Webinar: New Multifamily Credit Fund
Origin is excited to announce our new Multifamily Credit Fund, a credit fund backed by low leverage, institutional-quality multifamily loans designed to deliver a low-risk stream of passive income for qualified purchasers*. This is an exclusive and differentiated investment opportunity as Freddie Mac limits the primary auction pool to professional real estate operators with long-term capital and proven operational expertise.
On this webinar, Origin Investments Co-CEOs David Scherer and Michael Episcope take a deep dive into the mechanics of the Multifamily Credit Fund, discuss the logistics of investing, and answer the most pressing questions submitted by prospective investors.
*A qualified purchaser is generally an individual or a family-owned business that owns $5 million or more in investments, not including a primary residence or any property used for business.
Webinar: New Multifamily Credit Fund, Transcript:
Hi everybody, welcome I’m Michael Episcope. I’m here with David Scherer, and we are your co-CEOs of Origin. The purpose of this webinar today is introduce you to our latest Fund. The Origin Multifamily Credit Fund. And I know I may look like I’m in a nightclub here, but this is actually my basement.
I had to move from my upstairs office to get closer to the router, because in one of the previous webinars, I believe we were doing the IncomePlus Fund webinar, I got kicked off and left Dave a little bit stranded.
So, I didn’t want that to happen again. So here I am and I just want to address that up front. Thank you for attending. We have almost 600 registrants for this webinar today. So, a lot of interest in the new Multifamily Credit Fund.
We are obviously personally excited about this investment. We’ve done a ton of work to get here today. And it really it started with a lot of due diligence. And like every investment we bring to our investment partners, we approach this in what I’ll call a skeptical manner.
This is our money and our reputation. We don’t need to unnecessarily complicate the world. And I think you’ll see the risk-return characteristics speak for themselves. And we’re going to address everything in all of your questions throughout the webinar.
I’m going to save some of you a lot of time right now. This investment is only for qualified investors, and the term qualified can really mean different things to different people. But it has a very strict definition as defined by the SCC.
A qualified investor is someone who has an investment portfolio that exceeds 5 million dollars. And the reason why this Fund has a higher threshold and it’s not just for credit investors, is because these investments are considered securities and not real estate.
So unfortunately, if you don’t meet the qualified definition, this investment isn’t for you. The webinar today is going to be about one hour in length, we might run over by ten minutes or so, we have a lot to cover, and this is a launch webinar, so we want to make sure that we cover everything.
All of your questions will get answered. I’m going to introduce Origin and also go over the Fund at a very high level. David is going to cover the investment strategy in a lot of depth. And then I’ll finish with the Fund terms and how you can invest and then we’ll open it up for Q&A.
So, like all webinars, you can submit live questions during the webinar but I would ask that you hold off until we are finished, as I believe almost all of the questions that were mailed in during the registration (And they were very exhaustive list), they will be answered in the next 45 to 50 minutes.
So, let’s get started. So, I’m going to cover about Origin a little bit at a very broad strokes, we help high net worth investors generate passive income and grow their net worth through a variety of real estate funds that span from lower-risk income producing investments to higher-risk growth investments.
We focus exclusively on multifamily properties. In our previous life, we did multifamily, we did retail, we did student housing, a little bit of everything. But we made the decision a couple of years ago to only do multifamily properties going forward.
Our 3 core strategies within the multifamily segment are that we buy, build, and lend. And the credit investment we’re going to talk about is the Multifamily Credit Fund, it falls into the lending category. So today we serve more than 1800 high net worth investment partners across our various funds.
Our largest growth segment is certainly in the RIA space today. Far more than 2 dozen RIAs work with us actively putting their clients into our various funds, so we thank you very much we know many of you are on the call today.
As a platform, we have 30 what I call incredibly talented team members who call Origin home. So, if you’re listening, thank you for that. They are spread across asset management, acquisitions, investor relations, legal, accounting, and marketing. And they all have both helped and helped make Origin what it is today.
So, we have 5 offices. We’re headquartered in Chicago. We have a regional office model with offices in Charlotte, Denver, Nashville and Dallas. And we really decided to go with this model several years ago to give more of a boots on the ground that local knowledge of the different areas.
And now those serve as regional hubs. And more and more because of the virtualization of the world, we have other team members who are also working virtually in other places like Austin and Tampa and now moving to Miami as well.
So, we’re not a virtual firm, but we’re starting to sort of be more spread out as firm. And it’s working very well because the more people we can have in those cities, the more knowledge we can have about what’s happening at the local level.
Now, there are 2 metrics I really want to highlight on this page, and David and I are really proud of them both, and it’s probably the metrics we’re most proud of, and they go hand in hand. And the first one is 0 losses across any of our fund investments.
And the #1 rule in investing is don’t lose money. And at our core, David and I came into this business with capital and risk management backgrounds. And this metric, it really validates many of the decisions we’ve made over the years.
What we’ve decided to do, what we haven’t done, investments that we’ve passed on. But I will acknowledge that the absence of loss is not gain.
So the other metric and it really goes hand in hand with this, and that we’re equally proud of is our Preqin ranking. And we are currently ranked in the top 1% of more than 2,000 U.S. real estate managers. And Preqin is a reputable firm, they collect a lot of data for managers throughout the country.
We’re very proud of having being in that top 1%. And the ranking itself, what I was saying is it really speaks to our ability to make money, but make it consistently. And we’re not ranked in the top 1% because one fund hit it out of the park.
It’s because all of our fund returns have fallen into either the top decile or the top quartile. Now, one of the biggest reasons that I’ll say that I believe why we’ve had so much success is because we look at the world through the lens of our own investment dollars, and no one has invested more money here than David and me combined.
