Silver Bay Realty Trust Corp. - FORM 10-Q - May 7, 2015

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EX-31.1 - EXHIBIT 31.1 - Silver Bay Realty Trust Corp.sby-2015331x10qxexh311.htm
EX-32.2 - EXHIBIT 32.2 - Silver Bay Realty Trust Corp.sby-2015331x10qxexh322.htm
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EX-10.1 - EXHIBIT 10.1 - Silver Bay Realty Trust Corp.sby-2015331x10qxexh101.htm
EX-31.2 - EXHIBIT 31.2 - Silver Bay Realty Trust Corp.sby-2015331x10qxexh312.htm
EX-2.2 - EXHIBIT 2.2 - Silver Bay Realty Trust Corp.sby-2015331x10qxexh22.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015 
or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to             
Commission File Number 001-37560
 
SILVER BAY REALTY TRUST CORP.
(Exact name of registrant as specified in its charter)
Maryland
90-0867250
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
3300 Fernbrook Lane North, Suite 210
Plymouth, Minnesota
55447
(Address of principal executive offices)
(Zip Code)
(952) 358-4400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer x
 
 
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
As of May 4, 2015, there were 36,359,360 shares of common stock, par value $0.01 per share, outstanding.
 


SILVER BAY REALTY TRUST CORP.
 
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015
 
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q and its exhibits contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements may include statements about our projected operating results, our stabilization and renovation rates, our ability to successfully lease and operate acquired properties, including turnover rates, projected operating costs, estimates relating to our ability to make distributions to our stockholders in the future, market trends in our industry, real estate values and prices, and the general economy.
 
The forward-looking statements contained in this report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed or implied in any forward-looking statement. We are not able to predict all of the factors that may affect future results. For a discussion of these and other factors that could cause our actual results to differ materially from any forward-looking statements, see the discussion on risk factors in Item 1A, "Risk Factors", and in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission ("SEC"). These risks, contingencies, and uncertainties include:
 
•
Our ability to successfully employ a new and untested business model in a new industry with no proven track record;
•
Failure to manage the Portfolio Acquisition (as defined below), including the integration of the properties acquired and to be acquired into our systems, effectively and efficiently;
•
The availability of additional properties that meet our criteria and our ability to purchase such properties on favorable terms;
•
Real estate appreciation or depreciation in our target markets and the supply of single-family homes in our target markets;
•
General economic conditions in our target markets, such as changes in employment and household earnings and expenses or the reversal of population, employment, or homeownership trends in our target markets that could affect the demand for rental housing;
•
Competition from other investors in identifying and acquiring single-family properties that meet our underwriting criteria and leasing such properties to qualified residents;
•
Our ability to maintain high occupancy rates and to attract and retain qualified residents in light of increased competition in the leasing market for quality residents and the relatively short duration of our leases;
•
Our ability to maintain rents at levels that are sufficient to keep pace with rising costs of operations;
•
Lease defaults by our residents;
•
Our ability to contain renovation, maintenance, marketing, and other operating costs for our properties;
•
Our ability to continue to build our operational expertise and to establish our platform and processes related to residential management;
•
Our dependence on key personnel to carry our business and investment strategies and our ability to hire and retain skilled managerial, investment, financial, and operational personnel, and the performance of third-party vendors and service providers including third-party acquisition and management professionals, maintenance providers, leasing agents, and property management;
•
Our ability to obtain additional capital or debt financing to expand our portfolio of single-family properties and our ability to repay our debt, including borrowings under our revolving credit facility and to meet our other obligations under our revolving credit facility;
•
The accuracy of assumptions in determining whether a particular property meets our investment criteria, including assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing, and resident default rates;
•
Our ability to accurately estimate the time and expense required to possess, renovate, repair, upgrade, and rent properties and to keep them maintained in rentable condition, unforeseen defects and problems that require extensive renovation and capital expenditures;
•
The concentration on our investments in single family properties which subject us to risks inherent in investments in a single type of property and seasonal fluctuations in rental demand;

1

•
The concentration of our properties in our target markets, which increases the risk of adverse changes in our operating results if there were adverse developments in local economic conditions or the demand for single-family rental homes or natural disasters in these target markets; and
•
Failure to qualify as a REIT or to remain qualified as a REIT, which will subject us to federal income tax as a regular corporation and could subject us to a substantial tax liability and compliance with the REIT distribution requirements.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable laws. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.


2

PART I
 
FINANCIAL INFORMATION
 
Item 1. Financial Statements
Silver Bay Realty Trust Corp.
Condensed Consolidated Balance Sheets
(amounts in thousands except share data)
 

March 31, 2015 (unaudited)
 
December 31, 2014
Assets
 

 
 

Investments in real estate:
 

 
 

Land
$
170,065

 
$
167,780

Building and improvements
797,359

 
780,590

 
967,424

 
948,370

Accumulated depreciation
(49,890
)
 
(43,150
)
Investments in real estate, net
917,534

 
905,220

Assets held for sale
769

 
2,010

Cash and cash equivalents
32,897

 
49,854

Escrow deposits
22,158

 
20,211

Resident security deposits
9,338

 
8,595

In-place lease and deferred lease costs, net
755

 
688

Deferred financing costs, net
15,827

 
11,960

Other assets
6,395

 
3,842

Total assets
$
1,005,673

 
$
1,002,380

Liabilities and Equity
 

 
 

Liabilities:
 

 
 

Securitization loan, net of unamortized discount of $1,312 and $1,387, respectively
$
310,220

 
$
310,665

Revolving credit facility
82,221

 
67,096

Accounts payable and accrued property expenses
15,251

 
13,090

Resident prepaid rent and security deposits
10,655

 
9,634

Total liabilities
418,347

 
400,485

10% cumulative redeemable preferred stock at liquidation value, $0.01 par; 50,000,000 authorized, 1,000 issued and outstanding
1,000

 
1,000

Equity:
 

 
 

Stockholders’ equity:
 

 
 

Common stock $0.01 par; 450,000,000 shares authorized; 36,363,059 and 36,711,694, respectively, shares issued and outstanding
361

 
366

Additional paid-in capital
653,900

 
660,776

Accumulated other comprehensive loss
(145
)
 
(86
)
Cumulative deficit
(101,691
)
 
(94,593
)
Total stockholders’ equity
552,425

 
566,463

Noncontrolling interests - Operating Partnership
33,901

 
34,432

Total equity
586,326

 
600,895

Total liabilities and equity
$
1,005,673

 
$
1,002,380

 
See accompanying notes to the condensed consolidated financial statements.

3

Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands except share data)
(unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2015
 
2014
Revenue:
 
 

 
 

Rental income
 
$
21,703

 
$
17,671

Other income
 
549

 
460

Total revenue
 
22,252

 
18,131

Expenses:
 
 

 
 

Property operating and maintenance
 
4,357

 
3,610

Real estate taxes
 
3,551

 
2,486

Homeowners’ association fees
 
405

 
304

Property management
 
2,147

 
2,895

Depreciation and amortization
 
7,111

 
6,145

Advisory management fee - affiliates
 
—

 
2,201

Portfolio acquisition expense
 
755

 
—

General and administrative
 
4,050

 
1,919

Share-based compensation
 
497

 
198

Interest expense
 
3,486

 
2,327

Other
 
(266
)
 
411

Total expenses
 
26,093

 
22,496

Net loss
 
(3,841
)
 
(4,365
)
Net loss attributable to noncontrolling interests - Operating Partnership
 
222

 
—

Net loss attributable to controlling interests
 
(3,619
)
 
(4,365
)
Preferred stock distributions
 
(25
)
 
(25
)
Net loss attributable to common stockholders
 
$
(3,644
)
 
$
(4,390
)
Loss per share - basic and diluted:
 
 

 
 

Net loss attributable to common shares
 
$
(0.10
)
 
$
(0.11
)
Weighted average common shares outstanding
 
36,428,809

 
38,542,728

Comprehensive Loss:
 
 

 
 

Net loss
 
$
(3,841
)
 
$
(4,365
)
Other comprehensive loss:
 
 

 
 

Change in fair value of interest rate cap derivatives
 
(59
)
 
(86
)
Other comprehensive loss
 
$
(59
)
 
$
(86
)
Comprehensive loss
 
(3,900
)
 
(4,451
)
Less comprehensive loss attributable to noncontrolling interests - Operating Partnership
 
222

 
—

Comprehensive loss attributable to controlling interests
 
$
(3,678
)
 
$
(4,451
)
 
See accompanying notes to the condensed consolidated financial statements.

4

Silver Bay Realty Trust Corp.
Condensed Consolidated Statement of Changes in Equity
(amounts in thousands except share data)
(unaudited)
 
Common Stock
 
Accumulated 
Other
Comprehensive Loss
 
 
 
Total Stockholders’
Equity
 
Noncontrolling Interests - Operating
Partnership
 
 
 
Shares
 
Par Value
Amount
 
Additional Paid-In
Capital
 
 
Cumulative
Deficit
 
 
 
Total
Equity
Balance at January 1, 2015
36,711,694

 
$
366

 
$
660,776

 
$
(86
)
 
$
(94,593
)
 
$
566,463

 
$
34,432

 
$
600,895

Non-cash equity awards, net
125,990

 
—

 
478

 
—

 
—

 
478

 
—

 
478

Repurchase and retirement of common stock
(474,625
)
 
(5
)
 
(7,663
)
 
—

 
—

 
(7,668
)
 
—

 
(7,668
)
Dividends declared
—

 
—

 
—

 
—

 
(3,479
)
 
(3,479
)
 
—

 
(3,479
)
Net loss
—

 
—

 
—

 
—

 
(3,619
)
 
(3,619
)
 
(222
)
 
(3,841
)
Other comprehensive loss
—

 
—

 
—

 
(59
)
 
—

 
(59
)
 
—

 
(59
)
Adjustment to noncontrolling interests - Operating Partnership
—

 
—

 
309

 
—

 
—

 
309

 
(309
)
 
—

Balance at March 31, 2015
36,363,059

 
$
361

 
$
653,900

 
$
(145
)
 
$
(101,691
)
 
$
552,425

 
$
33,901

 
$
586,326

 
See accompanying notes to the condensed consolidated financial statements.


5

Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited) 
 
Three Months Ended 
 March 31,
 
2015
 
2014
Cash Flows From Operating Activities:
 

 
 

Net loss
$
(3,841
)
 
$
(4,365
)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
 

 
 

Depreciation and amortization
7,111

 
6,145

Non-cash share-based compensation
478

 
198

Amortization and write-off of deferred financing costs
1,023

 
460

Amortization of discount on securitization loan
75

 
—

Other
219

 
541

Net change in assets and liabilities:
 

 
 

Decrease (increase) in escrow cash for operating activities and debt reserves
2,683

 
(7,839
)
Increase in deferred lease fees and other assets
(966
)
 
(672
)
Increase in accounts payable, accrued property expenses, and prepaid rent
1,477

 
465

Decrease in related party payables, net
—

 
(7,656
)
Net cash provided (used) by operating activities
8,259

 
(12,723
)
Cash Flows From Investing Activities:
 

 
 

Purchase of investments in real estate
(9,897
)
 
(13,065
)
Capital improvements of investments in real estate
(9,502
)
 
(7,789
)
Increase in escrow cash for investing activities
(4,630
)
 
(35
)
Proceeds from sale of real estate
1,240

 
1,232

Other
(43
)
 
(19
)
Net cash used by investing activities
(22,832
)
 
(19,676
)
Cash Flows From Financing Activities:
 

 
 

Payments on securitization loan
(520
)
 
—

Proceeds from revolving credit facility
15,125

 
33,650

Deferred financing costs paid
(4,712
)
 
(1,260
)
Purchase of interest rate cap agreements
(2,250
)
 
(100
)
Repurchase and retirement of common stock
(7,668
)
 
(2,438
)
Dividends paid
(2,359
)
 
(409
)
Net cash (used) provided by financing activities
(2,384
)
 
29,443

Net change in cash
(16,957
)
 
(2,956
)
Cash and cash equivalents at beginning of period
49,854

 
43,717

Cash and cash equivalents at end of period
$
32,897

 
$
40,761

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
2,288

 
$
1,808

Decrease in fair value of interest rate cap agreements
$
59

 
$
86

Noncash investing and financing activities:
 
 
 
Common stock and unit dividends declared, but not paid
$
3,454

 
$
1,150

Financing costs in accounts payable
$
178

 
$
—

Capital improvements in accounts payable
$
1,543

 
$
903


See accompanying notes to the condensed consolidated financial statements.



