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SBY > SEC Filings for SBY > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for SILVER BAY REALTY TRUST CORP.

Form 10-Q for SILVER BAY REALTY TRUST CORP.


8-May-2014

Quarterly Report


Item 2. 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 Quarterly Report on Form 10-Q. This report, including the following Management's Discussion and Analysis of Financial Condition 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 Part II, 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 March 31, 2014, we owned 5,748 single-family properties, excluding properties held for sale, in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas, 92.2% of which were leased.

We are externally managed by PRCM Real Estate Advisers LLC, or 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 an affiliate of Pine River Capital Management L.P, or Pine River, and Provident Real Estate Advisors LLC, or Provident. Our Manager and its operating subsidiary together provide us with a 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. was incorporated in Maryland in June 2012. 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 March 31, 2014, Silver Bay Realty Trust Corp. owned, through a combination of direct and indirect interests, 100.0% of the partnership interests in the Operating Partnership. Except as otherwise required by the context, references to the "Company," "Silver Bay," "we," "us" and "our" refer collectively to Silver Bay Realty Trust Corp., the Operating Partnership and the direct and indirect subsidiaries of each.

In connection with our initial public offering in December 2012, we completed a series of contribution and merger transactions, or the Formation Transactions, through which we acquired an initial portfolio of more than 3,300 single-family properties from Two Harbors Investment Corp., or Two Harbors, and the owners of the membership interests of entities managed by Provident, or the Provident Entities.


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Property Portfolio

Our real estate investments consist of single-family properties in select
markets. As of March 31, 2014, we owned 5,748 single-family properties,
excluding properties held for sale, in the following markets:

                                      Aggregate Cost          Average Cost
                    Number of           Basis (2)          Basis Per Property      Average Age      Average Square
Market            Properties (1)       (thousands)            (thousands)         (in years) (3)       Footage
Phoenix                   1,424     $        199,382     $                140               25.2            1,636
Atlanta                   1,012              126,111                      125               17.9            2,011
Tampa                       926              131,878                      142               24.5            1,655
Northern CA (4)             384               72,067                      188               45.4            1,401
Las Vegas                   290               40,924                      141               17.7            1,719
Columbus                    284               31,402                      111               36.7            1,417
Dallas                      259               32,885                      127               21.4            1,654
Orlando                     231               34,731                      150               25.9            1,658
Tucson                      209               17,156                       82               41.0            1,330
Southeast FL (5)            189               38,102                      202               36.3            1,636
Southern CA (6)             156               23,521                      151               44.0            1,346
Jacksonville                152               19,479                      128               30.3            1,552
Charlotte                   130               17,041                      131               12.8            1,980
Houston                     102               11,202                      110               30.7            1,685
Totals                    5,748     $        795,881     $                138               26.6            1,672

(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 March 31, 2014 for the acquisition, stabilization, and significant post-stabilization renovation of properties, including land, building, possession costs and renovation costs. Aggregate cost includes $3.6 million in capital improvements, incurred from our formation through March 31, 2014, made to properties that had been previously renovated, but does not include accumulated depreciation.

(3) As of March 31, 2014, approximately 14% of our properties were less than 10 years old, 29% were between 10 and 20 years old, 18% were between 20 and 30 years old, 18% were between 30 and 40 years old, 9% were between 40 and 50 years old, and 12% 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.

Recent Highlights of 2014

Overall portfolio occupancy increased to 92.2% at March 31, 2014 from 88.1% at December 31, 2013, driven primarily by an increase in occupancy in our Columbus market to 75.4% from 36.6% at December 31, 2013.

Funds From Operations, or FFO, increased 42.2% to $2.1 million, or $0.05 per share, in the first quarter of 2014, as compared to the fourth quarter of 2013. Net Operating Income, or NOI, increased 11.2% to $9.2 million, or 50.9% of total revenue, in the first quarter of 2014, as compared to the fourth quarter of 2013.

In January 2014, we amended our revolving credit facility to increase the borrowing capacity to $350.0 million.


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In March 2014, we declared a $.03 per share dividend on our common stock; an increase from our 2013 quarterly dividend of $.01 per share. During the first quarter of 2014, we repurchased 155,657 shares of common stock under our share repurchase program at a total cost of $2.4 million.

At March 31, 2014, we had cash of $40.8 million and $151.5 million available under our revolving credit facility.

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.

Industry and Market Outlook

The housing market environment in our markets remains attractive for single-family property acquisitions and rentals. Pricing for housing in certain of our 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 twelve months. 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.

