RESI - Front Yard Residential

[thepupil]

I moved the discussion of RESI from the multi-family thread.

 

RESI trades for $7 relative to a recent busted deal at $12.50. 56% pre-covid takeout price. It has a long history of going from Wall Street NPL darling to a low-quality single family landlord, all while under the yoke of an egregious external management agreement (that eventually became less egregious).

 

After the merger bust, RESI got $25mm of cash for the breakup and placed $55 million (8% or so of pre-placement shares) at $12.50. Additionally Amherst (the one who backed out of the deal) is providing some short term liquidity to them at favorable terms. Collectively these help RESI not have to fire sale assets given that this is a busted merger where some of their short term financing was going to be taken out.

 

I have a lot of issues with this company, namely the amount, structure, and term of the leverage [as well as a speculation that the assets have deferred maintainance/capex issues] and I don't own it. but I think it is potentially of interest to others and thought it deserved its own thread. If it doesn't, then the thread will shortly die of natural causes.

 

Pupil, I think i remember reading you owned RESI in the past.

 

you said you're not a fan of SFR but what do you think of it at 7.15 after the takeover fell through?

 

someone wrote up a decent thesis here:

 

http://yetanothervalueblog.com/2020/05/quickie-idea-renting-some-resi.html

 

Tough to summarize all my thoughts on RESI.

 

At the risk of carpet-bombing you with a bunch of stuff, I'm going to copy a string of e-mails from 2016 re RESI to provide background on my thoughts.

 

For additional background (the prequel?), I suggest the AAMC thread.

 

I'd focus on the leverage and the nature thereof, the money from Amherst may mitigate this and they may have already addressed it, but a decent portion of the assets are still funded with repo that needs to be rolled, right?

 

Also, I think RESI's lower margins are structural and that the properties are lower quality because of the terribly misaligned structure throughout RESI's life where they were encouraged to grow very quickly to grow AAMC's fees.

 

it's probably cheap, but I'd rather be buying other stuff (less leverage, higher quality, is this still seriously the same management?)

 

 

January 15th 2016

$9.70, 45% of Book, management was talking $30.00 NAV like 6 months ago, this thing is trading like it will have liquidity issues (which it may given it owns a lot of assets that don't cash flow reliably).

 

sketchy accounting and sketchy people, i literally got into a long internet argument about why this was a terrible risk reward and the problems with the structure. it was paying a crazy unsustainable dividend and resembled a ponzi scheme, thankfully that's been cut

 

owns NPL's and houses, levered with securitization financing.

 

getting incredibly interesting here...buying this creates crappy houses at WAY below market.

 

January 20th 2016

we now have activists, a concentrated shareholder base (all of whom have taken a bath), 45% of tangible, 1/3 of $30 management's guesstimate of NAV (but take that w/ a grain of salt), the external manager (AAMC) trades for peanuts ($35MM) and is worthless, the largest  owner of AAMC's preferred and common (Luxor Capital) owns a greater amount of common stock at market value and is therefore aligned with the common.

 

the cash burn and liquidity are scary, but they have a TON of available financing.

 

just as an example of the math here. if you just do a simple total liabilities / assets, RESI is levered w/ a 55% LTV and trades 1/2 of book. they just bought 1,324 shitty homes from Blackstone in the atlanta area for $85K / home.

 

So that home has $46K of liabilities  and $40K of equity. But you are paying $20K by buying the stock at 50% of book (you are actually paying less because of the portion of the balance sheet in cash and they sold 15% of their NPL's for book value in Q4.

 

So buying RESI is like going to shitty part of atlanta and buying an $85K home for $65K w/ 70% financing that leaves some  room for error.

 

January 20th 2016

his has been accelerated to the top of what i'm working on by the activists.

 

this is a complex beast...attached is my attempt to re-build the balance sheet in a way that makes sense. you have to divide RESI into two beasts.

 

Beast 1 has $813MM of assets and has issued $684MM non-recourse debt against those assets, which is pretty levered.

 

Beast 2 has $1.8B of assets or so and $900MM of repurchase agreement liabilities (financing facilities) so that's less levered. BUT $449MM of that expires in 3/2016 or 4/2016!!! So there is some serious risk here with respect to rolling their financing.

 

To make things fun $111MM of the $1.8B of Beast 2's assets are debt of Beast 1's securitizations. RESI retained some of the securities from their securitizations  and put them in the collateral pool for the CS facility. $70/$111MM are the senior tranche.

 

it looks like you've got a serious maturity here. But thankfully they should have a lot of cash from this sale:

 

During the third quarter of 2015, 871 non-performing mortgage loans with a carrying value of $250.3 million were transferred to mortgage loans held for sale and offered for sale to interested bidders. Following the bidding process, in September 2015, we agreed in principle to sell such 871 non-performing mortgage loans, with an aggregate UPB of $346.9 million, or

 

approximately 15% of our aggregate loan UPB, to an unrelated third party for an aggregate purchase price of approximately $250 million, which is within the range of 1% to 2% of our balance sheet carrying value for the loans. Subject to confirmatory due diligence and negotiation of a definitive purchase agreement, we expect to consummate this transaction in the fourth quarter of 2015. No assurance can be given that we will consummate this sale on a timely basis or at all.