6
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)


Note 1.  Organization and Operations
 
Silver Bay Realty Trust Corp. ("Silver Bay" or the "Company"), is a Maryland corporation that focuses on the acquisition, renovation, leasing and management of single-family properties in select markets in the United States.

As of March 31, 2015, the Company owned 6,864 single-family properties, excluding assets held for sale, in Phoenix, AZ, Tucson, AZ, Northern California (currently consisting of Contra Costa, Napa, and Solano counties), Southern California (currently consisting of Riverside and San Bernardino counties), Jacksonville, FL, Orlando, FL, Southeast Florida (currently consisting of Miami-Dade, Broward and Palm Beach counties), Tampa, FL, Atlanta, GA, Charlotte, NC, Las Vegas, NV, Columbus, OH, Dallas, TX, and Houston, TX.

On April 1, 2015, the Company completed the acquisition of the portfolio of properties from The American Home Real Estate Investment Trust (“TAH”), a Maryland corporation. The Company acquired 2,373 properties in the transaction (the “Acquired Properties”) and had an additional 89 properties under contract with TAH to acquire at subsequent closings. The homes are primarily located in Atlanta, GA, Charlotte, NC, Tampa, FL, and Orlando, FL. See Note 3 for further description of this transaction.

In connection with its initial public offering the Company restructured its ownership to conduct its business through a traditional umbrella partnership ("UPREIT structure") in which substantially all of its assets are held by, and its operations are conducted through, Silver Bay Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership. The Company's wholly owned subsidiary, Silver Bay Management LLC, is the sole general partner of the Operating Partnership. As of March 31, 2015, the Company owned, through a combination of direct and indirect interests, 94.2% of the partnership interests in the Operating Partnership.

The Company has elected to be treated as a real estate investment trust ("REIT") for U.S. federal tax purposes, commencing with, and in connection with the filing of its federal tax return for, its taxable year ended December 31, 2012. As a REIT, the Company will generally not be subject to federal income tax on the taxable income that it distributes to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax at regular corporate rates. Even if it qualifies for taxation as a REIT, the Company may be subject to some federal, state and local taxes on its income or property. In addition, the income of any taxable REIT subsidiary ("TRS") that the Company owns will be subject to taxation at regular corporate rates.
 
Through September 30, 2014, the Company was externally managed by PRCM Real Estate Advisers LLC (the "Former Manager"). During this time, the Company relied on the Former Manager to provide or obtain on its behalf the personnel and services necessary for it to conduct its business as the Company had no employees of its own. On September 30, 2014, the Company closed a transaction to internalize its management (the "Internalization") and now owns all material assets and intellectual property rights of the Former Manager previously used in the conduct of its business and continues to be managed by officers and employees who worked for the Former Manager and who became employees of the Company as a result of the Internalization.

Note 2.  Basis of Presentation and Significant Accounting Policies

Consolidation and Basis of Presentation

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2015 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2015 may not be indicative of the results for a full year.  


7
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

The accompanying condensed consolidated financial statements include the accounts of the Company and the Operating Partnership. The Company consolidates real estate partnerships and other entities that are not variable interest entities when it owns, directly or indirectly, a majority voting interest in the entity or is otherwise able to control the entity. All intercompany balances and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions regarding future events that may affect the reported amounts and disclosures in the financial statements.  The Company’s estimates are inherently subjective in nature and actual results could differ from these estimates.
 
Reclassifications
 
Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentation.  These reclassifications have not changed the previously reported results of operations or stockholders' equity.

Assets Held for Sale

The Company evaluates its long-lived assets on a regular basis to ensure the individual properties still meet its investment criteria. If the Company determines that an individual property no longer meets its investment criteria, a decision is made to dispose of the property. The property is subject to the Company’s impairment test and any losses are recognized immediately. The Company then markets the property for sale and classifies it as held for sale in the consolidated financial statements.

In 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. The application of this guidance is prospective from the date of adoption and applies only to disposals (or new classifications to held for sale) that have not been reported as discontinued operations in previously issued financial statements. The Company adopted ASU 2014-08 during the quarter ended March 31, 2015.

Equity Incentive Plan

The Company adopted an equity incentive plan which provides incentive compensation to attract and retain qualified directors, officers, advisors, consultants and other personnel of the Company. The plan permits the granting of stock options, restricted shares of common stock, restricted stock units, phantom shares, dividend equivalent rights, or other equity-based awards.  The equity incentive plan is administered by the compensation committee of the Company’s board of directors. 

The cost of restricted shares of common stock awarded to independent directors is based on the price of the Company’s stock as of the date of grant, in accordance with Codification Topic Compensation - Stock Compensation (“ASC 718”).  Prior to the Internalization, the cost of restricted shares of common stock awarded to employees of the Former Manager and the Former Manager’s operating subsidiary were measured at each reporting date based on the price of the Company’s stock as of period end, in accordance with Codification Topic Equity (“ASC 505”). On the date of the Internalization, the employees of the Former Manager and the Former Manager's operating subsidiary became employees of the Company and the Company fixed the measurement of the awards to the respective employees to the stock price as of such date in accordance with ASC 718. The respective awards will not be subsequently remeasured and future awards to employees, subsequent to the Internalization, will be measured based on the price of the Company's stock as of the date of grant in accordance with ASC 718.  All restricted stock awards are amortized ratably over the applicable service period.

The Company recognizes compensation expense for performance stock units ("PSU") based on the grant-date fair value and the service period of the respective awards. These units represent shares potentially issuable in the future based upon

8
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

the Company's stock performance over a three-year performance period. Fair value of the PSU's are estimated using a Monte-Carlo simulation model.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the "JOBS Act") the Company meets the definition of an “emerging growth company.” The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised U.S. accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard is effective for interim or annual periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. Early adoption of this standard is not allowed. The Company is currently evaluating the impact the adoption of Topic 606 will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. This update is intended to improve targeted areas of consolidation guidance by simplifying the consolidation evaluation process, and by placing more emphasis on risk of loss when determining a controlling financial interest. The provisions of this ASU are effective for interim and annual periods beginning after December 15, 2015. The Company is currently in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The impact will be a reduction of other assets and the associated reported debt liability.

Note 3. Investments in Real Estate

Acquisition of The American Home Real Estate Investment Trust, Inc. Portfolio

On April 1, 2015, the Company completed the acquisition (the “Portfolio Acquisition”) of the portfolio of properties from TAH. The Company acquired 2,373 properties in the transaction and had an additional 89 properties under contract with TAH to acquire at subsequent closings. The aggregate purchase price for the Portfolio Acquisition, inclusive of the 89 properties not acquired as of April 1, 2015, was $263,000. The Portfolio Acquisition was financed using proceeds obtained under the Company's revolving credit facility, which was amended and restated on February 18, 2015 to increase the borrowing capacity to $400,000 from $200,000 (see Note 4). The homes are primarily located in Atlanta, GA, Charlotte, NC, Tampa, FL, and Orlando, FL. The Company intends to acquire all of the remaining homes and information regarding the Portfolio Acquisition detailed in these notes to the Company’s condensed financial statements reflect the full acquisition of the portfolio.
    
The purchase price included a holdback of $7,890, which is held by a third-party escrow agent under the terms of an escrow agreement and will be used to satisfy any claims by the Company made within 15 months of the closing date, including for breach by TAH or certain of its subsidiaries under the purchase agreement.     

9
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

The Company also incurred $755 in transaction expenses associated with the Portfolio Acquisition in the three months ended March 31, 2015. These costs are included in portfolio acquisition expense in the condensed consolidated statements of operations and comprehensive loss.

The following table summarizes the preliminary estimated fair values of the assets and liabilities acquired as part of the Portfolio Acquisition:

Land
$
55,684

Buildings and improvements
207,316

Estimated fair value of assets and liabilities acquired
$
263,000


As the Portfolio Acquisition was completed subsequent to quarter-end, the assets and liabilities acquired as part of the transaction and the related results of these operations are not reflected in the Company's condensed consolidated financial statements for the periods presented.
    
Note 4.  Debt

Securitization Loan

On August 12, 2014, the Company completed a securitization transaction (the "Securitization Transaction") in which it received gross proceeds of $311,164, net of an original issue discount of $1,503 and before issuance costs and reserves. The Securitization Transaction involved the issuance and sale of six classes of single-family rental pass-through certificates (the "Certificates") that represent beneficial ownership interests in a loan secured by 3,084 single-family properties (the "Securitization Properties") sold to one of our affiliates from our portfolio. In the Securitization Transaction, the Company sold $312,667 of pass-through certificates, with a blended effective interest rate of the London Interbank Offered Rate ("LIBOR") plus 1.92%.

As part of the Securitization Transaction, a newly-formed special purpose entity (the "Borrower") entered into a loan agreement (the "Securitization Loan"). The Borrower is wholly owned by another special purpose entity (the "Equity Owner"). The Securitization Loan was subsequently deposited into a trust in exchange for the pass-through certificates. The Securitization Loan has an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019. The Company used the proceeds of the Securitization Loan to pay down the balance of Company's revolving credit facility at closing and the remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties and the repurchase of common stock. In March 2015, the Company paid down $520 on the Securitization Loan to effect the release of four properties from the first priority mortgages securing the Securitization Loan.

The Securitization Loan requires monthly payments of interest and is comprised of six floating rate components computed based on one month LIBOR for each interest period plus a fixed component spread for each of the six components, resulting in a blended effective interest rate of LIBOR plus 1.92%, inclusive of the amortization of the original issue discount (described below), plus monthly servicing fees of 0.1355%. The principal amount of each component of the loan corresponds to the respective class of Certificates. In connection with entering into the loan, the Company recorded $311,164 as securitization loan in the accompanying condensed consolidated balance sheets. The original issue discount (the difference between the $312,667 balance of certificates sold and the gross proceeds of $311,164) is accreted and recognized to interest expense through the fully extended maturity date of September 9, 2019. In the three months ended March 31, 2015, the Company incurred gross interest expense of $1,655, excluding amortization of the discount and deferred financing costs and before the effect of capitalizing interest related to property renovations. As of March 31, 2015 and December 31, 2014, the loan had a weighted-average interest rate of 2.13% and 2.11%, respectively, which is inclusive of the monthly servicing fees, but excludes amortization of the original issue discount and deferred financing costs.

All amounts outstanding under the Securitization Loan are secured by first priority mortgages on the Securitization Properties in addition to the equity interests in, and certain assets of, the Borrower. The amounts outstanding under the Securitization Loan and certain obligations contained therein are guaranteed by the Operating Partnership only in the case of certain bad acts (including bankruptcy) as outlined in the transaction documents. The Borrower and Equity Owner are separate

10
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

legal entities, but continue to be reported in the Company’s consolidated financial statements.  As long as the Securitization Loan is outstanding, the assets of the Borrower and Equity Owner are not available to satisfy the debts and obligations of the Company or its other consolidated subsidiaries, and the liabilities of the Borrower and Equity Owner are not liabilities of the Company (excluding, for this purpose, the Borrower and Equity Owner) or its other consolidated subsidiaries.  The Company is permitted to receive distributions from the Borrower out of unrestricted cash as long as the Borrower is current with all payments and in compliance with all other obligations under the Securitization Loan.

