Ground-Up, Build-To-Core Multifamily Investing, With Origin Investments

In this webinar, Michael Episcope discusses the Origin Investments Growth Fund IV that will be launching in early 2022.

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You can visit the Official AltsDb Partner Page for Origin to:

  • Learn more about Origin’s strategy;
  • Learn key details about the project; and
  • Request more information from the sponsor.

Webinar Highlights

  • An overview of Origin Investments and the focus on helping investors turn wealth into passive, tax efficient income streams.
  • The investment case for focusing on low tax, high growth markets.
  • Origin’s goal of developing an institutional quality platform for individual investors.
  • The importance of being the first to discover promising real estate deals.
  • An overview of the target returns for Growth Fund IV including the target IRR and net equity multiple over an expected life of four to five years.
  • Why Origin focuses on Ground Up Development as opposed to Value Add and other strategies.
  • How Origin leverages its relationships with developers across the country to generate proprietary deal flow.
  • An overview of the 10-12 multifamily assets that will make up Growth Fund IV, including target rents and tenants.
  • Why affordability ratio is a critical metric to consider when evaluating multifamily investments.
  • The unique aspects of the fund structure, including an optional hold period that allows investors to exit after four years or remain invested for a longer period.
  • The pipeline for Growth Fund IV, including assets in Arizona, Tennessee, Texas, and Colorado.
  • Live Q&A with webinar attendees.

Origin Investments

Founded in 2007, Origin Investments is a private equity real estate firm based in Chicago. Designed for the needs of high net worth individuals, family offices and wealth management firms, Origin Investments provides the same level of service, terms, and results that larger institutions have enjoyed for decades.

Learn More About Origin Investments

Webinar Transcript

Jimmy: Next up is our title partner, Origin Investments. Origin Investments also has a qualified opportunity fund, in addition to a couple of other funds, including their flagship fund, which is the IncomePlus fund, which features tax-efficient passive income and appreciation by investing in equity and debt multifamily projects in neighborhoods across 14 fast-growing U.S. cities. And, Michael, how are you doing this morning? I’m not sure if you’re discussing the qualified opportunity fund or the IncomePlus Fund, or if you have a new offering you’d like to discuss, but…

Michael: Well, neither, Jimmy. We’re actually gonna talk about Growth Fund IV for today. And the Growth Fund IV is actually a fun that we’re gonna be launching in January. So, taking commitments from January 15th on, our first closing is expected 3/31. And we thought we would use this opportunity to, sort of, announce it to the world.

Jimmy: Fantastic. Well, I’ll turn the stage over to you, Michael, if you’d like to share your screen if you have a deck.

Michael: Great. Well, thank you again for having me, Jimmy.

Jimmy: You bet.

Michael: I’m really excited to be just announcing this fund. It is our fourth growth fund. There’s actually been a large gap between the third and fourth because that was when we, excuse me, launched the IncomePlus fund. So that has, sort of, taken up our time over the last two years. And there are really some great features that are unique to this fund. And I think it’s different than anything else in the market and you’re gonna learn a little bit about the terms and the structure, some of the things. We made it really friendly. And I know I have right around 25 minutes. So, I’m gonna try to get through this quickly so we can leave some Q&A at the end. I think I already talked about we’re gonna be accepting funds in 3/31 of next year or commitment starting in January 15th, and we’ll get to how you can do that.

Let me flip to about Origin. We’re on that page right now. So, we work with advisors, family offices, and high-net-worth individuals. And everything we do is about really helping investors grow their wealth and turn their assets into passive tax-efficient income streams. And we do that by investing in multifamily real estate in high-growth, low-tax states in Sun Belt region. So, we’re actually headquartered in Chicago. We don’t invest here anymore. We do have some properties here. But, you know, the argument for investing in Nashville over Chicago, Nashville wins every time. Phoenix wins every time. Tampa wins every time.

