UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
 
 
FORM 10-Q
 
ý       QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016  
or
 
o          TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to              
Commission File Number 001-37560
 
SILVER BAY REALTY TRUST CORP.
(Exact name of registrant as specified in its charter)
Maryland
90-0867250
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
3300 Fernbrook Lane North, Suite 210
Plymouth, Minnesota
55447
(Address of principal executive offices)
(Zip Code)
(952) 358-4400
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o
Accelerated filer  x
 
 
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
 
As of October 31, 2016 , there were 35,380,034 shares of common stock, par value $0.01 per share, outstanding.
 


SILVER BAY REALTY TRUST CORP.
 
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q and its exhibits contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Examples of forward-looking statements include statements about our projected operating results, our ability to successfully lease and operate acquired properties, including turnover rates, projected operating costs, estimates relating to our ability to make distributions to our stockholders in the future, market trends in our industry, real estate values and prices, and the general economy.
 
The forward-looking statements contained in this Quarterly Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed or implied in any forward-looking statement. We are not able to predict all of the factors that may affect future results. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements include national, international, regional or local economic, business, competitive, market and regulatory conditions and the following:
 
•
Those factors described in the discussion on risk factors in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 (and any updates to those risk factors included in Part II, Item 1A, “Risk Factors,” in this Quarterly Report), Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risk" in this Quarterly Report on Form 10-Q and other risks and uncertainties detailed in this and our other reports and filings with the Securities and Exchange Commission;

•
Our ability to successfully employ a new and untested business model in a new industry with no proven track record;

•
Poor performance of the properties acquired in the Portfolio Acquisition (defined below);

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

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

•
Our ability to maintain high occupancy rates and to attract and retain qualified residents in light of increased competition in the leasing market for quality residents and the relatively short duration of our leases;
 
•
Our ability to maintain rents at levels that are sufficient to keep pace with rising costs of operations;
 
•
Lease defaults by our residents;
 
•
Our ability to contain renovation, maintenance, turnover, marketing, and other operating costs for our properties;
 
•
Our ability to continue to build our operational expertise and to establish our platform and processes related to residential management;

•
Our dependence on key personnel to carry out our business and investment strategies and our ability to hire and retain skilled managerial, investment, financial, and operational personnel;


1

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

•
Our ability to obtain additional capital or debt financing to expand our portfolio of single-family properties and our ability to repay our debt, including borrowings under our revolving credit facility and securitization loan and to meet our other obligations under our revolving credit facility and securitization loan;

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

•
The accuracy of assumptions in determining whether a particular property meets our investment criteria, including assumptions related to estimated time of possession and estimated renovation costs and time frames, annual operating costs, market rental rates and potential rent amounts, time from purchase to leasing, and resident default rates;

•
Our ability to accurately estimate the time and expense required to possess, renovate, repair, upgrade, and rent properties and to keep them maintained in rentable condition, and the existence of unforeseen defects and problems that require extensive renovation and capital expenditures;

•
The concentration of our investments in single-family properties which subject us to risks inherent in investments in a single type of property and seasonal fluctuations in rental demand;

•
The concentration of our properties in our markets, which increases the risk of adverse changes in our operating results if there were adverse developments in local economic conditions or the demand for single-family rental homes or natural disasters in these markets; and

•
Failure to qualify as a REIT or to remain qualified as a REIT, which will subject us to federal income tax at regular corporate rates and could subject us to a substantial tax liability.
 
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable laws. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.



2

PART I
 
FINANCIAL INFORMATION
 
Item 1. Financial Statements
Silver Bay Realty Trust Corp.
Condensed Consolidated Balance Sheets
(amounts in thousands except share data)
 

September 30, 2016 (unaudited)
 
December 31, 2015
Assets
 

 
 

Investments in real estate:
 

 
 

Land and land improvements
$
213,978

 
$
220,110

Building and improvements
975,967

 
989,574

 
1,189,945

 
1,209,684

Accumulated depreciation
(99,386
)
 
(74,907
)
Investments in real estate, net
1,090,559

 
1,134,777

Assets held for sale
18,473

 
11,184

Cash
37,320

 
29,028

Escrow deposits
65,590

 
15,472

Resident security deposits
12,784

 
12,521

Other assets
8,197

 
13,298

Total assets
$
1,232,923

 
$
1,216,280

Liabilities and Equity
 

 
 

Liabilities:
 

 
 

Revolving credit facility
$
364,130

 
$
326,472

Securitization loan, net
296,754

 
295,741

Accounts payable and accrued expenses
24,687

 
16,752

Resident prepaid rent and security deposits
14,561

 
14,462

Total liabilities
700,132

 
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; 35,380,133 and 36,063,187, respectively, shares issued and outstanding
352

 
359

Additional paid-in capital
643,011

 
651,987

Accumulated other comprehensive loss
(1,646
)
 
(1,613
)
Cumulative deficit
(141,477
)
 
(121,620
)
Total stockholders’ equity
500,240

 
529,113

Noncontrolling interests - Operating Partnership
31,551

 
32,740

Total equity
531,791

 
561,853

Total liabilities and equity
$
1,232,923

 
$
1,216,280

 


See accompanying notes to the condensed consolidated financial statements.
3


Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands except share data)
(unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenue:
 

 
 

 
 

 
 

Rental income
$
30,750

 
$
29,919

 
$
91,895

 
$
81,184

Other income
811

 
698

 
2,290

 
1,869

Total revenue
31,561

 
30,617

 
94,185

 
83,053

Expenses:
 

 
 

 
 

 
 

Property operating and maintenance
6,262

 
6,529

 
17,875

 
16,479

Real estate taxes
4,563

 
3,918

 
13,493

 
11,864

Homeowners’ association fees
410

 
512

 
1,258

 
1,465

Property management
2,778

 
3,167

 
8,291

 
8,262

Depreciation and amortization
9,243

 
9,068

 
27,938

 
25,074

Portfolio acquisition expense
123

 
66

 
123

 
2,046

General and administrative
3,514

 
3,925

 
11,104

 
11,924

Share-based compensation
661

 
718

 
2,009

 
1,895

Severance and other
310

 
—

 
1,977

 
—

Interest expense
6,589

 
5,959

 
19,093

 
15,307

Total expenses
34,453

 
33,862

 
103,161

 
94,316

Loss before other income, income taxes and non-controlling interests
(2,892
)
 
(3,245
)
 
(8,976
)
 
(11,263
)
Other income:
 
 
 
 
 
 
 
Net gain on disposition of real estate
2,417

 
2,089

 
6,158

 
2,320

Adjustments for derivative instruments, net
(120
)
 
—

 
(120
)
 
—

Other expense
(646
)
 
(223
)
 
(1,436
)
 
(64
)
Total other income
1,651

 
1,866

 
4,602

 
2,256

Loss before income taxes and non-controlling interests
(1,241
)
 
(1,379
)
 
(4,374
)
 
(9,007
)
Income tax expense, net
(424
)
 
(48
)
 
(1,102
)
 
(147
)
Net loss
(1,665
)
 
(1,427
)
 
(5,476
)
 
(9,154
)
Net loss attributable to noncontrolling interests - Operating Partnership
98

 
84

 
321

 
531

Net loss attributable to controlling interests
(1,567
)
 
(1,343
)
 
(5,155
)
 
(8,623
)
Preferred stock distributions
(25
)
 
(25
)
 
(75
)
 
(75
)
Net loss attributable to common stockholders
$
(1,592
)
 
$
(1,368
)
 
$
(5,230
)
 
$
(8,698
)
Loss per share - basic and diluted:
 

 
 

 
 

 
 

Net loss attributable to common shares
$
(0.05
)
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.24
)
Weighted average common shares outstanding
35,385,138

 
36,071,146

 
35,617,262

 
36,257,449

 
 
 
 
 
 
 
 


See accompanying notes to the condensed consolidated financial statements.
4


Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands except share data)
(unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Comprehensive Loss:
 

 
 

 
 

 
 

Net loss
$
(1,665
)
 
$
(1,427
)
 
$
(5,476
)
 
$
(9,154
)
Other comprehensive loss:
 

 
 

 
 

 
 

Net change in fair value of cash flow hedges
357

 
(1,014
)
 
(281
)
 
(1,503
)
Losses reclassified into earnings from other comprehensive income (loss)
167

 
—

 
248

 
—

Other comprehensive income (loss)
524

 
(1,014
)
 
(33
)
 
(1,503
)
Comprehensive loss
(1,141
)
 
(2,441
)
 
(5,509
)
 
(10,657
)
Comprehensive loss attributable to noncontrolling interests- Operating Partnership
68

 
84

 
327

 
531

Comprehensive loss attributable to controlling interests
$
(1,073
)
 
$
(2,357
)
 
$
(5,182
)
 
$
(10,126
)
 



See accompanying notes to the condensed consolidated financial statements.
5


Silver Bay Realty Trust Corp.
Condensed Consolidated Statement of Changes in Equity
(amounts in thousands except share data)
(unaudited)
 
Common Stock
 
Accumulated 
Other
Comprehensive Loss
 
 
 
Total Stockholders’
Equity
 
Noncontrolling Interests - Operating
Partnership
 
 
 
Shares
 
Par Value
Amount
 
Additional Paid-In
Capital
 
 
Cumulative
Deficit
 
 
 
Total
Equity
Balance at January 1, 2016
36,063,187

 
$
359

 
$
651,987

 
$
(1,613
)
 
$
(121,620
)
 
$
529,113

 
$
32,740

 
$
561,853

Non-cash equity awards, net
132,089

 
1

 
1,939

 
—

 
—

 
1,940

 
—

 
1,940

Repurchase and retirement of common stock
(815,143
)
 
(8
)
 
(11,783
)
 
—

 
—

 
(11,791
)
 
—

 
(11,791
)
Dividends declared
—

 
—

 
—

 
—

 
(14,702
)
 
(14,702
)
 
—

 
(14,702
)
Net loss
—

 
—

 
—

 
—

 
(5,155
)
 
(5,155
)
 
(321
)
 
(5,476
)
Net change in fair value of cash flow hedges
—

 
—

 
—

 
(281
)
 
—

 
(281
)
 
