Webinar: Growth Fund IV June Update

Topic:  • By Origin Investments • June 3, 2022 Views

On this webinar, Origin Co-CEO David Scherer and Managing Director of Acquisitions Tom Briney provide an update on Growth Fund IV. After briefly doing a Fund overview, they discuss the current state of the market and why multifamily development is positioned to grow despite the current investing environment. They also provide the latest details about the Fund’s closed assets, give an update on the deal pipeline and answer questions from attendees.

Below is a transcript of the webinar.

 

David Scherer:

Good afternoon, everyone. Welcome to the Fund IV, Growth Fund IV update. My name’s David Scherer. I’m the co-CEO and co-founder of Origin Investments. Thanks for spending time with us today. And it will be recorded, if people signed up and had to work and couldn’t do this. We had about 500 people sign up and many of you are investors now. This is a fund update. We will be updating you on the progress of the fund, which has been significant and answering some questions along the way. We had maybe 40 to 50 questions emailed in. And as always, there were a lot of themes so I’ll try to touch on that in the opening remarks here, but also throughout the presentation. If we didn’t answer your emailed in questions, then please send them in the live Q and A box on Zoom. Very easy to do.

For those of you that are considering the fund, we’ll give you a little bit of background on Origin, and I think you’ll benefit from the progress, the fund update. I’m very lucky and you’re lucky to have Tom Briney joining me today. Tom has been with us 11 years. He came over from Equity Office, Blackstone in 2011, and just had his 11-year anniversary. He runs our Western operation and is quite involved in many of the fund acquisitions, he and his team out there. And so he’s going to be giving you an update on the deal pipeline. Candidly, the fund is almost 100% sourced and developments are in progress. And he’ll cover that now. This isn’t the fund where you’re going to later find out what we invest in. In fact, we’ve been working on the sourcing for this fund for the last 12 to 18 months. In terms of Origin’s development experience, we’ve developed, this is our fifth fund that has had development in it.

We have two qualified opportunity zone development funds. This is a non-Opportunity Zone development fund because many of our partners, they don’t have capital gains significant to invest. This is an area if you have capital, but it’s not a capital gain, that’s recently realized you would invest in this fund. In terms of our development returns we can point to over a billion dollars of development and we’ve returned on average, over 25%. And so we’re very comfortable in the space and we see that right now the… And I’ll get into this in a moment, but the margins in development right now are some of the highest that we’ve seen in our career. And Tom and I will both be explaining why that’s the case. I want to just tackle a couple questions that came up a lot. So one is how large is the fund and how much has been raised?

The fund target is $200 million. We began raising January 15th of this year. The first close was March 31st and we raised $130 million at that close. So roughly 65% of the target has been raised. March 31st, obviously we’ve raised significant money after that. Just based on demand we might raise the total target and by the way, our deal flow, we might raise it at $250 million. If we don’t, this fund will be fully invested very, very soon. The other question that I had a lot, this is comes from existing investors is, when are you going to invest the money? And you would know if you’re an existing investor that 33% of the capital has already been invested. And we anticipate calling capital for another 20% in early July. And you’ll have 10 days to fund that after which we believe it’ll be about eight to 14 months to invest the rest of the fund.

And Tom will go into the pipeline in detail and you’ll get a flavor of the timing and where we are and pre development in all those projects. The goal of this, I’m going to provide a little bit of information on Origin then I’m going to move to market commentary. What we’re seeing, this fund also benefits from the fact that we have many other funds and many other activities that we can leverage for information, deal flow expertise. So I’ll cover a little bit about that, and then I’m going to turn it over to Tom and he’s going to go over the deal pipeline, highlight a couple of deals. We’d like to have 30 minutes for Q&A. So I’m going to try to be 15 minutes and Tom will be 15 minutes. First slide please.

If you’re an existing investor in many of the folks that are in Growth Fund IV are also in some of Origin’s other funds. So you would know these things, but for a lot of the people that don’t know Origin, I just want to spend a little bit of time. What I’m most proud of, and I’m sure Tom agrees is we’re a top decile fund manager. What’s interesting about that is it’s not for a fund it’s for all of the work that we’ve done since 2015.

And it actually straddles four of our funds. And so if you’re an investor in Fund III or IncomePlus Fund, or QOZ I, all of those funds benefited from this designation and we’re not top decile, we’re actually 11th out of 249 domestic real estate managers. So it’s much better than that. We just say top decile. The returns sort of speak to that, 24% average realized gross IRR that’s across dozens and dozens of deals at this point that equates to a 2.1 equity, multiple much more important metric.

That’s what your money is doing in terms of growth. If you put a million dollars here, you’ve generally got $2.1 million back in those investments. We’ve grown a lot. And I think we’ve grown a lot because we have a high quality product and we invest significantly alongside our partners. $70 million of our fund investment capital comes from the Origin team. And I think people like that. And in terms of growth, 2,800 unique active investors, these are our partners. That number was half of that two years ago. And in terms of registered investment advisory partners, these are firms that invest on behalf of their clients. If you’re an investment advisor three or four years ago, we had five or six investment advisory partners, now we have 60. So that’s changed quite a bit as well. And I believe it’s predicated on, we really do have a better product, better returns, better risk management.

And we charge very, very fair fees for what it is we do. And we tend to be one of the most aligned firms, meaning we invest significantly alongside you. Next slide please.

State of the Market

And we really have a unique view here because we are both buying and selling assets for various funds. And we invest across the capital structure. In this case, we invest in common equity, but we also invest in preferred equity. And we do a variety of things. It’s one of our advantages quite frankly, is we’re very agile in terms of how we can structure deals.

