August Update with Justin Ford

Bob: [00:00:08] Bob Irish here with our monthly call with Justin Ford of Pax Properties. Today as usual, we're going to update you on all the standalone investments in Florida, plus keep you abreast of what's going on in the Cap plus diversified income fund. I say it every month, but it's important throughout real estate booms and busts Pax Properties has never failed to produce a positive result for investors or missed a mortgage payment. With that said, Justin, how are you?

 

Justin: [00:00:41] Very well Bob. How are you?

 

Bob: [00:00:42] I'm doing great, thank you. How have things at Pax Properties been going over the last month? Can we start maybe with the three hotels?

 

Justin: [00:00:53] Sure. We'll talk about the three hotels in the South. So Vero, which is coming up on our ten year anniversary of owning it in September continues to perform well, status quo looks good. It's actually getting some offers. People have been making offers to purchase. We were looking if we were to sell that, we want to get somewhere there about three times sales, which is close to 9 million. I don't know if we'll get that. We've had some interest around there, some interest a little above there with a seller note. We're sitting tight there. We're happy to hold that asset for quite a while. It's a really strong market but we have been generating some interest. So Vero is going well and it continues to be profitable. Again, we're going through a slower third quarter. Then [you] had a very strong season, which is really the end of the first quarter, beginning of the second quarter. But we're still paying for ourselves, growing in many ways. And Vero is doing very well overall. The next one would be Melbourne.

 

Bob: [00:02:00] Right.

 

Justin: [00:02:01] Melbourne as you know, we did get an offer and we've signed it and it's to a strategic buyer. So again something in the three times neighborhood would be a little above nine there and I think that property is actually worth at least 12, 12.5 when you talk about the amount of land and the amount of hotel bays. But [] contract that a higher number than that. Again, I don't want to get people too excited until we get past the due diligence. [It's definitely hard]. The number we're at is a meaningful number. The strategic buyer, we signed the deal maybe a month ago, I think it was. And they've been moving on their due diligence.

 

Justin: [00:02:48] They've been out there quite a few times. They've gone through every single room. They've ordered their third party reports. Again, we're happy to own Melbourne. It's a strong, strong product with a real competitive advantage. Two room suites for the price of a regular hotel room and in a booming market really Melbourne's a real strong growth market, coastal market of Florida heavy presence of the tech industries there. But it's quite possible that by early January the due diligence is up, we'll know that. Looks like we're going to be selling this at a significant premium. So that's kind of interesting. Those same brokers have to just put a word out about Equus again. Equus, our number there is about 16 bits. But even right off the bat, we weren't looking to do that and Equus was getting some interesting attention. But we really like it because we think we can grow. We like all our hotels. We think Equus is still so new out of the gate, year and a half now that it's going to grow too. We're trying to get it to 5,000,000 in sales. Right now it's almost four and with a margin close to 40% on that 5 million which would make it a really significantly valuable property. But that continues to go well. It's top rated and won another customer service award recently. I don't know if I mentioned that last month or if it happened just after that, but I think it's Expedia. So again, that's one of our properties that's won TripAdvisor highest award every single year. So we're the going's good. The going is going very well right now. So those three hotels are going well.

 

Bob: [00:04:22] Hey, that's great. Let's go up to Tallahassee. Let's talk about the pivot. We're moving Seven Hills and Casa Bella into apartments. So how is that going?

 

Justin: [00:04:33] Yeah, we're making progress. We have our final plans right now for Seven Hills. I've contracted with what's called a construction manager. This is a guy who has done work with another very large construction outfit I know from speaking at conferences together. And this guy for very reasonable pricing is sort of a, he's a guy who looks over our shoulder and makes sure we have all our systems and processes in place that we're executing well, that we're considering issues that we might not think of until it makes it a little difficult. For instance like today, he brought up that we want to get way out ahead on ordering our electric panels, the sub panels, because those seem to be still in short supply. So we're taking action on that. So my right hand guy, George will be the project manager. He's done much good work on all our stabilized properties, helping with these types of projects. This will be the biggest one he's done, but he'll do it with me and this guy should help us tremendously. Our next step is to talk to the city again. Hey, we're about to submit the plans. I still remember all the wonderful promises you made us.

 

Justin: [00:05:40] Now lets get you to help us actually get this done efficiently and expeditiously and also just a few days ago, I got back from Tallahassee. I flew up there with a guy who has a long career. He spent 20 years in Merrill Lynch. He was former Navy guy and he is an expert on housing for retired veterans. So we looked up there. We're thinking we may want to target one or two of the properties to certain populations.

