Silver Bay Realty Trust Corp's CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Silver Bay (SBY)

Silver Bay Realty Trust Corporation (NYSE:SBY)

Q2 2013 Results - Earnings Call Transcript

August 8, 2013 9:00 AM ET


Anh Huynh - Director-Investor Relations

David Miller - President and Chief Executive Officer

Patrick Freydberg - Chief Operating Officer

Christine Battist - Chief Financial Officer


Anthony Paolone - JPMorgan

Jade Rahmani - KBW

Dan Oppenheim - Credit Suisse

Dennis McGill - Zelman & Associates

Jane Wong - Bank of America Merrill Lynch


Good morning. My name is Jessica and I will be your conference operator. At this time, I would like to welcome everyone to Silver Bay’s second quarter 2013 financial results conference call. All participants will be in a listen-only mode. After the speakers’ remarks there will be a question-and-answer period. (Operator Instructions).

I would now like to turn the call over to Anh Huynh, Director of Investor Relations for Silver Bay.

Anh Huynh

Thank you, Jessica, and good morning. I’d like to begin by welcoming everyone to Silver Bay’s second quarter 2013 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 copies of materials, you may find them on our website.

The call is also being broadcast live over the Internet and may be accessed on our website at in the Investor Relations section under the Events Calendar page. We encourage you to reference the accompanying presentation to the call, which maybe also found on our website. In addition, we will be filing your 10-Q later today.

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. They imply risks and uncertainties and actual results may differ materially from expectations.

We encourage you to carefully consider the risks prescribed in our filings with the SEC, which may be obtained on the SEC’s website at We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate.

I would now like to turn the call over to David.

David Miller

Thanks, Anh, and thank you everyone for joining us. My prepared remarks this morning will provide an overview of the recent developments in the U.S. housing market, how we're strategically positioned to capitalize on this evolving industry and a summary of our second quarter performance.

The signs of a broad-based recovery of the U.S. housing market continue to be strong as we entered the second half of 2013. The percentage of underwater homes decreased to 20%, marking five consecutive quarters of improvement. Seriously delinquent mortgages also trended downward to 5.5%. Approximately 1 million homes are in the foreclosure process compared to 1.4 million a year ago. Shadow inventory decreased 18% over the past year but is still considerable at 2 million homes, valued at an estimated $314 billion.

Macroeconomic and demographic trends continue to support the long-term outlook for our businesses, although U.S. home building sentiment is high, the number of new housing starts remains relatively muted in comparison to historic levels. Limited housing supply s further extenuated against the backdrop of increasing new household formations.

As you can see on slide four, housing prices continue to gain momentum across the nation. According to CoreLogic, national home prices are up 12% year-over-year representing the highest annual growth rate since February 2006.

Pricing in all of our markets has also appreciated nicely increasing at a rate of 6% to 10% over the past three months as of May. At the same time many of our markets are still 30% to 50% off-peak pricing. This coupled with our ability to purchase homes at discounts to replacement cost suggest an attractive environment for acquisitions in select markets and further upside to the value of our portfolio.

During the quarter investor focused on the fed’s potential to taper its bond buying program initiated a sell-off of risk in rate sensitive sectors that rippled through the debt and equity markets. We observed the short move in 30-year mortgages increasing 100 basis points during the second quarter.

Despite the rising the rates we believe the housing market will continue to strengthen and our business is positioned to perform well under a variety of rate scenarios. The impact of rising rates on housing is complicated as evidenced by previous cycles. Rising rates are likely to affect sales volumes and affordability, although housing affordability still remains quite strong in historical contexts. While higher rates could moderate the pace of HPA in the near term, this may have a positive impact on our leasing operations as the relative cost of renting becomes more attractive.

We continue to believe that the single family rental business has some natural hedges build into it. For example, strong HPA is good for the value of our existing portfolio. Other forces like constraint credit availability or higher mortgage rates might temper HPA, but are positive for our rental demand and other factors, like income and economic growth are good for both.

Our investment thesis is predicated on buying assets below replacement costs in geographies that will benefit from strong demographic and economic growth. These factors will ultimately be the primary drivers of housing price and rents appreciation. Therefore we believe Silver Bay is well positioned to deliver attractive total returns under a variety of macro scenarios.

We view 2013 as the year of growth and stabilization of our properties. We had a strong quarter gaining momentum across all of our 2013 key initiatives extending operational capacity and increasing efficiency, growth through discipline acquisitions and adding debt financing to our capital structure.

For the second quarter we achieved a record leasing pace increasing the number of leased properties by approximately 1200 homes, a 50% increase compared to the prior quarter. The significant growth in the number of income generating properties resulted in total revenue increasing 40% quarter-over-quarter to $10.7 million.

Net operating income increased 79% outpacing our quarterly revenue growth. Christine will provide more information on this metric later.

