Silver Bay Realty Trust Corp. - FORM 10-Q - May 8, 2017

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EX-32.2 - EXHIBIT 32.2 - Silver Bay Realty Trust Corp.a2017q110kexh322.htm
EX-32.1 - EXHIBIT 32.1 - Silver Bay Realty Trust Corp.a2017q110kexh321.htm
EX-31.2 - EXHIBIT 31.2 - Silver Bay Realty Trust Corp.a2017q110kexh312.htm
EX-31.1 - EXHIBIT 31.1 - Silver Bay Realty Trust Corp.a2017q110kexh311.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, 2017 
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,” “smaller reporting company” and "emerging growth 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
 
 
Emerging growth company x
 

 If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ý


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 1, 2017, there were 35,471,534 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, 2017
 
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. Examples of forward-looking statements include statements about our projected operating results, 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 Quarterly 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. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include national, international, regional or local economic, business, competitive, market and regulatory conditions and the following:
 
•
Those factors described in the discussion on risk factors in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 (and any updates to those risk factors included in Part II, Item 1A, “Risk Factors,” in this Quarterly Report), Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risk" 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;

•
Increases in interest rates and interest rate volatility and our failure to effectively hedge against potential interest rate changes, which may be impacted by international events such as the United Kingdom's exit from the European Union, commonly referred to as "Brexit";

•
Real estate appreciation or depreciation in our markets and the supply of single-family homes in our markets;
 
•
General economic conditions in our markets, such as changes in employment and household earnings and expenses or the reversal of population, employment, or homeownership trends in our markets that could affect the demand for rental housing;

•
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, turnover, 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 out our business and investment strategies and our ability to hire and retain skilled managerial, investment, financial, and operational personnel;

•
The performance of third-party vendors and service providers, including third-party management professionals, maintenance providers, leasing agents, and property managers;


1

•
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 securitization loan and to meet our other obligations under our debt;

•
Competition from other investors in identifying and acquiring single-family properties that meet our underwriting criteria and leasing such properties to qualified residents;
 
•
The availability of additional properties that meet our criteria and our ability to purchase such properties on favorable terms;

•
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, and the existence of unforeseen defects and problems that require extensive renovation and capital expenditures;

•
The concentration of 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;

•
The concentration of our properties in our 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 markets;

•
Changes in governmental regulations, tax laws (including changes to laws governing the taxation of REITs) and rates, and similar matters;

•
Failure to qualify as a REIT or to remain qualified as a REIT, which will subject us to federal income tax at regular corporate rates and could subject us to a substantial tax liability; and

•
The announcement and pendency of or failure to complete the Merger and Partnership Merger (as defined below).

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report. 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, 2017 (unaudited)
 
December 31, 2016
Assets
 

 
 

Investments in real estate:
 

 
 

Land and land improvements
$
216,052

 
$
216,956

Building and improvements
991,090

 
992,867

 
1,207,142

 
1,209,823

Accumulated depreciation
(115,053
)
 
(106,463
)
Investments in real estate, net
1,092,089

 
1,103,360

Assets held for sale
9,048

 
16,543

Cash
53,965

 
52,279

Escrow deposits
22,979

 
16,858

Resident security deposits
13,068

 
12,992

Other assets
11,819

 
16,529

Total assets
$
1,202,968

 
$
1,218,561

Liabilities and Equity
 

 
 

Liabilities:
 

 
 

Term credit facility, net
$
343,239

 
$
—

Revolving credit facility
—

 
352,799

Securitization loan, net
294,824

 
296,782

Accounts payable and accrued expenses
19,267

 
17,862

Resident prepaid rent and security deposits
15,644

 
15,237

Total liabilities
672,974

 
682,680

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

 
1,000

Equity:
 

 
 

Stockholders’ equity:
 

 
 

Common stock $0.01 par; 450,000,000 shares authorized; 35,471,534 and 35,380,034, respectively, shares issued and outstanding
353

 
352

Additional paid-in capital
644,257

 
643,633

Accumulated other comprehensive income
3,404

 
2,841

Cumulative deficit
(150,328
)
 
(143,679
)
Total stockholders’ equity
497,686

 
503,147

Noncontrolling interests - Operating Partnership
31,308

 
31,734

Total equity
528,994

 
534,881

Total liabilities and equity
$
1,202,968

 
$
1,218,561

 


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,
 
2017
 
2016
Revenue:
 

 
 

Rental revenue
$
31,607

 
$
30,424

Other revenue
810

 
712

Total revenue
32,417

 
31,136

Expenses:
 

 
 

Property operating and maintenance
5,442

 
5,884

Real estate taxes
4,597

 
4,452

Homeowners’ association fees
415

 
436

Property management
2,758

 
2,771

Depreciation and amortization
9,279

 
9,366

General and administrative
3,649

 
3,853

Share-based compensation
838

 
572

Severance and other
—

 
1,667

Transaction expenses
2,210

 
—

Interest expense
6,991

 
6,212

Impairment of real estate
72

 
59

Total expenses
36,251

 
35,272

Loss before other income, income taxes and non-controlling interests
(3,834
)
 
(4,136
)
Other income:
 
 
 
Net gain on disposition of real estate
2,885

 
1,285

Adjustments for derivative instruments, net
(165
)
 
—

Other expense
(459
)
 
(271
)
Total other income
2,261

 
1,014

Loss before income taxes and non-controlling interests
(1,573
)
 
(3,122
)
Income tax expense, net
(279
)
 
(467
)
Net loss
(1,852
)
 
(3,589
)
Net loss attributable to noncontrolling interests - Operating Partnership
110

 
210

Net loss attributable to controlling interests
(1,742
)
 
(3,379
)
Preferred stock distributions
(25
)
 
(25
)
Net loss attributable to common stockholders
$
(1,767
)
 
$
(3,404
)
Loss per share - basic and diluted (Note 7):
 

 
 

Net loss attributable to common shares
$
(0.05
)
 
$
(0.09
)
Weighted average common shares outstanding
35,449,670

 
36,022,953

 
 
 
 


See accompanying notes to the condensed consolidated financial statements.
4


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,
 
2017
 
2016
Comprehensive Loss:
 

 
 

Net loss
$
(1,852
)
 
$
(3,589
)
Other comprehensive income (loss):
 

 
 

Net change in fair value of cash flow hedges
463

 
(474
)
Losses reclassified into earnings from other comprehensive income (loss)
100

 
24

Other comprehensive income (loss)
563

 
(450
)
Comprehensive loss
(1,289
)
 
(4,039
)
Comprehensive loss attributable to noncontrolling interests - Operating Partnership
76

 
238

Comprehensive loss attributable to controlling interests
$
(1,213
)
 
$
(3,801
)
 



See accompanying notes to the condensed consolidated financial statements.
5


Silver Bay Realty Trust Corp.
Condensed Consolidated Statement of Changes in Equity
(amounts in thousands except share data)
(unaudited)
 
Common Stock
 
Accumulated 
Other
Comprehensive Income
 
 
 
Total Stockholders’
Equity
 
Noncontrolling Interests - Operating
Partnership
 
 
 
Shares
 
Par Value
Amount
 
Additional Paid-In
Capital
 
 
Cumulative
Deficit
 
 
 
Total
Equity
Balance at January 1, 2017
35,380,034

 
$
352

 
$
643,633

 
$
2,841

 
$
(143,679
)
 
$
503,147

 
$
31,734

 
$
534,881

Non-cash equity awards, net
120,032

 
1

 
818

 
—

 
—

 
819

 
—

 
819

Repurchase and retirement of common stock
(28,532
)
 
—

 
(510
)
 
—

 
—

 
(510
)
 
—

 
(510
)
Dividends declared
—

 
—

 
—

 
—

 
(4,907
)
 
(4,907
)
 
—

 
(4,907
)
Net loss
—

 
—

 
—

 
—

 
(1,742
)
 
(1,742
)
 
(110
)
 
(1,852
)
Net change in fair value of cash flow hedges
—

 
—

 
—

 
463

 
—

 
463

 
—

 
463

Losses reclassified into earnings from other comprehensive income (loss)
—

 
—

 
—

 
100

 
—

 
100

 
—

 
100

Adjustment to noncontrolling interests - Operating Partnership
—

 
—

 
316

 
—

 
—

 
316

 
(316
)
 
—

Balance at March 31, 2017
35,471,534

 
$
353

 
$
644,257

 
$
3,404

 
$
(150,328
)
 
$
497,686

 
$
31,308

 
$
528,994

 




See accompanying notes to the condensed consolidated financial statements.
6


Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2017
 
2016
Cash Flows From Operating Activities:
 

 
 

Net loss
$
(1,852
)
 
$
(3,589
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
9,279

 
9,366

Non-cash share-based compensation
819

 
547

Losses reclassified into earnings from other comprehensive income (loss)
100

 
24

Amortization of deferred financing costs
1,251

 
1,153

Amortization of discount on securitization loan
75

 
75

Bad debt expense
298

 
273

Net gain on disposition of real estate
(2,885
)
 
(1,285
)
Impairment of real estate
72

 
59

Other
86

 
83

Net change in assets and liabilities:
 
 
 
Increase in escrow cash for operating activities and debt reserves
(6,216
)
 
(1,570
)
Decrease in other assets
1,834

 
397

Increase (decrease) in accounts payable, accrued expenses, and prepaid rent
1,689

 
(80
)
Net cash provided by operating activities
4,550

 
5,453

Cash Flows From Investing Activities:
 

 
 

Capital improvements of investments in real estate
(2,234
)
 
(4,068
)
Decrease in escrow cash for investing activities
95

 
7

Proceeds from disposition of real estate
14,916

 
7,342

Net cash provided by investing activities
12,777

 
3,281

Cash Flows From Financing Activities:
 

 
 

Payments on securitization loan
(2,594
)
 
—

Proceeds from revolving credit facility
—

 
7,732

Payments on term and revolving credit facility
(6,615
)
 
(2,874
)
Deferred financing costs paid
(1,008
)
 
(9
)
Repurchase of common stock
—

 
(7,867
)
Payments of employee tax withholdings related to share-based compensation
(510
)
 
(371
)
Dividends paid
(4,914
)
 
(4,978
)
Net cash used in financing activities
(15,641
)
 
(8,367
)
Net change in cash
1,686

 
367

Cash at beginning of period
52,279

 
29,028

Cash at end of period
$
53,965

 
$
29,395

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Net change in fair value of cash flow hedges
$
463

 
$
(474
)
Non-cash investing and financing activities:
 
 
 
Common stock and unit dividends declared, but not paid
$
4,882

 
$
4,916

Capital improvements in accounts payable
$
533

 
$
487





See accompanying notes to the condensed consolidated financial statements.
7

SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(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, 2017, the Company owned 9,013 single-family properties for rental purposes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, South Carolina and Texas, excluding properties reflected as assets held for sale on its condensed consolidated balance sheets.