So we have a, sort of, national view on where we can invest and where we should invest. And we spend a lot of time and use analytics to pick the cities we wanna be in and look at, you know, the trends over, not only the next one to three years, but also over the next 5 or 10 years, because a lot of what we’re doing has, sort of, a forever outlook.

And Origin has been around since 2007. And in the beginning, it was just my partner and me. And I would say it’s more like a family office. We were both ultra-high net worth individuals and we wanted to find great real estate investments for our own capital. And if you, kind of, rewind back the world in 2007, the investment options were just very different. There weren’t a lot of great options. There wasn’t the transparency that you see today. There weren’t the webinars and investment forums like this.

And the market at the time, I would say was dominated by high fee, non-traded REITs. So in many ways, when my partner and I got together doing this, we were, like, we had no choice but to build it. You know, “We can do a better job,” is kind of I remember us saying that. And we’ve always been guided by this idea of building an institutional quality platform for individual investors like ourselves. And so what you see today, what I’m gonna go over is really the culmination of 14 years working hard towards this vision. And we’ve grown from two investors in 2007 to serving more than 2000 investment partners today.

We have 40 team members. Our senior members have been with us more than 10 years at Origin. So, the people who are largely responsible for our past track record are really…they’re still here at Origin today. Those are our senior leaders. And so we’re very proud of our team. They all come from institutional backgrounds and believe in, you know, just building a better real estate investment platform.

As I said, we’re headquartered in Chicago. We have four offices around the country. And those really serve as deal-sourcing hubs. So, we have an office in Charlotte. We have an office in Nashville. We have an office in Dallas and Denver and we have people in those offices whose job it is to look for deals. Every single day, that’s their job, going to find deals because, you know, this world and anything, it’s about finding edge, being the first to see a deal. If you’re second, you might as well be last in those things.

So, it’s about creating relationships on the ground, but having those tentacles out there to do that. And real estate is local. It’s block by block. You have to live in the markets to know what you’re doing. You can’t be, you know, kind of what we’ll call that out-of-town money flying around trying to figure out a market, you know, in a week or two. That doesn’t work.

I’m very proud of the fact that we’ve never lost money on a deal in any of our funds. We consider ourselves first and foremost risk managers, if you will. And the absence of loss isn’t always gained. But, you know, we have done extremely well in our funds and our individual deals. We are ranked as a top decile manager by Preqin. This is a third-party rating agency for all of the consistencies we’ve had over the years in our fund. So, a lot to be proud of, and it’s something that we continue to strive for, is being the top decile in every single fund that we bring to the market. And this is no different, Growth Fund IV.

So, I’m gonna just jump right in to, sort of, what I’ll call the fund benefits, the high level, what returns are we trying to deliver to you. Our target returns on a net basis, this means that after all fees are considered are between a 14% to 16% IRR and a 1.7 to 1.8 net multiple. And what that means is that if you put in $100,000, our goal is to grow that to about $170,000 to $180,000 over the four to five-year life of the fund. And that is really the shortest fund life you will ever see in the market and it does have a termination at the end of year five. And I’ll share in a few slides, there’s an optional hold period, but how we’re accomplishing that. And there’s a few reasons why that has a lot of benefits. The minimum investment in this fund is $50,000 as well.

So, the first thing I’m gonna talk about is why ground-up development because this fund is 100% ground-up multifamily development. And if you don’t believe that development is a really good place to generate risk-adjusted returns, then nothing else really matters what I’m gonna talk about. So, I’m gonna spend a few minutes here really making the case for ground-up development versus other strategies because understand at Origin, we have the ability to do everything. We can do value add, we can do core plus, we can do lending, and we can do ground-up development.

And in our other funds, funds, one, two, and three, it was a combination of value-add and ground-up development, but the market has really changed. And so this fund is going to be 100% ground-up development. And the bottom line is that we believe this is where the greatest risk-adjusted returns lie today. It has the least amount of risk with the most amount of upside. And I know that might sound a little strange to say development has the least amount of risk. And I will admit, like, from an execution standpoint, it’s certainly more complex and risky than buying a brand new property or one that’s four or five years old. But that’s why you hire us, is to mitigate that risk, to build projects on time and on budget and pick the right cities.

