April 2022 Update with Justin Ford

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Bob  Irish 0:15 

Bob Irish here with our monthly call with Justin Ford of Pax Properties. Today we're going to update you on all the standalone investments in Florida. We're going to keep you abreast of the underlying investments in the cap plus diversified Income Fund. I say this every month, but it's important, especially for our more recent investors. Throughout real estate booms and busts, Pax Properties has never failed to produce a positive result for investors, or missed a mortgage payment. Justin with that said, good to have you back. How are you doing?

Justin Ford  0:54 

Great, Bob, how are you doing?

Bob  Irish  0:55 

Just super, thanks. Listen, today, I thought we'd change things up a little bit. Why don't we do a sort of a turbocharge or a speed round on the existing properties in Florida? I know there's some big changes coming to the Diversified Income Fund in terms of a pricing change. I want to get into the nuances of that and what it means for existing investors and potentially for new investors. Then finally, let's talk about the latest acquisitions and maybe some irons that you've got in the fire. Does that sound like a pretty good agenda?

Justin Ford    1:29 

That's perfect. Sounds great.

Bob  Irish  1:32 

Okay, where shall we start? Shall we start in Melbourne?

Justin Ford   1:37 

Well, I'll tell you what, Bob, we're gonna go south to north if it's okay with you.

Bob  Irish  1:41 

okay. So we'll start with really changing it up here.

Justin Ford    1:46 

Vero is further south than Melbourne. You know, we often give our updates with narratives and so forth. We're gonna give a speed round. You know, they say a picture tells 1000 words. Sometimes, the numbers tell 1000 words as well. So I just want to give you a little bit of what happened in March. So Vero last year, March $206,000 lets call it $207,000 in revenue right. This year $330,000 . Profits last year Vero, about $77,000. This year $120,000. Melbourne, last year, March, was $185,000 in revenue. This year $316,000. EBITDA last year was about $16,000. This year $121,000 plus. Ocala $192,000 last year, we hadn't yet finished renovations. That was the revenue. This year, $373,000. Last year, we squeezed out $42,000 in EBITDA, this year $154,000. Seven Hills is one exception in March, because you remember that March of last year, we had the homeless shelter there because we were still in the thick of COVID. Right? They were keeping us through it. And then when we let them go at the end of April, you know, we had to renovate everything again and it took much longer than expected because of all the supply chain issues and the labor shortages and everything else. So Seven Hills was actually down from last year. But the red is narrower than it's been in the last few months. Came in at like 28. And I'll talk about seven hills in April in a moment because it's really positive there. But we go to Baymont and Baymont was up and squeezed out $5,000 EBITDA in March of last year this year, slowly improving but they're up to $20,000 now. Then GSA you know, to which we recently pulled a bunch of money out, we haven't refinanced and all that went from $79,000 in EBITDA over the last year to $97,000 this year. Okay, so across the board with the one exception of that special circumstance and Baymont, where we are really coming out strongly from COVID. That includes Baymont and Seven Hills for sort of the ones that are struggling, mostly because the hospitality market in Tallahassee, Florida, which depends a lot on government and schools. You know that was the most challenging market because schools and government are not entirely back. April Bob, April the hits just keep on coming. In April, last year, Vero did $190,000.  We're projecting $270,000 in revenue and EBITDA to go from $67,000 last year, to $98,000 this year. I'm just gonna focus on EBITDA right now. Melbourne last April $29,000. EBITDA this year $89,000. Ocala last year $18,000. Revenue this year $119,000. Seven Hills last year, we lost, because last year is the one that we had just let the homeless shelter go. So we lost like $36,000 last year as we were doing that transition this year. Right now, this April, we're on track finally, for Seven Hills type year $223,000 in revenue. $77,000 plus in EBITDA. All right. Then Baymont, again, is growing payments on track for 90, I mean, payments on track for a higher EBITDA and  GSA is up to $94,000 in EBITDA. So it's been a long haul, but we stuck with it. We keep investing in our properties, keep investing in our people, keep working at having, you know, the best in our category of properties. We get the awards, we get people now, and we're getting the profits and so glad to report we're doing fairly well.

