Notes to Condensed Consolidated Financial Statements
March 31, 2020
(Unaudited)
1. Organization and Basis of Presentation
Front Yard Residential Corporation (“we,” “our,” “us,” or the “Company”) is a Maryland real estate investment trust (“REIT”) focused on acquiring, owning and managing single-family rental (“SFR”) properties throughout the United States. We conduct substantially all of our activities through our wholly owned subsidiary, Front Yard Residential, L.P., and its subsidiaries.
On August 8, 2018, we acquired a property management firm and commenced the internalization of our property management function. During the first quarter of 2019, we completed the transition of property management for our SFR properties that were previously externally managed to our internal property management platform. We anticipate that all SFR properties acquired in the future will also be managed internally.
As of March 31, 2020, we had a core rental portfolio of 14,533 homes. In addition, we had 124 rental homes that are identified for future sale, and we had a small portfolio of non-rental real estate owned (“REO”) properties remaining from our previous mortgage loan portfolio acquisitions. We have engaged third-party service providers to manage REO and certain other properties. We are currently preparing these non-core assets for future disposition in order to create additional liquidity and purchasing power to continue building our core rental portfolio.
We are managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). AAMC provides us with dedicated personnel to administer certain aspects of our business and perform certain of our corporate governance functions. AAMC also provides oversight of our acquisition and management of SFR properties and the ongoing management of our remaining REO properties. See Note 8 for a description of this related-party relationship.
On February 17, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BAF Holdings, LLC, a Delaware limited liability company (“Parent”), and BAF Sub, LLC, a Maryland limited liability company (“Merger Sub”), each affiliates of Amherst 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 for April 27, 2020. The parties ultimately determined that it was not feasible to proceed with the transaction, and on May 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 these interim condensed consolidated financial statements.
Basis of presentation and use of estimates
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All wholly owned subsidiaries are included, and all intercompany accounts and transactions have been eliminated.
The unaudited interim condensed consolidated financial statements and accompanying unaudited condensed consolidated financial information, in our opinion, contain all adjustments that are of a normal recurring nature and are necessary for a fair presentation of our financial position, results of operations and cash flows for the interim periods. The interim results are not necessarily indicative of results for a full year. We have omitted certain notes and other information from the interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q as permitted by Securities and Exchange Commission (“SEC”) rules and regulations. These condensed consolidated financial statements should be read in conjunction with our annual consolidated financial statements included within our 2019 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2020.
Use of estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Recently issued accounting standards
Adoption of recent accounting standards
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments, which amends the guidance on measuring credit losses on financial assets held at amortized cost. The amendment is intended to address the issue that the previous “incurred loss” methodology was restrictive for an entity's ability to record credit losses based on not yet meeting the “probable” threshold. The new language requires these assets to be valued at amortized cost presented at the net amount expected to be collected with a valuation provision. This ASU is effective for fiscal years beginning after December 15, 2019. The amendments in ASU 2016-13 should be applied on a modified retrospective transition basis. We adopted this standard on January 1, 2020, and our adoption of this standard did not have a material impact on our consolidated financial statements because the standard, as amended, excludes receivables arising from operating leases, which represent the majority of our receivables.
Recently issued accounting standards not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. While are currently evaluating the impact of the adoption of this standard, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
2. Asset Acquisitions and Dispositions
Real estate assets
Real estate acquisitions
During the three months ended March 31, 2020 and 2019, we acquired 4 and 14 SFR properties, respectively, for an aggregate purchase price of $0.5 million and $1.8 million, respectively.
Real estate dispositions
During the three months ended March 31, 2020 and 2019, we sold 82 and 576 properties, respectively. Net proceeds of these sales were $12.9 million and $125.3 million, respectively.
Mortgage loans
Mortgage loan dispositions and resolutions
On October 7, 2019, we sold the last of our remaining mortgage loans. During the three months ended March 31, 2019, we resolved 8 mortgage loans, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $1.1 million.
Net gain (loss) on real estate and mortgage loans
The following table presents the components of net gain (loss) on real estate and mortgage loans during the three months ended March 31, 2020 and 2019 ($ 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
|
|
|
$
|
8,777
|
|
3. Real Estate Assets, Net
The following table presents the number of real estate assets held by the Company by status as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
Held for Use
|
|
Held for Sale
|
|
Total Portfolio
|
Rental Properties:
|
|
|
|
|
|
Leased
|
14,010
|
|
|
—
|
|
|
14,010
|
|
Listed and ready for rent
|
234
|
|
|
—
|
|
|
234
|
|
Unit turn
|
205
|
|
|
—
|
|
|
205
|
|
Renovation
|
84
|
|
|
—
|
|
|
84
|
|
Total rental properties
|
14,533
|
|
|
|
|
|
Previous rentals identified for sale
|
76
|
|
|
48
|
|
|
124
|
|
Legacy REO
|
7
|
|
|
6
|
|
|
13
|
|
|
14,616
|
|
|
54
|
|
|
14,670
|
|
December 31, 2019
|
|
|
|
|
|
Rental Properties:
|
|
|
|
|
|
Leased
|
13,711
|
|
|
—
|
|
|
13,711
|
|
Listed and ready for rent
|
371
|
|
|
—
|
|
|
371
|
|
Unit turn
|
369
|
|
|
—
|
|
|
369
|
|
Renovation
|
94
|
|
|
—
|
|
|
94
|
|
Total rental properties
|
14,545
|
|
|
|
|
|
Previous rentals identified for sale
|
94
|
|
|
87
|
|
|
181
|
|
Legacy REO
|
10
|
|
|
12
|
|
|
22
|
|
|
14,649
|
|
|
99
|
|
|
14,748
|
|
For properties held for sale or identified for future sale, management has determined to divest these properties because they do not meet our residential rental property investment criteria.
Impairment of real estate
During the three months ended March 31, 2020 and 2019, we recognized $0.2 million and $1.0 million, respectively, of impairment on our real estate assets held for sale.
