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 are managed by Altisource Asset Management Corporation ("AAMC" or our "Manager"), on which we rely to provide us with dedicated personnel to administer our business and perform certain of our corporate governance functions. AAMC also provides 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 is 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." Management Overview OnFebruary 17, 2020 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") withBAF Holdings, LLC , aDelaware limited liability company ("Parent"), andBAF Sub, LLC , aMaryland limited liability company ("Merger Sub"), each affiliates ofAmherst Single Family Residential Partners VI, LP (collectively, "Amherst"), providing for the acquisition of the Company by Parent. The Front Yard Board of Directors unanimously approved the merger agreement and recommended that Front Yard shareholders vote in favor of it at a Special Meeting of Stockholders scheduled forApril 27, 2020 . The parties ultimately determined that it was not feasible to proceed with the transaction, and onMay 4, 2020 , we entered into a Termination and Settlement Agreement to terminate the 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. For further details of the Termination and Settlement Agreement, the Investment Agreement and the Non-Negotiable Promissory Note, please refer to Note 14 , "Subsequent Events" of the interim condensed consolidated financial statements.
During the first quarter of 2020, we continued to improve the operating efficiency of our internal property management platform, and we have seen significant improvements in occupancy levels, collections of overdue rent balances and unit turn timelines, all of which has translated into improved operating metrics during the first quarter of 2020 despite the COVID-19
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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 target optimized performance of our SFR portfolio by marketing certain rental properties for sale that do not meet our strategic objectives. During the quarter endedMarch 31, 2020 , we sold 73 non-core rental homes on an individual basis, and we have identified 124 non-core rental properties for sale as ofMarch 31, 2020 . We also disposed of 9 non-rental REO properties, and we had 13 non-rental REO properties remaining to be sold as ofMarch 31, 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, and could continue to 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 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 through this difficult time. Our collections forApril 2020 were only slightly below our previous months' average collection rates; however, the impact on future months is difficult to predict. 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 97.0% of stabilized properties leased as ofMarch 31, 2020 and increased further to 97.7% as ofApril 30, 2020 .
We believe that our business model is resilient and that we are well positioned to endure the COVID-19 pandemic.
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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
March 31, 2020 Stabilized Non-Stabilized Total Held for Sale Total Portfolio
Rental properties:
Leased 14,010 - 14,010 - 14,010
Listed and ready for
rent 227 7 234 - 234
Unit turn 205 - 205 - 205
Renovation - 84 84 - 84
Total rental
portfolio 14,442 91 14,533
Previous rentals
identified for sale - 76 76 48 124
Legacy REO - 7 7 6 13
14,442 174 14,616 54 14,670
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 March 31,
2020 , 97.0% of our stabilized properties were leased.
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The following table sets forth a summary of our real estate portfolio as of
Number of Average Age in
State Properties Carrying Value (1) Years
Georgia 4,377 $ 471,229 37
Florida 2,083 301,994 41
Texas 1,929 273,822 30
Tennessee 1,468 202,539 25
North Carolina 867 113,948 27
Alabama 720 79,644 43
Indiana 664 81,653 25
Minnesota 623 106,176 79
Missouri 484 67,665 43
Oklahoma 305 42,471 29
All other rentals 1,013 147,182 36
Total rental portfolio 14,533 1,888,323 37
Rental properties held for sale 48 6,622 54
Previous rentals identified for sale 76 8,825 49
Legacy REO 13 3,739 56
Total 14,670 $ 1,907,509 37
_____________(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 March 31,
2020 2019
Beginning count of real estate assets 14,748 15,445
Acquisitions 4 14
Dispositions (82 ) (576 )
Other additions - 2
Ending count of real estate assets 14,670 14,885
For further information regarding our real estate acquisition and disposition activities, refer to Item 1 - Financial Statements (Unaudited) - Note 2, "Asset Acquisitions and Dispositions."
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 March 31, 2019
Mortgage Loans at Fair Value
Beginning 74
Resolutions and dispositions (8 )
Ending 66
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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$15,780 per home for the 14,010 stabilized properties that were leased atMarch 31, 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 includepersonnel 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 ornon-recurring costs associated with the internalization of our property
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.
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 wereprimarily 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.
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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 in
employees who provide direct property management 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
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. For
information regarding our management fees to AAMC, refer to Item 1 -Financial Statements (Unaudited) - Note 8, "Related-Party Transactions."
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.
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.
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Results of Operations
The following sets forth discussion of our results of operations for the three
months ended March 31, 2020 versus the three months ended March 31, 2019 . Our
results of operations for the periods presented are not indicative of our
expected results in future periods.
Three months ended
Rental revenues
Rental revenues increased to$54.3 million for the three months endedMarch 31, 2020 compared to$52.6 million for the three months endedMarch 31, 2019 . This increase is primarily attributable to improved occupancy, increased fee and other income, better collections and rent increases. Our rental revenues depend primarily on the number of SFR properties in our portfolio as well as changes in the occupancy levels and rental rates for our residential rental properties. 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 increased to$18.9 million for the three months endedMarch 31, 2020 from$18.4 million for the three months endedMarch 31, 2019 . This increase is primarily due to increases in property taxes and compensation expense related to increased headcount of repair and maintenance employees, partially offset by lower external vendor costs. 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. With the internalization of our property management function, our residential property operating expenses will be dependent on our ability to control costs and 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.
