September Update with Justin Ford

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Bob Irish: Bob Irish here with our monthly call with Justin Ford of Pax Properties. Today, as we usually do, 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. Here I go again. throughout real estate booms and busts, Pax Properties has never fail to produce a positive result for investors or missed a mortgage payment. With that said, Justin, how are you?

Justin Ford: I'm doing great, Bob. Thank you very much.

Justin Ford: It's last day of September and the weather's getting cool here and I know because of that you'll be heading back from Utah soon, won't you?

Bob Irish: Yes, we'll be heading back from Utah in a couple of weeks.

Bob Irish: Looking forward to getting back to Florida, but hopefully all of the hurricane activity will be over and done with by the time we get back. That's our plan. No, no,…

Justin Ford: Yeah, that sounds like you're not a surfer then.

Justin Ford: Is that right?

Bob Irish: I'm not a surfer and I'm counting on Mother Nature to make my entry into Florida a piece of cake. So, we'll see about Hey Justin,…

Justin Ford: right. Okay.

Bob Irish: last time we talked we were talking about refies.

Bob Irish: I think in the neighborhood of $60 million over the next say what, six months, year six,…

Justin Ford: Mhm. 6 to 8 months.

Justin Ford: Yeah. Absolutely.

Bob Irish: eight months.

Bob Irish: And I suspect that with those refi’s we'll probably start to see distributions again in the fund. Is that right?

Justin Ford: That's the plan.

Bob Irish: Let's table that for now.

Justin Ford: Correct. Yep.

Bob Irish: Let's talk about that at the end of our call if we can and… let's walk through the properties as we usually do and give folks an update. Yeah. Okay.

Justin Ford: Perfect. That sounds great.So, I'll start with the southernmost property,…

Bob Irish: Good deal. Indeed.

Justin Ford: which is the Vero Beach Inn and Suites. Also, our longest owned property just passed our 13th year anniversary a couple of weeks ago there. that was the first property we bought with over 100 units And that's always performed We returned, whatever 80% of investor capital long time ago. We've been paying double digit distributions u consistently and in the mid- teens sometimes in the 20% range and we had a couple of u buyers interested that left us at the altar as you'll remember over the last year. Now we have another one and this group is stronger. They're at about the same price we were before but I've told my broker every time we go back to the market it's going to get more expensive because I don't want people playing games.  So, it's got to be now, they're matching the previous number. They got to come up just a little bit more but again, if that doesn't happen, we're going to open up the marketing. We've done confidential marketing but there's a way we can do more aggressive sort of national marketing, bringing out of state buyers and so forth. you want to be discreet because you don't want to, disturb your staff and all that, but there's a way to do that. So, we may do that, but I think there's a 50-50 chance that we may nail down that number.And this group, has shown me a couple million dollars in funds. They own about four or five of the hotels, so they seem to be the strongest buyer by far that we've seen. So, …

Bob Irish: Okay. Right.

Justin Ford: we shall know. But in the meantime, again, we just operate as we have for many years. we won the award, I think this year again, the Traveler's Choice Award and season is just around the corner starting late January. So should we end up owning it that far? We'll just make a bunch of money then and perhaps soon. But we'll know more by next month whether we're a contract or not with this new buyer.

Bob Irish: We'll look forward to the update next month on that. why don't we move a little further north? Do we want to talk about the two construction projects that are going on?

Justin Ford: Let's stop in the middle at Ocala, our other operating hotel.

Bob Irish: Okay, let's go to Equis. Yeah.

Justin Ford: Yeah. Yep. So uis that's always performed it's about 1.25 million in trailing 12 month net operating income. we want to get that up to about 1.4. The market is down there but we're still performing We're still beating our index almost all the time. it's in great shape. Again we've been paying 10% distributions cumulatively since inception there. and we have some refi issues to talk about there. It's a really good opportunity which we'll discuss when we get to that section of the call. But operationally it's doing really really well.

Bob Irish: The news is always good from Equus

Justin Ford: Yep. Just little bragging.

Bob Irish: I don't even know why we even bother talking about it. Always, right?

Justin Ford: Little bragging. Prroud papa.

Bob Irish: So, let's go to Tallahassee and

Justin Ford: So in Tallahassee we'll start with the stabilized Renaissance apartments again are our trailing three or four months there chose an NOI of $1.5 million if you analyze it which is really big because we were sub one million then we got to one two and we started to again we've been increasing rent for about a year and a half two years but now we're also pushing occupancy from the low 90s to the mid90s excuse me so that also has opened up some supplemental financing opportunities for that property which we'll cover when we get to that section of call. But operationally it's doing extremely well. The property's looking really good.