And this lens, it helps shape what funds we bring to the market, what investments get approved, who we hire. And it really permeates into so many other small decisions. And bringing the credit fund to the market followed that same arc of decision making. We have a high conviction around this investment opportunity.
It has a place in our personal portfolios. And we will be investing at least 5 million dollars of capital into this Fund, by the final closing.
Let me jump over, I’m going to tee up the fund here on this next page, and these are just really the overview. This is the overview of the fund. And I also want to answer the question about how is this different from the IncomePlus Fund? Because that’s a question that we’ve gotten over and over about this investment.
Now, this is called, a called cap. This is a Called Capital Closed End Fund that is expected to generate around a 6 to 8% distribution yield, a 1.60x net multiple over the life of the Fund and an 8 to 10% IRR.
The income will be paid out monthly. And what you see there on the bottom left, the inflation hedge is because around half of these bonds and these securities will be floating rate.
So as rates go up, so will our yield. And so that’s embedded in that inflation hedge as well. But also the absolute returns are far above inflation. And any time you can make a return, call it 700, 800 basis points of inflation, by very definition, you’re beating the market there.
So let me get into the distinctions or what I view as the 3 distinct characteristics between this Fund and the IncomePlus Fund. And at face value, it can look very similar to one another. And that’s understandable because if we had the IncomePlus Fund characteristics up here in this page, it would look similar.
But there are 3 distinct characteristics that separate them. This is credit and it’s not real estate. We are buying bonds backed by real estate loans, and that’s the first distinction. The second distinction is tax efficiency. The distributions here will be taxed at a much higher rate of around 30%.
This isn’t necessarily a tax inefficient investment. It’s just less tax efficient as compared to the IncomePlus Fund, where the distributions are generally shielded by depreciation. If you do the math, the after-tax returns between this and the IncomePlus Fund will vary probably around by 3 to 4% per year, which is pretty significant. Now, we’ve talked about this, and I know many of you have looked at this.
And, you know, the ideal capital here for the credit fund is nontaxable money. Self-directed IRAs are a great use for this fund. And I personally discourage people from investing in the IncomePlus Fund with self-directed IRA money because the fund is so tax efficient. So that’s something to consider is the tax efficiency of both of these.
Some people are not as tax sensitive, so this point might be moot. And the last one, which is really important, is volatility. In the credit fund, the band of returns will be much tighter around the target returns because we are in a debt position with known cash flows. The IncomePlus Fund is a multi-strategy Fund that has exposure to common equity and can fluctuate more than 5% around the target returns of 9 to 11%.
So in any given year, you can be that you can have a 4% return or you can have a 16% return because of the volatility, which is a big difference between these Funds. The question is really good, and it’s a valid one and probably one that we’ve had to address quite a bit. And I’ll just say before I hand it over to David and talk about the investment strategy, in many ways, this is an “and” Fund, everyone needs credit and everyone needs real estate in their portfolio.
But in other ways, it’s a choice based on your risk tolerance, your need for income, your time horizon, your tax status, and how you really digest the information that you’re going to hear today. Choice is yours. Our job is simply to give you all of the information so you can make an informed decision here today.
So that’s the brief overview I wanted to share. Dave is going to go over the investment strategy now, so I’m going to hand it off to him and then I’ll pick it back up when we start talking about more of the Fund structure. Dave, thank you.
Thanks a lot, Michael. First, I’m going to answer a question. Someone had a question about the shovel and my background here. I’m at the office; for the Fund II investors that was a groundbreaking shovel for the Olmsted, very successful development in Atlanta. And I didn’t actually carry it back on the plane, it was shipped. But it makes me happy and it’s going to be in the background as long as I’m here.
So, I’m going to add on briefly to what Michael said about alignment. This is the most aligned Fund we’ve ever had. In fact, all the investments that will seed this Fund, which is 30 million dollars right now, are the bonds that we own that were purchased by the manager.
I’m super excited and Michael’s super excited to be part of that equity and part of that manager’s seeding equity. I’m going to be increasing my position significantly in September, the September 30th initial close.
So why am I so excited about this? The simple answer and I’m going to take you through it in great detail. I’ve been sort of living this now for about 20 months, but I think I can make this a very simple presentation, because it’s a pretty simple strategy, actually.
The reason I’m so excited is, the deeper in the weeds that we became, the more evident it was that this is the best risk-adjusted opportunity in credit. And although all of the loans that occupy the bonds we’re buying are multifamily, and that’s really important, because I really like what Michael said in terms of how we position.
We’re fully in the multifamily, but in all phases. We developed it, we buy and operate it, and here we are lending to it. But we have deep, deep knowledge on how to underwrite and run and manage the risks of multifamily. And this is just an extension of that.
But when you’re looking at this investment, in particular, if you’re an investment advisor and I’ve met with quite a few, I always ask the same question, which is if you can find a better risk-adjusted return of credit anywhere, please let me know, because I’m an investor, too, and I’d like to see it, and candidly, I’ve never seen and so I’m going to take you through the why.
But first, let’s talk about what this is. When you’re buying bonds, what are they, why do they exist? So, the first slide is really about the opportunities that were to start.
Freddie Mac and Fannie Mae are the 2 largest lenders, 2 institutional multifamily in the U.S. Fannie Mae doesn’t do the same thing Freddie Mac does. So, I’m going to focus on Freddie Mac.
That’s the bonds we’ll be buying. The opportunity set is large. Freddie Mac typically does anywhere from 60 to 80 billion of loans per year. This year, their target is right around 70 million dollars.
So right in the middle. And when they make those loans, they don’t hold them. They make the loans and then they sort the loans by the type of loan they are. Are they a 7-year loan or are they a 10-year loan? And then also the characteristics, are they the current pay loan or the accrual loan?
