Playing Landlord: REIT Dudes Meet Reality

Jul.25.13 | About: Silver Bay (SBY)

By Carla Fried

It's no secret the rebound is on in the residential real estate market. Over the past year, the Case Shiller Index of home prices in 20 large metro areas has gained 10%, well ahead of inflation.

So you'd figure it would be pretty hard to lose money investing in single-family homes these days. Think again. Silver Bay Realty Trust (NYSE:SBY) a real estate investment trust (REIT) that focuses solely on single-family homes has managed the interesting feat of moving sharply lower amid strong gains in residential values.

Case-Shiller Home Price Index: Composite 20 Chart
(Click to enlarge)

Case-Shiller Home Price Index: Composite 20 data by YCharts

Granted, all REITs have taken a hit since late May when Ben Bernanke set off a sudden rate rise; but Silver Bay has been far more volatile than your average REIT since its December IPO.

SBY Chart
(Click to enlarge)

SBY data by YCharts

It's gotten so bad, that the company announced a stock buyback plan less than eight months after going public. In announcing the 2.5 million share plan -- nearly 7% of outstanding shares -- Silver Bay CEO David Miller said the plan "… affirms our confidence in the long-term view of the company's trajectory."

Long-term is the key. Silver Bay's business model is highly dependent on the rental income it generates from its properties. At the end of the first quarter the firm owned 4,594 single-family residential properties. The thing is, just 2,413 of those properties were leased. It's hard to make your numbers with a 53% occupancy rate.

Silver Bay says the low lease rate is simply a function of ramp-up realities: right now it's acquiring properties faster than it can spruce up its inventory and get them onto the rental market. Of Silver Bay's "stabilized" properties -- those ready to be rented -- the occupancy rate is 92%.

So is today's battered price a decent entry point, especially given the nod from management that it intends to start buying back shares? Well, management is all but screaming from the mountain top that patience is required.

In a recent SEC filing, here's what management had to say about acquisitions running far ahead of marketable properties: "Although this trend will likely continue for several more quarters, we believe our overall portfolio occupancy rate will gradually rise as renovation and leasing activity increases to absorb the new inventory and new acquisitions as a proportion of our existing portfolio decline."

Several quarters? Gradually rise? Not exactly what investors want to hear. Which raises the question of why go public before you have a revenue stream in place. As we explained in an earlier look at Silver Bay, while investors have yet to make a penny, the private equity firm that is behind this deal is pocketing an advisory fee through a subsidiary that is running the operation.

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.