Document
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER: 001-35657


http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13184035&doc=12
 
Front Yard Residential Corporation
(Exact name of registrant as specified in its charter)

MARYLAND
46-0633510
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

c/o Altisource Asset Management Corporation
5100 Tamarind Reef
Christiansted, United States Virgin Islands 00820
(Address of principal executive office)

(340) 692-0525
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
o
 
Accelerated Filer
x
Non-Accelerated Filer
o
(Do not check if a smaller reporting company)
Smaller Reporting Company
o
 
 
 
Emerging Growth Company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.01 per share
RESI
New York Stock Exchange

As of October 30, 2019, 53,880,544 shares of our common stock were outstanding.




Front Yard Residential Corporation
September 30, 2019
Table of Contents


i


(table of contents)

References in this report to “we,” “our,” “us” or the “Company” refer to Front Yard Residential Corporation and its consolidated subsidiaries, unless otherwise indicated. References in this report to “AAMC” refer to Altisource Asset Management Corporation and its consolidated subsidiaries, unless otherwise indicated.

Special note on forward-looking statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts” or “potential” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. Factors that may materially affect such forward-looking statements include, but are not limited to:

our ability to implement our business strategy;
our ability to make distributions to our stockholders;
our ability to acquire single-family rental assets for our portfolio;
the impact of changes to the supply of, value of and the returns on single-family rental assets;
our ability to successfully integrate newly acquired properties into our portfolio of single-family rental properties;
our ability to successfully perform property management services for our single-family rental assets at the standard and/or the cost that we anticipate;
our ability to predict our costs;
our ability to effectively compete with our competitors;
our ability to apply the proceeds from financing activities or asset sales to single-family rental assets in a timely manner;
our ability to sell non-core assets on favorable terms and on a timely basis or at all;
the failure to identify unforeseen expenses or material liabilities associated with asset acquisitions through the due diligence process prior to such acquisitions;
changes in the market value of our single-family rental properties and real estate owned;
changes in interest rates;
our ability to obtain and access financing arrangements on favorable terms or at all;
our ability to maintain adequate liquidity;
our ability to retain our engagement of AAMC;
the failure of our third party vendors to effectively perform their obligations under their respective agreements with us;
our failure to maintain our qualification as a REIT;
our failure to maintain our exemption from registration under the Investment Company Act;
the results of our strategic alternatives review and risks related thereto;
the impact of adverse real estate, mortgage or housing markets;
the impact of adverse legislative, regulatory or tax changes; and
general economic and market conditions.

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Such forward-looking statements speak only as of their respective dates, and we assume no obligation to update them to reflect changes in underlying assumptions or factors, new information or otherwise. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, please see Part II, Item 1A in this Quarterly Report on Form 10-Q and “Item 1A. Risk factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.


ii


(table of contents)

Part I
 
Item 1. Financial Statements (Unaudited)

Front Yard Residential Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)


September 30, 2019

December 31, 2018
 
(unaudited)
 
 
Assets:



Real estate held for use:



Land
$
392,153


$
395,532

Rental residential properties
1,671,809


1,667,939

Real estate owned
27,344


40,496

Total real estate held for use
2,091,306


2,103,967

Less: accumulated depreciation
(188,426
)

(137,881
)
Total real estate held for use, net
1,902,880


1,966,086

Real estate assets held for sale
22,817


146,921

Mortgage loans at fair value
3,613


8,072

Cash and cash equivalents
46,776


44,186

Restricted cash
34,343


36,974

Accounts receivable
10,712


11,591

Goodwill
13,376

 
13,376

Prepaid expenses and other assets
42,232


43,045

Total assets
$
2,076,749


$
2,270,251





Liabilities:



Repurchase and loan agreements
$
1,617,457


$
1,722,219

Accounts payable and accrued liabilities
93,258


72,672

Payable to AAMC
4,168


3,968

Total liabilities
1,714,883


1,798,859





Commitments and contingencies (Note 8)







Equity:



Common stock, $0.01 par value, 200,000,000 authorized shares; 53,880,544 shares issued and outstanding as of September 30, 2019 and 53,630,204 shares issued and outstanding as of December 31, 2018
539


536

Additional paid-in capital
1,187,973


1,184,132

Accumulated deficit
(805,104
)

(700,623
)
Accumulated other comprehensive loss
(21,542
)

(12,653
)
Total equity
361,866


471,392

Total liabilities and equity
$
2,076,749


$
2,270,251



See accompanying notes to condensed consolidated financial statements.

1

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Operations
(In thousands, except share and per share amounts)
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,

2019
 
2018

2019

2018
Revenues:

 





Rental revenues
$
50,768

 
$
48,313


$
154,946


$
128,984

Total revenues
50,768

 
48,313


154,946


128,984

Expenses:

 


 

 
Residential property operating expenses
20,775

 
17,269


58,180


45,372

Property management expenses
4,187

 
3,400

 
11,400

 
9,286

Depreciation and amortization
19,662

 
21,100


61,983


59,051

Acquisition and integration costs
202

 
25,220


3,064


26,012

Impairment
495

 
1,276


3,091


10,994

Mortgage loan servicing costs
246

 
479


827


1,153

Interest expense
21,135

 
20,142


63,810


52,543

Share-based compensation
1,457

 
1,200


4,387


1,880

General and administrative
5,519

 
3,483


19,277


8,633

Management fees to AAMC
3,584

 
3,648


10,715


11,135

Total expenses
77,262

 
97,217


236,734


226,059

Net gain (loss) on real estate and mortgage loans
354

 
1,177

 
12,973

 
(763
)
Operating loss
(26,140
)
 
(47,727
)
 
(68,815
)
 
