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Silver Bay Realty Trust Corp. (NYSE:SBY)

Q4 2013 Earnings Conference Call

March 6, 2014 10:00 ET

Executives

Anh Huynh - Director, Investor Relations

David Miller - President and Chief Executive Officer

Larry Shapiro - Chief Operating Officer

Christine Battist - Chief Financial Officer

Analysts

Dan Oppenheim - Credit Suisse

Anthony Paolene - JPMorgan

Jana Galan - Bank of America

Dennis McGill - Zelman & Associates

Jade Rahmani - KBW

Operator

Good morning. My name is Betty and I will be your conference facilitator. At this time, I would like to welcome everyone to Silver Bay’s Fourth Quarter 2013 Results Conference Call. All participants will be in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period.

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

Anh Huynh - Director, Investor Relations

Thank you, Betty and good morning. I’d like to begin by welcoming everyone to Silver Bay’s fourth quarter 2013 conference call. On the call with us this morning are David N. Miller, President and Chief Executive Officer; Larry Shapiro, 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 the materials, 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. We encourage you to reference the accompanying presentation to this call, which can also be found on our website on the Presentations page. In addition, we will be filing our 10-K 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 urge you to carefully consider the risks described in our filings with the SEC, which maybe 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.

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

David Miller - President and Chief Executive Officer

Thank you, Anh and thank you all for joining us this morning. Silver Bay was formed to capitalize on a generational opportunity to acquire homes at a substantial discount to replacement cost and to apply institutional excellence to the single-family rental industry. We have made significant progress since we purchased our first rental home. While we are still in the early stages of our company’s development and anticipate that the industry will continue to evolve, we believe our portfolio performance for our first full year as a public company speaks well to our investment thesis. For 2013, Silver Bay delivered total return on NAV of 13%, which we define as the change in estimated NAV per share plus dividend distributions.

According to CoreLogic, national home prices increased 12% year-over-year as of January. We believe our portfolio compared favorably to the relevant HPA indices during this period and our disciplined approach toward acquisitions has served us well. As of December 31, 2013, Silver Bay’s estimated NAV per share increased to $20.21 compared to $17.93 per share at end of 2012. The increase was primarily attributed to an approximate $100 million increase in the value of our properties offset by operating losses incurred during our ramp up phase. Furthermore, many of our homes remained well below our estimates of replacement cost in markets exhibiting tightening supply, which bodes well for further price appreciation in the coming years.

We are also pleased with our operating progress. As we will discuss in more detail, we finished the year at 88% total occupancy. Today, this metric is over 90% reflecting our continued leasing momentum into 2014. We also produced positive FFO for each month in the fourth quarter and believe we are well-positioned for increased cash flow generation in 2014 and eventual increases toward dividend distributions.

I would like to briefly comment on the housing market. 2013 marked the period of a strengthening in economy and improving housing market dynamics. We saw steady improvement in unemployment rates, a decrease in foreclosure inventory and homeowners recovering from negative equity. Increased participation by investors in the single-family rental market added to demand for housing inventory, while overall housing supply did not expand to keep pace with demand. These factors along with historically low interest rates and high affordability contributed to a significant recovery in home prices.

As you can see on Slide 5, home prices increased in all of our markets in 2013 ranging from mid single-digits to as high as 27% in Northern California. The housing recovery has been uneven across the nation and we are no longer able to buying some of our Western markets, although we remain excited about many others, where we can still acquire homes at a discount to replacement cost and attractive rental yields. Florida, for example, leads the nation with the highest foreclosure inventory at 6.7%, which should provide a continuing supply of distressed inventory in 2014. While we are generally quite sanguine about home price appreciation in our markets in 2014, we do expect the pace to moderate compared to 2013.

Over the course of 2013, we also advanced the three strategic priorities that I outlined a year ago. To quickly review, our 2013 priorities were one, growth through disciplined acquisitions; two, expansion of our operational capacity and efficiency in stabilizing properties; and three, addition of financing alternatives to our capital structure. 2013, we deployed more than $350 million in many of the most attractive MSDs in the country. We acquired more than 2,200 homes increasing the number of properties in the portfolio by 66% and leased more than 3,200 homes over the course of the year. We also leered on debt to our balance sheet by securing a $200 million credit facility, which we subsequently upsized by $150 million in January 2014.

