IPO Preview: Silver Bay Realty Trust

| About: Silver Bay (SBY)

Based in Minnetonka, MN, Silver Bay Realty Trust (NYSE:SBY) scheduled a $300 million IPO with a market capitalization of $709 million at a price range mid-point of $20, for Friday, December 14, 2012.

Five other IPOs Scheduled For Week Of December 10th. The full IPO calendar is available here.

S-11A filed December 12, 2012.

Manager, Joint Managers: Credit Suisse; BofA Merrill Lynch; J.P. Morgan. Co Managers: Keefe, Bruyette & Woods; RBC; JMP Securities; Zelman Partners.

SUMMARY

SBY has an unproven business model in the area of buying & renting/single family homes, in a market with potentially negative trends.

Also, SBY has a sweetheart deal with its 'independent' directors to pay them $555,000 annually. For the size of SBY's operation that seems like an exorbitant directors' fee.

RECOMMENDATION

Neutral, SBY is the only public play buying & leasing single family homes. Their business model is not yet proven. Seems premature to do an IPO at this time, based on reported financials.

BUSINESS

SBY was formed June 29, 2012 to speculate in buying single family homes for rental.

As of September 30, 2012, more than half of the homes owned by Two Harbors Property and the Provident Entities comprising SBY's Initial Portfolio as of that date had been acquired within the preceding six months.

A substantial number of those were still in the process of stabilization, the period of time during which time they are not generating revenue because we are gaining possession, conducting renovations or marketing and leasing such properties.

TRENDS ARE NOT ALL POSITIVE

SBY does not expect these favorable trends in the residential rental market to continue indefinitely.

Eventually, a strengthening of the U.S. economy and job growth, coupled with government programs designed to keep home owners in their homes and/or other factors may contribute to a stabilization or reversal of the current trend that favors renting rather than home ownership.

In addition, SBY expects that as investors like SBY increasingly seek to capitalize on opportunities to purchase undervalued housing assets and convert them to productive uses, the supply of single-family rental properties will decrease and the competition for tenants may intensify.

Also, mortgage loan modification programs and future legislative action may adversely affect the number of available properties that meet SBY's investment criteria.

COMPETITION

While there are a lot of hedge funds and private funds pursuing the same business plan, SBY is not aware of any other public REITS with the same single family business plan.

MANAGEMENT FEES

SBY intends to pay its manager 0.375% of the daily average of SBY's fully diluted market capitalization for the preceding quarter (a 1.5% annual rate), less any property management fees received by SBY's Manager's operating subsidiary.

MANAGERS

SBY's properties have been and will be managed by PRCM Real Estate Advisers LLC

ORGANIZATIONAL STRUCTURE

… seems unnecessarily complicated.

USE OF PROCEEDS

SBY expects to net $234 million from its IPO.

Proceeds are allocated to purchase single family homes.

In addition, SBY intends to make cash payments to Prior Provident Investors in connection with the Formation Transactions of $5.1 million.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.