- Front Yard's liquidity and leverage improved as a result of the termination, Amherst paid a termination fee of $20MM in cash, plus bought $55MM of newly issued stock from Front Yard at the deal price, $12.50/share, making Amherst one of the largest investors in Front Yard with a 7.5% stake. Lastly, Amherst also agreed to be the lender on a $20MM loan that is currently unfunded.
- There has been a quick and dramatic reversal of the popularity of cities, now they're seen as problematic both for pandemic/distancing reasons and recent social unrest, pushing people out to the suburbs in search of affordable space and relative perceived safety. Single family homes have been one of the largest beneficiaries of this crisis, home prices are up, mortgage rates are way down. But for many, home ownership is not an attractive option due to a lack of savings/credit or the desire to be mobile, thus a SFR could be a reasonable option.
- Front Yard has long been sub-scale, only recently in the last year or so did they internalize the property management function and then this month they announced the internalization of their corporate management. The incentives are finally aligned, but it doesn't fix the sub-scale part as it is only a fraction of the size of larger publicly traded SFR peers in INVH and AMH. The board sold it once and there's been continual consolidation in this decade long SFR theme following the housing fallout from the last recession, it seems likely that Front Yard would once again be a consolidation target when things settle down further.
The addressable market is large, fragment and growing which should be a tailwind for institutional platforms, part of the argument for large platforms like the SFR REITs is the professional property management, which could equal more peace of mind to the customer.
Not to pile on, but the other problem with Front Yard is leverage, they're highly levered which will make it difficult for the company to reach scale given where the stock trades. High leverage and a low stock valuation should essentially handcuff the newly internalized management from pursuing a go-it-alone strategy as additional capital raises will be difficult to justify as it no longer just raises fees for the external manager. The only reasonable option seems like another sale.
Given Front Yard's recent troubles and warts, its hard to value it just based on a cash flow metric, single family homes are gaining in value, especially recently with record low interest rates and limited home building since the last recession crimping supply. Front Yard puts out an adjusted investment in real estate number that lines up when they've purchased homes or made capital investments and the appreciation in the time since those investments were made.
Obviously there should be a lot of caveats when using that number, a true one-by-one liquidation of Front Yard would take a substantial amount of time and expense to complete, and some depreciation is certainly real in these rentals, but I think it provides some additional context to the valuation. After giving effect to the Altisource termination payments of $54MM (part of that is RESI acquiring some assets from AAMC), the enterprise value of Front Yard is ~$2.1B or about an 80% of unlevered asset value, given the high leverage of $1.5B of net debt, Front Yard is trading close to 55% of levered net asset value of ~$17.50 a share. Again, I don't anticipate an acquirer paying a full price, but given recent trends in home prices and a migration to the suburbs, I could see Front Yard being acquired for more than the $12.50 Amherst agreed to in February.Disclosure: I own shares of RESI