Sends Letter to Stockholders Laying Out the Facts and Indisputable
Realities Regarding the Incumbent Board’s Record of Value Destruction,
Strategic Lapses, and Governance Failings
Highlights That the Board has Failed to Assume Any Accountability
for ~$500 Million in Wealth Destruction Since 2015 and Continues to
Devote Stockholder Resources to Mischaracterizing the Company’s Dire
State and Deliberately Misleading Stockholders Regarding Snow Park’s
Interests
Believes That Unlike the Incumbent Directors, the Snow Park Slate
Possesses Public REIT Sector Experience, Single-Family Residential
Market Expertise, and Ownership Perspectives
Urges Front Yard Stockholders to Focus on a Central Question: Are
We Better Off With the Current Board That Has Failed to Develop a Viable
Strategy and Deliver Returns OR a
Reconstituted Board with Fresh Expertise, Impartiality, and a Vision to
Realize NAV?
Reinforces That ALL THREE Proxy Advisory Firms Support Snow Park’s
Campaign for Change and Recommend Stockholders Vote the BLUE Proxy Card
NEW YORK–(BUSINESS WIRE)–Snow Park Capital Partners, LP (together with its affiliates, “Snow
Park” or “we”), a significant long-term stockholder of Front Yard
Residential Corporation (NYSE: RESI) (“Front Yard” or the “Company”),
today sent a letter to stockholders in connection with its nomination of
three highly-qualified, independent director candidates – Leland Abrams,
Lazar Nikolic, and Jeffrey Pierce – for election to the Company’s Board
of Directors (the “Board”) at the upcoming annual meeting on May 23,
2019.
Snow Park reminds stockholders that all three proxy advisory firms –
Institutional Shareholder Services Inc., Glass, Lewis & Co., LLC and
Egan-Jones Proxy Services – have supported its case for change. All
three proxy advisory firms recommend that stockholders vote on the BLUE
proxy card to elect Snow Park’s nominees, who each possess distinct
expertise and relevant qualifications that would enhance Front Yard’s
Board. We urge all stockholders to vote the BLUE
proxy card today FOR Leland Abrams, Lazar Nikolic and Jeffrey
Pierce.
For more information and voting resources, please visit www.RenewRESI.com.
Below is the full text of the letter.
***
May 16, 2019
Dear Fellow Stockholders,
Snow Park Capital Partners, LP (together with its affiliates, “Snow
Park” or “we”) finds it extremely troubling that stockholders of Front
Yard Residential Corporation (“Front Yard” or the “Company”) continue to
receive inaccurate and misleading communications from the Company’s
management and Board of Directors (the “Board”). We also believe it is
egregious that a Board that has presided over approximately $500 million
in value destruction in recent years is unwilling to assume any
accountability or exhibit some level of humility. In our view, this poor
conduct – which has been further punctuated by Front Yard’s recent
willingness to criticize leading proxy advisory firms and disparage
major stockholders – only reinforces that meaningful change is needed in
the boardroom. It is confounding to Snow Park that Front Yard would go
to such great lengths and impugn the Company’s own credibility to
prevent additive expertise and helpful ownership perspectives from
entering the boardroom.
We firmly believe that Front Yard’s baseless campaign to misrepresent
Snow Park’s interests and mischaracterize its slate’s superior director
nominees is nothing more than a smokescreen – one designed to distract
stockholders from the incumbent Board’s track
record of value destruction and the Company’s current poor position.
This unfortunately makes sense, in our view, when considering that the
defining question in this election contest has a clear answer: are
stockholders better off with the incumbent Board that has sat by as the
Company’s share price declined nearly 50% in recent years OR with a
reconstituted Board that includes highly-qualified, independent
directors committed to acting in stockholders’ best interests by
properly overseeing the conflicted chief executive and pursuing a
strategy to realize management’s stated Net Asset Value (“NAV”)? We
contend that when stockholders are able to objectively assess Front
Yard’s history of failures and current structural issues, they will
conclude that our case for immediate Board-level change is valid and
warranted.
