Business Combinations

12 Months Ended

Dec. 31, 2023

Business Combinations

Business Combinations

Note 5. Business Combinations

Broadmark Merger

On May 31, 2023, the Company completed a merger with Broadmark, a specialty real estate finance company that specialized in originating and servicing residential and commercial construction loans. See Note 1 for more information about the Broadmark Merger. The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the Broadmark Merger.

(in thousands)	Preliminary Purchase Price Allocation			Measurement Period Adjustments		Updated Purchase Price Allocation
Assets
Cash and cash equivalents	$	38,710	$	—	$	38,710
Loans, net		772,954		(8,587)		764,367
Real estate owned, held for sale		158,911		(5,365)		153,546
Other assets		17,107		(7,151)		9,956
Total assets acquired	$	987,682	$	(21,103)	$	966,579
Liabilities
Corporate debt, net		98,028		—		98,028
Accounts payable and other accrued liabilities		22,531		819		23,350
Total liabilities assumed	$	120,559	$	819	$	121,378
Net assets acquired	$	867,123	$	(21,922)	$	845,201

In a business combination, the initial allocation of the purchase price is considered preliminary and therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of the merger date. Because the measurement period is still open for the Broadmark Merger, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received. The amounts presented in the table above pertained to the preliminary purchase price allocation reported at the time of the Broadmark Merger based on information that was available to management at the time the consolidated financial statements were prepared. The preliminary purchase price allocation is subject to change as the Company completes its analysis of the fair value of the assets acquired and liabilities assumed, which could have an impact on the consolidated financial statements. Subsequent to the determination of the preliminary purchase price allocation, the Company recorded a measurement period adjustment based on the updated valuations obtained by decreasing net assets acquired and the bargain purchase gain by $21.9 million.

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related bargain purchase gain.

(in thousands)		Preliminary Purchase Price Allocation		Measurement Period Adjustments		Updated Purchase Price Allocation
Fair value of net assets acquired	$	867,123	$	(21,922)	$	845,201
Consideration transferred based on the value of common stock issued		637,229		—		637,229
Bargain purchase gain	$	229,894	$	(21,922)	$	207,972

In the table above, the bargain purchase gain represents the fair value of the assets acquired and liabilities assumed in the Broadmark Merger which exceeds the fair value of the 62.2 million shares of common stock issued at $10.24 per share at the Effective Time. Gain on bargain purchase is recognized in the consolidated statements of income.

The following pro-forma income and earnings (unaudited) of the combined company are presented as if the Broadmark Merger had occurred on January 1, 2023 and January 1, 2022.

		Year Ended December 31,
(in thousands)		2023	2022
Selected Financial Data
Interest income	$	984,892	$	777,248
Interest expense		(721,239)		(409,412)
Provision for loan losses		(11,864)		(72,708)
Non-interest income		410,081		265,117
Non-interest expense		(274,981)		(413,022)
Income before provision for income taxes	$	386,889	$	147,223
Income tax expense		(7,174)		(29,733)
Net income	$	379,715	$	117,490

Non-recurring pro-forma transaction costs directly attributable to the Broadmark Merger were $30.7 million for each of the years ended December 31, 2023 and 2022, and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the Broadmark Merger.

Mosaic Mergers

On March 16, 2022, the Company acquired the Mosaic Funds, a group of privately held, real estate structured finance opportunities funds, with a focus on construction lending. See Note 1 for more information about the Mosaic Mergers. The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used, and key assumptions made, to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates.

The table below summarizes the fair value of assets acquired and liabilities assumed from the Mosaic Mergers.

(in thousands)	March 16, 2022
Assets
Cash and cash equivalents	$	100,236
Restricted cash		23,330
Loans, net		412,745
Investments held to maturity		161,567
Real estate owned, held for sale		44,748
Other assets		19,952
Total assets acquired	$	762,578
Liabilities
Secured borrowings		66,202
Loan participations sold		73,656
Due to third parties		24,301
Accounts payable and other accrued liabilities		38,781
Total liabilities assumed	$	202,940
Net assets acquired	$	559,638
Non-controlling interests		(82,524)
Net assets acquired, net of non-controlling interests	$	477,114

The table below illustrates the aggregate consideration transferred, net assets acquired, and the related goodwill.

(in thousands)		March 16, 2022
Fair value of net assets acquired	$	477,114
Consideration transferred based on the value of Class B shares issued		437,311
Consideration transferred based on the value of OP units issued		20,745
Fair value of CERs issued		25,000
Total consideration transferred	$	483,056
Goodwill	$	(5,942)

The table above includes contingent consideration in the form of CERs valued at approximately $25.0 million or $0.83 per CER. As of December 31, 2023, the CERs were valued at approximately $7.6 million or $0.25 per CER. See Note 7 for more information about the valuation of the CERs. As of December 31, 2023, the goodwill recorded in connection with the Mosaic Mergers has been allocated to the LMM Commercial Real Estate segment.