4. Fair Value of Financial Instruments
The following table sets forth the carrying value and fair value of our financial assets and liabilities by level within the fair value hierarchy as of March 31, 2020 and December 31, 2019 ($ in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying Value
|
|
Quoted Prices in Active Markets
|
|
Observable Inputs Other Than Level 1 Prices
|
|
Unobservable Inputs
|
March 31, 2020
|
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
|
Interest rate cap derivatives (1)
|
$
|
254
|
|
|
$
|
—
|
|
|
$
|
254
|
|
|
$
|
—
|
|
Not recognized on condensed consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
|
Repurchase and loan agreements
|
1,637,466
|
|
|
—
|
|
|
1,646,272
|
|
|
—
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Recurring basis (assets)
|
|
|
|
|
|
|
|
Interest rate cap derivatives (1)
|
$
|
2,070
|
|
|
$
|
—
|
|
|
$
|
2,070
|
|
|
$
|
—
|
|
Not recognized on consolidated balance sheets at fair value (liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and loan agreements
|
1,644,230
|
|
|
—
|
|
|
1,653,720
|
|
|
—
|
|
_____________
|
|
(1)
|
Included within prepaid expenses and other assets in the condensed consolidated balance sheets.
|
We have not transferred any assets from one level to another level during the three months ended March 31, 2020 or during the year ended December 31, 2019.
The fair value of our interest rate cap derivatives are estimated using a discounted cash flow analysis based on the contractual terms of the derivatives.
On October 7, 2019, we sold the last of our remaining mortgage loans. The following table sets forth the changes in our Level 3 assets, which consisted solely of mortgage loans at fair value, during the period indicated ($ in thousands):
|
|
|
|
|
|
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
Three months ended March 31, 2019
|
Mortgage loans at fair value based on Level 3 inputs, beginning balance
|
|
$
|
8,072
|
|
Net gain on mortgage loans
|
|
1,240
|
|
Mortgage loan dispositions, resolutions and payments
|
|
(1,100
|
)
|
Real estate tax advances to borrowers
|
|
12
|
|
Transfer of mortgage loans to real estate owned, net
|
|
(3,376
|
)
|
Mortgage loans at fair value based on Level 3 inputs, ending balance
|
|
$
|
4,848
|
|
|
|
|
Change in unrealized gain on mortgage loans at fair value based on Level 3 inputs held at the end of the period
|
|
$
|
2
|
|
5. Borrowings
Our operating partnership and certain of its Delaware statutory trust and/or limited liability company subsidiaries, as applicable, have entered into master repurchase agreements and loan agreements to finance the acquisition and ownership of the SFR properties and other REO properties in our portfolio. We have effective control of the assets associated with these agreements and therefore have concluded these are financing arrangements.
We pay interest on all of our borrowings as well as certain other customary fees, administrative costs and expenses each month. As of March 31, 2020, the average annualized interest rate on borrowings under our repurchase and loan agreements was 3.67%, excluding amortization of deferred debt issuance costs and loan discounts.
The following table sets forth data with respect to our repurchase and loan agreements as of March 31, 2020 and December 31, 2019 ($ in thousands):
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date
|
|
|
Interest Rate
|
|
|
Amount Outstanding
|
|
Maximum Borrowing Capacity
|
|
Amount of Available Funding
|
|
Book Value of Collateral
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Repurchase Agreement
|
5/15/2020
|
(1)
|
|
1-month LIBOR + 2.30%
|
|
|
$
|
101,569
|
|
|
$
|
250,000
|
|
|
$
|
148,431
|
|
|
$
|
107,139
|
|
Nomura Loan Agreement
|
5/3/2020
|
(2)
|
|
1-month LIBOR + 2.30%
|
|
|
33,340
|
|
|
250,000
|
|
|
216,660
|
|
|
37,748
|
|
HOME II Loan Agreement
|
11/9/2020
|
(3)
|
|
1-month LIBOR + 2.10%
|
(4)
|
|
83,270
|
|
|
83,270
|
|
|
—
|
|
|
97,528
|
|
HOME III Loan Agreement
|
11/9/2020
|
(3)
|
|
1-month LIBOR + 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 Agreement
|
12/7/2023
|
|
|
1-month LIBOR + 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 Agreement
|
2/15/2020
|
|
|
1-month LIBOR + 2.30%
|
|
|
$
|
109,002
|
|
|
$
|
250,000
|
|
|
$
|
140,998
|
|
|
$
|
111,593
|
|
Nomura Loan Agreement
|
4/5/2020
|
|
|
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
|
|
|
|
|
|
|
|
_____________
|
|
(1)
|
On April 30, 2020, we renewed the CS Repurchase Agreement until June 30, 2020 with an interest rate of 5.00% plus 1-Month LIBOR.
|
|
|
(2)
|
On May 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.
|
|
|
(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 October 17, 2019.
|
|
|
(4)
|
The interest rate is capped at 4.40% under an interest rate cap derivative. See Note 10.
|
|
|
(5)
|
The interest rate is capped at 4.30% under an interest rate cap derivative. See Note 10.
|
Additional details regarding the above repurchase and loan agreements are as follows:
CS Repurchase Agreement
Credit Suisse AG (“CS”) is the lender on the repurchase agreement entered into on March 22, 2013, (the “CS Repurchase Agreement”), which has been amended on several occasions. Under the terms of the CS Repurchase Agreement, as collateral for the funds drawn thereunder, subject to certain conditions, our operating partnership and/or one or more of our limited liability company subsidiaries will sell to the lender equity interests in the Delaware statutory trust subsidiary that owns the applicable underlying REO assets on our behalf. We may be required to repay a portion of the amounts outstanding under the CS Repurchase Agreement should the loan-to-value ratio of the funded collateral decline. The price paid by the lender for each REO asset we finance under the CS Repurchase Agreement is based on a percentage of the market value of the REO asset. With respect to funds drawn under the CS Repurchase Agreement, our applicable subsidiary is required to pay the lender interest monthly and certain other customary fees, administrative costs and expenses to maintain and administer the CS Repurchase Agreement. We do not collateralize any of our repurchase facilities with cash. The CS Repurchase Agreement contains customary events of default and is fully guaranteed by us.
Nomura Loan Agreement
Nomura Corporate Funding Americas, LLC (“Nomura”) is the lender under a loan agreement dated April 10, 2015 (the “Nomura Loan Agreement”), which has been amended on several occasions. Under the terms of the Nomura Loan Agreement, subject to certain conditions, Nomura may advance funds to us from time to time, with such advances collateralized by SFR properties and other REO properties. The advances paid under the Nomura Loan Agreement with respect to the applicable properties from time to time will be based on a percentage of the market value of the properties. We may be required to repay a portion of the amounts outstanding under the Nomura Loan Agreement should the loan-to-value ratio of the funded collateral decline.
