In this webinar, Michael Episcope discusses Origin’s unique history and its focus on class A multifamily projects in markets where its proprietary technology indicates promising tailwinds.

Webinar Highlights

• Origin’s goal of helping investors grow wealth through real estate;
• Origin’s impressive track record, which includes never losing money on a deal, and more than 3,200 individual investors;
• The rationale for Origin’s strategy of investing in class A properties in the Sun Belt;
• Status of fundraising to date for Fund II;
• Review of the portfolio and pipeline for Fund II;
• The importance of Origin’s proprietary market analytics tools;
• Overview of the rent-by-choice demographics;
• Live Q&A with webinar attendees.

Industry Spotlight: 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

• Visit OriginInvestments.com

Webinar Transcript

Jimmy: So, our next presenter is Michael Episcope with Origin Investments, and I’m bringing Michael up on the stage right now. And Origin Investments has been a long-time partner of OpportunityDb and has presented I think at just about every OZ Pitch Day. This is our seventh one. So, always pleased to hear from Michael Espicope and what he has to say with…we’re presenting Origin Investments QOZ Fund II this afternoon. Is that right, Michael?

Michael: That’s correct, Jimmy. It’s great to be here.

Jimmy: Great to see you, Michael. Well, you’ve got 20 minutes. So, I’ll turn it over to you. The floor is yours. Please take it away.

Michael: Thank you. I’m excited to be here today. Again, this presentation, it’s just kind of a teaser. It should take less than the full 20 minutes that Jimmy has allotted me here. And, we’ll have some time for some quick Q&A at the end. So, a little bit about Origin. We help investors, high-net-worth investors grow their wealth by building, buying, and lending to class A multi-family properties in growth markets. We’ve been around since 2015 on both a co-founder and a co-CEO of the company. And when we got into QOZ back in 2019, it really wasn’t a large leap for us to create QOZ1. We’re talking about QOZ2 today.

Every one of our investment partners, including my partner David and me, we’re taxable investors. And we were already in development at that time. So, we just saw it as kind of a natural extension, why not do more real estate but get even better tax breaks along the way? As a company, we’ve never lost money on a fund deal. We’ve averaged a little more than a 2X gross multiple and a 22.5% gross IRR over the last 10 years. That’s really our fund deals. And one thing that we’re really proud to say is that no one has invested more in Origin’s funds and deals than we have, my partner and I. We’ve invested $75 million of personal capital alongside investors since our founding. And today, I’m proud to say we serve more than 3,200 individual investors. And about 20% of our investor base are clients of roughly about 60 RAA partners out there.

I’m gonna jump into our strategy really quickly. We develop Class A multi-family properties in Sunbelt markets. That’s what this fund does. We were here before COVID, too. Our thesis has always been, “Lifestyle markets in low-tax states.” We have five offices throughout the country, one of which is in Chicago. That’s where I sit right now. We actually don’t invest in Chicago. And our other offices, they really serve as sort of a regional presence to give us that boots on the ground. We have officers who live in their markets. And that really leads to a lot of deal flow. And I would characterize our deal flow as prolific. And I would say that we have one of the best pipelines of opportunities in QOZ of any manager in the multi-family state across the country.

This fund is expected to generate between kind of a two-and-a-quarter to two-and-a-half net multiple over the first 10 years. And we do still believe that that’s more than achievable in today’s market and sort of some of the storm clouds that we see coming out on the horizons and maybe even some negative rent growth next year, but a lot of positive rent growth over the next kind of 4 or 5, even 10 years in these markets.

