Webinar: Origin IncomePlus Fund October 2021 Update

Welcome, everybody. This is the October IncomePlus Fund update webinar. I am Michael Episcope, co-CEO of Origin Investments, and my co-host today is David Welk, Managing Director of Acquisitions. David Scherer and I usually host this together, but it is divide and conquer right now because we have a lot of webinars.

So we’ve invited our other team members to do this. And Dave is joining us from Charlotte today. He leads the acquisition team and is really our longest tenured acquisition professional here at Origin. So really excited to have him on today.

And Dave is what I would refer to as the gray hair of the real estate department. And he actually does have a little bit of gray hair there as well. Yeah, he’s a wealth of knowledge and much of our track record as a result of deals he’s uncovered over the last decade, and I consider him a personal friend as well. So welcome, David. We also have a special guest today, Mike McVicar, Origin’s general counsel, and Mike is going to go over a proposed amendment. We’re going to kick off with that in a couple of minutes and then he’ll stay on for questions.

Anybody has questions about the amendment as well. I’m going to cover the high level Fund performance. We have a lot of good news to report. We actually removed the section this this update really about delinquencies because it’s just no longer relevant as the portfolio is more than 98% current and trending up.

It’s a it’s just a nice sign that we’re sort of reach the the other side now. Dave is going to cover the debt, common equity and development portfolio at a high level. He will dive into a deal or two and then talk about the state of the market, give sort of boots on the ground perspective.

And after that, we’re going to open it up for the Q&A session. Mike, I’m going to hand it over to you now so you can talk about the amendment, Jeff. Please tee up the slides. Thank you.

Great. Thanks, Michael. Yeah, so as Michael mentioned, we are proposing an amendment to the fund’s operating agreement that will change the way we measure performance from a per unit basis to a fund level basis. The current fund structure follows a hedge fund model in which each issuance of units creates a separate series from which performance is measured. And at the end of the year, the performance is assessed on a per unit basis. Each series is rolled up into a single series with a unified NAV and all investors unit counts are adjusted to account for this roll up and performance allocation process.

When we launched the Fund we had a single class of units and anticipated making quarterly distributions and admitting investors on a quarterly basis and issuing units on a quarterly basis with this relatively simple system. The hedge fund model works.

It’s not super difficult to to manage with the potential of four series a year that you need to roll up and account for. However, since we launched, we’ve added classes so that we now have four classes of units and we moved to a monthly distribution and a rolling admission and issuance process.

So this means that we now have at least 48 potential series each year to track and administer. This creates a tremendous burden on our accounting and fund administration, and it also means that we are unable to reflect to investors a unified NAV for reporting purposes.

The solution to this problem is to move from the per unit hedge fund model to a fund level model used by other real estate funds with similar investment strategies of profiles. Our amendment will eliminate the need to follow the per unit performance determination and effective 2022, we’ll move to fund level performance metric.

This will reduce the accounting and administrative costs and burdens. And most significantly, will enable us to accurately report out to investors a unified NAV per unit by class. There’ll be more details about the actual amendments when we send out the proposal and the consent, which we expect to do next week. But we just wanted to use this opportunity to give everyone on the call a heads up that this would be coming.

Yeah. Thank you, Mike, and I would clarify that this is a negative consent. You don’t have to do anything here. If you object to this, then you can state your objection. And the most important thing here is that this is this is revenue neutral.

This isn’t, you know, something that really impacts most investors. There could be nuances if you came in in the beginning of the year, but overall it’s going to reduce fund expenses and be more beneficial. And what Mike was talking about a unified NAV Well, the net asset value of the unit price that I’m going to show actually doesn’t reflect the performance fees those are taken at the individual level. So going forward, the net asset value on the unit price will reflect the impact of a performance fee as well going forward.

And so, you know, in an open ended fund, you when you when you start the fund at a period in time and it’s open forever, very different than closed, in a closed ended fund, if you get some things wrong in the PPM in Fund I, well then you just correct them in Fund II.

But in a fund that has, you know, that lives into perpetuity, amendments are are part of the lifestyle of the fund. So this is really important. We think that this is a, you know, something that we want to bring out.

Obviously, we think long and hard before we introduce an amendment to our investors. All right, thank you very much. Let’s let’s jump in to the webinar now the fund update itself. And then, Mike, if there’s any questions about that in the Q&A, we’ll let you address those.

So, Jeff, please put up the slides again.

And Mike, I apologize having some technical issues, I’m trying to transfer the deck over to David Welk so that he can share them. I apologize.

That’s OK. Let’s just put it up the way it is now, OK? And we don’t have to expand, and I saw that it was closing on you. Sure. And I can I can begin anyway. I don’t need these slides for this part, so the webinar is open to both new and prospective investors.

As you know, we welcome both of you, and if you don’t know a lot about Origin, I’m going to give you kind of a two minute version here. We exist to help high net worth investors grow their wealth and generate passive income through real estate, and that’s what this fund is designed to do.

The three pillars that define Origin are: alignment, our ability to execute and our team. And that’s always been the case for the last 14 years since we began. Alignment is everything, it sort of revolves from this, and it’s always been important to us because we believe that people should win and lose together.

And that’s how you build a firm. It’s the right way to do business, and it starts with David and I investing a significant amount of our capital alongside our investors. And then how we compensate our team in terms of performance.