The Nomura Loan Agreement contains events of default (subject to certain materiality thresholds and grace periods), including payment defaults, breaches of covenants and/or certain representations and warranties, cross-defaults, certain material adverse changes, bankruptcy or insolvency proceedings and other events of default customary for this type of transaction. The remedies for such events of default are also customary for this type of transaction and include the acceleration of the principal amount outstanding under the Nomura Loan Agreement and the liquidation by Nomura of the SFR and REO properties then subject thereto. The Nomura Loan Agreement is fully guaranteed by us. On May 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.
Seller Financing Arrangements
We have entered into the following facilities, each of which were initially seller financing arrangements:
|
|
•
|
In connection with the seller financing related to an acquisition of SFR properties on March 30, 2017, our wholly owned subsidiary, HOME SFR Borrower II, LLC (“HOME Borrower II”), entered into the HOME II Loan Agreement with entities sponsored by Amherst Holdings, LLC (“Amherst”). On November 13, 2017, HOME Borrower II entered into an amended and restated loan agreement, which was acquired by Metropolitan Life Insurance Company (“MetLife”). HOME Borrower II has the option to extend the HOME II Loan Agreement beyond the initial maturity date for three successive one-year extensions, provided, among other things, that there is no event of default under the HOME II Loan Agreement on each maturity date. The HOME II Loan Agreement is cross-defaulted and cross-collateralized with the HOME III Loan Agreement.
|
|
|
•
|
In connection with the seller financing related to an acquisition of SFR properties on June 29, 2017, our wholly owned subsidiary, HOME SFR Borrower III, LLC (“HOME Borrower III”), entered into the HOME III Loan Agreement with entities sponsored by Amherst. On November 13, 2017, HOME Borrower III entered into an amended and restated loan agreement, which was acquired by MetLife. HOME Borrower III has the option to extend the HOME III Loan Agreement beyond the initial maturity date for three successive one-year extensions, provided, among other things, that there is no event of default under the HOME III Loan Agreement on each maturity date. The HOME III Loan Agreement is also cross-defaulted and cross-collateralized with the HOME II Loan Agreement.
|
|
|
•
|
In connection with the seller financing related to an acquisition of SFR properties on November 29, 2017, our wholly owned subsidiary, HOME SFR Borrower IV, LLC (“HOME Borrower IV”), entered into two separate loan agreements
|
with entities sponsored by Amherst (collectively, the “HOME IV Loan Agreements”). The HOME IV Loan Agreements were acquired by MetLife on November 29, 2017.
Under the terms of the HOME II Loan Agreement, the HOME III Loan Agreement and the HOME IV Loan Agreements, each of the facilities are non-recourse to us and are secured by a lien on the membership interests of HOME Borrower II, HOME Borrower III, HOME Borrower IV and the acquired properties and other assets of each entity, respectively. The assets of each entity are the primary source of repayment and interest on their respective loan agreements, thereby making the cash proceeds of rent payments and any sales of the acquired properties the primary sources of the payment of interest and principal by each entity to the respective lenders.
Each loan agreement also includes customary events of default, the occurrence of which would allow the respective lenders to accelerate payment of all amounts outstanding thereunder. We have limited indemnification obligations for wrongful acts taken by HOME Borrower II, HOME Borrower III or HOME Borrower IV under their respective loan agreements in connection with the secured collateral. Even though the HOME II Loan Agreement, the HOME III Loan Agreement and the HOME IV Loan Agreements are non-recourse to us and all of our subsidiaries other than the entities party to the respective loan agreements, we have agreed to limited bad act indemnification obligations to the respective lenders for the payment of (i) certain losses arising out of certain bad or wrongful acts of our subsidiaries that are party to the respective loan agreements and (ii) the principal amount of each of the facilities and all other obligations thereunder in the event we cause certain voluntary bankruptcy events of the respective subsidiaries party to the loan agreements. Any of such liabilities could have a material adverse effect on our results of operations and/or our financial condition.
Term Loan Agreement
On April 6, 2017, RESI TL1 Borrower, LLC (“TL1 Borrower”), our wholly owned subsidiary, entered into a credit and security agreement (the “Term Loan Agreement”) with American Money Management Corporation, as agent, on behalf of Great American Life Insurance Company and Great American Insurance Company as initial lenders, and each other lender added from time to time as a party to the Term Loan Agreement. We may be required to make prepayments of a portion of the amounts outstanding under the Term Loan Agreement under certain circumstances, including certain levels of declines in collateral value.
The Term Loan Agreement includes customary events of default, the occurrence of which would allow the lenders to accelerate payment of all amounts outstanding thereunder. The Term Loan Agreement is non-recourse to us and is secured by a lien on the membership interests of TL1 Borrower and the properties and other assets of TL1 Borrower. The assets of TL1 Borrower are the primary source of repayment and interest on the Term Loan Agreement, thereby making the cash proceeds received by TL1 Borrower from rent payments and any sales of the underlying properties the primary sources of the payment of interest and principal by TL1 Borrower to the lenders. We have limited indemnification obligations for wrongful acts taken by TL1 Borrower and RESI TL1 Pledgor, LLC, the sole member of TL1 Borrower, in connection with the secured collateral for the Term Loan Agreement.
FYR SFR Loan Agreement
On August 8, 2018, FYR SFR Borrower, LLC (“FYR SFR Borrower”), our wholly owned subsidiary, entered into loan agreement (the “FYR SFR Loan Agreement”) with Berkadia Commercial Mortgage LLC, as lender (“Berkadia”) secured by 2,798 properties acquired on August 8, 2018 (the “RHA Acquired Properties”) as well as 2,015 other properties already owned by us and previously financed on our existing warehouse facilities with other lenders (together, the “FYR SFR Collateral Properties”). The FYR SFR Loan Agreement was originated as part of the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”) single-family rental pilot program and has been purchased from Berkadia by Freddie Mac. The FYR SFR Loan Agreement contains customary events of default and is secured by the equity interests of FYR SFR Borrower and mortgages on the collateral properties. In connection with the FYR SFR Loan Agreement, we maintained $1.1 million and $0.6 million in escrow for future payments of property taxes and repairs and maintenance as of March 31, 2020 and December 31, 2019, respectively.