And they put all like-kind loans into bonds. Importantly, all of the loans are multifamily. And that’s why, first and foremost, Michael and I were so interested in the strategy, is that there’s no strategy grouped at all.
It’s what we do is what we know. There are other products out there that are multi-strap loans. So, you would get all different types of collateral. This is only multifamily.
Once they make these loans, and now I’m going down to the second portion of the slide, the A-Piece and the B-Piece portion, they traunch the bond that occupies all the loans. And let’s say in a given bond, there’s anywhere from 40 to 60 loans. Importantly, all of the loans, in the K-Series program, Except we’ll get down to the SBL, but everything else are loans, 20 billion or above, and on average there are 40 million.
And so, they wind up being very large properties owned by very sophisticated institutional owners like Origin, like Blackstone, like Kane Anderson, like Bridge. And that’s important because those owners know how to own real estate. They know how to run real estate. They have great teams that focus on multifamily. And importantly, they really, really value their credit.
So I’ll focus on Blackstone as one example. And it’s important because Blackstone is actually the largest owner of loans in the Freddie Mac program, so they’re the ones occupying most of the bonds. They’re in them. Blackstone’s never defaulted on a loan ever. Not a private equity loan, not a real estate loan.
They value that. They value their credit. So it’s important. Not only is the collateral quality, the operator’s quality and the credit’s quality. And I’ll get down to the loss history in a moment, but I’m sort of taking it to the why, you know, why it’s so stated. So once Freddie takes all these loans and puts it the bonds, they then sort them into an A-Piece and a B-Piece, and the next slide will graphically depict this.
But basically what they’re doing is they’re saying, OK. The least risky part of the bond, is going to be government backed, which it is, and also Freddie Mac backed, but importantly, its government backed. So if you ever hear, you know, Freddie Mac bonds are government backed, that’s true. But it’s the A-Piece, and the government gets paid to do that.
And it’s been a really amazing investment for the government. But as you can imagine, you get incredibly low yield on A-Piece because it’s going to trade like the corresponding treasury. So a lot of questions that we had coming in before were how do you take loans that are generally made at 4% and get 6, 7, 8%?
And the answer is it’s just simple math. If 80% is sliced into an A-Piece that’s getting, you know, 50 basis points, maybe 1%, possibly 1.3% That leaves the other 20% can get a heck of a lot more, and you still wind up with a total of 4%. And so there’s not it’s a very, very simple math that anyone can do this really even without Excel you can do it with a simple calculator.
But that’s how it’s happening. So we’re focusing on the B-Piece, which is the first loss of the bonds, but importantly the loans made by Freddie Mac. And they’re very experienced in making these loans. They’ve been doing it for in this program over 27 years. It started in 1994. And they’re also the largest so they know what they’re doing.
We also underwrite every loan in these bonds as well, and we like to think we know, too. But the loans are generally made up to 70%. And the reason that’s important to know is although we’re the first loss piece in the bonds, even as first loss, we have 30% subordination of equity. So that’s what really I’m excited about and why I’m investing so much personally in this, this is an investment that not only is currently paid monthly, but if you have a situation where there’s a 15% correction, you’re nowhere near your position. Right.
This is 30% protected by equity on cash flowing bills. Institutionally operated
multifamily. Multifamily is the lowest volatility real estate asset class in the last 30 years. So on every level, it checks the box of lowest risk. In terms of our target Freddie Mac investments, floating rate, K-Deal, B-Pieces, that’ll be our largest concentration. And I’ll get to that slide later. This is actually the bond we already bought.
And I’ll focus on that; fixed rate K-Deals that there’s a tradeoff here, the yield in return higher than floating. But they don’t have current pay feature. So here you’re buying the bond at a discount. And it’s creating value through time, which you don’t have as much current pay.
SBL is short for Small Business. These are loans under 20 million, same collateral, multifamily, the yield is much higher So they yield anywhere from 300 to 450 basis points above floating rate K’s. And the big difference here is your credit quality is different.
So Blackstone is not your borrower in this case, it’s most likely a regional or city operator who owns less than a few hundred units. So it’s truly a credit. You’re being paid more yield for taking more borrowers. And then the interest only strips were also going to loan mainly as a cash management feature. They do yield anywhere from 5 to 8%.
These will be purchased on the primary. Generally, more than anything else, to comply with the 10% redemption that we’re going to offer after the committed period. And Michael and I can discuss that later, but they’re very, very liquid. We want to have some of them in the portfolios that we can make sure that people who need cash are able to get out on an annual basis.
Next slide, please.
So I want to kind of I want to cover the why, why do I think this is the best risk-adjusted return credit. And the simple answer, and I’ll go through these barriers to entry one by one. But the simple answer is there’s not many people who can buy these bonds.
And so Michael was talking about taxes earlier. It’s true that these are taxed like any other bonds. They’re no different. So you want to, if you want to buy any bonds in the universe of bonds, you’re going to be taxed the same there as here.
But the difference here is you just can’t buy them. So let’s say you’re a foreign sovereign, you’re a family office, you’re a RIA, you’re a hedge fund, You have a bunch of money you can’t buy. And the reason you can’t buy them is although the program has been around since 1994, everything changed after the Great Recession.
During the Great Recession, for the first time, Freddie Mac started to believe, wait a minute, we could actually be in a situation where we start seeing defaults, there have never been defaults. And what happens if there is defaults on these loans? And some of these buyers, they don’t know how to operate multifamily.
They don’t know how to take it over, operate it, sell it, and protect the bonds. Because importantly, you know, the bond is filled with the B-Piece but it’s also the government backed piece, and so they changed it. They changed everything around the program and said, look. We’re going to approve who can buy the first loss position in these bonds, and these are the criteria we’re going to use and I’ll go through them one by one.