Our operations team made impressive gains in regards to leasing which resulted in increases across all of our occupancy metrics. Occupancy for properties owned six months or longer improved by 6 percentage points to 87%. The aggregate portfolio occupancy increased 12 percentage points to 65%. Our objective is to manage a portfolio on a stabilized basis with occupancy well north of 90%. In the quarter stabilized occupancy increased to 94%.

Later on the call Patrick will provide additional color on our operations. This quarter we expanded our disclosures to include an estimated net asset value or NAV which we believe will be useful to investors particularly during our stabilization and lease-up phase. As of June 30, we estimated NAV to be $18.95 per share compared to our book value per share of $17.30.

We believe Silver Bay is well positioned to deliver attractive solid returns by combining capital appreciation with rental cash flow yields and we believe estimated NAV will provide insight into the capital appreciation component of the total return profile. Christine will provide additional information regards to this metric later on the call.

During the quarter, we continue to add more high quality single-family properties and increased the number of homes in our portfolio by 21% through the acquisition of 985 properties. Our quarterly acquisition pace is shown on slide five.

We plan to decrease in the pace of acquisitions towards the end of the quarter and continuing to beginning of the third quarter with the objective of absorbing our inventory. This has the added benefit of allowing us to avoid new inventory coming online in the low season of November to January.

Today it was approximately 5,600 homes in the portfolio totaling more than $710 million. We have the necessary scale for our business to generate positive cash flow on a stabilized basis. We have expanded our capacity to stabilize properties at our current pace. We expect to have the vast majority of our current portfolio leased by the end of the year which will position us well to generate cash flow in 2014.

During the quarter, we focused our acquisition activity in markets for the opportunities that was most compelling. Our top markets for acquisitions were Phoenix, Atlanta and Columbus, Ohio, which collectively comprised approximately 53% of total acquisitions.

We continue to source acquisitions through multiple channels and our broker relationships were integral to our acquisition strategy in the second quarter. Broker transactions represented 70% of total acquisitions for the second quarter, up from 38% in the prior quarter.

Although we remain active across all of our channels, auctions were somewhat crowded in certain markets and we strategically pivoted the channels that presented better relative value. We observed that acquisition channels tend to be dynamic as such we plan to remain (inaudible) capitalize on shifting market conditions. In addition, we continue to evaluate portfolio sales on an ongoing basis. Although we’ve not yet committed to any large transactions, we had seen several larger side portfolios for sale and we expect this trend to continue.

Our underwritten growth yields remained strong at 10.7% for the aggregate portfolio slightly down from 11% in the prior quarter. This trend is a function of rising prices which is positive for the value of our homes while concurrently affecting yields. We anticipate rental growth to highly correlate to rising home prices and believe that near term yield compression will eventually be offset by future increase in rental rates.

We underwrite our properties from a total return perspective and our portfolio reflects our desired balance potential appreciation with gross yield to gross per market. We continue to maintain an opportunistic stance toward acquisitions. During the quarter Northern and Southern California, and Las Vegas experienced robust appreciation reporting 18% to 25% increase in HB over the past 12 months and increases a 7% to 9% over the past three months according CoreLogic. These markets have moved fast and our currently less attractive for incremental investment on a relative basis to other opportunities.

Looking ahead we will continue to acquire selectively with a focus on expanding in markets where we see most compelling opportunities. We envision continued growth in our internal markets, Phoenix, Atlanta, and Southeast Florida in addition to Texas and other select markets; we particularly like the opportunities set in Florida where 17% of the nation’s distress properties located.

I would like to complete my remarks with a few comments about our capital strategy. Early in the year, we speeded our plans to first deploy the proceeds from our IPO and subsequently apply moderate leverage to the portfolio. In May, we entered in to a $200 million three year credit facility. As a result of our strong acquisition base, we fully deploy the proceeds from our IPO and are drawn down our credit facility as needed.

Looking forward, we plan to prudently evaluate opportunities available to us to raise additional debt or equity capital. Although there are inherent benefits to scale, we believe the remaining disciplined takes precedence over rapid growth. We intend to raise additional capital only if there is an attractive investment opportunity and if it creates incremental economic value for our stockholder.

Relatively, in July, the Board of Directors authorized the share repurchase, for up to 2.5 million shares of our common stock. A repurchase plan provides us the ability to buyback our stock if we believe it is trading at a significant discount to intrinsic value. We view share repurchases at these levels as a kin to buying back our home at a substantial discount rather than buying additional homes at the mark price. We maintain our commitment to being a prudent steward for stockholder capital.

We're excited about the long-term prospect of the single family residential sector and for Silver Bay. We continue to execute on our mission of being a leader in the single-family rental industry. The acquisition environment remains favorable to our investment thesis and we remain focused on stabilizing the portfolio and delivering an attractive total return to our investors. I'll now turn the call over to Patrick.

