By: Cindy Daly, vice president of underwriting at Four Springs Capital Trust
During the past few weeks and months as we’ve been adjusting to the ever-evolving “new normal” precipitated by the COVID-19 public health emergency, I’ve heard a lot of people say that “we’re all on the asset management team now.” This is no doubt true, but the groundwork for this pivot was laid over the preceding months and years.
In asset management and underwriting we do our best every day to predict what can go wrong with a tenant or a property and avoid or mitigate those risks before they happen. And when something does go wrong, we are on the front lines of fixing the problem and learning from it, so we can reduce the risk of it happening again.
Over the years, we’ve seen some major events that have disrupted the markets from which we have certainly learned, but I don’t believe that any of those events adequately prepared us for a worldwide pandemic and its resulting crushing impact on wide swaths of our economies.
The pandemic is providing a stress test of our business plans, processes and procedures, and infrastructures, as well as the importance of our relationships with our tenants and our peers that we’ve dedicated years to developing and strengthening. We’re now halfway through 2020, so it’s a good time to reflect on our experiences and the lessons we’ve learned thus far during this most unusual year.
When the pandemic began to spread and the ensuing stay-at-home orders were put in place, no one I spoke with knew what to expect. Many believed at first that the situation would last a brief time and we’d all be back to a new, more sanitized, socially-distanced normal before we knew it.
There was a great deal of uncertainty for both landlords and tenants, but at that time the assumption was that restrictions would be relatively short-lived, measured in weeks, rather than months. It wasn’t at all clear what the long-term implications would be, if any, as everyone sheltered in place and adjusted to their new routines working from home. This assumption did not last for long as the pandemic gained momentum.
Four Springs Capital Trust focuses on single tenant, triple net-leased properties with tenants that have strong credit. Pre-pandemic, collection of 100 percent of our rents and property expenses was almost a foregone conclusion. We quickly supplemented our existing processes as the shelter-at-home orders expanded, and we started to receive rent relief requests. We immediately began tracking rent receipts daily to proactively identify and reach out to tenants as soon as we received any indication that their payments could be late.
Not surprisingly, the earliest requests for rent relief came from tenants whose primary service-related businesses were among the first to be shut down by local and state governments. They were experiencing legitimate distress and uncertainty caused by their inability to operate in any capacity for a previously inconceivable period of time. They were asking for relief because they were trying to stop the bleeding however they could. While we could empathize with their circumstances on a human level, all businesses need to enact contingency planning, and landlords’ obligations to shoulder the costs of maintaining buildings, service debt, and pay taxes and insurance do not abate.
As we all know, the rent is a critical component of a landlord’s ability to meet its obligations to its lenders, shareholders, employees, and other constituents. Despite our inability to provide rent relief, the honest, collaborative conversations we had in the early days in response to good-faith requests generally helped to strengthen or at least maintain positive tenant relationships.
However, we also received early requests from those who were taking an opportunistic stance and were requesting or even demanding rent relief even though they had strong balance sheets, solid cash positions, ready access to capital, and strong support from investors. In addition, these were frequently businesses that were deemed essential and had been permitted to continue to operate. These requests that were not made in good faith were not well received, and we responded accordingly.
To manage rent relief requests, we devised a comprehensive application for rent relief package consisting of detailed questions regarding the tenant’s financial position and actions they, their investors, and their lenders had taken to mitigate their financial distress. We considered if there was an opportunity to offer relief in exchange for a lease extension or other modification of lease terms.
In the end, though, it was and is our belief that the landlord should not be the first to provide relief to a tenant that is facing financial challenges. We responded quickly and decisively to any tenants who failed to make regular rent payments in order to preserve our rights under the lease.
Communication was a critical part of our early initiatives and continues to be now. We increased the frequency of our conversations with our peers in the industry to be able to share market intelligence and brainstorm ideas. We had always had good relationships with our tenants, and this enabled us to have an open dialogue during this difficult time to offer our insights and expertise, to better understand their circumstances on a corporate and local level, and, where necessary, to remind them of their obligations to pay rent and property expenses.
At the same time, we bolstered communications with our investors in order to keep them fully informed of our efforts and current situation with regard to rent collections and, as we’ve required of our tenants requesting rent relief, the actions our company has taken to contain costs.
Today, we are seeing some green shoots of re-opening in some areas of the country, as well as some areas closing down again. We are expecting the public health emergency and the resulting tremendous uncertainty to continue for quite some time. But it isn’t too soon to reflect on some of the lessons we’ve learned thus far.
The most important lessons we have learned at this point in the pandemic are: (1) even though we did not specifically predict or plan for a global pandemic in 2020, we did develop and continuously enhance robust asset selection and underwriting processes, and we made significant investments in our asset management infrastructure in order to mitigate the risks associated with disruptions in the business activities of our tenants – we just didn’t anticipate or plan for an event that would disrupt virtually all of our tenants’ businesses so quickly and severely and at the same time; (2) building and maintaining positive, collaborative relationships with our tenants, investors, lenders and peers is extremely important during challenging and uncertain times, and (3) communicating, particularly when there isn’t much good news to share, is critical to maintaining those relationships we have worked so hard and for so long to nurture and develop.
No matter how hard we try to predict the next crisis based on our past experiences, things will occur from time to time that we didn’t expect. We have to be well-positioned with the tools and the mindset to be able to generate creative solutions to whatever happens, whether to a single building or tenant, to an entire industry or property sector, or, as in this case, on a global scale.
For example, a year ago, if you had asked investors about the greatest threat to bricks and mortar retailers, there was a high likelihood that their response would have been the “Amazon factor” or some variation thereof. Not too many would have mentioned “global pandemic”, and yet, here we are. There will be wide-ranging after-effects to the pandemic impacting how and where we all work, shop, travel, interact, and live. And there will be changes to things like lease structure and insurance policies precipitated by litigation that is still in its nascency.
The COVID-19 pandemic has provided us with a learning opportunity to identify areas where we will need to focus to be stronger in the future, and the chance to strengthen our relationships with our peers, tenants, lenders and investors. It also serves as a reminder that events will occur from time to time that we did not or could not predict, but that we must confront, nevertheless. The real estate industry has proven itself to be resilient time after time. We’re just halfway through 2020, and our mission now is to leverage what we’ve learned to make positive changes and be well-positioned to benefit from opportunities that will inevitably arise.
About Cynthia Daly
Daly has served as vice president of underwriting at Four Springs Capital Trust since December 2016. From November 2012 until December 2016, she served as director of acquisitions. Prior to joining the company, Daly was the founder of Sand Dollar Investments LLC, a real estate consulting firm, from March 2008 until November 2012. From January 2001 until November 2010, she served as executive vice president and director of Monmouth Real Estate Investment Corporation (NYSE: MNR), a REIT focused on net lease industrial properties. Daly earned a B.A. in English from Lafayette College and an M.B.A. from Monmouth University.
The opinions in the preceding commentary are those of the author alone and do not necessarily reflect the views of The DI Wire. Four Springs is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.