(97,838
)
Casualty (losses) loss reversals, net
(287
)
 
(461
)
 
(864
)
 
59

Insurance recoveries
48

 
133

 
586

 
248

Other (expense) income
(9,989
)
 
128


(10,786
)

918

Loss before income taxes
(36,368
)
 
(47,927
)
 
(79,879
)
 
(96,613
)
Income tax expense

 
6


14


6

Net loss
$
(36,368
)
 
$
(47,933
)

$
(79,893
)

$
(96,619
)

 
 








Loss per share of common stock - basic:
 
 








Loss per basic share
$
(0.68
)
 
$
(0.89
)

$
(1.49
)

$
(1.81
)
Weighted average common stock outstanding - basic
53,857,616

 
53,601,208


53,735,106


53,525,792

Loss per share of common stock - diluted:


 








Loss per diluted share
$
(0.68
)
 
$
(0.89
)

$
(1.49
)

$
(1.81
)
Weighted average common stock outstanding - diluted
53,857,616

 
53,601,208


53,735,106


53,525,792




 








Dividends declared per common share
$
0.15

 
$
0.15


$
0.45


$
0.45



See accompanying notes to condensed consolidated financial statements.

2

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Comprehensive Loss
(In thousands)
(Unaudited)

 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(36,368
)
 
$
(47,933
)
 
$
(79,893
)
 
$
(96,619
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Change in fair value of interest rate caps
(1,463
)
 

 
(12,554
)
 

Losses from interest rate caps reclassified into earnings from accumulated other comprehensive loss
1,430

 

 
3,665

 

Net other comprehensive loss
(33
)
 

 
(8,889
)
 

 
 
 
 
 
 
 
 
Comprehensive loss
$
(36,401
)
 
$
(47,933
)
 
$
(88,782
)
 
$
(96,619
)


See accompanying notes to condensed consolidated financial statements.

3

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Stockholders' Equity
(In thousands, except share and per share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Comprehensive Loss
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
December 31, 2018
53,630,204

 
$
536

 
$
1,184,132

 
$
(700,623
)
 
$
(12,653
)
 
$
471,392

Adoption of ASC 842 (Note 1)

 

 

 
96

 

 
96

Dividends on common stock ($0.15 per share)

 

 

 
(8,158
)
 

 
(8,158
)
Share-based compensation

 

 
1,119

 

 

 
1,119

Change in fair value of cash flow hedging derivatives in other comprehensive loss

 

 

 

 
(6,622
)
 
(6,622
)
Net loss

 

 

 
(18,508
)
 

 
(18,508
)
March 31, 2019
53,630,204

 
536

 
1,185,251

 
(727,193
)
 
(19,275
)
 
439,319

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
234,389

 
2

 
59

 

 

 
61

Shares withheld for taxes upon vesting of restricted stock
(38,135
)
 

 
(438
)
 

 

 
(438
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,258
)
 

 
(8,258
)
Share-based compensation

 

 
1,811

 

 

 
1,811

Change in fair value of cash flow hedging derivatives in other comprehensive loss

 

 

 

 
(2,234
)
 
(2,234
)
Net loss

 

 

 
(25,017
)
 

 
(25,017
)
June 30, 2019
53,826,458

 
538

 
1,186,683

 
(760,468
)
 
(21,509
)
 
405,244

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
68,890

 
1

 

 

 

 
1

Shares withheld for taxes upon vesting of restricted stock
(14,804
)
 

 
(167
)
 

 

 
(167
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,268
)
 

 
(8,268
)
Share-based compensation

 

 
1,457

 

 

 
1,457

Change in fair value of cash flow hedging derivatives in other comprehensive loss

 

 

 

 
(33
)
 
(33
)
Net loss

 

 

 
(36,368
)
 

 
(36,368
)
September 30, 2019
53,880,544

 
539

 
1,187,973

 
(805,104
)
 
(21,542
)
 
361,866



See accompanying notes to condensed consolidated financial statements.

4

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Stockholders' Equity (continued)
(In thousands, except share and per share amounts)
(Unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Comprehensive Loss
 
Total Equity
 
Number of Shares
 
Amount
 
 
 
 
December 31, 2017
53,447,950

 
$
534

 
$
1,181,327

 
$
(537,259
)
 
$

 
$
644,602

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
44,187

 
1

 
106

 

 

 
107

Dividends on common stock ($0.15 per share)

 

 

 
(8,071
)
 

 
(8,071
)
Share-based compensation

 

 
(414
)
 

 

 
(414
)
Net loss

 

 

 
(27,350
)
 

 
(27,350
)
March 31, 2018
53,492,137

 
535

 
1,181,019

 
(572,680
)
 

 
608,874

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
92,502

 
1

 

 

 

 
1

Shares withheld for taxes upon vesting of restricted stock
(22,836
)
 

 
(240
)
 

 

 
(240
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,142
)
 

 
(8,142
)
Share-based compensation

 

 
1,094

 

 

 
1,094

Net loss

 

 

 
(21,336
)
 

 
(21,336
)
June 30, 2018
53,561,803

 
536

 
1,181,873

 
(602,158
)
 

 
580,251

Common shares issued under share-based compensation plans, net of shares withheld for employee taxes
75,530

 

 

 

 

 

Shares withheld for taxes upon vesting of restricted stock
(7,129
)
 

 
(85
)
 

 

 
(85
)
Dividends on common stock ($0.15 per share)

 

 

 
(8,157
)
 

 
(8,157
)
Share-based compensation

 

 
1,200

 

 

 
1,200

Net loss

 

 

 
(47,933
)
 

 
(47,933
)
September 30, 2018
53,630,204

 
$
536

 
$
1,182,988

 
$
(658,248
)
 
$

 
$
525,276



See accompanying notes to condensed consolidated financial statements.

