Notes to Condensed Consolidated Financial Statements
September 30, 2018
(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 currently 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 4
for additional details of the AMA.
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
2017
Annual Report on Form 10-K, which was filed with the SEC on March 1, 2018.
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 may potentially cause us 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. Accordingly, 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 a change of control 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 the holder's termination of service with the Company for any reason. At
September 30, 2018
and December 31, 2017, we had
800
and
900
shares outstanding, respectively, and we included the redemption value of these shares of
$8,000
and
$9,000
, respectively, within accounts payable and accrued liabilities in our condensed consolidated balance sheets. In February 2018, our Board of Directors declared and paid an aggregate of
$0.9 million
of dividends on these shares of preferred stock, and in March 2017, our Board of Directors declared and paid an aggregate of
$0.6 million
of dividends on these shares of preferred stock. Such dividends are included in salaries and employee benefits in our condensed consolidated statements of operations.
Revenue recognition
Under the AMA, we administer Front Yard's business activities and day-to-day operations and provide corporate governance services to Front Yard. The base management fees are earned by us ratably throughout the applicable quarter and are based on a percentage of Front Yard's average invested capital (as defined in the AMA). In the event that Front Yard's performance exceeds certain hurdles, we would be entitled to an incentive management fee based on a percentage of Front Yard's earnings in excess of such hurdle (see
Note 4
).
We have evaluated the nature of the services provided to Front Yard and have determined that such services constitute a series of distinct services that should be accounted for as a single performance obligation completed over time, which is simultaneously performed by us and consumed by Front Yard. Therefore, base management fees and incentive management fees, if any, are earned ratably over the applicable fiscal quarter.
We also receive conversion fees based on a percentage of the fair value of properties that become rented for the first time in each quarter. Such conversion fees are earned by us in the quarter that the conversion to rentals occurs. In addition, we receive expense reimbursements from Front Yard 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. These expense reimbursements are earned by us at the time the underlying expense is incurred.
We have determined that each of the above-described components of our revenues derived from the AMA are variable consideration, and we recognize each component of this revenue on a quarterly basis up to the amount that would likely not be reversed.
Recently issued accounting standards
Adoption of recent accounting standards
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Compensation - Stock Compensation (Topic 718). The amendments in ASU 2018-07 expand the scope of the employee share-based payments guidance to include share-based payments issued to non-employees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This ASU is effective for fiscal years after December 15, 2018, including interim periods within that fiscal year. The Company has adopted the provisions of ASU 2018-07 effective April 1, 2018. This adoption had no significant effect on our condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). The amendments in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company has adopted the provisions of ASU 2017-09 effective January 1, 2018. This adoption had no significant effect on our condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under Topic 230. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The amendments in ASU 2016-15 should be applied on a modified retrospective transition basis. The Company has adopted the provisions of ASU 2016-15 effective January 1, 2018. This adoption had no significant effect on our condensed consolidated financial statements.
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.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which effectively delayed the adoption date of ASU 2014-09 by one year. In 2016 and 2017, the FASB issued accounting standards updates that amended several aspects of ASU 2014-09. ASU 2014-09, as amended, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Management performed an analysis of the AMA (our sole source of revenue within the scope of ASU 2014-09) and the related compensation and service obligations performed
pursuant to the AMA. The Company determined that its policy for recognition of management fees, conversion fees and expense reimbursements prior to our adoption is consistent with the updated revenue recognition requirements of ASU 2014-09, as amended. Therefore, our adoption of ASU 2014-09 effective January 1, 2018 had no significant impact on our previous or current revenue recognition practices. As a result, our application of the modified retrospective method of adoption resulted in no cumulative adjustment effective January 1, 2018.
Recently issued accounting standards not yet adopted
In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendment modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The revised guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. Companies are permitted to early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
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. 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. Early adoption is permitted. 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 are currently evaluating the impact of this ASU on our consolidated financial statements. Upon adoption, we expect to recognize a right-of-use asset and a related lease liability on our consolidated balance sheet for the leases we currently classify as operating leases.
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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Level 1
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Level 2
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Level 3
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Carrying Amount
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Quoted Prices in Active Markets
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Observable Inputs Other Than Level 1 Prices
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Unobservable Inputs
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September 30, 2018
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Recurring basis (assets):
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Front Yard common stock
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$
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17,625
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$
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17,625
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$
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—
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$
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—
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December 31, 2017
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Recurring basis (assets):
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Front Yard common stock
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$
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19,266
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$
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19,266
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$
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—
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$
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—
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We did not transfer any assets from one level to another level during the
nine months ended September 30, 2018
or during the year ended
December 31, 2017
.
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
September 30, 2018
and
December 31, 2017
, 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. We recorded dividends on Front Yard's common stock of
$0.2 million
and
$0.7 million
during the
three and nine months ended September 30, 2018
, respectively, and we recorded dividends on Front Yard's common stock of
$0.2 million
and
$0.7 million
during the
three and nine months ended September 30, 2017
, respectively.