MS Loan Agreement
On December 7, 2018, our wholly owned subsidiary, HOME SFR Borrower, LLC (“HOME Borrower”), entered into a loan agreement (the “MS Loan Agreement”) with Morgan Stanley Bank, N.A. (“Morgan Stanley”) and such other persons that may from time to time become a party to the MS Loan as lenders. The MS Loan Agreement can be prepaid without penalty at any time after December 7, 2021. The MS Loan Agreement contains customary events of default and is secured by the equity
interests in HOME Borrower and mortgages on its 4,262 SFR properties. In connection with the MS Loan Agreement, we maintained $6.4 million and $4.9 million in escrow for future payments of property taxes, insurance, HOA dues and repairs and maintenance as of March 31, 2020 and December 31, 2019, respectively.
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:
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|
•
|
reporting requirements to the agent or lender,
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|
|
•
|
minimum adjusted tangible net worth requirements,
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|
|
•
|
minimum net asset requirements,
|
|
|
•
|
limitations on the indebtedness,
|
|
|
•
|
minimum levels of liquidity, including specified levels of unrestricted cash,
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|
|
•
|
limitations on sales and dispositions of properties collateralizing certain of the loan agreements,
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|
|
•
|
various restrictions on the use of cash generated by the operations of properties, and
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|
|
•
|
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.
Reliance on financing arrangements
Our business model relies to a significant degree on both short-term financing and longer duration asset-backed financing arrangements, and we generally do not carry sufficient liquid funds to retire any of our short-term obligations upon their maturity. Prior to or upon such short-term maturities, management generally expects to (1) refinance the remaining outstanding short-term facilities, obtain additional financing or replace the short-term facilities with longer-term facilities and (2) continue to liquidate certain non-core real estate assets, which will generate cash to reduce the related financing. We are in continuous dialogue with our lenders, and we are currently not aware of any circumstances that would adversely affect our ability to complete such refinancings. We believe we will be successful in our efforts to refinance or obtain additional financing based on our recent success in renewing our outstanding facilities and obtaining additional financing with new counterparties and our ongoing relationships with lenders.
6. Leases
Front Yard as Lessor
Our primary business is to lease single-family homes to families throughout the United States. Our leases to tenants generally have a term of one year with potential extensions, including month-to-month leases after the initial term. These leases are classified as operating leases.
Future contractual rents for the 14,010 properties that were leased as of March 31, 2020 are as follows ($ in thousands):
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|
|
|
|
2020 (1)
|
$
|
97,459
|
|
2021
|
13,498
|
|
2022
|
563
|
|
2023
|
12
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
|
$
|
111,532
|
|
_____________
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|
(1)
|
Excludes the three months ended March 31, 2020.
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Front Yard as Lessee
We lease office space and automobiles throughout the United States to support our property management function. We include lease right-of-use assets as a component of prepaid assets and other expenses, and we include lease liabilities as a component of accounts payable and accrued liabilities.
Operating Leases
We lease office space under various operating leases. As of March 31, 2020 and December 31, 2019, we applied a weighted average discount rate of 4.72% and 4.70%, respectively, to our office leases. We determine the discount rate for each lease to be either the discount rate stated in the lease agreement or the rate that we would be charged to finance real estate assets. Our weighted average remaining lease term was 1.7 years and 1.9 years as of March 31, 2020 and December 31, 2019, respectively.
During the three months ended March 31, 2020 and 2019, our operating leases resulted in rent expense related to long-term leases of $0.2 million and $0.1 million, respectively, which is allocated amongst residential property operating expenses, property management expenses and general and administrative expenses. At March 31, 2020 and December 31, 2019, we had operating lease right-of-use assets of $0.8 million and $0.9 million, respectively.
The following table presents our future lease obligations under our operating leases as of March 31, 2020 ($ in thousands):
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|
|
|
|
|
Operating Lease Liabilities
|
2020 (1)
|
$
|
519
|
|
2021
|
218
|
|
2022
|
80
|
|
2023
|
—
|
|
2024
|
—
|
|
Thereafter
|
—
|
|
Total lease payments
|
817
|
|
Less: interest
|
31
|
|
Lease liabilities
|
$
|
786
|
|
_____________
|
|
(1)
|
Excludes the three months ended March 31, 2020.
|
Finance Leases
We lease vehicles under a master finance lease arrangement. At March 31, 2020 and December 31, 2019, the weighted average discount rate applied to our vehicle leases was 7.69% and 6.87% respectively, based on the rates implied in the individual lease agreements. The weighted average remaining lease term was 3.6 years and 3.7 years as of March 31, 2020 and December 31, 2019, respectively.
During the three months ended March 31, 2020 and 2019, our finance leases resulted in $0.2 million and $0.1 million, respectively, of amortization of our lease right-of-use assets, which is allocated amongst residential property operating expense, property management expenses and general and administrative expenses. At March 31, 2020 and December 31, 2019, we had finance lease right-of-use assets of $2.8 million and $2.9 million, respectively.
The following table presents our future lease obligations under our finance leases as of March 31, 2020 ($ in thousands):
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|
|
|
|
|
Finance Lease Liabilities
|
2020 (1)
|
$
|
995
|
|
2021
|
849
|
|
2022
|
315
|
|
2023
|
83
|
|
2024
|
13
|
|
Thereafter
|
—
|
|
Total lease payments
|
2,255
|
|
Less: interest
|
194
|
|
Lease liabilities
|
$
|
2,061
|
|
_____________
|
|
(1)
|
Excludes the three months ended March 31, 2020.
|
7. Commitments and Contingencies
Litigation, claims and assessments
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. We believe the matters to which we were party as of March 31, 2020 will not have a materially adverse effect on our financial position or results of operations upon resolution.
Potential purchase adjustments of certain properties sold
In January 2020, we received notice regarding potential purchase price adjustment/indemnification claims of up to $1.2 million relating to certain real estate sold in January 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.
COVID-19 Pandemic
Due to the current COVID-19 pandemic in the United States and globally, our employees, tenants, lenders and the economy as a whole have been, and will 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.
8. Related-Party Transactions
Terms of the Amended AMA
Front Yard and AAMC entered into an amended and restated asset management agreement (the “Amended AMA”) on May 7, 2019 (the “Effective Date”). The Amended AMA amends and restates, in its entirety, the asset management agreement previously entered into on March 31, 2015, as amended on April 7, 2015. The Amended AMA has an initial term of five years and will renew automatically each year thereafter for an additional one-year term, subject in each case to the termination provisions further described below.
