Silver Bay Realty Trust's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Mar. 1.13 | About: Silver Bay (SBY)

Silver Bay Realty Trust Corp. (NYSE:SBY)

Q4 2012 Earnings Call

March 1, 2013 9:00 am ET

Executives

David Miller – President, Chief Executive Officer

Christine Battist – Chief Financial Officer

Patrick Freydberg – Chief Operating Officer

Anh Huynh – Director, Investor Relations

Analysts

Dan Oppenheim – Credit Suisse

Jay Romani (ph) – KBW

Dennis McGill – Zelman & Associates

Anthony Paolone – JP Morgan

Jana Galan – Bank of America

Tayo Okusanya – Jefferies

Operator

Good morning and welcome to the Silver Bay Realty Trust Corp. Fourth Quarter 2012 Earnings conference call. All participants will be in listen-only mode. If you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note that this event is being recorded.

I’d now like to turn the conference over to Anh Huynh. Ms. Huynh, please go ahead.

Anh Huynh

Thank you, Keith, and good morning. I would like to begin by welcoming everyone to Silver Bay’s Fourth Quarter 2012 conference call. On the call with us this morning are David Miller, President and Chief Executive Officer; Patrick Freydberg, Chief Operating Officer; and Christine Battist, Chief Financial Officer. For your reference, the press release and financial tables associated with today’s conference call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website. This call is also being broadcast live over the Internet and may be accessed on our website at silverbayrealtytrustcorp.com in the Investor Relations section under the Events Calendar page. In addition, we like to encourage you to reference the accompanying presentation to this call which can also be found on our website on the Presentations page.

Before we begin, please note that today’s discussion may include forward-looking statements. Forward-looking statements reflect our views regarding future events and are typically associated with the use of words such as anticipate, target, expect, estimate, believe, assume, project, and should, or similar words. We caution all those listening, including investors, not to rely unduly on forward-looking statements, the implied risks and uncertainties, and actual results may differ materially from expectations. We encourage you to carefully consider the risks described in our filings with the SEC which may be obtained on the SEC’s website at SEC.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate.

With that being said, I would now like to turn the call over to David for his remarks.

David Miller

Thanks, Anh. Thank you for joining us for Silver Bay’s first earnings call as a public company. First, I would like to extend our appreciation to our investors, employees, business partners, sell-side analysts and bankers for sharing Silver Bay’s vision of bringing institutional excellence to the single family rental industry. I would also like to thank our residents for choosing a Silver Bay home. It is a privilege to be entrusted with your support as we strive to deliver on our mission of creating value for our stockholders and providing high quality homes and service to our residents.

Today I would like to briefly review four topics: first, the recent activity in the fourth quarter; second, our core strategy; third, the current housing market environment; and last, our key priorities for 2013.

December 2012 marked an important milestone in the early stages of our company’s development. Slide 3 in the accompanying presentation highlights this progress. Silver Bay completed an initial public offering of 15.2 million common shares for net proceeds of approximately 263 million, which reflects the full exercise of the underwriters’ overallotment option completed in January. Simultaneously, we combined the portfolios of single-family homes owned by Two Harbors and Provident. The successful completion of the IPO positions us well on several fronts. It launched us with a diverse portfolio and the transaction provided capital to execute our strategy and build upon our infrastructure to support the expansion of our business. In addition, we are pleased that our common shares, which are now traded on the New York Stock Exchange, provide a public currency for investors who seek both liquidity and exposure to the single-family residential asset class.

Silver Bay takes an opportunistic stance towards investing while maintaining a disciplined approach to growing our company. We manage our business with a long-term outlook and look to develop strong relationships with business partners and investors who share our approach and investment philosophy. Our core strategy is highlighted on Slide 4.

Silver Bay will continue to deploy capital in geographies that are the most attractive. We will also continue to achieve scale through a disciplined acquisition process while maintaining a commitment to excellence in transforming homes into high quality rentals with best-in-class service. In doing so, we intend to create a sustainable long-term business that will provide our residents desirable housing alternatives, access to quality school districts, and the convenience of living within close proximity to key employment centers.

For our stockholders, we believe Silver Bay provides an attractive total return profile that combines capital appreciation with cash flow yields generated from our leasing operations. The single-family homes in our portfolio were acquired a significant discounts to replacement cost. We also expect that we will see in most of our markets a mid to high single-digit annual capital appreciation on these residential assets over the next five to seven years as housing prices return to more normalized levels. When you combine this potential capital appreciation and rental yield, we believe our strategy provides attractive unlevered returns with inflation protection.

We believe competition in the single family residential industry will continue to increase. This industry is comprised of individuals, small investors, as well as the recent entry by a group of larger institutional players. Today, the competition for our target assets is reasonable, given the large size of the residential real estate market and the single family rental market. While competition increased markedly in the second half of 2012, institutional ownership of single family rentals is still estimated to be only 2 to 3% and pricing remains attractive. However, we believe this will change over time. This emphasizes the need to take advantage of being an early participant in this space and capture scale efficiencies as we grow our business.