But I’ll tell you, the barrier to entry is enormous because we’ve been in it. We’ve been trying to get in the primary market for 20 months and Origin checks every single box. And we’re now in it. But it’s taken a really long time to get in it. And so I’m well aware and experienced that. In terms of operational expertise, what that means is Freddie Mac wants to see that you’re a national owner of multifamily and they don’t assign a unit to that, but that it feels like they want at least 10,000 units based on our discussions with them.
They also want to know, #2, and it kind of is interrelated, but they want to see that you’re a repeated borrower, of Freddie Mac. That you’ve been using their products, you understand their products. And importantly, if you’re borrowing from Freddie Mac, that means that you’re doing large scale multifamily because they don’t do loans under 20 million.
The third is significant capital base. That’s why we’re raising the Fund. Once you get approved, these bonds are, you know, they’re large. So, you know, a typical bond is anywhere from let’s just say it’s a billion dollars, but our portion of that bond is sort of the bottom 10%. So there are hundred million dollar buys, and our use of leverage is quite low.
So it’s extraordinarily capital intensive to be buying these bonds. And once you get in and approved, Freddie Mac then wants you to actually buy loans and they allocate them to the approved buyers and you need to stay in the rotation. If you’re not able to buy the bonds, then they start to believe that maybe you don’t have the capital necessary and you’re not assigned as many.
Why do you want to buy bonds of the primary from Freddie? Well, the answer is once you’re approved, they want to incent you to stay in the primary. Freddie wants to have a diverse group, you know, at any given time. There’s 10 to 20 buyers of these bonds.
And Freddie wants them. They don’t want to have, you know, one or two or three buyers. They want to have a diverse group of buyers because situations change. Buyers might have a lot of capital at one point, and then they don’t. And so they incent that and how do they do that?
They do that by offering a 7 to 10% edge on every single bond they issue. So if the secondary market is trading 7% for a given unit of risk, a bond, if you’re getting it in the primary market, you’re going to get it for 10% higher.
So you’ll get it for 7.6, 7.7. And that’s something I’ve never seen, I believe in my entire career, which is it’s not that we’re looking for a deal with edge. That’s what Origin does in all of our other Funds. And we’ve worked very hard to try to buy things below the market.
So here what we’re saying no, when you’re in the primary market, when you wake up January 1st, you’re getting a 7, 10% edge on everything you do all the time. And we’ve actually tested this already. We’ve tested it with either strips and it’s true. We’re buying I/O strips on the primary and I tested a small sale in the secondary just to see. And it’s absolutely what happened.
There was significant hedge in the primary. So that’s very interesting to Michael and I, and then the last is long term holder. What that means is although you’re getting edge in the primary than you are, you don’t want to then turn around and sell the bonds in the secondary. Freddie Mac frowns on that.
In other words, they’ve approved Origin and that means they want Origin to be the sort of guardian of the bonds. The one who understands multifamily, you know, how to run it if there ever was a default, etc. They don’t want to see us just turn around and sell it for profit.
And so you really don’t want to do that. You can, you can do it. And if we did do it, we would notify Freddie and say, hey, we had to sell this because our Fund was coming to an end and we had a term issue. And it’s a one time thing. We don’t intend to do it in the future, etc. You don’t want to be sort of, found out as a group that was buying bonds, in other words, buying on the primary and selling on the secondary; if you have any other questions about that.
But the big picture here is the reason the yields are outsized in every market environment relative to credit is the buyer pool is very, very small.
All right, let’s move to the next slide.
So this expands on what I touched on before, graphically so. So if I have a pointer, and it looks like I do. If that’s translating this this area, the 70 to 100% area. If this isn’t translating, it’s the top portion of the graph on the right. That’s borrower equity. So let’s again talk about why this is so safe. #1, you have 30% equity is first loss before it hits your position.
#2, the borrower in everything except the SBL right, is an institutional borrower with huge scale, great risk management capabilities. an experienced team, and they really value their credit.
And #3, all of the collateral is multifamily. So the least volatile real estate asset class, the most necessity based asset class. That’s why we’re in it. It’s the most recession proof because you need a place to live.
Everything else is discretionary in life, you don’t have to go out to eat, or have to go to a hotel. You don’t have to go to an office. We found that out. You do need somewhere to live. And it’s all cash flowing.
There’s no development in any of these collateral in order to borrow from Freddie, you have to have cash flowing, built, occupied multifamily. And in exchange for that, you get the lowest rates. They’re very, very competitive. And that’s why people go there. That’s why Origin goes there and our developments but once they’re cash flowing and occupied.
So here’s where we occupy in the capital structure, 63 to 70 on average. And then this giant box here, the 0 to 63, that’s the government backed, it’s the most safe. But remember, you’re getting 50 basis points, maybe 1%, possibly 1.3 or 1.4. If you’re in 10-year pay period. Not interesting to us. In the B-Piece, we’re able to get 6 to 8%. And that’s interesting to us.
Next slide, please.
So all of this yields incredibly low historical loss ratio, and we have just a huge amount of data from 1994 on, I mention that the Great Recession scared Freddie, that’s what caused their, you know, shift into approving firms like Origin, who understand multi to own this plus piece, because you can see from ’94 to ’05, there’s nothing. There are no losses.
And then in ’06, you see your biggest loss year. And importantly, when I say ’06, that’s not the loss in ’06. That’s the vintage year ’06. That’s all the bonds that were issued, K-Series, by Freddie in ’06. Some of them were 5-years, some were 7, some were 10. And that’s the average loss of all those bonds over time. So all those bonds started out immediately into the 3 worst years of destruction in the last 50 years in real estate, which was the Great Recession. So obviously, the total is 0.076%, an incredibly low loss ratio. Your worst loss year was 0.0437%, also very low.
