September Update with Justin Ford

Bob Irish: [00:00:06] Bob Irish here with our monthly call with Justin Ford of Pax Properties. Today, as every month we're going to update you on the stand alone investments in Florida and keep you abreast of the investments in the CAP Plus Diversified Income Fund. I say it every month, but it's important to say it every month, throughout real estate booms and busts, Pax Properties has never failed to produce a positive result for investors or missed a mortgage payment. With that said Justin, great to see you again. How are you doing?

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Justin Ford: [00:00:42] I'm doing great, Bob. Very good. How are you?

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Bob Irish: [00:00:44] Terrific. Yeah, Things are good. Hey, let's just jump right in. Let's start from the south and go north. Do you want to start with Vero, or do you want to start with the chateau ghetto?

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Justin Ford: [00:00:59] Let's go with Vero since it is further south and it's our oldest property. We just passed our 10th year anniversary of owning that we bought in September of 2017.

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Bob Irish: [00:01:09] 10 years ago?

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Justin Ford: [00:01:11] A little over about a week, about ten years and a week ago. I remember Bob that first year we owned it, I must have spent almost half the year up there just sleeping and I was basically running the hotel. We bought it from a bank. Today you know that thing last year won Tripadvisor's top award. It's coming close to producing about $3 million in revenue. The EBITDA was, I think close to seven 57 to 60, which was a record number recently we hit earlier this year. And we got some pretty competitive offers on it recently when we let a broker put it out to market. We're going to hold it. We want to get a number between 9 and 10 if we sell it. But that continues to do well. We had a couple of months where we softened right after a very strong season and we're picking back up again. So Vero, it's in great shape. It has practically zero deferred maintenance. It's also a great piece of property and that it sits on I think it's six and a half acres on Route 60, which is the main artery into Vero Beach off the I-95. So it's performing well and I really, really like our prospects going forward in Vero in years 11 through 20 or maybe exiting this year if we get the right number. But we like what's going on there.

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Bob Irish: [00:02:34] Hey, that's great news. Let's talk about Melbourne. And last month we talked about somebody possibly wanting to buy it, but there was a whole bunch of due diligence that had to be done. And where are we at in terms of Melbourne at this point?

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Justin Ford: [00:02:55] Yeah. Well, when first went into that deal, we signed that contract I think in July, but it's a very long due diligence because the buyer's goal is to convert it to apartments, the class-A studio apartments. And the numbers work when you look at it. We're doing two of those in Tallahassee, which we'll be talking about later on in this call. And their experience, they've done it a few times including once in Florida. So they're somewhat of a proven entity but they do have to get the local politicians on board. This is a group, they hired a lobbyist. So they didn't just talk to the local powers that be themselves. And we've gone through a lot of the due diligence and we're checking off the boxes as we go. And the feedback I get is they're getting very positive responses from the local authorities about endorsing this project that they want to do. We'll know for certain one way or the other. I think it's early in December and if it's go time, if that's when due diligence ends and if we're green light there, then a lot of the money actually goes hard.

 

[00:04:04] We would be scheduled to close in late January. So that is moving along well and the property is performing extremely well. We implemented this new program earlier this month to incentivize a couple of our GM's to really do their best. It's a very creative program brought by my associate George, my new Chief Strategic Officer. He's been with me a couple of years, but he's really, really creative. He introduced it and then we worked out the details and we went from concept to execution in like 12 hours because we wanted to start it on on September 1st, by lunchtime. And we did. And it lit a fire under our folks at the GM at Melbourne and also the GM at Equus, which we'll talk about in a moment. So the property is performing well. We have good prospects of actually selling these properties at a significant premium. I'm sorry, Melbourne at a significant premium, but we'll know that for certain in December. In the meantime, very happy with how it's going right now. 

 

Bob Irish: [00:05:06] Terrific. Let's go a little further north. Let's go to Tallahassee.

 

Justin Ford: [00:05:10] Let's talk about Equus in the middle of the state.

 

Bob Irish: [00:05:12] Okay. Ocala first.

 

Justin Ford: [00:05:15] By the springs and all that stuff and horse country. So that continues to perform well. It's number two in the market. The program that we instituted at Melbourne, we also instituted at Equus and again it's had a similar effect and really, really put a new self-directed energy in the GM. Right. And so that is also performing very well. We have a small loan on that one, first mortgage and we have some private investor debt. We may have a ReFi coming up soon. And these ReFis may lead to some investment opportunities for Pax people, which we also can talk about towards the end of this call. But at the moment, Equus looks good. It's performing well. We're very happy with our situation there.

 

Bob Irish: [00:06:04] Terrific. Well, let's move west and let's go to Tallahassee. Let's talk about the two conversions that we're doing up there with Casa Bella and Seven Hills.