And we want to make sure we are all focused on one thing and that’s generating investment returns. And that’s what we’ve done and our ability to execute is really captured in our track record. We are a top ranked manager.

Very proud of that. Preqin is a third-party ranking system. They put us really in the top kind of 2% out of 2000 managers. We just found that out, I think about two months ago. So very proud to be there.

We’ve never lost money on a fund deal and we pride ourselves on being really good risk managers and locating great opportunities, adding value and understanding, you know, how to maximize the upside. Now, candidly, Fund III had a lot of office in it.

So you know, it’s not just about multifamily. Multifamily’s done well throughout the last 14 years. We’ve done retail, we’ve done office, we’ve done student housing even. And even in our own three portfolio, we’ve had some office that has done extremely well, actually generate a more than a 2x and some office that’s probably going to generate right around 1 or 1.1x multiple on that. So, you know, when we lose, we really want to see a scratch is the worst case scenario. But I’ll say that when we’ve won, we’ve done far better than what we’ve expected.

Our internal stated vision to the entire team is to maintain our status as a top performing manager. It’s really important to us. It’s not about growth for the sake of growing. We want to give people opportunities, but it’s growing while also maintaining our value proposition at all levels.

And that brings me to the to the third pillar, which is we have a team of 35 incredibly talented people here at Origin who make all this happen, and many of them come from institutional backgrounds. When you invest here, these are the people who are helping to put your money to work in great projects.

And what they all have in common is that they work really hard. They’re smart, they believe in the mission of the company. And what we’re doing is important to our more than 2000 individual investment partners at Origin. So it’s a, you know, just wanted to kind of say that if you’re not familiar with Origin, if you are, you know, these are probably a lot of the reasons why you invested.

Let me jump into the fund overview now and the. Next slide, please. Thank you. The fund’s primary purpose is to deliver tax efficient, stable income and appreciation to investors.

Target annual return is 9 to 11%, which includes both yield and appreciation, and we launch this fund about 30, 32 months ago, right around two and a half years ago. And the fund operates as an open ended multi-strategy fund that builds, buys and lends to multifamily properties in growth cities around the United States.

Now, in previous webinars, I did talk about the buying portion, how we weren’t doing. There’s always exceptions to the rule, and David is going to talk about our pipeline and one of the exceptions to the rule. Now this report that you see in front of you is as of 9/30 and the fund just crossed the 200 million dollar mark. The portfolio is allocated 23% in cash and marketable securities, 30% in real estate common equity and 47% in real estate preferred equity. Now, much of the cash in the fund is earmarked for near term deals that are going to be closing.

But because of our cash position, we have actually temporarily closed the fund to new investment. Now, new investors, they can. You can still subscribe. You will be in a queue and it looks like we will call capital to anybody entering the queue today around February.

Now that could slide by a month in either direction, depending on our pipeline and what deals get close, but deals get pushed back. Deals show up last minute. There’s a lot that can happen. We’re just trying to give you as much guidance as we can here.

The end of September unit price has been calculated at $10.62, and that’s up from $10.48 last month. So a nice gain month over month and about 85% of that gain is attributable to our common equity portfolio and valuations in our markets.

They’ve just continued to accelerate over the last several months, and I believe there is more room on the unit price to run and really for two reasons. Number one, we are pricing assets fairly, but the market is moving so quickly that information as old as 90 days can be stale.

And that’s what we’re basing valuations on our recent trades in the market. But when you look at the trades that are happening today versus 60 days ago, the market is really moving extremely fast. And the other reason is that our preferred equity is generating a yield kind of an average yield in the portfolio 12.5 to 13%, which is highly accretive because it far exceeds our distribution yield of 5.7% today. So I think you’re going to see continued good news in the unit price as a result of both these factors. Now, in terms of the risk or health metrics, we’re in really good shape there as well.

The common equity leverage has actually fallen to close to 55, 56% as a result of valuations going higher, and the debt service coverage ratio now sits close to 1.5x. So plenty of cash flow that’s being generated from those common equity investments and the fund is well-diversified, is at 12 total assets in the fund and that’s only going to grow this year and next year.

Next slide, please. So historical performance, this fund shows historical performance against the Odyssey Core Equity Index and this is a levered private real estate index. This is our benchmark and returns they really have to be measured against the benchmark because there are times when a 10% loss might be a really good outcome. And there are times when a 10% gain may not look that great if the index is up 15%.

So we really believe in measuring ourselves in all parts of the organization against the benchmark, and that extends from the acquisitions team to the investment management team to marketing to our investor relations team. And it’s important as a as a tool to really understand how you can get better and what your competitors are doing. So in this case, we beat our benchmark in all really, but one quarter tied it in a couple of quarters and we’ve had a really nice 12 months, with the fund gaining around a little more than 19% and that’s inclusive of distributions.

And over the last two and a half years, we’ve actually generated close to a 9% annualized net return to investors, and that includes the dip during COVID. So many of you have come into this fund because you wanted to both have exposure to private real estate and also get away from stock market volatility.

And it’s really doing what it’s designed to do, which is produce that consistent income with minimal volatility. And mind you, that this includes that portion of COVID. So you know that bogey of 9 to 11%, we’re going to have some great years where the fund might produce 15, 16%. 19% is really out of the norm.

