July Update with Justin Ford

Bob Irish: 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 and keep you abreast of the underlying investments in the Cap Plus diversified income fund. I say it every month, and I'm going to say it again. Throughout real estate booms and busts, Pax Properties has never failed to produce a positive result for investors or Mr. the mortgage payment. With that said, Justin, how are you?
Justin Ford: I'm doing
Bob Irish: I'm
Justin Ford: Great.
Bob Irish: doing great.
Justin Ford: How are you?
Bob Irish: I'm doing super. Doing super. Listen, I—I thought we'd, uh, kind of mix it up a little bit. Let's talk first about the former hotels that are where you're pivoting to residences. Let's go to Tallahassee and talk about Monarch first, if that's okay with you.
Justin Ford: Yeah, great. Because, um, the theme was stabilizing 25.
Bob Irish: Yeah.
Justin Ford: And we're getting there. So, Monarch, of the two that we're renovating, in about a month, it'll be ready to start leasing up one of the buildings.

 Justin Ford: Uh, we'll talk about the Swan, which is the other one across town. Uh, that one is much farther along, but one of the nice things about that one is as we're finishing that, a lot of that crew comes over to Monarch, and everything's, uh, really, really accelerated, even though Monarch has made really great progress. So at Monarch, it's really a question of, uh, final inspections on electric and plumbing. Uh, a few other things that we're doing as far as connecting the major service of the electric that we just brought in from the street. We had to increase the power to the building and run those to the road. So, we're making real progress there. Uh, we expect to be leasing up the first building there early September, maybe even late August. And again, going by what's happening at Swan, we are really, really bullish on our prospects for lease-up.
Bob Irish: Well, that's a nice segue. Tell me what's going on at Swan. Uh, last time we talked, uh, there were some buildings that had yet to get their final inspections and final approvals.
Bob Irish: Where are we now?
Justin Ford: So, we've basically finished the fourth building. So, the other three are Yep. They're ready for residents and the receiving residents. In fact, as of today, we're already 47% leased, and we are 58% pre-leased, I believe, or 57% pre-leased. So, we're making tremendous progress. We're also experimenting with the rate of, uh, rent increase there as well. So the only thing that remains there is basically all the heavy work has been done. All the crews from there, almost all the crews that are there, still finish up the final electric similar to Monarch, about connecting the transformer and bringing new power to the building. Uh, all that's basically done. That crew is heading over there tomorrow morning to Monarch. And here we just have a few final inspections. We have a final electric and final plumbing. All that's ready. We have a final building, and then we get our uh CC uh when we get our fire and safety. All that we're shooting for within a week.
Justin Ford: Uh, but none of it is stopping us. We have, uh, you know, of the 160 units, about half of them are full right now. Uh, we have another 40 of those remaining 80 that are receiving tenants that are moving in. So we're doing really, really well here. We were shooting to be at 90%. Uh, thereby, hopefully by the end of October when we send out our next quarterly report.
Bob Irish: Wow, tremendous momentum at Swan
Justin Ford: Yeah,
Bob Irish: and I can see why you're optimistic about Monarch kind of following in Swan's footsteps or
Justin Ford: Absolutely.
Bob Irish: Yeah.
Justin Ford: 100%.
Bob Irish: with pre-leasing and everything else. Wow, great news. Great news. Um, Justin, let's, uh, talk about the existing hotels. We've talked about the former hotels. Let's talk about Bau Beach. There was a sale that was possible pending an SBA loan. What's going on there?
Justin Ford: That's still in the works. Uh, we are, um, about eight days away from knowing if they're going to get their financing.
Justin Ford: They had a financing contingency period that expired about five weeks ago. They asked for an extension. We gave it to them. They increased the price a tiny bit. Uh, it's an SBA loan. The SBA folks have done all their phase one environmental reports, their surveys and all that stuff, and their appraisals. So, it is looking good. Again, as I always say, if this doesn't close, it's still a great award-winning hotel that's produced tremendous returns for investors for
Bob Irish: Right.
Justin Ford: Come after 13 years now. But we'll know whether we'll be selling that, uh, certainly by, uh, the time of our next call, uh, as soon as about eight or nine days from now.
Bob Irish: Oh, okay. Great. Uh, let's move up to, uh, Okeella. Let's talk about Equis. There's never anything bad to say about Equest, but go.
Justin Ford: No,
Bob Irish: ahead. Give me the good news.
Justin Ford: When you talk about equas doing something bad, it, you know, comes in with a report card of an A minus maybe.

