Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Special Note Regarding Forward-Looking Statements” included in this report. In addition, our actual results could differ materially from those projected in such forward-looking statements as a result of the factors discussed under “Special Note Regarding Forward-Looking Statements” as well as the risk factors described in Item 1A, “Risk Factors,” of this 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
December 31, 2016
, we owned
9,044
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 consolidated balance sheets.
We are the continuation of the operations of Silver Bay Property Investment LLC (the "Predecessor"). At the time of its formation, the Predecessor was a wholly owned subsidiary of Two Harbors Investment Corp. ("Two Harbors"). The Predecessor began formal operations in February 2012, when it started acquiring single-family residential rental properties. In our current form, we were created on December 19, 2012, through a series of formation transactions (the "Formation Transactions"), which included an initial public offering (the "Offering"), the contribution of equity interests in the Predecessor by Two Harbors, and the acquisition of entities (the "Provident Entities") managed by Provident Real Estate Advisors LLC ("Provident").
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 ("TRSs") 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
December 31, 2016
, 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.
Through September 30, 2014, we were externally managed by PRCM Real Estate Advisers LLC (our "Former Manager"). During this time, we relied on our Former Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business as we had no employees of our own. On September 30, 2014, we closed a transaction to internalize our management (the "Internalization") and now own all material assets and intellectual property rights of our Former Manager previously used in the conduct of its business. In connection with the Internalization, the officers and employees who worked for our Former Manager became our employees.
Recent Developments
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”). Under 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 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, 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 completion 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 Company anticipates the Merger and Partnership Merger will close in the second quarter of 2017. For additional information regarding the Merger, Partnership Merger, or the Merger Agreement, see the Company’s Current Report on Form 8-K filed on February 27, 2017 and additional future filings and disclosures it will make with respect to the transaction.
Any discussion of future trends or business plans of the Company in this Item 7 ignores any impact of the Merger, the Partnership Merger, or the Merger Agreement.
Management Internalization Transaction
On September 30, 2014, we closed the Internalization after receiving the required stockholder approval for the transaction. The Internalization was completed under the terms of a contribution agreement (the “Contribution Agreement”) among Silver Bay, Pine River Domestic Management L.P. ("Pine River"), Provident, our Former Manager, and the Operating Partnership, pursuant to which we acquired our Former Manager in exchange for 2,231,511 common units of the Operating Partnership. These common units are redeemable for cash or, at our election, a number of our common shares on a one-for-one basis. We incurred $39.4 million of expenses during 2014 in connection with the Internalization. These costs primarily relate to the issuance of common units at $36.2 million, and to a lesser extent, certain transaction fees and expenses and the assumption of certain liabilities in connection with the transaction.
Prior to the Internalization, our Former Manager received management fees and expense reimbursement under the advisory management agreement and property management and acquisition services agreement. As a result of this transaction, as of September 30, 2014, we no longer pay fees or expense reimbursements to our Former Manager or our Former Manager's operating subsidiary.
Acquisition of The American Home Real Estate Investment Trust, Inc. Portfolio
During 2015, we acquired a portfolio of
2,461
properties (the "Acquired Properties") from The American Home Real Estate Investment Trust, Inc. ("TAH"). The acquisition was substantially completed on April 1, 2015 with an aggregate purchase price of $263.0 million (the "Portfolio Acquisition"). The Portfolio Acquisition was financed using proceeds obtained under our revolving credit facility, which was amended and restated on February 18, 2015 to increase the borrowing capacity to $400.0 million from $200.0 million. The properties acquired in the Portfolio Acquisition were primarily located in Atlanta, Charlotte, Tampa and Orlando.
Property Portfolio
Our investments in real estate consist of single-family properties located in select markets. As of
December 31, 2016
, we owned
9,044
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
(3)
(in years)
|
|
Average Square
Footage
|
Atlanta
|
|
2,949
|
|
|
$
|
351,910
|
|
|
$
|
119,332
|
|
|
22.8
|
|
|
1,809
|
|
Phoenix
|
|
1,422
|
|
|
203,764
|
|
|
143,294
|
|
|
28.2
|
|
|
1,635
|
|
Tampa
|
|
1,136
|
|
|
164,859
|
|
|
145,122
|
|
|
28.5
|
|
|
1,622
|
|
Charlotte
(4)
|
|
689
|
|
|
86,223
|
|
|
125,142
|
|
|
16.6
|
|
|
1,644
|
|
Orlando
|
|
522
|
|
|
71,283
|
|
|
136,557
|
|
|
28.8
|
|
|
1,501
|
|
Dallas
|
|
511
|
|
|
69,092
|
|
|
135,209
|
|
|
25.1
|
|
|
1,619
|
|
Jacksonville
|
|
451
|
|
|
59,680
|
|
|
132,328
|
|
|
28.4
|
|
|
1,536
|
|
Northern CA
(5)
|
|
381
|
|
|
73,112
|
|
|
191,895
|
|
|
48.3
|
|
|
1,398
|
|
Las Vegas
|
|
290
|
|
|
41,409
|
|
|
142,790
|
|
|
20.7
|
|
|
1,717
|
|
Columbus
|
|
284
|
|
|
33,381
|
|
|
117,539
|
|
|
39.6
|
|
|
1,414
|
|
Tucson
|
|
209
|
|
|
17,685
|
|
|
84,617
|
|
|
44.0
|
|
|
1,330
|
|
Southeast FL
(6)
|
|
200
|
|
|
37,425
|
|
|
187,125
|
|
|
50.0
|
|
|
1,349
|
|
Totals
|
|
9,044
|
|
|
$
|
1,209,823
|
|
|
$
|
133,771
|
|
|
27.3
|
|
|
1,650
|
|
|
|
(1)
|
Properties reflected in this table exclude properties recorded as assets held for sale on our 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
December 31, 2016
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
$21.6 million
in capital improvements, incurred from our formation through
December 31, 2016
, made to properties that had been previously renovated, but does not include accumulated depreciation.
|
|
|
(3)
|
As of
December 31, 2016
, 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 its 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 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 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
The following is a summary of our acquisition and disposition activity by quarter for the year ended December 31,
2016
:
|
|
|
|
|
|
|
|
Quarter Ended,
|
|
Acquired properties
(1)
|
|
Disposed properties
|
March 31, 2016
|
|
—
|
|
|
53
|
|
June 30, 2016
|
|
—
|
|
|
62
|
|
September 30, 2016
|
|
14
|
|
|
66
|
|
December 31, 2016
|
|
329
|
|
|
134
|
|
Total
|
|
343
|
|
|
315
|
|
|
|
(1)
|
Our acquisitions in
2016
were sourced through portfolio transactions.
|
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 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 we may sell properties when we view market conditions as favorable given other potential uses of capital. As of
December 31, 2016
, we had
104
properties reflected as assets held for sale on our balance sheet. As of
December 31, 2016
, we had
30
properties under contract to sell with an aggregate contractual sales price of
$6.1 million
. There are no assurances we will close on the sales of these properties.
During the years ended
December 31, 2016
,
2015
and
2014
, we sold
315
,
230
and
60
properties, respectively, for total gross proceeds of
$58.1 million
,
$29.2 million
and
$6.0 million
, respectively, for a net gain on disposition of real estate of
$10.7 million
,
$4.0 million
and
$0.2 million
, respectively. The 2016 dispositions of real estate were primarily located in our Southeast Florida and Southern California markets. The 2015 dispositions of real estate were primarily located in our Houston, TX and Southern California markets.
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 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
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Number of
Properties
|
|
Properties
Occupied
|
|
Properties Vacant
|
|
Aggregate
Portfolio
Occupancy
Rate
|
|
Average
Monthly
Rent
(1)
|
|
Average Remaining Lease Term (Months)
(2)
|
Atlanta
|
|
2,949
|
|
|
2,846
|
|
|
103
|
|
|
96.5
|
%
|
|
$
|
1,119
|
|
|
7.6
|
|
Phoenix
|
|
1,422
|
|
|
1,390
|
|
|
32
|
|
|
97.7
|
%
|
|
1,143
|
|
|
7.8
|
|
Tampa
|
|
1,136
|
|
|
1,089
|
|
|
47
|
|
|
95.9
|
%
|
|
1,347
|
|
|
7.8
|
|
Charlotte
|
|
689
|
|
|
667
|
|
|
22
|
|
|
96.8
|
%
|
|
1,113
|
|
|
7.2
|
|
Orlando
|
|
522
|
|
|
500
|
|
|
22
|
|
|
95.8
|
%
|
|
1,220
|
|
|
7.3
|
|
Dallas
|
|
511
|
|
|
494
|
|
|
17
|
|
|
96.7
|
%
|
|
1,336
|
|
|
8.8
|
|
Jacksonville
|
|
451
|
|
|
437
|
|
|
14
|
|
|
96.9
|
%
|
|
1,175
|
|
|
8.1
|
|
Northern CA
|
|
381
|
|
|
373
|
|
|
8
|
|
|
97.9
|
%
|
|
1,734
|
|
|
7.9
|
|
Las Vegas
|
|
290
|
|
|
288
|
|
|
2
|
|
|
99.3
|
%
|
|
1,229
|
|
|
7.1
|
|
Columbus
|
|
284
|
|
|
278
|
|
|
6
|
|
|
97.9
|
%
|
|
1,099
|
|
|
8.3
|
|
Tucson
|
|
209
|
|
|
203
|
|
|
6
|
|
|
97.1
|
%
|
|
855
|
|
|
4.2
|
|
Southeast FL
|
|
200
|
|
|
184
|
|
|
16
|
|
|
92.0
|
%
|
|
1,606
|
|
|
5.3
|
|
Totals
|
|
9,044
|
|
|
8,749
|
|
|
295
|
|
|
96.7
|
%
|
|
$
|
1,205
|
|
|
7.6
|
|
|
|
(1)
|
Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of
December 31, 2016
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.
|
Aggregate portfolio occupancy increased to
96.7%
as of
December 31, 2016
as compared to
95.8%
as of
December 31, 2015
.
During the three months ended
December 31, 2016
,
594
properties turned over compared to
596
during the three months ended
December 31, 2015
. This turnover number includes move-outs, evictions and lease breaks on our stabilized portfolio. Quarterly turnover for the three months ended
December 31, 2016
was
6.6%
. 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
December 31, 2016
was
1,948
, including properties with month-to-month occupancy in the period. Of these properties,
407
properties turned over, resulting in a retention rate of
79.1%
compared to a retention rate of
80.3%
during the three months ended
December 31, 2015
.
The following is a summary of our turnover percentage by quarter for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
Quarter
|
|
Turnover
(1)
|
|
|
2016
|
|
2015
|
First
|
|
7.2
|
%
|
|
5.8
|
%
|
Second
|
|
7.6
|
%
|
|
7.0
|
%
|
Third
|
|
8.1
|
%
|
|
8.2
|
%
|
Fourth
|
|
6.6
|
%
|
|
6.6
|
%
|
Total
|
|
29.5
|
%
|
|
27.6
|
%
|
|
|
(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.
|
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,
2015
and (2) that we held in operations throughout the full
periods presented in both
2015
and
2016
. 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
December 31, 2016
, we had
5,780
properties included in Same-Home properties in the following markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Occupancy Rate
|
|
Average Monthly Rent
(1)
|
|
Number of Same-Home Properties
|
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2016
|
|
December 31, 2015
|
Atlanta
|
1,050
|
|
|
96.4
|
%
|
|
95.9
|
%
|
|
$
|
1,243
|
|
|
$
|
1,192
|
|
Phoenix
|
1,422
|
|
|
97.7
|
%
|
|
94.6
|
%
|
|
1,143
|
|
|
1,101
|
|
Tampa
|
920
|
|
|
95.4
|
%
|
|
95.1
|
%
|
|
1,378
|
|
|
1,326
|
|
Charlotte
|
143
|
|
|
95.8
|
%
|
|
97.9
|
%
|
|
1,249
|
|
|
1,194
|
|
Orlando
|
280
|
|
|
96.4
|
%
|
|
97.5
|
%
|
|
1,322
|
|
|
1,265
|
|
Dallas
|
378
|
|
|
96.6
|
%
|
|
95.2
|
%
|
|
1,343
|
|
|
1,309
|
|
Jacksonville
|
301
|
|
|
96.3
|
%
|
|
95.7
|
%
|
|
1,160
|
|
|
1,119
|
|
Northern CA
|
381
|
|
|
97.9
|
%
|
|
97.4
|
%
|
|
1,734
|
|
|
1,610
|
|
Las Vegas
|
290
|
|
|
99.3
|
%
|
|
98.3
|
%
|
|
1,229
|
|
|
1,189
|
|
Columbus
|
284
|
|
|
97.9
|
%
|
|
97.2
|
%
|
|
1,099
|
|
|
1,072
|
|
Tucson
|
209
|
|
|
97.1
|
%
|
|
95.7
|
%
|
|
855
|
|
|
844
|
|
Southeast FL
|
122
|
|
|
88.5
|
%
|
|
90.2
|
%
|
|
1,634
|
|
|
1,589
|
|
Totals
|
5,780
|
|
|
96.7
|
%
|
|
95.7
|
%
|
|
$
|
1,264
|
|
|
$
|
1,216
|
|
(1) Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of
December 31, 2016
and
2015
, respectively, and reflects rent concessions amortized over the life of the related lease.
Results of Operations
The following are our results of operations for the years ended
December 31, 2016
,
2015
, and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(amounts in thousands except per share data)
|
|
2016
|
% of Revenue
|
|
2015
|
% of Revenue
|
|
2014
|
% of Revenue
|
Consolidated Income Statement Data
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
126,635
|
|
100.0
|
%
|
|
$
|
113,694
|
|
100.0
|
%
|
|
$
|
77,930
|
|
100.0
|
%
|
Property operating expenses:
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
23,393
|
|
18.5
|
%
|
|
22,106
|
|
19.4
|
%
|
|
17,274
|
|
22.2
|
%
|
Real estate taxes
|
|
17,681
|
|
14.0
|
%
|
|
15,847
|
|
13.9
|
%
|
|
11,042
|
|
14.2
|
%
|
Homeowners’ association fees
|
|
1,665
|
|
1.3
|
%
|
|
1,912
|
|
1.7
|
%
|
|
1,260
|
|
1.6
|
%
|
Property management
|
|
10,895
|
|
8.6
|
%
|
|
11,093
|
|
9.8
|
%
|
|
9,401
|
|
12.1
|
%
|
Total property operating expenses
|
|
$
|
53,634
|
|
42.4
|
%
|
|
$
|
50,958
|
|
44.8
|
%
|
|
$
|
38,977
|
|
50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss before other income (expense), income taxes and non-controlling interests
|
|
$
|
(11,135
|
)
|
|
|
$
|
(14,415
|
)
|
|
|
$
|
(56,207
|
)
|
|
Net loss
|
|
$
|
(2,614
|
)
|
|
|
$
|
(9,952
|
)
|
|
|
$
|
(56,697
|
)
|
|
Net loss attributable to common stockholders
|
|
$
|
(2,563
|
)
|
|
|
$
|
(9,475
|
)
|
|
|
$
|
(56,654
|
)
|
|
Net loss attributable to common shares - basic and diluted
|
|
$
|
(0.07
|
)
|
|
|
$
|
(0.26
|
)
|
|
|
$
|
(1.49
|
)
|
|
Net operating income
(1)
|
|
$
|
73,001
|
|
|
|
|
$
|
62,905
|
|
|
|
|
$
|
39,709
|
|
|
|
(1) Net operating income ("NOI") is a non-GAAP financial measure we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance as a REIT. A reconciliation of NOI to net loss prepared in accordance with GAAP is found in this Item 7 under the heading "
Non-GAAP Financial Performance Measures
".
The following are the results of operations for our Same-Home portfolio for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(amounts in thousands)
|
|
2016
|
% of Revenue
|
|
2015
|
% of Revenue
|
Same-Home Properties Income Statement Data
|
|
|
|
|
|
|
Same-Home total revenue
|
|
$
|
85,162
|
|
100.0
|
%
|
|
$
|
80,652
|
|
100.0
|
%
|
Same-Home property operating expenses:
|
|
|
|
|
|
|
Property operating and maintenance
|
|
16,399
|
|
19.3
|
%
|
|
16,249
|
|
20.1
|
%
|
Real estate taxes
|
|
11,846
|
|
13.9
|
%
|
|
11,079
|
|
13.7
|
%
|
Homeowners' association fees
|
|
1,263
|
|
1.5
|
%
|
|
1,516
|
|
1.9
|
%
|
Property management
|
|
7,253
|
|
8.5
|
%
|
|
7,785
|
|
9.7
|
%
|
Same-Home property operating expenses
|
|
36,761
|
|
43.2
|
%
|
|
36,629
|
|
45.4
|
%
|
Same-Home net operating income
(1)
|
|
$
|
48,401
|
|
|
|
|
$
|
44,023
|
|
|
|
(1) Same-Home net operating income ("Same-Home NOI") is a non-GAAP financial measure we believe, when considered with the financial statements determined in accordance with GAAP, is helpful to investors in understanding our performance as a REIT. 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. See "Same-Home Properties" section above for information as to how we define our Same-Home property portfolio. A reconciliation of Same-Home NOI to net loss prepared in accordance with GAAP is found in this Item 7 under the heading "
Non-GAAP Financial Performance Measures
".
Comparison of the Year Ended December 31, 2016 and the Year Ended December 31, 2015
Revenue
We earn revenue primarily from rents collected from residents under lease agreements for our single-family properties. These include short-term leases that we enter into directly with our residents, which generally have a term of one year. The most important drivers of revenue (aside from portfolio growth) are rental and occupancy rates. Our revenue may be affected by macroeconomic, local and property level factors, including market conditions, seasonality, resident defaults or vacancies, timing of renovation activities and occupancy of properties and timing to re-lease vacant properties.
Total revenue increased
$12.9 million
, or
11.4%
, in
2016
over the prior year. We owned
8,749
leased properties as of
December 31, 2016
as compared to
8,645
as of
December 31, 2015
with aggregate occupancy rates of
96.7%
and
95.8%
, respectively. We achieved an average monthly rent for leased properties in our portfolio of
$1,205
as of
December 31, 2016
as compared to
$1,167
as of
December 31, 2015
. 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 year ended
December 31, 2016
over the prior year was primarily due to an increase in the number of occupied homes during the period driven by consummation of the Portfolio Acquisition on April 1, 2015 and to a lesser extent increases in our rental rates and occupancy rate.
Total revenue from Same-Home properties increased
$4.5 million
, or
5.6%
, in the year ended
December 31, 2016
, compared to the prior year. This increase was due primarily to the increases in average monthly rent and aggregate occupancy. Average monthly rent for occupied properties in our Same-Home portfolio increased to
$1,264
as of
December 31, 2016
compared to
$1,216
as of
December 31, 2015
. The average rent for the Same-Home portfolio is higher than our aggregate portfolio due to property mix as a result of the Portfolio Acquisition. Same-Home occupancy increased to
96.7%
as of
December 31, 2016
compared to
95.7%
as of
December 31, 2015
.
