FRONT YARD RESIDENTIAL CORPORATION Our Company
Front Yard Residential Corporation , ("we," "our," "us," "Front Yard" or the "Company") is an industry leader in providing quality, affordable rental homes to America's families in a variety of suburban communities that have easy accessibility to metropolitan areas. Our tenants enjoy the space and comfort that is unique to single-family housing at reasonable prices. Our mission is to provide our tenants with affordable houses they are proud to call home. We are aMaryland real estate investment trust ("REIT"), and we conduct substantially all of our activities through our wholly owned subsidiary,Front Yard Residential, L.P. , and its subsidiaries. We conduct a single-family rental ("SFR") business with the objective of becoming one of the top SFR equity REITs serving American families and their communities. Our strategy is to build long-term stockholder value through the efficient management and continued growth of our portfolio of SFR homes, which we target to operate at an attractive yield. We believe there is a compelling opportunity in the SFR market, and we believe that we have implemented the right strategic plan to capitalize on the sustained growth in SFR demand. By being in the affordable SFR space, we provide a viable solution for the underserved affordable, working-class housing market by giving an important alternative to families who cannot afford or do not want to own their home. We target the moderately priced single-family home market that, in our view, offers attractive yield opportunities and one of the best-available avenues for growth. In order to capitalize on this opportunity, we are focused on (i) maximizing the scale and operating efficiencies of our internal property management platform; (ii) identifying and acquiring large portfolios and smaller pools of high-yielding SFR properties; (iii) selling certain rental and non-rental real estate owned ("REO") properties that do not meet our targeted rental criteria to generate cash that we may reinvest in acquiring additional SFR properties and (iv) when deemed necessary or advisable, extending the duration of our financing arrangements to better match the long-term nature of our rental portfolio and, at times, reducing our exposure to floating interest rate fluctuations. We have been managed by Altisource Asset Management Corporation ("AAMC" or our "Manager"), on which we have relied upon to provide us with dedicated personnel to administer our business and perform certain of our corporate governance functions. AAMC also has provided portfolio management services in connection with our acquisition and management of SFR properties and the ongoing disposition and management of our remaining REO properties. OnMarch 31, 2015 , we entered into an asset management agreement (the "Former AMA"), under which AAMC was our exclusive asset manager for an initial term of 15 years fromApril 1, 2015 , with two potential five-year extensions. OnMay 7, 2019 , we entered into an amended and restated asset management agreement (the "Amended AMA"), under which AAMC has been our exclusive asset manager for an initial term of five years. For further details of these asset management agreements, refer to Item 1 - Financial Statements (Unaudited) - Note 8, "Related-Party Transactions."
Termination of the Amended AMA
OnAugust 13, 2020 , Front Yard and AAMC entered into Termination and Transition Agreement (the "Termination Agreement"), pursuant to which they have agreed to terminate the Amended AMA after a transition period, thereby effectively internalizing the asset management function of Front Yard in exchange for payment of a termination fee to AAMC. In connection with the internalization, Front Yard will acquire the equity interests of AAMC's Indian subsidiary, the equity interests of AAMC'sCayman Islands subsidiary, the right to solicit and hire designated AAMC employees that currently oversee the management of Front Yard's business and other assets of AAMC that are used in connection with the operation of Front Yard's business (the "Transferred Assets"). Once the transition period is complete and the Amended AMA is terminated, we expect to no longer pay any management fees to AAMC; however, we will then be responsible for the ongoing employment and other costs associated with the internalization of our asset management function. For a description of the Termination Agreement and its key terms, please see Item 1 - Financial statements (unaudited) - "Note 1. Organization and Basis of Presentation." 27 --------------------------------------------------------------------------------
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Management Overview
Pretium Merger Agreement
On October 19, 2020 , we entered into an Agreement and Plan of Merger (the
"Pretium Merger Agreement") with Pretium Midway Holdco, LP , a Delaware limited
partnership ("Pretium"), and Midway AcquisitionCo REIT, a Maryland real estate
investment trust ("Merger Sub"), and including funds managed by the real estate
equity and alternative credit strategies of Ares Management Corporation,
providing for the merger of Front Yard into Merger Sub, with Merger Sub
surviving the merger and becoming a wholly-owned subsidiary of Pretium (the
"Merger Transaction").
Under the terms of the Pretium Merger Agreement, Front Yard shareholders will
receive $13.50 in cash per share upon consummation of the transaction. The per
share purchase price represents a premium of approximately 35.5% over Front
Yard's closing share price on October 16, 2020 , the last trading day prior to
today's announcement, and 45.4% over Front Yard's one-month volume-weighted
average share price.
The Front Yard Board of Directors has unanimously approved the Pretium Merger
Agreement and the Merger Transaction and intends to recommend that Front Yard
stockholders vote in favor of the Merger Transaction at a Special Meeting of
Stockholders, to be scheduled as soon as practicable. The transaction is
expected to close in the first quarter of 2021, subject to the approval by the
holders of a majority of Front Yard's outstanding shares and the satisfaction of
customary closing conditions.