What we’re seeing probably the first pull is the most obvious. The traditional portfolio of stocks and bonds has struggled in the first five months of this year because interest rates have gone up and they’ve really been more than anything else the reason stocks have gone down. So in the traditional portfolio, they’re supposed to hedge each other and we use the word correlation. You don’t want correlated portfolios. And in the first five months of this year, they’ve been absolutely correlated. They both have done very bad. So stocks are down 15% to 20%. Bonds are also down 8% to 12%. And I’m talking about the risk free rate bonds, if you were in spreads above the risk free rate bonds has also done very poorly.

Why are interest rates going up? The inflation surge, it’s real. If you were on some of our webinars last year, we were talking about how we weren’t sure if it was transitory or not, but it’s real. And the reason that we see inflation more than anything else is our rents. The biggest input into the inflation index, CPI is the cost of housing. The cost of housing is measured by partners friends. That’s what we do. And so in a typical year, we have machine learning and AI and a lot of experience as well, anywhere from two to 4% is a reasonable growth rate for rents over the last 20 years. Last year, it was 15 to 20%. We are right in the middle of the inflation and we’re benefiting from it in a huge way. And Tom will talk a little bit about that.

But when we’re modeling rents that are $1,500 and we’re building a project and they started $1,800, that’s creating millions and millions of dollars of value that we did not expect. And so this notion that you hear a lot, real estate is a hedge for inflation. You hear that a lot. It’s a hard asset. It’s absolutely played out to a T that way, it’s been the best environment that we’ve ever seen in terms of rent growth in my career. Interest rates are certainly going up. We do hedge interest rates. We’ve done a lot and I’ll cover that on the next slide, but there’s no question, the risk-free rate’s gone up about 120 basis points. That wouldn’t matter if we were at 7% going to 8%, we are at 1.2% going to two and half. Keep in mind 120 is also a doubling of your risk-free rate, which is it’s quite frankly, something we’ve never seen.

It’s been the speed of the rise in interest rates. And by the way, that’s also showed up in the borrowing rate. And so when you think about home mortgages and a lot of people relate that way, you could get a 30-year fixed home mortgage for three, three and a quarter, January 1st. Now it’s five. So that’s a huge move. And what’s interesting about that is that’s producing a much larger demand curve in what we do because millions and millions of potential home buyers are now priced out of the market. They wanted to buy, but the home values went up and now the borrowing costs are so high. They actually can’t. And so now we have this group of potential home buyers that are renters much, much longer, and that’s our advance then. So, structurally our housing market on the rental side, we’re undersupplied by millions of units and all that goes all the way back to the Great Recession.

Not enough units were built and we never caught up. And now that’s paired with an undersupply. And in my opinion, a heightened demand that will endure until interest rates break back down. I like our fundamentals quite a bit. Construction pricing coming down directly relates to what I’m speaking to here. 20% of construction, your hard costs, your soft costs, your material costs come from multifamily. 80% as the home builders and what’s happened is, as mortgage rates go up, the home builders see that, and they understand there’s less buyers potentially down the road. And so they don’t start as many new homes and that’s already happened. And just as an example, if you have a few moments, you can Google lumber futures. They traded the mercantile exchange right here in Chicago. And those were plus or minus 1,000 six weeks ago, now they’re 600.

That’s how volatile it is. And those types of savings that saves millions of dollars per deal for us when we’re buying $600 board foot lumber versus a thousand, it makes a huge difference in what we’re doing. And the last is uncertainty about future. I would tell you that I’ve been in investments, real estate for 15 to 20 years investments for longer than that, I won’t date myself, but I would say right now is one of the most uncertain times I’ve ever been in, because you have a fed unwinding, a $10 trillion balance sheet. You have a war in Europe, you have inflation for the first time in my adult life. The last inflationary period was the early ’80s. So you can’t even rely on your own wisdom and what you’ve seen and reacted to. It’s very uncertain.

And so that doesn’t mean that you don’t invest. In fact, an inflationary environment is the worst time to go to cash. If you go to cash, you’re losing 8%. You know this. Inflation’s 8%, you’re losing eight. Maybe you’re getting one, one and a half back in a CD, but it’s pretty grim. But what you do need to do is focus on the best managers, the people that you think can manage in uncertain environment and companies that have a lot of margin in what they do so that if they’re getting a 40% margin, and maybe it’s a couple things go wrong, they’re still going to get you a 25% margin. And so that’s really where I believe we are. Next slide please.

What does Origin do in an uncertain world? The first thing we do is we hedge commodity and interest rate risk. And the reason we do that back to margin, we’ve never seen 40% margins in our career. Let me explain what that means. In Growth Fund IV, if you’re an investor, or if you’re thinking about investing, we typically build for $250,000 a unit. It might be slightly more or slightly less, depending on the type of construction in the market. But $250,000 is a good base case. And we’re selling them now for $350,000 to $375,000 a unit. And that’s what a margin means. You can get there a lot of more complicated ways, but that’s what’s happening. And so that’s not only a lot of profits, if we’re able to execute and we’ve proven to be able to do that, but it also means, let’s say there’s a 10%, 20%, 25% correction.

You’re not losing equity, you’re just losing profit. And I actually view this fund as incredibly defensive with an upside tail. That’s why I’m such a big investor personally in this fund, but also our QOZ Fund, just in development in general. If you know what you’re doing and you’ve done it for a long time and margins are this high, it gives you an awful lot of protection. And I like that. And that’s, our philosophy is, protect and grow. My partner, Michael and I, when we formed Origin, it was really for two reasons. One, we had been successful and accumulated capital and we wanted protect and grow it. And the other reason was, we didn’t see that people in the industry, real estate that were investing alongside and we call them retail investors. But all that means is, high net worth investors that invest on their own behalf.