The fourth quarter of 2013 marked a milestone quarter for the company. We have reported positive funds from operations or FFO of $0.04 per share and completed the stabilization of the great majority of the properties in our portfolio, two accomplishments which positioned us well to expand NOI margins and grow cash flow in the year ahead. Total revenue increased 15% on a sequential quarter basis to $16.7 million and was outpaced by NOI growth, which recorded a 48% quarter-over-quarter increase to $8.3 million.

In the upcoming year, we anticipate continued growth in our portfolio to drive further increases in revenue and FFO. Underwritten gross yields on the aggregate portfolio continue to be attractive and remain relatively unchanged compared to the prior quarter at around 10%. Acquisitions for the fourth quarter were muted in part due to capital constraints that were alleviated with the increase to our credit facility in January. Yields have compressed with HPA, but our acquisition team continues to be highly selective in the recent months we have been acquiring homes at levels consistent with the gross yields on our existing portfolio. In addition, we have been successful in identifying unique acquisition opportunities through our extensive network. For example, in the fourth quarter, we purchased 27 homes in Atlanta through a bulk transaction with gross yields north of 11%.

Looking ahead, we plan to acquire in Florida and Texas, while opportunistically adding properties to our Atlanta market and perhaps other markets as well. The recent increase to our credit facility provides us with additional capital to ramp up our acquisition pace and we anticipate substantially drawing down on the remaining balance over the next six months. We are excited about Silver Bay’s financial and operating trajectory. With the commitment to driving shareholder value, our management team commenced the New Year with an intense focus on achieving efficiency from both an operating and capital perspective.

For 2014, our three key strategic priorities include one, NOI margin expansion; two, continued portfolio growth; and three, completion of a securitization transaction. NOI margin expansion will be a key driver of cash flow, which in turn will support future dividend growth. We plan to achieve this through increased operational efficiency with a focus on centralization, enhanced processes and expense management. Last December, we announced the appointment of Larry Shapiro as Silver Bay’s Chief Operating Officer. I am confident that Larry’s extensive real estate background and proven track record with Silver Bay positions him well to execute our strategic objectives and drive long-term value. Larry will review our 2014 operational initiatives in greater detail later on the call.

Our second priority is to achieve continued growth through disciplined acquisitions. As I previously mentioned, our plan is to focus on the most attractive markets and strategically add to our existing portfolio of high-quality single-family homes, but we will only do so if quality assets are available at attractive pricing. Continued portfolio growth will enable us to gain further scale efficiencies, leverage our G&A expense, and increase FFO. We also intend to leverage the renovation and leasing experience we developed last year to stabilize newly acquired homes more quickly and efficiently.

Over the past year, the financing alternatives available to institutional single-family operators have evolved considerably as financial institutions have become more comfortable with the industry and asset class. Most notable is the success of the first single-family residential securitization completed late last year. The introduction of securitization to the industry is significant and will provide a lower cost of capital and enhanced ROEs, while adding credibility to the single-family rental sector as a long-term asset class. Securitization will allow us to improve our capital structure and substantially reduced our financing cost to improve FFO. Based on our conversations with underwriters, we believe that a securitization is quite feasible with our base of leased assets. And we are aggressively pursuing such a transaction this year. We will provide additional updates as we move through the process.

As we look forward to 2014, we remain optimistic about the continued strengthening of the housing market and the outlook for our business. The emergence of several public players in the single-family space further validates the potential for growth in this sector as an institutional asset class and we believe in time the market will reflect this in our stock price. We will continue to execute on our business plan and strategic priorities in the coming year, seeking to create value for our stockholders.

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

Larry Shapiro - Chief Operating Officer

Thank you, David. I am excited to lead a talented team of real estate professionals in my role as Silver Bay’s Chief Operating Officer. Having been with Provident and then Silver Bay from inception, I have a great appreciation of the company’s history as well as our accomplishments to-date. I look forward to building upon our institutional platform to deliver high quality homes and customer service to our residents in a consistent and cost effective manner. My prepared remarks this morning will included a review our portfolio performance and a summary of our 2014 operating objectives which are outlined on Slide 7.

We had an excellent quarter of portfolio stabilization achieving our objective of leasing the great majority of the homes in our portfolio by year end. We also completed almost 300 renovations and increased the number of leased homes in the portfolio by more than 450 properties. The higher number of leased homes combined with low resident turnover enabled us to accomplish an 88% occupancy rate on the aggregate portfolio. This increase in occupancy represented a 7 percentage point improvement quarter-over-quarter and a 38 percentage point improvement year-over-year.

