ALTISOURCE ASSET MANAGEMENT CORPORATION Our Company
We were incorporated in the
Our primary client is Front Yard, a publicly traded REIT focused on acquiring and managing quality, affordable SFR properties for America's families. Front Yard is currently our primary source of revenue and will drive our results.
Since we are heavily reliant on revenues earned from Front Yard, investors may
obtain additional information about Front Yard in its
Our strategy for Front Yard is to build long-term stockholder value through the efficient management and continued growth of its 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 that we have implemented the right strategic plan for Front Yard to capitalize on the sustained growth in single-family rental demand. We target the moderately priced single-family home market for Front Yard that, in our view, offers attractive yield opportunities for Front Yard that should benefit AAMC in the form of growing management fees as Front Yard continues to grow.
Management Overview
We made substantial progress during the 2019 fiscal year towards our strategic
objectives for Front Yard, including the renegotiation of the asset management
agreement, the completion of the internalization of Front Yard's property
management and continued disposition of Front Yard's non-core assets. Further,
we appointed a Co-Chief Executive Officer on
Amended Asset Management Agreement with Front Yard
On
Full Internalization of Front Yard's Property Management
During the first quarter of 2019, the internalization of Front Yard's property management function was completed with more than 14,000 of its rental properties managed on its internal platform. Front Yard now has direct control of leasing, renovation and turn management, vendor management, market analysis and other property management support functions, which has enhanced Front Yard's ability to control costs and generate long-term returns to its stockholders. The transition to internal property management has also provided Front Yard with the opportunity to continue developing its brand and enhancing its residents' experience. Over time, we expect Front Yard to develop a nationally recognized brand that is known for consistent quality at affordable prices. We believe that with the completion of the internalization, Front Yard is well positioned to continue improving upon its operating efficiencies as it refines its internal property management platform and grows its rental portfolio, which, in turn, could benefit AAMC with growing management fee revenues over time.
Continued Liquidation of Non-core Assets
We continued to manage Front Yard's liquidation of its remaining non-core
assets, including the full divestiture of its remaining mortgage loans in the
fourth quarter of 2019. In addition, as of
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only 22 non-rental REO properties. We continually evaluate the performance of
Front Yard's SFR portfolio and market certain rental properties for sale that do
not meet Front Yard's strategic objectives, and we have identified 181 former
rental properties for sale as of
Optimization of Financing in 2019
We have continued our efforts to optimize Front Yard's financing structure
during 2019. On
Development of New Business for AAMC
During the second quarter of 2019, Front Yard commenced a strategic alternatives
review process designed to maximize its stockholder value. In light of this
process, we appointed a new Co-Chief Executive Officer on
On
Observations on Current Market Opportunities
We believe there is a compelling opportunity in the SFR market and that we have implemented the right strategic plan for Front Yard to capitalize on the sustained growth in SFR demand. Front Yard targets the moderately priced single-family home market to acquire rental properties, which, in our view, not only provide a safe, comfortable SFR rental opportunity for our residents, but also offer attractive yield opportunities driven by demand from renters.
We believe that Front Yard's focus on affordable housing provides it with a potential advantage, as we believe this is an underserved market segment that provides Front Yard with attractive yield and growth opportunities. In our view, the macroeconomic environment is creating favorable tailwinds for Front Yard's business. Economic indicators suggest that affordable single-family housing is in short supply, home building is not keeping up with demand and mortgage lending for credit-challenged families remains constrained. Front Yard provides an important alternative: affordable rental properties that our residents are proud to call home. By targeting moderately priced, single-family homes, we believe that Front Yard can optimize the yield on its investments and capitalize on the sustained growth in affordable single-family rental demand.
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Metrics Affecting Our Consolidated Results
Our operating results are affected by various factors and market conditions, including the following:
Revenues
Our revenues consist of fees due to us under the asset management agreements
with Front Yard. Under the Amended AMA, our revenues include a quarterly Base
Management Fee and a potential annual Incentive Fee, each of which are dependent
upon Front Yard's performance and are subject to potential downward adjustments
and an aggregate fee cap. Beginning in the third quarter of 2019 (the first full
quarter under the Amended AMA), the Base Management Fee we recognize under the
Amended AMA is subject to a quarterly minimum of
Under the Former AMA, our revenues included a base management fee and a conversion fee. The base management fee was calculated as a percentage of Front Yard's 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.