Bob Irish: Fantastic. Why don't we talk about the former seven hills, the swan

Justin Ford: So 7 Hills we basically finished construction six weeks ago or so. we have minor things but nothing that's holding us up with Lisa.  We have to finish getting our final certificate of completion. It gives us our fire safety updated and all that kind of stuff. and a couple washers and dryers. It's been a very longgoing situation, but that's almost resolved. But, we're 63% leased and we're 66% leased. and our goal has been to add 10% every month.  So, we went from 25% when we finished because we always had one building full. Then we basically added 5% one month as we were fixing another one. Then we went 10% up to 60. This last month we might end up today at 67, but we just raised rents, 10% two months ago and we've kept velocity and we've slowed a little bit up on the actual signing of contracts,…but not by enough to worry about it because the new NOI is going to be boosted by $200,000 with that rent increase.

Bob Irish: Wow.

Justin Ford: Which also opens up greater financing possibilities there as well. But the Swan is looking great. It's performing well. we should have our CC by this time we speak and we should be close to I would say 77 80% accuracy by the time we speak next month still there very strong and…

Bob Irish: So, the demand is still there like we talked about last. Yeah.

Justin Ford: right now Tallahassee it's the slowest season for leasing right now just after kids moved in even though only perhaps 10 or 15% of our people are associated with the university are tenant base it still kind of just works that way with moms, par families moving and getting kids into school and that kind of stuff. So, we're in a bit of a low, but we're still doing well. We're getting good traffic and…we're signing leases at 10% higher rates.

Bob Irish: Fantastic. Let's talk about the former CaSa Bella, formerly Baymont. 

Justin Ford: The former Yes, of many different names, many ales, and now the Monarch luxury studio apartments.  So, the monarch is we have run into one construction issue after another, but we're really moving all the time now. And we just got some important on which is a smaller building. We just passed framing and plumbing and electrical roughs. And so now what we're doing is we're budding buttoning up all the walls. And so we're basically putting final drywall in places where we had cuts open for inspections. Then we're going to skim coat and paint and so forth. So we're shooting to actually have building A rent ready by the third week of this month. And it looks pretty good to be there.

Bob Irish: Okay. Yes.

Justin Ford: Simultaneously working on building B which is the bigger Building B has about a hundred of the 135 units. And we've had issues with our electrician. but we're working them out. we bring in new qualified journeymen to help accelerate. And we think that our goal is a very aggressive goal is to have all of building B ready by the end of October. That's a big hairy audacious goal. but we like to have those stretch goals. Even if we get close and it's a week or two after we're going to be in good shape because it'll take us a good two months to lease up building A. So that when building is finally leased up, B should be 100% ready to go. So that is our last construction project. By the way, everything else is done, our last renovation project. So we're really looking forward to a new chapter once we get that construction 100% done at the end of this month, the end of October, early November. and get that well into lease up. but again by the time we talk I hope to be able to tell you that we have our first new tenants in at the Monarch Luxury Studio Apartments.

Bob Irish: Yeah. Fantastic.

Bob Irish: I'll look forward to the update next month. Justin, what do you say we move across the country to Oklahoma, where everything is usually okay?

Justin Ford: And Oklahoma in Tulsa the 91 unit we bought a little over four years ago. Yes, it's performing now in the low 90s. It was in the high 90s for a little while. the manager feels he's getting a little resistance on the wrench we've been pushing, but we're working with them and we think we'll stop pushing rents as aggressively as we were. but we think we can keep the rents where they are. Maybe bump one or two% and get back to the mid 90s. but it has performed so well previous to this little lull.

Bob Irish: Okay. Yeah.  Yes.

Justin Ford: Mid, low 90s is fine. the national average for occupancy is probably around 92 and a half 93% right now. So we're right in that range, maybe a point below sometimes, but usually we're in the 95 to 98 range. but because we've put together decent numbers over the last year, again, we have a refi coming up there, which we'll talk about when we get to it, and we've already started that process. So we'll cover that when we get to that point. That's the Tulsa property.  Our next one is Oklahoma City Elevate 126 units. Again, that still has bridge debt on it. and that one we're also ready to get to refi, but that one is performing better than it ever has. It just had it absolute best quarter. we're expenses are in line. our occupancy, we've typically average in the low 90s there. now we're averaging actually in the mid to high 90s and we've pushed rents at the same time. We'll keep the expenses in check. So we actually beat our NOI last quarter by good margin and we're on track to do it again for the third quarter which wraps up today. so Elevate looks good and… we've begun not officially the refi process but we've begun the conversations about it. So that should be in a good shape also for refi.

