Do you own a home you rent out or know someone who does? Front Yard Residential (“RESI”) is kind of like that house, but instead of one they have 14,000+ single family homes spread across a few states. We’re talking about RESI today because it almost closed the sale of itself.. but didn’t. And now it’s (maybe) trading well below NAV (depending who you ask). Do you like angry letters, shareholder disputes, and a potentially fiery AGM (scheduled for tomorrow)? Then we have the Company for you.
But First – Pre-COVID RESI
RESI has been building a portfolio of single-family residences around the United States, primarily being in the South/Southwest in places like Texas and Georgia. Since 2014 they have put over $2 billion to work buying up these homes.
Unfortunately for management, a few shareholders (Snow Park Capital Partners, LP and others) were not happy with the results or the way things were being managed (there’s questions of overhead and a complex “external” manager structure, but those details are beyond this article). They got together in 2019 and called for the Company to be sold. It actually led to some Board turnover, newly independent members, and a real sales process that led to a real deal in February 2020. Per the press release…
“Front Yard Residential Enters Definitive Agreement to be Acquired by Amherst Residential for $12.50 Per Share in Cash
AUSTIN, Texas and CHRISTIANSTED, U.S. Virgin Islands, Feb. 18, 2020 (GLOBE NEWSWIRE) -- Amherst Residential, LLC (“Amherst Residential”), a privately-owned, vertically-integrated real estate firm, and Front Yard Residential Corporation (“Front Yard” or the “Company”) (NYSE: RESI), two industry leading providers of high-quality and affordable rental homes, announced today that the companies have entered into a definitive merger agreement, whereby Amherst Residential will acquire Front Yard in a transaction valued at approximately $2.3 billion, including debt to be assumed or refinanced.
Under the terms of the agreement, Front Yard shareholders will receive $12.50 in cash per share. The per share purchase price represents a premium of approximately 14.2% over the per share closing price of Front Yard’s common stock on May 20, 2019, the day prior to the public announcement of Front Yard’s decision to initiate a formal process to explore strategic alternatives.”
But “then COVID”
Unfortunately, thanks to COVID they say, the sale did not close as is. https://ir.frontyardresidential.com/news-releases/news-release-details/front-yard-residential-announces-termination-merger-agreement
As per the acquirer, Chairman of the Board and Chief Executive Officer, Amherst Holdings, LLC - “The unprecedented global health crisis has made the integration of the organizations too operationally complex and uncertain at this time, and we believe this equity investment is the best path forward for both companies’ investors, employees and stakeholders. In our thorough due diligence, we have become even more impressed with Front Yard’s management team and the strength of their platform. We are proud to continue our partnership as a long-term shareholder, and with our investment we are confident that Front Yard is well positioned to capitalize on positive industry fundamentals, deliver a return on our investment and achieve long-term growth.”
Instead of closing, management and Amherst agreed to one of the stranger “instead of the deal’ outcomes we have seen.
“In connection with the termination of the merger agreement, Amherst has agreed to pay a $25 million fee to Front Yard, purchase 4.4 million shares of Front Yard common stock in a primary issuance at $12.50 per share for an aggregate purchase price of $55 million and provide a $20 million committed two-year unsecured loan facility to Front Yard.”
Bring on the Angry Letters
My goodness, some people are incredibly unhappy with this outcome and they issued a few letters in advance of the AGM tomorrow (argued by one that the AGM itself was scheduled in a rush).
First Altisource issues a letter:
“RESI’s fast-tracked 2020 Annual Meeting frustrates meaningful shareholder participation and seeks to entrench the incumbent Board… RESI’s bloated cost structure and lack of viable strategy risk further value destruction…We therefore believe that RESI should act to monetize the fair value of its real estate portfolio by updating its strategic review to further evaluate promptly liquidating these assets on a one-by-one basis to real estate investors and/or owner occupants2, and distributing the net proceeds to shareholders after retirement of debt and payment of transaction and wind down costs.” https://www.sec.gov/Archives/edgar/data/1462418/000146241820000048/openlettertofellowsharehol.htm
Yikes!