The next slide, this fund, it caps out at $300 million, and we’ve raised a little more than $200 million to date so far. And you can see our current pipeline there and sort of the middle slide, it’s…we have seed deals and pipeline deals that require around $290 million in total fund equity. And anyone investing in this fund today would be investing in the portfolio you see in front of you. And there are two areas I want you to focus on in this chart. And the first is the stabilized yield column, and that’s also referred to as “return-on-cost.” And this is the future cap rate we are building to. And the return-on-cost of this portfolio ranges anywhere from 5.3% the deal in Nashville at the top all the way to 6% with an average right around that 5.6%. So, even with cap rates rising, I mean, you can kind of pick your number, there hasn’t been a lot of price discovery transactions in the market. We’re pricing assets today at 4.5%. Even in these markets, that’s up significantly from last year where they were 3.5%. But you can see there’s still a healthy margin in every one of these deals. And one of the biggest reasons these margins exist in our portfolio is that we’ve locked in a lot of the pricing while rents in these markets have continued to soar.

The right-hand column is equally as important. These are rent growth forecasts over the next five years in this portfolio, and were produced by Origin Multilytics, and that’s our proprietary machine learning tool built by two University of Chicago data science we hired about three years ago. There’s a long story behind that. I don’t have enough time to get into it today. But what I will say is it is the most sophisticated tool in the market. We have a lot of people knocking on our door about this, wanting to use it in one way or another. And remarkably, it’s more accurate than any other forecasting tools out there that you can rent.

That column, what’s important is that it shows positive rent growth over five years in every one of our markets. And there are plenty of markets out there when we run these simulations that you actually get negative rent growth, and we just aren’t in them in this particular fund, and we won’t be in them because we use this tool to help us with strategy and it helps augment what the team sees on the ground as well. And it’s important because 70% of our whole period, if you’re gonna be in for 10 years, if you’re gonna be in for 20, it’s even more than that. But, the majority of the whole period is going to be in a stabilized asset. And growth is the single most important variable when determining long-term investment returns. So, we have to get the development right and build margins, but then once we’re holding it after that, a lot of it has to do with data and being in the right markets and picking the right submarkets to them. And we spend an inordinate amount of time getting the market right. And I’m a person…I’m bullish on every one of these cities over the next 10 years, and Multilytics is saying the same thing.

This slide shows…it’s a snapshot kind of some of the properties we build. These are actual renderings of properties in our portfolio. So, we tend to build garden-wrap podium. These are different styles of building. Some are much less expensive than others, require more land. What we don’t do is we generally stay away from high rise, that more risk, those are urban, taller buildings, things of that nature. And our renter is a renter by choice. So, you can think of somebody who’s making between $70,000 and $150,000, someone who could buy but chooses to rent. These are your white-collar workers. They tend to have more discretionary income. And the thing that we look for in the demographic more than anything is affordability. When we’re building these things and we’re doing our analysis.

And so our going-in affordability ratio, which is defined by rent to gross income, it’s gotta be less than 25%. And we wanna make sure that people can afford not only the initial rent, but also rent increases. And when you get into the upper, you know, sort of those low 30% range, the upper 20s, there’s no room to raise rents because people are maxed out. They just don’t have any more discretionary dollars. And so, it’s really important that you look at that affordability ratio. And when you’re dealing with a white-collar worker, their incomes also tend to go up a lot faster than the blue-collar workers as well. So, somebody who’s making $125,000 today is more likely to make $200,000 in a few years than somebody making $40,000 is likely to make $80,000. So, those are kind of some of the things we look for when looking at projects and some of the things we consider.

Lofts at Eastland is a deal I’ll talk about briefly and then we can open it up for some Q&A after this, I hope, Jimmy, hope we have some time. We’re excited about this deal. It’s located in Charlotte, North Carolina. It is part of an 80-acre Eastland Mall redevelopment site, and this is a failed mall. So, we’ve all seen the class C malls that the anchors have left. It’s just a parking lot. And what’s happening with a lot of these malls is their great locations and the cities are pouring money in them to redevelop them and bring them back to life in one way or the other. Certainly not as a mall again, but repurposing them. And in this case, the city is throwing their weight behind the successful redevelopment of the site. We are acquiring the land from them for around $2,500 per unit, that’s insanely cheap, and we’re actually getting tax incentives on top of that worth about $7 million to $8 million. And those are valued right around $30,000 per unit.