We didn’t see that they were served fairly. We didn’t see that they were served professionally and we wanted to change that. And also efficiently, I should add that. Because all of our investors, they come directly into the fund, we don’t use distribution networks because those actually cost you money. It might cost you 5%, 8%, 10% to get put into a fund. That means you’re investing 90 cents on the dollar and we didn’t want to do that. So you come in here very efficiently and you’re treated fairly across the board and professionally and the returns sort to speak for themselves. This is an interesting slide because this is how we view the world.

If you sat in our deal committee, we don’t look at a base case. We look at a distribution of outcomes. And remember protect and grow. Protect means what’s the downside? Grow means what’s the base case and upside? When we look at the downside scenario here, this is cost overruns, interest rates going higher, cap rate’s going higher, rent’s starting lower than we’ve modeled. We believe you’re still going to get an 8% internal rate of return (IRR). And that’s on a net basis, by the way. That’s after fees, after promote. And then the base case, we believe you’re going to get a 17 on a net basis. And the upside is a 23. That’s why I like this fund. I really believe that you’ve got great downside protection with an upside tail.

If people here are in the IncomePlus Fund, for example, Multi-Strat Fund, Evergreen has some development has prep equity. We did 22% last year. We did 4% in the first quarter of this year, while everything went lower. I believe the fund is still undervalued and it’s defensively positioned. It’s actually going to do just fine in a correction. And so that’s what I’m most proud of. Because I think we keep up with others on the upside, but on the downside, you’ll be really happy you’re here because we’re really good at risk management. And we construct these funds in a way to protect and grow. Now with that, Tom, I will pass it to you and I’m late by four minutes. So you got to pick it up.

Tom Briney:

No problem. Thanks Dave. I got your back. Let’s talk deal pipeline. Right now, Growth Fund IV deal pipeline is 14 deals across eight markets. This is the entire pipeline that we have. So that includes deals that we’ve acquired the land and or broken ground, deals which are in due diligence as well as deals which we have submitted offers to potential partners. And we’re still negotiating through potential deal terms and whether or not we’re going to be able to put that deal together.

In total, the total pipeline is about $225 million of equity and just shy of 4,000 units. Now, taking that back a little bit further and saying what deals have actually we’ve acquired the dirt, broken ground in our, in due diligence. So very, very high probability deals. We’ve got about $165 million of committed equity to those deals. That’s about 83% of the fund if we assume a $200 million fund, 83% of it has been identified and committed, that’s extremely unusual for a closed end blind fund if you will.

As Dave mentioned that we launched fundraising in March of this year and we’re so we’re less than six months into the fund to have 83% committed is not what you would usually see. The reason we’re so committed at this point from a fundraising perspective is because all these deals have an immensely long lead time. We’ve been working on many of these deals for 12 or even 18 months to get them to where they are today. And what that means is, a lot of these deals are deeply in the money as well. So the land portions that we tied up were actually acquired at this point, are pricing based on late 2020, or early 2021. And although we forget how quickly COVID has come and gone for the United States, at least that was the heart of fear in COVID, that was Delta variant and everything else.

So we were able to tie up a lot of the land that we’ve gotten this fund at very attractive pricing. And I’ll talk about that on the two deals that I talk about in a minute here, but the bottom line is, most of our deals are 30% or 50% in the money. And some of them 100% in the money, meaning if we bought it for $25,000 a dollar today is probably worth $50,000 or more per unit. Both of these long lead time and in the money are a huge advantage to investors. It’s you get to see what’s going to be in the fund before we call capital. And even before you get to make a commitment. Additionally, all of that in the money land that we’ve acquired where our own contract to acquire, that value goes directly to the bottom line on the returns for our investors.

We’re not marking up land, we’re passing those savings along to our investors as pure return to our investors. How do we build such a deep pipeline over 12 to 18 months? It starts with relationships. A lot of these relationships, as you can see on the screen here have taken years and years to build. And it’s been frankly, the majority of our job has been building these relationships. Guefen, for example, on the left hand side of the screen, we did our first deal with them in 2017. They’re a vertically integrated group, meaning they do their own general contracting and they do their own development and building, versus a group who would go out and do a third party general contract. And they do a really nice job with that, that helps control the costs.

It controls the waste and it really provides a better product from a control perspective to our investors. And because we had such a great experience with Guefen through our first two deals in 2017 and 2018, we started a programmatic venture with them. And what programmatic means is that we, Guefen and Origin mutually agreed upon a box that deals should look like. And we said, “If we have a deal that we believe fits into this mutually agreed upon box, Origin will have a right of first refusal to do that deal with them.” And so that first deal turns into a second deal, turns into a fifth deal. And before you know, you’ve got eight or nine deals with a certain group, and there’s not a frenzy to compete against other capital groups to provide equity for these deals. And that programmatic structure is really advantageous to both us and Guefen or whoever the programmatic partner is.

And it really is advantageous, because we can get into the deals very early in the process. Early in the process is good for a couple of reasons. One, and is we have design input. Origin has thousands and thousands of units across the country that we’re developing. And our development teams speak on a daily basis and have formal, weekly meetings to talk about design and other things that we see in the market. So what that allows us to do is say, “Hey, this particular idea worked in Jacksonville, let’s try it in Austin. Or this particular other deal didn’t work or idea didn’t work in Charlotte, let’s not do the same thing in Phoenix because we don’t want to make the same mistake twice.” So being able to get in early into the design process allows us to avoid mistakes and make improvements that we’re seeing work elsewhere in the country.

