September 2022 Update with Justin Ford

Bob Irish: Bob Irish here with our monthly calls with Justin Ford of PAX Properties. Today we'll update you on all the standalone investments in Florida and keep you abreast of the underlying investments in the Cap plus Diversified income fund. Now, look, I say it every month, you're probably getting tired of hearing it, but 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, it's great to have you back. How are you?

 

Justin Ford: It's great to be back, Bob. It's nice to talk to you. You're still in Utah, aren't you?

 

Bob Irish: Still in Utah. Our next call, I'll be back in Florida. I'm very happy to be in Utah during hurricane season, and I know Ian is threatening Florida right now. And hopefully you'll-- well, you're on the East coast, so you probably won't have too much in the way of wind, but I would imagine that it may have some impact on our properties in North Florida. So we'll talk a little bit about that as we move along. Why don't we do a standard update and kind of start in Vero Beach? 

 

Justin Ford: So Vero we just had a quarterly report, a quarterly meeting there a couple weeks ago. Property's never looked better. It's probably heading to its best year ever. Recently, we slowed down a little bit in Vero. We had a change of GM, our new GM is really good. Our director of operations was standing in for the previous GM who was great, who left us to join the construction industry. Right now things are really picking back up strongly again as actually throughout all our properties in Florida, pretty much not so much Tallahassee once you figure that out. But this storm is filling our rooms. People are booking in to be in a safer spot if they lived in a mobile home community or something.

I think some of the power crews are starting to book rooms and be around in case they need to get the lights back on. So for better or for worse the storms, they take it, then they give it away. There's one year where they cost us like $30,000 in non-reimbursable damage. It was like awnings and landscaping and stuff that's not covered, or it was under our deductible. But other years that they bring a lot of business and the track of this storm so far the wind blows slightly in our favor. I guess I'm going to say , we hope everyone is well, of course. But it's helping biz a little bit. So Vero is doing well. It'll probably exceed budget by a little bit this month given our recent uptick in bookings.

 

Bob Irish: Let's move a little further north and talk about the former Chateau Ghetto Melbourne.

 

Justin Ford: So Melbourne, the Cinderella story. Now 99 2 room suites and 41 Junior Suites, I think that's doing well. That's on track to meet its budget this year. Again, it was a little bit behind, business softened a little bit, not dramatically, but again, it's picking up, it's, so for instance, I want to stay in Melbourne Thursday night, That's two nights from tonight. And I couldn't get a room in my own hotel. It was sold out.

 

Bob Irish: Come on don't they, reserve a room for you? It's like the presidential suite. It's saved, right?

 

Justin Ford: Yeah, no we’re not that cut of the cloth. No. 

 

Bob Irish: Oh my gosh. 

 

Justin Ford: So but I just got an email. We had one cancellation, so I snagged the room. So I'll be there, I'll stay there Thursday night. Because I'm going to a Tony Robbins business Mastermind over the weekend, believe it or not, a friend invited me so I get to go gratis and it's online or something, but hey, you can never be too masterful in your mind when it comes to business the way I look at it. 

 

Bob Irish: That's true. And he is one heck of a speaker. If you don't get anything out of just appreciate what a dynamic speaker he is.

 

Justin Ford: Oh I've always appreciated him. I've actually liked him a lot. So Melbourne as a property continues to do well, as I said, and again, this recent weather activity is probably going to push us a little over budget this month. So Yeah, Melbourne continues to do well.

 

Bob Irish: Yeah. I've heard a number of people who are on the west coast of Florida are leaving and going to the east coast of Florida. So you pick up some traffic there. Let's talk about Ocala.

 

Justin Ford: Ocala is in the center of the state and last I saw the storm's kind of cut right across it. Ocala, apart from the weather issue, is on track to meet its budget. It's been beating its budget all year. It's been, outperforming by probably an average around 10 to 15% consistently. So, Ocala will be our first hotel, I think to post a million dollars in profits in a calendar year. That's where we're expected to head north of seven figures in operating profits by the end of this year. Again, the storm is also making it sold out every single day. We just refinished our pool there. We had some issues with the pool. We had this, everyone was bidding like 60, 70, $80,000 for this repair, but we have this good construction group we work with who had the capability, and we got it done for around 12 or 13 grand. Mostly in house. Well,--

 

Bob Irish: Wow. 