 

Justin Ford: [00:06:17] Yeah. Well finally, a lot of the stuff we've been talking about forever that sounds like a broken record is now coming to fruition. Today we'll have our permit number for Seven Hills will be submitted. We've been approved by the city officially with documentation for expedited permitting. We've reached out again and talked to the head of the housing authority and the city manager's office and building and zoning. Let them know we're coming. And we got the expedited permitting plugged in. Our electrician and our major drywall and plumbing contractors are up there right now preparing. We have a major financing for both properties for Seven Hills and Casa Bella, the ones that were converting that have an LOI in today. And my attorney and I are going over and addressing some logistical issues. But we could be signing that LOI, I expect to sign it tomorrow. And we expect to close on that loan in 30 days.

 

Bob Irish: [00:07:19] Wow.

 

Justin Ford: [00:07:20] So that would be before Halloween. And should we do that? Of course we're going to be paying off the first mortgage loan at Pax all suites, which is several suites where we have investors in that first mortgage loan. The private investors and some supplemental debt that will be paid off. And then Casa Bella's permit number, we should have the permanent and permanent number meaning we're official sometime next week. So those are moving. Finally, everything we've been doing, all the planning and everything else is now paying off. But I must tell you refinancing in this market is hard. Refinancing an independent property in a tertiary market that you're converting to apartments is even a bit harder independent hotel. But we kept at it and we've got quite a few offers. It's not cheap money. We're going to be paying 11% for this bridge loan, maybe a little bit more when you count fees in, but the money helps us get done everything it needs to be done. We're going to be repositioned dramatically. The rents that we're counting on that we underwrote, which is an 895 base rent. They've done nothing but go up. I mean, we looked at our comps. And as you can see on the screen, the comps were at a certain level and now we check them again and they're even higher. So they keep rising. They keep rising. They keep rising. The one property that did convert in Tallahassee from a hotel to apartments, I think they're over 80% occupancy now. And talked and they've been marketing it for less than a year as since they haven't had construction done for even a full year. I've spoken to one of the owners and he's given me a lot of his feedback. So we're very excited that we're finally moving forward on executing the plan we've been working on for a long time. So we will keep you posted as we go.

 

Bob Irish: [00:09:17] Great. I look forward to hearing some more updates next month. Let's go across the street, Renaissance. Where's your occupancy at this point?

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Justin Ford: [00:09:26] Renaissance were north of 95. We could even be 97 right now. I'd have to double check that. Our GM is more like about 4 or 5 months continues to do a very good job. We just went up there and we were a little behind. We had some AC issues where the drainage of the ACs were not clearing. So they were causing back up and some issues and so forth. So we sent a crew up there to take care of all that. We have some old stairways and balconies that needed attention even though we renovated everything. There were a few that needed some attention after owning it six years. So basically we just did kind of a, if we were in the hotel business, you'd call it a PIP, a property improvement plan. But I guess since we're in the apartment business, you just call it an apartment improvement plan, I guess.

 

Bob Irish: [00:10:19] How about a refresh?

 

Justin Ford: [00:10:21] Refresh, There you go. Refresh. Some of it was a little bit structural like balconies and so forth. But yes, it was a

refresh to a lot of things. It looks good. It's performing about as well as it ever has, maybe a little bit better. We're sitting on a loan at 4% for another eight and change years interest only even though we advertise because we have a secondary debt that we pay down. So yeah, at Renaissance, it's going very, very well.

 

Bob Irish: [00:10:47] Glad to hear it. Let's go to Oklahoma, Tulsa.

 

Justin Ford: [00:10:53] Indeed, Apex. Apex also over 97%. I think last year we had only one vacancy. Sometimes you get a move out, so it's between 1 and 3 vacancies there. But we always have strong demand. We push rents. We're above where our pro forma initially was. We're doing a couple of things there. We found that one of the balustrades that connects two buildings needs to be redone. So that's a something around a $50,000 expense we weren't expecting. But this is what happens when you own physical property. You have to do that kind of work now and then. So we've had an engineer come in, draw up the plans, and we're taking care of that. But it doesn't affect occupancy. And we take care of it immediately. So the property is great. And again, Tulsa is one of my, what I call a stealth growth market. Reminds me of Austin when I first wrote about that, made it my number one market back in 2006 when everyone else was chasing the bubble markets. I love Austin. Austin's, it's becoming sort of this secondary little tech hub since people can now work remotely. A lot of them work where they don't have to deal with a lot of the issues the major cities are causing or some of the extraordinary expenses and so forth. So Tulsa's benefiting a lot from a lot of the shifts that have been going on across the country. And our property, Apex is doing just great.

 

Bob Irish: [00:12:19] Glad to hear it. I understand Elevate is basically finished at this point. Are we 90% there? Where are we?

