You Guys Know You Have Houses in Columbus, Right?

In a completely unprecedented course of action that is based on nothing more than my whimsical nature and the timing of Q3 Earnings Reports coming out, I have actually written blog posts in consecutive days. Don’t get used to that.

The Q3 report I am referencing is, of course, that of our good friends at Silver Bay (SBY) who were the first of the three publicly traded SFR REITs, approaching their first birthday (their IPO date was in Dec of 2012). While American Homes 4 Rent (AMH) and American Residential Properties Inc. (ARPI) are also just as active in the space, and certainly more patriotic, neither have released their earnings yet, and as of their Q2s did not have any inventory in MSAs that I also had inventory. So, I will continue to focus on SBY.

A good place to start is that SBY actually did exactly what they said they would do on their Q2 call. Their overall occupancy continued on its uptrend (going from 65% leased to 81% leased), which is probably a good thing since they didn’t bother to acquire a whole lot of houses. At the end of their Q2, they had 5,571 properties in total, and at the end of Q3 they had 5,575 properties. So, they bought um… carry the 1… 4 properties. Ok… not really. They also sold a lot of properties that they found did not fit their model (during the Q&A of their conference call their CEO referred to this as “cleaning up the portfolio”, which btw, is a euphemism I will totally steal if I screw up this badly). But, what is very clear, is that there was a huge shift in operational focus from acquisition to renovation/leasing across virtually their entire portfolio.

I say virtually because they did not apply this particular shift in focus to their operations in Columbus, OH. In fact, they really didn’t seem to focus on anything at all in Columbus. As of their Q2, which you may remember from one of my previous posts, SBY had 273 properties in Columbus, 66 of which were leased out, and had an aggregated cost basis of $82K /property or $22.4MM all told. Compare that to their Q3 numbers of 284 properties, 98 of which were leased out, with an aggregated cost of $89K/property or $25.2 MM all told. In other words, the net increase to their portfolio of 11 properties resulted in an additional 32 leased properties, which, when viewed in a vacuum as progress, is actually quite good (nearly double their leased inventory). But, we are still talking about 65.5% vacancy here. 65.5%!!!!

What’s more, these numbers get far worse when viewed as inputs to the yield that these homes produce. The 98 leased houses are generating an average of $979/mo in rent, or a GSI of $1,151,304 annually. On a $25.2 MM investment. The GRM here is 22. That’s absolutely terrible. Let’s look even deeper though, at what the cap rate is, since this is a publicly traded company that utilized IPO equity (along with a $200M credit facility) to facilitate these acquisitions. Anyhow, we’re going to assume $1000/property in property taxes annually, and a 45% additional expense ratio (because that is how I underwrite my own portfolio, with the exception of substituting actual property tax numbers for the estimate). So, we are now talking about an NOI of $579,317, on that same investment of $25.2 MM, which results in a cap rate of 2.3%… which, to be fair, is higher than their Q2 Columbus cap rate of 1.56%. Slightly higher.

So like… what they hell was their Columbus team doing?

I honestly have no idea. The analysts had similar questions, and the COO pointed to the fact that operations in Columbus and other underperforming markets (mainly in FL) paralleled the ramp-ups in markets that they eventually stabilized. As if that were like, a good thing. In my mind though, continuing to build in a 6 month period from acquisition to lease-up will continue to be a flaw in their business model, so there needs to be a fundamental shift in that mindset if they are going to be successful. You can say that the problem is that acquisitions scale more quickly than renovation/leasing, and that’s definitely a true statement (and one that their COO made), but it doesn’t apply if you stop actually acquiring more properties and don’t make a significant dent on the occupancy ratio. Which is what happened in Columbus. Just bizarre.

While SBY is having trouble with occupancy in Columbus, our holdings in Columbus in our existing entities, as well as the newly acquired properties in our newly created fund, Patriarch Real Estate Fund, continue to show strong performance and occupancy numbers. You can expect a detailed post on that some time next week!