It is critical for us to deploy capital in the early stages of the housing recovery while remaining disciplined. Equally important is continuing to develop an efficient operating platform. We also seek to establish our brand as the preferred manager within the rental community which will provide us a competitive advantage as the industry matures. Gaining scale will enable us to leverage our corporate G&A, reduce per-unit operating expenses, and lower our cost of capital.

The current housing environment across our core markets in eight states remains highly attractive. Housing prices, while off the lows, remain cheap relative to replacement costs and affordability metrics. As you can see on Slide 5, housing prices increased in all of our core markets in 2012, ranging from mid-single digit annual increase to as high as 23% in Phoenix. According to Core Logic, pricing showed flat to low single digit appreciation in the fourth quarter across our markets, although this does not give a complete picture of the general strength in our markets. First, normal seasonality typically results in weaker index pricing in the fourth quarter. Secondly, we did see relative strength in the distressed segment, particularly at foreclosure options were competition has caused a reduction in foreclosure discounts. However, it is important to keep these gains off the lows in context. In markets like Phoenix, Las Vegas and California, prices are still 40 to 60% below peak and roughly flat to prices seen over a decade ago, despite significant population growth and inflation.

The supply of homes available for sale that meet our criteria is large and the shadow inventory pipeline remains elevated. We estimate that over 5 million mortgages are in some form of delinquency or foreclosure, which equates to over 11% of all mortgages and roughly double normalized levels. However, there is variation across markets. For example, in Florida we are acquiring properties where the foreclosure process began as early as 2009 and 2010. Nevertheless, competition for this inventory has remained strong across all markets, and certain markets such as Phoenix have seen a substantial reduction in shadow inventory over the past 24 months.

On the demand side, we believe demographic factors are highly favorable to our business model. Household formations continued to increase in the fourth quarter to approximately 1 million on an annualized basis. When you combine this favorable trend with tight credit availability, we anticipate continued strong rental demand for single family homes.

Finally, while new building activity has begun to increase, we believe substantial underinvestment 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 believe pricing will inevitably revert to replacement cost, which would be favorable to our total return profile.

Looking ahead, we view 2013 as a period dedicated to laying the foundation to support future growth. Our top three priorities for 2013 are: first, growth through a disciplined acquisition process; second, expanding our operational capacity and efficiency in stabilizing properties; and third, adding financing alternatives to our capital structure. As previously mentioned, we are finding compelling investment opportunities across all of our markets. Silver Bay will grow by continuing acquisitions in existing markets, expanding to new markets, and acquiring portfolios.

We are currently acquiring approximately 40 to 50 million in single family properties on a monthly basis or approximately 300 to 400 homes per month, as shown in the chart on Slide 6. This has primarily been on an individual basis at auction, through brokers, and in privately negotiated transactions, although we are beginning to see an increasing number of small portfolios trade. We are quite optimistic in our ability to acquire quality homes, both leased and vacant, that have been aggregated by smaller players and believe the industry will continue to consolidate. For example, we recently closed on bulk purchases of nearly 80 homes in California for approximately $10 million.

During the fourth quarter, we acquired 857 properties exclusive of the acquisition of the 881 properties owned by Provident. The slowdown in pace in the fourth quarter was largely due to seasonality as December was markedly slower. In the first half of the first quarter, we acquired over 500 properties with contracts for an additional 175, bringing the total number of properties in our portfolio or under contract to over 4,000 as of February 15. Our top markets for acquisitions in the fourth quarter were Phoenix, Atlanta, Tampa, and northern California, collectively comprising approximately 77% of acquisitions. From year-end through February 15, these markets comprised approximately 64% of our acquisitions.

We are pleased to report that we’ve expanded our Florida presence to include Jacksonville and the region spanning from Miami to West Palm Beach, as well as expanding to Houston, Texas and Columbus, Ohio. While we are in relatively early stages in these markets, we are excited about the investment opportunity and prospects for growth.

Let me comment briefly on pricing and our underwriting criteria. Please note that when I talk about yields, I am talking about underwritten yields. On the aggregate portfolio, the underwritten gross yield are just over 11%, which is consistent with what we are acquiring today; however, there is variability in this number across markets. For example, in Atlanta and Tampa, yields have compressed from higher levels, although they are still at or above levels we find attractive. In markets like Phoenix and California, the yields we are underwriting currently are roughly in line with the yields on our existing properties in those markets. In our new markets, we are seeing gross yields higher than the rest of the portfolio; therefore in total, the gross yield of our recent purchases are consistent with the gross yields on the portfolio as of December 31; but net of the new markets, our underwritten gross yield have compressed somewhat from the second half of 2012.

Our second priority is to expand our operational capacity and efficiency in stabilizing properties. As we grow our portfolio, it is critical to maintain the appropriate capacity to renovate and lease properties in a timely and cost-effective manner in order to generate rental cash flows. In the fourth quarter of 2012, we stabilized 542 properties. We ended the year with stabilized occupancy of 96% and occupancy in properties owned for longer than six months of 83%. We are focused on improving capacity and efficiency in 2013 to maintain pace with our acquisitions pipeline. From the first of the year through February 15, we stabilized an additional 300 properties. Patrick will review these data metrics and our operational initiatives later on the call.