 

Justin Ford: [00:12:28] Well, 126 units. We've turned over 105 to property management. This Friday, they'll have 125. So basically by the end of September, 125 units handed over. So the one unit that we're going to start on and then renovate, there was some guy. It was a tenancy issue, but that's being taken care of. And now the last two major things, repaving the parking lot. That's $100,000 job that started last week and that's like the finishing touch because now we've made the outside so beautiful when we change the facade. We took away that old shingles running down the side and we put this beautiful new stucco finish, redid the balconies, put a new French doors, and now we have the finishing touch that even all the parking lot driveways are all pristine. And in the center, we're in the middle of constructing our pergola. Some of the renovations on the inside, the reason that they were held back was occasionally we'd find these plumbing issues. And sometimes we have to break up concrete and go down four feet and tear it out. But we've done so much of that in the courtyards and in certain units that when we're done once again, this is basically like a new property behind the walls and everything you can see as well. And again with these final public amenities, common area amenities being done finished within the next week I'd say. Next time you and I talk about this call, everything will be 100% done. Our next month's call, will be 100% done and we'll probably close to 100% occupancy. That would be my guess.

 

Bob Irish: [00:14:15] Wow. All right. Well, let's talk about the 146 units at Ascend. What's going on there?

 

Justin Ford: [00:14:22] So that has been a real challenge because they threw a real monkey wrench at us by requiring us to fix all balconies, redo all the balconies and preventing us from issuing CO. They wouldn't issue to us a CO, certificate of occupancy until the balconies done. For second floor, they did all these things that just made it logistically a nightmare. The people were living there previously for years with all these problems. Now we're fixing them. We can't move anyone else new in until they get these final sign offs. But we're finally over the hump of 72 balconies that we had to entirely replace. We thought we're going to replace maybe a half dozen and fix the others. 72, we have to replace. We've replaced 61. So we now have 11 left to do. And we've about 70 units now that are rented or rentable. And now we do expect with these final 11 balconies that instead of gaining 10 units a month, which is what we've been gaining painfully because of this, that we can rent. We'll be gaining over the next three months closer to 25 units a month. So we're shooting to be 100% done by the end of the year. We've moved ahead. We've done most of the common area work, the office, the gym. We started on the pool, I think the pergola out there. This roadblock, the last three months October, November, December, we should just about finish everything. So we should be 100% ready for 2024 and by the end of this year, occupancy should be close to or just above 90%.

 

Bob Irish: [00:16:08] It's fantastic. Things are going well in Tulsa, that's for sure.

 

Justin Ford: [00:16:12] That's more. 

 

Bob Irish: [00:16:15] Hey, let's talk about Port Saint John.

 

Justin Ford: [00:16:20] All right. Jumping back to Florida. That's our fourth property in the fund. That's our 78540 sq ft grocery anchored shopping center, doing beautifully. We bought at 97% occupancy, got to 100. I think we've never been lower than 95%. Today we have a new tenant probably coming on. There are some ocean conservation group, a nonprofit. They'll be joining us and we took out the roofs, as I said. My main worry remains that this investment is too easy in some respects. It's like, how can it be this good? It's like, why didn't I start doing this 20 years ago? But there is a method to the madness though. You can make bad investments. This one works for a number of reasons. The anchor tenant Winn-Dixie, they're a good company because they went through a bankruptcy before we bought a couple of years ago. So all their problems were kind of purged. So the remaining stores were strong and this one had been there for a long time and their rent is low. Now, you might ask, why would low rent be a good thing? That's a good thing because they're not going anywhere. So that anchor is staying and they just renewed for like another ten years. They're going to be there for a while. And then our other rents are pretty much all market. So all in all, we get a very good yield. Our cash on cash yield on that thing. From day one has been north of 10% because we put the loan on it before interest rates started to shoot up. I think our loan on that is like 4.375%. So continues to go well. And we have all this opportunity for added value as well. You remember, we talked about the outparcel.

 

Bob Irish: [00:18:11] The outparcel, yeah.

 

Justin Ford: [00:18:12] Yeah. So the outparcel could be another tenant. We could even sell it off. I mean, that alone could boost our ROI by quite a few points. 

 

Bob Irish: [00:18:25] Yeah. Well, you talk about added value and that's certainly a bonus on top of what's going on at Port Saint John. But I'll throw a hypothetical question at you. When you're talking about value, is there any better value than buying a dollar's worth of assets for $0.90 or $0.85 on the dollar? Would you consider that to be a pretty good deal?

 

Justin Ford: [00:18:50] I would. And I would say the only better thing than that would be buying it for like $0.90 and being in first mortgage position. So you have a collateralized investment and having a personal corporate guarantee and getting about a 7% yield plus a point so 8%. That would be better.

