July Update with Justin Ford

Bob: [00:00:06] 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 also keep you abreast of the underlying investments in the Cap plus diversified income fund. I say it every month. 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 missed a mortgage payment. With that said Justin, good to have you back. How are you doing?

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Justin: [00:00:38] Great to be back, Bob. How are you?

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Bob: [00:00:40] I'm doing as well as can be expected. As I told you prior to our call, I had a cardiac event a couple of weeks ago. I had to go into some hospital for some surgery, but that was two weeks ago and I'm on the mend, feeling good. And the doctor tells me that in essence I've got a brand new heart. So I kind of feel like the Tin Man in The Wizard of Oz, [].

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Justin: [00:01:13] Well I got to tell you, you're always in amazing shape. You're an avid biker and all that stuff, and I do different sets of exercises. So it's astounding when a person like you has that experience. In fact you were biking when it happened in Utah, but thankfully you look great. If you hadn't told me, I wouldn't have known. So I'm really happy that you're doing well.

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Bob: [00:01:33] Well just as a word to the folks who are listening, if you do experience some tightness in your chest and you start to feel an ache on either side of your body at the same time, it's time to go to the E.R. Do not mess around. And with that said, let's get on with our call Justin. How are things going at Pax Properties.

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Justin: [00:01:59] I thought those were symptoms of higher interest rates and inflation. But all right.

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Bob: [00:02:09] Why don't we start with the hotels? Do you want to start with Vero Beach?

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Justin: [00:02:15] Yep. So Vero keeps marching on. We had an amazing first quarter. It was a record. The second quarter traffic has softened a bit, but we're still profitable. We're still adding to our long term trailing 12 numbers. So Vero is doing well. Really not much to report there except that we're looking forward to trying to set new highs in the third quarter. But sort of status quo and the status quo is very good in Vero.

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Bob: [00:02:46] Understand. We've got some news regarding Melbourne. Yes?

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Justin: [00:02:50] Yep. So Melbourne performance wise is pretty much like Vero. The market softened, but again we're producing positive returns. We'll be paying our typical I think 12.5% cash on cash probably early next week for the second quarter. But as you know, we've had people approach us to talk about buying Vero with the idea of converting it to studio apartments. Class-A Studio. 

Bob: [00:03:18] Buying Melbourne is what you're saying.

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Justin: [00:03:20] Thank you very much. Yeah. They approached about buying Melbourne. We've been going back and forth with probably about two and a half, three months. They want to convert it to studio apartments and this is a proven converter. He's done it in Florida. He's done it elsewhere as well. It's a group. And they they're offering us a significant numbers. I would say a good 30, 35% over market value. But the trick is when they're buying it for conversion, they want the property delivered without [] it, not operating as a hotel. We've been negotiating that for a long time. What happens is you come up to your closing date and if they fail and you've stopped taking reservations, now you got to turn your lights on again. You got to ramp up. That was the issue. We've come to an agreement for certain amount of money, not a tremendous amount, but would be released at the end of due diligence, about 150. It's not even in escrow. It's released to us. And then there's a higher amount in escrow, a few hundred thousand more, about 300 more. We're supposed to remove the furniture if they do close, but we have ten business days afterwards. So we don't have to do anything before closing, which basically says, Oh, they didn't close, now we have to get.

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Justin: [00:04:31] So it's those types of logistics and this type of deal that we were dealing with and we've worked out those issues. And I still give this deal a 50% chance of closing because of the nature of the deal, they've hired a lobbyist. They've been talking with the city and the county and all this kind of thing. It'll take four months before we know if this is a real deal. But at least we've ironed out some of the major issues. Four months from maybe today or tomorrow, we could sign the purchase and sale agreement as early as today or tomorrow I would expect to the latest. So in about four months, we'll know. At that point, the money goes hard. They release a big chunk of change and we could have a sale at a significant number that would close in late January, a few weeks before season gets going in earnest. So we shall see in the meantime. We're producing positive results. So all in all, good things are happening at Melbourne.