Under both the Amended AMA and the Former AMA, our revenues also include reimbursements of certain expenses in our management of Front Yard's business, which relate primarily to travel and certain operating expenses solely related to our management of Front Yard's business and the base salary, bonus, benefits and stock compensation, if any, solely of the General Counsel dedicated to Front Yard. In addition, during 2019, we accrued the reimbursement of a one-time bonus payable to an AAMC employee on behalf of Front Yard. All other salary, bonus, benefits and stock compensation of AAMC's employees (other than Front Yard share-based compensation issued to them by Front Yard) are the responsibility of AAMC and are not reimbursed by Front Yard pursuant to the Amended AMA.
In addition, we receive dividends on the shares of Front Yard common stock that we own when Front Yard declares and pays dividends to its holders of common stock. Upon the declaration of such dividends, we record them as other income. The amount of dividends we receive will vary with Front Yard's financial performance, taxable income, liquidity needs and other factors deemed relevant by Front Yard's Board of Directors. Lastly, we recognize changes in the fair value of our holdings of Front Yard common stock as other income or loss that will be directly dependent upon fluctuations in the market price of Front Yard's common stock.
Expenses
Our expenses consist primarily of salaries and employee benefits, legal and professional fees and general and administrative expenses. Salaries and employee benefits include the base salaries, incentive bonuses, medical coverage, retirement benefits, non-cash share-based compensation and other benefits provided to our employees for their services. Legal and professional fees include services provided by third-party attorneys, accountants and other service providers of a professional nature. General and administrative expenses include costs related to the general operation and overall administration of our business as well as non-cash share-based compensation expense related to restricted stock awards to our Directors.
Primary Driver of Our Operating Results
Our performance in each particular period will be affected by our ability to manage Front Yard's business and rental portfolio effectively. If there are declines in Front Yard's performance, our fees in each such period could be adversely affected. Conversely, if there are improvements in Front Yard's performance, our fees in each period could be positively affected. Front Yard's operating results may be affected by various factors, including, but not limited to, the number and performance of Front Yard's SFR properties, its ability to use financing to grow its SFR portfolio and its ability to control operating expenses. The extent to which we are successful in managing these factors for Front Yard affects our ability to generate management fees, which are our primary source of income.
Results of Operations
The following discussion compares our results of operations for the years ended
For discussion that compares our results of operations for the years ended
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Fiscal Year ended
Management Fees and Expense Reimbursements
We recognized base management fees from Front Yard of
We earned conversion fees of
We recognized expense reimbursements due from Front Yard of
Salaries and Employee Benefits
Salaries and employee benefits decreased to
Legal and Professional Fees
Legal and professional fees increased to
General and Administrative Expenses
General and administrative expenses increased to
Change in Fair Value of Front Yard Common Stock
The change in fair value of Front Yard common stock was
Dividend Income
Dividend income on shares of Front Yard common stock was
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Liquidity and Capital Resources
As of
Between
On
AAMC intends to continue to pursue its strategic business initiatives despite this litigation. See " Item 1. Business ." If Luxor were to prevail in its lawsuit, we may need to cease or curtail our business initiatives and our liquidity could be materially and adversely affected. For more information on the legal proceedings with Luxor, see " Item 1A. Risk Factors " and " Item 3. Legal Proceedings " in this Annual Report on Form 10-K.
Treasury Shares
At
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Cash Flows
We report and analyze our cash flows based on operating activities, investing activities and financing activities. The following table summarizes our cash flows for the periods indicated ($ in thousands):
Year ended December 31,
2019 2018 2017
Net cash (used in) provided by operating activities
(186 ) (107 ) (1,841 )
Net cash used in financing activities (244 ) (3,645 ) (5,759 )
Total cash flows $ (7,174 ) $ (6,178 ) $ (7,235 ) Net cash used in operating activities for the years ended
Net cash used in investing activities for the years ended
Net cash used in financing activities during the year ended
Off-balance Sheet Arrangements
We had no off-balance sheet arrangements as of
Recent accounting pronouncements
See Note 1 , "Organization and Basis of Presentation - Recently issued accounting standards" to our consolidated financial statements.
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, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time our consolidated financial statements are prepared. These estimates and assumptions affect the amounts we report for our assets and liabilities and our revenues and expenses during the reporting period and our disclosure of contingent assets and liabilities at the date of our 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.
We consider our critical accounting judgments to be those used in the determination of the reported amounts and disclosure related to the following:
Income taxes
Income taxes are provided for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which management expects those temporary differences to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs. Subject to our judgment, we reduce a
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deferred tax asset by a valuation allowance if it is "more likely than not" that some or the entire deferred tax asset will not be realized. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in evaluating tax positions, and we recognize tax benefits only if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority.
For all temporary differences, we have considered the potential future sources of taxable income against which they may be realized. In so doing, we have taken into account temporary differences that we expect to reverse in future years and those where it is unlikely. Where it is more likely than not that there will not be potential future taxable income to offset a temporary difference, a valuation allowance has been recorded.
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