The Securitization Loan provides for the restriction of cash whereby the Company must set aside funds for payment of property taxes, capital expenditures and other reserves associated with the Securitization Properties.  As of March 31, 2015 and December 31, 2014, the Company had $6,606 and $4,635, respectively, included in escrow deposits associated with the required reserves.  The Securitization Loan does not contractually restrict the Company's ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. The Securitization Loan documents require the Company to maintain certain covenants, including a minimum debt yield on the Securitization Properties, and contain customary events of default for a loan of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments and cross-default with certain other indebtedness. In the event of default, the lender may apply funds, as the lender elects, from a cash management account controlled by the lender for the collection of all rents and cash generated by the Borrower's properties, foreclose on its security interests, appoint a new property manager, and in limited circumstances, enforce the Company's guaranty. As of March 31, 2015 and December 31, 2014, the cash management account had a balance of $2,896 and $3,542, respectively, classified as escrow deposits on the condensed consolidated balance sheets. As of March 31, 2015 and December 31, 2014, the Company was in compliance with all financial covenants.

Revolving Credit Facility

Certain of the Company's subsidiaries have a revolving credit facility (the "revolving credit facility") with a syndicate of banks. On February 18, 2015, the Company amended and restated the revolving credit facility to increase the borrowing capacity to $400,000 from $200,000. As amended, the revolving credit facility bears interest at a varying rate of LIBOR plus 300 basis points and is not subject to a LIBOR floor. Prior to the amendment, the revolving credit facility bore interest at varying rate of LIBOR plus 3.5% subject to a LIBOR floor of 0.5%. The Company is also required to pay a monthly fee on the unused portion of the revolving credit facility at a rate of 0.5% per annum, when the balance outstanding is less than $200,000 or 0.3% per annum when the balance outstanding is equal to or greater than $200,000.  As part of the amendment, the term of the revolving credit facility was extended to February 18, 2018 and the advance rate for borrowings was increased to 65% from 55%. The advance rate is based on the aggregate value of the eligible properties which value is calculated as the lesser of (a) the third-party broker price opinion value or (b) the original purchase price plus certain renovation and other capitalized costs of the properties. The Company used proceeds from the revolving credit facility to fund the Portfolio Acquisition. The remaining proceeds will be used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties.

As of March 31, 2015 and December 31, 2014, $82,221 and $67,096, respectively, was outstanding under the revolving credit facility. The interest rate on the revolving credit facility as of March 31, 2015 and 2014 was 3.27% and 4.0%, respectively. In the three months ended March 31, 2015 and 2014, the Company incurred $973 and $1,949 respectively, in gross interest expense on the revolving credit facility, excluding amortization of deferred financing costs and before the effect of capitalizing interest related to property renovations.

All amounts outstanding under the revolving credit facility are collateralized by the equity interests and assets of certain of the Company’s subsidiaries ("Pledged Subsidiaries"), which exclude the Securitization Properties. The amounts outstanding under the revolving credit facility and certain obligations contained therein are guaranteed by the Company and the Operating Partnership only in the case of certain bad acts (including bankruptcy) and up to $20,000 for completion of certain property renovations, as outlined in the credit documents.

The Pledged Subsidiaries are separate legal entities, but continue to be reported in the Company’s consolidated financial statements.  As long as the revolving credit facility is outstanding, the assets of the Pledged Subsidiaries are not available to satisfy the other debts and obligations of the Pledged Subsidiaries or the Company.  However, the Company is permitted to receive distributions from the Pledged Subsidiaries as long as the Company and the Pledged Subsidiaries are current with all payments and in compliance with all other obligations under the revolving credit facility.


11
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

The revolving credit facility does not contractually restrict the Company’s ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. For example, in the final year of the revolving credit facility, all cash generated by the properties in the Pledged Subsidiaries must be used to pay down the principal amount outstanding under the revolving credit facility.  The revolving credit facility requires the Company to meet certain quarterly financial tests pertaining to net worth, total liquidity, debt yield and debt service coverage ratios, as defined by the revolving credit facility agreement.  The Company must maintain at all times total liquidity of $25,000 and a net worth of at least $125,000, in each case as determined in accordance with the revolving credit facility agreement.  As of March 31, 2015, and December 31, 2014, the Company was in compliance with all financial covenants.  The revolving credit facility also provides for the restriction of cash whereby the Company must set aside funds for payment of insurance, property taxes and certain property operating and maintenance expenses associated with properties in the Pledged Subsidiaries' portfolios.  As of March 31, 2015 and December 31, 2014, the Company had $3,241 and $6,457, respectively, included in escrow deposits associated with the required reserves.  The revolving credit facility also contains customary events of default for a facility of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness.

Deferred Financing Costs

Costs incurred in the placement of the Company’s debt are being amortized using the straight-line method, which approximates the effective interest method, over the terms of the related debt. Amortization of deferred financing costs is recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss.  

In connection with its Securitization Loan, the Company incurred deferred financing costs of $477 for the three months ended March 31, 2015. The costs are being amortized through September 9, 2019, the fully extended maturity date of the Securitization Loan. Amortization of the deferred financing costs was $581 for the three months ended March 31, 2015.

In connection with its revolving credit facility, the Company incurred deferred financing costs of $4,413 and $1,260 for the three months ended March 31, 2015 and 2014, respectively. Amortization of the deferred financing costs was $411 and $460 for the three months ended March 31, 2015 and 2014, respectively.

Interest Rate Cap Agreements

The variable rate of interest on the Company's debt exposes the Company to interest rate risk. The Company seeks to manage this risk through the use of interest rate cap agreements.

As of December 31, 2014, the Company held four interest rate cap agreements, including three interest rate cap agreements with an aggregate notional amount of $245,000, LIBOR caps of 3.00%, and termination dates of May 10, 2016 associated with the revolving credit facility, and one interest rate cap with a notional amount of $312,667, a LIBOR cap of 3.1085%, and a termination date of September 15, 2016 associated with the Securitization Loan.
    
On January 28, 2015, the Company entered into a forward-starting interest rate cap agreement associated with the Securitization Loan at a purchase price of $1,383. The interest rate cap has an effective date of September 15, 2016, a termination date of September 15, 2019, a notional amount of $200,000, and a LIBOR cap rate of 3.1085%.

In conjunction with the amendment to the revolving credit facility executed on February 18, 2015, the Company sold the existing interest rate cap agreements associated with such facility for an aggregate sales price of $4 and entered into a new interest rate cap agreement with a notional amount of $83,000, a LIBOR cap of 3.0%, and a termination date of February 17, 2018, at a purchase price of $272.

On March 31, 2015, the Company entered into an interest rate cap associated with the revolving credit facility at a purchase price of $595. The interest rate cap has an effective date of March 31, 2015, a termination date of February 18, 2018, a notional amount of $266,100, and a LIBOR cap rate of 3.0%.

The Company determined that the interest rate caps purchased in the three months ended March 31, 2015 qualify for hedge accounting and, therefore, designated the derivatives as cash flow hedges with future changes in fair value recognized through other comprehensive loss (see Note 9). Ineffectiveness is calculated as the amount by which the change in fair value of the derivatives exceeds the change in the fair value of the anticipated cash flows related to the corresponding debt.

12
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

Capitalized Interest

The Company capitalizes interest for properties undergoing renovation activities and purchased subsequent to the Company obtaining debt in May 2013.  Capitalized interest totaled $270 and $82 for the three months ended March 31, 2015 and 2014, respectively.

Note 5. Equity Incentive Plan

Restricted Stock Awards

On February 12, 2015, the Company issued, in aggregate, 69,605 shares of restricted common stock to certain officers of the Company. The estimated fair value of these awards was $15.72 per share, based upon the closing price of the Company’s stock on the grant date. These grants will vest in one year commencing on the date of the grant, as long as such individual is an employee on the vesting date.

On February 13, 2015, the Company issued, in aggregate, 56,385 shares of restricted common stock to certain personnel of the Company. The estimated fair value of these awards was $15.67 per share, based upon the closing price of the Company’s stock on the grant date. These grants will vest in three equal installments commencing on the date of the grant, as long as such individual is an employee on the vesting date.

Performance Stock Units
    
On February 12, 2015, the Company granted 165,000 performance stock units to certain members of executive and senior management under its equity incentive plan. Each PSU represents the potential to receive Silver Bay common stock after the completion of three years of service from the date of grant. The number of shares of Silver Bay common stock to be earned as of the vesting date for each PSU increases and decreases based on Silver Bay's total stockholder return (stock price appreciation plus dividends) ("TSR"). The number of shares of common stock is determined by multiplying the target number of PSUs by the TSR multiplier, determined in accordance with the following table:

Annualized TSR
 
TSR Multiplier
6.5%
 
—%
8%
 
50%
10%
 
100%
12%
 
150%
16%
 
200%

To the extent the Company's annualized TSR falls between two discrete points, linear interpolation shall be used to determine the TSR multiplier. Additionally, each PSU contains one dividend equivalent right, which is equal to the cash dividend that would have been paid on the PSU had the PSU been an issued and outstanding common share on the record date for the dividend and is payable in additional shares if the market and service conditions are met.

13
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)


The Company utilized a Monte-Carlo simulation to calculate the weighted-average grant date fair value of $7.00 per unit, using the following assumptions:

Expected volatility (1)
17.55
%
Dividend assumption (2)
—
%
Expected term in years
3.00

Risk-free rate
1.02
%
Stock price (per share) (3)
$
15.72

Beginning average stock price (per share) (4)
$
16.06

_______________
(1)
Expected volatility is calculated as a 50.0% relative weighting of the Company's historical volatility of 15.54% (over the period from August 1, 2013 through the date of grant of the PSUs) and a 50.0% relative weighting on the implied volatility of 19.55%.
(2)
An assumed dividend yield of 0% is the mathematical equivalent to the reinvestment of dividends, which is consistent with the TSR definition described above.
(3)
Based on the closing price of the Company's common stock on February 12, 2015.
(4)
Based on the 30 trading days ended on February 12, 2015.

For the three months ended March 31, 2015, the Company recognized non-cash performance-based stock unit expense of $50, which is included within share-based compensation in the condensed consolidated statements of operations and comprehensive loss. Unrecognized compensation expense at March 31, 2015 was $1,105, which is expected to be recognized over the remaining three-year service period of the PSUs.

Note 6.  Stockholders’ Equity

Common Stock

On July 1, 2013, the Company’s board of directors authorized the Company to repurchase up to 2,500,000 shares of its common stock through a share repurchase program. On November 25, 2014, the Company's board of directors authorized an increase of 2,500,000 shares to the previously authorized share repurchase program for a total of 5,000,000 shares. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The manner, price, number and timing of share repurchases will be subject to a variety of factors, including market conditions and applicable U.S. Securities and Exchange Commission rules.
 
In the three months ended March 31, 2015, the Company repurchased and retired 470,417 shares under the program for a total cost of $7,601, at an average purchase price of $16.16, inclusive of commissions.

