Remember That Slam Dunk Housing Play?

Silver Bay Realty (SBY) and American Residential Property (ARPI) both went public in the past year riding what was billed as a smart way to participate in the housing rebound: Buy up cheap (foreclosed, REO) single family homes, then rent ‘em out to the expected growing pool of renters who had been foreclosed on, couldn’t meet tighter post-crisis lending standards, or had simply sworn off the American dream of home ownership.

Silver Bay Realty went public late last year, as private equity investors moved to cash in. So far, the stock isn’t following the script:

SBY Chart

SBY data by YCharts

American Residential Property has also lagged badly since its May IPO.

The latest monthly Rental Monitor from Trulia (TRLA) points to part of the problem. While apartment rental rates rose 3.9% nationwide over the 12 months through August, single-family home rental prices rose 1.6%. In its latest financial report, Silver Bay reported an average rental rate of $1,148, down slightly from the $1,158 at the end of the first quarter and flat with the December 2012 rate.

Trulia chief economist Jed Kolko pointed out that rental prices actually declined in six of the 25 largest rental markets Trulia tracks. In Phoenix, Silver Bay’s largest regional market, single family home rental rates fell 1.3% over the past 12 months, compared to a 5.3% increase for apartment rental rates. In Atlanta, Silver Bay’s second biggest region, single-family home rental rates slid 0.3%, while apartment rental rates rose an average of 2.2%. The news was better in the Tampa region—Silver Bay’s third largest market, where Trulia says the average rent rose 2.2% for single-family homes. Still, apartment rentals in Tampa did even better rising 3.8%.

Granted, six months is a short time frame, but clearly investors are going to want to see a rising income rental stream from Silver Bay’s properties that can at least keep pace with inflation.

Right now Silver Bay is reporting large revenue gains—40% last quarter-driven by the fact it is getting more of its acquired properties rented. With 35% of its properties not leased at the end of the second quarter there’s plenty more room for more revenue growth as the lease rate rises. But when that’s played out, it’s rising rental rates that would be an important income driver.

Going forward, the recent one-percentage point jolt in mortgage rates to more than 4.5% has to be a welcome sign for Silver Bay management. To the extent rising rates squeeze out more potential homebuyers it would increase rental demand. It also should slow down the price gain rate, which is making acquisitions more expensive.

Amid the hammered stock price, Silver Bay management announced a 2.5 million-share stock repurchase plan in July; if carried out it would reduce the outstanding shares by about 6% (no fixed time frame was given.)

While insider buying has been muted, vice-chairman Irvin Kessler bought 54,600 shares on the open market in mid May (average price of $18) and was dollar cost averaging down with another 41,500-share purchase in mid August at an average price of $15.60. Interestingly, Silver Bay may be on the verge of breaking free of short pressure. While still high, shorts as a percentage of float has declined almost 50% from earlier in the year:

SBY Percent of Float Short Chart

SBY Percent of Float Short data by YCharts

Carla Fried, a senior contributing editor at, has covered investing for more than 25 years. Her work appears in The New York Times, and Money Magazine. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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