Management Fees
The Amended AMA provides for the following management fee structure, which is subject to certain performance thresholds and an Aggregate Fee Cap (as described below):
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•
|
Base Management Fee. Front Yard will pay a quarterly base management fee (the “Base Management Fee”) to AAMC as follows:
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|
|
◦
|
Initially, commencing on the Effective Date and until the Reset Date (as defined below), the quarterly Base Management Fee will be (i) $3,584,000 (the “Minimum Base Fee”) plus (ii) an additional amount (the “Additional Base Fee”), if any, of 50% of the amount by which Front Yard's per share Adjusted AFFO (as defined in the Amended AMA) for the quarter exceeds $0.15 per share (provided that the Base Management Fee for any calendar quarter prior to the Reset Date cannot be less than the Minimum Base Fee or greater than $5,250,000). Beginning in 2021, the Base Management Fee may be reduced, but not below the Minimum Base Fee, in the fourth quarter of each year by the amount that Front Yard's AFFO (as defined below) on a per share basis is less than an aggregate of $0.60 for the applicable calendar year (the “AFFO Adjustment Amount”); and
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|
|
◦
|
Thereafter, commencing in the first quarter after which the quarterly Base Management Fee first reaches $5,250,000 (the “Reset Date”), the Base Management Fee will be 25% of the sum of (i) the applicable Annual Base Fee Floor plus (ii) the amount calculated by multiplying the applicable Manager Base Fee Percentage by the amount, if any, that Front Yard's Gross Real Estate Assets (as defined below) exceeds the applicable Gross Real Estate Assets Floor (in each case of the foregoing clauses (i) and (ii), as set forth in the table below), minus (iii) solely in the case of the fourth quarter of a calendar year, the AFFO Adjustment Amount (if any); provided, that the Base Management Fee for any calendar quarter shall not be less than the Minimum Base Fee.
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|
|
|
|
|
|
|
|
Gross Real Estate Assets (1)
|
|
Annual Base Fee Floor
|
|
Manager Base Fee Percentage
|
|
Gross Real Estate Assets Floor
|
Up to $2,750,000,000
|
|
$21,000,000
|
|
0.325%
|
|
$2,250,000,000
|
$2,750,000,000 – $3,250,000,000
|
|
$22,625,000
|
|
0.275%
|
|
$2,750,000,000
|
$3,250,000,000 – $4,000,000,000
|
|
$24,000,000
|
|
0.250%
|
|
$3,250,000,000
|
$4,000,000,000 – $5,000,000,000
|
|
$25,875,000
|
|
0.175%
|
|
$4,000,000,000
|
$5,000,000,000 – $6,000,000,000
|
|
$27,625,000
|
|
0.125%
|
|
$5,000,000,000
|
$6,000,000,000 – $7,000,000,000
|
|
$28,875,000
|
|
0.100%
|
|
$6,000,000,000
|
Thereafter
|
|
$29,875,000
|
|
0.050%
|
|
$7,000,000,000
|
_______________
|
|
(1)
|
Gross Real Estate Assets is generally defined as the aggregate book value of all residential real estate assets owned by Front Yard and its subsidiaries before reserves for depreciation, impairment or other non-cash reserves as computed in accordance with GAAP.
|
In determining the Base Management Fee, “AFFO” is generally calculated as GAAP net income (or loss) adjusted for (i) gains or losses from debt restructuring and sales of property; (ii) depreciation, amortization and impairment on residential real estate assets; (iii) unconsolidated partnerships and joint ventures; (iv) acquisition and related
expenses, equity based compensation expenses and other non-recurring or non-cash items; (v) recurring capital expenditures on all real estate assets and (vi) the cost of leasing commissions.
For any partial quarter during the term of the Amended AMA, the Base Management Fee is subject to proration based on the number of calendar days under the Amended AMA in such period.
|
|
•
|
Incentive Fee. AAMC may earn an annual Incentive Fee to the extent that Front Yard's AFFO exceeds certain performance thresholds. The annual Incentive Fee, if any, shall be an amount equal to 20% of the amount by which Front Yard's AFFO for the calendar year (after the deduction of Base Management Fees but prior to the deduction of Incentive Fees) exceeds 5% of Gross Shareholder Equity (as defined below).
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In each calendar year, the Incentive Fee will be limited to the extent that any portion of the Incentive Fee for such calendar year (after taking into account any AFFO Adjustment Amount and the payment of the Incentive Fee) would cause the AFFO per share for such calendar year to be less than $0.60 (the “Incentive Fee Adjustment”). For any partial calendar year under the Amended AMA, the Incentive Fee amount (and Incentive Fee Adjustment, if any) for that partial calendar year is subject to proration based on the number of calendar days of the year that the Amended AMA is in effect.
Gross Shareholder Equity for purposes of the Amended AMA is generally defined as the arithmetic average of all shareholder equity as computed in accordance with GAAP and adding back all accumulated depreciation and changes due to non-cash valuations (including those recorded as a component of accumulated other comprehensive income) and other non-cash adjustments, in each case, as of the first day of such calendar year, the first day of each of the second, third and fourth calendar quarters of such calendar year and the first day of the succeeding calendar year.
Front Yard has the flexibility to pay up to 25% of the annual Incentive Fee to AAMC in shares of its common stock, subject to certain conditions specified in the Amended AMA.
Aggregate Fee Cap
The aggregate amount of the Base Management Fees and Incentive Fees payable to AAMC in any calendar year cannot exceed the “Aggregate Fee Cap,” which is generally defined as follows:
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|
•
|
For any calendar year in which average Gross Real Estate Assets is less than $2,250,000,000, the aggregate fees payable to AAMC shall not exceed $21,000,000; or
|
|
|
•
|
For any calendar year in which average Gross Real Estate Assets exceeds $2,250,000,000, the aggregate fees payable to AAMC shall not exceed the sum of (i) the applicable Aggregate Fee Floor plus (ii) the amount calculated by multiplying the applicable Aggregate Fee Percentage by the amount, if any, by which average Gross Real Estate Assets exceed the applicable Gross Real Estate Assets Floor, in each case as set forth in the table below.