Bob Irish: Excellent.And we have one property left. Ascend. Okay. Uh-huh.

Justin Ford: Yes, a send in more Oklahoma 146 units. that has a first mortgage on it funded by our tax properties investors and we expect to pay that off in about six months because we started the refi there. and that is consistently in the mid to high 90s. We occasionally do have some turnover problems, but that property has beaten its NOI even by a higher margin than Elevate for the last probably five six months. that property is on a very very strong trend and…

Bob Irish: let's finish off before we get to Let's talk about Port St. John.

Justin Ford: We have some really interesting refinancing process that's going to help us pull out maximum amount of capital. so ascend is going very our one so far grocery anchor shopping center. So, all these I think was supposed to open last month. I'm not sure if they did yet. I have to check on that. But a lot of interesting things. You'll remember that. So, we just signed a lease with UPS. we got another one a fish bait and tackle store. We sign just signed a lease there. So, our only vacant space is the 5800 square foot space right next to the supermarket.

Bob Irish: So you're not looking for a third arcade.

Justin Ford: I call it a haunted space because we had an arcade that we had to kick out and then another that got in trouble the cops and then another arcade that we were dumb enough to put in and so both of them we have tracers on and we're suing no arcades. We're out of the arcade business but sure enough the few weeks ago or maybe a couple months ago a guy neighboring us on an out parcel which we do not own.  and they have one of those dental practices with a bunch of chairs and different dentists and an Aspen dental, but it's not that something like that, so he just wants to rent some of our parking spaces near them, And that then he reaches out to me and he goes, "Hey, what about your own parcel?" And then we looked at it and it just wouldn't work. And then he talks about the 5800 5900 square foot space and we think we're going to cut that in half. We're going to rent them half at a good number. That could boost our NOI by 75 $80,000. The way this works though, of course, there's what's called the tenant buildout. They got to do all the construction and install all their equipment, all that stuff. So it'll be probably two years before we see the money. but because we will give them an allowance in exchange for a contribution to their tenant improvements. It's kind of standard. There's different ways to do it. But regardless, you have eight years left after that with all this, whatever, let's call it 80 to $90,000 in extra NOI, which will greatly increase the resale value, As well.

Justin Ford: Yeah. …

Bob Irish: I see.

Justin Ford: so that's looking very good. and the remaining space that we have, that other 20 2900 f feet roughly, that will probably be a bit easier to rent because it's a size that fits a lot more businesses rather than the bigger box. So, there's that. the really nice surprise was when we had gone back and forth, I had this idea that maybe we can redevelop our out parcel. the outpost we have…which is right on US1 the main highway with about 40,000 cars a day that was undevelopable because it served for storm water retention so I hired some engineers and we thought we redirect the water so you could actually build on it right so first they came back and they said yes it'll cost around a million bucks then they came back said whoops no that's not true no you can't do it yes you can but you have to break away your parking back the parking lot then they come back and say no you can't do that. This is the way you do it. It's going to cost you $2.4 million. Now, I knew that their estimate was super wide, right? It was just cover your assets type of thing, So, they were being way too conservative, but it was still the kind of thing that kind of kills the deal, right? Because at a million to a million and a quarter, it makes sense because you can get rent there for 100 to 120,000. So, that the ratios work, but long story short, back when we were having that conversation, we had two people looking at it. One was Murphy's Oil, which is a chain of gas station chain that sells booze or something as well wine and beer, I guess. and then we had a car wash chain,…Modwash, looking at it. So the guys, the American oil, boom, the other day, they come out and they give us a million dollar LOI and they think that they'll be able to do the work that the engineers said for 2.4 for less than half that, because they have a lot of experience doing this, And they were in the mix before that. And so, I didn't bother to counter much. We took out the commission they wanted as part of it. So, maybe I cut 30 grand off that thing. But, we're ready to execute there. So, we'll net after our cost with the engineer and brokers, whatever else. When that 900 grand, but It was a 900 gimme. it had basically no value. and when we sell that it won't affect the value of the other of the rest of the shopping center because the other rest of the shopping center this nine acres still on US1 basically the value is based on income and the length of the terms of the lease. and we bought that property for you 7.8 and maybe we put 500 in it or 600. Basically, it's a 12% return just on top of what we had in it just by being a little creative. But let me not state it in definite ways. they got to do their due diligence and this and that. It'll be seven months before we really know if this deal is going to happen,…but it was going to make us nothing. So, we'll find out in seven months if it makes us something. And if it does, it'll be a nice return. Yep. Yep.