I am pleased to report that most of our markets are exhibiting strong occupancy results. Four out of five largest markets completed the fourth quarter with stabilized occupancy rates of 95% or above. Stabilized occupancy on a portfolio basis continues to be strong at 93%, which is consistent with our objective of maintaining an occupancy rate well north of 90% on the stabilized portfolio. Six months occupancy was flat compared to the prior quarter at 89%. As our portfolio approaches stabilization, we believe that the six months occupancy rate on a go forward basis will not be as meaningful due to the smaller percentage of homes undergoing initial renovation and lease up. This quarter will be the last period in which we report the occupancy rate of properties owned six months or longer.

Phoenix is our largest market with over 1400 homes of which 95% were leased as of year end. We were one of the first institutional operators to enter the Phoenix market and we believe that our high lease up rates speaks to the robust demand for our homes, our ability to successfully retain residents during the renewal process and our emerging reputation as a preferred manager of single-family homes. Generally speaking, the leasing demand across all of our markets has been strong and we anticipate favorable occupancy trends to continue as our resident leases begin to anniversary.

Columbus has been improving since year end. We made the decision to internalize property management in the market and starting in January, we began leasing homes to our internal platform. We are already seeing positive results. As of February 28, aggregate occupancy had increased 24 percentage points since the quarter end to 61%. In addition, we have signed about another 40 leases with moving dates before the end of March. Given these early results, we are confident that Columbus will be substantially leased up by the end of the second quarter.

The total number of properties with lease expirations for the quarter was 821 including properties with month-to-month occupancy in the period. Of these properties, 223 properties turned over implying a 27% turnover rate. A total of 374 properties turned over in the quarter representing 7% of our stabilized portfolio of 5,365 properties. As we stated last quarter, we believe our turnover metrics will become increasingly more meaningful starting with the first half of 2014, which is when we project the material step up in schedule lease expirations.

NOI margin expansion is our top priority for 2014 and we plan to achieve this by driving revenue growth and reducing expenses to increase the efficiency of our operations. Maximizing quality rental revenue is critical for long-term top line growth. This involves tracking residents from meter-screening criteria and providing institutional grade customer service to achieve high levels of resident satisfaction and ultimately drive resident retention. In optimizing rental revenue, it is important to balance the desire for rent growth with resident retention. With this in mind and based on what we are seeing in the market, we believe that a 3% to 3.5% rental increase on a same property basis is reasonable for 2014.

We have implemented a broad initiative to reduce overall property level cost while enhancing our effectiveness and consistency in responding to the needs of our residents. In addition to an intense focus on managing repairs and maintenance and turnover expense, we are looking to centralize several property management functions, including the processing of resident applications and certain marketing related work streams. We believe that centralizing these functions will translate into modest cost savings starting in the second quarter and more importantly promote uniformity in how we manage our interactions with our residents.

We also plan to shift to a centralized call – service call center for our internally managed offices. The call center will enable us to more effectively manage repair and maintenance cost through telephonic troubleshooting, while increasing our effectiveness in monitoring of our resident satisfaction. We have developed a robust institutional platform and now it’s a matter of blocking and tackling and refining business processes. We are confident that the cost reduction initiatives I outlined will translate into NOI margin growth over the course of the year. We look forward to providing updates on our progress in future quarters.

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

Christine Battist - Chief Financial Officer

Thank you, Larry. We are pleased to report another consecutive quarter of revenue and NOI growth. For the fourth quarter, we reported total revenue of $16.7 million, which represented a 15% increase on a sequential quarter basis. Net operating income increased 48% quarter-over-quarter to $8.3 million. We generated funds from operations of $0.04 per share compared to negative $0.02 per share for the prior quarter. These highlights are summarized on Slide 8.

This morning, I would like to review a few key line items in our financial statements. For the quarter, we reported $3.8 million in property, operating and maintenance expense, which compares to $4.3 million in the prior quarter. As a percentage of total revenue, property, operating and maintenance decreased to 23% from 30%, which was primarily attributed to a higher base of revenue, insurance proceeds for property damages related to prior periods and some cost control.