Common Stock Dividends

The following table presents cash dividends declared by the Company on its common stock during the three months ended March 31, 2015, and the four immediately preceding quarters:

Declaration Date
Record Date
Payment Date
Cash Dividend
per Share
March 25, 2015
April 6, 2015
April 17, 2015
$0.09
December 18, 2014
December 29, 2014
January 9, 2015
0.06
September 4, 2014
September 22, 2014
October 3, 2014
0.04
June 19, 2014
June 30, 2014
July 11, 2014
0.03
March 13, 2014
March 24, 2014
April 4, 2014
0.03



14
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

Preferred Stock Dividends

The following table presents cash dividends declared by the Company on its 10% cumulative redeemable preferred stock during the three months ended March 31, 2015, and the four immediately preceding quarters:

Declaration Date
Payment Date
Cash Dividend
per Share
March 25, 2015
April 17, 2015
$
27.22

January 9, 2015
January 9, 2015
26.67

October 3, 2014
October 3, 2014
22.78

June 25, 2014
June 30, 2014
26.94

April 2, 2014
April 4, 2014
23.33


Note 7.  Earnings (Loss) Per Share

The following table presents a reconciliation of net loss attributable to common stockholders and shares used in calculating basic and diluted earnings (loss) per share ("EPS") for the three months ended March 31, 2015 and 2014: 
 
Three Months Ended March 31,
 
2015
 
2014
Net loss attributable to controlling interests
$
(3,619
)
 
$
(4,365
)
Preferred stock distributions
(25
)
 
(25
)
Net loss attributable to common stockholders
$
(3,644
)
 
$
(4,390
)
Basic and diluted weighted average common shares outstanding
36,428,809

 
38,542,728

Net loss per common share - basic and diluted
$
(0.10
)
 
$
(0.11
)

A total of 2,231,511 common units were outstanding at March 31, 2015, but have been excluded from the calculation of diluted EPS as their inclusion would not be dilutive. In addition, 165,000 PSUs have been excluded from the calculation of diluted EPS for the three months ended March 31, 2015, as the requisite performance conditions had not been met as of such date.

Note 8.  Related Party Transactions

Advisory Management Agreement

On September 30, 2014, the Company closed the Internalization after receiving the required stockholder approval for the transaction. Prior to the Internalization, the Company and the Former Manager maintained an advisory management agreement whereby the Former Manager designed and implemented the Company’s business strategy and administered its business activities and day-to-day operations, subject to oversight by the Company’s board of directors.  In exchange for these services, the Former Manager earned a fee equal to 1.5% per annum, or 0.375% per quarter, of the Company’s daily average fully diluted market capitalization, as defined by the management agreement, calculated and payable quarterly in arrears. The fee was reduced for the 5% property management fee (described below) received by the Former Manager’s operating subsidiary or its affiliates under the property management and acquisition services agreement. The Company also reimbursed the Former Manager for all expenses incurred on its behalf or otherwise in connection with the operation of its business, other than compensation for the Chief Executive Officer and personnel providing data analytics directly supporting the investment function.
During the three months ended March 31, 2014, the Company expensed $2,201 in advisory management fees, net of the reduction for the 5% property management fee described below.

The Company also reimbursed the Former Manager for certain general and administrative expenses, primarily related to employee compensation and certain office costs. Direct and allocated costs incurred by the Former Manager on behalf of the Company totaled $1,339 for the three months ended March 31, 2014.

15
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

Property Management and Acquisition Services Agreement

Prior to the Internalization, the Company and the Former Manager’s operating subsidiary maintained a property management and acquisition services agreement pursuant to which the Former Manager’s operating subsidiary acquired and managed single-family properties on the Company’s behalf. For these services, the Company reimbursed the Former Manager’s operating subsidiary for all direct expenses incurred in the operation of its business, including the compensation of its employees. The Former Manager’s operating subsidiary also received a property management fee equal to 5% of certain costs and expenses incurred by it in the operation of its business that were reimbursed by the Company. Prior to the Internalization, this 5% property management fee reduced the advisory management fee paid to the Former Manager on a dollar-for-dollar basis. Upon Internalization, the Former Manager's operating subsidiary performing these services was acquired.

During the three months ended March 31, 2014, the Company incurred property management expense of $2,895. These amounts included direct expense reimbursements of $1,980 and the 5% property management fee of $111. The remaining amounts in property management fees of $804 were incurred to reimburse the Former Manager's operating subsidiary for expenses payable to third-party property managers and direct property management type expenses. In addition, the Company incurred charges with the Former Manager's operating subsidiary of $229 in acquisitions and renovation fees, which the Company capitalized as part of property acquisition and renovation costs of $11 for leasing services, which are reflected as other assets and amortized over the life of the leases.

Note 9.  Derivative and Other Fair Value Instruments

Codification Topic Fair Value Measurements and Disclosures (“ASC 820”) established a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Recurring Fair Value

The Company uses interest rate cap agreements to manage its exposure to interest rate risk (refer to Note 4). The interest rate cap agreements are valued using models developed by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves).

The following tables provide a summary of the aggregate fair value measurements for the interest rate cap agreements and the location within the condensed consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively:






Fair Value Measurements at Reporting Date Using
Description

Balance Sheet Location

March 31, 2015

Quoted Prices (Unadjusted) for Identical Assets/Liabilities
(Level 1)

Quoted Prices for Similar Assets and Liabilities in Active Markets
(Level 2)

Significant Unobservable Inputs
(Level 3)
Interest Rate Caps
(cash flow hedges)

Other Assets

$
2,248


$
—


$
2,248


$
—


16
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

 
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
Balance Sheet Location
 
December 31, 2014
 
Quoted Prices (Unadjusted) for Identical Assets/Liabilities
(Level 1)
 
Quoted Prices for Similar Assets and Liabilities in Active Markets
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Interest Rate Caps
(cash flow hedges)
 
Other Assets
 
$
58

 
$
—

 
$
58

 
$
—

Interest Rate Caps
(not designated as hedging instruments)
 
Other Assets
 
13

 
—

 
13

 
—

Total
 
 
 
$
71

 
$
—

 
$
71

 
$
—


The following table provides a summary of the effect of cash flow hedges on the Company's condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2015:


Effective Portion

Ineffective Portion
Type of Cash Flow Hedge

Amount of Gain/(Loss) Recognized in Other Comprehensive Loss on Derivative

Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income

Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income

Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
Interest Rate Caps

$
(59
)

Interest Expense

$
—


Interest Expense
 
$
—


The following table provides a summary of the effect of cash flow hedges on the Company's condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2014:
 
 
Effective Portion
 
Ineffective Portion
Type of Cash Flow Hedge
 
Amount of Gain/(Loss) Recognized in Other Comprehensive Loss on Derivative
 
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
Interest Rate Caps
 
$
(86
)
 
Interest Expense
 
$
—

 
N/A
 
$
—


As of March 31, 2015 and December 31, 2014, there were $145 and $86, respectively, in deferred losses in accumulated other comprehensive loss related to interest rate cap agreements. The Company expects to recognize $34 in interest expense during the twelve months ending March 31, 2016, which will be reclassified out of accumulated other comprehensive loss in accordance with the amortization schedules established upon designation of the interest rate caps as cash flow hedges. During the three months ended March 31, 2015, the Company recorded $9 in losses as interest expense related to the change in fair value of interest rate caps not designated as cash flow hedges.

Nonrecurring Fair Value

For long-lived assets held for sale, an impairment loss is recognized when the estimated fair value of the asset, less the estimated cost to sell, is less than the carrying amount of the asset at the time the Company has determined to sell the asset. Assets held for sale are valued based on comparable sales data, less estimates of third-party broker commissions, which are gathered from the markets (see Note 2). These impairment measurements constitute nonrecurring fair value measures under ASC 820 and the inputs are characterized as Level 2.


17
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2015
(amounts in thousands, except share data and property counts)

Fair Value of Other Financial Instruments

In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.  The following describes the Company’s methods for estimating the fair value for financial instruments. Descriptions are not provided for those items that have zero balances as of March 31, 2015.
•
Cash and cash equivalents, escrow deposits, resident prepaid rent and security deposits, resident rent receivable (included in other assets), accounts payable, and accrued property expenses have carrying values which approximate fair value because of the short-term nature of these instruments.  The Company categorizes the fair value measurement of these assets and liabilities as Level 1.
•
The Company’s revolving credit facility has a floating interest rate based on an index plus a spread and the credit spread is consistent with those demanded in the market for facilities with similar risk and maturities. As the revolving credit facility was amended and restated on February 18, 2015, the interest rate on this borrowing is at market as of March 31, 2015 and thus, the carrying value of the debt approximated fair value. The Company categorizes the fair value measurement of this liability as Level 2.
•
The fair value of the Company's Securitization Loan was $309,778 as of March 31, 2015, based on an average of market quotations. The Company categorizes the fair value measurement of this liability as Level 2.
•
The Company’s 10% cumulative redeemable preferred stock had a fair value which approximates its liquidation value at March 31, 2015.  The Company categorizes the fair value measurement of this instrument as Level 2.

Note 10.  Commitments and Contingencies

Concentrations

As of March 31, 2015, approximately 51% of the Company’s properties were located in Phoenix, AZ, Tampa, FL, and Atlanta, GA, which exposes the Company to greater economic risks than if the Company owned a more geographically dispersed portfolio. As of April 1, 2015, reflecting the impact of the Portfolio Acquisition, approximately 57% of the Company's properties were located in Phoenix, Tampa, and Atlanta.

Resident Security Deposits

As of March 31, 2015, the Company had $9,338 in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the underlying lease.

Earnest Deposits

Escrow deposits include non-refundable cash or earnest deposits for the purchase of properties. As of March 31, 2015, the Company had earnest deposits for property purchases of $5,369, including a $5,300 earnest deposit for the Portfolio Acquisition described in Note 3. As of March 31, 2015, for properties acquired through individual broker transactions and the Portfolio Acquisition, which involve submitting a purchase offer, the Company had offers accepted to purchase residential properties for an aggregate amount of $265,968. Not all of the properties, including 89 properties associated with the Portfolio Acquisition which are under contract to close in the future, are certain to be acquired because properties may fall out of escrow through the closing process for various reasons and the escrow deposits may be lost.

Legal and Regulatory

From time to time, the Company is subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary course of the Company's business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal or regulatory claims that would have a material effect on the Company's condensed consolidated financial statements and, therefore, no accrual has been recorded as of March 31, 2015.

18

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Special Note Regarding Forward-Looking Statements” included in this report. In addition, our actual results could differ materially from those projected in such forward-looking statements as a result of the factors discussed under “Special Note Regarding Forward-Looking Statements” as well as the risk factors described in Part II, Item 1A, “Risk Factors,” of this report.

Overview

We are an internally-managed Maryland corporation focused on the acquisition, renovation, leasing, and management of single-family properties in select markets in the United States. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation. We generate virtually all of our revenue by leasing our portfolio of single-family properties. As of March 31, 2015, we owned 6,864 single family properties in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio and Texas, excluding properties held for sale. On April 1, 2015, we acquired 2,373 properties in the Portfolio Acquisition (defined below) and had an additional 89 properties under contract as part of the Portfolio Acquisition. The homes are primarily located in Atlanta, Charlotte, Tampa and Orlando.

Through September 30, 2014, we were externally managed by PRCM Real Estate Advisers LLC (our "Former Manager"). During this time, we relied on our Former Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business as we had no employees of our own. On September 30, 2014, we closed a transaction to internalize our management (the "Internalization") and now own all material assets and intellectual property rights of our Former Manager previously used in the conduct of its business and continue to be managed by officers and employees who worked for our Former Manager and became our employees as a result of the Internalization.

We have elected to be treated as a real estate investment trust ("REIT") for U.S. federal tax purposes, commencing with, and in connection with the filing of our federal tax return for, our taxable year ended December 31, 2012. As a REIT, we generally are not subject to federal income tax on the taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property.  In addition, the income of any taxable REIT subsidiary ("TRS") that we own will be subject to taxation at regular corporate rates.

