Q3 2014 Update

We report Sandalstone’s 3rd Quarter 2014 revenues mostly flat: up 2.2% from prior year period, and up by 1.3% from prior quarter. We had a vacancy factor of 8.8% this quarter which is higher than our average and above the practically non-existent vacancy rates of the comparable time periods. We attribute this vacancy as a normal part of our business as tenant turnover is expected. The good news is that we have filled all of our vacancies with a partial exception in one of our properties where 1 of 6 rooms are vacant. So we are well positioned to close the year with a full slate again.

The primary reason we stayed flat on revenue in spite of this increase in vacancy is the contribution from our AirBnB property and also the price increases we put into effect over the past year in the Bay Area properties.  We were able to slightly raise rents in the Las Vegas properties where we experienced this last round of vacancies. The average increase was 2.4%.  The other factor to discuss is the length of vacancy.  As to be expected in the better areas of Las Vegas, which we identified with our A, B, C, D ranking we found that the expected relationship held.  In our B rated neighborhood we were able to find a new tenant within a week.  In the C rated areas it took us an average of about two months.  Looking forward if Unemployment is a good predictor (and it usually is) we are encouraged by the reduction in unemployment to 7.1% in the Las Vegas area and a growth in jobs and return to positive migration.  For comparison, SF recently moved its unemployment rate below 5% so for all practical purposes it is at full employment with more jobs being created on the strength of the (tech) economy.    

Two issues on the property management front besides the tenant turnover.  The first is the rather high rates of HVAC repairs mostly in Las Vegas as we are running towards the end of the expected life of most units.  Unfortunately, it seems that most of the homes we purchased were built in mid 1990.  While we believe that this period offers the modern style that is still relevant we are hitting the 20 year useful life of the AC units.  We replaced one at the beginning of the year and have since done major repairs on several others.  We haven't been impressed with the quality of HVAC vendors that we have thus far been using so will seek out better vendors.  The other issue is related to turnover in that costs associated with cleaning up after tenants vacate has also driven our cleaning and maintenance higher than normal.  We also caught up on some deferred maintenance items as we put into place a new carpet and fresh paint in one of our properties where we had kept in place the existing at purchase.

Some good news to report on the Financing front.  As stated last time we were in the process of renewing our credit line with Bay Commercial Bank.  Without too many details, we secured a 5 year renewal on our Sandalstone lines after a thorough review of Sandalstone's finances, cash flow and value of secured properties.  Coupled with the 4 remaining years on the Clarameda line we have cash available for us to use opportunistically.  The credit lines also support our NOTE program so those Partners who are taking advantage of that program should continue to feel confident that their "deposit" can be turned back into cash at anytime.   

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 lost their positions as the Top markets in the nation as they registered annual gains of 10.0% and 9% respectively.   They were displaced by Miami which logged a 10.5%.  More evidence that we have entered into flat period.  

It is our view that the next leg up will require a loosening of credit standards in order to allow more people to enter the housing market.  The upswing over the past 3 years was led by investors the next phase will be by actual home-owners who can take advantage of the tremendous subsidies offered by the mortgage market and tax structure.  We view the recent move by Fannie Mae to loosen credit standards this past month as a positive step in that direction.  See article below.  

Another development in finance is brought to you by Blackstone Group.  Blackstone has amassed one of the nation's largest portfolio of single family homes for rent, mostly through Invitation Homes.  They recently launched B2RFinance which is a loan product geared specifically for Funds such as ours.  We are evaluating the product - the positives are the relatively high loan to value, the fixed rate of interest and the 30 year amortization.  The negatives are the high up-front fees, the requirement to hold for the duration and the risk of being unable to re-finance the balloon at the end.  While perhaps not directly beneficial we see this product meeting a market need and one which will give the investor end of the market more fuel.  Our guess is that if successful it may well lure other players including the traditional mortgage players.  It appears that we are on track for a ten year cycle where past sins are forgiven - so away we go, again...  

If you are a Clarameda Partner and want to log in - you can see Zillow's estimates of assets here.  In aggregate Zillow estimates Clarameda properties over 50% gain from our cost.  Total Sandalstone assets have come up more in that time reflecting the increased appreciation in the Bay Area.                

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.      

Clarameda Fund, LLC:

  • Back to Full Occupancy.
  • 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.
  • Higher than anticipated costs due to turnover and also HVAC issues.   
  • Continued Partner distributions (every month for past 6 years and counting...).     

In Summary,

We had an active summer of filling tenant turnover and getting properties back in pristine condition.  We look forward to zero vacancy heading into year end.  Opportunities to examine HVAC costs / repairs / replacement.  The balance sheet has been fortified with the approval of the line of credit for Sandalstone. We are well positioned for new opportunities if the terms are right.  

Of some interest, I compared how VNQ which is a market proxy for real estate investment trusts have done over the past five years to the S&P500, AMZ (which is an MLP index), and two familiar stocks GOOGL and FB.  Somewhat interesting is that they are all relatively close.  I don't think this includes the dividends/distributions that have been payed out along the way.  If one employed a strategy of reinvesting those back into the stocks (or reducing cost basis) then I am fairly certain given the closeness that VNQ and AMZ would do better than the S&P500 and GOOGL and FB.  

Cheers!

 

Biren
Biren Talati
Managing Member
Sandalstone Group, LLC

 

MARKET DATA

VANGUARD REIT ETF:

 
 
 
CURRENT YIELD:  3.05%  Compare to Clarameda...

 

HEADLINES

 

Case Shiller:

S&P Index:  Q3 2014 Case Shiller: Slower growth across all metros

 

Las Vegas Unemployment:

ANOTHER NICE DROP IN UNEMPLOYMENT RATE - 7.1%:

Leading is construction and leisure and hospitality

Fannie Mae to Loosen Lending Criteria:  

From LA TIMES

 

The Urban Institute estimates that 1.2 million more home loans would have been made in 2012 had the lending standards common in 2001 — well before safeguards were tossed out the window during the housing bubble — been in place.