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Origin Investments' Morris at Belmont multifamily project in suburban Charlotte

Making a Pivot: How Origin Investments Changed its Strategy with the Change in the Market

The investment fund manager used to focus on value-add multifamily. Then it discovered the play no longer made sense.

When David Scherer and Michael Episcope launched Origin Investments nearly 15 years ago, the duo had a very clear goal: to preserve and grow their own self-made wealth. But it didn’t take long for them to realize other individuals could benefit from the same institutional quality real estate and investment management services that they desired for themselves.

Today, the Chicago-based private equity real estate manager develops, owns and operates multifamily properties in fast-growing Sunbelt markets. With regional offices in Atlanta, Charlotte, N.C., Dallas, Denver and Nashville, Tenn., Origin employs a team of roughly 40 people and has $1.4 billion in assets under management. Today, its portfolio consists of 10,000 multifamily units, with another 3,000 under development.

In Nashville, for example, Origin is developing up to 730 multifamily units on an eight-acre Opportunity Zone site near The Gulch. The project marks the company’s second OZ partnership with Chicago-based Marquette Companies. When fully built out, development costs are anticipated to be $250 million to $300 million. Ground-breaking is expected to take place in late 2022.

Currently, Origin is raising three funds, all focused on multifamily: QOZ Fund II, which invests in tax-advantaged, build-to-core development projects with high growth potential; IncomePlus Fund, which offers tax-efficient passive income and appreciation with a target net annualized return of 9 to 11 percent; and the Multifamily Credit Fund, which offers high-yield real estate debt investments for qualified purchasers.

Last month, Origin broke ground on one of its IncomePlus deals—a $76-million, class-A multifamily project in suburban Charlotte. Located on 39 acres of land, Morris at Belmont will be comprised of 322 units, including 32 townhomes and a mix of one-, two- and three-bedroom apartments. The company is developing the community in partnership with Kaplan Residential.

Origin plans to begin fundraising for another fund, Growth Fund IV, in January. That fund, targeted for $250 million in equity, will invest in market-rate housing. The company already has a project lined up to deploy Growth Fund IV capital—310 units of purpose-built single-family rental homes in suburban Austin.

The development, dubbed Preserve at Star Ranch, is Origin’s first foray into the SFR sector. It is one of six ongoing deals with Origin’s programmatic partner, Houston-based Guefen Development. Groundbreaking for Preserve at Star Ranch is anticipated in the second quarter of 2022.

Under the leadership of co-CEOs Scherer and Episcope, Origin has ranked in the top 2 percent of North America-focused private real estate fund managers by Preqin, an independent provider of data on alternative investments. Earlier this year, the company tied for number 9 out of 234 Preqin-ranked best performing global private real estate fund managers based on a combination of net IRR and equity multiple. The company averaged gross IRR of 24 percent across its Growth Fund I, II and II.

WMRE recently spoke with David Scherer about Origin’s investment strategy, relationship with its equity investors and plans for the future.

This Q&A has been edited for length, style and clarity.

WMRE: What is Origin’s investment strategy?

David-Scherer.jpgDavid Scherer: Right now, we’re 100 percent focused on ground-up multifamily development in target markets in the Southeast, Southwest and Texas. We stopped investing in value-add real estate five years ago. We spent 2010 to 2015 very active in value-add, and by 2016, we were transitioning into development. It’s all about the flow of capital and supply and demand. Expected value kept going lower because of all the capital.

My opinion today is that value-add is the lowest value strategy within multifamily. The problem with value-add is that you’re forced to buy 10- to 15-year-old product at or above replacement cost. And that’s Real Estate 101—don’t buy old real estate at more than replacement cost.

WMRE: What was Origin Investments’ original vision and mission? Has that changed over time?

David Scherer: Our mission hasn’t changed from day one and that is to provide the highest quality real estate for everyone. When you break that down, we want to bring institutional quality management to individuals.

We wanted to create a company that had all the things you would look for if you were an investment manager at the highest level. With alternatives, you need to pick the right management team because it could be the difference of 500 basis points a year or more. It could be the difference between making money and losing money.

WMRE: What type of investors does Origin Investments target? Do you anticipate your investor base changing in the near future?

David Scherer: Our investors are individuals and family offices, and I don’t expect that to change. In total, Origin principals have invested more than $60 million alongside our investors.

We like investing with individuals and family offices, in particular, because we have the same goals. They tend to be long-term investors focused on tax efficiency. Two of our funds—IncomePlus and Multifamily Credit—have subsidiary REITs. Institutions don’t have the same goals—they’re not concerned about taxes.

WMRE: How does Origin raise equity and attract new investors? What kind of investor outreach do you conduct?