For further details of the Pretium Merger Agreement, refer to Item 1 - Financial Statements (Unaudited) - "Note 14. Subsequent Events. "
Operations Update
During the third quarter of 2020, we have continued to realize very strong operating metrics with record levels in occupancy rates and unit turn timelines, despite the COVID-19 pandemic. During this time of crisis, we continue to be highly committed to our residents, employees and the communities which we serve. We have also continued to optimize the performance of our SFR portfolio by marketing certain rental properties for sale that do not meet our strategic objectives. During the quarter endedSeptember 30, 2020 , we sold 34 non-core rental homes on an individual basis, and we have identified 104 non-core rental properties for sale as ofSeptember 30, 2020 . We also disposed of 3 non-rental REO properties, and we had 5 non-rental REO properties remaining to be sold as ofSeptember 30, 2020 . We believe these non-core asset sales will allow us to improve our operating efficiency, recycle capital that may be used to purchase pools of stabilized rental homes at attractive yields, repurchase common stock, pay down debt or utilize the proceeds for such other purposes as we determine will best serve our stockholders.
We believe the foregoing developments are critical to our strategy of building long-term stockholder value through the creation of a large portfolio of internally managed SFR homes that we target operating at an attractive yield.
COVID-19 Pandemic Update
Due to the current COVID-19 pandemic inthe United States and globally, our employees, tenants, lenders and the economy, as a whole, could be adversely impacted. The magnitude and duration of the COVID-19 pandemic and its impact on our tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic, the success of actions taken to contain or treat the pandemic, and reactions by consumers, companies, governmental entities and capital markets. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and impact our financial performance. However, to date, we have seen little impact on our ability to operate effectively or on our actual and expected cash flows due to COVID-19. We are aware that the pandemic may impact our residents both financially and emotionally. We are highly committed to working with our residents to ease concerns and, where necessary, we have been proactively established mutually beneficial payment options to assist our residents in need through this difficult time. Our collections for the third quarter of 2020 were only slightly below our previous quarters' average collection rates; however, the impact on future months is difficult to predict. 28 -------------------------------------------------------------------------------- (table of
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We remain committed to the safety of our employees across the country who are providing a quality rental experience for our families. We had previously implemented a robust technology platform to enable us to seamlessly transition to a remote workplace while providing our field employees with necessary personal protective equipment to continue to provide essential services to our residents. We continue to utilize our extensive internal maintenance team and vendor network, where appropriate, to maintain our homes while practicing social distancing and safety during visits. We are proud of the quality of service, focus and dedication our employees have demonstrated during this unprecedented time, and we appreciate the concern they have shown for our residents.
In addition, demand for a safe and clean home is at a premium to help ease the
emotional stress of the pandemic. Our occupancy continues to be strong with
98.8% of stabilized properties leased as of
We believe that our business model is resilient and that we are well positioned to endure the COVID-19 pandemic.
Portfolio Overview
Real Estate Assets
The following table presents the number of real estate assets by status as of
the dates indicated:
Held for Use
September 30, 2020 Stabilized Non-Stabilized Total Held for Sale Total Portfolio
Rental properties:
Leased 14,286 - 14,286 - 14,286
Listed and ready for rent 81 2 83 - 83
Unit turn 95 - 95 - 95
Renovation - 30 30 - 30
Total rental portfolio 14,462 32 14,494
Previous rentals identified
for sale - 61 61 43 104
Legacy REO - 5 5 - 5
14,462 98 14,560 43 14,603
December 31, 2019
Rental properties:
Leased 13,711 - 13,711 - 13,711
Listed and ready for rent 357 14 371 - 371
Unit turn 369 - 369 - 369
Renovation - 94 94 - 94
Total rental portfolio 14,437 108 14,545
Previous rentals identified
for sale - 94 94 87 181
Legacy REO - 10 10 12 22
14,437 212 14,649 99 14,748
We define a property as stabilized once it has been renovated and then initially
leased or available for rent for a period greater than 90 days. All other homes
are considered non-stabilized. Homes are considered stabilized even after
subsequent resident turnover. However, homes may be removed from the stabilized
home portfolio and placed in the non-stabilized home portfolio due to renovation
during the home lifecycle or because they are identified for sale. At
September 30, 2020 , 98.8% of our stabilized properties were leased.
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The following table sets forth a summary of our real estate portfolio as ofSeptember 30, 2020 ($ in thousands): State Number of Properties Carrying Value (1) Average Age in Years Georgia 4,370 $ 465,513 38 Florida 2,077 297,885 41 Texas 1,923 269,820 30 Tennessee 1,467 199,743 25 North Carolina 867 112,548 27 Alabama 719 78,563 43 Indiana 664 79,959 25 Minnesota 623 104,859 79 Missouri 484 66,753 43 Oklahoma 305 41,843 29 All other rentals 995 142,491 36 Total rental portfolio 14,494 1,859,977 37 Rental properties held for sale 43 5,454 51 Previous rentals identified for sale 61 6,566 40 Total rental properties 14,598 1,871,997 36 Legacy REO 5 1,075 49 Total 14,603 $ 1,873,072 36 _____________ (1)The carrying value of an asset held for use is based on historical cost, plus renovation costs, net of any accumulated depreciation and impairment. Assets held for sale are carried at the lower of the carrying amount or estimated fair value less costs to sell.
