Arcan Capital Update: Early April Results and the COVID-19 Effect on Our Properties

The COVID-19 pandemic continues to wreak havoc on our way of life in the United States and around the world. As the novel coronavirus makes its way through a locked-down populace, the U.S. has experienced a sharp reduction in economic activity, with many economists projecting a 30-35% drop in GDP in Q2 alone. Moreover, over 10 million new jobless claims have been filed since mid-March. While the total impact of the pandemic will not be known for months, there has been widespread concern regarding the performance of apartment properties as of April 1st due to the dramatically higher unemployment numbers. As such, we wanted to share with you the initial results from our properties. Over the past few days, Arcan Capital has compiled the collections results from its assets and compared them to the previous months prior to COVID-19. The results are different than what you might expect.

Collections

With regard to collections, Arcan took a proactive approach and moved to incentivize early payments in the wake of the pandemic. Among the steps we took was to offer discounted rent for tenants who paid early. The results have been quite positive. Collections across our properties through the end of the day on April 5th remained ahead of the same period for March and February by 13% and 28%, respectively. As of this writing, Arcan has collected over 70% of total rent due for the month of April.

Leasing and Move-in Activity

Leasing and move-in activity across our portfolio have also been better than expected, though it is down from 2019. For the year-over-year period from March 1 through April 5, move-ins and applications are down by 13.6% and 12.9%, respectively. Move-ins during this period represent an annualized tenant replacement of over 46%. Historically, that is enough to replace all move outs in normal market conditions. While traffic is down 19.9%, we see this as a big victory considering these extraordinary circumstances; it would not be unreasonable to see this metric fall by 50% or more. It is also pertinent to note that our unit count changed during this period, but we adjusted our metrics to ensure that the analysis is statistically accurate.

Looking Forward

In our view, the story of April collections was always going to be about how challenging it would be to collect the last dollar, not the first. The reason for this is that at every property there is a solid base of residents who predictably pay rent on-time, every month. In our portfolio, we believe that percentage is about 75% of our residents. The remaining 25% struggle every month to make their rent payments and the real question is: what percentage of the challenged 25% eventually pay? The next few weeks will tell this important story.

Conclusion

While many were predicting collections and traffic in the apartment business would fall precipitously in early April, that has not been the case so far for Arcan. Activity has certainly slowed, but we can clearly see that people are still actively leasing and paying their rent. While the economic environment has clearly deteriorated due to the COVID-19 pandemic, we are encouraged by these early results. It is important to note, however, that each property and portfolio is different. Arcan Capital owns and manages assets that would rank between a high C and low A on the quality scale. A portfolio entirely composed of C-quality assets is likely to have worse results. A portfolio of entirely A class assets would likely have performed better. While our numbers are obviously preliminary, the results from our properties so far give us hope that overall performance in April will be better than many predicted.