The following table presents the cost basis and fair value of our holdings in Front Yard's common stock as of the dates indicated ($ in thousands):
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Cost
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Gross Unrealized Gains
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Gross Unrealized Losses
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Fair Value
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September 30, 2018
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Front Yard common stock
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$
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20,596
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$
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—
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$
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2,971
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$
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17,625
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December 31, 2017
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Front Yard common stock
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$
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20,596
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$
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—
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$
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1,330
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$
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19,266
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3
.
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, 2017. 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:
City of Cambridge Retirement System v. Altisource Asset Management Corp., et al.
On January 16, 2015, a putative shareholder class action complaint was filed in the United States District Court of the Virgin Islands by a purported shareholder of AAMC under the caption
City of Cambridge Retirement System v. Altisource Asset Management Corp., et al.
, 15-cv-00004. The action names as defendants AAMC, our former Chairman, William C. Erbey, and certain officers of AAMC and alleges that the defendants violated federal securities laws by failing to disclose material information to AAMC shareholders concerning alleged conflicts of interest held by Mr. Erbey with respect to AAMC’s relationship and transactions with Front Yard, Altisource Portfolio Solutions S.A., Home Loan Servicing Solutions, Ltd., Southwest Business Corporation, NewSource Reinsurance Company and Ocwen Financial Corporation, including allegations that the defendants failed to disclose (i) the nature of relationships between Mr. Erbey, AAMC and those entities; and (ii) that the transactions were the result of an allegedly unfair process from which Mr. Erbey failed to recuse himself. 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. AAMC and Mr. Erbey are the only defendants who have been served with the complaint.
On May 12, 2015, the court entered an order granting the motion of Denver Employees Retirement Plan to be lead plaintiff, and lead plaintiff filed an amended complaint on June 19, 2015.
AAMC and Mr. Erbey filed a motion to dismiss the amended complaint for failure to state a claim upon which relief can be granted, and on April 6, 2017, the Court issued an opinion and order granting defendants’ motion to dismiss.
On May 1, 2017, Plaintiff filed a motion for leave to amend the complaint and, at the same time, filed a proposed first amended consolidated complaint. AAMC and Mr. Erbey opposed the motion, and on July 5, 2017, the Court issued an opinion and order denying with prejudice the motion of the Plaintiff for leave to file the first amended consolidated complaint.
On July 7, 2017, Plaintiff filed a notice of appeal with the Third Circuit Court of Appeals with respect to the federal district court's April 6, 2017 memorandum and order granting Defendants’ motion to dismiss, the April 6, 2017 order granting Defendants’ motion to dismiss and the July 5, 2017 order denying with prejudice Plaintiff’s motion for leave to file the first amendment consolidated complaint in the matter. On September 18, 2017, Appellant filed its appeal brief, and briefing on the appeal motion was completed on November 15, 2017.
On May 24, 2018, the parties made oral arguments with respect to the briefs in response to the Plaintiff’s appeal of our successful motions to dismiss in the U.S. Court of Appeals for the Third Circuit.
We believe the amended complaint is without merit. At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
Kanga v. Altisource Asset Management Corporation, et al.
On March 12, 2015, a shareholder derivative action was filed in the Superior Court of the Virgin Islands, Division of St. Croix, by a purported shareholder of AAMC under the caption
Nanzeen Kanga v. William Erbey, et al.
, SX-15-CV-105. The action names as defendants William C. Erbey and each of the current and former members of AAMC's Board of Directors and alleges that Mr. Erbey and AAMC’s directors breached fiduciary duties in connection with the disclosures that are the subject of the City of Cambridge Retirement System case described above and certain other matters involving the relationship of Front Yard and AAMC.
On May 15, 2015, the plaintiff and the defendants filed an agreed motion to stay the action until the earliest of any of the following events: (i) the
City of Cambridge Retirement System
action is dismissed with prejudice; (ii) any of the defendants in the
City of Cambridge Retirement System
action file an answer in that action; and (iii) defendants do not move to stay any later-filed derivative action purportedly brought on behalf of us arising from similar facts as the Kanga action and relating to the same time frame or such motion to stay is denied.
At this time, we are not able to predict the ultimate outcome of this matter, nor can we estimate the range of possible loss, if any.
4
.
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 all 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 the renovation, leasing and property management of Front Yard's SFR properties performed by its property managers; (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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•
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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
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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.
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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 for the
third quarter
of
2018
because Front Yard's return on invested capital (as defined in the AMA) was below the cumulative required hurdle rate. As of
September 30, 2018
, Front Yard's aggregate return shortfall under the AMA was approximately
40.68%
of invested capital. As each quarter with a shortfall rolls off the trailing
seven
quarters, the aggregate shortfall will change by the difference in the quarter that rolls off versus the most recently completed quarter.
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.
If the AMA were terminated by Front Yard, our financial position and future prospects for revenues and growth would be materially adversely affected.