Our third priority is to establish a credit facility and pursue other financing alternatives. Silver Bay intends to fund its property acquisitions through a combination of equity and debt. We intend to first deploy the cash proceeds from our IPO and anticipate that we will finalize a financing agreement in the near future. We believe that single family rental properties are an obvious and high quality asset to leverage, based on the underlying asset value and cash flow generation. Our plan is to prudently apply leverage to our portfolio. As our business matures and the portfolio approaches stabilization, we anticipate a moderate leverage target in the range of 30 to 50% loan to value, which is comparable to other publicly-traded equity REITs. We are currently involved in detailed and productive discussions with financial institutions who have demonstrated a strong interest in providing financing. We believe a measured approach is beneficial to our stockholders because lending capacity and pricing continue to improve as institutions in the debt markets become more comfortable with the industry and asset class.

We are quite optimistic about the prospects for our company, the single family rental market and the overall housing market. We have a great team and we look forward to a fundamental year of expansion and infrastructure development and reporting our progress along the way. Silver Bay is committed to transparency and we expect to continue increasing the disclosure of relevant data metrics as the business develops and the portfolio matures.

I would now like to turn the call over to Patrick Freydberg, our Chief Operating Officer.

Patrick Freydberg

Thank you, David. I’m delighted to be part of the Silver Bay story. I’ve spent most of my career in the multi-family industry where I gained significant experience in the value-add space. Value-add is the practice of acquiring and repositioning properties through a process of renovation and initial lease-up. Joining Silver Bay has been exciting because I have had the opportunity to leverage my multi-family, value-add and core operations experience.

There are many similarities between multi-family operation and Silver Bay’s single family operations. We are able to bring best practices from the multi-family sector and overlay certain management philosophies and processes onto our single family rental infrastructure. By doing so, we have begun developing a scalable, institutional-grade infrastructure to support our mission to provide high quality rental homes and service to our residents. Silver Bay’s goal is to create a long term, sustainable business by providing high quality rental homes and service to our residents. Our operational vision is outlined on Slide 7.

We are focused on developing a national brand and we intend to achieve this by creating a standardized Silver Bay product across all of our markets. In addition, we strive to establish an efficient infrastructure that leverages the economies of scale inherent in managing a national operation. As David mentioned, this year we will continue to focus on enhancing our infrastructure to support future growth.

Although we are only two months into the year, we have already made great progress. Developing a standardized best-in-class product first begins with the renovation process. We have expanded and restructured our project management team to accommodate the rapid pace of our acquisitions and have adopted a four-point renovation methodology to help us reach this goal. First, we identify and complete necessary remedial repairs which are required to place the home into service. Second, we upgrade the property to meet Silver Bay’s life safety standards. Third, we complete renovations that will mitigate future maintenance and servicing expenses over the life of the property. This step may include upgrading to higher quality materials such as tile flooring, carrying out preventative work such as completing a thorough HVAC service as opposed to just changing the filters, and replacing all toilet valves to avoid future service calls. Fourth, we make cosmetic enhancements to the property that will appeal to our target resident, such as higher grade blinds, appliances, paint and carpet.

I would like to review a few operational highlights for the quarter on Slide 8. For homes owned for more than six months, we managed over 1,500 homes of which approximately 1,300 homes were leased, resulting in an occupancy rate of 83%. We believe that the occupancy rate on homes owned six months or more is a useful metric that demonstrates our progress in renovating properties and leasing up homes post-acquisition. The occupancy rate for the fourth quarter reflects how the pace of our acquisitions accelerated faster than our pace of renovations, which resulted in a backlog of properties in need of renovation and leasing.

In addition, we also experienced delays due to a lengthening of the eviction and permit processes in certain markets. We have recently made progress to improve this metric. As I mentioned earlier, we have taken steps to right-size our project management team to handle our current acquisitions pace. For certain markets, we have transitioned renovation responsibilities from third party partners to internal project management teams to improve the efficiency of this process. We believe that these changes will help us address processing the homes in our renovation pipeline.

We are introducing a new metric this quarter that reports the occupancy rate on stabilized properties. Silver Bay defines stabilized properties as post-renovated properties that we have leased for the first time plus properties acquired with leases in place. We believe this occupancy rate measures our effectiveness in managing homes that have been placed into service. Silver Bay is introducing this metric because we believe it more closely resembles the multi-family industry’s definition of occupancy for core operations. We believe this metric will further enhance the investment community’s ability to evaluate our progress, especially as our business matures and the impact of acquisitions and stabilization becomes a smaller part of our business.

Using this method, we reported an occupancy rate of over 96% on over 1,700 stabilized homes as of December 31. This metric reflects that many homes used in this calculation are newly leased properties and have not been through the renewal process. It is our long-term goal to maintain a stabilized occupancy rate above 90%.

With regard to leasing, the overall demand for Silver Bay’s rental homes remains strong. We have launched several marketing and leasing initiatives. Given the young age of our portfolio, there is relatively limited data on renewal rates and pricing. We anticipate sharing more information in the second half of the year as more leases come up for renewal.

Thank you. I would now like to turn the call over to Christine, our CFO.

