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Silver Bay Realty Files IPO To Be First Single-Family Rental REIT

Likely Won't Be the Last
September 19, 2012
Silver Bay Realty Trust Corp. is aiming to be the first firm out of the IPO gate to become a publicly traded REIT focused on the acquisition, renovation, leasing and management of single-family rental properties for rental income and long-term capital appreciation.

The proposed REIT won't be alone in chasing deals in the distressed housing market as several private investors have also been raising money for such ventures.

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The Minnetonka, MN-based Silver Bay filed a proposed initial public offering of its common stock looking to raise up to $287.5 million.

Two Harbors Investment Corp., a New York-based publicly traded mortgage REIT, will contribute its portfolio of some 700 single-family rental properties valued at approximately $75 million to help form the venture.

The contribution is intended to be part of a larger transaction in which Silver Bay expects to acquire two other large portfolios containing about 800 homes from Provident Real Estate Advisors LLC while concurrently offering its common stock.

Silver Bay will be externally managed by PRCM Real Estate Advisers LLC, a joint venture between a Pine River Capital Management affiliate and Provident Real Estate, a private capital management firm. An affiliate of Pine River also serves as the external manager of Two Harbors Investment.

In its IPO filing, Silver Bay called the large-scale, single-family residential rental industry a relatively new market in the U.S.

"Until recently, this industry has been fragmented in both its ownership and operations, consisting primarily of private and individual investors in local markets and managed by local property managers," Silver Bay stated. As a result, the firm believes a compelling opportunity exists to accumulate a large portfolio of properties and lease them to tenants for attractive yields.

Given recent turbulence in U.S. housing and mortgage markets, the firm said the opportunity for such a large-scale effort is driven by three key factors:
Housing prices in certain markets remain at a significant discount to replacement cost;
Large quantities of single-family properties remain available at these distressed prices;
Strong demand exists for single-family rental properties from renters.

Competition Coming for Money, Properties Raising Risks

The company said it expects to have plenty of competitors in trying to buy these houses in bulk.

"Traditionally, foreclosed properties and loans in respect of properties in pre-foreclosure were sold individually to private home buyers and small-scale investors. The sale of these assets in bulk pools and the entry into this market of large, well-capitalized institutional investors, including us, are relatively recent trends, which we expect to intensify in the near future," the company said.

"Several other REITs and other funds have recently deployed, or are expected to deploy in the near future, significant amounts of capital to these asset categories, and may have investment objectives that overlap with ours," the company said.

Some of those companies are already showing up.

Maynada Investment Group in Miami reported this week that it has raised $26.6 million for its private single-family rental REIT called Maynada REIT. Carlos A. Guajard, the REIT's sponsor, has already acquired 130 properties.

Also this month, Pacifica Companies LLC purchased 699 Fannie Mae properties in Florida as part of the Federal Housing Finance Agency's real estate owned (REO) pilot initiative. The purchase price paid by Pacifica was $12.33 million for its interest, which resulted in an estimated transaction valuation to Fannie Mae of $78.1 million or 95.8% of a third-party valuation. That would place the individual average price of the homes in the portfolio at $111,731.

The FHFA's pilot REO-to-rental program, which aims to reduce the inventory of foreclosed assets from Fannie Mae and other government-sponsored entities, recently began soliciting bids on roughly 2,500 properties in eight of the hardest-hit U.S. metropolitan areas.

Fitch Ratings analyst said that market interest for single-family rentals is strong. With the private label RMBS market stalled and the inventory of foreclosed homes and distressed borrowers elevated, financing of single-family rental properties may provide alternative investment opportunities for traditional non-agency RMBS buyers, such as Two Harbors.

Management Will be Key

According to Fitch, one of the factors that could make or break single-family rental investors is the expertise of the manager. Silver Bay employs a centralized property management and monitoring infrastructure, combined with local personnel located in its geographically diverse target markets.

So strong is the interest in these properties that the Office of the Comptroller of the Currency this week issued U.S. banks new supervisory guidances on risk management and reporting requirements for investor-owned one- to four-family residential properties (IORR).

The OCC said that the credit risk presented by IORR lending is similar to that associated with loans for income-producing commercial real estate (CRE). Because of this similarity, the OCC told banks it expects them to use the same types of credit risk management practices for IORR lending that are used for CRE lending.

"Borrowers may finance multiple properties through one or more financial institutions," the OCC warned. "Underwriting standards and the complexity of risk analysis should increase as the number of properties financed for a borrower and related parties increases. When a borrower finances multiple IORR properties, a comprehensive global cash flow analysis of the borrower is generally necessary to properly underwrite and administer the credit relationship. In such cases, bank management should analyze and administer the relationship on a consolidated basis."

Many expect that the acquisition loans for these properties will eventually be securitized. The securitization approach may offer a number of advantages to investors and other market participants, including its ability to achieve economies of scale, its capacity for efficient allocation of resources, and its use of risk tranching to allow investors with different risk appetites to participate, according to S&P.

Given the current extent of the REO inventory and its potential to grow, the market's enthusiasm for the REO-to-rent market's securitization potential may well be justified. Various estimates placed the number of REO properties between 480,000 and 500,000 at the end of first-quarter 2012, including $31 billion of mortgages on non-agency properties, according to CoreLogic.

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