It is in challenging times like this that true leaders emerge and the weak falter. Therefore, we believe it is vitally important to invest with a group that has extensive, successful experience managing and leading businesses. Our team has been taking daily decisive actions as we progress through this pandemic that has hit the entire world. Our priority has been to protect the health and safety of our residents and on-site teams while also protecting the downside for you.
The coronavirus has had a major impact on most of the economy. In an effort to protect your investment we have made some decisions that we’d like to share with you on how we are actively taking action given the circumstances.
Asset and Property Management Activity
One of the first actions we took across our portfolio was the closing of all on-site amenities to follow social distancing rules set forth by the government.
Shortly thereafter we made the decision to close the leasing office to non-essential traffic. All residents must submit their maintenance requests online via their resident portal or over the phone.
Since the leasing office was closed off to non-essential traffic, the on-site teams swiftly began adding virtual tour and self-guided tour options for touring prospective residents for vacant units.
The maintenance teams were instructed to not fulfill any non-life-threatening maintenance tickets. This helps to protect the health of our maintenance team but also helps us reduce expenses during this time.
All non-essential expenses have been halted to preserve cash flow during this time of uncertainty.
Steps to Maintain Occupancy
Our on-site teams are very good at staying on top of upcoming renewals. We communicate with all upcoming renewals that are within 60-90 days, so we know of residents that are planning to leave. This allows us ample opportunity to lease up their unit prior to their leaving.
We made the decision to halt any rent increases as the National Apartment Association made a strong recommendation that all rent increases should be halted for the next 90 days.
The residents that had already given us their notice-to-vacate were given the option to stay in their unit on a short-term basis during this national emergency.
Our goal during this time is to maintain occupancy and not try to push rents.
What About Renovations?
The construction teams were allowed to continue renovating units that were already in the middle of being renovated. We wanted to make sure we had units to rent when this was all over instead of just stopping in the middle and having to pick back up later.
In the short-term, any new vacant units would be quick turned to lease to a new resident.
Again, our goal right now is not to push rents but to maintain occupancy.
Time to Halt Investor Distributions? Not so fast.
Our goal is to always maintain our consistent, monthly cash distributions for you. The question about whether we will halt investor distributions has been brought up on several occasions.
We underwrite our assets to be well capitalized with ample operating reserves. However, we don’t want to dip into those operating reserves if we don’t have to. The operating reserve is a cushion to prevent any capital calls in the future for incidents like the one we are facing right now. Nobody likes capital calls.
At this point, we have decided not to halt any investor distributions. The March distribution was sent without any issues. The March rents were already paid prior to the pandemic hitting our economy. The April rent collections will be a better sign for each of our assets.
If we do decide to halt distributions it will be on an asset-by-asset basis and not a blanket decision across the board. The impact of the resident ability to pay April rents will vary based on the asset and thus halting distributions will vary.
Is Now the Time to Buy?
There has been an overall cessation in buyer demand for multifamily assets. This presents a great opportunity for us to acquire assets at a lower price since the demand has been lowered.
Most of you know by now that we are raising money for our current offering called Hawthorne at Lake Norman. As of this writing we are negotiating with the seller for price reduction due to the COVID-19. I am confident that we will be able to secure this discount and will make the investment an even more attractive one for you.
The debt piece is the biggest hurdle as rates have been fluctuating hour-by-hour. Even with the 10-year treasury at an all-time low and the Federal Reserve dropping it’s rate, the spreads on agency debt has been rising due to demand.
Most lenders, including CMBS, life insurance companies, bridge lenders, and local banks have dried up. This creates an extreme amount of demand for Fannie Mae and Freddie Mac. Since they have an increase in demand, they have very little competition, so the spreads are increasing.
This is where it is important to stress-test the underwriting very closely. With an increase in interest rates it causes the overall proceeds to go down due to the DSCR constraints. When the loan proceeds go down it causes the equity raise to go up. Debt is always cheaper than equity. This causes the returns to go down while simultaneously causing cap rates to expand across the board.
As long as you understand the interplay between the various debt metrics and you stress your model appropriately, you can still find solid deals to acquire even in the middle of the coronavirus pandemic.
Final Thoughts on the Impact of COVID-19
The coronavirus will certainly have a short-term impact on the overall multifamily market. The values of properties will likely decrease but we have no plans to exit any of our assets in the middle of a downward market trend.
We still strongly believe that the demand for multifamily will continue and will be in a stronger position even after this pandemic is behind us. Historically, pandemics cause a rise in divorces, more marriages, and an increase in births (maybe we should call them coronababies.) All of these will drive demand for multifamily housing.
Our team is committed to maintaining the assets and performing our fiduciary responsibilities for your investment. It might be painful in the short-term but we will come back stronger than before as we always do.