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| SBY > SEC Filings for SBY > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This report, including the following Management's Discussion and Analysis of Financial Conditions and Results of Operations, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under "Special Note Regarding Forward-Looking Statements" included in this report. In addition, our actual results could differ materially from those projected in such forward-looking statements as a result of the factors discussed under "Special Note Regarding Forward-Looking Statements" as well as the risk factors described in Item 1A, "Risk Factors," of this report.
Overview
We are an externally-managed Maryland corporation focused on the acquisition, renovation, leasing and management of single-family properties in selected markets in the United States. Our principal financial objective is to generate attractive risk-adjusted returns for our stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We generate virtually all of our revenue by leasing our portfolio of single-family properties. We currently own single-family properties in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas. We view our target markets as desirable because we believe they have an oversupply of properties that can be acquired at attractive prices, favorable demographics and long-term economic trends and healthy demand for rental properties.
Silver Bay Realty Trust Corp. was incorporated in Maryland in June 2012. Silver Bay Realty Trust Corp. conducts its business and owns all of its properties through the Operating Partnership. Silver Bay Realty Trust Corp.'s wholly owned subsidiary is the sole general partner of the Operating Partnership. Silver Bay Realty Trust Corp. has no material assets or liabilities other than its investment in the Operating Partnership. As of December 31, 2012, Silver Bay Realty Trust Corp. owned, through a combination of direct and indirect interests, 99.9% of the partnership interests in the Operating Partnership.
We intend to elect to qualify as a real estate investment trust, or REIT, for U.S. federal tax purposes, commencing with the portion of our taxable year ended December 31, 2012. We believe that our organization and method of operation will enable us to meet the requirements for qualification and taxation as a REIT. As a REIT, we generally will not be subject to federal income tax on the taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of any taxable REIT subsidiary, or TRS, that we own will be subject to taxation at regular corporate rates.
We are externally managed by our Manager. We rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business as we have no employees of our own. Our Manager is a joint venture of Pine River and Provident, and our Manager and its operating subsidiary together provide us with a comprehensive suite of investment, acquisition and property management services, utilizing the combined expertise of Pine River and Provident.
Background of Our Manager, Silver Bay Property and the Provident Entities
Our Manager was formed on December 22, 2011 as a joint venture between Pine River and Provident. Our Manager's operating subsidiary was formed by our Manager on January 30, 2012.
Our Predecessor, was an indirect, wholly owned subsidiary of Two Harbors. In the first quarter of 2012, our Predecessor began acquiring a portfolio of single family properties to rent for income and to hold for investment. We acquired our Predecessor upon consummation of the Formation Transactions, and our operations represent the continuation of our Predecessor.
The Provident Entities are five limited liability companies for which Provident served as managing member until the completion of our initial public offering. As early entrants into the large scale single family property rental market, the Provident Entities acquired a portfolio of approximately 880 single family properties between September 2009 and March 2012, with approximately two-thirds of the properties purchased in calendar years 2011 and 2012. We acquired the Provident Entities upon consummation of the Formation Transactions.
Property Portfolio
As of December 31, 2012, we owned 3,405 single-family properties in the
following markets:
Average Cost
Aggregate Cost Basis Per Average Number of Average Monthly
Number of Basis (1) Property Average Age Square Leased Number of Vacant Rent for Leased
Market Properties (thousands) (thousands) (in years) (2) Footage Properties Properties (3) Properties (4)
Phoenix 1,002 $ 127,308 $ 127 17.9 1,717 592 410 $ 1,041
Tampa 816 99,779 122 21.9 1,675 401 415 1,261
Atlanta 607 67,674 111 14.9 2,089 313 294 1,191
Northern CA (5) 256 43,323 169 40.6 1,418 113 143 1,457
Las Vegas 213 27,255 128 13.4 1,742 77 136 1,151
Tucson 186 14,334 77 38.8 1,343 112 74 828
Southern CA (6) 149 18,161 122 38.6 1,364 13 136 1,208
Orlando 90 13,001 144 18.0 1,889 71 19 1,318
Charlotte 60 7,181 120 9.7 2,035 12 48 1,058
Dallas 26 2,546 98 17.8 1,784 1 25 1,250
Totals 3,405 $ 420,562 $ 124 21.7 1,727 1,705 1,700 $ 1,148
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(2) As of December 31, 2012, approximately 29% of the properties in the combined portfolio were less than 10 years old, 27% were between 10 and 20 years old, 16% were between 20 and 30 years old, 15% were between 30 and 40 years old, 5% were between 40 and 50 years old, and 8% were more than 50 years old.