In connection with its initial public offering in 2012, the Company restructured its ownership to conduct its business through a traditional umbrella partnership 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. This structure is commonly referred to as an "UPREIT". The Company's wholly owned subsidiary, Silver Bay Management LLC, is the sole general partner (the "General Partner") of the Operating Partnership. As of March 31, 2017, the Company owned, through a combination of direct and indirect interests, 94.1% 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.

On February 27, 2017, Silver Bay Realty Trust Corp., the General Partner, and the Operating Partnership (collectively referred to as the “Company Parties”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Tricon Capital Group, Inc., a company incorporated under the laws of the Province of Ontario (“Tricon Ultimate Parent”), TAH Acquisition Holdings LLC, a Delaware limited liability company (“Tricon Parent”), and TAH Acquisition LP, a Delaware limited partnership (“Tricon LP” and, together with Tricon Ultimate Parent and Tricon Parent, the “Tricon Parties”). Subject to the terms and conditions of the Merger Agreement, Silver Bay Realty Trust Corp. will merge with and into Tricon Parent, with Tricon Parent being the surviving entity (the “Merger”). The board of directors of Silver Bay Realty Trust Corp. has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of Silver Bay Realty Trust Corp. common stock, par value $0.01 per share (other than shares held by any Tricon Party or any subsidiary thereof or any wholly-owned subsidiary of the Company), will be converted into the right to receive an amount in cash equal to $21.50, without interest (as the same may be adjusted, the “Merger Consideration”), subject to any applicable withholding tax, and each outstanding share of Silver Bay's 10% cumulative redeemable preferred stock, par value $0.01 per share, will be converted into the right to receive an amount in cash equal to $1,000 per share, plus an amount equal to all dividends accrued and unpaid on such share of preferred stock immediately prior to the Merger effective time, without interest (the “Preferred Merger Consideration”), subject to applicable withholding tax. The Merger Agreement also provides for the merger of Tricon LP with and into the Operating Partnership, with the Operating Partnership being the surviving entity (the “Partnership Merger”).

The closing of the Merger and the Partnership Merger is subject to customary conditions, including, among others: (i) approval by a majority of Silver Bay Realty Trust Corp.’s stockholders; (ii) the absence of a material adverse effect on the Company; (iii) the receipt of a tax opinion relating to REIT status of the Company; and (iv) the absence of any order, action or law by a governmental authority preventing, prohibiting, enjoining or making illegal the consummation of the Merger and the Partnership Merger.

The closing of the Merger is expected to occur during the week of May 8, 2017. See Note 10 for updates on the Merger transaction. In connection with the Merger Agreement, the Company has incurred legal, investment banking, due diligence and other transaction costs ("transaction expenses") of $2,210 for the three months ended March 31, 2017. The following description of the Company’s business and disclosures does not give any effect to the impact of the Merger, the Partnership Merger, or the Merger Agreement.

8
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

Note 2.  Basis of Presentation and Significant Accounting Policies

Principles of Consolidation

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the U.S. 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, 2016. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at March 31, 2017 and results of operations for all periods presented have been made. The results of operations for the three months ended March 31, 2017 may not be indicative of the results for a full year.  

The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership and its consolidated subsidiaries and have been prepared in accordance with GAAP. All intercompany balances and transactions have been eliminated in consolidation. The Company consolidates real estate partnerships and other entities that are not variable interest entities ("VIE") when it owns, directly or indirectly, a majority voting interest in the entity or is otherwise able to control the entity. The Company consolidates VIEs in accordance with Accounting Standards Codification ("ASC") 810, Consolidation, if the primary beneficiary of the VIE as determined by its power to direct the VIEs activities and the obligation to absorb its losses or the right to receive its benefits, which are potentially significant to the VIE. Ownership interests in certain consolidated subsidiaries of the Company held by outside parties are included in noncontrolling interest within the condensed consolidated financial statements.

The Company adopted ASU 2015-02, Amendments to the Consolidation Analysis, during the quarter ended March 31, 2016. This guidance improved 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. Based on its review and subsequent analysis of its legal entities structure, the Company concluded that the Operating Partnership is a VIE as the limited partners of the Operating Partnership do not have substantive kick-out rights. As the general partner and controlling owner of approximately 94.1% of the Operating Partnership with the power to direct its activities, the Company consolidates the Operating Partnership. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis. As of both March 31, 2017 and 2016, the Company had one VIE.

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.

Deferred Financing Costs, Net

Costs incurred in the placement of the Company’s debt are deferred and amortized, as a component of interest expense on the condensed consolidated statements of operations and comprehensive loss, using the effective interest method, or alternative methods that approximate the effective interest method. The costs are amortized over the terms of the related debt, which, where applicable, reflect the intended exercise of renewal options. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the original issue discount, rather than as an asset. As a result, the carrying values of the Securitization Loan and Term Credit Facility (see Note 4) are reflected as a net debt number on the condensed consolidated balance sheets. Additionally, in

9
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

accordance with ASU 2015-15, Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, issued in August 2015, the Company presents debt issuance costs related to its revolving credit facility as an asset within other assets on the condensed consolidated balance sheet as of December 31, 2016 (see Note 4) and amortizes them ratably over the term of the related facility.

Escrow Deposits

Escrow deposits include cash held in reserve at financial institutions, as required by the Company's debt agreements described in Note 4. In addition, escrow deposits include money held at financial institutions for cash flow hedge collateral and refundable earnest money on deposit with certain third party property managers for property operating costs.

Income Taxes

The Company intends to operate and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code") and intends to comply with the requirements of the Code relating to REITs. The Company has TRSs where certain investments may be made and activities conducted that may have otherwise been subject to the prohibited transactions tax or may not be favorably treated for purposes of complying with the various requirements for REIT qualification. The income and
losses within the TRSs are subject to federal, state, and local income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company recognized income tax expense of $279 in the three months ended March 31, 2017, compared to $467 in the three months ended March 31, 2016, primarily related to income taxes on net gain on disposition of real estate in the TRS entities.

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 will cease to be an "emerging growth company" under the JOBS Act on December 31, 2017.

The Company considers the applicability and impact of all accounting standard updates ("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 (Topic 606), which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance and some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The new standard specifically excludes lease revenue, but will apply to other revenue and real estate sales. The standard’s core principle is that a company will 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. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance will be effective for the Company for annual reporting periods beginning on January 1, 2018, and for interim periods within those annual periods. The Company can elect to adopt guidance using the full retrospective approach or the modified retrospective approach. Early adoption of this standard is only allowed as of the original effective date, annual periods beginning after December 15, 2016. The Company is currently evaluating the method of adoption and the impact on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, a new lease standard which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under ASU 2016-02, lessor accounting will be substantially similar to the current model, but aligned with certain changes to the lessee model and ASU 2014-09. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company’s rental revenue is primarily generated from short-term operating leases. The new standard requires lessees to apply a dual approach,

10
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard is expected to impact the Company’s consolidated financial statements as the Company is a lessor and has operating office lease arrangements for which it is the lessee. The new standard will be effective for the Company beginning on January 1, 2019, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, requiring application of the new guidance at the beginning of the earliest comparative period presented and provides for certain practical expedients. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on
Financial Instruments, which changes how companies will measure credit losses for certain financial assets. This guidance
requires an entity to estimate its expected credit losses and record an allowance based on this estimate so that it is presented at
the net amount expected to be collected on the financial asset. The guidance will be effective for annual periods beginning after
December 15, 2019 and interim periods within that reporting period with early adoption permitted beginning after December
15, 2018 and interim periods within that reporting period. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts
and Cash Payments, which clarifies how certain cash receipts and cash payments should be presented and classified on the
statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim
periods within that reporting period. The Company is currently evaluating the impact the adoption of this ASU will have on its
consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations, Clarifying the Definition of a Business, which amends the guidance in ASC 805 to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

Note 3. Investments in Real Estate
 
Sale of Real Estate Assets

During the three months ended March 31, 2017 and 2016, the Company sold certain properties for an aggregate sales price of $14,916 and $7,342, respectively, resulting in an aggregate net gain of $2,885 and $1,285, respectively, which has been classified as net gain on disposition of real estate in the condensed consolidated statements of operations and comprehensive loss. In connection with these asset sales, certain debt repayments were made. In accordance with ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, the disposals were not considered a discontinued operation. Any holding costs associated with homes being sold are reflected within held for sale expenses and are classified as other expense in the condensed consolidated statements of operations and comprehensive loss.

In connection with assets held for sale, the Company recognized $72 and $59, respectively, in impairment charges for the three months ended March 31, 2017 and 2016, respectively, classified as impairment of real estate on the condensed consolidated statements of operations and comprehensive loss.


11
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

Note 4.  Debt

The following table presents the Company's debt as of March 31, 2017 and December 31, 2016:

 
 
 
 
 
 
 
Carrying Amount
 
 
Interest Rate as of
March 31, 2017
 
Maturity Date
 
March 31, 2017
 
December 31, 2016
Securitization loan
 
2.90
%
(1) 
 
September 9, 2019 (2)
 
$
300,859

 
$
303,452

Unamortized original issue discount (3)
 
 
 
 
 
 
(711
)
 
(786
)
Unamortized deferred financing costs
 
 
 
 
 
 
(5,324
)
 
(5,884
)
Securitization loan, net
 
 
 
 
 
 
294,824

 
296,782

Revolving credit facility (4)
 
 
 
 
 
 
—

 
352,799

Term credit facility (4)
 
4.15
%
(5) 
 
February 18, 2018
 
346,184

 
—

Unamortized deferred financing costs
 
 
 
 
 
 
(2,945
)
 
—

Term credit facility, net
 
 
 
 
 
 
343,239

 
—

Total
 
 
 
 
 
 
$
638,063

 
$
649,581


(1)
The securitization loan provides for monthly payments at a blended rate equal to the one-month LIBOR plus 1.85% and a monthly servicing fee of 0.1355% (excluding the amortization of the original issue discount and deferred financing costs).
(2)
The securitization loan had an initial term of two years, with three, 12-month extension options, which management intends to exercise, resulting in a fully extended maturity date of September 9, 2019. The extension options may be executed provided there is no event of default under the securitization loan, a replacement interest rate cap agreement is obtained in a form reasonably acceptable to the lender and the borrower complies with other terms set forth in the loan agreement.
(3)
The original issue discount will be accreted and recognized to interest expense through the fully extended maturity date of September 9, 2019.
(4)
The revolving credit facility provided for a borrowing capacity of up to $400,000 and had a maturity date of February 18, 2018. On February 18, 2017, the revolving period ended on the revolving credit facility and the Company is no longer able to draw additional amounts. The aggregate commitment amount was automatically and permanently reduced to an amount equal to the advances outstanding resulting in a term debt credit facility (the "term credit facility") as shown above and further described below.
(5)
The term credit facility bears interest at a varying rate of three-month LIBOR plus 3.0%, subject to a LIBOR floor of 0.0%.

