed through periods of higher defaults in the past and we will continue to do so.
Further our liquidity position gives us comfort that we not only withstand this period of market stress, but ultimately take advantage of opportunities as appropriate.
Considering how much things have changed over the past several weeks, we want to give an update on our operations post quarter end.
First and foremost we have not stopped originations.
We continue to see ample opportunities to lend at attractive yields.
On high quality collateral and most importantly, we have the liquidity to do so.
Between March 30, Onest and May eight we've closed on for additional loans and our pipeline remained significant.
Within a range of $200 million to $250 million.
Our loan payoffs in April were slow as expected.
The good news is that we have already begun to see signs of improvement.
While there have been some incremental default since quarter end some of our loans that went into default in march of since emerged.
And our may pay offs appear to be improving.
We've had good inconsistent communication with our borrowers or as anxious to get their projects restart and complete as we are.
The mortgage refinance markets also appeared to be stabilizing in the residential markets in the states that we operate in continued to be strong.
We expect our projects to be completed and sold or refinanced.
It may just take some additional time.
Of course, these emerging signs of improvement will also depend on the path to covert 19 situation takes.
The Cobot 19 pandemic has created a period of unprecedented dislocation.
No one is able to predict the world will look like six months or 12 months from now.
As we sit here in may much of the country has been completely shut down for nearly two full months with openings just getting underway.
We have seen significant turmoil in the economy in financial markets.
And our business has been resilient, but not immune.
While we currently see emerging signs with respect to certain states reopening plans.
We don't know for certain what the future holds or how long the recovery will take.
To reflect these significant uncertainties our board adjust their monthly dividends for the month of April maintain this rate in may.
We are confident in our broader strategy and we want to be is well positioned as possible on the other side of this crisis.
Finally, as a reminder, the management team abroad, Mark is uniquely aligned with you.
As we are internally managed and management owns approximately 5% of the outstanding shares.
Ill now turn it over to David who will review our financial results in more detail.
Thanks, Jeff and good afternoon, everyone.
As a reminder, the first quarter 2020 was our first full quarter as a public company.
Financial results for any comparable periods. Prior to November 15, 2019 are presented on a pro forma basis and include the financials of the four broad mark lending funds that combined to form broad Mark Realty capital.
Starting with our operating results, which are detailed on slide five of our earnings presentation.
For the first quarter of 2020, we reported total revenue of $31.8 million and net income of $27.3 million on a per share basis. This reflects a GAAP net income of approximately 21 cents per diluted common share.
Adjusting for the impact of nonrecurring transaction costs and other non cash items, our core earnings for the first quarter or $27.5 million or 21 cents per diluted common share.
Interest income on our loans in the first quarter was $24.6 million and fee income was $7.2 million.
With regard to origination volumes, which are presented on slide six of the earnings presentation in the first quarter. We originated 21 loans with a total face value of $107 million.
This compares to $112 million of originations for the first quarter of 2019.
While the originations were strong for the quarter as a whole cobot 19 did have an impact on March originations as heightened market uncertainty and government ordered construction shutdowns took effect.
We currently have a pipeline of opportunities ranging from $200 million to $250 million.
As we've previously mentioned the full earnings benefit of originations in any given quarter will be realized over time as our accounting treatment requires that origination fees you recognized over the life of alone.
Now turning to our balance sheet.
I would like to briefly address the topic of defaults from an accounting perspective.
Every loan and default status has been evaluated for potential losses, and we have recorded aggregate estimated losses on these loans of $7.2 million as of March 30, Onest 2020.
For context, these estimated losses represent less than 5% of the principal outstanding on loans in default status and specifically relate to five loans out of our current portfolio of 218 loans.
To date, we've recognized more than $20 million in revenue on the loans currently in default status and we generally expect positive economic outcomes upon exit.
This further supports Jeff's earlier comments on management of defaults and that our underwriting model and our business plan our operating effectively.
In addition, as detailed on slide nine in the earnings presentation, we had zero debt and $258.4 million of cash on our balance sheet as of March 30, Onest 2020.
We believe our liquidity positions us well as we work through our current pipeline.
In fact, our pipeline of opportunities currently exceeds our available capital and we're looking for sources of capital to execute on strategic opportunities that have and continued to be presented to us.