This is very unusual for an investment manager. Most investment managers, especially the really big ones, usually get to a deal of 30 or 60 days before groundbreaking, not 12 to 18 months. They don’t have any input on design. They don’t have any input on what it looks like or how it’s laid out. And mistakes that they’ve made in the past will be repeated again because they’re not into the process early enough to avoid those mistakes the second time around. The other advantage to being in early is we’re allowed to have better terms. We take a little bit more risk with our development partners in sharing in some of those costs and sharing in the time to make sure the design is just right and the structure is just right, but that allows us to have better terms. Sometimes we’ll share in the fees. Sometimes we’ll share in better promotes and waterfalls.

And this all works to the advantage of our investment partners, you guys on the webinar today. And finally it’s the advantage of being in early is that there’s certainty of deal flow. As I mentioned, we’ve been working on a lot of these deals for 12 or 18 months. And that allows us to have a visibility today that most of our investors are looking for. And today we’re focused on deals that won’t come to fruition until 2023, mid or late 2023. And so because we’re working on and we’ve got these relationships to help us produce these very large and productive pipelines, we’re able to see into the future a little bit to help us guide cash flow, investor guidance, capital call guidance and that sort of things. So we develop an investment manage very well. Our partners who are vertically integrated here, they do an outstanding job of building and site selection and tying up these land sites at very attractive basises.

Deal: Haven at Cool Springs

If you guys have been on either Growth Fund IV, or even some of our AI webinars in the past, you’ve probably heard about this deal. This is one I’ve talked about in the past. This is a programmatic venture with Guefen as I just mentioned, we’ve been working on this deal for 12 plus months. It’s a 300-unit project in Franklin, Tennessee, which is suburban Nashville just to the south. And this is one of those deals that I mentioned that is deeply, deeply in the money. When we tied up the land more than 12 months ago, we tied it up for $24,000 per unit. At the time it was not entitled. Since we tied it up, we’ve gone through entitlement, which means all that means is we’ve gotten the city to approve of what we want to build.

It was prior zoning for something else. And we said, “Hey, we’d like to build these 300 apartment units.” And through a lot of back and forth and frankly, a little bit of brain damage, we were able to agree with the City of Franklin as to what we were going to build. Between that entitlement process and tailwinds in the capital markets, this land site is more than $8 million in the money today. As $24,000 is what we paid for it, we have closed on it at this point, it’s worth somewhere between $50,000 and $60,000 per unit today. That $8 million goes straight to the bottom line of our investors. It will help us offset some of the rising interest. The rising costs that we’ve seen, whether it’s interest rates or construction pricing or the case may be, but any excess goes straight to our returns and benefits the investors. And whether the investor is investing today or whether they’re considering to invest in the future, they will benefit from that initial $24,000 per unit acquisition price.

The actual asset is an A-plus location in Franklin. It’s overlooking the Vanderbilt Legends Golf Club, which is a beautiful, beautiful golf course. We are sitting on top of a hill that gives visibility for dozens of miles, not only on the golf course, but the surrounding communities, the hillside and everything else. And what’s really interesting about this city in this pocket is the demographics. The demographics here, the median household income is through the charts, which means the affordability, the amount of money that people can pay to rent in this community is very attractive to us. The high barriers to entry is something that we focus on when making site selection. As I mentioned, there was a little bit of brain damage to get the entitlements complete on this project that is complete, but the barriers to entry are something that will limit future supply in this micro market, which is something that we look for with all of our deals.

And then finally on this location, within about a mile, you’ve got several hundred thousand feet of office space for working. You can walk to work as well as retail amenities and outdoor amenities, hiking, biking, movie theaters, restaurants, that sort of thing. It’s really got everything that we look for in the location from high visibility, great demographics, high barriers to entries. It’s an A-plus asset that we’re really, really excited about. As I mentioned this asset, we acquired the land, I want to say it was probably about 30 days ago. We officially closed on it. We’re working through the final touches of design today and we’re likely to break ground on it in the next 60 days or so. So this one’s coming down very quickly and we’re very excited to get going on the actual construction.

Deal: Solace at the Ranch

This asset (Colorado Springs) I think I’ve talked about on prior webinars as well, is one that I’m very excited about. It’s about a 45-minute drive for my office here in Denver. This is the first of many, and I’m going to call it a pseudo programmatic venture that we have with Jackson Dearborn. That was the emblem all the way to the right on that pipeline slide that you saw earlier. Jackson Dearborn is a group that we’ve been working with for several years to build this relationship. And in the pipeline, this represents their third deal in Colorado Springs. It is Origin and Jackson Dearborn’s first of many. We have two more deals behind this in different funds and in different geographies. And I would bet that over the next couple years, we see somewhere between five and eight deals with Jackson Dearborn underway. And that’s the power of building the relationship, building that programmatic structure and really building the trust in one another to build a pipeline that’s mutually beneficial for all parties.

This asset is 378 units. And in what I would call the path of growth of Colorado Springs, and it’s immediately adjacent to a 35,000-acre master plan community that will be under development for the next 15 or 20 years. There the first set of homes has been delivered. Again, very, very strong demographic, similar to Franklin. And that path of growth momentum is really just starting to pick up steam. And we’re seeing that through this asset being also very deeply in the money from a land basis, similar to Cool Springs.

This is closer to about $9 million in the money. We acquired the land two months ago, today. And again, that $9 million will both go to offset any increases in construction pricing as well as flowing to the bottom line from a return perspective to our investors. The thing that I like most about this, and if you’ve heard me speak, you know how happy I am about Colorado Springs in general, but Colorado Springs is one of the markets that consistently shows up through our AI and through my experience as a big, big growth market that also has recession protection, which is something that’s very important to us right now is protecting that downside, protecting growth as Dave mentioned earlier.