Christine Battist

I’d like to begin by providing some insights into the preparation of our financial statements for the fourth quarter and full year of 2012. As highlighted on Slide 9, our fourth quarter results include the properties acquired from Two Harbors for the full quarter and those from Provident for 12 days. By way of background, Silver Bay was formed through a series of formation transactions which combined the portfolios of Provident and Two Harbors. The Two Harbor subsidiary we acquired is considered our predecessor, meaning that their balance sheet was recorded at carryover basis and our financial results include their operational activities since they began formal operations in 2012. Additionally, Provident assets were deemed to be acquired by us on December 19, 2012. As a result, their assets and liabilities were recorded at fair market value while their operational results were only reflected in our income statement for 12 days. We realize that this makes it difficult to analyze our financial performance or ascertain operating trends, especially since the Two Harbors portfolio was still in the ramp-up and stabilization mode during this time.

Our fourth quarter results summarized on Slide 10 were in line with our expectations, given the abbreviated operating period for Provident, and there were no unusual adjustments. We earned 2.8 million in revenue which was driven primarily by rental income generated by our properties in Phoenix, Tampa, and Atlanta, and reported a net loss of 3.2 million or negative $0.04 per diluted share. Note that the EPS calculation was calculated on the net loss for 12 days in 2012 because prior to that we were not a publicly traded company.

We consider FFO to be an important measure of our operations; however based on our limited operations for 2012, we believe FFO for the year does not provide any meaningful information. We intend to include a calculation in future periods when FFO becomes more meaningful.

Our ability to acquire, renovate, lease and maintain our portfolio in a cost-effective manner, as well as manage our G&A expenses are key drivers of our ultimate success. Let me make a few comments on some of our key expenses. First, property operating and maintenance expenses include property insurance and repairs and maintenance. In addition, utility costs are expensed from the time a property is market ready until leased. Property insurance ranges between 400 to $900 per property, depending on the market. Property taxes also vary by market but a typical tax bill would be 1.5% of the aggregate cost basis of a property. Homeowners association fees can vary widely and not all of our properties have HOAs. A typical HOA fee is $50 per month and approximately 40% of our properties are in an HOA. Property management fees include both third party and our internal offices. Our third party fees are a function of revenue and are generally in the 8 to 9% range, while the cost of our internal offices are relatively fixed and should see economies of scale as our occupancy rate increases.

Depreciation expense commences on the building portion once a property is market ready. The split between building and land is approximately 80% and 20%, though it varies by market. Building depreciation is calculated on a straight line basis over 27.5 years.

The advisory fee is calculated based on 1.5 per annum of our fully diluted market capitalization as defined by the management agreement. And finally, G&A costs include those costs related to being a public company and costs incurred under the management agreement with our manager primarily related to compensation. We expect to leverage our G&A as revenue grows.

We also expect the first quarter of 2013 will provide more meaningful results. With that said, we are in the process of growing our business through acquisitions and our results will ultimately be based on a number of key drivers, including our acquisition pace, timely renovations, and maximizing rental rates and occupancy.

As of December 31, 2012, we had cash and cash equivalents of approximately 228 million, plus roughly 20 million in escrow deposits. The underwriters’ overallotment, or greenshoe, was exercised after quarter end, so the (inaudible) cash proceeds of approximately 34.8 million are not reflected on our balance sheet as of December 31. Collectively, we expect this will provide us ample cash to pursue our acquisition strategy in coming months.

Let me briefly comment on our dividend policy. It is our intention subject to our performance and our Board’s approval to pay quarterly dividends. Our requirement as a REIT is to pay out substantially all of our taxable income each year; however, we’d also take into consideration our free cash flow and adjusted FFO, and both if positive bode well for our dividend consideration. Finally, we anticipate filing our 10-K with the SEC this afternoon.

I will now turn the call back to Keith for Q&A.

Question and Answer Session

Operator

Thank you. We will now begin the question and answer session. [Operator instructions]

The first question comes from Dan Oppenheim with Credit Suisse.

Dan Oppenheim – Credit Suisse

Thanks very much. I was wondering if you can talk about thoughts on entering new markets rather than continuing to get critical mass in some of the core markets, I think over time, where you’ve incorporated the property management internally. We’ve seen better success for that, and then you’re talking doing it—bringing the renovation internal now. Why not just continue to sort of focus on core markets right now rather than expanding at this point?

David Miller

Thanks Dan. No, it’s a good question. I’d say the first is they are not mutually exclusive. We are certainly very focused on our existing markets, the markets where we have scale – Phoenix and Atlanta, for example, where we have our internal property management, so we’re very focused on that and we are out there acquiring aggressively those homes that meet our criteria.

We are also moving into new markets, obviously adding acquisition personnel with local expertise in those markets because we’re finding terrific investment opportunities, so one does not detract from another and we think it’s a great way both to diversify the portfolio and take advantage of great investment opportunities there.

The second part of the question, just to respond to the renovation, we view the renovation as obviously a critical piece post-acquisition, and so really to facilitate the efficiency and increase our capacity, we thought it made sense in markets to add our personnel. So it’s not a full blown internalization of property management in those markets, but it’s certainly something to augment the capacity. But we’re still relying on some really great third party managers who are very good at the leasing process, are very good at managing the properties once they are stabilized, but had less ability to process large amounts of homes once they were acquired.