But execution risk aside, I would argue that buying an existing property today, for us to run a fund where we’re buying value-add or existing properties versus engaging in ground-up development, the latter will produce far greater returns. And here’s what you have to consider in today’s market, right? There’s been a huge shift. Existing properties in the market, properties that are 3 years old, 5 years old, 10 years old, they are trading 10% to 30% above replacement costs.

And the reason is because demand for apartments in cities like Nashville, in Phoenix, in Tampa, in Atlanta, and all these high-growth markets, we all know about, right? These are undersupplied markets in terms of apartments. So, we’ve seen a lot of investment returns being created for people who were positioned in those markets. But there’s an oversupply in those markets in terms of capital, which is taking existing properties and bidding them up well above replacement cost.

And so, we would much rather build for $240,000 per unit than buy an existing property that’s 5 years old, for $300,000 per unit or buy a value-add property that’s 10 years old for $260,000 per unit and put $20,000 per unit into it. We just think the math, it’s a lot smarter, because imagine if the market declines by 10% from that $300,000 level. Now you’re talking about a property worth $270,000 that you paid $300,000 for per unit, right?

And so, you’ve really, once you factor in leverage to that equation, you’ve lost a lot of money. If you built that same property for $240,000, the only thing that’s happened is you’ve made less money. The market is still trading at $270,000 and your basis is $240,000. And to us, it’s the best way to enter these markets. Basis matters. And if the market continues to go up and trades at $300,000, $350,000, $400,000, those other strategies will do well. But as a builder, when you have a brand new property, our property will be at least worth those if not more.

So, what we’re seeing today is, sort of, this inversion in the market. And really, everything is governed in this world of real estate by replacement cost and barriers to entry. And so, when we can go to these markets and build far cheaper, that’s how we like to position our money. And the whole strategy starts with there. That’s why I’m talking about that first.

So, let me go a little bit deeper into, sort of, the fund strategy, the makeup. Ten percent of the fund will be earmarked for GP positions, right? Those are general partner positions where we’re investing side-by-side with the sponsor. We’re getting better economics. And this serves two purposes. Number one, it’s higher margin capital. So, if a deal generates a 2X return, our capital in the general partner position will, you know, get a 50% premium to that money, right, for being promoted by the LP.

But more importantly, what this does, is it creates proprietary deal flow. We have more than a half dozen relationships with developers across our market to all do three to five developments per year. And we’re working closely with them with GP Capital to help them early on in the process to fund pre-development costs. And these are the costs associated with getting a deal to be shovel-ready condition. These are architectural costs. These are entitlements. These are land acquisition costs, etc. And for that, we get better economics and have an exclusive right to be the LP in the deal.

So, 90% of the fund’s capital is earmarked for the LP positions. And so what that means, when you’re in an LP position is that we are the majority of equity. We control the deal from the beginning. We have a say in all major decision makings. And we help execute from the time that the property is identified, to all the way when it’s sold.

The fund is gonna be diversified across both geography and number of deals. I’m gonna go over the pipeline in a few minutes here. And it will consist of around 10 to 12 assets. We are targeting 75% initial leverage on cost and this will be reduced to around 65% of value once the property is stabilized, and we refinance. And what we are specifically focusing on when we build is we’re trying to deliver Class-A apartments to these high-growth cities at rents that are affordable to our target demographic. And our target renter is the white-collar professional making between $60,000 and $100,000. And the goal is deliver apartments at chunk rents of anywhere between $1,700 and $2,000 per unit. And that depends on the market.

And really, what governs this is the affordability ratio. We want that to be below 28%. And the reason why that’s important is because the affordability ratio is one of the best metrics you can look at for future investment performance at any property. Because if people are paying already 30%, 35% of their income in rent, you can’t raise prices on them at all. If they’re only paying 22%, 23% and you raise the rent by $100 a month, they can afford that. That doesn’t move the needle.