 

Justin Ford: No, that's not true. That's the labor. When we count the materials, we've probably got it done for around 20, 22, 23. That’s one of the reasons we try to remain an in-house construction. We're the GC, We work with subs, we have a lot of other guys who do stuff. We're redoing the sidewalks up there as well. Again, the hotel's in great shape, but we're coming up with a new product to do those exteriors because we like exterior cord, our hotel, when you paint a sidewalk, it becomes an issue, no matter what you do you put the expensive paint, et cetera, after be walking a while, it starts to look a little beat up. You have to constantly treat it. So we're trying a new sort of stamped concrete technique there. But the hotel otherwise looks great. And that work will be done as soon as the rain is over, which will probably be in about four or five days. Right. But yeah, no the Equus continues to head towards a very, very good year.

 

Bob Irish: Let's move to Tallahassee, or do you want to talk about Port St. John first?

 

Justin Ford: We'll, we'll talk about port St. John at the end as the forefront properties.

 

Bob Irish: Yeah. Let's talk Seven Hills.

Justin Ford: Yeah. So Seven Hills we're working very hard on bringing seven hills back. It had been underperforming. We had the issue of getting past that reputation of having had the homeless shelter there and so forth. We’ve made all these marketing investments. And  I'm preaching a brimstone and fire every day basically to the sales and the marketing team. And we're making a lot of progress this month. We had good football sales over the weekend. Pretty much sold out, very close to, sold out on a Friday and a Saturday. We have another football game for this weekend, which they haven't canceled yet, but they probably will. They also had a homecoming for this weekend in Tallahassee. Oh. And that they've moved to April, which is kind of good. That gives us another event in April that we can market to.

While we may lose the football game business this coming weekend, both at Casa Bella and at Seven Hills Casa Bella is the former Baymont that we now made an independent. It's hard to say in Tallahassee right now, the direction of the storm, if, if it goes towards Georgia or if it goes towards the Panhandle we'll probably end up very busy there for quite a while. We had that experience with hurricane Michael about four years ago. We did record business for like a month and a half afterwards. Just mostly all the utility crews and so forth. So, again, right now we have financial projections, we have marketing projections now, we're going to bring on an in-house meteorologist.

At least for the next week. It's part of the biz. Seven Hills overall, looks great. We just went through it. Took every last deferred maintenance detail. All the rooms are just in great shape. And the numbers are still negative there, but we're really decreasing the negative. We were heading towards maybe being a cash floor negative and maybe 20,000 this month which would've been a significant improvement over recent months. Well, it's hard to say. We may end up there, we may end up a little better. A little worse again, that's in the hands of the storm at the moment. Yeah, sure. Yeah. Casa Bella though, that's, 

 

Bob Irish: Yeah. The rechristened Casa Bella. The flag is gone. It's gone casa Bella

 

Justin Ford: I didn't realize they make you pay when you exit a flag, because you can't market until you get your new website up and you can't even go on the OTAs. Those are the other travel agencies, Expedia, booking.com and all that until your new flag. So for like four months, you're in marketing purgatory, no one can reach you, no one sees you, so it really hurt our sales that transition. We got into booking.com two weeks ago, finally on Expedia last week. We weren't close to being sold out, but we were probably over 80% sold out on the football weekend recently. We had reservations taking up for this coming football weekend as well. We're building a whole marketing platform there of campaigns and so forth to introduce ourselves to the community. Right.

Again, right now the weather will tell us how we end this month. But the place is looking great. We painted the exterior a new, new color scheme outside. We were going to start this week, but again, the weather pushed it back, redoing our common area by the pool that'll give it more of a small resort feel, which is really cool. We're going to start the 14 units. We're going to put these little they're called wet bars. They're like kitchenettes without any power appliances, without anything stronger than the microwave. We're going to, we're going to have those in there very soon. 