Looking forward to 2014, we anticipate property, operating and maintenance as a percentage of total revenue to improve as a result of the operating initiatives Larry previously outlined and are owning a higher number of revenue generating properties. During the second and third quarters of 2014, we will have a large number of leases expire consistent with our heavy lease up activity from a year ago. With this in mind, our forecast includes an increase in turnover-related expenses for these periods for a portion of these properties.

Real estate taxes increased quarter-over-quarter to $2 million, primarily due to a corresponding increase and the number of homes being placed into service. We recorded $2.8 million in property management expenses for the fourth quarter compared to $3.7 million for the third quarter. As a percentage of total revenue, property management decreased to 17% from 25%, which was primarily due to a decrease an expenses related to personnel and consulting compensation and to a lesser extent lower software implementation cost.

The quarterly change in personnel and consulting compensation included an approximate $400,000 decrease that was a one-off event. Third-party property management fees were $770,000 for the quarter. For 2014, we are expecting a reduction in property management expense as a percentage of total revenue. This positive trend will be driven by an increasing base of revenues as we continue to add leased property to our portfolio, which includes growing our internal Southeast Florida market and leasing up Columbus to offset our infrastructure.

Note that, we expect a higher percentage of properties to generate rental income for the full period in stabilized markets over periods a year ago. In addition, we planned to see a run-off of certain expenses such as the software implementation cost. These benefits will be partially offset by increases in third-party property management fees as a result of our owning more leased properties. For the fourth quarter, our NOI margin increased on a sequential quarter basis to 50% from 39% as a result of a higher base of revenues and lower property level expenses as previously discussed. As David mentioned, we will be ramping up acquisitions in the coming months, which will result in some noise in our quarterly results and same drag on earnings as we renovate and lease newly acquired homes. In light of the expected portfolio growth, we believe the operational enhancements that Larry mentioned along with the additional revenue producing property homes in the portfolio will result in a more efficient cost structure that will in turn improve our NOI margin throughout 2014.

It’s important to note that markets have structurally different margins due to differences in cost such as insurance and real estate taxes, all of which gets factored into our underwriting model. For example, certain Florida markets have higher insurance costs and Texas has higher property taxes in our portfolio average. The range of stabilized NOI margins that we project for our markets is 50 to the low 60s and in aggregate we project a stabilized NOI margin to be in the mid to upper 50s.

Depreciation and amortization increased to $6.2 million primarily attributed to the quarterly increase in the number of homes placed into service. Included in this line item was $560,000 for amortization of in place leases and deferred lease fees. The Provident in place leases acquired a year ago were substantially amortized as of year end.

G&A was $2.1 million, which is relatively in line with the prior quarter. For 2014, we are anticipating some increase over annualized fourth quarter G&A. The increase in 2014 G&A will be primarily due to annualized compensation of certain corporate personnel. We also expect some additional costs related to securitization. Overall, we expect G&A to trend downward as a percentage of revenue as aggregate rental income increases.

As of December 31, we had a cash balance of $44 million in addition to $24 million in escrow deposits. We had $165 million outstanding in our credit facility and we expanded our borrowing capacity to $350 million in January 2014, which will provide ample liquidity.

I would like to wrap up with a few housekeeping items. During the fourth quarter, we bought back approximately 251,000 shares of our stock in a series of transactions at an average price of $15.35. The buyback activity for the quarter was accretive to book value and estimated NAV increasing each by $0.01 and $0.03 per share respectively. In addition, we converted approximately 27,000 shares of operating units into common shares by a cashless exercise on December 31. Accounting for this conversion and the stock repurchase resulted in total outstanding common shares of 38.6 million as of December 31.

Now, I will turn the call back to Betty for Q&A.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Dan Oppenheim of Credit Suisse. Please go ahead.

Dan Oppenheim - Credit Suisse

Thanks very much. Congratulations on the internationalization in Columbus, I am great to hear about the progress there. I wonder if you can a little bit more in terms of property management given so the focus on the NOI margin for 2014, how are you looking at property management overall in terms of just evaluating third-party property management? Are you thinking about internalizing more?

David Miller

Hi, Dan. Thanks for the question. I will pass the one over to Larry.

Larry Shapiro

I think, Dan, we are really looking at driving NOI margin this year and the goal is to eventually look at passively internalizing other markets as opportunities arise. We will only do that. We have managers that are doing a very good job. And if we don’t feel that we can do the same job at a better price or do a better job, then we won’t do anything, but like I say where we have opportunities we will look at internalizing other markets.