5

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
Nine months ended September 30,
 
2019

2018
Operating activities:
 
 
 
Net loss
$
(79,893
)
 
$
(96,619
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net (gain) loss on real estate and mortgage loans
(12,973
)
 
763

Depreciation and amortization
61,983

 
59,051

Impairment
3,091

 
10,994

Share-based compensation
4,387

 
1,880

Amortization of deferred financing costs
3,931

 
3,792

Casualty losses (loss reversals), net
864

 
(59
)
Insurance recoveries
(586
)
 
(248
)
Change in fair value of interest rate cap derivatives in profit or loss
3,665

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
5,657

 
(1,677
)
Deferred leasing costs
(2,088
)
 

Prepaid expenses and other assets
(9,125
)
 
(14,904
)
Accounts payable and accrued liabilities
15,573

 
24,271

Payable to AAMC
200

 
(145
)
Net cash used in operating activities
(5,314
)
 
(12,901
)
Investing activities:
 
 
 
Investment in real estate
(11,124
)
 
(475,276
)
Investment in renovations
(21,504
)
 
(25,459
)
Investment in HavenBrook (Note 2)

 
(11,399
)
Payment of real estate tax advances
(72
)
 
(196
)
Proceeds from mortgage loan resolutions and dispositions
1,129

 
6,357

Receipt of mortgage loan payments
203

 
192

Proceeds from dispositions of real estate
169,457

 
73,468

Proceeds from casualty insurance
1,552

 
2,113

Acquisition related deposits

 
(611
)
Net cash provided by (used in) investing activities
139,641

 
(430,811
)
Financing activities:
 
 
 
Proceeds from exercise of stock options
138

 
108

Payment of tax withholdings on share-based compensation plan awards
(76
)
 

Shares withheld for taxes upon vesting of restricted stock
(605
)
 
(325
)
Dividends on common stock
(24,444
)
 
(24,219
)
Proceeds from repurchase and loan agreements
42,681

 
593,634

Repayments of repurchase and loan agreements
(150,308
)
 
(166,123
)
Investment in interest rate cap derivative

 
(936
)
Principal repayments of finance leases
(688
)
 

Payment of financing costs
(1,066
)
 
(4,529
)
Net cash (used in) provided by financing activities
(134,368
)
 
397,610

Net change in cash, cash equivalents and restricted cash
(41
)
 
(46,102
)
Cash, cash equivalents and restricted cash as of beginning of the period
81,160

 
161,488

Cash, cash equivalents and restricted cash as of end of the period
$
81,119

 
$
115,386

 
 
 
 
 
 
 
 

See accompanying notes to condensed consolidated financial statements.

6

(table of contents)

Front Yard Residential Corporation
Condensed Consolidated Statements of Cash Flows (continued)
(In thousands)
(Unaudited)

 
Nine months ended September 30,
 
2019
 
2018
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for:
 
 
 
Interest
$
55,489

 
$
47,002

Income taxes

 
58

 
 
 
 
Non-cash transactions:
 
 
 
Transfer of mortgage loans to real estate owned, net
$
4,131

 
$
2,179

Changes in accrued capital expenditures
(612
)
 
(150
)
Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net
(7
)
 
(290
)
Changes in receivables from real estate owned dispositions
6,318

 
(2,353
)
Change in other comprehensive loss from cash flow hedges
(8,889
)
 

Right-of-use lease assets recognized - operating leases
1,475

 

Right-of-use lease assets recognized - finance leases
1,327

 

Operating lease liabilities incurred
1,475

 

Finance lease liabilities incurred
1,327

 

Dividends declared but not paid
8,584

 
8,423



See accompanying notes to condensed consolidated financial statements.

7

(table of contents)

Front Yard Residential Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2019
(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 September 30, 2019, we had a core rental portfolio of 14,403 homes. In addition, we had 229 rental homes that are identified for future sale, and we had a small portfolio of mortgage loans and non-rental real estate owned (“REO”) properties remaining from our previous mortgage loan portfolio acquisitions. We have engaged third-party service providers to service these remaining mortgage loans and 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 residential mortgage loans and REO properties. See Note 9 for a description of this related-party relationship.

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 2018 Annual Report on Form 10-K, which was filed with the SEC on February 27, 2019.

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 February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). ASU 2016-02 requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position and also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. Accounting by

8

(table of contents)

lessors is substantially unchanged from prior practice as lessors will continue to recognize lease revenue on a straight-line basis. The FASB has also issued multiple ASUs amending certain aspects of Topic 842. ASU 2016-02, as amended, also provides for certain practical expedients related to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. We have applied the amendments in ASU 2016-02 on a modified retrospective transition basis as of January 1, 2019, the effective date of the standard. We elected the “package of practical expedients,” which permits us not to reassess our prior conclusions about lease identification, lease classification and initial direct costs under the new standard. We did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. The new standard also provides practical expedients for an entity's ongoing accounting. We elected the short-term lease exemption for all leases for which we are lessee that qualify; as a result, we will not recognize right-of-use assets or lease liabilities for qualifying leases. We also elected the practical expedient to not separate lease and non-lease components. Effective January 1, 2019, we recognized aggregate right-of-use lease assets as a component of prepaid expenses and other assets and lease liabilities as a component of accounts payable and accrued expenses, resulting in a nominal aggregate transition adjustment to retained earnings. For more information on our leasing activity, see Note 7.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by removing step two of the goodwill impairment test, which had involved determining the fair value of individual assets and liabilities of a reporting unit to measure goodwill. Instead, goodwill impairment will be determined as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019 and early adoption is permitted. We adopted ASU 2017-04 effective June 30, 2019. Though it changed our goodwill impairment testing process, the adoption of ASU 2017-04 did not have a material impact on our consolidated financial statements.