Silver Bay Realty Trust Corp. was incorporated in Maryland in June 2012. Silver Bay Realty Trust Corp. conducts its business and owns all of its properties through Silver Bay Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership. Silver Bay Realty Trust Corp.’s wholly owned subsidiary, Silver Bay Management LLC (the "General Partner") is the sole general partner of the Operating Partnership. Silver Bay Realty Trust Corp. has no material assets or liabilities other than its investment in the Operating Partnership. As of March 31, 2015, Silver Bay Realty Trust Corp. owned, through a combination of direct and indirect interests, 94.2% of the partnership interests in the Operating Partnership. Except as otherwise required by the context, references to the “Company,” “Silver Bay,” “we,” “us” and “our” refer collectively to Silver Bay Realty Trust Corp., the Operating Partnership and the direct and indirect subsidiaries of each.

Acquisition of The American Home Real Estate Investment Trust, Inc. Portfolio
On April 1, 2015, we completed the previously announced acquisition (the “Portfolio Acquisition”) of the portfolio of properties from The American Home Real Estate Investment Trust (“TAH”), a Maryland corporation. We acquired 2,373 properties in the transaction (the “Acquired Properties”) and had an additional 89 properties under contract as of April 1, 2015 with TAH to acquire at subsequent closings. The aggregate purchase price for the Portfolio Acquisition, inclusive of the 89 properties not acquired as of April 1, 2015, was $263.0 million. The homes are primarily located in Atlanta, Charlotte, Tampa and Orlando and increase the total number of homes we own in these markets. We used amounts borrowed under our recently increased revolving credit facility to fund our payment of the purchase price. The Acquired Properties were substantially leased as of April 1, 2015 with aggregate occupancy of approximately 93% and average existing rents of approximately $960 per month.

    

19

Property Portfolio

Our real estate investments consist of single-family properties in select markets. As of March 31, 2015, we owned 6,864 single-family properties, excluding properties held for sale, in the following markets:
Market
Number of
Properties (1)
 
Aggregate Cost
Basis (2)
(thousands)
 
Average Cost
Basis Per Property
(thousands)
 
Average Age
(in years) (3)
 
Average Square
Footage
Phoenix
1,424

 
$
201,719

 
$
142

 
26.2
 
1,636

Atlanta
1,133

 
143,403

 
127

 
18.5
 
1,983

Tampa
926

 
133,046

 
144

 
25.4
 
1,656

Dallas
503

 
66,948

 
133

 
23.0
 
1,619

Jacksonville
450

 
59,265

 
132

 
26.4
 
1,527

Southeast FL (4)
385

 
74,720

 
194

 
43.4
 
1,495

Northern CA (5)
384

 
72,591

 
189

 
46.4
 
1,401

Orlando
335

 
49,644

 
148

 
27.4
 
1,555

Las Vegas
291

 
41,298

 
142

 
18.7
 
1,717

Columbus
284

 
32,913

 
116

 
37.6
 
1,414

Charlotte
262

 
36,645

 
140

 
13.9
 
1,804

Tucson
209

 
17,347

 
83

 
42.0
 
1,330

Southern CA (6)
156

 
23,715

 
152

 
45.0
 
1,346

Houston
122

 
14,170

 
116

 
31.0
 
1,653

TOTALS
6,864

 
$
967,424

 
$
141

 
27.4
 
1,647

 
 
 
 
 
 
 
 
 
 

(1)
Total properties exclude properties held for sale or sold by our TRS and any properties previously acquired in purchases that have been subsequently rescinded or vacated.
(2)
Aggregate cost includes all capitalized costs, determined in accordance with GAAP, incurred through March 31, 2015 for the acquisition, stabilization, and significant post-stabilization renovation of properties, including land, building, possession costs and renovation costs. Aggregate cost includes $9.5 million in capital improvements, incurred from our formation through March 31, 2015, made to properties that had been previously renovated, but does not include accumulated depreciation.
(3)
As of March 31, 2015, approximately 8% of our properties were less than 10 years old, 33% were between 10 and 20 years old, 19% were between 20 and 30 years old, 19% were between 30 and 40 years old, 9% were between 40 and 50 years old, and 12% were more than 50 years old. Average age is an annual calculation.
(4)
Southeast Florida market currently consists of Miami-Dade, Broward and Palm Beach counties.
(5)
Northern California market currently consists of Contra Costa, Napa and Solano counties.
(6)
Southern California market currently consists of Riverside and San Bernardino counties.



20

Recent Highlights of 2015

•
On April 1, 2015, we completed the Portfolio Acquisition, acquiring 2,373 properties with an additional 89 properties under contract. The aggregate purchase price for the Portfolio Acquisition, inclusive of the 89 properties not acquired as of April 1, 2015, was $263.0 million. The acquired portfolio was substantially leased as of the acquisition date. The Portfolio Acquisition was financed using proceeds from the revolving credit facility, which was amended and restated on February 18, 2015 to, amongst other changes, increase the borrowing capacity to $400.0 million from $200.0 million.

•
Funds From Operations ("FFO") was $3.0 million, or $0.08 per share, in the first quarter of 2015, as compared to $2.1 million, or $0.05 per share, in the first quarter of 2014. Core Funds From Operations ("Core FFO") was $4.5 million, or $0.12 per share, in the first quarter of 2015, as compared to $2.7 million, or $0.07 per share, in the first quarter of 2014.

•
On March 25, 2015, we declared a $0.09 per share dividend on our common stock.

•
At March 31, 2015, we had cash and cash equivalents of $32.9 million and $317.8 million in additional borrowing capacity under the revolving credit facility. On April 1, 2015, we borrowed $266.8 million under our revolving credit facility, leaving us with $51.0 million in additional borrowing capacity as of such date.

Factors likely to affect Silver Bay Results of Operations

Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. The key factors we expect to impact our results of operations and financial condition include our pace and costs of acquisitions, the time and costs required to stabilize a newly-acquired property and convert the same to rental use, the age of our properties, rental rates, the varying costs of internal and external property management, seasonality, occupancy levels, rates of resident turnover, home price appreciation, changes in homeownership rates, changes in homeowners’ association fees and real estate taxes, our expense ratios and our capital structure.



21

Industry and Market Outlook

The housing market environment in our markets remains attractive for single-family property ownership and rentals. Acquisition pricing for housing in certain of our markets remains attractive and demand for housing is growing or remains strong. At the same time, we continue to face competition for new properties and residents from local operators and institutional managers.

Housing prices across all of our core markets have appreciated over the past twelve months. Despite these gains, we believe housing in certain of our markets continues to provide attractive acquisition opportunities and remains inexpensive relative to replacement cost and affordability metrics.

MSA Home Price Appreciation (“HPA”)(1)
Source: CoreLogic as of February 2015
Market
 
HPA
 (Peak to
Trough)(2)
 
HPA
 (Peak to
Current)
 
HPA
 (Prior 12
months)
 
HPA
 (Prior 3
months)
Phoenix, AZ
 
-53
 %
 
-29
 %
 
3
%
 
1
 %
Tucson, AZ
 
-42
 %
 
-31
 %
 
2
%
 
1
 %
Northern CA (3)
 
-58
 %
 
-33
 %
 
7
%
 
—
 %
Southern CA (4)
 
-53
 %
 
-30
 %
 
5
%
 
1
 %
Jacksonville, FL
 
-41
 %
 
-29
 %
 
6
%
 
—
 %
Orlando, FL
 
-55
 %
 
-37
 %
 
3
%
 
—
 %
Southeast FL (5)
 
-53
 %
 
-35
 %
 
6
%
 
1
 %
Tampa, FL
 
-48
 %
 
-33
 %
 
5
%
 
—
 %
Atlanta, GA
 
-34
 %
 
-8
 %
 
7
%
 
—
 %
Charlotte, NC
 
-17
 %
 
5
 %
 
6
%
 
3
 %
Las Vegas, NV
 
-60
 %
 
-38
 %
 
6
%
 
—
 %
Columbus, OH
 
-18
 %
 
-4
 %
 
6
%
 
-1
 %
Dallas, TX (6)
 
-13
 %
 
7
 %
 
7
%
 
1
 %
Houston, TX
 
-13
 %
 
17
 %
 
10
%
 
3
 %
National
 
-32
 %
 
-12
 %
 
6
%
 
1
 %
_______________
(1)
“MSA” means Metropolitan Statistical Areas, which is generally defined as one or more adjacent counties or county equivalents that have at least one urban core area of at least a 50,000-person population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.
(2)
Peak refers to highest historical home prices in a particular market prior to the start of the housing recovery. Trough refers to lowest home prices in a particular market since the peak.
(3)
MSA used for Northern California is Fairfield-Vallejo, which most closely approximates the geographic area in which we purchase homes in Northern California. This MSA is comprised of Solano County and the most populous cities in the MSA are Vallejo, Fairfield, Vacaville, Suisun and Benicia.
(4)
MSA used for Southern California is Riverside-San Bernardino-Ontario. This MSA is comprised of Riverside and San Bernardino counties and the most populous cities in the MSA are Riverside, San Bernardino, Fontana and Moreno Valley.
(5)
MSA used for Southeast Florida is Fort Lauderdale-Pompano Beach-Deerfield Beach.
(6)
MSA used for Dallas is Fort Worth-Arlington.

On the demand side, we anticipate continued strong rental demand for single-family homes. While new building activity has increased, it remains below historical averages and we believe substantial under-investment in residential housing over the past seven years will create upward pressure on home prices and rents as demand exceeds supply. We expect this will take time and will be uneven across markets, but we believe pricing will revert to replacement cost, which would be favorable to our total return profile.

Acquisitions

Our ability to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets, the inventory of properties available through our acquisition channels, competition for our target assets,

22

and our capital available for investment. We acquired 85 properties at an average purchase price of $115,000 in the three months ended March 31, 2015.

As of March 31, 2015, for properties acquired which involve submitting a purchase offer, we had offers accepted to purchase 2,488 additional properties for an aggregate amount of $266.0 million. This amount includes approximately 2,460 properties acquired or to be acquired as part of the Portfolio Acquisition for $263.0 million.

The pace of our acquisitions following the Portfolio Acquisition will be subject to the availability of additional debt or equity capital, among other factors.

Stabilization, Renovation and Leasing

Before an acquired property becomes an income producing asset, we must possess, renovate, market and lease the property.  We refer to this process as property stabilization. We consider a property stabilized at the earlier of (i) its first authorized occupancy or (ii) 90 days after the renovations for such property are complete regardless of whether the property is leased. Properties acquired with in-place leases are considered stabilized even though such properties may require future renovation to meet our standards and may have existing residents who would not otherwise meet our resident screening requirements. The time to stabilize a newly acquired property can vary significantly among properties for several reasons, including the property’s acquisition channel, the age and condition of the property, whether the property was vacant when acquired, local demand for our properties, our marketing techniques, and the size of our available inventory of rent ready properties. During the three months ended March 31, 2015, we stabilized 392 properties.