Dan Oppenheim - Credit Suisse

Okay. Then just David you talked about on the acquisition side being disciplined on the acquisitions, but – and looking to purchase at the right price. It’s been relatively required over past two quarters, how are you thinking about that now as we are into 2014?

David Miller

Sure. Good question. Clearly, we had a slowdown in the second half of the year, initially that was absolutely to absorb what we had already purchased and stabilized that and really drive occupancy. Getting into the fourth quarter, we have done a lot of that and begin thinking about ramping up acquisitions. We have got the credit facility done maybe a touch later than we had expected that closed in mid January of 2014 and that kind of guided our thinking as well. So, I think as we said today obviously we have had the credit facility in place. We have been ramping up acquisitions. I think it is important to note that we have shifted more extensively almost exclusively to the MLS side based on just relative opportunities that we think we are getting better deals there. There is also certainty in terms of what we are getting ability to diligence that. There is a bit of a delay in terms of closing 30 to 45 days. So I think this quarter it will be higher than the fourth quarter, but not at the ramp rate we expect in the second and third quarters. So that’s how we are thinking about acquisitions.

Dan Oppenheim - Credit Suisse

Great, thank you.

Operator

And our next question comes from Anthony Paolene of JPMorgan. Please go ahead.

Anthony Paolene - JPMorgan

Thanks. Good morning.

David Miller

Hi, Tony. Tony, did you get cut off we are having trouble hearing?

Operator

I think he did get cut off, I am sorry. Our next question comes from Jana Galan. Please go ahead.

Jana Galan - Bank of America

Thank you. Good morning. Christine, I appreciated your comments on NOI margin variation by geography. I was wondering if you or Larry could share what peak NOI margins have been in the Provident portfolio?

Larry Shapiro

We really don’t track NOI margins by portfolio or by Provident we are really tracking by market. So, really the Provident portfolio and the houses in the Provident portfolio are very similar to everything that we purchased afterwards and there really is very little difference.

Jana Galan - Bank of America

And then maybe if you can let us know the Phoenix NOI margins since that’s been held a little bit longer than the rest of the portfolio?

Christine Battist

Yes, on average the margins that we are anticipating in the markets range between the 50s to the low 60s and there are variances in each markets as I commented with regards to insurance and property taxes as well as you could have HOAs, but we are very pleased about performance and we’ll continue focused on the NOI margins to drive up the aggregate portfolio to this upper 50s in 2014.

David Miller

Yes, just to add on that, it’s David. You can imply based on the big variables being the insurance taxes and taxes that Phoenix would be the upper end of that may be not the absolute top, but it’s certainly one of the markets that doesn’t have the highest insurance cost or the highest property tax.

Jana Galan - Bank of America

Thank you. And then maybe if you could just comment on trends you are seeing in repairs and maintenance?

David Miller

Sure. I will let Larry to talk about that.

Larry Shapiro

Really for the fourth quarter, results have been consistent with our expectations. And I think moving forward we expect to see some drop over the course of this next year as our new initiatives are rolled out our service call center and some of the other things that we are doing, but really we haven’t seen anything that leads us to believe we are not going down the right track.

Jana Galan - Bank of America

Thank you. And then just one last one on the system implementation cost is that mostly done or will we see a little bit more of that in 2014?

Christine Battist

We are very pleased with the implementation of our centralized or one – our new property management system. And Q3 and Q4 had the biggest dollars related to that implementation. And going forward, we will continue to refine, but you should expect those cost to trend down substantially.

Jana Galan - Bank of America

Thank you.

David Miller

Great, thanks.

Operator

And our next question comes from Dennis McGill of Zelman & Associates. Please go ahead.

Dennis McGill - Zelman & Associates

Hi, thank you. First question I got this, I think but the 3% to 3.5% inflation on rents that can you just clarify what that statement was, I think that was for ‘14 and just maybe put some context around that, what have you seen in the marketplace today or how do you think about arriving at that type of outlook?

David Miller

Great, thanks Dennis. Larry, why don’t you tackle that one?

Larry Shapiro

Sure, Dennis. Really, obviously there is variability among markets and I think we are really looking at the 3% to 3.5% increase on a same-property basis in 2014 over 2013. That will vary by market. In general we feel that that’s achievable based on the level of competition and where the economy is at.

Dennis McGill – Zelman & Associates

And does that include both renewals and move-ins?

