As part of an increased focus on Opportunistic Credit, we’ve invested roughly $20.8 million to provide financing in the form of preferred equity for the development of the Mason at Daytona Beach, a 300-unit multifamily community on 65.4 acres of centrally located land in Daytona Beach, Florida. We believe that because of the current macroeconomic conditions and dislocations in the credit markets, we are able to deliver higher risk-adjusted returns than were previously available.

In this instance, under the terms of the investment agreement, the borrower has agreed to pay us a 13.5%1 fixed annual rate that will accrue for as long as it takes to finish the project, and our investment will be paid back upon its completion.

Strategy

Fixed Income

Provide real estate backed loans or similar structured financing

  • Risk-return profile: Low to moderate
  • Expected timing / delay of returns: Typically immediately after acquisition
  • Expected source of returns: Interest income

More about our strategies

Note that this section is intended to provide a general overview of the Fixed Income strategy for educational purposes only, and is not meant to be representative of the specific details of any individual investment. All investments involve risk and there are no guarantees of any returns.

Business plan

Our loan will be used to finance the construction of this class-A multifamily community, which the borrower, Waypoint Residential, expects will take roughly two years to complete. At that point, they plan to lease up the units and pay back our preferred equity investment, either using proceeds from a sale or by refinancing the property once it’s stabilized. (In the world of real estate investing, “stabilized” refers to a property that is almost completely leased up — typically an occupancy rate over 90%, therefore producing a “stable” flow of rental revenue.)

In April 2022 Waypoint acquired the vacant land already zoned for residential development with plans to begin construction of eight three-story apartment buildings, with a total of 300 luxury units in early 2023. The development will offer a diverse unit mix of one-bedroom, two-bedroom, and three-bedroom floorplans and community amenities. Construction is anticipated to complete in late 2024.

Under the investment terms, our preferred equity will receive priority ahead of the common equity (i.e., the borrower's equity), in regards to any distributions, profits, or payback. By structuring this investment (and most of our other investments in construction) like debt, we aim to mitigate risk to our investors’ principal and negate the impact of delays on performance.

The borrower has agreed to pay us a 13.5%1 fixed annual rate that will accrue for as long as it takes to finish the project business plan. This means delays do not negatively impact returns as long as the project eventually reaches a successful completion. As the lender, we also have a built-in provision that will start to accrue interest on the total financing amount ($20.8 million) nine months after the deal closed, regardless of how much of the total capital the borrower has drawn. To further increase our margin of safety, the sponsor signed as a guarantor for the preferred equity and provided standard carve-out provisions and guarantees. In addition, the sponsor invested an amount of equity representing approximately 24% of the total expected costs, similar to our investment but junior to our position. That means they would lose their entire investment before our principal would be threatened.

Our approximately $20.8 million investment represents our full commitment to the project. At closing, the sponsor drew $4.7 million of the $20.8 million, with the remaining capital to be drawn down over time, based on agreed-upon milestones, such as foundation, framing, roofing, etc. Our team reviews detailed third-party progress reports before approving each draw, limiting the amount of principal at risk at any given point.

This investment was made by two Fundrise sponsored funds: the Fundrise Income Fund, which invested roughly $4.2 million, and the Fundrise Opportunistic Credit Fund, which invested roughly $16.6 million.

Dislocation in credit market creates opportunity

As we referenced most recently in our 2022 year-end letter and in our podcast entitled “The Great Deleveraging”, we believe the current macroeconomic environment has created a temporary period of market dislocation and, as a result, there exists a window of opportunity, specifically in the credit and lending markets, to achieve outsized returns relative to actual risk.

Consequently, we are seeing attractive opportunities to invest in high-quality assets or developments that are in the midst of value-enhancing activities — such as construction, renovations, or lease-up — before they reach stabilization and are ready for long-term fixed-rate debt or a sale. We believe that these opportunities can deliver a highly attractive risk-adjusted return by focusing on creditworthy borrowers.

While we often gravitate towards preferred equity investment structures given our preference for the risk-return profile, we believe the current dynamics are even more favorable for such a structure, and we expect to see lower relative loan-to-value/loan-to-cost (i.e., risk) paired with higher effective returns. This can be seen in the preferred return achieved in this investment of 13.5%1 vs. pricing for similar investments just 12-24 months ago, often in the range of only 9-10%.

Additionally, while this investment is initiating with a 75.7% LTC, we believe that we should be able to exit the deal at a 42% LTV (the ratio of the loan amount against the value of the property, as opposed to cost) once the construction is complete and community is leased up; this substantial difference between the initial LTC and the expected LTV highlights the project’s huge potential for value creation.

Why we invested

  • Trusted and reliable partnership: Waypoint Residential is a vertically-integrated developer, owner, and operator of apartment properties with a 12-year track record of success. Since inception, Waypoint has successfully completed over 140 transactions representing more than $6.2 billion in total capitalization across the Sunbelt region. Our first project with Waypoint dates back to 2017; since then, we’ve partnered on six successful, completed investments.

  • Prime location: The site for Mason at Daytona Beach is conveniently located, within a short drive of white sand beaches, major highways, the Daytona Beach International Airport, and the Daytona International Speedway.

  • Healthy local economy: Over the past few years, the Daytona Beach area has seen impressive growth, with the population rising over 2% in 2022, compared to the national average population growth rate of 0.4%.

  • Dated inventory: Many multifamily communities in the Daytona Beach area are older properties. As a new development, this community will have updated features and amenities, making it far more attractive to new prospective tenants.

As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.