So, it’s really looking at the affordability ratio chunk rents. And in order to execute this, our construction is limited to what we call garden, wrap, horizontal products. You don’t have to know exactly what these are. You only have to know that the cost of constructing these is far less than high-rise or podium. So, this is a really unique feature to this fund. And this is also the reason why this fund is only five years or less. So, yeah, I’ll just briefly go over this. So, it’s structured as what I’ll call a build core model. So, we’re gonna be developing 10 to 12 properties with the intention of holding them long-term.

Now, the fund technically ends four years from the end of the fundraising period. And at that time, the investor, you, you get to decide what you want to do, right? You can exit the fund or you can stay in the fund. And every year, we are gonna have redemption options. So you can stay in for an extra year, an extra two years, an extra three years, whatever you want. And when you liquidate, you get all of your capital at once. And anybody who’s been in funds long-term understands the concept of a fund tail. So, instead of you having to wait for us to buy these 10 to 12 properties, build them, stabilize them, hold them, maximize value, and then sell them off and have a 10-year fund, there is no fund tail here. You can get out all at once. You can get out of half, some, all, it doesn’t matter.

So, the important point is that after the stabilization period, and you opt into that, you really get to enjoy a tax-efficient passive income stream and continued growth. And at that time, what we do is we resize fees lower to kind of adjust for the core nature of the portfolio. And the reason why we’re doing this is number one, I’ve been in a lot of funds. I understand the pain of a fund tail and it’s really a huge pain when you see these funds go on for 10, 11, 12 years. But our previous funds, they were really by fixed sell, and we did great. Investors were happy, but they would often say, “Why don’t we just hold that?” Or, “Great, well, what do I do with my money?”

And what we’ve learned over time is that selling creates a taxable event, and it creates cash drag, and it’s just not an efficient way of investing because great assets should be held forever to maximize upside. And that’s what we’re doing here, is giving you the option,. is we’re not forcing to sell these things. You can stay in and you can maintain your position in these assets for as long as you like, and really benefit from the tax advantages of being in real estate, which are some of the reasons why you wanna be in real estate in the first place.

So, I’m gonna jump into our pipeline really quickly and talk about some deals now over the fund terms. But the Seed Deal, as we call it, is Preserve at Star Ranch. And we actually own the land here already. We’ve taken that down with our own capital. We’re gonna be going vertical on this in the second quarter. And this deal is just outside of Austin, Texas. We provided the GP capital here, and we exercise our option to be the LP as well. This is a project, what we call horizontal and multifamily. And you can think of townhomes and duplexes spread out over really a large tract of land. And this is a community with shared amenities as well.

It’s different than single-family rental in that this is purpose-built with renting in mind. So, you can think of a traditional 300-unit multifamily where you take the units and you spread them around. Then you have, you know, common areas and you have workout facilities, and you have, sort of, an enclosed community. And that’s what this is.

And this is…candidly, it’s the hottest space in the market right now because of the shortage of single-family homes in all of these markets. So, people really want that feeling of the detached home of the single-family home. But if they can’t buy it, they need to rent it. And I think we’ve all kind of read the headlines of what’s happening out there in the market and just bidding in places like Austin and Nashville. And we know…you know, I know people down there personally who just can’t buy as a result. Tampa is the same way. So, this market is really meeting that demand out there.

And this particular deal, I think it’s extremely conservative in the way it’s been underwritten. This will deliver well in excess of a 2X return to the fund in four to five years. And we’re looking for more deals like this in the horizontal space. And we’d like, you know, there to be three or four in the portfolio if we can find more.

Here is, what you’re looking at in front of you, is sort of the rest of the pipeline. And the top three deals, what you see, Under Due Diligence, are highly likely to be in the fund. They’ve been approved, and we are working towards groundbreaking on those deals, as well. And you can see some of the cities we are targeting. Phoenix has been on fire this last year. Rents were up more than 20%. Colorado Springs, this will now be our fourth deal in that market and we love it. It’s been one of the highest growth markets in the entire United States over the last year and a half since COVID. And it actually, I believe still has the moniker being the only city to have grown during COVID. So, rents actually grew during that whole March, April, May, June and this is where people were flocking to.

