After reading and participating in the discussion of Regarded Solutions' article "2 Brand New REITs That Have Strong Dividend Potential," I decided to dig into the IPO prospectus and drag out some numbers on Silver Bay Realty Trust (SBY).
Silver Bay Realty Trust is a REIT focused on buying, renovating, and renting out single-family homes. The company was formed by mortgage REIT Two Harbors Investment Corp. (TWO), chipping in 2,200 homes it has purchased and Provident Real Estate Advisors LLC, contributing 900 homes from investment funds it manages. Post-IPO, Two Harbors owns about 48% of SBY and Provident Real Estate Advisors LLC holds 16%. Silver Bay will be externally managed by PRCM Real Estate Advisers LLC, which is closely affiliated with the external manager of Two Harbors Investment.
Breaking Out the Numbers
After wading through the prospectus, here are some numbers that I believe provide an idea of where Silver Bay Realty Trust currently stands:
- The prospectus list 2,548 homes -- I do not know about the other 550 -- with a net investment cost of $307 million. That works out to $120,500 per home.
- The company has about $225 million in cash and no debt.
- Escrow deposits total $131 million. Note from prospectus: "Escrow deposits consist primarily of refundable cash on deposit with property acquisition managers for property purchases, renovation costs, and earnest money deposits."
- 1,186 of the 2,548 homes are leased -- 46% -- at an average monthly rent of $1,126. Assuming the not accounted for 550 homes are vacant, the total occupancy rate is about 38%.
- Of the 900 or so homes owned for more than six months, 91% are currently rented.
- The homes are located in Arizona, California, Florida, Georgia, Nevada, North Carolina, and Texas, with 57% in Phoenix and Orlando/Tampa.
A new management agreement went into effect with the IPO, which basically covers property management costs by the management company or any contracted third-party property managers, plus a 1.5% annual fee based on the company's market cap.
What Do the Numbers Say?
The currently rented homes work out to $4 million per quarter in revenue. A hypothetical fully rented portfolio based the numbers above would throw off 10.5 million in quarterly revenue or $42 million per year.
The prospectus gives pro forma 2012 expenses of $24.6 million. It is impossible to determine what portion of this was renovation costs and the management contract has changed significantly from the pre-IPO agreement. Still, expenses last year ran about $6 million per quarter.
Going really rough on the estimates, it seems at this point a maximum annual profit of about $15 million is possible, without further growth of the portfolio. With about 37 million shares out, that number works out to 40 cents per share.
The math above includes some significant assumptions, particularly on the expenses side. However, right now you have an $800 million market cap REIT with potential to generate about $40 million of revenue on its existing portfolio. This company is going to need to buy a lot more houses and get them renovated and rented out pretty quickly to justify the current market cap. It may take quite awhile to actually post a profit.
On the positive side is the $400 million of capital available to acquire more properties and the potential to leverage the equity with some debt. The next few quarters of earnings releases are going to be very interesting. My eye will be on the expense numbers and how quickly the company is able to get homes rented and cash flowing.