Real Estate Acquisitions and Dispositions
The following table summarizes changes in our real estate assets for the periods
indicated:
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Beginning count of real estate
assets 14,640 14,772 14,748 15,445
Acquisitions - 28 4 85
Dispositions (37) (126) (149) (862)
Mortgage loan conversions to REO,
net - - - 4
Other additions - - - 2
Ending count of real estate assets 14,603 14,674 14,603 14,674
For further information regarding our real estate acquisition and disposition activities, refer to Item 1 - Financial Statements (Unaudited) - Note 2, "Asset Acquisitions and Dispositions."
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Mortgage Loan Assets
We liquidated the last of our remaining mortgage loans during the fourth quarter of 2019.
The following table summarizes changes in our mortgage loans at fair value for the periods indicated:
Three months ended Nine months ended
September 30, 2019 September 30, 2019
Mortgage Loans at Fair Value
Beginning 57 74
Resolutions and dispositions (5) (18)
Mortgage loan conversions to REO, net - (4)
Ending 52 52
Metrics Affecting Our Consolidated Results
Revenues
Our revenues primarily consist of rental revenues. Minimum contractual rents from leases are recognized on a straight-line basis over the terms of the leases in residential rental revenues. Therefore, actual amounts billed in accordance with the lease during any given period may be higher or lower than the amount of rental revenue recognized for the period. We believe the key variables that will affect our rental revenues over the long term will be the size of our SFR portfolio, average occupancy levels and rental rates. The majority of our leases are for a term of one year. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues will be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, which involves expenses such as additional renovation costs and leasing expenses or reduced rental revenues. Our rental properties had an average annual rental rate of$16,140 per home for the 14,286 stabilized properties that were leased atSeptember 30, 2020 . Our investment strategy is to develop a portfolio of SFR properties inthe United States that provides attractive risk-adjusted returns on invested capital. In determining which properties we retain for our rental portfolio, we consider various objective and subjective factors, including but not limited to gross and net rental yields, property values, renovation costs, location in relation to our coverage area, property type, HOA covenants, potential future appreciation and neighborhood amenities.
Expenses
Our expenses primarily consist of the following:
i. Residential property operating expenses. Residential property operating expenses are expenses associated with our ownership and operation of residential properties, including expenses towards repairs, turnover costs, utility expenses on vacant properties, property taxes, insurance, HOA dues and personnel cost for repair and maintenance employees.
ii. Property management expenses. Property management expenses include personnel costs of property management employees and other costs incurred in the oversight and management of our portfolio of homes.
iii. Depreciation and amortization. Depreciation and amortization is a non-cash
expense associated with the ownership of real estate and generally remains
consistent over the life of an asset since we depreciate our properties on a
straight-line basis. Depreciation and amortization also includes the
amortization of our in-place lease intangible assets and lease commissions,
which generally are amortized for periods of one year or less. The level of
amortization of in-place lease intangible assets will vary depending upon our
acquisition activity.
iv. Acquisition and integration costs. Acquisition and integration costs
include expenses associated with acquisitions as well as duplicative or
non-recurring costs associated with the internalization of our property and
asset management function. We expect the majority of our asset acquisitions will
not meet the definition of a business; therefore, we expect that the majority of
acquisition costs will be capitalized into the cost basis of such assets.
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v. Impairment. Impairment represents the amount by which we estimate the carrying amount of a property will not be recoverable.
vi. Mortgage loan servicing costs. Mortgage loan servicing costs were primarily for servicing fees, foreclosure fees and advances of residential property insurance. Due to our liquidation of the last of our remaining mortgage loans during the fourth quarter of 2019, we do not expect to incur mortgage loan servicing costs in future periods.
vii. Interest expense. Interest expense consists of the costs to borrow money in connection with our debt financing of our portfolios.
viii. Share-based compensation. Share-based compensation is a non-cash expense related to the restricted stock units and stock options issued pursuant to our authorized share-based compensation plans. ix. General and administrative. General and administrative expenses consist of the costs related to the general operation and overall administration of our business, including compensation and benefits of certain employees. In addition, general administrative expenses include expense reimbursements to AAMC, which include the compensation and benefits of the General Counsel dedicated to us and, beginning inJanuary 2020 , certain specified employees who provide direct property management and other services to Front Yard as well as certain out-of-pocket expenses incurred by AAMC on our behalf. x. Management fees to AAMC. Under the Amended AMA, our management fees to AAMC include a quarterly Base Management Fee and a potential annual Incentive Fee, each of which are dependent upon our performance and are subject to potential downward adjustments and an aggregate fee cap. Beginning in the third quarter of 2019, the quarterly Base Management Fee under the Amended AMA is subject to a minimum of$3,584,000 . Under the Former AMA, our management fees to AAMC included a base management fee and a conversion fee. The base management fee was calculated as a percentage of our average invested capital, and the conversion fee was based on the number and value of mortgage loans and/or REO properties that Front Yard converted to rental properties for the first time in each period. Once the transition period is complete and the Amended AMA is terminated, we expect to no longer pay any management fees to AAMC. For information regarding our management fees to AAMC, refer to Item 1 - Financial Statements (Unaudited) - Note 8, "Related-Party Transactions." xi. Termination fee to AAMC. Pursuant to the Termination Agreement, we agreed to pay an aggregate termination fee of$46.0 million to AAMC, which we recognized in the third quarter of 2020, to terminate the Amended AMA after the completion of a transition period.
