Q3 2021 Broadmark Realty Capital Inc Earnings Call

[music].

Greetings, ladies and gentlemen, and welcome to broad Mark really capital third quarter 2021 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

And one require operator assistance during the conference. Please press star one on your telephone keypad.

Now my pleasure to introduce your host Mr. Devin Booker I. Thank you Sir you may begin good afternoon.

Thank you for joining us today for broad Mark Realty Capital's third quarter 2021 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.

Www dot broadband dot com.

As a reminder remarks made on today's conference call May include forward looking statements.

Forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today.

We do not undertake any obligation to update our forward looking statements in light of new information or future events.

For a more detailed discussion of the factors that may affect the company's results. Please refer to our earnings release for this quarter and to our most recent SEC filings.

During this call we will also be discussing certain non-GAAP financial measures.

More information about these non-GAAP financial measures and reconciliations to the most directly comparable GAAP financial measures are contained in our earnings release and SEC filings.

This afternoon's conference call is hosted by <unk>, 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'll turn the call over to Jeff.

Thank you, Kevin and welcome to our third quarter earnings call.

This afternoon I'll begin with a discussion of our quarterly performance and market overview, and then I'll turn the call over to David to provide additional detail on our financial results and loan portfolio.

We will then open up the call for your questions.

In the third quarter, we generated $337 million of new originations and amendments.

This is the largest origination volume in our 11 year history and reflects our efforts to scale, our operations reached new and repeat borrowers amid sustained demand for new construction.

We have also continued our targeted geographic expansion, making our first loans in Arizona, Nevada and Minnesota.

Now operate in 17 states plus the district of Columbia, providing greater access to excellent borrowers and projects.

As of September 30th our portfolio consisted of $1 $5 billion of loans secured by high quality real estate with a weighted average loan to value at the time of origination of 59%.

We are diversified across property types and geographies with single family and multifamily residential making up the majority of our portfolio.

We favor the residential sector because of the powerful demand drivers, resulting from population growth in our target markets as.

As well as a pervasive shortage of housing, which should continue to drive construction well into the future.

We also pursue select commercial real estate investments, which benefit from some of the same long term tailwind.

We've also continued to expand our opportunity set through our dynamic pricing system, which we have implemented this year as we've previously discussed.

This has allowed us to not only stay competitive in the midst of a highly active lending market.

But also to effectively reach a pool of borrowers that tend to be better capitalized and more experienced with larger projects and superior credit and collateral.

One constant is that our disciplined underwriting standards have not changed, particularly our maximum 65% loan to value, which gives us a significant value buffer in the event of cost overruns or other impacts.

We continue to maintain our relationships with smaller builders, even as we unlock opportunities where they're progressively wider pool of borrowers and broader range of projects.

Our increasing size and scale have enabled us to grow our average loan size, while keeping our percentage exposure to any individual borrower or loan very low.

In the third quarter, we originated 43, new loans with an average loan size of $7.5 million up from an average of $6 $7 million a year ago.

Additionally, although we are funding larger and more complex projects are loans remain short term in duration with a weighted average term of 12.6 months at the time of origination for our active loans.

The short term duration of our loans means that we have limited exposure to changes in interest rates.

It also means that our loan portfolio turns over relatively frequently providing us with a steady stream of payoffs stuff on new projects as well as allowing us to be nimble and pivot quickly as we allocate capital across our markets.

As we previously noted under our new pricing model and amid a competitive environment. We do expect that the weighted average all in yield on our portfolio will be reduced overtime.

As of September 30th our portfolio yield was 15% down from 16, 6% a year ago.

Over the coming quarters, we expect the portfolio yield to stabilize in a range of 11% to 12%.

However, by increasing our loan origination volume, while still utilizing our disciplined underwriting approach, we expect to grow the business accretively, but at a wider range of risk adjusted yields.

In the third quarter, we again demonstrated the power of our platform originated and a record amount of loans after coming off an already strong second quarter.

One of the benefits of our platform is that we can continue to build on this origination growth overtime without needing to add significant cost as we scale.