Bob Irish: That's great.How binding is the LOI?

Justin Ford: That's not really binding at all. No, I mean it basically just, the LOI goes to contract lays out the key terms. He goes, "All right, this is a price. This is how much we'll put down. This is how much the due diligence period will be. These are extension periods, all that kind of stuff." So,…and then you get the contract, which is all the finer stuff, and the lawyers argue out the finer stuff. the contract is binding, but the contract during their first six months of due diligence, the guy could get a flat tire and call off the deal, during those six months.

Bob Irish: Right. No.

Justin Ford: You can blame it on anything, but that's okay. Like I said, it's not like we're giving up income to let them do their work for six months. So, yeah, I'm pleasantly surprised and…cautiously optimistic about that one.

Bob Irish: That's just an incredible bluebird.I love it. hey,…

Justin Ford: Yeah. Yeah.

Bob Irish: Let's talk about $60 million.

Justin Ford: About $60 million. when we talk about let's say Apex, we already started the process. Apex, we had a permanent loan with a regional bank, but it was fixed for three years or something like that. and so it recently started to flow at the beginning of this year. So, the rates went up on it. So, now we're locking back down agency debt. Now, we're going to put on a loan that will probably be in the low to mid 5% range, right? And it will return to us probably, in other words, it'll pay off the current loan and…it will return to the fund maybe 7 to $800,000 for such a small property. That's a nice little thing to do. That's a Fanny May loan. we've already we gave him a deposit for the third party reports like the appraisals and the phase one environmental things like that.  So that one we're shooting for a close just before Thanksgiving. around November 20th. So works already. Okay. that's a loan that's close to $5 million. Again, returning maybe 7 to $800,000 to the fund. and then when we go to let's jump over to Ascend. we have with primary and with the first mortgage and secondary debt, our debt there is probably around 13 million.And the way to get that amount of leverage on a property, which is probably right around 16 now, is to go with a HUD, and a HUD gives you a 35-y year amization period. So your payments are a little bit less each month. And it gives you greater loan proceeds up to 87% in this case of the anticipated value. So that would just recapitalize our balance our lenders right now, I think, are private investors. they're protected by a first mortgage, so it's very low risk. And it was less than 65% LTV, but they're at 8% nonetheless. And then our secondary debt is more like 10 to 12. So our combined cost of debt right now is probably 9% on that property. We'll bring that down probably closer to five and a quarter,…

Bob Irish: Okay.  Mhm.