(3) A significant portion of the properties were purchased within the last six months and are still undergoing stabilization. We define stabilized properties as those that we have acquired, renovated, marketed and leased for the first time. Properties acquired with in-place leases are considered stabilized. Total number of vacant properties includes properties in the process of stabilization as well as those available for lease.
(4) Average monthly rent for leased properties was calculated as the average of the contracted monthly rent for all leased properties as of December 31, 2012. To date, rent concessions have been utilized on a limited basis and have not had a significant impact on our average monthly rent. If the use of rent concessions or other leasing incentives increases in the future, they may have a greater impact by reducing the average monthly rent we receive from leased properties.
(5) Northern California market currently consists of Contra Costa, Napa, Sacramento and Solano counties.
(6) Southern California market currently consists of Colton, Riverside and San Bernardino counties.
Factors likely to affect Silver Bay Results of Operations
Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. The key factors we expect to impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the time and cost required to stabilize a newly acquired property and convert the same to rental, rental rates, occupancy levels, rates of resident turnover, our expense ratios and capital structure.
Industry Outlook
The current housing market environment across our core markets in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas remains highly attractive for single-family property acquisition and rental. Pricing remains attractive, supply strong and demand for housing is growing.
In 2012, housing prices increased in all of our markets, ranging from mid-single digit annual increases to as high as 23% in Phoenix. Headline housing prices were roughly flat sequentially in the fourth quarter across our markets. Since the end of 2012 we have seen continued strength in housing prices across most markets, particularly in the distressed segment as competition for REO (real estate owned) and foreclosure sales remains strong. Nevertheless, pricing remains significantly below peak pricing and we believe housing in our markets is significantly undervalued relative to historical measures of income and replacement cost.
MSA(1) HOME PRICE APPRECIATION ("HPA")
HPA HPA HPA HPA
(Peak to (Peak to (prior 12 (Prior 3
Market Trough)(2) Current) months) months)
Phoenix -53 % -41 % 23 % 3 %
Tucson -43 % -37 % 9 % -1 %
Northern CA (3) -61 % -55 % 14 % 5 %
Southern CA (4) -54 % -48 % 11 % 4 %
Jacksonville -41 % -34 % 8 % 4 %
Orlando -56 % -47 % 11 % 2 %
Southeast FL (5) -54 % -47 % 9 % 1 %
Tampa -49 % -44 % 6 % 1 %
Atlanta -34 % -27 % 6 % -1 %
Charlotte -17 % -12 % 5 % -1 %
Las Vegas -60 % -54 % 15 % 3 %
Columbus, OH -19 % -13 % 5 % -1 %
Dallas -15 % -9 % 4 % 0 %
Houston -14 % -6 % 4 % 1 %
NATIONAL -33 % -27 % 8 % 0 %
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Source: Corelogic as of December 31, 2012
and economic integration with the core as measured by commuting ties
(2) Peak refers to highest historical home prices in a particular market. Trough refers to lowest home prices in a particular market since the peak
(3) MSA used for Northern California is Fairfield-Vallejo, which most closely approximates the geographic area in which we purchase homes in Northern California. This MSA is comprised of Solano County and the most populous cities in the MSA are Vallejo, Fairfield, Vacaville, Suisun and Benicia
(4) MSA used for Southern California is Riverside-San Bernardino-Ontario. This MSA is comprised of Riverside and San Bernardino Counties and the most populous cities in the MSA are Riverside, San Bernardino, Fontana and Moreno
(5) MSA used for Southeast FL is Fort Lauderdale-Pompano Beach-Deerfield Beach
The supply of homes available for sale that meet our criteria is large and the shadow inventory pipeline remains robust. Based on data from the Mortgage Bankers Association we estimate that as of the third quarter 2012 there were more than 5 million mortgages in some form of delinquency or foreclosure or over 11% of all mortgages. This is roughly double normalized levels. However, competition for this inventory from individuals and institutions has continued to strengthen as we have seen shrinking inventories in certain markets like Phoenix, Las Vegas and California. Certain markets in Florida continue to have elevated levels of supply and a large backlog of foreclosures in the pipeline due in part to the state's judicial foreclosure process.