David Scherer: We started Origin to build and protect our own wealth. Then, as we brought in people we knew, it grew to about 20 investors. When we started launching our first funds, our investor base grew to about 100. Now, we have just over 2,000 investors who’ve come to us primarily through word of mouth. Our only real outreach is articles and educational videos, and we’re prolific with those.

Eighty percent of our investor base has direct relationships with Origin, while 20 percent comes to us through relationships with investment advisory firms. These firms are looking to provide their clients with alternatives to stocks and bonds and help them build more diverse portfolios.

Investment advisory firms are a very fast-growing segment for us. A few years ago, we had three to four relationships. Now we have 40. I have a feeling that, within the next two years, 50 percent of our investors will come through investment advisory firms.

WMRE: How does the firm communicate and keep the conversation going with its existing investors to make sure they are on the same page regarding strategy, targeted returns etc.?

David Scherer: We host quarterly webinars for each of our funds, and we set aside half of the time for live Q&As. We answer every single question.

WMRE: What is the range of returns that you expect on your investments?

David Scherer: At the deal level, we’re looking to do 15 percent to 19 percent IRR. Over the past 10 years, we’ve been extraordinarily successful and averaged north of 20 percent IRR.

WMRE: How does Origin Investments structure its deals?

David Scherer: To deploy the amount of capital that we want to deploy, we have to be flexible with our deal structures. We do both GP and LP, and if we like a deal, we might do it by ourselves.

We’re also focused on preferred equity, occupying the 65 to 85 percent portion of the capital stack. We’re getting 11 percent to 14 percent IRR on that money, but we don’t have the upside tail on those. We like the preferred position. So far, we’ve done 10 preferred deals and plan to do another six to eight in the next few months.

With preferred equity, the biggest risk to us is the partner because you don’t have control, unlike in a majority common equity position. We try to mitigate that risk with underwriting and by having deep relationships with our preferred equity partners.

WMRE: What role does technology play at Origin Investments, specifically as it relates to communicating with investors, raising money, managing your properties and sourcing acquisitions?

David Scherer: We’ve invested $400,000 to $600,000 to build our own technology platform. We have an internal team of data scientists, and we continue to press for innovation with our machine learning and artificial intelligence. We get 3.5 billion unique pieces of data a month, which we use to predict rent growth and to identify markets and projects in which we want to invest. We believe our technology is better than anything available on the market.

WMRE: What differentiates Origin Investments from other investment firms?

David Scherer: I’ll give you an analogy—when you plant bamboo, it doesn’t come out of the ground for three years or so. But during that time, a tremendous root system is developing underground, and when it comes out, it grows quickly. I don’t think this business is any different, both on the capital raising side and the investment side. We took the time to build that root system, and that’s why we’ve had so much growth over the last three to four years.

Another differentiator is our technology. We pay very close attention to our machine learning because it takes all this data and tells us exactly where we are now and what rent growth should be over the next five years. We’ve back-tested it over the last five years, and it’s been amazingly predictive.

Now, it doesn’t make decisions for us. It’s a tool that we use. For example, when a deal is presented to credit committee, and it has all the elements we like, but the machine learning tool is saying that rent growth should be lower, we take a really hard look at why it’s not agreeing with our human judgment. It doesn’t happen that often, but when it happens, we stop and try to figure out what we’re not seeing. We really do trust data.

WMRE: What are the biggest challenges that Origin Investments is facing right now?

David Scherer: Since we’re focused on development, I’d say that we’re facing two big challenges: extraordinary volatility in the price of construction materials and labor pressure. The pricing volatility impacts margins, and it also creates delays because you have to go back to your lender.

The labor pressure affects us on every level. One of the reasons we’ve done so well is our senior people. They’ve been here an average of eight years, some as many as 12 years. There’s been amazing continuity. Our people are really good at what they do, so I’m certain they’re getting offers all the time. We have to respond positively with enough compensation and the right culture and mobility so people want to stay with us.

WMRE: What plans do you have for Origin Investments in the new year?

David Scherer: We want to invest $500 million in equity in 2022. When you pair that with debt—we leverage between 60 and 68 percent—it’s about $1.5 billion in total investment.

We’ve already lined up deals totaling $300 million to $350 million, so while we’re starting on January 1, it’s kind of like we’re already rounding second base.

WMRE: What is the biggest success that the company has experienced? What is the biggest failure?

David Scherer: I am most proud that Preqin has named Origin as a Top Decile Fund Manager. That is a big success.

As far as failures, we were slow to transition from value-add to development. It wasn’t that we started the transition too late, it just took too long. It took two to two and a half years to shift, and it should have taken only 12 to 18 months. But you know, those are the things you learn from. The next time we need to shift our strategy, we’ll be faster.

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