The current real estate market should be good news for companies in the business of single-family home rentals. After all, Invitation Homes (NYSE: INVH), the leader in the space, is launching a joint venture with Rockpoint Group to acquire more homes. Its competitor American Homes 4 Rent (NYSE: AMH) is also well-positioned for rapid growth. However, the third competitor in this category, Front Yard Residential Corporation (NYSE: RESI), is facing some unhappy investors.
Front Yard is a distant third when it comes to single-family home rentals with a portfolio of nearly 15,000 homes compared to the over 80,000 owned by Invitation Homes. It has a market cap of just around $587 million while its competitors have market caps in the billions. On the surface, the company seems to be doing relatively well.
In its most recent announcement at the beginning of September, it reported that August collections were strong and its stabilized rental leased percentage was at 98.8%. CEO George Ellison expressed confidence, saying, "August was another excellent month for Front Yard as key operating metrics improved further from already strong levels."
On Oct. 7, William Erbey, an investor and the founder and former CEO of Ocwen Financial (NYSE: OCN), issued a public letter asking the company's board of directors to liquidate the company in order to provide value to the shareholders. This type of strategy to draw attention to a company's issues is not uncommon. Front Yard is a spin-off of Altisource Portfolio Solutions (NASDAQ: ASPS) where Erbey was once the chairman of the board, stepping down at the end of 2014.
Following Erbey's public letter, Altisource itself, which maintains a 5.9% stake in the company, sent an email to Mortgage Professional America agreeing with Erbey that Front Yard's net asset value should be at least $20 to $21 per share and that liquidation was the best course of action.
Are they right?
In May 2020, Front Yard and Amherst Residential terminated plans for a merger that would have had Amherst acquiring Front Yard at $12.50 per share (the stock currently trades around under $10 a share). As part of the termination, Amherst paid a $25 million termination fee to Front Yard and purchased 4.4 million shares of Front Yard common stock at $12.50 per share, as well as offering a $20 million committed two-year unsecured loan facility to Front Yard. Front Yard in turn terminated its management relationship with Altisource Asset Management (NYSEMKT: AAMC) as it transitions from an externally managed REIT to an internally managed one. It paid a $46 million termination fee.
During the second-quarter earnings call, CEO George Ellison reflected a cautious optimism. He talked about the high demand for single-family rentals due to COVID-19 and stated that he believes that turnover in rentals will remain lower in the short term. During that quarter, Front Yard brought in $55.1 million in rental revenue. Its core funds from operations were $10 million, or $0.18 per share, up from $0.13 a year ago.
The Millionacres bottom line
There's no denying that Front Yard is a weak performer compared to its competitors. Despite the opportunities in the single-family rental market, It has suspended its dividend and is facing over $100 million in debt coming due within the next year.
While the investors may not be right that the company needs to liquidate in order to offer value to its shareholders quite yet, there are enough question marks to make this one a high risk for investors looking to capitalize on its low share price.