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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

OR

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

https://cdn.kscope.io/d9cbb24521d382ab18eafaba7a9eb1bb-aamc-20200930_g1.jpg
Front Yard Residential Corporation
(Exact name of registrant as specified in its charter)
Maryland46-0633510
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

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

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

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

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 No

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 No

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 FilerAccelerated Filer
Non-Accelerated FilerSmaller Reporting Company
Emerging Growth Company

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.

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

As of October 28, 2020, 58,747,146 shares of our common stock were outstanding.



Front Yard Residential Corporation
September 30, 2020
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:

the occurrence of any event, change or other circumstances that could give rise to the termination of the Agreement and Plan of Merger (the “Pretium Merger Agreement”) with Pretium Midway Holdco, LP, a Delaware limited partnership (“Pretium”) and Midway AcquisitionCo REIT, a Maryland real estate investment trust and direct wholly owned subsidiary of Pretium (“Merger Sub”);
our ability to complete the proposed merger due to the failure to obtain stockholder approval or satisfy other conditions to completion of the proposed merger;
risks related to disruption of management’s attention from the Company’s ongoing business operations due to the proposed merger;
the effect of the announcement of the proposed merger on the Company’s relationships with its customers and employees, and the potential effect on operating results and business generally;
the risk that the proposed merger will not be consummated in a timely manner;
the risk of exceeding the expected costs of the proposed merger;
our ability to successfully complete the transition plan contemplated in connection with the termination of our Asset Management Agreement with AAMC, our external asset manager, pursuant to the Termination and Transition Agreement dated August 13, 2020 (the “Termination Agreement”);
our ability to successfully internalize our asset management function under the Termination Agreement;
our ability to successfully implement our strategic initiatives and achieve their anticipated impact;
our ability to implement our business strategy;
risks and uncertainties related to the COVID-19 pandemic, including the potential adverse impact on our real estate related assets, financing arrangements, operations, business prospects, customers, employees and third-party service providers;
the effect of management’s attention being diverted from our ongoing business operations and costs associated with shareholder activism;
the impact of defending any litigation;
our ability to make distributions to stockholders;
our ability to integrate newly acquired rental assets into the portfolio;
the ability to successfully perform property management services at the level and/or the cost that we anticipate;
difficulties in identifying single-family properties to acquire;
the failure to identify unforeseen expenses or material liabilities associated with our acquisitions of assets through the due diligence process prior to such acquisitions;
the impact of changes to the supply of, value of and the returns on single-family rental properties;
our ability to acquire single-family rental properties generating attractive returns;
our ability to sell non-core assets on favorable terms or at all;
our ability to predict costs;
our ability to effectively compete with competitors;
changes in interest rates;
changes in the market value of single-family properties;
our ability to maintain, obtain or access financing arrangements on favorable terms or at all;
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our ability to deploy the net proceeds from financings or asset sales to acquire assets in a timely manner or at all;
our ability to maintain adequate liquidity and meet the requirements under our financing arrangements;
risks related to our engagement of AAMC as our asset manager;
the failure of our third-party vendors to effectively perform their obligations under their respective agreements with us;
our failure to qualify or maintain qualification as a REIT;
our failure to maintain our exemption from registration under the Investment Company Act of 1940, as amended;
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, 2019.

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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, 2020December 31, 2019
(unaudited)
Assets:
Real estate held for use:
Land$397,375 $398,840 
Rental residential properties1,724,133 1,707,043 
Real estate owned8,886 16,328 
Total real estate held for use2,130,394 2,122,211 
Less: accumulated depreciation(262,776)(206,464)
Total real estate held for use, net1,867,618 1,915,747 
Real estate assets held for sale5,454 14,395 
Cash and cash equivalents84,418 43,727 
Restricted cash32,191 34,282 
Accounts receivable5,525 9,235 
Goodwill13,376 13,376 
Prepaid expenses and other assets32,221 22,360 
Total assets$2,040,803 $2,053,122 
Liabilities:
Repurchase and loan agreements$1,620,968 $1,644,230 
Accounts payable and accrued liabilities73,124 64,619 
Payable to AAMC34,967 5,014 
Total liabilities1,729,059 1,713,863 
Commitments and contingencies (Note 7)
  
Equity:
Common stock, $0.01 par value, 200,000,000 authorized shares; 58,747,146 shares issued and outstanding as of September 30, 2020 and 53,933,575 shares issued and outstanding as of December 31, 2019
587 539 
Additional paid-in capital1,247,109 1,189,236 
Accumulated deficit(918,262)(830,602)
Accumulated other comprehensive loss(17,690)(19,914)
Total equity
311,744 339,259 
Total liabilities and equity
$2,040,803 $2,053,122 

See accompanying notes to condensed consolidated financial statements.