Supply and demand is something that we focus on very carefully across all of our markets and with growth comes supply. And a lot of times, supply can outpace growth. One of the metrics we look at internally is our units per capita. So how many units available, whether it’s multi-family or four sale units for living are available for every person in a market? And Colorado Springs is one of the few markets that’s delivered as much product as it has over the last three years, but that units per capita ratio has actually decreased, which means more folks have moved in to Colorado Springs than units have been delivered, whether it’s again for sale or for rent. And that’s a pretty interesting statistic to really think about. But it’s obvious when you really look at the data in the market and you see that the market is between 95% and 98% occupied from a rental space perspective, which is really what’s driving that rental rate increase.

Tom Briney:

The more occupied, the higher the occupancy is, the higher the rents tend to push. The second component to why I like Colorado Springs beyond the supply demand fundamentals is the economy. About 35% of the economy of Colorado Springs is military and defense R&D type spending, which historically has been a very strong recession, resistant type economy. So in addition to the growth that we’re experiencing in the market right now, there’s a lot of downside protection with what about a third of the economy is, driven by that defense spending that military, spending the multiple military bases, the Air Force Academy, everything else that’s in that market is very recession resistant. This particular asset is about 45 days from breaking ground and that’s an official breaking ground. We have started site work already. It is underway, I was at the site last week.

It’s very exciting to see the dirt move here. I’m super excited about the visibility that this has. It also sits on top of a hill. It’s overlooking Pike’s Peak. So you can see the mountain range to the west. And because of its juxtaposition on top of the hill, that cord will be preserved forever. It will never be inhibited, which is really a unique attribute to this particular asset. So the site work is underway. It’s fun to see it coming together. We will officially lock in pricing and break ground over the next 30 to 45 days. And it’s one that I’m very, very excited about. With that, I will push it back to Dave to start the Q&A.

David Scherer:

Thanks Tom, before we start the Q&A, Colorado Springs also, it’s a great example of, we have a thousand units going for QOZ I and II. And so remember earlier I was talking about how this fund leverage and benefits from everything else we do. The scope, the other funds. We know this area really, really well because Tom found it three and a half, four years ago. And we’re one of the large… We probably are actually the largest developer in the city now. And this is now bolting on the activity from the last three and a half to four years, but we could have that same conversation about Nashville, Phoenix, Charlotte, Denver. We’re very, very deep into this process. And I think we’re among the largest developers in the country right now in terms of activity. So you’re benefiting from that, all of that activity.

All right. I’m going to start. Actually, normally we start with live. I’m going to start with a couple from the emailed in, so I’ll ask you one Tom, and you can just start. One of them is, talking about how we manage inflation, both interest rates, they didn’t specify input costs, lumber, et cetera. But maybe you can talk about that. Obviously we had a two and half hour call on lumber this morning. Maybe don’t make it two and a half hours, but a little bit on that and a little bit on the swaps and swap and everything we do across all our funds, growth enforces no different, but we’re very different than other managers. We don’t talk about doing things. We do them.

Tom Briney:

Yeah, absolutely. And I was having a conversation actually with one of my friends who’s in the industry yesterday. Who’s considering investing in our funds and it’s very unusual to have an investment manager who’s as not just talking but active as we are in hedging the risk in the market. And that’s frankly, a compliment and a function of Dave and Michael (Episcope)’s background in risk management over their prior careers. As Dave mentioned, the first thing we do is we have relatively conservative underwriting. And some people might say very conservative underwriting where we don’t take our cap rates down to where the actual market is. We give ourselves some cushion there. We also underwrite to where the market is and where we expect the market to go from a lumber perspective, for example. In the Colorado Springs deals, a lot of those underwritings are at between $1,100 and $1,200 per thousand board feet on the index. Index that Dave mentioned earlier, which is now down to $600 per thousand board feet on the index.

We underwrite relatively conservatively. And then we put an inflation factor on top of that, with the expectation that it goes from $1,100 to $1,400. We’ve got a lot of cushion in that regards, but then more importantly, on the active hedging front, we have a mismatch of assets and liabilities from an interest rate perspective. We have a lot of short dated interest exposure from construction financing, which tends to be three to four years in length. But then the expectation is that we hold the asset for a longer period of time. We started buying swap options, which is just an interest rate derivative to help us hedge the interest rate exposure that we have across all of our funds. We bought those back in January and February of this year, before interest rates really took off. And so then as interest rates increased and we saw it coming, those swap options increased in value.

So we are able to sell those two options and book a profit to our funds, which will help offset our higher interest rates in the future. And then finally, and I’m jumping over so we don’t have a two and a half hour call on this, but the lumber is the piece that I mentioned earlier. Although we have underwritten a lot of our deals in that thousand to $1,200 per thousand board feet index. And now that the pricing has come down to $600, we want to try to lock in some of that $600, although not all of our projects are ready to break ground. I mentioned two, that one is 45 days out.

One is 60 days out, but we have others in the pipeline, which might be six months out, or nine months, out or 12 months out. And so we want to make sure that we can lock in as much of the $600 per thousand board feet as possible in the index and that results in us hedging by buying futures in the CME lumber futures, to make sure that if those costs for lumber increase going forward were hedge, we’ve blocked in some of that lumber at a much lower at today’s pricing rather than when it goes back up.

David Scherer:

Question: When do you expect distributions to start?