Other Factors Affecting Our Consolidated Results
We expect our results of operations will be affected by various factors, many of which are beyond our control, including the following:
Portfolio Size
The size of our SFR portfolio will impact our operating results. Generally, as
the size of our investment portfolio grows, the amount of revenue we expect to
generate will increase. A growing investment portfolio, however, will drive
increased expenses, including possibly higher property management fees, property
operating expenses and, depending on our performance, fees payable to AAMC. We
may also incur additional interest expense if we incur additional debt to
finance the purchase of assets.
The growth of our SFR portfolio will depend on our ability to identify and
acquire SFR properties and other single-family residential assets. Generally, we
expect that our SFR portfolio may grow at an uneven pace, as opportunities to
acquire SFR properties may be irregularly timed and may involve portfolios of
varying sizes. The timing and extent of our success in acquiring such assets
cannot be predicted. In addition, as we continue to identify rental properties
for sale in order to optimize our operating results, we may experience a
decrease in our SFR portfolio if we are not able to successfully identify and
acquire replacement SFR properties.
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Financing
Our ability to grow our business is dependent on the availability of adequate financing, including additional equity financing, debt financing or a combination thereof, in order to meet our objectives. We intend to leverage our investments with debt, the level of which may vary based upon the particular characteristics of our portfolio and on market conditions. To the extent available at the relevant time, our financing sources may include term loan facilities, warehouse lines of credit, securitization financing, structured financing arrangements, seller financing loan arrangements, repurchase agreements and bank credit facilities, among others. We may also seek to raise additional capital through public or private offerings of debt or equity securities, depending upon market conditions. To qualify as a REIT under the Internal Revenue Code, we will need to distribute at least 90% of our taxable income each year to our stockholders. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities.
Liquidation of Non-Core Assets
We continuously monitor the performance of our assets and expect to liquidate certain assets that no longer meet our investment criteria, including certain rental properties in sub-scale markets or that do not generate attractive returns and REO properties that do not meet our investment criteria. We generally sell real estate assets on an individual basis. We believe these non-core asset sales will allow us to improve our operating efficiency, recycle capital that may be used to purchase pools of stabilized rental homes at attractive yields, repurchase common stock, pay down debt or to utilize the proceeds for such other purposes as we determine will best serve our stockholders.
Results of Operations
The following sets forth discussion of our results of operations for the three and nine months endedSeptember 30, 2020 versus the three and nine months endedSeptember 30, 2019 . Our results of operations for the periods presented are not indicative of our expected results in future periods.
Three and nine months ended
Rental revenues Rental revenues increased to$56.9 million and$166.4 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to$50.8 million and$154.9 million for the three and nine months endedSeptember 30, 2019 , respectively. This increase is primarily attributable to improved occupancy, rent increases and better collections. Our rental revenues depend primarily on changes in the occupancy levels and rental rates for our residential rental properties as well as the number of SFR properties in our portfolio. We expect to generate increasing rental revenues from increases in rents on existing properties upon the re-lease of properties or renewal of existing leases. Because our lease terms generally are expected to be one year, our occupancy levels and rental rates will be highly dependent on localized residential rental markets and our renters' desire to remain in our properties. In addition, we continuously evaluate opportunities to grow our rental portfolio, which would increase our rental revenues.
Residential property operating expenses
Residential property operating expenses were$20.0 million and$57.7 million for the three and nine months endedSeptember 30, 2020 , respectively compared to$20.8 million and$58.2 million for the three and nine months endedSeptember 30, 2019 , respectively. The small decrease is primarily due to lower external vendor costs driven by an increase in the utilization of internal employees to complete maintenance and turn work, partially offset by increases in property taxes and insurance and compensation expense related to increased headcount of repair and maintenance employees. Our residential property operating expenses for occupied rental properties depends primarily on repair and maintenance expenditures, turnover costs, utility expenses on vacant properties, property taxes, insurance, and HOA dues. Our residential property operating expenses for vacant properties also includes utilities, property preservation and repairs and maintenance. Our residential property operating expenses will be dependent on our ability to control costs, perform unit turns and secure new tenants in a timely manner. Further, in periods when we are successful in growing our portfolio, we generally expect to incur increasing residential property operating expenses beginning in such periods. 33 -------------------------------------------------------------------------------- (table of
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Property management expenses
Property management expenses were$3.6 million and$11.4 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to$4.2 million and$11.4 million for the three and nine months endedSeptember 30, 2019 , respectively. The decrease for three months endedSeptember 30, 2020 is primarily due to reduced call center and lower eviction-related costs.