—

 
(281
)
Losses reclassified into earnings from other comprehensive loss
—

 
—

 
—

 
248

 
—

 
248

 
—

 
248

Adjustment to noncontrolling interests - Operating Partnership
—

 
—

 
868

 
—

 
—

 
868

 
(868
)
 
—

Balance at September 30, 2016
35,380,133

 
$
352

 
$
643,011

 
$
(1,646
)
 
$
(141,477
)
 
$
500,240

 
$
31,551

 
$
531,791

 




See accompanying notes to the condensed consolidated financial statements.
6


Silver Bay Realty Trust Corp.
Condensed Consolidated Statements of Cash Flows
(amounts in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash Flows From Operating Activities:
 

 
 

Net loss
$
(5,476
)
 
$
(9,154
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
27,938

 
25,074

Non-cash share-based compensation
1,940

 
1,826

Losses reclassified into earnings from other comprehensive loss
248

 
—

Amortization and write-off of deferred financing costs
3,456

 
3,341

Amortization of discount on securitization loan
225

 
225

Net gain on disposition of real estate
(6,158
)
 
(2,320
)
Other
1,633

 
1,129

Net change in assets and liabilities:
 
 
 
Increase in escrow cash for operating activities and debt reserves
(8,675
)
 
(3,776
)
Decrease (increase) in other assets
193

 
(3,733
)
Increase in accounts payable, accrued expenses, and prepaid rent
8,911

 
10,459

Net cash provided by operating activities
24,235

 
23,071

Cash Flows From Investing Activities:
 

 
 

Purchase of investments in real estate
(1,632
)
 
(272,679
)
Capital improvements of investments in real estate
(11,596
)
 
(20,698
)
(Increase) decrease in escrow cash for investing activities
(39,667
)
 
959

Proceeds from disposition of real estate
28,711

 
21,063

Other
—

 
(43
)
Net cash used in investing activities
(24,184
)
 
(271,398
)
Cash Flows From Financing Activities:
 

 
 

Payments on securitization loan
(910
)
 
(6,866
)
Proceeds from revolving credit facility
47,819

 
281,963

Payments on revolving credit facility
(10,161
)
 
(4,805
)
Deferred financing costs paid
(122
)
 
(5,783
)
Purchase of interest rate cap agreements
(30
)
 
(2,250
)
Change in interest rate swap collateral
(1,776
)
 
—

Repurchase and retirement of common stock
(11,791
)
 
(12,326
)
Dividends paid
(14,788
)
 
(10,434
)
Net cash provided by financing activities
8,241

 
239,499

Net change in cash
8,292

 
(8,828
)
Cash at beginning of period
29,028

 
49,854

Cash at end of period
$
37,320

 
$
41,026

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Decrease in fair value of cash flow hedges
$
281

 
$
1,503

Noncash investing and financing activities:
 
 
 
Common stock and unit dividends declared, but not paid
$
4,869

 
$
4,572

Capital improvements in accounts payable
$
307

 
$
1,058





See accompanying notes to the condensed consolidated financial statements.
7

SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)


Note 1.  Organization and Operations
 
Silver Bay Realty Trust Corp. ("Silver Bay" or the "Company") is a Maryland corporation that focuses on the acquisition, renovation, leasing and management of single-family properties in select markets in the United States.

As of September 30, 2016 , the Company owned 8,837 single-family properties for rental purposes in Arizona, California, Florida, Georgia , Nevada, North Carolina, Ohio, South Carolina and Texas, excluding properties reflected as assets held for sale on its condensed consolidated balance sheets.

In connection with its initial public offering in 2012, the Company restructured its ownership to conduct its business through a traditional umbrella partnership in which substantially all of its assets are held by, and its operations are conducted through, Silver Bay Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership. This structure is commonly referred to as an "UPREIT". The Company's wholly owned subsidiary, Silver Bay Management LLC, is the sole general partner of the Operating Partnership. As of September 30, 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.

During 2015, the Company acquired a portfolio of 2,461 properties from The American Home Real Estate Investment Trust, Inc. (the "Portfolio Acquisition"). The Portfolio Acquisition was substantially completed on April 1, 2015 with an aggregate purchase price of $263,000 . 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

Consolidation and Basis of Presentation

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP"), have been condensed or omitted according to such SEC rules and regulations. Management believes, however, that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 . In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2016 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2016 may not be indicative of the results for a full year.  

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

8
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

outside parties are included in noncontrolling interest within the condensed consolidated financial statements. The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions regarding future events that may affect the reported amounts and disclosures in the financial statements. The Company’s estimates are inherently subjective in nature and actual results could differ from these estimates.
 
Reclassifications
 
Certain reclassifications have been made to amounts in prior period financial statements to conform to current period presentation. These reclassifications have not changed the previously reported results of operations or stockholders' equity.

Escrow Deposits

Escrow deposits include cash held in reserve at financial institutions, as required by the Company's debt agreements described in Note 4, refundable earnest money deposits associated with the acquisition described in Note 3, and money held at financial institutions for cash flow hedge collateral.

Income Taxes

The Company intends to operate and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code") and intends to comply with the requirements of the Code relating to REITs. The Company has TRSs where certain investments may be made and activities conducted that may have otherwise been subject to the prohibited transactions tax or may not be favorably treated for purposes of complying with the various requirements for REIT qualification. The income and
losses within the TRSs are subject to federal, state, and local income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. The Company recognized income tax expense of $424 and $1,102 in the three and nine months ended September 30, 2016 , respectively, compared to $48 and $147 in the three and nine months ended September 30, 2015 , respectively, primarily related to income taxes on net gain on disposition of real estate in the TRS entities.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the "JOBS Act"), the Company meets the definition of an “emerging growth company.” The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised U.S. accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. The Company will cease to be an "emerging growth company" under the JOBS Act on December 31, 2017.

The Company considers the applicability and impact of all accounting standard updates ("ASUs"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company's consolidated financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should 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. This standard is effective for interim or annual periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. 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 impact the adoption of Topic 606 will have on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. This update is intended to improve 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. The Company adopted ASU 2015-02 during the

9
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

quarter ended March 31, 2016. Based on the Company's 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 94.1% of the Operating Partnership, the Company will continue to consolidate the Operating Partnership under this new guidance.

In April 2015, the FASB issued ASU 2015-03,  Simplifying the Presentation of Debt Issuance Costs.  The amendments in this ASU require that 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. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU and will continue to be reported as interest expense. This guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. The Company adopted this ASU as of January 1, 2016 and as a result of the retrospective adoption of this guidance, deferred financing costs, net of amortization of $6,441 and $8,139 at September 30, 2016 and December 31, 2015 , respectively, are netted against the carrying values of the securitization loan. Previously, these costs were recorded as part of deferred financing costs, net on the condensed consolidated balance sheets. Additionally, in accordance with ASU 2015-15,  Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,  issued in August 2015, the Company will continue to present debt issuance costs related to its revolving credit facility as an asset within other assets on the condensed consolidated balance sheets and amortize them ratably over the term of the related facility.

In February 2016, the FASB issued ASU 2016-02, Leases , which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than one year. Lessor accounting will remain similar to lessor accounting under previous GAAP, while aligning with the FASB's new revenue recognition guidance. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact the adoption of this ASU will have 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.

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 flow. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.

Note 3. Investments in Real Estate

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. In order to complete the transaction on October 1, 2016, the Company placed $39,675 in earnest money deposit with a third party escrow agent as of September 30, 2016 . The homes are located in Atlanta, GA, Tampa, FL and Orlando, FL.

10
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)


During both the three and nine months ended September 30, 2016 , the Company incurred $123 in transaction expenses associated with the acquisition of properties. During the three and nine months ended September 30, 2015 , the Company incurred $66 and $2,046 , respectively, in transaction expenses associated with the Portfolio Acquisition. These costs are included in portfolio acquisition expense in the condensed consolidated statements of operations and comprehensive loss.
 
Sale of Real Estate Assets

During the three and nine months ended September 30, 2016 , the Company sold certain properties, primarily in Southeast Florida and Southern California, for an aggregate sales price of $11,261 and $28,711 , respectively, resulting in an aggregate net gain of $2,417 and $6,158 , respectively, which has been classified as net gain on disposition of real estate in the condensed consolidated statements of operations and comprehensive loss. In connection with these asset sales, certain debt repayments were made. During the three and nine months ended September 30, 2015 , the Company sold certain properties, primarily in Houston, TX, for an aggregate sales price of $18,356 and $21,063 , respectively, resulting in an aggregate net gain of $2,089 and $2,320 , respectively. In accordance with ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity , the disposals were not considered a discontinued operation. Any holding costs associated with homes being sold are reflected within held for sale expenses and are classified as other expense in the condensed consolidated statements of operations and comprehensive loss.

In connection with assets held for sale, the Company recognized $255 and $504 in impairment charges for the three and nine months ended September 30, 2016 , respectively, and $14 and $46 in impairment charges for the three and nine months ended September 30, 2015 , respectively, classified within other expense on the condensed consolidated statements of operations and comprehensive loss.

Note 4.  Debt

The following table presents the Company's debt as of September 30, 2016 and December 31, 2015 :

 
 
 
 
 
 
 
Carrying Amount
 
 
Interest Rate as of
September 30, 2016
 
Maturity Date
 
September 30, 2016
 
December 31, 2015
Securitization loan
 
2.50
%
(1)  
 
September 9, 2019 (2)
 
$
304,056

 
$
304,966

Unamortized original issue discount (3)
 
 
 
 
 
 
(861
)
 
(1,086
)
Unamortized deferred financing costs
 
 
 
 
 
 
(6,441
)
 
(8,139
)
Securitization loan, net
 
 
 
 
 
 
296,754

 
295,741

Revolving credit facility
 
3.89
%
(4)  
 
February 18, 2018 (5)
 
364,130

 
326,472

Total
 
 
 
 
 
 
$
660,884

 
$
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.
(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 provides for a borrowing capacity of up to $400,000 and has a maturity date of February 18, 2018. In the final year of the revolving credit facility, all cash generated by the properties in the Pledged Subsidiaries (as defined below) must be used to pay down the principal amount outstanding under the revolving credit facility.