In recent days, all three proxy advisory firms – Institutional
Shareholder Services Inc. (“ISS”), Glass, Lewis & Co., LLC (“Glass
Lewis”) and Egan-Jones Proxy Services (“Egan-Jones”) – endorsed our case
for change following their independent and impartial assessments of
Front Yard. We are very pleased that these proxy advisory firms agreed
with Snow Park that the incumbent Board has endorsed and supported a
poorly-executed strategy that has left the Company saddled with an
excessively-leveraged balance sheet, needlessly-bloated operating
expenses, and an inability to generate sufficient income. In addition,
we feel it was extremely important that the Company’s poor governance
policies and Board-level conflicts were each highlighted by these
respected, trusted sources.
Between now and the date of Front Yard’s annual meeting, Snow Park is
committed to ensuring that all of our fellow stockholders have the
unfiltered information necessary to make an informed decision regarding
the future of the Board. The Company is at a crossroads – one that
cannot be concealed by half-truths and misrepresentations.
DESPITE ITS BEST EFFORTS, THE BOARD CANNOT
ESCAPE ITS OWN RECORD OF VALUE DESTRUCTION, STRATEGIC LAPSES AND
GOVERNANCE FAILURES
To illustrate the extent to which Snow Park believes Front Yard is
misleading stockholders about its past and present failings, we have
highlighted a sampling of the Company’s recent misstatements and added
our own data-centric, facts-based responses. We hope this will provide
you with a sense of how our nominees would work to challenge the status
quo and instill accountability at Front Yard henceforth.
Misleading Claim #1: Front Yard Has an Accountable and
Stockholder-Friendly Board
The Company recently declared that is has an “accountable Board of
Directors […] which is committed to strong corporate governance
practices, ensuring proper oversight and acting in the best interests of
all stockholders.”1
We believe the facts and recent history tell a different story:
-
Lack of Independent Directors –
Despite stockholders clamoring for change (including via multiple
proxy contests initiated), the Board still lacks independent
stockholder representatives. Instead, Rochelle Dobbs and George
McDowell were appointed to the Board, as “independent directors”,
though they were George Ellison’s former colleagues at Bank of America
for many years. -
Dismal Governance Policies –
Stockholders do not have the power to amend bylaws and the Company
does not have a majority vote standard or director resignation policy
in uncontested elections. Further, the Board has not opted out of the
Maryland Unsolicited Takeovers Act (“MUTA”), which allows it to take
various stockholder-unfriendly actions that include classifying the
Board without stockholder approval. Both ISS and Glass Lewis
highlighted these significant governance failings. -
Divergent Interests – Front
Yard’s officers and directors have actually seen their compensation
steadily increase in recent years as the Company has delivered
negative returns. While insiders have made more than $12 million since
2015, stockholders cumulatively lost more than $500 million –
underscoring the lack of accountability in the boardroom. 2 -
Excessive Compensation for Chief Executive
George Ellison – Mr. Ellison currently receives nearly
$2 million per year in compensation from Frond Yard, in addition to
the millions that he is paid by the external manager the Company pays
for management services. We believe such “double dipping” in
compensation is not only unseemly, but it is tone deaf given that
stockholders have seen approximately $500 million of value destroyed
under the Ellison regime. -
History of Broken Promises –
Front Yard consistently overpromises before ultimately
underdelivering, including telling stockholders it would add
independent expertise – not associates of George Ellison – to the
Board in 2017-2018 and to expect “distributable income of 9-11% on
equity.”3 Today, stockholders are still
waiting for a truly independent Board and to realize the real estate
value trapped within Front Yard’s shares.
