POP: C-Star Single Family Rental Fund

Real World Assets Pool Onboarding Proposals (POP)
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Overview: 

  • Business Name: C-Star Single Family Rental Fund 
  • Current AUM: 45M
  • $ Volume of Transactions Completed Last 24 months: 
    • Purchase: 40.15M 
    • Sale: 10.5M
    • Lending: 30.67M 
  • Target Launch Date: 10/1/2022
  • Location and Team Size: US; 11 members
  • Years in Operation: Established in 2018 and has been operating for almost 5 years
  • Historical Loan Tape (years): 4 years
  • Key Professional Partners (legal, accounting, operational, technical, structuring):
    • Legal: Meister Seelig and Fein LLP/ Wessels & Gerber/ Goins Law
    • Accounting: Black Hills CPA Group LLP
    • Fund Administration: Agora

Strategy: 

  • Business 
    • Describe your business and go to market strategy.
      • What makes your approach unique within your industry?

C-Star is a tech-empowered real estate investment and management firm in the single-family rental industry. Combining innovative technology and extensive expertise in real estate investment and management, C-Star built a modern investment platform with AI and digital solutions for real estate transactions. After years of development, C-Star is a fully integrated company and owns over 200 properties with over 40M AUM. In April 2022, C-Star SFR Fund I was sold to a large institution at a 10% premium to the market price with a gross IRR over 35% and a 3x multiple.

 

Founded by industry veterans, C-Star is unique in the industry for the following reasons: 

 

  • Promising Sector: Single Family Rental (SFR) is one of the strongest investment sectors in the real estate industry as an inflation hedging and recession resilient sector with stable cash flow. First of all, SFR demand was surging and will stay high during and after Covid. SFR is one of the few sectors that demonstrated strong performance during covid. With the popularization of working from home or hybrid work mode, people tend to pursue spacious and comfortable houses and they are no longer limited by geographical location when choosing a house, thus the demand will continue even after the pandemic. Additionally, a well-operated SFR portfolio would provide stable cash flow at an average lease term of 3-5 years as a result of a higher retention rate in the sector. Lastly, though major institutions have entered the market, such as Blackstone and Wall Street’s other firms, SFR sector is still a blue sea.  There is massive potential for institutional integration with 2% of single family rental houses owned by institutions at present. 
  • Market Selection: C-Star has a strong market selection strategy. Firstly, the target sunbelt markets have tremendous upside potential with a population growth rate above the US average. Secondly, the target markets of C-Star have low housing price volatility, as we invest in markets with promising economic and real estate fundamentals. Thirdly, C-Star operates in-house local property management teams in every market with extensive experience, knowledge about the rental demand, neighborhood characteristics, and community development detailed to the zip code level. 
  • Professional Operation: C-Star is a fully integrated operation platform with institutional level management standards for all operation aspects, including capital raising, acquisition, asset management, property management, and financing.
  • Unique Strategy: C-Star takes advantage of portfolio premium by buying individual assets from retail markets with higher going-in cap rates and selling to institutions at compressed cap rates. 

 

  • Why are you a good partner for Centrifuge?

C-Star is a good partner for Centrifuge for the following four reasons.

  1. Stable cash flow. SFR has an average lease term of three to five years, leading to a low turnover rate and low maintenance cost. An annual lease term with a monthly rent payment frequency can create stable cash flow. A stable cash flow can also be achieved during economic turmoil. U.S. housing vacancy rate moved between ~6% and ~11% for the past 15 years, a narrow range indicating its resistance to cycles. Meanwhile, the rent has been increasing since 1997 and never declined even during recessions.
  2. Good return with a lower risk. First, the increase in demand and shortage in supply can promise a good return for SFR investors. As people’s need for a spacious and comfortable living environment increases and more people choose to rent instead of purchasing a house, demand for SFR will continue to grow in the following years. However, the supply for SFR is still limited due to factors of increased interest rate, continuous pandemic, supply chain restrictions, etc. Besides, SFR is an inflation hedging sector. From 1970 to 2021, the nominal housing price only declined once during the 2008 financial crisis caused by the subprime mortgages.
  3. Tech can make C-Star’s strategy scalable and repeatable. C-Star is empowered by technology, incorporating AI and technology into daily business activities. For example, C-Star utilizes professional property management software to achieve scale management. C-Star also has self-developed PaiBox, a software that uses AI and big data technology to automate underwriting and identify acquisition opportunities from tremendous market listings. It can greatly improve C-Star’s acquisition and management efficiency, allowing C-Star to better off competitors. 
  4. Working with Centrifuge can make SFR investing accessible to everyone. Traditionally, C-Star has minimum investment requirements for potential investors. However, with the decentralization tech Centrifuge is utilizing, every stable-coin holder can be C-Star’s investor by investing as little as one coin, largely decreasing the investment barrier.

