How Origin’s Private Real Estate Experience Carries Over to Public REITs

Topic:  • By Michael Episcope • April 17, 2020 Views

How Origin’s Private Real Estate Experience Carries Over to REITs
Investors want their money working for them at all times to maximize potential returns. This can be problematic in private real estate, where investors must wait for capital to be called. Parking cash in a money market fund will yield 0.25% or less. This anemic return lowers a property’s true internal rate of return (IRR) because the money committed to it while waiting for a capital call can remain uninvested, often for months.

This conundrum led my partner David Scherer and me to develop Path by Origin, which allows private investors to invest committed capital in public REIT portfolios that can provide more substantial yields than parking money in cash. Real estate investment trusts, or public REITs, have typically outperformed the rest of the stock market over most periods of significant length, according to research from the national trade association NAREIT. For example, between 1978 and 2016, public REITs averaged close to a 12.87% return compared to 11.64% for stocks.

As our clients shared their financial goals with us, and their pain point about the low returns they were earning on the capital they were holding for private real estate investments, we considered how we could help the situation. We found inspiration in the robo-advisors that offer easy options to meet common investment goals. If capital is being earmarked for the real estate sector, why not invest it in the same asset class immediately through listed REITs? Since they’re traded on public exchanges, they’re more liquid and can be easy to buy and sell for short-term investment—with our app.

General Reg Inline – You deserve a better way to invest in real estate.

You deserve a better way to invest in real estate.

Bottom line, our goal was to offer investors a financial technology solution to give commercial real estate investors more optimal choices. Path by Origin provides a unique approach to investing in REITs. We vet and assemble REIT portfolios using the same discipline and due diligence we apply to the high-quality, high-yield private real estate portfolios David Scherer and I have brought to individual investors for the past 12 years. We’ve always been REIT investors too, because a real estate portfolio needs REITs for liquidity and diversification; our own proprietary research shows that public REITs can offer significant wealth-building potential and reduce risk when coupled with private real estate.

Our experienced in-house team analyzes public real estate securities and identifies options with the goal of maximizing yield and limiting downward risk. While the range of available public REITs and REIT exchange-traded funds has expanded in recent years, investors are often uninformed about which options best meet their safety, income or growth objectives. For investors assembling their own portfolios, real estate allocations are hard to tease out and track across money market funds, small- and mid-cap stock funds, REIT funds and ETFs.

Applying Lessons From Private Equity to Public REITs

As real estate specialists, we believe every investor benefits from diversification, but not every choice will make an investment portfolio stronger. It’s easy to overweight a high-risk real estate sector like hotels, and hard to spot signs of financial engineering. Public and private real estate options share many of the same pitfalls, and our due diligence and underwriting procedures that are were developed to minimize risk are valuable in both public and private investing, as commercial real estate fundamentals don’t change.

Below are some of the principles that we apply to all real estate investments, and how we’ve built our public equities side to hold true to our commitment to put all investors on the same playing field as far larger institutions:

  • Look for Underlying Value. In private real estate, investors benefit from a stringent approach to finding and underwriting properties with the greatest potential for income growth and property appreciation. Commercial real estate buyers and sellers often fall short at evaluating a building’s prospects, or their own ability to maintain and improve them. To alleviate such biases in validating deals, we have built objective risk models to score properties across markets. In public equities, we apply the same principles to REITs. Using experienced analysts, the Path app provides portfolios of real estate equities, each with a score for risk level and historical dividend yield.
  • Consider Sector Exposure. As private real estate asset managers, we concentrate on multifamily properties as the steadiest path to long-term appreciation. The more volatile public markets call for an approach that limits downside risk and allows options for growth. Past experience suggested tracking types of real estate to reveal risk and reward profiles. It’s an approach that we’ve adapted to building the specialized REIT Blocks available in Path, which include the growing healthcare segment and a technology bundle that includes projects such as data center and cell towers. Path’s REIT portfolios offer advantages over index ETFs, which have a limited ability to optimize complex real estate portfolios, especially for experienced private real estate investors who are already exposed to certain sectors and should consider diversifying across other real estate sectors.
  • Be Careful With Leverage. Borrowing can supercharge profits or create huge debt burdens. In private real estate, overleveraged projects can get into trouble for falling even modestly short of projections. In the REIT world, debt financing was a significant contributor to tumbling share values during the financial crisis of 2008. Path risk level scoring balances leverage against revenues that are sufficient to pay debt and keeps investors on the path to responsible risk exposure.
  • Determine Investor Cash Flow Needs. We have private real estate funds designed for different investor objectives. Our IncomePlus Fund may be a good fit for people who are looking for a stable, annual dividend that can be accessed today. And our QOZ Fund is designed for investors with capital gains, looking to maximize their total returns in the future. In the same vein, our public REIT portfolio recommendations have been designed based on an individual’s goals, such as their cash flow needs today.
  • Keep Fees Low. At Origin, we made our mark in private equity as a transparent alternative to private REITs with hidden upfront costs and we kept fees in mind when designing Path’s REIT portfolios. Path’s highest possible advisory fee is 0.40% of an investor’s capital (not including an additional technology fee as outlined in our FAQ here), which is less than 50% of the industry average of .99% (as cited by Investopedia on Jun 25, 2019).

Our goal has always been to give individual investors the wealth-building potential of commercial real estate. But there’s a huge advantage to managing both public and private real estate portfolios; data from the public markets give the private real estate investing team a better handle on valuations, and our private real estate experience will help us make recommendations or alterations in our portfolios on the public side. The two work together, and Origin’s track record in private equity real estate helped forge Path’s unique approach to investing.

Posted By

Michael Episcope

Michael is principal of Origin, co-chairs the Investment Committee and oversees investor relations, marketing and company operations. Michael brings 25 years of investment and risk management experience to the company and believes that calculated risk-taking in inefficient markets is the key to building wealth.