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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, but it's important, especially for our more recent investors 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, how are you? It's good to have you back.

 

Justin: [00:00:44] I'm doing great, Bob. I'm here in Florida with the heat index at 100 and something. But even though when it's muggy, it's still Paradise.

 

Bob: [00:00:53] Yeah, you guys have been getting dumped on rain wise and the temps are up big time. I know that.

 

Justin: [00:01:01] Yeah, yeah, yeah. But still I can get to the ocean 2 or 3 times a week. Take a swim. Um, it's still not a bad place. I know you like to seek refuge out in Utah.

 

Bob: [00:01:11] Well, there is air conditioning of course.

 

Justin: [00:01:15] That's true.

 

Bob: [00:01:16] Makes the whole thing bearable. Yeah. Justin, how are things going at Pax Properties? Let's talk about the properties in Florida to start. Maybe you give us a quick overview of what's going on there.

 

Justin: [00:01:30] So the hotels just came off their best years ever, that trend is continuing. We just got our weekly star reports and of our Southern properties, the ones in Ocala, which is really central Florida, Melbourne and Vero, their revpar, which is the revenue per available room is they're all above their index. So they're beating their competition every single one of them. And some you know Melbourne like Vero is up you know versus last year like 58%. So they're really, really cranking. The other two hotels we have Casa Bella and Tallahassee, which have been struggling, been below their index and losing money for a while. Ever since Covid. One was born at Covid one, changed brands during Covid, went to independent. Casa Bella is narrowing the gap. But Seven Hills is a puzzle we're not solving yet. However, as you know, we're converting both of them to apartments.

 

Bob: [00:02:29] Right, the conversion process is moving along. Last time we talked, you said that the city was doing everything they could to, you know, hustle this thing through. Where are we on that?

 

Justin: [00:02:44] Yeah. And they've been people of their word. I think about two and a half weeks ago, we had a meeting in Tallahassee with someone from the city manager's office, the Housing Authority building, and a few other people. And they gave us strong indications on sort of opening the gates for us, streamlining the process. We're still working with final tweaks on architectural plans, but we hope to have our permits submitted next week and we hope to have work started in July. So we think it's going to go fairly quickly. We have a few lenders bidding for it, but the lending situation has been, as I mentioned last time, you know, all these lenders are are retraining. That's why I mentioned the possibility of the debt fund at the end of the year. You have all these banks that are really tightening their standards to a drastic extent because they're afraid of losing deposits. They have the threat of virtual bank runs. They have the Federal Reserve possibly raising reserves. They have higher interest rates. They've got all this stuff going on. So they make an offer, but you can't count on it.

 

[00:04:01] The offer can change dramatically. I mean, that's happened to us, I'm going to say four times. And it wasn't because of the property and it wasn't because of us as the borrower. It was because in one instance they were involved with public bank or the committee changed their policy or who knows what happened. But so we are still getting our financing for that. In Oklahoma there's a major refi we'll talk about later. But we've been left at the altar four times. So, we're out there being very aggressive. We're dating a lot of people right now. And we expect to have some meaningful commitments on some important loans this July. And again, we'll talk about the Oklahoma portion soon. But as far as the conversion, the physical part, we have all the subs lined up, everything else. We got the suppliers lined up. We got the city at our back. Once we get our plans, we think it's going to be a very fast conversion.

 

Bob: [00:05:05] Okay. That's good to know. Let's talk about GSA Governor Square for a minute before we leave Florida.

 

Justin: [00:05:13] Yeah, so GSA struggled early in the year because we had a change of management. Our new manager there and our new director who hired and is working closely with her. They're doing really tremendously. They got occupancy back up to I'd say now think it's about 92 plus. Whatever tenants we had in arrears that the arrears are shrinking. You know at one point they were significant. Now their industry average, maybe 10, or 15,000 for a property that size and I think we'll whittle it down from there. She's also pushing rents. She's pushing rents beyond, you know, the guidance we gave her and she's getting it. So, rents have gone up, just boggles my mind. And as a property owner, you know, we have to charge it because we're facing higher labor, higher taxes. Our insurance but I looked at our insurance over the last seven years. We have it charted out. At GSA when we started, our total insurance cost was $44,000. And then it went up to like $50,000 then like $56,000. We're now at about last year we were about $147,000.

 

Bob: [00:06:25] Oh, my goodness.