Patrick Freydberg

We've made excellent progress in expanding our operational capacity and efficiency in stabilizing properties. During the first half of the year, we focused on augmenting our renovation and leasing capacity through corresponding to our historic acquisitions pace. Slide six represents our acquisition renovation and leasing pace by quarter, illustrating how the expansion and renovation and leasing activity is keeping pace with acquisitions.

During the second quarter, we completed over 1000 renovations, which represented an approximate 10% increase in the number of homes renovated quarter-over-quarter. We also expanded our leasing infrastructure and significantly increased the number of lease properties by approximately 1200. For our top five markets, we increased a number of lease properties by 43% during the quarter. In our smaller markets any of which are managed by third party partners, we continue to benefit from the local expertise of our partners and strong leasing demand for our homes.

We are seeing steady lease activity in these markets as well. We experienced increases in occupancy in essentially all of our markets. On the stabilized portfolio, occupancy improved to 94% from 92% quarter-over-quarter, primarily due to significant increases in leasing combined with low resident turnover during the quarter. Occupancy for properties owned six months or longer increased to 87% from 81%, reflecting second quarter renovation and leasing activity, keeping pace and exceeding historical acquisition activity. The percentage of revenue generating properties in our aggregate portfolio also significantly increased, with the aggregate portfolio increasing to 65% from 53%.

On our last earnings call, we presented a strategy that initially focused on enhancing occupancy in Las Vegas, in Northern California and subsequently transition to our focus in Tampa and Southern California in the second quarter. The adjustment that we made in Las Vegas and Northern California during the first quarter translated in to a significant improvements in occupancy and more importantly sustainable results. As you can see from the charts on slide seven, Las Vegas and Northern California continued to improve with both markets reporting six months occupancy rate at or above 90% for the second quarter.

We have gained positive momentum in both Tampa and Southern California during the quarter. In Tampa six month occupancy improved 10 percentage points to 81% from 71% on sequential quarter basis. In Southern California, six months occupancy more than doubled to 57% from 32% on a sequential quarter basis. We expect to see continuous improvements to these occupancy rates and targeting 90% or greater six month occupancy rates in both Tamp and Southern California by the end of the third quarter.

As we transition from the stabilization phase, we will look to drive operating efficiency and execute initiatives designed to enhance our margins and cash flows, which include optimizing our rental rates. As such we are not trying to refocus on pushing rents in the initial stages of our development, which positions us well to benefit from potential future rent increases. We believe having low turnover will be an important driver of future success.

In the second quarter, 155 properties turned over, representing 4% of our stabilized portfolio. However, we recognized that our portfolio is still relatively young and that the majority of leases have not yet come up for renewal. To provide additional turnover data the total number of properties with leases expiring in the quarter was 483 including properties with month to month occupancy in the period. Of these properties 94 properties turned over including 14 evictions in these breaks and 80 end of lease voluntary move-outs.

During the second quarter, we strategically utilized leasing concessions in certain markets to drive leasing philosophy. We believe the concessions prove useful to accelerating the stabilization process and may provide upside in rent growth when leases up come up for renewal. As we previously mentioned, we are not made it a priority to push rents on renewal this year. That said, we are generally seeing modest positive rent growth on renewals, though the sample size is still too small to extrapolate meaningfully. Thank you

I would now like to turn the call over to Christine.

Christine Battist

Thank you, Patrick. Our financial results for the second quarter were in line with our expectations. A summary for the quarter can be found on slide 8. The increase in the number of lease properties contributed to higher revenue and are starting to help us to gain efficiencies in operations. Total revenue increased 40% on a sequential quarter basis to $10.7 million, which was primarily driven by the significant increase in the number of leased homes in our portfolio.

Net loss for the second quarter was $6.8 million or negative $0.18 per share compared to negative $0.16 for the prior quarter. The higher net loss this quarter is primarily due to increased depreciation and amortization due to a higher number of assets placed in service during the period. We believe that net operating income or NOI is in an important metric and started to report it this quarter. We define NOI's total revenue less, property operating and maintenance, real estate taxes, home owners association fees, property management expenses, interest expense and other expense.

Our NOI increased 79% on a sequential quarter basis to $3.1 million. NOI as a percentage of revenue improved 6 percentage point to 29%. This quarter-over-quarter improvement is primarily driven by an increase in portfolio auction fee, which is (inaudible) began realizing efficiencies. A non-GAAP reconciliation of NOI is available in earnings press release and in the appendix of the earnings presentation.

Let me provide some comments on select items in our quarterly results. As a reminder, property operating and maintenance includes property insurance compared to maintenance and certain cost associated with getting a property market ready.

For the second quarter, we incurred $2.5 million in property operating and maintenance expenses which compares to $1.8 million in the first quarter. This change is primarily attributable to growth in repairs and maintenance associated with a higher number of leased homes. As a reminder, we incur market [ready] costs related to utilities and landscape maintenance until the property has leased.

