Q4 2020 Broadmark Realty Capital Inc Earnings Call
[music].
Good afternoon, and welcome to broad Mark to the L. T capital fourth quarter and full year 'twenty 'twenty earnings Conference call.
All participants will be and the finale milk should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be enough opportunity to ask the question.
Please note that this event is being recorded.
I would now like the planned to come from silver to moving.
Well, Hi, Ray from Rodman and General Counsel.
Please go ahead and.
Good afternoon.
Thank you for joining us today for <unk>.
<unk> Realty Capital's fourth quarter, and full year, 'twenty and 'twenty earnings Conference call.
In addition to the press release issued this afternoon.
We have filed a supplemental package with additional detail on our results.
Which is available in the investors section on our website at www.
The Ww debt.
And Mark Dot com.
As a reminder, the bar.
<unk> made on today's conference call May include forward looking statements.
Forward looking statements are subject to risks and uncertainties.
And that may cause actual results to differ materially from those discussed today.
We do not undertake any obligation to update our forward looking statements in light of new information or future events.
For a more detailed discussion of the factors that may affect the companys results.
Please refer to our earnings release for this quarter and to our most recent SEC filings.
During this call.
We will also be discussing certain non-GAAP financial measures.
More information about these non-GAAP financial measures.
And reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings.
This afternoon's conference call is hosted by broad marks Chief Executive Officer, Jeff pilot, and Chief Financial Officer, David Schneider.
Management will make some prepared comments.
After which we will open up the call to your questions.
Now I will turn the call over to Jeff.
Thank you Devin.
And welcome to our fourth quarter and full year, 'twenty and 'twenty earnings call.
We hope that all of you and your families remain safe and healthy.
This afternoon I'll begin by discussing our 'twenty and 'twenty performance and share some thoughts on our exciting opportunities for growth because we look ahead.
And then I'll turn the call over to David to provide additional detail on our financial results and the loan portfolio and some key updates on enhancements to our balance sheet and funding sources.
We will then open up the call for your questions.
We just concluded our first full years of public company.
While it was not the year any of US expected, we feel it provided a significant validation of our lending platform primarily focused on residential construction, which has served us so well for the last 10 plus years.
Through a combination of disciplined underwriting and balance sheet strength and the excellent work of our team members. We overcame the challenges presented by Covid and.
We believe we emerged stronger than ever.
And the fourth quarter, we generated over $190 million of originations and risk reducing amendments surpassing the level of many of our pre COVID-19 quarters.
In addition, we accomplished this in the quarter when originations are typically slower due to the holiday season.
This was primarily due to an acceleration and the second half of 'twenty and 'twenty.
As construction holds for lifted <unk>.
Market activity began to normalize.
It also speaks to our financial flexibility and our ability to be nimble and seek out opportunities even in the challenging environment.
We finished the year with the total loan production of more than $625 million and exceptional result, and a difficult year.
We believe our performance demonstrates not only our resilience, but also the power and potential of broad marks lending platform.
Much has changed over the past year with the urgent need for new housing construction is more acute than ever.
With historically tight housing inventory and record low mortgage rates.
While the pandemic caused a temporary bottleneck and construction, we have always been focused on markets and which population trends are creating long term secular demand for the types of the projects we fun.
We have historically focused on 14 states plus Washington D C as markets with some of the best growth trends and the country.
Supported by lower cost and job growth.
Our portfolio was 56% residential loans, and we lend and seven out of the top 10 states with the largest housing deficits.
Our credit and the investment committees continue to review additional states that are best suited to extend our lending activities and we look forward to sharing additional updates on those efforts and the near future.
We note however that we are and a highly competitive market, which has seen significant capital inflows over the past year.
Interest rates remain effectively at zero and new entrants as well as existing lenders are aggressively pursuing attractive yields and the world of construction lending.
While we view this intense investor interest as the validation of our business model. We note that the heightened competition could drive increased variability and our originations from quarter to quarter.
