The premise is simple—apartments will prove themselves to be one of the most stable investments during this pandemic. The rationale behind the premise is based on several factors:
- An apartment is a home for all those who can’t afford a house.
- A home is a necessity.
- The legislators and the Fed alike are invested in protecting people’s housing.
Yes, my own belief has been that while we will certainly have struggles in the short-run, apartments will ultimately outperform other investment vehicles coming through the COVID-19 pandemic.
So, now that we are in the final few days of April and have gained a meaningful perspective on both national statistics and the performance of our own portfolios, is this belief being validated?
Vast Majority of Renters Are Making Payments
The National Multifamily Housing Council (NMHC) recently reported on the findings of their rent payment tracker. Data show 89% of the households in apartment communities across America made a full or partial payment toward April rent.
Put into historical context, NMHC tracked the same thing this time last year and found that 93% of renter households made at least a partial payment toward rent. This is a -4% apparent impact due to COVID-19. Further, relative to last month (March), April lagged -5%, according to the NMHC payment tracker.
The fat lady hasn’t sung yet. In fact, she has barely started warming up her vocal cords. But whether it’s -4% or -5%, I tend to think that relative to the calamitous losses in other investment classes and vehicles, multifamily has to be viewed as doing pretty well.
That said, we have to acknowledge that the above-mentioned numbers track the act of payment by focusing on how many households paid. The numbers do not track the amount paid.
In other words, say we bill out $1,300 of rent in April, but the resident paid $500 and executed a PTP for the rest. While they get counted as having participated in the activity of paying rent, relative to actual collections, we are behind since we received only a partial payment.
So, let’s dig in a bit.
(Note: Let us not overcomplicate for now and leave the issue of accounts receivable and how it may play out in the coming months for another time.)
Even More Renters Are Paying in Higher-End Communities
As per our normal management infrastructure, we receive weekly reports from all of our on-site managers, capturing a number of vital statistics. These reports are not something specific to the COVID-19 pandemic. This is simply how we routinely keep track of things.
In April, however, we’ve implemented daily reporting across our Phoenix portfolio to help us dial things in.
As of April 23rd, 97% of residents across our portfolio have paid full or partial rent. This is compared to the national average per NMHC of 89%. However, our collections, as represented by bank deposits, are trailing at -8% relative to the same timeframe in March.
Both of these numbers require further qualification.
Among the assets we’ve owned for 12 months or longer, where we’ve renovated at least half of the units and completed most of the community amenities, we experienced 98% of residents making rent payments and collections are down by only 5%. On the other hand, at assets we’ve owned for under a year, only 96% of tenants made a full or partial rent payment and collections are trailing March by 11% on average.
Making Sense of the Numbers
Actually, this has been an increasingly satisfying exercise for us thus far. Why? Because we are watching theory become reality.
We purchase underperforming assets where we implement extensive value-add programs. Our typical interior scope is $11,000—more if we are installing washer/dryers—plus whatever we need to spend on the community amenities.
The thesis behind spending $15,000-$30,000 per unit all-in is to completely re-position the property in such a way as to attract a higher qualified tenant profile and lift rents by $250-$400. Clearly, the objective is to improve value, but that’s not all.
In times of economic distress, there can always be observed a flight to quality. People who have quality are less likely to part with it, and people who couldn’t afford quality before look for discounts allowing them to upgrade.
Simply put, you want to own quality when there is an increased demand for it.
That said, I am of the opinion that doing extensive renovations not only allows us to grow revenues in good times, but it also protects our downside in bad times. And for this reason, I think it’s absolutely critical to continue the implementation of the value-add programs we’ve begun.
The reality for many apartment syndicators is that they got into deals with insufficient reserve capital, which means that in times of stress, they must shut down their CapEx projects in order to reallocate capital to operations. However, while this may be prudent in the immediate future (if you don’t have enough reserves), freezing those projects is the exact wrong thing to do relative to future success.
Those CapEx projects are the thing that makes your asset better than the competition, keeps the asset from becoming functionally obsolete, and helps the asset to qualify itself as “quality” in the eyes of the potential residents. This is precisely why my company goes into deals with nine months of debt service reserve in every project, as I discussed in my last article. Thus, we are able to continue both exterior and interior renovations at all of our communities, with some safety adjustments due to COVID-19.
But coming back to April collections, the numbers seem to validate the thesis that high-quality renovated properties do better in times of distress. At communities where the majority of the amenities are completed and at least 50% of the units are renovated and rented at much higher rates, we are seeing more people pay. And more of those who pay are able to cover their entire rent. Meanwhile, at the less-repositioned properties, we are seeing more people unable to pay. And of those who do pay, many require a payment plan.
Well, as we consider the impact of COVID-19, it’s been manageable thus far. We have been successful at continuing to lease available units at all sites and to pre-lease units that are currently under renovation. Both are very encouraging signs.
Exterior and unit-interior renovation crews have been working, and there has been no loss of productivity to date (aside from some accommodations for safety due to the pandemic).
All and all, while this has been and will continue to be a challenging time, thus far, COVID-19 has not been a calamity for us. But of course, what will happen in May is still unknown.
As I survey asset classes, the premise seems to be proving out—apartments are seemingly one of the most stable investments during this pandemic. It’s one of many reasons why there is no place I’d rather be than large multifamily.
Are your renters paying? How are you handling those who cannot pay at this time?
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