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|
|
|
|
|
|
|
|
Gross Real Estate Assets
|
|
Aggregate Fee Floor
|
|
Aggregate Fee Percentage
|
|
Gross Real Estate Assets Floor
|
$2,250,000,000 – $2,750,000,000
|
|
$21,000,000
|
|
0.650%
|
|
$2,250,000,000
|
$2,750,000,000 – $3,250,000,000
|
|
$24,250,000
|
|
0.600%
|
|
$2,750,000,000
|
$3,250,000,000 – $4,000,000,000
|
|
$27,250,000
|
|
0.500%
|
|
$3,250,000,000
|
$4,000,000,000 – $5,000,000,000
|
|
$31,000,000
|
|
0.450%
|
|
$4,000,000,000
|
$5,000,000,000 – $6,000,000,000
|
|
$35,500,000
|
|
0.250%
|
|
$5,000,000,000
|
$6,000,000,000 – $7,000,000,000
|
|
$38,000,000
|
|
0.125%
|
|
$6,000,000,000
|
Thereafter
|
|
$39,250,000
|
|
0.100%
|
|
$7,000,000,000
|
Expenses and Expense Budget
AAMC is responsible for all of its own costs and expenses other than the expenses related to compensation of Front Yard’s dedicated general counsel and, beginning in January 2020, certain specified employees who provide direct property management services to Front Yard. Front Yard and its subsidiaries pay their own costs and expenses, and, to the extent such Front Yard expenses are initially paid by AAMC, Front Yard is required to reimburse AAMC for such reasonable costs and expenses.
Termination Provisions
The Amended AMA may be terminated without cause (i) by Front Yard for any reason, or no reason, or (ii) by Front Yard or AAMC in connection with the expiration of the initial term or any renewal term, in either case with 180 days' prior written notice. If the Amended AMA is terminated by Front Yard without cause or in connection with the expiration of the initial term or any renewal term, Front Yard shall pay a termination fee (the “Termination Fee”) to AAMC in an amount generally equal to three times the arithmetical mean of the aggregate fees actually paid or payable with respect to each of the three immediately preceding completed calendar years (including any such prior years that may have occurred prior to the Effective Date). Upon any such termination by Front Yard, Front Yard shall have the right, at its option, to license certain intellectual property and technology assets from AAMC.
If the Termination Fee becomes payable (except in connection with a termination by AAMC for cause, which would require the payment of the entire Termination Fee in cash), at least 50% of the Termination Fee must be paid in cash on the termination date and the remainder of the Termination Fee may be paid, at Front Yard’s option, either in cash or, subject to certain conditions specified in the Amended AMA, in Front Yard common stock in up to 3 equal quarterly installments (without interest) on each of the six-, nine- and twelve-month anniversaries of the termination date until the Termination Fee has been paid in full.
Front Yard may also terminate the Amended AMA, without the payment of a Termination Fee, upon a change of control of AAMC as described in the Amended AMA and “for cause” upon the occurrence of certain events including, without limitation, a final judgment that AAMC or any of its agents, assignees or controlled affiliates has committed a felony or materially violated securities laws; AAMC’s bankruptcy; the liquidation or dissolution of AAMC; a court determination that AAMC has committed fraud or embezzled funds from Front Yard; a failure of Front Yard to qualify as a REIT as a result of any action or inaction of AAMC; an uncured material breach of a material provision of the Amended AMA; or receipt of certain qualified opinions from AAMC or Front Yard's independent public accounting firm that (i) with respect to such opinions relating to AAMC, are reasonably expected to materially adversely affect either AAMC’s ability to perform under the Amended AMA or Front Yard, or (ii) with respect to such opinions relating to Front Yard, such opinions are a result of AAMC's actions or inaction; in each case, subject to the exceptions and conditions set forth in the Amended AMA. AAMC may terminate the Amended AMA upon an uncured default by Front Yard under the Amended AMA and receive the Termination Fee. A termination “for cause” may be effected by Front Yard with 30 days' written notice or by AAMC with 60 days' written notice. Upon any termination by Front Yard “for cause,” Front Yard shall have the right, at its option, to license certain intellectual property and technology assets from AAMC.
Transition Following Termination
Following any termination of the Amended AMA, AAMC is required to cooperate in executing an orderly transition to a new manager or otherwise in accordance with Front Yard’s direction including by providing transition services as requested by Front Yard for up to one (1) year after termination or such longer period as may be mutually agreed (including by assisting Front Yard with the recruiting, hiring and/or training of new replacement employees) at cost (but not more than the Base Management Fee at the time of termination).
If the Amended AMA with AAMC were terminated, our financial position and future prospects for revenues and growth could be materially adversely affected.
Terms of the Former AMA with AAMC
On March 31, 2015, we entered into an asset management agreement (the “Former AMA”) with AAMC. The Former AMA, which became effective on April 1, 2015, provided for a management fee structure as follows:
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|
•
|
Base Management Fee. AAMC was entitled to a quarterly base management fee equal to 1.5% of the product of (i) our average invested capital (as defined in the Former AMA) for the quarter multiplied by (ii) 0.25, while we had fewer than 2,500 SFR properties actually rented (“Rental Properties”). The base management fee percentage increased to 1.75% of invested capital while we had between 2,500 and 4,499 Rental Properties and increased to 2.0% of invested capital while we had 4,500 or more Rental Properties;
|
|
|
•
|
Incentive Management Fee. AAMC was entitled to a quarterly incentive management fee equal to 20% of the amount by which our return on invested capital (based on AFFO defined as our net income attributable to holders of common stock calculated in accordance with GAAP plus real estate depreciation expense minus recurring capital expenditures on all of our real estate assets owned) exceeded an annual hurdle return rate of between 7.0% and 8.25% (or 1.75% and 2.06% per quarter), depending on the 10-year treasury rate. To the extent that we had an aggregate shortfall in the return rate over the previous seven quarters, that aggregate return rate shortfall was added to the normal quarterly return hurdle for the next quarter before AAMC was entitled to an incentive management fee. The incentive management fee increased to 22.5% while we had between 2,500 and 4,499 Rental Properties and increased to 25% while we had 4,500 or more Rental Properties. No incentive management fee under the Former AMA has been payable to AAMC because our return on invested capital (as defined in the Former AMA) did not exceed the cumulative required hurdle rate; and
|
|
|
•
|
Conversion Fee. AAMC was entitled to a quarterly conversion fee equal to 1.5% of the market value of the SFR homes leased by us for the first time during the applicable quarter.
|
Because we had more than 4,500 Rental Properties, AAMC was entitled to receive a base management fee of 2.0% of our invested capital and a potential incentive management fee percentage of 25% of the amount by which we exceeded our then-required return on invested capital threshold.
Under the Former AMA, we reimbursed AAMC for the compensation and benefits of the General Counsel dedicated to us and certain other out-of-pocket expenses incurred by AAMC on our behalf.