Depreciation and amortization
We incurred$20.2 million and$60.8 million in depreciation and amortization for the three and nine months endedSeptember 30, 2020 , respectively, compared to$19.7 million and$62.0 million for the three and nine months endedSeptember 30, 2019 , respectively. The increase quarter over quarter is primarily driven by an increase in depreciable real estate assets. The decrease year over year is primarily driven by reduced amortization of lease-in-place intangible assets during 2020, partially offset by an increase in depreciable real estate assets. Generally, we expect to incur increasing depreciation and amortization if and when we place more residential properties into leasing service. Depreciation and amortization are non-cash expenditures that generally are not expected to be indicative of the market value or condition of our residential rental properties. Depreciation and amortization includes amortization of lease-in-place intangible assets associated with our real estate acquisitions and will vary depending upon our acquisition activity. We recognized a nominal amount and$0.5 million of lease-in-place intangible asset amortization for the three and nine months endedSeptember 30, 2020 , respectively, compared to$0.1 million and$2.8 million for the three and nine months endedSeptember 30, 2019 , respectively.
Acquisition and integration costs
We incurred$0.8 million and$0.9 million of acquisition and integration costs for the three and nine months endedSeptember 30, 2020 , respectively, compared to$0.2 million and$3.1 million for the three and nine months endedSeptember 30, 2019 , respectively. The increase quarter over quarter is primarily driven by costs recognized in relation to the internalization of our asset management function during the third quarter of 2020. The decrease year over year is primarily driven by the non-recurrence of costs in the first nine months of 2019 associated with the internalization of the property management function that began in 2018. Impairment We recognized$0.1 million and$1.0 million of impairment on our real estate assets for the three and nine months endedSeptember 30, 2020 , respectively, compared to$0.5 million and$3.1 million for the three and nine months endedSeptember 30, 2019 , respectively. These declines are primarily driven by the reduction in the remaining non-rental REO properties in our portfolio. For our real estate held for use, if the carrying amount of the asset exceeds the sum of its undiscounted future operating and residual cash flows, an impairment loss is recorded for the difference between estimated fair value of the asset and the carrying amount. If an increase in the fair value of our held for use properties is noted at a subsequent measurement date, we do not recognize the subsequent recovery. For our real estate held for sale, we record the properties at the lower of either the carrying amount or its estimated fair value less estimated selling costs. If the carrying amount exceeds the estimated fair value, as adjusted, we record impairment equal to the amount of such excess. If an increase in the fair value of our held for sale properties is noted at a subsequent measurement date, a gain is recognized to the extent of any previous impairment recognized. The majority of the valuation impairments we realize relates to our real estate assets held for sale, and we expect to recognize lower valuation impairments in future periods as our portfolio of non-rental assets declines.
Mortgage loan servicing costs
We incurred no mortgage loan servicing costs for the three and nine months endedSeptember 30, 2020 due to our liquidation of the last of our remaining mortgage loans during the fourth quarter of 2019. We incurred mortgage loan servicing costs of$0.2 million and$0.8 million for the three and nine months endedSeptember 30, 2019 , respectively. We incurred mortgage loan servicing and foreclosure costs as our mortgage loan servicers provided servicing for our loans and paid for advances relating to property insurance, foreclosure attorney fees, foreclosure costs and property preservation. We do not expect to incur mortgage loan servicing costs in future periods. 34 --------------------------------------------------------------------------------
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Interest expense
Interest expense relates to borrowings under our debt facilities and includes
amortization of deferred debt issuance costs and loan discounts and
mark-to-market adjustments of our interest rate caps. Interest expense decreased
to $17.4 million and $55.8 million for the three and nine months ended September
30, 2020 , respectively, from $21.1 million and $63.8 million for the three and
nine months ended September 30, 2019 , respectively. The decrease was primarily
driven by decreases in the floating component of our contractual interest rates
on certain of our debt. Interest expense also includes non-cash interest expense
related to our interest rate cap derivatives, which was $1.4 million and $4.2
million for the three and nine months ended September 30, 2020 , respectively,
compared to $1.4 million and $3.7 million for the three and nine months ended
September 30, 2019 , respectively.
Certain interest rates under our repurchase and loan agreements are subject to
change based on changes in the relevant index. We also expect our interest
expense to increase as our debt increases to fund and/or leverage our ownership
of existing and future portfolios we may acquire.
Share-based compensation
Share-based compensation expense was$1.6 million and$4.0 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to$1.5 million and$4.4 million for the three and nine months endedSeptember 30, 2019 , respectively. This decrease for the nine months endedSeptember 30, 2020 is primarily due to prior grants of restricted stock units becoming fully amortized in March andMay 2020 , partially offset by grants of restricted stock units to certain of our employees and employees of AAMC onJune 22, 2020 .
General and administrative expenses
General and administrative expenses increased to$6.6 million and$23.3 million for the three and nine months endedSeptember 30, 2020 , respectively, from$5.5 million and$19.3 million for the three and nine months endedSeptember 30, 2019 , respectively. The increase was primarily driven by legal and professional fees associated with the Pretium Merger Agreement, stockholder activism and the termination of the Amended AMA.
