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C-Star Exits SFR Fund In Sale To Institutional Operator

Updated: Jun 11, 2022

By Lynn Pollack

April 28, 2022 at 08:28 AM

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The firm is currently capitalizing two more funds that would expand its presence across the Sun Belt.

Investment firm C-Star has exited its first fund, an aggregated portfolio of single-family rental homes in the Atlanta metro area, in a sale to an unnamed institutional SFR operator.

C-Star CEO Sherri Li said the fund almost doubled its purchase price and received multiple cash offers from key players in the SFR sector. It sold at an in-place cap rate of sub-4% and at more than 10% over asking to an institutional investor that currently owns 40,000 homes across the United States.

C-Star’s acquisition strategy tends to target middle-income, entry-level properties at rental rates between $1,500 and $2,500. The fund’s average tenant profile has an annual income of around $60,000 to $100,000, Li said.

“The velocity with which we were able to complete this transaction – after five unique offers for the aggregated portfolio – speaks to the enduring institutional demand for SFR assets in the US market,” Li said, adding that the firm is currently capitalizing two more funds that would expand its presence across the Sun Belt in the Carolinas, Florida, and Georgia.

Li said the fund’s outperformance is also related to its strategy of buying individual assets from retail markets with higher going-in cap rates and then selling to institutional investors at compressed cap rates. The firm functions as a fully integrated investment and operations platform and uses an in-house brokerage team to source acquisitions from both the MLS and off-market channels. It also has an in-house property management team, allowing direct service to and communication with tenants.

The exit marks the latest in a string of deals focusing on the SFR sector, which emerged as an investor darling during the pandemic as COVID-19 upended renter preferences for space, amenities, and geographic regions. Earlier this year, the topic was discussed at length at GlobeSt’s Multifamily conference, with experts saying they anticipate up to a 20% increase in BFRs this year alone and opining that more capital will be needed in the years ahead to sustain the ongoing trend of demand outstripping supply.

More than $50 billion in capital is currently in the SFR market, according to John Burns Real Estate Consulting. In 2020, that figure is pegged in at just $3 billion.

“The SFR asset class is gaining momentum throughout the CRE industry, especially with institutional investors,” Michael Nemirovsky, vice president of investor relations at C-Star, told GlobeSt. “With Fund I, we’ve identified and proven a value-add with our ability to assemble a portfolio and exit to larger investment groups. They can allocate capital to SFR at a premium for the scalable size we assemble.”

The Sun Belt has been a particular favorite, as it’s home to some of the cities that are most benefiting from post-COVID migration.

“The Sun Belt region was already attracting a large inflow of population from the East and West Coasts over the last decade, and those people were primarily seeking employment opportunities and greater affordability,” Li told in an interview. “The trend had started before COVID, but it’s continuing now at a faster pace.”

Investors have come out on top: in the C-Star deal, for example, the sale closed at a 35.4% gross internal rate of return and 27.1% net IRR, Li said. Investors in the C-Star fund included high net worth individuals, family offices, and small- to mid-sized institutional sources of capital. The debt market for SFR has been somewhat bifurcated, with large institutions, family offices, and smaller private equity firms pouring capital into construction, as well as mid-market funds and high net worth individuals. Middle market investors, however, are facing more difficulty entering the sector due to the lack of banks active in the space.

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