Those pieces of the puzzle are finally coming together. But I will really have more to report since we only went off the Baymont brand about a month ago. We're only coming onto the OTAs now, Right. And we're finally getting our exterior renovations completely finished. Plus the new sign is coming in. Yeah. All that, we should have a lot more to talk about the direction of Casa Bella, but it is certainly improving. We hope by next month to be back in the black or quote, narrowing that gap.

 

Bob Irish: Cool. Let’s go across the street. Let's talk about Renaissance.

 

Justin Ford: Renaissance is at a hundred percent occupancy, or if it has, it might have three or four units where we just had a turnover, but those already leased up. So we're experiencing very strong rent at, at Renaissance. We're basically just, just on track to, our goal in the next 12 months is to get to the 1.2 million EBITDA number. That number may permit us to pull even a little more equity out. We returned two-thirds of investor equity last not too long ago, earlier this year. So, Renaissance is just a strong, strong property. We did all the renovations. So there's not a lot of deferred maintenance. It's a hundred percent occupied. We're getting very good rents. And for the most part, there's sometimes some turnover in the staff. But we're hitting our margins. Or when we fall a little bit below it, and then we catch back up. So we think Renaissance is in a good position, depending really on where interest rates are, but we think we'll hit the 1.2 million number within the next 12 months in EBITDA And depending on where rates are at that point that may provide us an opportunity to refi.

 

Bob Irish: Speaking of apartments and rentals, I've read recently that for the first time in 2 years, apartment rents, again, this is a national average decline. There are some experts saying that next month, it will decline further. What's your perspective on that, Justin?

 

Justin Ford:  I think it was inevitable. There were some markets where the rents were going up 30% in a year. How can a working family afford that? I mean their salaries aren't going up 30% a year, for the most part some are maybe working at Amazon, and then they bumped them big time. But for the most part, people aren't. And it was just becoming unaffordable. The term blue sky underwriting, of course, you know, from the stock market. That was a law from the 1930s where they said, hey, you can't portray the future of this investment as it's always going to be. Blue skies, you have to acknowledge, are going to be stormy days like we have here in Delray right now in Florida and in the markets.

We all know that the stock market is correcting significantly right now. You and I have been around long enough, we didn't think it was going to go up forever. We don't know exactly when things are going to crack, but, I'm always focused on the fundamentals? How sustainable is something, Not really what, I love that buffet boat in the short term. The market is a voting machine, in the long term, it's a weighing machine. Even in apartments, which is a much less liquid asset than stocks, you have all these folks who are pitching their deals and, trying to give them finance based on underwriting rent growth of like, 10% a year going out. We never did that. 

We might bump rent growth 30% in the first year or something like that, because we could see it, because it was way under market. It was beat up. We would renovate it, we'd bring it, et cetera. But we didn't, we didn't do that pie-in-the-sky underwriting. So for us, it does not hurt us. We're not, we're not seeing those rent declines. Until recently, we've still been pushing rents. I haven't, I wouldn't be surprised If I hear back, Hey, we were about at the max where we are. Or even if we have to-- if we had to trim our rents 20 or 25, 30 bucks, we'd be more than fine. We have plenty of ample margins. We bought this deal, we're in it fully renovated. Fully renovated, inside and out behind the walls, top of the line finishes have great amenities for less than probably less than $90 a square foot, something like that. 

 

Bob Irish: Wow. 

 

Justin Ford: No, I'm going to say a hundred dollars a square foot. Our average on that is probably like $1.30 a month in rent, some $15. I mean, some, the ratios are good. We could back off a little if we had to on rent and we're not going to be suffering. We're still going to be cash floor positive and pay return. Yeah.

 

Bob Irish: All right. Let's move on to the properties and the fund. Let's talk a little bit about Apex ,Elevate, Ascend.