Property management expenses
Property management expenses increased to
Depreciation and amortization
We incurred$20.4 million and$22.4 million in depreciation and amortization for the three months endedMarch 31, 2020 and 2019, respectively. This decrease is primarily due to reduced amortization of lease-in-place intangible assets during 2020. 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$0.3 million of lease-in-place intangible asset amortization for the three months endedMarch 31, 2020 compared to$2.5 million for the three months endedMarch 31, 2019 . 31
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Acquisition and integration costs
We incurred$0.1 million of acquisition and integration costs for the three months endedMarch 31, 2020 compared to$2.2 million for the three months endedMarch 31, 2019 . The decrease is primarily driven by non-recurring costs in the first quarter of 2019 associated with the internalization of the property management function that began in the third quarter of 2018.
Impairment
We recognized$0.2 million of impairment on our real estate assets for the three months endedMarch 31, 2020 compared to$1.0 million for the three months endedMarch 31, 2019 . These declines are primarily driven by the reduction in the remaining non-rental REO 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 months endedMarch 31, 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$0.4 million for the three months endedMarch 31, 2019 . 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.
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$19.5 million for the three months endedMarch 31, 2020 from$21.5 million for the three months endedMarch 31, 2019 . The decrease was driven by decreased average borrowings under our repurchase and loan agreements as well as 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 for the three months endedMarch 31, 2020 compared to$1.0 million for the three months endedMarch 31, 2019 . 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$1.5 million for the three months endedMarch 31, 2020 compared to$1.1 million for the three months endedMarch 31, 2019 . This increase is primarily due to additional grants of restricted stock units to certain of our employees and employees of AAMC, partially offset by the vesting of prior grants of restricted stock units.
General and administrative expenses
General and administrative expenses increased to$7.6 million for the three months endedMarch 31, 2020 from$5.8 million for the three months endedMarch 31, 2019 . The increase was driven by legal and professional fees associated with the Merger and certain incremental support costs associated with growth in the property management function that we internalized onAugust 8, 2018 . 32 --------------------------------------------------------------------------------
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Management fees
We incurred base management fees to AAMC of $3.6 million during the three months
ended March 31, 2020 compared to $3.5 million during the three months ended
March 31, 2019 , respectively. The increase in base management fees is primarily
driven by the Minimum Base Fee of $3.6 million per quarter becoming applicable
beginning in May 2019 . Due to our entry into the Amended AMA, we expect that the
management fees will increase over time but at a lower rate as we grow SFR
properties in our portfolio.
Under the Amended AMA, we no longer pay conversion fees to AAMC. During the
three months ended March 31, 2019 , we incurred conversion fees to AAMC $29,000 .
Conversion fees have fluctuated dependent upon the number and fair market value
of properties converted to rented properties for the first time during the
quarter.
Net gain (loss) on real estate and mortgage loans
The following table presents the components of net gain (loss) on real estate and mortgage loans during the three months endedMarch 31, 2020 and 2019 ($ in thousands): Three months ended March 31, 2020 2019 Conversion of mortgage loans to REO, net $ -$ 615 Change in fair value of mortgage loans, net -
116
Net realized gain on mortgage loans -
523
Net realized gain on sales of real estate 1,533
7,523
Net gain on real estate and mortgage loans $ 1,533
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 82 properties during the three months endedMarch 31, 2020 compared to 576 properties during the three months endedMarch 31, 2019 . 33 -------------------------------------------------------------------------------- (table of
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Liquidity and Capital Resources
As ofMarch 31, 2020 , we had cash and cash equivalents of$32.3 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. Based on our current borrowing capacity, leverage ratio and anticipated additional debt financing transactions, 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 discussed, onMay 4, 2020 , we entered into a Termination and Settlement Agreement to terminate the 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. For further details of the Termination and Settlement Agreement, the Investment Agreement and the Non-Negotiable Promissory Note, please refer to Note 14 , "Subsequent Events" of the interim condensed consolidated financial statements. 34 -------------------------------------------------------------------------------- (table of
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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
March 31, 2020
CS Repurchase 1-month LIBOR
Agreement 5/15/2020 (1) + 2.30% $ 101,569 $ 250,000 $ 148,431 $ 107,139
Nomura Loan 1-month LIBOR
Agreement 5/3/2020 (2) + 2.30% 33,340 250,000 216,660 37,748
HOME II Loan 1-month LIBOR
Agreement 11/9/2020 (3) + 2.10% (4) 83,270 83,270 - 97,528
HOME III Loan 1-month LIBOR
Agreement 11/9/2020 (3) + 2.10% (4) 89,150 89,150 - 108,109
HOME IV Loan
Agreement (A) 12/9/2022 4.00% 114,201 114,201 - 140,922
HOME IV Loan
Agreement (B) 12/9/2022 4.00% 114,590 114,590 - 141,707
Term Loan
Agreement 4/6/2022 5.00% 99,782 99,782 - 110,325
FYR SFR Loan
Agreement 9/1/2028 4.65% 508,700 508,700 - 570,918
MS Loan 1-month LIBOR
Agreement 12/7/2023 + 1.80% (5) 504,986 504,986 - 591,928
1,649,588 $ 2,014,679 $ 365,091 $ 1,906,324
Less:
unamortized loan
discounts (3,316 )
Less: deferred
debt issuance
costs (8,806 )
$ 1,637,466
December 31,
2019
CS Repurchase 1-month LIBOR
Agreement 2/15/2020 + 2.30% $ 109,002 $ 250,000 $ 140,998 $ 111,593
Nomura Loan 1-month LIBOR
Agreement 4/5/2020 + 2.30% 33,671 250,000 216,329 38,423
HOME II Loan 1-month LIBOR
Agreement 11/9/2020 + 2.10% 83,270 83,270 - 98,150
HOME III Loan 1-month LIBOR
Agreement 11/9/2020 + 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 1-month LIBOR
Agreement 12/7/2023 + 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
_____________
(1) On
with an interest rate of 5% plus 1-Month LIBOR.