Dan Oppenheim – Credit Suisse

Thanks. And then I guess a quick follow-up – in terms of the leasing progress, you talked about some of the delays in terms of the renovation and also the eviction process. Can you give a sense in terms of the overall leasing process to what’s happened with homes, call it 30, 60 days post-renovation, so just a sense of leasing as opposed to the delays that would have hindered any leasing ability.

David Miller

Sure, so as we mentioned—Patrick talked a little bit about – and I’ll let him comment – talked a little bit about the overall process which I think in the fourth quarter there was some seasonality, but really in the first part of the stabilization, the eviction process has elongated somewhat and we recognize certainly some delays in our capacity on the construction. On the leasing side, we are seeing very good demand. Typically we’re looking at really 30 to 60 days, but that includes a few weeks from the period when the tenant signs the lease and before they’ve moved in, so that would be the lease effective date. So just over 30 days is really where we’re seeing properties listed on the market, and we think that’s quite good, although we’re going to continue to improve that through additional marketing.

One of the things that we are always cautious about is speed to leasing is not always the best practice, and we take great care in our tenant screening and so we often have a great deal of applications that we reject that really delay the process a little bit. So someone who we think might be a good tenant otherwise does not complete that process, and then we obviously have to go through that with someone else. So that tends to take a little bit more time as well, but we’re seeing great demand out there in all of our markets for rentals. Clearly the foreclosure process creates incremental demand as well as increased demographic trends.

Patrick Freydberg

This is Patrick. I might add that the best-in-class approach to fit and finish of our homes certainly helps the leasing velocity, and we believe that this business plan will result in the best possible performance for our homes as far as leasing goes. I think that once we go through a full year’s cycle, it will be easier to discern the seasonality components of the various quarters.

Dan Oppenheim – Credit Suisse

Thank you.

Operator

Your next question comes from Jay Romani from KBW.

Jay Romani – KBW

Good morning. Thanks for taking the question and congrats on your first quarter as a public company. I wanted to ask about the difference between stabilized properties and those owned for more than six months. It’s apparent that the stabilized portfolio is actually larger than those properties owned for more than six months and that the occupancy rate of 96% exceeds the 83% on the over six months group. I’m wondering if this has anything to do with how big your in-place infrastructure is in certain markets and whether you are warehousing properties as you put in place the infrastructure to refurb, lease and service those homes.

Patrick Freydberg

I’ll take this – Patrick Freydberg. The temporary backlog on some of the renovations is really caused by just getting our processes and right-sizing our renovation capacity with our in-house project managers that we’ve now put into place. It was not an intentional thing and I think that the goal here is to be able to distinguish the relative occupancy rates in the repositioning phase, which is where we use the six month and more metric, versus the core operating or stabilized phase, which is where we are introducing our new metric. And I think you’ll see that both of these metrics are necessary to track the various progress in those two phases because they are and will continue to be ongoing phases that are part of our business plan, and that is the intention.

David Miller

Yeah, just to add on that, agreeing fully with Patrick. Over time, the stabilized number really reflects what’s going on with the business of those properties put into service. It will reflect renewal rates. Obviously over time, that will become a more relevant metric than the impact of the properties we recently purchased, but we do think both of those will give you a picture of what’s going on with the business generally.

Jay Romani – KBW

And would you say the key difference between the two buckets is the temporary backlog on renovations, or is it that you’re buying more properties that already have in-place leases or some other factor?

David Miller

No, you’re right. It is certainly a bit of a delay, both in the eviction and renovation process, so we put out a marker of six months. We still are sticking with that as a reasonable period of time to get a property stabilized. Certainly up-front of that, there are some issues outside of our control that have delayed that, and then some inside of our control that we have worked to rectify going forward, so that’s really the primary difference.

I guess I’d make one other comment, which is clearly there are two ways to address the problem of capacity. One is to acquire fewer homes. We don’t think that’s the right strategy, given that we’re just seeing terrific opportunity out there. The other is to right-size the capacity, and that’s what we’ve been working on and we expect that really to take hold this year.

Jay Romani – KBW

Okay, great. And then secondly on the inventory supply question, given the pick-up in housing demand and continued foreclosure bottlenecks in certain markets, you’ve said that you view the inventory as very large, but how do you see the current inventory of REO properties or supply playing out over the next six to 12 months, and do you view it as adequate to your needs and do you expect a seasonal pick-up in supply coming to market over the next few months?

David Miller

Great question. Yeah, we saw a seasonal decline at the end of the fourth quarter, as I mentioned. That is somewhat typical, but I think it was even stronger than we expected in December, but we do expect it to pick up. It’s going to be uneven across markets, but certain markets—certainly (inaudible) state like Florida, we see supply really for a number of years because of the backlog there, and every market is going to be different.