It will require us to remain disciplined as we historically have been and will continue to evaluate our pricing relative to appropriate risk levels across our markets and project types.
We are confident and and the long run our expertise and reputation as the lender of choice will continue to give us an edge over our competitors.
We also operate and a large and highly fragmented construction market and we believe we can continue to drive earnings growth, even with conservative market gains.
Next is David will discuss shortly we've made some key enhancements to our capital structure and we believe will help us unlock significant growth.
Earlier today, we announced the completion of our revolving credit facility given the nature of our business. We have historically needed to maintain large cash reserves to fund the construction dropped process.
This new credit facility will allow us to more efficiently manage our cash from quarter to quarter as we work through the funding process of our short duration loans and term freeing up significant existing capital, which we will use to grow our loan portfolio.
With regard to our current portfolio. We have previously discussed how the multiple effects of the COVID-19 from permitting and inspection office closures to construction halls delayed.
Delayed the completion of some of our projects and in some cases, we continue to work through these issues.
We've stated that it will take some time to work through these project delays and we believe that our resolution process will produce the best outcomes for broad market as we have always benefited from our reputation as a reliable partner on our builders projects.
Importantly, we believe the value of these projects has not significantly changed and we remain protected by our prudent underwriting and the active portfolio management and the unlikely event that we need to take the project over and sell it.
As an update and we reduced our population of loans and default by 10% and the fourth quarter relative to the third quarter and continue to find the fault resolutions. The generally result in full collection of principal and interest outstanding.
The default management effort will continue in 2021, as we work with our borrowers to find the best economic out from income for the company and its shareholders.
But we remain confident and our longstanding approach to principal preservation.
Lastly, our corporate responsibility initiatives are at the forefront of our efforts and we are always looking for ways to better communicate our progress on key environmental social and governance objectives.
We have added a section and our upcoming 10-K on our human capital and highlighting the measures we take to create a vibrant team oriented environment centered on open communication.
We will also published statistics on the diversity of our team, which we think will reflect well on our commitment to the quality and inclusion.
Lastly, as always we remind you that we are internally managed and fully aligned with our fellow shareholders English.
With that I'll turn it over to David to review the financials.
Thanks, Jeff and good afternoon, everyone.
Before we begin I would.
The call your attention to a change and our non-GAAP earnings measure core earnings, which we replaced with distributable earnings.
The change aligns us with our mortgage REIT peers and with recent SEC guidance.
We will be addressing distributable earnings on this call, but please note that except for one item that I will explain shortly for <unk>.
<unk> has not changed from prior quarters, when we presented core earnings.
Our operating results are detailed on slide 12 of our earnings presentation.
For the fourth quarter of 2020, we reported total revenue of $32 5 million and net income of $22 $4 million.
On a per share basis. This reflects the GAAP net income of approximately 17 cents per diluted common share.
Adjusting for the impact of nonrecurring costs and other noncash items, our distributable earnings for the fourth quarter for $26 $2 million or <unk> 20 per diluted common share.
Interest income on our loans and the fourth quarter was $25 $3 million and fee income was $7 $2 million.
The increase in interest income from the fourth quarter and was driven primarily by higher than expected collection of interest on the resolution of loans and default status.
For the full year 2020, we reported a total revenue of $122 4 million and net income of $92 million.
On a per share basis. This reflects the GAAP net income of approximately 68 per diluted common share.
Our distributable earnings for the full year were $99 6 million for 75 cents per diluted common share.
Interest income on our loans for the full year 2020, with $93 $9 million and fee income was $28 $5 million.
Now I'd like to call your attention to the two accounting items for this quarter.
First we adopted the current expected credit losses for CECO model and December 2020, with retrospective application for adoption as of January one 'twenty and 'twenty.
So you sort of requires us to evaluate potential credit losses across our entire portfolio no matter how remote.
Whereas our prior accounting under the incurred loss model, which focused on potential losses on loans and default status.
This naturally resulted in increase and the company's allowance for credit losses and for the fourth quarter, we recorded a provision for credit losses of approximately $998000.
