Earlier this month, Fundrise, a real estate investment platform using Reg A+ to provide access to “eREITs and eFunds”, has hit the pause button on redemptions to “maximize cash reserves and ensure the portfolio is in a position of strength.” The goal is to protect the investor community during a period of heightened risk due to the ongoing COVID-19 pandemic. The mature eREITs and eFunds, in which redemptions have been suspended, will also pause accepting new investments.
Fundrise is predicting that the current extreme levels of uncertainty will give way to a relatively more predictable period of economic contraction.
Additionally, the platform recently completed an “extensive stress test” of all the assets they are currently holding. Fundrise said they are “confident [their] portfolio will outperform most other investment assets through an extended recession.”
Fundrise said their goal is “transparency” as the company wondered about the possibility of a prolonged recession and what this means for Fundrise and its investors:
“In short, we’ve spent the last several years building the broader Fundrise portfolio, and by extension, the many unique permutations owned by our community of 130,000+ individual investors, to be a fortress specifically designed to withstand this type of severe downturn. We view each property that we collectively own or have invested in as another brick that’s been carefully laid by hand to form a secure barrier. And the dollars that we hold in reserve are the stores of grain, meant to ensure that our entire investor community can endure a long, harsh winter.”
Fundrise highlighted its conservative investment approach – one they believe will fare well during a difficult economic environment:
“Today, the result of that work is a portfolio which is more than 80% made up of rental apartments and residential senior loans (an asset type that we’ve stated before we feel is likely to be one of the best-performing investments during this crisis). In addition, virtually all of the remaining 20% of the portfolio consists of mixed-use property investments located in major urban markets, owned 100% equity with no leverage — an approach, we also believe, is one of the lowest-risk options available today. Lastly, the portfolio also has roughly $175 million of cash reserves (our grain stockpile) currently held in government money market funds.”
In brief, Fundrise believes it is well positioned to endure either a short systemic challenge or a full-blown recession.
The stress test used a model that was 3X more profound than the financial crisis of 2008.
“We believe that even under this scenario where we experience greater distress than in the Great Recession of 2008-2009, nearly the entirety of the portfolio would still be able to perform with little to no principal risk, assuming that a minimum $50 million of our $175 million cash reserve was available to either cover potential operating shortfalls, continue with development that is already in process, make debt paydowns, or in the very rare instance step in and take over as manager of the property. Of course, while we believe the assumptions made in this stress test analysis are extremely severe and ultimately unlikely to occur, we cannot guarantee how the future will play out.”
Fundrise hopes that their approach ends up being more conservative than necessary once the country has turned the corner on the crisis. As the dust settles, there may be some attractive opportunities that Fundrise could be well-positioned to deploy funds.