Q4 2014 Update

Operating Results:

We report Sandalstone’s Full Year 2014 results to be a record during the rental phase. Full year revenues increased 4.3% over 2013. The primary reason for this was the rise in rents and a slight increase in number of rental days. We didn't purchase any new properties in 2014 which highlights our discipline in purchasing assets that make sense. Asset prices continued rising in our markets and we are happy to sit on these unrealized gains and return capital to investors. Our Quarter to Quarter revenue declined 7.2% reflecting the deactivation of our highly successful AirBnB pilot unit. We plan on selectively activating this unit in 2015. We filled all vacancies in Q4 and head into the year with full occupancy. For the year we ended with 3.5% vacancy rate which is a good indicator of rental strength compared with our 6% historical average. Drilling down into our two geographic areas, our Bay Area vacancy rate was 1.0% with 20% turnover. We increased rents on those by 15% on new rent. In Las Vegas we had a 5.1% vacancy rate with 33% turnover and new rents coming in 2.4% higher. Overall, it was a good year on the Revenue Side.

On the Operating Expense Side, we had a number of issues which caused our repairs expense to be higher than expected.  We had a higher than expected number of HVAC issues inour Vegas properties.  In hindsight all of our Vegas properties were built in the mid 1990s and the expected life of the HVAC units is about 20 years.  Going forward, we will budget these costs in the units we have not replaced or substantially re-built.  The good news is that the newer units are more energy efficient so we can feel good about that.  The other expense was that the majority of the units in which we had turnover had large turnover expenses.  These costs exceeded our ability to charge the Security Deposit.  We stayed true to our philosophy of keeping units in excellent condition and were willing to incur that expense.  An cautionary side note is that one of our properties ended up being negative profit for the year.  This was a combination of all the negative issues mentioned:  long lease up time 2.5 months, HVAC issue and a large turnover expense.  It happens and reinforces our disciplined approach to ensuring that we make our purchases based on a realistic expectation of the costs associated with maintaining our assets along with an adequate return on capital and effort.

Going forward, we anticipate continuing to raise rents significantly in the Bay Area as the mobil/internet/Apple/Google/Facebook.... economy continues unabated.  The one caveat is our Section 8 units which are governed by non-market factors.  We have seen an uptick in Las Vegas as the broader economy continues to improve.  Growth as evidenced by the Unemployment rate and New Jobs created are trending positively.  Las Vegas unemployment moved down to 6.9% in December.  The rate fell with 38,200 more jobs created and 1.7% increase in population.  Looking with a macro lens the strong US economy will help domestic tourism while we suspect the strong dollar will hamper tourism from countries with weakened currencies and/or economic conditions (oil).  Overall, we see the positive trends continuing as the overall outlook is favorable.  We anticipate being able to reasonably raise rents in the 2 to 5% range.    

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 confirms a flattening in the price increases.  Las Vegas and SF registered annual gains of 6.9% and 9.3% respectively.   On a month over month basis, Las Vegas was slightly negative 0.3% while SF was slightly positive at 0.4.  The seasonal adjusted month to month looks better (with Vegas at 0.2 and SF at 1.2).  We will not be selling our properties in winter!  

We believe this reflects the end of the investor phase of the recovery.  The next leg up will require real people to get mortgages.  As we have stated throughout these Updates that will happen when credit loosens up.  We see that happening with the recent Fannie Mae guidelines.  We remain optimistic that this will happen in the 2016 to 2019 time period. Another tracking valuation tool that we employ is Zillow which has its ZEstimate.  Based on their Estimates our properties are up over 41.5% from our fully capitalized basis (including repairs).  This is on top of the income that has been distributed over the years.  We have had our earliest properties return their entire purchase cost.     

In summary, the market has moved quite dramatically up since we purchased most of our properties.  We see this appreciation flattening out over the near term.  We will continue to hold as we enjoy the income from rental operations and believe that the patient investor will see additional upside when the real buyer is able to re-enter the market in a meaningful way.       


We spend most of our time on these Updates writing about Operational results and Market value.  It seems though that we hardly ever discuss the overall Balance Sheet.  This is another area where Sandalstone has taken an extremely conservative approach.  From the outset we have ended up paying all cash for properties as that enabled us to get the properties at a discount.  Since then we have taken on relatively low levels of debt.  We have preferred to pay Partners a healthy yield rather than interest to debtholders.  Of course it reduces percentage measures such as IRR or ROE.  However it maximizes absolute dollars returned to equity Partners.  We are favor the return / risk characteristics of this approach for the Company.  There have been exceptions with properties we hold in special off-balance sheet situations.  The debt on those transactions have 30 year fixed terms at an interest rate range between 3.75% and 4.0%.  In addition, we have also employed short term and variable debt which has proven to be an attractive financing option these past seven years.  We suspect though that our variable rates may go up at the end of the year and so we are attempting to lock in fixed rates and extend the duration of our debt as the year progresses.  We believe this will position the company well when we head into an increased rate environment. 

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 Sandalstone Partners have used this facility and it has worked as anticipated.    

Clarameda Fund, LLC:  

-  Continued payout of monthly distribution.  Initial Partners have received close to 40% of capital back in the form of distributions.  

-  K1s will be distributed this month - thanks for everyones patience - as always this is a tiring time for our Accountants as the Corporate/LLC returns are due.  We have turned in our books to them in mid-February so we are in process.  

In Summary,

We head into 2015 we good financial shape.  The income from properties continues at a strong pace with rents in the Bay Area strong and looking up in Vegas.  The balance sheet has benefited as excess cash from operations is being used to pay down debt.  We hope to further improve our position in the coming months by increasing the duration of the debt and fixing the rate on some of our shorter maturity products.  

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.  




Biren Talati
Managing Member
Sandalstone Group, LLC




CURRENT YIELD:  3.37%  Compare to Clarameda...



Bay Area Rents:

SFCurbed Article on Bay Area Rents - Highest in Nation!

Case Shiller:

WSJ:  Q4 Case Shiller - Slow Down in Appreciaton   

Las Vegas Unemployment:

UNEMPLOYMENT RATE - 6.9% vs 8.6% - Increase in Jobs, workforce and Population