July 2022 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 what's going on in the cap plus diversified income fund. We've got a new acquisition to talk about. I say this every month, but it's important. Throughout real estate booms and busts Pax properties has never failed to produce a positive result for investors or missed a mortgage payment. With that said, Justin, great to have you back. How you doing?
 

Justin Ford: I'm doing well, Bob. How are you? I know you're in Park city, Utah today, right?
 

Bob Irish: Yeah. We spend our summers out here in Park city. We'll be back in Florida sometime in October. So yeah, it's great out here. It's low humidity. Temperatures range from sort of the low eighties and then at night they get down into the fifties. It's pretty nice. I hesitate to even tell people who are in Florida, how nice it's here.
 

Justin Ford: They're just going to follow you there, like they followed you down from the Northeast and everywhere else. 
 

Bob Irish: Yeah, exactly. So Justin, I thought today we'd do, maybe a quick overview of the properties. Just kind of a view from 30,000 feet. Let's talk about the new acquisition and I'd like to get your views on the market right now. And obviously a lot of stuff has changed. Inflation is high interest rates are going up. So there's a lot to talk about there. So why don't we start off with our view from 30,000 feet? Does that sound good?
 

Justin Ford: Yeah, that sounds great. So what I'll do is I break it up into hotels. We talk about departments and then we'll talk about the shopping center and then we'll start acquisition. So in hotels we have 5 as you know. Our 4 independent hotels, they all won the TripAdvisors top award and then we have a branded hotel we're dropping in that flag. That's in Tallahassee. We're dropping that flag in August. We're going to make it another one of our independent hotels. 
 

So Vero, Melbourne, Ocala, last month all beat budget on revenue and on EBITDA or prop or on operating profit again last month. Our Tallahassee properties making incremental progress, but they are still challenged. That market is still challenged, the hospitality market. So they're doing better. But they're still coming in a little negative EBITDA, they're narrowing that gap.
 

This month, finally, July, we have move in month towards the end of this month and in August as well is a big month. We're finally forecasting again so strong, consistent, positive EBITDA there. When you get to our apartments, The Renaissance, again we have new move-ins. August is the big move in month there. So we're forecasting coming close to our original EBITDA of around $96,000 a month over there. 
 

Tulsa, we're in the process of leasing up Tulsa. All the units are done, which is Apex. Tulsa, we have about 20 units left to lease up there, now that they're all available, after we had our construction guys move out of some of those units a couple weeks ago. And we're making very good pace there and we were budgeted at leasing there. I'm not sure exactly. I think it was close to a high 90 cents, maybe a dollar. But whatever it is we're getting a bit more than that. We're getting a 5 to 10% premium on that.
 

So Apex is going very well. Elevate as of yesterday we delivered really our first dozen units, fully renovated to the operations team. This coming Wednesday, we're going to deliver another dozen. Within two weeks after that, we'll have about 50 new renovated units delivered to the operations team. And we're shooting for a pace to continue to have all the 126 units renovated by the end of September. That may be a stretch, but we're still keeping that as our goal. Now I can tell you that the outside of Apex is amazing.  It had this ugly old, what's called a mansard sighting. So the top of a mansard roof is kind like shingled roof that overruns a bit on the top of roof. This went all the way down the building. It was a 1970s design I guess, it's not too attractive. 

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Bod Irish: 1970s mistake. 
 

Justin Ford: Exactly. Yes, indeed. A big mistake in 1970s. And so we're removing that, and this is a big job. We had some big quotes. So we're starting to do that in house with a guy who ran crews, who did this. We got the permit and all that kind of stuff. And I was there last week and 104 degree heat. That building looks beautiful. I'll see if we can include some of the photos in this conversation. I'm sure we can. I mean, the way they frame that out, they've torn all the mansard off, and then they put up all new metal framing. And now you have new insulation going in, then you're going to have the new eifs, which is a basically stucco going on top of it. And it's transforming the look of it. 

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And we're showing up all the balconies that are there. So this is one of those jobs that really excites me, really get my juice going. We really do like to turn ugly duckies into swans. And this was quite an ugly duckling and it's going to be quite a Swan when we're done. So Elevate is going well. And I guess that brings us in the apartment side to our newest acquisition, which is Mansions and More. So when last we spoke, we were about to close on that. So we have closed on that maybe three weeks ago. That's 146 units in a very nice suburb of Oklahoma called Moore, Oklahoma. And we bought that thing for 10.4 million. A budget of renovations is around 3 million give or take. 

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But we're already starting on all the exteriors. There were about 26 two story balconies, like an upstairs balcony and a downstairs balcony. They were old and beat up and looked just terrible. So we're already renovating all those, changing them out. We're starting our exterior paint and we've individually gone in when I was in Moore last week. I went in with my head of construction's that's been with me for 9 years now. And we wrote individual scopes of work for 30 units. And what we did is we found a lot of the units were in better conditioned than we thought.

