Q3 2015 Update

Operating Results:

We report Sandalstone’s Q3 2015 results to be up 13.2%  to prior year results. Our Quarter to Quarter revenue was also up by 13.2%.  This was a record quarter in the rental phase and we are very happy with the performance. We had practically no vacancy this quarter and we continued to increase rents. This will be a tough quarter to beat as we move forward. We benefit from the strong Bay Area rental market and we are holding firm on Las Vegas pricing as the economy there continues improving. We enter Q4 fully occupied. As discussed earlier we have stregthened our balance sheet by continuing to paydown our variable debt. We also swapped out a few variable rate loans for a fixed 30 year product which increases the duration of our debt. We are happy to have removed this risk as it appears the Fed will raise rates in Q4. This took a better part of the year to accomplish so we are relieved to have gotten it done.

In the Bay Area, from a Revenue standpoint, we welcome tenant turnovers.  As stated last quarter, we had one turnover and we secured a 18% increase with three days of vacancy. We also started recognizing the benefits of the Section 8 approvals for our rent increase petitions. We don't see a let up in price increases and have a majority of our properties still below market with long term tenants so we anticipate being able to continue raising rents in the Bay Area.  We didn't have any turnover in Las Vegas, so we are mostly holding firm there. We haven't been as aggressive in raising rents there, however we should begin testing our pricing ability next year.

An interesting project for us was to convert the backyard of one of our Oakland properties from lawn to mulch. EBMUD, our water company, subsidized the conversion to encourage water savings. They provided instructions on how to do this - let the grass die by not watering it, dig a trench at the boundary to prevent spillage, layer with cardboard/newspaper, cover with 3 inches of mulch. We ordered the material from Acapulco Rock and Soil and although they were late on the delivery (Bay Area summer weekend traffic) - it ended up being a one person job for one afternoon. Most of the time was spent getting the mulch from the front to the back.

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 showed strength in both of our markets.  SF led the nation (along with Denver) with a 10.7% YTY gain (August data). Las Vegas was up 6.0% YTY. It was a good strong summer for both markets.   

From a reversion to mean perspective, one can say that the SF market is likely past its long term growth trend. The Vegas market is probably below its long term trend line, while Detroit is probably also back to its long term growth of flat to declining. Of course we remain confident in the ability of the Bay Area to support a vibrant population and continue to see Las Vegas as a growth opportunity. Both markets are cyclical and we are well aware of that eventual possibility.

As stated throughout the year, 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.  Our gains according to Zillow are tempting, however we are steadfast in holding for the foreseeable future.          

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,

We are keeping this short as we have been late in getting Q2 and Q3 out. Stay tuned for a more timely Q4 and year end update. We are cautiously optimistic on those results!  

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:

 

CURRENT YIELD:  4.0%%  Compare to Clarameda...

 

HEADLINES

Bay Area Rents:

Oakland now nation's 5th most expensive rental market (SF Business Times)

Case Shiller:

20 City Update for Aug 2015

Las Vegas Unemployment:

UNEMPLOYMENT RATE - 6.8% as 20,800 jobs in September