So, we love it. It’s about 45 minutes south of Denver. That’s where this property is located, 10 minutes to Colorado Springs right on the Front Range. And it’s growing like wildfire down there. And really, like, what you’ll see is a theme here. Virtually every city we are targeting is benefiting from the work-from-home demographic shift. These are undersupplied markets in terms of housing. And the fundamentals really favor this investment strategy. And that’s why my partner and I will be investing in this fund is well. And I just don’t think there’s a better risk-adjusted return out there. And this is where we want capital to be for the next 3, 4, 5 10 years.

Last thing I’m gonna cover before we open it up, and hopefully, we’ll have a little bit of time here, a summary of terms. I did mention there’s a $50,000 minimum in this fund. There is a 1.5% annual asset management fee. We do not charge a committed fee. We only charge on invested capital. We do have a 50-basis-point acquisition fee and we then, in terms of our performance structure, it’s a 15% performance fee above an 8% preferred return that goes to the investor first.

We are targeting a $200 million raise. That raise will kick off, again, in March 31st of this year. It will be a one-year or whenever we hit our target or the cap of $250 million. And after the raise period, there is a two-year investment period by which we have to invest the capital. I think it’s gonna be much faster than that. I think we’re gonna be able to do that in, you know, during the capital-raising period plus the next year, because we already have 30% to 40% of the fund earmarked today.

So, the fund will be audited like all of our other funds. And really, next step, if you are interested in learning more or getting on the waitlist, is to go to our website. You can sign up. Go to origininvestments.com. Go to the offerings page. Register there. Sign up to be notified. Or you can email [email protected] and just tell them you’re interested in Growth Fund IV and they will take care of you from there. So, I appreciate you considering Origin and Growth Fund IV. And thank you for your time today.

Jimmy: Fantastic. Well, thank you, Michael. Thanks for presenting today. And thanks again to Origin Investments for being our title partner on today’s event, the inaugural Alts Expo 2021. I’ve got a few questions here from the audience, Michael. And we’ve got… Let’s see. We’ve got about eight, nine minutes before we have to move on to our next panel. So, should be plenty of time to get to a lot of these questions.

Again, if you do have a question for Michael about any of his fund products or of alternative investments in general, or… I know he has an opportunity zone fund as well. We’ve got a lot of OZ-interested investors on the call today as well. Please do use the Q&A tool in your Zoom toolbar to submit any questions. So, Michael, first question from Andy Hagans… We heard him give the keynote a few minutes ago. How does Origin’s four to five-year lifecycle compare to peers’ offerings and apple-to-apples type funds?

Michael: A typical fund life would be about, I would say, 8 to 10 years. All of our other funds that we structured had…that was typical. We had, sort of, a, you know, a one-year capital raising period. We had a three-year investment period. And then we had a five-year stabilization period. And then we had, sort of, a plus one plus one, the right to extend that fund. And if you’re in private equity, no matter what it is, real estate or others, 10 years is sort of your typical life.

I’ve been in a lot of those funds. I don’t like them that long. We did a lot of, sort of, studying behind the scenes and modeling and saying where can we maximize the IRR and the multiple on equity? And what does that period look like? Right? Where can we get people out? And I fundamentally believe that a lot of people are going to opt in for that whole period because what I’ve learned over time is that people are okay with taking risk. And after that, once they grow their capital, they want to enjoy those passive tax-efficient income streams.

And that’s the feedback we’ve gotten for years. And now we’re just codifying it. We’re putting it into the structure, and we’re leaving it up to you to say, “Hey, I want to stay in. I want that yield. I want all the tax benefits that real estate offers, you know, for that whole period.” And, you know, a lot of…like, as well as we did in funds one, two, three, I wish we would have done this a long time ago because deals that we sold three, four, or five, you know, seven years ago, those have doubled in price, right?

