CIARAN RYAN: I’m Ciaran Ryan from Moneyweb, and we are talking again to Justin Clarke, who is the chief operating officer at OrbVest.
OrbVest is a very interesting South African company – originally – which is involved in the global real estate market, and it’s focused specifically on medical real estate in the United States. It has been going for a few years, and it has built up a track record of generating returns for investors of 2% per quarter – and in some cases has exceeded that.
Now, the minimum investment there is $5 000, which is about R75 000. I thought it would be a good opportunity to talk again to Justin and get a bit more detail on exactly what is in these portfolios. So we thought we’d look under the hood. Justin, welcome again.
JUSTIN CLARKE: Thank you, Ciaran. I’m looking forward to it.
CIARAN RYAN: Let’s just talk about some of these portfolios that you’ve got. First of all, you are focused on medical real estate in the United States, but not just in the US. You are focused on certain states in particular. Just tell us which states you are in, and why you have focused on those.
JUSTIN CLARKE: That’s one of my favourite topics, Ciaran. The United States is a big place, and we have a funnel. The funnel is the fundamentals that make up real estate value, and the retained real estate value.
We look for a bunch of things. We look for – first fundamental, that is, population growth. The second fundamental is absolutely GDP growth. The third fundamental is a business-friendly environment, a landlord-friendly environment. And when I start working down the funnel – I’m not going to go through all the details – we end up with some areas that are super-interesting. Maybe I should touch on those if you don’t mind.
CIARAN RYAN: Go ahead.
JUSTIN CLARKE: In Georgia, the city of Atlanta has the biggest airport in the world. It is a completely diversified economy, so it doesn’t matter if there is a recession in a particular field, like oil. That will make absolutely zero difference to the economy there. It’s completely diversified – the global economy all in one city. So we absolutely love that type of city. So we have a lot of emphasis on it, and the project that we call Medical 24, at the moment is a portfolio of six buildings in that particular region, spread around the city of Atlanta.
The other one that is fascinating is Texas. Many of the listeners will have heard a lot about Texas. But one of the things that people don’t know is that the Texas area has a GDP the same size – in fact, I think larger than – France. It’s one state in the US that is bigger than the country of France. The building we have at the moment is in the Fort Worth/Dallas area, and Fort Worth/Dallas is for South Africans pretty much like Johannesburg/Pretoria. It’s kind of grown into one big mega-city.
Again, to give you an idea, in Texas the population growth is running at over 14% per annum.
CIARAN RYAN: Why is that? Just explain that. That’s huge.
JUSTIN CLARKE: It’s just an extremely well-run, business-friendly state. It’s tax-free. A lot of industry is moving into both Georgia and Texas for this reason. That’s, as you mention, one of the reasons why Houston is the biggest conglomerate of medical companies. In the US litigation is a big problem in the medical space. A large chunk of your revenue if you are a medical practitioner has to go to medical insurance because you can get hit by enormous claims.
In Texas they’ve capped it, so your insurance premiums are considerably lower. If you want a practice and you want to have a speciality service that you can offer to people around the country, you are going make sure that you that have it in Texas. That’s one of the reasons.
CIARAN RYAN: And of course there are a lot of companies we do read about moving from California – which is not particularly business-friendly at the moment – to Texas, which has, of course, a good reputation for attracting business. You’ve already mentioned it’s tax-free. Is that no corporate tax then?
JUSTIN CLARKE: No corporate tax in those states, yes, that’s correct. You’ve still got your federal taxes, but company tax, no – zero.
CIARAN RYAN: Your portfolio in Texas is based around Dallas/Fort Worth – or does it include Houston as well?
JUSTIN CLARKE: We really like the Texaplex area, so we have – Texaplex effectively runs, if you look at the i35, it runs from sort of Dallas, Texas down to San Antonio, slips through Austin, and in both of those cities we have buildings. Then down to Houston, right through to Galveston. That’s the full triangle, which includes Houston.
So it’s that kind of block which they refer to generally as the Texaplex.
CIARAN RYAN: How many buildings do you have in your portfolio in the Texas area or the Texaplex?
JUSTIN CLARKE: It’s split between Georgia, Texas and we have one now in New Jersey. We are trying to get a bit more diversity, but now we’d say the majority of our portfolio is in that Texaplex area.
CIARAN RYAN: Describe to us what a typical building looks like. Do you have certain requirements when you are taking on a building that’s got to be located in a certain area, got to be a certain size, and doesn’t need too much renovation? Just describe that process.
