CIARAN RYAN: This is Ciaran Ryan from Moneyweb, and today [Tuesday, November 5] we are joined by Justin Clarke, who is the chief operating officer of OrbVest. OrbVest is an interesting company that was started in South Africa, but is invested in buildings, commercial real estate, offshore in the United States. We are quite keen to find out why that business model came to be, and how it was developed. Welcome, Justin.
JUSTIN CLARKE: Ciaran, thanks for having me on the show.
CIARAN RYAN: Let’s kick off and describe how OrbVest came into being, when it happened and why [this is] your niche – why did you decide to focus on medical real estate in the United States?
JUSTIN CLARKE: I think that’s a great way to start, Ciaran. It’s kind of a different story from the conventional story. I guess I was involved with starting a company called Private Property, an online property portal, and ultimately One Africa Media, and I sold out about three years ago. Similarly, one of our partners, Martin Freedman, was the founder of Bayport Financial Services, and he also had sold out at around the same time.
So we both got joined up with Hennie Bezuidenhout. Effectively he co-founded the company, having made investments in commercial real estate already in the USA. He has this fascinating insight into the changes that are happening in the healthcare sector. There is this disruption that is happening, this move away from what we call sick care at the moment, to healthcare, where there is more preventive medicine than ways through which you develop the illness and then go and see a doctor.
So there is kind of a move away from hospitals into medical buildings, and this is an opportunity that we identified. Hennie had an incredibly big portfolio already in South Africa of these medical buildings that he has built up over the past 20 years, so he has a massive amount of IP in the States.
We all joined together effectively, and Hennie wanted to hyper-focus on medical, and specifically on the USA. Even when we talk about the USA, we don’t talk about all states; we talk specifically about those that with a growing population and GDP growth. So that’s why we have the focus on the States that we do.
It was with all that that we founded OrbVest, and the rest is history, I guess.
CIARAN RYAN: I think what you are saying is that there has been a fundamental change in the way that the healthcare market is operating. There is a move away from sick care to healthcare. How has that affected the commercial real estate market?
JUSTIN CLARKE: Well, I think that in the States – and let’s talk about the States – the first thing that perhaps I need to say is that South Africa has a very similar healthcare system to that of the US. We both have private healthcare systems, and so the similarity is quite interesting. What is happening in the States is that you’ve got the [baby] boomers that are getting older, so you have this kind of vicious circle. Boomers do have money, and generally what is happening is the person who is 65 years old or older visits a doctor six times more than somebody who is under 65. So, as the population grows older, it has more need for medical services to start off with.
The second thing is the technology, and the technology has changed. No longer do you go into hospital for five days to have a simple operation; you can actually go into a surgical centre that is remote from the hospital and you can have that procedure done there.
So there is a different type of building that is needed. It’s no longer about these massive hospital complexes; it’s about campuses of, if you want to call them, medical retailers. There are doctors that operate out of their own premises; they all work together in a sort of symbiosis and they might share a surgical centre and a pathology facility and so forth. It’s not a hospital, effectively. You go in, you have the procedure, and you leave.
That’s where the opportunity has come about.
CIARAN RYAN: You have a similar thing going on in South Africa, if you look around the Netcare hospitals, for example, in Johannesburg or Pretoria, where you have almost like a cluster of medical service providers who gather around these hospitals. I’m pretty sure this is what you are capitalising on – this type of phenomenon.
JUSTIN CLARKE: Absolutely. And then you’ve just got to 10X it for the States, because of this massive growth in the ageing population. And growth technology is more accessible and more affordable in the States. There are more people using some of these new types of procedure and technology than there would be in South Africa.
CIARAN RYAN: All this is now six years old. Can you give us a sort of thumbnail sketch of the portfolio as it stands today?
JUSTIN CLARKE: Yes. In fact we took over from Hennie’s previous company and we took over the medical portfolio. OrbVest is much younger than that, just under two years. Effectively we have 25 buildings that are fully funded. We run Medical 26 at the moment. And some of those – incidentally, the early ones – were portfolios of buildings, and one of the offerings we have at the moment is actually the portfolio in Atlanta. So you can say that’s pretty much 25 buildings, with a value approaching just over $300 million and real estates under management.
The other interesting thing is that the dividends are now approaching $1 million per quarter that we distribute; and bear in mind a lot of that distribution happens to South Africans. That is our core investor market at the moment.
CIARAN RYAN: This is of course while we are talking – there is an interesting opportunity here. Dividends are paid out quarterly at the fixed rate I believe of 2% a quarter, which comes to 8% a year in US dollar terms, which would be quite attractive for a lot of people who are looking for that stable income return. Plus there is the uplift of a capital gain when the property is sold. And all of these properties, I understand, are ring-fenced, so you are not talking about a pooled portfolio, you are talking about ring-fenced properties that can be sold at various different times. Is that correct?
JUSTIN CLARKE: That’s a great way of putting it, Ciaran. Again, our approach was really, where do we put our money? If we were to invest overseas, where would we put it, and would we put it into a fund? Well, we all know there are some issues with funds. Would we put it into buying a house or a building of our own? Well, then you’ve got to maintain it and look after it, and of course you’ve got to deal with all the US’s very complicated tax structures.
So we’ve come out with a solution that really is designed for the investor. First of all, we say that we want to know what the risk is, so we take a building which we effectively acquire. Then we get investors to come and co-invest alongside us. And then we obviously erase the senior debt. Then we list it on a public bourse. So effectively it’s a listed company that owns one single building. That means that there is a prospectus, or we call it a property supplement, that is the mandate that you as shareholders would have for us to operate that company for a fixed period of five years, after which the mandate requires that we sell the building and share the capital gain.
So, the first thing is full transparency because it’s a listed company. The second thing is, because there is a property supplement, or a prospectus, every single tenant is disclosed – the rent, the rent per square foot that they are paying, and so forth. It’s all in that document.
And then, finally, it’s a fixed building.
You can literally – and we do actually do this, we do what we call buyers’ trips – you can go over there and touch the concrete. It’s a physical building that you co-own alongside us.
OrbVest manages it on your behalf for the period of the five years. At the end of the five-year period, that building is sold, and the profits of that building are distributed between OrbVest and the investors. That’s the very, very simple business model. It’s super-easy for somebody to make a decision, to make the investment because you know exactly what you are investing in. It’s completely tangible.
It’s different from a fund. A fund, bear in mind, is dependent on the market. If there is a correction, which we are kind of anticipating will happen at some stage, then the market will be subdued and your asset value will decrease, even though there is nothing wrong with the underlying building that was in that particular company.
So our listing is a closed fund; it is not effectively traded. So the value is underpinned by the value of the underlying asset. So it doesn’t really change in value.
CIARAN RYAN: Alright, Justin, we are going to leave it there for the moment, but we are going to pick up this subject in subsequent podcasts. For anybody who is interested to find out more, visit the website www.OrbVest.com. You’ll get more information there. Justin, thanks very much for joining us.
For more information, visit orbvest.com.
Brought to you by OrbVest.