Now I think certainly there has been a reduction in supply in some markets. That will continue, but we are quite confident at least in our visibility for the year that there will be significant inventory coming out, and so it’s not something that we worry about. Our team is at auction every day. They are writing offers every day; they are looking at portfolios. There is still a significant supply out there, so while it has reduced somewhat – take Phoenix, for example. Certainly the last 24 months, you’ve seen REO and foreclosures come down, but they are still quite large and we’re out there buying in Phoenix every day, every week.

So again from our vantage point, we look at the macro statistic quite closely. We certainly would not argue the fact that supply is coming down somewhat, but it’s still pretty elevated from normalized levels and I think it will continue through this year and beyond.

Jay Romani – KBW

Thank you very much.

Operator

Thank you. The next question comes from Dennis McGill from Zelman & Associates.

Dennis McGill – Zelman & Associates

Hi, thank you. First question would just be on the potential side of the portfolio. I think back in December, you articulated that by the end of ’14, you could see the portfolio as much as 10,000 homes to 16,000 homes, and kind of gave us a blueprint by market how that might look. How would you update the commentary around that today, just based on what’s happened since and how the year has started? And what ultimately goes into determining within a market when you stop acquiring and shift more to an operational mode?

David Miller

Sure. I don’t really have an update to the potential size. Obviously that would be dependent upon what the acquisition environment looks like over the next 12 to 24 months, but we’re still comfortable with that. I think it’s important that while we’re growing, largely it’s been organically and one-by-one. There will be significant opportunity to consolidate this industry. There are a lot of small players that have aggregated portfolios. Those are beginning to trade, we’re seeing those in the marketplace. There are also some medium and larger players that we think will potentially consolidate. So I think there’s going to be a lot of homes available for us to purchase at good prices, so I’m still comfortable with roughly those ranges. But again, it’s hard to have that much visibility going forward, but fairly comfortable with that.

And sorry, what was the second part of your question?

Dennis McGill – Zelman & Associates

Yeah, second part just had to do within a market, what ultimately determines whether you continue buying or stop?

David Miller

Sure. Well I think you’d asked when we would stop and focus on operations. Well, we are very focused on operations simultaneously with buying. And look, we look at it market by market, and while we’re not going to disclose certainly publicly because we’ve got competitors out there and we’re in competitive bidding processes, but we certainly look at the total return profile and that’s a combination of yield and our expectations of appreciation, and that differs by market. But our expectations of appreciation are driven by cheapness relative to replacement cost, demographic trends, and our forward-looking pricing assumptions. So you combine those with the effective yields that we’re expecting and underwriting, and that is how we think about it. And if pricing obviously goes to a point where we don’t think we’re getting total returns that our shareholders want and that we think are acceptable, we would pull back and stop buying in one market and obviously redeploy our focus to another market.

Dennis McGill – Zelman & Associates

Okay, that’s helpful. And then just last question – of the 1,600 homes or so that are not stabilized, can you give us a sense of the breakdown between what would fall into sort of still occupied by the prior tenant, under renovation, and then maybe vacant and leaseable?

David Miller

You know, I don’t think we’re comfortable giving out all that information, but in a relative sense certainly the eviction component is relatively small in that. It’s something that certainly can push out the time of a specific home, but we do move those. The biggest bucket is certainly in renovation. That’s something we expect to do better at and get more efficient at, but it’s actually a very critical part of the process that we want to make sure we get right. We want to do it as quickly as we can but we want to make sure that it’s cost effective and all of the renovations are done appropriately so that we don’t have increased maintenance expenses later, or not doing a good fit and finish to retain tenants. So we’re taking great care at that, we are getting better at it, but that is where you would see the biggest bucket out of those areas.

Dennis McGill – Zelman & Associates

Okay, thank you, guys.

Operator

Thank you. The next question comes from Anthony Paolone from JP Morgan.

Anthony Paolone – JP Morgan

Thank you, good morning. As it relates to your 40 to $50 million a month clip, if you weren’t going into Orlando and Charlotte and southern California, these other markets, if you were just focused on Phoenix, Tampa, Atlanta, would you be able to keep that clip going or are those return thresholds being hit where you really need to go into some of these newer places?

David Miller

Yeah, it’s a good question. I think that our rate of 40 to 50 million, I think there is upside to that, but I think it’s a little too early to tell because we’ve just gone into these new markets. So I don’t think the clip is dramatically different in the existing markets, but it’s going to depend on supply and certainly the demand and the pricing out there. But I think it’s relatively consistent, although certain markets are somewhat lower, and that I attribute more to supply rather than calling a big trend from the last couple of months.

So look, we like the new markets not because we’re there filling a void of not being able to purchase in the other ones. It was always part of our plan to be in all markets that have attractive returns. It provides optionality, certainly, in markets that could be quite big and could be around longer as far as acquisition goes, and some of these markets are far less competitive so as I indicated, we are initially seeing higher underwritten yields there.

Anthony Paolone – JP Morgan

And as you talked about your expectations for mid to high single digit price appreciation, if I think about that, it’s probably a number that’s greater than what we should expect for rent growth over the next five to seven years. So how should we think about—like, at what point does the yield kind of get to a level where you think this is not what investors are expecting?