So if you were lucky enough to get in last year, you’ve done very well. If you’ve been in since the beginning, the fund is doing what it’s supposed to do. The fund has paid out dividends every month since inception at a rate of $0.05 per unit, and our original target was a 6% yield.

But with the increase in the unit price, the yield is now dipped to 5.7%. That’s still very generous in today’s world when you compare it to other income products and well within our target range of 5 to 7%, I do have some good news to report and that is we will be raising the distribution yield in January by about 5%. We haven’t totally solidified that yet, but it’s really important to us that we’re not only growing unit price, but also growing the dividend year over year and keeping at that 5, 6% annualized yield.

So let me let me jump in to the last slide that I’m going to cover, which is operational highlights.

And this is a twelve month snapshot of the operational highlights of the common equity portfolio, only the orange (light blue) line is occupancy and the (dark) blue line is revenue. And they say a picture paints 1000 words. And when you have a revenue chart that starts in the lower left corner and ends in the upper right corner, that’s generally very good and I really couldn’t have hand-drawn this any better. So our occupancy has risen in the last twelve months from about 88%. Portfolio COVID impacted a lot of the occupancy out there. And, you know, at that time, it was also we had a lot of collection issues, so the revenue was was really depressed.

So today our occupancy is just above 96% and our revenue has grown by more than 20% over that same period. So the portfolio is doing very well. We’re able to continue to produce the distribution yield, grow unit price, so a lot of good news.

And now I’m going to hand this over to Dave, and he’s going to talk about some individual deals, the makeup of the portfolio, the breakdown state of the market, and then we’ll open it up for questions at the end.

Thank you, Dave.

Thank you, Michael, and can you hear me OK? Yes. I can echo in the background for some reason. If anybody questioned whether we were doing this live, they know now that we are. Good morning, all. Good to be with you.

We’ll jump into the portfolio highlights here and see how long I can deal with the second on the back of my ear. As Michael mentioned, I’ll provide a brief overview of our current acquisition pipeline for our fund investment opportunities, which includes about 91 million of potential equity deployment across 7 investments, and then I’ll provide a quick state of the market on operations, construction and lending.

We’ll get started here first with Monroe & Aberdeen. We averaged about 93.4% occupancy during the second quarter or third quarter here, just below our comps that average of 96% during the quarter.

But we ended the quarter ahead of the market at a 96.7% during the quarter. We retained 37% of the expiring leases compared to our competitors renewal trade outs of about 50%, which was due to a significant increase that we pushed rents over the course of the quarter, which since January lows have presented a 35% increase.

And this was actually evidence our renewal trade out rent increases of 6.5% versus our comp-set average of 5.7%, and the operational recovery here over the past 10 months has been quite impressive. And we will continue to push rates and implement parking charges to increase additional income over the year.

The next asset that’s included on the list here is Madison at Westinghouse. This asset continues to represent one of the strongest performing assets of the entire farm. We have a 97% occupancy during the quarter, and our average renewal trade out during the quarter represented a staggering 12% increase while maintaining that high occupancy that I just referenced of 97%. And this renewal trade on increase is a 33% higher than our comp-set average. So we’ve significantly outperformed our competitors and all the while retaining 63% of our residents, which is 9% above our competition as well.

And as I mentioned in a previous webinar, we will continue to move the valuation of this asset forward as operations continue to improve and we eliminate the loss to lease from these significant rent increases.

Excited to update you all on the District at Memorial performance, as some of you have seen this, this asset has lagged operationally over the past couple of quarters.

It was hit particularly hard by COVID and Houston as a market also saw some challenges from a capital markets perspective and valuation perspective. But we are all we will be writing this asset up significantly over the quarter due to a significant improvement both in the market and property fundamentals.

The submarket itself, which is the Energy Corridor Memorial City Corridor, occupancy held stable for the quarter at 94%, which is a significant increase from the first quarter, which was around 89%. And the property itself, we are exceeding the market at quarter end with 95% occupancy, so we are fully stabilized from from a operational perspective. We achieved 5.3% increase in trade out rents here, which is slightly ahead of the market. But we’ve significantly outperformed the market with our retention of 60% versus 52%.

And this is a marked improvement from where we were performing at the property level at roughly 42% in the second quarter. As we mentioned previously, the upgrades to the exterior many spaces have been completed have been well-received by the residents.

The rooftop pool with brand new outdoor kitchen and exterior lighting has been well received and we completed the pool refresh for summer use.

The next series of updates that I’ll be providing here represent our build-to-core portfolio. And for those of you who have been following in recent updates, we have executed on a strategy of allocating up to 20% of the fund’s capital to development projects that we will hold long term. And first on this list is Charlotte Avenue.

We reported out on this one last quarter. This represents our first build-to-core asset. It closed in July. And this is in partnership with PDG, who’s a strategic relationship of ours there, a vertically integrated developer, you may have in-house general contracting capabilities, which allows them to maintain a very tight control on schedule and costs, and we believe that this is a competitive advantage in the marketplace.

In total, this will be about a 320-unit project located about seven minutes from downtown Nashville, and it’s walkable to a number of neighborhood amenities, including L&L Market, which has over 20 high end retailers, which is a very successful adaptive reuse project. And there’s a lot of neighborhood amenity demand drivers.

