Portfolio update: New preferred equity investment in Knoxville, TN

New preferred equity investment with 15.5%¹ gross return to fund the development of 120 single-family homes.

Jun 20, 2024

We are pleased to announce the latest addition to the Fund’s portfolio—a preferred equity investment in The Highlands, a to-be-constructed build-to-rent community located in Knoxville, TN. The investment, which carries an attractive 15.5%¹ fixed return, underscores our continued focus on high-quality credit investments that capitalize on the current period of higher interest rates and dislocated credit markets. The Highlands investment was made through a joint venture between the Fundrise Income Fund and the Opportunistic Credit Fund.

The Highlands development is planned to include 120 three-and-four-bedroom detached single-family homes. Homes will range in size from 1,000 to 1,800 square feet with Class A finishes, an attached one-car garage, a private driveway, and a fenced backyard. Community amenities include a central clubhouse with a fitness/wellness center, a private dog park, an outdoor pavilion, a pool, and a grill area.

Our investment is structured as preferred equity with an attractive 15.5%¹ fixed annual rate of return. As shared previously, this structure ensures that our investment receives priority in terms of distributions from the asset, offering significant protection against future risks while still providing a compelling return profile. The loan-to-cost (LTC) ratio is approximately 82% with the developer/borrower putting up 18% of the capital as equity, which is junior to (i.e. subordinate to) our investment.

Key investment strengths

High Yield Potential: With a projected gross rate of 15.5%¹ per year, this investment offers a strong risk-adjusted return profile.
Strategic Location: Situated in the North Knoxville submarket, the project is expected to benefit from continued local demand for high-quality rental housing, which has driven consistent rent growth over the past several years.
Quality Construction: The sponsor, Flournoy Development, has completed more than 230 projects and developed over 43,000 units over their 30+ year history. The Highlands will be Flournoy’s third Class A residential development in Knoxville.

About the market

The northern Knoxville submarket continues to experience strong demographic growth along with annual rent growth of approximately 6% (source: CoStar) and vacancy rates below 5% (source: CoStar). This project not only aligns with our strategic focus on build-to-rent communities but also positions us to continue to benefit from the ongoing supply constraints and the subsequent demand for high-quality rental housing.

Funding the gap continues on

As we’ve discussed at length, we believe the current macroeconomic environment continues to create a window of opportunity for what are historically attractive investments with uncommonly strong risk-adjusted returns, specifically in the credit and lending markets.

With interest rates continuing to remain elevated, we expect to continue seeing strong investment opportunities arise in the preferred equity and bridge/gap financing space.

Impact on your portfolio

Currently, the Income Fund boasts an annualized distribution rate of approximately 8%. Given the sustained high-interest rate environment, we have been actively adding new deals to our pipeline that we expect will support us in maintaining and at times potentially improving the fund's distribution rate.

It’s important to understand that high-quality, high-yielding investments like the 15.5%¹ preferred equity investment in The Highlands are rare and not easily replicated, furthermore, no one investment can single-handedly elevate the fund’s overall yield alone. The Income Fund is intentionally a broad and diversified portfolio of quality assets, originated over different time periods with different rates of return, with the goal of providing stable, consistent distributions over a longer time horizon.

Should you have any questions or require further information, please do not hesitate to reach out to our Investor Relations team at investments@fundrise.com.

Additional Information: An investor in the Fundrise Income Real Estate Fund (the “Income Fund”) should consider the investment objectives, risks, and charges and expenses of the Income Fund carefully before investing. The Income Fund’s prospectus contains this and other information about the Income Fund and may be obtained here. Investors should read the prospectus carefully before investing.

1. This solely represents a fixed rate of preferred return due to the Opportunistic Credit Fund and Fundrise Income Fund under the terms of their investment agreements and does not reflect either a gross or net return that an investor in the Opportunistic Credit Fund or Fundrise Income Fund may expect to receive as a result of this fixed rate return. Due to the uncertainty of other factors that will ultimately determine the return to any investor (such as leverage, cash drag, and other potential financings), the performance of this asset to the investor is currently unknowable and undeterminable, and may ultimately be lower or higher than the stated fixed rate of preferred return. However, please note that all investors in the Fundrise Income Fund will be subject to a 0.85% asset management fee and 0.15% advisory fee, and all investors in the Opportunistic Credit Fund will be subject to a 1.75% fund management fee, and, if the Opportunistic Credit Fund is able to achieve a greater than 10% overall return on its portfolio, which is also uncertain and undeterminable at this time, then the asset will also be subject to an additional 20% performance-based fee for those Opportunistic Credit Fund investors.