Bob  Irish  5:50 

Those are some incredible numbers. Justin, thanks for sharing those with us. That's fantastic. It's a natural result from the effort and the philosophy that you bring to this whole  area of real estate investing. So, I can't say I'm surprised, but I am surprised at the magnitude of the increase.

Justin Ford    6:16 

I feel like those new parents whose kids just got back from first grade and we want to show their report card, you know, on the refrigerator. We are doing pretty well.

Bob  Irish  6:26 

That's great. That's great. That's better than bringing back that report card with a little note that says “see me”. That was a great speed round. Let's talk a little bit about the Diversified Income Fund. I know there's some changes unless you've got anything else you want to add to the

Justin Ford    6:49 

We'll have our quarterly reports coming out in a couple of weeks. So individual quarter reports, we'll get more details on most numbers. So we spoke a bit about the pending price increase, right. But by the end of March, we need to come up with a price. We came up with broker opinions of value issued to us by Capstone. This brokerage has sold us Tulsa, the Apex in Tulsa. They sold us Elevate. If we sold them today, combined, you know, they are up $3 to $4 million, somewhere in that neighborhood.

Bob  Irish  7:28 

What's that in percentage terms,

Justin Ford   7:30 

I'm gonna say 25%

Bob  Irish  7:35 

Wow for the Year, 25%?

Justin Ford    7:39 

Less than a year! Part of that is of course, the market, which is beyond our control. But Apex is almost done. And that is a brand new type of property. Elevate is on its way to becoming one. And also we get unsolicited phone calls. I'm sure we bought it for about 5.3. We've only put around 700 so far, we slowed up, we're about to really accelerate now our renovations. So we're in it for maybe 6. I don't exaggerate when I say we can sell for 9 million tomorrow. Actually, it's probably better than 25. It's on a great street, May Avenue. It has all this potential, but we like to renovate our own. Put on good financing, and own a good asset, maintain it for a long time, and deliver a lot of income to people and return equity through refies over time, right stuff like that. Then our shopping center, at $7.8 million we bought that one in Port St. John.  I got an unsolicited offer, a serious offer of $9 million. You know, that was after only five months, six months, something like that. And I said no, thank you. And he said, Well, what would you take? I said look, I'm gonna give you a little crazy number because it's only going to be a crazy number that's going to make me want to sell. I go okay, how about $12 million to $12.3 million, something like that.  I said because at that point, that shopping center is $150 a square foot. At that price, you're about $1.2 million an acre. I think the way Florida is going, it's very reasonable that within five years, that thing's gonna be worth $150 a square foot, $1.2 million an acre, across the intercoastal  in the fast growing space coast of Florida. He goes, I kind of agree with you. He didn't make the $12 million though. Yeah, I made it a price would you'd have to really offer me stupid money for us to sell. We just like our assets and we're delivering what we want to, which is diversified income, right? We haven't finished all our renovations. New pricing right now would be at about 15% to 17% higher. In other words, right now everyone gets a 7% pref. New investors after May would only get 6% pref. Anything above that would go towards a capital reduction, return of capital, whereas the existing investor is 7, everything above 7 cumulative, goes to returning capital. So that would be the change. But during this pricing thing going back with my attorney, you know, we've done Bob, I don't know if it's 15-20, maybe syndications we've been successful. We're very fortunate to say in all our syndications, but this is the first fund right. So funds a bit of a different animal. You know, as far as you give too large, you give it to the fund accountants all that stuff, you follow along as best you can, but that legal stuff belongs in their bailiwick, mostly. So I'm talking to my fund attorney, and he goes, you know, Justin, what you can do here, the way we wrote the documents, you can actually grandfather in your existing investors. After May, if they want to invest in the originals, they can. So, that would only apply to existing investors. So new investors, you know, they'd have to get in by the end of May there for their funds and everything else to get into the original price. That's it, because that's just before the one year anniversary of our first acquisition. Also just before we finish our first complete renovation, 100%. After that, they would face a higher price. For the existing investors, I found a way to grandfather them in. However, that is only under certain circumstances. We do intend to grandfather them in?

Bob  Irish  11:30 

Okay, let's say I'm an existing investor and I am actually. Let's say that all  existing investors are grandfathered in at the old pref rate. Justin, what's my incentive to invest more right now? 