This is and part of true up provision as a part of Cecil adoption and we do not expect significant variability in future quarters for.
Furthermore, this is a noncash items and we remove it from our distributable earnings and we have in past quarters with core earnings.
In connection with the full adoption, we added a line item to distributable earnings for realized credit losses on loans, where we did not recover the full amount of principal outstanding at the time of loan was repaid.
This is the change and treatment from our historical calculation of core earnings.
For the fourth quarter realized losses for $189000.
Representing approximately two basis points on the total principal amount of our outstanding loan portfolio.
Second.
Our compensation expense of $6 $1 million for the fourth quarter reflects the combination of added personnel and regular and of your costs.
As we've previously stated we have made substantial progress on internalizing, our legal and corporate functions and we expect that the increase in compensation expense will be more than offset by cost savings and professional fees and G&A beginning in 2021.
We continue to expect to see a total compensation and G&A cash expense run rate of less than $6 million per quarter for 2021, which reflects the success and further internalization.
Yeah.
With regard to origination volumes, which are presented on page five of the earnings presentation and.
And the fourth quarter, our risk, reducing amendments and originations reached the total value of $194 $8 million and.
As Jeff mentioned the <unk>.
Ceded many of our quarterly volumes prior to the COVID-19 pandemic and we expect this pace to moderate somewhat as we start the new year.
We reiterate that origination volumes may still vary from quarter to quarter based on the timing of loan closings, but we believe that our recent capital structure and Hampton will provide us with greater origination capacity over the long term.
With regard to our portfolio credit we continue to work with borrowers to address the legacy defaults, resulting from Covid related delays.
As we previously stated this will take some time.
But we're very confident and our ability to generate positive economic outcomes, given our historical track record and our low ltvs.
We expect to provide further updates for the near future and we remind you that the earnings drag of approximately <unk> <unk> per quarter of distributable earnings per share, resulting from loans on non accrual status should continue to decrease.
At the resolutions are achieved.
Now.
Turning to our balance sheet and.
Detailed on slide 11, and the earnings presentation, we had no debt and $223 $4 million of cash as of December 31, 2020.
While we are seeing a very competitive landscape, we believe our liquidity position as well as we work through our current pipeline, which is in the range of $200 million to $250 million.
Next I want to take the opportunity to comment on two developments that we believe will help us unlock exciting new growth potential.
First as Jeff touched on earlier, we recently finalized the 135 million for.
Solving credit facility with the diverse syndicate of leading banks.
While we have historically operated without debt. We believe this modestly sized credit facility will enable us to optimize our cash management, allowing us to deploy a greater percentage of our existing cash.
More specifically, we expect that this facility will allow us to reduce our cash balance by approximately $100 million over the coming quarters, as we fund additional loans and grow our business.
Second.
We filed our shelf registration statement and January 2021, which gives us additional capital Optionality and increase financial flexibility.
Let me provide some additional context on new loan originations and the premium yields we produce.
The <unk> loans typically range, 14% to 16% inclusive of the interest and fees.
Given the short term nature of our loans and the urgent demand for housing construction and we're confident that we can continue to put capital to work effectively.
Furthermore, another area of distinction is that we are fully aligned with shareholders. Given that we are internally managed its aligned and helps to ensure that we will raise capital only when the time is appropriate.
To conclude as we look ahead.
I want to reiterate the set of principles, we laid out last quarter, which we believe will allow us to achieve our goal of significant growth and a manner that is incredibly accretive to our shareholders.
The principles are as follows.
Maximize earnings on our currently deployed capital through the continued resolution of the loans and contractual default.
Maximum deployment of existing capital with the credit facility now in place.
And sure sufficient operating capital available for deployment through our various sources, including through our recent shelf registration statement.
And finally identify opportunities for new earnings power and growth.
Now I'd like to turn the call back to Jeff for a few closing comments.
To recap we are proud of our achievements and net of challenging environments in 2020.
