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Front Yard Residential: Cheap Valuation Overshadowed By Liquidity Risk

Double S Capital profile picture
Double S Capital


  • Amherst/RESI acquisition failed to close and RESI is down 40% since the news.
  • RESI needs to refinance ~$315 million of debt in 2020 and a dividend cut likely required to complete a refinancing transaction.
  • Implied cap rate of ~7.0% should provide some valuation protection.

Situation Update

On May 4, 2020, the unfortunate news came out that the take-private transaction by Amherst is terminated because "the unprecedented global health crisis has made the integration of the organizations too operationally complex and uncertain at this time", according to the Chairman and CEO of Amherst Holdings.

Instead of the $48 million reverse breakup fee, Amherst has agreed to:

  • pay a $25 million fee to RESI
  • purchase 4.4 million shares of RESI at $12.50/share, or $55 million proceeds, and
  • provide a $20 million promissory notes to RESI maturing in two years

All things considered, this is a net positive as (1) RESI is receiving $100 million liquidity in the very near-term and (2) RESI has Amherst as one of its biggest institutional investors (excluding passive vehicles) - 4.4 million shares translates to about 7.5% pro forma equity ownership.

RESI also pre-released some operational data for Q1-2020 and April rent collection. The headline numbers look business-as-usual for now. We will get an update from the company from the earnings release on May 11.

Refinancing Risk

Notwithstanding the asset value, RESI is facing a tough maturity wall with ~$314.7 million of debt mature in 2020. Most urgently, the $142.3 million CS Repurchase Agreement is due on June 30, 2020. I suspect that it's an all-or-nothing situation - Home II and III also need to agree to an extension in order to get CS on board.

The management has been busy completing the take-private transaction and only now they are focusing on their balance sheet and maturity profile. I think there's enough asset value to go around to get all creditors on board, although I expect the cost of capital to come in slightly more expensive. To help make a refinance case, the company might consider reducing its distribution (RESI is paying ~$35 million distribution per

This article was written by

Double S Capital profile picture
Event-driven, fundamentally oriented value investor. My favorite quote - if you want to be the smartest person in the room, go to an empty room - something like that.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RESI over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (10)

astute pathways profile picture
Why would Amherst pay 100 million breakup fee....rather than 48 million?
Double S Capital profile picture
I take that as a positive sign. As you'd imagine a substantial amount of due diligence was conducted throughout the process and the fact that Amherst is willing to pay more than they had to, and $55 million of the capital came in the form of junior capital (i.e. equity) means that Amherst like what they saw and this could be a toe-hold investment until market normalizes.
Look for a renegotiated breakup on that $12.50 per share portion....
Double S Capital profile picture
I'm sorry could you clarify what you mean?
02 Jun. 2020
Do you think either Invitation or American Homes is likely to acquire them? While American Homes seems a more natural fit given geographic portfolio and access to inexpensive debt, i am not sure what is the burning platform for either of these 2 to make a move? Are either of them going to move within this year? If Amherst were to make a move, I am guessing that is at least 2 years away.

Also, given the June 30 2020 debt financing, and the latest earnings call transcripts where RESI management seemed to say no debt repo/margin call issue, should we or should we not be worried about debt overhang?

Seems like your analysis indicatea target of approx 11-12 with a 30-40% Margin of Safety. Do you still think this is true given more recent data?

Would appreciate your inputs.
Double S Capital profile picture
Thanks for your comment. I'm 100% convinced that RESi shouldn't be a standalone entity. The SG&A is too high vs. competitor and that's mostly due to their lack of scale. So yes, I believe somebody will make a play. Also don't discount Amherst coming back when the world returns to normal.

I think with the dividend put on hold and April collection number being okay, I don't think there will be too much issue with the rolling the maturity forward for RESI.

Could you point me to the more recent data? I'm not aware of any data points that could swing my thesis the other way yet.

Not sure if you saw this, but Altisource Portfolio Solutions could be trying to push for a board change, potentially.
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