Year to date, we have hired six sales and originations personnel to support our expansion into new states as well as in our existing states.

We feel confident that we're well staffed to scale our operations with our current head count.

The macro environment remains highly supportive of our lending activities driven by supply and demand fundamentals that seem likely to persist well into the future.

On the residential side.

Man for new housing continues to far outstrip supply with a deficit of units both single and multifamily it is actually widening.

Underlining the demand for new construction.

In addition household balance sheets remained very strong and given the fundamental shift in working arrangements that resulted from Covid. Many Americans are free to move the upsize and to relocate to the high growth States, where we operate.

All of these demographic trends continue to drive new single family and multifamily construction, which flows through as demand for our loans.

Taken together these factors give us confidence that the housing market is well supported by strong supply and demand fundamentals and consumer credit.

We continue to monitor inflation supply chain disruptions and labor shortages, which could potentially impact the cost and timeline of our projects.

The short term nature of our loans means that we can respond quickly to a changing environment.

We continuously assess changing input costs as part of our underwriting process.

Our contracts include guaranteed ceilings on construction costs, which helps to protect us from overruns.

In our conversations with borrowers we are hearing that they have generally been able to source supplies without major issues with the majority of pressure coming from the tight labor market.

While we feel better protected than most in the current environment.

We remind you that these factors can translate into delays requirements to modify our loans or place them into a maturity default.

The vast majority of such cases are typically resolved without issue, but the length of the loan is extended.

The interest payments and fees that we receive.

Our portfolio also benefits from diversification across geographies and property types beyond residential.

Approximately 33% of our portfolio at the end of the third quarter consisted of commercial projects, including retail storage senior housing hotels in land.

We are focused on locations and real estate uses that have remained resilient during COVID-19.

To conclude we are very excited with our third quarter progress generating record originations and continuing our expansion into new markets.

We have an excellent record of repeat customers and every new borrower represents additional future revenue opportunities as we continue to scale our platform to be the leading lender of choice for construction loans.

With our highly experienced team best in class balance sheet, we have all the tools in place to continue to build upon this pace of activity to drive further shareholder value.

Lastly, as part of our ongoing efforts to expand and enhance our ESG disclosures. We have included two new slides in our earnings presentation.

These slides cover the principles that are at the core of broad Mark's organization and also provide some metrics on our ESG performance with that I'll turn it over to David to review the financials.

Thanks, Jeff and good afternoon, everyone.

Our operating results are detailed on slide nine of our earnings presentation.

For the third quarter of 2021 we reported total revenue of $30 $6 million and net income of $21 $7 million on a per share basis. This reflects a GAAP net income of approximately 16 cents per diluted common share.

Adjusting for the impact of nonrecurring costs and other noncash items, our distributable earnings prior to realized loss on investments for the third quarter were $24 $6 million or <unk> 19 cents per diluted common share.

Interest income on our loans in the third quarter was $22 $8 million and fee income was $7 $7 billion.

On the expense side.

We continue to balance our G&A reduction efforts with modest head count expansion to support our growth as Jeff mentioned.

For the third quarter.

We had cash compensation expense of $3 $1 million and G&A expense of $3 $4 million.

With $18 $1 million of cash compensation and G&A expense year to date, we remain in line with our previously estimated $24 million for 2021 and expected decrease of $5 million from 2020.

In addition, we expect to further reduce our G&A expense as a percentage of revenue as we grow our operations with our in place team.

With regard to origination volumes, which are presented on slide 10 of the earnings presentation.

We achieved a record $337 million of originations and amendments.

This pace will likely moderate as we enter the winter season, which is traditionally slower for construction.

We reiterate that origination volumes may vary from quarter to quarter based on the timing of loan closings.

Now turning to our balance sheet as detailed on slide 18 of our earnings presentation. We.

We had $37 $4 million of cash and no debt outstanding as of September 30th.

The lower than usual cash balance reflects two developments in the third quarter in October.

First in addition to record high originations in the third quarter as previously announced we repurchased $42 million of loan participations at carrying value from our private REIT has a part of the funds retiring.

