March Update with Justin Ford

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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 keep you a breast of the underlying investments in the Cap Plus diversified income fund. I say it every month. I'm going to say it again. And throughout real estate booms and busts, tax properties has never failed to produce a positive result for investors or…

Bob Irish: missed a mortgage payment. Justin, with that said, how are you? Nice to see you.

Justin Ford: Great to see you,…

Justin Ford: I'm doing very well. Thank you.

Bob Irish: I'm glad to hear it. You've got a lot of news for us. I know last on our last call, we talked about a lot of pending refies.

Bob Irish: Rather than kick that off, why don't we walk through the properties one by one and you can fill us in on the details on those refies as we go along.

Bob Irish: Does that make sense?

Justin Ford: That's good.

Justin Ford: Let's do that.

Bob Irish: Okay, let's talk about Vero first.

Justin Ford: Let's go. That's a property we've owned 12 and a half years. We're at contract to sell it at a good price and…

Bob Irish: Yeah. Uh-huh.

Justin Ford: That's moving along. We also had a really good season in February and March. again, we're beating our comp set by often 30%. it's u but the market was down but February and March were u that was down 50% in the fourth quarter basically even though we were way outpacing our competitors but we had a very good February and March we got a good chunk of cash in the till and we are due diligence is set to close in around two weeks but I think it's one two week extension some of that is tied to if there's a government shutdown that affects

Justin Ford: the SBA loan they're using to purchase it. But long and short is by the time we talk next,…

Justin Ford: due diligence should be just about over. So, either we'll know we have a deal that's going to close or not, but right now it's looking good. And again, we're performing well.

Bob Irish: Give us some odds on this deal closing…

Bob Irish: because we've been down this path before.

Justin Ford: Yes, I know.

Bob Irish: 5050 60 40 80 20

Justin Ford: I give it a 5050. it's so funny. when the market is really strong, when the buyers are just competing with each other, there was a time when people would insist on cash going hard day one before due diligence. And they would get it.

Bob Irish: Right.

Justin Ford: Here's a quarter million dollars, a half million dollars, a million dollars just going hard from day one, subject only to clean title and the environmental. That's it. But everything else, if there's leaky ceilings, you still have to buy it. but yeah, we were kind of in the opposite market and so the buyers that showed up were more hopeful than let's say flush with cash but they owned other properties so they had been able to pull off purchases before.

Justin Ford: But they look pretty serious. They've been showing up a lot and they put up a quarter million dollars and they own three other hotels in other states. So I would give it a 55 to 45 chance in favor of closing right now.

Bob Irish: We'll know more next month,…

Bob Irish: won't we? Okay, let's go to Ocala. Let's talk about Equus and

Justin Ford: Yes, we will.

Justin Ford: Equ yeah, Equities's market also is down, 50%. but again, we've been outperforming our competitive there by a good generally 10 to 15%. Sometimes we would underperform, but if you look at a stretch of three and six months, we're generally 10 to 15% better than our benchmark. And that benchmark is a higher benchmark than we used to have. We used to compare ourselves against the economy hotels. And now we're com comparing ourselves against the midscale hotels and we're outperforming our compset generally. Again, even though the fourth quarter was down in both VO and Ocala mark as far across the market, we ended up at Ocala with a pretty strong February and March again. So our tills are flushed with cash again.

Bob Irish: right?

Justin Ford: And we have a pending SBA refi there. And that refi has been just a crazy story. we had one foreign investor a Canadian a friend of mine he had half a percent of the hotel and the SBA said in the fourth quarter they go you can't have a foreign investor then they go but wait till January because they'll change the rules back to where you 5% can be foreign so then we wait till January and then they go what no one can be foreign so now we had to have one of our other investors buy that investor out and then we're set to close and then they found another investor great guy has been investing with us very good

Justin Ford: He had one small SBA loan, a default on his record, $10,000, but it was a fraud and he showed it and all that kind of stuff, but to make things simple, he just assigned it to his wife and…

Bob Irish: that's great. Great.

Justin Ford: whatever. I mean, it's crazy how your customers they get at SBA, but we're past all that. and we do expect to close the SBA this month in April. that should return about $4 million to investors close to $4 million and Ocala has paid 10% cumulatively since inception but during this whole process when we started the refi four months ago interest rates were probably 40 basis points lower than they are today.

Justin Ford: So, we still think we're getting the loan they quoted, but we don't know if they'll come back and say, because interest rates are higher, we're going to give you less money based on your NOI. So, …

Justin Ford: that but at the very least we should return, $2 and half $3 million to investors, but we're hoping we'll get the original basically $9 million they offered us, which will return about four million. But we should know by the time we speak next month.

