Q4 2012 Update

Sandalstone Group, LLC.

 

Highlights

Operating Results:  
Sandalstone’s 4th Quarter of 2012 culminates an exciting year of growth and solid business performance.  We once again report record quarterly rental revenue:  37% year to year growth compared to Q3 2011 and 13.1% growth compared to Q3 2012.  The primary reason for the Year to Year growth is that we have grown the number of properties under control.  The double digit Quarter to Quarter growth reflects the renting out of properties that were vacant at the end of Q3.

The same story plays itself out on an Annual Basis. For the Full Year 2012 we report record rental revenue: 33.7% vs 2011 rental revenue. For those of you tracking Sandalstone for the past 9 years, you will note we have had considerably more revenue in the past when we were in the Development phase. Those results were highly erratic, and mirrored the real estate cycle - our Rental Revenues are steady and generally increasing over time. We therefore are happy to have reduced the volatility of earnings through this phase of the cycle.

We ended up having zero East Bay vacancy for the entire year.  As stated before this reflects the strong demand across the Bay Area.  Tenants stay put when other options are not as readily available.  We also believe it is a result of operations.  All of our East Bay tenants have renewed at least once and several are heading into their 5th year with us.  They appreciate the quality of the units and the service level we provide.  (Also moving is a pain).

 
We cleared up the few vacancies in the Las Vegas market.  We rented out our high end property after more than 3 months of vacancy.  This is a property that has more upside and along with it more risk.  We rented our “bread and butter” property within 3 weeks of marketing it.  

Going forward we would see a slowing down of our growth rates as we will not be able to acquire properties using the strategy of the past 4 years.  Plans are underway to move to the next part of the cycle and return to more Develpment / Value Add opportunities. This is the REAL story of Q4 - the cycle has turned and with it we shift strategies. Thus, we CLOSED Clarameda Fund to additional investors as the properties have appreciated significantly. Our next anticipated offering - the forth one for investors - "Sandalstone Fund IV" will feature opportunities that are expected to be of shorter duration, MORE expected return, perhaps without the steady, consistent yield of Clarameda Fund as more emphasis will be placed on appreciation. Please contact us if you are interested.

 
The Fund's Manager, Biren Talati also became a licensed Real Estate Agent in Las Vegas, so that we can more easily conduct operations in the state.

 

Market Update

No better way to illustrate what's currently taking place in the market then to share the experience of the last three offers we made in Las Vegas:

1)  42 bids - didn’t win
2)  18 bids - didn’t win
3)  24 bids - didn’t win  

GLVAR, the local REALTOR organization reports 24% y/y price increase.  And we believe it (this time).  

The Market has come sharply off the bottom and for most properties the price is above what we are willing to pay for our numbers to work.  The primary reason is that the banks have significantly cut the foreclosures and as a result only about 6,000 homes have come into the market in the quarter.  We recall last year, something like 15,000 homes came into the market.  On the demand side, investors similar to us, have figured out the gifts being handed out and have rushed in, and increasingly people with govt backed financing are coming in.  So our model is not supported at these higher price points.  This is why Clarameda Fund 1 is closed - if you are reading this and are a Member (or have purchased properties through another vehicle) - congratulate yourself.  

This is exactly what happened in the Bay Area two years ago.  The same story played itself out in Las Vegas.  In Oakland, following the frenzy in asset prices - vacancies increased and rents decreased.  It took about a year and a half for rental supply and demand to work itself out (we also had a Great Recession - now we are in an improving Economy - so the effects may not be as great).  Real Estate is a cyclical business and the cycles tend to play out the same each time - with experience you learn not to fight it - just play along - much easier and much more rewarding that way.  

Stay tuned for the next set of opportunities that correspond to the change in cycle.

 
Clarameda Fund, LLC:

  • Acquisitions:

    • None - many offers made, none accepted...  cycle has changed...

  • Operations:

    • 1457 Homestead - rented on Nov 1st at $1,399 after about 13 weeks of vacancy - priced too high initially    

    • 6243 Elderberry Wine Avenue - rented on Nov 1st after only 3 weeks of vacancy

    • BackWoods - Tenant to move out at end of January  

    • Various and routine fixes/repairs.  All within budget. Decided to increase self-insurance by waiving all HomeOwner warranties. Next year will probably increase deductible amount.  

  • Finance:

    • In negotiations to secure credit line - $250K at 5.5% - stay tuned.  Plan is to purchase another property (if possible) - otherwise will enable company to more aggressively self-insure.  

    • In the meantime, started the program by implementing a 3.25% Note program, which an existing Clarameda Partner took further 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 49 straight months of distributions of the Preferred amount to Partners.

    • We had one Partner take MORE 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.   Contact us if interested.

  • Clarameda Fund is NO LONGER seeking new Partners  
    • Raised an additional $30K in 3.25% Note .  

In Summary,

Q4 2012 DEFINITELY marked a transition, as we are now in the period of rising Asset prices.  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.  The Las Vegas market is seeing a frenzy in sales activity.  We remain cautious in that 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.  That is why we closed Clarameda Fund.

 
Through the Quarter we have remained disciplined - in our selection of properties and tenants - our portfolio approach lets us absorb the vacancies and take the time to secure a base of quality tenants who will steadily pay rent - that hasn’t changed.   
Stay tuned and let me know if you are considering real estate as part of your portfolio - as the past 9 years have demonstrated it’s a great alternative investment vehicle for income and growth! Consistent with the overall cycle we are moving towards greater return investments.

   
Here’s to a great 2013 to all!

 
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:  3.56%  Compare to Clarameda...

HEADLINES

GLVAR reports home prices increased 24 percent in 2012,ranking as third best sales year ever

WSJ:  Q1 Case Shiller - reports over 8% uptick in Bay Area, Vegas - October numbers...  

Rise in Las Vegas housing prices tilts advantage to renters

We remain cautious - based on Oakland experience we expect to see vacancies rise...  

Las Vegas Valley, state unemployment rate ratchets downward

“Start with those unemployment rates. Nevada's jobless rate dropped to 10.8 percent in November, its lowest rate since March 2009 and a big drop from 11.5 percent in October and 13.2 percent in November 2011. In Las Vegas, the rate slipped to 10.4 percent, compared with 11.1 percent in October and 13 percent in November 2011. Reno won the race to single-digit unemployment, with its 9.9 percent rate easily besting its 10.6 percent rate in October and 12.1 percent in November 2011. It was Reno's first single-digit jobless rate since 2008.”