RYK VAN NIEKERK: Martin Freeman joins me now. He’s the CEO of the international real estate group OrbVest. He speaks to us from New York in the US. OrbVest of course offers investors the opportunity to invest in individual properties in the US and to earn dividends in dollars. These properties are predominantly in the medical sector.
Martin, thank you so much for joining me. We last spoke in early July and subsequently I received several emails and phone calls from listeners asking several questions, and I’m going to put these questions to you today.
Let’s start with OrbVest’s track record. Many people look at investments and would just like to see exactly how this business has performed in the past, because they believe that could indicate what will happen in the future. Can you just give us a quick history of the company and the actual returns you were able to generate for investors?
MARTIN FREEMAN: Perfect. Thanks Ryk, and thanks for having me on your show again. Just starting with a short history of the company, from a selfish perspective I exited a large financial services company in South Africa that I had co-founded, and ended up going to the US and doing an executive management programme. When I returned, the one thing I wanted to do was, just like your listeners, to invest offshore and earn dollars. Investing into the United States obviously is very complicated: it’s expensive, it’s difficult, and there are many barriers to entry.
I started to look around and figure out whether any other people were doing it, and how they were doing it. Over those years it led me to my current partners, who were seeking the exact same objectives, which was to invest offshore.
As friends we have now moved forward over the years and co-invested into deals and, if you fast-forward seven years, we have built the brand which is now known as OrbVest and the team has amassed – acquiring deals in the US – $350 million. That’s pretty much how the company got going. It was from a selfish perspective and then other people started to invest into the same deals and we’ve built a superb brand, not only in South Africa but around the world.
As far as the track record is concerned, we have continued to grow the brand globally, where we raise equity. We now have investors from over 20 countries in the world and they number in the thousands, and we’re very proud of our reputation.
Importantly, what do these investors get? They earn on average, over the seven years, 7.5% to 9% cash dividends. These are paid out quarterly. And then when we exit the deals after typically five years, they have generated double-digit returns in total of 11% plus.
RYK VAN NIEKERK: That is substantial. In how many properties have you invested during the past seven years?
MARTIN FREEMAN: We are now on Medical 34; we’ve just completed Medical 33. So you can see that the team certainly has a very strong track record of knowing how to acquire, and where to acquire in the United States. It’s important for listeners to understand that we only invest in the medical niche. We have a hyper-focus on that, and we’ve spoken before as to why it is medical. We believe that’s one of the most resilient sectors in the United States and it’s easy for people to understand.
RYK VAN NIEKERK: I’ve received several questions from listeners regarding the demographics of the typical investor. Typically a question is about whom you are targeting and who you think should consider your offering as a potential investment? Can you maybe just start off with how many people have actually invested in your properties, and what is the average demographic?
MARTIN FREEMAN: In terms of the number, as I mentioned, it’s certainly in the thousands now. And in terms of the demographic, what I will say is the following. We took a decision many years ago that our strategy would be to help investors from around the world build wealth for themselves and their families. So anybody who has $5 000 – which at the moment is about R75 000 – is able to invest into our deals. We are very proud of the fact that we simply are able to assist people anywhere in the world who want to invest into these deals with R75 000 or $5 000. It is fair to say that in some countries elsewhere, in Europe and so on, they will have a minimum investment in their own area of around $25 000 or $50 000 or $100 000 dollars. But typically for South Africans it can range anywhere from $5 000 right up to a $1 million.
RYK VAN NIEKERK: What is the average investment amount from your South African investors?
MARTIN FREEMAN: It started off in the early days that we were attracting high-net-worth individuals. With the minimums being a little bit higher, it was sitting close to $100 000. It then moved swiftly down towards $50 000 and, over the last year-and-a-half, it sits at between $10 000 and $20 000. That’s because when a lot of people hear about us for the first time, we encourage them just to put in $5 000 or $10 000, see how we go, make sure that they actually experience our real client service and that we’re as good as we say we are.
Then over time they reinvest again and again and again into multiple deals. Ultimately, while they may have invested a large amount of money or $50 000, $100 000 or more, we encourage them to split it over multiple deals. That’s why [the] average is actually lower per deal.
RYK VAN NIEKERK: Liquidity was also an issue for some listeners. What is the average period investors hang on to their investments, and are they able to exit some of the investments earlier if they need the money locally?