The Former AMA required that AAMC continue to serve as our exclusive asset manager for an initial term of 15 years from April 1, 2015, with two potential five-year extensions, subject to our achieving an average annual return on invested capital of at least 7.0%. Neither party was entitled to terminate the Former AMA prior to the end of the initial term, or each renewal term, other than termination by (a) us and/or AAMC “for cause” for certain events such as a material breach of the Former AMA and failure to cure such breach, (b) us for certain other reasons such as our failure to achieve a return on invested capital of at least 7.0% for two consecutive fiscal years after the third anniversary of the Former AMA and (c) us in connection with certain change of control events.
Summary of related-party transactions
The following table presents our significant transactions with AAMC, which is a related party, for the periods indicated ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2020
|
|
2019
|
Base management fees (1)
|
$
|
3,584
|
|
|
$
|
3,546
|
|
Conversion fees (1)
|
—
|
|
|
29
|
|
Expense reimbursements (2)
|
368
|
|
|
328
|
|
______________
|
|
(1)
|
Included in management fees to AAMC in the condensed consolidated statements of operations.
|
|
|
(2)
|
Included in general and administrative expenses in the condensed consolidated statements of operations.
|
9. Share-Based Payments
Equity Incentive Plan
Our non-management directors each received annual grants of restricted stock units. These restricted stock units are eligible for settlement in the number of shares of our common stock having a fair market value of $80,000 for the 2019-2020 service year ($75,000 for the 2018-2019 service year) on the date of grant. Subject to accelerated vesting in limited circumstances, the restricted stock units vest on the earlier of the first anniversary of the date of grant or the next annual meeting of stockholders, with distribution mandatorily deferred for an additional two years thereafter until the third anniversary of grant (subject to earlier distribution or forfeiture upon the respective director’s separation from the Board of Directors). The awards were issued together with dividend equivalent rights. In respect of dividends paid to our stockholders prior to the vesting date, dividend equivalent rights accumulate and are expected to be paid in a lump sum in cash following the vesting date, contingent on the vesting of the underlying award. During any period thereafter when the award is vested but remains subject to settlement, dividend equivalent rights are expected to be paid in cash on the same timeline as underlying dividends are paid to our stockholders.
We have also made grants of restricted stock units and stock options to certain employees of AAMC with service-based or market-based vesting criteria. Our service-based awards vest in equal annual installments on each of the first three anniversaries of the grant date, subject to acceleration or forfeiture. Our market-based awards vest in three equal annual installments on the first, second and third anniversary of the later of (i) the date of the award and (ii) the date of the satisfaction of certain performance criteria, subject to acceleration or forfeiture. The performance criteria is satisfied on the date on which the sum of (a) the average price per share for the consecutive 20-trading-day period ending on such date plus (b) the amount of all reinvested dividends, calculated on a per-share basis from the date of grant through such date, shall equal or exceed 125% of the price per share on the date of grant (the “Performance Goal”); provided however that the Performance Goal must be attained no later than the fourth anniversary of the grant date. In the event that the Performance Goal is not attained prior to the fourth anniversary of the grant date, the market-based awards shall expire.
On March 29, 2019, we granted an aggregate of 419,657 service-based restricted stock units and 280,320 market-based restricted stock units to certain of our employees and employees of AAMC with a weighted average grant date fair value of $9.27 per share and $7.39 per share, respectively.
We recorded $1.5 million and $1.1 million of share-based compensation expense for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and December 31, 2019, we had $3.2 million and $4.7 million, respectively, of unrecognized share-based compensation cost remaining with respect to awards granted under the Equity Incentive Plan to be recognized over a weighted average remaining estimated term of 0.9 years and 1.0 year, respectively.
2012 Conversion Option Plan and 2012 Special Conversion Option Plan
On December 21, 2012, as part of our separation transaction from ASPS, we issued stock options under the 2012 Conversion Option Plan and 2012 Special Conversion Option Plan to holders of ASPS stock options to purchase shares of our common stock in a ratio of one share of our common stock to every three shares of ASPS common stock. The options were granted as part of our separation to employees of ASPS and/or Ocwen solely to give effect to the exchange ratio in the separation, and we do not include share-based compensation expense related to these options in our consolidated statements of operations because they are not related to our incentive compensation. As of March 31, 2020, options to purchase an aggregate of 4,583 shares of our common stock were remaining under the Conversion Option Plan and Special Conversion Option Plan.
10. Derivatives
We may enter into derivative contracts from time to time in order to mitigate the risk associated with our variable rate debt. We do not enter into such derivatives transactions for investment or trading purposes. Derivatives are carried at fair value within prepaid expenses and other assets in our condensed consolidated balance sheet. Upon execution, we may or may not designate such derivatives as accounting hedges.
Designated Hedges
We have entered into various interest rate cap agreements to mitigate potential increases in interest payments on our floating rate debt. The interest rate caps we currently hold have been designated as and are being accounted for as cash flow hedges with changes in fair value recorded in other comprehensive income or loss each reporting period. Amounts reported in accumulated
other comprehensive income or loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable rate debt. During the next 12 months, we estimate that $6.1 million will be reclassified to interest expense.
No gain or loss was recognized related to hedge ineffectiveness or to amounts excluded from effectiveness testing on our cash flow hedges during the three months ended March 31, 2020 or 2019.
The table below summarizes our interest rate cap instruments as of March 31, 2020 ($ in thousands):
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Effective Date
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Termination Date
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Strike Rate
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Benchmark Rate
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Notional Amount
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November 2, 2018
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May 9, 2024
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2.50%
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One-month LIBOR
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$
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505,000
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October 16, 2018
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October 15, 2022
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2.30%
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One-month LIBOR
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83,270
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October 16, 2018
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October 15, 2022
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2.30%
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One-month LIBOR
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89,149
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Tabular Disclosure of Fair Values of Derivative Instruments on the Condensed Consolidated Balance Sheets ($ in thousands)
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Asset Derivatives
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Balance Sheet Location
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Fair Value as of
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March 31, 2020
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December 31, 2019
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Derivatives designated as hedging instruments:
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Interest rate caps
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Prepaid expenses and other assets
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$
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254
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$
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2,070
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Total
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$
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254
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$
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2,070
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Tabular Disclosure of the Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations ($ in thousands)
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Amount of Gain (Loss) Recognized in OCI on Derivative (effective portion)
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Location of Gain (Loss) Reclassified from Accumulated OCI into Net Loss
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Amount of Gain (Loss) Reclassified from Accumulated OCI into Net Loss (effective portion)
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Total Amount of Interest Expense Presented in the Condensed Consolidated Statements of Operations
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Three Months ended March 31,
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Three Months ended March 31,
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Three Months ended March 31,
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2020
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2019
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2020
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2019
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2020
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2019
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Derivatives in cash flow hedging relationships
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Interest rate caps
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$
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(1,815
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)
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$
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(7,609
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)
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Interest expense
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$
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(1,368
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)
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$
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(987
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)
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$
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19,496
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$
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21,510
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11. Income Taxes
As a REIT, we must meet certain organizational and operational requirements, including the requirement to distribute at least 90% of our annual REIT taxable income (excluding capital gains) to our stockholders. As a REIT, we generally will not be subject to federal income tax to the extent we distribute our REIT taxable income to our stockholders and provided we satisfy the REIT requirements, including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT, and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which our REIT qualification was lost. As a REIT, we may also be subject to federal taxes if we engage in certain types of transactions.
