February 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 keep you abreast of the underlying investments in the Cap Plus Diversified income fund. I say this every month, I'm going to say it again. Throughout real estate booms and bust pax properties has never failed to produce a positive result for investors or missed a Mortgage payment. With that said, Justin, it's great to have you back. How are you doing?

 

Justin Ford: I'm doing great, thank you, Bob. It's great to be back. I just got back from Nicaragua, as a matter of fact.

 

Bob Irish: Oh, no kidding. Were you down there in business or pleasure?

 

Justin Ford: It was a Rancho Santana, so I was in the down there for the business of having a good time. Five days.

 

Bob Irish: That's a beautiful facility. Rancho Santana. And they have, I guess, some of the best surf breaks in Nicaragua.

 

Justin Ford: They do, and I was riding the very smallest of them. I just started surfing a couple years ago and was having a lot of fun doing that. Some horseback riding and just hanging out with some friends. It was great.

 

Bob Irish: Oh, that's terrific. I'm glad you got a chance to get away and recharge. And why don't we jump right in. Last update we talked extensively about the pivot, the move for Seven Hills and for Casa Bella. We talked about the pivot from hotels to apartments. So what's going on there? So let's cover that first.

 

Justin Ford: So we're still moving full speed ahead. We await drafts to the engineers so we can have a final draft review on Seven Hills, which we then submit to the city. Then we do the follow up. Same thing with Casa Bella right after that. That hasn't happened yet, and we're reaching out to him again today. We are hoping to submit our initial permit plans to the city at the end of this week or early beginning next week. In the meantime we're doing a lot to reduce expenses and everything associated with running basically a slower hotel. Slower hotels right now, as far as on revenue side, the properties look beautiful, but we're not generating the traffic we need. And so we've suspended quarterly distributions probably for at least a year until we get this fully converted.

 

Once we do get it converter, once the bank finances our conversion, we have lenders very interested in the conversion. They funded things like this. They've seen how successful they can be. The city is strongly behind this, but the banks will not fund a conversion and then fund distributions of payments to investors. Those payments have to come from operations. Over the last couple years, all our payments to investors for these hotels have come from either debt that we had or money that Pax lent at no interest. Because we believe in our long-term projection, but right now we have to suspend payments. It makes sense. It's for the health of the business itself. And we're thinking about a year, we should be fully converted.

 

We should be close to fully leased up. In fact what we do, it's called a stabilized refinance after the conversion. In other words, you're now a fully converted apartment building. You're at 90% plus occupancy for three or more months, and then you go for your financing. Your best financing is multi-family. That financing will probably allow us to return actually initial equity capital to investors, plus get them caught up in all their deferred preferred return. So we have what's called a deferred preferred return means, our, I think our pref on these things are like 8%, something like that. That's the preferred return. If you don't make your 8%, then before Pax will share anything, we have to get caught up on all your 8% for Pax shares in any dollar of earnings.

 

So we're highly motivated financially to make sure we get back up there and there is what's called a waterfall. A waterfall means a return above your preferred return. So we're highly motivated, but we're more than that. We're just motivated generally and professionally because we intend to keep our perfect track record of never later, never fail to produce a positive return for investors, but we should be able to see that happen I would say by early next week, the permits we were hoping, we can start to submit them and with any luck, we'll be starting construction late March on the record.

 

Bob Irish: Okay. Great. Well, thanks for the update on that. I'm happy to know that all of the investors in those two properties will be made whole with that preferred return. Just going to be a little bit of a wait on that and that's fine. Let's move to do you want to talk about Vero Beach? Let's go to Vero.

 

Justin Ford: Vero it's funny, it was the oldest one in our portfolio, and now it's kind of the star again. In other words, it has the second most revenue of everything. It's got $229,000 in revenue, which is a record month for us. That was February. But it's bringing 169 of that to the bottom line. In Ocala, which is our newest hotel, is also doing great. They're doing $369,000 in revenue in February, bringing 165 is the bottom line. So we want to get Ocala a little bit more efficient along the lines of Vero, but still posting record numbers both on the top and bottom line. Both those are budget beating numbers for both properties. And then on Melbourne, which is in between the two of them we are doing this month, $264,000 in sales and bringing about $101,000 to the bottom line. So the other hotels, the ones that are in what we call destination markets have in the coast or Ocala, which is a boom horse country market. Those hotels continue to have record years and March, the forecast for March, they'll be stronger than February. So those are very strong performers.

 

Bob Irish: Oh, that's excellent news. Well this is the season down here in Florida right now, that's for sure. And March is always a pretty good month as well. Hey, let's talk about Governor Square or Renaissance.

