Q3 2012 Update

 

Sandalstone Group, LLC.

Highlights
Overall Market:  
Sandalstone’s 3rd Quarter of 2012 shows continued growth with robust results despite some slowing down in the Vegas rental market.  We report record quarterly rental revenue:  43% year to year growth compared to Q3 2011 and 2.4% growth compared to Q2 2012.  The primary reason for the Year to Year growth is that we have grown the number of properties under control.  The Quarter to Quarter growth reflects rent increases while the rate of Quarterly growth slowed as the latest acquisitions have been slow to lease.  

 

The zero East Bay vacancy for the year reflects the strong demand across the Bay Area.  A reflective data point - one of our investor’s 1BDR, 1BA SF loft (close to Pac Bell Park - go Giants!) which was being rented for $2750 was rented to a new tenant for $3400 within a week.  The strong SF and Peninsula rental market is making its way across the Bay.  We were anticipating some tenant turnover in the East Bay and to test market rates however the strong rental market has had the noticeable effect of keeping existing tenants in place.

 
We have had a few vacancies in the Las Vegas market - as the latest acquisitions have been slow to lease.  We believe the reasons are as follows:  First, the overall number of properties offered for lease has been increasing as the supply from investors like us has led to more competition.  Second, we continue to be vigilant about the selection of tenants.  We have denied several applicants on the basis of our selection criteria.  Third, these properties are targeted to a higher price point, that segment is slower to pick up.  Forth, unemployment in Las Vegas remains high.  The trend is heading in the right direction dropping each month - however the absolute number at 11.5% is still too high.  We continue to have activity so view vacancies as an opportunity to improve results going forward.  

Having said that, we are positioning ourselves to revert earlier than anticipated to Plan A - which is to sell properties.  We continue to see strong evidence that Las Vegas prices have picked up as the number of properties offered for sale continues to be low.   The Manager has passed the exam for the Nevada Real Estate Agent’s license on his last trip to Vegas (and also helped celebrate the end of an Investor’s bachelorhood) and will be in a position to quickly sell properties that have appreciated in asset value (and which aren’t renting as quickly as we would like at our price points).  We continue to favor the Buy and Rent approach, however we will not hesitate to sell if that is what the market dictates.

    
We are reminded of our experience in the Bay Area these past few years.  As investors snapped up properties in 2009/2010, it portended a temporary increase in vacancies and a decrease in rents in 2010.  Rents rebounded in 2011, and in 2012 we have had a very strong rental market. We are comfortable in our fundamental approach which is to not overpay for any asset and believe we are well positioned to manage any similar pullback in the Vegas market.  As seen in the Bay Area, an improved jobs picture will lift the rental market.  We thus continue to be vigilant in our purchases and are prepared to shift to harvest mode if conditions warrant.

Shorey House Landmark Status:
Sandalstone continued along its path to get the Shorey House designated as a City of Oakland Landmark.  It was approved by the Landmark Commission on June 11th.  Next it goes before the Planning Commission on November 7th and then the full City of Oakland City Council for final approval...(good reminder of the time it takes to get City of Oakland approval on any matter).   

  
Clarameda Fund, LLC:

 

  • Acquisitions:
    • 6243 Elderberry Wine Avenue, Las Vegas, NV:  4BDR, 3BA - $120,200 purchase price, $131,000 all-in rehab price.    
    • Currently on market
    • Budgeted $1200 per month in rent 
    • Property is in same neighborhood as an existing Clarameda Fund property (Back Woods), is a two story and over 2,000 sq feet in size.

 

  • Operations:
    • 8462 Lodge Haven tenants renewed lease at $1075/month which is a 2.4% increase.
    • Passed Section 8 inspection in East Oakland.
    • 1457 Homestead - vacant for about 12 weeks as we’ve denied two applicants who did not meet our criteria (sufficient income, credit, no evictions).  We also priced it too high in the beginning.  We have an Applicant who indicated the desire to move in on November 1st and who meets our criteria.  
    • 6243 Elderberry Wine Avenue - completed rehab in about 2 weeks and placed on Rental Market last week (October 12).  Have had one application - which we are denying due to a prior Eviction.  Evaluating a second... 

 

 

 

  • Finance:
    • Made the decision to start using some debt.  Plan is for Clarameda to secure its own Credit Line next year.  
    • In the meantime, started the program by implementing a 3.25% Note program, which an existing Clarameda Partner took advantage of, modelled after the Sandalstone Note Program.  This offers a higher rate of return with full liquidity compared to alternate “deposit” or equivalent fixed income opportunities.

 

  • Partners:  
    • Continued record of paying 46 straight months of distributions of the Preferred amount to Partners.
    • We welcomed one additional Partner this past quarter and continue to raise additional funds from existing Partners.  
    • One Partner took advantage of the Opportunity to utilize their excess cash into Clarameda’s 3.25% Note Program.  This is similar to Sandalstone’s Note Program.  The Note pays 3.25% and is fully liquid - as a credit line (backed by Sandalstone) is in place to pay off the Note at a moment’s notice. 

 

 

 

Clarameda Fund may be seeking new Partners.  This Company is expected to return 10 to 12% to investors.  Company has paid 46 straight months of distributions (plus Special Distributions which boost distributions in “profitable” years - and TAX loss in “unprofitable” years).  

  • Raised $100,000 in Partner Equity, plus Debt

In Summary,

In the Bay Area, where job growth is strong the rising Asset prices are coupled with rising rents our results are strong and we continue to be in cultivate mode.  In the Las Vegas market we are seeing a weakness in the rental market as there may be a temporary over-supply of rental housing.  We have taken the steps to position ourselves to harvest properties as needed to take advantage of the rising asset prices - we will continue to opportunistically buy properties only when our strict purchase criteria can be met.

 
Through the Quarter we have remained disciplined - primarily by not renting to low quality tenants - the portfolio approach lets us absorb the vacancies and take the time to secure a base of quality tenants who will steadily pay rent.

  
Stay tuned and let me know if you are considering real estate as part of your portfolio - its a great alternative investment vehicle for income and growth!    

Cheers!
Biren
Biren Talati
Managing Member
Sandalstone Group, LLC
www.sandalstone.com

 

Market Data follows...

MARKET DATA

VANGUARD REIT ETF:
http://finance.yahoo.com/q/bc?s=VNQ+Basic+Chart&t=1d

CURRENT YIELD:  3.37%  Compare to Clarameda...

HEADLINES

WSJ:  Q1 Case Shiller - reports continued monthly uptick in Bay Area, Vegas (and most other markets) - July numbers...  

SFGATE / Bloomberg:  Rents increase, Vacancy decrease, not by much - real action in Asset Prices

Las Vegas Review Journal:  Nevada, Las Vegas Valley unemployment rates fall (to 11.5%