But let’s go further with the math of ’06, because it is a stress test. So what does that mean? What that means is on an unlevered basis, instead of getting 8 to 10% on an unlevered basis, if you bought all equity, you would have received 6%. So that’s the difference. Still making money. And by the way, that’ not an IRR that’s not total. It’s 6% IRR per year.
And then if you use small amounts of leverage, which we’re going to call it 30 or 40%, you would receive, you know, 7 to 7.5% IRR. Like in other words, the reason we’re so excited about this is we have a lot of data. We’ve seen the stress test, Covid’s another stress test, by the way. And people were scared when Covid hit. But the reality is there’s been no losses during Covid thus far. And as recently as last week when we talked to Freddie, there’s only one loan in their entire portfolio every year that’s in default right now.
Think about that. I mean, they’re doing 70 billion a year, OK? And at any given time. They probably have 5 to 10 years out. So let’s just take the low-end, 350 billion dollars of loans. And these bonds, there’s one loan that’s defaulted.
And by the way, when a loan defaults, that doesn’t mean that you incur the whole loss. It means that, the owner of the first loss position in this case, let’s just make it Origin Would take over the loan and maximize value, sell the asset and protect the bottom. You know, so maybe you were able to sell the loan far, maybe who knows? The notion that a loan is in default doesn’t mean that it goes to zero. You still have a multifamily that has value and it’s our job to maximize it.
But the big picture here is ’06 still made 6% higher IRR, unlevered, and 7 to 7.5 levered. To me, that’s incredibly powerful. Stress tests, analysis, and it’s why I’m so excited about investing in this. It’s a defensive way to still get a lot of monthly yield in an incredibly low yield environment.
So next slide, please.
So the first I want to focus on our first seed deal. We do have a total of 5 positions that will seed the Fund right now. But the biggest by far is K-96, which was purchased in January. So K-96, we purchased it 860 over LIBOR, its floating rate, as Michael mentioned, that mitigates the short term interest rate increases because it’s priced over LIBOR or they call it SOFR, but same idea.
So if the Fed starts raising rates, our rate goes up one to one with what’s happening in LIBOR. LIBOR is not controlled by the Fed, but it tends to track at almost one to one, except in extreme market environments. In terms of the leverage we use 35% leverage here, meaning 65% equity was used to buy it. 35% debt, the LTV at origination that’s Freddie Mac’s underwriting.
I can tell you that values have gone up significantly in multifamily in the last 6 months. So this LTV is significantly lower. I would say it’s anywhere from 60 to 65% at this point based on what we’ve seen in multifamily valuations. The asset quality is Class A. That means it’s all relatively new multifamily in large cities with good operators. The debt service coverage ratio 2.1x, that’s extraordinarily high.
That means that the assets are over double the amount of cash needed to service debt. The loans in this particular bond are 49 Units: 10,000, you know, simple math. You can figure that that’s about 400 units. So again, it corroborates what we’re talking about before. 400-unit assets are large assets that require large loans, that require sophisticated borrowers.
The top geographies as you can see, we’re talking about 60% of these loans were made in essentially the southeast, in Texas, in Virginia. These are all areas we like a lot. Most of these loans will not be so concentrated. I’m sorry, these bonds. Well, the loans in them won’t be so concentrated in the southeast Texas. Most of them will be national. So they’ll be in New York and California.
The reason this is so concentrated in those areas is this was production that Freddie Mac had in Q3 and early Q4 that was then put in the bond and brought to the primary and closed in January. And as you recall, last year, there was a lot of disruption in the northeast, in California.
People didn’t know how to value those assets. Populations were sort of following out cities that they were moving. Certainly in New York, also in San Fran and L.A. And so there just wasn’t a lot of loan production from Freddie because of that. People weren’t refinancing. They weren’t doing new acquisitions in those regions. But going forward, we expect that it will be national exposure, much more evenly distributed than this. I happen to like this distribution a lot, both because I believe in these markets a lot of and importantly, Origin is very, very focused in these markets as well.
And then in terms of composition, multifamily’s, 98% of the pool manufactured housing and senior housing was 2 and 1%, obviously that doesn’t add up. So there’s some rounding, but you get the idea in general. This is a little bit more focused on multi than the bonds will be.
Senior housing would typically be a little bit higher. There are also student housing in some of this, but none of these will occupy aggregate more than 10% of the pool. Well, this is low again, because of the destruction of Covid. Covid disrupted senior housing, student housing. So you didn’t see as much production, in Q3 and Q4 of 2020.
Importantly, and this is really important to understand, when we bought this, we had a huge edge to the market because it was still reflecting Covid uncertainty. And so not just like the entire credit market has become much, much stronger in the last 6 to 8 months. And just across the board, every unit of risk and credit you could pay less for. And so in this case, we already made 25% of the 25 billion that was invested. So obviously that that amounts to, you know, 6 or 7 million dollars of gain.
Like I talked about before, we can’t (we could), I don’t want to sell this position, Freddie Mac doesn’t want us to sell this position, so we won’t. But we are collecting an outsize yield that increase in NAV will not be paid by anyone investing in the Fund. So essentially what we’re doing is we’re taking an asset that’s 6 to 7 million dollars than we paid for, and we’re putting it into the Fund at basis. So obviously, that’s a huge benefit to you, the investor, if you choose to partner with us in the Fund.
Next slide, please.
So this is our target portfolio. And you can see we’re overweighting and floating rate K-Deal on paper. We’re also, you know, fixed rate as I said before, it offers a higher total return, but less yield. SBL offers the most return and most yield, but it’s also the highest risk part. And then I/0 strips is more of just a cash management position, although it does offer pretty high returns, too. I will tell you that we have over 100 million dollars of primary paper that’s coming in addition to the 30 million that we already invested in.