Securitization Loan

On August 12, 2014, the Company completed a securitization transaction (the "Securitization Transaction") in which a newly-formed special purpose entity (the "Borrower") entered into a loan with a third-party lender for $312,667 represented by a promissory note (the "Securitization Loan"). The Borrower is wholly-owned by another special purpose entity (the "Equity Owner"), and the Equity Owner is wholly-owned by the Operating Partnership. The Borrower and Equity Owner are separate legal entities, but continue to be reported in the Company’s condensed consolidated financial statements.

The Securitization Loan provides for monthly payments 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 rate equal to the one-month LIBOR plus 1.85% and a monthly servicing fee of 0.1355% (excluding the amortization of the original issue discount and deferred financing costs). The Securitization Loan has a blended effective rate of one-month LIBOR plus 1.95%, including the amortization of the original issue discount, plus monthly servicing fees of 0.1355%. The Securitization Loan was issued at a discount of $1,503, which will be accreted and recognized to interest expense through the fully extended maturity date of September 9, 2019. The principal amount of each component of the loan corresponds to the respective class of certificates which were issued in connection with the Securitization Transaction.

In the three months ended March 31, 2017 and 2016, the Company incurred gross interest expense of $2,086 and $1,839, respectively, excluding amortization of the discount, deferred financing costs, other fees and the effect of any hedging derivatives. As of March 31, 2017 and December 31, 2016, the Securitization Loan had a weighted-average interest rate of 2.90% and 2.68%, respectively, which is inclusive of the monthly servicing fees, but excludes amortization of the original issue discount, deferred financing costs and interest rate cap accretion.


12
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

During the three months ended March 31, 2017, the Company paid down $2,594 on the Securitization Loan to effect the release of certain properties from the first priority mortgages securing the Securitization Loan, including certain properties sold as described in Note 3. The Company did not make any payments on the Securitization Loan during the three months ended March 31, 2016.
    
The Securitization Loan had an initial term of two years, with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019. The Borrower may execute the extension options provided there is no event of default under the Securitization Loan, the Borrower obtains a replacement interest rate cap agreement in a form reasonably acceptable to the lender and the Borrower complies with the other terms set forth in the loan agreement. The Company executed the first 12-month extension option in the third quarter of 2016.
    
As part of the Securitization Transaction, the Securitization Loan (including the related promissory note) was transferred by the third-party lender to one of the Company's subsidiaries and subsequently deposited into a REMIC trust in exchange for pass-through certificates. The pass-through certificates represent the entire beneficial interest in the trust and were sold to investors in a private offering through the placement agents retained for the transaction for gross proceeds of $311,164, net of the original issue discount of $1,503.

At closing, the Company transferred the Securitization Properties (as defined below) to the Borrower. The Securitization Properties are substantially similar to the other properties owned by the Company and were leased to residents underwritten on substantially the same basis as the Company's other properties. During the duration of the Securitization Loan, the Company can substitute properties only if a property owned by the Borrower becomes a disqualified property under the terms of the Securitization Loan. The lender immediately transferred the Securitization Loan, upon closing, to a subsidiary of the Company and then to a trust in exchange for the certificates. The Company accounted for the transfer of the Securitization Loan from its subsidiary to the trust as a sale under Codification Topic, Transfers and Servicing ("ASC 860"), with no resulting gain or loss as the Securitization Loan was both originated by the lender and immediately transferred at the same fair market value. The Company has also evaluated and not identified any variable interests in the trust.

All amounts outstanding under the Securitization Loan are secured by first priority mortgages on the securitization properties (the "Securitization Properties"), a pool of 2,973 properties excluding properties recorded as assets held for sale, 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 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 real estate taxes, capital expenditures and other reserves associated with the Securitization Properties. There is also a cash management account controlled by the lender for the collection of all rents and cash generated by the Borrower's properties. In the event of default, the lender may apply funds, as the lender elects, from the cash management account, foreclose on its security interests, appoint a new property manager, and in limited circumstances, enforce the Company's guaranty. As of March 31, 2017 and December 31, 2016, the Company had $6,037 and $3,715, respectively, included in escrow deposits associated with the required reserves on the condensed consolidated balance sheets.

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. As of March 31, 2017 and December 31, 2016, the Company believes it was in compliance with all financial covenants.




13
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

Term and Revolving Credit Facility

Certain of the Company's subsidiaries entered into a revolving credit facility (the "revolving credit facility") with a syndicate of banks on May 10, 2013. On February 18, 2015, the Company amended and restated the revolving credit facility to increase the borrowing capacity to $400,000 from $200,000 and subsequently amended the credit facility to address certain interest calculation mechanics. As amended, the revolving credit facility bore interest at a varying rate of three-month LIBOR plus 3.0%, subject to a LIBOR floor of 0.00%. The Company was also required to pay a monthly fee on the unused portion of the revolving credit facility at a rate of 0.50% per annum when the balance outstanding was less than $200,000, or 0.30% per annum when the balance outstanding was equal to or greater than $200,000. As of December 31, 2016 the interest rate on the revolving credit facility was 4.04%, inclusive of the unused fee. As of December 31, 2016, the balance outstanding was $352,799. In the three months ended March 31, 2016, the Company incurred $3,055 in gross interest expenses on the revolving credit facility, excluding amortization of deferred financing costs and interest rate cap accretion. As part of the amendment and restatement, 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 was 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 acquisitions, renovation of properties, and other corporate purposes.

The revolving period on the revolving credit facility ended February 18, 2017 and the Company is no longer able to make additional draws thereunder, resulting in a term loan credit facility (the "term credit facility"). On February 22, 2017, the Company amended the term credit facility to (a) clarify that the aggregate commitment would automatically and permanently reduce on each day to an amount equal to the advances outstanding on that day and (b) retain the Company's access to cash in excess of payments made for property level expenses, interest, and required reserves for an additional six month period before such cash would be swept to prepay principal of the term credit facility. The term credit facility bears interest at a varying rate of three-month LIBOR plus 3.0%, subject to a LIBOR floor of 0.00%.
    
As of March 31, 2017, $346,184 was outstanding under the term credit facility. As of March 31, 2017 the interest rate on the term credit facility was 4.15%. In the three months ended March 31, 2017, the Company incurred $3,579 in gross interest expense on the term and revolving credit facility, excluding amortization of deferred financing costs and interest rate cap accretion.

All amounts outstanding under the term credit facility and former revolving credit facility (collectively referred to as the "Credit Facility") are collateralized by the equity interests and assets of certain of the Company’s subsidiaries (the "Pledged Subsidiaries"), which exclude the owners of the Securitization Properties. The amounts outstanding under the Credit Facility and additional specified 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. As of March 31, 2017, there were 5,821 properties pledged as collateral under the Credit Facility, excluding properties recorded as held for sale.

The Credit Facility provides for mandatory reserves whereby the Company must set aside funds for payment of insurance, real estate taxes and certain property operating and maintenance expenses associated with properties in the Pledged Subsidiaries' portfolios. As of March 31, 2017 and December 31, 2016, the Company had $14,924 and $11,037, respectively, included in escrow deposits associated with the required reserves.

The Pledged Subsidiaries are separate legal entities, but continue to be reported in the Company’s consolidated financial statements. As long as the Credit Facility is outstanding, the assets of the Pledged Subsidiaries are not available to satisfy the other debts and obligations of the other Pledged Subsidiaries or the Company. The Credit Facility does not contractually restrict the Company’s ability to pay dividends. 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 Credit Facility, however certain covenants contained therein may limit the amount of cash available for distribution. For example, beginning on August 18, 2017, all net cash generated by the properties in the Pledged Subsidiaries (after paying associated property-level expenses) will be directed towards principal repayment rather than being distributed to the Company.

The Credit Facility agreement requires the Company to meet certain quarterly financial tests pertaining to net worth, total liquidity, debt yield and debt service coverage ratios. The Company must maintain total liquidity of $25,000 and a net

14
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

worth of at least $125,000, as determined in accordance with the credit facility agreement. The 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.  The Company believes it was in compliance with all financial covenants under the credit facility as of March 31, 2017 and December 31, 2016.

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 no deferred financing costs for the three months ended March 31, 2017 and 2016. Deferred financing costs are being amortized through September 9, 2019, the fully extended maturity date of the Securitization Loan.

In connection with its Credit Facility, the Company incurred deferred financing costs of $1,008 and $9, for the three months ended March 31, 2017 and 2016, respectively. The costs are being amortized through February 18, 2018, the maturity date of the credit facility.

Interest Expense

The following table presents the Company's total interest expense for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Gross interest expense (1)
 
$
5,665

 
$
4,894

Amortization of discount on Securitization Loan
 
75

 
75

Amortization of deferred financing costs
 
1,251

 
1,153

Other interest (2)
 
—

 
90

Total interest expense
 
$
6,991

 
$
6,212


(1)
Includes the Securitization Loan's monthly servicing fees.
(2)
Includes monitoring service fees and interest related to the Company's designated derivative financial instruments (see Note 8).

Derivative Financial Instruments

The variable rate of interest on the Company's debt exposes the Company to interest rate risk. Currently, the Company uses interest rate cap agreements and interest rate swap transactions (collectively “Hedging Derivatives”) to manage this interest rate risk. These instruments are carried at fair value in the Company’s financial statements (see Note 8). Changes in the fair value of the designated portion of the Company's Hedging Derivatives that qualify for hedge accounting are recognized through other comprehensive income (loss) (see Note 8).

Non-designated hedges are derivatives that do not meet the criteria for hedge accounting or for which the Company did not elect to designate as accounting hedges. The Company does not enter into derivative transactions for speculative or trading purposes, but may enter into derivatives to manage the economic risk of changes in interest rates.








15
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)


The following table summarizes the consolidated derivative positions at March 31, 2017:

 
 
Non-designated Hedged Interest
 Rate Caps (1)
 
Cash Flow Hedges Interest Rate Caps
 
Cash Flow Hedges Interest Rate Swaps
Notional balance
 
$
304,367

 
$
370,100

 
$
296,000

Weighted average interest rate (2)
 
2.90
%
 
4.15
%
 
N/A

Weighted average capped/swapped interest rate (3)(4)
 
5.08
%
 
6.00
%
 
2.63
%
Earliest maturity date
 
September 15, 2017

 
February 17, 2018

 
August 15, 2017

Latest maturity date
 
September 15, 2019

 
February 18, 2018

 
September 15, 2019


(1)
The full notional balance is hedged through September 15, 2017 after which $200,000 is hedged through September 15, 2019.
(2)
For interest rate caps, represents the weighted average interest rate on the hedged debt as of March 31, 2017.
(3)
For interest rate caps, represents the capped interest rate, which is inclusive of the monthly servicing fees, but excludes amortization of the original issue discount, deferred financing costs and interest rate cap accretion.
(4)
The swap transactions are structured with a fixed rate that steps up over the three-year term locking in the forward LIBOR curve at the time of execution. This structure resulted in an average effective rate of 2.77% over the three-year term.