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Bob: [00:05:28] I'm curious Justin with this deal. Let's suppose that we do close or you do close on this, is it a cash deal or is it more like an earn out as they convert?

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Justin: [00:05:44] No. This is a cash deal. We would be paid off at closing. That's the nature of it[].

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Bob: [00:05:51] That's the way it goes. Okay, great. Well, that's good news on Melbourne. If it does close, I'm going to miss talking about the chateau ghetto. The ghetto chateau. But let's move on up to Tallahassee.

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Justin: [00:06:08] Well, I'll tell you what. Let's stop in Ocala first. 

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Bob: [00:06:10] Okay, let's go to Ocala first. Yeah.

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Justin: [00:06:12] The middle of the state. So Equus also is doing extremely well. Actually, those numbers even though Vero and Melbourne are profitable, but they're seeing the second quarter of the market soften a little bit. Ocala is doing well and Equus continues to do well. So they're actually pushing revenue, continuing to push it north. I think very soon for the first time on a trailing 12 basis, we could be a $4 million revenue hotel.

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Bob: [00:06:37] Wow.

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Justin: [00:06:38] First property to hit that mark. It also won last week. We've won TripAdvisor's highest award there something like three years in a row. And we just won Priceline and [AGODAS] Customer Service award, Booking.com award. So many awards and we're holding on to number two in the market as a rate on TripAdvisor so Equus continues to really perform well. We're very pleased there.

Bob: [00:07:03] Boy, that's great. That is great. Let's move a little bit further west. Let's talk about Tallahassee. Where do you want to start there with the two conversions? 

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Justin: [00:07:17] Two conversions. That's great. We've been finalizing these architectural plans for a while, and recently the architect threw in a partition wall that I really liked. And so we've worked around that. What happens is now you have a small space. It's a 270 square foot studio. It's a small space. They are high end finishes, beautiful amenities, really nice property, nine sloping acres. The kitchens are gorgeous. What we have there is the existing wet bars which we are converting to kitchens by bringing power. But now after the kitchen run, we decided that I'm going to put in a full stove, a 30 inch stove. The marketing testing we've done, we're going to drop in a two burner cooktop, but really our read of the market and the other conversion in the market has a full regular range of stove. We're doing that route. We want to eliminate any possible reservations people may have about that small kitchen delivering what they need. So we're adding a stove and the partition wall now when you walk in, you have this beautiful little kitchen to your left. A little dinette table. The fridge is against the partition wall. And then you pass the partition wall and you have a bedroom area. So it feels a little bit more like an apartment. And then of course the bathroom is behind that.

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Justin: [00:08:37] We had dividing doors between the units. We put them in. Some were existing, but we put them in because we wanted initially flex suites where you could rent them singly or doubly. On a lot of these, what we're going to do is we're going to remove the trim and we're going to put an insulation and drywall so you won't even see the connecting door. So the feel of a self-contained apartment is going to be greater and we think it's going to be a real success. This is for Seven Hills. Now when we get to Casa Bella, what I realized was I like that layout of Seven Hills so much I said, I can recreate that at Casa Bella. So previously what we did is we had a little kitchen run back by the bathroom wall. You walked in. There was your bed and your side tables and stuff and then there was the kitchen area in the back. But really from a construction perspective, it's not too hard to change that. We're just going to run a chase wall, which is basically a frame out walls with studs and you run your pipe and your electric through that. Instead of doing the bathroom in the back by where the bathroom wall is, we're going to do it over by the front window, just like we're doing at Seven Hills.