Recently issued accounting standards not yet adopted

In June 2016, the FASB issued 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 will require 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 expect to adopt this standard on January 1, 2020. While we are still evaluating the overall impact of this ASU, we do not expect the adoption of this standard to 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.


9



2. Asset Acquisitions and Dispositions

Real estate assets

HB Acquisition in 2018

On August 8, 2018, we acquired all of the equity interests of HavenBrook Partners, LLC (“HavenBrook” or our “internal property manager”) and three real estate investment trusts owned by Rental Home Associates, LLC, a Delaware limited liability company (“RHA”), for an aggregate purchase price of $485.0 million. The purchase was accounted for as a business combination because it included the acquisition of a property management company as well as the 3,236 single-family rental properties that it managed. We refer to this transaction as the “HB Acquisition.”

The following table presents the components acquired ($ in thousands):
Purchase price allocable to RHA entities, including underlying properties
 
$
471,400

Purchase price allocable to HavenBrook
 
13,600

Gross purchase price
 
485,000

Less: net purchase price adjustments at closing (1)
 
(3,644
)
Net purchase price
 
$
481,356

__________________
(1)
Purchase price adjustments at closing relate primarily to (i) properties sold by RHA subsequent to negotiation of the purchase price and prior to closing and (ii) working capital balances of each acquired entity.

The HB Acquisition was completed using the following sources of funds ($ in thousands):
Cash
$
88,489

Net proceeds of borrowings
462,794

Less: financing related to assets previously acquired
(69,927
)
   Net purchase price
$
481,356


We incurred $6.2 million and $6.9 million of acquisition costs related to the HB Acquisition during the three and nine months ended September 30, 2018, respectively, which are included in acquisition and integration costs in the consolidated statements of operations. In addition, our acquisition and integration costs for the three and nine months ended September 30, 2018 included $18.0 million to Altisource S.à r.l (“ASPS”) in relation to the amendment of the Master Services Agreement to allow the transition of our externally managed SFR properties to our internal property management platform. During the third quarter of 2018, we also incurred $0.8 million of duplicative or non-recurring costs associated with the internalization of our property management function, which we included in acquisition and integration costs.

We recognized $6.8 million of revenues and $3.6 million of net loss related to the operations of HavenBrook and the RHA Acquired Properties in our consolidated statements of operations for the three and nine months ended September 30, 2018, respectively.


10


In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, we performed an allocation of the purchase related to the assets acquired and liabilities assumed in the HB Acquisition. The assets and liabilities of HavenBrook and RHA were recorded at their respective estimated fair values at the acquisition date. The allocation of the purchase consideration is as follows ($ in thousands):

Land
 
$
82,739

Rental residential properties
 
282,914

Real estate assets held for sale
 
94,946

Cash and cash equivalents
 
9,255

Restricted cash
 
4,780

Accounts receivable, net
 
1,778

Goodwill
 
13,376

In-place lease intangible assets (1) (2)
 
6,462

Other assets (2)
 
1,784

   Total assets acquired
 
498,034

 
 
 
Accounts payable and accrued liabilities
 
16,678

   Total liabilities assumed
 
16,678

 
 
 
   Total allocation of purchase price
 
$
481,356

__________________
(1)
The value of in-place leases is being amortized over the weighted average remaining life of the leases, which was approximately eight months as of the acquisition date.
(2)
Included in prepaid expenses and other assets in the consolidated balance sheet.

The goodwill recorded on the consolidated balance sheets represents the expected synergies to be achieved from the internalization of property management.

Supplemental pro forma financial information of the HB Acquisition (unaudited)

The following supplemental pro forma financial information summarizes our results of operations as if the HB Acquisition occurred on January 1, 2017 ($ in thousands, except per share amounts):
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Unaudited pro forma revenues
$
53,560

 
$
159,278

Unaudited pro forma net loss
$
(49,962
)
 
$
(106,816
)
Pro forma loss per basic common share
$
(0.93
)
 
$
(2.00
)
Weighted average common stock outstanding - basic
53,601,208

 
53,525,792

Pro forma loss per diluted common share
$
(0.93
)
 
$
(2.00
)
Weighted average common stock outstanding - diluted
53,601,208

 
53,525,792


11



The following table presents the adjustments included in the above pro forma financial information for the period indicated ($ in thousands):
 
Three months ended September 30, 2018
 
Nine months ended September 30, 2018
Revenues from consolidated statements of operations
$
48,313

 
$
128,984

Add: historical revenues not reflected in consolidated statements of operations
5,247

 
30,294

Unaudited pro forma revenues
$
53,560

 
$
159,278

 
 
 
 
Net loss from consolidated statements of operations
$
(47,933
)
 
$
(96,619
)
Plus: historical net loss not reflected in consolidated statements of operations
(3,034
)
 
(9,785
)
Adjustment for pro forma depreciation and amortization
2,075

 
5,679

Adjustment for pro forma interest expense
(1,070
)
 
(6,091
)
Unaudited pro forma net loss
$
(49,962
)
 
$
(106,816
)

The supplemental pro forma financial information for all periods presented was adjusted to reflect depreciation and amortization on the acquired properties and related intangible assets and interest expense on the related financing. The supplemental pro forma financial information is for informational purposes only and is not necessarily indicative of the actual results of operations that would have been achieved if the acquisition had taken place on January 1, 2017, nor does it purport to represent or be indicative of the results of operations for future periods.

Other acquisitions

During the three months ended September 30, 2019 and 2018, we acquired 28 and 12 SFR properties, respectively, for an aggregate purchase price of $3.8 million and $1.6 million, respectively.