Great question. We get this a lot in all of our funds. This is development funds so just take you through the life cycle of a deal. Typically, it takes depending on construction type, if it’s garden, it’s quicker, if it’s podium, it’s a bit longer. But in general, it takes about 30, 35 months to build and then 12 to 15 months to lease. And then you refinance at that point, because you’ve created that value I was talking about earlier, that margin, that 35% to 40%. And so you can refi pull out proceeds and then post refi, you get distributions from cash flow. But the short answer is, you’re going to wait about 42 to 48 months to start distributions. And in exchange for waiting you’re getting this enormous margin, that’s both protection and upside.

And then of course, once you build it, you can also depreciate it. And that’s the wonderful part about real estate is, once you start depreciating it, that depreciation offsets your distribution. You won’t be taxed on distributable income, which is really unique and investing. So that’s going to conclude. The other questions I had emailed in. We had a lot of them, but they were kind of grouped into. So I’m just going to be a little bit redundant. When do you think we’ll be done raising the funds? I mean, the short answer to that is, if we don’t raise the amount from 200 to 250 really soon, we raised 130 and that was two months ago. We’re probably much closer to filling it now. So if you’re interested, you should probably consider doing it now.

Question: Do second close investors participate at the same basis as first close investors?

The answer is yes. Tom touched on this before. We never mark up land. All this value that’s been created, Tom was talking about one deal that has an $8 million value to where we paid for the land through entitlements and appreciation. But the reality is, that’s true of all of our deals. I’m not saying and save million, but it’s all higher. And you’re buying in. The day you sign, you’re buying something that has much more value than what you paid. The only difference between a first and second close investor is the preferred equity. You only get the preferred return once you send in your money, once you make the commitment and your capital is called. So for those investors that are in the first close, we called your capital.

And of that capital that’s called you’re accruing the preferred return. If you come in at the second close, obviously you didn’t participate. You’re not participating in the initial preferred equity. You’ll participate when your equity is called. If you have any questions on this, we have, I believe eight to 10 people on our investor relations teams. They can absolutely answer any of these questions.

Question: Can you invest via an IRA?

Absolutely. All of our funds you can, by the way. This is actually a really good fund to use an IRA for. If you have one, there are intermediaries you have to use. We’ve used them for probably a decade at this point, so we can recommend some.

But again, all of these types of questions are for our investor relations teams. And you can either email me directly david@origininvestments.com. I will put you in touch with those people if you have those questions. If you have questions about the fun strategy or anything we’re discussing Tom and I or members of our team can answer that. I’m moving the live questions.

Tom Briney:

Question: What is your opinion on an impending recession? And what would you do about it?

That is a great question. My personal opinion, which is not the formal opinion of Origin Investments, is I believe a recession is coming. How bad and how quick is the question, but it’s pretty unusual to have a fed tightening cycle the magnitude that we are expecting, plus the fed shrinking his balance sheet, plus inflation the magnitude that it is, plus a war in Ukraine. It’s pretty unlikely that we don’t experience some level of negative GDP growth in this country. I think it’s coming.

What do you do about it? I think as Dave noted, you’re not benefiting from sitting in cash today because of the inflationary environment. So it’s a little bit different today than it has been in the past where recessions come with limited inflation. I personally have my money in these funds. I believe in the funds. I believe in what we’re doing and they are an outstanding inflation adjusted perspective. I can’t tell anybody what to do with their money, but I know mine is here at origin.

Questions: Minimum investments and K-1 requirements

David Scherer:

All right, next question. I will cover this. It’s blocking and tackling. The minimum investments is 50,000. The K-1s. There’s questions about K-1s always. Yes, this is a partnership. You get a K-1 every year. Those will be delivered on time. You’ll be able to file on time and it’s across multiple states, but it’s a composite. If you elect to be part of the composite, you received one K-1 where all of them are rolled up. I handled that one. This is a question. This is a good one. You get all the good questions, Tom.

Question: Tax efficiency in the Fund

Thank you for your question, Kai. I hope I pronounce that, right. This again is about tax efficiency. After the development phase… Well, it’s kind of two part one, will depreciation offset distributions once you’ve developed. I think I’ve covered that already? So the answer is yes, but the second you can answer. Kai is talking about the election to stay in long term or leave the fund. And how that will be executed. If somebody wants to leave the fund, where is that capital coming from? Or if they want to stay in et cetera. And I can answer this too, if you would rather be, do it, but you can take a crack if you want.

Tom Briney:

My understanding is that after four years, there will be an opportunity for folks to exit the fund. We’ll take an understanding of what the fund investors’ desires are, how much wants to be pulled out. We’ll execute our wholesale strategy at that point in time to make sure we have liquidity to meet investor demand. And then the fund will roll into a core type structure. Those assets, which are remaining will contribute cash flow. Again after tax because of depreciation, there’ll be no tax. There shouldn’t be any tax liability for those distributions. And investors will have the opportunity I believe once a year to elect, to remove summer all in their capital on a best effort basis. It is a really unique structure and that is kind of closed ended type fund structure along with the benefits of having an Evergreen type fee liquidity structure to it. It’s something that I like quite a bit and provides a lot of flexibility down the road.

David Scherer:

Yeah. That’s 100% accurate everything you said. In terms of the thing to remember is, it’s an option. And options are valuable. They’re good. So you have the option to stay in, you have the option to leave. And so if you need liquidity, you can get out. If you want exposure to real estate, it’s not a good idea to get out and then get back in. Because what winds up happening is you pay capital gains, you pay the catch on appreciation, all of those things, and then you reinvest post tax. And so that’s why we’re giving people the auction. If people want to stay in, have exposure to real estate, it’s much better to not sell in real estate than to sell.