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
December 31, 2016
, 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 increased
$2.7 million
, or
5.3%
in the year ended
December 31, 2016
over the prior year primarily as a result of the significant increase in the number of properties owned and in-service during the year ended
December 31, 2016
due to the Portfolio Acquisition and the resulting increases in expenses for turnover, repairs and maintenance and real estate taxes. Property management decreased in the year ended
December 31, 2016
over the prior year due to efficiencies realized from cost saving measures. As a percentage of revenue, property operating expenses decreased
2.5
percentage points in the year ended
December 31, 2016
over the prior year primarily due to revenue growth as well as efficiencies of scale reflected in our property management expense calculated as a percentage of revenue.
Property operating expenses for the Same-Home properties increased
$0.1 million
, or
0.4%
during the year ended
December 31, 2016
primarily as a result of an increase in real estate taxes partially offset by a decrease in property management due to efficiencies realized from cost savings measures. As a percentage of total revenue, property operating expenses for the Same-Home properties decreased to
43.2%
for the year ended
December 31, 2016
from
45.4%
for the year ended
December 31, 2015
.
Depreciation and Amortization
. Depreciation and amortization includes depreciation on real estate assets placed in-service and amortization of deferred lease fees and in-place leases. Depreciation and amortization increased
$2.1 million
, or
6.0%
, in
2016
compared to the prior year, primarily as a result of the significant increase in the number of properties owned and in-service in
2016
compared to
2015
primarily due to the consummation of the Portfolio Acquisition on April 1, 2015.
Portfolio Acquisition Expense.
Portfolio acquisition expense represents transaction costs incurred when acquiring
properties that meet the definition of a business under the guidance codified in Codification Topic,
Business Combinations
("ASC 805"), which must be expensed when incurred rather than capitalized into the basis of each property.
We incurred
$0.5 million
in portfolio acquisition expense in the year ended
December 31, 2016
as compared to
$2.1 million
during the year ended
December 31, 2015
. We purchased
343
properties during the year ended
December 31, 2016
as compared to the
2,461
properties acquired in the Portfolio Acquisition during
2015
. We anticipate this expense to fluctuate from year to year as our preference toward portfolio acquisitions is inherently less predictable than other forms of acquisitions.
General and Administrative
. General and administrative includes those costs related to being a public company and other expenses associated with our corporate and administrative functions. General and administrative expense decreased
$1.5 million
in
2016
compared to the prior year primarily due to expense management.
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 which are described in Note 6 of the consolidated financial statements included with this Annual Report on Form 10-K.
Severance and other.
Severance and other consists primarily of executive severance and related costs for certain
employees that have departed.
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, net of certain amounts capitalized for properties undergoing renovation activities, interest expense associated with the interest rate swap transactions and interest rate cap accretion. The following table presents total interest expense for the years ended
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
Gross interest expense
(1)
|
|
$
|
20,604
|
|
|
$
|
16,634
|
|
Amortization of discount on Securitization Loan
|
|
301
|
|
|
301
|
|
Amortization and write-off of deferred financing costs
(2)
|
|
4,597
|
|
|
4,494
|
|
Other interest
(3)
|
|
611
|
|
|
157
|
|
Capitalized interest
(4)
|
|
—
|
|
|
(311
|
)
|
Total interest expense
|
|
$
|
26,113
|
|
|
$
|
21,275
|
|
(1) Includes the Securitization Loan's monthly servicing fees.
(2) For 2015, excludes deferred financing fees written-off in conjunction with the paydown of the Securitization Loan related to the sale of the Houston portfolio (see Note 5 of the consolidated financial statements included with this Annual Report on Form 10-K).
(3) Includes monitoring service fees and interest related to our designated derivative financial instruments (see Note 11 of the consolidated financial statements included with this Annual Report on Form 10-K).
(4) We capitalized interest for properties undergoing renovation activities and purchased subsequent to obtaining debt in May 2013.
Interest expense increased
$4.8 million
during the year ended
December 31, 2016
as compared to the prior year primarily attributed to a higher average outstanding balance of debt in the revolving credit facility related to financing the Portfolio Acquisition in April 2015, as well as other acquisitions purchased during 2016, in addition to higher average interest rates and an increase in losses reclassified from accumulated other comprehensive income (loss) into earnings associated with our designated interest rate cap agreements.
Impairment of Real Estate.
We evaluate long-lived assets for indicators of impairment periodically or whenever events or changes in circumstances indicate that an asset's carrying amount may not be recoverable. Upon identification as held for sale, a property is subject to an impairment test and an impairment is immediately recognized when the fair market value, less costs to sell, is less than the carrying amount of the asset. For the years ended
December 31, 2016
and
2015
, we recognized impairment charges of
$1.1 million
and
$0.1 million
, respectively, due to mix of properties identified for sale, predominantly in the Southeast Florida market.
Total Other Income (Expense).
Total other income (expense) consists of activities related to our sales of investments in real estate as well as adjustments for derivative financial instruments, net. Total other income was
$9.5 million
and
$3.7 million
for the years ended
December 31, 2016
and
2015
, respectively. The increase in other income is primarily due to the net gain on disposition of real estate related to our Southeast Florida and Southern California markets along with certain other properties.
Income Tax (Expense) Benefit, 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 and 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
$1.0 million
during the year ended
December 31, 2016
, which was primarily related to the income taxes on net gain on disposition of real estate in the TRS entities. We recognized a net income tax benefit of
$0.8 million
during the year ended
December 31, 2015
which was primarily related to the reversal of a net deferred tax asset valuation allowance in
2015
. Prior to 2015, our TRS had a history of losses and, as a result, had historically recognized a valuation allowance for net deferred tax assets. Each quarter, we evaluate the need to retain all or a portion of the valuation allowance on our net deferred tax assets. In the fourth quarter of 2015, we determined that it was more likely than not that the deferred tax assets, including any remaining net operating losses will be realized in certain TRS entities. In making this determination, we analyzed, among other things, our recent history of earnings, forecasts of future earnings from sales of depreciable property, and our cumulative earnings for the last year.
Comparison of the Year Ended December 31, 2015 and the Year Ended December 31, 2014
Revenue
Total revenue increased
$35.8 million
or
45.9%
during
2015
over the prior year. This increase was primarily related to the Portfolio Acquisition and our increased aggregate occupancy, which increased to
95.8%
as of
December 31, 2015
from 85.7% as of
December 31, 2014
. We owned
8,645
leased properties as of
December 31, 2015
as compared to 5,812 as of
December 31, 2014
. We achieved an average monthly rent for leased properties in our portfolio of
$1,167
as compared to $1,194 as of December 31, 2014, primarily as a result of changes to portfolio mix. Excluding the Portfolio Acquisition, our average monthly rent increased 3.1% over the prior year period due to increases achieved on renewal and re-lease offset minimally by changes to portfolio mix.
Expenses
Property Operating Expenses.
Property operating expenses increased
$12.0 million
or
30.7%
in
2015
over the prior year. The increase in property operating expenses was attributable to the significant increase in the
number of properties owned and in-service in
2015
as compared to
2014
and the resulting increases in resident turnover, repairs and maintenance, real estate taxes, homeowners' association fees and property management. Property operating expense as a percentage of revenue decreased to
44.8%
in
2015
from
50.0%
in
2014
. This decrease as a percentage of revenue is primarily attributable to an increase in revenue due to the Portfolio Acquisition as well as changes in our property management as a result of the Internalization.
Prior to the Internalization, rather than compensating our Former Manager’s operating subsidiary with commissions or fees based on rental income, we reimbursed all costs and expenses of our Former Manager’s operating subsidiary incurred on our behalf. In addition to these costs, we paid a property management fee to our Former Manager’s operating subsidiary equal to 5% of certain compensation and overhead costs incurred as a result of providing services to us, which reduced the advisory management fee paid to our Former Manager by the same amount. Following the Internalization, we incur all property management costs directly. Third-party property management arrangements include fees based on a percentage of rental income and other fees collected from our residents and, in some cases, fees for renovation oversight and leasing activities.
Depreciation and Amortization
. Depreciation and amortization increased
$9.6 million
, or
37.3%
, in
2015
compared to the prior year, primarily as a result of the significant increase in the number of properties owned and in-service in
2015
compared to
2014
.
Advisory Management Fee
. Prior to the Internalization, we relied on our Former Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business because we had no employees of our own. Under this previous arrangement, we paid our Former Manager a quarterly advisory management fee equal to 0.375% (a 1.5% annual rate) of our average fully diluted market capitalization during the preceding quarter, less the 5% property management fee paid to our Former Manager’s operating subsidiary. As a result of the Internalization, beginning in the fourth quarter of 2014, we ceased incurring the advisory management fee and, as described below, general and administrative expenses related to certain personnel expenses and certain other expenses previously borne by our Former Manager have increased. As a result, we incurred no advisory management fees in
2015
compared to
$6.6 million
in
2014
.
Management Internalization
. We did not incur any expenses during
2015
in connection with the Internalization as compared to
$39.4 million
during
2014
. These costs primarily related to the issuance of
2,231,511
common units of the Operating Partnership at
$36.2 million
, and to a lesser extent, certain transaction fees and expenses and the assumption of certain liabilities in connection with the transaction.
Portfolio Acquisition Expense
. We incurred
$2.1 million
of costs associated with the Portfolio Acquisition in the year ended December 31,
2015
. We had no such costs for 2014.
General and Administrative
. General and administrative include those costs related to being a public company, expense reimbursements under the advisory management agreement with our Former Manager through the date of Internalization on September 30, 2014, certain personnel costs we now incur directly following the Internalization and other expenses associated with our corporate and administrative functions. Under the advisory management agreement, we paid all costs and expenses of our Former Manager incurred in the operation of its business, other than the compensation of our Chief Executive Officer and personnel providing data analytics directly supporting the investment function. Beginning in the fourth quarter of 2014, general and administrative now includes these expenses previously borne by our Former Manager. General and
administrative now also includes certain personnel and operational costs classified as property management prior to Internalization. These changes primarily caused the year over year increase in general and administrative expense of
$5.6 million
.
Share-based Compensation.
Share-based compensation expense increased
$1.6 million
in
2015
compared to the prior year, due to awards made in February and May 2015, which are described in Note 6 of the consolidated financial statements included within this Annual Report on Form 10-K.
Interest Expense.
Interest expense included 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, and amortization of deferred financing fees, net of certain amounts capitalized for properties undergoing renovation activities. Interest expense increased
$9.7 million
, or
83.6%
, in
2015
compared to the prior year. The change is primarily attributable to a higher average outstanding balance of debt and amortization of additional financing fees incurred in the securitization transaction for the entire year of 2015 and the credit facility upsize.
Impairment of Real Estate.
For the years ended
December 31, 2015
and
2014
, we recognized impairment charges of
$0.1 million
and
$0.6 million
. The change is primarily due to the mix of properties identified as held for sale. The majority of the properties sold during
2015
were either from our Houston, TX or Southern California markets or those acquired in the Portfolio Acquisition.
Total Other Income (Expense)
. Total other income (expense) was
$3.7 million
and
$(0.5) million
for the years ended
December 31, 2015
and
2014
, respectively. The increase in other income is primarily related to the net gain on disposition of real estate related to the sale of our Houston portfolio along with certain other properties. In addition, during 2014 we recorded
$0.5 million
in adjustments for derivative instruments, net pertaining to ineffectiveness on the revolving credit facility interest rate cap agreements upon entering into the securitization transaction in 2014.
Income Tax (Expense) Benefit, Net
. We recognized an income tax benefit of
$0.8 million
during the year ended
December 31, 2015
. Prior to 2015, our TRS had a history of losses and, as a result, had historically recognized a valuation allowance for net deferred tax assets. Each quarter, we evaluate the need to retain all or a portion of the valuation allowance on our net deferred tax assets. In the fourth quarter of 2015, we determined that it was more likely than not that the deferred tax assets, including any remaining net operating losses will be realized in certain TRS entities. As such, we recorded a reversal of the net deferred tax asset valuation allowance in 2015. In making this determination, we analyzed, among other things, our recent history of earnings, forecasts of future earnings from sales of depreciable property, and our cumulative earnings for the last year.
Critical Accounting Policies
The preparation of financial statements in accordance with GAAP 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 statements. Our significant accounting policies are described below.
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.
Revenue Recognition
We lease our single-family properties under operating leases. The lease periods are generally short-term in nature (one or two years) and reflect market rental rates. Rental income, net of concessions and sales tax, is recognized on a straight-line basis over the term of the lease.
We periodically evaluate the collectability of our resident and other receivables and record an allowance for doubtful accounts for any estimated probable losses. This allowance is estimated based on payment history and probability of collection. We generally do not require collateral other than resident security deposits.
We recognize sales of real estate when the sale has closed, title has passed, adequate initial and continuing investment by the buyer is received, possession and other attributes of ownership have been transferred to the buyer, and we are not obligated to perform significant additional activities after closing. All these conditions are typically met at or shortly after closing.
Investments in Real Estate
Property acquisitions are evaluated to determine whether they meet the definition of a business combination or of an asset acquisition under GAAP. For asset acquisitions, we capitalize (1) pre-acquisition costs to the extent such costs would have been capitalized had we owned the asset when the cost was incurred, and (2) closing and other direct acquisition costs. We then allocate the total cost of the property including acquisition costs, between land and building based on their relative fair values, generally utilizing the relative allocation that was contained in the property tax assessment of the same or a similar property, adjusted as deemed necessary.
For acquisitions that do not qualify as an asset acquisition, we evaluate the acquisition to determine if it qualifies as a business combination. For acquired properties where we have determined that the property has a resident with an existing lease in place, we account for the acquisition as a business combination. For acquisitions that qualify as a business combination, we (1) expense the acquisition costs in the period in which the costs were incurred and (2) assign the cost of the property among land, building and in-place lease intangibles, if any, based on their fair value. The fair values of acquired in-place lease intangibles are typically less than one-year and are based on costs to execute similar leases including commissions and other related costs. The in-place lease intangible is amortized over the life of the remaining lease.
If, at acquisition, a property needs to be renovated before it is ready for its intended use, we commence the necessary stabilization and renovation activities. During this stabilization period, we capitalize all direct and indirect costs incurred in renovating the property. If we acquire a property with an existing lease, we capitalize the cost of the initial renovation of such property following lease expiration and resident move out.
Once a property is ready for its intended use, expenditures for ordinary maintenance and repairs thereafter are expensed to operations as incurred, and we capitalize expenditures that improve or extend the life of a home.
We begin depreciating properties to be held and used when they are ready for their intended use. We compute depreciation using the straight-line method over the estimated useful lives of the respective assets. We depreciate buildings and building improvements over 27.5 years, and we depreciate other land improvements over periods ranging from three to 15 years, with no salvage value. Land is not depreciated.
Properties are classified as assets held for sale when they meet the applicable GAAP criteria, including that the property is being listed for sale and that it is ready to be sold in its current condition. Held-for-sale properties are reported at the lower of their carrying amount or estimated fair value less costs to sell.
Impairment of Real Estate
We evaluate our long-lived assets for impairment periodically or whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Significant indicators of impairment may include declines in homes values, rental rate and occupancy and significant changes in the economy. If an impairment indicator exists, we compare the expected future undiscounted cash flows against the net carrying amount of a property. We make our assessment at the individual property level because it represents the lowest level of identifiable cash flows. We prepare our future undiscounted cash flow analysis using estimates based on current rental rates, renewals and occupancy and using inputs from our annual long-range planning process and historical performance.
When preparing these estimates, we consider each property’s historical results, current operating trends, current market conditions, anticipated future capital expenditures and remaining useful life. These estimates may be impacted by variable factors including inflation, expected rental rates, the general health of the economy and market competition. If the sum of the estimated undiscounted cash flows is less than the net carrying amount of the property, we record an impairment loss for the difference between the estimated fair value of the individual property and the carrying amount of the property at that date. To determine the estimated fair value, we consider both recent comparable homes sales and the use of discounted projected future cash flows. The rates used to discount projected future cash flows reflect a weighted average cost of capital that a market participant would incur.
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 we have determined to sell the asset. Long-lived assets held for sale and their related liabilities are separately reported, with the long-lived assets reported at the lower of their carrying amount or their estimated fair value, less their costs to sell. Assets held for sale are not depreciated nor are they included in our operating metrics at period end.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist primarily of trade payables, renovation and stabilization liabilities, real estate taxes and homeowners' association fees as of the end of the respective periods presented. We accrue for real estate taxes and homeowners' association fees based on amounts billed, and, in some circumstances, estimates and historical trends when bills or assessments are not available. If these estimates are not correct, the timing and amount of expenses recorded could be incorrect. Accounts payable and accrued expenses also consist of contingent loss accruals, if any, when they are both probable and estimable. When it is reasonably possible that a significant contingent loss has occurred, we disclose the nature of the potential loss and, if estimable, a range of exposure.
Income Taxes
We have elected to be taxed as a REIT under Section 856 to 860 of the Code which commenced with our taxable year ended December 31, 2012. We believe we have operated and intend to continue to operate in a manner that will allow us to satisfy requirements for qualification as a REIT. As long as we qualify as a REIT, we do not generally expect to pay U.S. federal corporate income taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state and local income taxes on REIT taxable income. Refer to Note 4 of the consolidated financial statements for further description of our income taxes.
Our financial results are generally not expected to reflect provisions for current or deferred income taxes, except for those taxable benefits or provisions recognized by our TRSs. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be realized. A valuation allowance is provided if we believe it is more likely than not that all or some portion of our deferred tax assets will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances, and that causes us to change judgment about the ability to realize the related deferred tax asset is included in the provision when such changes occur.
Derivative Instruments
We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our borrowings. We do not use these derivatives for speculative purposes, but instead they are used to manage our exposure to interest rate changes.
As required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815,
Derivatives and Hedging
, we record all derivatives in the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The
ineffective portion of the change in fair value is recorded directly in adjustments for derivative instruments, net in our consolidated statements of operations.
Recent Accounting Pronouncements
Under the Jumpstart Our Business Startups Act (the "JOBS Act"), we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We 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 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 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 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 consolidated financial statements as we have operating office lease arrangements for which we are the lessee. The new standard will be effective 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 the adoption will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The amendments in this ASU include multiple provisions intended to simplify various aspects of the accounting for share-based payments. The guidance will be effective for annual reporting periods beginning after December 15, 2016, and for interim reporting periods within those annual periods, with early adoption permitted. We do not anticipate the adoption of this ASU will have a material impact on our consolidated financial statements and we have adopted as of January 1, 2017.