Justin Ford    11:57 

I would actually say there's three reasons. One is the sooner you fund your new investment, the sooner you invest pref right? If you fund it now from day one, fund it six months later, that is six months you're not accumulating pref. The second sort of more general reason is, if we're, we're still accepting funds, and you're giving funds, it gives us the opportunity to buy more good properties for you and for all the investors, right, but specifically for your return on your capital. The third one is also we will only accept that if we're accepting capital. So you know, by September, let's say, you might say, hey, you know what, I want to put in x amount more..than we might say that thank you very much, Bob, but you know, we've kind of deployed our capital, we're not seeing opportunities right there. So we're not taking any more money right now. Okay, so it's really a question of a crew sooner and make sure you can get in first because we're not accepting capital at any price, which is just not accepting capital.

Bob  Irish  13:02 

But for people who have not invested, they basically got six weeks to get their act together, right? Absolutely. Correct. Yes, that's okay. So for all of you out there who are contemplating maybe you've been procrastinating a little bit, get it together, because you got six weeks and the funds have to be in, where you can't wait until the end of May to process the docs. So get on it if you're going to get on? Yeah.

Justin Ford    13:29 

Excellent. Okay.

Bob  Irish  13:31 

Let's talk a little bit about what irons you have in the fire. Maybe some stuff you're looking at right now. Have you signed any LOI’s? What's what's going on?

Justin Ford   13:44 

Well, I do want to talk about the irons in the fire. Why don't I tell you about the one that we're a contract on our fourth property? Yeah. So that's property in Oklahoma, an A suburb right outside of Oklahoma City. That one we got at a good price, it's 146 units. The average rent right now per square foot is about .91 cents. We're fairly confident that after work, we can bring that up to about $1.09. Our budget is $1.05. A  little more conservative, or at least our initial underwriting was even at $1/ foot. But, we're looking hard at the rent comps. And the thing about our rent comps, we use rent comps. We don't cherry pick, we sort of look at everyone in the area, right? Then, we obviously will not look at a high rise luxury thing. If we're the best in class B garden. We're not gonna look at a subsidized thing. It's got to be in our market rate category right? We're garden style apartments. I think without exception, we’ve always been, almost always, the best in class. When we're done, if you're looking for a 2/1 in the $1,000 range or something, or $1200 range, whatever the price is, wherever the market is.  You'll want to look at our apartments. The reason that's important is this keeps our projections not overly rosy. We make the investments to really have a competitive product and then we work very hard at operating well and we are very, very relentless marketers. We get the word out and we feel that once people are in the market, see our units, they’ll still take them. So we're looking at when we're done, something like a 7 cap cash on cash after the financing. Even with the higher rates right now should be in the 8% range steadily growing from there, and we'll lock those interest rates. We've already acquired a financing commitment from a group through Northmark. We have a bridge loan that we're going to move on to a fix.  We're moving  forward on our due diligence. We're working very diligently to get all our budgets and everything together so that from day one, we can hit the ground running with our renovations. You know, Apex is 91 units and we did it in a year. Interior, exterior,  everything. Elevate even though we had that delay, we're on track to complete those 126 units in one year. By the way, we're scheduled to close on these 146 on May 23rd. I have a two week extension at no cost. I can push it to mid June if I want.  We’re  scheduled to finish Apex at the end of May. So those guys can go straight from there to mansions. And Bob we do the same thing again and again. We have the great shaker cabinets. We got that three centimeter quartz countertops. You got stainless steel undermount sinks. We got the LED fixtures. We have the vinyl wood plank flooring. It's a formula now. We know everybody. It's a smile and dial. We call our vendors. We got our pricing. We got our subs. We feel we're in a position to really move to take care of good values and we've matured as the construction side of our companies matured. We think we're going to move from pro forma to actual fairly quickly and it should be a very successful investment. So late May to early June that property will close.

Bob  Irish 17:34 

That's just incredible that you're able to get that work done at Apex and elevate in such a short period of time. What are the efficiencies that you guys have brought to bear to make this even possible? Because I remember a few years back renovations didn't happen that fast? 

