Broadmark Realty Capital Inc (BRMK) 2021 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to Broadmark Realty Capital Third Quarter 2021 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to introduce your host, Mr. Nevin Boparai. Thank you, sir. You may begin.

Good afternoon. Thank you for joining us today for Broadmark 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 at www.broadmark.com.

As a reminder, remarks made on today's conference call may include forward-looking statements. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those discussed today. We do not undertake any obligation to update our forward-looking statements in light of new information or future events. For a more detailed discussion of the factors that may affect the company's results, please refer to our earnings release for this quarter and to our most recent SEC 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 Broadmark's Chief Executive Officer, Jeff Pyatt; 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, Nevin, 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 and reach new and repeat borrowers amidst sustained demand for new construction. We have also continued our targeted geographic expansion, making our first loans in Arizona, Nevada and Minnesota. And we now operate in 17 states, plus the District of Columbia, providing greater access to excellent borrowers and projects.

As of September 30, 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 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 tailwinds.

We have also continued to expand our opportunity set through our dynamic pricing system which we have implemented this year, as we have 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 with a 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, our 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 to fund 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 over time. As of September 30, our portfolio yield was 15%, down from 16.6% a year ago. And over the coming quarters, we expect the portfolio yield to stabilize in the 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, originating 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 over time without needing to add significant cost as we scale. Year-to-date, we have hired 6 sales and originations personnel to support our expansion into new states as well as in our existing states. And we feel confident that we are 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, demand for new housing continues to far outstrip supply with a deficit of units, both single and multifamily, that is actually widening, underlining the demand for new construction. In addition, household balance sheets remain very strong. And given the fundamental shift in working arrangements that resulted from COVID, many Americans are free to move, to 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 time line 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, and 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 requiring us to modify our loans or place them into maturity default. The vast majority of such cases are typically resolved without issue, but the length of the loan is extended as are 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 and land. We are focused on locations and real estate uses that have remained resilient during COVID.

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 and 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 2 new slides in our earnings presentation. These slides cover the principles that are at the core of Broadmark'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 9 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 $0.16 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 $0.19 per diluted common share. Interest income on our loans in the third quarter was $22.8 million and fee income was $7.7 million.

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, an 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 had $37.4 million of cash and no debt outstanding as of September 30. The lower-than-usual cash balance reflects 2 developments in the third quarter and 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 as 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 balance in full by October 31 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 have been constrained by the timing of loan payoffs. As of October 31, 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's in the long-term interest of Broadmark 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, these reduced 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 over time.

During the quarter, we retired our Private REIT and repurchased its loan participations for approximately $42 million. The repurchase price was equal to the loan's carrying value and, therefore, did not have a significant impact to our earnings.

Turning to our portfolio management. As of September 30, we had 32 loans in contractual default, representing $226 million in 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 have been normal course for us historically and are expected to be resolved quickly. More importantly, subsequent to quarter end, we are 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 0 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 of Broadmark's default management capabilities. More specifically, I would highlight the following: the default consisted of 3 loans with 1 borrower located in Portland, Oregon, including 1 loan collateralized by an incomplete office building that 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. Broadmark remained 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 incentivized and found refinancing with 2 banks, resulting in a full payoff of the loans with no principal loss.

As Jeff often says, it's easy to make construction loans and a lot harder to collect on them. These actions are proof of our strong underwriting model and resolute default management. As a result, we reduced our default pool to $188 million or 12% total commitment as of October 31, down meaningfully from September. Ultimately, there is still work left to be done in clearing defaults, but 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 continue to have a drag on earnings. For the third quarter, the earnings drag was approximately $0.04 per share. At quarter end, we owned 7 foreclosed properties with $52.4 million in carrying value. During the third quarter, we foreclosed on 2 loans and received total payoffs on 7 loans in default, representing a total commitment of $50.5 million.

Finally, I would like to provide an update on the 4 principles for growth that we have previously outlined. Number one, maximize earnings on our currently deployed capital to 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 the 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 loans.

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. This will 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, positioning 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. And we have multiple capital sources in place to fund our growth as opportunities arise. We have also made additional progress on our portfolio credit, reducing our population of nonaccrual 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 that 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?