Second in October we made our first use of our revolving credit facility.

With the credit facility in place we had the flexibility in September to bring down our cash levels to $37 million without needing to tap the facility during the quarter.

Subsequent to quarter end, we drew $50 million on the facility to support borrower draws and new originations, while we awaited several large loan payoffs.

We then paid off the balancing pool by October 31st following the receipt of loan repayments.

This demonstrates the value of our credit line as a cash management tool.

It gave us the ability to take advantage of the opportunities in our pipeline, while maintaining operating liquidity, whereas historically, we would've been constrained by the timing of loan payoffs.

As of October 31st we remain fully undrawn with $135 million of capacity on the credit facility.

We continue to target a cash balance of approximately $50 million to $100 million and note that timing considerations. As we saw this past quarter may result, in a lower level of cash at quarter end.

We did not issue any shares under our ATM program in the third quarter and in the future. We would access capital only when we believe that it is the long term interest of broad market shareholders.

As we have discussed previously we are assessing multiple sources of capital, including a conservative amount of long term debt, which is very attractively priced in today's low interest rate environment and will be accretive to our shareholders.

Even at the levels, we are contemplating our leverage would remain very low by industry standards, and we will continue to be patient and deliberate as we work to optimize our capital structure.

Maintaining a fortress balance sheet has always been part of our DNA and this will not change, but we believe this approach will support future growth as it will help to lower our overall cost of capital and make us even more competitive in the marketplace.

As Jeff mentioned, we expect that our pricing adjustments will result in our overall portfolio yield being reduced to approximately 11% to 12% from their current levels of 15% to 16%.

As seen on slide 11.

Asset yields remain higher than our peers and a conservative amount of leverage in tandem with the increased origination volumes that we are already realizing should help to offset the effect of those lower yields and set us up to drive earnings growth overtime.

During the quarter, we retired a private REIT and we purchase loan participations for approximately $42 million.

The repurchase price was equal to the loans carrying value and therefore did not have a significant impact to our earnings.

Turning to our portfolio magazine.

As of September 30th we had 32 loans and contractual default, representing 226 million and total commitments or 14, 7% of the total portfolio value.

This was up slightly from the second quarter and primarily reflects some new maturity defaults, which had been normal course for us historically and are expected to be resolved quickly.

More importantly, subsequent to quarter end, we were pleased to announce the resolution of one of our larger legacy Covid related defaults, which had a total commitment of $41 million and which we resolved with zero loss of principal.

Let me take a moment to discuss this default resolution in detail as it reflects both the delays associated with defaults and the success abroad marks default management capabilities.

More specifically I would highlight the following.

The default consisted of three loans with one borrower located in Portland, Oregon, including one loan collateralized by an incomplete office building.

Entered default in April 2020.

The valuation of offices deteriorated during the pandemic, making refinancing unavailable and we were unable to start foreclosure given the foreclosure moratorium in Oregon.

Brought back for named patient, taking steps to cross collateralize, the borrowers loans and worked with the borrower to identify refinancing.

And finally with the moratorium lifted and foreclosure available. The borrower was further incentivize and found refinancing with two banks, resulting in a full payoff of balloons with no principal loss.

As Jeff often says it's.

It's easy to make construction loans and a lot harder to collect on them here.

These actions are proof of our strong underwriting model and resolute default management.

As a result.

Our default pool.

$188 million or 12% total commitment as of October 31st down meaningfully from September.

Ultimately there is still work left to be done and clearing default.

This recent resolution of a large loan gives us added confidence and we expect to make further progress on reducing our default pool over the coming quarters.

As a reminder, loans in nonaccrual status continued to have a drag on earnings.

For the third quarter the earnings drag was approximately four cents per share.

At quarter end, we owned seven foreclosed properties with $52 $4 million in carrying value.

During the third quarter, we foreclosed on two loans and received total payoffs on seven loans and default representing a total commitment of $55 million.

Finally, I would like to provide an update on the four principles for growth that'd be a previously outlined.

Number one maximize earnings are currently deployed capital through the continued resolution of defaults.