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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,
2020201920202019
Revenues:
Rental revenues$56,944 $50,768 $166,400 $154,946 
Total revenues56,944 50,768 166,400 154,946 
Expenses:
Residential property operating expenses20,048 20,775 57,735 58,180 
Property management expenses3,569 4,187 11,367 11,400 
Depreciation and amortization20,229 19,662 60,837 61,983 
Acquisition and integration costs771 202 913 3,064 
Impairment105 495 994 3,091 
Mortgage loan servicing costs 246  827 
Interest expense17,378 21,135 55,790 63,810 
Share-based compensation1,616 1,457 4,039 4,387 
General and administrative6,637 5,519 23,280 19,277 
Management fees to AAMC3,584 3,584 10,752 10,715 
Termination fee to AAMC46,000  46,000  
Total expenses119,937 77,262 271,707 236,734 
Net gain on real estate and mortgage loans176 354 1,546 12,973 
Operating loss(62,817)(26,140)(103,761)(68,815)
Casualty losses(292)(287)(924)(864)
Insurance recoveries10 48 85 586 
Other (loss) income(78)(9,989)25,231 (10,786)
Net loss before income taxes(63,177)(36,368)(79,369)(79,879)
Income tax expense  28 14 
Net loss$(63,177)$(36,368)$(79,397)$(79,893)
Loss per share of common stock - basic:
Loss per basic share$(1.08)$(0.68)$(1.41)$(1.49)
Weighted average common stock outstanding - basic58,747,146 53,857,616 56,329,863 53,735,106 
Loss per share of common stock - diluted:
Loss per diluted share$(1.08)$(0.68)$(1.41)$(1.49)
Weighted average common stock outstanding - diluted58,747,146 53,857,616 56,329,863 53,735,106 
Dividends declared per common share$ $0.15 $0.15 $0.45 

See accompanying notes to condensed consolidated financial statements.

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

Three months ended September 30,Nine months ended September 30,
2020201920202019
Net loss$(63,177)$(36,368)$(79,397)$(79,893)
Other comprehensive income (loss):
Change in fair value of interest rate caps(245)(1,463)(1,956)(12,554)
Losses from interest rate caps reclassified into earnings from accumulated other comprehensive loss1,419 1,430 4,180 3,665 
Net other comprehensive income (loss)1,174 (33)2,224 (8,889)
Comprehensive loss$(62,003)$(36,401)$(77,173)$(88,782)

See accompanying notes to condensed consolidated financial statements.

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

Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Comprehensive LossTotal Equity
Number of SharesAmount
December 31, 201953,933,575 $539 $1,189,236 $(830,602)$(19,914)$339,259 
Common shares issued under share-based compensation plans243,089 3 62 — — 65 
Shares withheld for taxes upon vesting of restricted stock(64,290)(1)(767)— — (768)
Dividends on common stock ($0.15 per share)
— — — (8,263)— (8,263)
Share-based compensation— — 1,487 — — 1,487 
Change in fair value of cash flow hedging derivatives in other comprehensive loss— — — — (447)(447)
Net loss— — — (20,215)— (20,215)
March 31, 202054,112,374 541 1,190,018 (859,080)(20,361)311,118 
Issuance of common stock, including shares under share-based compensation plans4,693,383 47 54,953 — — 55,000 
Shares withheld for taxes upon vesting of restricted stock(58,611)(1)(414)— — (415)
Share-based compensation— — 936 — — 936 
Change in fair value of cash flow hedging derivatives in other comprehensive income— — — — 1,497 1,497 
Net income— — — 3,995 — 3,995 
June 30, 202058,747,146 587 1,245,493 (855,085)(18,864)372,131 
Share-based compensation— — 1,616 — — 1,616 
Change in fair value of cash flow hedging derivatives in other comprehensive loss— — — — 1,174 1,174 
Net loss— — — (63,177)— (63,177)
September 30, 202058,747,146 $587 $1,247,109 $(918,262)$(17,690)$311,744 


See accompanying notes to condensed consolidated financial statements.

