Michael Episcope, Principal of Origin Investments, joins us to discuss his shift from equities trader to real estate investor with a team of 30 and $2.5B in transactions executed. We discuss investment philosophy, asset classes, funds, team building, and much more.
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Michael, welcome. Thank you for coming on the show. How are you?
Good, Devin. Thank you so much for having me.
Yeah. Yeah. Glad to have you on. And I want to dive into it and talk about your real estate career and some of the things you’ve done, but first, by way of introduction here, maybe a little bit of your background and how you ended up coming to real estate investments. What was that journey like for you?
Yeah, a little bit of a long, circuitous route. I was first really introduced to real estate as a youngster. My grandfather was in it. I used to work summer jobs. Didn’t really know that that was going to be so impressionable, I mean, when I was that young. But this was when I was 12, 13, 14. I just loved work, swing a hammer, help out, do things. And he was managing a lot of buildings on the west side of Chicago, so some really rough stuff back in the ’70s, bought those things out of tax credit sales, things of that nature.
I got away from it after high school, went to college. My first career was actually trading. So I was a commodities trader until I was age 36. And in that business, that’s where I really built my wealth. And then I had the need to invest my wealth and build it. And the computers took over, and I decided enough was enough and I didn’t want to take risk. And at the end of my trading career, I was married, I had two kids, so a lot more people who relied on me. It was very different from when I started my career.
So I decided that I really wanted to use real estate as a means to grow my wealth, protect my wealth, build passive income. So I went and got a master’s in real estate, then, at DePaul, and I had partnered with my partner, David Scherer, who I’m still partners with today. And we got together really because we had a mindset about what we wanted to do with our own capital. We had both invested in a passive manner, and it was always two steps forward, one step back. And we just looked at each other and said, “We can do better than this with our own money.” And that was the genesis of it, is saying, “Look, we just want to be stewards of our own capital and do this together.”
And I think what we’re really good at is risk management and understanding, I mean, this isn’t rocket science. There’s a lot of just common sense around this industry. And we started in the beginning, there’s always a little luck to every career as well. We started in ’07. We didn’t put any money out in ’07. We put some money out in ’08. That was only our own capital. We started putting more money out in ’09, so a little bit of a falling knife there. And then we started syndicating deals in 2010, raised our first fund in 2011, our second fund in 2013.
We then started marketing our company in 2015. And the reason was, is our whole philosophy was, look, we have a really great product. And we had about 70 investors in 2015, but we were also a top decile manager. So fund one ended up being top decile performance. Fund two was tracking in top decile. We were getting more and more referrals, people coming in. And the simple adage is that if you have a great product and you put it in front of a lot of people, you’re going to get more people who buy it.
So then, that was really the inflection point of Origin. I would say, pre-2015, even going 2007, it was two guys buying real estate, that’s all it was, and then bringing in friends and family looking to do great deals. And today, though, we’ve been blessed. We’ve got a great team, 30 people who choose to call Origin home. We represent more than 1,800 high net worth investors today across our various funds. We have four offices. We’re located in Chicago. But it’s been an absolutely great run. So that’s maybe the abbreviated version. I’ve told this story in five minutes and 50 minutes at times. So you’ve gone from age 12 to 51, where I am today.
It was very concise, and there’s a lot to unpack there. Thank you. You mentioned your career as a trader. And I was at a conference recently and one of the themes that kept coming up was that building wealth and keeping and growing wealth are really two very different activities, and they require some different skill sets and different outlooks. So it sounds like you navigated through that piece. I’m curious, too, on your structure around syndicating. Have you always done the fund model versus a one-off asset by asset syndication model? And why one or the other?
Yeah, so we really are what I’ll call an investor-centric firm. And we’ve always… The fund has two benefits, right? There is a benefit for investors, when you think about the diversification aspect. And some people, the fees are no different, right? And this is what the people don’t understand about the funds or syndicated deals. But the advantage to a manager having a fund is you have permanent capital going into a market. And in every market, when you go and you go to tie up a deal, the most important thing is, do you have capital?