MSA Home Price Appreciation ("HPA")(1) Source: CoreLogic as of February 2014

                       HPA           HPA           HPA            HPA
                     (Peak to      (Peak to      (Prior 12      (Prior 3
Market             Trough)(2)     Current)       months)        months)
Phoenix, AZ           -53  %        -31  %          13 %          1  %
Tucson, AZ            -43  %        -31  %          11 %          3  %
Northern CA (3)       -60  %        -41  %          28 %          5  %
Southern CA (4)       -53  %        -34  %          22 %          3  %
Jacksonville, FL      -40  %        -33  %           7 %         -3  %
Orlando, FL           -55  %        -39  %          14 %          1  %
Southeast FL (5)      -54  %        -39  %          14 %          1  %
Tampa, FL             -48  %        -37  %          10 %          0  %
Atlanta, GA           -34  %        -15  %          17 %          1  %
Charlotte, NC         -17  %          2  %          10 %          2  %
Las Vegas, NV         -60  %        -42  %          19 %          1  %
Columbus, OH          -18  %        -10  %           9 %         -1  %
Dallas, TX            -14  %          3  %          11 %          2  %
Houston, TX           -13  %          8  %          14 %          4  %
National              -33  %        -17  %          12 %          1  %

(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.


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(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 increased, 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, 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 acquired 110 properties at an average purchase price of $118,000 in the three months ended March 31, 2014. As of March 31, 2014, for properties acquired through individual broker transactions which involve submitting a purchase offer, we had offers accepted to purchase 57 additional properties for an aggregate amount of $8.0 million. We intend to continue acquisitions in select markets in 2014 subject to the availability of additional debt or equity capital, among other factors.

Stabilization, Renovation and Leasing

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. The time to stabilize a newly acquired property can vary significantly among properties for several reasons, including the property's acquisition channel, the age and condition of the property, whether the property was vacant when acquired, local demand for our properties, our marketing techniques, and the size of our available inventory of rent ready properties. We are nearing stabilization of our existing portfolio, with less than 3% of our properties at March 31, 2014 still undergoing stabilization. During the three months ended March 31, 2014, we stabilized 225 properties.

The following table summarizes the stabilized and leasing status of our properties as of March 31, 2014:

                             Number of                                                                                 Average
              Number of      Stabilized     Properties     Properties     Aggregate Portfolio       Stabilized         Monthly
Market        Properties     Properties       Leased         Vacant         Occupancy Rate        Occupancy Rate       Rent (1)
Phoenix           1,424          1,424          1,362             62                 95.6 %             95.6 %       $    1,032
Atlanta           1,012            989            894            118                 88.3 %             90.4 %            1,164
Tampa               926            924            895             31                 96.7 %             96.9 %            1,217
Northern CA         384            384            376              8                 97.9 %             97.9 %            1,478
Las Vegas           290            290            284              6                 97.9 %             97.9 %            1,150
Columbus            284            269            214             70                 75.4 %             79.6 %            1,029
Dallas              259            227            224             35                 86.5 %             98.7 %            1,257
Orlando             231            213            209             22                 90.5 %             98.1 %            1,240
Tucson              209            208            204              5                 97.6 %             98.1 %              834
Southeast FL        189            147            144             45                 76.2 %             98.0 %            1,742
Southern CA         156            155            149              7                 95.5 %             96.1 %            1,147
Jacksonville        152            133            129             23                 84.9 %             97.0 %            1,090
Charlotte           130            127            117             13                 90.0 %             92.1 %            1,156
Houston             102            100             99              3                 97.1 %             99.0 %            1,192
Totals            5,748          5,590          5,300            448                 92.2 %             94.8 %       $    1,163

(1) Average monthly rent for leased properties was calculated as the average of the contracted monthly rent for all leased properties as of March 31, 2014 and reflects rent concessions amortized over the life of the related lease.


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Stabilized occupancy increased to 94.8% as of March 31, 2014 from 92.7% as of December 31, 2013, primarily as a result of favorable leasing activity in Columbus since our Manager's operating subsidiary internalized management of the Columbus market in December 2013. This improved leasing activity resulted in stabilized occupancy increasing to 79.6% as of March 31, 2014 from 53.9% as of December 31, 2013 in that market. The improvement in stabilized occupancy during the three months ended March 31, 2014 was also driven to a lesser extent by favorable leasing activity in the Dallas and Atlanta markets.

In the quarter ended March 31, 2014, 369 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 March 31, 2014 was 6.6%. Quarterly turnover represents the number of properties turned over in the period divided by the number of properties in stabilized status during the period (i.e., 5,590 properties for the three months ended March 31, 2014). 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 March 31, 2014 was 1,011, including properties with month-to-month occupancy in the period. Of these properties, 213 properties turned over (implying a 21.1% turnover rate).