As of both March 31, 2017 and December 31, 2016, the Company held four interest rate cap agreements, which included two interest rate cap agreements with an aggregate notional amount of $370,100, LIBOR caps of 3.0%, and termination dates of February 17, 2018 and February 18, 2018 associated with the Credit Facility, one interest rate cap agreement with a notional amount of $104,367, a LIBOR cap of 3.1085%, and a termination date of September 15, 2017 associated with the Securitization Loan, and one interest rate cap agreement with a notional amount of $200,000, a LIBOR cap of 3.1085%, and a termination date of September 15, 2019.

The two interest rate cap agreements associated with the Credit Facility were purchased for an aggregate price of $867. The two interest rate cap agreements associated with the Securitization Loan were purchased for an aggregate price of $1,413. Portions of the purchase prices of the interest rate cap agreements, representing the premiums paid to enter into the contracts, were capitalized as deferred financing costs and are being amortized using the straight-line method over the terms of the related agreements. The Company determined that the interest rate caps qualified for hedge accounting and, therefore, were designated as cash flow hedges with future changes in fair value recognized through other comprehensive income (loss) (see Note 8). Ineffectiveness was 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 and is recorded in adjustments for derivative instruments, net in the condensed consolidated statements of operations and comprehensive loss.




















16
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

In August 2016, the Company, through its Operating Partnership, entered into interest rate swap transactions with two counterparties (the “Swaps”). The Company entered into the Swaps to effectively fix the interest rate on $296,000 of the Company’s floating rate indebtedness under the Securitization Loan for three years. The Swaps have an effective date and maturity date as reflected in the table below. From each respective effective date through the corresponding maturity date, the Company will be required to make monthly fixed rate payments at the fixed swap rate and on the notional amounts reflected in the table below, while the counterparty will be obligated to make monthly floating rate payments to the Company based on one-month LIBOR and referencing the same notional amount. In connection with the Swaps, the Company is required to maintain cash reserves of at least $15,000. The Company determined that the Swaps qualified for hedge accounting and designated the derivatives as cash flow hedges. Concurrently, the Company de-designated three interest rate cap agreements also associated with the Securitization Loan and will reclassify the balance of deferred losses of $1,229 in accumulated other comprehensive income as of March 31, 2017 to earnings over the remaining life of the associated interest rate cap agreements.
Notional Amount
 
Fixed Swap Rate
 
Effective Date
 
Maturity Date
$
177,600

 
0.6495
%
 
August 15, 2016
 
August 15, 2017
$
177,600

 
0.8045
%
 
August 15, 2017
 
August 15, 2018
$
177,600

 
0.9200
%
 
August 15, 2018
 
September 15, 2019
$
118,400

 
0.6600
%
 
August 15, 2016
 
August 15, 2017
$
118,400

 
0.8030
%
 
August 15, 2017
 
August 15, 2018
$
118,400

 
0.9300
%
 
August 15, 2018
 
September 15, 2019

Note 5. Equity Incentive Plan
    
Restated 2012 Equity Incentive Plan    

The compensation committee of the Company’s board of directors has the full authority to administer and interpret the plan, to authorize the granting of awards, to determine the eligibility of directors, officers, advisors, consultants and other personnel of the Company to receive an award, to determine the number of shares of common stock to be covered by each award, to determine the terms, provisions and conditions of each award, to prescribe the form of instruments evidencing awards and to take any other actions and make all other determinations that it deems necessary or appropriate in connection with the equity incentive plan or the administration or interpretation thereof. In connection with this authority, the compensation committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the restrictions on any such awards to lapse.

The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, during the three months ended March 31, 2017. This guidance simplified various aspects of share-based payments. As a result, the Company separated cash paid to a tax authority related to stock compensation as a financing activity in the condensed consolidated statement of cash flows for shares that were withheld to satisfy the Company's statutory income tax withholding obligation. Historically, the withholdings have been classified as a financing activity under repurchase of common stock. Additionally, the Company elected to recognize forfeitures as they occurred.

Restricted Stock Awards

On January 4, 2017, the Company appointed a new independent director to the Company's Board of Directors. The independent director was awarded an equity retainer in the form of an award of 1,055 shares of restricted stock with a fair market value of $17.27. Annual equity retainers for such independent directors will vest as to all of such shares on the earlier of (i) the one year anniversary of the date of grant and (ii) the date immediately preceding the date of the Company's next annual meeting of stockholders, subject, in each case, to the independent director's continued service to the Company through the vesting date.

On January 27, 2017, the Company issued, in aggregate, 121,067 shares of restricted common stock to certain officers and employees of the Company. The estimated fair value of these awards was $16.82 per share, based upon the closing price of the Company’s stock on the date prior to the grant. 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, unless earlier accelerated pursuant to its terms.


17
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

Performance Stock Units
    
Certain of the Company's executive officers have been awarded performance stock units ("PSUs") under the Restated 2012 Plan. Each PSU represents the potential to receive Silver Bay common stock based on the extent to which specified performance targets are met during the 36-month performance period, and is subject to continued employment until the end of the performance period. 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 Company utilized a Monte-Carlo simulation to calculate the weighted-average grant date fair value for all outstanding PSUs.

On January 27, 2017, the Company granted 30,000 PSUs to the Chief Executive Officer which would vest based on the Company's annualized TSR during the performance period on an absolute (i.e., non-relative) basis (the "Absolute TSR PSUs"), with a grant date fair value of $7.78 per unit. The number of shares of common stock eligible to be received is determined by multiplying the target number of PSUs by the TSR multiplier, determined in accordance with the following table:
Annualized TSR
 
TSR Multiplier (1)
6.5%
 
—%
8%
 
50%
10%
 
100%
12%
 
150%
16%
 
200%

(1)
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.     

On January 27, 2017, the Company further granted 30,000 PSUs to the Chief Executive Officer which will vest based on the Company’s TSR during the performance period relative to a peer group index (the “Relative TSR PSUs”) comprised initially of those companies in the Apartment and Single Family Home subsectors of the FTSE NAREIT All REIT Index (the “Index”) with equal weighting provided to each subsector in constructing the peer group index. The grant date fair value was $13.67 per unit. The number of shares of common stock eligible to be received will be determined by multiplying the target number of PSUs by the TSR Multiplier determined in accordance with the following table:

TSR Relative to Peer Group
 
TSR Multiplier (2)
Underperform index by 6 percentage points
 
—%
Underperform index by 3 percentage points
 
50%
Outperform index by 3 percentage points
 
100%
Outperform index by 6 percentage points
 
200%

(2)
To the extent the Company's TSR performance compared to the Index TSR falls between two discrete points, linear interpolation will be used to determine the TSR Multiplier.

Notwithstanding the foregoing, the payout of any Relative TSR PSU will be capped at 110% if the Absolute PSU TSR during the performance period is negative. 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.

    




18
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

On January 27, 2017, certain executives were awarded 39,610 PSUs which would vest based on the Company's annualized TSR during the performance period based on an absolute period (the "Outperformance TSR PSUs") with a grant date fair value of $5.37 per unit. The number of shares of common stock is determined by multiplying the number of PSUs by the TSR multiplier, determined in accordance with the following table:
Annualized TSR
 
TSR Multiplier (3)
6.5%
 
—%
8%
 
25%
10%
 
50%
12%
 
100%
14%
 
125%
16%
 
150%

(3)
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.
    
The following assumptions were used in the Monte-Carlo simulation to calculate the weighted-average grant date fair value:
Expected volatility (1)
18.53
%
Dividend assumption (2)
—
%
Expected term in years
2.92

Risk-free rate
1.48
%
Stock price (per share) (3)
$
16.68

Beginning average stock price (per share) (4)
$
17.42


(1)
Expected volatility is based on the Company’s historical stock price volatility over the last three years using daily data points.
(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 January 27, 2017.
(4)
Based on the average closing price for the 30 trading days prior to December 31, 2016.

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 SEC rules.
 
The Company did not repurchase any shares under the program during the three months ended March 31, 2017. During the three months ended March 31, 2016, the Company repurchased and retired 545,223 shares under the program for a total cost of $7,867, at an average purchase price of $14.43 per share, inclusive of commissions.

19
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

Common Stock Dividends

The following table presents cash dividends declared by the Company on its common stock during the three months ended March 31, 2017, and the four immediately preceding quarters:

Declaration Date
Record Date
Payment Date
Cash Dividend
per Share
February 27, 2017
April 3, 2017
April 14, 2017
$
0.13

December 20, 2016
December 30, 2016
January 13, 2017
0.13

September 22, 2016
October 3, 2016
October 14, 2016
0.13

June 21, 2016
July 1, 2016
July 15, 2016
0.13

March 23, 2016
April 4, 2016
April 15, 2016
0.13


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, 2017, and the four immediately preceding quarters:

Declaration Date
Payment Date
Cash Dividend
per Share
March 1, 2017
April 14, 2017
$
25.28

December 20, 2016
January 13, 2017
24.72

September 22, 2016
October 14, 2016
24.72

June 22, 2016
June 30, 2016
25.00

March 30, 2016
April 15, 2016
26.94


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, 2017 and 2016: 
    
 
Three Months Ended March 31,
 
2017
 
2016
Net loss attributable to controlling interests
$
(1,742
)
 
$
(3,379
)
Preferred stock distributions
(25
)
 
(25
)
Net loss attributable to common stockholders
$
(1,767
)
 
$
(3,404
)
Basic and diluted weighted average common shares outstanding
35,449,670

 
36,022,953

Net loss per common share - basic and diluted
$
(0.05
)
 
$
(0.09
)

A total of 2,231,511 common units not owned by the Company were outstanding for the three months ended March 31, 2017 and 2016, but have been excluded from the calculation of diluted EPS as their inclusion would not be dilutive. In addition, 420,269 PSUs, inclusive of dividend equivalent rights and their market condition rate have been excluded from the calculation of diluted EPS for the three months ended March 31, 2017, as their inclusion would not be dilutive. For the three months ended March 31, 2016, 105,000 PSUs have been excluded from the calculation of diluted EPS as their market conditions had not been met and their inclusion would not be dilutive.


