Q2 2013 Update

 

Operating Results:

Sandalstone’s 2nd Quarter reflects the slow down in the number of new acquisitions in the quarter.  While we once again report record quarterly rental revenue:  28% year to year growth compared to Q2 2012 and 1.5% quarterly growth compared to Q1 2013.  The primary reason for the Year to Year slow down is in the number of new properties acquired. We did acquire one additional property during the quarter, however the rental income has yet to be recorded. The headline news of the Quarter has to be the red hot real estate market in the East Bay - both in asset prices and rents. Our Las Vegas properties continue to see asset price appreciation, while rents are steady to slightly down.

In the Quarter, we accomplished the following.  We placed one new tenant in our East Bay townhome at a rent that was 10% higher than the previous tenant was paying.  Interestingly enough this tenant has previously lived in this community and was happy to move back from SF where rents have risen much faster much sooner.  This situation perfectly illustrates the trickle down effect the SF economy has on Oakland and beyond.  Another side note is that this unit had sustained flood damage, and we were able to fix the damage with the proceeds of the insurance payment.  The insurance also reimbursed us for the lost rental income while we made the fixes.  

One other note is that our Shorey House Property finally was approved as a City of Oakland Landmark.  For which we made the paper.  

In Las Vegas we quickly found a tenant at our Single Tree property at the same rate as our previous tenant.  This tenant used to work for our Property Management company and chose to live with us.  We also placed a tenant in our newly purchased Pheasant Lane property at our asking price within 3 weeks (having a pool in May is a very good thing).  On the other hand, our vacant Back Woods property was rented at a 8.4% decrease from the prior rental amount.  We had three months vacancy on that unit - which we solved by lowering price.
 
So a few observations given the rental activity.  One is that we are rewarded for our sound management as we have tenants who choose us on a repeat / informed basis.  Two, the better locations "B" areas are performing better as rentals than the "C" areas in Las Vegas.  This is to be expected and is reflected in the acquisition price.   

 

On the acquisition front we closed and re-habbed a 2BDR, 2BA is a "C" location in Vegas.  The property had suffered flood damage and was thoughtfully gutted.  The bank had estimated the repair work at approximately $50K.  We acquired the property for $55K and we were able to get it back on the rental market for about $20K.  The relationship with our contractor in Vegas enabled us to assertively take on this project.  We hope to have it rented at $895/month.  For those of you following, we decided to keep as a rental property as the lure of making taxable profits on a flip didn't measure to keeping it in the portfolio and adding to our monthly cash flow.  

 

Finally a few notes about asset prices.  We reference Case Shiller in each of our updates as we believe that index to be the best indicator of asset prices.  This index has been capturing the above 20% year to year growth in our markets for the past 3 Qtrs now - with SF, Phoenix and Las Vegas being the top 3 markets nationwide.  While Case Shiller is a lagging indicator -  we believe we have on the ground data that is about 3 months ahead of them - we continue to see the same feverish activity in the Bay Area and Las Vegas as in prior quarters.  

One reason for this is that the Big Boys have started coming out of the private equity woodwork and we've seen the first two IPOs in this sector - the single family REIT:  Silver Bay Realty Trust SBY and American Residential Properties ARPI.  I haven't seen any dividends coming out of these yet, which may be a function of their growth strategy.  Colony recently delayed their IPO (due to the interest rate hike over the past two weeks) and of course Blackstone (BX) and Waypoint will no doubt add their heft to this space shortly.  So far with SBY and ARPI  retail (stock) investors are betting solely on appreciation as there has been no dividend or distribution paid out.  To us, having a REIT that doesn't offer a yield seems like half the boat is missing - actually its worse than that - it's having a cherry without the sundae -  and would hope that these companies and the ones that follow are more like traditional REITs - stable income AND appreciation over time.  It is our hope is that the big boys are successful and can legitimize this sector as that will make financing easier for us going forward.  

MOVING FORWARD

This Quarter we reached agreement on the types of deals we will be doing going forward.  If you are interested please let us know as we are now building our investor committment list.   We are looking for acquisitions where we can do significant value added work - for example through changing zoning - ie. multi-plex to single family condo in the Bay Area and the design and construction around that.  The deal will be structured so that investors will get a partial/significant return of capital through a partial sale of the newly created assets in the short to medium term while holding on to part of the deal for long term tax advantaged gains.  This strategy reflects our conviction that we would rather create value over the long term over short term gains (and having to pay taxes on them).  It is ideal for investors who share that view and who do not see a foreseeable need for invested cash over any short term horizon. 

It is a hybrid of the work of Sandalstone Group over the past ten years and is lined up with where we currently are in the cycle.      

Clarameda Fund, LLC:

  • Acquisitions:
    • Unfortunately the property which was in contract fell out as the bank decided to foreclose.
  • Operations:
    • Returned to 100% occupancy as two tenant turnovers filled. 
    • Single Tree: 7 days vacancy. Rented at same rate as prior. "B" location.
    • Back Woods: 3 months vacancy. Rented 8% below prior.  "C" location.
    • Several appliances replaced - within repair budget. Made strategic decision to remove all home warranty insurance as they expired - will self insure.
  • Partners:
    • Continued uninterrupted streak of monthly distributions of the Preferred amount to Partners.

So far this year, no growth, which will mean increased profits and taxes. Hope to acquire new property to avoid...mostly financed through credit line...

 

CLARAMEDA PARTNER BALANCES (closed to new Partners):*

  • If any Partner wants to make 3.25% on "demand deposit" money - let us know - that's been a win-win for those that have parked money here...  I haven't seen money market rates move at all over the last few weeks?   
     

In Summary,

We are excited about the opportunities that lie before us.  This is the time in the cycle where smart money has a chance to add value and create wealth.  For us its the second time through this part of the cycle and we hope to apply the many lessons learned the first time through and do it better.   We are better capitalized and have a strong group of investors who share our core beliefs and for whom we have developed mutual trust and appreciation.  

One of whom reminded us that part of our success the first time through was because we didn't know the pitfalls and thus took on risks which we may not have had we been wiser.   A good reminder to be more aggressive and take on the risks and responsibilities that is part of any business - nothing ventured nothing gained!  

 

Cheers!

 

Biren
Biren Talati
Managing Member
Sandalstone Group, LLC

 

MARKET DATA

VANGUARD REIT ETF:

Note the pronounced effect of the recent rate hike...  
 

CURRENT YIELD:  3.6%  Compare to Clarameda...

HEADLINES

Bay Area Rents:

http://www.mercurynews.com/business/ci_23031693/rents-bay-area-jump-by-single-digits

Case Shiller:

WSJ:  Q2 Case Shiller - reports over double digit increase in Bay Area, Vegas -  TOP 3:  SF, Phoenix, Las Vegas - Sandalstone is in two of these - SF took over 1st place from Phoenix (if only the Giants could take over from the D-Backs).   

Las Vegas Unemployment:

Latest information not yet out...