Notes to Condensed Consolidated Financial Statements
March 31, 2019
(Unaudited)
1
.
Organization and Basis of Presentation
Altisource Asset Management Corporation (“we,” “our,” “us,” or the “Company”) was incorporated in the U.S. Virgin Islands (“USVI”) on March 15, 2012 (our “inception”) and commenced operations on December 21, 2012. Our primary business is to provide asset management and corporate governance services to institutional investors. We have been a registered investment adviser under Section 203(c) of the Investment Advisers Act of 1940 since October 2013.
Our primary client is Front Yard Residential Corporation (“Front Yard”), a public real estate investment trust (“REIT”) focused on acquiring and managing quality, affordable single-family rental (“SFR”) properties throughout the United States. All of our revenue for all periods presented was generated through our asset management agreement (the “AMA”) with Front Yard.
On March 31, 2015, we entered into the AMA, under which we are the exclusive asset manager for Front Yard for an initial term of
15
years from April 1, 2015, with
two
potential
five
-year extensions. The AMA provides for a fee structure in which we are entitled to a base management fee, an incentive management fee and a conversion fee for mortgage loans and real estate owned (“REO”) properties that become rental properties for the first time during each quarter. Accordingly, our operating results continue to be highly dependent on Front Yard's operating results. See
Note 5
for additional details of the AMA.
On May 7, 2019, we amended and restated the AMA with Front Yard. See Note 10 for additional details.
Since we are heavily reliant on revenues earned from Front Yard, investors may obtain additional information about Front Yard in its Securities and Exchange Commission (“SEC”) filings, including, without limitation, Front Yard’s financial statements and other important disclosures therein, available at http://www.sec.gov and http://ir.frontyardresidential.com/financial-information.
Basis of presentation and use of estimates
The accompanying unaudited 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 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 from those estimates.
Preferred stock
Issuance of Series A Convertible Preferred Stock in 2014 Private Placement
During the first quarter of 2014, we issued
250,000
shares of convertible preferred stock for
$250.0 million
(“Series A Preferred Stock”) to institutional investors. All of the outstanding shares of Series A Preferred Stock are redeemable by us in March 2020, the sixth anniversary of the date of issuance, and every
five
years thereafter. On these same redemption dates, each holder of Series A Preferred Stock has the option to redeem all the shares of Series A Preferred Stock held by such holder at a redemption
price equal to
$1,000
per share from funds legally available therefor. The Series A Preferred Stock certificate of designations further provides that we may redeem the shares of Series A Preferred Stock, whether at our option or at the option of the holders, only out of funds legally available therefor. If holders of the Series A Preferred Stock were to exercise their option to require us to redeem the Series A Preferred Stock at a time when we do not have funds legally available to make the related redemption payment, our obligation to make such payment at such time would be limited to the funds legally available therefor. Due to the redemption provisions of the Series A Preferred Stock, we classify these shares as mezzanine equity, outside of permanent stockholders' equity.
The holders of Series A Preferred Stock are not entitled to receive dividends with respect to the Series A Preferred Stock. The shares of Series A Preferred Stock are convertible into shares of our common stock at a conversion price of
$1,250
per share (or an exchange ratio of
0.8
shares of common stock for each share of Series A Preferred Stock), subject to certain anti-dilution adjustments.
Upon certain change of control transactions or upon the liquidation, dissolution or winding up of the Company, holders of the Series A Preferred Stock will be entitled to receive an amount in cash per Series A Preferred Stock equal to the greater of:
(i)
$1,000
plus the aggregate amount of cash dividends paid on the number of shares of common stock into which such shares of Series A Preferred Stock was convertible on each ex-dividend date for such dividends; and
(ii) the number of shares of common stock into which the Series A Preferred Stock is then convertible multiplied by the then current market price of the common stock.
The Series A Preferred Stock confers no voting rights to holders, except with respect to matters that materially and adversely affect the voting powers, rights or preferences of the Series A Preferred Stock or as otherwise required by applicable law.