Justin: [00:09:50] We're going to have our little kitchen run and our stove and our partition wall. We're going to create sort of a mirror layout with the same basic feel. That's a 300 square foot unit versus about 270 at Seven Hills, but still small. But it will have that nice feel where you walk in. You have your really nice little kitchenette here with a full stove, full size fridge, and then you walk in and you have your bedroom area and that bedroom area because we're running the partition wall. We'll have an extra outlet. We'll have an extra light there, which will create more light for the bedroom. So I'm really excited about this final tweak and design that we made for both the properties. And we should be having the final permit now ready for application. I know I've said this before, but this was it. We had a meeting today ready for Seven Hills this week. As early as this week. Well, today is Wednesday. We hope to get in Friday and Casa Bella next week. From there once we start renovating in sections, it's about leasing up and we have some interesting new prospects on lease up with a new type of tenant for both of them. 

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Bob: [00:11:03] More on that later or do you want to talk about that now?

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Justin: [00:11:07] [] now. A couple of months ago I was talking in Newport and one of the other guys was talking on another panel, worked for Morgan Stanley for many years and he's a Navy vet and very interesting guy. And he says, In any county you have in the US, even in the lowest populated states, which Florida certainly is not one of the lower populated states, but in any county you have about 5000 vets on the waiting list for homes, retired vets. So that may be a market we target. I've met with him a couple of times already. We're digging a bit deeper, but we think that that could be a very rich sort of ready to go market for these two properties. We're exploring that. We have other market segments that could appeal to from just general retirees to young couples, things like that. But this is a new twist that we think we're able to gain a more direct pipeline to the vets who are receiving. They're receiving certain benefits and so forth already. And we think we can deliver to them the absolute best accommodations that they'll find for the money and end up with a really strong tenant base. So we're working on that more right now. It's very promising.

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Bob: [00:12:17] Wow, that's great. Good. Homework there. That's terrific. I'll be interested to see how that pans out. 

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Justin: [00:12:27] That's one of the reasons I go to these conferences as a matter of fact, met that mean speak at them but I meet a lot of people and that's why I speak at so many and one of them is a possible new lender for this conversion actually, a New York fund that I sat down, I had lunch with up there. We have a few other people bidding on that finance as well. So I don't just go there to hear myself talk. I learn and make valuable connections. So we'll see if these bear fruit.

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Bob: [00:12:57] Sounds great. Let's go across the street from Casa Bella to GSA. How's all that going?

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Justin: [00:13:04] So Renaissance is going well. Again we have a new manager there now for a few months and she's really doing well. She's really reduced the collections issue that we had sort of a hangover from COVID. It's almost completely gone. She has sharpened up the operations overall. A few of the tenants who were having their laundry on their balcony or whatever it was, she's cleared that up. We generally operated without that type of environment. But in transition sometimes you find that happening. And she is now 95% pre-leased as of September. The summer is when you do have some transition. A lot of people getting ready for the new school year, whether it's parents with kids or whether it's graduate students or seniors, some of whom also live with us. So we're at 95% pre-leased as of September. We drop down to 88% lease. But again as of September, we'll be at 95% pre-leased and I think we'll probably be at 97, 98% by the end of October. We have no deferred maintenance issues of any significance. We've taken care of a few of the older ACs. We've replaced most of them previously when we did the renovation. So all in all, we really like the way things are going at Renaissance. And again, we'll be paying another 10% dividend as we typically do cash on cash after having returned something like 65% of investor capital last year. So Renaissance still continues to perform well.

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Bob: [00:14:31] That's great. Good deal. You want to go to Oklahoma or do you want to make a stop at Port Saint John first?

Justin: [00:14:38] Let's stop at Port Saint John. That's one of our four properties in the fund so Port Saint John is 78,400 square foot shopping center. We just redid the roof finally over the supermarket, about 55,000ft². And again because we're a roofing company ourselves, we contract directly with the crews. These are proven crews. We negotiate materials directly with vendors who sell us some very different jobs. We did a job that would normally cost you probably around 7 or $800,000, 400, something like that. So we saved. And that's very, very solid job. We've done a few hundred thousand square feet of roof. It took us so long to get to do this just because the supply chain issues. We only finally got the materials a few months ago. That's been taken care of. We've had we got a few new tenants. We've had a few of our smaller tenants leave. So we have 1900 square feet out of 78,400. So that's something like on a square foot basis around. We're about 95%, 96% occupied. Good numbers. We do have interest in our outparcel. We have a lot of people talking to us about that.