Justin Ford: yeah, and in all, so that's a $13 million loan. So you got five in Apex, you got 13 on that. And that one we also signed.  We send in our third party stuff, 304 million thousand wire for different things and that's a much longer process. So that takes typically six to seven months to close HUDs. But this property is right for a HUD because this property won't be ready to the market won't be where we want it to get a good return this property for at least 5 years. Now, we have prepayments on a HUD that can make it owner to sell before too soon a time. The prepayments typically go 10 9876 all the way down to one over a 10-year period. So if you sold, after let's say six years, you have 4% left on a $13 million loan, you got to come up with over $500,000 just to prepay that loan, And of course, if you sell in the first year, you got to pay over a million. So what I did was I committed to five years in the sense said the first five years are going to be 10% prepaids, but year six, it go straight to one. So, we expect to hold that property for five years and sell it in year six or seven. this will get all the debt off the books. It'll create really good strong cash flow and put us in a good long-term position to create the value we need in a set. so that's ascend those and then Elevate. We didn't, pay the check and do the application yet, but we've gotten primary indications from two again Fanny May lenders. and that will basically just pay off the first and secondary debt. which is around $8.8 million on that property. and that again we have bridge defating from construction. It's a little lower than it was in construction. But our average cost of capital on that $8.8 million right now is probably 10%. We'll bring that down to five and a half,…five and a quarter. and we expect to close that one either before year end or early in 2026. So that's another $8 million Port St. John's fine. We don't need to touch that one for another three years. So in the fund, those are three major loans. then when you come out of the fund Renaissance, has a $17 million, which I think it's $6.7 million first mortgage with Fanny May. We've had it for about four years at 4% interest. It's a really great loan. So, you can't pay those off. What you can do is you can't mean it'd be too expensive. But what you can do is you can add to it by going to Fanny May for what's called a supplemental where they give you another chunk of debt, And in bank industries sometimes they call it an earnout, but here's called a supplemental.  So because we recently boosted our NOI on a T3 basis, meaning trailing three months annualized, even on a T4 basis, from about 125 to about 15 and change. We're working with our underwriters and we're seeing if we'd like to get as much as 3 million. Frankly, I'm not sure we will because there are all these underwriting restrictions on certain things. But if we get a million two, we pay off our secondary debt, which we have on that and bring that down by half. If we get the full three, we'll also return the little bit of remaining equity capital we have in that property. but we're waiting to pull the trigger on that. And very interesting thing we have a great team. Parker and Jimmy have been working on stuff in Tel A. I want to give a shout out to these guys. But especially I want to also mention Jimmy's working great on our tax abatements. So in Tallahassee in Renaissance and at Monarch and at Swan, we've been applying for tax abatements because all of our rents fit in the category of afford naturally occurring. We won't know if we get that or not or accepted till about November,  And if we are accepted in that, it's not an issue with timing as far as Swan and Monarch because we won't be ready for refies with Swan until the end of the first quarter and with the Monarch until the third quarter next year. But Renaissance, we're kind of ready now, but we're thinking of holding off because if we do get even if it's like a $50,000 abatement in our tax bill, that could boost the potential loan proceeds by over a half million or more. or if we get a 60 or $70,000 payment,…maybe we can boost it by another million. so we're working on that timing, but we think at a minimum, we're just going to, recapitalize the secondary debt and bring down the cost of capital a good little bit. We've paid 10% to investors cumulatively since inception there. cash flow is great, but we'd like to also return that last piece of equity capital if we can. we'll know  I would say maybe by if not that the call after that but we'll keep you posted. Yep. And then since I mentioned that a supplemental is equivalent to an earnout in the banking industry. Let's talk about the bank industry. We have a bank loan on our number one rated Equis and Ocala. and I wrote to the guy who I work with there who's a great guy. I've done four or five loans with him at three different banks. And I said, 'Hey, I'm getting this offers. our NOI is so strong now. We've increased it so much that I know we go out there and we get a loan for9 to$10 million because I think our debt at that time was only 5 million or…: something. Replace finally return equity capital and bring down our overall cost of capital because the pref on the equity there is eight the preferred return. Long story short, he comes up and they're giving us an earnout. Basically, they're giving us a second loan on top of our current loan at a good rate, and we expect to get about $4 million extra there. So, it's an air and that will return more than half of ors original equity capital in cala. and again, that's a place we've already been up 10% all the while. so that's Ocala and then the last two And between then we're going to recapitalize around $23 million in capital. okay and that will turn things so as all these refies close again between we should start closing late November all the way through I would say late April early May that all these can close money goes back to the fund cost of debt goes down cash flow increases we expect to u resume distributions to the fund and…and to do some gradual catch-ups as well on past distribution we didn't make at the end of the first quarter or maybe the end of the second quarter. We'll see how the timing goes with all these loans. but yeah, so it's really quite optimistic, but I tell you it's crazy. I never used to watch the markets daily, but every single day now at four o'clock I click on and I see how the 10-year Treasury ended the day. After Powell announced his 25 basis point cut, it went from 4.1 to 4.20 over the course of the next week. It actually went up.

Bob Irish: I know.

Justin Ford: Yeah. Yeah. Then yesterday it went down five pips. But I'm not usually that guy. But right now I'm that guy because I have $60 million in refies I'm working on and we'd like to see the tenure come down, and it's not on pal. It's on the market really, stay tuned. we'll have lots to report.

Bob Irish: Justin,…this been a great call. This is very exciting with all these refies. I'm looking forward to hearing from you next month. Anything you want to add here before we sign off?

Justin Ford: No.People can always put their name on the waiting list for the 1% a month note. We just filled a few. We fill some every month. We reach out to the people on the list. We don't make an announcement. So we don't really have a need right now, but when we do refies, sometimes we need short-term cash just to facilitate the loan. but they can just send me an email and copy Chris at justin chrispaxpropies.com. And in the subject put 1% a month note offering, please. Yep.

Bob Irish: sounds great. Justin enjoyed it. Take care. We'll talk to you next month.

Justin Ford: Thank you very much, Bob. My pleasure.