With respect to the distribution of assets upon the liquidation, dissolution or winding up of the Company, the Series A Preferred Stock ranks senior to our common stock and on parity with all other classes of preferred stock that may be issued by us in the future.
The Series A Preferred Stock is recorded net of issuance costs, which are being amortized on a straight-line basis through the first potential redemption date in March 2020.
2016 Employee Preferred Stock Plan
On May 26, 2016, the 2016 Employee Preferred Stock Plan (the “Employee Preferred Stock Plan”) was approved by our stockholders. Pursuant to the Employee Preferred Stock Plan, the Company may grant one or more series of non-voting preferred stock, par value
$0.01
per share in the Company to induce certain employees to become employed and remain employees of the Company in the USVI, and any of its future USVI subsidiaries, to encourage ownership of shares in the Company by such USVI employees and to provide additional incentives for such employees to promote the success of the Company’s business.
Pursuant to our stockholder approval of the Employee Preferred Stock Plan, on December 29, 2016, the Company authorized
14
additional series of preferred stock of the Company, consisting of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock, Series J Preferred Stock, Series K Preferred Stock, Series L Preferred Stock, Series M Preferred Stock, Series N Preferred Stock and Series O Preferred Stock, and each series shall consist of up to an aggregate of
1,000
shares.
We have issued shares of preferred stock under the Employee Preferred Stock Plan to certain of our USVI employees. These shares of preferred stock are mandatorily redeemable by us in the event of such employee's termination of service with the Company for any reason. At
March 31, 2019
and December 31,
2018
, we had
1,000
and
800
shares outstanding, respectively, and we included the redemption value of these shares of
$10,000
and
$8,000
, respectively, within accounts payable and accrued liabilities in our condensed consolidated balance sheets. In February 2019 and 2018, our Board of Directors declared and paid an aggregate of
$1.1 million
and
$0.9 million
, respectively, of dividends on these shares of preferred stock. Such dividends are included in salaries and employee benefits in our condensed consolidated statements of operations.
Recently issued accounting standards
Adoption of recent accounting standards
In February 2016, the FASB issued 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 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 is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within those fiscal years. The amendments in ASU 2016-02 should be applied on a modified retrospective transition basis, and a number of practical expedients may apply. These practical expedients relate 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. We adopted this standard as of January 1, 2019 when the standard became effective and was required to be adopted. Consistent with the standard, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. As mentioned above, the new standard provides a number of optional practical expedients in transition. 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 that qualify; as a result, we will not recognize right-of-use assets or lease liabilities for leases with a term of less than 12 months at inception. Upon our adoption of this standard, we recognized operating lease right-of-use assets of
$2.8 million
, lease liabilities of
$2.8 million
and a cumulative-effect adjustment to retained earnings of
$(0.1) million
. We have also provided the required incremental disclosures about our leasing activities on a prospective basis in
Note 3
.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10). ASU 2016-01 requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). Our adoption of ASU 2016-01 effective January 1, 2018 resulted in a cumulative-effect adjustment to our balance sheet of
$1.3 million
to reclassify our accumulated other comprehensive loss to retained earnings, and thereafter we record the impact of changes in the fair value of our Front Yard common stock during the current period through profit and loss. Periods ending prior to the adoption were not impacted.
2
.
Fair Value of Financial Instruments
The following table sets forth the carrying amount and the fair value of the Company's financial assets by level within the fair value hierarchy as of the dates indicated ($ in thousands):
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|
|
|
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|
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Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying Amount
|
|
Quoted Prices in Active Markets
|
|
Observable Inputs Other Than Level 1 Prices
|
|
Unobservable Inputs
|
March 31, 2019
|
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|
|
|
|
|
|
Recurring basis (assets):
|
|
|
|
|
|
|
|
Front Yard common stock
|
$
|
15,059
|
|
|
$
|
15,059
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Recurring basis (assets):
|
|
|
|
|
|
|
|
Front Yard common stock
|
$
|
14,182
|
|
|
$
|
14,182
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We did not transfer any assets from one level to another level during the
three months ended March 31, 2019
or during the year ended
December 31, 2018
.