For longer term capital efficiency and cash management, we continue to evaluate the most appropriate balance which may include a modestly sized working capital credit facility.
While we have historically operated without debt.
And funded our unfunded commitments from pay offs.
Our finance team spent a great amount of time watching the residential housing markets and analyzing our pipeline of loans and our unfunded commitments relative to anticipated payoffs.
We would look to add and appropriately sized credit facility by the end of 2020.
Assuming market conditions remain conducive.
Again, we do not plan to run our business at a high level of leverage, but we want to be position to efficiently use our available capital to meet the significant opportunities and dislocations, we are seeing in the market.
In March as previously announced we launched a broad mark private right.
This private vehicle will offer an alternative way to invest in the broad mark platform, diversifying and enhancing our capital sources.
The private REIT participated in seven loans for a total participation of $8.7 million for the one month that it was active in the first quarter.
As we expected capital raising the private read the flow during April, but we expect the pace to slowly improve as long as markets continue to stabilize as we've seen in recent weeks.
Now I'd like to turn the call back to Jeff for a few closing comments.
Thanks, David.
To recap.
We have originated over $110 million loans year to date.
We have plenty of opportunities for growth.
And as of March we now have our private REIT, raising capital and participating in broad market homes.
We have the tools and expertise to handle this challenging period.
And we believe we will emerge from this stronger than ever.
This completes our prepared remarks, we will now open up the line for questions operator.
Thank you we will now begin the question and answer session joined the question Q You me correct, sorry, I've been one.
You will hear Anton and all the junior quit.
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Our first question is from PVC with B. Riley.
Please go ahead Sir.
Hey, good afternoon, Jeff and David Thanks for taking my questions Hope, you're both doing well.
My first one here can you expand a little bit more on semi strategic opportunities you are seeing whether you can maybe size. Some of these potential portfolio at or asset acquisitions that have come your way what the collateral type looks like and really how serious you are in a value.
Waiting these types of initiatives at kind of given the uncertainty we still face.
David do you want to take that please.
Hi nicely.
Yes, Hi, Tim Thanks for the Hey, Jeff.
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So we have already been getting a lot of them within a lot of inbound calls.
And to declare or what to look at any specific transaction.
Got a banner lane, we're not going to be going and looking at it collateral that were not experience with.
Looking looking that competitors portfolios.
Other folks that were directly competing with either in our region or other region opportunities to potentially expand into other regions, where we have with of the presence right now but.
It would always being something that we're familiar with it we're going to take on servicing of.
Another loan portfolio that was underwritten by another firm, which has not historically something we've done we're going to be wasn't built into we're going to make sure. It's loans that were familiar with most likely it would be borrowers that we're familiar with that would just make it much cleaner due diligence process that we'd feel comfortable with.
In terms of side you know.
It's been a variety, but we've seen whole portfolios in some cases of portfolios.
They were going to look at them. All we're open to the opportunities I think we're in a unique position of strength.
We can actually execute on someone's opportunity if that are ones that are presented to us.
Okay understood.
Thanks for the color there and then switching gears I guess.
Talking more on the defaults here, where these home just a little bit more context here you know what do you don't borrowers that we're expecting to get takeout financing or sell properties in the first quarter that all of a sudden had those options drift away from them or when these projects you know in different stages of development.
I'll take a stab and Jeff feel free to jump in I would say the overwhelming majority the maturity double meaning that they were coming up to the end of the term they were expecting to get a pay off and then the financing kind of dried up and they were unable to execute.
Exit.
Hello.
Based on the term of the original maturity date of alone so.
No cases.
Pretty much all of them work maturity defaults were interest reserve has been fully depleted.
And they were unable to get pale financing that we were expecting debt directly impacted by told that 19. So we're working with those borrowers to Jeff's comment you know a in his remarks earlier.
We're trying to find ways.
For the best economic outcome for for the company in and working with our borrowers.
And then the loan, but yes, the overwhelming majority of timing.
Ladies and timing.
Right, Okay, and <unk> and just picking on kind of that last comment there.
Where are these it.
Did you consider giving these borrowers forbearance that I guess technically would keep them out of default and is that.
Part of the reason why some of these loans have kind of resolve themselves or or where they able to come up with the cash to to start accruing again on and then just yeah I guess broadly like how many of your borrowers have requested some level of forbearance.
Sure.