As just discussed we made meaningful progress after quarter end, reducing our default pool by 7% since March 31, 2021 and 10% from a high as of August 2020.

Number two maximum deployment of existing capital with the credit facility now in place.

We took advantage of an enhanced balance sheet flexibility given to us by our credit facility by deploying existing cash in September drawing on our credit line in early October and then repaying it in tandem with October loan payoffs.

As discussed we are now seeing the tangible benefits of having this cash management tool in place, which means we are less constrained by the short term timing of loan payoffs and better able to take advantage of opportunities to fund new zones.

Number three ensure sufficient operating capital available for deployment through our various sources.

We are evaluating available sources of capital with a focus on the lowest available weighted average cost of capital for the company and the most accretive to our shareholders.

Likely include raising a modest amount of long term debt in the fourth quarter.

And finally number four identify opportunities for new earnings power and growth.

In the third quarter, we made great progress in expanding our operations and proving the increased originations capacity of our platform.

We have a large opportunity set with both new and existing customers and all the tools in place to capitalize on it.

Now I will turn the call back to Jeff for a few closing comments.

Thank you David.

As we close out the year and look ahead to 2022 we have made progress on many different fronts.

<unk> us well for the new year and beyond.

The third quarter demonstrated the power of our platform with record originations and expansion into new markets.

We have fortified our balance sheet and given ourselves more flexibility to operate we have multiple capital sources in place to fund our growth as opportunities arise.

We've also made additional progress on our portfolio credit, reducing our population of non accrual loans.

In light of these milestones our fundamental approach to our business remains the same and we will continue to apply the same prudent underwriting standards and practices.

They have supported us so well and allow us to deliver attractive risk adjusted returns.

This completes our prepared remarks, we will now open up the line for questions.

Operator.

Thank you, ladies and gentlemen, we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

I start to feel like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star one.

I'm a believer we poll for questions.

Our first question comes from the line of Tim Hayes with B P. I G. Please proceed with your question.

Hey, good evening guys. Thanks for taking my questions.

My first one on the liquidity position here. So nice to see you guys start using the credit line and <unk> and that certainly has.

Proven to be fruitful when when cashes come down quite a bit nice cash management tool for you, but you're at $37 million of cash at the end of the quarter less than 10% of construction hold backs can you just touch on you know I know you have capacity on the line you talked about some some of the options to you in the capital Mark.

In the fourth quarter and the ATM, just maybe give us an idea of.

How you see the liquidity position trending over the coming quarters maybe.

Maybe where leverages going what type of corporate debt or any other options you're considering right now just so we have an idea of how the balance sheet should evolve over the coming quarters.

Sure Great and thanks for joining him and great question. So.

<unk> liquidity position.

It's a little bit about in the prepared remarks, but as of September 30, we've got down to 37 million we draw on the line for $50 million.

One of the things that we will see and this is the whole reason, we got the credit facility as a cash management tool as you know.

Addicting when exactly we're going to get a large payoffs, particularly in this case that the $40 million in defaults that we got paid off in full a post a 930 a M.

It's very difficult so being able to draw on the line pay it back when the payoffs come in was exactly the intent behind us achieving and why it was such a focus for us strategically from a cash management perspective.

As of today, we have about $79 million of cash we're expecting some good movement from the origination pipeline over the next couple of weeks as.

As we think about you know raising capital as we as we mentioned in the prepared remarks in the fourth quarter.

We're focused on I think the same things we've said in the last couple of earnings calls no flexibility in sizing.

Not putting out you know, we're not gonna put out three $400 million in the quarter. So something around 70 $500 million in capital makes sense, we can put that out in one and a half to two quarters, which is important to us we don't want to increase the drag on earnings from from interest expense and then two obviously as we said, we're really strategically focused on overtime, bringing.

Our cost of capital and industry. So you see some leverage onto the balance sheet, so going out being able to lower the cost of capital through something like an unsecured bond issuance that would allow us to slowly overtime introduced very reasonable amounts of leverage to the balance sheet.

In conjunction with increased origination volume that will help offset.

Any any reductions we're seeing in the asset yields.