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 flows. 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
December 31, 2016
consisted of cash of
$52.3 million
and escrow deposits of
$16.9 million
, including cash held in reserve at financial institutions as required by our debt agreements of
$14.8 million
.
We believe our cash flows from operations together with current cash will be sufficient to fund the anticipated needs of our operations, including the acquisition and renovation of certain properties 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 in the future, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms or at all.
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 consolidated financial statements.
During the years ended
December 31, 2016
and
2015
, we paid down
$1.5 million
and
$7.1 million
, respectively, on the Securitization Loan to effect the release of certain properties from the first priority mortgages securing the Securitization Loan, including certain properties sold in the Southeast Florida and the Houston, TX markets.
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
1.84%
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 year ended
December 31, 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
2,975
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, and cross-default with certain other indebtedness. We believe we were in compliance with all financial covenants under the Securitization Loan as of
December 31, 2016
.
We used proceeds of the Securitization Loan to pay down the full balance of our revolving credit facility at closing and the remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties and the repurchase of common stock. Simultaneously, we reduced the size of our revolving credit facility from $350.0 million to $200.0 million (which has subsequently been amended as discussed below). As a result, we wrote off $1.1 million of deferred financing fees and reclassified $0.5 million from accumulated other comprehensive income (loss) to adjustments for derivative instruments, net due to hedge ineffectiveness in the associated credit facility interest rate cap agreements during the third quarter of 2014.
Revolving Credit Facility
Certain of our subsidiaries have a revolving credit facility with a syndicate of banks. On February 18, 2015, we amended and restated the revolving credit facility to increase the borrowing capacity to $400.0 million from $200.0 million 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. Prior to the amendment, the revolving credit facility bore interest at a varying rate of LIBOR plus 3.5% subject to a LIBOR floor of 0.5%. We are also required to pay a monthly fee on the unused portion of the revolving credit facility at a rate of 0.5% per annum, when the balance outstanding is less than $200.0 million or 0.3% per annum when the balance outstanding is equal or greater than $200.0 million. As part of the amendment, the term on the revolving credit facility was extended to February 18, 2018 and the advance rate for borrowings was increased to 65% from 55%. The advance rate is based on the aggregate value of the eligible properties which value is calculated as the lesser of (a) the third-party broker price opinion value or (b) the original purchase price plus certain renovation and other capitalized costs of the properties. We used the revolving credit facility to fund the Portfolio Acquisition in 2015 and other acquisitions of properties in 2016. The remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties. At
December 31, 2016
, there was
$352.8 million
outstanding under the facility. The revolving period ended on February 18, 2017, and we are no longer able to draw additional amounts under the revolving credit facility.
All amounts outstanding under the revolving credit facility are collateralized by the equity interests and assets of certain of our subsidiaries ("Pledged Subsidiaries"), which exclude the owners of the Securitization Properties. The amounts outstanding under the revolving credit facility and certain obligations contained therein are guaranteed by Silver Bay Realty Trust Corp. and the Operating Partnership only in the case of certain bad acts (including bankruptcy) and up to $20.0 million for completion of certain property renovations, as outlined in the credit documents. As of
December 31, 2016
, there were approximately
5,840
properties pledged as collateral under the revolving credit facility, excluding properties recorded as held for sale.
The revolving credit facility does not contractually restrict our ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. For example, beginning on August 18, 2017, pursuant to a recent amendment, all net cash generated by the properties in the Pledged Subsidiaries (after paying associated property-level expenses) is directed towards principal repayment rather than being distributed to us. The revolving 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, as determined in accordance with our revolving credit facility. We believe we were in compliance with all financial covenants under the revolving credit facility as of
December 31, 2016
.
Derivative Financial Instruments
Our objective in using derivative instruments is to manage our exposure to interest rate movements impacting interest expense on our borrowings. 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 revolving credit facilities (see Note 5 and Note 11 to the accompanying consolidated financial statements for a detailed description of our hedging derivatives).
Operating Activities
Net cash provided by operating activities during
2016
was
$32.2 million
compared to net cash provided by operating activities of
$31.1 million
and
$8.7 million
during
2015
and
2014
, respectively. Our operating cash flows during
2016
were primarily due to our experiencing the increased cash flow from the Portfolio Acquisition for the full year ended
December 31, 2016
as compared to just nine months during the same period in
2015
. Our increase in operating cash flows during
2015
over
2014
were driven by an increase in our portfolio of cash-generating properties and a decrease in cash on deposit with certain third-party property managers as we internalized property management across our portfolio.
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 used in investing activities during
2016
of
$0.5 million
was primarily driven by the acquisition and disposition of properties. We used
$44.0 million
for property acquisitions and another
$14.5 million
on capital improvements, of which
$6.9 million
was attributable to our initial renovation of properties, which includes properties purchased in a bulk purchase that have been renovated for the first time, and
$7.6 million
was attributable to capital improvements made to properties that had been previously renovated. In addition, we received
$58.1 million
in proceeds from the sale of real estate, primarily due to the sale of properties in Southeast Florida and Southern California.
The average renovation cost per property was approximately
$26,200
or
23%
of the average purchase price for all properties placed in service since our Predecessor commenced operations through
December 31, 2016
, including properties acquired with an in-place lease but excluding (i) properties acquired from entities managed by Provident, (ii) properties acquired in the Portfolio Acquisition and (iii) properties purchased in 2016 through portfolio transactions. These renovation costs included capitalized expenditures for renovations, property 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.
Cash used in investing activities in
2015
was
$268.8 million
and was largely driven by the Portfolio Acquisition. We used
$273.3 million
for property acquisitions and another
$25.7 million
on capital improvements, of which
$17.5 million
was attributable to our initial renovation of properties, which includes properties purchased in a bulk purchase which have been renovated for the first time, and
$8.2 million
was attributable to capital improvements made to properties that had been previously renovated. In addition, we received
$29.2 million
in proceeds from the sale of real estate, primarily due to the sale of our Houston portfolio and certain other properties.
Cash used in investing activities in
2014
was
$166.9 million
and was primarily the result of us executing our acquisition and renovation strategies on newly acquired properties. In
2014
, we used
$136.0 million
for property acquisitions and
$37.8 million
on capital improvements, of which $32.2 million was attributable to our initial renovation of properties, which includes properties purchased in a bulk purchase which have been renovated for the first time, and $5.6 million was attributable to capital improvements made to properties that had been previously renovated.
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 property taxes or homeowners’ association dues in arrears, along with capitalized interest on properties purchased since we obtained debt in May 2013. Typically, these costs are capitalized as components of the purchase price of the acquired asset 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 non-controlling interests. Net cash used in financing activities during
2016
was
$8.5 million
and was attributable to payments on the revolving credit facility of
$21.5 million
, dividends paid of
$19.7 million
, repurchases and retirement of our common stock of
$11.8 million
and repayment of our Securitization Loan of
$1.5 million
, partially offset by draws on the revolving credit facility of
$47.8 million
, used mostly to fund the acquisition of properties. The repayments on both our revolving credit facility and our Securitization Loan were primarily to effect the release of certain properties which were sold.
Net cash provided by financing activities during
2015
was
$216.8 million
and was primarily attributable to a draw on the revolving credit facility of
$282.0 million
, used mostly to fund the Portfolio Acquisition, partially reduced by repayments of our revolving credit facility of
$22.6 million
, dividends paid of
$15.0 million
, repurchases and retirement of our common stock of
$12.4 million
, repayment of our Securitization Loan of
$7.1 million
and deferred financing costs of
$5.8 million
.
Cash provided by financing activities in
2014
was
$164.3 million
and was primarily attributable to the proceeds from the Securitization Loan of
$311.2 million
and
$137.8 million
in proceeds from our revolving credit facility, reduced by repayments on our revolving credit facility of
$235.5 million
, repurchases of our common stock of
$31.5 million
, deferred financing costs of
$12.3 million
and dividends paid of
$4.3 million
. We used the proceeds from our Securitization Transaction to pay down our revolving credit facility, repurchase common stock, invest in residential properties and for other general corporate purposes.
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
$0.1 million
in preferred dividends during
2016
.
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
December 20, 2016
, our board of directors declared
$4.6 million
in common stock dividends and
$0.3 million
in distributions on the common units, which were paid on
January 13, 2017
.
The 2,231,511 common units issued by the Operating Partnership in connection with the Internalization 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
December 31, 2016
, 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.
Aggregate Contractual Obligations
The following table summarizes the effect on our liquidity and cash flows from certain contractual obligations, as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
|
Less than One Year
|
|
One to Three Years
|
|
Three to Five Years
|
|
More Than Five Years
|
Purchase obligations
|
|
$
|
4,279
|
|
|
$
|
4,268
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term debt obligations
(1)
|
|
695,744
|
|
|
22,716
|
|
|
673,028
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
(2)
|
|
1,878
|
|
|
574
|
|
|
805
|
|
|
499
|
|
|
—
|
|
Total
|
|
$
|
701,901
|
|
|
$
|
27,558
|
|
|
$
|
673,844
|
|
|
$
|
499
|
|
|
$
|
—
|
|
|
|
(1)
|
Includes estimated interest payments on the respective debt and derivative agreements based on amounts outstanding as of
December 31, 2016
and rates in effect as of such date. The revolving credit facility has a maturity date of February 18, 2018. The Securitization Loan had an initial maturity date of September 9, 2016 and three, 12-month extension options, of which the first 12-month extension has been exercised, resulting in a fully extended maturity date of September 9, 2019; this analysis assumes our exercise of the three extension options, which is management's intent.
|
|
|
(2)
|
Includes operating leases for corporate and market offices.
|
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.
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, the former advisory management fees, management internalization, portfolio acquisition expense, general and administrative expenses, share-based compensation, severance and other, interest expense, impairment of real estate, net gain on disposition of real estate, adjustments for derivative instruments, net, income tax expense (benefit), net and other non-comparable items as applicable. Additionally, NOI excludes certain property management add backs, such as the former 5% property management fee payable prior to the Internalization because it more closely represents additional advisory management fee, expensed acquisition fees and costs, and certain other property management costs.
We consider NOI to be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the core performance of our real estate operations 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 years indicated (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
Net loss
|
|
$
|
(2,614
|
)
|
|
$
|
(9,952
|
)
|
|
$
|
(56,697
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
(5,521
|
)
|
Depreciation and amortization
|
|
37,291
|
|
|
35,189
|
|
|
25,623
|
|
|
20,235
|
|
|
2,106
|
|
Advisory management fee - affiliates
|
|
—
|
|
|
—
|
|
|
6,621
|
|
|
9,775
|
|
|
2,159
|
|
Management internalization
|
|
—
|
|
|
—
|
|
|
39,373
|
|
|
—
|
|
|
—
|
|
Portfolio acquisition expense
|
|
526
|
|
|
2,064
|
|
|
—
|
|
|
—
|
|
|
—
|
|
General and administrative
|
|
14,457
|
|
|
15,915
|
|
|
10,334
|
|
|
6,834
|
|
|
843
|
|
Share-based compensation
|
|
2,667
|
|
|
2,613
|
|
|
1,022
|
|
|
927
|
|
|
38
|
|
Severance and other
|
|
1,977
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest expense
|
|
26,113
|
|
|
21,275
|
|
|
11,586
|
|
|
2,911
|
|
|
—
|
|
Impairment of real estate
|
|
1,105
|
|
|
95
|
|
|
601
|
|
|
792
|
|
|
—
|
|
Net gain on disposition of real estate
|
|
(10,657
|
)
|
|
(4,044
|
)
|
|
(174
|
)
|
|
(114
|
)
|
|
—
|
|
Adjustments for derivative instruments, net
|
|
(44
|
)
|
|
51
|
|
|
480
|
|
|
—
|
|
|
—
|
|
Other expense
|
|
1,211
|
|
|
288
|
|
|
184
|
|
|
606
|
|
|
—
|
|
Income tax expense (benefit), net
|
|
969
|
|
|
(758
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Property operating and maintenance add back:
|
|
|
|
|
|
|
|
|
|
|
Market ready costs prior to initial lease and other
|
|
—
|
|
|
169
|
|
|
278
|
|
|
—
|
|
|
—
|
|
Property management add backs
|
|
—
|
|
|
—
|
|
|
478
|
|
|
2,456
|
|
|
10
|
|
NOI
|
|
73,001
|
|
|
62,905
|
|
|
$
|
39,709
|
|
|
$
|
19,872
|
|
|
$
|
(365
|
)
|
Less non-Same-Home
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
(41,473
|
)
|
|
(33,042
|
)
|
|
|
|
|
|
|
Property operating expenses
|
|
16,873
|
|
|
14,160
|
|
|
|
|
|
|
|
Same-Home NOI
|
|
$
|
48,401
|
|
|
$
|
44,023
|
|
|
|
|
|
|
|
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 are calculated on the same basis to determine FFO. In addition, we have adjusted net income (loss) for the income tax expense (benefit) 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 expensed acquisition fees and costs, certain fees and expenses related to our Securitization Transaction, share-based compensation, severance and other, write-offs of expenses associated with changes in our debt structure, 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 non-controlling interests - Operating Partnership.
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 years ended
December 31, 2016
,
2015
,
2014
,
2013
and
2012
. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
Net loss
(1)
|
|
$
|
(2,614
|
)
|
|
$
|
(9,952
|
)
|
|
$
|
(56,697
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
(5,521
|
)
|
Depreciation and amortization
|
|
37,291
|
|
|
35,189
|
|
|
25,623
|
|
|
20,235
|
|
|
2,106
|
|
Net gain on disposition of real estate
|
|
(10,657
|
)
|
|
(4,044
|
)
|
|
(174
|
)
|
|
(114
|
)
|
|
—
|
|
Impairment on real estate assets
|
|
1,105
|
|
|
95
|
|
|
601
|
|
|
792
|
|
|
—
|
|
Income tax expense (benefit) on disposition of real estate
|
|
623
|
|
|
(941
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Other (income) expense
|
|
—
|
|
|
(285
|
)
|
|
130
|
|
|
—
|
|
|
—
|
|
FFO
|
|
25,748
|
|
|
20,062
|
|
|
(30,517
|
)
|
|
(3,637
|
)
|
|
(3,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
Portfolio acquisition expense
(2)
|
|
526
|
|
|
2,064
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Acquisition fees and costs expensed
(3)
|
|
—
|
|
|
—
|
|
|
815
|
|
|
834
|
|
|
—
|
|
Securitization fees and costs expensed
(4)
|
|
—
|
|
|
—
|
|
|
801
|
|
|
—
|
|
|
—
|
|
Share-based compensation
|
|
2,667
|
|
|
2,613
|
|
|
1,022
|
|
|
927
|
|
|
38
|
|
Severance and other
|
|
1,977
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Market ready costs prior to initial lease and other
|
|
—
|
|
|
169
|
|
|
278
|
|
|
—
|
|
|
—
|
|
System implementation costs
|
|
—
|
|
|
—
|
|
|
139
|
|
|
971
|
|
|
—
|
|
Management internalization
(1)
|
|
—
|
|
|
—
|
|
|
39,373
|
|
|
—
|
|
|
—
|
|
Write-off of deferred financing fees
|
|
—
|
|
|
31
|
|
|
1,058
|
|
|
—
|
|
|
—
|
|
Adjustments for derivative instruments, net
|
|
(44
|
)
|
|
51
|
|
|
480
|
|
|
—
|
|
|
—
|
|
Amortization of discount on securitization loan
|
|
301
|
|
|
301
|
|
|
116
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
(5)
|
|
—
|
|
|
114
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Core FFO
|
|
$
|
31,175
|
|
|
$
|
25,405
|
|
|
$
|
13,565
|
|
|
$
|
(905
|
)
|
|
$
|
(3,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
25,748
|
|
|
$
|
20,062
|
|
|
$
|
(30,517
|
)
|
|
$
|
(3,637
|
)
|
|
$
|
(3,415
|
)
|
Preferred stock distributions
|
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
|
(3
|
)
|
FFO available to common shares and units
|
|
$
|
25,648
|
|
|
$
|
19,962
|
|
|
$
|
(30,617
|
)
|
|
$
|
(3,737
|
)
|
|
$
|
(3,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Core FFO
|
|
$
|
31,175
|
|
|
$
|
25,405
|
|
|
$
|
13,565
|
|
|
$
|
(905
|
)
|
|
$
|
(3,377
|
)
|
Preferred stock distributions
|
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
|
(3
|
)
|
Core FFO available to common shares and units
|
|
$
|
31,075
|
|
|
$
|
25,305
|
|
|
$
|
13,465
|
|
|
$
|
(1,005
|
)
|
|
$
|
(3,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and units outstanding
(6) (7)
|
|
37,891,605
|
|
|
38,441,510
|
|
|
38,688,548
|
|
|
39,101,378
|
|
|
37,355,672
|
|
FFO per share
|
|
$
|
0.68
|
|
|
$
|
0.52
|
|
|
$
|
(0.79
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.09
|
)
|
Core FFO per share
|
|
$
|
0.82
|
|
|
$
|
0.66
|
|
|
$
|
0.35
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.09
|
)
|
|
|
(1)
|
Includes cost to internalize our Former Manager of $39.4 million, primarily related to issuance of common units of the Operating Partnership and to a lesser extent, certain transaction costs and assumption of certain liabilities during the year ended December 31, 2014.
|
|
|
(2)
|
Portfolio acquisition expense represents transaction costs incurred when acquiring properties that meet the definition of a business under the guidance codified in ASC 805, which must be expensed when incurred rather than capitalized into the basis of each property.
|
|
|
(3)
|
Includes a one-time expense reflected in general and administrative expense during the year ended December 31, 2014 to acquire the former Tampa third-party property manager.
|
|
|
(4)
|
Represents non-capitalizable costs related to our Securitization Transaction for personnel and other matters.
|
|
|
(5)
|
Non-comparable costs from prior periods.
|
|
|
(6)
|
Represents the weighted average of common shares and common units in the Operating Partnership outstanding for the periods presented.
|
|
|
(7)
|
Includes the effect of dilutive securities attributable to certain stock based awards meeting market conditions during the year ended
December 31, 2016
.
|
Item 8. Financial Statements and Supplementary Data.
SILVER BAY REALTY TRUST CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of Silver Bay Realty Trust Corp.
We have audited the accompanying consolidated balance sheets of Silver Bay Realty Trust Corp. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive income (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Silver Bay Realty Trust Corp. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
February 28, 2017
Minneapolis, Minnesota
Silver Bay Realty Trust Corp.