Larry Shapiro

Yes, it does.

Dennis McGill – Zelman & Associates

Okay, can you elaborate may be on the geographic spots where you are seeing maybe the stronger pricing power and what would be below average?

Larry Shapiro

I am not sure that there is really wide variability. I think the variability is probably pretty muted among the markets so that if one market might be upper twos, the low threes and one might be three to three and a half. We are not really seeing big geographic variances.

Dennis McGill – Zelman & Associates

Okay. How much including the transition in Columbus, how much of the portfolio today is externally managed versus internally managed?

David Miller

It’s roughly 50-50.

Dennis McGill - Zelman & Associates

Okay. And then David, since we are almost done with the first quarter, can you maybe talk about where acquisitions are quarter-to-date or where you think acquisitions will be by the end of the quarter?

David Miller

Yes, as I mentioned acquisitions this quarter are running certainly through the first part of the quarter at a similar pace, they have ticked up since then. So it will be larger than the fourth quarter, but it’s not going to be multiples by any stretch, although I think the pace is picking up nicely and as we get into the second quarter it will be substantially higher.

Dennis McGill - Zelman & Associates

Okay. I appreciate, thank you.

David Miller

Thanks Dennis.

Operator

Our next question comes from Jade Rahmani of KWB. Please go ahead.

Jade Rahmani – KBW

KBW. Thanks for taking the question. Can you talk to the company’s footprint and how you view it, do you think – have you started to think about any markets that you might view as non-core and juxtapose the question one on exit markets in which you are not acquiring and not doing internal property management generates some gains and redeploy that capital into core markets, where you already have scale before pursuing and thereby encumbering assets in a securitization?

David Miller

Thanks Jade. It’s a good question. We clearly think a lot about optimizing the portfolio. I think from our perspective even markets where we are not buying anymore, we still see substantial appreciation potential we think we are trading, homes are still priced well below replacement costs and so we are benefitting from holding those, they are also contributing nice cash flow to the company. But I think you raised an excellent point that as we moved a little further down the line here that a number of opportunities will be available to either swap assets potentially with others to really optimize the footprint or potentially sell and redeploy. I think we are comfortable today with our liquidity and our ability to draw down on our credit facility to continue acquisitions. But certainly if that becomes more constrained and our ability to raise debt or equity capital isn’t there, that’s a great way to continue to both optimize the portfolio and redeploy capital into other areas.

Jade Rahmani – KBW

And just to what extent are rules around holding periods, the two-year hold, is that a major constraint or as you are thinking independent of that?

David Miller

Well, it’s a great question for those who wanted to get into extensive tax and read rules we can do a side bar, but yes there is a two-year holding period that’s related to really for tax purposes. So it’s tax inefficient to sell properties inside of that. It doesn’t preclude the possibility if there was a really good circumstance or ability to sell and it made a lot of sense, but certainly it would be tax inefficient. But after the two-year holding period one can do it much more efficiently.

Jade Rahmani – KBW

Okay. Just on the expense side I was surprised by the decline in property operating expenses given the lease portfolio increase, can you just quantify the impact of the insurance proceeds and I guess if I take that amount plus the $400,000 that you referred to, were those the only two one-time items?

David Miller

Why don’t I give that to Christine?

Christine Battist

Sure Jade. On the property operating and maintenance the quarter-over-quarter decrease was roughly $432,000, the insurance proceeds were approximately half of that and the remainder was some cost controls. So as I noted as well we expect these costs as a percentage of revenue are going to trend down in 2014 due to the leverage that we’ll gain there. And then you also asked about on the property management side as well, the unique item in the quarter, yes it was related to personnel and consultant compensation. And you should take that in consideration when you’re putting your models together in the first quarter because it was unique and (dispute) to the quarter.

Jade Rahmani - KBW

So that unique item that’s an expense not a gain?

Christine Battist

That’s correct.

David Miller

Right. So there is a reduction – it lowered the expense rate in the fourth quarter which as we go into the – shouldn’t recur in the first quarter. So expenses will come up some on a relative basis.

Jade Rahmani - KBW

Okay. So if I took half of those that insurance and the 400,000 one-time item. Were those are the only one-time items in the quarter?

Christine Battist

Those were the primary items as well as we always point out to included in property management is the Yardi, the property management system in the NOI table we can see the Yardi costs which were roughly 278,000 for the quarter.