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

Common StockAdditional Paid-in CapitalAccumulated DeficitAccumulated Comprehensive LossTotal Equity
Number of SharesAmount
December 31, 201853,630,204 $536 $1,184,132 $(700,623)$(12,653)$471,392 
Adoption of ASC 842— — — 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, 201953,630,204 536 1,185,251 (727,193)(19,275)439,319 
Common shares issued under share-based compensation plans, net of shares withheld for employee taxes234,389 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, 201953,826,458 538 1,186,683 (760,468)(21,509)405,244 
Common shares issued under share-based compensation plans, net of shares withheld for employee taxes68,890 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, 201953,880,544 $539 $1,187,973 $(805,104)$(21,542)$361,866 

See accompanying notes to condensed consolidated financial statements.

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Front Yard Residential Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended September 30,
20202019
Operating activities:
Net loss$(79,397)$(79,893)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Net gain on real estate and mortgage loans(1,546)(12,973)
Depreciation and amortization60,837 61,983 
Impairment994 3,091 
Share-based compensation4,039 4,387 
Amortization of deferred financing costs5,017 3,931 
Casualty losses924 864 
Insurance recoveries(85)(586)
Change in fair value of interest rate cap derivatives in profit or loss4,180 3,665 
Changes in operating assets and liabilities:
Accounts receivable1,277 5,657 
Deferred leasing costs(2,012)(2,088)
Prepaid expenses and other assets(8,826)(9,125)
Accounts payable and accrued liabilities9,333 15,573 
Payable to AAMC29,953 200 
Net cash provided by (used in) operating activities24,688 (5,314)
Investing activities:
Investment in real estate(543)(11,124)
Investment in renovations(24,155)(21,504)
Payment of real estate tax advances (72)
Proceeds from mortgage loan resolutions and dispositions 1,129 
Receipt of mortgage loan payments 203 
Proceeds from dispositions of real estate25,424 169,457 
Proceeds from casualty insurance85 1,552 
Acquisition related deposit paid to AAMC (Note 1)
(3,200) 
Net cash (used in) provided by investing activities(2,389)139,641 
Financing activities:
Proceeds from issuance of common stock, including stock option exercises55,086 138 
Payment of tax withholdings on share-based compensation plan awards(21)(76)
Shares withheld for taxes upon vesting of restricted stock(1,183)(605)
Dividends on common stock(8,572)(24,444)
Proceeds from repurchase and loan agreements54,063 42,681 
Repayments of repurchase and loan agreements(78,628)(150,308)
Payment of financing costs(3,714)(1,066)
Principal repayments of finance leases(730)(688)
Net cash provided by (used in) financing activities16,301 (134,368)
Net change in cash, cash equivalents and restricted cash38,600 (41)
Cash, cash equivalents and restricted cash as of beginning of the period78,009 81,160 
Cash, cash equivalents and restricted cash as of end of the period$116,609 $81,119 
See accompanying notes to condensed consolidated financial statements.

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

Nine months ended September 30,
20202019
Supplemental disclosure of cash flow information:
Cash paid for:
Interest$47,509 $55,489 
Income taxes144  
Non-cash transactions:
Transfer of mortgage loans to real estate owned, net$ $4,131 
Changes in accrued capital expenditures(136)(612)
Changes in receivables from mortgage loan resolutions and dispositions, payments and real estate tax advances to borrowers, net (7)
Changes in receivables from real estate owned dispositions(2,433)6,318 
Change in other comprehensive loss from cash flow hedges2,224 (8,889)
Right-of-use lease assets recognized - operating leases14 1,475 
Right-of-use lease assets recognized - finance leases333 1,327 
Operating lease liabilities incurred14 1,475 
Finance lease liabilities incurred333 1,327 
Dividends declared but not paid390 8,584 

See accompanying notes to condensed consolidated financial statements.

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Front Yard Residential Corporation
Notes to Condensed Consolidated Financial Statements
September 30, 2020
(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, 2020, we had a core rental portfolio of 14,494 homes. In addition, we had 104 rental homes that are identified for future sale, and we had a small portfolio of non-rental real estate owned (“REO”) properties remaining from our previous mortgage loan portfolio acquisitions. We have engaged third-party service providers to manage REO and certain other properties identified for sale. 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.

Asset Management Agreements and Termination Agreement with AAMC

Since December 2012, we have been managed by Altisource Asset Management Corporation (“AAMC” or our “Manager”). AAMC has provided us with dedicated personnel to administer certain aspects of our business and perform certain of our corporate governance functions. AAMC has also provided oversight of our acquisition and management of SFR properties and the ongoing management of our remaining REO properties.