11
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)


Securitization Loan

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

The Securitization Loan provides for monthly payments 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 1.94% , 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. In the three and nine months ended September 30, 2016 , the Company incurred gross interest expense of $1,917 and $5,611 , respectively, excluding amortization of the discount, deferred financing costs and other fees. In the three and nine months ended September 30, 2015 , the Company incurred gross interest expense of $1,706 and $5,081 , respectively, excluding amortization of the discount, deferred financing costs and other fees. As of September 30, 2016 and December 31, 2015, the loan had a weighted-average interest rate of 2.50% 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.

During the nine months ended September 30, 2016 and 2015 , the Company paid down $910 and $6,866 , 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 had an initial term of two years, with three , 12 -month extension options, resulting in a fully extended maturity date of September 9, 2019. The Borrower may execute the extension options provided there is no event of default under the Securitization Loan, the Borrower obtains a replacement interest rate cap agreement in a form reasonably acceptable to the lender and the Borrower complies with the other terms set forth in the loan agreement. During the nine months ended September 30, 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 .

All amounts outstanding under the Securitization Loan are secured by first priority mortgages on the securitization properties (the "Securitization Properties"), a pool of approximately 3,000 properties, 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. As long as the Securitization Loan is outstanding, the assets of the Borrower and Equity Owner are not available to satisfy the debts and obligations of the Company or its other consolidated subsidiaries and the liabilities of the Borrower and Equity Owner are not liabilities of the Company (excluding, for this purpose, the Borrower and Equity Owner) or its other consolidated subsidiaries. The Company is permitted to receive distributions from the Borrower out of unrestricted cash as long as the Borrower is current with all payments and in compliance with all other obligations under the Securitization Loan.

The Securitization Loan provides for the restriction of cash whereby the Company must set aside funds for payment of real estate taxes, capital expenditures and other reserves associated with the Securitization Properties. There is also a cash management account controlled by the lender for the collection of all rents and cash generated by the Borrower's properties. In the event of default, the lender may apply funds, as the lender elects, from the cash management account, foreclose on its security interests, appoint a new property manager, and in limited circumstances, enforce the Company's guaranty. As of September 30, 2016 and December 31, 2015, the Company had $6,060 and $5,139 , respectively, included in escrow deposits associated with the required reserves on the condensed consolidated balance sheets.


12
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

The Securitization Loan does not contractually restrict the Company's ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. The Securitization Loan documents require the Company to maintain certain covenants, including a minimum debt yield on the Securitization Properties, and contain customary events of default for a loan of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments and cross-default with certain other indebtedness. As of September 30, 2016 and December 31, 2015 , the Company believes it was in compliance with all financial covenants under the Securitization Loan.

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. 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 0.00% . Prior to the amendment, the revolving credit facility bore interest at varying rates of three-month LIBOR plus 3.50% subject to a LIBOR floor of 0.50% , 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 0.50% per annum when the balance outstanding is less than $200,000 , or 0.30% 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 September 30, 2016 and December 31, 2015 , $364,130 and $326,472 , respectively, was outstanding under the revolving credit facility. As of September 30, 2016 and December 31, 2015 , the interest rate on the revolving credit facility was 3.89% and 3.68% , respectively, inclusive of the unused fee. In the three and nine months ended September 30, 2016 , the Company incurred $3,225 and $9,374 , respectively, in gross interest expense on the revolving credit facility, excluding amortization of deferred financing costs and interest rate cap accretion. In the three and nine months ended September 30, 2015 , the Company incurred $2,989 and $6,898 , respectively, in gross interest expense on the revolving credit facility, excluding amortization of deferred financing costs 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 (the "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 September 30, 2016 there were approximately 5,680 properties pledged as collateral under the revolving credit facility.

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 Pledged Subsidiaries or the Company. However, 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.

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 September 30, 2016 and December 31, 2015 , the Company had $17,848 and $10,101 , respectively, included in escrow deposits associated with the required reserves.

The revolving credit facility 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. For example, in the final year of the revolving credit facility, all cash generated by the properties in the Pledged Subsidiaries must be used to pay down the principal amount outstanding under the revolving credit facility. 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

13
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

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, 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 September 30, 2016 and December 31, 2015 .

Deferred Financing Costs

Costs incurred in the placement of the Company’s debt are being amortized using the straight-line method, which approximates the effective interest method, over the terms of the related debt. Amortization of deferred financing costs is recorded as interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss.  

In connection with its Securitization Loan, the Company incurred deferred financing costs of $17 and $460 , for the nine months ended September 30, 2016 and 2015 , respectively. The costs are being amortized through September 9, 2019, the fully extended maturity date of the Securitization Loan. In conjunction with the paydown of the Securitization Loan related to the sale of the Houston, TX portfolio, the Company wrote off $174 in deferred financing costs for both the three and nine months ended September 30, 2015 , which has been included in net gain on disposition of real estate in the condensed consolidated statements of operations and comprehensive loss.

In connection with its revolving credit facility, the Company incurred deferred financing costs of $105 and $5,323 , for the nine months ended September 30, 2016 and 2015 , respectively.

Interest Expense

The following table presents the Company's total interest expense for the three and nine months ended September 30, 2016 and 2015 :

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Gross interest expense (1)
 
$
5,142

 
$
4,695

 
$
14,985

 
$
11,979

Amortization of discount on Securitization Loan
 
75

 
75

 
225

 
225

Amortization and write-off of deferred financing costs
 
1,155

 
1,167

 
3,456

 
3,341

Other interest (2)
 
217

 
22

 
427

 
73

Capitalized interest (3)
 
—

 
—

 
—

 
(311
)
Total interest expense
 
$
6,589

 
$
5,959

 
$
19,093

 
$
15,307

(1)
Includes the Securitization Loan's monthly servicing fees.
(2)
Includes monitoring service fees and interest related to the Company's designated derivative financial instruments (see Note 8).
(3)
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 8). Changes in the fair value of the designated portion of the Company's Hedging Derivatives that qualify for hedge accounting are recognized through other comprehensive income (loss) (see Note 8).

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


14
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

The following table summarizes the consolidated derivative positions at September 30, 2016 :

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

 
$
370,100

 
$
296,000

Weighted average interest rate (2)
 
2.50
%
 
3.89
%
 
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 September 30, 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.

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. 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 $1,390 in accumulated other comprehensive 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.

During the nine months ended September 30, 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 condensed consolidated balance sheets and recorded at fair value (see Note 8).


15
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

Note 5. 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 under the 2012 Plan. The 2012 Plan allows for the Company’s board of directors to expand the types of awards available under the 2012 Plan 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 2012 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.

Restricted Stock Awards

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, with each award having a fair market value of $50 . On August 2, 2016, the Company appointed a new independent director to the Company's Board of Directors. The independent director was awarded an equity retainer in the form of an award of 2,179 shares of restricted stock with a fair market value of $39 based upon a prorated calculation of the annual equity retainer. In addition, 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. Annual equity retainers for such independent directors will vest as to all of such shares on the earlier of (i) the one year anniversary of the date of grant and (ii) the date immediately preceding the date of the Company's next annual meeting of stockholders, subject, in each case, to the independent director's continued service to the Company through the vesting date.

Performance Stock Units
    
On June 21, 2016, the Company granted performance stock units ("PSUs") under the Restated 2012 Plan to its newly-named permanent Chief Executive Officer. The award was based on a target number of 60,000 PSUs. 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. 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").


16
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

Fifty percent of the award will vest based on the Company's annualized TSR during the performance period on an absolute (i.e., non-relative) basis (the "Absolute TSR PSUs"). Subject to continued employment until the end of the performance period, the number of shares of common stock eligible to be received will be determined by multiplying fifty percent of the target number of PSUs by the TSR Multiplier determined in accordance with the following table:

Annualized TSR
 
TSR Multiplier (1)
Up to 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 will be used to determine the TSR Multiplier.

The remaining fifty percent of the award 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. Subject to continued employment until the end of the performance period, the number of shares of common stock eligible to be received will be determined by multiplying fifty percent of the target number of PSUs by the TSR Multiplier determined in accordance with the following table:

TSR Relative to Peer Group
 
TSR Multiplier (1)
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%

(1)
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 of $12.84 per unit for the Absolute TSR PSUs and a weighted-average grant date fair value of $18.68 per unit for the Relative TSR PSUs, for a total estimated compensation expense of $946 over the 36 -month performance period, using the following assumptions:

Expected volatility (1)
18.48
%
Dividend assumption (2)
—
%
Expected term in years
3.00

Risk-free rate
0.89
%
Stock price (per share) (3)
$
16.40

Beginning average stock price (per share) (4)
$
14.47


(1)
Expected volatility is based on the Company’s historical stock price volatility over the last three years using daily data points.
(2)
An assumed dividend yield of 0% is the mathematical equivalent to the reinvestment of dividends, which is consistent with the TSR definition described above.
(3)
Based on the closing price of the Company's common stock on June 21, 2016.
(4)
Based on the average closing price over the period from January 19, 2016 to June 21, 2016.


17
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

Note 6.  Stockholders’ Equity

Common Stock

On July 1, 2013, the Company’s board of directors authorized the Company to repurchase up to 2,500,000 shares of its common stock through a share repurchase program. On November 25, 2014, the Company's board of directors authorized an increase of 2,500,000 shares to the previously authorized share repurchase program for a total of 5,000,000 shares. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or by any combination of such methods. The manner, price, number and timing of share repurchases will be subject to a variety of factors, including market conditions and applicable SEC rules.
 
During the nine months ended September 30, 2016 , the Company repurchased and retired 776,202 shares under the program for a total cost of $11,281 , at an average purchase price of $14.53 per share, inclusive of commissions. During the nine months ended September 30, 2015 , the Company repurchased and retired 770,417 shares under the program for a total cost of $12,260 , at an average purchase price of $15.91 per share, inclusive of commissions.