And we want to extend our deepest gratitude to our team members shareholders and other partners for your continued support.
Over the past year, we've made significant progress and continuing to enhance our capital structure to provide the optimal flexibility leaving.
Leaving us well positioned to execute as we look ahead into 2021 and beyond.
We're very excited of the opportunities that lie ahead, as we continue to focus on origination activity and meet the demand for much needed housing construction.
This completes our prepared remarks, we will now open up the line for questions.
Operator.
We will now begin the question and answer session. So that's a question you May Press Star then one on your Touchtone phone.
And if you're using a speakerphone. Please pick up your handset before pressing the key to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Randy finer from B Riley security.
Go ahead.
Hi, This is Colin Johnson from B Riley I'm on for Randy the same and thanks for taking my questions.
For any column just wanted to ask on the new credit facility.
You mentioned it would reduce you might reduce your cash balance by about $100 and the coming quarters does that kind of imply relying on the revolver for a similar amount of liquidity to replace that or is it thinking kind of take that balance sheet cash down, but then dropped smaller amounts on our revolver.
Yeah sure. Thanks, Tom that's a great.
It's a great question and and yes. So first we are very excited to have that credit facility and place announced earlier Tonight and.
And consistent with our messaging and the past.
For now and in the near term.
That is the street $100 million.
Our current $223 million for as of December 31st bit of about $223 million on the balance sheet.
And we kind of view it as a working capital solution. It allows us the hold less of that cash from our balance sheet and then we'll reevaluate kind of how we use that facility going forward, but I think.
In 2021, we've got about 100 billion cash on the balance sheet debt, we can deploy into new originations without drawing on the credit facility.
Okay. Thanks that makes sense and then.
Just wanted to ask on the I noticed that the weighted average LTV and the new originations ticked up a little bit in the quarter.
And you think that reflects maybe just the supplier slightly higher risk appetite of should we not really read into it that much yet.
And I'll call and I'll take a stab and I'll, let Jeff jump in if he has any additional comments I mean, we haven't changed any of our underwriting.
I think that might just be a this quarter and maybe a little bit of an uptick, but we're standing by our 65% Ltvs, we feel confident about the the loans we originated in Q4 and Werent really any differences versus the previous quarters. When we originate loans that we felt good though that we were able to put about 100 over $190 million and the fourth quarter, which usually.
Impacted by seasonality, so we felt good, but but no change and risk appetite.
Collyn when we when we when we go vertical.
So the building of homebuilding and apartment, we usually get closer to that 65% maximum of ours.
When we are doing land loans, we dropped that down quite a bit and are the portion of our portfolio that has been land we've been working to bring down and my guess is debt. If you did the math, that's where a lot of that would come out.
Okay that makes sense.
Yeah.
Thanks for taking the questions.
Thanks, Tom.
Our next question is from Stephen laws from Raymond James Go ahead.
Hi, good afternoon.
Hum.
The first.
And you know Jeff was sort of think about the Oh.
And maybe David if you could talk maybe just from a modeling standpoint, and so I think about the pace of near term repayments versus share origination pipeline.
How should we think about growth.
Going up and cash balance down in the coming quarters and and.
And I guess coupled with that.
You know.
The the mix of mid Atlantic and southeast loans has increased a little debt from the last couple of quarters, but I'm a little surprised that it hasnt increased more so can you talk about.
Expanding out of those markets is it.
Just having limited capital deployed there as you recycle of capital with that other regions or how should we think about the those two new regions growing.
As the mix of the portfolio of the share.
Thanks, Thanks, Stephen for joining of Jeff how about I'll take I'll talk a little bit about liquidity, Steven and then I'll, let you talk a little bit more about the regions.
So yes, I mean, we had 100 $223 million and cash from the balance sheet as of December 31.
That's obviously, a little bit higher and we would've liked to have seen and.
I think the driver of that to your point I think you mentioned prepayments, we saw almost higher than pre COVID-19 levels of payoffs and saw about 169 million and the fourth quarter, which is a little bit higher than our run rate that we would expect so that kind of.
