When the coronavirus public health crisis seized America by storm in mid-March, investors in residential rental properties struck a tone of concern regarding whether or not tenants would be able to pay rent in the coming months. This was for good reason, as the broad economic stoppage led to massive layoffs and a sudden spike in unemployment that jeopardized the personal cash flow of tens of millions of Americans within a few short weeks. In an effort to understand the ongoing implications to Birgo Capital's portfolio, we’ve been taking a detailed look at rent collections and past-due balances pre- and post-COVID-19.
Our preliminary conclusions in mid-April, and corresponding mid-May questions to answer, were threefold:
- Historically reliable tenants still paid rent on time in April. During the first half of April, our collections were spot on with monthly averages from January, February, and March. Would tenants continue to pay rent on time in May?
- Historically late payers were definitely late payers in April. At the initial shock of coronavirus economic concerns, our late-month collections during March were notably lower than in a typical month. Individuals that were behind on rent prior to the crisis were falling even further behind, due in part to eviction bans. Would late-month collections suffer in April as they did in March, and are pre-COVID-19 delinquent tenants still falling even further behind?
- In April, tenants residing in lower-cost apartments were not disproportionately impacted. Whereas many in the industry forecasted collections would suffer most at lower-priced apartments, our experience indicated that residents of our most affordable properties were weathering the storm relatively well. Would this hold true in May?
It’s a month later, and we now have more data to either support or challenge our preliminary conclusions. Let’s take a look at the data and see what we can learn.
01 Tenants are paying rent through COVID-19
Below is Birgo Capital's rent collection data for the portfolio as of mid-month from January through May:
Wow! It’s simply clear at this point, mid-month collections have not suffered in our portfolio as a result of COVID-19. Of course, the first question we must ask ourselves is “why?” Perhaps a modest increase in mid-month collections can be attributed to general prioritization of shelter as a basic need among our customers, temporary excess liquidity from CARES Act Economic Impact Payments, or our management team’s proactive, empathetic, and relational communication with residents.
Given that the tenants who are paying as usual make up approximately 90% of our revenue base, we’re also seeking to understand whether this trend will continue. An assessment of the durability of underlying sources of income for this group of renters can, at least in part, inform our perspective on this.
We also saw an increase in late-month collections in April relative to March, which is an encouraging sign. This leads us to believe that March’s dip in late-month collections was a reflection of the general fear and uncertainty that was present at the time, and prior to the CARES Act being signed into law on March 27.
02 Historically late payers are falling further behind
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. In mid-May, we see that the total number of delinquent accounts is reduced to typical levels, but the average balance per delinquent account continues to rise.
Interestingly, a noteworthy proportion of tenants that were delinquent in mid-April have since brought their accounts into good standing. However, they are offset in large part by those that were previously delinquent falling further behind on rent. There is a significant incentive issue at play here, as eviction bans in Pennsylvania are active, leaving property owners with little near-term recourse for non-paying tenants. In fact, 65% of Birgo Capital tenants owing more than $2,500 as of mid-April have made no payments towards May rent. We expect this trend of increasing size of past-due accounts to continue for the foreseeable future, but we are encouraged to see the number of delinquent tenants normalize.
03 Renters of affordable properties are weathering the storm
The issue of economic vulnerability within our tenant base has been of significant concern to Birgo Capital since the onset of COVID-19. However, disproportionate susceptibility to job loss or income disruption is not evident from missing rent payments at lower-cost apartments in our portfolio. Certainly, unemployment reports are now coming out which allow us to understand which industry segments and population demographics are most impacted at this point. We don’t expect to be immune from these dynamics, but we also are not convinced that workforce housing assets will be more negatively affected than other multifamily property types.
What we’ve observed thus far in our portfolio is that the average past-due amount as a percentage of monthly rent is not correlated to the price of rent. The below chart illustrates the average accounts receivable outstanding as a percentage of monthly rent for each of our six distinct operating regions, compared to the average monthly rent charged per unit in that region:
*Note that this includes all outstanding A/R (previous months’ unpaid rents), and not just unpaid rent for the current month.
As we can see, this rudimentary analysis indicates no distinctive delinquency among the most affordable properties. Mid-month delinquencies for May also indicate a pattern consistent with what was observed in April: whereas typically 25% of tenants carrying a balance at the middle of the month pay above average rent per month, in both April and May this number is skewing upward to 32% and 40%, respectively.
It’s worth noting that anecdotally there is some skew in this data as we’re seeing minor concentrated patterns of delinquency at certain properties, perhaps as a function of density of employment in certain industries. However, our observation is that this is regardless of price point. In general, we are approaching this issue on a property-by-property, tenant-by-tenant basis, and we are encouraged that we see no evidence of a unique rise in delinquencies in our lowest-cost properties at this point.
Let’s give renters the credit they deserve
As we reflect on two months of operating in joint economic and public health crises, we are grateful to observe this relative consistency of performance within our portfolio thus far. Attribution is difficult at this stage: why is the income stream proving to be durable thus far? Is it no loss of wages, CARES Act support, proactive property management, or any of a myriad of other factors? Ultimately, we can only place credit where credit is due: the decision to pay or not pay is made by our tenants, and they are overwhelmingly deciding to pay.
Looking to the prolonged uncertainty to come, we will continue to work hard to provide safe, clean, and dignified homes, and we believe in turn they will continue to be willing to pay rent. We also believe their economic durability is understated, and that they will be not only willing, but also able to pay going forward. We look forward to continuing to monitor these trends and share insights as they become available to us in the coming weeks and months.
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 and May at 95% occupancy.
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