(Operator Instructions) Our first question comes from the line of Tim Hayes with BTIG.

Just the first one on the liquidity position here. So nice to see you guys start using the credit line, and that certainly has proven to be fruitful when cash has 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 holdbacks. Can you just touch on -- I know you have capacity on the line. You talked about some of the options to you in the capital markets 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 where leverage is 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, Tim. Great question. So yes, liquidity position. We talked a little bit about it in the prepared remarks. But as of September 30, we got down to $37 million. We drew on the line for $50 million. One of the things that we'll see, and this is the whole reason we've got the credit facility as a cash management tool, is predicting when exactly we're going to get a large payoff. Particularly in this case, the $40 million in defaults that we got paid off in full post 9/30. 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 it 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 we think about raising capital, 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, flexibility and sizing. We're not putting out -- we're not going to put out $300 million, $400 million in the quarter. So something around $75 million to $100 million in capital makes sense. We can put that out in 1.5 to 2 quarters, which is important to us. We don't want to increase the drag on earnings from interest expense.

And then two, obviously, as we said, we're really strategically focused on over time bringing down our cost of capital and introducing 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, over time, introduce very reasonable amounts of leverage to the balance sheet in conjunction with increased origination volume that will help offset 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 evolve responsibly and still be at levels that are 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 sheet is evolving, too, with some new loan types, which I wanted to ask about. So I know it's kind of a moving target, but just any preliminary thoughts on where you could see leverage migrate to?

And then I just wanted to -- a 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. Yes. No, that's a great question, Tim. So debt-to-equity ratio. Again, when we have over $1.2 billion of equity, the debt-to-equity ratio is going to remain low, very low by industry standards, for the next several years. If we were to go out -- hypothetically, 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%, 15% debt-to-equity ratio. So over time, I think that will evolve. 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, the primary 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 5-year model. Do I see us being over 1x levered? Absolutely not. That's not what we're targeting at this moment. I think it's going to be a slow reasonable, responsible approach to the introduction of debt and balancing of our capital structure over time. So I think we will still have a competitive advantage years from now from a low leverage relative to our peers.

Yes, that's great. And then just one more for me, and I'll hop back in the queue. But just on the new types of loans that you originated this quarter, I think rehab and bridge seem to be the 2 categories we saw in the supplement. When you say rehab, is that resi fix and flip? Any other types? Maybe just give us kind of some examples of the type of collateral you're working with here so we get a feel for what these new loan types are.

Sure, yes. And I think that was just us really refining. It wasn't necessarily a Q3 new origination. I think 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 a bridge loan is, but no construction risk, maybe certificate of occupancy is available. You're typically going to get a lower coupon and fee 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 did a little bit in the commercial space between mixed use and hotel. We probably had about 35% of the new originations, but it didn't look terribly different than the existing portfolio. Still continue to focus on, let's call it, 60% residential-focused or slightly more than that while still taking the time to look at opportunistic deals in the commercial space. We 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 borrower, a good piece of collateral, then we're going to 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. We're 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 looks a lot like the existing portfolio. I think what you're seeing in the supplement is just refinement of some of our categorizations, but not necessarily us going out and doing different loans in Q3.

Our next question comes from the line of Steve Delaney with JMP Securities.

Jeff and David, good to be on with you. The first thing that I'd like to ask about is you had realized losses this year and that took your gap down $0.01 to $0.18. So that's $695,000. 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 great. Thanks for joining, Steve, and great question. It actually -- it does not relate to REO. That was from a legacy loan, 2017 loan, single-family loan in the Seattle area. It was -- I'll talk -- a lot of times, you ask us, what are your -- when we talk about high-touch defaults, what drives such high-touch default? It's typically borrower, either borrower error, borrower 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 defaults that we have. But that was specific to one large kind of single-family housing layout in the Seattle area that had been in default for a while, even pre-COVID. 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. We're able to redeploy that capital from the payoff of that during the third quarter into new loans that are generating interest and fees.

So that resolution was one of the $88 million or -- forgive me if I didn't get the exact amount, but you had a nice heavy resolutions. Some of them you got out whole or close to whole, I think you suggested. But in this one case, you did take -- there was a deficiency so you had a little write-off at the end.

