June 2022 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 usual, we're going to update you on all the standalone investments in Florida and keep you abreast of what's going on with the underlying investments in the Cap Plus Diversified Income Fund. I say it every month. I'm going to say it again. Through booms and bust Pax Properties has never failed to make a mortgage payment or deliver a positive result for investors. Justin, with that said, how are you?

Justin Ford: I'm doing great, Bob. Thank you. How are you?

Bob Irish: I'm doing just super thank you. I'd like to do a speed round on the properties in Florida, but I almost don't want to do it because last month the numbers were so incredible. I just don't know what could top that, but why don't we start there and as we usually do at the Chateau Ghetto, former Chateau Ghetto, Melbourne, Florida.

Justin Ford: Well Melbourne continues to do well. Melbourne this last month came in around $64,000 in EBITDA on a budget of 56. So it beat it again. So we're beating budget. We are a little bit under budget on revenue yet we're over budget on EBITDA, so our GM There operates very effectively, very efficiently. And soon I think we're going to start growing sales again because Melbourne, we've been reinvesting again. We just got new furniture and that took quite a while in COVID, the whole furniture situation. I told you a story once, all the old furniture we put outside, we couldn't get anyone to take it. It was in good shape, because the shortage of manpower and we had a Goodwill store right next to us and we just couldn't even give it away.

And I think you gave me a great idea on that. you told me a story, but we finally moved it, I'm not sure how. This month we're also above EBITDA, we're at $50,000 on a budget of $34,000. So that's very positive. When we go further south to Vero. Vero is going to double its budgeted income this month, $72,000. That was last month, actually $72,000 on a budget of 34 and this month $65,000 on a budget of 23. So we're beating both the revenue and the earnings there on both of them. 

Vero this month looks like it's going to do $65,000 in earnings on a budget of $23,000. That's our southernmost properties. We go to Ocala in the middle of Florida, the great horse country. We had our quarterly meeting there last week. We had about 35 or 40 of our group there. And we follow a process called traction or EOS entrepreneurs operating system. It really helps us get aligned as a company. We have all our property managers there, various department managers, director of ops, our controller, folks like that. And it was a very productive meeting. We have a really great team.

And when we're in Ocala we went to this beautiful grand view horse farm, where they raise all these enormous Clydesdales. That was really inspiring. It was a beautiful place and in Ocala the market is booming and we are too. Last month, our budget of revenue was $270,000. We came into $289,000. We probably doubled our EBITDA. It was scheduled around $56,000. We're probably going to come close to $112,000. And this month we're looking, our budget was $70,000 in earnings for June. We think we're going to come closer to $88,000. So those continue to go very strong. 

The two properties that are still struggling coming back, is Baymont and Seven Hills. Baymont basically broke even last month on earnings. It didn't make any positive earnings and it's going to break even, or come in a little short this month. We're going to turn it around soon, but it's not there yet. Seven Hills I misreported last month, that was one piece of good news that I had wrong. Last month that actually lost $12,000. The forecast we got for last month was off. We have a GM who's new on the forecast side. 

So I was incorrect about that, but in June, June seems to be actually the first month since March of 2021, that we were actually going to beat budget. So in June at Seven Hills, we are scheduled to make $57,000 in profit on a budget of $45,000. That market has been severely impaired, as I said, and we're working our way out of it, so it's taken a while. But finally we're seeing really, really good news in Seven Hills this month. And Baymont next month, we're finally starting our renovations. We have our drawings coming this month. We're going to be installing cabinets in all the units, so that they have basically like bar, basically they look like an apartment without a stove, a little micro apartment. 

So we're going to be able to do more extended stay. Actually the apartment leases, perhaps limited amount of student housing, about four miles away from the university. So we're still taking very significant action there. And then at GSA we are scheduled to do about $98,000 in profit this month, which is right in line with budget. We had revenue move-ins, we're continuing to move rent. Our rents now are probably more than they were when we first acquired the property. And so all the outside, the independent properties continue to do well. Baymont is our main challenge. We're about to take significant action on that now.

Bob Irish: Justin, thanks for the update on the standalone properties in Florida. Let's talk a little bit about the underlying investments in the Pax Diversified Income Fund, what's going on there?

Justin Ford: Well, Bob, the first thing is that we basically completed our renovations in Tulsa in a year. That was fantastic. We're just finishing now. There are two units pending evictions, and then we started those two and just finishing, we're waiting for some materials for the individual meters and the electric on 40 of the 91 units. But it's growing beautifully. We have very strong demand. Our rents are above proforma. In Elevate, which is in Oklahoma City. And we're picking up the pace for lost time previously. We still believe we can finish that entire project by the end of September, that means completing around 30 units a month and starting in July. 

We believe we can do that because we have the subs line up. We have the materials coming in. We've made progress in some of the worst units. And we've left some easier units there. So we're basically hitting our stride there. And we've made great deals of progress on the amenities, from the pool, to the gym, to the laundry room and things like that. 

And then Port St. John that has been pretty much turn key investment. We lost one small tenant, a hair salon. She turned in the key. She said she wasn't making a go of it, even though she has a few years left on her lease. So of our roughly 78,540 square feet, we have probably, still leased out around 74,000 and change. So we still at 90 something occupied. We're still producing. Even with her absence, we're going to be producing about 10% cash on cash yields.

We have a strong tenant base from the Win Dixie anchor to Planet Fitness, to Pinch a Penny, Win Dixie liquors, Papa John, Subway and stores like that. Solid sort of online resistant type businesses. So that goes well, we just have to lease up now for these small bays, we have quite a few interested parties. But that has been an overwhelmingly positive experience, our first grocery anchored retail center. And then our next acquisition, as you know, is Mansions and Moore, Oklahoma. That's 146 units, and that we are closing on, in about 10 days, on June 15th. We are working out final details and our goal there is to get all that renovation done within a year as well. We're going to shoot for 10 months actually. And so far we think we've learned enough that we'll be able to pull that off.