So, in this case, our land basis is actually less than zero. And the redevelopment, it’s going to be beautiful when it’s done. I’ve seen these renderings, I’ve seen the plans. It’s gonna have loads of park space and green space and a retail center and you can sort of see it in those renderings in front of you now, what the end result. And some people, they might consider this a bit pioneering in the sense that we are one of the first developers getting out of the ground. But the beauty about QOZ is that we can take a long-term look. This isn’t a buy, fix, sell, we’re trying to get in two or three years. We can take a 10-year view here and watch as the redevelopment takes shape. It is an impressive master plan and our property sits right in the center of it all. And this deal easily pencils out to around a 5.6% return on cost with conservative underwriting and a lot more future upside in the growth of this city. So, I know that I did that pretty quickly, Jimmy. So, hopefully, we have some questions that came in, and, again, that was just a teaser. Oh, and I forgot to show, if you wanna get in touch with us, that was in my last slide.

Jimmy: Bring up that last slide. That’s the most important one.

Michael: Well, I’ll just say it. So, email me, [email protected]. Go to our website, origininvestments.com, or you can email [email protected]. Any one of those places will get you to the right spot or at least start you off and we’ll take care of you from there.

Jimmy: Fantastic. So, I’ve just posted the links to all of those contacts in the chat, origininvestments.com, [email protected], and [email protected]. Reach out if you have any questions for Michael. But we’ll see if we can get to some live Q&A here. We’ve got another 10 minutes to get to some Q&A. So, first question is, “Origin mentioned that you see negative rent growth for the next year, potentially. Does this change anything operationally for your funds?”

Michael: Good question. So, when we’re running our Origin Multilytics, what we’re looking at is negative rent growth, kind of end of 2023 going into 2024, and then a bounce back in ’24 and ’25. It definitely, like, I don’t… The rent growth doesn’t make as much of a difference as what we’re looking at at borrowing costs and cap rates and interest rates in today’s market. But certainly, rent growth, when you’re plugging it into a model and you have these other variables that have run away, if you’re in a market that has negative rent growth over the next 3, 4, 5 years, the deal will not pencil out. So there’s always gonna be ups and downs. You’re always going to have, you know, a little, you know, dips along the way. And I’ll tell people, and I’ve said this a lot, but this will not be the last recession we go through in this fund. So, does it change our perspective? I think we’ve made a lot of good choices, the markets, the amount of leverage we use, the projects we build, the risk management we employ. We’ve done some interest rate hedging on swaption side as well. So we’re always cautious and conservative, but you have to adjust to the existing market. And it would be naive for me to say that we haven’t changed anything when interest rates in the last year have gone from, you know, 1.5% to 4.3%. We’ve changed a lot [inaudible 00:12:54.432]

Jimmy: Okay, no worries. So, Michelle mentions that there are 135 opportunity zones in Chicago where you’re headquartered, and many in the mayor’s priority neighborhoods or community areas where city-led projects are being proposed. Why doesn’t Origin Investments have any investments in Chicago?

Michael: We have one investment here in Chicago in QOZ1. But the advantage of our model is that we have a view of the entire unit [inaudible 00:13:24.621] 3, 5, 10 years. Chicago doesn’t make a cut. And for me and our investment dollars, I’d rather be in Nashville and Tampa and Jacksonville and Colorado Springs and markets like that. And that’s the simple answer. And it is, like, we can be agile and move in and outta markets and there’s certainly markets that we were in, you know, five years ago that we are no longer in today and markets that we want to overweight for the next five years as well. All comes down to growth. Jimmy, are you okay? You need to take a break there?

Jimmy: It does, yeah. Yeah, I’ll be alright. It’s been a long day. Got another question from Michelle. “Do you have any socially conscious investments where ROI is less than desired but exceeds the triple in that gain?” Do you ever put ROI aside and focus more on positive impact, I guess, is kind of what her question’s getting at. What’s your philosophy there?