The fair value of our holdings in Front Yard common stock is based on unadjusted quoted prices from active markets.
We held
1,624,465
shares of Front Yard's common stock at each of
March 31, 2019
and
December 31, 2018
, representing approximately
3.0%
of Front Yard's then-outstanding common stock at each date. All of our shares of Front Yard's common stock were acquired in open market transactions.
The following table presents the cost basis and fair value of our holdings in Front Yard's common stock as of the dates indicated ($ in thousands):
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Cost
|
|
Gross Unrealized Gains
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|
Gross Unrealized Losses
|
|
Fair Value
|
March 31, 2019
|
|
|
|
|
|
|
|
Front Yard common stock
|
$
|
20,596
|
|
|
$
|
—
|
|
|
$
|
5,537
|
|
|
$
|
15,059
|
|
|
|
|
|
|
|
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|
December 31, 2018
|
|
|
|
|
|
|
|
Front Yard common stock
|
$
|
20,596
|
|
|
$
|
—
|
|
|
$
|
6,414
|
|
|
$
|
14,182
|
|
3
.
Leases
We lease office space under various operating leases. We currently occupy office space in Christiansted, U.S. Virgin Islands; Charlotte, North Carolina; College Station, Texas; George Town, Cayman Islands; and Bengaluru, India. Our office leases are generally for terms of
one
to
five
years and typically 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, taxes and insurance, each of which vary from period to period and are therefore expensed as incurred.
As of
March 31, 2019
, our weighted average remaining lease term, including applicable extensions, was
9.3
years. We applied a discount rate of
7.0%
to our office leases. We determine the discount rate for each lease to be either the discount rate stated in the lease agreement or our estimated rate that we would be charged to finance real estate assets.
During the
three months ended March 31, 2019
, our operating leases resulted in rent expense of
$0.1 million
related to long-term leases and
$0.1 million
related to short-term leases, all of which we include as a component of general and administrative expenses.
The following table presents a maturity analysis of our operating leases as of
March 31, 2019
($ in thousands):
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Operating Lease Liabilities
|
2019 (1)
|
$
|
264
|
|
2020
|
364
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|
2021
|
376
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|
2022
|
393
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|
2023
|
412
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|
Thereafter
|
2,071
|
|
Total lease payments
|
3,880
|
|
Less: interest
|
1,072
|
|
Lease liabilities
|
$
|
2,808
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|
_____________
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|
(1)
|
Excludes the
three months ended March 31, 2019
.
|
On March 12, 2019, we entered into a lease agreement for office space in Charlotte, North Carolina. This lease is expected to commence in the third quarter of 2019 and has an initial term of
five
years and a renewal option for an additional
five
year term. Monthly base rental payments during the first year are
$21,867
, plus common area maintenance and other charges customary with this type of lease, and the base rental payments will increase by approximately
3%
each year thereafter. Upon
commencement, we expect to record an operating lease right-of-use asset and a related lease liability of approximately
$1.9 million
.
4
.
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 unfavorable outcome is probable and the amount of loss can be reasonably estimated. We do not currently have any reserves for our legal proceedings. The following updates and restates the description of the previously reported matters:
Erbey Holding Corporation et al. v. Blackrock Management Inc., et al.