 

Bob: [00:06:10] Okay.

 

Justin: [00:06:11] Veterans is one of them so we keep plugging away. We're hoping that there's a slight possibility we could have our permits at least on one property by the time you and I speak next month. That would be truly fast. But the city said they will be truly fast. We shall see. In the meantime, we do our best to minimize the losses that we've been taking. But again, we recently pulled off a refi speak about later that returned a bunch of money to different areas, including Pax, which had lent out money. So we're in a good position to carry us through even while we wait to get our plans and start to do the conversion to get the profitable apartments.

 

Bob: [00:06:53] Well, as long as we're on the subject of Seven Hills and Casa Bella, you and I were talking earlier, you're looking at doing something that you did successfully in Melbourne and at Renaissance that gave investors very nice return. Now of course it's too late to get into the Renaissance and Melbourne at that stage, but I was very intrigued with what you were talking about with regard to Seven Hills and Casa Bella. Maybe you could give us the Reader's Digest version on that.

 

Justin: [00:07:29] Sure. So we're thinking of offering a first mortgage participation note. So this is where investors, they get the security of being a mortgage. So it's a collateralized loan. It's not a non secured promissory note. We've raised well over ten, maybe over $20 million. I'm not sure exactly of unsecured promissory notes when we're finishing a project. And of course they've all been paid off and they've all produced good returns. Melbourne was one of the first ones that was back in 2016 I think. So Melbourne for instance, we had a $4 million first loan. We borrowed 3 or 4 million and then after we finished everything, we filed, we paid it off. Misstated that a little bit. We didn't have the 4,000,00 first mortgage loan yet, but it was not a first mortgage. It was a secondary loan. It was all paid off. We did the same at Renaissance. We had an underlying first mortgage. So we had this secondary data, what's called mezzanine debt sometimes and that debt also we raised to finish the project paid made a nice, very high competitive interest rate, paid that all off on refi. This is actually a little bit different in that it has more features because we're in a in a market that demands that we pay with the market. We're paying an 8% yield for three years and then it goes to extendable to a fourth year to 10%.

 

Justin: [00:08:50] The 8% is front loaded, meaning the 8% is paid as a 1 point plus 7%. So that means if you're paid off early in any year, you end up making more than 8% that one year since you got a big chunk of your stuff as a point early on. Most importantly, the investor pool is part of a collateralized first mortgage, so it's secured by the property superior to any other debt that you would typically see. And the combined LTV would be fairly low. We've already had this appraised because we're going to do a loan which fell through after Silicon Valley Bank fell through. This was back in March. In March we had a major regional bank was gung ho about this thing. The appraisal values are very high post renovation with a lot of extra equity, but the moment they sign the LOI, three days later, Silicon Valley Bank went belly up and all the banks started retraining. Oh, you know what? On second thought, no, we can't do this. We can't do that because they're all intertwined. They may have had bonds with them. They may have had some sort. So we've been busy with other things, including another refi. We just closed. It was very successful, which we'll talk about when we get to Oklahoma. So now we're ready that we have our plans ready. Okay, let's go get the financing.

 

Justin: [00:10:03] We have some offers out there at probably in the 10 to 11% range, and we may even have one at prime at 8.5%. Actually, we did get an offer on prime at 8%, but certainly we didn't get the LOI yet. That's a very strong loan. And it's a loan like for 3 or 4 years. But I was thinking the same time of making this offer to investors. And so I think we will decide if we make the offer. But I'm going to tell you that if we make the offer, it'll have those important features, first mortgage, plus a personal guarantee, plus the corporate guarantee, plus the 8% minimum yield, plus an inflation protection, where at the end of the note, if inflation happens to be greater than what they were paid, it bumps up to a maximum of 10%, plus a fairly low LTV. Again, even post rental somewhere around the high 50s maybe 60%. So we think it's a very compelling loan. Now the participation part is the key. After all that, and even after they're paid off, when we sell the property, any equity beyond the return of all equity to investors and the return and getting caught up on all the preferred return payments, anything above that, they get 10% of that. So they're participating in the equity. It's an equity kicker in addition to the loan and the first mortgage possession.

