Supporting Our Communities

June 4, 2020

Like everyone in the housing industry, Polaris is navigating in uncharted territory. Our experience moving through the second quarter of the year has shown us that concern for our staff and residents, careful fiscal management, close communication with our partners and investors, and prudent future planning are the guideposts we’re using to mitigate potential hits to our portfolio performance and provide the necessary support to see our firm land safely in a brighter future.

As of June 1, 2020, the portfolio was 94.1% occupied. Our May total income collected was 104.2% of the average monthly collections for the prior 12 months. We have implemented online, virtual leasing strategies for all assets and, at least for now, leasing remains brisk, with online leasing strong throughout our portfolio.

We feel that we have sufficient clarity by now – the beginning of June – to draw reasonable conclusions regarding what we expect to collect of rent and additional income for the past month. For many assets, this is roughly in line with their historical collections percentage by this time of the month. To support our resident communities, we have executed rent payment plans with those residents who have notified us that they have lost employment due to the COVID-19 impact. We have seen significant support from our tenants in May, even those who were late or delinquent in April paying back rents due.

We are also focused on reducing expenses. This includes halting all non-essential capital projects requiring outside contractors and reviewing costs associated with utilities use. We also are establishing online marketing programs to take advantage of increased reliance by prospective residents of internet-based information-gathering while reducing traditional marketing vehicles. We have been able to reduce temporary staffing costs as the onsite management teams’ workload has lessened and complete certain capital projects with our existing maintenance teams who, with lower apartment turnover, have more capacity for these tasks. With fewer residents moving, apartment turnover costs have dropped; with a moratorium on evictions in all of our cities, related legal costs have also been reduced. We are pricing out portfolio-wide telecom plans to both reduce our per-asset telecom charges and provide improved wireless connectivity for our residents who are spending more time at home.

These initiatives will provide a cushion for what we suspect may be difficult rent collections for June and into the summer months. For many Americans, income for April and May may exceed their typical income. Most Americans will receive a stimulus check of $1,200; for those with children, an additional $500 per child. Additionally, the typical State unemployment check of $400 – 450 (depending on State) per month will be augmented by $600 per week in additional Federal support through July. Finally, many will receive Federal and State tax refunds over the next 30-60 days. We’re hopeful that our residents will utilize these extra funds to pay their rent on time and in full.

Beyond May, we note that many states intend to begin cautiously re-opening their workplaces soon. We expect that those businesses opening will be primarily essential work, such as manufacturing, distribution, and to a lesser extent retail and restaurant establishments under certain stringent conditions. One of our fundamental investment criteria has been to acquire assets that are close to major industrial parks and corridors as well as rail hubs where one finds a high concentration of working class, blue collar jobs. We believe that this will be a particular advantage as the economy begins to start back up.

As of June 1, 21.5 million Americans are out of work. This number is probably lower than actual as most States are having difficulty processing the unusually high number of claims. As those claims are registered throughout the remainder of June, coupled with additional layoffs, we expect that US unemployment will end the month in the range of 15% to 20% (the Great Depression’s peak was 24.9%). As a perspective, the US jobless rate in 2009 was 9.9%; in 2010, 9.3%.

We believe that this rate will drop much faster than during a typical economic recovery as many of those without work were furloughed rather than laid off and will have jobs to return to once shelter-in-place restrictions are lifted. If half of those currently unemployed were to return to work within a few months, we would end the year at 2009-2010 recessionary levels or lower. Clearly, this is not a great outcome. However, the multifamily industry should be able to manage the assets through a recessionary environment at that level.

Throughout all of this, we recognize that we are providing what is arguably one of the most important essential services behind our medical professionals and first responders. People must have a safe place to shelter. Our onsite teams are working through a high degree of potential physical risk to provide safe and clean living environments for our residents, and are doing a phenomenal job. We have implemented numerous cleanliness and health initiatives at each of our assets which we believe will mitigate the spread of COVID-19. We are grateful that, at the time of this correspondence, we have had only 4 confirmed cases that we know of among our properties, which are collectively housing over 6,000 residents.

We have implemented a number of resident-focused initiatives, including food sources, ensuring that our younger and elderly residents had access to local lunch programs and food in general, sources for rent support from Cities and local NGOs as well as nearby employers that were actively hiring. In May we assembled and distributed a program schedule of online entertainment, fitness, travel and education programs that our residents can enjoy which we continue to roll out.

We have noted for some time that when the US enters into a recessionary economic environment, we would increase the volume of our acquisition program. We are closely monitoring values in our preferred markets and will pursue opportunities that fit our investment criteria and offer strong returns. One hurdle to investment currently is lending restrictions. Although borrowing interest rates are low, lenders are requiring very large reserves that would cover loan, insurance and tax payments for at least a year. However, we expect that, as the economy starts to recover, lending criteria will loosen as it did when we were investing in the depths of the last recession.

For the mid- to long-term, multifamily fundamentals have not changed; if anything, they will become stronger. The tension between spiraling construction costs and heavy population growth besieging every metro worldwide, particularly that of low- to moderate-wage earners, will stay in place for at least the next decade. Compounding this will be Millennial renter trends, a demographic that grew up in the shadow of the Great Recession who, faced again with extraordinary job insecurity, will be loath to commit to a mortgage.

Polaris will continue to manage our existing portfolio with scrutiny and diligence in the face of this challenge.

Travis and Ron