Over time, market ready costs decline as our occupancy increases and should be offset by expected increases in repairs and maintenance as a portfolio stabilizes. Real estate taxes increased $293,000 or 21% on a sequential basis due to the increase in the number of properties owned. Homeowner’s association fees were flat on a sequential quarter basis and decrease as a percentage of revenue as a result of our client fewer properties and neighborhoods with homeowner association.

Property management expenses for the second quarter were $3.1 million compared to $3.4 million for the first quarter. On a sequential quarter basis, we experienced an improvement in property management expenses as a percentage of revenue. As a reminder, property management includes cost associated with our internal offices Phoenix, Atlanta and South East Florida as well as fees paid to our third-party property managers. Our internal team also provides asset management and regional management oversight functions over both internal and external markets.

We believe we will achieve further efficiencies in our internal infrastructure as we continue to stabilize the portfolio. The sequential quarter increase and property management expense is primarily due to a higher number of properties and the associated compensation for leasing agents, increased third-party fees and to a lesser extent certain non-recurring software implementation cost, we expect to incur between now and year-end. For the quarter, approximately $513,000 was attributable to third-party property managers compared to $378,000 in the first quarter.

Depreciation and amortization increased $1.6 million or over 53% in the second quarter on a sequential basis due to more revenue promising asset being placed in service. Including in this line item is approximately $700,000 of amortization of in-place leases primarily related to the properties that we acquired from Provident at the time of our IPO. You can expect to some amount for amortization of these leases in each quarter for the remainder of 2013.

We reported $1.9 million for G&A expenses for the quarter which was in line with our expectations. As we mentioned on our last earnings call, we projected G&A to trend upwards sum from first quarter G&A of $1.5 million due to the timing of certain public company expenses. This quarter-over-quarter change in G&A is currently consisted of stock compensation and public company cost for professional services and our annual stockholder meeting offset partially by decline in legal fees. We added a new line item in our statement of operations this quarter titled other. This line item catches certain non-recurring cost primarily related to properties that we intend to sell.

To-date, the number of properties that we have classified for sale are less than in 1% of our portfolio, until the property is sold, we are responsible for the property taxes, HOA dues, and utilities.

Other captures these costs along with the estimated impairment if any, along gain, loss on sales. Once we designate the property for sale, it is reclassified to asset held for sale on the balance sheet until sold.

Now for a few comments on the balance sheet, as of June 30, we had cash and cash equivalents of nearly $40 million in addition to $80 million in escrow deposits. As David mentioned, we entered into a $200 million revolving credit facility during the quarter. During the quarter, we due down $78.8 million on the facility and as of June 30 had a $121 million available.

And now, I’d now like to spend a few minutes discussing our net asset value or NAV disclosure and our proprietary automated valuation model or AVM behind it, an overview in methodology of the AVM can be found on slide nine. We developed automated valuation model for internal purposes to estimate the value of our portfolio as well as to be used for evaluating bulk purchases.

The AVM estimates the value of each property as an individual asset is in comparable sales analysis based on sales data from CoreLogic at the zip code level. The model does not consider the intent of use of the property seeing in different to a rental property or owner occupied.

Comparable sales analysis is a same conceptual approach to fully used by appraisers in valuing single-family properties. However, the AVM has the ability to evaluate hundreds of comparable properties as opposed to the three to six comparable properties used by typical appraisers.

We calculate our estimated NAV by starting with our GAAP book value subtracting the net investment in real estimate as found on our balance sheet and adding the AVM derived value of our properties with an adjustment for the estimated renovation cost on properties still under renovation. This approach differs from traditional NAV disclosures for equity rates which are typical based on cap rates and our usually associated with relatively illiquid market.

By contrast, the single-family residential market is reasonably liquid with thousands of transaction prices observable on a regular basis. Overtime, we expect to migrate towards a more traditional cash flow cap rate evaluation approach for NAV but we believe that AVM derived NAV is a useful data point at this stage in our developments, because this is a new metrics for Silver Bay, we thought be both rigorous and conservative and calculating NAV.

We have employed multiple validation measures on an ongoing basis to discuss these movements of AVM calculations and establish internal controls over end developments. Additionally, we engaged in independent third-party who assessed the model is working as we had designed. We have also tested the model against the large sample of BPOs of properties in our portfolio and we regularly compare the models for accuracy against thousands of actual sales transactions.

This compares to calculations performed in June covered over 16,000 transactions and the AVM derived value within aggregate 1.8% less than the actual aggregated sales prices. We believe that AVM has limitations which underestimate the value of our portfolio. First, it does not account for the value of leases in our portfolio.

Second, it does not consider the value of portfolio aggregations in which thousands of attractive assets have been selected and acquired largely on a one-by-one basis. Finally, we believe it discounts the condition of our newly renovated properties, because it is unable to adequately find direct comparable with similar renovations. And therefore, we believe the model likely under values our substantial improvements to the properties.