Common Stock Repurchased from Luxor
On March 23, 2017, we completed the repurchase of an aggregate of
50,000
shares of common stock from an affiliated fund of Luxor Capital Partners Group (“Luxor”) in a block trade at a price of
$52.50
per share, or an aggregate of
$2.6 million
, pursuant to our previously reported
$300.0 million
stock repurchase program. Luxor may be considered a related party of the Company because a Luxor partner is a member of our Board of Directors. Following the transaction, the Company now holds the acquired shares as treasury shares.
5
.
Share-Based Payments
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 units will vest in three equal annual installments on each of February 20, 2019, 2020 and 2021, subject to forfeiture or acceleration.
On March 7, 2017, we granted
20,205
shares of restricted stock to members of management with a weighted average grant date fair value of
$78.58
per share. The restricted stock units vest in three equal annual installments, the first of which occurred on March 7, 2018 with the remaining installments vesting in March 2019 and 2020, 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. No dividends are paid on the shares until the award is issued. During the
nine months ended September 30, 2018
and
2017
, we granted
1,866
and
2,001
shares of restricted stock, respectively, to our Directors, with a weighted average grant date fair value per share of
$64.30
and
$89.93
, respectively.
We recorded
$1.1 million
and
$3.7 million
of compensation expense related to our grants of restricted stock for the
three and nine months ended September 30, 2018
, respectively, and we recorded
$1.7 million
and
$5.7 million
of compensation expense related to our grants of restricted stock for the
three and nine months ended September 30, 2017
, respectively. As of
September 30, 2018
and December 31,
2017
, we had an aggregate
$2.5 million
and
$4.5 million
, respectively, of total unrecognized share-based compensation cost to be recognized over a weighted average remaining estimated term of
1.0 year
and
1.2 years
, respectively.
6
.
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
September 30, 2018
and December 31,
2017
, we accrued
no
interest or penalties associated with any unrecognized tax benefits, nor did we recognize any interest expense or penalty during the
nine months ended September 30, 2018
and
2017
.
The following table sets forth the components of our deferred tax assets:
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September 30, 2018
|
|
December 31, 2017
|
Deferred tax assets:
|
|
|
|
|
Stock compensation
|
|
$
|
415
|
|
|
$
|
374
|
|
Accrued expenses
|
|
480
|
|
|
550
|
|
Available-for-sale securities
|
|
379
|
|
|
307
|
|
Net operating losses
|
|
96
|
|
|
114
|
|
Other
|
|
34
|
|
|
29
|
|
|
|
1,404
|
|
|
1,374
|
|
Deferred tax liability:
|
|
|
|
|
Depreciation
|
|
9
|
|
|
14
|
|
|
|
1,395
|
|
|
1,360
|
|
Valuation allowance
|
|
(905
|
)
|
|
(828
|
)
|
Deferred tax asset, net
|
|
$
|
490
|
|
|
$
|
532
|
|
7
.
Earnings Per Share
The following table sets forth the components of diluted earnings (loss) per share (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
Net loss
|
$
|
(1,155
|
)
|
|
$
|
(2,125
|
)
|
|
$
|
(6,586
|
)
|
|
(5,185
|
)
|
Amortization of preferred stock issuance costs
|
(52
|
)
|
|
(52
|
)
|
|
(155
|
)
|
|
(155
|
)
|
Numerator for basic and diluted EPS – loss attributable to common stockholders
|
$
|
(1,207
|
)
|
|
$
|
(2,177
|
)
|
|
$
|
(6,741
|
)
|
|
$
|
(5,340
|
)
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Weighted average common stock outstanding – basic
|
1,613,413
|
|
|
1,574,822
|
|
|
1,609,932
|
|
|
1,562,056
|
|
Weighted average common stock outstanding – diluted
|
1,613,413
|
|
|
1,574,822
|
|
|
1,609,932
|
|
|
1,562,056
|
|
|
|
|
|
|
|
|
|
Loss per basic common share
|
$
|
(0.75
|
)
|
|
$
|
(1.38
|
)
|
|
$
|
(4.19
|
)
|
|
$
|
(3.42
|
)
|
Loss per diluted common share
|
$
|
(0.75
|
)
|
|
$
|
(1.38
|
)
|
|
$
|
(4.19
|
)
|
|
$
|
(3.42
|
)
|
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 September 30,
|
|
Nine months ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
Reversal of amortization of preferred stock issuance costs
|
$
|
52
|
|
|
$
|
52
|
|
|
$
|
155
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
Stock options
|
21,194
|
|
|
40,310
|
|
|
24,109
|
|
|
66,235
|
|
Restricted stock
|
47,888
|
|
|
40,311
|
|
|
37,698
|
|
|
40,537
|
|
Preferred stock, if converted
|
200,000
|
|
|
200,000
|
|
|
200,000
|
|
|
200,000
|
|
8
.
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.
9
.
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.