20
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)


Note 8.  Derivative and Other Fair Value Instruments

Codification Topic Fair Value Measurement (“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 Hedging Derivatives to manage its exposure to interest rate risk (refer to Note 4) and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Hedging Derivatives 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 Hedging Derivatives and the location within the condensed consolidated balance sheets at March 31, 2017 and December 31, 2016, respectively:






Fair Value Measurements at Reporting Date Using
Description

Balance Sheet Location

March 31, 2017

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)
Non-Designated Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps
 
Other Assets
 
$
107

 
$
—

 
$
107

 
$
—

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps

Other Assets

—


—


—


—

Interest Rate Swaps

 
Other Assets
 
5,294

 
—

 
5,294

 
—

Total
 
 
 
$
5,401

 
$
—

 
$
5,401

 
$
—


 
 
 
 
 
 
Fair Value Measurements at Reporting Date Using
Description
 
Balance Sheet Location
 
December 31, 2016
 
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)
Non-Designated Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps
 
Other Assets
 
$
245

 
$
—

 
$
245

 
$
—

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps

 
Other Assets
 
2

 
—

 
2

 
—

Interest Rate Swaps
 
Other Assets
 
4,830

 
—

 
4,830

 
—

Total
 
 
 
$
5,077

 
$
—

 
$
5,077

 
$
—



21
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

The following table provides a summary of the effect of Hedging Derivatives on the Company's condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2017:


Effective Portion

Ineffective Portion
Description

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

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

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

Location of Gain/(Loss) Recognized in Earnings on Derivative
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
Non-Designated Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
—

 
Adjustments for derivative instruments, net
 
$
(26
)
 
N/A
 
$
—

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps

(2
)

Interest Expense

(74
)

N/A
 
—

Interest Rate Swaps
 
465

 
N/A
 
—

 
N/A
 
—

Total
 
$
463

 
 
 
$
(100
)
 
N/A
 
$
—


The following table provides a summary of the effect of Hedging Derivatives on the Company's condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2016:
 
 
Effective Portion
 
Ineffective Portion
Description
 
Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative
 
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
 
Location of Gain/(Loss) Recognized in Earnings on Derivative
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Earnings
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
(474
)
 
Interest Expense
 
$
(24
)
 
N/A
 
$
—


As of March 31, 2017 and December 31, 2016, there was $3,404 and $2,841, respectively, in deferred gains in accumulated other comprehensive income related to Hedging Derivatives. The Company expects to recognize $663 in interest expense during the twelve months ending March 31, 2018, pertaining to the designated interest rate cap agreements, which will be reclassified out of accumulated other comprehensive income in accordance with the amortization schedules established upon designation of the interest rate caps as cash flow hedges. In addition, the Company expects to recognize approximately $286 into earnings during the twelve months ended March 31, 2018, pertaining to the de-designated interest rate cap agreements, which will be reclassified out of accumulated other comprehensive income into adjustments for derivative instruments, net in accordance with the amortization schedules established upon designation of the interest rate cap agreements as cash flow hedges. Interest expense pertaining to the interest rate swap transactions will be recognized as incurred.

In August 2016, the Company entered into a series of interest rate swaps (see Note 4) and determined they qualified for hedge accounting and designated the derivatives as cash flow hedges. In connection with entering into these interest rate swaps, the Company de-designated three interest rate cap agreements associated with the Securitization Loan. As the Company still holds a balance on the Securitization Loan, it will reclassify the balance at March 31, 2017 of $1,229 in deferred losses in accumulated other comprehensive income (loss) to earnings over the remaining life of the associated interest rate cap agreements. During the three months ended March 31, 2017, the Company realized $139 in losses related to the change in fair value on the de-designated interest rate cap agreements which is recorded in adjustments for derivative instruments, net.

Nonrecurring Fair Value

For long-lived assets to be disposed of, 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

22
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three Months Ended March 31, 2017
(amounts in thousands, except share data and property counts)

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. These impairment measurements constitute nonrecurring fair value measures under ASC 820 and the inputs are characterized as Level 2.

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, 2017.
•
Cash, escrow deposits, resident prepaid rent and security deposits, resident rent receivable (included in other assets), and accounts payable and accrued 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 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. Accordingly, the interest rate on this borrowing is at market, and thus, the carrying value of the debt approximates fair value as of March 31, 2017. The Company categorizes the fair value measurement of this liability as Level 2.
•
The fair value of the Company's Securitization Loan was $300,583 as of March 31, 2017, 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, 2017. The Company categorizes the fair value measurement of this instrument as Level 2.

Note 9.  Commitments and Contingencies

Concentrations

As of March 31, 2017, approximately 61% of the Company’s properties were located in Atlanta, GA, Phoenix, AZ, and Tampa, FL, which exposes the Company to greater economic risks than if the Company owned a more geographically dispersed portfolio.

Resident Security Deposits

As of March 31, 2017, the Company had $13,068 in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the underlying lease.

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 adverse effect on the Company's condensed consolidated financial statements, and therefore no accrual has been recorded as of March 31, 2017.

Note 10.  Subsequent Events

On May 5, 2017, Silver Bay's shareholders voted in favor of the Merger, which is subject to customary closing conditions as outlined in Note 1. The closing of the Merger is expected to occur during the week of May 8th, 2017.

23

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

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly 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 Quarterly 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 I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2016 and any updates to those risk factors included in Part II, Item 1A, “Risk Factors,” of this Quarterly Report.

Overview

We are an internally-managed Maryland corporation that focuses 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, 2017, we owned 9,013 single-family properties for rental purposes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, South Carolina and Texas, excluding properties reflected as assets held for sale on our condensed consolidated balance sheets.

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 continue to 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 our taxable REIT subsidiaries ("TRS") is 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, 2017, Silver Bay Realty Trust Corp. owned, through a combination of direct and indirect interests, 94.1% 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.

On February 27, 2017, Silver Bay Realty Trust Corp., the General Partner, and the Operating Partnership (Silver Bay Realty Trust Corp., the Operating Partnership and the General Partner collectively referred to as the “Company Parties”), entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Tricon Capital Group, Inc., a company incorporated under the laws of the Province of Ontario (“Tricon Ultimate Parent”), TAH Acquisition Holdings LLC, a Delaware limited liability company (“Tricon Parent”) and TAH Acquisition LP, a Delaware limited partnership (“Tricon LP” and, together with Tricon Ultimate Parent and Tricon Parent, the “Tricon Parties”). Subject to the terms and conditions of the Merger Agreement, Silver Bay Realty Trust Corp. will merge with and into Tricon Parent, with Tricon Parent being the surviving entity (the “Merger”). The board of directors of Silver Bay Realty Trust Corp. has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each outstanding share of Silver Bay Realty Trust Corp. common stock, par value $0.01 per share (other than shares held by any Tricon Party or any subsidiary thereof or any of our wholly-owned subsidiaries), will be converted into the right to receive an amount in cash equal to $21.50, without interest (as the same may be adjusted, the “Merger Consideration”), subject to any applicable withholding tax, and each outstanding share of Silver Bay Realty Trust Corp. 10% cumulative redeemable preferred stock, par value $0.01 per share, will be converted into the right to receive an amount in cash equal to $1,000 per share, plus an amount equal to all dividends accrued and unpaid on such share of preferred stock immediately prior to the Merger effective time, without interest (the “Preferred Merger Consideration”), subject to applicable withholding tax. The Merger Agreement also provides for the merger of Tricon LP with and into the Operating Partnership, with the Operating Partnership being the surviving entity (the “Partnership Merger”).



24

The closing of the Merger and the Partnership Merger is subject to customary conditions, including, among others: (i) approval by a majority of Silver Bay Realty Trust Corp.’s stockholders; (ii) the absence of a material adverse effect on us; (iii) the receipt of a tax opinion relating to our REIT status and (iv) the absence of any order, action or law by a governmental authority preventing, prohibiting, enjoining or making illegal the consummation of the Merger and the Partnership Merger. In connection with the proposed merger transaction, we have incurred legal, investment banking, due diligence and other transaction costs ("transaction expenses") of $2,210 for the three months ended March 31, 2017. The closing of the Merger is expected to occur during the week of May 8, 2017. See Note 10 in the notes to the condensed consolidated financial statements for updates on the Merger and Partnership Merger since March 31, 2017.

Any discussion of future trends or business plans of the Company in this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, ignores any impact of the Merger, the Partnership Merger, or the Merger Agreement.

Property Portfolio

Our investments in real estate consist of single-family properties located in select markets. As of March 31, 2017, we owned 9,013 single-family properties in the following markets:
Market
 
Number of
Properties (1)
 
Aggregate Investment in Real Estate (2)
(in thousands)
 
Average Investment in Real Estate Per Property
 
Average Age
(in years) (3)
 
Average Square
Footage
Atlanta
 
2,946

 
$
352,985

 
$
119,818

 
22.7
 
1,810

Phoenix
 
1,421

 
203,876

 
143,474

 
28.2
 
1,634

Tampa
 
1,136

 
165,053

 
145,293

 
28.5
 
1,622

Charlotte (4)
 
687

 
86,005

 
125,189

 
16.6
 
1,642

Orlando
 
519

 
71,074

 
136,944

 
28.8
 
1,500

Dallas
 
511

 
69,148

 
135,319

 
25.1
 
1,619

Jacksonville
 
451

 
59,721

 
132,419

 
28.4
 
1,536

Northern CA (5)
 
380

 
72,975

 
192,039

 
48.4
 
1,396

Las Vegas
 
290

 
41,436

 
142,883

 
20.7
 
1,717

Columbus
 
284

 
33,428

 
117,704

 
39.6
 
1,414

Tucson
 
209

 
17,692

 
84,651

 
44.0
 
1,330

Southeast FL (6)
 
179

 
33,749

 
188,542

 
49.4
 
1,353

Totals
 
9,013

 
$
1,207,142

 
$
133,933

 
27.2
 
1,650


(1)
Properties reflected in this table exclude properties recorded as assets held for sale on our condensed consolidated balance sheets.
(2)
Aggregate investment in real estate includes all capitalized costs, determined in accordance with U.S. generally accepted accounting principles ("GAAP"), incurred through March 31, 2017 for the acquisition, stabilization, and significant post-stabilization renovation of properties, including land, building, possession costs and renovation costs. Aggregate investment in real estate includes $22.7 million in capital improvements, incurred from our formation through March 31, 2017, made to properties that had been previously renovated, but does not include accumulated depreciation.
(3)
As of March 31, 2017, approximately 2% of our properties were less than 10 years old, 39% were between 10 and 20 years old, 20% were between 20 and 30 years old, 19% were between 30 and 40 years old, 11% were between 40 and 50 years old, and 9% were more than 50 years old. Average age is an annual calculation.
(4)
Charlotte market includes properties in South Carolina due to their proximity to Charlotte, North Carolina.
(5)
Northern California market currently consists of Contra Costa, Napa and Solano counties.
(6)
Southeast Florida market currently consists of Miami-Dade, Broward and Palm Beach counties.

Factors likely to affect Silver Bay's Results of Operations

Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. Some of 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

25

levels, rates of resident turnover, home price appreciation, changes in homeownership rates, changes in homeowners’ association fees and real estate taxes, changes in insurance costs, expenses incurred in the maintenance and turnover of our properties, resident defaults, our expense ratios and our capital structure. Certain of these factors are described in greater detail below.

Acquisitions and Dispositions

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, and our capital available for investment. Acquisitions may be financed from various sources, including proceeds from the sale of equity securities, retained cash flow, debt financings, securitizations, or the issuance of common units in the Operating Partnership. Availability of financing from such sources on acceptable terms will greatly impact our pace of acquisitions, as will any preference we may then have for portfolio acquisitions, which are inherently less predictable than purchases through other channels.

We periodically sell properties after determining the property or related market no longer fit our portfolio and may sell properties when we view market conditions are favorable given other potential uses of capital. As of March 31, 2017, we had 61 properties reflected as assets held for sale on our balance sheet. As of March 31, 2017, we had 38 properties under contract to sell with an aggregate contractual sales price of $7.5 million. There are no assurances we will close on the sales of these properties.

