Well, we’re a year in. A year into what feels like the longest year of any of our lives. We’re a year into the unknown, into the health scares, the toilet paper fiascos, the conflicting expert opinions. A year into the “we promised we won’t lose your money but if nobody pays rent at all we might lose your money” Black Swan scenario that none of us could have predicted when we spun up our first fund in 2015.
In a lot of ways, life "pre-COVID" feels unreal. A dream. A past life. The other day, we caught ourselves wishing we could meander aimlessly around Target without a mask or an agenda. We didn’t even do that before the pandemic.
If we rewind the tape back to the March that feels like a decade ago, we can remember the conversations of denial and the swift journey to acceptance. We started at “That might happen in China, but it won’t happen anywhere else.” Then we moved to “What is Italy thinking? I bet that lockdown might hurt their economy.” Suddenly it was “There’s zero chance my neighborhood coffee shop closes its doors because of this thing.” And then, finally, we settled in at “I better buy a ton of toilet paper and pasta.” In what seemed like the course of a week, everything changed, and the “It will never happen here” turned into a stomach-churning, heart-sinking, “Oh no.”
As asset managers, we’ve been stretched beyond what we thought possible, and we’ve grown by leaps and bounds. As we reflect over the last twelve months of stewarding capital and operating apartments, a few lessons have emerged. It is our privilege to share them with you now.
The truism has never been more true. To every one of our investors, tenants, employees, lenders, mentors, partners, and friends: We are grateful to each and every one of you. Beating a dead horse is worthwhile in this instance -- we have been in this together, and the unity has made us stronger.
A seismic event like the one we’ve experienced can be isolating -- even more so given that the remedy in this case was literally to stay apart. The weight of decisions that impact the lives and capital of so many felt daunting and, at times, lonely.
But the empathy of our community was tangible and stabilizing.
We called our investors with our plan to weather the storm -- they told us that they believed in us and were there for us. We called our lenders to discuss our options if collections took a turn for the worst -- they assured us that we were in this together and that we’d get through it together. We called our tenants and told them we’d work with them if they’d work with us, and they paid rent like it was going out of style. We called our team and told them that would rise to the occasion together. And rise we did.
So why did our lenders respond the way we did when we called them that week? Probably because we were on the phone with them the week before any of us were worried about any of this. And because we most likely had lunch a couple weeks before that. And probably chatted the week before that, maybe talking about real estate, maybe talking about our kids, maybe talking about college hoops. We kept it real in the good times, and it paid off in the bad.
Why did our investors communicate that they believed in us? We’d like to think it’s because we’ve been transparent with them since they signed subscription docs, consistently communicating the bad news along with the good. Maybe it’s that we’ve hosted them at our offices, toured them through our assets, and taken all of their phone calls. Or maybe it’s that they’re really good people, and they had empathy for the unknown challenges we faced.
Why did our employees rise to the occasion and continue to perpetuate a great culture even when forced to do so virtually? Why did our tenants pay rent with remarkable consistency when there was a federal moratorium on evictions?
We’ll never be able to fully unpack the causal factors, and we’d be foolish to credit ourselves for the gracious response of others. But we can’t ignore our intuition, which leads us to think their response had something to do with the fact that we invested in relationships before the crisis, not during. And we didn’t just invest in people because we might need them someday, but because we genuinely care for and believe in relationships. And when times do get hard, and the chips are stacked against you, that makes all the difference.
Workforce Housing is Resilient
We know, we know: we sound like a broken record. We’ve said it before and we’re going to keep saying it: Workforce housing generates the best risk-adjusted returns of any alternative asset class in today’s investment landscape. Period. And, despite what all the industry experts said early in this crisis, COVID-19 turned out to be just another proof point.
The average apartment in our first fund rents for $672 a month. We launched our fund based on the thesis that no economy is so bad that we can’t find someone to pay us $672 a month for a one bedroom apartment within twenty miles of Pittsburgh’s central business district. In fact, workforce housing tends to be a countercyclical product. When the economy takes a downturn, people don’t leave their homes for the streets. They downsize into - you guessed it - Class B apartments.
Enter COVID-19. The one Black Swan that seems to blow our thesis out of the water. After all, what happens when the workforce - by government mandate - can’t work? Recall, many of our tenants are hourly wage earners. They get paid for their time, which generally requires doing something outside of the home. Would people figure out a way to keep paying rent?