Consolidated Balance Sheets
(amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Assets
|
|
|
|
|
|
Investments in real estate:
|
|
|
|
|
|
Land and land improvements
|
$
|
216,956
|
|
|
$
|
220,110
|
|
Building and improvements
|
992,867
|
|
|
989,574
|
|
|
1,209,823
|
|
|
1,209,684
|
|
Accumulated depreciation
|
(106,463
|
)
|
|
(74,907
|
)
|
Investments in real estate, net
|
1,103,360
|
|
|
1,134,777
|
|
Assets held for sale
|
16,543
|
|
|
11,184
|
|
Cash
|
52,279
|
|
|
29,028
|
|
Escrow deposits
|
16,858
|
|
|
15,472
|
|
Resident security deposits
|
12,992
|
|
|
12,521
|
|
Other assets
|
16,529
|
|
|
13,298
|
|
Total assets
|
$
|
1,218,561
|
|
|
$
|
1,216,280
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Revolving credit facility
|
$
|
352,799
|
|
|
$
|
326,472
|
|
Securitization loan, net
|
296,782
|
|
|
295,741
|
|
Accounts payable and accrued expenses
|
17,862
|
|
|
16,752
|
|
Resident prepaid rent and security deposits
|
15,237
|
|
|
14,462
|
|
Total liabilities
|
682,680
|
|
|
653,427
|
|
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; 35,380,034 and 36,063,187, respectively, shares issued and outstanding
|
352
|
|
|
359
|
|
Additional paid-in capital
|
643,633
|
|
|
651,987
|
|
Accumulated other comprehensive income (loss)
|
2,841
|
|
|
(1,613
|
)
|
Cumulative deficit
|
(143,679
|
)
|
|
(121,620
|
)
|
Total stockholders’ equity
|
503,147
|
|
|
529,113
|
|
Noncontrolling interests - Operating Partnership
|
31,734
|
|
|
32,740
|
|
Total equity
|
534,881
|
|
|
561,853
|
|
Total liabilities and equity
|
$
|
1,218,561
|
|
|
$
|
1,216,280
|
|
See accompanying notes to the consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
Silver Bay Realty Trust Corp.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(amounts in thousands except share data)
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Revenue:
|
|
|
|
|
|
|
|
Rental revenue
|
$
|
123,544
|
|
|
$
|
111,159
|
|
|
$
|
75,910
|
|
Other revenue
|
3,091
|
|
|
2,535
|
|
|
2,020
|
|
Total revenue
|
126,635
|
|
|
113,694
|
|
|
77,930
|
|
Expenses:
|
|
|
|
|
|
|
|
Property operating and maintenance
|
23,393
|
|
|
22,106
|
|
|
17,274
|
|
Real estate taxes
|
17,681
|
|
|
15,847
|
|
|
11,042
|
|
Homeowners’ association fees
|
1,665
|
|
|
1,912
|
|
|
1,260
|
|
Property management
|
10,895
|
|
|
11,093
|
|
|
9,401
|
|
Depreciation and amortization
|
37,291
|
|
|
35,189
|
|
|
25,623
|
|
Advisory management fee - affiliates
|
—
|
|
|
—
|
|
|
6,621
|
|
Management internalization
|
—
|
|
|
—
|
|
|
39,373
|
|
Portfolio acquisition expense
|
526
|
|
|
2,064
|
|
|
—
|
|
General and administrative
|
14,457
|
|
|
15,915
|
|
|
10,334
|
|
Share-based compensation
|
2,667
|
|
|
2,613
|
|
|
1,022
|
|
Severance and other
|
1,977
|
|
|
—
|
|
|
—
|
|
Interest expense
|
26,113
|
|
|
21,275
|
|
|
11,586
|
|
Impairment of real estate
|
1,105
|
|
|
95
|
|
|
601
|
|
Total expenses
|
137,770
|
|
|
128,109
|
|
|
134,137
|
|
Loss before other income (expense), income taxes and non-controlling interests
|
(11,135
|
)
|
|
(14,415
|
)
|
|
(56,207
|
)
|
Other income (expense):
|
|
|
|
|
|
Net gain on disposition of real estate
|
10,657
|
|
|
4,044
|
|
|
174
|
|
Adjustments for derivative instruments, net
|
44
|
|
|
(51
|
)
|
|
(480
|
)
|
Other expense
|
(1,211
|
)
|
|
(288
|
)
|
|
(184
|
)
|
Total other income (expense)
|
9,490
|
|
|
3,705
|
|
|
(490
|
)
|
Loss before income taxes and non-controlling interests
|
(1,645
|
)
|
|
(10,710
|
)
|
|
(56,697
|
)
|
Income tax (expense) benefit, net
|
(969
|
)
|
|
758
|
|
|
—
|
|
Net loss
|
(2,614
|
)
|
|
(9,952
|
)
|
|
(56,697
|
)
|
Net loss attributable to noncontrolling interests - Operating Partnership
|
151
|
|
|
577
|
|
|
143
|
|
Net loss attributable to controlling interests
|
(2,463
|
)
|
|
(9,375
|
)
|
|
(56,554
|
)
|
Preferred stock distributions
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
Net loss attributable to common stockholders
|
$
|
(2,563
|
)
|
|
$
|
(9,475
|
)
|
|
$
|
(56,654
|
)
|
Loss per share - basic and diluted (Note 9):
|
|
|
|
|
|
|
|
Net loss attributable to common shares
|
$
|
(0.07
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(1.49
|
)
|
Weighted average common shares outstanding
|
35,557,636
|
|
|
36,209,999
|
|
|
38,119,971
|
|
Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,614
|
)
|
|
$
|
(9,952
|
)
|
|
$
|
(56,697
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
Net change in fair value of cash flow hedges
|
4,147
|
|
|
(1,587
|
)
|
|
(291
|
)
|
Losses reclassified into earnings from other comprehensive income (loss)
|
307
|
|
|
60
|
|
|
481
|
|
Other comprehensive income (loss)
|
4,454
|
|
|
(1,527
|
)
|
|
190
|
|
Comprehensive income (loss)
|
1,840
|
|
|
(11,479
|
)
|
|
(56,507
|
)
|
Comprehensive (income) loss attributable to noncontrolling interests- Operating Partnership
|
(109
|
)
|
|
669
|
|
|
143
|
|
Comprehensive income (loss) attributable to controlling interests
|
$
|
1,731
|
|
|
$
|
(10,810
|
)
|
|
$
|
(56,364
|
)
|
See accompanying notes to the consolidated financial statements.
69
Silver Bay Realty Trust Corp.
Consolidated Statements of Changes in Equity
For the Years Ended December 31, 2016, 2015 and 2014
(amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Par Value
Amount
|
|
Additional
Paid-In
Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Cumulative
Deficit
|
|
Total
Stockholders’
Equity
|
|
Noncontrolling
Interests -
Operating
Partnership
|
|
Total
Equity
|
Balance at January 1, 2014
|
38,561,468
|
|
|
$
|
385
|
|
|
$
|
689,646
|
|
|
$
|
(276
|
)
|
|
$
|
(31,795
|
)
|
|
$
|
657,960
|
|
|
$
|
—
|
|
|
$
|
657,960
|
|
Non-cash equity awards, net
|
68,062
|
|
|
—
|
|
|
1,002
|
|
|
—
|
|
|
—
|
|
|
1,002
|
|
|
—
|
|
|
1,002
|
|
Repurchase and retirement of common stock
|
(1,917,836
|
)
|
|
(19
|
)
|
|
(31,470
|
)
|
|
—
|
|
|
—
|
|
|
(31,489
|
)
|
|
—
|
|
|
(31,489
|
)
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,244
|
)
|
|
(6,244
|
)
|
|
—
|
|
|
(6,244
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,554
|
)
|
|
(56,554
|
)
|
|
(143
|
)
|
|
(56,697
|
)
|
Issuance of common Operating Partnership units in connection with management internalization
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
36,173
|
|
|
36,173
|
|
Net change in fair value of cash flow hedges
|
—
|
|
|
—
|
|
|
—
|
|
|
(291
|
)
|
|
—
|
|
|
(291
|
)
|
|
—
|
|
|
(291
|
)
|
Losses reclassified into earnings from other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
481
|
|
|
—
|
|
|
481
|
|
|
—
|
|
|
481
|
|
Adjustment to noncontrolling interests - Operating Partnership
|
—
|
|
|
—
|
|
|
1,598
|
|
|
—
|
|
|
—
|
|
|
1,598
|
|
|
(1,598
|
)
|
|
—
|
|
Balance at December 31, 2014
|
36,711,694
|
|
|
366
|
|
|
660,776
|
|
|
(86
|
)
|
|
(94,593
|
)
|
|
566,463
|
|
|
34,432
|
|
|
600,895
|
|
Non-cash equity awards, net
|
132,932
|
|
|
1
|
|
|
2,522
|
|
|
—
|
|
|
—
|
|
|
2,523
|
|
|
—
|
|
|
2,523
|
|
Repurchase and retirement of common stock
|
(781,439
|
)
|
|
(8
|
)
|
|
(12,426
|
)
|
|
—
|
|
|
—
|
|
|
(12,434
|
)
|
|
—
|
|
|
(12,434
|
)
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,652
|
)
|
|
(17,652
|
)
|
|
—
|
|
|
(17,652
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,375
|
)
|
|
(9,375
|
)
|
|
(577
|
)
|
|
(9,952
|
)
|
Net change in fair value of cash flow hedges
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,587
|
)
|
|
—
|
|
|
(1,587
|
)
|
|
—
|
|
|
(1,587
|
)
|
Losses reclassified into earnings from other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
60
|
|
|
—
|
|
|
60
|
|
|
—
|
|
|
60
|
|
Adjustment to noncontrolling interests - Operating Partnership
|
—
|
|
|
—
|
|
|
1,115
|
|
|
—
|
|
|
—
|
|
|
1,115
|
|
|
(1,115
|
)
|
|
—
|
|
Balance at December 31, 2015
|
36,063,187
|
|
|
359
|
|
|
651,987
|
|
|
(1,613
|
)
|
|
(121,620
|
)
|
|
529,113
|
|
|
32,740
|
|
|
561,853
|
|
Non-cash equity awards, net
|
132,089
|
|
|
1
|
|
|
2,576
|
|
|
—
|
|
|
—
|
|
|
2,577
|
|
|
—
|
|
|
2,577
|
|
Repurchase and retirement of common stock
|
(815,242
|
)
|
|
(8
|
)
|
|
(11,785
|
)
|
|
—
|
|
|
—
|
|
|
(11,793
|
)
|
|
—
|
|
|
(11,793
|
)
|
Dividends declared
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,596
|
)
|
|
(19,596
|
)
|
|
—
|
|
|
(19,596
|
)
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,463
|
)
|
|
(2,463
|
)
|
|
(151
|
)
|
|
(2,614
|
)
|
Net change in fair value of cash flow hedges
|
—
|
|
|
—
|
|
|
—
|
|
|
4,147
|
|
|
—
|
|
|
4,147
|
|
|
—
|
|
|
4,147
|
|
Losses reclassified into earnings from other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
307
|
|
|
—
|
|
|
307
|
|
|
—
|
|
|
307
|
|
Adjustment to noncontrolling interests - Operating Partnership
|
—
|
|
|
—
|
|
|
855
|
|
|
—
|
|
|
—
|
|
|
855
|
|
|
(855
|
)
|
|
—
|
|
Balance at December 31, 2016
|
35,380,034
|
|
|
$
|
352
|
|
|
$
|
643,633
|
|
|
$
|
2,841
|
|
|
$
|
(143,679
|
)
|
|
$
|
503,147
|
|
|
$
|
31,734
|
|
|
$
|
534,881
|
|
See accompanying notes to the consolidated financial statements.
Silver Bay Realty Trust Corp.
Consolidated Statements of Cash Flows
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(2,614
|
)
|
|
$
|
(9,952
|
)
|
|
$
|
(56,697
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
37,291
|
|
|
35,189
|
|
|
25,623
|
|
Non-cash management internalization
|
—
|
|
|
—
|
|
|
36,173
|
|
Non-cash share-based compensation
|
2,577
|
|
|
2,523
|
|
|
1,002
|
|
Losses reclassified into earnings from other comprehensive income (loss)
|
307
|
|
|
60
|
|
|
481
|
|
Amortization and write-off of deferred financing costs
|
4,597
|
|
|
4,668
|
|
|
3,613
|
|
Amortization of discount on securitization loan
|
301
|
|
|
301
|
|
|
116
|
|
Bad debt expense
|
1,002
|
|
|
1,426
|
|
|
671
|
|
Net gain on disposition of real estate
|
(10,657
|
)
|
|
(4,044
|
)
|
|
(174
|
)
|
Income tax valuation allowance reversal
|
—
|
|
|
941
|
|
|
—
|
|
Impairment of real estate
|
1,105
|
|
|
95
|
|
|
601
|
|
Other
|
611
|
|
|
471
|
|
|
239
|
|
Net change in assets and liabilities:
|
|
|
|
|
|
Decrease in escrow cash for operating activities and debt reserves
|
467
|
|
|
3,766
|
|
|
5,062
|
|
Increase in other assets
|
(5,008
|
)
|
|
(7,505
|
)
|
|
(2,184
|
)
|
Increase in accounts payable, accrued expenses, and prepaid rent
|
2,252
|
|
|
3,208
|
|
|
1,799
|
|
Decrease in related party payables, net
|
—
|
|
|
—
|
|
|
(7,611
|
)
|
Net cash provided by operating activities
|
32,231
|
|
|
31,147
|
|
|
8,714
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
Purchase of investments in real estate
|
(44,037
|
)
|
|
(273,266
|
)
|
|
(136,045
|
)
|
Capital improvements of investments in real estate
|
(14,498
|
)
|
|
(25,651
|
)
|
|
(37,846
|
)
|
(Increase) decrease in escrow cash for investing activities
|
(77
|
)
|
|
972
|
|
|
(731
|
)
|
Proceeds from disposition of real estate
|
58,149
|
|
|
29,223
|
|
|
5,979
|
|
Cash acquired in management internalization
|
—
|
|
|
—
|
|
|
2,069
|
|
Other
|
—
|
|
|
(43
|
)
|
|
(295
|
)
|
Net cash used in investing activities
|
(463
|
)
|
|
(268,765
|
)
|
|
(166,869
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Proceeds from securitization loan
|
—
|
|
|
—
|
|
|
311,164
|
|
Payments on securitization loan
|
(1,514
|
)
|
|
(7,085
|
)
|
|
(615
|
)
|
Proceeds from revolving credit facility
|
47,819
|
|
|
281,963
|
|
|
137,779
|
|
Payments on revolving credit facility
|
(21,493
|
)
|
|
(22,587
|
)
|
|
(235,508
|
)
|
Deferred financing costs paid
|
(48
|
)
|
|
(5,783
|
)
|
|
(12,348
|
)
|
Purchase of interest rate cap agreements
|
(30
|
)
|
|
(2,250
|
)
|
|
(393
|
)
|
Change in interest rate swap collateral
|
(1,776
|
)
|
|
—
|
|
|
—
|
|
Repurchase and retirement of common stock
|
(11,793
|
)
|
|
(12,434
|
)
|
|
(31,489
|
)
|
Dividends paid
|
(19,682
|
)
|
|
(15,032
|
)
|
|
(4,298
|
)
|
Net cash (used in) provided by financing activities
|
(8,517
|
)
|
|
216,792
|
|
|
164,292
|
|
Net change in cash
|
23,251
|
|
|
(20,826
|
)
|
|
6,137
|
|
Cash at beginning of period
|
29,028
|
|
|
49,854
|
|
|
43,717
|
|
Cash at end of period
|
$
|
52,279
|
|
|
$
|
29,028
|
|
|
$
|
49,854
|
|
See accompanying notes to the consolidated financial statements.
71
Silver Bay Realty Trust Corp.
Consolidated Statements of Cash Flows
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for interest, net of amounts capitalized
|
$
|
20,645
|
|
|
$
|
15,974
|
|
|
$
|
7,690
|
|
Cash paid for taxes
|
$
|
227
|
|
|
$
|
181
|
|
|
$
|
—
|
|
Increase (decrease) in fair value of cash flow hedges
|
$
|
4,147
|
|
|
$
|
(1,587
|
)
|
|
$
|
(291
|
)
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Common stock and unit dividends declared, but not paid
|
$
|
4,869
|
|
|
$
|
4,978
|
|
|
$
|
2,331
|
|
Interest rate swap contingent consideration
|
$
|
1,184
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Capital improvements in accounts payable
|
$
|
442
|
|
|
$
|
597
|
|
|
$
|
1,950
|
|
Non-cash management internalization transaction:
|
|
|
|
|
|
Issuance of units to noncontrolling interests
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,173
|
|
Other liabilities acquired in management internalization
|
—
|
|
|
—
|
|
|
(2,067
|
)
|
See accompanying notes to the consolidated financial statements.
72
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per 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
December 31, 2016
, the Company owned
9,044
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 consolidated balance sheets.
The Company is the continuation of the operations of Silver Bay Property Investment LLC (the "Predecessor"). At the time of its formation, the Predecessor was a wholly owned subsidiary of Two Harbors Investment Corp. ("Two Harbors"). The Predecessor began formal operations in February 2012, when it started acquiring single-family residential rental properties. The Company in its current form was created on December 19, 2012, through a series of formation transactions (the "Formation Transactions"), which included an initial public offering (the "Offering"), the contribution of equity interests in the Predecessor by Two Harbors, and the acquisition of entities (the "Provident Entities") managed by Provident Real Estate Advisors LLC ("Provident"), which owned
881
single-family properties.
In connection with the Offering, the Company restructured its ownership to conduct its business through a traditional umbrella partnership ("UPREIT structure") in which substantially all of its assets are held by, and its operations are conducted through, Silver Bay Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership. The Company's wholly owned subsidiary, Silver Bay Management LLC, is the sole general partner of the Operating Partnership. As of
December 31, 2016
, 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.
Through September 30, 2014, the Company was externally managed by PRCM Real Estate Advisers LLC (the "Former Manager"). During this time, the Company relied on the Former Manager to provide or obtain on its behalf the personnel and services necessary for it to conduct its business as the Company had
no
employees of its own. On September 30, 2014, the Company closed a transaction to internalize its management (the "Internalization") and now owns all material assets and intellectual property rights of the Former Manager previously used in the conduct of its business. In connection with the Internalization, the officers and employees who worked for the Former Manager became employees of the Company (see Note 10).
During the year ended December 31, 2015, the Company acquired a portfolio of
2,461
properties (the "Acquired Properties") from The American Home Real Estate Investment Trust ("TAH"). The acquisition was substantially completed on April 1, 2015 with an aggregate purchase price of
$263,000
(the "Portfolio Acquisition"). The Portfolio Acquisition was financed using proceeds obtained under the Company's revolving credit facility, which was amended and restated on February 18, 2015 to increase the borrowing capacity to
$400,000
from
$200,000
. The properties acquired in the Portfolio Acquisition are primarily located in Atlanta, GA, Charlotte, NC, Tampa, FL, and Orlando, FL.
Note 2. Basis of Presentation and Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership and its consolidated subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles ("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
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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 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 will continue to consolidate the Operating Partnership under this new guidance.