Bob Irish: Okay. Hey,…

Bob Irish: not to get too off track here,…

Bob Irish: but give a quick update on the horsey flu. What's going on in there?

Justin Ford: Yeah,…

Justin Ford: horse food. Yeah. I don't know what happened with I call it horse co, but it just cut down all the activity. I haven't looked at the status of the horse flu recently, but I do think that's a big part of it.

Justin Ford: That, many events were cancelled. So, we wish all the horses out there the best of health and we hope our market will return to health very soon, too. Yeah.

Bob Irish: All right.

Bob Irish: Hi, old silver. Let's go to Monarch. What's going on there?

Justin Ford: So, Monarch is Bob, why don't we go to Renaissance first because I'll talk about Swan because they're in lease up.

Bob Irish: Renaissance. Yeah.

Justin Ford: So, Renaissance is stabilized and Renaissance is at 94% occupancy, 95% pre-leased.  We've rents steadily over time. I think when we bought that property, the NOI was probably $500 - $600,000 and finally we got up to about a million. Right now our NOI is on track for about a little over 1.6 million. So on that property we've been shooting for a supplemental refi. We have about a million three in secondary debt on that and that will pay off that million three and maybe return a little more to investors.  we've already returned over half of investors original equity there. Plus, we've paid 10% cash on cash cumulatively since the beginning. So, that property is doing extremely well.

Justin Ford: but we owe and also we have received sort of preliminary approval on a tax abatement that could save us about $100,000 a year in taxes which could conceivably increase the value of the property. if it was like a permanent savings, yes, it would definitely increase it, but it's a savings that you have to qualify year by year. and we get that because a certain amount of our units fall under what's called the naturally occurring affordable rubric where people making up to 120% of the AMI can afford the apartment. We didn't do that as sort of a program. That's just kind of where we were. but then we're getting so Fanny May loan the supplemental they were actually objecting to that but I think they misunderstood it.

Justin Ford: And meanwhile, FA's mission is to also create housing and also affordable housing.

Bob Irish: right?  Sure.

Justin Ford: And they even give you discounts for having affordable housing. Again, this is non-s subsidized affordable, just kind of market rate workforce affordable. so there just weird technicalities that conflict with each other, but I think we're going to resolve that with them. because their concern is that we're going to artificially keep our rents low to qualify for the tax abatement. But no, some of our rents about half of them naturally fall in that category. So saving $100,000 helps them because we make more cash which makes us able to cover the debt more comfortably. so we're going through that whole process.

Justin Ford: again, anything related to government loans are interesting,…

Bob Irish: Cool. You want to go to Monarch or…

Justin Ford: let's say, but overall ops are really good and we think we have a decent chance of qualifying for that refi. And as far as the tax abatement, we will know that they told us they could push back the decision all the way to July 1. So, we'll know within the next three months, but ops ops are doing great and we think we'll get that refi soon.

Bob Irish: swan next? Okay.

Justin Ford: Let's go to Swan because that's closer to stabilize. So, Swan, we closed the refi on Swan, I think since last we talked. I think it was pending when we discussed it last month.  So, we put a $12 half million dollar refi on the Swan and we handed a $10 million loan with the bridge lender probably at around 11% all in and we put about a $12.5 million loan also at about 11%. the goal there was I wanted I went from high meaning a bridge is like a temporary loan just to get you over to the other side to you're ready for the lower cost permanent loan, right?

Bob Irish: Yeah.

Justin Ford: And my desire was to go from bridge to Perm is the lower cost loan, but I ended up having to go bridge to bridge because we needed to pull money out and we couldn't wait till we qualified for The perm is when you get to 90% plus occupancy. We had just finished really renovations there probably, nine months ago. but right now we're 75% occupancy We're 79% leased. on that refi we returned I believe it was something like a million-four to the fund and $400,000 to PAX and this money coming back is very important to the fund and to PAX because it's going to play a role in the other refines providing liquidity and support for things that are in lease up and there are liquidity requirements that the lenders have they want to see.

Justin Ford: So that restored liquidity and when we go to refy the monarch which is just beginning lease up that will return I think it's a million more or less to the fund and it'll return maybe almost two million to Pax and then we're in really really strong shape as far as finishing all the refies. but the swan right now we've been stuck in the 70s in occupancy for four months and sometimes that happens. especially Tallahassee's real strong moving season is basically from July to about September and so we have a lot of applications coming in. we lease some folks up but a lot of the applications are for June July.

