Two Harbors Investment Corp (TWO), The Blackstone Group L.P. (BX), Public Storage (PSA): Silver Bay Realty Knocks It Out of the Park

Though heavy investor involvement in the single-family housing market has helped fuel a sort of housing boom, real estate investment trusts created on the new foreclosure-to-rental paradigm haven’t tickled the fancies of investors. Since their initial public offerings, Silver Bay Realty, American Residential Properties, and the newest of the new, American Homes 4 Rent, have elicited a general feeling that can be summed up in one syllable: eh.

But, all that is about to change. Silver Bay, an offshoot of mortgage REIT Two Harbors Investment Corp (NYSE:TWO), turned in a brilliant second-quarter earnings report, and investors are sitting up and taking notice.

Recent slowdown spooked investors
The whole notion of REITs based on the concept of buying foreclosures in bulk, renovating, and renting them is a new one, born of the chaos that ensued after the mortgage meltdown. At first, private equity giants like the The Blackstone Group L.P. (NYSE:BX) invested — literally — billions in the new idea, and things went swimmingly for a while.

This past spring, however, the red-hot new asset class began to cool off. Public Storage (NYSE:PSA) icon B. Wayne Hughes put off his own IPO for American Homes, finally taking the plunge at the beginning of August. Response was tepid, at best, raising 44% less than originally imagined, according to Bloomberg.

Similarly, American Residential Properties has had a less than exciting short life, drawing yawns from investors and trading approximately 20% below its IPO price just this past May.

Business is evolving
Silver Bay’s report shows that the model can work, but flexibility is paramount. Revenue shot up by 40% from the first quarter, thanks to increased rental occupancies. The company rented nearly 1200 additional homes during the quarter, and the emphasis on renting rather than acquiring properties paid off.

Management slowed its rate of acquisition in the second quarter, deciding to put more effort into making the properties they had on hand, tenant-ready. According to Silver Bay’s COO, the renovation pace increased by 10% in the last quarter, and CFO Christine Battist noted that maintenance costs associated with increased rental activity increased to $2.5 million, compared with $1.8 million in the linked quarter. The occupancy rate for properties for at least six months jumped from 81% last quarter to 87% in Q2.

Silver Bay’s shift from megaacquisition to concentrating on running a rental business was timely, and the other REITs will do well to learn from it. This is a young sector, and the learning curve isn’t over yet. Thanks to Silver Bay’s example, however, the others will probably have fewer pitfalls in their own paths.

The article Silver Bay Realty Knocks It Out of the Park originally appeared on Fool.com and is written by Amanda Alix.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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