Justin Ford: But so because recently it's been like A+. We went from, you know, high 900 NOI last year to over 1.3, closing in on even 1.4. Recently, we dropped down into the one-twos. The market's a little slow. We have to replace some of our local negotiated rates, which are the rates with the local businesses that keep heads and beds apart from your main business, which is the transient hotel guest. Um, and, um, so we think we'll get back up into the 13s, 14s, but even at 1 point, you know, two plus, we're paying a 10% dividend steadily, cumulatively, uh, since we've owned that property, and, uh, that produces more than enough to continue to do so. But because we're producing such high NOI consistently and because the lending market is now coming back, Bob, because the lending market is coming back, we're having conversations with a few people, including the current lender. And, uh, it could be quite possible that in addition to the, uh, healthy distributions we're making, we may be able to return as much as half of investor equity within the next, uh, three to four months, I would say.

 Justin Ford: But we'll know that in about a month or a month and a half. Now that the tariff situation seems to have stabilized a bit, you know, the recent agreement with Europe and so forth, that really affects the long-term market very much. We're all concerned about how that factors into inflation and so forth. Um, and we've seen over the last month or two hotel lenders who had previously been in the market and stepped out are now stepping back in. And we've seen rates of the risk premium on top of whatever, uh, general, uh, index they generally, uh, base it off of; the spread has narrowed. So now that the rates are coming down, where for a stabilized property you might have gotten, you know, four or five months ago a rate of 8 to 8 and a half percent. We believe we can reify at a rate in the mid-60s, maybe high sixes.
Bob Irish: Wow.
Justin Ford: And now that our NOI is so strong, we believe there's a very good chance we may be able to return up to $3 million of investor equity in that property alone. 
Bob Irish: Wow. Well, as usual, great news at Equis. Uh, let's let's go to Tallahassee and talk about the Renaissance. There's typically always good news there as well, but go ahead.
Justin Ford: Yeah, I know they're performing very well. We're at 94% economic occupancy. We should be at 95% in a couple of weeks when we have a few more movements coming. The property is in great shape. You know, we've gated as well. We have excellent management over there. So, um, it's kind of like Ocala most times, and that no news is kind of good news and that it's performing very well. And that's another property where we've paid 10% cumulatively since the beginning of, uh, since the inception of that investment, 10% annual distributions, cash on cash. And that's going on eight years now. Just over eight years we've had that property.
Bob Irish: Wow.
Justin Ford: Uh, and of course we returned over half of the investor capital maybe three or four years ago when we did a refi.
Bob Irish: Yeah.
Justin Ford: And now that our NOI is really trending up. So we've been, we were about a million for a while, and then last year we got up to about 1.2 million. Last quarter we did about 350,000 in NOI there annualized. That's 1.4 million.
Bob Irish: Yeah.
Justin Ford: And we think we think we can sustain that. You're going to go through some slow periods during a year, but we believe we're going to get close to that. And right now we're starting to talk to the lender, Greystone, to see if we can do what's called a supplemental loan. We have about $2 million of investor original equity remaining in that property. We're going to see if we can do a loan that can return maybe half of that. We also have about a million dollars in secondary debt. So, return more equity to investors, pay off the secondary debt at a lower rate, and, uh, continue to pay, you know, double-digit cash-on-cash yields.
Bob Irish: Okay, good deal. Hey, let's talk about what's going on inside the fund. 
Bob Irish: Let's go to Oklahoma.
Justin Ford: Um, yeah, well, let's see. We'll start, I guess, with Apex. Um
Bob Irish: Okay.
Justin Ford: So Apex is at 93% economic occupancy, as it's always been. Our challenge there is, um, for a while we didn't bump rents. We've been bumping rents. So we kept a little bit under market at high occupancy. Once we really started paying attention and seeing how some of our sister properties were really successfully bumping rents, we started to demand the same of Apex. We've been doing that for probably 6 months. That takes a little while to filter through the system when you get to renewals and so forth. So even though we're consistently in the mid-90s occupancy there, uh, we have to do a little more work to get up to our budget at NOI. We're typically a few thousand short of our budget at NOI, but we're still producing more than enough to cover our debt service and generate extra cash. And now, as the uh rent renews through, we're going to get uh fully up to market on our rents, and we should be meeting or beating our NOI fairly consistently.
Justin Ford: I would consistently, I would say, starting in the fourth quarter.
Bob Irish: Okay, good deal. Uh, you want to go to Ascend next?
Justin Ford: Uh, well, in sequence it would be Elevate. So
Bob Irish: Okay.
Justin Ford: Apex was 91 units. Elevates 126 in Oklahoma City in an amazing location. It's on May Avenue, which probably has, I don't know, 40,000 cars a day or something like that. And, uh, it's in an area where they're doing all sorts of new development and so forth. I don't know if you're aware, Bob, but Oklahoma City actually had plans to build the tallest building in the world, believe it or not. In Oklahoma City. Yes. This
Bob Irish: What?
Justin Ford is Yeah. I don't know where that stands, but even the fact that that became a news item tells you what's happening in the gas and oil cities, right? It's—it's, I think it's the 20th largest city in the country. It's a great town.