 

Justin Ford: Yeah, so talking about the three apartment communities in the fund that are all in Oklahoma. So all those are going to run into the same headwinds that we're talking about. The rent limitations. I mean, the rents were so fundamentally low. I mean, all our deals work with rents at like a dollar a square foot. In other words, an 800 square foot unit for $800 a month, base rent of that. And even there, for the quality we deliver, that's extremely affordable. Again, our all in costs range from, I think like maybe $65 a foot on one property to about 98 on the most, most expensive one. That's all in, including all renovations. 

So we're priced well relative to our rents. And Apex, which is now a hundred percent renovated, a hundred percent occupied all fully paying, that's producing very good returns. We're going in right now, that's in Tulsa, 91 units in Tulsa. We're going in right now to replace our bridge loan, perhaps with the longer-term loan. But what we may do is we may just work with our current bank, because we have about two years left on that loan at, I think we're at about four and three quarters. And we may do what's called an earn out, where they give us an extra chunk of cash, like maybe a million or million and a half of our equity, rather than refinancing everything. We keep the underlying mortgage. And then we take like another piece on top of that at a higher interest rate, probably five in the recorders, but the blended rate will be low fives.

That won't be a bad spot for us to be in the next couple of years. We can always go to an agent. We can go to HUD but even HUD right now HUD that's your best term loan. This 35 year ammonization. HUD right now, I had a meeting with the HUD department at, one, at a major loan shop the other day. I think it's four and three-quarters as well. It's really up there. But here's the thing, Bob, and I'm sorry if I'm going to get a little wonky on you, but if you look at the yield curve, your three years at like three, three and change, I think maybe four right now.

Then your 30 years below it, you have an inverted yield curve at, at that point. So the market could be right, it could be wrong, but the market doesn't necessarily see this as lasting at the current rate. It is forever. The offsetting factor that I say is, again, our cost basis is so low, that even if interest rates kept going up and was a bad move on our part, two years from now, we would have a refi at six and a half percent. Let's say that was it. And what, what does the world look like if two years from now, interest rates are still going up and because it's being pushed by underlying inflation, but what's the cost of materials? What's the cost of utilities? What's the cost of rent? Because rents have to rise with that stuff, otherwise people have to stop building.

I'm not saying anything's foolproof. I'm just saying there's somewhat offsetting considerations that we're okay with just extending that loan right now for a couple years, or at least we're considering it. We're looking at locking the HUD now as well. So that's kind of the math we're doing right there, right now. But the thing is, is cash flowing beautifully? It has zero deferred maintenance. It looks great, we're very proud of that property. That's Apex in Tulsa, 

 

Bob Irish: Elevate. 

 

Justin Ford: So, Elevate Oklahoma City, which is an hour and a half away. And that one, that's a much heavier lift. We went behind the walls in Apex as well, a bit when we needed to, but we didn't have to pull permits for a lot of it. Cause a lot of it was kind of unit specific issues that came up. Elevate is more systemic. So the renovation, so, and plus we're doing the whole facade. We're tearing off that old mansard section and we're putting in the new EIFS. So we're dealing with a lot of inspections issues, and a lot of permit issues and things like. Every now and then they throw in a wrench. They recently threw another wrench at us. They said we needed a special permit on buildings that are three stories versus the ones we have that are 2 stories. It wasn't insurmountable, but it's just these things tend to pop up a lot in Oklahoma's a fairly construction-friendly state. They’re not highly, highly regulated, I think, compared to like, say, South Florida.

We're working through all that. We've delivered 35 brand new renovated units. So about a little more than a quarter, I think of our 126 units. Once we've finished the mansard on the second building, it gives us access to the interiors of that building that have already had a lot of work done on them. We'll probably have another 35 delivered in the next 6 weeks. But, we'll be completely done with that property right now. It seems like it's probably going to be the end of January. So we were hoping to get it done in a year. That property looks like it's more like a 16 month project, but we're getting the wrench we wanted. It's a beautiful property. Oklahoma is still, it's one of these stealth growth markets. We’re at a great cost. So long term, I know I get offers to buy that thing all the time. We will sell tomorrow for probably two and a half million more than we put into it already. But we really like that, that, that property long term, we like the area we like what the property we're creating. So it's a keeper. And so far so good.

 

Bob Irish: Let's talk a little bit about Ascend.