 

Justin Ford: So, Governor Square continues to perform well, it's a 97 or 98% plus occupancy, steadily growing the bottom line. Last year, its NOI came in a little shy of 1.2. Part of that was due to an interest rate cap we bought for a loan that we sold at a multiple, we bought for like 15,000. We sold it later for like $180,000 or something like that wit interest rates. But we were forced to buy the cap. So this year we're shooting to do 1.2 million plus in operating revenue, not extraordinary revenue. Pure operating revenue. And we can do it and we'll still be what's called naturally affordable. In other words, all our unit types fit into government guidelines per this market of what an affordable unit is for people making the area median income. If you're making 80% of it, you can still afford most of our units, whether it's a 1, 2, or 3 

 

So we actually have more pricing power to go. We don't underwrite our rents unrealistically. If anything we're a little conservative on our rents, keeping them very affordable to folks. But we are pushing rents there a little bit. I think we're going to move them up as people renew. We're moving them up about $50 a unit right now. So we expect, rather than the 1.2 originally projecting, we'll probably, shortly after this year our trailing 12 will be closer to one three. So everything is quite positive there, the province is in great shape and we're performing as we should and we're working on performing better still.

 

Bob Irish: Hey, that's great. I'm anxious to hear what's going on inside the Cap Plus diversified income fund. Let's talk about that. Let's go to Tulsa.

 

Justin Ford: Okay. Tulsa. Tulsa. Bob, I don't know if you recall when I first started talking about Tulsa, I was what's with Tulsa, right? And I told them, for me, it's what I call a stealth value market. It's not on everyone's radar. It's not a marquee name, it's not Dallas or Chicago, New York, LA, Atlantic, et cetera. And it's not Austin, because Austin is now a marquee name, isn't it? 

 

Bob Irish:  Sure. But you were in Austin way early before it became a marquee name.

 

Justin Ford: Yeah. I bought in 2006 and I wrote a book called secret Value Growth Cities. I told people to say away the bubble markets, and I told them, my number one market that I recommended was Austin, because of good value and growth metrics and was a diversified economy, a few other reasons. Well, I saw Tulsa to be a similar story, not to the extent, but similar story. So now market study came out the other day, and do you know what the third fastest growing market for commercial real estate was in the country last year?

 

Bob Irish: I'm going to hazard a wild guess and say it was Tulsa.

 

Justin Ford: You are correct. Up 44% prices. Crazy. Our property is fully leased up. We have a few. We finally got our last permit for the electric meter. So soon all our tenants will be paying their own electric, plus they'll be contributing towards water, which is really nice, it helps in many different ways. Prevents waste, makes management simpler, lets you compete better on your base rent, etcetera. But yeah, that's a very strong property going through the refi right now. We could sell it for. For us, that's a smaller property. Now, again, it's 91 units we bought for like 3.6. We're probably in it for like six and a half, something like that in total. And we probably could sell it for between 9 and 10, I'd say. And, you know, that's after less than two years. 

 

But we did all this work because we want to build, we don't want to just make a grown apple tree, then sell the apple tree. We want the apple tree to produce apples, and then we want another apple tree, and then we want an orchard of apple trees. And it's the whole idea of a fund. We want lots of apples. Watch your mailbox, Bob. We want to send you tons and tons of apples. That's the best thing. 

 

Bob Irish: I am loving the agricultural analogy, Justin. Very, very powerful. Hey so what's going on with elevate or Mansions?

 

Justin Ford: Yeah, elevate is rounding the last turn, as they say in the racing business. We're heading towards the home stretch there. We have 80 something units done, another 30 that I would say 70% plus done. The exterior is basically all done. Now we have to do the parking lot and there's a pergola in the middle, but all the major amenities, the pool, the gym, the sauna, the laundry room, they've all been renovated. We get very strong demand there. And just recently, I instituted another program. Now because construction is mostly done. Right now, we're a little bit above our pro forma rents where we underwrote them. We underwrote them. I think they were like at a $1.05 a square foot, somewhere between a dollar one and a dollar five.

 

We are now, again, what that means for folks who are new to this terminology, if you have a thousand square foot apartment and it rents for a thousand dollars a month, you're getting a dollar foot. If it rents for $2,000 a month, you're getting $2 a foot. And the smaller units always rent for more per foot than the bigger ones. It's kind of like an individual slice of pizza that sells more per square inch of pizza, I guess, than the whole pie. But any case we're bumping those rents there, 35 bucks right now. And then we're starting to implement that right across the board. We're seeing a better, a more responsible quality of resident apply. It's really a location. I mean the place right next to us just renovated, they had this little drive through deli and cleaners over there, they fixed it up. 

 

But it's right across from Barnes and Noble. I think it's the last Barnes and Noble in the United States, I don't know. But actually going there and read these things called books. I'll explain it some other time, but it's a really archaic technology, but really enjoyable if you ever get your hands on one. So we're expecting that elevate, we're shooting to be done by the end of early in the second quarter and be stabilized by mid-year and to have a refi in process by July and close on it before the end of that quarter. 

 

Bob Irish: Okay. Great. Let's go to Port St. John and talk about the shopping center. I want to find out if the roof's been fixed yet.