And that's something that we think we can do on kind of a recurring basis as needed being able to tap into those markets get.

Cheap coupons from our perspective, the debt markets are incredibly attractive right now and slowly over time have our capital structure evolves responsibly and still be at level.

They're really really reasonable compared to our peers.

That makes sense I appreciate the comments there David I mean, but do you have a target leverage ratio in mind clearly the asset side of the balance sheets evolving too with some new loan types, which I wanted to ask about so you know I I know, it's kind of a moving target but.

Just any preliminary thoughts on where you could see leverage migrate to and then just wanted to follow up to that would be just the equity ATM right. I mean, that's you trade at a premium to book value. So it's accretive as you issue stock. It helps manage your leverage levels. Just curious how you think about using that in tandem with some type of corporate debt issuance.

And the credit line.

Sure Yeah, no. That's that's great question Tim.

So that's the equity ratio again, you know when we have you know one over $1 $2 billion of equity.

The equity ratio is going to remain low very low by industry standards for the for the next several years.

Where to go out.

Hypothetically, if we go out and we do 100 million. This year, let's say, we do $200 million next year.

We're still looking at somewhere around 10, 10% 10, 15% debt to equity ratio. So.

Over time, I think that will fall, but I think it will be somewhat driven.

By our capital needs and pricing out there the ATM remains very attractive to us as well, but at this point in time, you know that the pre.

I'm Mary focus is being able to source the right amount of capital that we can put out quickly while simultaneously achieving our focus of over time, bringing down that cost of capital.

Do I see us.

We've got a five year model, who I see us being over one times levered absolutely not that that's not what we're targeting at this moment I think it's gonna be a slow reasonable responsible approach to the introduction of that.

And balancing of our capital structure over time, So I think we will still have a competitive advantage.

Or from now from a low leverage relative to our peers.

Yeah, that's that's great.

And then just one more for me and I'll hop back interview, but just on the new types of loans that you originated this quarter I think you know rehabbing Reg seem to be the two categories. We saw in the supplement.

You know when you say rehab is that Reg Z rescue fixed and flip them.

Any other types of Covid, maybe just give us kind of some examples of the type of collateral you're working with here until we get a feel for what these new loan types are.

Sure Yeah, and I think that was just us really refining it wasn't necessarily at Q3, new origination I think there's there's some loans that we've done in the past that really look more like a bridge loan and we can argue over what the definition of original ideas, but no construction risk maybe certificate of occupancy is available.

You're going to get a lower coupon than he on something like that so there is a little bit of that but I'd say for Q3. It looked a lot like what we've seen in the past I think we did about 35% for rent residential about 24% for sale residential we get a little bit in the commercial space between mixed use in hotel, we probably had about 35%.

<unk> of the new originations.

But it didn't look terribly different than the existing portfolio is still continue to focus on let's call it 60%.

Residential focus or slightly more than that.

While still taking the time to look at opportunistic deals in the commercial space.

Do think things like hotels definitely not our primary focus but if there's a good deal for a hotel, where it's a great power with a good piece of collateral.

Look at that and I think that's one of the benefits of our operating model is that we can.

Pivot, we do all types of collateral were primarily residential focused but.

Depending on what the market is looking like we can certainly shift our focus to different collateral types. So I would say Q3 looked a lot like the existing portfolio I think what you're seeing in the supplement it's just refinement of some of our categorization, but not necessarily us going out and doing different loans in Q3.

Got it got it well thanks for all the color David I appreciate it.

Yeah. Thanks, Tim.

Thank you. Our next question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.

Hello, Geoff and David good to be on with you.

Let's see first thing first thing.

Thanks, Jeff the first thing that I'd like to ask about is you had realized losses. This year and that took your gapped down a penny to 18th cent. So that's 695000 was that primarily fair value write downs on the $10 million addition to real estate owned I guess you had a foreclosure.

And is that where that particular realized loss came from.

It's a great. Thanks for joining Steve and Great question. It actually because it does not relate to Oreo that was from a legacy loan 2017 alone single family loan in the Seattle area.

It was.