On April 12, 2018, a partial stockholder derivative action was filed in the Superior Court of the Virgin Islands, Division of St. Croix under the caption Erbey Holding Corporation, et al. v. Blackrock Financial Management Inc., et al. The action was filed by Erbey Holding Corporation (“Erbey Holding”), John R. Erbey Family Limited Partnership (“JREFLP”), by its general partner Jupiter Capital, Inc., Salt Pond Holdings, LLC (“Salt Pond”), Munus, L.P. (“Munus”), Carisma Trust (“Carisma”), by its trustee, Venia, LLC, and Tribue Limited Partnership (collectively, the “Plaintiffs”) each on its own behalf and Salt Pond and Carisma derivatively on behalf of AAMC. The action was filed against Blackrock Financial Management, Inc., Blackrock Investment Management, LLC, Blackrock Investments, LLC, Blackrock Capital Management, Inc., Blackrock, Inc. (collectively, “Blackrock”), Pacific Investment Management Company LLC, PIMCO Investments LLC (collectively, “PIMCO”) and John and Jane Does 1-10 (collectively with Blackrock and PIMCO, the “Defendants”). The action alleges a conspiracy by Blackrock and PIMCO to harm Ocwen and AAMC and certain of their subsidiaries, affiliates and related companies and to extract enormous profits at the expense of Ocwen and AAMC by attempting to damage their operations, business relationships and reputations. The complaint alleges that Defendants’ conspiratorial activities, which included short-selling activities, were designed to destroy Ocwen and AAMC, and that the Plaintiffs (including AAMC) suffered significant injury, including but not limited to lost value of their stock and/or stock holdings. The action seeks, among other things, an award of monetary damages to AAMC, including treble damages under Section 605, Title IV of the Virgin Islands Code related to the Criminally Influenced and Corrupt Organizations Act, punitive damages and an award of attorney’s and other fees and expenses.
On January 18, 2019, plaintiffs and AAMC filed a motion for leave to file a second amended verified complaint to include AAMC as a direct plaintiff, rather than as a derivative party. On February 8, 2019, the Defendants Blackrock and PIMCO each filed an opposition to the motion for leave to amend. Plaintiffs’ filed their reply brief on March 1, 2019. On March 27, 2019, the Court held oral argument on Defendants' motions to dismiss the first amended verified complaint and Plaintiffs' motion for leave to file the second amended verified complaint.
At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible damages to be awarded to AAMC, if any. We have determined that there is no contingent liability related to this matter for AAMC.
5
.
Related Party Transactions
Asset management agreement with Front Yard
Pursuant to our AMA, we design and implement Front Yard's business strategy, administer its business activities and day-to-day operations and provide corporate governance services, subject to oversight by Front Yard's Board of Directors. We are responsible for, among other duties: (1) performing and administering certain of Front Yard's day-to-day operations; (2) defining investment criteria in Front Yard's investment policy in cooperation with its Board of Directors; (3) sourcing, analyzing and executing asset acquisitions, including the related financing activities; (4) overseeing Front Yard's renovation, leasing and property management of its SFR properties; (5) analyzing and executing sales of REO properties and residential mortgage loans; (6) overseeing the servicing of Front Yard's residential mortgage loan portfolios; (7) performing asset management duties and (8) performing corporate governance and other management functions, including financial, accounting and tax management services.
We provide Front Yard with a management team and support personnel who have substantial experience in the acquisition and management of residential properties and residential mortgage loans. Our management also has significant corporate governance experience that enables us to manage Front Yard's business and organizational structure efficiently. We have agreed
not to provide the same or substantially similar services without the prior written consent of Front Yard's Board of Directors to any business or entity competing against Front Yard in (a) the acquisition or sale of SFR and/or REO properties, non-performing and re-performing mortgage loans or other similar assets; (b) the carrying on of an SFR business or (c) any other activity in which Front Yard engages. Notwithstanding the foregoing, we may engage in any other business or render similar or different services to any businesses engaged in lending or insurance activities or any other activity other than those described above. Further, at any time following Front Yard's determination and announcement that it will no longer engage in any of the above-described competitive activities, we would be entitled to provide advisory or other services to businesses or entities in such competitive activities without Front Yard's prior consent.