During the nine months ended September 30, 2019 and 2018, we acquired 85 and 66 SFR properties, respectively, for an aggregate purchase price of $11.1 million and $8.3 million, respectively.

Real estate dispositions

During the three months ended September 30, 2019 and 2018, we sold 126 and 72 properties, respectively. Net proceeds of these sales were $22.6 million and $10.9 million, respectively.

During the nine months ended September 30, 2019 and 2018, we sold 862 and 402 properties, respectively. Net proceeds of these sales were $175.8 million and $71.1 million, respectively.

Mortgage loans

Mortgage loan dispositions and resolutions

During the three months ended September 30, 2019 and 2018, we resolved 5 and 5 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $0.2 million and $0.8 million, respectively.

During the nine months ended September 30, 2019 and 2018, we resolved 18 and 26 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $1.8 million and $2.7 million, respectively.


12


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 and nine months ended September 30, 2019 and 2018 ($ in thousands):

 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Conversion of mortgage loans to REO, net
$
17

 
$
1,540

 
$
769

 
$
1,824

Change in fair value of mortgage loans, net
(81
)
 
81

 
211

 
187

Net realized (loss) gain on mortgage loans
(1,671
)
 
793

 
(944
)
 
892

Net realized gain (loss) on sales of real estate
2,089

 
(1,237
)
 
12,937

 
(3,666
)
Net gain (loss) on real estate and mortgage loans
$
354

 
$
1,177

 
$
12,973

 
$
(763
)

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:
September 30, 2019
Held for Use
 
Held for Sale
 
Total Portfolio
Rental Properties:
 
 
 
 
 
Leased
13,499

 

 
13,499

Listed and ready for rent
405

 

 
405

Unit turn
416

 

 
416

Renovation
83

 

 
83

Total rental properties
14,403

 
 
 
 
Previous rentals identified for sale
128

 
101

 
229

Legacy REO
24

 
18

 
42

 
14,555

 
119

 
14,674

December 31, 2018
 
 
 
 
 
Rental Properties:
 
 
 
 
 
Leased
13,546

 
423

 
13,969

Listed and ready for rent
434

 
8

 
442

Unit turn
428

 
18

 
446

Renovation
136

 
2

 
138

Total rental properties
14,544

 
 
 
 
Previous rentals identified for sale
158

 
188

 
346

Legacy REO
56

 
48

 
104

 
14,758

 
687

 
15,445


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 September 30, 2019 and 2018, we recognized $0.5 million and $1.3 million, respectively, of impairment on our real estate assets held for sale.

During the nine months ended September 30, 2019 and 2018, we recognized $3.1 million and $11.0 million, respectively, of impairment on our real estate held for sale.


13

(table of contents)

4. Mortgage Loans

The following table sets forth information related to our mortgage loans at fair value, the related unpaid principal balance and market value of underlying properties by delinquency status as of September 30, 2019 and December 31, 2018 ($ in thousands):

 
 
Number of Loans
 
Fair Value and Carrying Value
 
Unpaid Principal Balance
 
Market Value of Underlying Properties (1)
September 30, 2019
 
 
 
 
 
 
 
 
Current
 
19

 
$
1,520

 
$
2,818

 
$
4,409

30 days past due
 
2

 
113

 
195

 
280

90 days past due
 
11

 
364

 
3,731

 
3,718

Foreclosure
 
20

 
1,616

 
5,481

 
7,136

Mortgage loans at fair value
 
52

 
$
3,613

 
$
12,225

 
$
15,543

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
Current
 
20

 
$
1,827

 
$
2,701

 
$
4,353

60 days past due
 
1

 
115

 
148

 
180

90 days past due
 
17

 
649

 
6,019

 
5,418

Foreclosure
 
36

 
5,481

 
12,376

 
16,097

Mortgage loans at fair value
 
74

 
$
8,072

 
$
21,244

 
$
26,048

________
(1)
The market values of the underlying properties are estimated based on BPOs.

On October 7, 2019, we sold 47 of the 52 remaining mortgage loans in our portfolio for an aggregate sales price of $3.5 million.

5. 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 September 30, 2019 and December 31, 2018 ($ in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Carrying Value
 
Quoted Prices in Active Markets
 
 Observable Inputs Other Than Level 1 Prices
 
 Unobservable Inputs
September 30, 2019
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
3,613

 
$

 
$
3,613

 
$

Interest rate cap derivatives (1)
1,812

 

 
1,812

 

Not recognized on condensed consolidated balance sheets at fair value (liabilities)
 
 
 
 
 
 
 
Repurchase and loan agreements
1,617,457

 

 
1,627,472

 

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Recurring basis (assets)
 
 
 
 
 
 
 
Mortgage loans at fair value
$
8,072

 
$

 
$

 
$
8,072

Interest rate cap derivatives (1)
14,367

 

 
14,367

 

Not recognized on consolidated balance sheets at fair value (liabilities)


 


 


 


Repurchase and loan agreements
1,722,219

 

 
1,734,152

 

_____________
(1)
Included within prepaid expenses and other assets in the condensed consolidated balance sheets.

14


(table of contents)


We transferred our mortgage loans at fair value from Level 3 to Level 2 as of September 30, 2019. Due to our sale of the majority of our remaining mortgage loans on October 7, 2019, the contract price was the primary input to the fair value of the mortgage loans as of September 30, 2019. We have not transferred any other assets from one level to another level during the nine months ended September 30, 2019 or during the year ended December 31, 2018.

Prior to September 30, 2019, the fair value of our mortgage loans was estimated based on (i) market information, to the extent available and as adjusted for factors specific to individual mortgage loans, or (ii) as determined by AAMC's proprietary discounted cash flow model. 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.