Misleading Claim #2: Snow Park Has Poor Alignment With Front
Yard’s Stockholders
The Company has decided to baselessly attack Snow Park by claiming it
is “a highly conflicted hedge fund composed of short-term traders and is
not a ‘true owner’ of Front Yard.”4
We believe the facts tell a different story:
-
Snow Park is “Long” Front Yard
– Snow Park, which has been a sizable stockholder of Front Yard for
multiple years, is net “long” Front Yard. Although we sought to
partially hedge against sector-worst governance while the incumbent
Board – which has presided over $500 million of value destruction –
continues embracing Maryland’s anti-stockholder protections and adding
George Ellison’s long-term associates, our intent has always been to
unwind this position upon installing independent and qualified
directors on the Board. To be clear, like every other stockholder,
Snow Park will make money on its Front Yard position if shares rise
and will lose money if shares depreciate. This has been true since
we started the campaign, but the Company is deliberately misleading
its stockholders to distract from its own poor track record and our
slate’s superior qualifications. -
Snow Park’s Goals Are Completely Aligned with
Those of Fellow Stockholders – Snow Park’s substantial
investment in a capital-intensive proxy contest that is focused on
adding ownership perspectives and strategic vision to the Board should
make clear that it has the same goals as its fellow stockholders. Snow
Park is singularly focused on seeing Front Yard’s shares appreciate in
value. -
Snow Park’s Diminishing AAMC Position Poses
No Issue – Snow Park continues to reduce its holdings in
Altisource Asset Management Corporation (“AAMC”), which were amassed
years ago, while George Ellison has grown his holdings in AAMC (where
he is also chief executive and chairman). Moreover, Snow Park’s
critiques of Mr. Ellison’s performance and Front Yard’s
poorly-constructed amended agreement with AAMC should reinforce it is
completely focused on maximizing value for Front Yard’s stockholders. -
The Front Yard Board is Not Aligned
– The Board barely owns any stock. The three directors we seek to
replace own less than 45,000 shares, nearly all of which was awarded
by the Company rather than purchased.
Misleading Claim #3: Front Yard’s Director Nominees Have More
Relevant Experience and Qualifications
The Company has apparently concluded that ISS, Glass Lewis and
Egan-Jones erred in their recommendations to vote FOR Snow Park’s
nominees, as evidenced by its assertion that our “nominees have little
to no experience in the ownership and management of SFR homes and
possess repetitive, finance-related backgrounds.”5
We believe the facts tell a different story:
-
The Snow Park Slate Has Significant SFR
Market Experience – Leland Abrams’ firm, Wynkoop, was an
early player in the single-family residential (“SFR”) market that has
acquired and sold more than 1,000 homes similar in profile to the
assets in Front Yard’s portfolio. Lazar Nikolic founded MVC Real
Estate, an SFR property investment vehicle that acquired and managed
rentals in Atlanta for six years until the portfolio was sold. Jeffrey
Pierce, outside of his role at Snow Park, owns and operates a
portfolio of SFR and multi-family properties that has achieved
significant appreciation since inception. -
The Snow Park Slate Possess the REIT
Experience the Board Lacks – Jeffrey Pierce, who founded
one of the alternative asset management industry’s only firms
dedicated to public real estate, has been analyzing and investing in
Real Estate Investment Trusts (“REITs”) for nearly 15 years. He has a
long track record of securing outcomes for shareholders while working
with public REIT management teams to enhance corporate governance,
improve strategic execution, and optimize portfolios. He has also
helped notable REITs close significant NAV discounts through
alternative strategies and transactions. -
The Snow Park Slate Brings Valuable
Relationships – While most of the incumbent directors
come from mortgage and financial services backgrounds, like George
Ellison, our nominees bring years of SFR market and REIT industry
relationships that can support future financing efforts and
transactions. Moreover, our nominees’ backgrounds investing in REITs
have afforded them visibility into strategic review processes and
connections to the types of advisors that excel at helping REITs
maximize value.
Misleading Claim #4: Front Yard is a Market Leader
The Company touts that “[u]nder the stewardship of our current Board,
Front Yard has established its position as a market leader in this
attractive, growing space.”6
We believe the facts and recent history tell a different story:
-
Negative Total Returns –
Despite operating during a bull market in the SFR space and a period
of tremendous economic growth, Front Yard has dramatically
underperformed all relevant industry benchmarks and its two public
company peers: American Homes 4 Rent and Invitation Homes. The
Company’s shares are down approximately 50%
over the past four years. -
One of the REIT Sector’s Worst Valuation Gaps – Although
REITs often trade at modest discounts to their NAV calculations, Front
Yard’s shares trade at a consistent 45-60% discount to the Company’s
own stated NAV.7 It recently had the second
largest discount to NAV out of all publicly-traded REITs in the United
States.8 -
Peer-Worst General & Administrative Expenses
– Front Yard’s incumbent Board has sat idle while the Company’s
General & Administrative (“G&A”) expenses remain at levels that far
exceed more profitable peers – despite the fact that the portfolio has
grown. This dichotomy is concerning for stockholders when considering
that management seems unable to curb costs yet has stated its desire
to scale further.