Justin Ford: So we expect to be 90% occupied plus I would say I would hope midday but maybe mid June and…

Bob Irish: Okay. Right.

Justin Ford: then we'll begin that process at Swan to go for a perm loan where that $12.5 million in debt will be replaced by 12 a.5 or maybe a tiny bit more at much lower cost debt perhaps instead of perhaps 6%. so it's moving in the right direction. the place is beautiful.

Bob Irish: Okay,…

Justin Ford: But we have a couple months to go before we get stabilized.

Bob Irish: let's talk about Monarch.

Justin Ford: So Monarch, it's two buildings, A and B. A has u something like 30 units and B is 105. so the outside's all the heavy lifting is complete. It's done. B we're just finishing up last bits of electrical and some drywall patching and some painting. we have five tenants there and six more that are pre-leased. So, we're leased. We're about something like, let's call it seven or 8% right now. and that refi should close about a week from tomorrow. I think we're scheduled to close and it's with the same lender that lent us the $12.5 million at Swan.

Justin Ford: Working directly with the principles. I really like these guys. so that's going to return a lot of liquidity and…

Bob Irish: Yeah. Super.

Justin Ford: and now that we're entering season we're hoping that we'll go from 8% now by the time let's say September comes around I'm hoping we'll be at 60% by the time September comes around maybe 65 u because we're right we're entering where a lot of the applications turn into leases sooner rather than later. So, we're moving along at Monarch and we expect to close out refi in a week.

Bob Irish: Let's go to Oklahoma and let's talk about the properties that are inside the fund.

Justin Ford: So, Apex that's always performed in the sometimes mid 90s but occasionally would drop to 89 90 and then you get back up. Right now at Apex, we're at 99% leased and…

Bob Irish: What happened?

Justin Ford: we have applications pending. We think we may be 100% by the end of today or tomorrow. yeah, it's a small property. It's 91 units. So, you have one property manager and then we have one The maintenance guy's been there since before we bought the property. And they do a pretty good job together and they keep expenses in line. but after a while when we were seeing it it would occasionally drop to the high 8s, we said, "Let's just get a part-time leasing assistant in there." We got one. After two weeks, she got this great offer somewhere else.

Bob Irish: Okay.

Justin Ford: She had to leave. And then we got another one. And she's really good. So now we have just a part-time leasing agent supplementing them. and we think we have a good chance at Apex of continuing in the high 90s going forward most of the time.  And as far as the refi there, that had low cost per debt, but after three years it started to float about a year ago. So it's higher cost now. It's around nine and a half. that one we're refinancing with Greystone and we've done two other Fanny Mae loans with Greystone. We're doing what's called a balance sheet loan, they're providing their own cash on this and that one should return to the fund about a million dollars in cash and that one I think is going to be one of the loans that closes I would say late April.

Justin Ford: So, by the time we talk next week, I'm hoping we can say Apex is at next month.

Justin Ford: I'm hoping we say Apex is at 100% accuracy and we just got a million dollars back. Yep. Yep.

Bob Irish: Super great.

Bob Irish: Okay, let's go to more. let's talk about Ascend or…

Justin Ford: Let's go to Elevate first. That's Oklahoma.

Bob Irish: Okay.

Justin Ford: And we bought Apex first and then So, Elevate is 126 units. And we've always had a part-time leasing person there. the property manager there was at that property for five years before we bought the property so when we go to a property people ask us how do you manage we just show up and we say hi you you want to work for us yeah this is how we do things bing our follow-up here's our KPIs key performance indicators blah blah we'll train you on this we'll train you on that and I tell you we have managers that just really thrive and they're so grateful that when they were in the place the owners didn't put the money in or whatever else and these

Justin Ford: people they make more money they take on more responsibility the property does better and…

Bob Irish: wow. Yeah.

Justin Ford: that's very much elevate I mean it's also the case by the way for a moment I go back to Ocala the woman who's our general manager there when we bought Ocala seven years ago or something like that had been the general manager there for seven years already there yep but during those seven previous years they never won trip advisor top award we've won it every year I think we've been in existence at Ocala as a Pax property right and it's rated number one in the market consistently and  her understanding of things has gone way up. So that's really a great part of our business. I love that part of our business that we help communities do well and we help the people who work there do so at Elevate we're 99% occupied now and also have applications pending where by the end of today or tomorrow we could be 100% occupied. We are working on the refi with basically the lender at Elevate Yeah.