 

Justin: [00:11:22] That equity by the way, comes strictly out of Pax Properties and no other investor is diluted as we have typically done. So we think it's a compelling offer, if anyone's interested. We're not ready for anyone to sign docs or anything yet. We're still figuring out what we're going to go with this 89%. And we do want to see the strength of the interest. We would raise 15 to $16 million for these two loans combined that replaces all the existing debt, pays off the first mortgage on Seven Hills, pays off the first mortgage on some private investor debt there as well. And then it funds about a million and a half to 2 million in each property of their renovations, either all or most of it. That's the use of funds. If anyone's interested though, when we did this with Melbourne, we did a renaissance even when we did the first mortgage at Seven Hills, which we would now be paying off either this one or another one. Like so many of our offerings, we were very fortunate to be sold out. So people should definitely let us know, hey, please put us on the list, but be aware that we haven't 100% decided to go this route. But there's a high enough probability that we'd love to hear from them. And the order received, we'll reserve their spot.

 

Bob: [00:12:40] Okay.

 

Bob: [00:12:42] It's a very attractive offer. I mean, big differences with Melbourne and Renaissance and that it's a first mortgage and I love that equity kicker. That is awesome. That is awesome. Let's go across the street to talk of, You told me Renaissance is doing very well.

 

Justin: [00:13:02] Yeah. Yeah, it's doing extremely well. The early beginning this year we had management transition and we had some trouble. We sank down like 88% occupancy. We were still working through a lot of the legacy problems with COVID, some collections on the balance sheet, all that kind of stuff. So we've really been cleaning that up. We have a new property manager. She's quite good. She's working directly with my son Chris right now. He's in touch with her on a fairly regular basis to make sure she has the support she needs. And so at the moment we're at 91% occupancy. Typically we shoot for 95. Yet in September we're going to be at least 97 with all the pre lease and maybe more than that. But here's the real thing, it's kind of nice that we're at 91 because the reason we're going through that, we're getting rid of some of the tenants who've been a little problematic, let's say. But she's been pushing rents. Our last, I'm going to say over 20 leases, including new leases and renewals or something in the area of about $150 more than the previous lease.

 

[00:14:05] And she is extremely aggressive at getting us into market because we truly are the best. I think we're the best property in our category. I truly do. I've seen the other properties and it was exceptional. Now hundred $50, our average rents were something like a thousand bucks or something a little bit. Yeah, maybe between 1000 1100 so it's 12 to 15%. She's getting significant boosts and bringing on quality tenants. I really like the way things are going at Renaissance. And if there's one lesson I've learned in business, it would be your store managers are everything. Do everything you can to take care of them. Open the path, create whatever you can because they make all the difference in the world. They make your best plans a reality. And in this case, she's making them a little bit more because she's getting more than we actually budgeted.

 

Bob: [00:14:59] That's great news. Great news Justin. Hey, let's, why don't we move to Oklahoma?

 

Justin: [00:15:08] Sure. So, yeah, I guess let's start with Apex. It's the oldest.

 

Bob: [00:15:13] Apex. Let's start with Apex.

 

Justin: [00:15:16] 91 units finished a year ago. All good occupancies and collections, always in the high 90s. We're doing a few extra work. We had an engineer go out there for some, I think it was for the electrical panels. No, it was for an insurance report or something. So we have to fix a balustrade, which is sort of a structural component with two sections of buildings meet. So that's an extra expense. It's probably going to be around 70 grand total. We've already have the engineering and so forth. But that's kind of what happens now and then we are dealing with physical assets, after all, and so we'll take care of that. And we'll finish that about the same time we get those final individual electric panels in. But other than that, Apex is doing well. You know Tulsa is such, I love Tulsa. Like I said I call it's a stealth market. It's a stealth growth market. Right. It's like when I in 2005, 2006, I wrote the Secret Value and Growth Cties. And I told people stay away from the bubble markets and it's still out there and I said instead buy these value markets. My number one value market was Austin and I went there and I bought a couple of properties myself.

 

Justin: [00:16:34] Of course, I was doing a smaller scale then when you couldn't buy anything in South Florida because everything was crazy priced right. It was like 30 times the annual rent or 300 and [something times] the monthly rent was ridiculous. Possible to cash flow. But I recommended Austin. Austin never crashed. And in 2008 and we all know how Austin is today. I consider Tulsa very similar to Austin. And you see articles, I saw an article the other day, Tulsa, the New Tech Hub or something like that. It's got this real kind of modern beatnik vibe. It's got its legacy from the Woody or Arlo Guthrie days from the Route 66, tech something and the Playboys or something and all that kind of stuff and all these wonderful murals. It's got these great little restaurant areas and so forth. It's got that small town feeling. And in an environment like today where a lot of people are changing homes, changing locations, moving to more affordable, moving for less regulation, people are discovering Tulsa. I'm glad we got in there when we did, but yeah I'm really happy with what's going on at Apex.