The following table sets forth the changes in our Level 3 assets, which consisted solely of mortgage loans at fair value, during the three and nine months ended September 30, 2019 and 2018 ($ in thousands):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Mortgage loans at fair value based on Level 3 inputs, beginning balance
$
4,372

 
$
9,778

 
$
8,072

 
$
11,477

Net (loss) gain on mortgage loans (1)
(1,759
)
 
785

 
12

 
1,143

Mortgage loan dispositions, resolutions and payments (1)
1,355

 
(841
)
 
(405
)
 
(2,847
)
Real estate tax advances to borrowers
36

 
68

 
65

 
164

Selling costs on loans held for sale

 

 

 
(83
)
Transfer of mortgage loans to real estate owned, net
(391
)
 
(2,115
)
 
(4,131
)
 
(2,179
)
Transfers out of Level 3 (2)
(3,613
)
 

 
(3,613
)
 

Mortgage loans at fair value based on Level 3 inputs, ending balance
$

 
$
7,675

 
$

 
$
7,675

 
 
 
 
 
 
 
 
Change in unrealized gain on mortgage loans at fair value based on Level 3 inputs held at the end of the period (3)
n/a

 
$
158

 
n/a

 
$

_____________
(1)
Includes downward purchase price adjustments on prior loan sales of $1.6 million, which were recognized during the third quarter of 2019 as a component of net gain (loss) on real estate and mortgage loans in the interim condensed statements of operations.
(2)
Transferred from Level 3 to Level 2 because observable market data became available and is the primary valuation input.
(3)
Included in net gain (loss) on real estate and mortgage loans in the interim condensed consolidated statements of operations.

The significant unobservable inputs used in the fair value measurement of the mortgage loans that were valued using the discounted cash flow model are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.


15

(table of contents)

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of certain of our mortgage loans:
Input
 
December 31, 2018
Equity discount rate
 
17.0%
Debt to asset ratio
 
65.0%
Cost of funds
 
3.5% over 1 month LIBOR
Annual change in home pricing index
 
-0.55% to 16.79%
Loan resolution probabilities — modification
 
0% to 5.9%
Loan resolution probabilities — liquidation
 
38.8% to 100%
Loan resolution probabilities — paid in full
 
0% to 61.2%
Loan resolution timelines (in years)
 
0.1 to 6.1
Value of underlying properties
 
$50,000 to $2,500,000

6. 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, other REO properties and the remaining mortgage loans 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 September 30, 2019, the average annualized interest rate on borrowings under our repurchase and loan agreements was 4.26%, excluding amortization of deferred debt issuance costs and loan discounts.


16

(table of contents)

The following table sets forth data with respect to our repurchase and loan agreements as of September 30, 2019 and December 31, 2018 ($ in thousands):
 
Maturity Date
 
 
Interest Rate
 
 
Amount Outstanding
 
Maximum Borrowing Capacity
 
Amount of Available Funding
 
Book Value of Collateral
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
CS Repurchase Agreement
11/15/2019
 
 
1-month LIBOR + 2.30%
 
 
$
82,382

 
$
250,000

 
$
167,618

 
$
85,652

Nomura Loan Agreement
4/3/2020
 
 
1-month LIBOR + 2.30%
 
 
34,359

 
250,000

 
215,641

 
39,789

HOME II Loan Agreement
11/9/2019
(1)
 
1-month LIBOR + 2.10%
(2)
 
83,270

 
83,270

 

 
98,710

HOME III Loan Agreement
11/9/2019
(1)
 
1-month LIBOR + 2.10%
(2)
 
89,150

 
89,150

 

 
109,522

HOME IV Loan Agreement (A)
12/9/2022
 
 
4.00%
 
 
114,201

 
114,201

 

 
142,963

HOME IV Loan Agreement (B)
12/9/2022
 
 
4.00%
 
 
114,590

 
114,590

 

 
143,805

Term Loan Agreement
4/6/2022
 
 
5.00%
 
 
99,782

 
99,782

 

 
111,785

FYR SFR Loan Agreement
9/1/2028
 
 
4.65%
 
 
508,700

 
508,700

 

 
575,375

MS Loan Agreement
12/7/2023
 
 
1-month LIBOR + 1.80%
(3)
 
504,986

 
504,986

 

 
598,810

 
 
 
 
 
 
 
1,631,420

 
$
2,014,679

 
$
383,259

 
$
1,906,411

Less: unamortized loan discounts
 
 
 
 
 
(3,948
)
 
 
 
 
 
 
Less: deferred debt issuance costs
 
 
 
 
 
(10,015
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,617,457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
CS Repurchase Agreement
11/15/2019
 
 
1-month LIBOR + 3.00%
 
 
$
193,654

 
$
250,000

 
$
56,346

 
$
224,934

Nomura Loan Agreement
4/5/2020
 
 
1-month LIBOR + 3.00%
 
 
30,497

 
250,000

 
219,503

 
48,388

HOME II Loan Agreement
11/9/2019
 
 
1-month LIBOR + 2.10%
 
 
83,270

 
83,270

 

 
100,461

HOME III Loan Agreement
11/9/2019
 
 
1-month LIBOR + 2.10%
 
 
89,150

 
89,150

 

 
111,542

HOME IV Loan Agreement (A)
12/9/2022
 
 
4.00%
 
 
114,201

 
114,201

 

 
145,461

HOME IV Loan Agreement (B)
12/9/2022
 
 
4.00%
 
 
114,590

 
114,590

 

 
146,479

Term Loan Agreement
4/6/2022
 
 
5.00%
 
 
100,000

 
100,000

 

 
114,401

FYR SFR Loan Agreement
9/1/2028
 
 
4.65%
 
 
508,700

 
508,700

 

