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SBY > SEC Filings for SBY > Form 10-K on 6-Mar-2014All Recent SEC Filings

Show all filings for SILVER BAY REALTY TRUST CORP.

Form 10-K for SILVER BAY REALTY TRUST CORP.


6-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 select markets in the United States. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation. We generate virtually all of our revenue by leasing our portfolio of single-family properties. As of December 31, 2013, we owned 5,642 single-family properties, excluding properties held for sale, in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas, 88.1% of which were leased.

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.

We have elected to be treated as a real estate investment trust, or REIT, for U.S. federal tax purposes, commencing with, and in connection with the filing of our federal tax return for, our taxable year ended December 31, 2012. As a REIT, we generally are not 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.

Silver Bay Realty Trust Corp. conducts its business and owns all of its properties through Silver Bay Operating Partnership L.P., or the Operating Partnership, a Delaware limited partnership. Silver Bay Realty Trust Corp.'s wholly owned subsidiary, Silver Bay Management LLC, or the General Partner, 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, 2013, Silver Bay Realty Trust Corp. owned, through a combination of direct and indirect interests, 100.0% of the partnership interests in the Operating Partnership.

Recent Highlights

We completed our initial public offering on December 19, 2012 in which we received net proceeds of approximately $263.0 million (including the closing of the underwriters' overallotment option on January 7, 2013 by which we received net proceeds of approximately $34.5 million). In connection with our initial public offering, we also completed the Formation Transactions through which we acquired our Initial Portfolio of more than 3,300 single-family properties from Two Harbors and the owners of the Provident Entities.

In 2013, we grew our portfolio by 2,237 properties, increasing our gross investment in real estate by $355.7 million to $776.3 million. We also stabilized a significant number of properties, increasing the total number of stabilized properties to 5,365 with an occupancy rate as of December 31, 2013 of 92.7%. This increase drove aggregate portfolio occupancy from 50% at December 31, 2012 to 88.1% at December 31, 2013 and contributed to the revenue growth and margin expansion throughout the year. We reported Funds From Operations, or FFO, of $1.5 million in the fourth quarter of 2013, our first positive quarter of FFO.

In May 2013, certain of our subsidiaries entered into a $200.0 million revolving credit facility, which was amended on January 16, 2014 to increase the borrowing capacity to $350.0 million. We have used the revolving credit facility for the acquisition, financing, and renovation of properties and for other general purposes. As of December 31, 2013, we had drawn down $164.8 million under our revolving credit facility.


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Property Portfolio



Our real estate investments consist of single-family properties in select
markets. As of December 31, 2013, we owned 5,642 single-family properties,
excluding properties held for sale, in the following markets:



                                                                Average Cost
                                             Aggregate Cost       Basis Per                          Average
                            Number of          Basis (2)          Property       Average Age (in      Square
Market                    Properties (1)      (thousands)        (thousands)       years) (3)        Footage
Phoenix                            1,424             198,889    $         140               24.2         1,636
Atlanta                            1,000             123,938              124               16.9         2,011
Tampa                                924             130,791              142               23.5         1,657
Northern CA (4)                      384              71,902              187               44.4         1,401
Las Vegas                            290              40,800              141               16.7         1,719
Columbus                             284              29,651              104               35.7         1,417
Dallas                               227              28,804              127               20.2         1,652
Orlando                              215              32,632              152               24.9         1,681
Tucson                               209              17,134               82               40.0         1,330
Southeast FL (5)                     165              33,262              202               34.3         1,688
Southern CA (6)                      156              23,383              150               43.0         1,346
Jacksonville                         131              17,002              130               30.4         1,568
Charlotte                            130              16,961              130               11.8         1,980
Houston                              103              11,155              108               29.8         1,698

Totals                             5,642    $        776,304              138               25.6         1,675



(1) Total properties exclude properties held for sale or sold by our TRS and any properties acquired in previous periods in sales that have been subsequently rescinded or vacated.

(2) Aggregate cost includes all capitalized costs, determined in accordance with GAAP, incurred through December 31, 2013 for the acquisition, stabilization, and significant post-stabilization renovation of properties, including land, building, possession costs and renovation costs. Aggregate cost does not include accumulated depreciation.

