Q2 2015 Update

Operating Results:

We report Sandalstone’s Q2 2015 results to be up 1.4%  to prior year results. Our Quarter to Quarter revenue was also flat.  In this quarter we had a higher vacancy rate than in earlier comparative periods.  However, the increase in rents on occupied units offset the higher vacancy resulting in flat revenue.  The largest expense was in our largest property where we installed new granite and other vacancy / turnover expenses.  We continue to strengthen our balance sheet as we are paying down debt (especially variable rate loans) and we have also selectively re-purchased Investor equity upon Partner request.  We exit the quarter fully occupied.  

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We had a few tenant turnovers this past quarter.  In the Bay Area we had one turnover and we secured a 18% increase with three days of vacancy.  In hindsight we probably could have increased rents more - it would be an interesting solution to address this situation with other forms of pricing.  For example, an auction type mechanism for price discovery.  Nonetheless we are very happy with the quality of the new tenants.  We also successfully petitioned for raises in our Section 8 properties.  Again, the rising rents have also made their way with a lag to all areas of the Bay.  In Las Vegas, the situation is mostly consistent with the rest of the nation.  Our rent increases are in the flat to up 2% range.  While we only had one turnover, it took one and a half months to occupy.  Part of this time was that we enhanced the kitchen with granite counter and island and undermounted stainless steel sink.  IMG_3865.JPGAn interesting side story was that we had the opportunity to rent out the property to a family whose primary source of income was winnings from the World Series of Poker, etc.  It was tempting to rent to them, especially with the offer of six months rent, however we went with a group of dentist students.  A revealing story of our overall approach to the business.  

The other large maintenance item was the re-painting of the Shorey House.  This is part of our 10 year Mills Act contract and after 8 years it was certainly time to re-paint.  An interesting aspect was the selection of painters for the job.  We ended up getting 4 bids and the first 3 all came in at around the same 5 digit sum and it would take two to three weeks.  The last bid was in the 4 digit range and it would only take one week.  I asked why the difference?  It turns out the first three painters were going to roll on the paint.  The last company would spray it on.  After some research, I decided to go with the last company.  They did an awesome job and finished on-time!  If anyone needs a recommendation we would be happy to provide.  IMG_3713.JPG

Next quarter we will embark on a project to convert lawn to sheet mulch to do our part to help with the Bay Area water shortage.     

Market Update

We reference Case Shiller in each of our updates as we believe that index to be the best indicator of asset prices.  The index continues to reflect a flattening in the price increases.  Las Vegas and SF registered annual gains of 6.1% and 9.5% respectively.   

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What is interesting is that SF market it above the last market peak, while Vegas is still well below.  For comparison we also show the Denver market.  Denver is typical of many in-land areas where it is easy to expand as land at the frontier is readily available.  It reflects more of the steady growth in real estate based on a return to means market that ultimately all investments converge upon.

We continue to evaluate our holding strategy - should we sell is the question we ask ourselves often, especially in the Bay Area.  We continue to believe that regardless of appreciation, we favor managing for yield for the foreseeable future.  Our Partners share that belief so it makes it easy for us to continue our steady approach.  For reference our Clarameda properties according to Zillow have almost doubled in value from our purchase price.        

BALANCE SHEET

We finally closed on a 30 year fixed loan at the start of Q3.  The Company replaced three variable rate amortizing loans into one 30 year fixed rate mortgage.  We paid almost 1% more in interest costs.  We are comfortable in paying more interest for the certainty of fixed payments for 30 years.  It reduces our interest rate risk in a cash flow neutral way.  We are almost certain that in 15 years the monthly payment on this product will seem negligible as inflation will have eaten into its purchasing power.  

We would once again like to highlight the 3.25% Note program that the Company has been offering for the past three years.  Under this program, Partners have had the chance to "deposit" funds with the Company.  The Company has an underlying credit facility which enables it to pay back funds on demand.  If you have excess funds sitting in checking/savings and/or are considering a CD this program might be a suitable alternative.  In addition, the Company can increase the rate payable if interest rates rise so this product, unlike CDs, offers upside.  Check it out...  Approximately 40% of Partners have used this facility and it has worked as anticipated.   We have reduced our holdings in this product over the year as part of reducing our variable rate loan obligations, so we are currently creating a wait list for new entrants.   

Clarameda Fund, LLC:  

-  Continued payout of monthly distribution.  Initial Partners have received close to 45% of capital back in the form of distributions.  

-  We had a Partner request a part of their capital back at Par.  All Partners were notified and approved the Company buying back that share.  The Company issued debt which will be repaid in the next quarter

-  We had a request to re-introduce the Special Distribution.  Management has diminished this over the past few years in order to reduce bank debt and deal with some unforeseen expenses.  Based on current trends it seems highly likely that we will be able to re-issue this in the current year and beyond.  

In Summary,

2015 has been a very good year so far.  We have been blessed with a terrific up-cycle move in the Bay Area which has pushed property values and rents to all time highs.  In Las Vegas, we are keeping our eye on the basics and managing our properties in a thoughtful manner consistent with our long term view.   While we see headwinds in the stock market, and global markets, our portfolio having been purchased at the right time and now with a healthy time of seasoning is delivering strong consistent returns.  

My thanks as always to the people who assist us in our endeavors and the Partners who trust us to manage the Company with their capital.  

Cheers!

Biren

Biren Talati

Managing Member

Sandalstone Group, LLC

www.sandalstone.com

MARKET DATA

VANGUARD REIT ETF:

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CURRENT YIELD:  4.17%  Compare to Clarameda...

HEADLINES

Bay Area Rents:

SFGATE article on Bay Area Rents - Oakland largest increase in nation

Case Shiller:

20 City Update for July 2015

Las Vegas Unemployment:

UNEMPLOYMENT RATE - 7% - Holds steady