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Summary

  • Silver Bay Realty Trust reported Q214 earnings.
  • Positive investment case remains intact.
  • The anticipated NAV gains have not impacted the stock price as originally expected.

The single-family rental market originally offered a lot of potential for investors, but now the group gets limited attention. In the case of Silver Bay Realty Trust (NYSE:SBY), the company continues to make progress on improving operations with several shifts to internalize management processes. During Q214, the company increased net asset value to $20.95, up from $20.35 in the prior quarter. The stock still lags around $16 due to concerns over the internal property valuation metrics and previously high operating expenses. The book value per share sits at only $16.74 since home price appreciation isn't officially factored into that valuation metric until the asset or single-family property is sold.

The single-family rental firm continues to make progress on a cost structure that was producing limited funds from operations (FFO) commonly use to value REITs. Using the adjust core number provided by the company, it increased to $3.0 million from $2.7 million in the prior quarter. Occupancy rates remain high at 95% for stabilized properties and 90% for aggregate properties. The real question is how well FFO improves from internalizing the management business that charged 1.5% of market cap for 2.2 million units, or roughly 5.8% of the outstanding shares. The cost savings will go directly to the bottom line with NAV taking a roughly $1.20 hit back down to roughly $19.75.

The thesis in my original article "Silver Bay Is Finally Cheap" is actually enhanced by the continued improvement in operations and a shift in management of the business internally. The market will appreciate a business with a higher FFO regardless of the lower NAV it initially causes. The ability to spin out larger dividends to investors is typically what drives REITs anyway.

Source: Update: Silver Bay Realty Trust Q2 '14 Earnings