(3) As of December 31, 2013, approximately 19% of the properties in the combined portfolio were less than 10 years old, 26% were between 10 and 20 years old, 18% were between 20 and 30 years old, 17% were between 30 and 40 years old, 9% were between 40 and 50 years old, and 11% were more than 50 years old.

(4) Northern California market currently consists of Contra Costa, Napa and Solano counties.

(5) Southeast Florida market currently consists of Miami-Dade, Broward and Palm Beach counties.

(6) Southern California market currently consists of 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 and costs of acquisitions, the time and costs required to stabilize a newly-acquired property and convert the same to rental use, the age of our properties, rental rates, the varying costs of internal and external property management, occupancy levels, rates of resident turnover, home price appreciation, changes in homeownership rates, changes in homeowners' association fees and real estate taxes, our expense ratios and our capital structure. Certain of these factors are described in greater detail below in Item 7 of this Annual Report on Form 10-K.

Industry Outlook

The housing market environment in our markets remains attractive for single-family property acquisitions and rentals. Pricing for housing in certain markets remains attractive and demand for housing is growing. At the same time, we continue to face relatively steady competition for new properties and residents from local operators and institutional managers.

Housing prices across all of our core markets have appreciated over the past year. Despite these gains, we believe housing in certain of our markets continues to provide attractive acquisition opportunities and remains inexpensive relative to replacement cost and affordability metrics.


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MSA Home Price Appreciation ("HPA")(1)

Source: Corelogic as of December 2013

                     HPA
                   (Peak to     HPA         HPA        HPA
                   Trough)    (Peak to   (prior 12   (Prior 3
Market               (2)      Current)    months)    months)
Phoenix, AZ             -53 %      -32 %        14 %        0 %
Tucson, AZ              -43 %      -33 %         7 %       -1 %
Northern CA (3)         -60 %      -42 %        27 %        5 %
Southern CA (4)         -53 %      -36 %        22 %        2 %
Jacksonville, FL        -40 %      -30 %         9 %        1 %
Orlando, FL             -55 %      -39 %        14 %        0 %
Southeast FL (5)        -53 %      -39 %        14 %        1 %
Tampa, FL               -48 %      -37 %        10 %       -1 %
Atlanta, GA             -34 %      -15 %        15 %        0 %
Charlotte, NC           -17 %       -1 %         6 %       -1 %
Las Vegas, NV           -60 %      -42 %        25 %        1 %
Columbus, OH            -18 %       -9 %         4 %       -1 %
Dallas, TX              -14 %        1 %        10 %        1 %
Houston, TX             -13 %        4 %        11 %        1 %
National                -33 %      -18 %        11 %        0 %



(1) "MSA" means Metropolitan Statistical Areas, which is generally defined as one or more adjacent counties or county equivalents that have at least one urban core area of at least a 50,000-person population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.

(2) Peak refers to highest historical home prices in a particular market prior to the start of the housing recovery. 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.

On the demand side, we anticipate continued strong rental demand for single-family homes. While new building activity has begun to increase, it remains below historical averages and we believe substantial under-investment in residential housing over the past six years will create upward pressure on home prices and rents as demand exceeds supply. We expect this will take time and will be uneven across markets, but we believe pricing will revert to replacement cost over time, which would be favorable to our total return profile.

Acquisitions

Our Manager's ability to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets, the inventory of properties available through our acquisition channels, competition for our target assets, and our capital available for investment. We increased the number of properties in our portfolio by 67 and 2,237 properties in the three and twelve months ended December 31, 2013, respectively. Our acquisition rate decreased substantially beginning in the second quarter of 2013. We significantly curtailed new acquisitions in the third quarter of 2013 while we continued to focus on renovating and leasing our existing inventory. We began purchasing again at the end of the third quarter of 2013 in certain key markets and continued limited acquisitions in the fourth quarter of 2013 having substantially deployed available capital. On January 16, 2014, we increased the borrowings available under our revolving credit facility and intend to continue acquisitions in select markets in 2014 subject to the availability of additional debt or equity capital, among other factors.