Management fees
We incurred base management fees to AAMC of$3.6 million and$10.8 million during the three and nine months endedSeptember 30, 2020 , respectively, compared to$3.6 million and$10.7 million during the three and nine months endedSeptember 30, 2019 , respectively. The small increase in base management fees during the nine months endedSeptember 30, 2020 is primarily driven by the Minimum Base Fee of$3.6 million per quarter becoming applicable beginning inMay 2019 . Under the Amended AMA, we no longer pay conversion fees to AAMC. During the three and nine months endedSeptember 30, 2019 , we incurred conversion fees to AAMC of$0 and$29,000 , respectively. Conversion fees fluctuated dependent upon the number and fair market value of properties converted to rented properties for the first time during the quarter.
Termination fee
Pursuant to the Termination Agreement, we agreed to pay an aggregation fee of
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Net gain on real estate and mortgage loans
The following table presents the components of net gain on real estate and
mortgage loans during the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Conversion of mortgage loans to REO, net $ - $ 17 $ - $ 769
Change in fair value of mortgage loans,
net - (81) - 211
Net realized loss on mortgage loans - (1,671) - (944)
Net realized gain on sales of real estate 176 2,089 1,546 12,937
Net gain on real estate and mortgage loans $ 176 $
354 $ 1,546
Due to our liquidation of the last of our remaining mortgage loans during the fourth quarter of 2019, we no longer expect to recognize unrealized gains on conversion of mortgage loans to REO, changes in the fair value of mortgage loans or realized gains or losses on mortgage loans. The reduction in net realized gain on sales of real estate is primarily driven by a reduction in the number of properties sold. We sold 37 and 149 properties during the three and nine months endedSeptember 30, 2020 , respectively, compared to 126 and 862 properties during the three and nine months endedSeptember 30, 2019 , respectively.
Liquidity and Capital Resources
As ofSeptember 30, 2020 , we had cash and cash equivalents of$84.4 million compared to$43.7 million as ofDecember 31, 2019 . Our liquidity reflects our ability to meet our current obligations (including our operating expenses and, when applicable, retirement of, and margin calls relating to, our financing arrangements). We are required to distribute at least 90% of our taxable income each year to our stockholders to qualify as a REIT under the Internal Revenue Code. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital to support our activities. We were initially funded with$100.0 million onDecember 21, 2012 . Since our inception, our primary sources of liquidity have been proceeds from equity offerings, borrowings under our repurchase and loan agreements and securitization financings, cash generated from our rental portfolio and liquidations of non-core assets. We expect that our existing business strategy will require additional debt and/or equity financing. We continue to explore a variety of financing sources to support our growth, including, but not limited to, debt financing through bank warehouse lines of credit, additional and/or amended repurchase agreements, term financing, seller financing arrangements, securitization transactions and additional debt or equity offerings. As disclosed above, we expect to pay an aggregate of$36.0 million (of which up to$21.0 million may be paid in shares of Front Yard stock in lieu of cash at our option) to AAMC pursuant to the Termination Agreement upon completion of the termination of the Amended AMA. Based on our current borrowing capacity, leverage ratio and remaining payment requirements under the Termination Agreement, we believe that these sources of liquidity will be sufficient to enable us to meet anticipated short-term (one year) liquidity requirements, including paying expenses on our existing residential rental portfolio, funding distributions to our stockholders (if any), paying fees to AAMC under the AMA and general corporate expenses. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be successful. If we are unable to renew, replace or expand our sources of financing, our business, financial condition, liquidity and results of operations may be materially and adversely affected. As previously disclosed, onMay 4, 2020 , we entered into a Termination and Settlement Agreement to terminate the Amherst Merger Agreement. Pursuant to the Termination and Settlement Agreement,Amherst agreed to pay the Company a$25 million cash termination fee, purchase from the Company 4.4 million shares of Front Yard common stock for an aggregate cash purchase price of$55 million ($12.50 per share) pursuant to an Investment Agreement and provide the Company with a$20 million committed Non-Negotiable Promissory Note. The proceeds of the Termination and Settlement Agreement were the primary driver of our increased liquidity sinceDecember 31, 2019 . For further details of the Termination and Settlement Agreement, the Investment Agreement and the Non-Negotiable Promissory Note, please refer to our Current Report on Form 8-K filed with the SEC onMay 5, 2020 . 36
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Repurchase and Loan Agreements
The following table sets forth data with respect to our repurchase and loan
agreements as of
Maximum Amount of
Amount Borrowing Available Book Value of
Maturity Date Interest Rate Outstanding Capacity Funding Collateral
September 30, 2020
CS Repurchase Agreement 6/29/2021 1-month LIBOR + 3.50% (1) $ 118,549 $ 200,000 $ 81,451 $ 125,834
HOME II Loan Agreement 11/9/2020 (2) 1-month LIBOR + 2.10% (3) 83,270 83,270 - 96,207
HOME III Loan Agreement 11/9/2020 (2) 1-month LIBOR + 2.10% (3) 89,149 89,149 - 106,619
HOME IV Loan Agreement (A) 12/9/2022 4.00% 114,201 114,201 - 139,095
HOME IV Loan Agreement (B) 12/9/2022 4.00% 114,590 114,590 - 139,983
Term Loan Agreement 4/6/2022 5.00% 99,782 99,782 - 108,820
FYR SFR Loan Agreement 9/1/2028 4.65% 508,700 508,700 - 566,466
MS Loan Agreement 12/7/2023 1-month LIBOR + 1.80% (4) 504,545 504,545 - 584,202
Amherst Promissory Note 5/4/2022 1-month LIBOR + 5.00% - 20,000 20,000 -
1,632,786 $ 1,734,237 $ 101,451 $ 1,867,226
Less: unamortized loan discounts (2,684)
Less: deferred debt issuance costs (9,134)
$ 1,620,968
December 31, 2019
CS Repurchase Agreement 2/15/2020 1-month LIBOR + 2.30% $ 109,002 $ 250,000 $ 140,998 $ 111,593