Common Stock Dividends

The following table presents cash dividends declared by the Company on its common stock during the three months ended September 30, 2016 , and the six immediately preceding quarters:

Declaration Date
Record Date
Payment Date
Cash Dividend
per Share
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


Preferred Stock Dividends

The following table presents cash dividends declared by the Company on its 10% cumulative redeemable preferred stock during the three months ended September 30, 2016 , and the six immediately preceding quarters:

Declaration Date
Payment Date
Cash Dividend
per Share
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



18
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

Note 7.  Earnings (Loss) Per Share

The following table presents a reconciliation of net loss attributable to common stockholders and shares used in calculating basic and diluted earnings (loss) per share ("EPS") for the three and nine months ended September 30, 2016 and 2015 : 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss attributable to controlling interests
$
(1,567
)
 
$
(1,343
)
 
$
(5,155
)
 
$
(8,623
)
Preferred stock distributions
(25
)
 
(25
)
 
(75
)
 
(75
)
Net loss attributable to common stockholders
$
(1,592
)
 
$
(1,368
)
 
$
(5,230
)
 
$
(8,698
)
Basic and diluted weighted average common shares outstanding
35,385,138

 
36,071,146

 
35,617,262

 
36,257,449

Net loss per common share - basic and diluted
$
(0.05
)
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.24
)

A total of 2,231,511 common units not owned by the Company were outstanding for the three and nine months ended September 30, 2016 and 2015 , but have been excluded from the calculation of diluted EPS as their inclusion would not be dilutive. In addition, 253,801 and 88,487 performance stock units have been excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2016 , respectively, as their market conditions had been met, however, their inclusion would not be dilutive. During the three and nine months ended September 30, 2015 , no performance stock units have been excluded from the calculation of diluted EPS as their market conditions had not been met.

Note 8.  Derivative and Other Fair Value Instruments

Codification Topic Fair Value Measurement (“ASC 820”) established a three level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:

Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Recurring Fair Value

The Company uses Hedging Derivatives to manage its exposure to interest rate risk (refer to Note 4) and in conjunction with certain variable rate secured debt to satisfy lender requirements. The Hedging Derivates are valued using models developed by the respective counterparty that use as their basis readily observable market parameters (such as forward yield curves).


19
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

The following tables provide a summary of the aggregate fair value measurements for the Hedging Derivatives and the location within the condensed consolidated balance sheets at September 30, 2016 and December 31, 2015 , respectively:






Fair Value Measurements at Reporting Date Using
Description

Balance Sheet Location

September 30, 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
 
$
73

 
$
—

 
$
73

 
$
—

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps

Other Assets

2


—


2


—

Interest Rate Swaps

 
Other Assets
 
402

 
—

 
402

 
—

 
 
 
 
$
477

 
$
—

 
$
477

 
$
—


 
 
 
 
 
 
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

 
—

 
 
 
 
$
721

 
$
—

 
$
721

 
$
—


The following table provides a summary of the effect of Hedging Derivatives on the Company's condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2016 :


Effective Portion

Ineffective Portion
Description

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

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

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

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

 
Adjustments for derivative instruments, net
 
$
(120
)
 
N/A
 
$
—

Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps

(683
)

Interest Expense

(128
)

N/A
 
—

Interest Rate Swaps
 
402

 
N/A
 
—

 
N/A
 
—

 
 
$
(281
)
 
 
 
(248
)
 
N/A
 
$
—



20
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

The following table provides a summary of the effect of Hedging Derivatives on the Company's condensed consolidated statements of operations and comprehensive loss for the nine months ended September 30, 2015 :
 
 
Effective Portion
 
Ineffective Portion
Description
 
Amount of Gain/(Loss) Recognized in Other Comprehensive Loss on Derivative
 
Location of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
 
Location of Gain/(Loss) Recognized in Income on Derivative
 
Amount of Gain/(Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
Cash Flow Hedges
 
 
 
 
 
 
 
 
 
 
Interest Rate Caps
 
$
(1,503
)
 
Interest Expense
 
$
(1
)
 
N/A
 
$
—


As of September 30, 2016 and December 31, 2015 , there was $1,646 and $1,613 , respectively, in deferred losses in accumulated other comprehensive loss related to Hedging Derivatives. The Company expects to recognize $411 in interest expense during the twelve months ending September 30, 2017, pertaining to the designated interest rate cap agreements, which will be reclassified out of accumulated other comprehensive loss in accordance with the amortization schedules established upon designation of the interest rate caps as cash flow hedges. Interest expense pertaining to the interest rate swap transactions will be recognized as incurred.

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

Fair Value of Other Financial Instruments

In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.  The following describes the Company’s methods for estimating the fair value for financial instruments. Descriptions are not provided for those items that have zero balances as of September 30, 2016 .
•
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 approximates fair value as of September 30, 2016 . The Company categorizes the fair value measurement of this liability as Level 2.
•
The fair value of the Company's Securitization Loan was $ 301,440 as of September 30, 2016 , based on an average of market quotations. The Company categorizes the fair value measurement of this liability as Level 2.
•
The Company’s 10% cumulative redeemable preferred stock had a fair value which approximates its liquidation value at September 30, 2016 . The Company categorizes the fair value measurement of this instrument as Level 2.

Note 9.  Commitments and Contingencies

Concentrations

As of September 30, 2016 , approximately 59% of the Company’s properties were located in Atlanta, GA, Phoenix, AZ, and Tampa, FL, which exposes the Company to greater economic risks than if the Company owned a more geographically dispersed portfolio.


21
SILVER BAY REALTY TRUST CORP.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Three and Nine Months Ended September 30, 2016
(amounts in thousands, except share data and property counts)

Resident Security Deposits

As of September 30, 2016 , the Company had $12,784 in resident security deposits. Security deposits are refundable, net of any outstanding charges and fees, upon expiration of the underlying lease.

Earnest deposits

As of September 30, 2016 and December 31, 2015 , the Company had refundable earnest deposits for property purchases of $39,685 and $0 , respectively. However, not all of these properties are certain to be acquired because properties may fall out of escrow through the closing process for various reasons.

Legal and Regulatory

From time to time, the Company is subject to potential liability under laws and government regulations and various claims and legal actions arising in the ordinary course of the Company's business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal or regulatory claims that would have a material adverse effect on the Company's condensed consolidated financial statements, and therefore no accrual has been recorded as of September 30, 2016 .

22

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

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report, including the following Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or trends that should be read in conjunction with the factors described under “Special Note Regarding Forward-Looking Statements” included in this Quarterly Report. In addition, our actual results could differ materially from those projected in such forward-looking statements as a result of the factors discussed under “Special Note Regarding Forward-Looking Statements” as well as the risk factors described in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and any updates to those risk factors included in Part II, Item 1A, “Risk Factors,” of this Quarterly Report.

Overview

We are an internally-managed Maryland corporation that focuses on the acquisition, renovation, leasing, and management of single-family properties in select markets in the United States. Our objective is to generate attractive risk-adjusted returns for our stockholders over the long term through dividends and capital appreciation. We generate virtually all of our revenue by leasing our portfolio of single-family properties. As of September 30, 2016 , we owned 8,837 single-family properties for rental purposes in Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, South Carolina and Texas, excluding properties reflected as assets held for sale on our condensed consolidated balance sheets.

We have elected to be treated as a real estate investment trust ("REIT") for U.S. federal tax purposes, commencing with, and in connection with the filing of our federal tax return for, our taxable year ended December 31, 2012. As a REIT, we generally are not subject to federal income tax on the taxable income that we distribute to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates. Even if we continue to qualify for taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. In addition, the income of our taxable REIT subsidiaries ("TRS") is subject to taxation at regular corporate rates.

Silver Bay Realty Trust Corp. was incorporated in Maryland in June 2012. Silver Bay Realty Trust Corp. conducts its business and owns all of its properties through Silver Bay Operating Partnership L.P. (the "Operating Partnership"), a Delaware limited partnership. Silver Bay Realty Trust Corp.’s wholly owned subsidiary, Silver Bay Management LLC (the "General Partner") is the sole general partner of the Operating Partnership. Silver Bay Realty Trust Corp. has no material assets or liabilities other than its investment in the Operating Partnership. As of September 30, 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.

During 2015, we acquired a portfolio of 2,461 properties from The American Home Real Estate Investment Trust, Inc.(the "Portfolio Acquisition"). The Portfolio Acquisition was substantially completed on April 1, 2015 with an aggregate purchase price of $263.0 million. 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 are primarily located in Atlanta, GA, Charlotte, NC, Tampa, FL and Orlando, FL.


23

Property Portfolio

Our investments in real estate consist of single-family properties located in select markets. As of September 30, 2016 , we owned 8,837 single-family properties in the following markets:
Market
 
Number of
Properties  (1)
 
Aggregate Investment in Real Estate  (2)
(in thousands)
 
Average Investment in Real Estate Per Property
 
Average Age
(in years)  (3)
 
Average Square
Footage
Atlanta
 
2,694

 
$
319,222

 
$
118,494

 
21.9
 
1,804

Phoenix
 
1,424

 
203,778

 
143,103

 
27.2
 
1,636

Tampa
 
1,111

 
160,614

 
144,567

 
27.6
 
1,625

Charlotte (4)
 
689

 
85,966

 
124,769

 
15.6
 
1,644

Dallas
 
504

 
68,006

 
134,933

 
24.0
 
1,617

Orlando
 
491

 
66,368

 
135,169

 
28.4
 
1,501

Jacksonville
 
451

 
59,649

 
132,259

 
27.4
 
1,536

Northern CA (5)
 
382

 
73,202

 
191,628

 
47.4
 
1,399

Southeast FL (6)
 
308

 
60,785

 
197,354

 
45.0
 
1,470

Las Vegas
 
290

 
41,373

 
142,666

 
19.7
 
1,717

Columbus
 
284

 
33,329

 
117,356

 
38.7
 
1,414

Tucson
 
209

 
17,653

 
84,464

 
43.0
 
1,330

Totals
 
8,837

 
$
1,189,945

 
$
134,655

 
26.6
 
1,645


(1)
Properties reflected in this table exclude properties recorded as assets held for sale on our condensed consolidated balance sheets and any properties previously acquired in purchases that have been subsequently rescinded or vacated.
(2)
Aggregate investment in real estate includes all capitalized costs, determined in accordance with U.S. generally accepted accounting principles ("GAAP"), incurred through September 30, 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 $20.2 million in capital improvements, incurred from our formation through September 30, 2016 , made to properties that had been previously renovated, but does not include accumulated depreciation.
(3)
As of September 30, 2016 , approximately 4% of our properties were less than 10 years old, 38% were between 10 and 20 years old, 19% were between 20 and 30 years old, 19% were between 30 and 40 years old, 10% were between 40 and 50 years old, and 10% were more than 50 years old. Average age is an annual calculation.
(4)
Charlotte market includes properties in South Carolina due to their proximity to Charlotte, North Carolina.
(5)
Northern California market currently consists of Contra Costa, Napa and Solano counties.
(6)
Southeast Florida market currently consists of Miami-Dade, Broward and Palm Beach counties.