Yes. Yes, that's correct. And I would say getting $88 million and having the $695,000, we never want principal losses. We have a history of avoiding them. But if we can -- just under $700,000 off of $88 million of resolved defaults, I think that's generally a win for us.

You can live with that. That is a win, yes. And then, Jeff, looking forward, a record quarter, you're not going to have that every quarter for sure. And you got -- as David said, you've got the winter months approaching. But 5 or 6 new hires, a couple of new states, maybe some more states. I mean, realistically, when you look out to 2022 -- and I intentionally want this to be vague enough so that it's nowhere near phrased guidance or anything. But is -- and I don't -- forgive me, but I don't have the 2018, 2019 pre-COVID numbers right in front of me in terms of originations. But a round number like $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 a range of what your expectations might be for a full year?

So that one might get perilously close to giving guidance, Steve.

All right. I was trying to...

Let's go with this. Let's go with this. Let's go with this. We have historically been a market leader since we were big enough to -- for people to notice us. 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 you a promise, we're not going to switch loan documents at the closing table, that we're going to have funds available to close loans.

And all of that is why we have such sticky repeat borrowers and why last quarter we had a lot of new borrowers, and 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 -- all of us are just a tiny fraction. And so I expect -- and we are certainly 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 I got it. I'm clear. 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 unsecured corporate debt 5 to 7 years, whatever, you and your Board and bankers pick -- I mean, I just think that would be an ideal complement to your capital base at this time given the coupons on those securities. I appreciate your comments.

Our next question comes from the line of Stephen Laws with Raymond James.

A follow-up on Tim's question. The bridge and rehab, I know it didn't go from 0% to 5%, David, as you mentioned in an answer. But how much do you think the mix will change as you continue to offer the expanded pricing sheets and other products, how big of a percentage of the portfolio do you see the bridge and rehab becoming over the next 12 months, let's say?

Great question. Thanks for joining, Stephen. I think we'll pick our spot. It's certainly not a focus. I think we talked a little bit probably last quarter or the quarter before when we 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 our construction loans that our borrowers want and we're not currently offering. So bridge loans definitely is probably the top of that list. We do see a lot of them. We haven't put a kind of focused effort on doing bridge loans. Sometimes it just makes sense to do a loan that maybe looks like a bridge loan, but it fits all of our criteria, primarily the 65% LTV, which often did not happen.

But I think they'll remain pretty small percentage 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 that our borrowers want beyond construction loans that will make sense for us to add to the portfolio and have additional segments in our portfolio that we'll 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 -- continue to bring in new borrowers.

Great. And then I appreciate those comments, David. On the geographic kind of expansion, you moved into 2 new states. I guess kind of a 2-part question. Are there other states you've identified that you'd like to be in that you're not yet in one of those? And conversely, as you look back 2 years ago, let's say, are there states now that you are more active in that you've looked at and decide you want to be less active in kind of going forward?

Yes. 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 enter states, but we're also mindful that opportunities come up. And maybe a state that was lower on the list maybe actually has 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. Our Chief Credit Officer has done a pretty significant analysis of both from a legal perspective, still focused on lender-friendly space. Our preference is always going to be nonjudicial foreclosures. Sometimes, there's judicial foreclosure. But ultimately, it looks a lot like nonjudicial foreclosure from a time line 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 are looking to expand into a new state and want to continue doing business with us. So that's something that we'll have in mind and -- as we pick additional states.

The 2 that we were -- we entered or the 3 we entered this quarter, Nevada, Arizona and Minnesota, this is a great example. Nevada and Arizona are 2 states we've been looking at for a while. They're -- I think Arizona was slightly more complicated from a licensing and lending perspective, but those are 2 that we had our eyes on for a while. Whereas Minnesota, there's obviously a gap in the Midwest that we historically have not done much lending, and there's a lot of opportunities there. So a deal came to us in Minnesota that was just a great piece of collateral, a 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 in the near term. It takes time. We enter these new markets. We find the local market experts. We start to develop the relationships. We 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, Stephen, that you'll -- I think right now, we're at 17 states in the District of Columbia. I would say a year from now, I would expect it to be significantly more than 7 states. But each of those states are going to take time to grow beyond a handful of loans right here. So Nevada and Minnesota, this and Arizona, I think 1 or 2 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 as we look to grow the portfolio, state expansion will continue to be a focus.