The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects 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
December 31, 2016
and
2015
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 equity.
Investments in Real Estate
Operating real estate assets are stated at cost and consist of land and improvements, buildings and improvements, including other capitalizable costs incurred during their possession, renovation and acquisition.
Single-family properties acquired that are not subject to an existing lease are treated as asset acquisitions and, as such, are recorded at their purchase price, including acquisition costs, which is allocated to land and building based upon their relative fair values at the date of acquisition. Fair value is determined under the guidance of Codification Topic,
Fair Value Measurements
(“ASC 820”), and is primarily based on unobservable data inputs which are categorized as Level 3 valuations. In making estimates of fair values for purposes of allocating the purchase price of individually acquired properties that are not subject to an existing lease, the Company utilizes its own market knowledge and published market data. In this regard, the Company also utilizes information obtained from county tax assessment records to assist in the determination of the fair value of the land and building.
Single-family properties that are acquired either subject to an existing lease or as part of a portfolio level transaction are treated as a business combination under the guidance of Codification Topic,
Business Combinations
(“ASC 805”), and, as such, are recorded at fair value, assigned to land, building and the existing lease, if applicable, based upon their fair values at the date of acquisition, with acquisition fees and other costs expensed as incurred. The Company engages a third party valuation specialist to assist management in the determination of fair value for purposes of assigning the purchase price of properties acquired as part of portfolio level transactions along with information obtained from county tax assessment records to assist in the determination of the fair value of the land and building. The value of acquired lease related intangibles, if any, is estimated based upon the costs the Company would have incurred to lease the property under similar terms. Such costs are capitalized and amortized over the remaining life of the lease.
The nature of the Company's business requires that in certain circumstances Silver Bay acquires single-family properties subject to existing liens. Liens that the Company expects to be extinguished in cash are estimated and accrued for on the date of acquisition and recorded as a cost of the property.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Building and improvements depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The Company generally uses a
27.5
-year estimated life with
no
salvage value. Depreciation on land improvements is computed on the straight-line basis over the estimated useful lives of the assets, generally
3
to
15
years with
no
salvage value. Land is not depreciated. The Company considers the value of acquired in-place leases in the allocation of purchase price and the amortization period reflects the average remaining term of each respective in-place acquired lease. The lease periods are generally short-term in nature (
one
or
two
years).
The Company incurs costs to prepare certain of its acquired properties to be placed in service. These costs are capitalized and allocated to building improvement costs or land improvement costs as part of such properties’ initial renovation. If the Company acquires a property with an existing lease, the Company capitalizes the cost of the initial renovation of such property following lease expiration and resident move out. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred and expenditures for significant capital expenditures that improve the asset and extend the useful life of the asset are capitalized and depreciated over their remaining useful life.
The Company evaluates its long-lived assets for indicators of impairment periodically or whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and the Company’s ability to hold, and its intent with regard to, each asset. If an impairment indicator exists, the Company compares the expected future undiscounted cash flows against the carrying amount of the asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, the Company records an impairment loss for the difference between the estimated fair value and the carrying amount of the asset.
Single-Family Properties Held for Sale and Discontinued Operations
Single-family properties are classified as held for sale when they meet the applicable GAAP criteria, including, but not limited to, being listed for sale and the home is in present condition for immediate sale, the existence of an active program to locate a buyer and the probable sale of the home within one year. Upon identification as held for sale, the property is subject to the Company’s impairment test and an impairment loss is immediately recognized when the estimated fair value, less costs to sell, is less than the carrying amount of the asset. The property is then marketed for sale and classified as held for sale in the consolidated financial statements. Depreciation ceases to be recorded upon designation of an asset as held for sale. As of
December 31, 2016
and
2015
, the Company had
104
and
98
single-family properties, respectively, classified as held for sale. These properties did not have material historical operating results under the Company's ownership. At
December 31, 2016
and
2015
, the Company had
$16,543
and
$11,184
, respectively, of assets held for sale.
For the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized impairment charges of
$1,105
,
$95
and
$601
, respectively, classified as impairment of real estate on the consolidated statements of operations and comprehensive income (loss). For the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized a net gain on sale of assets of
$10,657
,
$4,044
and
$174
, respectively, classified as net gain on disposition of real estate on the consolidated statements of operations and comprehensive income (loss).
ASU 2014-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, defines a discontinued operation as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity's operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. The application of this guidance is prospective from the date of adoption and applies only to disposals (or new classifications to held for sale) that have not been reported as discontinued operations or held for sale in previously issued financial statements. The Company adopted ASU 2014-08 during the quarter ended March 31, 2015 and did not have any discontinued operations during the years ended
December 31, 2016
,
2015
and
2014
.
Cash
The Company maintains its cash and escrow deposits at financial institutions. The combined account balances at one or more institutions typically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant, as the Company does not anticipate the financial institutions’ non-performance.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Escrow Deposits
Escrow deposits primarily include cash held in reserve at financial institutions, as required by the Company's debt agreements described in Note 5. 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.
Deferred Lease Costs, Net
Direct and incremental costs incurred by the Company to lease properties are capitalized and amortized over the life of the lease and reflected as other assets on the consolidated balance sheets. Amortization of leasing costs is included in depreciation and amortization on the consolidated statements of operations and comprehensive income (loss).
Rent and Other Receivables, Net
The Company maintains an allowance for doubtful accounts for estimated losses that may result from the inability of residents to make required rent or other payments. This allowance is estimated based on payment history and current occupancy status. The Company generally does not require collateral or other security from its residents, other than security deposits. If estimates of collectability differ from the cash received, the timing and amount of the Company’s reported revenue could be impacted.
At
December 31, 2016
and
2015
, the Company had
$738
and
$978
in gross rent receivables, respectively, and
$89
and
$164
in allowances for doubtful accounts, respectively, classified as other assets on the consolidated balance sheets.
For the years ended
December 31, 2016
,
2015
and
2014
, the Company recognized
$1,002
,
$1,426
and
$671
in bad debt expense, respectively, classified as property operating and maintenance on the consolidated statements of operations and comprehensive income (loss).
Fair Value of Financial Instruments, Including Derivative Instruments
The valuation of financial instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. The Company, where possible, bases the fair values of its financial instruments, including its derivative instruments, on listed market prices and third party quotes. Where these are not available, the Company bases its estimates on current instruments with similar terms and maturities or on other factors relevant to the financial instruments.
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company seeks to manage these risks through the use of derivatives to hedge interest rate risk on debt instruments.
The Company recognizes derivatives as either assets or liabilities on the consolidated balance sheets and measures those instruments at fair value. In addition, fair value adjustments will affect either accumulated other comprehensive income (loss) (a component of stockholders’ equity) or net income (loss) depending on whether the derivative instruments qualify as a hedge for accounting purposes and, if so, the nature of the hedging activity. The Company does not use derivatives for trading or speculative purposes.
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 consolidated statements of operations and comprehensive income (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. The Company adopted ASU 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, as of January 1, 2016, which requires debt issuance costs related to a recognized debt liability be 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 of the retrospective adoption of this guidance, deferred financing costs, net of amortization of
$5,884
and
$8,139
at December 31, 2016 and 2015, respectively, are netted against the carrying values of the Securitization Loan (see Note 5). Previously, these costs were recorded as part of deferred financing costs, net on the consolidated balance sheets. Additionally, in accordance with ASU 2015-15,
Interest-Imputation of Interest: Presentation
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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 consolidated balance sheets and amortize them ratably over the term of the related facility.
Revenue Recognition
Rental income, net of concessions and sales tax, attributable to resident leases is recorded on a straight-line basis over the term of the lease. Leases entered into between residents and the Company for the rental of property units are generally year-to-year and renewable upon consent of both parties on an annual or monthly basis.
The Company recognizes other revenues such as pet fees, late fees, and application fee income when the related fees are earned and are realized or realizable.
The Company recognizes sales of real estate when the sale has closed, title has passed, adequate initial and continuing investment by the buyer is received, possession and other attributes of ownership have been transferred to the buyer, and the Company is not obligated to perform significant additional activities after closing. All of these conditions are typically met at or shortly after closing.
Noncontrolling Interests
The ownership interests in a consolidated subsidiary that are not held by the Company are noncontrolling interests and are reported on the consolidated balance sheets within equity, separately from the Company’s equity. However, securities that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. This would result in certain outside ownership interests being included as redeemable noncontrolling interests outside of permanent equity in the consolidated balance sheets. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company considered the guidance in the Codification Topic,
Derivatives and Hedging —Contracts in Entity’s Own Equit
y (“ASC 815-40”) to evaluate whether it controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract. The Company presents the noncontrolling interest for common Operating Partnership units in the equity section of its consolidated balance sheets.
Net income (loss) is allocated to common Operating Partnership unit holders based on their respective ownership percentage of the Operating Partnership. Such ownership percentage is calculated by dividing the number of common Operating Partnership units held by the common Operating Partnership unit holders by the total Operating Partnership units held by the common Operating Partnership unit holders and the Company. Additional issuance or repurchase of shares of common stock or common Operating Partnership units changes the percentage ownership of both the noncontrolling interests — common Operating Partnership unit holders and the Company. Due in part to the exchange rights (which provide for the redemption of common Operating Partnership units into shares for common stock on a one-for-one basis), such transactions and the proceeds or costs therefrom are treated as capital transactions and result in an allocation between stockholders’ equity and noncontrolling interests to account for the change in the respective percentage ownership of the underlying equity of the Operating Partnership.
At both
December 31, 2016
and
2015
, the Company had
2,231,511
common Operating Partnership units classified as noncontrolling interests, respectively. As described in Note 10, the
2,231,511
common Operating Partnership units were issued on September 30, 2014 pursuant to the Internalization.
Preferred Stock
The Company accounts for its
10%
cumulative redeemable preferred stock in accordance with the Codification Topic,
Distinguishing Liabilities from Equity—SEC Materials
(“ASC 480-10-S99”). Holders of the Company’s
10%
cumulative redeemable preferred stock have certain preference rights with respect to the common stock. Based on the Company’s analysis, the preferred stock has been classified as redeemable interests outside of permanent equity in the mezzanine section of the Company’s consolidated balance sheets as a result of certain redemption requirements or other terms.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares and potential common shares outstanding during the years ended
December 31, 2016
,
2015
and
2014
. For both basic and diluted per share calculations, potential common shares represent issued and unvested shares of restricted stock, which have full rights to the common stock dividend declarations of the Company. The common Operating Partnership units and any performance stock units whose market conditions have been met are excluded from the calculation of earnings (loss) per share as their inclusion would not be dilutive.
Equity Incentive Plan
The Company adopted an equity incentive plan which provides incentive compensation to attract and retain qualified directors, officers, advisors, consultants and other personnel of the Company. The plan permits the granting of stock options, restricted shares of common stock, restricted stock units, phantom shares, dividend equivalent rights, or other equity-based awards. The equity incentive plan is administered by the compensation committee of the Company’s board of directors.
The cost of restricted shares of common stock awarded to independent directors is based on the price of the Company’s stock as of the date of grant, in accordance with Codification Topic,
Compensation - Stock Compensation
(“ASC 718”). Prior to the Internalization, the cost of equity awards to employees of the Former Manager and the Former Manager’s operating subsidiary were measured at each reporting date based on the price of the Company’s stock as of period end, in accordance with Codification Topic,
Equity
(“ASC 505”). On the date of the Internalization, the employees of the Former Manager and the Former Manager's operating subsidiary became employees of the Company and the Company fixed the measurement of the awards to the respective employees to the stock price as of such date in accordance with ASC 718. The respective awards will not be subsequently remeasured and future awards to employees, subsequent to the Internalization, will be measured based on the price of the Company's stock as of the date of grant in accordance with ASC 718. All equity awards are amortized ratably over the applicable service period.
The Company recognizes compensation expense for performance stock units ("PSUs") based on the grant-date fair value and the service period of the respective awards. These units represent shares potentially issuable in the future based upon the Company's stock performance over a
three
-year performance period. Fair value of the PSUs are estimated using a Monte-Carlo simulation model.
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. To qualify as a REIT, the Company must distribute at least
90%
of its annual REIT taxable income to stockholders (not including taxable income retained in its TRS entities) within the time frame set forth in the Code and the Company must also meet certain other requirements. In addition, because certain activities, if performed by the Company, may cause the Company to earn income which is not qualifying for the REIT gross income tests, the Company formed or acquired TRS entities, as defined in the Code, to engage in such activities. These TRS activities are subject to federal, state, and local income taxes on any taxable income of such entities after consideration of any net operating losses, as well as any REIT taxable income not distributed to stockholders.
The Company assesses its tax positions for all open tax years and determines whether the Company has any material unrecognized liabilities in accordance with Codification Topic,
Income Taxes
(“ASC 740”). The Company records these liabilities to the extent the Company deems them more likely than not to be incurred. The Company classifies interest and penalties on material uncertain tax positions as income tax expense, on its consolidated statements of operations and comprehensive income (loss).
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Deferred Tax Assets and Liabilities
Income recognition for GAAP and tax differ in certain respects. These differences often reflect differing accounting treatments for tax and GAAP, such as differing basis on capitalized assets, differing treatment for certain acquired assets and real estate asset impairments and the timing of expense recognition for certain accrued liabilities and net operating losses. Some of these differences are temporary in nature and create timing mismatches between when taxable income is earned and the tax is paid versus when the GAAP income is recognized and the tax provision is recorded. Some of these differences are permanent since certain income (or expense) may be recorded for tax but not for GAAP (or vice-versa). One such significant permanent difference is the Company’s ability as a REIT to deduct dividends paid to stockholders as an expense for tax, but not for GAAP. The Company's deferred tax assets also include net operating losses generated or acquired.
As a result of these temporary differences, the Company’s TRS entities, may recognize taxable income in periods prior or subsequent to when it recognizes income for GAAP. When this occurs, the TRS will pay or defer the tax liability and establish deferred tax assets or deferred tax liabilities, respectively, for GAAP.
As income previously taxed is subsequently realized in future periods under GAAP, the deferred tax asset is reversed and a tax expense is recognized. Alternatively, as income previously recognized for GAAP is subsequently realized in future periods for tax, the deferred tax liability is reversed and a tax benefit is recognized. To date, the Company’s deferred tax assets and/or liabilities are generated solely by differences in GAAP and taxable income from the TRS entities. GAAP and tax differences in the REIT may create additional deferred tax assets to the extent the Company does not distribute all of its taxable income.
A valuation allowance is provided if the Company believes it is more likely than not that all or some portion of deferred tax assets will not be realized. Any increase or decrease in the valuation allowance that results from a change in circumstances and that causes the Company to change judgment about the realizability of the related deferred tax asset is included in the provision when such changes occur.
Segment reporting
In accordance with Codification Topic,
Segment Reporting
("ASC 280"), the Company has determined that it has
one
reportable segment with activities related to leasing and operating single-family homes as rental properties. The Company's properties are geographically dispersed and management evaluates operating performance at the market level and while each market and its properties are unique, the aggregate market portfolios have similar economic interests and operating performance. The distribution of the properties throughout the United States reflects the Company's belief that geographic diversification helps insulate the portfolio from regional economic influences.
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 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
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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, 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 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 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The
amendments in this ASU include multiple provisions intended to simplify various aspects of the accounting for share-based
payments. The guidance will be effective for annual reporting periods beginning after December 15, 2016, and for interim
reporting periods within those annual periods, with early adoption permitted. The Company does not anticipate the adoption of this ASU will have a material impact on its consolidated financial statements and has adopted as of January 1, 2017.
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
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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. Investment in Real Estate
Acquisition of Properties
On October 1, 2016, the Company completed the acquisition of a portfolio of
322
homes located in its core markets. The aggregate purchase price for the acquisition was
$41,455
which was primarily financed using proceeds obtained under the Company’s revolving credit facility. The homes are located in Atlanta, GA, Tampa, FL and Orlando, FL.
During the year ended December 31, 2015, the Company acquired a portfolio of
2,461
properties from TAH. The aggregate purchase price for the Portfolio Acquisition was
$263,000
and was substantially completed on April 1, 2015.
The Portfolio Acquisition was financed using proceeds obtained under the Company's revolving credit facility, which was amended and restated on February 18, 2015 to increase the borrowing capacity to
$400,000
from
$200,000
(see Note 5). The homes are primarily located in Atlanta, GA, Charlotte, NC, Tampa, FL, and Orlando, FL.
Transaction costs associated with portfolio acquisitions are expensed as incurred in accordance with ASC 805. During the years ended
December 31, 2016
and
2015
the Company incurred
$526
and
$2,064
, respectively, in transaction expenses associated with the acquisition of properties. These costs are included in portfolio acquisition expense in the consolidated statements of operations and comprehensive income (loss).
The following table summarizes the acquisition date fair values of the assets acquired as part of the Portfolio Acquisition:
|
|
|
|
|
Land and land improvements
|
$
|
55,684
|
|
Buildings and improvements
|
207,316
|
|
Estimated fair value of assets acquired
|
$
|
263,000
|
|
Since the date of the Portfolio Acquisition, the Company has consolidated the
2,461
properties acquired as part of the transaction and the related results of these operations are reflected in the Company's consolidated financial statements.
Total revenue and net income (loss) attributable to the Portfolio Acquisition that was included in the Company's consolidated statements of operations and comprehensive income (loss) from the date of acquisition through December 31, 2015 were
$19,919
and
$(3,909)
, respectively.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
The following table illustrates the effect on net loss and loss per share - basic and diluted as if the Company had completed the Portfolio Acquisition on January 1, 2014 (unaudited):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2014
|
Revenue
(1)
|
$
|
120,309
|
|
|
$
|
101,868
|
|
Net loss
(1) (2) (3)
|
$
|
(10,076
|
)
|
|
$
|
(70,754
|
)
|
Net loss attributable to common stockholders
(1) (2) (3)
|
$
|
(9,599
|
)
|
|
$
|
(70,711
|
)
|
Loss per share - basic and diluted
(1) (2) (3)
|
$
|
(0.27
|
)
|
|
$
|
(1.85
|
)
|
Weighted average common shares outstanding
|
36,209,999
|
|
|
38,119,971
|
|
(1)
The unaudited pro forma information includes revenue and operating expenses based on the historical operations of TAH as well as the Company and does not purport to be indicative of what the Company's operating results would have been had the Portfolio Acquisition occurred on January 1, 2014.
(2)
Assumes portfolio acquisition expense for the year ended December 31, 2015 had been incurred on January 1, 2014, and thus is included in the year ended December 31, 2014.
(3)
Includes net gain on disposition of real estate as noted in the consolidated statements of operations and comprehensive income (loss).
Disposition of Real Estate Assets
During the year ended
December 31, 2016
, the Company sold certain properties, primarily in Southeast Florida and Southern California, for an aggregate sales price of
$58,149
, resulting in an aggregate net gain of
$10,657
, which has been classified as net gain on disposition of real estate in the consolidated statements of operations and comprehensive income (loss). In connection with these asset sales, certain debt repayments were made.