You know what I'll call a lot of times people ask us what what are your when we talk about high touch defaults, what drives such high touch default, it's typically borrower either borrower error bar wherever it budgeting something like that so we don't we obviously don't like to see those and we always like to learn from.

Any of those type of default that we have but that was specific to one large kind of single family House housing lay out in the Seattle area that had been in default for awhile, even pre COVID-19.

We were able to resolve it we took a small loss on the overall value of the portfolio but.

More so good to get it off the books were able to redeploy that capital from the payoff of that during the third quarter and into new new loans that are generating interesting interesting piece.

So that that resolution was one of the 88 million or forgive me if I get the exact amount, but you had a nice heavy resolution some of them you got out.

Paul we're close to home I think you said suggests it but in this one case you did take a there was a deficiency. So you've had a little right off the gate.

Yeah, Yeah, that's correct and I would say, Adam you know getting out $88 million and having a $6 95.

We never want principal losses, we have a history of avoiding them, but if we can just under 700000 in off of $88 million of resolve defaults I think that's generally a win for US you can you can live with that as a win Yep and then Jeff looking forward you're in a record quarter, you're not going to have that every quarter.

For sure and you got it was as David said, you've got the winter months approaching them, but you know five or six new hires a couple of new states, maybe some more states I mean realistically when you look out to 2020, two and I intentionally wanted us to be vague enough. So that it is nowhere near.

That phrase guidance or anything but.

Is is.

And I don't forgive me, but I don't have the 2018 2019 pre COVID-19 numbers right in front of me in terms of originations, but around number like a it's like a $1 billion. A year is that something that would be if you were to set out goals for 2022 is that a realistic figure or at least in our range.

Of what your expectations might be.

For a full year so.

That one might get perilously close to giving guidance. The hotel alright, I was trying to let's go let's go with this let's go with this.

We we have historically.

Storage really Ben.

A market leader.

Since we were big enough to for people to notices.

Since we are since we've introduced our dynamic pricing model.

And candidly brought our pricing down we have in my opinion reemerged as a market leader people know that we deliver when we say we're going to and that we do what we say we're going to do that if we make a promise we're not gonna switch our loan documents at the closing table there were going to.

Have funds available to close loans and all of that is y.

We have such sticky repeat borrowers.

And why last quarter, we had a lot of new borrowers and I expect I expect that to continue and I think there's so much demand out there.

And if you look at us as a.

As our segment of the construction lending market we're just.

We're just to.

All of US are just a tiny fraction and so I expect and we are certainly set are setting ourselves up to grow so that breaking a record in the third quarter is not an anomaly.

And that we continue to grow at a nice healthy pace is that close enough for an answer that was very elegant and then.

I got it I'm clear.

Thanks, and David just one comment to Echo Tim's comment I think just looking at your balance sheet and how you're positioned I think you know unsecured corporate debt you know five to seven years whatever.

You and your board and bankers pick out I mean, I, just think that would be an ideal complement to your capital base at this time given given the coupons on those securities. Thanks I appreciate your comments.

Thanks, Steve.

Thank you. Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Hi, Good afternoon, I Hope you guys are both doing well.

Follow up on Tim's question the bridge in rehab and I know it didn't go from zero to 5% David as you mentioned in the answer but you know how how much do you think the mix will change as you continue to offer the expanded you know price sheets and other products you know how big of a percentage of the portfolio do you see the bridge and rehab.

Becoming you know over the next 12 months or so.

Great question, Thanks for joining us.

I think.

Well, we'll pick our spots. It's it's certainly not a focus I think we talked a little bit probably last quarter or the quarter before when he talked about what are you guys going to do with the private REIT like what are you looking at and we said well we're looking at complementary products to.

Two are construction loans that our borrowers want and we're not currently offering so.

Bridge loans is definitely.

It's probably the top of that list, we do see a lot of them we haven't.

<unk> put a kind of a focused effort on doing bridge old sometimes it just makes sense to a loan that maybe it looks like a bridge loan, but it fits all of our criteria primary the 65% LTV, which.