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Justin: [00:15:52] We have to be able to invest more time that could add some more about 7 to 800,000 to maybe $1 million in value to our property, a property that we bought for 7.8 million. So it could basically add 10% off the get go. We've already accrued the value that's grown on that property since we bought it two years ago. I'd say is at least 2 million we would sell. If we sold it today, it would be at least 10 million in change. And we're in it including the roof for maybe [eight three]. That's worked out very well on that basis. But we think this outparcel would give us some additional value. And those two small spaces, we're going to contract with either 1 or 2 local agents to fill those for us. That's the story in Port Saint John. Again it's been a really great new area of real estate market that we got into. And once we finish our conversions or have them mostly done, we're going to be looking at more grocery anchored shopping centers.

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Bob: [00:16:52] Cool. All right. I think it's time to go west. Tulsa, Oklahoma.

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Justin: [00:17:00] Tulsa, Oklahoma, one of my favorite small towns in the world. Love Tulsa. It's a great town. And our 96 units there, which we finished renovating almost a year ago. One issue is we're just adding separate meters to about 40 of the units. We're still finalizing that. That should be finalized in the next few weeks, but that's only as two vacancies. So very high occupancy, something like 96, 97%. Our manager there is doing a good job. Really boring in the best way possible.

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Bob: [00:17:35] Great. So things are going well there. Let's move to the other properties in Tulsa.

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Justin: [00:17:44] Okay, So we'll go to Oklahoma City. So Elevate 126 units. We've 94 units rented now. My property manager with the units that are being punched out today has 113 in her hands. Those are being punched. So I'll have them, let's say by Friday. So there's 13 left to really finish. Of those 13, 11 of them are probably 80% done. And then we have two legacy people because of housing authority issues from the previous management. We're going to relocate one within the community. I think the other one might be leaving and we'll renovate those in about one month's time. So we expect everything to be done there in mid September. Now today we had people compete on refinancing that. And we had a lot of people what's called the re-trade in the business. So re- trade is like back in the day when you and I were working the financial markets with different areas of financial market. But you remember the term bait and switch.

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Bob: [00:17:44] Of course.

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Justin: [00:18:52] You showing us you deliver something less, right?

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Bob: [00:18:55] Right.

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Justin: [00:18:56] Once you got them a little bit [pregnant]. So we were left at the altar a couple of times recently because of the refinance of Elevate, because of the crazy market. Not only the higher interest rates, we're willing to deal with that, but just banks reneging because their committee all of a sudden changed their policy even after they initially kind of gave it a soft approval, all these types of things.

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Justin: [00:19:17] But this particular company we're doing business with, they're out of New York and they were brought to us by a large regional bank, which is very unusual because usually the regional banks would do the lending themselves. But again I mentioned this in the last call I'm pretty sure. It's a sign of the times that the regional bank is now brokering deals with a private money lender. And there are substantial private money lender. They probably move at least a half billion dollars, maybe more than that a year. So they're not a mom and pop shop. But anyhow long story short, we were set to close on that refi even today. And we're very, very close. We're just going over some a bunch of details. But because typical delays you run into, we think we're going to close Friday at latest Monday. So the refi and Elevate will close that will return around $4 million in cash to the fund. We bought that property. Our CapEx renovations has been around 6 million. We funded all that with equity capital, all of it. So we're pulling a big chunk of that out about 700 grand of that well a lot of that will go back to the fund. And about 700,000 of that will get us caught up on the first quarter and the second quarter distributions for the fund. So the fund caught up with those payments will have paid 7% quarterly to the fund since inception even through our renovations and so forth.

