Charting the Course
Ten Lessons from the Pandemic
By Mitch Siegler, Senior Managing Director
It has been a topsy-turvy year. Last March, we held our annual investor meeting and ten days later, our nation went into lockdown.
It has also been an extraordinary year of learnings. We learned that our multifamily business and the markets where we operate – which we always thought of as resilient – may be even more resilient than we thought. And while we knew we had a terrific team at Pathfinder and great technology, systems and processes, it’s been amazing to watch how the team pulled together, shared information, documents and spreadsheets, worked from home, held Zoom meetings and oversaw nearly 40 properties and 3,000 apartments and basically reinvented elements of our business from top to bottom.
That is another learning – yesterday’s ways of doing things may not serve us well tomorrow. Pathfinder has long had disaster recovery plans in place and robust file-sharing and cloud computing systems, which served us well when we went from the office to working from home on March 13. My partner, Brent Rivard’s mantra – “act quickly but decide slowly” has become a rubric for decision-making. Last January, we read the tea leaves and purchased facemasks for our team and their family members. Last March 13, we closed our office, assembled our Crisis Response Team, and began reimagining many elements of our business.
“Act quickly but decide slowly” has framed much of how we have operated. We immediately understood that some of the old metrics needed to be updated – like property occupancy rates were not nearly as important as actual rent collections. So, we created tools for tracking collections and incentivizing the leasing staff to collect rent on time and at maximum levels. We also needed to be able to understand our “margin of safety” – how far could collections fall with us still being able to pay all property and fund expenses and make mortgage payments? We developed a tool – Sustainable Economic Vacancy – to help us understand and manage to this margin of safety.
We managed Sustainable Economic Vacancy or SEV with a massive spreadsheet we created in 72 hours to track actual rent collections and compare this to operating expenses and debt service payments for each property, each fund, and the overall portfolio. SEV showed us that we had a substantial margin of safety – 20%-30% for four out of five properties. SEV also highlighted that 20% of our properties had a smaller margin of safety – 10%-15% – and if we suffered a dramatic falloff in collections at those properties, we could have a shortfall with respect to operating expenses or, worse, mortgage payments.
Now, some of these properties had cash cushions and most underlying funds had further cash cushions. We thought we were going to be okay, but nobody knew what tomorrow would bring a year ago – with the entire country locked down, tens of millions of Americans out of work and the stock market in free fall. So, we wanted both a belt and suspenders and reached out to our primary lender to lay the groundwork for interest-only payments, if needed, on a handful of the property loans. It is always better to overcommunicate – lenders appreciate hearing about potential issues early. While we did not need to pull this lever, it was good to know we could if necessary.
Excellent communication is always essential. We have always prioritized strong communication with our team and with our investors. But, in times of crisis, the frequency and depth of communication really needs to be increased. Here are a few ways we thought about internal and external communication a year ago.
When a team is physically together, the opportunities for communication are constant. You can gather in the conference room for a scheduled meeting, convene an impromptu meeting or even work through a problem for ten minutes at the water cooler. When people are working from home, the natural fabric of an organization can break down.
And it is complicated with a portfolio of 40 properties in six different cities with several property managers, scores of leasing agents and a dozen contractors and sub-contractors working at the properties at any time. Our Asset Management team held daily calls or Zoom meetings, generally multiple meetings each day. Members of this team engaged with each property manager and leasing manager and developed tools for having real-time visibility on rent collections at each property and overall – this all fed into a massive portfolio rent collections spreadsheet that they built and that they maintain still. Our Crisis Response Team spoke daily for several months, then three times/week, then twice/week.
And we took a similar approach to communicating with our investors. We issued a series of seven five to ten-page Special Communications to Pathfinder investors last year in addition to our regular quarterly updates for each Fund/property syndication. We felt additional communication was important because nature abhors a vacuum and it is natural for people to have anxiety in the absence of good, clear information.
A year ago, it seemed like “The Pandemic Would Change Everything”. Covid cases were exploding. The stock market was in free fall. Most offices, stores, restaurants, and schools closed, and many remain closed a year later. Tens of millions of Americans shifted to working from home. Nobody knew how safe it was to visit a grocery store so many people shifted to having groceries delivered. New Federal, state, and local regulations prohibiting eviction moratoriums – our primary tool to enforce rent collections – were being issued every week.
What did this mean for our investors? We wanted to tell our investors what we were seeing and share with them how we were thinking about everything to help provide confidence that our business was strong, our team was on it and their Pathfinder investments were secure and in good hands. Many investors have told us that these communications provided some of the best information they received last year and gave them confidence not only about their Pathfinder investments but about how to position their overall portfolios, how to think about the future of travel, office work, transportation and more. Most importantly, people told us the information inspired them that we needed to be patient and cautious and that we could get through this challenge and to the other side together.
It is said that in crises, weak companies may fail, decent companies may flounder, and great companies may become stronger. Pathfinder has been very fortunate. We received hundreds of calls and emails from investors who were amazed that we have been able to collect 97%-98% of the rents, boost portfolio occupancy from about 93% last March to 98% today and continue to renovate apartments and generate substantial rent premiums on renovated units.
And we didn’t just survive, we thrived. Last spring, we launched Pathfinder Income Fund with five properties in Phoenix and San Diego from legacy Pathfinder funds and acquired a sixth property last fall in Denver. The Income Fund received more than $20 million in new investments in its January 2021 closing and will be closing on two more property acquisitions in the next two months in Denver. Last year, we also launched Pathfinder Opportunity Fund VIII to take advantage of multifamily distress precipitated by the pandemic – we received $50 million in commitments, closed our first acquisition, in Portland, this month and have several other potential acquisitions in the queue. Multifamily is a healthy real estate food group and likely won’t suffer nearly as much as hospitality, retail or office. But, if opportunities in this sector present themselves in our target markets, we will likely find our share.
Of course, we had no idea that a pandemic was coming. But the last real estate up-cycle began in 2009 and after a decade, we suspected the cycle could turn. Trees don’t grow to the sky. That’s why we began preparing many years ago to prune our portfolio of all but multifamily assets. During the past five years, we have sold retail centers, office buildings, a hotel, land, condos – prior to the pandemic, 95% of our portfolio was apartments and it is nearly 100% today. We were fortunate to enter the pandemic in a strong position, with solid properties in excellent markets. Our Class-B suburban properties in mid-tier cities may have benefited from an exodus from gateway cities to these mid-tier cities and from urban areas to the suburbs. The rents on our properties represent a good value for residents. We are also fortunate to have a great team at Pathfinder and a very supportive group of investors. We are certainly grateful for that! Gratitude – another very important lesson from the past year.
As we approach Spring, there is a greater sense of optimism about vaccinations/impending herd immunity, learning to live with the virus and a rebounding economy. Let’s all be careful out there and continue to look forward to more sunshine and better days ahead.
Mitch Siegler is Senior Managing Director of Pathfinder Partners. Prior to co-founding Pathfinder in 2006, Mitch founded and served as CEO of several companies and was a partner with an investment banking and venture capital firm. He can be reached at email@example.com.
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