Additionally, a Publix has announced that they will be going in just over a block away, which would be great news. So the walkable to the project and other employ drivers, including Oracle, who purchased land in Nashville and will be building out over a 250 million dollar campus, with their regional headquarters adding up to 8,500 jobs over the next 5 to 10 years is a short drive from the project.

Construction kicked off in late July and is anticipated to last approximately 24 months, and project amenities will include some submarket leading courtyard, two-story pool, fitness center, co-working lounge, private booths and a 2000 square foot sky deck.

Unit finishes themselves will include granite countertops throughout stainless steel appliances. Full size washer dryer incommensurate with classic finishes the marketplace. Linden House and Horizon, which are the next two on this list, are both new partnerships with Rise Development, which is based in Georgia.

The first one that we closed here was Linden House. This is a 295-unit garden project that marks Origin’s first investment in the Jacksonville MSA. This is scheduled for a February 2023 delivery date. And is located about 25 minutes from downtown Jacksonville at the intersection of Racetrack Road and Highway 9B.

It’s in the Bartram Park neighborhood, which is walking distance to Durbin Park, which is a 1,600 acre masterplan development project with a hospital which will be a great employment driver for residents here and the number of park space and other employment is located throughout.

Specific to the project will have to resort style pools here courtyards, club rooms, fitness centers and other onsite amenities and very similar finishes again, as we mentioned to the Nashville project.

Horizon will be the next deal in our partnership to close with Rise development that is set to close in the next two weeks, and it will be our first development project in Tampa. Although we did close a pref equity investment for the fund, that will be a sorry we closed on that three weeks ago.

This will be our first equity investment, so the projects located on the front ends of the PG Farms, which is a 280 acre master plan community as well, and the site will be improved with four-story elevator served buildings, 320 units in total, 100-car covered parking spaces with 32 garages. I think the most unique attribute about this project is we will be providing golf carts to residents where they can access nearby retail construction timeline.

Here is a little bit faster than some of the other projects will be about 18 months. And we’re excited to get that one kicked off, as I mentioned the next couple of weeks. The last project on the list here has got a special place for me as I’ve spent the last six months bringing this project to life

We are partnered with Atlanta and Miami based Kaplan Residential, who we are trying to build a much more programmatic relationship with over a number of deals throughout the southeast. Kaplan spent part of two years in tackling this project.

It’s located in Belmont, North Carolina, which is suburban Charlotte. It’s about 15 minutes from the international airport here and 25 minutes from downtown Charlotte and represents one of the most desirable bedroom communities in the area. It’s well known for its high quality schools and its dedicated downtown.

Which you can look at too many locations throughout Charlotte, where you have this amount of retail that has its own vibrant, self-contained atmosphere, and the project itself is walkable to this downtown. It’ll be 322 units with a 3, 4-story split design, along with some very desirable townhome units with direct access garages. And we are set to kick off developmental projects literally this week.

I will jump in, the preferred equity portfolio. And not to spend a ton of time on any one individual deal. I’m going to talk in a high level about these seven investments.

And I’ll point you to the annual yields column and the coupons here. And if you compare that to what we will show in the next slide in the pipeline, it tells a story of the competitive landscape that exists in the market over the past two years, which has led to continued yield compressions.

So Star Metals and Aspire Westminster are the two projects that represent our first investments in preferred equity into the fund. And as you can see their annual yields are in the 13% range. If you compare to the yields that will be shown on the next pipeline slide where we’re currently competitive in the marketplace, those yields are compressed

down to around 11.5 to 12.5% range. So we expect this trend to continue going forward. But we do have minimum yield targets that we’re solving for. So we really can’t push much more below that 11% range to achieve our target for terms.

And one of the most attractive elements of our structures that we have embedded in, most, if not all of our preferred equity investments is a multiple floor. And for those of you that aren’t familiar with what that term means, that basically guarantees that irrespective of the time of the investment, a minimum return for our capital.

So those those minimum multiples can range somewhere in the range of 1.25 to 1.4%. But just like the annual coupons, those multiple for some continue to move down as well. Our early investments in Star Metals and Aspire are benefiting from this substantially because those are being paid off early and both Star Metals and Aspire, we expect to be retired in the next, well Star Metals has been retired in the last few weeks, Aspire in the next couple of weeks. But those multiple protections that I mentioned will provide us with IRRs that are much greater than the coupon rates of 13%.

We expect those to produce mid to high teens IRRs when they are retired. So we will continue to remain active in this space, as evidenced by the six pref deals on the pipeline. We believe these investments continue to represent some of the best risk adjusted returns in the marketplace because they generally sit in the 80 to 85% cost of new construction, which is about 30 to 40% below current trades that we’re tracking in the marketplace for stabilized product.

So in theory, this produces a 50% edge protection to values in the market. And we have built a number of strong relationships in the marketplace for developers and brokers that will yield a strong line, a strong pipeline of opportunities.

But as a whole, the portfolio here continues to perform quite well and we expect that this will pay off over the next year or so as developers are taking advantage of strong valuations and are retiring our positions early.

But we, as I mentioned before, this is going to produce higher IRR than our coupon rates would suggest due to these multiple protections. I’ll jump to the deal pipeline, I’ve been referencing this for a little bit now, but we’ve got seven deals on the pipeline.