 

Justin Ford: Yeah. So Ascend is our newest acquisition. We closed on that in June. So what's that three months now roughly? And 146 units. We're just delivering our first 10 now. We're hoping to have them done sooner, but renovations are interesting, even though the units themselves are nice, in other words, the units themselves are not dilapidated. You don't have a lot of mold issues or plumbing either. Sporadic instances of that, but it's not widespread. But we do-- we knew this going in, we've talked about this always or since early on, we have these plumbing issues, major plumbing issues on the lines that lead to the buildings and so forth. So we're digging up a lot of those lines. And replacing a lot of those lines, a lot of the cast iron stuff.

All this work slows up your interior too, because you can't change all your valves and stuff inside unless you install your shutoffs. You can't do your shutoffs until you really get your other pipes squared away, for the most part. We've moved at a pretty good pace on the exterior. Again, we're not executing quite at the same pace, but we're not wasting a lot of time, and we're not, even though we're a little bit behind on schedule, we're not really wasting money. We're staying within our budget. And not only that, but we're staying fairly full. So we were I think last month, we actually on an operating basis met our budget, even though we were renovating 10 units at the time.

We got the revenue we were projecting, we got the earnings we were projecting. And now we have another, we're going to try to keep that one at just 15 units being worked on at a time. So that we have a 126, is it no,131 that are producing income for us so far. That's working. That also is going to be a great property. It's a really strong suburb. It's a good location. It's right off a major thoroughfare. And that is I think we do have a good chance of finishing that within the year. I think we can complete that by June. Yeah. Oh, one thing we did, by the way, this is very interesting.

 We put in these quartz countertops, these three sentiment quartz countertops. It's one of the distinguishing features when we spend a little more. The value proposition is significant. Kitchens sell properties, especially apartments. Kitchens and bathrooms are a big part of it. We were having issues with the local fabricator, and then we were having issues with the supply chain, and then prices went up, so we just abandoned that. Because these countertops were in good shape. So what we're doing is we're tiling over the countertops now. So first, we started with these big pieces like marble, like tile, and now there's a little smaller piece like marble and it looks beautiful. And saving us probably like a thousand dollars a unit. And the job is quicker because you don't have all the demo. It's really, it's really quite-- I may give up on quartz nowadays, when you just have that nice substrate, when you have a good solid cabinet base, you can just tile over and make it look as nice as quartz, really. So we're doing that.

 

Bob Irish: Is the tile ceramic or is it quartz space? What sort of tile is it? 

 

Justin Ford: It's ceramic. Let me think about that. No, I think porcelain, I believe it's porcelain.

 

Bob Irish: Okay.

 

Justin Ford: It's not even porcelain. It might even be like telling the truth might even be like a travertine, I gotta get out there again. I've been seeing this on Zoom recently, working with the team. But I bought a lot of that type of tile. So porcelain is probably what I'm guessing. And in addition to that, we had all these AC set up. We were going through. Put in this new central air conditioning, used to have what's called an old chiller system, which kind of fell apart. Now we have to change course on that because the ACs we're doing with the air handler was going to be usually in a closet, and then we're going to do it overhead in what's called it. It's a pancake unit, like a flat unit that does the air handling and distributes it through the ducts.

Long story short, when we got the courtesy inspection, that would entail redoing all the ductwork, upgrading electric inside the units adding more power, and outside it would add $400,000 to the project. Wow. So we, so we stopped and canceled that order, and we're going, we're going to mini splits, which is something we have a lot of experience with, and it'll be very close to the same budget. But these are the types of things you get into a project, you try to plan everything as much as you can. And every now and then there's a little curve ball and you just gotta adjust.

 

Bob Irish: Let's finish up on Port St. John the shopping center.

 

Justin Ford: Yeah. Port St. John. So the property I'm really looking to buy next is another one, just like Port St. John. I don't like to say any of my kids are my favorite, but Port St. John at the moment is my favorite. I mean, it's now a hundred percent occupied. It was always 97%, we had the bear to come available, and now we're all leased up. We added that thrift store, and we added a vape shop. And I would like us to be better landlords than we have been because we have not successfully taken care of their roof issues. We order their materials, but it's months, months out until the materials will come. We have the crew ready to go.

