October Update with Justin Ford

Bob Irish: 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 and also keep you a breast of what's going on with the underlying investments in the cap plus diversified income fund. I say every month here it goes again throughout real estate booms and busts tax properties has never failed to produce a positive result for investors or missed a mortgage payment. Justin, with that said, how are you?

 

Justin Ford: I'm doing great,…Thank you so much. I'm in New York in my son Justin's apartment and today I'm seeing my son Aean as And last night I was with my son Chris at a conference here.

Bob Irish: Hey, so I under tell me a little bit about this conference you were at yesterday. I understand it was some sort of prestigious real estate conference with big players from all over the place. Tell me you spoke at the conference I know that…but what was the temperature of the room Yeah.

Justin Ford: Yeah. It's interesting. So, is it the Union League Club near Park Avenue in Midtown? And that club dates back literally to the Civil War. It's got all history to it. So, you have a lot of big New York players there. some major REITs. I sat down with some top guys from Starwood Capital. and the feeling all around is that there are deals coming up in the pipeline. I'm very glad that we're going to be fully stabilized by and then this year we'll be done with all construction and we'll just have one property probably lease up because Swan should be completely leased up.But there are deals coming up because there's a lot of loans that they are no longer going to extend and…pretend, especially from the lenders from what's called CNBS, the collateralized mortgage back securities market. So those loans can be good terms sometimes. They can be aggressive get a borrower more money, but once those loans kind of go back, there's difficulty. there's no one to talk to because it's a security, so you can't call the banker and say, "Hey, I need another six months." There's none of that discussion going on. so deals are already starting to shake out a little bit.The theme of the conference was, conversions, not religious or anything else. It was just a real estate conversions, So, Exactly. Right. Right.

Bob Irish: you're pretty much an expert in that

Justin Ford: So, I was on the panel with two other guys and one was with a company that had done 27 of these conversions specifically focusing on hotel to apartments, right? And we're doing two of them right now. And last year when we sold Melbourne, we sold that at a three or four million premium to a er. So converted conversion is really picking up steam. these guys are conversions by converters by choice.  And we were converters by necessity. As far as the two in the Tallahassee, the hotels were hit by COVID, Then there's all sorts of folks who do buy office and convert to multifamily, all this kind of things. So, there's a lot of activities. The temperature in the room There's some value deals emerging. the other is that generally everyone thinks rates will continue to trend down and activity is already picking up. I mean commercial transaction activity the volume of transactions is probably up I believe 40 or 50% over the last year you picked up significantly right people are starting to trade assets they were holding on to it for a long time and as rates go down interest rates we do think that I mean the general temperature is probably that cap rates will start to also compress meaning the value of properties will tend to rise a little bit it's usually the reaction  lower rates leads to higher prices usually over the long term. and they also talked about Mandami the Democratic nominee for mayor and who's likely to be elected and a lot of the thoughts were that if he does there's going to Florida real estate's going to go up in price again because you're going to have an exodus of folks with money businesses and so forth and move them down to Florida or something like that. But I think the real news I believe is that transaction volume is picking up now. Of course, yesterday Jerome Pal at the Fed, he said don't count on a December rate cut basically, right? so he cut the race he cut the 25 bips off the Fed rate and of course the 10ear went up eight bips, which is kind of what happened  Last time you cut it 25 basis points and the 10-year basically went up again, right? but just before that it dipped before below 4% which is kind of at least in my mind an interesting barrier point. The spreads are starting to contract. The spreads are you take the index which is a 10 year on a longer term loan. You add the spread and that gives you a rate. So, the spreads contract a little bit u and the rates going the index is going down a little bit. It's good for us because I'll tell you how this now impacts our portfolio. Is that fair?

Bob Irish: Yeah, you've given us a good sense for the temperature in the room.Let's talk about how it affects our investments. Yeah.

Justin Ford: Let me start with the refies and we We'll start in Oklahoma since that's where we have a lot of refies going on. So, right now we're set to close i for our 91 unit in Tulsa on I think it's November 14th we should close that and that should return about $700,000 to the fund. That money will sit in the fund until the other two are refied because we need the liquidity to support the other two loans. so again, we're shooting to resume distributions for the fund in the first or second quarter. We're fairly confident about that. The next loan that we should close because the rates are coming down the proceeds actually may go up a bit. So you don't lock in your rate until a certain time but it looks like we're going to get even a little bit more proceeds that will apply to te Elevate. So Apex's alone is about 4.8 million 4.7 4.8 Apex we're going for around close to 9 million and…again proceeds are looking better in the current environment and we think we're going to be able to close elevate by the end of the year. That's our 126 units in Oklahoma. And then we have our 146 units and more. We just got our appraisal back and We were thinking it would come back in the mid5s. They came back 16.1 million, which is good. And we're doing a HUD loan there, because we ran into trouble there where we had to replace all the balconies, so things took long longer and cost more. so we're doing a HUD loan that's going to really maximize our proceeds there.  So we might be able to get about $13.5 million there in loan proceeds and in the mid5s right and of course we'll pay off our first mortgage there we have with investors which is around $10 million and all secondary debt. So all these things are looking good for those loans in Oklahoma. and then I'm going to talk I'm jump real quick to another loan we have. We got an offer for our award-winning hotel in Ocala, Eccles. now, those proceeds came in a little lower. the valuation came in at $12.7 million and the bank's pretty stingy. I think they're only giving us 65%. So, we could return to a calo right now to investors there around $2.2 $.2 million, but we were trying to get a little over three and a half million or closer to three and a half. So rather than take that burden hand, we are actually talking about an SBA loan and with that SBA loan, we might be able to instead of returning 2.2 to a Cal investors, we might be able to return four and a half million to about twice as much, And then if that happens, that'll happen by the end of the year. So we're not taking the that's sitting there for us we're declining that to go for the higher proceeds and we'll actually even save a little bit on rate given the current environment as well. So, that's a good loan. other than that, let those are the major loans that are in the pipeline.I think what I'll now is I'll just jump to ops for you real quick. Perfect.