David Miller

I think it’s, again, hard to know exactly what the rental growth will be. I wouldn’t argue with that premise. Again, it’s too early for us to indicate what renewal pricing and new move-in pricing is going to be. Certainly we’re encouraged by our conversations with our third party property managers who manage other properties and the market research out there. But yeah, I think to the extent that lags, we’re always evaluating what is the return on our assets and our portfolios, and we do that market-by-market; and if it gets to a point where pricing is very high, well that’s pretty good for our existing portfolio. And if investors are not happy with the rental yield component of that, we’ll react; but I think we’re years away from that.

Anthony Paolone – JP Morgan

Okay. And then last question is just on the competitive landscape. There is a handful of platforms, including yours, that seem to have emerged as sort of the largest, and it seems like a lot of capital continues to be raised there and has to be put to work. So is there a next tier down that is similarly—maybe it’s regional folks or whatever that’s also continuing to raise capital, or is the business consolidating really among these top half-dozen folks?

David Miller

Yeah, I don’t have great visibility into our competitors. What I will say is as a group, it’s still quite small relative to the total size of the single family rental market. I mentioned 2 to 3% that I’d seen out there in terms of studies. In our core markets, our target markets, it may be a little bit higher than that; but again, I still view our primary competitor when it comes to—certainly on the leasing side, are mom and pops that make up the preponderance of the industry.

But I think as far as consolidation goes, I think that will occur. I think there are medium sized and regional players that are at the point where perhaps they’ve seen some gains but it is getting harder to raise capital, I think, if you’re smaller and don’t have a big platform, and it’s quite expensive to do so as well. So I expect some of those to get consolidated by the larger players.

Anthony Paolone – JP Morgan

Okay, and if I could sneak in one last one—

Anh Huynh

Anthony?

Anthony Paolone – JP Morgan

Yes?

Anh Huynh

Could we—I’m sorry to do this to you, but would you mind resubmitting your question in the queue? We do have a couple behind you.

Anthony Paolone – JP Morgan

Sure.

Anh Huynh

Thank you, and I apologize.

Operator

The next question comes from Jana Galan from Bank of America.

Jana Galan – Bank of America

Hi, good morning. David, thank you for providing the comments on underwritten gross yields by market. How do you think about underwriting bulk purchases versus actions where you may already have renovations completed and a lease in place? And also, what net yields are you achieving on the stabilized portfolio?

David Miller

Yeah, thanks for that question. So we look at bulk portfolios pretty similarly to how we look at every other asset. I mean, we triangulate; we’ve got a number of different ways that we look at valuation. So would we potentially pay a little bit more for a portfolio that’s leased? That would be logical, but I will caveat and say it depends because often the quality of leases in place might be impaired, certainly if they were bona fide leases that came and were not properly screened. So it really depends, and so I really can’t say that we would underwrite higher or lower yields with a given portfolio. It’s on a case-by-case basis.

Was there a second part of that question?

Jana Galan – Bank of America

I was curious what are the net yields that you’re seeing on the stabilized portfolio?

David Miller

Yeah, I think the net yields are not something that we’re comfortable disclosing piecemeal as part of the portfolio. They are still consistent with what we’ve talked about in our—how we underwrite properties in general, so that really has not changed. As I mentioned, you can imply that the slight compression in gross yields in certain markets would apply to the slight compression in net yields, but are still in the ranges that we have always talked about, just maybe perhaps slightly towards the lower end of the range given some of the compression. And then as I said, offsetting that are some of the higher yields we’re seeing in new markets, so net there is no change.

Look, the net yields are something that as an industry, because it’s such a nascent industry, there isn’t yet a clear set of standards, and so various competitors and people out there calculate it in different ways. Certainly we look at—you know, after the revenue, we’re looking at the asset level expenses, the vacancy, bad debt, property taxes, insurance, HOA fees, repairs and CAPEX, so we bucket everything in there when we think about it. Not everyone does that, so again, that’s why we’re not comfortable at this point disclosing that.

Jana Galan – Bank of America

Okay, thank you. And then Patrick, David mentioned some seasonality in the home sales in fourth quarter. I understand it’s a pretty limited operating history, but have you noticed any seasonality in the leasing in 4Q?

Patrick Freydberg

Yes, in fact just as in multi-family industry, there is no question that the period between Thanksgiving and kind of mid-January is a slower period than, say, Easter through 4th of July. That’s our observation, at least through the end of December, so we would expect some pick-up in the first quarter. And as I said before, we will after a full year’s worth of observation be able to distinguish much better between what is the average seasonality in the marketplace versus particular to our homes. That’s all we can really talk about right now.

Jana Galan – Bank of America

Thank you.

Operator

Our next question comes from Tayo Okusanya from Jefferies.

Tayo Okusanya – Jefferies

Yes, good morning. I found your comment about leverage and the lending environment pretty interesting. Could you just talk a little bit more about—in regards to ramping up leverage, who exactly are the key players who seem more willing to lend towards this space? What kind of rates are you expecting to get, whether it’s unsecured versus secured lending, and if the government could also play a role in that?