Our condensed consolidated financial statements include the operations of our taxable REIT subsidiary (“TRS”), which is subject to federal, state and local income taxes on its taxable income. From inception through March 31, 2020, the TRS has operated at a cumulative taxable loss, which resulted in our recording a deferred tax asset with a corresponding valuation allowance.
As of March 31, 2020 and 2019, we did not accrue interest or penalties associated with any unrecognized tax benefits. We recorded nominal state and local tax expense along with nominal penalties and interest on income and property for each of the three months ended March 31, 2020 and 2019.
12. Earnings Per Share
The following table sets forth the components of diluted loss per share (in thousands, except share and per share amounts):
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Three months ended March 31,
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2020
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2019
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Numerator
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Net loss
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$
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(20,215
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)
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$
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(18,508
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)
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Denominator
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Weighted average common stock outstanding – basic
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53,943,434
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53,630,204
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Weighted average common stock outstanding – diluted
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53,943,434
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53,630,204
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Loss per basic common share
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$
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(0.37
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)
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$
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(0.35
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)
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Loss per diluted common share
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$
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(0.37
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)
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$
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(0.35
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)
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We excluded the items presented below from the calculation of diluted loss per share as they were antidilutive for the periods indicated:
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Three months ended March 31,
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2020
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2019
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Denominator (in weighted-average shares)
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Stock options
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99,377
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47,949
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Restricted stock
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820,539
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321,637
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Pursuant to the Amended AMA, we have the flexibility to pay up to 25% of the Incentive Fee to AAMC in shares of our common stock. In addition, up to 50% of a Termination Fee, if payable, may be paid in shares of our common stock. Should we choose to do make any such payments in shares of our common stock, our earnings available to common stockholders would be diluted to the extent of such issuance.
13. Segment Information
Our primary business is the acquisition and ownership of SFR assets. Our primary sourcing strategy is to acquire these assets by purchasing SFR properties, either on an individual basis or in pools. As a result, we operate in a single segment focused on the acquisition and ownership of rental residential properties.
14. Subsequent Events
Management has evaluated the impact of all events subsequent to March 31, 2020 and through the issuance of these interim condensed consolidated financial statements. We have determined that there were no subsequent events other than those already disclosed that require adjustment or disclosure in the financial statements, except as follows:
As described below, on May 4, 2020, we entered into a Termination and Settlement Agreement (as described below) with certain affiliates of Amherst Residential LLC (“Amherst”) to terminate that certain Agreement and Plan of Merger, dated as of February 17, 2020 (the “Merger Agreement”), by and among the Company, BAF Holdings, LLC (“Parent”) and BAF Sub, LLC, a wholly-owned subsidiary of Parent (“Merger Sub”). As contemplated by 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 our common stock for an aggregate cash purchase price of $55 million ($12.50 per share) pursuant to an Investment Agreement (as described below), and provide the Company with a $20 million committed Non-Negotiable Promissory Note (as described below).
Termination and Settlement Agreement
On May 4, 2020, Front Yard entered into a Termination and Settlement Agreement (the “Termination and Settlement Agreement”), by and among the Company, Parent, Merger Sub, and the Purchaser, pursuant to which, among other things,
Parent paid $25 million in cash (the “Settlement Payment”) to the Company on May 4, 2020, and the Merger Agreement was terminated by mutual written consent of the Company and Parent, effective upon receipt by the Company of the full amount of the Settlement Payment. Under the Termination and Settlement Agreement, the parties agreed to release each other from all claims and actions arising out of or related to the Merger Agreement, the Equity Commitment Letter, the Limited Guarantee, the Debt Commitment Letter, and the Voting Agreements (as such terms were defined in the Merger Agreement) or the transactions or payments contemplated by any of the foregoing.
Investment Agreement
On May 4, 2020, in connection with the Termination and Settlement Agreement, we entered into an Investment Agreement (the “Investment Agreement”) by and between the Company and Amherst Single Family Residential Partners VI LP (the “Purchaser”), an affiliate of Amherst, pursuant to which, among other things, the Company agreed to issue and sell to the Purchaser, and the Purchaser agreed to purchase, 4.4 million shares of Front Yard common stock (the “Acquired Shares”) from the Company at a price of $12.50 per share for an aggregate cash purchase price of $55 million (the “Purchase Price”). The closing of the transaction is scheduled to occur as promptly as practicable and no later than May 19, 2020. The Purchaser has also agreed to a customary standstill for a two-year period and a restriction on transferring the Acquired Shares for one year (other than to permitted transferees). Beginning on the first anniversary of the closing date, the Purchaser will be entitled to transfer up to 1.1 million of the Acquired Shares per quarter on a cumulative basis.
Promissory Note
On May 4, 2020, in connection with the Termination and Settlement Agreement, we also entered into a Non-Negotiable Promissory Note (the “Promissory Note”) by and between Front Yard and Amherst SFRP VI REIT, LLC (the “Amherst Noteholder”), pursuant to which, among other things, the Amherst Noteholder committed to make advances from time to time to Front Yard in an aggregate principal amount of up to $20 million.
The Promissory Note matures on May 4, 2022, and the outstanding principal balance thereof bears interest at LIBOR plus 5.00% per annum. Advances under the Promissory Note are available in multiple draws with minimum draw increments of $500,000, subject to prior written notice and absence of an event of default. Amounts under the Promissory Note can be repaid at any time and from time to time, without premium or penalty, and amounts repaid may be reborrowed.
The Promissory Note contains a limited set of customary representations and warranties, covenants and events of default, and does not contain any financial covenants.