Silver Bay Realty Trust Is Cheap, But Is It Any Better Than Competitor American Homes 4 Rent?

The latest results from Silver Bay Realty Trust (NYSE: SBY  ) continue to highlight a concerning problem with the structure of the company. It is the prime reason that investors aren't interested in the company's stock despite it trading considerably below the net asset value that grows on a quarterly basis.

Silver Bay Realty was created to exploit an opportunity to invest in attractive housing prices and the expanding single-family rental market.

Prior to the financial crisis, mom-and-pop investors with a few rental homes dominated the sector. Silver Bay, along with other recently established companies like American Residential (NYSE: ARPI  ) and American Homes 4 Rent (NYSE: AMH  ) , rushed into the market. While a lot of the rental properties were purchased during the ongoing housing crisis at values below replacement costs, the firms still have the important task of proving that the individual investments can scale to generate profits for investors.

Expenses remain too high
The first quarter provided more insight into the trend that everybody feared with Silver Bay Realty.

With the company reaching an aggregate portfolio occupancy rate of 92%, its portfolio has moved from the formation stage with expenses remaining too high. For the quarter, the company absorbed costs of $2.9 million for property management, $2.2 million for advisory management fees, and another $2.1 million for general and administrative costs.

Out of $18.1 million in quarterly revenue, the Silver Bay spent an incredible $7.2 million on those administrative-related expenses, or in essence the costs that a sole proprietor would handle on the side in renting a house.

Silver Bay achieved operating margins of 50%, but only about 10% made it to the funds from operations (FFO) line due to the awfully high expenses of managing the business.

Considering the relatively low leverage, investors aren't getting a very good return for their investments with all the revenue spent on management and administrative costs.

Are competitors that much better?
American Homes 4 Rent only had a total occupancy rate of 81% at the end of the first quarter, but the company appears to have much lower costs than Silver Bay Realty. It's possible that with a much larger portfolio at 25,000 houses the company achieves better economies of scale, but it appears to be more of an administrative issue with Silver Bay having a costly financial advisor.

During the quarter, American Homes 4 Rent generated FFO of nearly 30% of revenues (compared to the meager 11% by Silver Bay) even though it had a lower occupancy rate. American Homes has a noticeable lack of the administrative, advisory, and property management expenses.

While the numbers aren't broken out equally by the firms on the income statement, American Homes only has a $5.1 million expense for general and administrative and zero advisory fees on revenue of $77.3 million, compared to the combined $4.3 million paid by Silver Bay on a revenue base of only $18.1 million.

Though American Residential continues to ramp up property acquisitions, the company has very favorable expenses compared to Silver Bay.

While the company does have relatively high administrative costs that amount to over 20% of revenue, it doesn't have the separate expensive property management costs of Silver Bay. As with American Homes 4 Rent, American Residential sits with only an 81% occupancy rate following the addition of 689 single-family homes during the quarter.

Bottom line
Despite Silver Bay Realty trading below estimated NAV, the company's stock isn't showing much lift. The nearly 30% gain required to reach NAV of $20.21 isn't worth the risks to most investors concerned that the costs are rampant.

With a much higher occupancy rate than other single-family rental stocks, the company doesn't have very favorable cost controls. In addition, concerns probably exist that the estimated NAV isn't accurately reflecting the price the company would obtain in bulk sales of nearly 6,000 homes.

Keep Silver Bay on a watch list, but it is difficult to own until expense controls improve.

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