Offset the significant.
Originations that we did and the corner but.
But we feel really good about Q1 and in the upcoming quarters, knowing that we basically got.
Free range to go out and do as much as we want without significant liquidity and the other way of the credit facility in place. So I don't think there's any.
Necessary changes, it's just continuing to attack the pipeline.
Put out and good loans and take the loans that are in front of us right.
The residential single family residential is very hot right now there's a lot of competition. There we're continuing to see competitors enter the market and we're going to pick our spots and do the best collateral that's in front of us.
And ultimately ensure that we deploy as much capital as possible and the upcoming quarters.
And I think Stephen and by the way of nice the nice to hear your voice and thank for joining us.
I think that you and I certainly expect.
Spec to see both the southeast and the mid Atlantic to.
And to continue to grow over the course of this year and and the future.
They the the for regional guys or are very close and very competitive and I think they all have each other and their sites. So so keep an eye on them and I think you'll see the debt picks up.
Great Great and then yeah and got to be on the call Jeff I appreciate the comments.
You know when I think about the.
Timing and and.
You know the resolving the remaining 158 million of defaults, the typically short term loans sort of imagined.
Get resolved fairly quickly compared to maybe some other the other possible owns but can you talk about the timing of resolutions here and kind of where where do you think that it'll get to kind of back to a more normalized level is it.
We're aware of is that from from where we are today of 158 billion.
Sure, Yeah, and I would say Stephen.
So I think and Q4, we reduced our total deposits outstanding by about 10% from Q3, so not.
And we'd love to be doing 20% of quarter, I think 10% whats the good run rate for Q4, we're trying to attack the similar rate and Q1, but I think to your point, yes, I think 70 per cent of the loans and the current the bulk.
And our complete or nearly complete.
The seven presented that is collateralized by residential properties. So we feel good about those numbers. They just do we're still catching up on some of those so it will take a little bit more time I.
I think our goal is to get it to.
The normalized run rate in 2021.
Not going to be the first quarter, obviously, if we're at I think we're at the 13% or default rate right now that's not where we want it we want to keep bringing that down with the goal of kind of having a normalized rates by the.
The end of 2021, but I think we did we made good progress you saw the pickup in the earnings.
And based off of the default resolution I think we dropped our loans on non accrual status.
The significantly probably by about 30, or 40 million and Thats. The the driver for the pick up and some of the interest income. So we're working on that <unk> drag.
We dropped it from 174 million of non accrual at September 32 of about $127 million as of December 31, So it's not happening as quickly as we'd like but we're continuing to get some default that we get for total defaults from acute and Q4, plus three that were and default status we bought back current.
We're just chipping away.
And to bring that drag on earnings down.
And just finding the best economic outcome that we can for each individual loan in default.
<unk> been successful to date, we continue to get principal and interest on most if not all loans and resolution. So theres always going to be some harrier loans. It takes a little bit more time and those of the ones that youll see us working through and 2021.
Great last question.
And I want to touch on the private REIT and it looks like another good months of growth.
From the newsletter.
Days ago is this the.
Pretty good pace.
And so good about it seems like the last.
For five months of been have been pretty pretty solid growth. There the debt have picked up over the first five or six months of the the fund.
Yes, I mean, we've seen.
We've seen a lot of interest we have really picked up the pace and the last three or four months I think we were at 74 million of assets under management as of January. So obviously, that's a long time coming from from March when we launched the private REIT and the middle of the pandemic. So.
Currently positive.
The pick up there at the at the current.
State that we're at in the current environment, where we've got a ton of cash on balance sheet and we're working through that.
We're going to evaluate each month.
How much capital, we want to bring and from the private REIT and you've got a lot of interest.
And we've got some folks and the pipeline looking to get involved in the <unk>. So.