Justin Ford: North Mark again another what they call balance sheet loan and we have to replace around a little over $9 million in debt there about 77 and first mortgage and a million-6 I think in secondary debt. So, that's going to have to be a little bit of a cash in refi because interest rates have gone up.

Bob Irish: What?

Justin Ford: And I'll explain what that means in a second because interest rates have gone up. the amount of money you can get out of your property goes down because for every dollar you earn now you have to pay more in debt service so you qualify for less debt. So now we thought we were going to get about an $8 half million loan, but it looks like we'll probably get an 8.1 So there's 1.2 million we still have to pay off. So, some of that money we're getting back from Apex's refi is going to go to help pay off the secondary debt when we I don't know if I'm confusing things for everybody, but hopefully we take that,…

Justin Ford: we're getting lent, then we take the million from Apex and we pay off the 93 in debt and whatever other 200,000 we're missing comes from the other money that returns to the fund from Swan and from Monarch. So these are all the,…

Bob Irish: What? Okay,…

Justin Ford: real estate is ops, it's bricks and mortar, it's ops, and then it's financing the whole thing. So these are the things that we're working on to get these now stabilized properties down to perm lower debt levels across the board. and so elevate that loan we expect to close about mid May. So yeah, so we're working on that and we'll have an update for you next month.

Bob Irish: sounds good. let's go to ascend 146 units in more

Bob Irish: Oklahoma. Yes.

Justin Ford: And ascend that one often does the high 90s…

Justin Ford: but it too can drop into the high 80s. so we had some change in the office leasing staff. we had excellent people there, but one of the young ladies had some health issues or something so we found someone to step in and now we're back up to 94% occupancy, 95% performing very well. we are going for a loan that could be somewhere between 13.4 and 14.1 million, which will pay off all the primary debt and all the secondary debt.  The primary mortgage we have there is I think it's $9.9 million funded entirely by PAX investors 8% protected by the property first mortgage secured by that. so it'll pay off that and it'll pay off secondary debt which pays higher interest rate but is unsecured. It's not backed by the mortgage. it's guaranteed but unsecured and subordinated.

Justin Ford: So that loan will pay off all that and bring the interest rate down from again from an average cost when you count the primary and secondary debt of close to 10 and a half% probably to about it's hard to say with interest rates but probably around 5 and…

Bob Irish: Yeah.

Justin Ford:

Justin Ford: a half %. In total, as I think I've said this we will say when we're done with all these refines, our interest costs will go down by $2 million across all our portfolio and our cash flow across all our portfolio will go up around I think a million-3 after you put aside some for amortization which is paying down your loan balance. So, that's Again, a government involved loan. so that where this one takes six months to close,…

Justin Ford: six or seven. So, we're expecting that one to close either in May or in June. I hope by the next time we talk, 30 days from today, we'll have an actual closing date, but it should be May or June that we close.

Bob Irish: Okay.

Bob Irish: Let's finish up with Port St. John.

Justin Ford: Port St. John is, just such a great little property. it's 10.1 acres. It's 70 or 79,000 square feet anchored formerly by Wind Dixie. Aldi one is really the most popular fastest growing supermarket of its kind in the United States. It draws traffic. we have one vacant bay 5,000 square feet. and everything else is full. Everyone else pays.

Justin Ford: we have that out parcel that we contracted to sell. it was formerly unusable. We figured out a way to sort of market it that someone else could come in and redevelop it so it could be usable. And we have Murphy's Oil at contract to buy that parcel and they recently asked for a blessing from Aldi's. All these has to acknowledge that they're okay with them being there because all these being what's called the anchor tenant can say yes or no to certain types of new tenants,  especially because Murphy's always sells beer and wine of course so does Aldi but it's also a gas station that drives more traffic to the center and essentially I think they're getting that approval. we had gotten it previously in more of an informal way.

Justin Ford: So that sale could close late June or sometime in July and when that closes that would return another million dollars to the fund or…

Bob Irish: Thank you.

Justin Ford: about 900 after closing costs. again so the fund in total could have coming back to it something around over course of all these refies over $3 million. and of course of that three million maybe a million and a half will go towards paying off secondary debt.  So a million and a half net and most importantly the properties in the fund their debt service cost will go down about let's say a million half dollars and the cash flow go up by a million dollars. so we're on a good path for all of it. and that 5,000 square feet, we do get some window shoppers now but, so far we're still marketing it, but we're doing great. But overall, it's 92% occupancy, and, we have good debt on there since the beginning, four and three, and we could get another million dollars soon, so we like what's going on there.