Bob Irish: Wow. Well, you guys certainly have been busy in the last month. Justin let me go a little bit off track here. I've been reading as I'm sure everyone listening to this call has been reading, about inflation in this country now and how out of control it is and how maybe it's not transitory. And I just wanted to get, you've been in this business a long time. Typically, how does real estate do in an inflationary environment? Is this good news or is this bad news? Are you indifferent?

Justin Ford: I wouldn't say it's necessarily good news, but there's sort of a silver lining, I guess, as far as real estate goes. So recently I dug into about 60 years of research. An associate worked with me and we pulled up everything on housing prices, construction prices, rents, federal funds rate, ten year treasury and on and on. We did correlations and all sorts of things. And what I saw was, you wouldn't be surprised that the ten year treasury and housing prices are inversely correlated. Not entirely, but somewhat inversely correlated, as the 10 years of benchmark for the 30 year mortgages. The reason for that is because the average person holds a home maybe 7 to 10 years. 

And even we're talking multifamily, apartment units like we buy of 150, 170 units more, there's a strong correlation of that to general housing prices. But the housing prices are where you have all the data going back. So the long and the short is, as interest rates go up, housing prices to us go down in the long run. But there's almost a perfect correlation between inflation and housing prices. It's almost a one, that as change in housing prices goes, whatever direction that is. So goes the change in the CPI. 

In fact, when you look at the consumer price index, the basket of the consumer goods upon which they create the CPI, 40% to 42% is made of housing related items, everything from copper plumbing, lumber, rent, heating, petroleum products and all this stuff. So it's very hard to imagine the CPI going up significantly without housing continuing to go up over sustained period. In fact, when you look at it over the past 60 years, housing has actually increased by two and half percent more than the CPI.

Now this doesn't make housing crash proof, as we know in 2008. So I looked, there are three periods where housing corrected significantly in the last, let's call it 50 years or so. So in 1980 when interest rates were the ten year treasurer is at 11 and a half percent, in 81, it was at 14% and so on. And Paul Vaulker, who by the way was appointed by Jimmy Carter, people don't realize that and started to do his work in the Reagan administration. 

But during those times, of course, if you were holding real estate, real estate went up. It went up in 1980 by 6%. It went about 9% in 81 and maybe 1% in 82, but those are nominal price changes because the inflation change was more. So when you adjusted for inflation, they fell during those three years, those three calendar years, about 14%. And that's the calendar years. If you went from peak to trough, it might have been 20%. And if you went in your worst markets, it might have been 25%, 30%. So there is some vulnerability in it. 

Now we move on to the next one, which is 1990, during the savings and loan crisis and when properties started to adjust there. In nominal terms, it was maybe flat, in 1990 it was up 1% and then 91, 92 it was down a little bit, 1%, 2%, that kind of thing. Then 93 it was up again 2%. But our inflation kicked back up in those years. So in inflation adjusted terms during those four years, we were down somewhere around 15% of those calendar years. And again, if you do peak the trough, maybe 20, the worst markets, maybe 30. 

And of course comes old 2008. That one there was the wakeup call about what cheap money can do, to run wild and low rates for so long. The inflation adjusted return during the four years from 2008 to 2012, those calendar years ,was negative 23%. Again, if you go peak the trough, it was closer to the 35, worse markets you're looking at 45, 50%, as we saw here in Miami, in South Florida. So that sets the stage. That's kind of what things were. So, people ask me, well, where do you think interest rates are going to go? Where do you think inflation is going to go? And I have my hunch, especially after doing all these 60 years of research. But you should never invest in my hunch. I don't know where purchase rates are going to go. 

The answer is, I don't know where any of it's going to go. I do have my hunches. I have my educated guesses, but I know one thing for certain, I know what I'm going to do. What I'm going to do is I'm going to only buy a cash flow price. My long term debt is going to be fixed-rate amortizing loans and I'll combine the two in a way that produce positive returns, positive leverage, which increases returns without dramatically increasing risk. I'm not going to hang my head on appreciation. I'm not going to hang my head on anyone's Nostradamus type forecast, where there's a fed chairman, a PhD for this, and certainly not a broker. I'm also going to focus on buying markets, that are showing steady long and short term growth and where I can buy close to or below replacement value.

Because if we do get sustained inflation month, these apartments that we just finish in Tulsa, whatever it was, $80, a square foot, best in class wood cabinets, quartz countertops, steel, $80 a foot. What's the value of that as the cost is construction, if we keep going, goes to 200.  What's the value of the one we're finishing at Mansions all in at $95 a foot. At Port St. John at 100 a foot. So we are value buyers more than ever in this type of market. We always have been. We like to create value. 

We'll buy newer turn-key stuff. If there's a big crash, that's when we'll waltz into A side Miami and buy a luxury buildings at a discount. But until then, if we can't buy cash flow, we don't buy. And if we can't put on permanent amortizing loan where the cash flow can service that comfortably and create positive leverage, we don't buy, but we're finding those deals. So we're still buying and we like our prospects going forward.

Bob Irish: Well, Justin, that is comforting to hear. You're doing what you've always done. And as I said at the top of this call, through booms and busts, Pax Properties has never missed a mortgage payment or failed to deliver a positive return for investors. Just keep doing what you're doing, Justin. It's good stuff. I look forward to checking in with you next month and have a happy 4th of July.

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