And so, that was one of the reasons early on that we created a fund model, but it was also because we just believe this is how investors should invest. And you’re so much better protected in a fund model than you are in an individual model. And I’m sure that there’s a lot of investors listening today who understand this, because when things go wrong, and they will, when you’re in an individual deal and that deal starts, whether it’s office, or multi-family, or retail, loses a tenant or struggles and it needs money, well, if you’re not with a sponsor with unbelievably deep pockets, and who’s benevolent, and is just going to lend it money, guess what? They’re calling capital from you.
And we’ve seen this, even in some deals that we did syndicate individually, and it became the bank of David and Michael. We loan the property money because we didn’t want to call money from investors. And so, in a fund structure, what happens is you have a company, a holding company with all of these assets underneath it, and you have a diversified portfolio. And just like any portfolio of investments, some are going to do really well and some might struggle a little bit. And that money can go through the holding company and come down and around. And so, that’s a huge advantage from a risk management standpoint.
And personally, real estate is about people. And you don’t bet on projects or individual investments. You bet on the people, because that’s what it comes down to, and that’s the correlation between success and failure there. So we believe strongly in funds. And I’ll tell you, in my own personal investment portfolio, outside of real estate, I only invest in managers and funds on that side, because I don’t know what I’m doing. I can’t pick a deal better than they can.
And what we do, and we’ve sort of adopted this in the market, it’s not an or, it’s an and. So if we have a deal or we’re trying to diversify the fund or keep our equity component a little lower than we want it, what we do is we syndicate a part of that deal through sidecar, but we only bring that out to fund investors. So they have the benefit of being in the fund, knowing that we vetted a deal, that it’s been looked over, it’s gone through a rigorous process, and then they can invest in it. And that is what we found is the best way for investors investing in the fund, but also getting access to those sidecar deals on a one-off opportunity. And there’s a lot of demand for those.
I love it. Well, thank you. Yeah, that certainly makes a lot of sense with spreading the risk around. And I’ve certainly been in the position of being the bank of Devin on some deals, because our investors trust us to get the projects done and hit or beat our pro formas. And no sponsor wants to go back for a capital call. And if you are a passive investor and you’re doing one-off deals, you got to make sure your sponsors is well capitalized.
And there is that benevolence that you mentioned, because it’s a responsibility for the sponsor to be able to cover some things that maybe need to happen on an older asset to ride through a rough patch, whatever the case is. So I like the diversity approach. Are you guys always raising capital, then, for the fund? And then is it a challenge to try to get it deployed? Or have you found a pretty good balance with that?
So I’d say we found a pretty good balance with that, and I’ll take you through the way our mindset is. So we build, buy, and lend multi-family properties across around 14 markets. Those are changing, expanding. We use a proprietary machine learning model to look at our various markets, and some of them come off, some of them get added. Chicago is one that we just, what we’ll call as it’s a hold market, not maybe a sell market. But we’re not doing any business here until they get the… Not that they’re ever going to straighten out the fiscal situation, but hopefully we can get a little more clarity around it.
So when we think about our fund structure, we think about the risk spectrum of investors. What do investors want, right? And so, investors, when you think about some just want income and passive income in a product, some want a little bit of income and growth, and some want only put the pedal to the metal in the growth side. So when we’re out there and our team is looking at multi-family, well, they’re also providing solutions to the market. So they want… A lot of what we do is joint venture with developers out there. But if we can’t come to terms, then what we do, if we can’t come to terms on the equity side, well, then the conversation might turn to, well, what about preferred equity, a protected position in the capital structure?
And so, we’ll do development on common equity, which is obviously a higher growth, no income on that. We’ll do preferred equity, which is a structured position, less risk with capital or with income on those. And then, in the middle, we do value add and core plus properties as well, and that provides some upside, some cashflow, depreciation, et cetera. And then, where those go in the different funds is really up to us as portfolio managers, for the benefits that we’re trying to give to investors. I hope I’m making sense there, in that.
But I’ll tell you right now, we’re not… The middle segment, we’re not active in that at all. So we have a lot of flexibility. We don’t have a mandate in any one of our funds that we have to do this much in value add, we have to do this much in preferred equity. You have a target portfolio, but then life changes, and the world changes, and it’s up to us to look at the risk-reward. So right now, I would categorize our approach as very barbell.