Misleading Claim #5: Front Yard Has Achieved Critical Mass at the
15,000 Home Level
The Company highlights that it is well-positioned after acquiring
“11,000 additional revenue-generating SFRs since March 31, 2016 without
raising additional equity capital, allowing the Company to achieve scale
in several key target markets.”9
We believe the facts and recent history tell a different story:
-
No Cash Flows or Profits –
Despite claiming to be set up for success at the 15,000-home level,
particularly now that property management is internalized, Front Yard
still has generated no material cash flows or profits – and still does
not even cover its dividend. There is no reason to believe the future
will be different if this Board that has failed to embrace checks and
balances remains in place. -
NAV Has Actually Declined During the Period
of Purchasing 15,000 Homes – Front Yard’s
leverage-fueled acquisition spree has both eroded its balance sheet
and resulted in a $4.50 depreciation in management’s stated NAV as the
portfolio has increased from approximately 3,500 homes to roughly
15,000 homes. Given the commensurate rise in housing prices during the
same period of time, we find this unacceptable. -
Contradictions Regarding Scale
– Front Yard’s assertion that it has achieved scale in any markets
runs counter to its own statements from earlier this year regarding
reaching the 50,000-home level as a way to bring its sector-worst G&A
expense ratio in line with peers.10 We are
only left to conclude that management is willing to say and do
whatever it has to in order to try to garner support for Front Yard
this proxy season.
Misleading Claim #6: Stockholders Should Take Solace in Revenue
Growth
The Company implies stockholders should be hopeful about the future
because it grew “first quarter rental revenues from $6.1 million as of
March 31, 2016 to $52.6 million as of March 31, 2019.”11
We believe the facts and recent history tell a different story:
-
Lingering Structural Issues Mitigate Revenue
Growth – Front Yard’s share price actually declined more
than 22% during the specific three-year period it cited revenue
growth, reflecting the Company’s inability to generate sufficient
income to offset its increasing debt levels, poor external management
structure, and needlessly high G&A expenses. -
Negative Returns Continue as NOI Increases –
To be clear, NOI has increased as a result of reckless leverage-fueled
acquisitions and in no way reflects any value-add or progress. To try
to conflate reckless growth with progress is just another way for the
Company to dodge accountability for the poor decisions that have led
to stockholder value destruction over the years.
Misleading Claim #7: The Amended Agreement with AAMC Reflects the
Board’s Commitment to Value Creation
The Company contends that its amended agreement with AAMC is the
“most recent example of the current Board’s proactivity, strategic
vision, independence and focus on providing long-term stockholder value.”12
We believe the facts and recent history tell a different story:
-
No Accountability for Stockholder Returns
– Rather than mirror many external management agreements that
contemplate Total Shareholder Returns (“TSR”) as a performance metric,
Front Yard has crystalized a flawed structure and a perverse incentive
package with its external manager that offers zero accountability for
stockholder returns. AAMC’s fee stream remains intact regardless of
the depreciation in Front Yard’s shares – just like the previous
agreement. Moreover, the new external agreement – which uses leveraged
cash flows to determine performance incentives – promotes the further
leveraging of the balance sheet and actually disincentivizes any
capital strategy that could de-leverage or return capital at NAV to
stockholders. This shows that the Board clearly did not learn any
lessons from the reckless leverage-fueled acquisition spree that
caused stockholder value destruction to begin with. -
Concerning Incentives – The
amended agreement eliminates Front Yard’s optionality to terminate the
contract for performance default while giving AAMC another five years
of strong fees with limited accountability. This is particularly
troubling – as leading proxy advisory firms have noted – given that
George Ellison is not only the chief executive at both Front Yard and
AAMC, but also a director on Front Yard’s Board and the Chairman at
AAMC (where he is a large stockholder).