We will continue to evaluate what's the best source of capital I think we of the luxury now between the registration statement the credit facility debt, but that allows us to free up cash we've got kind of a giant toolbox of different tools and finally that we can use to the source capital and we need it but I think right now the top priority is just to make and as many loans and dropping that cash balance.
And now that we've got the credit facility in place, but we will continue to monitor the private REIT and theirs.
We're happy to say that there is significant interest and.
And it's come a long way.
Great for Jeff David Thank you both for the comments the signal.
Thank you, Steve and I appreciate it.
Our next question is from Steve Delaney from JMP Securities go ahead.
Hi, Jeff and David Nice to be with you. This evening.
And thanks for letting me take question here, even though I'm not official yet.
David If I may start with you on the new revolver of nice accomplishment on on that.
It's referred to as the secured facility.
You just comment on generally on on how it might be secured with respect to either specific assets or is it more of a blanket lien type of thing.
Yeah.
Sure Great Great question, Stephen and thanks for joining yes, it's the latter it's more about it's the blanket lien on the equity and the company, so theres not individually and as being taken on on our loans and it's.
Covered and the equity of the company and that was that was important to us and I think our lenders.
We're incredibly supportive and helpful and finding a solution that meet for made sense for us and there arent a ton of mortgage Reits out there that have credit facilities that are kind of a revolving credit facility like this and this was optimal for us. It just made sense because we carry so much cash on our balance sheet to get something thats flexible.
And that allows us to draw of as needed and really just use it as net working capital solution, where we can just free up significant cash and put.
And that out of new loans.
Great and it sounds like it's a lot of flexibility you're not having to move assets around and pledge assets seem so basically they are just standing and not debt.
And our disastrous situation that you guys voluntarily decided for whatever reason youre going to liquidate. They would just stand ahead of your common shareholders right and that will be paid in full and then.
And the shareholders get everything else. So that's that's the great exactly thank.
Thank you and Jeff one for you and.
Notice I don't read everything that comes across my desk, I, just I wish I could but.
Finally found something to read on Tuesday.
And FHFA put out the home price increases.
For for February for free.
Year over year, but this was for the fourth quarter and.
Four of the the.
The top four states in terms of HPA.
All with year over year home prices improve.
Improvement and fourth quarter, where Idaho, Montana, Utah and Arizona.
So you guys are and three your mountain region, you're in three of those for all except for Montana.
Obviously, not a large state population, but as the situation there one of where is it a judicial state or is there simply just not enough population density and.
And any one.
Particular market to support of presence. Thanks.
Youre, referring to Montana.
Yes, we're growing the Montana, yes.
<unk>.
Month, Montana is a state that debt, we have on our radar and it is small and and.
It's pretty easy for Montana to grow quickly because it's starting with this depends on the size of the numerator as well as the denominator right and so yes, yes net.
But it's a it's a good it's a good state.
It sort of reminds me of of Idaho when we.
Went in there and.
And we will look at it we'll look at and we'll look at other markets and we will do it cautiously.
And and home prices all over Steve of just Ben.
Strong the.
Sure.
For the us.
And it just shows the they're multiple investor.
Investors I'm sure when you get out of defaulted or troubled property.
There are people looking for that right. They don't want to pay full freight by the property and if they can do a little private you don't buy something that's 80% done and and improve it that's that's great value for a potential Homer so yeah and.
The.
Part of the Steve is that debt.
There is every month every quarter theres another headline about one place or another and and we tend to stay focused on what we do and it served us pretty well for the last decade or so and.
And so before we just jumped.
On whatever the.
The next hot spot is we wanted to make sure that we do it methodically and we do it with the same rigor that we always have.
Well it serves you well. Thank you both for your comments Tonight.
Thanks, Steve.
This concludes our question and answer session I would like to turn the conference back on what's the management for closing remarks.
Okay.
Thank you. Thank you all for being part of this call. It's exciting to have our first full year under our belt and.
And we couldn't have done it without all of you and on behalf of all of us of broad Mark I'm Grateful I hope that you all stay healthy and I look forward to speaking with you again.
Not before at the end of next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.