Factors likely to affect Silver Bay's Results of Operations

Our results of operations and financial condition will be affected by numerous factors, many of which are beyond our control. Some of the key factors we expect to impact our results of operations and financial condition include our pace and costs of acquisitions, the time and costs required to stabilize a newly-acquired property and convert the same to rental use, the age of our properties, rental rates, the varying costs of internal and external property management, seasonality, occupancy levels, rates of resident turnover, home price appreciation, changes in homeownership rates, changes in homeowners’ association fees and real estate taxes, changes in insurance costs, expenses incurred in the maintenance and turnover of our properties, resident defaults, our expense ratios and our capital structure. Certain of these factors are described in greater detail below.

Acquisitions and Dispositions

Our ability to identify and acquire single-family properties that meet our investment criteria will be affected by home prices in our markets, the inventory of properties available through our acquisition channels, competition for our target assets, and our capital available for investment. Acquisitions may be financed from various sources, including proceeds from the sale of equity securities, retained cash flow, debt financings, securitizations, or the issuance of common units in the Operating Partnership. Availability of financing from such sources on acceptable terms will greatly impact our pace of acquisitions, as

24

will any preference we may then have for portfolio acquisitions, which are inherently less predictable than purchases through other channels. As of September 30, 2016, we had 322 properties under contract that were purchased on October 1, 2016 for $41.5 million .

We periodically sell properties after determining the property or related market no longer fit our portfolio and may sell properties when we view market conditions are favorable given other potential uses of capital. To date, our disposition activity has been limited. As of September 30, 2016, we had 116 properties reflected as assets held for sale on our balance sheet. As of September 30, 2016, we had 46 properties under contract to sell with an aggregate contractual sales price of $9.4 million. There are no assurances we will close on the sales of these properties.

During the three and nine months ended September 30, 2016 , we sold 66 and 181 properties, respectively, primarily in our Southeast Florida and Southern California markets for total gross proceeds of $11.3 million and $28.7 million , respectively, for a net gain on disposition of real estate of $2.4 million and $6.2 million , respectively. During the three and nine months ended September 30, 2015 , we sold 150 and 173 properties, respectively, primarily in the Houston, TX market for total gross proceeds of $18.4 million and $21.1 million , respectively, for a net gain on disposition of real estate of $2.1 million and $2.3 million , respectively.

Stabilization, Renovation and Leasing

Before an acquired property becomes an income producing asset, we must possess, renovate, market and lease the property. We refer to this process as property stabilization. We consider a property stabilized at the earlier of (i) its first authorized occupancy or (ii) 90 days after the renovations for such property are complete regardless of whether the property is leased. Properties acquired with in-place leases are considered stabilized even though such properties may require future renovation to meet our standards and may have existing residents who would not otherwise meet our resident screening requirements. The time to stabilize a newly acquired property can vary significantly among properties for several reasons, including the property’s acquisition channel, the age and condition of the property, whether the property was vacant when acquired, local demand for our properties, our marketing techniques, and the size of our available inventory of rent ready properties.

The following table summarizes the occupancy status of our properties as of September 30, 2016 :

Market
 
Number of Properties
 
Properties
Occupied
 
Properties
Vacant
 
Aggregate Portfolio
Occupancy Rate
 
Average 
Monthly
Rent  (1)
 
Average Remaining Lease Term (Months) (2)
Atlanta
 
2,694

 
2,593

 
101

 
96.3
%
 
$
1,100

 
8.3
Phoenix
 
1,424

 
1,382

 
42

 
97.1
%
 
1,133

 
8.2
Tampa
 
1,111

 
1,075

 
36

 
96.8
%
 
1,338

 
8.2
Charlotte
 
689

 
663

 
26

 
96.2
%
 
1,106

 
7.7
Dallas
 
504

 
487

 
17

 
96.6
%
 
1,329

 
9.2
Orlando
 
491

 
480

 
11

 
97.8
%
 
1,209

 
8.7
Jacksonville
 
451

 
439

 
12

 
97.3
%
 
1,164

 
8.1
Northern CA
 
382

 
376

 
6

 
98.4
%
 
1,704

 
8.3
Southeast FL
 
308

 
292

 
16

 
94.8
%
 
1,673

 
6.8
Las Vegas
 
290

 
286

 
4

 
98.6
%
 
1,223

 
7.8
Columbus
 
284

 
272

 
12

 
95.8
%
 
1,086

 
8.1
Tucson
 
209

 
205

 
4

 
98.1
%
 
854

 
4.9
Totals
 
8,837

 
8,550

 
287

 
96.8
%
 
$
1,202

 
8.1
(1)
Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of September 30, 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.

The aggregate portfolio occupancy rate increased to 96.8% as of September 30, 2016 compared to 94.9% as of September 30, 2015 .

During the three months ended September 30, 2016 , 713 properties turned over compared to 744 in the three months ended September 30, 2015 . This turnover number includes move-outs, evictions and lease breaks on our stabilized portfolio. Quarterly turnover for the three months ended September 30, 2016 was 8.1% compared to 8.2% for the three months ended September 30, 2015 . Quarterly turnover represents the number of properties turned over in the period divided by the number of

25

properties in stabilized status at period-end. The total number of properties with lease expirations in the three months ended September 30, 2016 was 2,372 , including properties with month-to-month occupancy in the period. Of these properties, 497 properties turned over, resulting in a retention rate of 79.0% compared to a retention rate of 77.5% during the three months ended September 30, 2015 .

The following is a summary of our turnover percentage, by quarter, for the trailing twelve-month periods ended September 30, 2016 and 2015 :

 
Turnover (1)
September 30, 2016
 
8.1
%
June 30, 2016
 
7.6
%
March 31, 2016
 
7.2
%
December 31, 2015
 
6.6
%
Total turnover for twelve months ended September 30, 2016
 
29.5
%
 
 
Turnover (1)
September 30, 2015
 
8.2
%
June 30, 2015
 
7.0
%
March 31, 2015
 
5.8
%
December 31, 2014
 
6.6
%
Total turnover for twelve months ended September 30, 2015
 
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. We consider a property stabilized at the earlier of (1) its first authorized occupancy or (2) 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 require a future initial renovation to meet our standards and may have existing residents who would not otherwise meet our resident screening requirements.
    
As of September 30, 2016 , we had 5,876 properties included in Same-Home properties in the following markets:

 
 
 
Aggregate Occupancy Rate
 
Average Monthly Rent (1)
 
Number of Same-Home Properties
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
Atlanta
1,052

 
96.9
%
 
94.1
%
 
$
1,230

 
$
1,184

Phoenix
1,424

 
97.1
%
 
96.8
%
 
1,133

 
1,095

Tampa
922

 
96.9
%
 
92.8
%
 
1,367

 
1,317

Charlotte
143

 
93.7
%
 
93.7
%
 
1,242

 
1,184

Dallas
378

 
96.3
%
 
93.9
%
 
1,337

 
1,297

Orlando
282

 
98.6
%
 
98.9
%
 
1,313

 
1,256

Jacksonville
301

 
97.3
%
 
98.7
%
 
1,145

 
1,113

Northern CA
382

 
98.4
%
 
99.2
%
 
1,704

 
1,574

Southeast FL
209

 
93.8
%
 
91.4
%
 
1,715

 
1,669

Las Vegas
290

 
98.6
%
 
97.9
%
 
1,223

 
1,181

Columbus
284

 
95.8
%
 
96.1
%
 
1,086

 
1,066

Tucson
209

 
98.1
%
 
96.2
%
 
854

 
842

Totals
5,876

 
97.0
%
 
95.6
%
 
$
1,262

 
$
1,214


(1)
Average monthly rent for occupied properties was calculated as the average of the contracted monthly rent for all occupied properties as of September 30, 2016 and 2015 , respectively, and reflects rent concessions amortized over the life of the related lease.

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Results of Operations

The following is a summary of our results of operations (unaudited) for the three and nine months ended September 30, 2016 and 2015 :

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(amounts in thousands except per share data)
 
2016
 
2015
 
2016
 
2015
Condensed Consolidated Income Statement Data
 
 
 
 
 
 
 
 
Total revenue
 
$
31,561

 
$
30,617

 
$
94,185

 
$
83,053

Property operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
6,262

 
6,529

 
17,875

 
16,479

Real estate taxes
 
4,563

 
3,918

 
13,493

 
11,864

Homeowners’ association fees
 
410

 
512

 
1,258

 
1,465

Property management
 
2,778

 
3,167

 
8,291

 
8,262

Total property operating expenses
 
$
14,013

 
$
14,126

 
$
40,917

 
$
38,070

 
 
 
 
 
 
 
 
 
Loss before other income, income taxes and non-controlling interests
 
$
(2,892
)
 
$
(3,245
)
 
$
(8,976
)
 
$
(11,263
)
Net loss
 
$
(1,665
)
 
$
(1,427
)
 
$
(5,476
)
 
$
(9,154
)
Net loss attributable to common stockholders
 
$
(1,592
)
 
$
(1,368
)
 
$
(5,230
)
 
$
(8,698
)
Net loss per share attributable to common shares - basic and diluted
 
$
(0.05
)
 
$
(0.04
)
 
$
(0.15
)
 
$
(0.24
)
Net operating income (1)
 
$
17,548

 
$
16,497

 
$
53,268

 
$
45,152

 
 
 
 
 
 
 
 
 
Same-Home Properties Income Statement Data (2)
 
 
 
 
 
 
 
 
Same-Home total revenue
 
$
21,931

 
$
20,809

 
$
65,050

 
$
61,660

Same-Home property operating expenses:
 
 
 
 
 
 
 
 
Property operating and maintenance
 
4,546

 
4,687

 
12,828

 
12,475

Real estate taxes
 
3,191

 
2,518

 
9,406

 
8,618

Homeowners' association fees
 
311

 
399

 
975

 
1,210

Property management
 
1,897

 
2,114

 
5,666

 
6,092

Same-Home property operating expenses
 
9,945

 
9,718

 
28,875

 
28,395

Same-Home net operating income (1)
 
$
11,986

 
$
11,091

 
$
36,175

 
$
33,265


(1)
Net operating income ("NOI") and Same-Home net operating income ("Same-Home NOI") are non-GAAP financial measures we believe, when considered with the financial statements determined in accordance with GAAP, are helpful to investors in understanding our performance as a REIT. Reconciliations of NOI and Same-Home NOI to net loss prepared in accordance with GAAP are found in this Item 2 under the headings " Non-GAAP Financial Performance Measures ".
(2)
See "Same-Home Properties" section for information as to how we define our Same-Home property portfolio.

