Why We Killed $241M in Private Real Estate Deals In One Day

Topic:  • By David Scherer • March 12, 2020 Views

241M in Private Real Estate Deals
In retrospect, it wasn’t a difficult decision. After seeing the equity markets decline 15%, watching the price of crude oil decline by 20% after the Saudis slashed their target price on oil and hearing about businesses, Universities and entertainment limit or suspend operations, it was clear to the Origin team that this market crash was different than past ones. No one knows when the COVID-19 will stop posing a health threat to the U.S. and the world, but we do know that it already has reduced global growth in 2020. The only question now is how much and for how long.

Origin is decisive and we put our investor interests above our own. One reason for this is because my partner, Michael Episcope, and I are among the largest investors. We have more than $56 million of our personal capital invested in our private real estate funds since the company’s inception. We do this because we believe private real estate is the best way to grow and preserve our wealth, but also because we want our investment partners to be invested together with us and so that the decisions that we make are aligned with our partners.

All of this considered, on Monday, March 9, we decided to walk away from five multi-family investments totaling $241 million in aggregate value in Austin, Charlotte, Denver, Houston, and Orlando. Many of these deals had been under contract since mid-2019 and represent hundreds of hours of work on business plans, due diligence, legal and physical inspections that Origin the company would have to fund ourselves.

With no certainty on future rent demand, multiples on earnings, and with publicly traded apartment REITs correcting significantly, the decision to walk away from $241 million in private real estate deals was clear.

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When Competitive Advantages Help

A casino wants you to stay for the weekend and spend hours gambling. It incents this by offering free hotel rooms, free drinks in the casino, and free tickets to shows. In return, the gambler spends hours playing games with a negative expected return. The casino has a competitive advantage; the odds are in favor of the casino for any gambling game played.

Origin has competitive advantages too. We are among the best in off-market sourcing, deal structuring, and operating multi-family real estate. Our 13-year record of never having incurred a loss across 50 deals and our consistent ranking as a top 10% manager by Preqin prove this. This is also forward looking, as it stems from our local team members who live in the cities where we invest and the partnerships that they have built. These relationships result in off-market transactions, better information and enhanced deal flow.

Because of these competitive advantages we know that we will be profitable in times when value and the variables that are used to quantify value are defined. This is not one of those times. No one is certain about growth or multiples on earnings right now.

Investing in private real estate today feels more like gambling and Origin does not gamble.

At a time with no competitive advantage and no clarity on future market volatility, it made sense to walk away from our deals. What we do know is that this will pass, and markets will normalize. When this happens Origin will be positioned to acquire assets and grow. Cash not used today will be available for future acquisitions with better pricing, with greater confidence in underwriting, or both. When that time comes Origin will be prepared and will grow opportunistically.

Our partners in the five deals that we killed understood why we decided not to proceed, and, in many cases, have expressed interest in pursuing the deals together in the future. Stressful situations like this teach us a lot about people and companies. The $241 million decision we made was supported unanimously by the Origin team. Michael and I could not be prouder of our team and the shared values of putting our clients first in order to build long term value for our investment partners and the company.

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Posted By

David Scherer

David Scherer formed Origin Investments in 2007, along with co-founder Michael Episcope. He has over 20 years of experience in real estate investing, finance, development and asset management.