MARTIN FREEMAN: It’s a great question. We often get asked about liquidity. Real estate obviously is something that – just as when you had to buy a house or a property in South Africa – certainly is not short term.
But again, if you had to invest into the equities market, people would say don’t do it on a short-term perspective. Our deals are typically five years. What that means is you invest, you’re going to get – call it, on average, let’s assume, 7% to 8% cash dividends, and then your capital gain at the end.
But life is life and people have circumstances, and it often happens that people want to exit the deals. While we don’t actively promote that, we have a secondary market. I can tell you that when people have wanted to get out of a deal and have approached us, what we do is we then float their share – let’s assume they invested $20 000 – to the other investors in the same deal, and most times it gets snapped up very, very quickly by the other investors. It’s because once the deal is performing most people turn around to us and say: “I wish I’d invested more money initially.”
RYK VAN NIEKERK: What are the fees related to these investments?
MARTIN FREEMAN: Everything that we charge is disclosed 100% transparently in all our documentation upfront before investors invest. And so OrbVest typically makes three fees. Number one, we have an acquisition fee upfront, which is market-related, which then is around 1.5% to 2%. Then during the life of the deal we charge an asset-management fee, which currently sits at about 0.75%; as most people know, competitors in the industry usually charge between 1% and 2% to manage funds.
And then, where we make the bulk of our money, is when we exit after five years. What happens at the exit is if investors make money, we make money with them, and if they don’t, we don’t. So we feel we’re very well aligned to investors – and that’s how we make our fees, and that’s our business model.
RYK VAN NIEKERK: How do you make money from an exit?
MARTIN FREEMAN: What happens is that, when a building is acquired in America, the one misconception is that people think that there is no inflation or escalation. That’s incorrect. Almost all of our leases have a 2% to 3% escalation of their rental built into it. When you buy a building in America, what happens is you’re buying it based on the net operating income, and there is something called a cap rate. I won’t go into that. Over the years what we believe is we can increase the income, and the income increases naturally because of these escalations.
That means a building in a decent location with decent tenants, and with the right fundamentals, will increase in value over time, like in any other country. And so what happens is when we sell the building after five years there is a profit known as a capital gain, and that gain is then shared between the investors and ourselves.
At all times bear in mind we also have what’s known as a hurdle of 7%, which means that we don’t really earn until investors have got the 7%.
RYK VAN NIEKERK: Interesting. Another question relates to the management of OrbVest. Is the management invested in these individual opportunities or properties alongside investors?
MARTIN FREEMAN: Absolutely. OrbVest management and OrbVest the company co-invest into every single deal. That’s something we’re very proud of and we believe strongly that you’ve got to have skin in the game.
RYK VAN NIEKERK: In the past you offered an investment opportunity where an individual investor – not only in South Africa, but around the world – could invest only directly into a single property. I always thought that could be a bit risky: why not offer a portfolio of properties to invest in to reduce the risks of individual properties? But you have launched such a product. Tell us about it.
MARTIN FREEMAN: You are quite right that investing into a single building is risky. Up till now we have acquired only multi-tenanted buildings because obviously we want to spread the risk within the building. We also launched a portfolio product last year which was OrbVest Diversified Holdings [ODH], which was where you invest from R5 000 up to R1 million into ODH. ODH then invests a little bit into each of our multi-tenanted buildings.
But I’m very happy to announce that as from today we are launching the ‘triple net’ portfolio. What that is, is in America you get single-tenant buildings – and ‘triple net’ actually stands for the term of the lease, meaning that the tenant pays for pretty much all the expenses in the building. So it’s very easy to understand; it is a single-tenant building with a 10-plus-year lease. It would be a very strong tenant. An example of that would be a dental practice, a Walgreens in America, a CVS, an imaging centre that has a very proud history and reputation of being present in that town. And so we are going to be acquiring eight to 10 of these assets that are very low risk. Many of the names that I’ve mentioned actually come with corporate guarantees; some of them are listed on the Nasdaq. When you put them together in a portfolio of eight to 10 buildings, it is low risk and allows investors to get in, earn strong dividends, with a strong exit after five years and able to really sleep well at night. That is our newly-launched triple net portfolio as from now.
RYK VAN NIEKERK: You say there’s low risk. Are the potential returns also around 7%?