 Justin Ford: Um, but there's just a lot going on there, and at our property there, we're at, uh, 98% occupancy, and based on pre-lease, we expect to actually hit 100% in August. So, our collections are strong. Uh, our bridge debt that we had there from when we finished, uh, renovations there a little over a year ago. Um, we just extended it as we were talking about last time. We don't want to go right into the PERM loan because we think there's a really strong chance that, um, if we go into the PERM loan towards the end of the year, first quarter, we're going to end up doing maybe 50 to 75 basis points better.
Bob Irish: Yeah.
Justin Ford: Uh, that will save us cost of capital and also give us more proceeds, allowing us to return a little more equity to the fund. And as interest rates go down, should they go down, uh, cap rates tend to compress as well, meaning people are willing to pay more for each dollar of earnings. So valuation should go up, also increasing our proceeds.
Justin Ford: So we've, uh, we're, we're doing this, um, extension, uh, with the, uh, current lender for nine months. Uh, they're giving us a little rate relief. It was based on an index plus a spread. I won't go into those details, but basically it's going to drop our rate about a point, a little over 1%. Um, and, uh, we think we're in a really good position to go into a Fannie Mae or Freddie Mac loan there, you know, in the late fourth quarter to mid-first quarter.
Bob Irish: Okay, good deal. Let's, uh, let's go to Ascend.
Justin Ford: Send it. Uh, you know, that was a property of our fund properties where we had real trouble with that construction. Not
Bob Irish: Yeah.
Justin Ford: Not only do we have to dig up all the ground and replace so many pipes, but also the, uh, the local building department made us replace 70, 70, uh, balconies, all 70 balconies. Uh, which really slowed up our lease-up because we couldn't lease up any building even if it was ready if the balcony was even on the first floor for some reason.
Justin Ford: But so anyhow, that really put us behind the eight ball, and then we struggled with lease-up for a while because we didn't lease up to, uh, the best people. Uh, some of our team got on that. They did a great job. They turned it around. We have an amazing property manager out there as well. And, uh, and now we're at, uh, I think we're at 94 to 95%. Sometimes we are at 96 or 97, but we consistently operate really, really, uh, inefficiently. And I think we're coming up on our sixth month in a row. We're going to beat our budgeted NOI there. So Ascend has a $10 million first mortgage, or maybe it's about nine and a half, and about two and a half in secondary debt. Um, we're in a good position now to refire that and bring that cost down dramatically, and that'll be part of a very, very strong return of capital that will happen soon, uh, throughout our properties.
Bob Irish: Well, speaking of return of capital, you've been returning a lot of money to investors over the last, uh, over the last couple of months.
Bob Irish: Can you quantify that for me?
Justin Ford: Well, last year when we sold Melbourne and we did a few other refis and all that, in the span of eight weeks, we returned over $20 million to investors. That was in addition to whatever monies in distributions we paid during the normal cost of the year, with the exception of the fund where we suspended distributions for about the last 18 months because of the construction that ran high and because of, you know, super high interest rates and super high insurance and general inflation and so forth. But we're now poised again to resume distributions in the fund we would expect in the second quarter of next year and to do a significant catch-up, and the refinancing is part of that refinancing ascent and then going to the permanent loan on Elevate as well and even a permanent one on Apex. Those three combined should return significant capital to investors. A send-alone could return as much as $12 million to investors. And then we have, uh, refis outside the fund that are pending, like we're talking about at, at, uh, Equis and a few others in the fund, uh, the Elevate and the Apex.
Justin Ford: And there's the two hotels that we just converted. So a lot of financing activity, which is the last piece of basically stabilizing now, to bring all the debt down to the best possible rate on long-term fixed loans. So, Ascend is performing extremely well, and, uh, we'll have news; we may, on Ascend, go to what's called a bridge to HUD loan. We may go straight even to a HUD. We'll figure that out. But, uh, and we may have news on that by the time we get to this call next month. But, uh, right now it's performing very well, and it's earning its stripes.
Bob Irish: Fantastic. Well, it sounds like with what's coming down the road, a lot of folks listen.
Justin Ford: Yeah, that's yeah.
Bob Irish: money
Justin Ford: So,
Bob Irish: In their pocket, and what are they going to do with it?
Justin Ford: Well, um, after we get money, we may have other things in the future.
Justin Ford: We may even buy
Bob Irish: Sure.
Justin Ford: At some point, uh, because we're seeing real deals out there, but we haven't bought in over three years because we believe in taking care of what you have, right? And, um, uh, but very soon we're going to be fully stabilized, all refinanced, and everything else. But between now and then, uh, we have that 1% a month waiting list, right? And we don't expect to raise a lot there. Just maybe $2 million, maybe a tiny bit more than that. And each time we raise, we will raise basically to support a refi. For instance, the Elevate extension—they want us to pay down the loan by a couple hundred thousand, plus there's a $75,000 extension fee for some closing costs, and we're probably going to put a gate there, uh, drive gates and and a privacy fence because they've done so well at three other properties where we've just added that feature.
Bob Irish: Yeah.
Justin Ford: So, because of that, we're only going to reach out to people on the waiting list.