We’re developing and we’re lending, but the value add and the core plus is really challenging, because everything, and you see this, Devin, it’s trading above replacement costs, and we can’t make sense of buying a property that’s 10 years old with value add potential, and you’re buying it at 240 a unit, you’re putting $15,000 a unit into it, you’re at 255, your exit price is at 290 in five years, and yet you can build today for 210 a door. That math does not make sense to us, and so we’re choosing to stay out of that middle. But what is great today is that the development side, you’re still getting great margins on that. And then, in deals that either we can’t come to terms with, or maybe we just don’t believe in as much, we’ll do the preferred equity side. So that’s where we are today in how we think about the world.
I love it. And thank you for the overview. Are you guys exclusively in multi-family projects? Or you mentioned maybe there’s some office retail type assets as well?
So, it’s been an evolution. Today, we are exclusively in multi-family. We own and control around 9,000 multi-family units. We have done, in our history, we’ve done office, we’ve done industrial, we’ve even done student housing, we’ve done retail, and it was a different world. When you think about the world in ’08 and ’09, capital had all of the leverage back then, and all you had to do was buy, buy, buy, and it didn’t really matter.
And as you move through time, as that edge disappears, it really comes down to operational excellence and understanding all of the inputs, and where the pennies, and the nickels, and the dimes, and where you can save money. And it’s really helped us in a lot of ways, because our entire investment management department is set up with their technology around multi-family, and multi-family only. And when you start having different asset classes, well, you’re using all kinds of different models and systems.
And then, also, just the message to the market. So when we’re working in the market, and the only thing we’re looking for is multi-family, the brokers, the people who are selling the properties, control the deals, they know exactly what we do. Because when you go out to the market and you say, “Hey, we do everything,” what they hear is you do nothing. And so, that’s really helped us actually increase deal flow more than anything. But we just like multifamily. It’s not going to be impacted by the internet or… In markets we’re in, we’re actually benefiting from the virtualization. Office is too chunky. Office looks great on paper, but you lose a big tenant, and all of a sudden, your occupancy goes from 98% to 78%. It’s expensive, the TIs. And what you realize is it’s the brokers and the contractors who make all the money in the office side.
Right, right. Yeah. I’ve seen a lot of friends of mine doing office to multi-family conversions, taking that chunky asset class that’s been, in some cases, pretty negatively impacted by COVID in the last two years, and turning it into multi-family, which to your point, is stable and immune, for now anyway, to a lot of these market shifts, and just a more stable asset class. I think that makes a lot of sense.
And I resonate with what you say about the focus. I mean, we’ve got a very narrow focus at our firm. It’s kind of like San Antonio multi-family. And we want everybody to think about us when that extremely narrow conversation comes up. And it’s helped the whole team stay focused. I mean, as you know, you’ve got to say no to just about everything. And doing that and focusing on what’s in your box is just going to increase everything, deal flow, and the team efficiency, and so forth. So you mentioned it started with you and your partner deploying your own capital, trying to find a better way to do things. Now you’ve got 30 employees. What does the team look like today?
So, yeah, we have four offices. So we’re headquartered in Chicago. That’s where about two thirds of the team is. We also have offices… I mean, you can include, we’ve had people take advantage of the virtualization, so we have people living in Tampa, we have people living in Nashville, in Charlotte, in Dallas, in Denver. So we’re actually growing. And then we have another team member who is going to be moving down to Miami. So I never thought that we would be, really, a virtual workforce. And we’re not quite that today, but we are allowing some flexibility of people to move.
And the way we’re set up is, I think, very similar to other firms. So when you think about our divisions, we have an acquisitions division, where people, boots on the ground around the United States, they’re the ones who are creating the relationships with local sponsors, people like yourselves, because real estate is local and you got to have that insight. Because you can’t just look at real estate on a spreadsheet, going down, kicking the tires. There’s an art to this that you lose if you’re just trying to be in Chicago, underwrite deals, and looking at that, so we made that switch a long time ago.