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Throughout 2013, the percentage of properties purchased at auction decreased substantially as our use of broker and bulk purchases increased. Auction purchases accounted for the acquisition of approximately 14% of the properties acquired in the second half of 2013. By comparison, 20% of the properties acquired in the second quarter of 2013, 55% of the properties acquired in the first quarter of 2013, and 70% of the properties acquired in 2012 were acquired at auction. We anticipate that auction purchases will continue to represent a decreasing percentage of 2014 acquisitions, which should allow us to take possession and renovate properties quicker and with better predictability in renovation costs than if we continued acquiring significant numbers of auction properties. For purposes of this discussion, "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; and "bulk" refers to purchases of more than one property in a single sale directly from the owner, often an investor group, financial institution, or governmental agency, and may include future acquisitions of entire legal entities holding single-family properties.

Stabilization, Renovation, and Leasing

For most periods of 2013, many properties in our portfolio were not yet generating 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. We consider a property stabilized at the earlier of (i) its first authorized occupancy or (ii) 90 days after the renovations for such property are complete regardless of whether the property is leased. Properties acquired with in-place leases are considered stabilized even though such properties may require future renovation to meet our standards and may have existing residents who would not otherwise meet our resident screening requirements.

We stabilized 569 and 3,484 properties in the three and twelve months ended December 31, 2013, respectively. The average time to stabilization for our properties on a historical basis was 146 days (excluding properties acquired from the Provident Entities), and the average time to stabilization for properties stabilized in the fourth quarter of 2013 was 209 days, each increasing from the comparable average stabilization times as of September 30, 2013. This increased stabilization time on a sequential quarter basis and the higher quarterly average as compared to the portfolio average are each a function of our historic acquisition activity outpacing our historic renovation and leasing activity during our ramp-up, which resulted in our stabilizing longer held properties, many of which had increased renovation needs or longer times to possession as a result of evictions or challenges to our auction purchases, in the fourth quarter of 2013 as compared to the third quarter. Of the properties stabilized in the fourth quarter of 2013, the average time from acquisition to completion of renovation was 150 days and the average time from the completion of renovation until the lease effective date was 52 days compared to averages of 136 days and 39 days, respectively, for properties stabilized in the third quarter of 2013. The sequential quarter increase in the average time from acquisition to completion of renovation is attributable to the same factor that caused our average stabilization time to increase in sequential quarters as described above. The sequential quarter increase in the average time from completion of renovation to lease is attributable in part to a seasonal slowdown. The sum of the average time from acquisition to completion of renovation and the average time from completion of renovation to lease (202 days) differs from the average time to stabilization (209 days) because stabilized properties includes properties where renovations have been completed for at least 90 days even though they have not yet been leased and this cohort of properties had a shorter average time from acquisition to completion of renovation.

We do not believe the average renovation and stabilization times described above are indicative of our future renovation and stabilization capabilities. In the second half of 2013, we began taking steps to shorten the time between our acquisition of a property and the time it becomes a revenue-generating asset. As part of this change, we focused our new acquisitions predominately on broker transactions, which reduced many of the delays we historically faced in taking possession of properties purchased at auction and allowed us to start renovation within days of acquisition. These changes show promising results. The properties acquired in the third quarter were renovated in less than half the time as the average for those properties stabilized in the fourth quarter of 2013, and we expect the properties acquired in the fourth quarter of 2013 will have even better average renovation and stabilization times.


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The following table summarizes the leasing status of our properties as of December 31, 2013:

                                                                              Aggregate
                              Number of                                       Portfolio   Stabilized    Average
               Number of      Stabilized     Properties                       Occupancy   Occupancy     Monthly
Market         Properties   Properties (1)     Leased     Properties Vacant     Rate         Rate       Rent (2)
Phoenix             1,424            1,423        1,350                  74        94.8 %       94.9 % $    1,026
Atlanta             1,000              950          840                 160        84.0 %       88.4 %      1,165
Tampa                 924              916          902                  22        97.6 %       98.5 %      1,215
Northern CA           384              383          370                  14        96.4 %       96.6 %      1,478
Las Vegas             290              290          278                  12        95.9 %       95.9 %      1,150
Columbus              284              193          104                 180        36.6 %       53.9 %      1,112
Dallas                227              207          186                  41        81.9 %       89.9 %      1,241
Orlando               215              194          189                  26        87.9 %       97.4 %      1,247
Tucson                209              207          192                  17        91.9 %       92.8 %        829
Southeast FL          165              124          117                  48        70.9 %       94.4 %      1,760
Southern CA           156              155          145                  11        92.9 %       93.5 %      1,148
Jacksonville          131              112          101                  30        77.1 %       90.2 %      1,083
Charlotte             130              120          112                  18        86.2 %       93.3 %      1,155
Houston               103               91           87                  16        84.5 %       95.6 %      1,180