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So we think our budget is going to come in better. There's a lot of flooring we didn't need to replace, but being conservative in our budget, we imagine we would. So now that we're going into a lot of these units, we're taking them off the deal. We don't need the flooring in this room. We don't need necessarily new cabinets in this one, et cetera. And so that one, again Apex has been our best renovation yet. We renovated 91 units, start to finish inside now, a lot of stuff. Again, there's one pending issue there, but it doesn't stop us from lease and that was mostly supply chain issue that has to do with changing of meters. But Apex was our best one yet. 
 

I think that Mansions will be better than Apex. I think we'll do 146 units in about a year. I think we'll have the exterior done in the first three months, which means once you have your first one or two interior units done, for that person renting that first unit, the whole property is renovated. Because they don't see the other 144 interiors. They see their interior and they see the exterior. And then that really helps with your lease up. So we're very, very excited about how that progress is going and our guy Angel out there, he's amazing. Fantastic. 
 

And then there's the retail. So the retail is the Port St. John shopping Plaza by Winn Dixie. So Winn Dixie is undergoing the new boost up. All these supermarkets have this program where they get fancied up, where they invest and they make it, I don't know, at a sushi bar or whatever they did, the touches. The Winn Dixie has been picked for this. So that's really interesting. We have to fix that roof. The roof, they have some roof leaks. We knew about it when we acquired it. But we're dealing with the supply chain issues. We think we've finally resolved that. So we're going to take care of that. We had three vacant units when we bought it. And then we got another vacant unit, recently, small base, these are small base. 
 

So on a total square footage base. And so occupancy is still, 94%, something like that. But renting a vacant 900 foot bay in retail is a lot tougher than renting a 900 square foot apartment. But finally we have two things. We have a pet shop that's been there for a while that wants to take over two of the adjacent bays, which is great.

 

And then we have a new, vape shop coming in. And I was hesitant about a vape shop and I really don't know much about vape. And I said, is a vape shop a positive or negative in a grocery anchored center? It's basically where families come and go. And we did some research. We looked at other supermarkets around it and they have like vape shops and everything and all that kind stuff. And apparently it seems to be fairly neutral. It's not like what they used to call the old days, apparently a hedge shop or anything. It's a vape shop, I guess. And this group has seven other shops, so it's a strong outfit. So they're basically successful at whatever they do. 

 

So when all that is done, we'll only have one 900 vacant units. So 90 square foot vacant unit, which means we'll be at whatever that is 98, 99% accuracy still. So that is still operating very, very well. So that's the story of the portfolio Bob. It remains very positive. I still have those two hotels in Tallahassee to really, really work on, but we're making steady progress.

 

Bob Irish: So the COVID seems to be making a comeback all across the country. Do you anticipate that's going to be an issue or are people kind of done with worrying about this whole thing?

 

Justin Ford: So when we bought Mansions, when we closed on Mansions, I walked in there, like I told you out in Oklahoma and I met the new staff out there. I said, Hey folks, I'd like to have a meeting tomorrow and whatever 3:00 PM or something like that. And the next day two of the girls came down with COVID, the very next day, of our new employees. And I wasn't sure if that was, we don't like to actually work hard for the new boss COVID or if that was a different strain of COVID. But we'll figure that out. 

 

That's the thing, Bob, I mean, I gotta tell you about hotels, so we got hit by this COVID as you know, and we made it through. Now there's the fear of recession also.

Recession is a possibility on the horizon. And a decent part of hotel travel can be discretionary. So that can hit hotels, much more than apartments. Apartments are much more recession resistant. Now they're talking about new strains of COVID. Whatever it is, at the Baymont Inn, we are transforming 14 of our units right now into extended stay type units, where we can sort of least them out like apartments. 

 

We will accelerate that program. If the market again gets hit by a COVID and recession and hospitality becomes impaired. So I don't think we're seeing it yet, but we remain, our strategy and our attitude is we don't know what the world's going to do, but we know what we're going to do, and we're going to finish our units. We're going to push through. We're going to make sure that we pay our bills, until we get to normal market, whatever that looks like once again one day. But again, our destination market's Vero, Melbourne, Ocala, those are still strong. We're not seeing the new strain impair yet. But it's the non-destination markets that are slow to recover. And seem to be more vulnerable, the new

strain. 

 

Bod Irish: Let talk a little bit about what this rise in interest rates means for our investments and just for the real estate market in general.

 

Justin Ford: Yeah. So there are two forces going on that I can see. So the rising interest rates has put a real break on the overheating of the real estate markets. I mean, in the residential thing, in small residential housing sector, you've seen it dramatically. The prices have cooled down, transaction volume has gone down tremendously, both in commercial and in residential. And terms have become much more negotiable and open. It used to be, it was entirely a seller's market until just a couple months ago. And on a dime, it became, I think it's now buyer's market. 

 

But you have two competing factors, the high real estate, it slows down new construction. That's a big one where it's hit. And it slows down even the amount of buyers who can buy at the former prices, but now with higher interest rates, for existing product as well.

But the counteracting thing in Florida and in Texas is you have all this migration. You have people coming from the Northeast, coming from California. And they're coming with a checkbook that is used to paying more per dollar per square foot. for a C class property in a similar neighborhood, they might pay $300 a foot up there, down here it used to be $150, but their $200 now. 