 Justin Ford: You can't make an offer for $400,000. It would be swamped in very, very quickly. So,
Bob Irish: All right.
Justin Ford: We're just reaching out to the first three or four people on our waiting list. We expect to fill that, but then we may have another one after that, you know, in a month or two as we start to refinance. So, it's going to be little pieces reaching out to strictly the people on the waiting list. Bob.
Bob Irish: Okay. Uh, if you're not on the waiting list, I would recommend that you get on the waiting list; that would be my advice. Um, let's, uh, let's talk about Port St. John.
Justin Ford: Uh, excellent. Uh, and let me also say if they're interested in getting on the waiting list, just email me at justinpaxpropies.com and copy Chris at chrispaxpropies.com, and in the subject line, please put 1% a month note, and then we'll, uh, we'll be sure to catch it. Uh,
Bob Irish: Okay.
Justin Ford: Port St. John, some really good news.
Justin Ford: I mean, we're looking at—we have the UPS store coming in soon, and of course, let's see, this is coming in August. Uh, all these officially open up, and soon after that, they're going to have their subtenant, uh, which will be very interesting to see, and those two should be real traffic drivers, you know, because all these—it's, I mean, you know, Winn-Dixie alone was a good traffic driver that
Bob Irish: Yeah.
Justin Ford: That center did very, very well, but Aldi's is the fastest-growing value supermarket, I think, in the country.I've seen reports on that, and then usually they have a Hobby Lobby or something like that as their second driver, you know, which is a different customer mix. And these things are really exciting. Uh, all our, you know, the other tenants that we have, our co-anchor is Planet Fitness, which renewed recently, but we have these little spaces we've been working on leasing, and and and we're leasing them. So, we have a 200-foot space where UPS will start its lease in the next month or so.

 Justin Ford: We basically signed that lease. Uh, we just got on an 18,800-foot space. We just got an offer from a fishing tackle place. Really good offer. And, uh, and their name is One-Eyed Jacks. How can you not go with a guy like that? So, we're going to have Oneey Jacks there. And then on that 5800 square foot space, that was our one haunted space in the whole complex where we had two arcades that went, you know,
Bob Irish: Right.
Justin Ford: That went bad and absconded on us. Um, now we have a restaurant, uh, a restaurant interested in that space, and we're in the early stage of that negotiation, but a restaurant would fit perfectly there because the only other restaurant we really have is like burgers and fries in a sort of a bar or a bar with like pool tables, you know, but this will be a real restaurant, and it'll and it'll be right adjacent to the Aldi's. So, I think it's going to be strong, and I think we're standing at a point where we have a really good chance early next year of being 100% occupied there with good long-term leases and a great new anchor drawing more traffic than ever.

 Justin Ford: So, Port St. John's is going really well.
Bob Irish: That's great. Any news on the outparcel?
Justin Ford: Um, actually that's kind of stalled. Excuse me. That's kind of stalled a little bit, and Modwash has not gone back to us and Murphy's Oil. I need to reach out to the broker there, uh, again on that. But the findings we had on the usability of that were mixed and a little bit ambiguous. I think it was enough of a green light that a person you know dramatically interested in that space could—um—want to invest whatever the $10, $20, or $25,000 is to dig further to confirm for themselves that they can do what they want to do.
Bob Irish: Right.
Justin Ford: Um, and I believe we'll have a much better chance at having that interest once all these open and once the whole center is 100% occupied again. I mean, right now we're at 89%. We're still doing very well, but, uh, so I'm, I, I remain moderately optimistic that we may be able to extract some significant extra value out of that parcel, but I think we'll likely know that in the first quarter or second quarter of next year.
Bob Irish: Okay. Great, Justin. Thanks for the update. Anything you want to add before we sign off?
Justin Ford: Nope. Just, uh, always a pleasure to talk to you.
Bob Irish: Great talking to you, Justin. I'll talk to you next month.
Justin Ford: Thank you, Bob.