Most of these are preferred equity investments in total, about 91 million of total equity commitments. We’ve got about another 30 to 40 million of equity comittments behind this that are in various stages of the pipeline with pretty robust and diverse. The one highlight I’d like to point folks to.

Well, we’ll start with the top from the bottom. Both are in Austin. The first one will be the Austin Multi Development Project, 21.2 million of equity in a 12.25% yield that is set to schedule or sorry scheduled to close next week.

And the size of that fits in pretty well because it will retire or replace almost all of the Aspire Westminster proceeds that will be coming back to us. We are very excited about that deal, it’s in a great location in East Austin, very near the Tesla Gigafactory, and we have a very well-protected basis.

Around 230,000 a unit, comp trades in the marketplace today are going off around the door. So substantial amount of insulation and protection on our basis that are the last opportunity that I’ll highlight on this slide is another project in Austin.

And it’s important to highlight this one for the reason is that this represents the first concrete position deal that we have on our pipeline really since COVD. And we mentioned before that we’re not actively pursuing common equity acquisitions due to valuations currently in the marketplace.

But simply put, this opportunity represents a market opportunity to buy something below replacement costs, those opportunities in this marketplace are almost completely never found. The market is very efficient and developers are generally aware of how much active capital is out there pursuing multifamily acquisitions.

So this has been sourced off market by a partner of ours who’s based in Texas, who’s had the relationship with the developer for a long time and has said the center contract for the better part of 6 to 9 months.

So still working through our acquisition efforts here. But if this does make it through the pipeline to represent the first common equity investment that will be made again, as I mentioned prior to COVID. Last slide for me here is a quick update on the state of the market.

I’m not going to spend a tremendous amount of time going through each one of these bullet points because we could make a webinar out of each one of these. But operational performance, I’ll just highlight some of the strength of our existing markets and some of our newly established expansion markets like Las Vegas.

So one of the the most important factors that weighs in on about performance is rent growth and something that we track very closely. We also built an AI tool that can forecast rent growth fairly accurately. But the markets that have been the biggest and the strongest performers year over year have been Las Vegas, and they’ve seen year over year rent growth in excess of 23%. In Raleigh and Charlotte, or right behind around 20% annual increases year over year with Austin and Nashville around the 18% level. So these are some staggering performance boost in the lights that we haven’t seen on a year over year basis.

Now some of these have been largely depressed due to COVID. But a lot of this due to the continued immigration flows into these markets from largely northern and in some cases the let’s say, western markets, but predominantly California.

The forecast for next year still very strong for most of these markets. The expectation is not for double-digit rent growth to continue. But in 5 to 7% is largely forecasts for markets like Las Vegas, Phoenix, Raleigh, Charlotte, Nashville, Atlanta, and Orlando.

So those will significantly outperform what is more common a three to 4% year over year growth forecast than a lot of these markets. So you’re excited about the pipelines that we have in these markets or the construction starts that will exist because we are not certainly forecasting any of our models for this level of rent growth too allowed to occur.

On the construction cost side of the equation. You know, as I reported out in the last webinar, the topic du jour was lumber. That went up, went down. It seems to be stabilizing to a degree in the spot price level right around somewhere between 6.50 to 7.50, 1000-board foot.

But the challenging thing today that we are working through in real time is engineer trusses, which is interesting enough that those require lumber for the manufacturing of these. But these are basically the roof joints that go into all the roofs of our apartment project, and it’s crazy to believe that this is true.

But what is really driving these costs are the metal plates that are used to fabricate the roof trusses. And there’s a general shortage of metal and materials up and down the supply chain. It is. It’s been exceptionally pronounced on the assembly of these engineered trusses.

So we’ve seen increases of these trusses anywhere between 140 and 300% from where they were pre-pandemic. So we’re working through that. You know, we continue to model significant price increases, escalations and contingencies into our development projects. But there’s other challenges here just in terms of the general supply chain and lead times that can affect schedule like, for example, roofing systems, which are largely TPO roofs are now upwards of a year in terms of lead time, whereas pre-COVID he would order those, you know, 90 days prior to needing that materials to be on site. So we’re working with our general contractors and our development partners to get ahead of potential additional supply chain disruptions.

We’re getting creative in terms of ordering materials well in advance, storing them some cases paying for the cost to store them ourselves, or paying slightly more to our material providers to store the materials themselves. But taking in that potential price escalation risk off the table.

So over the last year, just to put a number to it, we’ve seen about a 6% increase in construction costs. And according to a recent JLL study, the market is anticipating somewhere in the neighborhood of 4 to 7% increases over the next year. On top of this.

So to put this into perspective, and this is something that we’ve discussed quite often in our investment committee, a 20 dollar monthly increase on 1,400 dollar rents, which is about a 1.4% increase. And as I mentioned on the previous slide, or sorry, on a previous section, operationally we’re seeing rents increases in our markets in the neighborhood of 10 to 25%. So a 1.4% increases is certainly below what we’re experiencing in real time. But that 20 dollar increase in rents on 1,400 dollar rents can absorb a 2 million dollar increase in costs when you capitalize that increase at a 4% cap rate.

