Item 1.01 Entry into a Material Definitive Agreement
On August 8, 2018, Front Yard Residential Corporation (the “Company”) acquired all of the equity interests of HavenBrook Partners, LLC, a Delaware limited liability company (“HavenBrook”), and three real estate investment trusts owned by Rental Home Associates LLC, a Delaware limited liability company (“RHA”), for an aggregate purchase price of $485.0 million. HavenBrook is a property management company, and the assets of the entities acquired from RHA include 3,236 single-family rental properties (the “RHA Acquired Properties”). The acquisition increases the size of the Company’s single-family rental portfolio to approximately 15,000 properties and enhances the Company’s presence in existing strategic target markets, including Alabama, Florida, Georgia and Minnesota. HavenBrook provides the Company with an internal property management service company that will initially manage the RHA Acquired Properties and, following a short transition period, will also manage the rental properties currently managed by Altisource S.à r.l., one of the Company’s external property managers. In connection with this acquisition, the Company amended the Master Services Agreement (the “MSA”), dated December 21, 2012, with Altisource S.à r.l. as further described below.
In conjunction with the acquisition of HavenBrook and the new rental properties, Berkadia Commercial Mortgage LLC provided a $508.7 million interest only, 10-year loan with a fixed rate of 4.65% (the “Loan”) through the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) affordable single-family rental pilot program. This financing includes 2,798 of the newly acquired properties as well as 2,015 additional properties already owned by the Company and previously financed on its existing warehouse facilities. Approximately 78% of the homes financed pursuant to the Loan have rents that are considered affordable for families earning at or below 80% of the area median income (“AMI”). Moreover, approximately 93% of the homes are affordable for families earning at or below 100% of AMI.
In connection with the acquisition of HavenBrook and the RHA entities and the amendment to the MSA, subsidiaries of the Company entered into several agreements, which are described in more detail in this Item 1.01 and Item 2.03 below.
Purchase Agreement
On August 8, 2018, FYR SFR Purchaser, LLC, a newly formed Delaware limited liability company and indirect, wholly-owned subsidiary of the Company (the “Purchaser”), acquired the equity interests of HavenBrook and three Delaware corporations, RHA 1 Inc. (“RHA 1”), RHA 2 Inc. (“RHA 2”), and RHA 3 Inc. (“RHA 3” and, together with RHA 1 and RHA 2, the “RHA Companies”), through its entry into a Purchase Agreement (the “Purchase Agreement”) with RHA, each of the unitholders of HavenBrook identified therein (the “HB Sellers” and, together with RHA, the “Sellers”), the RHA Companies and HavenBrook.
Pursuant to the Purchase Agreement, the Purchaser acquired from Sellers 100% of the equity interests of each of HavenBrook and the RHA Companies (the “Equity Interests”), which owned the RHA Acquired Properties at closing. Following the consummation of the transaction, HavenBrook and the RHA Companies became indirect, wholly-owned subsidiaries of the Company.
As consideration for the Equity Interests, the Purchaser paid to Sellers collectively $485.0 million, which is subject to certain purchase price adjustments in accordance with the Purchase Agreement. The purchase price was partially funded with the proceeds from the FYR SFR Loan Agreement (as defined and described more fully in Item 2.03 below).
The foregoing descriptions of the Purchase Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the full text of the Purchase Agreement, which is filed as Exhibit 2.1 hereto and is incorporated herein by reference.
The Purchase Agreement has been included as an exhibit hereto to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about HavenBrook, the RHA Companies, the Purchaser, the Sellers or the Company. The representations, warranties, covenants and agreements contained in the Purchase Agreement were made only for the purposes of such agreement and were made as of specified dates. These representations, warranties, covenants and agreements were solely for the benefit of the parties to the Purchase Agreement, and may be subject to limitations agreed upon by the contracting parties. The representations and warranties may have been made for the purposes of allocating contractual risk between the parties to the Purchase Agreement instead of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors. Investors and security holders are not third-party beneficiaries under the Purchase Agreement and should not rely on the representations, warranties, covenants and agreements or any descriptions thereof as characterizations of the actual state of facts or condition of HavenBrook, the RHA Companies, the Purchaser, the Sellers or the Company. Moreover, the assertions embodied in the representations and warranties contained in the Purchase Agreement are qualified by information in disclosure
schedules that the parties have exchanged. Accordingly, investors and security holders should not rely on the representations and warranties as characterizations of the actual state of facts concerning HavenBrook, the RHA Companies, the Purchaser, the Sellers or the Company. Information concerning the subject matter of the representations and warranties may change after the date of the Purchase Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures.
Amendment to the MSA between the Company and Altisource S.à r.l.
In connection with the acquisition of the Equity Interests pursuant to the Purchase Agreement, on August 8, 2018, the Company and Altisource S.à r.l. entered into an amendment to the MSA (the “MSA Amendment Agreement”). Pursuant to the MSA, Altisource S.à r.l. had been the exclusive provider of leasing and property management services to the Company and each of its subsidiaries. Under the terms of the MSA Amendment Agreement, the Company will acquire certain property management resources owned by Altisource S.à r.l. The exclusivity provisions with respect to the renovation and property management provisions have been terminated in order to allow the Company to complete the acquisition of HavenBrook, internally manage the RHA Acquired Properties and internalize the property management function related to the rental properties managed by Altisource S.à r.l. over a transition period ending December 31, 2018 (the “Transition Period”). Following the Transition Period, the MSA will be terminated in its entirety in respect of the renovation, leasing and property management services set forth in the MSA. Subject to certain conditions, the title insurance services statement of work under the MSA will remain in place until the fourth anniversary of the MSA Amendment Agreement. In addition, Altisource S.à r.l. will continue to provide certain services, including property preservation, maintenance, valuation, and sale brokerage services, with respect to approximately 300 remaining non-rental legacy assets of the Company until such properties are sold. The MSA Amendment Agreement also contains a lock-up agreement under which, subject to certain limited exceptions, Altisource S.à r.l. will be restricted from selling its shares in Front Yard until December 31, 2018, and thereafter sales would be limited under a quarterly share dispositions schedule.
In exchange for the property management resources to be acquired and the above-described amendments, including the termination of the exclusivity provision of the MSA, the Company has agreed to pay an aggregate of (x) $15.0 million upon the signing of the MSA Amendment Agreement and (y) $3.0 million, which will be paid on the earlier to occur of (i) a change of control of the Company or (ii) August 8, 2023.
The foregoing description of the MSA Amendment Agreement does not purport to be complete and is subject to and qualified in its entirety by reference to the full text of the MSA Amendment Agreement, which is filed as Exhibit 10.1 hereto and is incorporated herein by reference.
FYR SFR Loan Agreement
The information set forth in Item 2.03 is incorporated by reference into this Item 1.01.