Often does not happen, but I think they'll remain pretty small percentages in the near term, but I think longer term.

I think Jeff and I would both say that we imagine ultimately having more than one product right. I think there's other products that are complementary and our borrowers want beyond construction loans that will make sense for us to add to the portfolio and have additional segments.

Our portfolio that will add so I think that's something that there will be opportunities for that when we talk about growth potential offering different products to the same borrower set as well as bringing its team to bring in new borrowers.

Yes.

Great and then I appreciate those comments David on the geographic kind of expansion you know moved into two new states.

Two part question are there other states you've identified that you'd like to be on that that you're not yet and what are those.

Conversely, as you look back two years ago.

Let's say or the other states now that you were more active in them that you've you've looked at and decided you want to be less active than kind of going forward.

Yeah, Oh, I'll take that and then I'll, let Jeff jump in to the extent he has additional comments.

I think we're being very strategic and focused when we interstates, but we're also mindful that opportunities come up and maybe a state that was lower on the list maybe actually has a really attractive opportunity. So I think it's constantly evolving quarter over quarter. There's a long list of states that we've been looking at.

Chief credit officers done pretty significant analysis of.

Both from a legal perspective still focused on lender friendly states you know our preference is always going to be non judicial foreclosure sometimes.

Theres judicial foreclosure, but ultimately it looks a lot like nonjudicial foreclosure from a timeline perspective. So we're open minded to that as well focused on migration rates, but ultimately in the business that we're in we have borrowers that sometimes do business in multiple states. So existing borrowers will come to us and we're looking to expand into a new state and one of them.

Continue doing business with us so that's something that we'll have in mind and as we as we take additional states.

The two that we were we entered where the three we entered this quarter, Nevada, Arizona in Minnesota. This is a Great example, Nevada and Arizona are two states we've been looking at for a while.

I think Arizona was a slightly more complicated from a licensing and lending perspective, but those are two that we had our eyes on for a while whereas Minnesota Theres, obviously, a gap in the Midwest that we historically have not done much lending and theres a lot of opportunities. There. So you know a deal came to us in Minnesota that was just a great piece of.

Collateral great borrower and it just made sense from an opportunistic investment to do that loan and then I think that will ultimately you're not going to see any one of these new states become a large portion of our portfolio and in the near term. It takes time, we enter these new markets, we find a local market experts we started.

Developed the relationships.

You get some new borrowers they become repeat borrowers and then word of mouth travels so you'll start to see more expansion I would say Steven that you'll you know I think right now we're at 17 States and the district of Columbia, I would say a year from now I would expect it to be.

Significantly more than Stephan states, but each of those states are going to take time to grow.

Beyond that a handful of loans right here, So, Nevada and Minnesota. This in Arizona, I think you know one or two loans each in those states. We're continuing to focus on those continuing to look to build out the relationships, but there will be more states in 2022, probably significantly more new states and I think longer term, there's always going to be states that just.

Don't make sense for us to look at but I think you know as we look to grow the portfolio state expansion will continue to be a focus.

Yeah.

Great.

Last question for me.

Tied to kind of the the couple of ads, but compensation was up a little bit sequentially. I know you talked about adding a little bit on head count, especially that you've identified the markets are is this the right run rate from the third quarter to think about going forward or you know more head count additions planned where we should think about that increasing slightly as we assume.

My bad.

Yeah.

And so it's always a little bit difficult. So I like to always focus as we did in the prepared remarks around cash compensation. So once you back out <unk>.

You kind of extend since some amortization, we havent on tangible assets. So I think we ended up at about $6 5 million of what I'll call total cash expense between cash between compensation and G&A.

For the year that puts us just around $18 million, so still kind of in line with that target of $24 million of cash and competition. So I think you know it will probably be Q4 will probably look similar to Q3 somewhere between six and six and a half and will probably come in either just at or just slightly above kind of that 24 million dollar.

Cash expense target in.

In terms of 2022 and beyond I think there'll be there might be slight head count.

Creases, but nothing significant that's going to make.

Make the numbers in 2020 to look significantly different in 2021 I think.