The first will be an accrual fixed rate accrual K-Piece that’s the 26% bucket that’s going to come in October. And then we have another floating rate that’s coming in January, again on the primary from Freddie. And so this is much more certain than it is a projection. And most likely, the 42% is going to be a bit higher because that paper is much more expensive.
Remember this paper you buy at a discount requires less equity. That’s how you get most of your return. This paper, you buy at-par, it’s priced over LIBOR or so. And so, you know, this will be 80 million dollar paper. This is more like 30 million dollar paper. So I’m very confident that not only is this portfolio allocation.
Accurate, but I’m also confident that this bucket of 42 is going to be probably higher. And that’s a good thing, because that’s what provides the most yield, the lowest return, but also is an inflation hedge as Michael mentioned before. So I covered a lot, Michael I’m going to hand it to you. I believe, for the tax efficiency slide.
Great. Thanks, Dave. We got a lot of questions, I was actually offline for a few minutes trying to answer some of those, getting the easy ones out of the way. So I’ll hand it off to you in a minute. So this slide is just to kind of talk about how the Fund is structured and that we have a REIT blocker.
We know that a lot of people are going to be using self-directed IRAs, nontaxable accounts, and there’s some concern about unrelated business tax income and also unrelated debt financing, income UDFI. So the REIT structure is in place so that those aren’t issues that you UBTI the UDFI, those are blocked. And it’s also in place because if you do invest with nontaxable money, then you get a 20% discount. And that’s what this is showing.
So if you’re in the highest tax bracket of 37%, the way the REIT rules are written is that that income is actually subject to a 20% discount. So it comes out to 29.6%. Let me jump in to the next page. So that’s all we want to say about the REIT structure. But in reality, any investor coming in is going to be investing through an LLC.
So there will be a K-1, but not multiple states. This doesn’t carry through the REIT blocker helps that. Again, these are bonds, not a look through to the individual properties. So that wouldn’t be the case anyway. But you will be investing in an LLC with a REIT blocker beneath that.
So here are the kind of basic terms of the Fund. The minimum investment is one hundred thousand dollars. David already talked about the GP position. That’s 30 million dollars that’s made up of senior advisors, strategic investors and us, of course. The first closing is scheduled around a month from now to be on September 30th with a final closing one year from the first call. So we will have multiple closings along the way.
Best guess is about once every quarter, but some of that will depend on how fast fundraising takes place and where we end up tapping out in the fund as well.
So after that, there’s a 2-year investment period following final close. We don’t believe it’s going to take that long to invest the capital.
And then after that, there’s a 5-year kind of hold period to the investment. So the entire fund will be right around 6-8 years in in total length. And then the last thing I’ll talk about are the fees, so. Well, there’s actually two things, liquidity.
We understand we actually put liquidity into this Fund. So after year one, if you want liquidity, you can actually opt out of the Fund. That’s subject to no more than 10%. And this Fund isn’t meant to be a liquid Fund if you’re coming in.
We’d like you to think about staying in until the end. But we also understand that circumstances change and that people want to get out. And because this Fund is liquid, we’re creating that optionality for it.
And lastly, I will talk about the fees here. So the fees are pretty straightforward. Investors get a 7% preferred return and then we get a 10% performance fee above that subject to catch up. The annual management fee is on a sliding scale, and it ranges anywhere from 1.35% all the way down to 0.85% for investors for investors who commit more than 15 million dollars.
And we do aggregate commitments for the purpose of calculating fees. So, for example, if you’re an RIA with 30 clients committing a total of 7 million dollars, you would fall into the bucket of 95 basis points and all of those investors would get that fee. And the same applies to individual investors if you come in together as a group with friends.
Just notify the IR team who you’re coming in with and you’ll get the aggregation benefit. But you don’t have to form an LLC. We’ve done this with other Funds. It’s much easier. We don’t expect you to form an LLC.
In some ways, a little bit more complicated on our end. So invest together. Let us know who your investment group is and we will extend that discount to you as well.
So the next page and the last one I’m going to cover before we jump into the Q&A is how to invest.
So pretty easy. You can simply, if you’re an existing investor, reach out to your Investor Relations contact, talk to them. They can send you the deck, they can send you this webinar if you want to review it, they can send you the subscription materials, any information that you need.
If you’re new to Origin, you can connect with us in a few ways. #1 is email “firstname.lastname@example.org” Or you can engage with somebody directly from our website.
And again, we try to make it really easy for people to engage with us. So if you want to go to the website, download the deck first, get some more information before you set up a call. Feel free to do so. But somebody will get back to you immediately from Investor Relations, assign you to a dedicated Investor Relations contact who can answer any more questions you have and then shepherd you through the entire process.
So thank you for your time and interest. Really appreciate it today. Let’s jump into the Q&A. All right, I’m going to fire these at you just in the interest of time, I think we’re doing pretty well. We’re at 50 minutes past. I again, I took some liberty of answering a lot of these questions while you were speaking.
So let’s just go from the top.
“Can you please talk about how this may be attractive to an investor who is not investing via a self-directed IRA?”
Oh, of course. By the way, I’m investing regular capital. It’s the best risk-adjusted return that provides yield that I see. Period. So that’s my opinion.
There’s a lot of people there’s over 600 people on this webinar. Please send us your ideas. If they can compete with this, you know, 6 to 8% current yield, 8, 10% total return, and something that really has never had losses in 27 years. So I, I like it either way.
I agree with you. It’s better if you can invest it. But importantly, this gets taxed like any other. So if you’re in any fixed income investment or any investment, that is providing dividends. You’re getting taxed the same way, in addition to that, because this is real estate as collateral and because you’re in a Fund. You can’t do this yourself.