Bob Irish: Right. Yeah,I want to hear how the construction's going and I want to hear how the lease ups are going. So, yeah.

Justin Ford: So, real quick, Bureau, it's when we're still for sale. We got some people ing. One of the guys at the conference talked to me about buying Bureau to convert it his independently they reached out just before even sat down on the same panel. so we'll see what happens there. Again, we're looking for a particular number. We're getting close finally. So we already talked about a calendar refi doing well there. if we jump up to Tallahassee, we got Renaissance. we're not going to do the refi there. We're going to do a supplemental and pull out a couple of million dollars. The appraisal came out not enough for us to pull that. Came out around $22 million. we think in around 6 to9 months It may qualify especially if we get this tax abatement, but just the market will improve and so forth.  it might be a year or so. So, we're not pulling any additional money out of there. We've already returned more than half of investors capital there. but now we get to the construction side. Monarch, which is diagonally across from Renaissance. we got about four to five weeks optimistically on that thing. The first building we're shooting to finish in the first two weeks of November and simultaneously be working on finishing the second building. so we're shooting to get it done in I would say first week of December. That's a real push, but we could be leasing up as soon as mid November there. So, we've made a lot of progress. We've essentially finished most of the electrical work in the first building, which was kind of the heavy lift there, and we've done a lot of it in the second building, and we're doing all the cosmetics at the same time.

Bob Irish: And how does demand look for the former Pasadena?

Justin Ford: Those are going fairly quickly. So, again, we're hoping to start leasing up mid November and be completely done, have everything rent ready mid December. but we think the rain's going to be strong. we have people walk in, it looks pretty good. we have a couple really good folks managing our Renaissance, our property manager and our leasing manager. they're super confident that they can lease that up Kasa Bay all day long. And they do a really good job at Renaissance. Renaissance right now is 95% and our property manager there helped us dramatically increase our top line and bottom line over the last two years. So when she has a strong opinion about at least up in the market I listen she's proven herself. So we like it there. Yeah. But given that if we talk across town we got the Swan and the Swan is now at 67% pre-leased and that's kind of stalled. we were releasing about 16 units a month June, July, and Aug we raised rates in the beginning of August. The slow season came in September, and since September, we've only released about six a month. So, we've dropped by more than half again, one of our leasing agents, from Renaissance has come over and started to really help us there. The market is slow, but we're really driving home the message to our team there that, there's what the market gets, gives you and there's what you go out and make happen. So, we got to make it happen. So, right now we're a little slow. We went through this before out in Oklahoma. We're leasing up more. We also stalled right around the two/3 mark, but this is a very different situation. By and large, we're bringing on really good tenants. we're not bringing a bunch of bad tenants that we have to kind of as we lease them kick them out. so that's really our big focus to see if we can get that back up to at least 10 a month. At the current rate, it's going to take us five or six months to finish the lease up, but we think we can get it done in about three. We'll pick up the pace again. So, that's where our lease up there. I guess we covered all of Florida, all of Oklahoma. They're all doing over 90%. except for Apex dipped a little bit, but it's pretty back to 90. So Apex was performing well for a while, but it dipped into the high 80s. Now it's around 90. Our shopping center is the last one I'll talk to you about. shopping center is doing great. we have an L contract with Murphy's Oil to buy that out parcel for a million dollars. We've sort of recreated that value. we have a new dental practice going in right next to the new Aldi's. we're subdividing that space and we're getting a good high rent, like $25 a foot, which is most the other spaces were $14 a foot because of the nature of that lease, they're paying 25, but they'll kind of get free rent for almost two years to offset their tenant improvements, their buildouts.

Bob Irish: Yeah, it's been a good experience.

Justin Ford: But that's going to be really strong. It's going to give us just one 2900 foot space left. All these is now in there. I mean, that place is great. we want to do that again. Grocery market shopping centers. We like them. So, it's been a good experience. Yeah. So, yeah, that's it. We're good. Refies are the main thing. We're still pushing to return, between now and spring, over $20 million to investors. And the 800 7800,000 that Apex will produce again will sit in the fund to support the other refies won't go to investors yet. But the more the ascend loan that 13 million goes right back to investors right there. When we close the Ocala loan which could be before the end of the year four to five million will go to investors right there. So we're making progress. We just got to keep at it and pray that the interest rate gods continue to smile upon us.

Bob Irish: I'll put in a word with Jerome Powell next time I see him. Okay. Justin,…

Justin Ford: Awesome. I appreciate that.

Bob Irish: thanks for being with us. look forward to talking with you next month.

Justin Ford: Real pleasure, Bob. Thank you.