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. The Former AMA provided for a fee structure in which AAMC was entitled to a base management fee, an incentive management fee and a conversion fee for mortgage loans and real estate owned (“REO”) properties that became rental properties for the first time during each quarter.

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 amended and restated, in its entirety, the Former AMA. The Amended AMA has an initial term of five years and could renew automatically each year thereafter for an additional one-year term, subject in each case to certain termination provisions. The Amended AMA provides for a fee structure in which AAMC has been entitled to a Base Management Fee and a potential Incentive Fee.

For further information on the Former AMA and the Amended AMA, please see Note 8.

On August 13, 2020, Front Yard and AAMC entered into a Termination and Transition Agreement (the “Termination Agreement”), pursuant to which they have agreed to effectively internalize the asset management function of Front Yard. The Termination Agreement provides that the Amended AMA will terminate following a transition period to enable the internalization of Front Yard’s asset management function, allow for the assignment of certain vendor contracts and implement the transfer of certain employees to Front Yard and the training of required replacement employees at each company. The transition period will end at the time that Front Yard and AAMC mutually agree that all required transition activities have been successfully completed (the “Termination Date”), which will occur no later than February 9, 2021. On the Termination Date, the Amended AMA will terminate, and AAMC will no longer provide services to Front Yard under the Amended AMA. Below are the material terms of the Termination Agreement:

Front Yard will pay AAMC an aggregate termination fee of $46.0 million (the “Termination Fee”), consisting of the following payments:
$15.0 million paid in cash to AAMC on August 17, 2020,
$15.0 million payable in cash on the Termination Date, and
$16.0 million payable in cash or Front Yard common stock, at the option of Front Yard and subject to certain conditions, restrictions, and limitations, on the Termination Date.
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Front Yard will acquire the equity interests of AAMC's Indian subsidiary, the equity interests of AAMC's Cayman Islands subsidiary, the right to solicit and hire designated AAMC employees that currently oversee the management of Front Yard's business and other assets of AAMC that are used in connection with the operation of Front Yard's business (the “Transferred Assets”) for an aggregate purchase price of $8.2 million ($3.2 million of which was paid to AAMC on August 17, 2020), of which all or a portion of the remaining $5.0 million may be paid in Front Yard common stock, at Front Yard’s option and subject to certain conditions, restrictions, and limitations.
Front Yard will continue to pay Base Management Fees to AAMC under the Amended AMA in the amount of $3.6 million per quarter through the date that Front Yard delivers written notice to AAMC that the transition has been satisfactorily completed, subject to proration for partial quarters.
AAMC has agreed to vote any shares of Front Yard common stock that it receives in connection with the Termination Agreement in accordance with recommendations of the Front Yard board of directors for a period of one year following the Termination Date, including regarding the approval of the Pretium Merger Agreement (described below) and related transactions, which may be presented to Front Yard’s stockholders.

We have recognized the entire Termination Fee under generally accepted accounting principles as an operating expense in our condensed consolidated statements of operations for the three and nine months ended September 30, 2020. We have also included the unpaid portion of the Termination Fee of $31.0 million within our payable to AAMC in our condensed consolidated balance sheet as of September 30, 2020.

During the third quarter of 2020, we made an upfront payment of $3.2 million of the $8.2 million aggregate purchase price of the Transferred Assets. We have included this $3.2 million upfront payment within prepaid expenses and other assets in our condensed consolidated balance sheet.

Amherst Merger Agreement and Subsequent Termination and Settlement Agreement

On February 17, 2020, we entered into an Agreement and Plan of Merger (the “Amherst Merger Agreement”) with BAF Holdings, LLC, a Delaware limited liability company (“Parent”), and BAF Sub, LLC, a Maryland limited liability company (“Merger Sub”), each affiliates of Amherst Single Family Residential Partners VI, LP (collectively, “Amherst”), providing for the acquisition of the Company by Parent. Following the approval of the merger, the parties ultimately determined that it was not feasible to proceed with the transaction, and on May 4, 2020, we entered into a Termination and Settlement Agreement to terminate the Merger Agreement. Pursuant to the Termination and Settlement Agreement, Amherst agreed to pay the Company a $25.0 million cash termination fee, purchase from the Company 4.4 million shares of Front Yard common stock for an aggregate cash purchase price of $55.0 million ($12.50 per share) pursuant to an Investment Agreement and provide the Company with a $20.0 million committed Non-Negotiable Promissory Note.