And in many of our markets, we’re seeing cap rates in the low to mid 3% range. So you can see how this math actually begins to work in terms of rent increases more than absorb. These increases we’re seeing in the construction pricing market don’t know how long both of these will continue both the high increase in rents and also in construction pricing. What we believe that we’re in a pretty good position to see attractive opportunities over the next, certainly twelve to 24 months.

And on borrowing costs, I know this is the last bullet on the slide here. I don’t have a ton to update other than the capital markets. Environment continues to be exceptionally robust. There is a host of lending opportunities between agencies, banks, life insurance companies, bridge lenders. There is a wash of capital marketplace and we’re still seeing the record level lows in terms of borrowing costs, which certainly helps to offset again, as I mentioned before, some of the challenges in the construction pricing market that we’re seeing. So with that, I’ll kick it back to Michael.

Great. Thank you, Dave. Let’s take the slides down, if you can. I know you’re operating in those Dave, and then we’ll address the questions. And the first few questions that I want to address are ones that were mailed in.

And tax efficiency seems to be a big topic that everybody wants to talk about. Then there’s the tax efficiency of the fund, of real estate and just taxes in general. So what kind of lumped these all together? And for those of you who may not understand who are curious about the tax efficiency of the fund with all the preferred equity, the way the fund was originally designed was that it was going to be sort of 80% common equity, 20% preferred equity.

But with the ability to tactically shift across those as we saw movements in the market and the common equity was providing the depreciation to the fund, to the REIT, to offset any of the income produced by the preferred equity investments because preferred equity by itself is not tax efficient. But if we have excess depreciation, we can use that and we can distribute money tax free to investors. And that’s what we’ve been able to do for the last two and a half years is make distributions tax free.

We also added to the fund the 20% allocation to ground-up development, and the 20% allocation was actually incorporated earlier this year. We talked to investors. We didn’t actually need an amendment, but we sought approval from investors anyway because it wasn’t represented at the beginning.

So we are bound by that, that 20% target and that’s about what’s in there. Dave went over five deals in the way that we’ve skinny those down to only account for there a little less than $40 million, about $38 million in fund exposure as we did a considerable amount of sidecars so that the fund would be diversified across more than just one deal because candidly, $38 million, even $40 million of room for ground up development would mean one and a half deals, maybe even one deal. And so we wanted to diversify the fund. We wanted to make sure that happened and those are built to core.

So those will ultimately go into the common equity bucket, and it’s a way for us to penetrate into these markets where we see pricing just getting a little crazy into the Austins, the Nashville. We can answer them at a much better basis and not compete with the wall of capital that’s out there.

So the fund has been operating very tax efficient. It is extremely tax efficient even today. Obviously, the more we have it tilted towards preferred equity, the less tax efficient it becomes. But it will still be more tax efficient than a lot of the other opportunities out there.

And for us as managers are our first goal is to protect your capital. And we do that by making these decisions. And just because we said, Look, originally we’re going to do 80% equity in 20% preferred equity. We have to make adjustments along the way and on the fly, and we don’t want the tail wagging the dog, so at times this is going to be amazingly tax efficient where there’s going to be none. And at other times you might have some taxes to pay and we’re doing what we can on our end to make sure that we’re generating the highest risk adjusted returns for you.

So I wanted to address that question. That’s about tax efficiency of the fund. I’m not going to really opine on what’s happening in Biden’s proposal right now, and we have a lot of questions that came in about the compliance, the IRAs potentially not being able to invest in private funds.

I’ll tell you right now we’re going to cross that bridge when we get to it and see what the final proposal looks like, because there’s there’s so many things that are thrown into these initial proposals that end up getting thrown out because they’re just kind of pie in the sky, you know, wants versus actually well-thought-out plans.

And one of them was they wanted to do away with 1031 exchange plan. Well, that’s no longer part of the plan because I think some very smart people came together and said that you just couldn’t make this happen.

Like the amount of jobs and the velocity of capital as a result of 1031 exchanges is just too great. So it’s a wait and see. The last question that I’m going to answer before I throw it over to Dave.

And by the way, if you have more questions, now is the time to ask us and we’ll answer all those the future composition of the fund. I believe I’ve answered this already in terms of ground up development is is never going to exceed 20% at any one time.

And so today the fund is $204 million, the net asset value. And you know, right now we’ve got about $38 million in ground up development to the fund. Let me see, were there any others that got a tax efficiency? So now now we could go on to the other Q&A and Dave, before we begin, I’m actually going to hand a question over to Mike, because he’s been waiting patiently here for about 40 minutes, but Mike, this is kind of funny because I asked you the same question the other day to investors who are asking question about can you explain the for share classes?

Yeah. I think so, although I don’t have them in front of me. I mean, basically, we created share classes last last year to allow IRAs and broker dealers to invest their clients in the fund. So there are there’s the general share class that everyone is a part of.

And then there are two share classes specifically designed to allow broker dealers and IRAs to invest. And there’s a separate fee structure in those classes that allows IRAs to extract additional fees for their clients and broker dealers to earn commissions for their investors. And then there’s a class that’s set up for employees of Origin.

Thank you for that. And Mike, I’m going to ask you one more follow up question, and I think this will be the last one, but the question is about will any investors nerves on the portal change higher or lower based on this reporting change?

So based on the on the amendment, if if it gets adopted? No. So so what will happen is we will follow the existing structure through this year. So there will be adjustments made at the end of this year to basically roll all of the existing series up into a unified NAV.