 
585,563

MS Loan Agreement
12/7/2023
 
 
1-month LIBOR + 1.80%
 
 
504,986

 
504,986

 

 
609,619

 
 
 
 
 
 
 
1,739,048

 
$
2,014,897

 
$
275,849

 
$
2,086,848

Less: unamortized loan discounts
 
 
 
 
 
(4,896
)
 
 
 
 
 
 
Less: deferred debt issuance costs
 
 
 
 
 
(11,933
)
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,722,219

 
 
 
 
 
 
_____________
(1)
Represents initial maturity date. We have the option to extend the maturity date for up to three successive one-year extensions. On October 17, 2019, we exercised an option to extend the maturity to November 9, 2020.
(2)
The interest rate is capped at 4.40% under an interest rate cap derivative. See Note 11.
(3)
The interest rate is capped at 4.30% under an interest rate cap derivative. See Note 11.


17

(table of contents)

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 mortgage or REO assets on our behalf, or the trust will directly sell such underlying mortgage assets. 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 mortgage or REO asset we finance under the CS Repurchase Agreement is based on a percentage of the market value of the mortgage or REO asset and, in the case of mortgage assets, may depend on its delinquency status. 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. As of September 30, 2019, the maximum funding capacity of the Nomura Loan Agreement was $250.0 million, all of which is uncommitted but available to us subject to our meeting certain eligibility requirements.

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.

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 the 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.


18

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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 $7.3 million and $2.9 million in escrow for future payments of property taxes and repairs and maintenance as of September 30, 2019 and December 31, 2018, 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

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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 $11.2 million and $8.2 million in escrow for future payments of property taxes, insurance, HOA dues and repairs and maintenance as of September 30, 2019 and December 31, 2018, 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:

reporting requirements to the agent or lender,
minimum adjusted tangible net worth requirements,
minimum net asset requirements,
limitations on the indebtedness,
minimum levels of liquidity, including specified levels of unrestricted cash,
limitations on sales and dispositions of properties collateralizing certain of the loan agreements,
various restrictions on the use of cash generated by the operations of properties, and
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 and mortgage loan 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.

7. 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.


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Future contractual rents for the 13,499 properties that were leased as of September 30, 2019 are as follows ($ in thousands):
2019 (1)
$
44,158

2020
68,389

2021
1,743

2022
108

2023

Thereafter

 
$
114,398

_____________
(1)
Excludes the nine months ended September 30, 2019.

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

Our office leases, which are operating leases, are generally for terms of one to five years and generally include renewal options, which we include in determining our lease right-of-use assets and lease liabilities to the extent that a renewal option is reasonably certain of being exercised. We do not record lease right-of-use assets or lease liabilities for leases with an initial maturity of one year or less. Along with rents, we are generally required to pay common area maintenance, property taxes and insurance, each of which vary from period to period and are therefore expensed as incurred. As of September 30, 2019, we applied a weighted average discount rate of 4.69% 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 2.1 years.

During the three and nine months ended September 30, 2019, our operating leases resulted in rent expense related to long-term leases of $0.2 million and $0.5 million, respectively, which is allocated amongst residential property operating expenses, property management expenses and general and administrative expenses. At September 30, 2019, we had operating lease right-of-use assets of $1.1 million.

The following table presents a maturity analysis of our operating leases as of September 30, 2019 ($ in thousands):
 
Operating Lease Liabilities
2019 (1)
$
155

2020
622

2021
242

2022
121

2023

Thereafter

   Total lease payments
1,140

Less: interest
54

   Lease liabilities
$
1,086

_____________
(1)
Excludes the nine months ended September 30, 2019.


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Finance Leases

Our vehicle leases, which are finance leases, are each for an initial term of 36 months with the option to renew on a month-to-month basis. In determining our lease right-of-use assets and lease liabilities, we include such future month-to-month extensions based on our historical average period of use for our vehicles. We have elected to combine the lease and non-lease components, which relate primarily to maintenance services. At September 30, 2019, the weighted average discount rate applied to our vehicle leases was 7.3% based on the rates implied in the individual lease agreements and our weighted average remaining lease term was 3.7 years.

During the three and nine months ended September 30, 2019, our finance leases resulted in $0.2 million and $0.5 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 September 30, 2019, we had finance lease right-of-use assets of $3.5 million.

The following table presents a maturity analysis of our finance leases as of September 30, 2019 ($ in thousands):
 
Finance Lease Liabilities
2019 (1)
$
233

2020
775

2021
667

2022
190

2023
66

Thereafter

   Total lease payments
1,931

Less: interest
161

   Lease liabilities
$
1,770

_____________
(1)
Excludes the nine months ended September 30, 2019.

8. Commitments and Contingencies

Litigation, claims and assessments

Information regarding reportable legal proceedings is contained in the “Commitments and Contingencies” note in the financial statements provided in our Annual Report on Form 10-K for the year ended December 31, 2018. We establish reserves for specific legal proceedings when we determine that the likelihood of an outcome is probable and the amount of loss can be reasonably estimated. We currently have a net legal reserve for our legal proceedings in the amount of $10.0 million in connection with the previously reported Martin v Altisource Residential Corporation et al. matter, as updated below:

Martin v. Altisource Residential Corporation et al.
On March 27, 2015, a putative shareholder class action complaint was filed in the United States District Court of the Virgin Islands by a purported shareholder of the Company under the caption Martin v. Altisource Residential Corporation, et al., 15-cv-00024. The action names as Defendants the Company, our former Chairman, William C. Erbey, and certain officers and a former officer of the Company and alleges that the Defendants violated federal securities laws by, among other things, making materially false statements and/or failing to disclose material information to the Company's shareholders regarding the Company's relationship and transactions with Ocwen Financial Corporation (“Ocwen”), Altisource Portfolio Solutions S.A., and other third-party entities. These alleged misstatements and omissions include allegations that the Defendants failed to adequately disclose the Company's reliance on Ocwen and the risks relating to its relationship with Ocwen, including that Ocwen was not properly servicing and selling loans, that Ocwen was under investigation by regulators for violating state and federal laws regarding servicing of loans and Ocwen’s lack of proper internal controls. The action seeks, among other things, an award of monetary damages to the putative class in an unspecified amount and an award of attorney’s and other fees and expenses.