Comparison of the Three and Nine Months Ended September 30, 2016 and the Three and Nine Months Ended September 30, 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.


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Total revenue increased $0.9 million and $11.1 million , or 3.1% and 13.4% , respectively, in the three and nine months ended September 30, 2016 compared to the prior year periods. We owned 8,837 properties as of September 30, 2016 as compared to 9,074 properties as of September 30, 2015 with aggregate occupancy rates of 96.8% and 94.9% , respectively. Our average monthly rent for occupied properties in our portfolio increased to $1,202 as of September 30, 2016 from $1,159 as of September 30, 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 three months ended September 30, 2016 over the prior year period was primarily due to increases in our rental rates and occupancy rate, partially offset by a decrease in portfolio size. The increase in revenue for the nine months ended September 30, 2016 over the prior year period 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 $1.1 million and $3.4 million , or 5.4% and 5.5% , respectively, in the three and nine months ended September 30, 2016 , compared to the prior year periods. 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 $1,262 as of September 30, 2016 compared to $1,214 as of September 30, 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 97.0% as of September 30, 2016 compared to 95.6% as of September 30, 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 September 30, 2016 , we internally managed 94.4% 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 was consistent in the three months ended September 30, 2016 over the prior year period. As a percentage of revenue, property operating expenses decreased 1.7 percentage points primarily due to an increased revenue base. Property operating expenses for the entire portfolio increased $2.8 million , or 7.5% in the nine months ended September 30, 2016 over the prior year period primarily as a result of the significant increase in the number of properties owned and in-service during the nine months ended September 30, 2016 , due to the Portfolio Acquisition, and the resulting increases in expenses for turnover, repairs and maintenance, real estate taxes, and property management. As a percentage of revenue, property operating expenses decreased 2.4 percentage points in the nine months ended September 30, 2016 over the prior year period, primarily due to efficiencies of scale reflected in our property management expense calculated as a percentage of revenue.

Property operating expenses for the Same-Home properties increased $0.2 million , or 2.3% for the three months ended September 30, 2016 , and stemmed primarily from an increase in real estate taxes partially offset by decreases in property management and property operating and maintenance. Property operating expenses for the Same-Home properties increased $0.5 million , or 1.7% during the nine months ended September 30, 2016 primarily as a result of an increase in real estate taxes and property operating and maintenance partially offset by a decrease in property management.

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 $0.2 million and $2.9 million , or 1.9% and 11.4% , respectively, in the three and nine months ended September 30, 2016 , over the prior year periods. The increase in the three months ended September 30, 2016 is primarily as a result of capital improvements for renovation and post-renovation activities. The increase in the nine months ended September 30, 2016 stemmed primarily from the significant increase in the number of properties owned and in-service during the nine months ended September 30, 2016 , due to the consummation of Portfolio Acquisition on April 1, 2015, as compared to the prior year period.

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 $0.1 million in portfolio acquisition expense in both the three and nine months ended September 30, 2016 resulting from acquisitions during and subsequent to the three and nine months ended September 30, 2016 . We incurred $0.1

28

million and $2.0 million , respectively, in portfolio acquisition expense associated with the Portfolio Acquisition in the three and nine months ended September 30, 2015 . 

General and Administrative . General and administrative includes those costs related to being a public company and expenses associated with our corporate and administrative functions. General and administrative expense decreased $0.4 million and $0.8 million , or 10.5% and 6.9% , respectively, in the three and nine months ended September 30, 2016 , over the prior year periods primarily related to expense management and timing of certain items.

Share-based Compensation. Share-based compensation expense includes costs associated with our restricted stock awards to our board of directors and certain employees and our performance stock unit awards to certain members of management.

Share-based compensation expense decreased $0.1 million and increased $0.1 million , respectively, in the three and nine months ended September 30, 2016 over the prior year periods. The decrease in the three months ended September 30, 2016 over the prior year period is primarily the result of forfeited performance stock unit shares during the period. The increase over the prior period for the nine months ended September 30, 2016 over the prior year period is primarily due to the issuance of 127,648 shares of restricted stock made in February 2016, which will vest on the first anniversary of the grant date, as long as such individual is an employee on the vesting date, subject to earlier acceleration pursuant to their terms.

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 and interest expense associated with the interest rate swap transactions.

The following table presents total interest expense for the three and nine months ended September 30, 2016 and 2015 :

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Gross interest expense (1)
 
$
5,142

 
$
4,695

 
$
14,985

 
$
11,979

Amortization of discount on Securitization Loan
 
75

 
75

 
225

 
225

Amortization and write-off of deferred financing costs
 
1,155

 
1,167

 
3,456

 
3,341

Other interest (2)
 
217

 
22

 
427

 
73

Capitalized interest (3)
 
—

 
—

 
—

 
(311
)
Total interest expense
 
$
6,589

 
$
5,959

 
$
19,093

 
$
15,307

(1)
Includes the Securitization Loan's monthly servicing fees.
(2)
Includes monitoring service fees and interest related to our designated derivative financial instruments (see Note 8).
(3)
We capitalize interest for properties undergoing renovation activities and purchased subsequent to obtaining debt in May 2013.

 Interest expense increased $0.6 million and $3.8 million , respectively, in the three and nine months ended September 30, 2016 , over the prior year periods. The increase in interest expense for the three months ended September 30, 2016 over the prior year period is due to higher average interest rates and an increase in losses reclassified from accumulated other comprehensive loss into income associated with our designated interest rate cap agreements. The increase for the nine months ended September 30, 2016 over the prior year period is primarily attributed to a higher average outstanding balance of debt in the revolving credit facility related to financing the Portfolio Acquisition in April 2015 in addition to higher average interest rates and an increase in losses reclassified from accumulated other comprehensive loss into income associated with our designated interest rate cap agreements.

Total Other Income. Total other income consists of activities related to our sales of investments in real estate as well as adjustments on derivative financial instruments, net. Total other income decreased $0.2 million and increased $2.3 million , respectively, in the three and nine months ended September 30, 2016 , over the prior year periods. The increase in total other income during the nine months ended September 30, 2016 is primarily due to an increase in the net gain on disposition of real estate related to certain properties of $6.2 million , partially offset by an increase in operating costs of assets held for sale.

29


Income Tax Expense, Net. We intend to operate and to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code") and intend to comply with the requirements of the Code relating to REITs. We have TRSs where certain investments may be made and activities conducted that may have otherwise been subject to the prohibited transactions tax or may not be favorably treated for purposes of complying with the various requirements for REIT qualification. The income and
losses within the TRSs are subject to federal, state, and local income taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We recognized income tax expense of $0.4 million and $1.1 million , respectively, in the three and nine months ended September 30, 2016 compared to $48 thousand and $0.1 million , respectively in the three and nine months ended September 30, 2015 . The increase in income tax expense is primarily related to income taxes on net gain on disposition of real estate in the TRS entities.

Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in preparation of the financial statements.

Accounting estimates are considered critical if the estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made and if different estimates reasonably could have been used in the reporting period or changes in the accounting estimate are reasonably likely to occur from period to period that would have a material impact on our financial condition, results of operations or cash flows.
        
Our critical accounting policies are those related to:
•
Revenue recognition;
•
Investments in real estate;
•
Impairment of real estate;
•
Income taxes; and
•
Derivative instruments

Our critical accounting policies are described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , of our Annual Report on Form 10-K for the year ended December 31, 2015. The critical accounting policies used in preparing our interim 2016 condensed consolidated financial statements are the same as those described in our Annual Report.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (the "JOBS Act") we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised U.S. accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. We will cease to be an "emerging growth company" under the JOBS Act on December 31, 2017.

We consider the applicability and impact of all accounting standard updates ("ASUs"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which creates a new Topic, Accounting Standards Codification Topic 606. The standard is principle-based and provides a five-step model to determine when and how revenue is recognized. The core principle is that a company should 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. This standard is effective for interim or annual periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. 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 impact the adoption of Topic 606 will have on our consolidated financial statements.

30


In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. This update is intended to improve 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. We adopted ASU 2015-02 during the quarter ended March 31, 2016. Based on our review and subsequent analysis of our legal entities structure, we concluded that the Operating Partnership is a variable interest entity 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, we will continue to consolidate the Operating Partnership under this new guidance.

In April 2015, the FASB issued ASU 2015-03,  Simplifying the Presentation of Debt Issuance Costs.  The amendments in this ASU require that 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. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU and will continue to be reported as interest expense. This guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. We adopted this ASU as of January 1, 2016 and as a result of the retrospective adoption of this guidance, deferred financing costs, net of amortization of $6.4 million and $8.1 million at September 30, 2016 and December 31, 2015 , respectively, are netted against the carrying values of the Securitization Loan. Previously, these costs were recorded as part of deferred financing costs, net on the condensed consolidated balance sheets. Additionally, in accordance with ASU 2015-15,  Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,  issued in August 2015, we will continue to present debt issuance costs related to our revolving credit facility as an asset within other assets on the condensed consolidated balance sheets and amortize them ratably over the term of the related facility.

In February 2016, the FASB issued ASU 2016-02, Leases , which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than one year. Lessor accounting will remain similar to lessor accounting under previous GAAP, while aligning with the FASB's new revenue recognition guidance. The guidance will be effective for annual reporting periods beginning after December 15, 2018, and for interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact the adoption of this ASU 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.

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

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


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.