Justin Ford   17:59 

No, they didn't always end well, you know. One of the reasons that we're so pro-investor in the way we arrange things is because our investors, you know, invested for the first time in 2006. I started 2002 myself.  I've always thought you know, they have subsidized my education to tell the truth. I've learned by doing and that includes sometimes doing mistakes. We’re such deep value buyers that thankfully that gives us a little cushion for mistakes, we get something's right, something's wrong. But through all this process, we have learned, you know. There's a guy who's talking about the large investment firms and Wall Street. I can't remember what it's called, Blackrock or Rockwell or something like that. This guy was talking about compounding. It's an idea I've talked about many times. We've all heard like Einstein say the most powerful force in the universe is compound interest, right? It’s not just compound interest or compound anything, it is compound experience, right? I mean my property manager, this woman was at the desk  8 ½ years ago, she's now I'd say one of the best general property managers/operation managers out there. She's just using so much time and energy, which she understands now, you know, in a few moments, would have taken a few weeks to understand years ago. Same with me in what I do. The same with our site supervisor, as well, was with us 8 ½ years ago when he was a maintenance manager. Together, we've renovated Bob, including the units we're doing now 1400 units. You can't do 1400 units without learning something, even me. But these are great people. We also have an excellent new project manager with us, who is excellent. So I think it's just sticking to it. Its sticking to your craft and really loving your craft, wanting to get better at it and fortunately, we're getting a little better at it. Also, we have relationships with all our vendors, you know, Mike, Mike Pachello, Home Depot. Caesarstone The guy over there who's delivering the granite to us in giant slabs. We have all these guys on speed dial, we have all our prices negotiated, and we're not reinventing the wheel every time

Bob  Irish  20:09 

A well oiled machine. Super Well, Justin, anything else to add before we, before we sign off here?

Justin Ford    20:20 

I'll just give you an idea of a couple things we're looking at real quick. So sometimes we look at smaller units. Typically we favor over 100 units, around 150-200. The trouble is, the higher you get, you're competing with institutional money, which they're dealing with almost free money. They have huge pressure to put it to work. So they drive prices up and cap rates down. In this footprint 100-120 units, you can still find it's a little big for some guys. It's a little small for the bigger guys, but not so much the bigger guys will also buy the small. However we're looking at 98 units in Albuquerque, New Mexico for instance, which is an interesting market. It's one of the highlights in that secret value and growth cities report I wrote before the crash in 2007. I actually highlighted Albuquerque back then. We're looking at some more grocery anchored shopping centers, you know, like Port St. John because it has been a blessing to us. We picked up like 97% occupancy. Like I said it's, it's been quote, unquote, sort of the easiest/best we have.I don't mean to say that in a light hearted way, because we still have to be good operators.  We have to be good managers. We have to stay on top of it. And we will become better and better at managing those centers. The same guys who brought us Port St. John brought me to others also in Florida. Grocery anchored by the same folks. Again, these are actually a little bit below replacement costs. They're in markets that are growing in Florida. Of course there are significant terms remaining on the anchor lease. They’re at high occupancy. The unlevered yield is going to be in the 7-7 ½ range. We're going to get debt on it even with the higher rates, it's going to produce positive leverage and a little higher cash on cash on our total return including puts reduction is going to be double digits. So these are the things we're working on. I'm taking a flight Monday morning to check out a few of these. So we shall keep you posted. 

Bob  Irish  22:15 

Okay, great. Well, to kind of wrap up, I think it's a wonderful thing you're doing grandfathering existing investors with the old rate. That's super, but like you said, if you're an existing investor, why wait, why not start earning these returns right away? And let me make sure that you are accepting new capital right now are you not? 

Justin Ford   22:41 

We are but it is quite possible that after, you know June we might not. That might be it for the diversified income fund as far as you know, building our portfolio. Who knows the deal will go up but yeah, that is the other big caveat there. Better to get in sooner than later. For that reason as well, I would say

Bob  Irish  22:58 

And again, if you're not in, you're thinking about it, get on your horse. You’ve got six weeks till the price increases. Justin, thanks for joining us today. I look forward to chatting with you next month.

Justin Ford   23:10 

Thank you very much Bob.