During the three months ended March 31, 2017 and 2016, we sold 74 and 53 properties, respectively, for total gross proceeds of $14.9 million and $7.3 million, respectively, for a net gain on disposition of real estate of $2.9 million and $1.3 million, respectively.

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.

The following table summarizes the occupancy status of our properties as of March 31, 2017:

Market
 
Number of Properties
 
Properties
Occupied
 
Properties
Vacant
 
Aggregate Portfolio
Occupancy Rate
 
Average 
Monthly
Rent (1)
 
Average Remaining Lease Term (Months) (2)
Atlanta
 
2,946

 
2,842

 
104

 
96.5
%
 
$
1,128

 
8.1
Phoenix
 
1,421

 
1,412

 
9

 
99.4
%
 
1,153

 
7.9
Tampa
 
1,136

 
1,097

 
39

 
96.6
%
 
1,361

 
7.5
Charlotte
 
687

 
677

 
10

 
98.5
%
 
1,123

 
7.0
Orlando
 
519

 
508

 
11

 
97.9
%
 
1,237

 
7.6
Dallas
 
511

 
498

 
13

 
97.5
%
 
1,342

 
8.8
Jacksonville
 
451

 
436

 
15

 
96.7
%
 
1,186

 
8.6
Northern CA
 
380

 
375

 
5

 
98.7
%
 
1,760

 
8.1
Las Vegas
 
290

 
288

 
2

 
99.3
%
 
1,241

 
7.2
Columbus
 
284

 
280

 
4

 
98.6
%
 
1,103

 
7.8
Tucson
 
209

 
204

 
5

 
97.6
%
 
863

 
6.1
Southeast FL
 
179

 
127

 
52

 
70.9
%
 
1,606

 
5.0
Totals
 
9,013

 
8,744

 
269

 
97.0
%
 
$
1,213

 
7.8
(1)
Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of March 31, 2017 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.

26


The aggregate portfolio occupancy rate increased slightly to 97.0% as of March 31, 2017 compared to 96.9% as of March 31, 2016.

During the three months ended March 31, 2017, 641 properties turned over compared to 645 in the three months ended March 31, 2016. This turnover number includes move-outs, evictions and lease breaks on our portfolio. Quarterly turnover for the three months ended March 31, 2017 was 7.1% compared to 7.2% for the three months ended March 31, 2016. Quarterly turnover represents the number of properties turned over in the period divided by the number of properties in stabilized status at period-end. The total number of properties with lease expirations in the three months ended March 31, 2017 was 2,399, including properties with month-to-month occupancy in the period. Of these properties, 469 properties turned over, resulting in a retention rate of 80.5% compared to a retention rate of 81.0% during the three months ended March 31, 2016.

The following is a summary of our turnover percentage, by quarter, for the trailing twelve-month periods ended March 31, 2017 and 2016:

 
Turnover (1)
March 31, 2017
 
7.1
%
December 31, 2016
 
6.6
%
September 30, 2016
 
8.1
%
June 30, 2016
 
7.6
%
Total turnover for twelve months ended March 31, 2017
 
29.4
%
 
 
Turnover (1)
March 31, 2016
 
7.2
%
December 31, 2015
 
6.6
%
September 30, 2015
 
8.2
%
June 30, 2015
 
7.0
%
Total turnover for twelve months ended March 31, 2016
 
29.0
%
(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.


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Same-Home Properties. We refer to our Same-Home properties as those properties (1) that we had stabilized and for which we had completed the initial renovation as of January 1, 2016 and (2) that we held in operations throughout the full periods presented in both 2016 and 2017. Same-Home properties exclude properties classified as held for sale and properties taken out of service as a result of a casualty loss.
    
As of March 31, 2017, we had 6,863 properties included in Same-Home properties in the following markets:

 
 
 
Aggregate Occupancy Rate
 
Average Monthly Rent (1)
 
Number of Same-Home Properties
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
Atlanta
1,471

 
97.2
%
 
98.3
%
 
$
1,198

 
$
1,149

Phoenix
1,421

 
99.4
%
 
98.6
%
 
1,153

 
1,109

Tampa
962

 
96.6
%
 
96.4
%
 
1,387

 
1,329

Charlotte
348

 
98.9
%
 
96.3
%
 
1,205

 
1,164

Orlando
367

 
98.4
%
 
98.1
%
 
1,296

 
1,239

Dallas
502

 
97.6
%
 
95.8
%
 
1,342

 
1,304

Jacksonville
451

 
96.7
%
 
97.3
%
 
1,186

 
1,144

Northern CA
380

 
98.7
%
 
99.5
%
 
1,760

 
1,631

Las Vegas
290

 
99.3
%
 
99.0
%
 
1,241

 
1,200

Columbus
284

 
98.6
%
 
96.1
%
 
1,103

 
1,074

Tucson
209

 
97.6
%
 
97.1
%
 
863

 
846

Southeast FL
178

 
70.8
%
 
94.9
%
 
1,606

 
1,586

Totals
6,863

 
97.3
%
 
97.6
%
 
$
1,257

 
$
1,210


(1)
Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of March 31, 2017 and 2016, respectively, and reflects rent concessions amortized over the life of the related lease.


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Results of Operations

The following is a summary of our results of operations (unaudited) for the three months ended March 31, 2017 and 2016:
    

 
Three Months Ended March 31,
(amounts in thousands except per share data)
 
2017
 
% of Revenue
 
2016
 
% of Revenue
Condensed Consolidated Income Statement Data
 
 
 
 
 
 
 
 
Total revenue
 
$
32,417

 
100.0
%
 
$
31,136

 
100.0
%
Property operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
5,442

 
16.8
%
 
5,884

 
18.9
%
Real estate taxes
 
4,597

 
14.2
%
 
4,452

 
14.3
%
Homeowners’ association fees
 
415

 
1.3
%
 
436

 
1.4
%
Property management
 
2,758

 
8.5
%
 
2,771

 
8.9
%
Total property operating expenses
 
$
13,212

 
40.8
%
 
$
13,543

 
43.5
%
 
 
 
 
 
 
 
 
 
Loss before other income, income taxes and non-controlling interests
 
$
(3,834
)
 
 
 
$
(4,136
)
 
 
Net loss
 
$
(1,852
)
 
 
 
$
(3,589
)
 
 
Net loss attributable to common stockholders
 
$
(1,767
)
 
 
 
$
(3,404
)
 
 
Net loss per share attributable to common shares - basic and diluted
 
$
(0.05
)
 
 
 
$
(0.09
)
 
 
Net operating income (1)
 
$
19,205

 


 
$
17,593

 


 
 
 
 
 
 
 
 
 
Same-Home Properties Income Statement Data (2)
 
 
 
 
 
 
 
 
Same-Home total revenue
 
$
25,582

 
100.0
%
 
$
24,475

 
100.0
%
Same-Home property operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
4,433

 
17.3
%
 
4,829

 
19.7
%
Real estate taxes
 
3,670

 
14.3
%
 
3,519

 
14.4
%
Homeowners' association fees
 
344

 
1.3
%
 
364

 
1.5
%
Property management
 
2,201

 
8.6
%
 
2,166

 
8.8
%
Same-Home property operating expenses
 
10,648

 
41.6
%
 
10,878

 
44.4
%
Same-Home net operating income (1)
 
$
14,934

 


 
$
13,597

 



(1)
Net operating income ("NOI") and Same-Home net operating income ("Same-Home NOI") 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 and Same-Home NOI to net loss prepared in accordance with GAAP are found in this Item 2 under the headings "Non-GAAP Financial Performance Measures".
(2)
See "Same-Home Properties" section for information as to how we define our Same-Home property portfolio.

Comparison of the Three Months Ended March 31, 2017 and the Three Months Ended March 31, 2016

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.


29

Total revenue increased $1.3 million, or 4.1%, in the three months ended March 31, 2017 compared to the prior year period. We owned 9,013 properties as of March 31, 2017 as compared to 8,981 properties as of March 31, 2016 with aggregate occupancy rates of 97.0% and 96.9%, respectively. We achieved an average monthly rent for occupied properties in our portfolio of $1,213 as of March 31, 2017 as compared to $1,178 as of March 31, 2016. We calculate average monthly rent for a period as the average of the contracted monthly rent for all occupied properties as of the end of such period, net of the concessions amortized over the life of the related lease. The increase in revenue for the three months ended March 31, 2017 over the prior year period was primarily due to increases in our rental rates and to a lesser extent occupancy rate increases.

Total revenue from Same-Home properties increased $1.1 million, or 4.5%, in the three months ended March 31, 2017, compared to the prior year period. This increase was due primarily to the increases in average monthly rent. Average monthly rent for occupied properties in our Same-Home portfolio increased to $1,257 as of March 31, 2017 compared to $1,210 as of March 31, 2016. The average rent for the Same-Home portfolio is higher than our aggregate portfolio due to property mix as a result of previous bulk acquisitions. Same-Home occupancy decreased slightly to 97.3% as of March 31, 2017 compared to 97.6% as of March 31, 2016.

Expenses

Property Operating Expenses. Property operating expenses include property operating and maintenance, real estate taxes, homeowners' association fees, and property management. Included in property operating and maintenance are repairs and maintenance expenses associated with resident turnover, property insurance, bad debt and utilities and landscape maintenance on market ready properties not occupied. Real estate taxes are expensed once a property is placed in service. As of March 31, 2017, we internally managed 94.5% of our portfolio, which represented all of our markets other than Las Vegas and Tucson where we use third-party managers.

Property operating expenses for the entire portfolio decreased $0.3 million, or 2.4%, for the three months ended March 31, 2017 over the prior year period due to a decrease in property operating and maintenance offset by an increase in real estate taxes. As a percentage of revenue, property operating expenses decreased 2.7 percentage points largely due to an increased revenue base and reduction in turnover expense.

Property operating expenses for the Same-Home properties decreased $0.2 million, or 2.1% for the three months ended March 31, 2017 compared to the prior quarter. This decrease stemmed primarily from a decrease in property operating and maintenance offset by an increase in real estate taxes. As a percentage of total revenue, property operating expenses for the Same-Home properties decreased 2.8% to 41.6% compared to 44.4% in the year ago quarter.

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 decreased $0.1 million, or 0.9%, in the three months ended March 31, 2017 over the prior year period. The decrease in the three months ended March 31, 2017, despite the increase in number of properties over the prior period, is a result of the capital reallocation strategy and disposal of properties in the Southeast Florida market which carry a higher cost basis.

General and Administrative. General and administrative includes those costs related to being a public company and expenses associated with our corporate and administrative functions. General and administrative expense decreased $0.2 million, or 5.3%, in the three months ended March 31, 2017, over the prior year period primarily related to expense management and timing of certain items.