During the year ended
December 31, 2015
, the Company sold certain properties, primarily in Houston, TX, for an aggregate sales price of
$29,223
resulting in an aggregate net gain of
$4,044
. During the year ended December 31
2014
, the Company sold certain properties for an aggregate sales price of
$5,979
, resulting in an aggregate net gain of
$174
.
In accordance with ASC 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 consolidated statements of operations and comprehensive income (loss).
Note 4. Income Taxes
For the years ended
December 31, 2016
,
2015
and
2014
, the Company believes that it qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, does not engage in prohibited transactions, and maintains its intended qualification as a REIT. The majority of states also recognize the Company’s REIT status, and as such, the Company has generally only incurred certain state franchise taxes. The TRS entities are subject to all applicable federal, state and local income, excise and franchise taxes. The Company’s TRS entities file separate tax returns and are fully taxed as standalone U.S. corporations. Certain activities the Company performs may produce income which will not be qualifying income for REIT purposes. The Company has designated the TRS entities to engage in these activities to mitigate any negative impact on the Company’s REIT status.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
The following table summarizes the tax expense (benefit) recorded at the taxable subsidiary level for the years ended
December 31, 2016
,
2015
and
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Current tax expense (benefit):
|
|
|
|
|
|
|
Federal
|
$
|
153
|
|
|
$
|
19
|
|
|
$
|
—
|
|
State and local
|
297
|
|
|
184
|
|
|
—
|
|
Total current tax expense
|
450
|
|
|
203
|
|
|
—
|
|
Deferred tax expense (benefit)
(1)
|
713
|
|
|
(246
|
)
|
|
(201
|
)
|
Valuation allowance
|
(194
|
)
|
|
(715
|
)
|
|
201
|
|
Income tax expense (benefit)
|
$
|
969
|
|
|
$
|
(758
|
)
|
|
$
|
—
|
|
|
|
(1)
|
In addition to the deferred tax benefit generated for the year ended December 31, 2014, the Company acquired
$486
of deferred tax assets in connection with the Internalization transaction.
|
The following is a reconciliation of the Company’s statutory federal and state rates to the effective rates, for the years ended
December 31, 2016
,
2015
and
2014
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Computed income tax benefit at federal rate
|
$
|
(681
|
)
|
|
$
|
(3,749
|
)
|
|
$
|
(19,277
|
)
|
State and local tax, net of federal (benefit) expense
|
(86
|
)
|
|
101
|
|
|
(21
|
)
|
Permanent differences in taxable income from GAAP income
|
49
|
|
|
60
|
|
|
7
|
|
Valuation allowance
|
(198
|
)
|
|
(628
|
)
|
|
120
|
|
Tax at statutory rate on earnings not subject to federal income tax
|
1,885
|
|
|
3,458
|
|
|
19,171
|
|
Expense (benefit) from income taxes
|
$
|
969
|
|
|
$
|
(758
|
)
|
|
$
|
—
|
|
The Company’s consolidated balance sheets as of
December 31, 2016
and
2015
contained the following current and deferred tax assets and liabilities, which are included in other assets and are recorded at the taxable subsidiary level.
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Current tax payable
|
|
|
|
|
Federal income tax payable
|
$
|
(114
|
)
|
|
$
|
(19
|
)
|
State and local income tax payable
|
(217
|
)
|
|
(3
|
)
|
Current tax payable, net
|
(331
|
)
|
|
(22
|
)
|
Deferred tax assets (liabilities)
|
|
|
|
|
Deferred tax asset
|
1,154
|
|
|
1,923
|
|
Deferred tax liability
|
(70
|
)
|
|
(126
|
)
|
Deferred tax asset, net
|
1,084
|
|
|
1,797
|
|
Valuation allowance
|
(642
|
)
|
|
(836
|
)
|
Total tax asset, net
|
$
|
111
|
|
|
$
|
939
|
|
The cost basis of land and depreciable property, net of accumulated depreciation, for federal income tax purposes as of
December 31, 2016
and
2015
was
$1,109,152
and
$1,141,531
, respectively (unaudited).
Deferred tax assets and liabilities applicable to the TRS entities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These assets and liabilities are measured using enacted tax rates for which the temporary differences are expected to be
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
recovered or settled. The effects of changes in tax rates on deferred tax assets and liabilities are recognized in earnings in the period enacted. Similarly, deferred income tax assets and liabilities are recorded at the date of contribution to the TRS entities to reflect the tax benefit/detriment on the movement of assets from the non-taxed REIT to the taxable TRS entities. The TRS entities deferred tax assets and liabilities are generally the result of real estate asset impairments, differing basis on capitalized assets, the timing of expense recognition for certain accrued liabilities, and net operating losses. In addition, during calendar year 2014, the Company recognized deferred tax assets assumed in the Internalization, which relate to net operating losses and differences in GAAP and tax treatment of assets acquired from the third-party property manager in Tampa (refer to Note 10 for descriptions of these transactions). As of
December 31, 2016
and
2015
, the TRS entities have recorded net deferred tax assets of
$1,084
and
$1,797
, respectively. Certain TRS entities have a history of operating losses and as a result, historically resulted in a full valuation allowance for their deferred tax assets. As of December 31, 2015, the Company determined it was more likely than not that certain deferred tax assets, including certain net operating loss carryforwards, would be realized. In making this determination, the Company analyzed, among other things, its recent history of earnings from certain sales of depreciable property and forecasts of future taxable earnings. The reversal of the deferred tax asset valuation resulted in an income tax benefit of
$964
during the year ended December 31,
2015
which is reported as income tax (expense) benefit, net on the consolidated statements of operations and comprehensive income (loss) and an offsetting asset of the same amount is included in other assets on the consolidated balance sheets.
The Company’s TRS entities have approximately
$1,598
and
$3,900
, respectively, of net operating loss carry-forwards available as of
December 31, 2016
and
2015
that will expire between December 31, 2032 and December 31, 2035.
Based on the Company’s evaluation, it has concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements of a contingent tax liability for uncertain tax positions. None of the Company’s consolidated entities are currently under federal or state audit for the years ended
December 31, 2016
,
2015
and
2014
, but these years remain subject to examination by the applicable tax jurisdictions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in the consolidated financial statements.
During the years ended
December 31, 2016
,
2015
and
2014
the Company’s tax treatment of dividends and distributions per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Tax treatment of dividends and distributions:
|
|
|
|
|
|
|
Ordinary dividends
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term capital gains
|
—
|
|
|
—
|
|
|
—
|
|
Nondividend distributions (return of capital)
|
0.52
|
|
|
0.46
|
|
|
0.16
|
|
Dividends and distributions declared per common share/unit outstanding
|
$
|
0.52
|
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Note 5. Debt
The following table presents the Company's debt as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
Interest Rate as of
December 31, 2016
|
|
Maturity Date
|
|
December 31, 2016
|
|
December 31, 2015
|
Securitization loan
|
|
2.68
|
%
|
(1)
|
|
September 9, 2019
(2)
|
|
303,452
|
|
|
$
|
304,966
|
|
Unamortized original issue discount
(3)
|
|
|
|
|
|
|
(786
|
)
|
|
(1,086
|
)
|
Unamortized deferred financing costs
|
|
|
|
|
|
|
(5,884
|
)
|
|
(8,139
|
)
|
Securitization loan, net
|
|
|
|
|
|
|
296,782
|
|
|
295,741
|
|
Revolving credit facility
|
|
4.04
|
%
|
(4)
|
|
February 18, 2018
(5)
|
|
352,799
|
|
|
326,472
|
|
Total
|
|
|
|
|
|
|
$
|
649,581
|
|
|
$
|
622,213
|
|
|
|
(1)
|
The securitization loan provides for monthly payments at a blended rate equal to the one-month LIBOR plus
1.84%
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. During the twelve months ended December 31, 2016, the Company executed the first 12-month extension option.
|
|
|
(3)
|
The original issue discount will be accreted and recognized to interest expense through the fully extended maturity date of September 9, 2019.
|
|
|
(4)
|
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%
and includes an unused fee as further described below.
|
|
|
(5)
|
The revolving credit facility had a borrowing capacity of up to
$400,000
and a maturity date of February 18, 2018. The revolving period ended on February 18, 2017 and the Company is no longer able to draw additional amounts under the revolving credit facility. Beginning August 18, 2017, pursuant to a recent amendment, all net cash generated by the properties in the Pledged Subsidiaries (as defined below) (after paying associated property-level expenses) is directed towards principal repayment rather than being distributed to the Company.
|
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 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
1.84%
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 years ended
December 31, 2016
,
2015
and
2014
, the Company incurred gross interest expense of
$7,584
,
$6,791
and
$2,594
, respectively, excluding amortization of the discount, deferred financing costs, other fees, the effect of any hedging derivatives and before the effect of capitalizing interest related to property renovations. As of
December 31, 2016
and
2015
, the loan had a weighted-average interest rate of
2.68%
and
2.30%
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.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
During the years ended
December 31, 2016
and
2015
, the Company paid down
$1,514
and
$7,085
, respectively, on the Securitization Loan to effect the release of certain properties from the first priority mortgages securing the Securitization Loan, including certain properties sold from the Southeast Florida and Houston, TX markets as described in Note 3.
The Securitization Loan has an initial term of
two
years, with
three
,
12
-month extension options, resulting in a fully extended maturity date of September 9, 2019. The 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. During the twelve months ended December 31, 2016, the Company 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 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
2,975
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 Company used
$235,160
of the Securitization Loan proceeds in 2014 to pay down the full balance of the Company's revolving credit facility at closing and the remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties and the repurchase of common stock. Simultaneously, the Company reduced the size of the revolving credit facility from
$350,000
to
$200,000
. As a result, the Company wrote off
$1,058
of deferred financing fees and reclassified
$480
from accumulated other comprehensive income (loss) to earnings due to hedge ineffectiveness in the associated interest rate cap agreements for the year ended December 31, 2014.
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
December 31, 2016
and
2015
, the Company had
$3,715
and
$5,139
, respectively, included in escrow deposits associated with the required reserves on the 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
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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
December 31, 2016
and
2015
, the Company believes it was in compliance with all financial covenants.
Revolving Credit Facility
Certain of the Company's subsidiaries have a revolving credit facility (the "revolving credit facility") with a syndicate of banks. On February 18, 2015, the Company amended and restated the revolving credit facility to increase the borrowing capacity to
$400,000
from
$200,000
and subsequently amended the revolving credit facility to address certain interest calculation mechanics. The revolving period ended February 18, 2017 and the Company is no longer able to draw additional amounts under the revolving credit facility. 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%
. Prior to the amendment, the revolving credit facility bore interest at varying rates of LIBOR plus
3.5%
subject to a LIBOR floor of
0.5%
, payable monthly. The Company is also required to pay a monthly fee on the unused portion of the revolving credit facility at a rate of
0.5%
per annum, when the balance outstanding is less than
$200,000
, or
0.3%
per annum when the balance outstanding is equal to or greater than
$200,000
. As part of the amendment, the term of the revolving credit facility was extended to February 18, 2018 and the advance rate for borrowings was increased to
65%
from
55%
. The advance rate is based on the aggregate value of the eligible properties which value is calculated as the lesser of (a) the third-party broker price opinion value or (b) the original purchase price plus certain renovation and other capitalized costs of the properties. The Company used proceeds from the revolving credit facility to fund the Portfolio Acquisition and other acquisitions of properties as referenced in Note 3. The remaining proceeds were used for working capital and other corporate purposes, including the acquisition, financing and renovation of properties.
As of
December 31, 2016
and
2015
,
$352,799
and
$326,472
, respectively, was outstanding under the revolving credit facility. As of
December 31, 2016
and
2015
, the interest rate on the revolving credit facility was
4.04%
and
3.68%
, respectively, inclusive of the unused fee. In the years ended
December 31, 2016
,
2015
and
2014
, the Company incurred
$13,020
,
$9,843
and
$6,073
, respectively, in gross interest expense on the revolving credit facility, excluding amortization of deferred financing costs, interest rate cap accretion and before the effect of capitalizing interest related to property renovations.
All amounts outstanding under the revolving credit facility are collateralized by the equity interests and assets of certain of the Company’s subsidiaries ("Pledged Subsidiaries"), which exclude the owners of the Securitization Properties. The amounts outstanding under the revolving credit facility and certain obligations contained therein are guaranteed by the Company and the Operating Partnership only in the case of certain bad acts (including bankruptcy) and up to
$20,000
for completion of certain property renovations, as outlined in the credit documents. As of
December 31, 2016
, there were approximately
5,840
properties pledged as collateral under the revolving credit facility, excluding properties recorded as held for sale.
The revolving credit facility provides for the restriction of cash 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
December 31, 2016
and
2015
, the Company had
$11,037
and
$10,101
, 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 revolving 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 revolving 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 revolving credit facility, however certain covenants contained therein may limit the amount of cash available for distribution. For example, beginning on August 18, 2017, pursuant to a recent amendment, all net cash generated by the properties in the Pledged Subsidiaries (after paying associated property-level expenses) is directed towards principal repayment rather than being distributed to the Company.
The revolving 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 worth of at least
$125,000
, as determined in accordance with the revolving credit facility agreement. The revolving credit facility also contains customary events of default for a facility of this type, including payment defaults, covenant defaults,
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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 revolving credit facility as of
December 31, 2016
and
2015
.
Total Borrowings
As of
December 31, 2016
, the Company had total outstanding borrowings of
$656,251
, of which borrowings under the Securitization Loan were
$303,452
and borrowings under the revolving credit facility were
$352,799
.
The following table summarizes the Company's contractual maturities of debt as of
December 31, 2016
(in thousands):
|
|
|
|
|
2017
|
$
|
—
|
|
2018
|
352,799
|
|
2019
|
303,452
|
|
2020
|
—
|
|
Thereafter
|
—
|
|
Total
|
$
|
656,251
|
|
The revolving credit facility was amended and restated on February 18, 2015 and has a maturity date of February 18, 2018. The Securitization Loan has an initial maturity date of September 9, 2016 and
three
,
12
-month extension options resulting in a fully extended maturity date of September 9, 2019; this table assumes the exercise of the
three
extension options, which is the Company's intent. During the twelve months ended December 31, 2016, the Company executed the first 12-month extension option.
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 consolidated statements of operations and comprehensive income (loss).
In connection with its Securitization Loan, the Company incurred deferred financing costs of
$19
,
$460
and
$11,040
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. The costs are being amortized through September 9, 2019, the fully extended maturity date of the Securitization Loan. Amortization of the deferred financing costs was
$2,260
,
$2,321
and
$865
for the years ended
December 31, 2016
,
2015
and
2014
, respectively. In conjunction with the paydown of the Securitization Loan related to the sale of the Houston portfolio, the Company wrote off
$174
in deferred financing costs for the year ended December 31, 2015, which has been included in net gain on disposition of real estate in the consolidated statements of operations and comprehensive income (loss).
In connection with its revolving credit facility, the Company incurred deferred financing costs of
$29
,
$5,323
and
$1,852
, respectively, for the years ended
December 31, 2016
,
2015
and
2014
. Amortization of the deferred financing costs was
$2,337
,
$2,141
and
$1,691
, respectively, for the years ended
December 31, 2016
,
2015
and
2014
.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Interest Expense
The following table presents the Company's total interest expense for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Gross interest expense
(1)
|
|
$
|
20,604
|
|
|
$
|
16,634
|
|
|
$
|
8,667
|
|
Amortization of discount on Securitization Loan
|
|
301
|
|
|
301
|
|
|
116
|
|
Amortization and write-off of deferred financing costs
(2)
|
|
4,597
|
|
|
4,494
|
|
|
3,613
|
|
Other interest
(3)
|
|
611
|
|
|
157
|
|
|
48
|
|
Capitalized interest
(4)
|
|
—
|
|
|
(311
|
)
|
|
(858
|
)
|
Total interest expense
|
|
$
|
26,113
|
|
|
$
|
21,275
|
|
|
$
|
11,586
|
|
|
|
(1)
|
Includes the Securitization Loan's monthly servicing fees.
|
|
|
(2)
|
For 2015, excludes deferred financing fees written-off in conjunction with the paydown of the Securitization Loan related to the sale of the Houston portfolio.
|
|
|
(3)
|
Includes monitoring service fees and interest related to the Company's designated derivative financial instruments (see Note 11).
|
|
|
(4)
|
The Company capitalizes interest for properties undergoing renovation activities and purchased subsequent to the Company obtaining debt in May 2013.
|
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 11). 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 11).
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.
The following table summarizes the consolidated derivative positions at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
2.68
|
%
|
|
4.04
|
%
|
|
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
December 31, 2016
.
|
|
|
(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 December 31, 2015, the Company held
four
interest rate cap agreements, which included
two
interest rate cap agreements with an aggregate notional amount of
$349,100
, LIBOR caps of
3.00%
, and termination dates of February 17, 2018
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
and February 18, 2018 associated with the revolving credit facility,
one
interest rate cap agreement with a notional amount of
$312,667
, a LIBOR cap of
3.1085%
, and a termination date of September 15, 2016 associated with the Securitization Loan and one forward-starting 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 revolving credit facility with an aggregate notional amount of
$349,100
, were purchased in the first quarter of 2015, at an aggregate purchase price of
$867
. In August 2014, the Company entered into the first interest rate cap agreement associated with the Securitization Loan with a notional amount of
$312,667
at a purchase price of
$293
. In January 2015, the Company entered into a forward-starting interest rate cap agreement associated with the Securitization Loan at a purchase price of
$1,383
. 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 11). 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 consolidated statements of operations and comprehensive income (loss).
In July 2016, the Company entered into
one
interest rate cap agreement at LIBOR of
3.1085%
with a notional amount of
$104,367
and a termination date of September 15, 2017 to hedge interest rate risk associated with its Securitization Loan. The Company determined that the interest rate cap agreement qualified for hedge accounting and, therefore, designated the derivative as a cash flow hedge. The interest rate cap agreement was subsequently de-designated as noted below.
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
$1,255
in accumulated other comprehensive income (loss) 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
|
In connection with the financing of the October 1, 2016 acquisition (see Note 3), effective September 29, 2016, the Company modified an existing interest rate cap agreement originally entered into on March 31, 2015 to increase the notional amount from
$266,100
to
$287,100
to hedge interest rate risk associated with its revolving credit facility. The Company determined that the interest rate cap agreement qualified for hedge accounting and, therefore, continued its designation of the derivative as a cash flow hedge. 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.
During the years ended
December 31, 2016
and
2015
, the Company paid
$30
and
$2,250
, respectively, in connection with the purchase of interest rate cap agreements which are included in other assets on the consolidated balance sheets and recorded at fair value (see Note 11).