So there will be adjustments made this year in accordance with the existing documents. But moving forward, there will not be any change or adjustments or add or effect on any.

OK. Thank you, Mike. Those are all the questions, I think on the legal side related to the amendment. Appreciate you being on today. Dave, any questions you want to take?

Yeah, I’ll take the. Construction related question. Are the construction costs increases, supply chain issues factored into your build-to-core underwriting or you’re hoping that rents overshoot your underwriting to offset any cost overruns? As we like to say here, Origin hope is not a strategy.

While we’re experiencing that happening, the way we structure our construction contracts with our general contractors is that we secure what’s known as a guaranteed maximum price. So those prices that are assumed in the contracts themselves are guaranteed with the caveat that due to the increase in lumber over the past twelve months, many of the guaranteed maximum price contracts have been carving out lumber. And so we’re taking pretty proactive strategies mentioned in the past on how we address that relates to a couple of ways. one, it’s through more than adequate contingencies that we’re allocating each of these projects.

Likely they’re 3%, but in some cases they’re more to 4 to 5%, depending on how much risk we believe we are taking on and some of these allowances. And we are also taking the opportunity to watch the lumber pricing market very closely and we will execute.

And actually the PDG Charlotte Avenue project I mentioned earlier is a great example for the fund of this happening in real time. We took the allowance when we closed and we were carrying a very high lumber allowance in our in our underwriting.

We watched the pricing come down and we locked in a lumber contract post closing before we needed the lumber on site and we’re saving upwards of seven figures from what we underwrote. So between contingency underwriting and taking a very proactive approach to watching for opportunistic times in the marketplace to purchase lumber are stupid examples of how we

are addressing this in our development projects.

And I just want to say that sometimes you win on this and PDG Charlotte, we left it out on purpose and we underwrote to a 1,700 dollars per board foot lumber price and we’ve saved more than 2.5 million dollars on that deal alone.

And we knew the deal worked at 1,700 dollars. So it’s not always, you know, when that when lumber is at 500 or $700, you definitely have to do your best to hedge these things. But sometimes there is also a way to win on that side.

And I’ll also add that costs are really important, and I don’t want to underestimate that. But the 2 million dollar cost is not as important as the revenue side because the revenue has a multiplier on it. And if you miss by $100,000 on the NOI, if you think about that being almost a 30 multiplier, that’s $3 million in value that you’re missing. So even if costs go up by $2 million, if you have rents that are climbing at 6, 8, 10% per year, the margin that you’re trying to capture is still protected. And that’s what we’re looking for. And yes, costs have gone up a lot and they’ve gone up this year and last year in the year before.

And you can look back in the history of real estate. They go up every year and as long as your revenue growth exceeds the cost, you’re going to be fine. And what we’re seeing today is actually development margins higher because of the rent growth in the current rent in the market than they were two years ago.

So there is there’s a couple offsetting factors, but getting the revenue right is so much more important because of that multiplier factor. Thank you for the question. Let me, Dave, I’m going to take this really quickly. There’s a couple that I want to answer.

Can existing investors put more money into the fund? Existing investors don’t get to skip the queue, so if you want to, you can actually go into the queue. And again, we’ll be calling money probably around February with a March first trade date again, that can go up or up or back.

You can always reinvest your dividends in the fund. If you’re not doing that already, that’s an easy way. We’re not sending dividends back, but we have to manage. An open ended fund is a little bit challenging because Dave and his team are out there looking for deals constantly, and we’re also taking money in on a regular basis.

And deals unfortunately, they don’t happen on a cadence of closing every 45 or 60 days along the way. Sometimes you can go three months without closing a deal and then four will close at once and we just have to manage the cash drag in the fund.

Michael, I take this one on preferred equity investments; conversion feature to common equity for any portion of the investment. Good question. We try and build this into all of our preferred equity investment structures to the extent that we can and we do have.

I believe on 4 out of the 7 investments, we have the opportunity to acquire the asset in a common equity position prior to the developer taking the project to market for sale. The thing to note on this option that we have, it’s an option. first and foremost and generally, they’re structured as fair market value so we can acquire the asset if we acquire it. Today is established market value and for the reasons we discussed which have been many and why we’re not participating in the equity, common equity market and at the moment is we are struggling with valuations.

And for us to exercise that option, we would have to pay market price. We won’t get an edge in theory to the market, which is why we’re so excited about that opportunity in Austin, because that represents a real edge to market price today.

So this next question is about Monroe &Aberdeen, if we plan on selling or holding it, given that we’re no longer investing in Chicago and I did, I address this. I think I’m one of the earlier webinars in Chicago isn’t necessarily a sell to us you have buy, hold, or sell.

It’s more of a hold where we we do like Chicago as a city we’re the dominant Midwest city, we’ve got great transportation and great infrastructure universities, et cetera. You can’t ignore the fiscal problem, but we went into this deal eyes wide open about what was happening with taxes.

And in fact, we just got really, really good news on our tax situation. And in fact, I believe that we were as 24% lower than what our purchase price is. And so it’s very favorable news relative to what we underwrote.