JUSTIN CLARKE: Let’s talk about the Dallas one, for example, because it’s a perfect example of what we look for. This is really a magnificent building. It’s an 11-storey building. It is 200 000 square foot of lettable area. That’s a big building. The transaction size is just under $40 million, so we acquired it at that price. What is nice about this building is that it is 40% medical already.
Let me go into that as well. Right next to it is one of the biggest 800-bed hospitals called Medical City. Medical City has expanded, so it has actually filled its entire campus and has now jumped across the i75 to Forest Park Medical Centre, which they’ve built on the other side, and now it’s moving in our direction and it’s taken over the building right next door to us, and now the tenants are starting to flow into this particular building.
So 40% of the building is already medical, and there is demand, but there are obviously some existing office tenants in there. So, as we get the office tenants out, and there is a little bit of vacancy coming up now, so we will replace those office tenants with medical tenants. Just to give you again an idea, the office tenant will pay $21 per square foot; a medical tenant will pay up to $25 per square foot. The leases on a small office, the guy will want a three to five-year lease, max. Medical – in our last building we had average leases of 17.5 years. So we’ve pushed the leases up by having medical, and that’s one of the things that makes it so recession-resistant.
Basically what your listeners are interested in is the sort of returns that we would offer on a building like that. Bear in mind, returns, our RoR [rate of return] is a look into the future, so it’s all just modelling, but we are hoping to be able to generate an ultimate exit of 16.5% RoR on this particular building, and your cash on cash looks fairly consistent, averaging around 8%, which is one of our criteria. We look to pay an 8% yield on these buildings. Remember, that depends on the performance of the building.
CIARAN RYAN: So you are targeting an 8% return per year, and an IRR [internal rate of return] of 16% in the exit.
Just talk for a minute about the minimum investment – that’s $5 000. For a South African that’s about R75 000. Typically your investors – are they coming in at that threshold, or are you getting people investing far larger amounts?
JUSTIN CLARKE: That’s a brilliant question. I think that the idea is that it’s not really worth our while to look at a loss-leader, to do a $6 000 investment. But, you know what, it is the best way to taste what we are offering. And so, if somebody is interested in investing, we get them to buy and taste. Put in a $5 000 investment and experience the process and how it all works, and then you can make sure you come back and invest a lot more.
So the $5 000 is really a teaser. I would say that a lot of our investments happen at around $50 000 to $100 000. That’s kind of the sweet spot for us.
CIARAN RYAN: I think it’s also important to mention that investors do actually acquire a physical asset. In other words, they are buying a building. It’s not like it’s a pooled investment – have I got that correct?
JUSTIN CLARKE: Indeed. I think that’s what makes it attractive. First of all, it’s ring-fenced, so you are buying into a company which owns only that building. Second of all, all the details of the building you know upfront, because you know who all the tenants are and what rent they are paying. You know exactly what the operating costs are. It’s beautifully contained. Very different from a fund. You are buying something quite specific.
CIARAN RYAN: Justin, what happens if Donald Trump gets booted out of office next year?
JUSTIN CLARKE: In the event that that happens, if you look at the leading democrats, they are all proposing increased spend on medical – free Medicaid, and so on. That’s not going to reduce demand at all. It’s going to increase demand. How that gets spread out is the question. But remember, we are offering a more cost-effective service; that is the service of a medical practitioner in their room, doing the procedure, rather than you going and booking into hospital for 48 hours. We are never going to spend less on medical, I’m afraid.
CIARAN RYAN: The other point that I think needs to be emphasised here is that medical is always a defensive investment, is it not? No matter what happens in the economy, the buildings that you are renting to medical professionals – there is going to be demand for them.
JUSTIN CLARKE: The fundamentals are – if you look at the US – nearly 80 million people will be over the age of 65 by 2050. It’s an exponential problem, and we know that those people over 65 need five times more medical services than those under 65. It’s a problem that we are not going to be able to make go away. I’m not afraid; I’m very happy that it is that way, Ciaran.
CIARAN RYAN: So the demand for medical buildings is going to be there, no matter what happens.
JUSTIN CLARKE: Exactly.
CIARAN RYAN: Alright Justin, we are going to leave it there. Thanks very much for joining us.
JUSTIN CLARKE: Thanks again, Ciaran.
Brought to you by OrbVest.