Nevertheless, we believe the AVM value and corresponding NAV calculation are useful measures for investor seeking to value Silver Bay. NAV represents a non-GAAP financial measure; we have included the reconciliation in the earnings press release and in the appendix of the earnings presentation on slide 14. For more comprehensive disclosure on this metric and our valuation approach is also available on our website.

This concludes my review of the financial results. I would now like to turn the call back to Jessica for Q&A.

Question-and-Answer Session


We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Tony Paolone with JPMorgan.

Anthony Paolone - JPMorgan

Can you just reconcile, I think as a 731 it says you have got about 5,600 homes which is not much more than 5,571 at quarter end. And so just suggest pretty dramatic down shift in pace. Am I reading that right?

David Miller

Yeah Tony, thanks. Yeah. So as I mentioned we had a deliberate slowdown towards the end of the quarter and going into the third quarter. The reasons I decided of early straight forward, first, I wanted to observe the inventory we already have built up, which was quite considerable on the first half of the year, make sure that we were effectively renovating and leasing those. And then the second leasing we talked about was making sure that when the acquisitions are coming on line, call four to six months afterwards and being rent ready, it’s not at the heart to the low season which typically is November, December and to January. So I think it’s strategic cause and we expect it to that backup.

Anthony Paolone - JPMorgan

Okay, and so then have you bought back stock at this point?

David Miller

No, we haven’t. So the board authorized it, the repurchase program as I mentioned. Given that we were in a blackout period, we were not able to execute actual repurchases until the window opens up following the release of the earnings.

Anthony Paolone - JPMorgan

Okay. And then just my other question is as you had mentioned the current market being about I think at 10.7% gross yield, but if I look at just your average rents and just kind of do the basic math against sort of the gross value of your assets as you laid out in your NAV, it seems like a yield closer to a 9 or something in the low 9s, and so just trying to reconcile those two things.

David Miller

Yeah, sure, I mean the number we’re giving obviously is computing is what if you can go and look at as far as the rents achieved in the portfolio today and the basis. Clearly there has been appreciation in the markets. So if you take those yields on the NAV, they’re going to be lower, so I don’t repeat that calculation. I think what we’re seeing out in the marketplace reflects that to some degree particularly in the market that have experienced the most rapid appreciation.

So talking about California and Las Vegas in particular have really have been robust and gone to levels that are not attractive to us at this time as far as yield and it’s always been two components, the yield components as well as the capital depreciation, but we're mindful of yields that started on making sense and that’s why we shied away from those markets. So your analysis seems reasonable.

Anthony Paolone - JPMorgan

But to make sure I understand this today if you went out and bought, you would be able to buy at the 10.7% gross yields?

David Miller

Yes, it’s really market dependent. In some markets, yes, we absolutely can, in others we can’t, but again it doesn’t mean that the market you are buying at a 9.5 or 10 is less attractive than the one you can buy at 10.5 and 11. These are gross yields. Not only are there differences across properties but across geographies, there are different components of the cost structure. So in some places, the gross yield that’s lower might translate in to a higher net yield.


The next question comes from Jade Rahmani with KBW.

Jade Rahmani - KBW

Thanks. I am confused about the deliberate slowdown. I guess the puzzle is, how does the prospective increase in home prices going forward because I presume you are still optimistic about home price depreciation compared with the cost to hold those homes in inventory and way down the occupancy rate prior to having those rented out. Is your view that and perhaps it’s mortgage rate related, but is your view that home price depreciation is taking a breather and that you will be able to continue to source assets attractively later or can you just expand on that?

David Miller

Sure. I think, as I said, it is pretty temporary for us to be buying out there. They got to be attractive investment opportunity. We think that’s the case. Obviously we need the capital to do so. We’ve got ample liquidity and their credit facility and I think we’ve got additional debt capacity on top of that.

And so the question is, why the temporary pause? It really was to make sure that we have the right capacity in place that we were working through the inventory and not neglecting that by piling on acquisitions. And I think if you look at the timing on sort of late June through early August and you go forward the period I talk about call four to six months to stabilizing those, you don’t want a influx of properties in the market call it in November, December, January and just lying there vacant.

So that was the timing but is not reflective of our strategy which is still focused on growth not in every single market but certainly in our select markets and we expect that to start picking up shortly.

Jade Rahmani - KBW

Okay. And then turning to a question about size and scale, you are at 200 plus homes in nine markets and over a 100 and another three. Among participants we speak within the industry, there is quite a range about the -- of opinion regarding the end points of scale and critical math required. I have heard a range from as low as 200 units in the market to with 1000, what's your view and does it account? And I guess does your comment that you’ve achieved the necessary scale to generate positive cash flows on a stabilized basis suggest more of the long-term strategic shift, in other words where you are at over 200 homes, is that sufficient scale with respect to your planning?