Jade Rahmani - KBW

Okay. And then were there any changes to capitalization policies in the quarter regarding because I think in the past some of your turnover costs and also initial repair and maintenance costs, you had said related to not having done sufficient initial CapEx or you thought like with respect to the Provident assets for example, your system since then has improved. Was there any change in capitalization due to that?

Christine Battist

Jade I can confirm. We’ve had consistent capitalization policy since the company was formed even than the legacy company so there was nothing unusual. The trends that you’re seeing with cost is having now the portfolio leased up as well as just some cost control in our part. And we look forward to continuing to implement these initiatives and show some continued cost controls through 2014.

Jade Rahmani - KBW

Great. Thanks for taking the questions.

David Miller

Thanks, Jade.

Operator

Our next question comes from (indiscernible). Please go ahead, please.

Unidentified Analyst

Hi, good morning. Just going back to the prepared opening comments, do you – did I hear you right you said expecting to drawdown the remainder of the line through the balance of 2014. Is that correct?

David Miller

Yes, thanks for the question. Yes, I think in terms of guiding towards the capital we have for acquisitions, we increased the facility about $150 million. We never want to drawdown to 100%. We like to keep a little bit of room but I think just to put parameters around acquisition pace certainly we’d expect majority of that to be drawn down over the next six months or so obviously with the caveat that we have to have some good do with the money, right now we’re seeing attractive opportunities. So just to think about rough pace that will start ticking up in the second quarter. So over the second and third quarter we would expect a lot of that to be used to fund additional acquisitions.

Unidentified Analyst

Okay. So just – I’m sorry go ahead.

Christine Battist

The other thing I was going to add is we do have a liquidity requirement to keep $25 million under our credit facility. So a matter of drawing down – you’re not going to draw it down completely as we want to have a little drypowder for opportunistic activity as well.

Unidentified Analyst

Okay. So I ask then on an average sort of acquisition rate, obviously the caveat you pointed out you got to have some with the money. That kind of points to 1,100 homes maybe, is that massed in the right neighborhood?

David Miller

Yes. That’s good math. And I guess just to take at a step further right so that would be if we just use our existing debt capacity call it a 1,000 houses and that would get us to roughly 30% debt to value. And we’ve always talked about a 30% to 50% range and so that the higher end of the range now then we’re talking about incremental debt of another $500 million and so that would be the upper end which would be 3,600, 3,700 homes on our average home price. Now we have to actually go out and get that, that debt capital but that gives you the range of I think where we’ve always thought about the right capital structure and where we’re going over the course of the next year, year and a half.

Unidentified Analyst

Okay, great, perfect. And then about 1,300, 1,400 homes leased up in the last two quarters in total. What was the breakdown or mix of one year versus two year leases if you have that?

David Miller

It’s substantially all one year. We’ve got maybe a few percentage points in there would be two year leases. And that’s pretty consistent with what is just generally accepted in the marketplace. I will tell you we’ve been a little more proactive in trying to move some leases that expired in the winter months to push those to be 15, 16 months to get them to actually then expire in the busier season but that as well as been relatively small part in the portfolio.

Unidentified Analyst

Okay. And just one last one, bigger picture, rents here have been holding in I think across the industry better than a lot of the skeptics would have thought. With your rent rates they’ve held in as well I mean is there any material shift quarter-on-quarter on the 452 leased up or is it just what we think it is which is pricing is holding in still pretty well?

David Miller

Why don’t Larry you start and I’ll finish.

Larry Shapiro

Sure. I think we’re seeing pricing that’s very consistent. I don’t think we’ve seen really – there haven’t been pressures on pricing maybe in very small submarkets of markets. but in general pricing is held up and we don’t anticipate that, that should change going forward in the near term.

David Miller

Yes, I’d just add on that. I think that’s right, that’s what we’re seeing. You could make the argument that we would actually would think that pricing ultimately gets pushed up further as a lot of the inventory that has been converted to rental housing gets fully absorbed, obviously there are some larger players in this space and the vast majority are actually smaller players. But we’re seeing obviously the amount of inventory that’s distressed decline obviously its market-by-market. But in some of the markets where you’ve seen really good healing, there is not that much distressed inventory. So you would expect kind of going forward over the next 12 months there to be just fewer new homes added to the entire stock of rental homes. And I think that will show good supply demand dynamics that ultimately will push rents up.

