Risk-adjusted income and capital protection are two aspects of wealth building that are even more critical during periods of economic uncertainty. Many investors want to shelter their nest eggs during times like these. But high inflation and high interest rates provide potential rewards for investors who are willing to take on some risk. This is done through credit investments—a form of debt financing that could pay off not just in the current economic climate but for years to come.
That’s the objective of our new Strategic Credit Fund, a portfolio of yield-focused multifamily real estate credit investments that seek to provide investors with a consistent stream of risk-adjusted income, appreciation and capital protection. These investments, which provide debt financing, are designed to produce income—not only despite the elevated interest rate environment but also because of it—through securities and a direct lending program that are backed by multifamily properties.
How Debt Financing Works
Credit investments, or debt financing, work this way: A company issues debt investments to investors, most commonly in the form of a bond, security, or a direct loan, so that it can develop and expand. The company then repays the loan; in the event that it can’t or goes bankrupt, the investors in this debt financing have a higher claim on any liquidated proceeds than equity shareholders. This type of lending has advantages for both companies and investors: The debt investments provide needed working capital for companies, and investors know their cash is protected by its position in the capital stack (see illustration below).
In the current environment, one of the opportunities we see for the Strategic Credit Fund is to invest in securities. Another is in providing gap or rescue equity, which allows a borrower to recapitalize debt to bridge the difference between what it owes and what it owns. The Fund provides the borrower with the ability to restructure senior debt while sitting in a priority position for repayment.
Sample Capital Structure
The chart above represents where the Fund is positioned in the capital stack, representing about 55% to 75% of the capital structure. Simply put, a hypothetical property could lose 25% of underlying collateral value before any investor capital is at risk. Being in a priority position for repayment is a particular advantage in today’s uncertain market, and it is where we see potential opportunity for at least the next two years.
In a high-interest-rate environment, the Fund provides a built-in hedge against inflation by seeking to allocate 30% to 60% of its equity to floating rate debt investments. That means that when interest rates rise, so do the borrowers’ interest payments.
Multifamily Credit Invests in Tangible Assets
In a private credit fund such as the Strategic Credit Fund, the collateral is property and buildings: a marketable, tangible, necessary asset. We focus on multifamily because we believe in its long-term value and viability.
With a predicted shortage of multifamily housing units numbering in the millions by 2035, we believe it’s more critical than ever to provide financing for this real estate sector. The need for multifamily development doesn’t, and shouldn’t, stop even during periods of economic uncertainty. More than 90% of the Strategic Credit Fund’s investments will be backed or collateralized by multifamily properties geographically diversified throughout the United States. In this way, the Fund helps keep critical investment flowing by providing capital that helps ensure renters have the housing they need now and in the future. We’re proud to be playing a role in that with this new Fund.
Why We Launched the Strategic Credit Fund
Origin Credit Advisers, a registered investment adviser and an affiliate of Origin Investments, was created to manage this Fund. We consider the Origin Strategic Credit Fund a successor to Origin Investments’ Multifamily Credit Fund, which closed in early 2023 and was limited to Freddie Mac K-Deals (read more about those below). And while the Strategic Credit Fund, which we launched in April, will invest in K-Deals, it will also be a direct lender to private deals. That gives it useful latitude in the current deal environment, as we will explain shortly.
The Strategic Credit Fund’s investment strategy and open-end structure allows for flexibility across several product types and are designed to deliver potential risk-adjusted returns and income in any market environment by moving to where the market is providing what we believe are mispriced buying and selling opportunities.
The Strategic Credit Fund has no target equity limit but will only acquire new investments that meet risk and return objectives. We generally target the following portfolio composition ranges:
Multifamily debt securitizations: 20% to 50%
- B-Piece certificates in Freddie Mac floating rate K-Deals, conservatively leveraged commercial mortgaged-backed securities, or CMBS pools comprising at least 90% multifamily
- Freddie Mac fixed-rate K-Deals
- Freddie Mac SB-Deals
- Interest-only strips in Freddie Mac K-Deals and MSCR notes
- Multifamily-centric commercial real estate collateralized loan obligations (CRE CLOs) and single-asset single-borrower (SASB) loans securitized by collateral mortgages that comprise 90% or more multifamily housing assets
The Fund’s security investments are anchored with Freddie Mac products. Freddie Mac—the Federal Home Loan Mortgage Corp.—ensures a reliable supply of mortgage funds by buying loans from approved lenders, pooling the mortgages into securities and selling them to investors. To become a directing certificate holder (DCH) and purchase Freddie Mac B-Pieces, Origin was scrutinized by Freddie Mac on four metrics: operational expertise, history of borrowing with Freddie Mac, capital base and the commitment to the partnership. That partnership entails working with the borrower to either resolve issues before there’s any loss or to buy the loan out of the pool and resolve those issues as the owner. Freddie Mac’s historical loss is so low because of the care with which it vets partners.
Similarly, the Fund will invest in CRE CLOs, debt securities backed by pools of commercial real estate loans that are part of a $910 billion asset class, and SASB loans. Both have similar structures to Freddie Mac but have a different originator, such as a bank or realty trust. Liquidity CRE CLO investments will provide fuel in the Fund and allow for nimble movements designed to maximize yield and protect downside. Any bonds we acquire will have at least 90% multifamily loans as collateral.
Direct Financing: 30% to 60%
- First-lien whole loans and second-lien preferred equity, mezzanine debt and other forms of multifamily real estate financing originated by Origin Credit Advisers.
- Non-securitized direct lending of first- and second-lien preferred equity, mezzanine debt and other forms of direct lending in multifamily real estate assets.
We see preferred equity and direct lending as the biggest opportunities in the multifamily space today. Direct bridge and senior lending operate in first-lien positions. In our case, we will provide an opportunity to general additional potential yield by going “higher” in the capital stack—up to 80%, after determining that we would be comfortable owning that particular property, with that location and the credit behind it, at 80% of the price being paid.
How We Execute on Our Strategy of Debt Investing
Along with evaluating, investing in and taking control of any defaulted properties to protect the Fund’s investment, we will play several roles in the portfolio including originating, underwriting and conducting due diligence on all new investment opportunities. Origin Credit Advisers, is uniquely suited for this role for several reasons:
- Regional offices that offer insights into the markets and property operators where many of the assets are located
- More than a decade of experience working through distressed real estate acquisitions and asset repositioning
- Proprietary MultilyticsSM machine-learning models that provide bespoke intelligence to support analysis of multifamily real estate and potential opportunities
Investors who seek to protect and grow their wealth do so even during periods of economic uncertainty, knowing that volatility can provide unique opportunities to invest their capital. The Strategic Credit Fund is structured to capitalize on those potential opportunities—not just today but throughout the duration of this evergreen Fund.
Disclosure
A more complete description of the risks and other disclosures involved in investing in the Strategic Credit Fund (SCF) is contained in the offering memorandum. Before making any investment, you should thoroughly review the offering memorandum with your financial, legal and tax advisers to determine whether an investment in the SCF would be suitable for you. The SCF is not suitable for all investors. Past performance may not be indicative of future results. This information may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those discussed. No investor should assume future performance will be profitable or equal to the previous reflected performance. There is no guarantee that investors will or are likely to achieve their objectives or that any investor will or is likely to achieve results comparable to those shown or will avoid incurring substantial losses. Additionally, the performance results displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future.