And another separate letter providing shareholders with ten questions to ask management -
https://www.sec.gov/Archives/edgar/data/1462418/000146241820000050/questionsforshareholdersto.htm
Pointed questions include things like:
“1.Will RESI commit to a strategy of selling its assets on an individual basis and, where advantageous, also on a portfolio basis?...
In the meantime, we continue to believe that the seriousness of the RESI Board’s lack of transparency and history of underperformance and governance failures demand urgent action. We reiterate the fact that we will vote WITHHOLD on the apparently conflicted nominees Rochelle R. Dobbs and George W. McDowell, and AGAINST the advisory proposal to approve the compensation for RESI’s named executive officers.”
But they’re not the only ones..
Snow Park Calls on Front Yard’s Board to Return Capital to Stockholders via an Orderly Liquidation
https://www.sec.gov/Archives/edgar/data/1555039/000092189520001800/ex1px14a6g10911008_06182020.pdf
“As a reminder from our campaign last year, the Board and management team have delivered a -47% return since 2015, destroying more than $700 million in market value. Over the same period, insiders at Front Yard generously awarded themselves with nearly $18 million in compensation at the expense of stockholders. This came on top of the advisory fees that the Company has paid to its external manager, Altisource Asset Management Corporation (“AAMC”). Unfortunately, the Board cannot outrun its dismal track record and the following facts….”
A fun read.
But like all good arguments, you should listen to both sides!
“While we, like many of Front Yard’s stockholders, are disappointed that the transaction with Amherst Residential could not proceed, we are highly focused on continuing the upward trend in Front Yard’s operational performance…
The Board is focused on continuing to take significant actions to help drive shareholder value. In fact, over the last two years, the Board has:
Increased available liquidity by $100 million in the face of a financial crisis;
Overseen significant improvement in operational performance as illustrated in the Company’s Q1 2020 results;
Developed scale in attractive markets with favorable long-term demographics;
Negotiated an improved Asset Management Agreement with AAMC that creates a foundation for sustainable growth and includes flexibility to terminate AAMC and internalize its asset management function if the Board determines that is best for Front Yard stockholders;
Grown the Company’s rental portfolio to 14,442 homes; and
Internalized our property management function.
We believe Front Yard is on the path to generate sustained long-term financial and operating performance, and we are committed to pursuing a course that creates value for all stockholders. The Board will, however, continue to evaluate all strategic options to enhance value for Front Yard stockholders, including the potential termination of the AMA and internalization of the Company’s asset management function, a potential sale of the Company and other transactions, strategic investments and/or dispositions that can optimize returns for our stockholders.”
So what is this Company worth and what is going to happen?
When looking to value RESI when you have a bunch of angry shareholders pushing for a sale, we have focused on the value of the net realizable assets, i.e. on the value of the homes.
The Company’s accounting policy holds all rental properties at cost plus maintenance capital less depreciation. If you take the financials at face value as of March 31st and then modify them for the Amherst instead-of-a-deal-here’s-some-money proceeds, you end up with a value per share of $5.55. Not great, especially when the Company is off from its bottom of ~$6. But the real world sometimes differs from an accountant’s spreadsheet. There has been meaningful price appreciation in some of the neighborhoods since these houses went on the books. If you simply value, the houses at historical cost (i.e. exclude depreciation) you end up around ~$9.40 a share. We did look at a more comprehensive analysis and also cashflow / NOI yield, but that’s beyond our focus today on angry letters. As always, do your own analysis.
We are not sure what is going to happen… but we sure look forward to the AGM call tomorrow morning!
“The meeting will be held via live webcast on Monday, June 22, 2020, at 8:30a.m., Eastern Time. The annual meeting can be accessed by visiting www.virtualshareholdermeeting.com/RESI2020AM “
As per RESI… (do your own work)