 

So you still have that pressure creating significant demand, but you do have interest rates counteracting that in these markets. I just think that we stay focused on fundamentals and we are now seeing values. I'll give you an opportunity. We're looking at a 261-unit apartment, it's actually a student housing complex in Tallahassee. And we can buy it for about, what's called $42,000 a bed. They talk per bed there. Where it's a little bit off campus, if you're right in campus, you're paying over $100,000 a bed is where the typical market is right now. 

 

The thing is that full occupancy, there's very little deferred maintenance. It's a different business in apartments. If we're running that as apartments, our payroll might be little over $200,000, where these guys run it their payroll is over $700,000 by the bed. But they generate a lot more. Our payroll would probably not be what theirs is. But it would come down a bit. They assume all utilities, because everything is rent through, all bills paid. But we're able to buy that thing for probably less than $95 a foot, for something very little deferred maintenance. And a lot of guys in the commercial space, whether it's student housing and so forth, don't think of it anything in terms of dollar square foot. 

 

We always do because we're worried about replacement volume. We want to know that someone can't come in and undersell us. So, this opportunity would not have been priced at this a few months ago. It would not have been like this. So I think we're just at the point where the market is turning, starting to offer values, but there's select values here and there where big players are selling for strategic reasons at prices below, that could have easily gotten just a few months ago. So there's a good deal of it that's kind of, we'll wait and see, but we're seeing real opportunities. And Bod I will tell you this, our druthers right now is to focus on turnkey, even class A, if we can get it. 

 

We always done the ugly duck into the swan. That was called heavy value add. And the reason for that is because the market is so expensive. If you bought turnkey, you are getting negligible yields. You're basically just breaking even after paying your debt service. But now if the prices continue to soften, as we expect they may in certain markets. On turnkey asset, which means B, B plus or A asset, with little or no deferred maintenance that are highly occupied. Our preference would be to go there because that will allow us to scale much more quickly and responsibly. Because every heavy value add you really have to dig in and make sure you're doing it right. You have to spend more time. 

 

So, I guess to recap the whole thing, I would say that the market is turning it's presenting opportunities. And I think it may even show the harder markets like Dallas, harder like Miami. But you're not seeing that in great quantity yet. But you're seeing it in enough select opportunities that we like our chances for new acquisitions going forward.

 

Bob Irish: That's great recap. I'm curious, one quick question about the off campus housing. A lot of universities have gone to virtual classes and stuff. Is that a factor at all?

 

Justin Ford: Yeah and I'll tell you why. So when we look at this, the way we underwrote it, we didn't underwrite it per bed. We underwrote it as conventional market rate housing. So what happens obviously, if we bought this thing, we'd have 100% occupied with students as is right. Obviously, because that's what you're receiving, but we want to know that if we need to transition to conventional, we can, we could do very well. So, one of the ways we're looking at, so a lot of these are four bedroom, four bath. So how are they laid out? Can you divide your living space? Can you create two entry doors? Can you basically, and the second kitchen, and now you have two twos. 

 

And, and the two, two is one that's more rentable as conventional housing, but even in the student market, a two, two is more rentable than a four, four. because apparently this is something I didn't really know myself, but it makes sense to me. Instead of renting with three other slobs, you can rent with just one other slob. 

 

Bob Irish: You lower your chances of being pen up with a jerk, I guess.

 

Justin Ford: I guess. I mean, believe me, every time I visited my kids in college. They lived with friends and it was always kind of a mess. And I just think that, but I'm sure that's not the way all students live, but I guess the point is right. That if you're able to divide certain units like that, you have more potential to rent on a market basis to regular potential housing and you get a little more rent, I believe for two, two than a four, four, as you said. So we're looking at it that way. We're not sold on this opportunity, but just seeing the fundamental value that's there, I'm surprised. And it's almost to the point, Bob, where let's imagine there's a small chance that this inflation thing dies down quickly.

 

Let's imagine that it did. It could rear its head later, no doubt. Because we see lumber coming down, we see petroleum coming down. We see labor even softening a little bit. You see all these prices coming down a bit, let's say for some reason, for recession or whatever else, prices came down real quickly. And all of a sudden the interest rates that were staying up started to go down again. And by the end of the year, you were back where we were close to it, where we were a few months ago. 

 

Well, I don't think that's likely to happen, but let's say there's a 10 or 15 chance that something like that might happen. I'm going to tell you, we're going to lose this window to acquire stuff at good prices if something like that were to happen. So again, I don't think it's likely. I am looking very intently right now at what's emerging because even though we may lock in, interest rate a point up higher than a few months ago, depending on how you finance, there's a way you can lower that interest rate cost, should interest rates go down again, depending how you finance it. It does require some planning. I think there are interesting times for sure.

 

Bob Irish: Well, Justin, as usual, I'm very impressed with how well thought out your plans and forecasts are, your due diligence as usual is just incredibly thorough. Anything else to add before we sign off?

 

Justin Ford: Nope. I just try to stay cool out there this summer. That's all.

 

Bob Irish: Good to see you, Justin. We'll talk to you again next month.

 

Justin Ford: Great to see you, Bob. Thank you.