 

Justin Ford: It has not been scheduled to be fixed. I think it's in like two weeks. And we ordered that material almost a year ago. I mean, it's been crazy. And so it finally arrived. We're at a hundred percent occupancy there. We had the one arcade is really shady kind of arcade. Anyhow, long story short, they paid their money, then they disappear. I think they got raided once. And now they're getting out now, now we're getting them out in the next two days. There's another arcade that wants to take that space. And normally you would say, well, fool me once, but don't fool me twice. But I do see arcades as a business that aren't necessarily, let's say sketchy like this from us. They have them in the northern and middle parts of Florida and so forth.

 

And it's certainly not my bag of tricks, but it doesn't stimulate me. But we're looking at this arcade. They seem to have a strong record. We're looking at other tenants as well, but other than that it's a hundred percent occupied. Winn Dixie went through an upgrade, not the full upgrade, where they had amines, like a sushi bar or gourmet coffee bar or something like that. But they repainted, they upgraded a bunch of stuff which is just a strong vote of confidence. All the stores are full. The neighborhood continues to grow. Yeah, I mean, that's another property that we could certainly sell for 2 to 3 million more than we put into it, than we have into it after just two years. But I think that one over the long term is going to do really, really well for us. It's a good piece of real estate, but at a good price, producing good income where we can really afford to be patient. Just earn our long term returns.

 

Bob Irish: Sure. Clarify something for me. I went to arcades when I was in college, way back when, and it was just pinball machines. And is that what they are now, pinball or video games, or what is it exactly?

 

Justin Ford: I'm not exactly sure. I know I've driven by a few, like in Vero and so forth, I've seen them. And ours is kind of weird because the front window's blacked out. It looks really sketchy. And then someone said that's required by Florida law, but I doubted that and I don't think it is by the way, because I've seen ones where the window was transparent in these little chip balls. But it's just a place here where people go play poker, whatever else, but they're not gambling, I guess in whatever way they're not supposed to gamble, but they're getting their excitement from video games of different sorts. I think a lot of it is competitive where you win points or something. You don't have to worry about it, Bob. I'm not going to build a portfolio of arcades. Not an expertise we will have to develop. 

 

Bob Irish: Okay. Great. Hey Justin. Anything else before we sign off?

 

Justin Ford: Well, we got the two other properties in oh, I'm sorry we missed Ascend, one other property. Ascend is more Oklahoma. So Ascend is going well. We have most of our exterior done, it's all painted. We have the parking lot done. We've done the gym. We've probably renovated, our in-house team has been working on 52 units of those. At least 40 or 80% plus our new team. And we're stopping our in-house team in those 52 units. And then we're going to send them back to accelerate there. We're going to send most of them to Oklahoma City to finish accelerate, finishing that one. We have a new team from Chicago, a third party. We pay them a good premium over what we do in house. But it's far less management headaches for us. And they move quicker. They move much more quickly. And that's important. And they do good work.

 

Our guys do good work, but you gotta manage it. Sometimes we have to go back and redo things. And so they're good professional outlet and outfit and their goal is to deliver to us like six a week, five to six a week, which means we can be done by mid-year with the whole project by July. So far it looks like that's quite possible. But we're taking it, we made decision, we're taking sacrifice and revenue right now because we have a lot of units close. We have a lot of units that we can accelerate. We think we can get to a point where we only have 20 units vacant again by the end of March. And then we'll be, if we're producing six a week, we should be done by July. So that's going fairly well. It has its challenges, but overall we're very pleased with how we're going there right now.

 

Bob Irish: Good deal. So thanks for the update. I will look forward to talking with you again next month. Unless there's anything you'd like to say before we sign off.

 

Justin Ford: Last week we mentioned the Vero promissory note. We sold out Ocala, we sold out the apartments one and then Vero, I think Vero is going to be oversold as well by a little bit. But we might be able to move a little bit into the apartments because I thought the apartments were sold out, but they had like 250 left. So just to let folks know about that. But we've had very strong response on those. Those are the notes paying between, I think it's 8.7 and 10%. They have a partial inflation hedge and we think that if the long end of the curve is cresting now, it may not be. If it is, these could be particularly interesting notes right now. But yeah, just let folks know there are still a few spots left where we're pretty much sold out.

 

Bob Irish: So there's still a little bit of availability there. Okay. Got it. Okay, well what should folks do if they're interested in that?

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Justin Ford: We have a special email address, but I can't remember it. So just send it to justin@paxproperties.com and if you could just put in the subject line promissory note, then we'll find it and we'll get back to you and we'll send you all the information.

 

Bob Irish: Okay, great. Justin, well welcome back from Nicaragua. I enjoyed your agricultural, the apple analogy. I like the pizza analogy. I can't wait next month. And you know what you're going to come up with next. Thanks Justin. We'll see you next month. 

 

Justin Ford: Thank you Bob.