 

Justin: [00:06:27] But right now we just did some things. We'll probably bring it down to around maybe 130. But it's crazy. I mean, you asked why rents are higher, because that's what inflation does. Not withstanding the  high cost of money at Renaissance, of course, we locked in a 4% rate for ten years. So we're good there. But again, everything else as mentioned has gone up and as well as materials as well as utilities and so forth. So we are pushing rents where we can get them. And even when we push them significantly, we're still relatively affordable. We're not the highest in the market, even though our quality is among the very best. So the long the short, very pleased with the way things are going at GSA. And we think we're going to have a record year there in 2023. We're going to end with a very strong year.

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Bob: [00:07:18] Fantastic. Why don't we shift gears and talk a little bit about the what's going on in the fund?

 

Justin: [00:07:25] Ok. Let's start in Florida. There's this one property in Florida and then there's three in Oklahoma. So Port Saint John is our grocery anchored shopping center. I think we have 17 tenants. We have a Winn-Dixie supermarket, which as soon as we bought it, they extended for ten years during our contract. And that's important because that keeps all the other business there. Our second anchor tenant is Planet Fitness. And people like to go out to gyms. Myself, I hit the bag in the backyard and then I go to the ocean myself. But unless I'm like doing jujitsu with my brother who's trying to break my arm or I'm going to boxing gym occasionally, but that's where I am. But people love to go to gyms. It's a social thing. It's not just a fitness thing.

 

[00:08:09] So those are e-commerce resistant. I guess there's Peloton. You know, Peloton stock is going way down. I guess people were happy with the Peloton stuff and they couldn't leave the house. But now they want to get out of the house and they want to meet people and exercise in the gym. That's a strong business. And that's our second anchor, Winn-Dixie Liquor, strong anchor as well. And then right now, we're at around, I think we're 97% []. We had a pet store [] and we had cricket wireless []. So that's 2600ft² out of 78,540. We're marketing those. We think we'll get them filled within the next three months. They're not like apartments. Retail is not like apartments generally, but it is a strong market. And I mentioned before, not last month, maybe six months ago or so, we have an Outparcel. 

 

[00:08:59] So our property sits on 10.1 acres on US 1. So it's got a good amount of traffic, certainly over 20,000 cars a day, maybe 30. So in the front there's like maybe a Burger King and a Kentucky Fried Chicken. They don't belong to us, but we have a parcel adjacent to them that can be developed. And it happens to sit on a piece of land that's used for stormwater drain off. There's a way that we may be able to accommodate the same amount of stormwater drain off elsewhere in the property and make that parcel on US 1 available either for purchase or for lease. And that could be big. If we sold it, I think we'd get at least somewhere around a million bucks and we bought it for 78. So it's like knocking the price we got retroactively down 12%.

 

[00:09:54] I would prefer to own it and just lease it. They build out, we give them free rent for a few years, but after that you have all this income, future income, the long term contract and with a national chain. So today we were speaking with a retail broker strong in the Florida market and they are tenant reps. The tenant rep represents stores that want to find space, change right, for like 50 brands. So it might be a fast food brand. It might be a bank. It might be a gas station. It might be a coffee shop, etcetera. So they're very interested in working on that site. So I'm hoping that within the next few months we're going to start to get some offers because our property is a C property. It's really nice C property and we're going to make it a bit nicer. But basically the area is like a C area and it's not a higher end shopping environment let's say. It's likely that people will want to buy that outparcel rather than lease it. So worse comes to worse, we take a big chunk of cash from a piece of dirt we're not making any money from right now. So we like our prospects there. That's Port Saint John.

 

Bob: [00:11:00] Good. That's very exciting. Let's go to Oklahoma.

 

Justin: [00:11:06] So Oklahoma Apex is doing very well. Our manager there and our regional out there have really combined to keep it focused at 91 units. I think we have maybe two vacant and we tend to keep at that level around 95 to 97, 98%. We've heard about all this stuff in Oklahoma, like they're part of what they're talking about the heat dome, right. It's very hot out there right now. [Yeah] And they also be getting tons of wind, right. And our insurance there has skyrocketed too. That's always been a tornado place, Oklahoma. [Yeah] But anyhow, so we had a nice big tree fall on our newly remodeled pool. [Oh] So thankfully no one was hurt, but the tree did drown. So we're going to pay whatever five grand to chop that up and haul it away, it's a big one.

 

[00:12:05] But other than that, the property's performing well. So that was a real pleasure. We bought that property for, what did we pay him? $40,000 a door, we put in maybe $30,000, I think. So we're there for like $70.000 a door. And that thing is worth at least $90,000 a door. But as the market recovers, maybe in a few years it'll probably be at least be $100,000 a door. So we have really nice numbers that are working for us. So Apex, that's a stabilized property. We're really happy about that.

 

Bob: [00:12:38] Yeah. How about Ascend?