The beauty of our platform is it its scalability, we added some headcount in sales for state expansion I think we're not expecting any new sales head count for 2022, I think there might be a little bit of.

Back office operations functions, which are not going we will have a marginal impact on our total cash compensation number. So I think you can probably continue running with that you know, let's call that 24 $25 million of cash expense for the near term and we're hoping to keep it at that number.

As long as we can.

Great I appreciate it.

Yeah.

Thanks, Matt.

Our next question comes from the line of Matthew Howlett with B Riley. Please proceed with your question.

Oh, Hi, David and Jeff. Thank you for taking my question just on the.

On just the earnings reconciliation for the quarter.

When I look at the growth of the portfolio.

The the Covid. So we're up over 10 million and recognized a four cent drag, but just could just with where their closings that were backend weight through the quarter I just would've thought it would've been a bigger pick up in the 10, a penny sequentially given the growth in the portfolio. Just curious if there was a timing issue.

Interest recognition.

Yeah, Yeah sure Great question and thanks for joining Matt.

So from a total production perspective for the quarter. It was heavily weighted towards September I think about $180 million out of our.

337 million was in September so you probably lost that a little bit on on fees and interest income from that.

What tends to happen we work on deals throughout the quarter, they tend to close towards quarter end, but.

So I think that's probably driver and then to your point I think the nonaccrual.

Nice a lot like the comments, we talked about in the prepared remarks around the $40 million or $41 million of defaults that week.

Got it fully paid off on that happened in October so that won't be reflected in.

In the Q3 numbers, we're hoping we're hoping you know one and a half to Susannah pick up potentially in Q4.

Based off default resolutions and continued.

You know elevated origination numbers as well as a full quarter on these Q3 originations in Q4 is what were hoping for so no wait.

Weighted towards the end of the quarter still had a full quarter of let's call. It a four cent drag from the non accrual we took about $40 million off that non accrual post quarter end. So hopefully that will lead to a nice pickup of earnings in Q4.

Got it great. So it looks like you've got the helix security got the dividend covered here and it's just a.

Timing issue and then you know what just to help us out with sort of a modeling when do you think about the yield guidance with the with the introduction of the debt the leverage I.

I mean can you just tell us generally the are we profile of the company do you expect it.

To increase I mean, do you think the CRO with the capital structure in place and the new platform will be higher there versus the old broad Mark just just curious if you took what trajectory how do you tell investors or what do you think about the trends that are always as you begin to rotate to capital structure.

Yeah absolutely.

Absolutely a great great question, Matt So yes.

Yes, we are.

Short answer is yes, we definitely expect.

A significant increase in ROE over time, we think as weighted average cost of capital comes down, which we expect you know again it will be slowly it's a marathon not a sprint, but we think over the next three to five years, our weighted average cost of capital come down our origination volumes will continue to increase again.

Not going to give guidance, but I think what we did in the third quarter is something that can be definitely replicated. Obviously Q4. We spent you mentioned in prepared remarks, theres some seasonality issues, but you know.

Steve had mentioned the $1 billion gas the ability of $1 billion is something that I'm.

Should we expect in the future and we are targeting those type of numbers.

As well as you know so this year I think we've grown year to date, we've grown the portfolio about 23%, we think will grow at a little bit more in Q4, and then you know targeting 20% growth in the upcoming years is something that is definitely achievable from our perspective so.

So you know lowering the weighted average cost of capital continuing to increase growth to offsetting the impact of the lower asset yields.

Continuing to be focused on default resolution I think all of those things are going to lead to what I would like to believe significant increase in return on equity over time, it's not going to happen overnight, but I'd like to thank every year, we're going to pick up a little bit and then we're going to be in a really good place.

And in the relatively near term.

Thanks, a lot David.

Thanks, Matt.

Thank you ladies and gentlemen at this time there are no further questions.

I'd like to turn the floor back to management for closing comments.

Thank you everyone for being part of broad Mark Realty capital and thanks for taking part in our third quarter earnings call Hope you all stay safe and healthy and we look forward to seeing you after the new year right.

Right.

Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Are we still on.