We have included the $25.0 million termination fee received from Amherst within other income in our condensed consolidated statements of operations for the nine months ended September 30, 2020.

Since the termination of the Amherst Merger Agreement, we have continued to operate our business in the ordinary course as a stand-alone company.

Pretium Merger Agreement

On October 19, 2020, we entered into an Agreement and Plan of Merger (the “Pretium Merger Agreement”) with a partnership led by Pretium Midway Holdco, LP, a Delaware limited partnership (“Pretium”), and Midway AcquisitionCo REIT, a Maryland real estate investment trust (“Merger Sub”), and including funds managed by the real estate equity and alternative credit strategies of Ares Management Corporation, providing for the merger of Front Yard into Merger Sub, with Merger Sub surviving the merger and becoming a wholly-owned subsidiary of Pretium (the “Merger Transaction”).

Under the terms of the Pretium Merger Agreement, Front Yard stockholders will receive $13.50 in cash per share upon consummation of the Merger Transaction. The Front Yard Board of Directors has unanimously approved the Pretium Merger Agreement and related transactions and intends to recommend that Front Yard stockholders vote in favor of it at a Special Meeting of Stockholders, to be scheduled as soon as practicable. The Merger Transaction is expected to close in the first quarter of 2021, subject to the approval by the holders of a majority of Front Yard’s outstanding shares and the satisfaction of customary closing conditions.

For further details of the Pretium Merger Agreement, refer to Note 14.

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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 2019 Annual Report on Form 10-K, which was filed with the SEC on February 28, 2020.

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 June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 requires 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 adopted this standard on January 1, 2020, and our adoption of this standard did not 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.

Recently issued accounting standards not yet adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (Topic 740), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. While we are currently evaluating the impact of the adoption of this standard, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

2. Asset Acquisitions and Dispositions

Real estate assets

Real estate acquisitions

During the three months ended September 30, 2020, we acquired no SFR properties. During the three months ended September 30, 2019, we acquired 28 SFR properties for an aggregate purchase price of $3.8 million.

During the nine months ended September 30, 2020 and 2019, we acquired 4 and 85 SFR properties, respectively, for an aggregate purchase price of $0.5 million and $11.1 million, respectively.

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Real estate dispositions

During the three months ended September 30, 2020 and 2019, we sold 37 and 126 properties, respectively. Net proceeds of these sales were $5.0 million and $22.6 million, respectively.

During the nine months ended September 30, 2020 and 2019, we sold 149 and 862 properties, respectively. Net proceeds of these sales were $23.8 million and $175.8 million, respectively.

Mortgage loan dispositions and resolutions

On October 7, 2019, we sold the last of our remaining mortgage loans. During the three and nine months ended September 30, 2019, we resolved 5 and 18 mortgage loans, respectively, primarily through short sales, refinancing and foreclosure sales. Net proceeds of these resolutions were $0.2 million and $1.8 million, respectively.

Net gain on real estate and mortgage loans

The following table presents the components of net gain on real estate and mortgage loans during the three and nine months ended September 30, 2020 and 2019 ($ in thousands):

Three months ended September 30,Nine months ended September 30,
2020201920202019
Conversion of mortgage loans to REO, net$ $17 $ $769 
Change in fair value of mortgage loans, net (81) 211 
Net realized loss on mortgage loans (1,671) (944)
Net realized gain on sales of real estate 176 2,089 1,546 12,937 
Net gain on real estate and mortgage loans$176 $354 $1,546 $12,973 

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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, 2020Held for UseHeld for SaleTotal Portfolio
Rental Properties:
Leased 14,286  14,286 
Listed and ready for rent83  83 
Unit turn95  95 
Renovation30  30 
Total rental properties14,494 
Previous rentals identified for sale61 43 104 
Legacy REO5  5 
14,560 43 14,603 
December 31, 2019
Rental Properties:
Leased 13,711  13,711 
Listed and ready for rent371  371 
Unit turn369  369 
Renovation94  94 
Total rental properties14,545 
Previous rentals identified for sale94 87 181 
Legacy REO10 12 22 
14,649 99 14,748 

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, 2020 and 2019, we recognized $0.1 million and $0.5 million, respectively, of impairment on our real estate assets held for sale.