 

January 28th 2016

NAME REDACTED, they are indeed doing that, but no one knows why on earth they would and shareholders are attempting to force some kind of change. 

 

this is basically a ponzi scheme that ran out of buyers, so it had to switch strategies to figure out a new way to get people excited about its stock when it could no longer issue above NAV, pay a dividend/grow NAV, issue again, etc.

 

it will take you a bit but I recommend the VIC write-ups for starters, then read the COBAF thread on AAMC in its entirety. the history/context is important.

 

http://www.valueinvestorsclub.com/idea/ALTISOURCE_RESIDENTIAL_CORP/110919

http://www.valueinvestorsclub.com/idea/ALTISOURCE_RESIDENTIAL_CORP/108911

http://www.valueinvestorsclub.com/idea/Altisource_Asset_Management/88060

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aamc-altisource-asset-management/

 

I'm still torn on this one. it's so opaque and the repo facilities scare me a little. I imagine it will take a while to sort out all these NPL's.

 

February 11th 2016

how low can it go! 39% of book, definitely pricing in some serious liquidity issues...too much risk here to make it big though (in my opinion), but I think this is very well compensated risk.

 

May 11th 2016 (in response to shift in strategy)

This is disappointing. While the intended buyback of $100MM is certainly good news given this trades for about 1/2 book and $100MM is over 15% of the shares at current prices, I think a more sweeping change in management/strategy would be better, or an outright sale of the company. And they haven't bought back that much stock yet, so I'll believe it when I see it.

 

In the end I don't think the activists had enough muscle or shares (2.5%). I trimmed the lots I bought in the $8's and $9's at prices above $12 and am sitting on a 6% position.

 

I am probably going to trim a little more. It's cheap and interesting, but look like management is here to stay.

 

June 16th 2016

RESI is dropping like a rock despite a pretty hard rally by the single family REIT's.

 

Industry leader Colony Starwood is trading at a substantial premium to book and probably pretty close to NAV which is a big shift from the begining of the year.

 

Meanwhile RESI has continued to sell portfolios of loans and increase allocation to single family rental.

 

While I think management is shitty and I don't like the strategy and the activists lost, I think buying $2.1B of assets levered with $1B of low cost repo and securitization financing for a mere $480mm is a great set up.

 

June 2016

continues to drop like a rock, 43% of tangible book. I am not sizing this up (but am instead maintaining constant dollar size). It is not a huge position because of the opacity, but Brexit probably doesn't change the outcome of a low quality NPL / single family rental operation.

 

December 2016

FWIW, I'm selling this. I believe it to still have a lot of upside (like 50%+), but I know it the least well, it's the most opaque, pretty levered, and not positive on a cash flow basis yet, so I consider it to be relatively risky and it to be my lowest quality/least aligned management team.

 

In the spirit of intellectual honesty, it's probably also a bit of suboptimal yearly performance management (wanting to lock some in and de-lever).

 

I was going to wait to next year for tax purpose, but I'm only up 20%, so the difference b/w short term and long term is not incredibly dramatic.

 

March 2017

this is up another 20% since I sold. They've basically liquidated the entire loan operation and it now trades at 70% of management's stated NAV of ~$20...they've paid out some divvies along the way but it's telling that they used to say NAV was $30...the economics of the NPL operation was worse than expected and it's taking a while to get to cash flow positive on renting out those shitty houses. they seem to be pretty close. 

 

I am not tempted to get back in.

 

Why does RESI pay a management fee to AAMC? It's like $4M a quarter or something, IIRC.

 

Externally managed REITs are almost as bad as SPACS especially when the external manager are AAMC crooks.

[ratiman]

Amherst is bearish on renters, expects risk of evictions and foreclosures in excess of GFC. That would explain why Amherst backed out of the deal. Amherst may expect it to be cheaper to buy from broke landlords than from RESI.

 

https://files.constantcontact.com/109f2f29501/e48146de-f15d-490f-89a0-8d9771d1b561.pdf

[thepupil]

Pretium and Ares Management announce $2.4B take-private transaction with Front Yard Residential

 

 

Single family tailwinds...was wrong here to have not bought

 

[thepupil]

 

 

Front Yard Residential (NYSE:RESI) jumps 21% in premarket trading after Pretium and funds managed by Ares Management (NYSE:ARES) boost the price they'll pay for Front Yard to $16.25 per share in cash from $13.50 in response to another party submitting a binding proposal for REIT.

The new price values RESI at ~$2.5B, including debt to be assumed or refinanced, and represents a 63% premium over RESI's closing share price on Oct. 16, 2020, the last trading day before it entered into the merger pact.

“After receiving a binding proposal reflecting a higher purchase price for Front Yard, Front Yard advised the Pretium Partnership of the proposal as required by the terms of the merger agreement, which led to the Pretium Partnership increasing the price of our transaction with them,” said Rochelle R. Dobbs, Front Yard’s chair.