Hi, Bill and Yeah, I think on that and you can jump in yeah. Some of them some of them debit forbearance opportunities others. It didn't make sense do any forbearance and it and again I think.
At the point in running at home is that being in a default status for broadsmart is not necessarily but the worse, if not a bad outcome for us and not necessarily for the borrowed sometimes it center incentive either them.
So you can get the cast together make a payment that out I think authentic and become cure. So yes, we worked with every individual borrower.
Some didn't end up in default that at some did end of the book that and we're going to continue to work with them to.
To that come out with the best economic outcome for us and for our shareholders.
In each of these loans is is unique and each of the bar.
So we really take them on a case by case basis, I suppose making blanket.
Policies around those kinds of things.
Mhm.
And can you maybe touch on some of the measures you used to grant forbearance so far.
Well, so remember that that we draw a bright line, 65% loan.
And and so yes, if we believe that alone is over that then that's a default weather.
Regardless of everything else and so.
We were to look at a prospect and say you know this just given the market is now at a 67% loan to value ratio.
We can't really do much there, except except put the loan default.
Yes, if a municipality slow project way down or.
This whole environment slowing and project.
Well, we will look at it but most of our loans are are performing and and.
And so forbearance I worry when we use the term like that that it gets lumped into the the Arctic over reading about People's mortgage with going into Port parents, and we're just that different.
Business.
[noise] [noise] right.
Okay. Thanks for that Jeff and then I know that you guys said that you know some loans have resolve themselves some have fallen into default since quarter end can you just get enough data were where you're at.
As of today or the end of April.
Yeah, we're not we're not going to disclose the the numbers on the call, but I mean, there's definitely been an uptick and there's a in.
You mentioned, there's definitely been from early loans there rolled off I think are more important thing the focus on is where the loans in default and the new loans that were constantly monitoring.
Going into people that it is not going to me that there's a capital loss. It doesn't mean, what is the bad economic outcome for us and one so we'll definitely we're not immune to coven 19 will definitely see an uptick I'm sure, we'll probably end up disclosing that.
Middle later time, but.
I think in more importance active from a.
Financial statements effective we've already been evaluating as long as or potential losses, and kind of taken our medicine.
In terms of potential estimated losses, which may not ultimately not have a loss on and then I think the more important thing is no on I think we mentioned five out of 218 loans or five out of the 32 loans that were in default status.
As a 31.
Within the whole bucket of the allowance, which means that the other 27 units that positive outcomes and potentially.
Could pick up you know like chunks of income in the future state, but that's all driven by the accounting is going to have let's take our losses upfront and welcome latency and on the exit of these other loans.
Mhm and the end just my last one here and I'll hop back in the queue is you mentioned that the 7 million of estimated losses on that defaulted balance on those five loans I believe.
Can you just give it a little a little bit more color on what those you know what assumptions go into that estimate and you have you already decided on which of the projects you would look to take over and work out yourself in which ones you wouldn't and just curious if you already you know if you've already seen an uptick in Oreo so far this quarter.
We haven't so as a 31 were actually down to one Argo property, we havent.
Having what goes on any new property I mean, they're also probably wasn't a lot of foreclosure activity because the the courts and everything we're close right, but not expecting a big <unk> and foreclosure the way we evaluate our allowance is.
All of our loans are collateral dependent so we're kind of assuming.
Whether the business strategy is to take over the project or not for purposes of accounting, we basically assuming that we're going to take over the property. We're looking at the underlying collateral.
Appraised value add complete in the estimated cost that is going to take us to get it complete.
And then we were looking at appraisals for what we're going to exit at.
Where they can comparing that to our investment in alone which is the reason why we feel comfortable or add to that goes back to that 65% will convene most of these loans, we should be in a position where you were recorded investment in alone. It is going to be lower significantly lower in certain cases than what we expect to answer that.
Mhm.
Makes sense all right. That's it for me for now and hop back in the queue, Thanks, again and that stay well.
I know you too.
Our next question is from Stephen laws with Raymond James. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
Yeah.
Yeah, that's you're evaluating new investments kind of how do you.
How do you way you know sticking to your three or four core regions, where you've got a lot of local market expertise in a big track record and better relationships I would think.
As opposed to allocating new capital.
What are intend to do the company's intended plan was prior to this two weeks increased diversification into the southeastern mid Atlantic.