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Capitalized Interest
The Company capitalizes interest for properties undergoing renovation activities and purchased subsequent to the Company obtaining debt in May 2013. Capitalized interest totaled
$0
,
$311
and
$858
, respectively, for the years ended
December 31, 2016
,
2015
and
2014
.
Note 6. Equity Incentive Plan
Restated 2012 Equity Incentive Plan
On December 4, 2012, the Company adopted an equity incentive plan (the "2012 Plan") which provides incentive compensation to attract and retain qualified directors, officers, advisors, consultants and other personnel of the Company. The 2012 Plan provides for grants of restricted common stock, phantom shares, dividend equivalent rights and other equity-based awards, originally subject to a ceiling of
921,053
shares available for issuance. The 2012 Plan allows for the Company’s board of directors to expand the types of awards available to include long-term incentive plan units in the future. If an award granted under the 2012 Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of future awards.
No
award may be granted under the equity incentive plan to any person who, assuming payment of all awards held by such person, would own or be deemed to own more than
9.8%
of the outstanding shares of the Company’s common stock.
On February 9, 2016 the Company's board of directors approved the amendment and restatement of the 2012 Plan (the "Restated 2012 Plan"), which was approved by stockholders on May 17, 2016. The amendment and restatement of the 2012 Plan increased the number of shares available for issuance by
1,500,000
shares and made certain other changes. Unless previously terminated by the Company's board of directors, no new award may be granted under the Restated 2012 Plan after February 9, 2026.
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.
Restricted Stock Awards
Restricted shares that have been awarded to certain personnel of the Company through December 31, 2015 vest in
three
annual installments commencing on the date of the grant, as long as such individual is an employee on the vesting date. Restricted shares that have been awarded to personnel and certain officers of the Company during the year ended December 31, 2016 vest in
one
year commencing on the date of the grant, as long as the individual is an employee on the vesting date. Restricted share awards to independent directors generally vest on the earlier of (i) the one year anniversary of the date of grant and (ii) the date immediately preceding the date of the annual meeting of the Company’s stockholders for the year following the year of grant for the award, as long as such director is serving as a board member on the vesting date.
The Company’s unvested restricted stockholders have the same voting rights as any other common stockholder. During the period of restriction, the Company’s unvested restricted stockholders receive quarterly dividend payments on their shares at the same rate and on the same date as any other common stockholder. For the years ended
December 31, 2016
,
2015
and
2014
inclusive of the impact of cash dividends, the Company recognized
$2,489
,
$2,274
and
$1,022
, respectively, of stock compensation expense related to the restricted stock awards.
On February 9, 2016, the Company issued, in aggregate,
127,648
shares of restricted common stock to certain officers and employees of the Company. The estimated fair value of these awards was
$12.97
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.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
On May 17, 2016, the Company awarded each of its
four
independent directors an equity retainer in the form of an award of
3,432
shares of restricted stock at a grant date fair value of
$14.57
per share. On August 2, 2016 the Company appointed a new independent director to the Company's Board of Directors who received
2,179
shares of restricted stock at a grant date fair value of
$18.11
per share. On August 31, 2016 the Company accepted the resignation from
one
independent director on the Company's Board of Directors effective August 31, 2016. In connection with this resignation, the Board of Directors accelerated the vesting of
997
shares of restricted stock held by such director.
As of
December 31, 2016
, the total compensation cost related to nonvested awards not yet recognized was
$508
and the weighted-average period over which such amount is expected to be recognized is
0.61 years
.
The table below summarizes the award activity of the restricted stock awards for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Shares
|
|
Weighted Average Grant Date
Fair Market Value
|
|
Shares
|
|
Weighted Average Grant Date
Fair Market Value
|
|
Shares
|
|
Weighted Average Grant Date
Fair Market Value
|
Outstanding at beginning of period
|
176,863
|
|
|
$
|
15.79
|
|
|
107,088
|
|
|
$
|
16.68
|
|
|
82,463
|
|
|
$
|
18.44
|
|
Granted
|
143,555
|
|
|
13.20
|
|
|
142,100
|
|
|
15.67
|
|
|
77,559
|
|
|
15.95
|
|
Vested
|
(148,934
|
)
|
|
(15.36
|
)
|
|
(63,157
|
)
|
|
(16.07
|
)
|
|
(43,437
|
)
|
|
(18.35
|
)
|
Forfeited
|
(11,466
|
)
|
|
(14.25
|
)
|
|
(9,168
|
)
|
|
(16.06
|
)
|
|
(9,497
|
)
|
|
(18.37
|
)
|
Outstanding at end of period
|
160,018
|
|
|
$
|
13.92
|
|
|
176,863
|
|
|
$
|
15.79
|
|
|
107,088
|
|
|
$
|
16.68
|
|
On January 4, 2017, the Company appointed a new independent director to the Company's Board of Directors who received
1,055
shares at a grant date fair value of
$17.27
per share.
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.
Performance Stock Units
The table below summarizes the award activity of the PSUs for
2016
and
2015
. There were no PSUs granted prior to 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Shares
|
|
Weighted Average Grant Date
Fair Market Value
|
|
Shares
|
|
Weighted Average Grant Date
Fair Market Value
|
Outstanding at beginning of period
|
165,000
|
|
|
$
|
7.00
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
60,000
|
|
|
15.76
|
|
|
165,000
|
|
|
7.00
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(85,000
|
)
|
|
7.00
|
|
|
—
|
|
|
—
|
|
Outstanding at end of period
|
140,000
|
|
|
$
|
10.75
|
|
|
165,000
|
|
|
$
|
7.00
|
|
As of December 31, 2016, the Company had
140,000
performance stock units (“PSUs”) granted to certain members of executive management under its equity incentive 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, which begins on the grant date 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").
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
On February 12, 2015, the Company granted
165,000
PSUs 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”). On June 21, 2016, the Company granted an additional
30,000
Absolute TSR PSUs to the Chief Executive Officer. On January 27, 2017, the Company granted an additional
30,000
Absolute TSR PSUs. The number of common stock is determined by multiplying the target number of PSUs by the TSR multiplier, determined in accordance with the following table:
|
|
|
|
Annualized TSR
|
|
TSR Multiplier
(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 each of June 21, 2016 and January 27, 2017, the Company granted an additional
30,000
PSUs to its 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 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.
The Company utilized a Monte-Carlo simulation to calculate the weighted-average grant date fair value for all outstanding PSUs. The grant date fair value of the Absolute TSR PSUs granted in
2016
and
2015
were
$12.84
and
$7.00
, respectively. The grant date fair value of the Relative TSR PSUs granted in
2016
was
$18.68
. The grant date fair value of the Absolute TSR PSUs and Relative TSR PSUs granted on January 27, 2017 was
$7.78
and
$13.67
, respectively.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
The following table summarizes the Monte-Carlo simulation inputs used to calculate the weighted-average grant date fair value of PSUs issued during the years ended December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Expected volatility
(1)
|
18.48
|
%
|
|
17.55
|
%
|
Dividend assumption
(2)
|
—
|
%
|
|
—
|
%
|
Expected term in years
|
3.00
|
|
|
3.00
|
|
Risk-free rate
|
0.89
|
%
|
|
1.02
|
%
|
Stock price (per share)
(3)
|
$
|
16.40
|
|
|
$
|
15.72
|
|
Beginning average stock price (per share)
(4)
|
$
|
14.47
|
|
|
$
|
16.06
|
|
|
|
(1)
|
For the 2016 grants, expected volatility is based on the Company's historical stock price volatility over the last three years using daily data points. For the 2015 grants, expected volatility is calculated as a
50.0%
relative weighting of the Company's historical volatility of
15.54%
(over the period from August 1, 2013 through the date of grant of the PSUs) and a
50.0%
relative weighting on the implied volatility of
19.55%
.
|
|
|
(2)
|
An assumed dividend yield of
0%
is the mathematical equivalent to the reinvestment of dividends, which is consistent with the TSR definition described above.
|
|
|
(3)
|
Based on the closing price of the Company's common stock on the date of the grant.
|
|
|
(4)
|
For the 2016 grants, based on the average closing price over the period from January 19, 2016 to June 21, 2016. For the 2015 grants, based on the
30
trading days ended on February 12, 2015.
|
During the year ended
December 31, 2016
and
2015
, the Company recognized non-cash performance-based stock unit expense of
$178
and
$339
, respectively, which is included within share-based compensation in the consolidated statements of operations and comprehensive income (loss). Unrecognized compensation expense at
December 31, 2016
was
$988
, and the weighted-average period over which such amount is expected to be recognized is
1.70 years
.
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
. 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
(1)
|
6.5%
|
|
—%
|
8%
|
|
25%
|
10%
|
|
50%
|
12%
|
|
100%
|
14%
|
|
125%
|
16%
|
|
150%
|
|
|
(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.
|
Note 7. Preferred Stock
During the Company's formation, it issued
1,000
shares of its
10%
cumulative redeemable preferred stock to a subsidiary of Two Harbors, which subsequently sold the shares. This preferred stock ranks, with respect to dividend rights and rights upon the Company's liquidation, dissolution or winding up, senior to the rights of holders of the Company’s common stock. The Company may issue other classes or series of capital stock in the future, including classes or series of preferred stock, and expressly designate such classes or series as ranking junior to, on parity with or senior to the
10%
cumulative redeemable preferred stock. The Company may not, however, issue capital stock ranking as to dividends or rights upon the
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Company's liquidation, dissolution or winding up, senior to the 10% cumulative redeemable preferred stock, without the affirmative vote or consent of two-thirds of the issued and outstanding shares of 10% cumulative redeemable preferred stock. Dividends shall accrue on a daily basis and be cumulative from the initial issue date. Dividends, if authorized by the board of directors, will be payable annually in arrears on June 30 of each year, or more frequently as determined by the board of directors. The Company has the option at any time after
five years
from the initial issue date of December 18, 2012 to redeem the 10% cumulative redeemable preferred stock at a redemption price of
$1
per share, plus all accrued and unpaid dividends. At any time, beginning on the sixth anniversary of the initial issue date, a preferred stockholder, with adequate notice, may put their shares back to the Company, at a redemption price of
$1
per share, plus all accrued and unpaid dividends.
As of both
December 31, 2016
and
2015
, there was
$21
in preferred stock dividends included in accounts payable and accrued expenses on the consolidated balance sheets.
Note 8. Stockholders’ Equity
Common stock
As of
December 31, 2016
, the Company had
35,380,034
shares of common stock outstanding. The following table presents the changes in the Company’s issued and outstanding common shares for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
Number of
Common Shares
|
Common shares outstanding, January 1, 2014
|
38,561,468
|
|
Restricted stock grants, net
|
68,062
|
|
Repurchase and retirement of common stock
|
(1,917,836
|
)
|
Common shares outstanding, December 31, 2014
|
36,711,694
|
|
Restricted stock grants, net
|
132,932
|
|
Repurchase and retirement of common stock
|
(781,439
|
)
|
Common shares outstanding, December 31, 2015
|
36,063,187
|
|
Restricted stock grants, net
|
132,089
|
|
Repurchase and retirement of common stock
|
(815,242
|
)
|
Common shares outstanding, December 31, 2016
|
35,380,034
|
|
On July 1, 2013, the Company’s board of directors authorized the Company to repurchase up to
2,500,000
shares of its common stock through a share repurchase program. On November 25, 2014, the Company's board of directors authorized an increase of
2,500,000
shares to the previously authorized share repurchase program for a total of
5,000,000
shares. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The manner, price, number and timing of share repurchases will be subject to a variety of factors, including market conditions and applicable U.S. Securities and Exchange Commission rules.
In the years ended
December 31, 2016
,
2015
and
2014
, the Company repurchased and retired
776,202
,
770,417
and
1,912,139
common shares, respectively, under the program for a total cost of
$11,281
,
$12,260
and
$31,396
, respectively, at an average purchase price of
$14.53
,
$15.91
and
$16.42
, respectively, inclusive of commission.
In the years ended
December 31, 2016
,
2015
and
2014
, respectively, the Company repurchased and retired
39,040
,
11,022
and
5,697
common shares, respectively, outside of the repurchase program for a total cost of
$512
,
$174
and
$93
, respectively, at an average purchase price of
$13.13
,
$15.74
and
$16.28
, respectively. The shares were repurchased from certain employees, officers, directors, advisors and certain personnel of the Former Manager and the Former Manager's operating subsidiary to cover the minimum statutory tax withholding obligations related to the vesting of restricted common stock.
On September 30, 2014, the Company issued
2,231,511
common units of the Operating Partnership to acquire the Former Manager (see Note 10).
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Common Stock Dividends
The following table presents cash dividends declared by the Company on its common stock for the
three years
ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Cash Dividend per Share
|
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
|
|
December 17, 2015
|
|
December 28, 2015
|
|
January 8, 2016
|
|
0.13
|
|
September 25, 2015
|
|
October 6, 2015
|
|
October 16, 2015
|
|
0.12
|
|
June 17, 2015
|
|
June 29, 2015
|
|
July 10, 2015
|
|
0.12
|
|
March 25, 2015
|
|
April 6, 2015
|
|
April 17, 2015
|
|
0.09
|
|
December 18, 2014
|
|
December 29, 2014
|
|
January 9, 2015
|
|
0.06
|
|
September 4, 2014
|
|
September 22, 2014
|
|
October 3, 2014
|
|
0.04
|
|
June 19, 2014
|
|
June 30, 2014
|
|
July 11, 2014
|
|
0.03
|
|
March 13, 2014
|
|
March 24, 2014
|
|
April 4, 2014
|
|
0.03
|
|
On
February 27, 2017
, our board of directors declared a quarterly dividend of
$0.13
per share payable on
April 14, 2017
, to shareholders of record on
April 3, 2017
.
Preferred Stock Dividends
The following table presents cash dividends declared by the Company on its
10%
cumulative redeemable preferred stock for the
three years
ended
December 31, 2016
:
|
|
|
|
|
|
|
|
Declaration Date
|
|
Payment Date
|
|
Cash Dividend per Share
|
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
|
|
January 8, 2016
|
|
January 8, 2016
|
|
22.78
|
|
September 29, 2015
|
|
October 16, 2015
|
|
26.67
|
|
June 17, 2015
|
|
June 30, 2015
|
|
23.06
|
|
March 25, 2015
|
|
April 17, 2015
|
|
27.22
|
|
January 9, 2015
|
|
January 9, 2015
|
|
26.67
|
|
October 3, 2014
|
|
October 3, 2014
|
|
22.78
|
|
June 25, 2014
|
|
June 30, 2014
|
|
26.94
|
|
April 2, 2014
|
|
April 4, 2014
|
|
23.33
|
|
January 1, 2014
|
|
January 10, 2014
|
|
24.72
|
|
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Note 9. 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 years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Net loss attributable to controlling interests
|
$
|
(2,463
|
)
|
|
$
|
(9,375
|
)
|
|
$
|
(56,554
|
)
|
Preferred distributions
|
(100
|
)
|
|
(100
|
)
|
|
(100
|
)
|
Net loss attributable to common stockholders
|
$
|
(2,563
|
)
|
|
$
|
(9,475
|
)
|
|
$
|
(56,654
|
)
|
Basic and diluted weighted average common shares outstanding
|
35,557,636
|
|
|
36,209,999
|
|
|
38,119,971
|
|
Net loss per common share - Basic and Diluted
|
$
|
(0.07
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(1.49
|
)
|
A total of
2,231,511
common units were outstanding from September 30, 2014 through
December 31, 2016
which have been excluded from the calculations of diluted EPS as their inclusion would not be dilutive. In addition,
102,458
performance stock units, inclusive of applicable dividend equivalent rights, have been excluded from the calculation of diluted EPS for the year ended
December 31, 2016
as their inclusion would not be dilutive, even though their market conditions had been met. During the year ended December 31,
2015
,
165,000
performance stock units have been excluded from the calculation of diluted EPS as their market conditions had not been met. There were no PSUs granted prior to February 12, 2015.
Note 10. Related Party Transactions
Management Internalization Transaction
On September 30, 2014, the Company closed the Internalization after receiving the required stockholder approval for the transaction. The Internalization was completed under the terms of a contribution agreement (the "Contribution Agreement") among the Company, Pine River Domestic Management L.P., Provident, the Former Manager, and the Operating Partnership, pursuant to which the Company acquired the Former Manager in exchange for
2,231,511
common units of the Operating Partnership. These common units are redeemable for cash or, at the Company's election, the Company's common shares on a
one
-for-one basis.
The Contribution Agreement included a net worth adjustment, payable in cash, in the event that the closing net worth of the Former Manager was greater or less than
$0
after making an adjustment to exclude any liabilities for accrued bonus compensation payable to the Chief Executive Officer and personnel providing data analytics directly supporting the investment function of the Company. The Company settled the net worth adjustment on September 30, 2014 based on estimated amounts. The Company finalized the net worth adjustment in the fourth quarter of 2014 and the settlement was de minimis. As a result of this transaction, as of September 30, 2014, the Company no longer pays fees or expense reimbursements to the Former Manager or the Former Manager's operating subsidiary.
The Company recognized
$39,373
in the third and fourth quarters of 2014 in connection with the Internalization, which is recorded as management internalization expense in the accompanying consolidated statements of operations and comprehensive income (loss). The Internalization expense primarily consists of the issuance of the
2,231,511
common units of the Operating Partnership with a fair value of
$36,173
, based on the stock price on the date of closing of
$16.21
. The issuance of the common units was recognized as an expense as it represented the cost of terminating the advisory management fee agreement. The remaining amounts in management internalization were attributable to transaction fees and expenses, and the assumption of certain liabilities in connection with the transaction. The Company acquired cash of
$2,069
and other net liabilities of
$2,067
in the transaction.
Upon Internalization, the Company assumed net operating losses and a deferred tax asset of the Former Manager's operating subsidiary. The Company has elected to have this new entity be treated for tax purposes as a TRS. See Note 4 for further detail on income taxes.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Advisory Management Agreement
Prior to the Internalization, the Company and the Former Manager maintained an advisory management agreement whereby the Former Manager designed and implemented the Company’s business strategy and administered its business activities and day-to-day operations, subject to oversight by the Company’s board of directors. In exchange for these services, the Former Manager earned a fee equal to
1.5%
per annum, or
0.375%
per quarter, of the Company’s daily average fully diluted market capitalization, as defined by the agreement, calculated and payable quarterly in arrears. The fee was reduced for the
5%
property management fee (described below) received by the Former Manager’s operating subsidiary or its affiliates under the property management and acquisition services agreement. The Company also reimbursed the Former Manager for all expenses incurred on its behalf or otherwise in connection with the operation of its business, other than compensation for the Chief Executive Officer and personnel providing data analytics directly supporting the investment function.
During the year ended December 31, 2014, the Company expensed
$6,621
in advisory management fees, net of the reduction for the 5% property management fee described below. As of December 31, 2014, the Company had settled the final advisory management fee payable and had
$0
outstanding related to the advisory management fee.