David Miller

Great question, Jade. So let me talk about the scale in I guess two context. The first is, the number of homes in the market, our strategy to remind folks on the call was predicated upon having both the internal property management resources and using third parties, specifically to address these questions in markets where we have a limited number of properties is superior economically to utilize a third party which in itself has scaled but not necessarily our properties. I think that’s what we gone and done largely, but that can change over time and it is uncertain how many properties we may acquire in any given market. So I think that is a good strategy and really is benefiting the bottom line.

I can’t give a specific number on the number of homes. It starts to make sense it’s breakeven or it makes actually bring it in house. There are different estimates. It depends on the market. It depends on the rents that you are generated there. And it depends on our growth strategy. You require more personnel and more infrastructure when you are in a ramp up phase and when you are in a steady phase stabilization. So it really does depend. It’s certainly more than 200.

And so that’s something we evaluate. Right now we are pretty focused on stabilizing, on occupancy and growing, so the composition of the external, internal will change over time, but right now we are pretty comfortable that in some markets like we said that we don’t have that many properties internally that could change but if it stays that we were still very comfortable that we have good cash flowing assets and a good business in those markets.

Jade Rahmani - KBW

Okay. And just a final one is, you didn’t add any new markets before [10 markets] you are in, do you view all of those as core markets or are there some the ones below 200 where I mean I guess Houston seems to have highly attractively gross rental yields but are there any markets where they are non-core?

David Miller

I think on this lift, we like all them, certainly the pace of growth will differ across the markets and I think it's a little too early to name some core, some non-core. But as it stands, we certainly at the right price points, we grow in each of these markets because we like the demographic and economic trends, then the growth is certainly will be there, the opportunity is attractive. And some we will have to wait and see as I talked about California, Las Vegas, gotten harder to purchase assets at prices that we think make sense. So, I think the growth will be uneven there, but we like all these markets as it stands today.


The next question comes from Dan Oppenheim with Credit Suisse.

Dan Oppenheim - Credit Suisse

Good progress on the leasing during the quarter. I wonder if you can talk about in terms of the strategy, in terms of having (inaudible) coming online in November, December. I guess if we think about this call following the third quarter results post October presumably, at that point is your thinking that much of the portfolio with (inaudible) to that point, in other words we should think about in terms of going into the timeframe?

David Miller

Dan, yeah, that's exactly right. If you look at what we have on our books today, that will be substantially leased up and stabilized by next time we talk. So it really depends on the acquisition pace going forward from today as far as what the total occupancy is that it’s always been something that we say it’s a little bit uncertain based on the environment, based on the capital and what we're seeing out there, but that portion obviously will not be fully stabilized with certainly what we have today.

Dan Oppenheim - Credit Suisse

Okay. And then you were talking about the trends in terms of in the – this our thoughts on the occupancy and not so much turnover but as you talked in terms of the rents and some of the concessions, just wondering what the trends are being doing more color in terms of the trends in the rents and trends in the rents on the renewals, I presume you’re not giving currently any concession on the renewals there with more of the initial leases, is that right?

Patrick Freydberg

That’s basically correct, Dan it’s Patrick. One thing I would like to point out is that maybe in single family rentals as opposed to multifamily rentals only one of the things that we realized is that the nature of comparing rents on a quarter-to-quarter basis, it’s more difficult because of the, what we would call the unit mix component. There is a lot of variability it’s easy to see between markets. You have some markets that are higher rent market and some markets that are lower rent markets and to the extent that you’re buying a lower rate market more than a higher rent market were, just like renting those in the quarter that the rents are reflective or somewhat skewed down because of that market component. But what we discovered is that even within a market, I looked at this very carefully in Las Vegas in the quarter, that – there is a lot of variability even between in the same market, say with no concessions same size houses, same everything but the cohort of home to get leased in that market in a month could vary as much as $36 between say April and June rents just based on the unit mix within the quarter. So there is a tremendous variation and variability in markets because the same house, the same size house for the same square footage, same bathrooms, whatever in a different location will be priced completely differently. It's very different from comparing commodity, two bedrooms in a multi-family environment versus another (inaudible).

David Miller

And Dan just to follow up on that, I mean obviously that’s the accounting, the mix issue accounting for the trends, rents, which is we expected and then on concessions, you are correct. We're not offering concessions on renewals and so the trends are positive. We will see a lot more in the way of renewal activity, second half of the year and certainly the first half of next year. I think you mentioned also just to round this out, turnover obviously was quite positive. It’s early we don’t want to read too much in to it but certainly are trending the right way in terms of it being at a low rate.

Dan Oppenheim - Credit Suisse

In terms of the accounts (inaudible) business oriented acquisition supply in terms of join them through (inaudible) largest. As we think of that in terms of a six months timing from acquisition to one good leasing such, as we go in to September that would presumably then be properties that would then be ready for leasing. Springtime which could be a better time for that but given where the stock is and the opportunity to, as you point out to basically product homes back at a discount where there be a market right now. How do you think about that to occur? So get in to September with the stock at this levels versus the opportunity to buy home, or anything about the (inaudible) capital there?