And no tree grows to the sky. I get it. But when…you know, you have to consider multifamily, institutional multifamily has never lost money over a 10-year period. And we will have a recession. But when you’re in the right cities, you have moderate leverage on your properties, you have good management, you’ve made all the right selections, hold them, right? This is a strategy that has been proven out over and over, buy and hold forever. That’s the way to make…you know, to build real wealth, not take something, make a little money, and then flip out of it. I’ve done that in my stock portfolio. I can tell you it doesn’t work.

Jimmy: We’ve got a lot of great questions that are rolling in. So I’ll try to get to as many of these we can. If we don’t get to your question, I apologize, and I’ll try to get your questions forwarded on to Michael and he can answer them offline maybe later today or sometime this week. So, let’s keep moving along here. Reed asks, “Is your 10% for GP co-investment a goal or a hard cap?”

Michael: Goal. I mean, candidly, you know, we can’t…I would say we’re gonna be 5% to 15%. And the way we do that is there’s a lot of conversations that happen in forming a fund. But it’s really working with our acquisitions team to understand what they can do, right? And so, when we’re talking to them, “Okay, what’s achievable? What’s possible?” I would love for the fun to be 30% co-GP positions and have that benefit of that promoted position. But it’s not realistic in today’s market because the sponsors…you know, the way banks are…people are coming in a lot earlier, I’ll say that, like the LP. So, what we’re trying to do is swim upstream, and really take ourselves out of that competitive process by working with people a lot earlier. It’s not a hard cap, though.
Jimmy: Got you. Anonymous attendee asks, and I think you answered this a little bit in one of your previous answers, but how have the first three growth funds performed? Are they still active?

Michael: So fund one full-round turn. That’s been a top decile fund. It’s above a 20% IRR and a 2.1 net multiple. Fund two was also a top decile fund performance and that was above a 20% IRR and right around a 2X multiple. Fund three is a top quartile performer, and that is going to generate right around, I think when we’re all done… That one’s still active. So, we’ve only sold maybe half the properties in that fund right now. So we’re still harvesting that.

But metrics, you know, when you’re measuring a fund, it’s kind of real-time, and where we are there is top quartile. We’ll probably end up being about a one, seven net multiple in that fund and about a 13% IRR. And candidly, what hurt us on that fund, historically, we’ve done office in our other funds. This fund will have no office. It’ll be multifamily only. We made that decision about three years ago.

But we had some office projects that were…some did, actually, really well, but others are sort of scratch where we’re getting a 1.05, you know, 1.1 multiple on them. And candidly, we’re kind of happy with that result in this environment because living in Chicago, reading the news, I mean, there are office buildings right now that are being handed back to lenders. So, we had to kind of scrape and claw, you know, for some of those returns. But we got in, you know, to the right deals in the right cities, and a scratch is what I’ll call the second-best outcome in investing.

Jimmy: Excellent. A couple of questions from Ashley and from Mark, they both want you to go into more detail on that 50/50 catch-up mentioned in the fees. Can you describe that in a little more detail?

Michael: Yeah. The 50/50 catch-up is simple. I’m not gonna give you the math behind it, but it works like this. As long as we do our job, like, if we generate a 12%, 15%, 18% IRR, we get 15% of the profits. That’s how you can look at it. So you can kind of forget. And the way it works is that the investor gets the first 8%. We get 100% of…or 50% of the IRR until we’re caught up to 15%. But the math works out that it’s a 15% performance fee as long as we do their job. And there’s nuances around the math of how that works. Like, you know, if we make an 8.5% IRR, then there is some math that goes into that. If we make a 9%, there’s math. But by the time we hit 10% IRR, we’re caught up to 15% of total profits.

Jimmy: Matt asks, for someone with capital gains, which of your funds would you invest in, Growth Fund IV, or the OZ Fund?