 

Justin: [00:12:44] Well, let's go to Elevate first because Elevate is [Cross-talk].

 

Bob: [00:12:48] We'll talk Elevate first. 

 

Justin: [00:12:50] Because Elevate is almost a stabilized property. Elevate, we bought it'll be, I think, two years ago in August. And we did a huge renovation. So it's been a two year renovation. We probably could have done it a little sooner, but we took off all the mansard off the buildings, reinsulated everything, reframed the exterior, put on all new stucco. So it's got a brand new envelope. It looks modern. The envelope was sealed tighter, so it's more energy efficient. We put in all the windows, etcetera. We did all the amenities and in the interiors we did all the 126 apartments. I would say like 15 or 20 apartments, we jackhammered the concrete floors to get down to the cast iron pipe and replace it and we [Inaudible].

 

[00:13:36] So it's another one of these where we're not just putting lipstick on it. We're creating an asset that we can own for generations, right. So that one, we're shooting for end of October. Out of those 126 units, we've delivered 109 to management to lease up. They are 75% leased. They're 80% pre-leased. I think we'll be done by July. And when we're done, we'll have spent around 6 million renovation. What if for five for spent six. That's 126. So we're, we're at about $48,000 a unit there. So in renovations again but that includes the the common area amenities.

 

Justin: [00:14:22] It includes all the mansard I talked and and all tremendous amount of plumbing underground behind the walls work and everything else. But still when you're done we're at 11 million for 126 units really in an A minus area. I mean, maybe even an A area. I mean, it's in a really great area. It's a busy street. It's probably almost 40,000 cars a day across from a books-a-million by a Chick fil. By a bed, Bath and Beyond. Even though they're going out of business. Those are all retail markers of people who did their demographic homework. And, you know, so we're in it at what's that, maybe 85 door or something like that. And that thing, even today is worth in the condition it's in. It's worth north of 100 a door, you know, or close to a 100 a door, but I'd say a little bit north of it.

 

[00:15:07] So I think when we did the add value, we really created additional value, which is what that work is all about. We have tremendous demand. We have pushed rents there as well, and we think we had a good offer on a refi. So, I had this one. This one is a tale. This one is a tale for like bourbon and, you know, large ice cubes. But we had an offer from a local bank and then they came and they changed it dramatically. So we dropped them. We worked with this great broker. We've done two deals with, and they're also an agency direct lender. We'll work with them on that. They had a good offer, 7.8 million. It was high. It was a bridge loan around 10%,11%. But we're going to transfer it to a permanent loan in about a year. 

 

[00:15:57] That loan the guy said we can close in 28 days. All right, great. It's a known group. I know the group. The benefit of that loan, they were going to close at a certain number that would give us about $4.5 million in cash back. So great. So we got a bunch of cash back. They come back, they can close it 28 days. They go radio silent for ten days. They're not even returning the broker's call. Then finally, they get back on the line and they issue an application and it's $6.9 million. You know, 900,000 just disappeared. And this is typical. So now and they're still wanting to do the loan. But while they were doing that, there was like another person who was courting me and they had a better offer. But I said, look, I'm already committed to these guys. But now that they changed their thing, I went back to the other one. It's a big bank. It's a well known bank. And this well known bank, Bob, usually will lend. But this bank is brokering. This tells you where the market we're in today. They are brokering because the bank what I infer about this is the bank is like, look, we're playing it close to the vest. You know, maybe we invested too much in ten year treasuries at 2% yield. We can't lend a lot of money, but we need to make money. So you guys go out there and broker the deals for the debt funds. So, that's basically what they're doing. We're working with a large bank I won't name right now. And they got another large debt fund involved or sort of medium sized. So we went back to them. They're offering 8.15 million. And so after this other one went from 78 to 69, I got these guys, the new guys on the phone. I said, Look, guys, first of all, did this go through all your decision makers? I don't want to be this bait and switch thing.

 

[00:17:41] One of the guys on the phone says, I'm one of the principals. He's one of the three founding principles. And yes, my other partners. Okay, great. So what I'm looking at is this what we're going to close on or is there going to be, you know, a change at the alter? Am I going to get a little bit pregnant? And then all of a sudden before we close, boom, it's going to change. And so they gave me some assurances, but they said, let us see a bunch of the latest data. I just sent them a bunch of the latest data.