 

Bob: [00:17:43] By the way Justin it's Bob Wills and the Texas Playboys. But anyway.

 

Justin: [00:17:49] Well, there you go. There you go.

 

Bob: [00:17:52] [overlap] So Apex, let's talk about Elevate.

 

Justin: [00:17:58] All right. So Elevate, we're probably at 126 units. I think we've delivered to management close to 116. So we have around ten units to go, give or take 1 or 2. And those ten are pretty much in process. Our last big job is the installing the pergola slash gazebo stuff in the courtyard and the parking lot. We're waiting for that to remove the last trailers to kind of make room.  They are short on elevators that it should be done certainly by the time next time I talk to you. I mean but they are some small things, but all those big things should be done and all the units should be done. We're leasing up. I mean, every unit that we get, we lease up. We've pushed rents there a bit more than our projections as well. That area is extremely strong. They just had some new development right near us. It's at a very high traffic road just before I was 35 or 45, I can't remember, 35 I think it is. But Elevate, it's been a good long haul, but we're doing really, really well. And we're just about to hit the sort of the payoff area of the project. And so I'm very happy.

 

Bob: [00:19:16] Excellent. Let's finish off Oklahoma with Ascend.

 

Justin: [00:19:22] Okay some more. We had the issue of the CEOs because we had to build all those balconies. Over 80% of these balconies are all built now. We're starting to get our CEOs. We have around 60 or 65 of the units that are now rentable and or rented.

 

Bob: [00:19:39] Yeah.

 

Justin: [00:19:40] Next month that should be closer to 90, 95. And then we're still shooting to be at 100% available and 95% rented by sometime in early December so the balconies look beautiful again. This a property when things come up. We address it. We did all the underground stuff. So it's another property that great finishes. The apartments look good. The amenities look good, but it is a good property and that it's new behind the walls, under the ground. It's got the windows. We've taken care of any roof issues. So it's not just one of those pigs with lipstick. This is a keeper. This is a generational asset. And we're getting to where we need to be to start paying for itself by the end of the fourth quarter. So far so good right now at Ascend.

 

Bob: [00:20:26] Oh, that's great. Let's finish things up. Let's go to Winn-Dixie, Fort St John.

 

Justin: [00:20:33] So Fort St John, my son Chris who acts as my sort of assistant finance chief, and he also does a lot of asset management and that he works with some of the managers touching base with them, seeing what they need. Today he's at the [] show, which is the International Shopping Center show or something like that. And it's a big, big show. 

 

Bob: [00:20:55] Who even knew they had one. Right. So go ahead.

 

Justin: [00:20:58] Surprised that I knew about Bob Wills and the Texas Playboys didn't know about the [overlap] information on everything. But anyhow, yeah. So it is a giant show and he's out there and he's making connections, talking to people strategically. For instance, we have this I've talked about before, we have an outparcel that we've been approached on. We've never moved it to a point where any specific action. But by making the connections out there, we may get closer to finding chains or brokers who represent chains or something who want to develop that parcel. Also we our occupancy is probably I think it's 96, 97%. We've always been that way, occasionally touching 100. But again, if we meet a strong retail person who can help us fill those small bays more quickly, even better. So we're taking the strategic action we can to make this, the experience with this property has been excellent. Like I told you, my biggest problem was I keep thinking this is too good to be true. But it's been wonderful. And so we just want to make sure we get it better. We make it stronger. So Fort St John is going well. I'm very happy to say.

 

Bob: [00:22:07] Super well. I think that kind of covers the waterfront Justin. Anything else you'd like to add before we sign off?

 

Justin: [00:22:16] Yeah. Yeah, I would say anyone who wants to reserve their spot before the potential sell out, should we go ahead with that note. Just put participation mortgage in a subject line. That way we'll be able to capture all the same ones. You can send it to me at Justin at Pax Properties. That's fine. Participation mortgage would be the way to put it there.

 

Bob: [00:22:37] Okay, great. Well, that's a super attractive offer and I think that's a good note for us to end on. Thanks for the update, Justin. I'll look forward to catching up with you next month.

 

Justin: [00:22:46] Thank you, Bob. Always a pleasure.