The following table summarizes the stabilized and leasing status of our properties as of March 31, 2015:

Market
 
Number of Properties
 
Number of
Stabilized
Properties
 
Properties
Leased
 
Properties
Vacant
 
Aggregate Portfolio
Occupancy Rate
 
Stabilized Occupancy Rate
 
Average 
Monthly
Rent (1)
 
Average Remaining Lease Term (Months) (2)
Phoenix
 
1,424

 
1,424

 
1,386

 
38

 
97.3
%
 
97.3
%
 
$
1,073

 
7.5
Atlanta
 
1,133

 
1,111

 
1,064

 
69

 
93.9
%
 
95.8
%
 
1,155

 
7.8
Tampa
 
926

 
926

 
884

 
42

 
95.5
%
 
95.5
%
 
1,285

 
6.5
Dallas
 
503

 
469

 
427

 
76

 
84.9
%
 
91.0
%
 
1,280

 
7.3
Jacksonville
 
450

 
414

 
392

 
58

 
87.1
%
 
94.7
%
 
1,115

 
8.7
Southeast FL
 
385

 
331

 
305

 
80

 
79.2
%
 
92.1
%
 
1,668

 
8.7
Northern CA
 
384

 
384

 
376

 
8

 
97.9
%
 
97.9
%
 
1,526

 
4.3
Orlando
 
335

 
319

 
316

 
19

 
94.3
%
 
99.1
%
 
1,214

 
7.4
Las Vegas
 
291

 
291

 
287

 
4

 
98.6
%
 
98.6
%
 
1,166

 
5.6
Columbus
 
284

 
284

 
275

 
9

 
96.8
%
 
96.8
%
 
1,047

 
9.1
Charlotte
 
262

 
169

 
145

 
117

 
55.3
%
 
85.8
%
 
1,194

 
6.3
Tucson
 
209

 
209

 
201

 
8

 
96.2
%
 
96.2
%
 
840

 
4.8
Southern CA
 
156

 
155

 
152

 
4

 
97.4
%
 
98.1
%
 
1,185

 
5.7
Houston
 
122

 
122

 
119

 
3

 
97.5
%
 
97.5
%
 
1,225

 
6.2
Totals
 
6,864

 
6,608

 
6,329

 
535

 
92.2
%
 
95.8
%
 
$
1,200

 
7.1
(1)
Average monthly rent for leased properties was calculated as the average of the contracted monthly rent for all leased properties as of March 31, 2015 and reflects rent concessions amortized over the life of the related lease.
(2)
Average remaining lease term assumes a remaining term of 30 days for leases in month-to-month status.

Stabilized occupancy increased to 95.8% as of March 31, 2015 compared to 93.5% as of December 31, 2014. The increase in the stabilized occupancy percentage was primarily a function of positive leasing momentum in the Jacksonville, Atlanta and Phoenix markets.

In the quarter ended March 31, 2015, 381 properties turned over. This turnover number includes move-outs, evictions and lease breaks on our stabilized portfolio but excludes evictions of unauthorized residents at time of acquisition. Quarterly turnover for the three months ended March 31, 2015 was 5.8% compared to 6.6% for the three months ended March 31, 2014. Quarterly turnover represents the number of properties turned over in the period divided by the number of properties in stabilized status at period-end (i.e., 6,608 properties as of March 31, 2015). The total number of properties with lease expirations in the three months ended March 31, 2015 was 1,510, including properties with month-to-month occupancy in the period. Of these properties, 257 properties turned over (indicating an 83.0% retention rate for these properties).

23


The following is a summary of our turnover percentage by quarter for the three months ended March 31, 2015 and the prior three quarters:
Quarter Ended
Turnover (1)
March 31, 2015
5.8
%
December 31, 2014
6.6
%
September 30, 2014
8.9
%
June 30, 2014
8.1
%
Trailing twelve months
29.4
%

(1)
Quarterly turnover percentage represents the number of properties turned over in each respective period divided by the number of properties in stabilized status as of each respective period-end.

Results of Operations

The following are our results of operations (unaudited) for the three months ended March 31, 2015 and 2014:

Income Statement Data
 
Three Months Ended March 31,
(amounts in thousands except per share data)
 
2015
% of Revenue
 
2014
% of Revenue
Revenue:
 
 
 
 
 
 
Total revenue
 
$
22,252

100
 %
 
$
18,131

100
%
Expenses:
 
 
 
 
 
 
Property operating and maintenance
 
4,357

19.6
 %
 
3,610

19.9
%
Real estate taxes
 
3,551

16.0
 %
 
2,486

13.7
%
Homeowners’ association fees
 
405

1.8
 %
 
304

1.7
%
Property management
 
2,147

9.6
 %
 
2,895

16.0
%
Depreciation and amortization
 
7,111

32.0
 %
 
6,145

33.9
%
Advisory management fee - affiliates
 
—

—
 %
 
2,201

12.1
%
Portfolio acquisition expense
 
755

3.4
 %
 
—

—
%
General and administrative
 
4,050

18.2
 %
 
1,919

10.6
%
Share-based compensation
 
497

2.2
 %
 
198

1.1
%
Interest expense
 
3,486

15.7
 %
 
2,327

12.8
%
Other
 
(266
)
(1.2
)%
 
411

2.3
%
Total expenses
 
26,093

 
 
22,496

 
Net loss
 
$
(3,841
)
 
 
$
(4,365
)
 
Net loss attributable to common stockholders
 
$
(3,644
)

 
$
(4,390
)
 
Net loss attributable to common shares - basic and diluted
 
$
(0.10
)
 
 
$
(0.11
)
 
Other data (1):
 
 
 
 
 
 
Net operating income
 
$
11,876

53.4
 %
 
$
9,223

50.9
%
Funds from operations (FFO)
 
$
2,984

 
 
$
2,075

 
Core funds from operations (Core FFO)
 
$
4,490

 
 
$
2,656

 
FFO per share
 
$
0.08

 
 
$
0.05

 
Core FFO per share
 
$
0.12

 
 
$
0.07

 

(1) NOI, FFO and Core FFO are non-GAAP financial measures we believe, when considered with the financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance as a REIT. Reconciliations of NOI, FFO and Core FFO to net loss prepared in accordance with GAAP are found in this Item 2 under the headings "Net Operating Income" and "Funds From Operations and Core Funds From Operations".



24


Comparison of the Three Months Ended March 31, 2015 and the Three Months Ended March 31, 2014

Revenue

We earn revenue primarily from rents collected from residents under lease agreements for our single-family properties. These include short-term leases that we enter into directly with our residents, which generally have a term of one year. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates.  Our revenue may be affected by macroeconomic, local and property level factors, including market conditions, seasonality, resident defaults or vacancies, timing of renovation activities and occupancy of properties and timing to re-lease vacant properties.

Total revenue increased $4.1 million, or 22.7%, in the first quarter of 2015 over the prior year period. This increase was due primarily to the increase in the number of properties leased and secondarily to the increase in average monthly rent at March 31, 2015, as compared to the prior year. We owned 6,329 leased properties as of March 31, 2015 as compared to 5,300 leased properties as of March 31, 2014. We achieved an average monthly rent for leased properties in our total portfolio of $1,200 and $1,163 as of the end of the first quarters of 2015 and 2014, respectively.

Expenses

Property Operating and Maintenance Expenses.  Property operating and maintenance expenses increased $747,000, or 20.7%, in the first quarter of 2015 over the prior year period.  Included in property operating and maintenance expenses are property insurance, bad debt, utilities and landscape maintenance on market ready properties not leased, repairs and maintenance, and expenses associated with resident turnover. The increase in these expenses from the prior year period was generally due to the significant increase in the number of properties owned and in-service in the three months ended March 31, 2015 as compared to the prior year period as well as an increase in turnover in the first quarter of 2015.

Real Estate Taxes.  Real estate taxes are expensed once a property is market ready for the first time.  Real estate taxes increased $1.1 million, or 42.8%, in the first quarter of 2015 over the prior year period. The increase in real estate taxes is attributable to the significant increase in the number of properties owned and in-service in the three months ended March 31, 2015 as compared to the prior year period and increased property tax assessments largely attributable to home price appreciation in certain of our markets. 

Property Management.  We utilize a hybrid approach for property management. As of March 31, 2015, we used internal teams in Phoenix, Atlanta, Southeast Florida, Columbus, Tampa (effective July 2014), Southern California (effective August 2014), Charlotte (effective October 2014), Northern California (effective December 2014), and Dallas (effective February 2015), which represents 79.5% of our portfolio. We use third-party property managers in our other markets. Prior to the Internalization, rather than compensating our Former Manager’s operating subsidiary with commissions or fees based on rental income, we reimbursed all costs and expenses of our Former Manager’s operating subsidiary incurred on our behalf.  In addition to these costs, we paid a property management fee to our Former Manager’s operating subsidiary equal to 5% of certain compensation and overhead costs incurred as a result of providing services to us, which reduced the advisory management fee paid to our Former Manager by the same amount. Following the Internalization, we incur all property management costs directly. Third-party property management arrangements include fees based on a percentage of rental income and other fees collected from our residents and, in some cases, fees for renovation oversight and leasing activities.

Property management expenses decreased $748,000, or 25.8%, in the first quarter of 2015 compared to the prior year period due to the classification of certain personnel related costs in general and administrative in the first quarter of 2015, which were classified in property management in the prior year period, the lack of system implementation costs, and the lack of the 5% property management fee in the current period. Beginning in the fourth quarter of 2014, certain personnel related costs previously classified in property management are classified in general and administrative due to changes in the management structure resulting from the Internalization. We incurred $675,000 in such reclassified costs in the first quarter of 2014 now reflected as general and administration expense.

Depreciation and Amortization.  Depreciation and amortization includes depreciation on real estate assets placed in-service and amortization of deferred lease fees and in-place leases.  Depreciation and amortization increased $966,000, or 15.7%, over the prior year period, primarily as a result of an increase in the number of properties being depreciated in the first quarter of 2015, as more properties are owned and in-service than the prior year period.

Advisory Management Fee. Prior to the Internalization, we relied on our Former Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business because we had no employees of our own.  Under

25

the previous arrangement, we paid our Former Manager a quarterly advisory management fee equal to 0.375% (a 1.5% annual rate) of our average fully-diluted market capitalization during the preceding quarter, less the 5% property management fee paid to our Former Manager’s operating subsidiary. Beginning in the fourth quarter of 2014, we no longer incur the advisory management fee and, as described below, general and administrative expenses will increase related to personnel expenses and other expenses previously borne by our Former Manager.

Portfolio Acquisition Expense. We incurred $755,000 of costs associated with the Portfolio Acquisition in the three months ended March 31, 2015 and we expect to expense additional costs related to the transaction in the second quarter of 2015.  

General and Administrative Expense. General and administrative expenses include those costs related to being a public company, costs incurred under the advisory management agreement with our Former Manager through the date of Internalization on September 30, 2014, certain personnel costs we now incur directly following the Internalization and other expenses associated with our corporate and administrative functions. Under the advisory management agreement, we paid all costs and expenses of our Former Manager incurred in the operation of its business, including all compensation costs (other than for our Chief Executive Officer and personnel providing data analytics directly supporting the investment function). As described above, beginning in the fourth quarter of 2014, general and administrative expense includes certain amounts previously borne by our Former Manager for the compensation of our Chief Executive Officer, personnel providing data analytics directly supporting the investment function and certain other costs, in addition to personnel and operational costs classified as property management.

General and administrative expense increased $2.1 million, or 111.0%, in the first quarter of 2015 compared to the prior year period, which was primarily attributable to increased personnel and related costs for the reasons described above.

Share-based Compensation. Share-based compensation expense includes costs associated with our restricted stock awards to our board of directors and certain employees and our performance stock unit awards to certain members of management.

Share-based compensation expense increased $299,000, or 151.0%, in the first quarter of 2015 compared to the prior year period due to the awards made in February 2015, which are described in Note 5 of the condensed consolidated financial statements included within this Quarterly Report on Form 10-Q.