David Miller

Sure. So I’d say the interest in providing financing has really gone up in the last quarter. I will not speak to specific banks but most of the banks, large banks out there either have developed a product and actually have some sort of facility that’s been named publicly, or are working on one. So that to me is quite a good sign. We’ve had good conversations with a number of banks and are in detailed discussions with others. So again, we are seeing a lot of interest and certainly from initial indications of both rate, leverage, and interest a year ago and six months ago, it is vastly improved. We’re seeing that certainly on the secured side. On the unsecured side, obviously it’s not something that this early in the life cycle of our company is really an option outside of other instruments that could be done, whether it’s converts or preferreds, which we haven’t really explored at this point. So again, that’s a general commentary but we are seeing, again, interest by the lending institutions across the board, and much more so.

Can’t really speak to the government. At this point, there is no program really to speak of. I know certainly about a year or longer ago, they were looking quite closely at providing a program that looked like the multi-family program, but that’s sort of in limbo in Washington so I don’t have any insight on that.

Tayo Okusanya – Jefferies

That’s helpful. Then anything just on the structured finance side, of the ability to kind of securitize the product?

David Miller

You know, I don’t have any specific viewpoint on that other than I followed—I know, certainly have heard that others are working on a structure that would lead to securitization. The rating agencies have come out with comments, certainly questioning a structure and how it would work. I suspect it will take some time before the rating agencies get comfortable with both potential structure as well as just seeing more operating history from the business before they would be comfortable giving high quality ratings to allow securitization to be cost competitive. But that’s certainly a possibility and a strong possibility over time, but I just don’t see it very much in the near future.

Tayo Okusanya – Jefferies

Very helpful, thank you.

Operator

Next we have a follow-up question from Anthony Paolone from JP Morgan.

Anthony Paolone – JP Morgan

Thanks. If I recall correctly, I think the renovation costs were generally estimated in that $15,000 a home range, so I guess the question is has that changed at all, given the delays that you had on some of that, just changing up how you’re approaching some of those things?

David Miller

Yeah, I think that probably 15% is a good marker. I think when we initially estimated, we gave a broader range and I think we’re comfortable now talking about it’s about 15%. So it’s probably about $1,000 more on average if you look at our average cost of property, but so $15,000, $16,000. And that’s not a function really of delay. I think we’re very focused on the cost. We have spent a great deal of time in terms of—we’re not leaving it just bidding out to general contractors to tell us exactly what they will charge us. We’ve got very detailed pricing sheets because we’ve done so many of these and we know what it should cost and what the best pricing should be. So I thin that’s an important component, but it does add some time. But we think it’s important to save costs for our shareholders, so we’re certainly getting better at that. But again, it will be a function of the types of properties we buy, and so we don’t shy away from those that need substantial renovations because they can be terrific values that others won’t buy.

We’re actually seeing that in a lot of markets where certainly some competitors have spent most of their focus on newer properties that are perhaps in better condition, whereas we’re comfortable with older properties that may require more substantial renovation if they’re going to make great rentals, and obviously we underwrite for all of those.

Anthony Paolone – JP Morgan

Okay, got you. And then I know it’s still kind of early, but you are starting to anniversary a number of properties that have been leased. Can you give us a sense as to what the rate of increase you’re sending out on renewal notices is, and perhaps maybe what the take rate is?

David Miller

Yeah, I guess what I would say is it’s really too early because we don’t really have a lot of anniversarying going on until a quarter or so from now, and really more heavily in the back end of the year. That’s largely because Silver Bay as a management company really started operations about a year ago. It sort of excludes some of the properties that we took in-house because we just don’t have great sense of the type of tenant screening, the type of renovation often was different, and so we don’t read too much into that.

I’ll let Patrick talk about how we think about the pricing instructions.

Patrick Freydberg

Yes, and I would say first and foremost, our approach depends on some variation between markets. Some markets have—some of the older markets that have been around the longest on the Provident portfolio have more experience that we’re coming up to now; but anecdotally, from some of our very best third party managers who also manage other portfolios on their own, they are seeing some rent increases on their same store renewals, and our rates, I think, are for the most part in line with what they’ve been seeing. And as David said, within the next quarter or two, we’ll be able to give you much better insights into what our experience has been.

Anthony Paolone – JP Morgan

Okay, and last one for Christine – any sense—I know you’re not giving guidance for 2013, but just things like G&A where it probably shouldn’t be as variable to the platform. Any change in what you expect on those line items?

Christine Battist

With regards to that, we’re still growing and evolving as a company and working to get our cost structure in line. We’re prudent about managing cost, so there’s nothing dramatic or new to report there, and I think in the future once we get our arms around a couple more quarters, we’ll be able to provide some more perspective on G&A.

Anthony Paolone – JP Morgan

Okay, thank you.

Operator

Thank you. This concludes our question and answer session. At this time, I’d like to turn the conference back over to David Miller for any closing remarks.

David Miller

Great, well thank you everyone. Really appreciate your interest in the company. I would like to take the opportunity to inform everyone that we will be participating in the Goldman Sachs Equity Housing Conference on March 7. We look forward to meeting with investors at this conference.

So finally, I just want to close by sharing that we are committed to a disciplined growth strategy in order to maximize value for our stockholders over the long term, and we are excited about the prospects for our sector, and we’ll continue to deliver on our business plan. Thanks everyone.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your phone lines.

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