Michael: So, we’re not like a positive impact fund, that’s not what we put. Like, our job because of the way this program was designed is… In order for investors to get the benefit, we have to make returns. So that’s first and foremost. I would say the ancillary benefits of what we’re doing, and I tell people this, the QOZ program in many ways, as people were looking at it, it had all these maybe unintended consequences, or it didn’t help these neighborhoods. And I look back and I’m like, “Well, did you really think that just building, you know, a brand new pretty building in a distressed neighborhood is gonna make that neighborhood better?” What it is, is a huge jobs program. So our first fund has about a billion dollars worth of assets. This fund will have more than a billion dollars worth of assets, and we’ve created a lot of jobs along the way, both at origin and on the ground during the construction in between. And we’re going to deliver a lot of returns as well. But that’s not the primary goal of our fund and I know it is of others.

Jimmy: So Amy has an interesting question. She asks, “Can you say why you want to be in the areas where you are? Maybe you can tell us about the cap rates there. What do you like about the areas where you’re investing?”

Michael: Yeah, well, first, I alluded to this. It starts with the market, but then I would characterize that when we’re looking at QOZ areas, there’s about 5% of them that are viable across the whole United States, right? We talk about 8,700 zones out there, but even in our cities, there’s such a finite data set that you can hunt in. We look for deals that are along the fringes, that are literally right on the edge of the QOZ area and market rate. And when you go and you saw any one of our QOZ sites like Nashville, I’ll give you an example, the Edge Hill site down there, it sits right at the edge of the gulch. And you’re looking at this and you can’t believe it’s a QOZ until you really understand the law and you go back because everything was based on the 2010 census. And in 2010, nobody lived in downtown Nashville. It was empty. And all of that building and development has just exploded now, and there are still these, what I’ll call diamonds in the rough. And that’s what we’re looking for because QOZ doesn’t change our cost of capital. We don’t use a different set of Excel requirements. Our job is to make you money. You know, that’s the bottom line. So whether it’s direct development for our growth fund or for our QOZ fund, they both have the same cost of capital.

Jimmy: Next question here is, “How many assets do you expect you’ll have in that Fund II portfolio, and when do you think you might identify all of them?

Michael: Well, already the fund has $290 million in pipeline and seed deals. So, what you saw on the screen is sort of the, you know, almost the full portfolio. Some of those could change out. Even in today’s world, deals are getting delayed, deals are getting mothballed, new deals are coming in a little faster. So, generally in a fund like this, we see the whole portfolio being about 12 to 15 assets in total.

Jimmy: Good. So, just since our last pitch-day event back in July, doesn’t seem like that long ago, but interest rates have gone up several times and by pretty big jumps over those last few months. What is your approach to debt now and how has those interest rate increases impacted it for your projects?

Michael: So, I’ll give you…it was about, I would say, our first hedge that we put on interest rates, because you gotta remember that development debt is floating rate, and you can hedge those with swaps, but not every bank develop swaps interest rates. And so, what we did is we went to the market and we bought swaptions, which are not a perfect hedge, but they’re still directionally really good. And we hedged about a half, 50% to 60% of the interest rates in this portfolio. That’s actually a large asset of this portfolio. Our view on interest rates is…I’m not gonna give you guidance. They’ve gone up faster than anybody could have imagined, but this is one thing I love personally about ground-up development is the margin. And we’ve been talking about this for more than two years and all of our funds, that the way you protect basis is either through lending or through building, but you can’t do it in buying.

So, value add, buying above replacement cost was probably not a good bet in the last year and that’s gonna come back down to earth. But development, you can still develop at prices that make sense, especially relative to where new properties are trading today. And I know that doesn’t answer the question about debt, but in this portfolio, once we have a chance to fix debt, we will. But we will also have a percentage, call it 30% to 35% of the debt that’s floating because if you do the analysis looking backwards, floating-rate debt has almost always been cheaper than fixed-rate debt. And so, it’s good from a risk management perspective to have the majority of your portfolio fixed but still have some of it that’s floating along the way. So these properties, once they’re built, we’ll get out of those swaptions, we’ll enter into fixed-rate debt and we’ll see about floating-rate debt and where we are at that time. Certainly, if interest rates go back down below 3%, we’ll probably fix the entire portfolio.