On March 31, 2015, we entered into the AMA with Front Yard. The AMA, which became effective on April 1, 2015, provides for the following management fee structure:
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•
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Base Management Fee
. We are entitled to a quarterly base management fee equal to
1.5%
of the product of (i) Front Yard’s average invested capital (as defined in the AMA) for the quarter
multiplied by
(ii)
0.25
, while it has fewer than
2,500
single-family rental properties actually rented (“Rental Properties”). The base management fee percentage increases to
1.75%
of average invested capital while Front Yard has between
2,500
and
4,499
Rental Properties and increases to
2.0%
of invested capital while Front Yard has
4,500
or more Rental Properties;
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•
|
Incentive Management Fee
. We are entitled to a quarterly incentive management fee equal to
20%
of the amount by which Front Yard's return on invested capital (based on AFFO, defined as net income attributable to holders of common stock calculated in accordance with GAAP
plus
real estate depreciation expense
minus
recurring capital expenditures on all real estate assets owned by Front Yard) exceeds 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 Front Yard has an aggregate shortfall in its return rate over the previous seven quarters, that aggregate return rate shortfall gets added to the normal quarterly return hurdle for the next quarter before we are entitled to an incentive management fee. The incentive management fee increases to
22.5%
while Front Yard has between
2,500
and
4,499
Rental Properties and increases to
25%
while Front Yard has
4,500
or more Rental Properties. Front Yard has the flexibility to pay up to
25%
of the incentive management fee to us in shares of its common stock; and
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•
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Conversion Fee
. We are entitled to a quarterly conversion fee equal to
1.5%
of assets converted into leased single-family homes by Front Yard for the first time during the applicable quarter.
|
Because Front Yard has more than
4,500
Rental Properties, we are entitled to receive a base management fee of
2.0%
of Front Yard’s invested capital and a potential incentive management fee percentage of
25%
of the amount by which Front Yard exceeds its then-required return on invested capital threshold.
No
incentive management fee under the AMA has been earned by us to date because Front Yard's return on invested capital (as defined in the AMA) has been below the cumulative required hurdle rate.
Under the AMA, Front Yard reimburses us for the compensation and benefits of the General Counsel dedicated to Front Yard and certain other out-of-pocket expenses incurred on Front Yard's behalf.
The AMA requires that we are the exclusive asset manager for Front Yard for an initial term of
15
years from April 1, 2015, with
two
potential
five
-year extensions, subject to Front Yard achieving an average annual return on invested capital of at least
7.0%
. Front Yard's termination rights under the AMA are significantly limited. Neither party is entitled to terminate the AMA prior to the end of the initial term, or each renewal term, other than termination by (a) us and/or Front Yard “for cause” for certain events such as a material breach of the AMA and failure to cure such breach, (b) Front Yard for certain other reasons such as its failure to achieve a return on invested capital of at least
7.0%
for
two
consecutive fiscal years after the third anniversary of the AMA or (c) Front Yard in connection with certain change of control events.
On May 7, 2019, we amended and restated the AMA with Front Yard to, among other things, amend the management fee structure to prioritize Front Yard's funds from operations, provide an aggregate fee cap to control Front Yard's general and administrative expenses as it grows and change the termination provisions of the AMA to provide more flexibility to Front Yard and add clarity to the termination fees payable upon termination. See Note 10 for additional details.
If we were terminated as asset manager by Front Yard, our financial position and future prospects for revenues and growth would be materially adversely affected.
6
.
Share-Based Payments
On January 23, 2019, we granted
60,329
shares of restricted stock to members of management with a weighted average grant date fair value per share of
$26.68
. The restricted stock units will vest in three equal annual installments on each of January 23, 2020, 2021 and 2022, subject to forfeiture or acceleration.
On February 20, 2018, we granted
25,074
shares of restricted stock to members of management with a weighted average grant date fair value per share of
$64.05
. The restricted stock will vest in three equal annual installments, the first of which occurred on February 20, 2019 with remaining installments vesting in February 2020 and 2021, subject to forfeiture or acceleration.
Our Directors each received annual grants of restricted stock equal to
$60,000
based on the market value of our common stock at the time of the annual stockholders meeting. These shares of restricted stock vest and are issued after a
one
-year service period, subject to each Director attending at least
75%
of the Board and committee meetings.
