Update: Silver Bay Realty Trust Q2 '14 Earnings

Aug.11.14 | About: Silver Bay (SBY)

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.

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