Nomura Loan Agreement 4/3/2020 1-month LIBOR + 2.30% 33,671 250,000 216,329 38,423
HOME II Loan Agreement 11/9/2020 1-month LIBOR + 2.10% 83,270 83,270 - 98,150
HOME III Loan Agreement 11/9/2020 1-month LIBOR + 2.10% 89,150 89,150 - 108,860
HOME IV Loan Agreement (A) 12/9/2022 4.00% 114,201 114,201 - 141,787
HOME IV Loan Agreement (B) 12/9/2022 4.00% 114,590 114,590 - 142,620
Term Loan Agreement 4/6/2022 5.00% 99,782 99,782 - 111,061
FYR SFR Loan Agreement 9/1/2028 4.65% 508,700 508,700 - 573,961
MS Loan Agreement 12/7/2023 1-month LIBOR + 1.80% 504,986 504,986 - 595,650
1,657,352 $ 2,014,679 $ 357,327 $ 1,922,105
Less: unamortized loan discounts (3,632)
Less: deferred debt issuance costs (9,490)
$ 1,644,230
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(1)Subject to a 1-month LIBOR floor of 0.50%.
(2)Represents the current maturity date. We have the option to extend the
maturity date for up to three successive one-year extensions, the first of which
we exercised on October 17, 2019 . We intend to exercise our option to extend the
maturity date until November 9, 2021 .
(3)The interest rate is capped at 4.40% under an interest rate cap derivative.
(4)The interest rate is capped at 4.30% under an interest rate cap derivative.
For a discussion of additional details regarding the above repurchase and loan agreements, see Item 1 - Financial Statements (Unaudited) - Note 5, "Borrowings" to our interim condensed consolidated financial statements.
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Compliance with Covenants
Our repurchase and loan agreements require us and certain of our subsidiaries to maintain various financial and other covenants customary to these types of indebtedness. The covenants of each facility may include, without limitation, the following: •reporting requirements to the agent or lender, •minimum adjusted tangible net worth requirements, •minimum net asset requirements, •limitations on the indebtedness, •minimum levels of liquidity, including specified levels of unrestricted cash, •limitations on sales and dispositions of properties collateralizing certain of the loan agreements, •various restrictions on the use of cash generated by the operations of properties, •a requirement to maintain positive net income, after adjustment to add back non-cash items, for any two consecutive quarters, and •a minimum fixed charge coverage ratio.
We are currently in compliance with the covenants and other requirements with respect to our repurchase and loan agreements.
Counterparty Risk
We monitor our lending partners' ability to perform under the repurchase and loan agreements, including the obligation of lenders under repurchase agreements to resell the same assets back to us at the end of the term of the transaction, and have concluded there is currently no reason to doubt that they will continue to perform under the repurchase and loan agreements as contractually obligated.
Advance Rates
As amended, the CS Repurchase Agreement provides for the lender to finance our portfolio at advance rates (or purchase prices). Advance rates for our REO and SFR properties currently range from 72.2% to 78.0% of the discounted value of the underlying asset as described below. Our advance rate under the CS Repurchase Agreement was 62.4% of estimated fair value atSeptember 30, 2020 compared to 69.4% as ofDecember 31, 2019 . The advance rate of the CS agreement may vary from period to period dependent upon the type and value of assets that serve as collateral thereunder. The advance rate on each of the HOME II Loan Agreement, HOME III Loan Agreement and the HOME IV Loan Agreements was 75% of the aggregate purchase price at acquisition. The advance rate on the Term Loan Agreement, the FYR SFR Loan Agreement and the MS Loan Agreement was 72%, 68.5% and 70% of the BPO value of the underlying properties at the time of funding, respectively. We do not collateralize any of our repurchase facilities with cash. The lender determines the discounted asset value by applying a "haircut," which is the percentage discount that a lender applies to the market value of an asset serving as collateral for a borrowing under a repurchase or loan agreement for the purpose of determining whether such borrowing is adequately collateralized. Under the CS Repurchase Agreement, the haircut ranges from 10% to 15%, depending on the class of asset serving as collateral. We believe these are typical market terms that are designed to provide protection for the lender to collateralize its advances to us in the event the collateral declines in value. The weighted average contractual haircut applicable to the assets that serve as collateral for the CS Repurchase Agreement declined slightly to 10.2% of the estimated fair value (based on BPOs) of such assets atSeptember 30, 2020 compared to 10.3% atDecember 31, 2019 . The haircut applied may vary from period to period dependent upon the type of assets that serve as collateral under the CS Loan Agreement. If the carrying value of the collateral declines beyond certain limits, we would have to either (a) provide additional collateral or (b) repurchase certain assets under the agreement to maintain the applicable advance rate. The decrease in amounts outstanding under our repurchase and loan agreements fromDecember 31, 2019 toSeptember 30, 2020 is primarily due to reductions of debt upon the sale of non-core properties. 38 -------------------------------------------------------------------------------- (table of
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The following table sets forth data with respect to our contractual obligations under our repurchase and loan agreements as of and for the three months endedSeptember 30, 2020 ,December 31, 2019 andSeptember 30, 2019 ($ in thousands): Three Months Ended September 30, 2020 December 31, 2019 September 30, 2019 Balance at end of period $ 1,632,786$ 1,657,352 $ 1,631,420 Maximum month end balance outstanding during the period 1,641,261 1,660,381 1,636,591 Weighted average quarterly balance 1,638,195 1,645,609 1,636,859 Amount of available funding at end of period 101,451 357,327 383,259 Repurchases of Common Stock The Board of Directors has authorized a stock repurchase program under which we may repurchase up to$100.0 million in shares of our common stock. AtSeptember 30, 2020 , a total of$51.5 million in shares of our common stock had been repurchased to date under this authorization. Repurchased shares are held as shares available for future issuance and are available for general corporate purposes.