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[00:20:44] And we expect to be completely done with Elevate. The only last two major exterior projects, we're about to repave the parking lot in early September. A pergola is going to be, we're going to start construction in the next week or two and we're going to finish these units. So our goal is to be out done 100% buttoned up by mid September there. And by the end of September, we hope to be closing in on 90% occupancy by the end of October to be at 95. And if we're hitting those numbers, we could bridge loan we're getting now, which is around 7 to $8 million. There's a draw schedule for the final construction. So they hold back $650,000, which they release as we finish our construction. But it's between 7 and 8 all in. We could replace that with a new loan, I would say early to mid 2023, but we'll take our time. We have 18 months and then we have another, I think nine month extension I believe it is. We'll take our time. We'll be watching interest rates. If they start a downward trend, we'll wait a little bit until we pull the trigger on the refi. But we should close on the permanent refi. The bridge refi will close this Friday or Monday at the latest and then be all done with the construction mid September. So far, so good.

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Bob: [00:22:02] Well yeah and you've got a nice window after that to kind of see which way the wind is blowing. 

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Justin: [00:22:10] 100%. That's right. Yeah.

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Bob: [00:22:12] Cool.

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Justin: [00:22:12] And then last but not least is our more Oklahoma ascend.

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Bob: [00:22:16] Yes, Ascend. Let's talk about Ascend.

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Justin: [00:22:19] Very good. 146 units. Our issue there was we ran the inspectors through a bunch of curveballs with us making us renovate all these balconies before they would issue CEOs. So we've probably renovated and we have, I think, 72 balconies. We have to redo them entirely, not renovate I'm sorry, scrape them and build new. So of those 72, we've probably rebuilt close to 50. So we rebuilt a lot of them, but then takes a while to finish all the other details and get your []. So right now we're at about 30% occupancy in that property. So it's a property. Our strategy, we're hoping to keep it more highly occupied. We were not able to execute that. So we're low occupancy right now, but we're delivering on order of about 30 new [] a month. So right now, in the next so we have about 41 units that are rent ready or rented, most of them rented. By the end of next week, we're expecting to have 16 more. And then by [] month another 16 to 24. So with the pace we're finally getting over this balcony hurdle. We could be 100% [] in October and we could be 90% occupied sometime in December. So that's kind of the pace we're on right now. We've been throwing a curve ball, but we're sticking with it and we're making good progress as far as the balconies go. And finally, we're in a good rhythm on getting our [] the property as well received and that when we have units that are sealed and we offer them, we're leasing up at a good pace.

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Bob: [00:24:03] So the demand for ascend, the demand is out there. That has not been the issue. Okay.

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Justin: [00:24:10] Very strong. So just these inspector things, wish they would have told us earlier because we did have conversations beforehand. But you have to you have to play the cards. You're dealt and learn what you can. And we're finally making good progress. So we expect to be highly [] again in October.

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Bob: [00:24:28] Oh, that's great. Good deal. Wow. Well, that was quite a tour Justin. Anything else to add before we sign off?

Justin: [00:24:41] No. We're going to be focusing on getting these conversions buttoned up. These construction jobs will be done. I do think we're going to enter a very interesting real estate market in the fourth quarter and going to the first half of 2023. So our job is to focus on what we have. Once we get them buttoned up, we may have some good deals going forward. But right now we're going to focus on what we have.

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Bob: [00:25:09] So you taking care of the current business and when that's done, you'll be able to look outward again and look for some more opportunities.

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Justin: [00:25:17] That's correct. Yeah.

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Bob: [00:25:18] Okay, great. Well Justin, it's always great talking to you. I look forward to our conversation next month. You take care and we'll talk to you soon.

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Justin: [00:25:27] Thanks, Bob.

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Bob: [00:25:32] Yes, sir. We'll do.

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Justin: [00:25:35] All right. Take care.

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Bob: [00:25:37] Thanks.