(2) On
Nomura Loan Agreement under the CS Repurchase Agreement, and the Nomura Loan
Agreement was terminated and repaid in full.
(3) Represents initial 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
(4) The interest rate is capped at 4.40% under an interest rate cap derivative.
(5) 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, and
• a minimum fixed charge coverage ratio.
We are currently in compliance with the covenants and other requirements with respect to the 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 and the Nomura Loan Agreement provide for the lender to finance our portfolio at advance rates (or purchase prices). Advance rates for our mortgage loans, REO and SFR properties currently range from 55% to 78% of the discounted value of the underlying asset as described below. Our overall advance rate under the CS Repurchase Agreement and the Nomura Loan Agreement was 64.8% of estimated fair value atMarch 31, 2020 compared to 65.9% as ofDecember 31, 2019 . The advance rate of the CS and Nomura agreements will vary from period to period dependent upon the 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 these agreements, the haircut ranges from 0% 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 increased to 8.2% of the estimated fair value (based on BPOs) of such assets atMarch 31, 2020 from 8.0% atDecember 31, 2019 . The haircut applied will vary from period to period dependent upon the assets that serve as collateral under the CS Loan Agreement. Under these agreements, 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. EffectiveApril 5, 2019 , a haircut was no longer applied to the estimated fair value of stabilized assets serving as collateral under the Nomura Loan Agreement. OnMay 1, 2020 , we refinanced the assets serving as collateral under the Nomura Loan Agreement under the CS Repurchase Agreement, and the Nomura Loan Agreement was terminated and repaid in full. The decrease in amounts outstanding under our repurchase and loan agreements fromDecember 31, 2019 toMarch 31, 2020 is primarily due to reductions of debt upon the liquidation of non-core property sales. 36 -------------------------------------------------------------------------------- (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 endedMarch 31, 2020 ,December 31, 2019 andMarch 31, 2019 ($ in thousands): Three Months Ended March 31, 2020 December 31, 2019 March 31, 2019 Balance at end of period$ 1,649,588 $ 1,657,352$ 1,647,979 Maximum month end balance outstanding during the period 1,657,596 1,660,381
1,743,383
Weighted average quarterly balance 1,655,343 1,645,609
1,687,266
Amount of available funding at end of period 365,091 357,327 366,700 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. AtMarch 31, 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$1.2 million relating to certain real estate sold inJanuary 2019 . We are investigating these claims, and, if they are determined to be valid, we may be required to repay a portion of the sales proceeds to the purchaser, based on the terms of the purchase agreement. At this time, we are not able to predict the ultimate outcome of these claims, nor can we estimate the range of possible adjustment/indemnification obligation, if any.
Cash Flows
We report and analyze our cash flows, including cash, cash equivalents and restricted cash, based on operating activities, investing activities and financing activities. The following table sets forth our cash flows for the periods indicated ($ in thousands):
Three months ended
2020 2019
Net cash used in operating activities $ (2,941 ) $ (7,987 ) Net cash provided by investing activities 6,282
108,501
Net cash used in by financing activities (17,255 ) (99,702 ) Net change in cash, cash equivalents and restricted cash$ (13,914 ) $ 812 Net cash used in operating activities for the three months endedMarch 31, 2020 consisted primarily of net payments made for operating assets and liabilities, partially offset by rental revenues in excess of cash operating expenses. Net cash used in operating activities for the three months endedMarch 31, 2019 consisted primarily of cash operating expenses in excess of revenues. Net cash provided by investing activities for the three months endedMarch 31, 2020 and 2019 consisted primarily of proceeds from dispositions of real estate, partially offset by investments in real estate and renovations. Net cash used in financing activities for the three months endedMarch 31, 2020 and 2019 consisted primarily of net repayments of repurchase and loan agreements and payment of dividends on common stock.
Off-balance Sheet Arrangements
We had no off-balance sheet arrangements as of
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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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