Interest Expense.  Interest expense includes interest incurred on the outstanding balance of our debt, an unused line fee on the undrawn amount of the revolving credit facility, and amortization of deferred financing fees, net of certain amounts capitalized for properties undergoing renovation activities.  Interest expense increased $1.2 million or 49.8% in the first quarter of 2015 over the prior year period, which was primarily attributable to a higher average outstanding balance of debt and amortization of additional financing fees incurred in the securitization transaction.

Critical Accounting Policies

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2014. The accounting policies used in preparing our interim 2015 condensed consolidated financial statements are the same as those described in our Annual Report, with the exception of our adoption in the first quarter of 2015 of Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). Refer to discussion of ASU 2014-08 in Note 2 of the condensed consolidated financial statements included within this Quarterly Report on Form 10-Q.

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in preparation of the financial statements.

Accounting estimates are considered critical if the estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows.
    


26

Our critical accounting policies are those related to:
•
Revenue recognition;
•
Real estate acquisition valuation;
•
Capitalized costs;
•
Impairment of real estate;
•
Depreciation of real estate; and
•
Income taxes.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the "JOBS Act") we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

We consider the applicability and impact of all accounting standard updates ("ASU"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The impact will be a reduction of other assets and the associated reported debt liability.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, fund and maintain our assets and operations, make interest payments and distributions to our stockholders. Our liquidity, to a certain extent, is subject to general economic, financial, competitive and other factors that are beyond our control. Our near-term liquidity requirements consist primarily of acquiring and renovating properties, funding our operations, and making interest payments and distributions to our stockholders.

Our liquidity and capital resources as of March 31, 2015 consisted of cash and cash equivalents of $32.9 million, escrow deposits of $22.2 million, and $317.8 million in additional borrowing capacity under our revolving credit facility.  Escrow deposits primarily include refundable and non-refundable cash and earnest money on deposit with certain third-party property managers for property purchases and renovation costs, earnest money deposits, and at times, monies held with certain municipalities for property purchases.  Escrow deposits also include cash held in reserve at financial institutions, as required by our debt agreements, of $9.8 million at March 31, 2015.  As of March 31, 2015, for properties acquired through individual broker transactions and the Portfolio Acquisition that involve submitting a purchase offer, we had offers accepted to purchase residential properties for an aggregate amount of $266.0 million, including $263.0 million associated with the Portfolio Acquisition described above; however not all of these properties, including the 89 properties associated with the Portfolio Acquisition which are expected to close on dates subsequent to April 1, 2015, are certain to be acquired because certain properties may fall out of escrow through the closing process for various reasons. On April 1, 2015, we used $266.8 million drawn from the revolving credit facility to fund the Portfolio Acquisition, leaving us with $51.0 in additional borrowing capacity as of such date.

We believe the cash flows from operations together with current cash and funds available under our revolving credit facility will be sufficient to fund the anticipated needs of our operations, fund any existing contractual obligations to purchase properties and renovate our portfolio of properties in 2015.  We may also opportunistically utilize the capital markets to raise additional capital, including through the issuance of debt and equity securities (including the issuance of common units in the Operating Partnership) and securitizations in the future, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms or at all.


27

Securitization Loan

On August 12, 2014, we completed a securitization transaction (the "Securitization Transaction") in which we received gross proceeds of $311.2 million, net of an issue discount of $1.5 million and before issuance costs and reserves. The Securitization Transaction involved the issuance and sale of single-family rental pass-through certificates that represent beneficial ownership interests in a loan secured by 3,084 single-family properties (the "Securitization Properties") sold to one of our affiliates from our portfolio. In the Securitization Transaction, we sold approximately $312.7 million of certificates, with a blended effective interest rate of the London Interbank Offered Rate ("LIBOR") plus 1.92%. 

As part of the Securitization Transaction, one of our subsidiaries (the "Borrower") entered into a loan agreement described below (the "Securitization Loan"). The Securitization Loan was subsequently deposited into a trust in exchange for the pass-through certificates. The pass-through certificates represent the entire beneficial interest in the trust and were sold in a private offering through the placement agents retained for the transaction. The certificates were offered and sold under Rule 144A and Regulation S under the Securities Act of 1933, as amended. In March 2015, we paid down $520,000 on the Securitization Loan to effect the release of four properties from the first priority mortgages securing the Securitization Loan.

The Securitization Loan has an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019, and bears interest at a blended effective interest rate of LIBOR plus 1.92%, plus monthly servicing fees of 0.1355%.

All amounts outstanding under the Securitization Loan are secured by first priority mortgages on the Securitization Properties in addition to the equity interests in, and certain assets of, the Borrower. The amounts outstanding under the Securitization Loan and certain obligations contained therein are guaranteed by the Operating Partnership only in the case of certain bad acts (including bankruptcy) as outlined in the transaction documents.

The Securitization Loan does not contractually restrict our ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. The Securitization Loan documents require us to maintain certain covenants, including a minimum debt yield on the Securitization Properties, and contain customary events of default for a facility of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness. 

We used the proceeds of the Securitization Loan to pay down the balance of our revolving credit facility at closing and the remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties and the repurchase of common stock.

Revolving Credit Facility

Certain of our subsidiaries have a revolving credit facility with a syndicate of banks. On February 18, 2015, we amended and restated the revolving credit facility to increase the borrowing capacity to $400.0 million from $200.0 million. As amended, the revolving credit facility bears interest at a varying rate of LIBOR plus 300 basis points and is not subject to a LIBOR floor. Prior to the amendment, the revolving credit facility bore interest at varying rate of LIBOR plus 3.5% subject to a LIBOR floor of 0.5%. We are also required to pay a monthly fee on the unused portion of the revolving credit facility at a rate of 0.5% per annum, when the balance outstanding is less than $200.0 million or 0.3% per annum when the balance outstanding is equal to or greater than $200.0 million.   As part of the amendment, the term on the revolving credit facility was extended to February 18, 2018 and the advance rate for borrowings was increased to 65% from 55%. The advance rate is based on the aggregate value of the eligible properties which value is calculated as the lesser of (a) the third-party broker price opinion value or (b) the original purchase price plus certain renovation and other capitalized costs of the properties. We used the revolving credit facility to fund the Portfolio Acquisition. The remaining proceeds will be used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties. At March 31, 2015, there was $82.2 million outstanding under the facility and $317.8 million in borrowing capacity. 
 
All amounts outstanding under the revolving credit facility are collateralized by the equity interests and assets of certain of our subsidiaries ("Pledged Subsidiaries"). The amounts outstanding under the revolving credit facility and certain obligations contained therein are guaranteed by Silver Bay Realty Trust Corp. and the Operating Partnership only in the case of certain bad acts (including bankruptcy) and up to $20.0 million for completion of certain property renovations, as outlined in the credit documents. The Pledged Subsidiaries are required to pay a monthly fee in connection with the revolving credit facility based upon the unused portion of the facility, certain fees assessed in connection with establishing the facility and other fees specified in the revolving credit facility documents. 


28

The revolving credit facility does not contractually restrict our ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. For example, in the final year of the revolving credit facility, all cash generated by the properties in the Pledged Subsidiaries must be used to pay down the principal amount outstanding under the revolving credit facility. As of March 31, 2015, there were 2,280 properties pledged in the revolving credit facility. The revolving credit facility requires us to meet certain quarterly financial tests pertaining to total liquidity, net worth, debt yield and debt service coverage ratios and contain customary events of default for a facility of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness.  We must maintain at all times total liquidity of $25.0 million and a net worth of at least $125.0 million, in each case as determined in accordance with our revolving credit facility.

Interest Rate Cap Agreements

We enter into interest rate cap agreements to manage interest rate risk associated with our variable rate debt. As of March 31, 2015, we have two interest rate cap agreements at LIBOR of 3.00% with an aggregate notional amount of $349.1 million to hedge interest rate risk associated with our revolving credit facility, one interest rate cap agreement at LIBOR of 3.1085% with a notional amount of $312.7 million to hedge interest rate risk associated with our Securitization Loan with a termination date of September 15, 2016 and one forward-starting interest rate cap agreement at LIBOR of 3.1085% with a notional amount of $200.0 million to hedge interest rate risk associated with our Securitization Loan for the period September 15, 2016 through September 15, 2019.

Operating Activities

Net cash provided by operating activities in the three months ended March 31, 2015 was $8.3 million compared to cash used by operating activities of $12.7 million for the three months ended March 31, 2014.  Our operating cash flows during the three months ended March 31, 2015 were driven by an increase in our portfolio of cash-generating properties and the release of certain cash reserves associated with our debt. Our operating cash flows during the three months ended March 31, 2014 were affected by the results of our operations and other uses of operating cash, including payments to related parties, additional reserves provided under the revolving credit facility, and provision of cash to our property managers for operations.
  
Investing Activities

Net cash used in investing activities in the three months ended March 31, 2015 was $22.8 million and was primarily the result of our acquisition and renovation of newly acquired properties. We used $9.9 million for property acquisitions and another $9.5 million on capital improvements of which $8.2 million was attributable to our initial renovation of properties, which includes properties purchased in a bulk purchase that have been renovated for the first time, and $1.3 million was attributable to capital improvements to properties that had been previously renovated.

The average renovation cost per property was approximately $28,000 or 26% of the purchase price for all properties placed in service since commencing operations through March 31, 2015, including properties acquired with an in-place lease but excluding properties acquired from Provident Real Estate Advisors LLC. These renovation costs include capitalized expenditures for renovations, property taxes, homeowners’ association dues, interest, costs required to gain possession of the property and other capitalized expenditures until the property is ready for its intended use.

Net cash used in investing activities in the three months ended March 31, 2014 was $19.7 million and was primarily the result of our acquisition and renovation of newly acquired properties. We used $13.1 million for property acquisitions and another $7.8 million on capital improvements, of which $6.8 million was attributable to our initial renovation of properties which includes properties purchased in a bulk purchase that have been renovated for the first time and $1.0 million was attributable to capital improvements to properties that had been previously renovated.
 
The acquisition of properties involves the outlay of capital beyond payment of the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, and property taxes or homeowners’ association dues in arrears, along with capitalized interest on properties purchased since we obtained debt in May 2013. Typically, these costs are capitalized as components of the purchase price of the acquired asset. We also make significant capital expenditures to renovate and maintain our properties to Silver Bay standards. Our ultimate success depends in part on our ability to make prudent, cost-effective decisions measured over the long term with respect to these expenditures.


29

Financing Activities

Net cash used by financing activities in the three months ended March 31, 2015 was $2.4 million and was attributable to repurchase and retirement of our common stock of $7.7 million, purchases of interest rate caps and other financing costs of $7.0 million, and payments of dividends of $2.4 million, partially off-set by draws on the revolving credit facility of $15.1 million. Cash provided by financing activities in the three months ended March 31, 2014 was $29.4 million, primarily attributable to proceeds from our revolving credit facility of $33.7 million, partially off-set by repurchases of our common stock of $2.4 million and other costs.

We have an obligation to pay dividends on our outstanding 10% cumulative redeemable preferred stock with a $1.0 million aggregate liquidation preference in preference to dividends paid on our common stock.

We have elected to be treated as a REIT for U.S. federal income tax purposes. As a REIT, under U.S. federal income tax law we are required to distribute annually at least 90% of our REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and to pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Subject to the requirements of the Maryland General Corporation Law, we intend to pay quarterly dividends to our stockholders, if and to the extent authorized by our board of directors, which in the aggregate approximately equal our REIT taxable income in the relevant year. On March 25, 2015, our board of directors declared $3.5 million in common stock and common unit dividends, which were paid on April 17, 2015.

In connection with our Internalization, we issued 2,231,511 common units of the Operating Partnership, which may be redeemed for cash or, at our election, a number of our common shares on a one-for-one basis beginning on September 30, 2015. To the extent that we redeem the common units for cash, our liquidity will decrease.