 

  • How do you differentiate yourself from competitors?

 

C-Star identifies five core competencies: Corporate governance, Strategy, Team, Automation, and Record. This acronym derives our company name: C-Star. 

 

  • Corporate governance: Most of the corporate governance is made up of our limited partners. They have fair decision making capabilities, such as capital distribution, mergers, and acquisitions.
  • Strategy: Using the strategy of assembling a portfolio of high-quality investment homes, C-Star purchases individual houses as units, operates and stabilizes yield, then sells the assembled portfolio to larger institutional buyers.
  • Team: The core team has an average of more than 10 years of practical experience. Leaders have held senior positions in top private equity and investment banks.
  • Automation: C-Star is a mature lean and efficient company with a complete management and operation team. Furthermore, C-Star uses AI and internal proprietary databases to help identify potential market opportunities.
  • Record: C-Star has a record of successful past investment returns. The internal rate of return of fund I exceeded 35%, completing a three-times multiple on investment.

 

  • How is your entity financed today, what are the current sources of capital?
    • Equity: High Net Value individuals and family office 
    • Debt: Institutional lenders and private lenders
  • What is your entity’s revenue/fee model:
    • Origination fees: 1%
    • Target spread: 3.5%
    • Other: N/A
  • Capital 
    • Please explain the source(s) of, and ability to scale, your first-loss junior (TIN) capital in the pool:

C-Star will fund the first-loss equity tranche through our own balance sheet capital.

  • Please explain the source(s) of, and ability to scale, your senior (DROP) capital in the pool:

C-Star will actively promote the project to DeFi investors and attract them to invest. They will be the main sources of DROP capital.

  • Capital relationships and how much you will bring through Centrifuge KYC to invest in either senior or junior tranche of your pool:

C-Star will fund up to 1M equity for TIN. C-Star has up to 10M private lender relationships that can invest into DROP on the chain.

 

  • DeFi 
    • Outline why DeFi is important to your business strategy:

DeFi is an important alternative source to C-Star’s bridge loan solution. Defi can reduce both transaction costs and the cost of debt. By decentralization, every single individual stable-coin holder can become a small bank with real estate as collateral. 

 

  • Articulate why Centrifuge’s community and protocol is a fit for financing:

 

  • Centrifuge can help C-Star accelerate the purchasing pace and scale. SFR is a real estate project with stable cash flow. Historical rent has never declined. Investors can therefore enjoy a stable cash flow as profits meanwhile take real estate as collateral.

 

  • The pace of the acquisition pipeline exactly matches the pace of the financing pipeline. C-Star will assemble portfolios for dozens of properties to do the refinance. Upon the time C-Star does the refinance, the loan from the centrifuge can be repaid, and reuse the debt from the centrifuge’s pool to acquire more properties. 

 

Structure: Risk & Terms

  • Please explain the key risks inherent in this opportunity and asset class:

 

Risk

Description

Mitigation

Market Risk

House prices might decrease

C-Star only enters markets with continuous population growth rates which can support the housing price. Besides, the price per unit for C-Star’s targeted properties fits the middle class’s needs. When the economy enters a recession, people will downgrade their living standards, C-Star’s selected properties will be their last resort and will be the least vulnerable to financial recession or crises.

Interest Rate Risk

When the interest rate increase, C-Star’s financing cost will increase, decreasing the cash yield. 

The positive impact of decreasing housing prices will offset the negative impact of increasing interest rates. When the interest rate increases, the price of housing will decrease in return improving the cash yield. Additionally, C-Star’s acquisition team has factored in the higher interest in their underwriting model to meet the minimum cash yield requirement for every purchase of properties.

 

  • Pool Size & Pipeline:
    • At Launch: 10M
    • 6 Months after Launch: 50M
    • 12 Months after Launch: 75M
    • Origination Pipeline Details:

 

  • Asset & Rates:
    • Asset Type(s): Real Estate Bridge Loan
    • Average Ticket Size: 50k 
    • Average Asset Maturity: 12-24 month
    • Expect Default Rate: 0
    • Expected borrowing rate on senior tranche (on-chain): 3.5%
    • Expected lending rate to end borrower (off-chain): Average effective APR of 6%~7%
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Hi @xueyinglee, thank you for your POP submission and the clear information.

I just have one question; you write that:

How certain is it that the 10M private lender relationships are willing to invest in the DROP tranche?