Unidentified Analyst

Alright, great. Thank you.

Operator

Our next question is from Emil Shalmiyev of JPMorgan. Please go ahead.

Anthony Paolene - JPMorgan

Hi, it’s Tony Paolone actually with Emil, sorry for the trouble earlier.

David Miller

Hi, Tony, good morning.

Anthony Paolene - JPMorgan

Good morning. David, I think you kind of answered a question that was going to have about just leverage in saying that you still think this 30% to 50% is kind of a sweet spot. But I’m just wondering if you rethought that much at all given that if we look at your line and the covenants there it seems to allow you to go up to 55% and if we look at the securitization that’s been done in the market that seems to go up to about 75% suggesting that if you guys wanted to – you could take on a lot more leverage and given the importance of scale here. Just wondering if you thought about just your capital structure over time and whether or not 30% to 50% is indeed the right level for the business?

David Miller

Yes, Tony. It’s a really great question. As I said the 30% to 50% range is big. If we draw down just our existing debt today gets us close to that 30% mark. We’re aggressively pursuing a securitization transaction that would obviously increase our total leverage And so I think that’s we’re talking about an additional $500 million. And so I guess the reason we’re quite comfortable with that as a range not withstanding your question is we still have ways to go to add another $500 million of debt capital, that is obviously structured well and good pricing.

And so if we get to that point or even close to that point it’s certainly something we can consider, we’ll have more operating history, I do think these assets as the invitation homes deal showed can certainly afford more leverage. But I just don’t think we have to make that decision right now, but it’s something that we’ll certainly be looking at as we move further down the path with leverage.

Anthony Paolene - JPMorgan

Okay. I mean on the acquisition side and the pace to a similar point. You mentioned during the bulk of your deals just point through the MLS. Is the – are the economics just that different at this point versus the court how it steps or can you give a little more color there and whether or not if you wanted to step on the gas you could?

David Miller

Sure. Larry you start this off..

Larry Shapiro

Sure. Tony, I think we’ve made the decision at this point that we can buy MLS homes or through small bulk purchases to replace carve-out step. And I think it gives us some advantages always in our mind going forward we can see these houses, we can get in the houses, we know what’s required to repair the houses. And particularly in a market like Florida it’s very difficult to get prior homeowners out of the homes if you’re buying at trustee sales. So the ultimate end game is to buy the house, get it fixed up, and get a resident in there. And particularly in Florida, it’s difficult to determine how long that process is, but we just feel more comfortable buying them less going forward and we think it gives us better visibility into what our ultimate margins are.

David Miller

Yes, just to add on that, there is also, we are seeing I think I have said this before, but it continues to pickup more small portfolios 10 to 50 homes that have been aggregated them as leased up by small operators in the markets in which we operate and so we continue to see more. I will say we look at a large quantity of those small deals and ultimately pass or bids are not accepted on a lot of them, but we are getting more traction there. I mentioned a small portfolio in Atlanta in the fourth quarter will have some of those in the first quarter as well and I just think that’s going to be a really fruitful way for us to continue acquisitions, but not sacrificing our discipline on price or quality.

Anthony Paolene - JPMorgan

Okay, thanks and just last one for Larry, you had mentioned 223 properties in the fourth quarter turned out of the 821 scheduled explorations and then you mentioned the total of 374 turned, what’s the differences between those two numbers, is that unscheduled like skip and evicts or what’s the difference between those two numbers?

Larry Shapiro

Yes, it’s definitely unscheduled people who are leaving the combination of evictions and people are breaking their leases for a number of different reasons.

Anthony Paolene - JPMorgan

Are you – and then (indiscernible) you are getting a sense now with some operating history behind you as to like what sort of – I don’t know if you want to call bad debts or unscheduled move outs like what that percentage might – might start to look like over time?

Christine Battist

Yes, certainly, it’s Christine here. We are seeing some visibility on that and it’s within line of our expectations in that 1% range of revenue.

Anthony Paolene - JPMorgan

Okay, thank you.

Operator

There are no more questions in the queue. This concludes the question-and-answer session. I will now turn the call back to David N. Miller for his closing remarks.

David Miller - President and Chief Executive Officer

Great, thanks everyone who participated on the call today. I just want to reiterate how excited we are about 2014, our initiatives and Silver Bay’s future. So thanks for your continued interest and support of Silver Bay.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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