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Results of Operations

The following are our results of operations (unaudited) for the three months
ended March 31, 2014 and 2013 and December 31, 2013:

                                                                                                                   Sequential Quarter Comparison
                                                                                      Three Months Ended        Three Months Ended March 31, 2014 vs
Selected Financial Data (unaudited)              Three Months Ended March 31,            December 31,                    December 31, 2013
(amounts in thousands except share data)            2014               2013                  2013                   $ Change               % Change
Revenue:
Rental income                                 $      17,671       $       7,296     $           16,409        $         1,262                   7.7  %
Other income                                            460                 385                    300                    160                  53.3  %
Total revenue                                        18,131               7,681                 16,709                  1,422                   8.5  %

Expenses:
Property operating and maintenance                    3,610               1,702                  3,848                   (238 )                (6.2 )%
Real estate taxes                                     2,486               1,420                  2,000                    486                  24.3  %
Homeowners' association fees                            304                 281                    282                     22                   7.8  %
Property management                                   2,959               2,431                  2,818                    141                   5.0  %
Depreciation and amortization                         6,145               3,518                  6,174                    (29 )                (0.5 )%
Advisory management fee - affiliates                  2,201               2,852                  2,179                     22                   1.0  %
General and administrative                            2,053               1,528                  2,110                    (57 )                (2.7 )%
Interest expense                                      2,327                   -                  1,764                    563                  31.9  %
Other                                                   411                 331                    594                   (183 )               (30.8 )%
Total expenses                                       22,496              14,063                 21,769                    727                   3.3  %
Net loss                                             (4,365 )            (6,382 )               (5,060 )                  695                 (13.7 )%

Net loss attributable to noncontrolling
interests - Operating Partnership                         -                   5                      3                     (3 )              (100.0 )%
Net loss attributable to controlling
interests                                            (4,365 )            (6,377 )               (5,057 )                  692                 (13.7 )%
Preferred stock distributions                           (25 )               (25 )                  (25 )                    -                     -
Net loss attributable to common
stockholders                                  $      (4,390 )     $      (6,402 )   $           (5,082 )      $           692                 (13.6 )%

Loss per share - basic and diluted
Net loss attributable to common shares        $       (0.11 )     $       (0.16 )   $            (0.13 )      $          0.02                 (12.4 )%
Weighted average common shares outstanding       38,542,728          39,182,153             38,705,311               (162,583 )                (0.4 )%

Comprehensive loss:
Net loss                                      $      (4,365 )     $      (6,382 )   $           (5,060 )      $           695                 (13.7 )%
Other comprehensive loss:
Change in fair value of interest rate cap
derivatives                                             (86 )                 -                    (33 )                  (53 )               160.6  %
Other comprenhensive loss                     $         (86 )     $           -     $              (33 )      $           (53 )               160.6  %
Comprehensive loss                                   (4,451 )            (6,382 )               (5,093 )                  642                 (12.6 )%
Less comprehensive loss attributable to
noncontrolling interests - Operating
Partnership                                               -                   5                      3                     (3 )              (100.0 )%
Comprehensive loss attributable to
controlling interests                         $      (4,451 )     $      (6,377 )   $           (5,090 )      $           639                 (12.6 )%

Other Data (1):
Net operating income                          $       9,223       $       2,133     $            8,292        $           931                  11.2  %
Net operating income as a percentage of
total revenue                                          50.9 %              27.8 %                 49.6 %

Funds from operations                         $       2,075       $      (2,633 )   $            1,459        $           616                  42.2  %
FFO per common share - basic and diluted      $        0.05       $       (0.07 )   $             0.04

(1) NOI and FFO are non-GAAP financial measures we believe, when considered with the financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance as a REIT. Reconciliations of NOI and FFO to net loss and net loss attributable to common stockholders prepared in accordance with GAAP, respectively, are found in this Item 2 under the headings "Net Operating Income" and "Funds From Operations".


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Revenue

We earn revenue primarily from rents collected from residents under lease agreements for our single-family properties. These include short-term leases that we enter into directly with our residents, which generally have a term of one year. 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.

Total revenue increased $1.4 million, or 8.5%, in the first quarter of 2014 on a sequential quarter basis. Total revenue increased $10.5 million in the three months ended March 31, 2014 over the prior year period. These increases are due primarily to the increase in the number of properties leased in the three months ended March 31, 2014 as compared to prior periods. We owned 5,300 leased properties as of March 31, 2014 as compared to 4,973 and 2,413 leased properties as of December 31, 2013 and March 31, 2013, respectively. We achieved an average monthly rent for leased properties in our total portfolio of $1,163 and $1,162 as of the end of the first quarter of 2014 and fourth quarter of 2013, respectively.

Expenses

Property Operating and Maintenance Expenses. Property operating and maintenance expenses decreased $238,000, or 6.2%, in the first quarter of 2014 on a sequential quarter basis and increased $1.9 million for the three months ended March 31, 2014 over the prior year period. Included in property operating and maintenance expenses are property insurance, bad debt, utilities and landscape . . .

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