I sent the crew there recently to take care of leaks, you know, to repair and patch repair. But in some places, they're popping up. The tenants seem to be fairly understanding. But I would want us to be as good there as we've been at our award-winning hotels as we try to be at our apartments, which should soon be award-winning as well. But as a business like I tell you, it's almost so good. It's scary.  I mean, it's in Florida, it's a growth market. We have a brand new community behind the shopping center. All these people are coming in and the shopping center's full and it's busy. We’re locked in with the main tenant for another 10 years. So yeah, that's going very well.

 

Bob Irish: That's great. Hey, Justin, last month we talked about, or you talked about some promissory notes that everybody listening has an opportunity to invest in. I'm just wondering how that has gone. Is there any more availability? So what's happening there?

 

Justin Ford: Yeah, so we are, we were raising the fund and had done short term loans, a few of the properties so that we, the fund could put that money to work while it was waiting, going through its own acquisitions. So we're not repaying that. And so yes, we filled that note.. I was like 1,700,00 or something like that and it was completely sold out. And now we're about halfway at GSA, so there may be another 800 there or something like that. And then, and then Vero. So we have about 2 million left Elevate and Ocala halfway through GSA, and then we have Vero. So there's-- GSA is the I'm sorry, the acronym for Governor Square Apartments, which was the former name of that it's the legal entity, but that's the Renaissance apartments.

Yeah. So Renaissance is performing greats. So that, that, that's a note that we really like. And then Vero is our oldest hotel. I mean, you've been in Vero for nine years. Yeah, it's the lowest cost-based oldest hotel that's on record for a record year. And it's in a super strong market in Florida, a growth market on the coast. So we think both those notes are good. We have about 2 million left to fill. So the way that note works, just real quick, Is the coupon is I believe 8% and then a point for a year and a half. Then it goes up like nine and a point. And then after three years if it goes as long as three years, if you didn't make at least inflation, we'll increase it to up to 10% a year.

So if inflation was 10% a year, we'll increase it to 10% a year, non-compounded. If inflation was 11%, it's still only 10%. We have to cap it up to 10%. So it provides a partial inflation hedge. There's also like a minimum earned interest, like in the case of Renaissance, it's possible we could do that refi, let's say in the next year. So it could be, or even it might be, if it happened sooner, let's say you still get a minimum earned interest, I think of at least four months. If we immediately turn a refi around the actual cash on cash the annualized return would be higher than even 10%. So there's all the speeches in it to kind of just add some protection against inflation to make sure that you get a decent return for a worthwhile amount of time. Yeah.

 

Bob Irish: Yeah. And eight percent is a pretty attractive rate in the world we're living in right now, that's for sure.

 

Justin Ford: Well, it's eight plus one, so it's nine.

 

Bob Irish: That's Right. 8 plus 1

 

Justin Ford: The second year it's 9 plus 1 and then, it could go up all the way to 10 each of the three years if we need the protection. Yeah. And that's where the personal and a corporate guarantee, and we've never failed on a mortgage payment or private note payment or anything in the 20 years we are in real estate. These are strong properties. Plus it has a Pax’s guarantee as well. So yeah we think it's a good investment. We hope folks may be interested in it. 

 

Bob Irish: And if they are, what should they do?

 

Justin Ford: Highyieldplus@paxproperties.com is an email. Okay. That's H I G High yield plus. And just send an email and just tell us they want to participate in the note. Our minimum is a hundred, but repeat investors will often take 50 or something like that. Some take more as well. Or they can just email me as well, Justin@paxproperties either way. 

 

Bob Irish: Cool. Hey, anything more to add before we sign off, Justin?

 

Justin Ford: Oh, just enjoy your nice weather there, Bob, and we'll see you back here and you can help us clean up all the branches.

 

Bob Irish: Thanks Justin. Great to see you. We'll talk to you next month.

 

Justin Ford: Thank you. Bye.