Michael: QOZ, not without a doubt. I mean, there is no better fund out there. And this is a gift from the government. And by our math, when we’re looking at QOZ versus a market-rate fund, QOZ will generate 75% more after-tax wealth than a market-rate fund. The reason why we’re coming out with this fund, though, is because there are a lot of people who don’t have capital gains, and there’s a lot of market-rate development happening in the market that are great opportunities. So, if you have capital gains 100% into a QOZ fund.

Jimmy: Yeah, if you have capital gains, I agree. QOZ fund is the way to go. And if you wanna learn more about Origin Investments’ offerings, I would encourage you to head to their website at origininvestments.com. Rick asks…let’s see, oh, “Do the Growth Fund and the OZ Fund invest in some of the same properties? Is there some overlap there?”

Michael: No, not in the OZ fund. No, there won’t be. And really, the way that we differentiate those two is if a property is in a qualified opportunity zone fund, it automatically is earmarked for the qualified opportunity zone fund, the growth fund. But we do have, you know, a lot of the same partners, because the partners who are in the qualified opportunity zone fund, they do a lot of market-rate deals as well.

So, these are relationships we’ve had for years. And when we’re out there on the ground, you know, one of the ways that you get the good qualified opportunity zone deals is you solve their other problems, right, or you partner with them on other deals. But you can’t say, “Hey, we want all your fantastic qualified opportunity zone deals, but we’re gonna, you know, ask somebody else to do the market rate deals.” So, you know, this is about bringing a great product out to our investors, but also, you know, helping us on the ground as well. And it’s all synergistic and helps just, you know, the company as a whole. And investors benefit, and certainly, our team benefits on that side as well.

Jimmy: Great. A couple of questions came in right around the same time, one from Bill, and one from someone who is remaining anonymous. They ask, “Is there risk and focusing on red-hot markets, meaning you’ll be overpaying for the assets?” The way Bill words it is, “It seems like everyone is investing in Colorado Springs. When do you determine enough is enough?”

Michael: Yeah, that’s a good question. So, Bill, I…and I’m happy to share this. But we actually embarked about two and a half years ago in building, what we call Origin Multilytics [SP]. So, we hired two data scientists from the University of Chicago who now work for us full time. And we built an artificial intelligence platform because you’re right. Like, one of the biggest…the most important variables in any financial model is growth. And we were banging our heads against the wall because we were renting these programs from companies out there who do this for a living. And we just didn’t think that it was good, especially when we back-tested and looked at it and we said, “There’s got to be something better here.”

So we took a flyer and we said, “Let’s try to build something out there.” And we have, and we built something that we believe is incredibly accurate. It’s certainly better than what can be rented. It’s only for Origin. It helps us to constantly evaluate markets, look at growth rates over time. And you’re right that the markets in Phoenix and Tampa, they have grown a lot. And the question is can they grow more? Are they still affordable? Are they oversupplied, undersupplied?

And so, what our AI does is it really looks at millions of pieces of public data, brings them together, aggregates them, looks at growth rates from the property level, the sub-market level, the city level, to give us unbiased information on that. And our cities are constantly changing and we’re re-evaluating them and adding new cities.

But what you’re asking is a fantastic question because we’ve never been good momentum buyers when the market, you know, is running like this. But it’s the number one reason why we’re entering these markets via development. And we’re not going to the table where there are 25 other letters of intent on a deal that’s five years old and has a value-add potential and is being bid 30%. We think there’s still more growth. Those strategies might do okay over the next couple of years, you know, 5, 10 years that there is a lot of runway to go here, but we’re gonna do far better in ground-up development by having a lower basis.

Jimmy: Fantastic. We’ve got a few more questions. I wanna get to them. Michael, I just wanted to let everybody know that our next session coming up is an educational panel starting in just… We’ll get that started in just a few more minutes. The panel is titled “Alternative Investment Trends for 2022.” And we’ll have Megan Gavin, Reid Thomas, and Ashley Tison coming up on stage for that. I see the three of you in the audience right now. We’ll bring you up shortly. But I wanted to see if we can answer a few more of these questions. We’re getting great response from our attendees today. So, thank you for attending and for participating everybody out there. Kim asks, “How do you get Class A property and also maintain 28% affordability? What are your practical tips?”