 

[00:18:07] So the long and the short on that. And I know I'm going a little bit too detail, but I hope some of our listeners or readers will enjoy the the miserable detail because they probably experiencing this in their businesses too to some extent. So either we'll go with this new group at around 8 million. They'll probably trim a little bit off of it. Or if we don't, this other one at 6 to 9 is now chomping at the bit. The six nine will return to us, you know, $3.5 million or 3.8, something like that. So that's where we are. But all this slows things up, Bob. You know, it's what a refi that would have been done two months ago. We're trying to get to the commitment letter now, you know, because it's always going back and forth. And once we get that refi, we're going to pay the distributions for the first quarter of the fund and the second quarter of the fund. We want it to hold cash until we got the refund right. We didn't want to be cash thin in this environment. So anyhow, so that's where Elevate is. It's looking great. It's got great demand. The last piece of the puzzle just to finish everything in July, and I think at the end of July, we'll close out refi as well with either maybe $3.5 to $5 Million in cash. So we like on there. Yeah.

 

Bob: [00:19:21] Wow. What a struggle.

 

Justin: [00:19:25] Yeah.

 

Bob: [00:19:25] So, what else do we need to talk? Ascend. 

 

Justin: [00:19:29] Ascends. Yeah. Sorry. Ascend is the last one. So ascend has been really tough along the short is, we've had inspections that keep asking more things of us that prevent us from getting our certificate of occupancy. So it's keeping our occupancy very low. And that has made us it's now triggered a closing along the loan where we have to put up $340,000 and we have to put up $340,000 in interest reserve because of this. But we'll handle all that. And we're getting past this inspection thing. Yeah, I think I mentioned last time we have 73 balconies. We're going to fix some. We had an engineer involved. All of a sudden the city said, you know what? Rebuild them all. So we've had to do all that and they won't let us give COs to buildings until those are done, etcetera. So without going into too much detail on that one. We've been yanked back and forth on the whole permit issue, but we've been working like crazy. Our guys have been putting out tremendous, tremendous effort. Even in the 105, 110 degree Oklahoma heat. They're out there, they're cranking away, and they're working Saturdays and often Sundays. And we think tomorrow we're going to get a temporary certificate of occupancy for two of the buildings. And then from there, the goal is to get one a week.

 

[00:20:44] So it's been a very tough couple of months when this whole permit thing popped up. But we expect the next 3 or 4 months that we could finish the entire project four months from now. And we have strong demand waiting for apartments to become available. So that's where we are with Ascend.

 

Bob: [00:21:04] Wow. What happened to the good old days when you could just take the inspector out for a nice meal and a thick envelope full of cash and everything was great?

 

Justin: [00:21:14] You know, Bob, if I meet someone like that, I'm going to hire the guy who knows how to do that.

 

Bob: [00:21:20] Listen, Justin, you were telling me that you spoke at a real estate conference in Newport, Rhode Island, recently. And I know last month you gave us sort of a flavor of how you saw the real estate market. Any insights from that conference in Newport that you'd like to share with us?

 

Justin: [00:21:41] Yeah. Yeah, it's very interesting. So it's a private equity and family office conference, So you have a lot of funds. We had one fund that purchased last year 4 billion dollar fund that wants to invest a lot with us. But we've generally stayed away with them because we're fortunate that we have about 500 accredited investors and we have other folks who want to join us. But sometimes at one point in the future, it may be beneficial to work with a strategic investor. Let's say we're ready to take down for the sake of argument, a $50 million deal. We use whatever 10 million of investor capital and then 10 million of a strategic investor, 30 million in debt, something like that. So, it's always good to make these. And also they're often good sources of secondary debt, whether that's something called preferred equity, which is very different than the preferred return on equity, which we offer, I won't get into that. Or whether it's mezzanine debt or whether it's, you know, bridge debt on the conversions we're doing things like that. But the long and short is, guys on the panel were saying, you know, a lot of people think we're going to go back to the way we were pre these rate hikes. We're probably going to go back to you know back before all this the 30 years when interest rates were falling you know, where the cost of money was often around 5%, you know, 4%, 5%, 6%. You're not going to see the give away money rates that we have before.

 

[00:23:02] My response to that is that's possible. But our philosophy is always we have our opinion on the markets, but we focus on what we can control. You know, so whether it's going to be go down or go up, we're going to lock in. When we go to our permanent debt, we are going to lock in the best debt we can. We're going to try to minimize the prepay, right. So if rates do drop, we can refi. [Right]. And get a better rate. Or if we end up with an agency loan, which they usually have owners prepays for a long time, 7 to 10 years, like a Fannie Mae or Freddie will do. We'll do the Fannie and Freddie. Probably not a HUD. A HUD can give you higher leverage, even a little better rates, but you can never increase your leverage on a HUD. So if your property increases by value $10 million, you can't pull $5 million out of that with a HUD. They won't let you get a second mortgage or anything like that. [Wow]. Yeah. So but with Fannie and Freddie, you can do what's called supplemental loans. So the whole point of that is we'll focus on what we can do and execute, finish our renovations and create a quality product, manage well, lock in the best permanent financing we can, and be prepared for whether rates go up or whether they go down now.