We’ve learned that lesson over the last 15 years. Remember, every single one of our investors, 2,800 are taxed. And so everything we do at Origin is yes, returns, yes, risk adjusted returns. And then we look at taxes. And because we don’t want you taxed, we don’t want to pay a lot of taxes either. Everything is set up so that you can win there as well. A lot of folks try to mix and match people like us with pensions and endowments, they don’t pay taxes. And so you have this enormous conflict of interest. We don’t have that here. We’re after one thing, which is tax efficient wealth growth. Okay. Next question.

Question: Do you share general partner fees?

Yeah, this is Gregory. Thank you Gregory for your question. And someone else had a similar question, so I’m kind of combining them. Oh, actually it’s Gregory twice. The answer is yes. When we come in as co-sponsored GP, the fund receives those extra returns, and then we also do deals by the way that are direct. And so where we’re the developers. We’ll have deals where we do the development. We have the expertise to do that here. And what we’re trying to balance is the efficiency of direct development with the scale that you need. You actually need both because you want to have a diversified portfolio of high quality assets. And that means we need to do a lot of deals, but we also want to have some deals that are extraordinarily high margin and we can do both. And we also believe that by being a direct developer, which we are, we have much more expertise across every function. Do you want to add to that, Tom?

Tom Briney:

I totally agree with you. And the actual structure is different fund by fund, but we try to generally capture as much as is reasonable across as many deals as possible.

Question: Loans and debts

David Scherer:

Yep. We have an anonymous question about loans and debt, which we didn’t really cover in risk management, but one of the other reasons we’re so protected in all environments is we don’t use a lot of debt to create our returns. And I would just tell you that I don’t care what manager or what real estate you’re looking for, if you have a manager using above 75% leverage just don’t do it. And by the way, preferred equity is debt. If you say, “Oh, the bank loan’s only 65%,” and then they’re using prep up to 90%. That equity sits above yours. It’s protected. So if there’s a loss, you can take all of it. And so there’s enough good managers in the world. And it’s also reflective of them in general, if they’re willing to take 80%, 90% leverage risk, what other risk are they willing to take?

It is a very easy question and you should ask it to every manager you use, what type of debt you use? If it’s above 75%, just go somewhere else. It’s not worth it. Real estate and in particular multifamily real estate is an amazing investment, provides cash flow. It’s an essential asset. You can appreciate it. It always goes up over a horizon of over five to 10 years, always, but you can lose. And the way you lose is you pick managers that aren’t good. They don’t know what they’re doing. Or you pick managers that are using too much risk and you can get taken out of the game. So you don’t want to do that. Okay.

Question: Rent collections

Tom Briney:

Okay. I’ll do my best. The federal government in mid-2020 said because of COVID people can’t go to work and because they can’t go to work, they can’t pay rent. And so if you don’t have the ability to pay rent, you can’t be kicked out because it’s not your fault there was COVID. And this is what the government said. And so there was a protection, there was an eviction moratorium that said, landlords cannot kick out residents who are not paying rent. And that was an extremely painful process for Origin and all landlords for the first I’ll call it half of the COVID experience. From really April or May of 2020 through February, March of 2021, that was a painful process because there were residents who would specifically skip town on certain assets. They would rent at property A, they would live there and not pay rent for six months.

And because we couldn’t kick them out, there was nothing we could do about it they would go rent at apartment B before any notification was given to the authorities to evict these folks. Some people would have one, two or three apartments going at the same time. And there was not a whole lot anybody could do about it at that time. Now the nice part is the eviction moratorium for a large part across this country has expired. And so we are able to evict bad apples. There were losses that were realized, the uncollectable rents at each property that, because that person moved in, lived there for six months, never paid a dime rent and never had any attention of paying rent.

There were losses that were realized, and some assets experienced those losses. And as a result of decreased net operating income (NOI) that generally had washed through the system by call it summer of last year, about a year ago. Today, everybody is paying. I believe and Mark could correct me if he was on here, but I believe we’re at or near the highest collection rate we’ve ever been across our portfolio. And so the eviction moratorium, we are getting paid, the economy and the job market is as strong as it’s ever been. And so the collections are very, very high right now.

David Scherer:

Yeah. What was really fascinating about the moratorium, the stock market hated it because it’s uncertainty. All the publicly traded department reach really got hurt. And then what wound up happening is most people paid their rent. I mean, it went from 99% down to probably 95%, 96% at the worst parts of COVID. And what I take out of that is, multifamily rentals what we do, there’s a reason we only do this. It is the most stable asset class in real estate. And think about it just intuitively, you pay your rent, you need somewhere to live period, full stop. You don’t have to go out to eat. You don’t have to go on a trip. You don’t have to do any of these things. It’s discretionary, but people hunker in and they pay their rent, even when they couldn’t be evicted, they still did. Which was interesting.

And I didn’t know that would happen either at that time, but that is what happened. Okay.

Question: How do we know that we can exit the Fund at the end of four years?

Clark, thank you for your question, he’s asking about how do we know that we’re going to be taken out. In other words, the end of four years, I’m assuming is your question. If you want to be taken out, what’s providing that? And then how do you know that you’re going to be able to do that? And so whether we do a deal direct, or we are in a joint venture, there are legal exit clauses where you’re building stabilized to either refi and sell and provide liquidity. And so there’s plenty of liquidity to take people out, either through sale or refi. Depending on how many people elect to get out. After that period we’ll have to refi or potentially sell assets to provide the liquidity, to let those investors out.

Obviously, if most of the investors or all the investors decide to stay in, you’ll still get a distribution because as we’re refing, that’s generating proceeds to distribute, but there won’t be the need to sell assets because that would be if a lot of people wanted out. And in terms of how, you didn’t ask this, but how we would actually value assets, because obviously you have some people staying in, some leaving, we have a process established where there’s going to be multiple appraisals by different firms to establish value. And then just to make sure that it’s as fair as it can be, myself, my partner, Origin, we’re required to participate on both sides.