30

Off-Balance Sheet Arrangements

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Aggregate Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from certain contractual obligations, as of March 31, 2015 (amounts in thousands):

 
 
Total
 
Less than One Year
 
One to Three Years
 
Three to Five Years
 
More Than Five Years
Purchase obligations (1)
 
$
265,968

 
$
265,968

 
$
—

 
$
—

 
$
—

Long-term debt obligations (2)
 
433,709

 
10,493

 
101,959

 
321,257

 
—

Operating lease obligations (3)
 
2,240

 
631

 
596

 
232

 
781

Total
 
$
701,917

 
$
277,092

 
$
102,555

 
$
321,489

 
$
781

 
 
(1)
Reflects accepted offers on purchase contracts for properties acquired through individual broker transactions that involve submitting a purchase offer and those associated with the Portfolio Acquisition. Not all of these properties, including 89 properties associated with the Portfolio Acquisition, which are under contract to close in the future, are certain to be acquired as properties may fall out of escrow through the closing process for various reasons.
(2)
Includes estimated interest payments on the respective debt based on amounts outstanding as of March 31, 2015 and rates in effect as of such date. The revolving credit facility was amended and restated on February 18, 2015 and has a new maturity date of February 18, 2018. The Securitization Loan has an initial maturity date of September 9, 2016 and three, 12-month extension options resulting in a fully extended maturity date of September 9, 2019; this analysis assumes our exercise of the three extension options, which is management's intent.
(3)
Includes operating leases for corporate and market offices.


31

Net Operating Income

We define net operating income ("NOI") as total revenue less property operating and maintenance, real estate taxes, homeowners’ association fees, property management expenses, and certain other non-cash or unrelated non-operating expenses. NOI excludes depreciation and amortization, the former advisory management fees, portfolio acquisition expense, general and administrative expenses, share-based compensation, interest expense, and other non-comparable items as applicable. Additionally, NOI excludes certain property management add backs, such as the former 5% property management fee payable prior to the Internalization because it more closely represents additional advisory management fee, expensed acquisition fees and costs, and certain other property management costs.

We consider NOI to be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the core performance of our real estate operations.

The following is a reconciliation of our NOI to net loss as determined in accordance with GAAP for the three months ended March 31, 2015 and 2014 (amounts in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Net loss
$
(3,841
)
 
$
(4,365
)
Depreciation and amortization
7,111

 
6,145

Advisory management fee - affiliates
—

 
2,201

Portfolio acquisition expense
755

 
—

General and administrative
4,050

 
1,919

Share-based compensation
497

 
198

Interest expense
3,486

 
2,327

Other
(266
)
 
411

Property operating and maintenance add back:
 
 
 
Market ready costs prior to initial lease and other
84

 
89

Property management add backs
—

 
298

Net operating income
$
11,876

 
$
9,223

Net operating income as a percentage of total revenue
53.4
%
 
50.9
%

NOI should not be considered an alternative to net loss or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. Not all REITs compute the same non-GAAP measure. Accordingly, there can be no assurance that our basis for computing this non-GAAP measure is comparable with that of other REITs.

32

Funds From Operations and Core Funds From Operations

Funds From Operations ("FFO") is a non-GAAP financial measure that we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance because it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets.  The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as net income (loss), computed in accordance with GAAP, excluding gains or losses from sales of, and impairment losses recognized with respect to, depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated on the same basis to determine FFO.

Core Funds From Operations ("Core FFO") is a non-GAAP financial measure that we use as a supplemental measure of our performance. We believe that Core FFO is further helpful to investors as it provides a more consistent measurement of our performance across reporting periods by removing the impact of certain items that are not comparable from period to period. We adjust FFO for expensed acquisition fees and costs, including those associated with our Portfolio Acquisition, certain fees and expenses related to our Securitization Transaction, share-based compensation, write-offs of expenses associated with changes in our debt structure, and certain other non-comparable costs to arrive at Core FFO.

FFO and Core FFO should not be considered alternatives to net income (loss) or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. These non-GAAP measures are not necessarily indicative of cash available to fund future cash needs. In addition, although we use these non-GAAP measures for comparability in assessing our performance against other REITs, not all REITs compute the same non-GAAP measures. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO and Core FFO.  Real estate costs which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time, whereas real estate costs that are expenses are accounted for as a current period expense.  This affects FFO and Core FFO because costs that are accounted for as expenses reduce FFO and Core FFO.  Conversely, real estate costs associated with assets that are capitalized and then subsequently depreciated are added back to net income to calculate FFO and Core FFO.

FFO and Core FFO are calculated on a gross basis and, as such, do not reflect adjustments for the noncontrolling interests - Operating Partnership.    


33

The following table sets forth a reconciliation of our net loss as determined in accordance with GAAP and our calculations of FFO and Core FFO for the three months ended March 31, 2015 and 2014. Also presented is information regarding the weighted-average number of shares of our common stock and common units of the Operating Partnership outstanding used for the computation of FFO and Core FFO per share (amounts in thousands, except share and per-share amounts):

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net loss
 
$
(3,841
)
 
$
(4,365
)
Depreciation and amortization
 
7,111

 
6,145

Other
 
(286
)
 
295

Funds from operations
 
2,984

 
2,075

 
 
 
 
 
Adjustments:
 
 
 
 
Portfolio acquisition expense
 
755

 
—

Acquisition fees and costs expensed and other
 
—

 
60

Securitization fees and costs expensed (1)
 
—

 
110

Share-based compensation
 
497

 
198

Market ready costs prior to initial lease and other
 
84

 
89

System implementation costs
 
—

 
124

Write-off of deferred financing fees
 
31

 
—

Amortization of discount on securitization loan
 
75

 
—

Other (2)
 
64

 
—

Core funds from operations
 
$
4,490

 
$
2,656

 
 
 
 
 
FFO
 
$
2,984

 
$
2,075

Preferred stock distributions
 
(25
)
 
(25
)
FFO available to common shares and units
 
$
2,959

 
$
2,050

 
 
 
 
 
Core FFO
 
$
4,490

 
$
2,656

Preferred stock distributions
 
(25
)
 
(25
)
Core FFO available to common shares and units
 
$
4,465

 
$
2,631

 
 
 
 
 
Weighted average common shares and units outstanding (3)
 
38,660,320

 
38,542,728

FFO per share
 
$
0.08

 
$
0.05

Core FFO per share
 
$
0.12

 
$
0.07


(1)
Represents non-capitalizable costs related to our Securitization Transaction for personnel and other matters.
(2)
Non-comparable costs from prior periods.
(3)
Represents the weighted average of common shares and common units in the Operating Partnership outstanding for the periods presented.


34

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future revenue, cash flows and fair values relevant to certain financial instruments are dependent upon prevailing market interest rates. Our Securitization Loan and revolving credit facility have variable rates of interest. We are therefore most vulnerable to changes in short-term LIBOR interest rates. For discussion of our borrowing activity in the three months ended March 31, 2015, see Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” of this Quarterly Report on Form 10-Q.

There have been no material changes in our interest rate market risk during the three months ended March 31, 2015. For additional information on our interest rate market risk, refer to Item 7A of Part II of our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of March 31, 2015. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We continue to review and document our disclosure controls and procedures, including our internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

35

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are party to claims and routine litigation arising in the ordinary course of our business, including disputes regarding title to or possession of individual properties in our portfolios. We do not believe that the results of any such claims or litigation individually, or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.

Item 1A.  Risk Factors

There have been no material changes to the risk factors disclosed under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities
None.

Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period
 
Total Number 
of Shares
Purchased
 
Average Price
Paid Per Share (1)
 
Total Number of Shares 
Purchased as Part of 
Publicly Announced Plans 
or Programs (2)
 
Maximum Number of
Shares That May Yet be
Purchased Under the Plans or Programs
January 1, 2015 - January 31, 2015
 
338,100

 
$
16.3100

 
338,100

 
1,998,993

February 1, 2015 - February 28, 2015 (3)
 
136,265

 
15.7600

 
132,317

 
1,866,676

March 1, 2015 - March 31, 2015 (4)
 
260

 
15.7500

 
—

 
1,866,676

Total
 
474,625

 
$
16.1500

 
470,417

 
1,866,676

 
 
 
 
 
 
 
 
 
(1)
Includes commissions.
(2)
These shares were repurchased and retired under the Company’s share repurchase program authorized on July 1, 2013, pursuant to which the Company is authorized to repurchase up to 5,000,000 shares of its common stock and which does not have an expiration date.
(3)
Includes 3,948 shares withheld to settle tax withholding obligations related to the vesting of restricted stock awards at a price of $15.72 per share.
(4)
Consists of shares withheld to settle tax withholding obligations related to the vesting of restricted stock awards.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

In the first quarter of 2015, we borrowed an aggregate amount of $15.1 million under our revolving credit facility described elsewhere in this Quarterly Report on Form 10-Q.

Item 6.  Exhibits

(a)
The attached Exhibit Index is incorporated herein by reference.

36

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SILVER BAY REALTY TRUST CORP.
 
 
 
Date: May 7, 2015
By:
/s/ David N. Miller
 
 
David N. Miller
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: May 7, 2015
By:
/s/ Christine Battist
 
 
Christine Battist
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)

37

EXHIBIT INDEX

Exhibit Number
 
 
 
Incorporated by Reference
 
Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
2.1
 
Contribution Agreement dated as of August 3, 2014 among Silver Bay Realty Trust Corp., Silver Bay Operating Partnership L.P., Pine River Domestic Management L.P., Provident Real Estate Advisors LLC, and PRCM Real Estate Advisers LLC.
 
8-K
 
001-35760
 
2.1
 
August 4, 2014
2.2
 
Real Estate Sales Contract, dated as of February 18, 2015, between The American Home Real Estate Investment Trust, Inc. and 2015A Property Owner LLC
 
 
 
 
 
 
 
 
3.1
 
Articles of Amendment and Restatement of Silver Bay Realty Trust Corp.
 
10-K
 
001-35760
 
3.1
 
March 1, 2013
3.2
 
Amended and Restated Bylaws of Silver Bay Realty Trust Corp.
 
S-11/A
 
333-183838
 
3.5
 
October 17, 2012
3.3
 
Articles Supplementary for Cumulative Redeemable Preferred Stock of Silver Bay Trust Corp.
 
10-K
 
001-35760
 
3.3
 
March 1, 2013
4.1
 
Specimen Common Stock Certificate of Silver Bay Realty Trust Corp.
 
S-11/A
 
333-183838
 
3.5
 
November 23, 2012
4.2
 
Instruments defining the rights of holders of securities: See Articles VI and VII of our Articles of Amendment and Restatement.
 
10-K
 
001-35760
 
4.2
 
March 1, 2013
4.3
 
Instruments defining the rights of holders of securities: See Article VII of our Amended and Restated Bylaws.
 
S-11/A
 
333-183838
 
3.5
 
October 17, 2012
4.4
 
Instruments defining the rights of holders of securities: See Article Second of our Articles Supplementary.
 
10-K
 
001-35760
 
4.4
 
March 1, 2013
4.5
 
Registration Rights Agreement by and among Silver Bay Realty Trust Corp. and certain holders of common units in Silver Bay Operating Partnership L.P., dated September 30, 2014.
 
10-K
 
001-35760
 
4.5
 
February 26, 2015
10.1
 
Amended and Restated Revolving Credit Agreement, dated as of February 18, 2015, among Silver Bay Operating Partnership L.P., several property owners party thereto, SB Financing Trust Owner LLC, U.S. Bank National Association, Bank of America, National Association, JPMorgan Chase Bank, National Association and the lenders party thereto
 
 
 
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 

38

101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 

39

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