 

[00:24:16] So that's generally how we look at it. But I'll tell you one things I told people last year and I told them something different this year. Last year I said, you know, people talk about we got money, we learned this, we learned that. I remember, Bob, I had a $3.5 million credit line from a bank like five years ago. They lent me that money so I could lend the money to other people. So I would combine it with $3.5 million of investor loans and we'd lend out $7 million. I didn't lend out a single dollar of that money, Bob. It was like walking into a flea market with fistfuls $100 bills and no one would take your money. Why? Because up until about 15 months ago, the most plentiful thing in the market was money. Money was cheap. Everyone had it. Anyone could get it. It was more stringent than [] 2007. If you had a pulse, you got a loan, right? And sometimes you don't even need a pulse. But now money's plentiful. And I used to say the scarcest thing are talent and deals. So, now money's scarce. [] is becoming more available because there's fewer transactions in the market. Far fewer. Transactions are down like 70%. So, a lot of the people who used to be busy are not busy. Now, they may be looking for a new shop to help with. Right. And deals are becoming more abundant because the real estate market is down 21% roughly, depending what official numbers you're looking at. And if you're a sharp buyer, as we try to be, you know, you're probably looking at opportunities. And if you're a value add, well, you might be buying a 30% discount [] previous prices.

 

[00:25:48] We're not buying at all yet. We're looking and we're watching because you have to take care of what you have before you grow. So we want to make sure our conversions are strong. We want to finish those two renovations again, elevate in July and the other one three months after that. Once we know we're on a good path, strong path there, we may be aggressive buyers in the fourth quarter. And if so, we'll make an offer for more equity investments to the fund. And initially think about the fund docs is that you are able to contribute more fund original investors are able to contribute at the same original price. So they don't have to pay a higher price than a new investor would. So that's a heads up. And I would say if anyone's interested, if we decide to raise more equity capital in the fourth quarter, they could shoot me an email. I'll put them first on the list. But again, it won't be till late the third quarter, fourth quarter till we're buyers again. But I think we're going to be looking at some really, really interesting opportunities in the market. Few reasons, not only price is down, interest rates seem to be stabilized a little bit. Housing is in tremendous demand. It's a fundamental thing that's truly needed. And we know the markets where it's needed acutely. So we think there's going to be great opportunity. And in the third quarter, beginning in the fourth.

 

Bob: [00:27:10] Beautiful. Well, we'll look forward to that. One last thing before we go. Last month, you told me that you had a number of brokers calling on you to possibly sell some properties. Has that abated or is that continuing? And have you finally gotten the offer that you can't refuse?

 

Justin: [00:27:33] So on bureau, we've had a number of good offers. They are at least almost 50% higher than we would have gotten two years ago. And so it's very strong. We have one offer in particular that looks really good. And separately, I bought the land next to Bureau. It was a small purchase. I offered it. Not many people participated. I bought it with only like one other investor or maybe lender. Now they want to buy the land with it or they might buy it separately. We'll figure it out, but there's a strong offer there, so that may turn into a contract in the next few weeks. [Okay]. That's one. Melbourne, we have an offer there that's paying us, I'm going to say a 30% premium to its actual market value because they want a four month due diligence period and then they want two months to close and they're not putting up a huge amount of money, just like [] because they want to convert it to apartments. Yeah, we figure there's no harm for the most part in taking that offer because if they don't close, we're still going to operate and keep pushing our numbers north. But there are some technicalities. The way they're closing close to season, we'd have to cancel, our seasonal business, which we're okay with, they're paying such a premium. It's okay. We got a little before season. We'd cancel it. But it runs into logistics where if you don't do it right, we could turn off our lights and they fail to close and we're like, Whoops, turn our lights back on and get our bookings in. So, those are the details we're wrestling with. But I give that one, you know, a 50% chance at best at closing. So I'm not excited about it, but it's strong enough. And if we get the details right, the risk is minimal or almost nothing for us to accept the offer for now.

 

Bob: [00:29:22] Okay. Anything else you'd like to add before we sign off here, Justin?

 

Justin: [00:29:27] Nope. I just hope everyone enjoys the summer. We just started it just last week I think it is. So enjoy the summer. Yeah.

 

Bob: [00:29:36] Have a great summer. I'll talk to you in a month or so, Justin. Take care.

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Justin: [00:29:40] Thanks, Bob. Always a pleasure.