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 $0.3 million in the three months ended March 31, 2017 over the prior year periods due to the performance stock unit (PSU) grants in June 2016 and January 2017, which will vest over the next three years as long as such the recipient is an employee on the vesting date. These new PSU grants and related expenses were offset in part by the reversal of the previous CEO's PSU expense recognized in the three months ended March 31, 2016.

Severance and Other. Severance and other consisted primarily of executive severance and related costs for certain employees that have departed during the three months ended March 31, 2016. There were no severance and other costs incurred in the three months ended March 31, 2017.


30

Transaction Expenses. Transaction expenses consists of legal, investment banking, due diligence activities and other transaction costs associated with the proposed Merger Agreement. We incurred $2.2 million in transaction expenses in the three months ended March 31, 2017.

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, debt service costs, amortization of deferred financing fees, and interest expense associated with the interest rate swap transactions and interest rate cap accretion.

The following table presents total interest expense for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31,
 
 
2017
 
2016
Gross interest expense (1)
 
$
5,665

 
$
4,894

Amortization of discount on Securitization Loan
 
75

 
75

Amortization of deferred financing costs
 
1,251

 
1,153

Other interest (2)
 
—

 
90

Total interest expense
 
$
6,991

 
$
6,212

(1)
Includes the Securitization Loan's monthly servicing fees.
(2)
Includes monitoring service fees and interest related to our designated derivative financial instruments (see Note 8 on the accompanying condensed consolidated financial statements).

 Interest expense increased $0.8 million in the three months ended March 31, 2017, over the prior year period primarily due to higher average interest rates.

Total Other Income. Total other income consists of activities related to our sales of investments in real estate as well as adjustments on derivative financial instruments, net. Total other income increased $1.2 million in the three months ended March 31, 2017 over the prior year period due to an increase in the net gain on disposition of real estate related to certain properties of $2.9 million partially offset by an increase in operating costs of assets held for sale.

Income Tax Expense, Net. We intend to operate and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), and intend to comply with the requirements of the Code relating to REITs. We have TRSs where certain investments may be made and activities conducted that may have otherwise been subject to the prohibited transactions tax or may not be favorably treated for purposes of complying with the various requirements for REIT qualification. The income and
losses within the TRSs are subject to federal, state, and local income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We recognized income tax expense of $0.3 million in the three months ended March 31, 2017 compared to $0.5 million in the three months ended March 31, 2016. The decrease in income tax expense is due to the amount of tax gain on the disposition of real estate being less in the three months ended March 31, 2017 over the prior period in the TRS entities.


31

Critical Accounting Policies

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.
        
Our critical accounting policies are those related to:
•
Revenue recognition;
•
Investments in real estate;
•
Impairment of real estate;
•
Accounts payable and accrued expenses;
•
Income taxes; and
•
Derivative instruments

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, 2016. The critical accounting policies used in preparing our interim 2017 condensed consolidated financial statements are the same as those described in our Form 10-K.

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 U.S. 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 will cease to be an "emerging growth company" under the JOBS Act on December 31, 2017.

We consider the applicability and impact of all accounting standard updates ("ASUs"). 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which provides guidance on revenue recognition and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, most industry-specific guidance and some cost guidance included in Subtopic 605-35, “Revenue Recognition-Construction-Type and Production-Type Contracts.” The new standard specifically excludes lease revenue, but will apply to other revenue and real estate sales. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expect to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The guidance will be effective for us for annual reporting periods beginning on January 1, 2018, and for interim periods within those annual periods. We can elect to adopt guidance using the full retrospective approach or the modified retrospective approach. Early adoption of this standard is only allowed as of the original effective date, annual periods beginning after December 15, 2016. We are currently evaluating the method of adoption and the impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, a new lease standard which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). Under ASU 2016-02, lessor accounting will be substantially similar to the current model, but aligned with certain changes to the lessee model and ASU 2014-09. The new standard requires lessors to account for leases using an approach that is substantially

32

equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. Our rental revenue is primarily generated from short-term operating leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard is expected to impact our condensed consolidated financial statements as we are a lessor and have operating office lease arrangements for which we are the lessee. The new standard will be effective for us beginning on January 1, 2019, with early adoption permitted. The new standard must be adopted using a modified retrospective transition, requiring application of the new guidance at the beginning of the earliest comparative period presented and provides for certain practical expedients. We are currently evaluating the impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, Measurement of Credit Losses on Financial Instruments, which changes how companies will measure credit losses for certain financial assets. This guidance requires an entity to estimate its expected credit losses and record an allowance based on this estimate so that it is presented at the net amount expected to be collected on the financial asset. The guidance will be effective for annual periods beginning after December 15, 2019 and interim periods within that reporting period with early adoption permitted beginning after December 15, 2018 and interim periods within that reporting period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows, Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and cash payments should be presented and classified on the statement of cash flow. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, Restricted Cash, which requires the statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations, Clarifying the Definition of a Business, which amends the guidance in ASC 805 to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

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 make 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 certain properties, maintaining properties, funding our operations, and making interest payments and distributions to our stockholders.

Our liquidity and capital resources as of March 31, 2017 consisted of cash of $54.0 million, escrow deposits of $23.0 million, including cash held in reserve at financial institutions as required by our debt agreements of $21.0 million.

We believe our cash flows from operations together with current cash will be sufficient to fund the anticipated needs of our operations in 2017. 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, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms or at all.


33

Securitization Loan

On August 12, 2014, we completed a securitization transaction (the "Securitization Transaction") in which a newly-formed special purpose entity (the "Borrower") entered into a loan with a third-party lender for $312.7 million represented by a promissory note (the "Securitization Loan"). The Borrower is wholly owned by another special purpose entity (the "Equity Owner"), and the Equity Owner is wholly-owned by the Operating Partnership. The Borrower and Equity Owner are separate legal entities, but continue to be reported on our condensed consolidated financial statements.

During the three months ended March 31, 2017, we paid down $2.6 million on the Securitization Loan to effect the release of certain properties from the first priority mortgages securing the Securitization Loan. We did not make any pay downs on the Securitization Loan during the three months ended March 31, 2016.

The Securitization Loan had an initial term of two years with three, 12-month extension options, resulting in a fully extended maturity date of September 9, 2019 and provides for monthly payments at a blended rate equal to the one-month LIBOR plus 1.85% and a monthly servicing fee of 0.1355% (excluding the amortization of the original issue discount and deferred financing costs). The Securitization Loan has a blended effective rate of one-month LIBOR plus 1.95%, including the amortization of the original issue discount, plus monthly servicing fees of 0.1355%. The Securitization Loan was issued at a discount of $1.5 million, which will be accreted and recognized to interest expense through the fully extended maturity date of September 9, 2019. During the third quarter of 2016, we executed the first 12-month extension option.

As part of the Securitization Transaction, the Securitization Loan (including the related promissory note) was transferred by the third-party lender to one of our subsidiaries and subsequently deposited into a REMIC trust in exchange for pass-through certificates. The pass-through certificates represent the entire beneficial interest in the trust and were sold to investors in a private offering through the placement agents retained for the transaction for gross proceeds of $311.2 million, net of the original issue discount of $1.5 million.

All amounts outstanding under the Securitization Loan are secured by first priority mortgages on the Securitization Properties, a pool of 2,973 properties, excluding properties recorded as held for sale, 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 believe we were in compliance with all financial covenants under the Securitization Loan as of March 31, 2017.

Term and Revolving Credit Facility

As of December 31, 2016, certain of our subsidiaries had a revolving credit facility (the "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 and subsequently amended the revolving credit facility to address certain interest calculation mechanics. As amended, the revolving credit facility bears interest at a varying rate of three-month LIBOR plus 3.0%, subject to a LIBOR floor of 0.0%, payable monthly. 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 acquisitions, renovation of properties, and other corporate purposes.

The revolving period on the revolving credit facility ended February 18, 2017 and we are no longer able to draw additional amounts. On that date, the aggregate commitment amount was automatically and permanently reduced to an amount equal to the advances outstanding resulting in a term debt credit facility. On February 22, 2017, the Company amended the term credit facility to provide the Company with continued access to cash in excess of payments made for property level expenses, interest, and required reserves for a six month period ending August 18, 2017. The term credit facility bears interest at a varying

34

rate of three-month LIBOR plus 3.0%, subject to a LIBOR floor of 0.00%. The Company is no longer required to pay an unused fee.

All amounts outstanding under the revolving credit facility and term credit facility (collectively, "Credit Facility"), are collateralized by the equity interests and assets of certain of our subsidiaries (the "Pledged Subsidiaries"), which exclude the owners of the Securitization Properties. The amounts outstanding under the 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. As of March 31, 2017, there were 5,821 properties pledged as collateral under the Credit Facility, excluding properties recorded as held for sale.

The 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, beginning on August 18, 2017, pursuant to the recent amendment, all cash generated by the properties in the Pledged Subsidiaries (after paying associated property-level expenses) is directed toward principal repayment rather than being distributed to us. The Credit Facility agreement requires us to meet certain quarterly financial tests pertaining to net worth, total liquidity, 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 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 credit facility. We believe we were in compliance with all financial covenants under the revolving credit facility as of March 31, 2017.

Derivative Financial Instruments

Our objective in using derivative instruments is to manage our exposure to interest rate movements impacting interest expense on our borrowings as well as to satisfy certain debt requirements. We use interest rate cap agreements and interest rate swap transactions to hedge the variable cash flows associated with our existing variable-rate loans and credit facilities (see Note 4 and Note 8 to the accompanying condensed consolidated financial statements for a detailed description of our hedging derivatives).

Operating Activities

Net cash provided by operating activities in the three months ended March 31, 2017 was $4.6 million compared to net cash provided by operating activities of $5.5 million for the three months ended March 31, 2016. Our operating cash flows during the three months ended March 31, 2017 were impacted by an increase of certain cash reserves associated with our debt, partially offset by a decrease in other assets and an increase in operating payables. Our operating cash during the three months ended March 31, 2016 were driven by an increase in certain cash reserves associated with our debt.
  
Investing Activities

Our net cash related to investing activities is generally used to fund acquisitions and capital expenditures and is offset by proceeds from the disposition of real estate. Net cash provided by investing activities in the three months ended March 31, 2017 of $12.8 million was driven by $14.9 million in proceeds from the disposition of real estate from the sale of 74 properties, partially offset by $2.2 million for capital improvements of which $1.0 million was attributable to our initial renovation of properties, which includes properties purchased in a portfolio purchase that have been renovated for the first time, and $1.2 million was attributable to capital improvements to properties that had been previously renovated.

The average renovation cost per property was approximately $27,600 or 24.9% of the purchase price for all properties placed in service since we commenced operations through March 31, 2017, including properties acquired with an in-place lease but excluding properties acquired from entities managed by Provident Real Estate Advisors LLC, and properties purchased through portfolio transactions in 2015 and 2016. These renovation costs included capitalized expenditures for renovations, real estate taxes, homeowners’ association dues, interest, property insurance, costs required to gain possession of the property and other capitalized expenditures until the property is ready for its intended use.

