Shares of Front Yard Residential (NYSE:RESI) shot higher by 37% in early trading on Monday. That's in stark contrast to the rest of the year, when the stock of this real estate investment trust (REIT), which specializes in single-family homes, lagged well behind its peers American Homes 4 Rent and Invitation Homes. That all changed today, with Front Yard catching up in one swift move. That said, the less-than-impressive showing leading up to today's giant gain was a key catalyst for today's move.
Over the past two weeks, two activist investors have openly requested that Front Yard Residential liquidate and return cash to investors. The reason for the request is that these investors believed that the REIT was trading for less than it was worth. The laggard stock performance this year was a key factor in this pair's request for an orderly sale of the company's assets. Front Yard Residential went a slightly different direction, but has largely achieved the same end.
Today, the REIT announced that it has agreed to be bought for $13.50 per share in cash by Pretium and Ares Management. The total value of the deal is roughly $2.4 billion, including debt and other costs. The stock closed Friday at around $10 a share, with the price increase early Monday actually pushing the shares slightly above the value of the proposed deal. Still, the activists are getting what they wanted: cash. And they'll get it fast, which is probably a better outcome than waiting for Front Yard to sell, bit by bit, the roughly 14,000 homes it owns.
When an acquisition target's stock trades above the offer price, it often suggests that investors think another, higher bid will come in. While that may or may not happen here, what is clear is that the upside from this proposed deal is fully priced in at this point. Conservative investors wouldn't be making a mistake to simply sell the stock and put that money to work elsewhere.