And I would add the business plan on that deal hasn’t even really begun. So there’s a lot of value to add in that deal. If you recall, we bought that deal with above market debt, debt that really couldn’t be de-fees or gotten rid of because it would have been too expensive in the millions and millions of dollars

And the rate on that is about 4.3%. So we’ll continue to evaluate that. And at the time, in the future, if we can swap that debt into 3% debt, that property will have just a will produce a tremendous amount of cash flow.

And then Dave alluded to this earlier that West Loop, there is huge parking problem and we can pay, we can charge for parking. And the previous owner never was. So there’s still value to add in there. And Chicago has had a lot of strength.

I mean, that property went from a low of 78% occupied to where it is today, which is almost above 97, 98%. So strength is is abundant in this market today. And once we add value in that property and see the business plan through, then we will make a decision whether or not we want to sell it and we’ll reevaluate Chicago as a market. But the biggest risk factors have been underwritten correctly. We’re actually getting favorable news on that property and we’re going to continue to add value. But thank you for your question.

Michael, go ahead and take the question on the smile state, seeing a lot of development activity over the next two to three years and our concern on there’s some oversupply. And a good question, and if you look at where development is, is focused in the marketplace across the country, it is predominantly in the small states.

And this for good reason, is because those are the locations that are seen the strongest fundamentals, the strongest immigration trends and the the need for housing is actually the highest. And if you look at markets like Charlotte, you know that I’m sitting in here today.

We have been averaging about 5% of new supply as a percentage of existing inventory, which is a metric that we look at quite a bit to determine how much supply is occurring in any given market and benchmark other markets against that.

The interesting thing about that fact is that Charlotte has been averaging about 5% rent growth, effective rent growth over that time period. So what that means is that all of those new units, even though that’s a high percentage of new deliveries to the market, are getting absorbed and there’s more demand than there is supply.

And we have a lot of metrics that we track and we have a lot of analysis on development pipelines that demand and we use our AI tool to calculate the demand side of things. So we’re taking a very data driven approach to analyzing these fundamentals, but we feel that this is the best.

These are the best markets to be investing in and developing in over the next five to seven years.

Thanks, Dave. And there was a question about, I think, one of the slides that you had earlier, and it’s what’s the difference between build-to-core and development.

I mean, it’s just a nomenclature thing, and we were. That’s what we’re doing inside of this fund in that we have a long term strategy, so development can mean merchant build, you know, build and sell. Build-to-core means we are developing this asset with the intention to hold it and to until a period of time and stabilizes and becomes a core asset and holds it long term.

Yeah, I’m probably not asking the question, right? I saw the same thing. This is from an anonymous and the reality is that all of our development deals are built to core that we’re building them with the intention of holding them long term.

Will the schedule Nov 2021 capital call still be processed and this is for people who are in the queue today, in the answer to that is yes, we have decided that when we when we build a queue and you should know this if you’re listening, even for February at a certain point, if the queue gets too big, we start another batch, if you will, right? And so there are people who have been in the queue since August, September of this year. We are going to be calling their capital in November with the December first trade date for deals that we’re closing and then anybody hitting.

And today will be coming in in February. And there is a chance that if you’re not committing to the fund until January, February, that you might have a trade date gets pushed out to April or May. So just wanted to clarify that?

Thank you for the question. And then another question here about the queue. Where do you sign up for the queue? It’s the same. Whether you invest with us, you fill out your subscription agreements, you will be in the queue.

You have to go through somebody on our IR team. You can contact them at investorrelations@origininvestments.com that if you don’t have one, you have a personal contact. Please reach out to them directly.

Rob asked the question are there additional side cars, Rob, we don’t have any plans for additional side cars because that part of the fund has been fully subscribed to, so we’re not going to be doing any more ground up development deals. However, in January of next year, in 2022, we are going to be launching the Growth Fund IV which is going to be all ground-up development, and that’s going to feature probably 12 grand of developments.

And many of them are going to have sidecar opportunities. So if you like to invest in funds and individual side cars on the development side, that will that will be an opportunity for you. And the reason why we have so many side cars and the Income Plus fund was really because we were allocating to that 20% bucket. But in the future, especially next year, the IncomePlus grows, we might add one development deal to the fund to make sure that we’re complying with that 20% bucket and we always have something in the in the pipeline, in the portfolio there.

OK, last question, and then we’re going to kind of sign off here. When do you expect visibility into what the final legislation will be? That’s anybody’s guess. I mean, that’s up to the politicians right now to pass something.

This bill is getting chopped up. Pieces are getting ripped out or revised everything. And like I said, you know, we’ll know when you know and then when we do find out, then we’ll sit down and figure out if we’re impacted at all and then make some decisions then at that time.

So thank you for your question. And Dave, I think I think that’s it. So we can we can sign off and we’re actually a little bit over an hour right now. So it kind of makes makes sense. Anything else to add or we’re good.

Now, good to be with you today.

Okay, thanks for having me. You, too. Yeah. Thanks, Dave. Thanks, Mike, for being on and everybody else. We really appreciate your time today. If you’re a current investor, thank you for participating with us. And if you’re a prospective investor, thank you for considering Origin and if you have any further questions again.

Investorrelations@origininvestments.com is a really easy way. You can go to our website, you can look at you can contact anybody. If you have a personal contact in the investor relations department, you can reach out to them as well.

So thank you. Enjoy the rest of your day.