And then they’re supported by transactional officers in the acquisitions department, analysts, et cetera. Then we have our investment management department. Because when you think about the life cycle of an asset, acquiring it might take three to six months, but then that asset lives with you for 10 years. So we have a dedicated investment management team that is responsible for managing that asset, keeping an eye on the property manager. They have the technology set up in a way that when they sit down at their desk in the morning, they’re getting real-time reports on all of this social media, and reviews, and the things that matter on those, and keeping track of everybody. And when you’re looking at 9,000 units across multiple markets, this is truly a team effort.
And you’ve got to be the squeaky wheel, because if you are one of these managers who is just letting them do their job and trusting them, well, guess what? I mean, that doesn’t work in the world. We all know that, anybody who runs a business. So we have great property managers, but you have to stay on them at all times. And so, what we do a good job of, I think, in that department, as well, is we benchmark ourselves against all of the comparable properties in the market.
So this is information that David and I have that we get from our investment management team, because it’s really important for us that every department is benchmarking their success, or else, if you’re not measuring it, then you don’t even know if you’re winning in the market. So, great, you increased rents this year at 4%. I don’t know if that’s good. What if the market went up 10%? Guess what? That’s not so good, so we look at that.
And then we have a marketing team, we have an investor relations team, we have corporate operations, which include legal and accounting as well. So all of the… We have an operations team, as well, behind the IR team. So there’s a lot that goes on to managing 1,800 investors, 9,000 units, and doing it well. So we’ve always made sure that we’re investing ahead of growth and just being disciplined and staying true to our core values. And I would say that we’ve been very measured about the way we’ve grown over the last five or six years. And the last year has been… We’ve grown quite a bit.
But Devin, I do want to touch on something you said that I grabbed on, because I think it’s such an important word, and the word is no. That’s something that I think, when we’re in the market, even turning down a deal to our deal team and saying, “No, this doesn’t make sense. We can recreate the steel. It’s average, or it’s below average, or this.” And that’s a word that I learned later on in life, because I used to say yes to everything and I made a lot of mistakes that way. And you got to understand that there’s another bus that’s going to come by. And no is, I think, to our investors out there and the listeners, it’s okay to say no. You learn from doing that, but that’s a really important word just to exercise on a regular basis.
Yeah. 100%. And I have to be reminded of that constantly. And I’ve got to go back to my own notes on this constantly. And I look at what’s led us astray or led the company astray over the last couple of years, it was invariably me getting outside the box on some things. In retrospect, why did I waste time and energy? And now, one of the things I’ve been challenged with as I’ve grown our firm is it’s not just me as an entrepreneur out there making all these decisions.
I could be giving the organization whiplash now, because we’re a bigger organization and I can’t be as nimble with all these decisions. And so, saying no has become even more important as the company has grown, and we have to set our strategy and stick to our guns, which for some entrepreneurs, myself included, very difficult to do. You’ve got shiny objects, and new things, and changing markets. But couldn’t agree more.
And the people questioning you, too. Yeah. It’s hard, and you have to stay disciplined. And there’s an old saying in trading, it was plan your trade and trade your plan, and that applies to every business. Have a strategic plan, follow it, understanding that life happens and there are ways, but we have to have guardrails as entrepreneurs to use that word, no, in a very exercised manner. Now, there’s… But anyway, we can move on.
Yeah. No, that makes sense, and I appreciate you touching on that. So you mentioned a little bit last year. We’re talking, right now, mid 2021. This year has gone by a lot faster than last year. I think last year was the longest year on record for many of us. How was COVID? How did it impact the business and what lessons came out of that for you guys?
Well, I’ll take you through. So March of 2021, we were having a record first quarter, we were raising a lot of capital-
This is of 2020, or 2021?
I’m sorry. 2020. Yes. March of 2020. And I mean, it’s crazy. These are scarred in your mind no different than the ’07, ’08. When you look back, it feels like yesterday. The 9/11s, I can remember exactly where I was. But it was March of 2020, and it was surreal. You remember that. The stock market was sliding 5% a day. We’d never seen a pandemic come to the United States of any materiality. And we had about $250 million in deals under contract, and every day that went by, my partner and I were talking, and listening, and you’re watching the stock market, and you’re like, “Oh my God. What is happening?” We killed all those deals.