In late March, we weren’t sure. Candidly, we recall conversations with our families about how this could be the one unforeseen event that poked a hole in our thesis. We remember talking several times with legal counsel -- precious, wise legal counsel -- to discuss contingencies in the event that rental income fell off a cliff. We still have the Excel models that we built to answer the question “how much rent do we actually need to collect on April 1st to pay our mortgage in April, without dipping into cash reserves?” Those weren’t fun conversations to have or models to build.
Thankfully, our tenants met the moment. As to whether or not they would figure out a way to keep paying rent, they answered loud and clear: “YES.”
As we have observed, there are tremendous safeguards in place for the protection of the asset class. It’s too essential to fail. No politician - left, right, or center - is going to leave this massive segment of the population starving on the street. They certainly don’t want to destabilize the livelihood of the lower-middle class by having Fannie Mae or Freddie Mac foreclose on multifamily properties. And so we saw mortgage forbearance policies, rent relief programs, stimulus, the list goes on... and rent checks continued to come in, and they continued long after direct stimulus buffers were gone.
We also saw a nationwide prioritization of the home. While stay-at-home orders did have the potential to disrupt income streams, they also redirected the energy, time, and dollars of the population towards the four walls in which they were spending an increasing amount of time. For the portion of the population that rents a very affordable apartment, purchasing a home or moving into a larger apartment generally isn’t a viable option. What is viable is prioritizing the shelter you already have, and ensuring that nothing happens to jeopardize the stability of your present situation. This played out clearly through consistent collections in our portfolio, to the credit of our resilient residents.
Manage Risk on Sunny Days
Some of us have kids. And we live in Pittsburgh. Where it’s been cold for months, and sunny days are few and far between. On the rare occasion when we do have a beautiful, sunny day (another Black Swan event, for Pittsburghers, at least), our kids want to get outside and play ASAP. No need for breakfast, brushing teeth, or an episode of Odd Squad on PBS Kids -- they want the playground, and they want it now.
But we make them make their beds and clean their room first. Because if they don’t, the mess is going to be sitting there for them when they get back. And we make them have breakfast first. Because if they don’t, they’re going to get grumpy and it’ll ruin the sunny day. And we make them brush their teeth, because we know that good habits lead to good results.
COVID-19 provided a moment of healthy reflection for us. In some ways, we were pleasantly surprised at the amount of risk management we had been doing. We had healthy defenses in place for liquidity backstops, good processes for communicating with stakeholders, strong technology infrastructure in place, and we had cultivated authentic relationships over a period of many years.
And, we had to acknowledge a few ways in which we were caught with our proverbial pants down. We could have had better cash flow stress test models in place before March 2020. We could have been more knowledgeable about the details of our loan covenants, and we could have had more diverse methods of business development than the typical conferences and cocktail hours. Coulda, woulda, shoulda -- COVID-19 presented us with an opportunity to improve the resilience of our business moving forward, and we now have a greater appreciation of the importance of risk management which has worked its way into our internal key performance indicators.
The analogy with kids on sunny days only goes so far, but we hope you get the point: the right time to manage risk is when most people aren't thinking about risk at all. Thank you, COVID-19, for teaching us that lesson with incredible clarity.
Concluding Thoughts: Trust, Optimism, and Gratitude
March of 2020 was a wild ride. We’ll conclude with mentioning one final set of unforgettable dialogues. During that month, we had a steady stream of inbound messages from our largest investors asking for a phone call. Of course, we took those calls, and they are remarkably memorable conversations.
What sticks out about them is the agendas that these investors wanted to set, which seemed to be consistent from one call to the next. They weren’t reaching out to make sure we had solid contingency plans or to coach us on how to navigate tough times. They didn’t really want to talk about playing defense and building liquidity buffers. Sure, we touched on practical realities, but that wasn’t the impetus for the conversation. They were reaching out for two reasons: to see how we were doing, and to talk about opportunity.
Of all the risk mitigating reasons they could have been reaching out to talk, they wanted to ensure personal wellbeing and look on the horizon. Those dialogues built an incredible amount of confidence in our team to chart the course and march ahead. What lessons we learned from them in investment and in leadership in how they led those conversations -- trust your stakeholders, build them up, and direct them towards opportunity.
Obviously, we won’t soon forget the earliest moments of the pandemic practically making its way into our lives. And we’d be remiss to not mention that this has been an absolute tragedy, with so many lives lost and disrupted. However, as we reflect upon the year past, we are flush with gratitude for three hundred and sixty degrees of support from Birgo stakeholders. Perhaps this is the primary reflection, after all -- we are surrounded by a tremendous community of employees, investors, lenders, tenants, vendors, partners, family members, friends… the list goes on and on, and we are grateful.