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Hi Rhano, thanks for your question. We are promoting the Centrifuge platform to the 10M private lender relationships, as many of them have invested in Crypto and real estate before, we think they would be interested in exploring the lending platform like centrifuge.

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Thank you for quick reply @xueyinglee - appreciate that!

Good to hear you are actively promoting our platform to your investors.

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Hi @xueyinglee, this seems like a great POP! I am excited to see where this leads! I wanted to clarify a few of the points mentioned:

  • Default Rate: 0 - can you please explain? I would expect in general there would be some defaults. What is the industry average of a renter not paying? Can you also elaborate on your process in the event of a default/non-payment? How will lenders be made whole.
  • Senior Borrowing rate: Do you think a 3.5% is competitive enough to attract investment from Senior lenders to help the pool scale effectively and meaningfully?
  • What market locations are your current and prospective properties?
  • Can you please provide more information on the SFR sector of the industry?
  • Can you dig deeper on the Unique strategy such as timeline of buying and selling assets?
  • Note, That centrifuge currently has a $5k minimum investment for senior capital

Looking forward to your answers! :slight_smile:

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Hi sirj, thanks for your interest and questions. Following is our reply:

  • Default Rate: 0 - can you please explain? I would expect in general there would be some defaults. What is the industry average of a renter not paying? Can you also elaborate on your process in the event of a default/non-payment? How will lenders be made whole.

Our default rate is zero, which can be explained in a few aspects. First, the SFR sector itself is stable and the default rate is low.  The vacancy rate remains at a 6%~11% level since 1997. Secondly, C-Star has proven track records by its tech-empowered integrated platform enabling acquisition, asset management, and property management all in-house. On one hand, we only deploy capital in promising markets supported by our rich market data analysis and industry experience. On the other hand, we have a systematic tenant selection process to ensure all tenants are good tenants. The industry average rent collection rate is 95%, but for C-Star is 99%+ over the past years. Even during the pandemic period in 2021, we still achieved a 100% rent collection rate. We did dozens of refinancing and bridge loans, which we pay on time. The rent yield of our portfolio is higher than the U.S average, and the DSCR of the portfolio is 1.7x, leaving cushions above the lender’s criteria. Thus, the risk passed to the lender is very remote and minimal. In the case of default, which, though, is unlikely to happen, the lender can foreclosure our properties to get back the money.

 

  • Senior Borrowing rate: Do you think a 3.5% is competitive enough to attract investment from Senior lenders to help the pool scale effectively and meaningfully?

Generally speaking, the rate is relative to the risks that the assets possessed. Considering the risks associated with our stable cash asset class in the growing markets, we believe a 3.5% rate is a safer return compared to many other projects. 3.5% as the spread is also the rate offered to us by most traditional institutional lenders on the market.

 

  • What market locations are your current and prospective properties?

We’ve been in Georgia for almost five years and Georgia is our main market. We also entered North Carolina and South Carolina.

 

  • Can you please provide more information on the SFR sector of the industry?

We have a lot to talk about SFR industry, but I would recommend you read the SFR Primer by Green Street to begin with. Here is the report: https://www.rentalhomecouncil.org/wp-content/uploads/2017/12/Green-Street-Advisors-Single-Family-Rental-Primer.pdf

 

  • Can you dig deeper on the Unique strategy such as timeline of buying and selling assets?

It typically takes two to four months from identifying a property opportunity to stabilizing the cash flow. The process includes acquisition, closing, renovation, and leasing. We typically hold properties for 3-5 years, and then exit to a larger institution at a portfolio premium.

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POP Criteria Score: C-Star Single Family Rental Fund

The Centrifuge community has reviewed the POP for C-Star Single Family Rental Fund, based on the 10 criteria, and the result is: :nine: / :ten:.

SCORE

For each criteria, either a :zero: (criteria not met) or :one: (criteria met) will be given.

Below you will find the results of the individual criteria:

Business Years in Operation: :one:
Off-Chain Institutional Investors: :one:
Strong Pipeline: :one:
Volume Originated last 2 years: :one:
Historical Loan Tape: :one:
TIN Tranche: :zero:
DROP Tranche: :one:
Pool Value at Launch: :one:
Pool Value in 1 Year: :one:
Asset Maturity: :one:

RESULT

:white_check_mark: This proposal meets the threshold of >66% and has passed step 2.

NEXT STEP

Step 3 will be to get a recommendation from the Centrifuge DAO. This will be done within the next 5 days and the result will be published here on the Forum.

If you want to see all the steps of Stage 1 of the POP process, you can check this post here.

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