Great. And last question for me, tied to kind of the couple of adds. But compensation was up a little bit sequentially. I know you talked about adding a little bit on head count, especially as you've identified new markets. Is this the right run rate from the third quarter to think about going forward? Or more head count additions planned, where we should think about that increasing slightly as we move ahead?

Yes. So it's always a little bit difficult. So I'd like to always focus, as we did in the prepared remarks, around cash compensation. So once you back out RSU kind of expense and some amortization we have on intangible 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 compensation. So I think we'll probably be -- Q4 will probably look similar to Q3, somewhere between $6 million and $6.5 million. And we'll probably come in either just at or just slightly above kind of that $24 million cash expense target.

In terms of 2022 and beyond, I think there will be -- there might be slight head count increases, but nothing significant that's going to make the numbers in 2022 look significantly different than 2021. I think the beauty of our platform is 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 -- will have a marginal impact on our total cash compensation numbers. So I think you can probably continue running with that, let's call that, $24 million to $25 million of cash expense for the near term. And we're hoping to keep it at that number as long as we can.

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

Just on -- just the earnings reconciliation for the quarter. When I look at the growth of the portfolio, the commitments were up over $200 million and I recognized a $0.04 drag. But just could you just -- were there closings that were back-end weighted through the quarter? I just would have thought there would have been a bigger pickup than $0.01 sequentially given the growth in the portfolio. Just curious if there was a timing issue with interest recognition.

Yes. Yes, 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 out a little bit on fees and interest income from that. That tends to happen. We work on deals throughout the quarter. They tend to close towards quarter end. But -- so I think that's probably a driver.

And then to your point, I think the nonaccrual, we saw a nice -- a lot -- the comments we talked about in the prepared remarks around the $40 million or $41 million of defaults that we got fully paid off on that happened in October. So that won't be reflected in the Q3 numbers. We're hoping $0.015 to $0.02 pickup potentially in Q4 just based off default resolutions and continued elevated origination numbers as well as a full quarter on these Q3 originations in Q4 is what we're hoping for. So weighted towards the end of the quarter, still had a full quarter of, let's call it, a $0.04 drag from the nonaccrual. We took about $40 million off that nonaccrual post quarter-end. So hopefully, that will lead to a nice pickup of earnings in Q4.

Got it. Great. So it looks like you got the security -- you got the dividend covered here. It's just a timing issue. And then would just -- help us on sort of the modeling when you think about the yield guidance with the introduction of the debt, the leverage. I mean can you just tell us generally the ROE profile of the company? Do you expect it to increase? I mean do you think the ROEs with the capital structure in place and the new platform will be higher versus the old Broadmark? Just curious if you think about ROE trajectory, how do you tell investors -- or what do you think about the trends with ROEs as you begin to rotate the capital structure?

Yes, absolutely. Great question, Matt. So yes, we -- so 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 -- again, it will be slowly. It's a marathon, not a sprint. But we think over the next 3 to 5 years, weighted average cost of capital will come down. Our origination volumes will continue to increase.

Again, we're not going to give guidance, but I think what we did in the third quarter is something that can be definitely replicated. Obviously, Q4, as we mentioned in the prepared remarks, there's some seasonality issues, but Steve had mentioned $1 billion. Yes, $1 billion is something that should be expected in the future, and we are targeting those type of numbers as well as -- so this year, I think we've grown -- year-to-date, we've grown the portfolio about 23%. We think we'll grow it a little bit more in Q4. And then targeting 20% growth in the upcoming years is something that is definitely achievable from our perspective.

So lowering the weighted average cost of capital, continuing to increase growth to offset any 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 as significant increase in return on equity over time. It's not going to happen overnight, but I'd like to think every year we're going to pick up a little bit, and then we're going to be in a really good place in the relatively near term.

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 Broadmark 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. Bye.

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