 

Bob Irish: [00:19:08] You and I talked a little bit before our call, so I kind of set you up for this. But this to me sounds like a tremendous opportunity if it does come to fruition. And as I understand it, the bank that has made several loans to you is now in a position where they're not as crazy about your loans as they used to be, and they might be willing to sell them back to you at a discount. Do I have that right?

 

Justin Ford: [00:19:38] That's basically it. But to put a little more clarification on it, we worked with the bank previously called Legacy Bank and I did about 11 or 12 loans with them. They invited me to be a shareholder. I was. They invited me to their chairman's lunches because we had a great relationship. They lent me on just about all sorts of things. Then they got bought out by another bank, by a bigger bank. The bigger bank that bought them out inherited three of the loans I had with Legacy and they inherited three hotel loans during COVID. They're not crazy about having hotel loans. They like the other part of the portfolio. But of course being Pax even during COVID, we were never laid on a single mortgage payment on any of our properties, including the hotels. So they've been talking to us and at one point they've indicated that they might be open to taking what's called what's called a short payoff. So rather than if we keep our loans down, they may have it on for a few years more and we may say, Hey, you know what? Why don't we get the loans off the books for you? Three properties combined, we have about, I'm going to say around $10.5 million. I think there's a possibility they might accept 9 million for that loan. Therefore, that would allow us to pay our investors to replace them. We'd pay a little bit more than we pay the bank. Instead of 5%, we pay 7% plus a point. They'd be in the same first mortgage position and they have a corporate and personal guarantee. And then that creates equity also for the current investors, because instead of owning X, you go down to owning less than X, right?

 

Bob Irish: [00:21:13] Right.

 

Justin Ford: [00:21:13] Now, that's the idea. In fact, the person who brought this idea to me was a person who [], I think. So that person came to me. It's a person I've done other deals with. And they said, Hey, Justin, here's an idea. And we went through the whole thing. So the timing is now right where I may have some ReFis coming up. So before those ReFis come up, if I can step in with private capital, buy at the discount and then replace the private capital with the longer term refines, it's going to be a win for the private investors because they're going to make a good return. Low risk, as far as first mortgage position, the guarantees, the healthy yield and the point helps increase the yield when you pay it off early. So it's going to be a really, really good deal for the equity investors and ultimately for the projects entirely. But we won't know for sure what deal we have with the bank, if they're going to actually give us a good payoff number until probably next week or the week after that. But again, I would encourage investors who are interested in this to send me a note and they can just put first mortgage notes if they want. And again, it's going to pay a minimum of 8%, seven plus one. But if we pay it off less than a year, if we pay it off in 6%, the equivalent, you'll be 9%. But again, with the collateralized position, first mortgage and the guarantees. So we really like this opportunity.

 

Bob Irish: [00:22:46] That sounds like a great deal, Justin. And in terms of the length of this loan, you're thinking it would be under two years. Yeah?

 

Justin Ford: [00:22:55] Yeah, it would probably be 18 months with a one year extension, and that extension would come at paying another point as well and another interest rate increase. So it would be an incentive to pay it off in less than 18 months. But if we had to hold it another year, the investor simply make more. But it's all contingent upon us getting a number from the bank on a short payoff. That makes sense. And we could raise anywhere from if we're buying off just the smallest loan, anywhere from a million and a half bucks to about $9 million would we buy off all three of them. But again, I'll know within the next week or two. And if people are interested, they should email me.

 

Bob Irish: [00:23:36] Well, I don't know anywhere else you can tie your money up for less than two years and conceivably make 7 or 8%. I mean, that's a great deal.

 

Justin Ford: [00:23:48] [] conceivably make 8 to 9%. You make a minimum of 8.

 

Bob Irish: [00:23:53] Seven plus the point. Yeah, there you go.

 

Justin Ford: [00:23:56] You make 8 or 9% and again, first mortgage position because a lot of the notes that are out there. Those rates, they're not collateralized. This is a collateralized first mortgage note. It's a big, big difference.

 

Bob Irish: [00:24:07] So folks, you've heard it from the horse's mouth. Send Justin your indications of interest on this. Justin, you'll know more in the next month as to whether the bank is amenable to this deal.

 

Justin Ford: [00:24:21] I will. I would expect to know more within the next two weeks. So the sooner [], the sooner we'll be able to start getting things together.

 

Bob Irish: [00:24:29] All right. Well, Justin, anything else to add before we sign off here?

 

Justin Ford: [00:24:34] Nothing at all Bob. As always, it's been a slice of heaven.

 

Bob Irish: [00:24:39] Always great talking to you Justin. I'll talk to you next month. So long.

 

Justin Ford: [00:24:43] Bye.