MARTIN FREEMAN: Absolutely. We will never go below 7% at this stage in our business model. We believe that 7% to 8% cash dividends to investors from anywhere in the world are acceptable. Those are obviously paid out quarterly. And then, provided we can generate double-digit returns when we exit after five years, we again believe that’s acceptable, and people have spoken with their money. They’ve invested consistently. Even our equity that we raise in America continues to grow, and it certainly is being accepted over here also. So the model is working.
RYK VAN NIEKERK: It’s interesting that the tenants pay for most of the expenses. What is OrbVest’s role in such an investment – just to own the building, or do you need to do other things as well?
MARTIN FREEMAN: No. There is always a role for what’s known as the general partner, meaning OrbVest. When you acquire a building, there are always responsibilities of a landlord, even in the US and even with the triple net deal. So often those will exclude expenses or maintenance of, for example, the roof or the parking, bearing in mind that things do happen in these buildings. You still need someone to manage them.
Hence I’ve got my acquisition team based out of Atlanta, and I myself am in New York. So, when we acquire these deals, we still obviously need to be able to arrange the debt to be able to sign for the debt, and to build a portfolio across America with our relationships. We really have solid relationships going on for many, many years.
RYK VAN NIEKERK: You refer to debt. What typically will the gearing of such a property be?
MARTIN FREEMAN: All our deals are generally around 65:35, which means 65% debt – we want to be conservative – and 35% equity. So, for example, if you had to buy a building that was $10 million, it would be $6.5 million of debt and $3.5 million of equity. We do not take risk on the interest rates in America. They are low. In all the deals that we do we will lock in those interest rates and make sure that we are not affected if interest rates go up going forward.
RYK VAN NIEKERK: You say a gearing of around 65%. How does that compare to other property companies?
MARTIN FREEMAN: You’ll remember that prior to GFC [the global financial crisis of 2007/8] and so on, that number was up around 85%, 90%. People generally in our industry certainly have moved down towards the 70% and around the 65% mark. That’s where we believe it’s prudent. If your property’s value drops, there’s enough equity in the deal, and your ratios are right that you’re not going to end up with a capital call or some other adverse event.
RYK VAN NIEKERK: Just lastly, one question regarding the dividends: How are they paid and where are these dividends paid?
MARTIN FREEMAN: Investors in South Africa, particularly, can invest via two methods. Number one, we have offshore structures, and then via a US structure. So for most of our South African investors we have a structure based out of the Seychelles. We are listed, in fact, in the Seychelles. What happens is they invest seamlessly via the Seychelles.
It is a method that we’ve used for many years. What happens is that the money goes via their single discretionary allowance or via their foreign-investment allowance, or they’ve got an offshore structure via the Seychelles. And together with our international investors it goes into the US; it then generates the returns. Those returns are paid back to wherever we’ve received the funds from, into their appropriate structures. And then they would pay their dividends tax in whatever jurisdiction they come from.
RYK VAN NIEKERK: Can you maybe use an example of a South African investor who invests – where would that person receive the dividends? Or, put differently, would that person be able to deposit that dividend into a bank account offshore?
MARTIN FREEMAN: Absolutely. I’ll give you a real example, as we generally do. People contact us. It’s a seamless process. They register on OrbVest. One of our client relationship managers will get hold of the client and take them through everything. We’ll show them everything. There’s no pressure on them to invest. They’ve just got to look at the information and decide if they want to proceed.
If they want to proceed, we will take them seamlessly through a process, we’ll get them registered and make sure that they meet the requirements of Fica, AML [anti-money laundering], KYC [Know Your Client] and so on. We will then ensure that we assist them to get the money into their account that is opened in the Seychelles. What happens is we use various well-known brokers and individual companies, such as Sable and others who do this for a living.
When the money arrives there it’s in their wallet. They then decide which deal they would like to invest into. They invest into that deal or deals. We always encourage people to spread their risk, and once those deals close they start to generate dividends. Remember all our deals are income-producing and generate dividends from the very first day, and the very first quarter.
So at the end of the following quarter, when a dividend is produced, it goes back into the wallet. That client then can seamlessly go onto our platform and see exactly what is in their wallet or account and then either reinvest those funds, or simply withdraw them back into the bank account that they came from – for example, in South Africa – and thereby earn their dollar dividends. This means if the rand weakens they are just earning more rands from their dollars.
RYK VAN NIEKERK: Martin, thank you so much for your time today. That was Martin Freeman, the CEO of OrbVest.
Brought to you by OrbVest.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.