Jimmy: Good. So, I just had a question from Oliver that I’ll answer from the chat. Oliver was asking, “Where are the links to the various presenters and their information?” We do have that available as a free download. If you head to opportunitydb.com/bonuses, you’ll be able to download our OZ investing cheat sheet and we’ve got info on all of our presenting funds here today. You could also head to ozpitchday.com to view the current agenda and list of speakers. Several more great questions here. Move on to…Actually, Amy wanted to follow up. She was asking specifically about cap rates in the areas where Origin is investing. I think we forgot to answer her on that one. So, what are some cap rate ranges that you’d like to see?

Michael: Cap rates in today’s market, I mean, they’re up at least a hundred basis points from the low. So, everything that we’re valuing and looking at when, one, I’m looking at this return on cost out there and I’m giving you the multiples, we’re looking at a 4.5% cap rates in these markets. We don’t know, there hasn’t been a lot of price discovery. There have been a few transactions and many of those are momentum and things that were already in place, and we’ll see what’s gonna happen over the next 12 months. And I think what we’re really gonna see from a price discovery is when you start getting negative rent growth and some of this last year’s rent growth being given back and then loans coming due and refinancings maybe not taking place. You used to be able to take 50% of your equity out and there’s no doubt when we run the math, people are gonna have to come to the table with a lot of equity in the refinancing scenarios here in the next year. Good news is though…I’m sorry. As I’m looking out, you know, like ’23, ’24, probably a little rocky. At the end of ’24, it jumps back and ’25 looks to be pretty good vintage.

Jimmy: Excellent. We’ve got time for one or two more questions. Michelle asks…she’s been prolific with the questions all throughout the course of the day-to-day. Thank you for your participation, Michelle. “What is the project that you are most proud of and why?”

Michael: I’ll say what I’m most excited about. I love…like, the two markets I’m most excited about are Colorado Springs and Jacksonville. And those markets, we just did our entire retreat with our company, took all 50 people down to Colorado Springs. We’ve got four developments down there. We did market tours, and you can just feel the energy and why people wanna live down there. And then Jacksonville benefits from that lifestyle city, low-tax state growth, everything from it. So, I’m really excited about those two cities. In terms of particular projects, you know, it just comes down to which projects are gonna perform the best and the fun. That’s what I get more excited about than an actual real estate project itself because, you know, our job, what we’re doing here is to build wealth for other people. And that’s what we wanna do. And that’s what I get excited about is when I come on these webinars, we’ve done our job and done it well.

Jimmy: Absolutely. Well, one last question from Jerry. And thank you for all your questions today, Jerry. Jerry’s also been great today. “Does Origin joint venture with developers?”

Michael: We do. Yeah. And majority of our properties, we also develop directly, but the majority of what we do, and that’s a function of our sort of national model. And oftentimes what we’re doing is getting into deals that are shovel-ready. And it really increases also our acquisition pipeline. So, you can think about our partners as extensions of our organization and we have four acquisition officers out there that’s gonna be moving to six in a couple years. But when you add our partners, we have 15 out there looking at deals. And that’s what I said earlier about having the most prolific pipeline across the United States in multi-family. I truly believe that.

Jimmy: All right. Well, we’re out of time Michael, and we got through almost all the questions. I think if we didn’t get to your question, you can reach out to Michael directly, [email protected]. I just put that info in the chat. I’ll put it up there one more time because it’s kind of falling off the front page now. But, Michael, thank you so much for presenting with us today. Always great to have you on OZ Pitch Day.

Michael: Jimmy, thanks for having me. Appreciate it.