David Miller

Yes, it's a good question for we think a lot about ultimately underlying that is what make the most sense for shareholder and what creates the most value. I don’t think they are mutually exclusive I think there are certain opportunity to buy back stock as we said if the stock is cheap doesn’t mean that it means we never buy another home. I think it depends on the environment for acquisitions, it also depends on where a stock price trade. So obviously there are levels at which we should be building more capital to share repurchases and vice versa. So I think you have to wait and see, but I think it’s our expectation that we’ll buybacks some stock and we’ll buy some bonds and we’ll see where we are but right now we feel good, the work able to draw on our credit facility I think there are certainly (inaudible) lease up the portfolio it should allow us to have even incremental debt capacity on it. So I think that will drive the acquisitions and share repurchase as far as liquidity and [development].


The next question comes from Dennis McGill with Zelman & Associates.

Dennis McGill – Zelman & Associates

I guess first question Dave you mentioned a couple of times, you think there is additional debt capacity beyond the revolver? Can you just maybe be more specific about how you think about that and how that could be impacted by any future share repurchases?

David Miller

Sure, yeah again it comes down to just think about we’ve got on rough numbers over $700 million of cost value of the properties, now we’ve given our estimate what we think they are worth, so you can take something in the middle and we’ve got credit facility of $200 million. So we think that as a leverage ratio it’s pretty light, and so as I said, if we expect to have the current base of properties, substantially stabilized and leased up over the next quarter or so, quarter two then we should have ample ability to increase that to still a modest and conservative rate relative to other real estate peers and that’s how we think about that.

Dennis McGill – Zelman & Associates

What’s roughly how you think about that rate?

David Miller

Well we’ve always talked to a range of 30% sort of loan to value upto a high of 50% which really probably more, peers are more closer to that 40% level, and so I think we feel comfortable in that range, but it was always predicated by stabilizing the portfolios so we have cash flows associated and not getting ahead of ourselves as far as the generation and being able to amply service debt and feel that we are doing so in a conservative way, so that should give you an idea of what we think is ultimately appropriate for this value of assets.

Dennis McGill – Zelman & Associates

Christine can you help us at all with thinking about stabilized operating margin or where you think portfolio wide operating margins could be in the second half of the year the fourth quarter once you get the majority of the portfolio stabilized, anything around the margin side of things.

Christine Battist

Sure I can provide a bit of color, and may be Dave was a little bit deeper in to the property (inaudible) in the inline item. Again those components took care of the maintenance, property, insurance and market ready costs, the big three items there. Property insurance is about $700 on average. It range widely based on market from a low 300 to 1600 just depending on these markets. Market ready costs are going to take us about two months of time once the property is renovated and so it gets leased up about a $150 a property and repairs and maintenance as we indicated that’s going to trend some because your market ready costs will shift down as you are probably get leased up your repairs and maintenance cost will trend up some and so on a collective basis, I can give you a little bit of inside and you can do some modeling. We have not in a publicly commented with regards to what we think these margins will be, but I think with that about data that I provide you should be able to put some analysis together.

David Miller

Yeah. Let me just add a little bit of color, because I know

Dennis McGill – Zelman & Associates

When you do David just sorry to interrupt, but can you elaborate on the property management side as well, kind of where do you think that could level?

Christine Battist

I'll take that question and let David wrap it. So on the property management side, say you have got your internal and your third parties let me break out the details in terms of that cost in terms of total dollars and we think there is further efficiency to be gained in our internal market particularly we'll be able to streamline our leasing operations as David mentioned, as you are renovating as well leasing all these properties you need more personnel, on hand to the renovating as well as leasing up, so there are some opportunities to gain some efficiencies there and particularly on internal market. So I'll turn it turn to David just for some other comments.

David Miller

Yeah, no I was going to say generally the way we think about obviously where the operating margin is today, which is very depressed compared to a normalize stabilized margin that we also expect to get to which is significantly higher, the main reason are we've got close to 2,000 properties at June 30 that are now lease, but incurring expenses. So those are on the operating expense side and nothing that we see in the various buckets of operating expenses that are property related would change our view of what it ultimately looks like stabilized, just obviously higher, because we're incurring in now.

And so that's the first bucket and then the property management as Christine said, we are running at higher capacity than we need, once we're stabilized because of the ramp up, we lost Southern Florida, which has a low base of lease properties, which is a drag. And so that's something that we'll grow into as we grow that market,

Obviously if we don't grow that market significantly, then we have to make some decisions there but that something it’s impacting it, as well as some of these one-time costs that are really truly ramp up related costs, but that’s what’s really dragging down those two big buckets, the cost structure today in terms of NOI margin and where it ultimately get to which point haven’t changed about where we’re going to get to on a stabilize basis and I think, it will take a couple of quarters and certainly depends on our acquisition pace to some degree as far as we’re seeing that drag but we’re going to much more in the direction of a normalized operating margins.