We can set up a subsidiary REIT and comply with REIT law. We’ve done this in IncomePlus, we know how to do it. But the only way to do it is to have lots of investors that that’s the cliff notes of REIT law.
You better have a lot of investors. You won’t be able to comply. Only through investing in this way where you get a 20% tax deduction on dividends, which is the majority of this investment. So I like it even without the tax benefit.
But for taxed investors, when you layer on a 20% tax break to something, that’s an incredible investment, in my opinion. I’m all in. I’m going to be investing a ton of this.
All right. Awesome.
“Dave, how would the fun act in a rising rate environment?”
This is from Richard, thank you for your question. Yeah.
So half of the Fund is going to be bonds that are based over SOFR over LIBOR. So that’s going to mitigate it. I don’t want to seed it completely because it only mitigates if the Fed raising rates isn’t affecting the back end of the curve more. Right. So the 10-year note yield is going up 5x faster than LIBOR. You’re going in the right direction, but it’s not the same as if it’s all moving together. Right.
But the short answer is half the portfolio is already hedged because it’s priced over the federal. The Fed’s rate right now is zero. If it went to 3, let’s just take an example.
If we have a bond that’s priced 7% over SOFR. OK, that’s 7% right now because SOFR is essentially zero. Now the Fed raises rates 3%. Now, that SOFR is going to be 3%.
Now you have a 10% yield. So it’s hedging itself. The other part of the portfolio of the accrual or is not a hedge. So you should be aware of that. That’s something that is not going to be hedge here.
OK, great. So let’s talk about how. (Hold on one second.)
Here’s a question:
“Will you be floating the NAV between the first closing at 9/30, ’21 and the final closing of 9/30 ’22 and what are the advantages of being part of the first close?”
The first answer is no, we’re not going to float it there.
The answer to the second question is the advantage of being part of the first close is you get 6 to 8% yield from us when your capital is called, and it will be called quickly in this case, because we have a huge deal pipeline immediately. Right.
So I don’t anticipate this being a long capital call, period. So that’s really the opportunity cost. And a lot of the times people wait because they want to see what’s in a Fund. Here we already know what’s in the Fund, we can share with you the next two bonds. You know, we’re going to be purchasing in addition to the first one. So that’s going to occupy over, you know, cumulatively that’s 150 million dollars of investments. So there’s an awful lot we can show you. It’s not a blind tool at all.
And today, here’s another question from Kevin.
“How can the primary bonds trade at a 10% discount to the secondary market when there are 10 to 20 primary bidders in the market? Shouldn’t the bonds get paid closer to the secondary market?”
Yeah, so as I mentioned, Freddy wants to incent the primary buyers to stay in. It’s hard to get in. It’s hard to come up with that money all the time. And so there’s an edge that’s provided. So why is it providing the 10 to 20? They want to have a diverse group of buyers all the time in terms of there’s a bit of a nuance to this.
Auctions determine where stuff is priced for a whole year for every single bond type that’s issued. And so all of the primary buyers, let’s say it’s 10 to 15 buyers at any point will participate in these auctions. And then those auctions, whoever is most competitive, is awarded that bond.
But importantly, that rate is then what’s issued to all primary buyers until the next auction resets the value. If something is crazy, like in other words, let’s take us through a scenario that could have happened. There’s an auction in February 2020. And you know, the auction is pricing the bonds at 700 over and then Covid hits.
And all of a sudden there’s more risk received, and they go at 800 over. Freddie will then have another auction because they don’t want that to happen. They don’t want a case where were issued bonds below where the new rate is.
But generally, those auctions set rate for the whole year and then the bonds are allocated based on how aggressive you are bidding at auction, because it’s really a signal to Freddie of the primary buyers, how much money they have, how interested they are, etc.
So if Origin were to come in second, we don’t get that bond, but we would be perceived as a firm that’s very interested in that given year of buying paper so we can talk more offline. There’s a lot of nuance to this, as you can see. But the premise is true.
You get an edge all the time. I’ll go a little bit deeper down the wormhole, there is a very vibrant secondary market for that market is also for approved buyers.
So if you’re on the line thinking, well, jeez, at least I can go call and I can buy this on the secondary. The answer to that is no, too. You have to have a DCH designated certificate holder status in order to buy the secondary. So all of this is a pretty restricted market.
As you and I can both take this one, I’ll give it to you first,
“As Origin continues to grow, assets under management, expand strategies, geographies, how do you ensure you have the adequate resources focused to generate great returns going forward?”
Well, the first way you do it is you focus on one asset class, which we do, we just keep going deeper and deeper and deeper into one thing, and that’s the first.
The second thing is we’ve always been overstaffed relative to our strategies. Equity under management, always. I mean, people who study our firm shake their head leaving and are like, how can you have 30 people at this size company?
To give you an example, our competitors are half of the staff we have. So like I’m very comfortable and confident in what we have, particularly relative to the size of our firm and what we do.
And we’ll keep doing that. Michael and I always invested ahead of growth. And then the last thing and I was remiss in not covering this one thing we did do, because we didn’t have experience pricing and participating in the credit markets.
We hired a team member who brought that experience. So that’ll be in our PPM when you read it.
It’s also in our materials that Brad Morgan spent 7 years at JP Morgan leading their K-Series on the CBS trading desk. And then he’s also been in various funds that buy the paper.
So he’s been in this ecosystem for 20 years. So we brought him on the team for precisely that. His knowledge of the ecosystem, trading, how to finance it, but then also his relationships with Freddie Mac, with all of the primary and secondary dealers that we needed to meet and build relationships with. So I was remiss in not sharing that critical hiring before.