Totals              5,642            5,365        4,973                 669        88.1 %       92.7 % $    1,162



(1) We consider a property stabilized at the earlier of (i) its first authorized occupancy or (ii) 90 days after the renovations for such property are complete regardless of whether the property is leased. Properties acquired with in-place leases are considered stabilized even though such properties may require future renovation to meet our standards and may have existing residents who would not otherwise meet our resident screening requirements.

(2) Average monthly rent for leased properties was calculated as the average of the contracted monthly rent for all leased properties as of December 31, 2013 and reflects rent concessions amortized over the life of the related lease.

Stabilized occupancy decreased slightly to 92.7% as of December 31, 2013 as compared to 94.7% as of September 30, 2013 as a result of poor leasing activity by our third party manager in Columbus. Our Manager's operating subsidiary internalized management of this market in December 2013, and we expect improved leasing activity going forward.

In the quarter ended December 31, 2013, 374 properties turned over. This turnover number includes move-outs, evictions and lease breaks on our stabilized portfolio but excludes evictions of unauthorized residents at time of acquisition. Quarterly turnover for the three months ended December 31, 2013 was 7.0%. Quarterly turnover represents the number of properties turned over in the period divided by the number of properties in stabilized status as of quarter end (i.e. 5,365 properties for the three months ended December 31, 2013). We believe that our turnover rate is not indicative of future results on a stabilized portfolio and that the turnover rate will be higher in future periods because the large number of recently-leased and stabilized properties in our current portfolio results in a disproportionately small number of properties with expiring leases and thus lower potential turnover attributable to resident move-out. The total number of properties with lease expirations in the three months ended December 31, 2013 was 821, including properties with month-to-month occupancy in the period. Of these properties, 223 properties turned over (implying a 27.2% turnover rate).

Results of Operations

Comparisons to 2012 presented in our financial statements are not representative of a full year of operating activity and are not generally meaningful as our predecessor did not have substantial operations in 2012. Additionally, our 2012 results included revenue and expenses related to properties owned by the Provident Entities for only 12 days of activity, from the date of the Formation Transactions through year-end.


Table of Contents

The following are our results of operations for the years ended December 31, 2013 and 2012 along with the three months ended December 31, 2013 (unaudited) and September 30, 2013 (unaudited):

                                                                                                                                   Sequential Quarter Comparison
                                                     Year Ended              Three Months Ended      Three Months Ended                  Three Months Ended
Income Statement Data (unaudited)                   December 31,                December 31,           September 30,          December 31, 2013 vs September 30, 2013
(amounts in thousands except share data)        2013            2012                2013                    2013                 $ Change                % Change
Revenue:
Rental income                               $     47,953    $      3,584    $             16,409    $             13,923    $            2,486                     17.86 %
Other income                                       1,640              32                     300                     563                  (263 )                  (46.71 )%
Total revenue                                     49,593           3,616                  16,709                  14,486                 2,223                     15.35 %

Expenses:
Property operating and maintenance                12,472           1,868                   3,848                   4,280                  (432 )                  (10.09 )%
Real estate taxes                                  6,893           1,273                   2,000                   1,761                   239                     13.57 %
Homeowners' association fees                       1,129             391                     282                     286                    (4 )                   (1.40 )%
Property management                               11,991             459                   2,818                   3,675                  (857 )                  (23.32 )%
Depreciation and amortization                     20,235           2,106                   6,174                   5,683                   491                      8.64 %
Advisory management fee - affiliates               9,775           2,159                   2,179                   2,166                    13                      0.60 %
General and administrative                         7,453             881                   2,110                   1,866                   244                     13.08 %
Interest expense                                   2,911               -                   1,764                     989                   775                     78.36 %
Other                                              1,284               -                     594                     142                   452                    318.31 %
. . .
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