31

Our liquidity and capital resources as of September 30, 2016 consisted of cash of $37.3 million , escrow deposits of $65.6 million , which consists of cash held in reserve at financial institutions as required by our debt agreements of $23.9 million and earnest money deposits for property purchases of $39.7 million , and $35.9 million in additional borrowing capacity under our revolving credit facility. 

We believe our cash flows from operations together with current cash and funds available under our revolving credit facility will be sufficient to fund the anticipated needs of our operations, including the acquisitions and renovations of certain properties in 2016 . We may also opportunistically utilize the capital markets to raise additional capital, including through the issuance of debt and equity securities (including the issuance of common units in the Operating Partnership) and securitizations, but there can be no assurance that we will be able to access adequate liquidity sources on favorable terms or at all.

Securitization Loan

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

During the nine months ended September 30, 2016 and 2015 , we paid down $0.9 million and $6.9 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 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 1.94% , 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 nine months ended September 30, 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 the 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 approximately 3,000 properties, in addition to the equity interests in, and certain assets of, the Borrower. The amounts outstanding under the Securitization Loan and certain obligations contained therein are guaranteed by the Operating Partnership only in the case of certain bad acts (including bankruptcy) as outlined in the transaction documents.

The Securitization Loan does not contractually restrict our ability to pay dividends but certain covenants contained therein may limit the amount of cash available for distribution. The Securitization Loan documents require us to maintain certain covenants, including a minimum debt yield on the Securitization Properties, and contain customary events of default for a facility of this type, including payment defaults, covenant defaults, breaches of representations and warranties, bankruptcy and insolvency, judgments, change of control and cross-default with certain other indebtedness. We believe we were in compliance with all financial covenants under the Securitization Loan as of September 30, 2016 .

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 varying rate of three-month 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

32

balance outstanding is equal to or greater than $200.0 million. As part of the amendment, the term on the revolving credit facility was extended to February 18, 2018 and the advance rate for borrowings was increased to 65% from 55% . The advance rate is based on the aggregate value of the eligible properties, which value is calculated as the lesser of (a) the third-party broker price opinion value or (b) the original purchase price plus certain renovation and other capitalized costs of the properties. We used the revolving credit facility to fund the Portfolio Acquisition 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 September 30, 2016 , there was $364.1 million outstanding under the facility and $35.9 million in borrowing capacity. 
 
All amounts outstanding under the revolving credit facility are collateralized by the equity interests and assets of certain of our subsidiaries (the "Pledged Subsidiaries"), which exclude the owners of the Securitization Properties. The amounts outstanding under the 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 September 30, 2016 , there were approximately 5,680 properties pledged as collateral under the revolving credit facility.

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, in the final year of the revolving credit facility, all cash generated by the properties in the Pledged Subsidiaries must be used to pay down the principal amount outstanding under the revolving credit facility. 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, in each case 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 September 30, 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 4 and Note 8 to the accompanying condensed consolidated financial statements for a detailed description of our hedging derivatives).

Operating Activities

Net cash provided by operating activities in the nine months ended September 30, 2016 was $24.2 million compared to net cash provided by operating activities of $23.1 million for the nine months ended September 30, 2015 . The increase in our operating cash flows during the nine months ended September 30, 2016 compared to the prior period was primarily due to our experiencing the increased cash flow from the Portfolio Acquisition for the full nine months ended September 30, 2016 as compared to just six months during the same period in 2015 offset by a change in escrow deposits.
  
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 in the nine months ended September 30, 2016 of $24.2 million was driven by $39.7 million in earnest deposits for the purchase of 322 properties that closed on October 1, 2016 partially offset by $28.7 million in proceeds from the disposition of real estate from the sale of 181 properties primarily in our Southeast Florida and Southern California markets. In addition, we used $11.6 million for capital improvements of which $5.6 million was attributable to our initial renovation of properties, which includes properties purchased in a portfolio purchase that have been renovated for the first time, and $6.0 million was attributable to capital improvements to properties that had been previously renovated.

The average renovation cost per property was approximately $28,100 or 25.1% of the purchase price for all properties placed in service since we commenced operations through September 30, 2016 , including properties acquired with an in-place lease but excluding properties acquired from entities managed by Provident Real Estate Advisors LLC and The American Home Real Estate Investment Trust. These renovation costs included capitalized expenditures for renovations, real estate taxes, homeowners’ association dues, interest, costs required to gain possession of the property and other capitalized expenditures until the property is ready for its intended use.

33


Net cash used in investing activities in the nine months ended September 30, 2015 was $271.4 million and was largely driven by the Portfolio Acquisition. We used $272.7 million for property acquisitions and another $20.7 million on capital improvements, of which $15.1 million was attributable to our initial renovation of properties, which includes properties purchased in a portfolio purchase that were renovated for the first time, and $5.6 million was attributable to capital improvements 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 real estate taxes or homeowners’ association dues in arrears, along with capitalized interest on properties purchased since we obtained debt in May 2013. Typically, these costs are capitalized as components of the purchase price of the acquired asset unless the property was purchased with an existing lease. We also make significant capital expenditures to renovate and maintain our properties to Silver Bay standards. Our ultimate success depends in part on our ability to make prudent, cost-effective decisions measured over the long term with respect to these expenditures.

Financing Activities

Our net cash related to financing activities is generally affected by any borrowings and capital activities net of any dividends and distributions paid to our common shareholders and holders of non-controlling interests. Net cash provided by financing activities in the nine months ended September 30, 2016 was $8.2 million and was attributable to the proceeds from the revolving credit facility of $47.8 million , primarily to fund the acquisition of properties on October 1, 2016, partially offset by dividends paid of $14.8 million , repurchases and retirement of our common stock of $11.8 million and repayment on our revolving credit facility of $10.2 million .

Net cash provided by financing activities in the nine months ended September 30, 2015 was $239.5 million and was primarily attributable to proceeds from the revolving credit facility of $282.0 million to fund the Portfolio Acquisition, partially offset by repurchases and retirement of our common stock of $12.3 million , dividends paid of $10.4 million , payments on our Securitization Loan of $6.9 million , deferred financing costs of $5.8 million , payments on our revolving credit facility of $4.8 million and purchases of interest rate caps of $2.3 million .

Payment Obligations

We have an obligation to pay dividends on our outstanding 10% cumulative redeemable preferred stock with a $1.0 million aggregate liquidation preference in preference to dividends paid on our common stock.

We 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 September 22, 2016 , our board of directors declared $4.9 million in common stock dividends and common unit distributions, which were paid on October 14, 2016 .

The 2,231,511 common units issued by the Operating Partnership in connection with the internalization of our former advisory manager may be redeemed for cash or, at our election, a number of our common shares on a one-for-one basis. To the extent that we redeem the common units for cash, our liquidity will decrease. As of September 30, 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.


34

Aggregate Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from certain contractual obligations, as of September 30, 2016 (amounts in thousands):

 
 
Total
 
Less than One Year
 
One to Three Years
 
Three to Five Years
 
More Than Five Years
Purchase obligations (1)
 
$
41,900

 
$
41,872

 
$
28

 
$
—

 
$
—

Long-term debt obligations (2)
 
713,231

 
22,507

 
690,724

 
—

 
—

Operating lease obligations (3)
 
2,032

 
604

 
849

 
560

 
19

Total
 
$
757,163

 
$
64,983

 
$
691,601

 
$
560

 
$
19

(1)
Reflects accepted offers on property purchase agreements. Not all of these properties, which are under contract to close in the future, are certain to be acquired as properties may fall out of escrow through the closing process for various reasons.
(2)
Includes estimated interest payments on the respective debt and derivative agreements based on amounts outstanding as of September 30, 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.
(3)
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, portfolio acquisition expense, general and administrative expenses, share-based compensation, severance and other, interest expense, net gain on disposition of real estate, adjustments for derivative instruments, net, income tax expense, net and other non-comparable items as applicable. We consider NOI to be a meaningful financial measure when considered with the financial statements determined in accordance with GAAP. We believe NOI is helpful to investors in understanding the core performance of our real estate operations without regard to items excluded from the calculation of such measure, which can vary substantially from company to company depending upon accounting methods, book value of assets, capital structure and the method by which assets were acquired, among other factors.

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


35

The following is a reconciliation of our NOI and Same-Home NOI to net loss as determined in accordance with GAAP for the three and nine months ended September 30, 2016 and 2015 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(1,665
)
 
$
(1,427
)
 
$
(5,476
)
 
$
(9,154
)
Depreciation and amortization
9,243

 
9,068

 
27,938

 
25,074

Portfolio acquisition expense
123

 
66

 
123

 
2,046

General and administrative
3,514

 
3,925

 
11,104

 
11,924

Share-based compensation
661

 
718

 
2,009

 
1,895

Severance and other
310

 
—

 
1,977

 
—

Interest expense
6,589

 
5,959

 
19,093

 
15,307

Net gain on disposition of real estate
(2,417
)
 
(2,089
)
 
(6,158
)
 
(2,320
)
Adjustments for derivative instruments, net
120

 
—

 
120

 
—

Other expense
646

 
223

 
1,436

 
64

Income tax expense, net
424

 
48

 
1,102

 
147

Property operating and maintenance add back:
 
 
 
 
 
 
 
Market ready costs prior to initial lease and other
—

 
6

 
—

 
169

Net operating income
17,548

 
16,497

 
53,268

 
45,152

Less non-Same-Home
 
 
 
 
 
 
 
Total revenue
(9,630
)
 
(9,808
)
 
(29,135
)
 
(21,393
)
Property operating expenses
4,068

 
4,402

 
12,042

 
9,506

Same-Home net operating income
$
11,986

 
$
11,091

 
$
36,175

 
$
33,265


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.

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, share-based compensation, severance and other, adjustments for derivative instruments, net, income tax expense on disposition of real estate, and certain other non-cash or non-comparable costs to arrive at Core FFO.


36

FFO and Core FFO should not be considered alternatives to net income (loss) or net cash flows from operating activities, as determined in accordance with GAAP, as indications of our performance or as measures of liquidity. These non-GAAP measures are not necessarily indicative of cash available to fund future cash needs. In addition, although we use these non-GAAP measures for comparability in assessing our performance against other REITs, not all REITs compute these non-GAAP measures in the same manner. Accordingly, there can be no assurance that our basis for computing these non-GAAP measures is comparable with that of other REITs. This is due in part to the differences in capitalization policies used by different companies and the significant effect these capitalization policies have on FFO and Core FFO. Real estate costs incurred in connection with real estate operations which are accounted for as capital improvements are added to the carrying value of the property and depreciated over time, whereas real estate costs that are expenses are accounted for as a current period expense. This impacts FFO and Core FFO because costs that are accounted for as expenses reduce FFO and Core FFO. Conversely, real estate costs associated with assets that are capitalized and then subsequently depreciated are excluded from the calculation of FFO and Core FFO.

