What to Know About Origin’s Multifamily Credit Fund

Topic:  • By David Scherer • September 21, 2021 Views

Qualified purchasers* can now lock in a stable stream of risk-adjusted returns that is substantially higher than other fixed income investments and diversify their real estate portfolios with Origin’s new Multifamily Credit Fund, backed by high-quality multifamily assets. The Multifamily Credit Fund offers a low-risk passive income stream that comes from conservatively leveraged mortgaged-backed securities—specifically Freddie Mac K-Deal and SBL B-Piece certificates secured by cash flowing, geographically diversified multifamily mortgage loans. The Fund targets a total net annual IRR of 8% to 10%.

We’ve met Freddie Mac’s stringent requirements to become an approved B-Piece certificate purchaser because we are a multifamily owner, lender and asset manager with extensive experience and a proven track record. Freddie Mac requires bond purchasers to be active borrowers who are familiar with the inner workings of their products. Plus, they require equity of $25 million to $65 million to bid on B-piece certificates, an intensive capital requirement that eliminates 90% of potential buyers.

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This private credit fund has been rated A- by Egan-Jones, which conducts private placement ratings. This rating means that the Fund is expected to have a high level of creditworthiness with low sensitivity to evolving credit conditions. Investors in Fund will receive the following benefits:

  • High, inflation-hedged yields. The Fund will target a net distribution yield to shareholders of 6% to 8%, substantially higher than fixed income yields, such as ETFs, corporate bonds and certificates of deposit. The Fund’s investments include a combination of fixed-rate certificates bought at a deep discount and floating-rate investments. The latter will pay a substantial premium over the Secured Overnight Financing Rate (SOFR) or its predecessor, the soon-to-be-retired London Interbank Offered Rate (LIBOR). The more transparent SOFR is an index of overnight Treasury yields.
  • Downside protection. Freddie Mac has a low historical loss rate (.076%) and the Fund’s bond certificate position is senior to common equity owners, providing a 30% cushion to loss. Plus, the B-Piece certificates we invest in will be free of home loan or credit card debt, benefiting from the safety and resilience of multifamily housing.
  • Built-in inflation hedge. The yield on the Fund’s floating rate bonds rises in tandem with rising interest rates, offering a build-in inflation hedge.
  • Tax efficiency. The Multifamily Credit Fund is structured with a REIT subsidiary, which under provisions of the Tax Cuts and Jobs Act of 2017 provides a 20% tax deduction on all taxable dividends, regardless of an investor’s income. The REIT structure also blocks Unrelated Business Taxable Income (UBTI) for tax-exempt investors, including IRAs.

About the Multifamily Credit Fund’s Target Investments

Freddie Mac is the largest multifamily lender in the U.S. It helps to ensure an ample supply of rental apartments by purchasing high-credit quality multifamily mortgages, which it securitizes through K-Deal and SB-Deal bond certificates and sells to third-party investors. Freddie Mac’s volume of new business is huge, totaling $83 billion in 2020. And its robust loan traffic allows it to bundle $800 million to $1.5 billion in loans on properties across the country and convert them into a single offering of securities with different investment tiers.

The Freddie Mac apartment portfolio has a lower risk profile than high-yield corporate bonds, investment grade bonds or other commercial mortgage-backed securities. Underlying properties are conservatively leveraged, with loan-to-value ratios at typically 70% and no more than 80%. As well, its rigorous loan requirements align with Origin’s underwriting standards. Freddie Mac’s delinquency rate is lower than comparable Fannie Mae certificates or commercial mortgage-backed securities. Its loss rate over the past 26 years is an extraordinarily low 0.076%.

The Multifamily Credit Fund derives its high yields from taking a position subordinate to Freddie Mac’s senior debt, which is known as a B-piece. This slice of the loan pool is not guaranteed by Freddie Mac but is lower in the capital stack than property owner common equity. Owners provide 30% of funding and risk losing their entire investment in event of a default. Multifamily Credit Fund investors are at risk only if this 30% cushion is exhausted.

About two-thirds of the Multifamily Loan Fund portfolio will consist of floating and fixed-rate K-Deal certificates. Loans in the K-Deal portfolio originate from a diverse set of properties, primarily located in Texas, California, Florida and Georgia. The target allocation also includes small balance loan (SBL) certificates on loans originated for smaller apartment buildings and interest-only K-Deal certificates backed by future cash flows.

Although Freddie Mac has its own rigorous vetting process prior to lending to multifamily owners and operators, we thoroughly vet each B-Piece certificate. We do that using our own proprietary underwriting and due diligence processes. When participating in a January 2021 K-Deal, we looked at the property locations, the property operators, and the investment’s risks and position in the capital stack. As well, we review every investment’s strengths and weaknesses in depth to make bidding decisions.

We are excited to offer this new product that expands upon our portfolio of multifamily real estate investments to help high-net-worth investors, family offices and registered investment advisors grow and preserve their wealth.

*Generally, a qualified purchaser is 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.

Posted By

David Scherer

David Scherer formed Origin Investments in 2007, along with Co-CEO Michael Episcope. He has more than 25 years of experience in real estate investing, finance and asset management.