The next question comes from Jana Galan with Bank of America Merrill Lynch.

Jane Wong - Bank of America Merrill Lynch

Hi, this is Jane Wong for Jana. I was wondering if you can elaborate on the book purchases completed in the quarter and you had mentioned that you’re seeing some portfolios on the market and maybe if you could give some color on the seller, their institution, their smaller regional owners and mom and pop, two of that of portfolio?

Patrick Freydberg

Yeah, so it’s still relatively small piece of the business. We look at significant number of these small, [calling box] but adjacent of 89 for the quarter, which is down somewhat but these are in a dozen, two dozen batches and they’re largely small players out there that amass them and need to recycle their capital.

Now we talked about looking at some midsize and large size portfolio. So in the hundreds or in the thousands and I think you are seeing more people coming at the realization there has been some appreciation out there and it’s very difficult to manage asset efficiently once you get to that size and so I think you’re going to see that increasingly.

The players out there really range, it really ranges from private capital with a few individuals that have put together a few hundred properties, once you get into the thousand, obviously you are talking about more significant capital but there are large number of private equity types that have worked with small operating platforms to a mass regional portfolios and so seeing those out there and again we're focused, we are going to evaluate them quickly and respond quickly but we also need to be mindful not to overpay for growth sake and that’s what we've done is evaluating a lot, get in the process a lot and stay firm to what we think are fair prices and reasonable but also good for our business of shareholders.


The next question is a follow-up from Tony Paolone with JPMorgan.

Anthony Paolone – JPMorgan

Thanks. Just to follow-up really on some of the unit economics and operationally how things are going. Can you talk about just experience thus far with things like maintenance request, and how frequently they are occurring and if you have any read on maybe what it takes to turn a unit in terms of those costs, just any color there will be appreciated?

Christine Battist

Sure I can take a shot at that, Tony. So with regard to turns, we haven't seen a significant or sizeable population of turns so that the data there is somewhat new. In terms of repairs and maintenance, some of the cost there to we expect to level out once these tenants get settled into these properties, but things are a bit higher on the repairs and maintenance because we are ahead of some of the provident homes and at which in terms of some of the maintenance that were done on them that we are doing some clean up on those but overall things are according to our expectations.

Patrick Freydberg

Yeah. I mean, just add to that this is our plan, I think we’ve developed as we talk about I think several times, Silver Bay’s scope which is really a very high standard of renovation and certainly some of the properties were in the older side in the portfolio we acquired needed some update there.

But generally speaking, the means of repairs have trended with our expectations, and just a little too early to draw conclusions because there are differences cross market, there are differences cross seasons based on what you see whether its repair, whether there is rain storm. So we’d like to gather bigger body of volume data to go through it, but so far its trended inline I think turns as well, turns it just still hard to give an exact number I continue to say well the average turn we expect to be $1,500 and $2000, we actually have a lot of turns that are well below that because of the condition is so new up in the time of getting renovation and some that would be above that based on, that would be the time at which you would do material renovations for something that maybe you didn’t need to do or you didn’t have the lifecycle of H-unit require a year or two ago. So its order depends but nothing we’ve seen on that side of the business, it’s problematic or outside of expectations as far as getting to our operating margins.

Anthony Paolone – JPMorgan

I mean actually having a (inaudible) we are all trying to figure out how the model revolves on a unit basis, you guys set forth the bunch of parameters and brackets around the IPO what you thought these things would cost and whether they would shake out, it’s safe to say that’s where its coming out thus far?

Patrick Freydberg

Yeah. I mean there is not a material difference there, I’d say if you want to think about again when we were talking about the economics of the business on a stabilized basis, obviously it’s hard to compare directly with results right now, because there are so much noise and that was when I just went through as far as to gain significant body of leased properties out there and the one that is probably higher than what we would have expected to talk about was on the property management, I am now in the repairs and maintenance simply because we got excess capacity, we got regional overlaying asset management. We got an office that is underutilized at the moment. So that would be the area but it’s something it’s too early days and it’s something that we are obviously watching very closely.

Anthony Paolone – JPMorgan

Okay and then just last question, have you all given any thought to putting out a path to internalizing the advisor at some point?

Patrick Freydberg

Not something we are considering right now. We are comfortable with our structure. We think we are very in line with shareholders, every decision we made thus far confirms that, that’s how we think about the business.


With no further questions that concludes our question and answer session. I would like to turn the call back over to David Miller for his closing remarks.

David Miller

Great, thank you. Thank you all for joining us for second quarter earning call. We appreciate your support and interest in Silver Bay and look forward to seeing many of you in September at the Bank of America Merrill Lynch global real estate conference and the (inaudible)1:20 housing submit. Thank you.


Ladies and gentlemen that concludes our conference for today. You may all disconnect and thank you for participating.

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