If you’ve been following along on Birgo Capital's journey as a workforce housing operator navigating the treacherous waters of the COVID-19 public health crisis, you’ll know that March’s industry-wide fears of a total collapse in rent collection have thus far proven to be unfounded. In our view, the passage of the CARES Act on March 27 largely provided the American renter base with confidence that in the near-term, the federal government will ensure that the average American stays afloat. As such, renters shocked the world and paid rent in April, and again in May. In order to really understand what’s going on within our own tenant base, and to help shape our thoughts about what is likely to come in the months ahead, Birgo has been paying particularly close attention to rent collection trends in our portfolio. This month, we’re updating our analysis to see if previously observed trends are holding steady, and to sharpen our perspective based on the most recent data.
Our preliminary conclusions from mid-April and mid-May, and corresponding issues to consider in June, are as follows:
- Historically reliable tenants still paid rent on time in April and May. During the first half of April, our collections were spot on with monthly averages from January, February, and March. In May, we even saw an uptick of payments in the first half of the month. Did tenants continue to pay rent on time in June?
- At the initial shock of coronavirus economic concerns, our late-month collections during March were notably lower than in a typical month, but they recovered in April. The first half of May was strong, but did late-month collections in May look more like March, when fear seized the nation and payment activity slowed significantly, or April, when normal payment patterns resumed?
- COVID-induced eviction bans resulted in tenants who were behind on rent prior to the pandemic falling even further behind in March, April, and May. Are pre-COVID-19 delinquent tenants still falling even further behind in June?
- In April and May, tenants residing in lower-cost apartments were not disproportionately impacted. Whereas many in the industry forecasted collections would suffer most at affordable apartments, our experience indicated that residents of our lowest price properties were weathering the storm relatively well. Does this still seem to be the case in June?
As The Real Estate Guys have often said, it’s wise to do the math, and let the math tell you what to do. So, let’s take a look at the math.
01 Tenants paid rent through the shutdown
Below is rent collection data for Birgo Capital's portfolio as of mid-month from January through June:
As you can see from the chart above, collections midway through June are better than every other month this year with the exception of May. The crystal clear conclusion of the collection pattern through COVID-19 is that tenants in our portfolio who historically pay rent by the middle of the month continued to do so through the second quarter of 2020, perhaps at an even greater rate than is typical. Naturally, as in previous months, we are asking ourselves why this trend persists amidst an economic crisis. There are likely many causal factors which we have discussed, including fundamentally persistent capacity to pay, federal stimulus, and relational property management. With this data in the rear view mirror, we are now preparing for the potential that the trend shifts downward as unemployment support from the federal government tails off in the months ahead.
02 Low late-month collections in March appear to be an anomaly
In March, late-month collections were very concerning. Whereas we typically collect approximately 10-11% of a month’s rents in the second half of the month, in March we only collected 6% of rents late in the month, or about 60% of what we expected to collect. This trend reversed in April, as late-month collections were 98.3% of what was expected mid-month. We’re pleased to report that this continued in May, as 99.2% of expected payments arriving in the second half of the month were indeed received. This furthers our conviction that the dry spell in late March was directly correlated to the broad sentiment of timidity that was present in the marketplace while Congress developed an action plan.
03 Delinquency is worsening for pre-COVID troubled tenants
In mid-April, Birgo Capital observed an increase in the total number of delinquent tenants, as well as an increase in the average balance of a past-due account from mid-March to mid-April. By mid-May, the total number of delinquent accounts had been reduced to more typical levels, but the average balance per delinquent account was continuing to rise. Now, in mid-June, the trend is solidifying: there are actually fewer delinquent accounts than at any point in 2020, but the total amount of past due rent has increased significantly. This is a direct result of eviction bans.
We can clearly observe the correlation with eviction bans by looking at the total past due balance of the 15 most delinquent accounts throughout the shutdown. On March 15th, the average past due balance of our 15 most delinquent accounts was roughly $3,650 per account. By mid-June, this amount had steadily ballooned to approximately $5,450 per account. So, these account balances grew by $1,800 within three months, or an average of $600 per month over the eviction ban period; with a median price point of $680 per month for the cohort, this implies that only 10% of rents due were paid by this group during the shutdown:
While we expect this trend of increasing size of past-due accounts to continue modestly in the coming weeks, we also believe that a reopening of eviction proceedings will cause the data to normalize in Q3, preferably by means of tenants remitting funds to remove these balances.
04 Residents of affordable properties are pulling through
Throughout the season of the COVID-19 pandemic, Birgo Capital has been concerned with the potential for economic vulnerability within our tenant base to have a disproportionate negative impact on our low income tenants. In recent months, we have analyzed this from a number of different angles, but have consistently come to the same conclusion: financial hardship resulting from coronavirus does not appear to be negatively impacting tenants at our most affordable properties.
One such metric we’ve utilized in recent weeks is to look at the total outstanding receivables relative to the average rent in a particular geographic region. In our observation, the likelihood of occurring delinquency is not correlated to the price of rent, as illustrated in the chart below:
*Note that this includes all outstanding A/R (previous months’ unpaid rents), and not just unpaid rent for the current month.
On the contrary, we’re actually noticing that many of our low income tenants are making it through this season without a financial hiccup, as the combination of stable pre-existing fixed income coupled with additional stimulus liquidity has placed them in a position that is as good or better than their pre-pandemic standing.
We didn’t see this coming
As we reflect on what is now three months of operating in joint economic and public health crises, we are frankly surprised at the resilient strength of our workforce housing portfolio. If we had been asked in late March what our expectations were for April, May, and June income, we would have certainly assumed a material dropoff from standard performance. We intend to publish more reflective thoughts next month, but for now, we are again grateful to our tenants for honoring their commitments, and to our team members for working diligently, creatively, and effectively under challenging conditions. Our perspective is balanced: as grateful as we are for the success of the last few months, we recognize there will be significant challenges that lie ahead of us. As structural shifts in the labor market set in, we will not be immune to the economic impact - but we have no reason to be anything but more confident than ever before of workforce housing as a sound investment strategy.
Analysis Context
Our analysis spans a portfolio of approximately 1,250 residential units of Class B and Class C workforce housing within Pittsburgh and surrounding markets, held in various investment vehicles. This represents all residential properties that we have owned and operated for at least 6 months. Units included in this analysis range from studios to 3-bedrooms, with the majority of them being 1-bedroom or 2-bedroom, 1-bathroom apartments. Rents across all unit types average $690 per month; the least expensive unit is rented for $390, the most expensive for $1,415, and the median for $680. The gross potential rent for these apartments in one month is $860,000 assuming 100% occupancy and zero loss to collections; in an average month, we budget total rental income of approximately $805,000 to account for 5% vacancy loss and 1.5% collections loss, and we entered the months of April, May, and June at 95% occupancy.
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