We recorded
$0.7 million
and
$1.3 million
of compensation expense related to our grants of restricted stock for the three months ended March 31, 2019 and 2018, respectively. As of
March 31, 2019
and December 31,
2018
, we had an aggregate
$2.7 million
and
$1.8 million
, respectively, of total unrecognized share-based compensation cost to be recognized over a weighted average remaining estimated term of
1.5 years
and
1.6 years
, respectively.
7
.
Income Taxes
We are domiciled in the USVI and are obligated to pay taxes to the USVI on our income. We applied for tax benefits from the USVI Economic Development Commission and received our certificate of benefits (the “Certificate”), effective as of February 1, 2013. Pursuant to the Certificate, as long as we comply with its provisions, we will receive a
90%
tax reduction on our USVI-sourced income taxes until 2043.
As of
March 31, 2019
and December 31,
2018
, we accrued
no
interest or penalties associated with any unrecognized tax benefits, nor did we recognize any interest expense or penalty during the
three months ended March 31, 2019
and
2018
.
The following table sets forth the components of our deferred tax assets:
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|
March 31, 2019
|
|
December 31, 2018
|
Deferred tax assets:
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|
|
Stock compensation
|
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$
|
121
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|
|
$
|
199
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|
Accrued expenses
|
|
172
|
|
|
619
|
|
Available-for-sale securities
|
|
1,279
|
|
|
1,482
|
|
Net operating losses
|
|
399
|
|
|
184
|
|
Other
|
|
34
|
|
|
35
|
|
|
|
2,005
|
|
|
2,519
|
|
Deferred tax liability:
|
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|
|
|
Depreciation
|
|
9
|
|
|
10
|
|
|
|
1,996
|
|
|
2,509
|
|
Valuation allowance
|
|
(1,582
|
)
|
|
(1,877
|
)
|
Deferred tax asset, net
|
|
$
|
414
|
|
|
$
|
632
|
|
8
.
Earnings Per Share
The following table sets forth the components of diluted earnings (loss) per share (in thousands, except share and per share amounts):
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|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
Net loss attributable to stockholders
|
$
|
(840
|
)
|
|
$
|
(4,364
|
)
|
Amortization of preferred stock issuance costs
|
(51
|
)
|
|
(51
|
)
|
Numerator for basic and diluted EPS – net loss attributable to common stockholders
|
$
|
(891
|
)
|
|
$
|
(4,415
|
)
|
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|
Denominator
|
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Weighted average common stock outstanding – basic
|
1,582,016
|
|
|
1,603,898
|
|
Weighted average common stock outstanding – diluted
|
1,582,016
|
|
|
1,603,898
|
|
|
|
|
|
Loss per basic common share
|
$
|
(0.56
|
)
|
|
$
|
(2.75
|
)
|
Loss per diluted common share
|
$
|
(0.56
|
)
|
|
$
|
(2.75
|
)
|
We excluded the items presented below from the calculation of diluted earnings per share as they were antidilutive for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2019
|
|
2018
|
Numerator
|
|
|
|
Reversal of amortization of preferred stock issuance costs
|
$
|
51
|
|
|
$
|
51
|
|
|
|
|
|
Denominator
|
|
|
|
Stock options
|
14,180
|
|
|
27,588
|
|
Restricted stock
|
44,043
|
|
|
29,979
|
|
Preferred stock, if converted
|
200,000
|
|
|
200,000
|
|
9
.
Segment Information
Our primary business is to provide asset management and certain corporate governance services to institutional investors. Because all of our revenue is derived from the services we provide to Front Yard under the AMA, we operate as a single segment focused on providing asset management and corporate governance services.
10
.
Subsequent Events
Management has evaluated the impact of all subsequent events through the issuance of these condensed consolidated interim financial statements and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements, except as follows:
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
|
|
◦
|
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
1/4
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.
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 years 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 and four specified employees who are contemplated to become employees of Front Yard after the effective date of the Amended AMA. 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 out-of-pocket 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 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).