The Company also reimbursed the Former Manager for certain general and administrative expenses, primarily related to employee compensation and certain office costs. Direct and allocated costs incurred by the Former Manager on behalf of the Company totaled
$0
for both the years ended
December 31, 2016
and
2015
and totaled
$5,476
for the year ended December 31,
2014
. As of
December 31, 2016
and
2015
, the Company did not have an outstanding balance due to the Former Manager and affiliates on the consolidated balance sheets.
Property Management and Acquisition Services Agreement
Prior to the Internalization, the Company and the Former Manager's operating subsidiary maintained a property management and acquisition services agreement pursuant to which the Former Manager's operating subsidiary acquired and managed single-family properties on the Company's behalf. For these services, the Company reimbursed the Former Manager’s operating subsidiary for all direct expenses incurred in the operation of its business, including the compensation of its employees. The Former Manager’s operating subsidiary also received a property management fee equal to
5%
of certain costs and expenses incurred by it in the operation of its business that were reimbursed by the Company. Prior to the Internalization, this
5%
property management fee reduced the advisory management fee paid to the Former Manager on a dollar-for-dollar basis. Upon Internalization, the Former Manager's operating subsidiary performing these services was acquired.
Prior to the Internalization, through the nine months ended September 30, 2014, the Company incurred property management expense of
$7,569
, which included direct expense reimbursements of
$5,120
and the
5%
property management fee of
$288
. The remaining
$2,161
of property management fees incurred prior to the Internalization was incurred to reimburse the Former Manager's operating subsidiary for direct property management type expenses and payments due directly to third-party property managers. In addition, the Company incurred charges with the Former Manager's operating subsidiary of
$608
in acquisitions and renovation fees, which the Company capitalized as part of property acquisition and renovation costs and
$11
for leasing services, which are reflected as other assets and are being amortized over the life of the leases (typically
one
year or less). Following the Internalization, the Company incurred property management expense of
$1,832
for total 2014 expense of
$9,401
.
As of
December 31, 2016
and
2015
, the Company did not have an outstanding balance due to the Former Manager and affiliates on the consolidated balance sheets for property management and acquisition services.
In June 2014, the Former Manager's operating subsidiary acquired the Company's third-party property manager in Tampa, who provided services exclusively to the Company, for
$775
. No significant assets or liabilities were acquired or assumed as part of the transaction and the payment was recorded as a one-time general and administrative expense.
Note 11. Derivative and Other Fair Value Instruments
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:
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
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 5) 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 table provides a summary of the aggregate fair value measurements for the Hedging Derivatives and the location within the consolidated balance sheets at
December 31, 2016
and
2015
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
Description
|
|
Balance Sheet Location
|
|
December 31, 2015
|
|
Quoted Prices (Unadjusted) for Identical Assets/Liabilities
(Level 1)
|
|
Quoted Prices for Similar Assets and Liabilities in Active Markets
(Level 2)
|
|
Significant
Unobservable Inputs
(Level 3)
|
Non-Designated Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
Other Assets
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
Other Assets
|
|
712
|
|
|
—
|
|
|
712
|
|
|
—
|
|
Total
|
|
|
|
$
|
721
|
|
|
$
|
—
|
|
|
$
|
721
|
|
|
$
|
—
|
|
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
The following table provides a summary of the effect of Hedging Derivatives on the Company’s consolidated statements of operations and comprehensive income (loss) for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion
|
Description
|
|
Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) on Derivative
|
|
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Location of Gain/(Loss) Recognized in Income on Derivative
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
Non-Designated Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
$
|
—
|
|
|
Adjustments for derivative instruments, net
|
|
$
|
(136
|
)
|
|
N/A
|
|
$
|
—
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
(683
|
)
|
|
Interest Expense
|
|
(171
|
)
|
|
N/A
|
|
—
|
|
Interest Rate Swaps
|
|
4,830
|
|
|
N/A
|
|
—
|
|
|
N/A
|
|
—
|
|
|
|
$
|
4,147
|
|
|
|
|
$
|
(307
|
)
|
|
|
|
$
|
—
|
|
The following table provides a summary of the effect of Hedging Derivatives on the Company’s consolidated statements of operations and comprehensive income (loss) for the year ended
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion
|
Description
|
|
Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) on Derivative
|
|
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Location of Gain/(Loss) Recognized in Income on Derivative
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
$
|
(1,587
|
)
|
|
Interest Expense
|
|
$
|
(9
|
)
|
|
Adjustments for derivative instruments, net
|
|
$
|
(51
|
)
|
The following table provides a summary of the effect of Hedging Derivatives on the Company’s consolidated statements of operations and comprehensive income (loss) for the year ended
December 31, 2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
Ineffective Portion
|
Description
|
|
Amount of Gain/(Loss) Recognized in Other Comprehensive Income (Loss) on Derivative
|
|
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
|
Location of Gain/(Loss) Recognized in Income on Derivative
|
|
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
$
|
(291
|
)
|
|
Interest Expense
|
|
$
|
(1
|
)
|
|
N/A
|
|
$
|
(480
|
)
|
As of
December 31, 2016
and
2015
, there were approximately
$2,841
and
$(1,613)
, respectively, in deferred gains (losses) in accumulated other comprehensive income (loss) related to Hedging Derivatives. The Company expects to recognize approximately
$593
in interest expense during the year ending
December 31,
2017
, pertaining to the interest rate cap agreements, which will be reclassified out of accumulated other comprehensive income (loss), 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
$207
into earnings during the year ended
December 31,
2017
, pertaining to the de-designated interest rate cap agreements (as discussed below), which will be reclassified out of accumulated other
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
comprehensive income (loss) 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.
In association with the pay down of the revolving credit facility in the third quarter of 2014, the Company de-designated the
three
interest rate cap agreements associated with the revolving credit facility and concurrently reclassified
$480
in deferred losses from accumulated other comprehensive income (loss) to income which is recorded as adjustments for derivative instruments, net on the consolidated statements of operations and comprehensive income (loss). All future gains and losses associated with these interest rate cap agreements were recorded in earnings. During the year ended December 31, 2014, the Company recorded a loss of
$49
related to the change in fair value following the de-designation of the
three
interest rate cap agreements associated with the revolving credit facility (see Note 5).
In conjunction with the paydown of the revolving credit facility in the fourth quarter of 2015, the Company recorded a portion of the
$266,100
interest rate cap agreement as ineffective. Current and future gains and losses associated with the ineffective portion of this interest rate cap agreement will be recorded as adjustments for derivative instruments, net on the consolidated statements of operations and comprehensive income (loss). During the year ended December 31, 2015, the Company recorded
$51
in losses as ineffectiveness in interest rate cap agreements associated with the revolving credit facility.
In August 2016, the Company entered into a series of interest rate swaps (see Note 5) 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
December 31, 2016
of
$1,255
in deferred losses in accumulated other comprehensive income (loss) to earnings over the remaining life of the associated interest rate cap agreements. During the year ended
December 31, 2016
, the Company realized
$180
in gains 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 asset. Assets held for sale are valued based on comparable sales data, less estimates of third-party broker commissions, which are gathered from the markets (see Note 2). These impairment measurements constitute nonrecurring fair value measures under ASC 820 and the inputs are characterized as Level 2.
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 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
December 31, 2016
and
2015
.
|
|
•
|
Cash, escrow deposits, resident prepaid rent and security deposits, resident rent receivable (included in other assets), 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 revolving credit facility has a floating interest rate based on an index plus a spread and the credit spread is consistent with those demanded in the market for facilities with similar risk and maturities. Accordingly, the interest rate on this borrowing is at market and thus the carrying value of the debt approximated fair value as of
December 31, 2016
and
2015
. The Company categorizes the fair value measurement of this liability as Level 2.
|
|
|
•
|
The fair value of the Company's Securitization Loan was
$301,582
and
$293,536
as of
December 31, 2016
and
2015
, respectively, based on an average of market quotations. The Company categorizes the fair value measurement of this liability as Level 2.
|
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
|
|
•
|
The Company’s
10%
cumulative redeemable preferred stock had a fair value which approximates its liquidation value at
December 31, 2016
and
2015
. The Company categorizes the fair value measurement of this instrument as Level 2.
|
Note 12.
Commitments and Contingencies
Concentrations
As of
December 31, 2016
, approximately
61%
of the Company’s properties were located in Phoenix, AZ, Tampa, FL, and Atlanta, GA, which exposes the Company to greater economic risks than if the Company owned a more geographically dispersed portfolio.
Resident security deposits
As of
December 31, 2016
, the Company had
$12,992
in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the underlying lease.
Operating leases
Upon Internalization, the Company assumed certain commitments that were previously those of the Former Manager or the Former Manager’s operating subsidiary. The Company leases certain office facilities under operating leases, some of which include rent payment escalation clauses, with lease terms ranging from
one
to
five years
. In addition to minimum lease payments, some of the Company's office facility leases require payment of a proportionate share of fees and taxes and building operating expenses.
In the years ended
December 31, 2016
,
2015
and
2014
the Company incurred
$890
,
$837
and
$104
, respectively, in rental expense on operating leases.
A schedule of future minimum lease payments under non-cancelable operating leases for the following years is as follows:
|
|
|
|
|
2017
|
$
|
574
|
|
2018
|
445
|
|
2019
|
360
|
|
2020
|
296
|
|
2021
|
203
|
|
Thereafter
|
—
|
|
Total
|
$
|
1,878
|
|
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 consolidated financial statements and, therefore,
no
accrual has been recorded as of
December 31, 2016
.
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
Note 13. Quarterly Financial Data (Unaudited)
Following is quarterly financial data for
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenue
|
$
|
31,136
|
|
|
$
|
31,488
|
|
|
$
|
31,561
|
|
|
$
|
32,450
|
|
Net (loss) income
|
(3,589
|
)
|
|
(222
|
)
|
|
(1,665
|
)
|
|
2,862
|
|
Net (loss) income attributable to common stockholders
|
(3,404
|
)
|
|
(234
|
)
|
|
(1,592
|
)
|
|
2,667
|
|
(Loss) income per share attributable to common shares - basic
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
(Loss) income per share attributable to common shares and units - diluted
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarter Ended
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
Total revenue
|
$
|
22,252
|
|
|
$
|
30,184
|
|
|
$
|
30,617
|
|
|
$
|
30,641
|
|
Net loss
|
(3,841
|
)
|
|
(3,886
|
)
|
|
(1,427
|
)
|
|
(798
|
)
|
Net loss attributable to common stockholders
|
(3,644
|
)
|
|
(3,686
|
)
|
|
(1,368
|
)
|
|
(777
|
)
|
Loss per share attributable to common shares - basic and diluted
|
(0.10
|
)
|
|
(0.10
|
)
|
|
(0.04
|
)
|
|
(0.02
|
)
|
During the quarter ended
December 31, 2016
, the Company recorded net income attributable to common stockholders of
$2,667
, as such, the Company has reported diluted EPS of
$0.07
for the quarter. The diluted weighted average shares outstanding during the quarter included
2,231,511
common units and
147,176
performance stock units, inclusive of applicable dividend equivalent rights, as their market conditions had been met.
D
uring the fourth quarter of 2015, the Company recorded a tax benefit of
$964
related to the reversal of a deferred tax valuation allowance for the portion of the Company’s deferred tax assets that the Company believes meets the “more-likely than not” realizability test as described in Note 4.
Note 14. Subsequent Events
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”). Under 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 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”).
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data and property counts)
The completion 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 Company anticipates the Merger and Partnership Merger will close in the second quarter of 2017.
Silver Bay Realty Trust Corp.
Schedule III — Real Estate and Accumulated Depreciation
As of December 31, 2016
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Encumbrances
|
|
Initial Cost to Company
|
|
Costs Capitalized Subsequent to Acquisitions
|
|
Total Cost
|
|
|
|
|
|
|
|
|
Market Location
|
|
Number of Owned Properties
|
|
Number of Encumbered Properties
(1)
|
|
Encumbrances
(1)
|
|
Land
|
|
Building
|
|
Land Improvements
|
|
Building Improvements
|
|
Land and Land Improvements
|
|
Building and Improvements
|
|
Total
(2)
|
|
Accumulated Depreciation
(3)
|
|
Date of Construction Range
|
|
Date
Acquired
|
Atlanta, GA
|
|
2,949
|
|
|
2,922
|
|
|
$
|
177,088
|
|
|
$
|
68,523
|
|
|
$
|
243,412
|
|
|
$
|
32
|
|
|
$
|
39,943
|
|
|
$
|
68,555
|
|
|
$
|
283,355
|
|
|
$
|
351,910
|
|
|
$
|
23,737
|
|
|
1900 - 2013
|
|
2012 - 2016
|
Phoenix, AZ
|
|
1,422
|
|
|
1,422
|
|
|
137,502
|
|
|
34,070
|
|
|
136,484
|
|
|
23
|
|
|
33,187
|
|
|
34,093
|
|
|
169,671
|
|
|
203,764
|
|
|
23,526
|
|
|
1944 - 2010
|
|
2012 - 2013
|
Tampa, FL
|
|
1,136
|
|
|
1,098
|
|
|
95,552
|
|
|
30,872
|
|
|
104,533
|
|
|
114
|
|
|
29,340
|
|
|
30,986
|
|
|
133,873
|
|
|
164,859
|
|
|
16,404
|
|
|
1941 - 2010
|
|
2012 - 2016
|
Charlotte, NC
|
|
689
|
|
|
671
|
|
|
36,782
|
|
|
15,957
|
|
|
63,237
|
|
|
9
|
|
|
7,020
|
|
|
15,966
|
|
|
70,257
|
|
|
86,223
|
|
|
5,323
|
|
|
1941 - 2013
|
|
2012 - 2016
|
Orlando, FL
|
|
522
|
|
|
490
|
|
|
29,548
|
|
|
12,171
|
|
|
48,954
|
|
|
22
|
|
|
10,136
|
|
|
12,193
|
|
|
59,090
|
|
|
71,283
|
|
|
5,544
|
|
|
1937 - 2012
|
|
2012 - 2016
|
Dallas, TX
|
|
511
|
|
|
493
|
|
|
32,682
|
|
|
11,643
|
|
|
44,963
|
|
|
38
|
|
|
12,448
|
|
|
11,681
|
|
|
57,411
|
|
|
69,092
|
|
|
5,623
|
|
|
1958 - 2010
|
|
2012 - 2016
|
Jacksonville, FL
|
|
451
|
|
|
418
|
|
|
28,268
|
|
|
11,937
|
|
|
35,005
|
|
|
6
|
|
|
12,732
|
|
|
11,943
|
|
|
47,737
|
|
|
59,680
|
|
|
4,349
|
|
|
1944 - 2009
|
|
2013 - 2015
|
Northern CA
|
|
381
|
|
|
381
|
|
|
36,749
|
|
|
14,943
|
|
|
47,608
|
|
|
79
|
|
|
10,482
|
|
|
15,022
|
|
|
58,090
|
|
|
73,112
|
|
|
8,179
|
|
|
1909 - 2006
|
|
2012 - 2013
|
Las Vegas, NV
|
|
290
|
|
|
290
|
|
|
28,593
|
|
|
2,064
|
|
|
32,916
|
|
|
—
|
|
|
6,429
|
|
|
2,064
|
|
|
39,345
|
|
|
41,409
|
|
|
5,624
|
|
|
1970 - 2009
|
|
2012 - 2014
|
Columbus, OH
|
|
284
|
|
|
284
|
|
|
18,741
|
|
|
4,468
|
|
|
18,032
|
|
|
—
|
|
|
10,881
|
|
|
4,468
|
|
|
28,913
|
|
|
33,381
|
|
|
3,284
|
|
|
1947 - 2009
|
|
2013 - 2014
|
Tucson, AZ
|
|
209
|
|
|
208
|
|
|
12,819
|
|
|
2,673
|
|
|
10,266
|
|
|
10
|
|
|
4,736
|
|
|
2,683
|
|
|
15,002
|
|
|
17,685
|
|
|
2,208
|
|
|
1940 - 2008
|
|
2012 - 2013
|
Southeast FL
|
|
200
|
|
|
142
|
|
|
12,925
|
|
|
7,290
|
|
|
19,511
|
|
|
12
|
|
|
10,612
|
|
|
7,302
|
|
|
30,123
|
|
|
37,425
|
|
|
2,662
|
|
|
1950 - 2005
|
|
2013 - 2015
|
|
|
9,044
|
|
|
8,819
|
|
|
$
|
647,249
|
|
|
$
|
216,611
|
|
|
$
|
804,921
|
|
|
$
|
345
|
|
|
$
|
187,946
|
|
|
$
|
216,956
|
|
|
$
|
992,867
|
|
|
$
|
1,209,823
|
|
|
$
|
106,463
|
|
|
|
|
|
|
|
(1)
|
Encumbrances include the number of properties pledged under the revolving credit facility and the number of properties secured by first priority mortgages under the Securitization Loan, as well as the aggregate value of outstanding debt attributable to such properties, excluding the original issue discount. There are
87
properties in various markets classified as assets held for sale as of
December 31, 2016
that are encumbered under the Company's revolving credit facility and Securitization Loan for an aggregate total of
$9.0 million
that have been excluded from Schedule III.
|
|
|
(2)
|
The gross aggregate cost of total real estate for federal income tax purposes was approximately
$1,217,745
at
December 31, 2016
(unaudited).
|
|
|
(3)
|
Depreciation of building and improvements is computed on the straight-line basis over the estimated useful life of
3
to
27.5 years
, with no salvage value.
|
The changes in investments in real estate for the years ended December 31,
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of year
|
|
$
|
1,209,684
|
|
|
$
|
948,370
|
|
|
$
|
776,304
|
|
Acquisition of real estate
|
|
44,037
|
|
|
273,266
|
|
|
136,045
|
|
Improvements
|
|
14,157
|
|
|
24,299
|
|
|
38,188
|
|
Dispositions and other
(1)
|
|
(58,055
|
)
|
|
(36,251
|
)
|
|
(2,167
|
)
|
Balance, end of year
|
|
$
|
1,209,823
|
|
|
$
|
1,209,684
|
|
|
$
|
948,370
|
|
The changes in accumulated depreciation for the years ended December 31,
2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance, beginning of year
|
|
$
|
74,907
|
|
|
$
|
43,150
|
|
|
$
|
18,897
|
|
Depreciation expense
|
|
35,962
|
|
|
33,617
|
|
|
24,281
|
|
Dispositions and other
(1)
|
|
(4,406
|
)
|
|
(1,860
|
)
|
|
(28
|
)
|
Balance, end of year
|
|
$
|
106,463
|
|
|
$
|
74,907
|
|
|
$
|
43,150
|
|
|
|
(1)
|
Includes assets transferred to held for sale.
|