Misleading Claim #8: Front Yard’s Balance Sheet is Not in Shambles
The Company expects stockholders to believe its balance sheet is not
decimated because it has “[o]ptimized financing arrangements by
transitioning away from repurchase facilities into term loan facilities
with significantly longer maturities, lower interest rates and less
interest rate volatility.”13
We believe the facts and recent history tell a different story:
-
Peer-Worst Balance Sheet –
Front Yard’s debt-fueled acquisition spree in recent years has left
the Company with a balance sheet that remains significantly more
leveraged than its two public REIT peers. -
More Debt on the Horizon –
Given that Front Yard has stated it intended to scale to 50,000 homes
and cannot access the public markets for growth capital, we are left
to assume the Company currently intends to use debt financing to
pursue future acquisitions. To be clear, without the stock trading at
NAV, any sort of equity issuance would be highly dilutive and actually
perversely increase fees to the external manager when used to purchase
more homes. In our view, stockholder oversight is clearly needed to
prevent Front Yard’s conflicted management team from placing its own
economic incentives ahead of real owners’ interests.
WE INVITE STOCKHOLDERS TO CLOSELY ASSESS OUR
NOMINEES’ SUPERIOR BACKGROUNDS, EXPERTISE AND QUALIFICATIONS
We believe it should be a telling sign to all stockholders that Front
Yard would rather spend time besmirching Snow Park and mischaracterizing
our nominees’ backgrounds, expertise, and qualifications than debating
us on the facts or producing a credible plan for realizing NAV. The
truth is this process should not be marred by the Board’s fear-mongering
and rancor, but instead should be focused on providing stockholders with
the opportunity to assess both slates’ ideas and qualifications. It is
very regrettable, in our view, that Front Yard is committing
stockholders’ resources to a campaign that consciously attempts to shift
focus away from the Company’s performance, strategy, governance, and
officers and directors. We are only left to conclude that Front Yard
simply lacks either the ability or willingness to acknowledge the
failures that have led to years of negative returns. Regardless, the
facts make clear that Board-level change is desperately needed.
Looking ahead, Snow Park urges stockholders to not only focus on the
facts pertaining to Front Yard, but to also examine the respective
director nominees’ qualifications. We are very confident that given
Front Yard is a highly-leveraged, unprofitable and poorly-run REIT
operating in the SFR market, our nominees bring the ideal backgrounds
and relevant experiences needed to help the Company get on an
accelerated path to stability and value creation. Below is an overview
of the distinct skillsets and perspectives that each of Snow Park’s
nominees would bring to the Board:
Leland Abrams, Principal of Wynkoop
Unique SFR market acquisitions background along with highly
additive financing experience and relationships
-
Significant SFR Market Acquisition and
Transaction Experience – Wynkoop has bought and sold
more than 1,000 homes similar in profile to the assets in Front Yard’s
portfolio. -
Unique Knowledge of SFR Market Fundamentals
– Years of experience investing in residential market securities has
led to distinct knowledge of SFR market financing practices, portfolio
management and operational efficiencies. -
Proven Track Record Realizing Value in the
SFR Space – Recently helped Wynkoop execute the sale of
a $50 million block of SFR homes to another large institutional entity. -
Strong Alignment with Stockholders
– Front Yard is one of the largest equity positions in Wynkoop’s
portfolio.
Lazar Nikolic, Founder of JPL Advisors
Robust SFR market expertise based on experience constructing and
managing portfolios of residential homes, including via his own property
investment business
-
Significant SFR Market Investing Experience
– Previously founded MVC Real Estate, an SFR market investment vehicle
that acquired and managed rentals in one the country’s largest home
markets. -
Deep Understanding of SFR Market Fundamentals
– Oversaw investments in some of the earliest institutional-level
private funds that deployed capital to the SFR space in 2010 and 2011. -
More Than a Decade of Real Estate and REIT
Investing Knowledge – Years of experience analyzing real
estate securities and investing in public REITs on behalf of limited
partners. -
Strong Alignment with Stockholders
– Front Yard is one of the largest positions in JPL’s portfolio.
Jeffrey Pierce, Managing Partner of Snow Park
Capital Partners
Nearly 15 years of dedicated public REIT knowledge and expertise,
including with respect to effective governance practices and helping
management teams realize NAV
-
Significant Public REIT Experience
– Brings 15 years of experience analyzing and investing in public
REITs across SFR, apartment, lodging, and office markets.
Contacts
For Investors:
Saratoga Proxy Consulting LLC
John Ferguson /
Joe Mills, 212-257-1311
[email protected]
/ [email protected]
For Media:
Profile
Greg Marose / Charlotte Kiaie, 347-343-2999
[email protected]
/ [email protected]