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In May 2015, two of our purported shareholders filed competing motions with the court to be appointed Lead Plaintiff and for selection of lead counsel in the action. On October 7, 2015, the court entered an order granting the motion of Lei Shi to be Lead Plaintiff and denying the other motion to be Lead Plaintiff.

On January 23, 2016, the Lead Plaintiff filed an amended complaint.

On March 22, 2016, Defendants filed a motion to dismiss all claims in the action. The Plaintiff filed opposition papers on May 20, 2016, and the Defendants filed a reply brief in support of the motion to dismiss the amended complaint on July 11, 2016.

On November 14, 2016, the Martin case was reassigned to Judge Anne E. Thompson of the United States District Court of New Jersey. In a hearing on December 19, 2016, the parties made oral arguments on the motion to dismiss, and on March 16, 2017 the Court issued an order that the motion to dismiss had been denied. On April 17, 2017, the Defendants filed a motion for reconsideration of the Court’s decision to deny the motion to dismiss. On April 21, 2017, the Defendants filed their answer and affirmative defenses. Plaintiff filed an opposition to Defendants’ motion for reconsideration on May 8, 2017. On May 30, 2017, the Court issued an order that the motion for reconsideration had been denied. Shortly thereafter, discovery commenced.

On October 10, 2018, the Lead Plaintiff filed a second amended complaint, which added a second Lead Plaintiff to the case. The allegations and causes of action asserted by the Plaintiffs were virtually identical to the prior complaint, except that they added what the Plaintiffs claimed was additional detail in support of their allegations.

On December 7, 2018, the Defendants moved to dismiss the second amended complaint in its entirety. Plaintiffs filed their opposition to the motion on December 31, 2018, and Defendants filed their reply brief on January 24, 2019. On February 21, 2019, Judge Thompson issued an order that granted Defendants’ motion and dismissed the second amended complaint in its entirety.

On February 26, 2019, the Court granted Plaintiffs’ request for leave to file a Third Amended Complaint within 14 days. On March 12, 2019, Plaintiffs filed their Third Amended Complaint, and on April 12, 2019, Defendants moved to dismiss the Third Amended Complaint in its entirety. Plaintiffs filed their opposition to the motion to dismiss on May 13, 2019, and Defendants filed their reply in support of the motion on May 31, 2019. On June 12, 2019, Judge Thompson issued an Order granting in part and denying in part Defendants’ motion to dismiss the Third Amended Complaint. Specifically, Judge Thompson granted Defendants’ motion to dismiss any alleged misrepresentation made after each Plaintiff’s final purchase of securities. Judge Thompson denied Defendants’ motion to dismiss on the remaining grounds.

On June 26, 2019, Defendants filed a motion to certify interlocutory appeal to the Third Circuit of Judge Thompson’s Order granting in part and denying in part Defendants’ motion to dismiss the Third Amended Complaint. Plaintiffs filed their opposition to the motion on July 10, 2019 and Defendants’ reply in support of the motion was filed on July 24, 2019. On August 6, 2019, Judge Thompson denied Defendants’ motion to certify interlocutory appeal.

Separately, on July 5, 2019, Judge Thompson accepted the case schedule proposed by the parties, and discovery resumed. The deadline for the completion of fact discovery was November 8, 2019, the deadline for the completion of expert discovery was January 30, 2020, and the deadline to submit dispositive motions was February 27, 2020.

On October 8, 2019, based on input from a mediator, we entered into a stipulation and agreement of settlement with Plaintiffs to settle the litigation for $15.5 million in exchange for, among various other terms, a full release of claims by Plaintiffs on behalf of the purported class of shareholders. On the same date, Plaintiffs filed their unopposed motion for preliminary approval of the settlement and ancillary documents, which included the stipulation and agreement of settlement. On October 17, 2019, the court issued an order granting preliminary approval of the settlement, approving the form and manner of notice and setting a hearing date for final approval of the settlement for January 30, 2020. Proceeds from the directors' and officers' insurance policies will fund $5.5 million of the settlement. We have included the settlement amount, net of insurance coverage, as a component of other expense within the interim condensed consolidated statement of operations for the three months ended September 30, 2019.

Potential purchase price adjustments of certain acquired properties

Certain of the properties we acquired on November 29, 2017 are subject to potential purchase price adjustments in accordance with the related purchase and sale agreement, which may result in an upward or downward adjustment of up to 10% of the purchase price related to the affected properties. The purchase price adjustment will be determined based on the rental rates

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achieved for the properties within 24 months after the closing date. We currently do not expect to recognize any material purchase price adjustment related to these properties.

Potential purchase price adjustments of certain mortgage loans previously sold

As of September 30, 2019, we are evaluating $2.7 million in potential purchase price adjustment/indemnification claims relating to mortgage loans sold in prior years. 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 prior purchase agreements. 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.

9. 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):

Base Management Fee. Front Yard will pay a quarterly base management fee (the “Base Management Fee”) to AAMC as follows:

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.

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).

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.


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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:

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.

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. 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

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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:

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

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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 September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Base management fees (1)
$
3,584

 
$
3,613

 
$
10,686