On the demand side, we believe demographic factors are favorable to our business model. Household formations continued to increase in the fourth quarter to approximately 1.0 million annualized and when combined with tight credit availability should lead to continued strong demand for single-family rental homes.
While new building activity has begun to increase, we believe significant under-investment in residential housing over the past six years coupled with deliberate home demolitions will create upward pressure on prices and rents as demand exceeds supply. We expect this will take time and will be uneven across markets but believe pricing will eventually revert to replacement cost.
Highlights of 2012
Our formal operations commenced with the purchase of our first residential properties in the first quarter of 2012. From February 2012 through December 19, 2012, we acquired 2,467 residential properties. Concurrently with our initial public offering, we completed the Formation Transactions, pursuant to which we acquired the Provident Entities and the portfolio of single-family properties held by them totaling 881 residential properties. From December 19, 2012 through December 31, 2012, we acquired an additional 57 residential properties. At December 31, 2012, we owned 3,405 residential properties, of which 1,705 were leased. Because it typically takes up to six months from the time we acquire residential properties to leasing and the collection of rental income under a lease agreement, we did not have significant operations for 2012.
Our Predecessor was capitalized with contributions during the year of approximately $324.0 million, which were used to acquire and renovate residential properties. We completed our initial public offering in December 2012 in which we raised approximately $228.5 million in net proceeds. We had approximately $228.1 million in cash and cash equivalents at December 31, 2012.
Acquisitions and Stabilization
Our Manager's ability to identify and acquire single family properties that meet our investment criteria will be affected by home prices in our target markets, the inventory of properties available through our acquisition channels and competition for our target assets.
As of December 31, 2012, many properties in our portfolio were still in the renovation and stabilization phases and are therefore not producing rental income. Before an acquired property becomes an income producing asset, we must possess, renovate, market and lease the property. We refer to this process as property stabilization. Our possession can be delayed for a multitude of reasons beyond our control, including applicable statutory rights of redemption, rescission rights and legal challenges to our ownership or unauthorized occupants living in the property at the time of purchase. The typical stabilization period for our properties has ranged from three to six months depending on the factors discussed above. Through December 31, 2012, 74.2% of the properties of our Predecessor had been stabilized within six months of acquisition.
The following table summarizes the acquisition and stabilization activity of our Predecessor and us for 2012. We believe this information is relevant because a significant portion of the portfolio is still in the acquisition or stabilization process:
Cumulative
Total
2012 Quarterly Results as of
Mar. 31, June 30, Sep. 30, Dec. 31, Dec. 31,
2012 2012 2012 2012 2012
Acquisitions (1) 70 632 965 857 2,524
Newly-stabilized properties(2) 7 71 282 542 902
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(2) Represents the number of properties stabilized by quarterly period, including properties acquired with in-place leases, which we consider stabilized on the date of acquisition. Stabilization numbers exclude the acquisition of the Provident Entities' owned properties.
The following chart shows the pace of quarterly acquisitions by source of our Predecessor and us for 2012 and does not reflect accepted purchase agreements that have not yet closed or the acquisition of the properties owned by the Provident Entities:
[[Image Removed]]
For purposes of this chart:
"Broker" refers to a purchase of a single property directly from the owner, including REO, short sales and properties listed on a multiple listing service.