Thanks for adding that, and I would say, you know, when we think about the world, we think of it in terms of solutions both on the ground to the market and then solutions to investors.
What do we want? What do our customers want, what do they need? But also what does our deal team need on the ground to make sure that we’re getting deals done?
And when we think about our building, our lending and our buying strategy, but all being in multifamily, they’re very synergistic with one another. And then you add on the K-Series, which is the lending program, taking the knowledge, being in the markets, understanding the buyers.
All of this works together. And we have a scalable platform so that we can add people into these divisions with division leaders who are incredibly knowledgeable that we can lean on as a firm. And then when we think about the assets and the investments that we’re finding at the ground.
Well, how do we package these up in a way to meet the needs of our investors in K-Series really fills that void on that lower risk end of the spectrum, which is credit only then you have multifamily in the middle, and then we’re coming out with Growth Fund in a couple of months, which is development and growth for people who don’t need income. So that’s my answer.
But I can tell you that we’ve never been a volume shop. So as we expand, we’ve always been incredibly measured and have these discussions about before we expand, what personnel, what expertise, who do we need on the team to do this.
So thank you for your question. All right, here’s a question about workouts that I’m going to give you, and there were a couple about these.
“If a specific property, (this is from Terry) with a loan in the pool is unable to pay debt service, does Origin have the right to negotiate a workout? Does Origin have the right to step into the owner’s position via foreclosure?”
I know you answer this before during your part probably deserves more. And then secondly, there was another question.
“What happens if Origin is buying a loan pool with their own loans in it? Does that create a conflict of interest worth double up on the risk?”
Yes, the workout part. I’m going to start with.
It’s likely that we’ll never have a workout. I mean, they just don’t happen very often. But in the event they did, and that is why we’re in the position we’re in. Freddie wants to make sure that we have the ability to do it.
#1 Origin has a really, really large history of workouts.
Our entire first Fund was workouts, bankruptcies, foreclosures and short sales. That was the period of time we were in, you know, ’11 to ’14. It was a tough time.
And we did really, really well in that period. Do we have the right to step in? Yes.
The way it works is if a loan is in, you know, it’s not just on the watch list, but it’s gotten to a point where Freddie Mac wants us to foreclose.
Or buy the paper out of the bond. We have the right to do that and we make an offer to Freddie, and we either can pay face for the loan, in which case we get it or we can bid less than face.
In which case, Freddie would have the ability to say no and take it over themselves. They would prefer that we do it and we would likely do it. But in the event that we’re not going to do it, we just lose money doing it.
In the event that were to happen no one in the Fund has to participate. You’ll have the option if you want to, because this isn’t an investment anymore in the Fund. This is an investment in a loan workout and we’re viewing that at Origin as an opportunity to do what we do, which is buy something at some discount rate that we believe we can achieve. So if we want to, we view this as 16% risk. We’re going to discount it at 16% and say, OK, this is this is the business plan with this asset, we can buy the loan here.
And so this is what we’re going to do. And people in the Fund will have the ability to co-invest in to that SPE, that special purpose entity that will execute that.
But you don’t have the obligation. And, you know, we’ll price it accordingly and that we’ll want to do it with or without investors participating. But you obviously can. Everyone wanted to participate. It would be done pro-rata, obviously.
So that’s the first answer. The second answer?
Theoretically, yes. Origin’s a borrower of Freddie. And it could be that one of Origin’s loans is in the pool, meaning statistically that could happen. There’s 50 loans in these pools, it’s highly unlikely if that were to happen. I don’t view that as much risk at all.
I mean, you’re talking about, you know, 2% of a bond. I don’t see that as much of a conflict of interest, so much of the issue. But theoretically, I suppose it could have.
All right, we have time for probably one more question here, so we’re going to take this last one, which really, again, you mentioned a 50 percent hedge against rising rates.
“How does the hedging against rising rates compare between this Fund and the IncomePlus Fund?”
Well, in any given point, the IncomePlus Fund and our build-to-core. You know, the idea is to put long term debt and IncomePlus on all of our assets and all of our assets that are built with cash flow, and that’s true. On the assets under construction have construction loans.
And those are long term loans. So, you know, IncomePlus is predominantly hedge, but not entirely hedged in the same way. This is much more hedge than bonds that aren’t priced over.
So but it’s not entirely (so), the one thing I’ll say about hedging that investors have to understand. We can hedge interest rates to 100% all the time. And there’s also a huge cost to that. And so, you know, believe me, Michael, I have spent hours and hours and hours on calls with every hedging strategy available. You can do swaptions, swaps. You can do Koller’s.
You can do fixed rate that blends into stabilized fixed rate. And we’ve done the math behind all this. But in general, if you want to hedge 50 million dollars of a floating rate, short term debt, I don’t care what the strategy is, it’s going to cost you half a million bucks. So look like everyone wants to hedge, but do you want to hedge relative to the expense of hedge it?
That’s a much more difficult question to answer.
Great. So we are over time, we’re at about 12, 10 right now. Let sign-off, I just want to thank everybody for their time and their interest in participating today.
And Dave, do you want to you want to sign us off and finish this up?
Absolutely. We threw a lot at you. Please give us feedback and let us know if you’d like to hear more.
I’ll tell you a story. I met with a really sophisticated investor about this, and I thought that, you know, they understood everything.
And, you know, a month later, they told me that they really didn’t understand everything and they wanted to kind of do the whole thing again.
So my first question is if this just didn’t resonate?
This is a simple strategy. And if it wasn’t conveyed, that’s my fault. It’s not the strategy’s fault that means that I didn’t do a good job of being clear, concise and happy to go with in more detail.
But I do believe in the product quite a bit. And thank you for your time.
Thank you, everybody.