And it was the right decision. And I’m going to get to that in a point, but we had no idea what was going to happen. They were announcing that, all of a sudden, the NBA was shut down, the global economy was shutting down, and we pulled out. And a lot of our partners, they totally understood. They’re like, “Yeah. We’re out of this too.” Some people weren’t that happy though. They’re like, “You committed to this deal. You did this.” We’re a fiduciary. And we tried to be like, “You shouldn’t be doing this deal either. We don’t know where the world is.”
And for people who have been through ’08 and ’09, well, I thought we were right back in there. And ’08, if you think about it, there were little cracks in the foundation in ’07, then came ’08. You thought it was bad then, but then came ’09 and it was really bad. Then came ’10, and that was the bottom of the market. Then came ’11, and you were still holding your breath. And then came ’12 and you were looking over your shoulder and still hoping. And ’13, and… And I don’t think, psychologically, we recovered till ’14, ’15, ’16, during that period.
And so you looked at this five years, and we had a conversation with our team about this. We didn’t lay anybody off during that period, but a lot of our team is young. They’re in their mid-twenties, so when this happened to them in ’08, they were in middle school. They didn’t know what was going on here. They didn’t realize… Like, “What do you mean we might not get a bonus? What do you mean?” So it was very eye-opening to me, first of all, as a manager, dealing with a younger group, never having gone through this before, and only knowing annual raises, and bonuses that exceed target, et cetera. But we got through. And it was sort of…
I think one thing we did really well during that is we started communicating and over-communicating. And this is an advantage I think we have as investors. We know that nobody wants a black hole. And even if you don’t know, you still have to say you don’t know. And so, we got on a webinar in April, and we’re like, “Look. We don’t know what’s going to happen here. We’re going to do everything in our power. We’re aligned with you. Nobody has more money in these deals than us. And we’re going to fight, and scratch, and claw.”
And what we told people, it’s all the decisions you make before a crisis that really matter in a crisis, because when you’re in a crisis, it’s too late. So how much do you leverage, what kind of assets do you buy, where are you located, et cetera, et cetera. And assets that are under capitalized, and just poor business plans, and bad locations, and et cetera, et cetera, those are going to be the first to get clobbered. Fortunately, the Fed, they came in and they pumped in trillions of dollars. It was kind of crazy about what happened. I mean, it was funny money going into the market. We got out of it. The stock market recovered.
Oh, yeah. And so quick on the trigger.
And I say, the reason why I focused on it was the right decision to pull out of those deals. The outcome, though, nobody would have guessed that. Nobody would have guessed, sitting there in March, that the stock market would be at new highs in three to four months, the lumber prices would be up to 1,700, that multi-family would benefit from this. So the deals that we did buy in early 2020, we wrote those down. We wrote those down, and investors were understanding about it, and we’ve written them all back up, and they’ve done amazing.
But it was a tough time and a learning experience, but every crisis is very different. So we wouldn’t have done anything differently, and that’s my point of that, is sometimes you make the right decision with the wrong outcome. But what we don’t want to make is just get lucky and start making bad decisions, because bad decisions generally lead to a lot of bad outcomes. So I would make that choice over, and over, and over again today, and pull out of deals, and wait and see.
And we jumped back into the market, I would say, in probably August and September. And I don’t say jumped back in. We opened our fund back up and started allowing new investment in, and we really started focusing on the preferred equity side of the equation, then, to protect capital. And that works. So our income plus fund, which is our core flagship fund, was down 7%, which is great. It’s what it was meant to do, protect. It’s got some preferred equity development in there, some core plus opportunities, and it’s been screaming ever since. So it’s been really good.
Outstanding. What a ride. I remember in March 2020, I would get on the scale every morning because it was a number I could control and feel good about, because every other metric I’m looking at is like, “I don’t know. I don’t know what’s going to happen.” We did have to-
Well, personally, I would say, I mean, COVID was awful. I couldn’t stand being on Zoom every day. I undertook a lot of house projects around here. I built my kids a baseball net up on the roof. I built a Murphy bed. I put in new windows. When you’re staying at your home all day, you realize all the imperfections. So I was at Home Depot every other day, loading the car up with lumber or something else. So I did get some things done, and still, my wife reminds me all the time, I’ve got some unfinished projects to finish.