"Auction" refers to properties purchased at trustee or judicial auctions.
"Bulk" refers to purchases of more than one property in a single sale directly from the owner, often an investor group, bank, financial institution or governmental agency, and may include future acquisitions of entire legal entities holding single-family properties.
Results of Operations
We earn revenue primarily from rents collected from residents under lease agreements for our properties. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our revenue may be affected by macroeconomic, local and property level factors, including market conditions, seasonality, resident defaults or vacancies, timing of renovation activities and occupancy of properties and timing to re-lease vacant properties.
Operating expenses associated with the operations of our residential properties primarily include property insurance, utilities and lawn maintenance (until market ready), repairs and maintenance, real estate taxes and homeowner's association fees. Our residential properties are managed by our Manager's operating subsidiary or third-party property management companies. In conjunction with the completion of our initial public offering, we entered into a new property management agreement with our Manager's operating subsidiary. See discussion on the property management agreement in Item 1, "Business - Management Agreements". As our properties are placed in service, we record depreciation and amortization expenses on a straight-line basis over the estimated useful life of the related assets.
Expenses associated with the overall operation of our business consists primarily of advisory management fees and general and administrative costs. Since we have no employees, we rely on our Manager to oversee our operations. Prior to our initial public offering, our Predecessor was allocated an annual management fee of 1.5% of contributed capital. In conjunction with the completion of our initial public offering, we entered into a new advisory management agreement with our Manager as discussed in Item 1, "Business - Management Agreements". Our general and administrative expenses primarily consist of professional fees and services and compensation.
The following are our results of operations for the year ended December 31, 2012:
(amounts in thousands except share data)
Revenue: Rental income $ 3,584 Other income 32 Total revenue 3,616 Expenses: Property operating and maintenance 1,971 Real estate taxes 1,273 Home owner's association fees 391 Property management 459 Depreciation and amortization 2,003 Advisory management fee - affiliates 2,159 General and administrative 881 Total expenses 9,137 Net loss (5,521 ) Net loss attributable to noncontrolling interests - Operating Partnership 4 Net loss attributable to controlling interests (5,517 ) Preferred stock distributions (3 ) Net loss attributable to common stockholders $ (5,520 ) Loss per share - basic and diluted (Note 8): Net loss attributable to common shares $ (0.04 ) Weighted average common shares outstanding 37,328,213 |
Revenue
We earned $3.6 million in revenue during 2012. Our 2012 revenue is not representative of a full year of results because a substantial portion of our Predecessor's properties did not generate revenue during the full year because they were either recently acquired or still in the stabilization phase. Additionally, our 2012 results include revenue from properties owned by the Provident Entities for only 12 days of activity, from the date of the Formation Transactions through year end.
The following table summarizes our stabilized properties and those owned six months or longer as of December 31, 2012:
Stabilized Properties Properties Owned at Least Six Months
Average Monthly
Number of Average Monthly Properties Rent for
Stabilized Rent for Leased Owned 6 Properties
Properties Properties Properties Occupancy Stabilized Months or Properties Properties Occupancy Owned at Least
Market (1) Leased Vacant Rate Properties (2) Longer Leased Vacant Rate Six Months (3)
Phoenix 648 592 56 91 % $ 1,041 551 481 70 87 % $ 1,030
Tampa 409 401 8 98 % 1,261 426 359 67 84 % 1,258
Atlanta 318 313 5 98 % 1,191 302 243 59 80 % 1,185
Northern CA 113 113 - 100 % 1,457 52 35 17 67 % 1,554
Las Vegas 81 77 4 95 % 1,151 101 57 44 56 % 1,155
Tucson 112 112 - 100 % 828 78 76 2 97 % 828
Southern CA 13 13 - 100 % 1,208 21 10 11 48 % 1,209
Orlando 72 71 1 99 % 1,318 52 51 1 98 % 1,357
Charlotte (4) 12 12 - 100 % 1,058 - - - - -
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