Net cash provided by investing activities in the three months ended March 31, 2016 was $3.3 million and was largely driven by $7.3 million in proceeds from the disposition of real estate. In addition, we used $4.1 million for capital improvements, of which $1.7 million was attributable to our initial renovation of properties, which includes properties purchased in a portfolio purchase that were renovated for the first time, and $2.4 million was attributable to capital improvements to properties that had been previously renovated.

35

 
The acquisition of properties involves payments beyond the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, and real estate 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 unless the property was purchased with an existing lease. 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.

Financing Activities

Our net cash related to financing activities is generally affected by any borrowings and capital activities net of any dividends and distributions paid to our common stockholders and holders of non-controlling interests. Net cash used in financing activities in the three months ended March 31, 2017 was $15.6 million and was attributable to payments on our outstanding debt of $9.2 million, dividends paid of $4.9 million, and $1.0 million in deferred financing costs paid related to the February 2017 term credit facility amendment.

Net cash used in financing activities in the three months ended March 31, 2016 was $8.4 million and was attributable to the repurchases and retirement of our common stock of $8.2 million, dividends paid of $5.0 million, and repayments on our revolving credit facility of $2.9 million, partially offset by a draw on the revolving credit facility of $7.7 million.

Payment Obligations

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 declared a preferred dividend in the three months ended March 31, 2017 (see Note 6 to the accompanying condensed consolidated financial statements for a summary of the preferred stock dividends).

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. On February 27, 2017, our board of directors declared $4.9 million in common stock dividends and common unit distributions, which were paid on April 14, 2017.

The 2,231,511 common units issued by the Operating Partnership in connection with the internalization of our former advisory manager may be redeemed for cash or, at our election, a number of our common shares on a one-for-one basis. To the extent that we redeem the common units for cash, our liquidity will decrease. As of March 31, 2017, none of the common units had been redeemed.

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.

Non-GAAP Financial Performance Measures

In addition to our net loss which is presented in accordance with GAAP, we also present certain supplemental non-GAAP performance measures. These measures are not to be considered more relevant or accurate than the performance measures presented in accordance with GAAP. In compliance with applicable rules of the Securities and Exchange Commission ("SEC"), our non-GAAP measures are reconciled to net loss, the most directly comparable GAAP performance measure. As with other non-GAAP performance measures, neither the SEC nor any other regulatory body has passed judgment on these non-GAAP performance measures.


36

Net Operating Income and Same-Home Net Operating Income

We define net operating income ("NOI") as total revenue less property operating and maintenance, real estate taxes, homeowners’ association fees, and property management expenses. NOI excludes depreciation and amortization, general and administrative expenses, share-based compensation, severance and other, transaction expenses, interest expense, impairment of real estate, net gain on disposition of real estate, adjustments for derivative instruments, net, income tax expense, net and other non-comparable items as applicable. 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 without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon accounting methods, book value of assets, capital structure and the method by which assets were acquired, among other factors.

We believe Same-Home NOI is a useful measure of performance because the population of properties in this analysis is consistent from period to period, thereby eliminating the effects of changes in the composition of the portfolio.

The following is a reconciliation of our NOI and Same-Home NOI to net loss as determined in accordance with GAAP for the three months ended March 31, 2017 and 2016 (amounts in thousands):
        
 
Three Months Ended March 31,
 
2017
 
2016
Net loss
$
(1,852
)
 
$
(3,589
)
Depreciation and amortization
9,279

 
9,366

General and administrative
3,649

 
3,853

Share-based compensation
838

 
572

Severance and other
—

 
1,667

Transaction expenses
2,210

 
—

Interest expense
6,991

 
6,212

Impairment of real estate
72

 
59

Net gain on disposition of real estate
(2,885
)
 
(1,285
)
Adjustments for derivative instruments, net
165

 
—

Other expense
459

 
271

Income tax expense, net
279

 
467

NOI
19,205

 
17,593

Less non-Same-Home
 
 
 
Total revenue
(6,835
)
 
(6,661
)
Property operating expenses
2,564

 
2,665

Same-Home NOI
$
14,934

 
$
13,597


Neither NOI nor Same-Home NOI should 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. Although we use these non-GAAP measures for comparability in assessing our performance against other REITs, not all REITs compute these non-GAAP measures in the same manner. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs.

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

37

are calculated on the same basis to determine FFO. In addition, we have adjusted net loss for the income tax expense on disposition of real estate.

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 share-based compensation, severance and other, transaction expenses and adjustments for derivative instruments, net, and certain other non-cash or 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 these non-GAAP measures in the same manner. 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 incurred in connection with real estate operations 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 impacts 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 excluded from the calculation of 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.    


38

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, 2017 and 2016. Also presented is information regarding the weighted-average number of shares of our common stock and common units of the Operating Partnership outstanding and the effect of dilutive securities attributable to certain performance-based stock awards 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,
 
2017
 
2016
Net loss
$
(1,852
)
 
$
(3,589
)
Depreciation and amortization
9,279

 
9,366

Net gain on disposition of real estate
(2,885
)
 
(1,285
)
Impairment on real estate
72

 
59

Income tax expense on disposition of real estate
185

 
350

FFO
4,799

 
4,901

 
 
 
 
Adjustments:
 
 
 
Share-based compensation
838

 
572

Severance and other
—

 
1,667

Transaction expenses
2,210

 
—

Adjustments for derivative instruments, net
165

 
—

Amortization of discount on securitization loan
75

 
75

Core FFO
$
8,087

 
$
7,215

 
 
 
 
FFO
$
4,799

 
$
4,901

Preferred stock distributions
(25
)
 
(25
)
FFO available to common shares and units
$
4,774

 
$
4,876

 
 
 
 
Core FFO
$
8,087

 
$
7,215

Preferred stock distributions
(25
)
 
(25
)
Core FFO available to common shares and units
$
8,062

 
$
7,190

 
 
 
 
Weighted average common shares and units outstanding (1)(2)
38,101,450

 
38,254,464

FFO per share
$
0.13

 
$
0.13

Core FFO per share
$
0.21

 
$
0.19


(1)
Represents the weighted average of common shares and common units in the Operating Partnership outstanding for the periods presented.
(2)
Includes the effect of dilutive securities attributable to certain stock based awards meeting market conditions during the three months ended March 31, 2017.


39

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 Credit Facility have variable rates of interest. We are therefore most vulnerable to changes in short-term LIBOR interest rates, which may result from many factors, including government monetary and tax policies, domestic and international economic and political considerations, and other factors that are beyond our control. To mitigate this risk, we use derivative financial instruments such as interest rate swaps and interest rate caps in an effort to reduce the variability of earnings caused by changes in the interest rates we pay on our debt. We do not use derivatives for trading and speculative purposes.

There have been no material changes in our interest rate market risk during the three months ended March 31, 2017. 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, 2016.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal 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, 2017. Based on such evaluation, our principal executive officer and principal 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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

40

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. 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. The complaints seek declaratory and injunctive relief, including enjoining or rescinding the transaction and rescissory damages to the extent already implemented, an order directing the dissemination of a proxy statement that is not false or misleading, and an award of attorneys’ and experts’ fees.

In connection with the Merger, two purported class action complaints have been filed on behalf of stockholders of the Company. On April 5, 2017, a putative class action lawsuit captioned Scarantino v. Silver Bay Realty Trust Corp. et al., 0:17-cv-01066-PAM-TNL (the "Scarantino Action"), was filed in the United States District Court for the District of Minnesota against Silver Bay Realty Trust Corp., the Operating Partnership, and the General Partner (the “Company Parties”), members of the Company’s board of directors and the Parent Parties. On April 7, 2017, a putative class action lawsuit captioned Dell’Osso v. Silver Bay Realty Trust Corp. et al., 1:17-cv-00969-JKB (the "Dell'Osso Action") was filed in the United States District Court for the District of Maryland against the Company Parties and members of the Company’s board of directors. The lawsuits allege, among other matters, that the Company’s definitive proxy statement relating to the Merger contained certain material omissions.

On April 12, 2017, the plaintiff in the Dell’Osso Action filed a motion for preliminary injunction that sought to enjoin the shareholder vote on the Merger scheduled for May 5, 2017 unless certain additional disclosures relating to the Merger. On April 21, 2017, the plaintiffs in both Actions agreed to withdraw any pending motions for preliminary injunction, and to dismiss their individual claims as moot, in return for the Company’s agreement to make certain the supplemental disclosures. On April 24, 2017, the Company filed a Current Report on Form 8-K with the SEC making certain supplemental disclosures to the definitive proxy statement related to the Merger. That same day, the plaintiff in the Dell’Osso Action filed a notice of withdrawal of his motion for preliminary injunction. The plaintiffs in both Actions may seek an award of attorneys’ fees in connection with the lawsuits, and the parties have reserved all rights and arguments in connection with any such claim.

Item 1A.  Risk Factors

There have been no material changes to the risk factors disclosed in Part I, Item 1A. "Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. In addition to the other information set forth in this Quarterly Report, you should carefully consider those risk factors which could materially affect our business, financial condition and results of operations.

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

Unregistered Sales of Equity Securities
    
None.

Use of Proceeds from Registered Securities

None.












41

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period
 
Total Number 
of Shares
Purchased (1)
 
Average Price
Paid Per Share
 
Total Number of Shares 
Purchased as Part of 
Publicly Announced Plans 
or Programs
 
Maximum Number of
Shares That May Yet be
Purchased Under the Plans or Programs
January 1, 2017-January 31, 2017
 
—

 
$
—

 
—

 
790,474

February 1, 2017-February 28, 2017
 
28,310

 
17.86

 
—

 
790,474

March 1, 2017-March 31, 2017
 
222

 
21.47

 
—

 
790,474

Total
 
28,532

 
$
17.89

 
—

 
790,474


(1)
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

None.


42

Item 6.  Exhibits

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

43

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 8, 2017
By:
/s/ Thomas W. Brock
 
 
Thomas W. Brock
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: May 8, 2017
By:
/s/ Julie M. Ellis
 
 
Julie M. Ellis
Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)

44

EXHIBIT INDEX

Exhibit Number
 
 
 
Incorporated by Reference
 
Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
2.1
 
Agreement and Plan of Merger, dated as of February 27, 2017, by and among Tricon Capital Group Inc., TAH Acquisition Holdings LLC, TAH Acquisition LP, Silver Bay Realty Trust Corp., Silver Bay Management LLC and Silver Bay Operating Partnership L.P.
 
8-K
 
001-35760
 
2.1
 
February 27, 2017
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.
 
10-K
 
001-35760
 
3.2
 
February 25, 2016
3.3
 
Articles Supplementary for Cumulative Redeemable Preferred Stock of Silver Bay Realty 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
 
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
 
Second Amendment dated as of February 22, 2017 to the Amended and Restated Revolving Credit Agreement dated as of February 18, 2015


 
10-K
 
001-35760
 
10.1
 
February 27, 2017
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
32.1
 
Certification of Principal 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 Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
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
 
 

45

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