How do you think about that are or do you really not it's just a deal by deal or those those are historical target markets more attractive Renault.
Oh, Steven Hi, nice nice talking to by the way.
We like the four regions that we're in.
We know them as you pointed out we know the states, we know the markets and the Submarkets within those states.
So.
As we look at anything.
I think if its strays very far from from the business. So we're doing we're probably not going to be very interested in that we have an awful lot of opportunity ahead of us.
The capital that we have is precious and we want to use it.
Carefully in wisely.
And so I think we're going to the ER.
Our initial inclination is just to stay in our own backyards, where we know it.
Yeah like success, but I would touch on that is thinking about your geographic mix changing or staying the same.
The recent events you know from your feedback with with your borrowers and what you're seeing as far as your pipeline and new opportunities.
Oh are you seeing a significant mix of people wanting to do more you know whether it be duplexes or more single family rental type things as opposed to the more concentrated multifamily apartments micro housing kind of you know this this isolation or or.
You know revaluing, how we look at space, Yeah, how has that changed your pipeline and your thoughts on the loan fuel originate going forward.
Our our single family borrowers continue to us family projects as as you know there's a there's a great imbalance still.
Between demand for single family housing and the supply of housing.
And so there is real opportunity for our single family builders.
Our multifamily builders.
Continue to see opportunities and again in the markets that that we see goes in.
There's a shortage of apartments and so.
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Yeah. This all unfold in real time, who knows who knows where that market goes but that hasn't right now there's plenty in that in both the apartment space and the single family space.
Great appreciate the color and look forward to monitoring that your comments that going forward as we get more information.
I'm thinking about any any borrower concentration risk in the portfolio I know its 218 loans, we've got a pretty small average loan size, but are there any single borrowers that have five or seven or 10 loans.
Any borrower concentration we go where.
Thank our largest borrowing David correct me, if I'm wrong, but is about 5% of our portfolio.
A long term.
Hi, quality borrowers, but we certainly keep track.
Keep track of those concentration.
Great and.
Let's see I had one oh <unk> through <unk>.
It's going to glean loans with one borrower that 6% does if at all but that over 5%.
Great. That's helpful I appreciate that and.
Lastly on the on the private read I know it just launched and a you know difficult market environment to to launch something like that you know how do we think about.
Fund raising their as it does at 5 million lot that the 10 million a much me how do we think about that or do we really think about it more on hold until we get some kind of stability in the in the market conditions here.
I put it somewhere in between there or is.
He did certainly not a whole we are continuing to raise money continuing to have success raising money.
You can imagine April was top you may is improved.
We kind of started with a bang in March.
But I think as.
As people and we all get through this cope with 19, either getting more comfortable with it or whatever we do people are continuing to look for high quality safe places to invest with good returns and for those people looking for private option.
I think our private read is a is it good opportunity for them and so we're we're still quite optimistic about it.
Great and then lastly, I guess, maybe David Oh on modifications.
For barrels are you guys do you charge a modification for you when you extend if so is that also amortized or is it really look more as that's part of asset management and leads to to recurring business.
How do we think about whether or not you're charging fees and had a well how do I realized recognize those in the model for for modifications and extensions.
Yes, yes, yes, so we do charge an extension team.
Dick Johnson, it's treated in the same way as an origination fee so it's going to be.
The third and accreted into income over the life obvious that generally shorter terms on the quantity booklet over 12 months. It seems you're going to be a one month to month extension, sometimes the six month extension, but it will be treated in the same way.
The Jason Thanks for accounting.
Okay and that is all.
Cash B. Riley your not take will pick or any kind of equity in the transaction.
Okay.
Okay, great. Thanks, a lot for taking my questions, Jeff David appreciate the comments Tonight.
Thanks, David.
This concludes the question and answer session I would like to turn the conference back over to management for any closing remarks.
I just want to say, thank you to all of you or we're being our investors. Most importantly, I wouldn't want to wish you.
All good health and safety and I look forward to having this all behind us and I'm grateful that we are positioning the way we are I'd like to remind you that when we set this company up almost 10 years ago.
It was coming out of the great recession, and we we put together an architecture.
That would allow us to have.
The weather a storm and.
And we are doing well and I look forward day talking to all of you end up.
Thank you.
This concludes todays conference call you may disconnect. Your lines. Thank you for participating and has lessened.
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