That’s right. Yeah. The honey do list is never complete. But yeah, I think all the dads have had that experience of going to Home Depot during COVID and seeing all the other dads there loading up on home project stuff. Yeah. That was something else. Well, thanks for sharing that. What a wild ride from so many different perspectives. And then the Fed coming in quicker on the trigger than ever before. And it just made everybody’s head spin. What do you guys see… Obviously, I won’t come out point blank and ask you a crystal ball question. But as a firm, what are you guys looking ahead, next 12, 18, 24 months, as far as strategy goes?
So that’s a good question. A great way to phrase it. I hate the crystal ball questions, where is the market going? Nobody knows, and that’s what you have to understand. I’ll tell you, though, how we’re positioning ourselves. We’re still favoring the Sun Belt markets, the low tax states, the growth cities, because the virtualization of the workforce is real. And we think that the Southern cities are going to continue to benefit from what’s happening here. Now you have this mass rush going down there. You’ve had a lot of people return to the Northern cities, but over time, people will continue to migrate down there, and those Southern cities are going to win.
The question is, right now, when you’re looking at the growth of the last year, I mean, Phoenix grew at 17% on top of growth over growth, year over year. Las Vegas grew at 12%. Atlanta grew at 10%. Charlotte grew 12. So you’ve seen a tremendous amount of growth. And what I’ve always said is we’re not going to chase the growth. And that growth has happened mainly in existing properties. But even though you’ve had a rise in construction costs as well, that, what we call the return on cost or the margin on development, has increased because rents have grown way faster than construction costs. So we’re bullish on cities like Phoenix, Nashville, Atlanta. We’re looking at some smaller cities now as well.
And I think I mentioned this earlier, Devin. We actually took it upon ourselves to build a proprietary machine learning tool to forecast market rent growth and back test it. Because the services that we use, we were just never happy with, and it was always this pit in our stomach using these, but not understanding how the data works and the limitations. And so, we actually hired two internal data scientists to look at… I mean, they take millions of pieces of public data to rank the markets and look at them on future rent growth. And it’s not perfect, it’s not a crystal ball, but I think it’s better than the other services.
And what we’re looking at is this migration of high wage earners going to moderate wage earning states. And you have the California trade, all these Californians who are making, let’s call it $200,000, now moving to Phoenix. And that’s why you’ve gotten this massive jump. It’s not just population, but it’s also when people are used to paying $4 per square foot in rent, and now you go to Phoenix and it’s $1.80, you’re like, “Oh my God, I’ll take two of these.”
And the same thing is happening on the East Coast. We have the New Yorkers and people from Boston who are paying astronomical rates on a price per square foot, and they’re moving down to Miami, they’re moving down to Tampa, they’re moving to Orlando. They’re just accelerating some of their, maybe retirement plans as well, because it’s so much cheaper down there. So we think that momentum is going to continue, but I want to be careful about racing in and trying to buy momentum.
Because as we talked about, one of the most important metrics you can look at out there is replacement costs. And we’re not going to buy a ten-year-old project, no matter what the rental growth looks like over the next two or three years. Because at some point, that 10 year old project is going to be a 20 year old project, and if you have to compete with new project rents, you’re going to lose. There’s going to be a point in time where you’re just not able to keep up.
I love it. That’s a great synopsis, and I appreciate you peeking into the future a little bit, at least from a strategy perspective. Michael, this has been great. I sincerely appreciate you sharing your story and your insights with the audience here. If someone listening wants to understand more about your firm and maybe get a look at your future projects if they’re qualified, what’s a good avenue for somebody to do that?
Just go to our website, origininvestments.com. We make it really easy. You can download all of our fund materials. You can find our team, our bios. You can connect with somebody directly on the website, somebody in investor relations, right there as well.
Outstanding. Well, we’ll link to that in the show notes. If you’re listening, you can just click the URL right there in the show notes or the description of this episode and go meet Michael and his team. Thanks very much. Wish you guys continued success. Appreciate you joining us today.
Devin, thank you so much for having me on. This was great.
All right. Take care.