And so whatever that appraisal process comes back with, we will be doing both to ensure that it’s a fair process. But thanks for your question. We actually have one more question and then I want to… We’re we’re a little bit ahead, which is great.

Question: Do you have a lot of investors in IncomePlus as well as the Growth Fund? Why would they decide to be in both Funds?

Tom Briney:

It is the case. And I don’t know the actual number, but I’m sure I’m one of them, you’re one of them, where we have investors that are in funds. There are a number and they provide different benefits. IncomePlus is a what I’ll call a safer, it’s a lower risk prospect today. And it’s current income today. So we’re generating, I believe just below 6% current yield on that with a total return between 10% and 11%, this is a higher risk, higher return and you’re going to be waiting a little bit longer for your investment to start cash flow in this fund. There are, it’s a nice balance. I can’t tell anybody what to do and how much to invest in each fund, but I can tell you that from an alignment perspective, we are invested across all of our funds.

And we see it from existing investors also, it’s easier to spend the time to really do your due diligence on any manager and then rinse and repeat. And that’s frankly, what we do with our development partners. We find a development partner that we like a lot and we rinse and repeat across markets across, sometimes it’s a three story garden. Sometimes it’s a podium asset. You find the sponsor that you know and you trust and you do more deals with them and you continue to have your success with those individual partners. And that’s what people have chosen to do with Origin as well.

Question: Will this investment trigger unrelated business taxable income?

David Scherer:

Thanks Tom. We had a variety of questions. I won’t name names because there was like four, five on unrelated business taxable income (UBTI). And if this is going to generate in UBTI? And the short answer is it will, but not during construction and not in the first years of the depreciation schedule, but if you’re looking at a go, no go choice based on if it generates any UBTI no, don’t do it. I would say this is the wrong fund for you. And that’s for generally people that are investing via foundation or an IRA, it’s probably not the right vehicle. It’ll be nominal and it’ll be in the outer years, but I can’t tell you that it’s going to have none. That’s the answer to that question. And I believe there was one more.

Question: Will there be side car opportunities for this Fund?

Tom Briney:

Folks have asked about side cars, we have done side cars for our IncomePlus Fund, as well as I do believe there will be some side car opportunities for this fund. I’m not sure, it could be one or two depending on what our pipeline looks like and how big those deals end up getting when we get final pricing back. Those side car investments would go to fund investors first. And I would imagine based on the number of investors in the fund today, that any side opportunity that comes up from this fund would be fully capitalized by the current fund investors or any fund investor at that point within Growth Fund IV, so there are likely to be maybe one or two side car opportunities in this fund, but they’re likely to be captured within those fund investors.

Question: Why aren’t we eventually selling properties into the IncomePlus Fund portfolio as a strategy?

David Scherer:

We have a question from Michael Harrington. I’m wondering if this is the Michael Harrington I played football with many, many years ago. If it is, it’s great to see you on the webinar. Michael’s question was, why aren’t we eventually selling properties into the IncomePlus Fund portfolio as a strategy? And the answer Michael is, we don’t ever want to have any even appearance of a conflict of interest. There’s a lot of people in IncomePlus Fund that aren’t in this fund and vice versa. And so we really try to avoid any of those situations. I know other fund managers do that, but the reality is, we have tons of deal flow and competitive advantages and it’s not necessary. We don’t need to do that. And there’s no tax benefits to doing that. If there was, we absolutely would do it, but there aren’t because they’re different investor sets.

So it’s not relevant in that way. I think that’s it. Now we are over and I want to be respectful of everyone’s time. Hopefully we answered your questions. If you didn’t feel like the question was answered in totality, email me directly david@origininvestments.com I will make sure we have 45 people now at Origin, I will answer it or I’ll send you the right person to answer it. We also have a Q&A webinar. It’s actually tomorrow, shocking, I’m on that as well. We started a new format as I mentioned… Oh, I’m sorry. It’s next week. Our head of marketing is, this is live TV. She’s saying, “Nope, next week.” Next week we have this Q&A webinar and it’s exactly for all the questions we get that either aren’t answered completely or just weren’t covered. Remember this was about Growth Fund IV.

If you sent in questions about QOZ, which people did, or QOZ II or Fund III, this always happens, I won’t cover them because it’s not on this webinar, but I will cover them in the next webinar next week. It’s all Q&A, there’s no presentation. It’s literally me and Michael and it’s the lightning round. Ask us whatever it is you want. Stump us if you can, it’s fine. So that’s going on next week. And then the last thing I want to leave you with is, yeah, it’s an uncertain time for sure. And I agree with you, Tom, by the way, I think again, I view the world in probabilities. I think it’s very probable that we will hit a recession in the next… We might hit it in the next quarter. We might hit it in the next year, but I do think that this is a time you don’t stop investing, but you focus on where you think firms or strategies can protect and grow your money.

And I really believe we’re one of those. And I vote with my checkbook. We’ve invested at this point $70 million of our capital into our funds and it’s worked. And over a long period of time. I’m very confident that we’ll continue to outperform other investment choices. And importantly, real estate and what we do, it’s proven now to not correlate with the rest of what you own. And that’s important. You don’t want all your investments doing the same thing at the same time. That’s the whole point of the portfolio. I feel very good about our investment partners who have had the portfolios helps in the last four or five months by having exposure here. That does make me feel good. Thank you for your time. And again, please email any questions. Tom, appreciate your time. I know you travel a lot.

Tom Briney:

It was fun. Thanks Dave.

David Scherer:

All right. Take care. Good bye.

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