During the nine months ended September 30, 2020 and 2019, we recognized $1.0 million and $3.1 million, respectively, of impairment on our real estate assets held for sale.

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4. 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, 2020 and December 31, 2019 ($ in thousands):
Level 1Level 2Level 3
Carrying ValueQuoted Prices in Active Markets Observable Inputs Other Than Level 1 Prices Unobservable Inputs
September 30, 2020
Recurring basis (assets)
Interest rate cap derivatives (1)$114 $ $114 $ 
Not recognized on condensed consolidated balance sheets at fair value (liabilities)
Repurchase and loan agreements 1,620,968  1,630,102  
December 31, 2019
Recurring basis (assets)
Interest rate cap derivatives (1)$2,070 $ $2,070 $ 
Not recognized on consolidated balance sheets at fair value (liabilities)
Repurchase and loan agreements1,644,230  1,653,720  
_____________
(1)Included within prepaid expenses and other assets in the condensed consolidated balance sheets.

We have not transferred any other assets from one level to another level during the nine months ended September 30, 2020. We transferred our mortgage loans at fair value from Level 3 to Level 2 during the third quarter of 2019 due to the contract price being the primary input to the fair value of the mortgage loans prior to the sale of the remaining loans on October 7, 2019. We have not transferred any other assets from one level to another level during the year ended December 31, 2019.

The fair value of our interest rate cap derivatives is estimated using a discounted cash flow analysis based on the contractual terms of the derivatives.

On October 7, 2019, we sold the last of our remaining mortgage loans. The following table sets forth the changes in our Level 3 assets, which consisted solely of mortgage loans at fair value, during the period indicated ($ in thousands):
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Three months ended September 30, 2019Nine months ended September 30, 2019
Mortgage loans at fair value based on Level 3 inputs, beginning balance$4,372 $8,072 
Net gain (loss) on mortgage loans(1,759)12 
Mortgage loan dispositions, resolutions and payments1,355 (405)
Real estate tax advances to borrowers36 65 
Transfer of mortgage loans to real estate owned, net(391)(4,131)
Transfers out of Level 3(3,613)(3,613)
Mortgage loans at fair value based on Level 3 inputs, ending balance$ $ 


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5. 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 and other REO properties 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, 2020, the average annualized interest rate on borrowings under our repurchase and loan agreements was 3.45%, excluding amortization of deferred debt issuance costs and loan discounts.

The following table sets forth data with respect to our repurchase and loan agreements as of September 30, 2020 and December 31, 2019 ($ in thousands):
Maturity DateInterest RateAmount OutstandingMaximum Borrowing CapacityAmount of Available FundingBook Value of Collateral
September 30, 2020
CS Repurchase Agreement6/29/2021
1-month LIBOR + 3.50%
(1)$118,549 $200,000 $81,451 $125,834 
HOME II Loan Agreement11/9/2020(2)
1-month LIBOR + 2.10%
(3)83,270 83,270  96,207 
HOME III Loan Agreement11/9/2020(2)
1-month LIBOR + 2.10%
(3)89,149 89,149  106,619 
HOME IV Loan Agreement (A)12/9/2022
4.00%
114,201 114,201  139,095 
HOME IV Loan Agreement (B)12/9/2022
4.00%
114,590 114,590  139,983 
Term Loan Agreement4/6/2022
5.00%
99,782 99,782  108,820 
FYR SFR Loan Agreement9/1/2028
4.65%
508,700 508,700  566,466 
MS Loan Agreement12/7/2023
1-month LIBOR + 1.80%
(4)504,545 504,545  584,202 
Amherst Promissory Note5/4/2022
1-month LIBOR + 5.00%
 20,000 20,000  
1,632,786 $1,734,237 $101,451 $1,867,226 
Less: unamortized loan discounts(2,684)
Less: deferred debt issuance costs(9,134)
$1,620,968 
December 31, 2019
CS Repurchase Agreement2/15/2020
1-month LIBOR + 2.30%
$109,002 $250,000 $140,998 $111,593 
Nomura Loan Agreement4/3/2020
1-month LIBOR + 2.30%
33,671 250,000 216,329 38,423 
HOME II Loan Agreement11/9/2020
1-month LIBOR + 2.10%
83,270 83,270  98,150 
HOME III Loan Agreement11/9/2020
1-month LIBOR + 2.10%
89,150 89,150  108,860 
HOME IV Loan Agreement (A)12/9/2022
4.00%
114,201 114,201  141,787