FFO and Core FFO are calculated on a gross basis and, as such, do not reflect adjustments for the noncontrolling interests - Operating Partnership.    


37

The following table sets forth a reconciliation of our net loss as determined in accordance with GAAP and our calculations of FFO and Core FFO for the three and nine months ended September 30, 2016 and 2015 . Also presented is information regarding the weighted-average number of shares of our common stock and common units of the Operating Partnership outstanding and the effect of dilutive securities attributable to certain performance-based stock awards used for the computation of FFO and Core FFO per share (amounts in thousands, except share and per share amounts):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(1,665
)
 
$
(1,427
)
 
$
(5,476
)
 
$
(9,154
)
Depreciation and amortization
9,243

 
9,068

 
27,938

 
25,074

Net gain on disposition of real estate
(2,417
)
 
(2,089
)
 
(6,158
)
 
(2,320
)
Other expense (income)
255

 
14

 
504

 
(239
)
Funds from operations
5,416

 
5,566

 
16,808

 
13,361

 
 
 
 
 
 
 
 
Adjustments:
 
 
 
 
 
 
 
Portfolio acquisition expense (1)
123

 
66

 
123

 
2,046

Share-based compensation
661

 
718

 
2,009

 
1,895

Severance and other
310

 
—

 
1,977

 
—

Market ready costs prior to initial lease and other
—

 
6

 
—

 
169

Write-off of deferred financing fees
—

 
—

 
—

 
31

Adjustments for derivative instruments, net
120

 
—

 
120

 
—

Amortization of discount on securitization loan
75

 
75

 
225

 
225

Income tax expense on disposition of real estate
333

 
—

 
815

 
—

Other expense (2)
26

 
1

 
26

 
114

Core funds from operations
$
7,064

 
$
6,432

 
$
22,103

 
$
17,841

 
 
 
 
 
 
 
 
FFO
$
5,416

 
$
5,566

 
$
16,808

 
$
13,361

Preferred stock distributions
(25
)
 
(25
)
 
(75
)
 
(75
)
FFO available to common shares and units
$
5,391

 
$
5,541

 
$
16,733

 
$
13,286

 
 
 
 
 
 
 
 
Core FFO
$
7,064

 
$
6,432

 
$
22,103

 
$
17,841

Preferred stock distributions
(25
)
 
(25
)
 
(75
)
 
(75
)
Core FFO available to common shares and units
$
7,039

 
$
6,407

 
$
22,028

 
$
17,766

 
 
 
 
 
 
 
 
Weighted average common shares and units outstanding (3)(4)
37,870,450

 
38,302,657

 
37,937,260

 
38,488,960

FFO per share
$
0.14

 
$
0.14

 
$
0.44

 
$
0.35

Core FFO per share
$
0.19

 
$
0.17

 
$
0.58

 
$
0.46


(1)
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.
(2)
Non-comparable costs from prior periods.
(3)
Represents the weighted average of common shares and common units in the Operating Partnership outstanding for the periods presented.
(4)
Includes the effect of dilutive securities attributable to certain stock based awards meeting market conditions during the three and nine months ended September 30, 2016 .


38

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Our future revenue, cash flows and fair values relevant to certain financial instruments are dependent upon prevailing market interest rates. Our Securitization Loan and revolving credit facility have variable rates of interest. We are therefore most vulnerable to changes in short-term LIBOR interest rates. To mitigate this risk, we use derivative financial instruments such as interest rate swaps and interest rate caps in an effort to reduce the variability of earnings caused by changes in the interest rates we pay on our debt.

These derivative transactions are entered into solely for risk management purposes, not for investment purposes. When undertaken, these derivative instruments likely will expose us to certain risks such as price and interest rate fluctuations, timing risk, volatility risk, credit risk, counterparty risk and changes in the liquidity of markets. Therefore, although we expect to transact in these derivative instruments purely for risk management, they may not adequately protect us from fluctuations in our financing interest rate obligations.

We currently borrow funds at variable rates using secured financings. As of September 30, 2016 , we had recorded $668.2 million of variable rate debt outstanding, of which $296.0 million was effectively converted to fixed rate through swap contracts and $372.2 million was protected by interest rate caps. If the weighted-average interest rate on this variable rate debt had been one percentage point higher the annual interest expense would increase by $3.7 million. If the weighted-average interest rate on this variable rate debt had been one percentage point lower the annual interest expense would decrease by $3.2 million. These amounts were determined by considering the impact of hypothetical interest rates on our debt. This analysis does not consider the effects of the changes in overall economic activity that could exist in such an environment and assumes no changes in our financial structure.

We cannot predict with certainty the effect of adverse changes in interest rates on our Securitization Loan and
revolving credit facility and, therefore, our exposure to market risk, nor can we provide any assurance that long-term debt will
be available at advantageous pricing. Consequently, future results may differ materially from the estimated adverse changes
discussed above.

For discussion of our borrowing activity in the three and nine months ended September 30, 2016 , see Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” in Part I of this Quarterly Report on Form 10-Q.

Item 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2016 . Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We continue to review and document our disclosure controls and procedures, including our internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

39

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time, we are party to claims and routine litigation arising in the ordinary course of our business. We do not believe that the results of any such claims or litigation individually, or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.

Item 1A.  Risk Factors

T here have been no material changes to the risk factors disclosed in Part I, Item 1A. "Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 . In addition to the other information set forth in this Quarterly Report, you should carefully consider those risk factors which could materially affect our business, financial condition and results of operations.

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

Unregistered Sales of Equity Securities
    
None.

Use of Proceeds from Registered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period
 
Total Number 
of Shares
Purchased (1)
 
Average Price
Paid Per Share
 
Total Number of Shares 
Purchased as Part of 
Publicly Announced Plans 
or Programs
 
Maximum Number of
Shares That May Yet be
Purchased Under the Plans or Programs
July 1, 2016 - July 31, 2016
 
41

 
$
16.82

 
—

 
790,474

August 1, 2016 - August 31, 2016
 
—

 
—

 
—

 
790,474

September 1, 2016 - September 30, 2016
 
3,749

 
18.17

 
—

 
790,474

Total
 
3,790

 
$
18.16

 
—

 
790,474

(1)
Consists of shares withheld to settle tax withholding obligations related to the vesting of restricted stock awards.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.


40

Item 6.  Exhibits

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

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
SILVER BAY REALTY TRUST CORP.
 
 
 
Date: November 3, 2016
By:
/s/ Thomas W. Brock
 
 
Thomas W. Brock
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
Date: November 3, 2016
By:
/s/ Julie M. Ellis
 
 
Julie M. Ellis
Chief Accounting Officer
(Principal Financial Officer and Principal Accounting Officer)

42

EXHIBIT INDEX

Exhibit Number
 
 
 
Incorporated by Reference
 
Description
 
Form
 
File No.
 
Exhibit
 
Filing Date
2.1
 
Real Estate Sales Contract, dated as of February 18, 2015, between The American Home Real Estate Investment Trust, Inc. and 2015A Property Owner LLC
 
10-Q
 
001-35760
 
2.2
 
May 7, 2015
2.2
 
Amendment dated June 1, 2015 to Real Estate Sales Contract dated as of February 18, 2015 with The American Home Real Estate Investment Trust, Inc.
 
10-Q
 
001-35760
 
2.3
 
August 6, 2015
2.3
 
Amendment dated July 1, 2015 to Real Estate Sales Contract dated as of February 18, 2015 with The American Home Real Estate Investment Trust, Inc.
 
10-Q
 
001-35760
 
2.4
 
November 5, 2015
2.4
 
Amendment dated September 1, 2015 to Real Estate Sales Contract dated as of February 18, 2015 with The American Home Real Estate Investment Trust, Inc.
 
10-Q
 
001-35760
 
2.5
 
November 5, 2015
2.5
 
Amendment dated October 1, 2015 to Real Estate Sales Contract dated as of February 18, 2015 with The American Home Real Estate Investment Trust, Inc.
 
10-Q
 
001-35760
 
2.6
 
November 5, 2015
2.6
 
Amendment dated December 15, 2015 to Real Estate Sales Contract dated as of February 18, 2015 with The American Home Real Estate Investment Trust, Inc.
 
10-K
 
001-35760
 
2.14
 
February 25, 2016
3.1
 
Articles of Amendment and Restatement of Silver Bay Realty Trust Corp.
 
10-K
 
001-35760
 
3.1
 
March 1, 2013
3.2
 
Amended and Restated Bylaws of Silver Bay Realty Trust Corp.
 
10-K
 
001-35760
 
3.2
 
February 25, 2016
3.3
 
Articles Supplementary for Cumulative Redeemable Preferred Stock of Silver Bay Realty Trust Corp.
 
10-K
 
001-35760
 
3.3
 
March 1, 2013
4.1
 
Specimen Common Stock Certificate of Silver Bay Realty Trust Corp.
 
S-11/A
 
333-183838
 
3.5
 
November 23, 2012
4.2
 
Registration Rights Agreement by and among Silver Bay Realty Trust Corp. and certain holders of common units in Silver Bay Operating Partnership L.P., dated September 30, 2014.
 
10-K
 
001-35760
 
4.5
 
February 26, 2015
10.1
 
Consent and Joinder Agreement dated October 4, 2016 among the property owners party thereto, each as borrower, Silver Bay Realty Trust Corp., Silver Bay Operating Partnership L.P., SB Financing Trust Owner LLC, and SB Financing Trust, each as guarantor, and Bank of America, National Association as agent on lender and JPMorgan Chase Bank, National Association, as lender.

 
 
 
 
 
 
 
 
10.2
 
Separation Agreement and Release dated October 7, 2016 with Christine Battist.
 
 
 
 
 
 
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
 
 
 
 
 
 
 
32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 
32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
 

43

101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 

44
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