Michael: Well, it goes back, number one, to the AI selecting the city, selecting the right sub-market, and building costs as well. And I mentioned this a little bit in my email. You can’t really get affordable rents, and that $1,800, those chunk prices I was talking about, if you’re building podium, if you’re building high-rise properties because the cost to construct those is so expensive, that you have to get rents that are $2,800 a unit, $3,000 per unit. And it’s just a very different demographic.

So, what we’re looking for is the bulk of the market. Where’s the greatest demand of the market? And then how do we enter that space? So, horizontal multi is a great way to do it. And it generally starts with less expensive land, and then less expensive costs to build. And I will candidly say, like, there is a big range of Class A. You have your trophy Class A, which is your high-rise development catering to the ultra-high net worth, people who have tremendous amount of discretionary income who can pay $5,000, $6,000 a month.

And then you have your brand new property that’s been built for this renter by choice, the one I described, $60,000 to $100,000. And that’s really our sweet spot, is making sure that we are…you know, this is more stick building than it is concrete construction. It could be surface park, but it’s that wrap, that horizontal multi, and that garden product. And it’s more in your suburban areas. And suburban areas in Chicago, they languished forever, but this is going on in other cities too. They’re really having a revitalization because of the work-from-home phenomenon.

So, that’s a lot of where we are focusing on this, those suburban areas, on projects that really have more affordable building costs so we can deliver those rents at that $1,800 price.

Jimmy: Great. A couple more questions here. I’m gonna wrap them into one and then…

Michael: Sure.

Jimmy: …we’ll move along. So, this will be the last one for you, Michael. You’re doing great. Thanks again for participating today. Rick asks, “What loan leverage is projected for these projects?” And then, related, Gary asks, “Leverage seems higher than your other funds. What is target IRR at more typical 60% leverage? And why are you using higher leverage in this case?”

Michael: So, this is a growth fund and we’ve decided to use slightly higher leverage at 75%. And you have to consider also the margin on your deal level, right? So, what I’m quoting here is 75% loan to cost on these deals. So, if a project for round numbers, you know, costs $100 million, we’ll be using $75 million of leverage on that deal. What you also have to consider in that is we’re generally building to about a 30% margin on our deals, right? Return on costs, what we look at.

So, if we’re building for a hundred, we expect the property to be worth $130 million once completed, once the plan is executed. So, when you look at it from a loan to cost, yes, it is more. And this fund, by the way, is designed to deliver a higher IRR, higher multiple on equity as well. And, you know, post refinance, we plan on refinancing these at about 65% because we will have more of a core property at that point in time.

I’ll tell you. A typical deal that we look at, if it’s leveraged at 65%, we would probably be looking at returns here of 12% to 14% and a multiple in the range of, you know, right around 1.6, 1.65. So, you know, everything we do is evaluating, are we getting paid for the risk we’re taking here and we believe we are. So, for that 10% incremental risk, we’re getting, you know, call it, an additional 20% return on our capital for that. And risk is exponential, so you’d expect to get more.

And candidly, I would expect that we outperform these projections, because one thing I didn’t mention on the pipeline, we’ve had these deals tied up for six months. This is pricing from six months ago and we own the land. Land prices have gone up substantially. We’ve got GMPs in a lot of these projects, gross maximum price contracts. Those have gone up, you know, over the last few months. So, that’s a big advantage, coming into a fund that has a pipeline of deals already secured, and pricing already secured as well.

Jimmy: Terrific. Well, Michael, I think we actually got to all of the questions, believe it or not. We had a lot of great questions from our audience, really engaged audience this morning. Thanks again, everybody, for participating. And Michael, thank you once again for presenting on another one of my events, the inaugural Alts Expo here. I really appreciate it. Thanks again.

Michael: Thank you for having me, Jimmy. Take care.

Jimmy: All right. You too.