Q2 2014 Update

Operating Results:

We report Sandalstone’s 2nd Quarter 2014 revenues up 7.5% from prior year period, and down 1.4% from prior quarter. The yearly gain reflects the full contribution of the properties purchased in this period last year. The quarterly downturn reflects slightly higher vacancy from Q1. Q1 had zero vacancy so that was a tough comp to beat. Given that no new properties were acquired since Q1 of last year, the year over year comps will be a function of two variables until we acquire our next property: Vacancy and Rent increases - with the greatest effect coming from Vacancy. For this quarter, we had a vacancy of 3.5% which is below our historical range of 6%. As stated in our prior Updates we have turned this property into an AirBnB host and are seeing great results which we shall discuss below. Going forward we have had several properties turn so far in Q3 and we are using those turnovers as opportunities to raise price. We anticipate that Q3 will have lower revenue, however we expect to be well positioned in Q4 as higher rents take effect.

The most exciting development over the last quarter is our experiment with AirBnB.  In turning the unit to an AirBnB we made an initial investment to furnish the place.  We ended up with a 2 bedroom unit with the capacity to sleep 5 people.  That unit with actual results for June, July and current backlog for August has done 61% better in net revenue than with a long term tenant.  This number subtracts out the additional cost in hosting which is primarily the cost of housekeeping services and the incremental utility spend.   We anticipate that the breakeven is about 3 months to recover the cost of the furnishings.  September backlog is building and we are over 60% occupancy - so we already have more in backlog than the prior rental amount.  Many lessons learned including automating processes, having a great housekeeping solution, setting cancellation policies and optimizing furnishings.  We still have opportunities to better price (probably under-pricing during peaks).  The results have exceeded our expectations and we shall look for additional venues to further expand this area for the Company.  We have a 100% 5 star review feedback, so customer satisfaction is perfect!    

In the Core business, several issues of note, starting with financing.  We are in the process of renewing our credit line with Bay Commercial Bank.  The appraisals came in for the subject properties at 27.4 percent higher than the last appraisal three years ago.  We are confident that we shall have the funds to opportunisically make future acquisitions once this is in place.  

Several issues on the property management front.  We have some turnover in Las Vegas, which we don't especially like as it entails higher costs and increased vacancy factors.  We filled the first of our three vacancies with about 6 weeks of vacancy.  We secured a 3.3% rent increase.  That tenant stayed one year at the location.  The two current vacancies are at properties where the tenant stayed 2 years 10 months and the other 1 year and 2 months.  In a long term rental model (as opposed to a short term model) lengthening the stay of tenants is generally a positive development (unless in a rapidly increasing price environment), so we shall try and incorporate that in our methods.  Q3 is traditionally our highest turnover quarter as people move in the summer so we expect the turnover in these months.  

Market Update 

We reference Case Shiller in each of our updates as we believe that index to be the best indicator of asset prices.   Las Vegas and SF retained their positions as the Top Two markets in the nation registering annual gains of 16.9% and 15.4% respectively.   The headlines around it though are that the pace of acceleration is decreasing.  In prior quarters both these metros registered 25%+ annual growth.  Our perspective is that the two metros registered gains for different reasons.  Las Vegas registered its gains in reaction to what we call the pendulum effect.  Prices had gotten too low and investors rushed in to convert single family homes to rental properties.  From our vantage point, which is when we bought - according to Zillow - are properties are up 50% so we are happy with our timing.   In the short term we believe Las Vegas property value will stay mostly flat until we seem more uplift from the ecomony.  Medium term we are bullish as real demand will follow the improving economy.  Moreover, housing in that will need a credit environment that greater facilitates activity.  

In the Bay Area, housing prices are predictably following the upward cyclical move in wealth, jobs and income.  The tech cycle is on a strong upswing and as long as this cycle continues its upward trajectory we see no let up in prices.  In both markets we are taking a long term view and are happy to hold through the cycle.  Both areas will benefit as credit standards are loosened, which will happen when memories fade and we find reasons to once again more freely lend.  

So we continue to hold given our long term strategy of collecting yield and letting the market continue through the cycle.  It is comforting to know our assets are comfortably above purchase price while continuing to pay us a solid tax advantaged yield.       

MOVING FORWARD

One consequence of not acquiring any properties over the past year is that the balance sheet is strengthing.  We have been using the excess cash flow to reduce outstanding debts and also make some short term financing for others with our excess cash.  As stated earlier this combination coupled with rising asset values that serve as collateral will enable us to make opportunistic acquisitions.  We remain vigilant for those.  

Clarameda Fund, LLC:

  • Strong first half as we had 0% vacancy.
  • Two tenant turnovers in Q3.  We are implementing our usual strategy of getting the units back in pristine shape to minimize vacancy and secure good tenants. 
  • Continued Partner distributions (every month for past 5 years and going...).  
  • Made decision to issue next special distribution in Q4.    

In Summary,

We stopped growing the Company a year ago, the results are showing flat revenue.  Within this time period we are encouraged by our experiment with a hotel type property using AirBnB.  We continue to manage the properties diligently which is to say keep them in good, pristine order to maintain high occupancy and minimize vacancy.  The lull in growth has allowed us to further strengthen the balance sheet and will enable us to grow when the opportuntiy is right.  Until then we continue to meet all investor expectations.       

 

Cheers!

 

Biren
Biren Talati
Managing Member
Sandalstone Group, LLC

 

MARKET DATA

VANGUARD REIT ETF:

 
 
 
CURRENT YIELD:  3.05%  Compare to Clarameda...

 

HEADLINES

Bay Area Rents Soar, Despite Increase in Units

City Avg. asking rent 1-year change
San Francisco $3,229 9.4%
Oakland 2,421 19.1
San Jose 2,169 9.0
Bay Area 2,158 10.3

Case Shiller:

S&P Index:  Q2 2014 Case Shiller - Top Two Markets Again: Vegas and SF, however slowing.   

 

Las Vegas Unemployment:

NICE DROP IN UNEMPLOYMENT RATE - 7.9% down 2.5% points from year ago!