Potential purchase adjustments of certain properties sold
InJanuary 2020 , we received notice regarding potential purchase price adjustment/indemnification claims of up to$1.2 million relating to certain real estate sold inJanuary 2019 . We are investigating these claims, and, if they are determined to be valid, we may be required to forfeit a portion of the sales proceeds to the purchaser, based on the terms of the purchase agreement. AtSeptember 30, 2020 , we have reserved$0.8 million of indemnity loss, which is included in net realized gains and losses on mortgage loans and real estate.
Acquisition from AAMC under the Termination Agreement
OnAugust 13, 2020 , we agreed to terminate the Amended AMA with AAMC, facilitating our transition from an externally managed REIT to an internally managed REIT. In connection therewith, we expect to acquire the Transferred Asset, including equity interests of AAMC's Indian subsidiary and the equity interests of AAMC'sCayman Islands subsidiary as well as certain other operational assets and employees of AAMC. The purchase price for this acquisition is$8.2 million , consisting of an upfront payment of$3.2 million , which was paid in cash duringAugust 2020 , and a payment of$5.0 million in cash or Front Yard common stock, at our election, on the Termination Date.
Cash Flows
We report and analyze our cash flows, including cash, cash equivalents and restricted cash, based on operating activities, investing activities and financing activities. The following table sets forth our cash flows for the periods indicated ($ in thousands):
Nine months
ended
2020 2019
Net cash provided by (used in) operating activities $ 24,688
$ (5,314) Net cash (used in) provided by investing activities (2,389) 139,641 Net cash provided by (used in) by financing activities 16,301 (134,368) Net change in cash, cash equivalents and restricted cash $ 38,600 $ (41) Net cash provided by operating activities for the nine months endedSeptember 30, 2020 consisted primarily of the receipt of$25.0 million related to the termination of the Amherst Merger Agreement and rental revenues in excess of cash operating expenses, partially offset by the initial termination fee payment to AAMC of$15.0 million pursuant to the Termination Agreement during the third quarter of 2020. Net cash used in operating activities for the nine months endedSeptember 30, 2019 consisted primarily of cash operating expenses in excess of revenues. 39
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Net cash used in investing activities for the nine months endedSeptember 30, 2020 consisted primarily of a deposit of$3.2 million paid to AAMC related to the Transferred Assets and investments in real estate and renovations, partially offset by proceeds from dispositions of real estate. Net cash provided by investing activities for the nine months endedSeptember 30, 2020 consisted primarily of proceeds from disposition of real estate, partially offset by investments in real estate and renovations. Net cash provided by financing activities for the nine months endedSeptember 30, 2020 consisted primarily of the issuance of 4.4 million shares for proceeds of$55.0 million , partially offset by net repayments of repurchase and loan agreements and payment of dividends on common stock. Net cash used in financing activities for the nine months endedSeptember 30, 2019 consisted primarily of net repayments of repurchase and loan agreements and payment of dividends on common stock.
Off-balance Sheet Arrangements
As of
Recent Accounting Pronouncements
See Item 1 - Financial Statements (Unaudited) - Note 1, "Organization and basis of presentation - Recently issued accounting standards."
Critical Accounting Judgments
Accounting standards require information in financial statements about the risks and uncertainties inherent in significant estimates, and the application of generally accepted accounting principles involves the exercise of varying degrees of judgment. Certain amounts included in or affecting our financial statements and related disclosures must be estimated, which requires us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time our condensed consolidated financial statements are prepared. These estimates and assumptions affect the amounts we report for our assets and liabilities, our revenues and expenses during the reporting period and our disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements. Actual results may differ significantly from our estimates, and any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. For additional details on our critical accounting judgments, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Judgments" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 as filed with the Securities andExchange Commission ("SEC") onFebruary 28, 2020 .
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