RYK VAN NIEKERK: We continue with our podcast series regarding the investment opportunities offered by OrbVest. OrbVest is of course an international real estate company focusing exclusively on the niche market of medical buildings in the United States. The company allows investors to invest directly into these properties and earn regular dividends in US dollars.
Justin Clarke joins me now. He’s the chief operations officer at OrbVest. Justin, thank you so much for joining me. I’ve spoken to several of your senior colleagues at OrbVest over the past few weeks and months, and that includes Martin Freeman, the CEO; Machiel Lucas, your global acquisitions director; and Hennie Bezuidenhout, the chairman.
You are in charge of global operations. It’s evident that you have a very, very big and strong management team. What is your background and how do you fit in?
JUSTIN CLARKE: Thanks, Ryk. Always good chatting to you, and we really appreciate all the coverage that you give us on Moneyweb and of course [RSG] Geldsake. Certainly there is a very strong management team. I think what’s really important is that we gel so well together. We’ve all run our own companies and had exits or have been involved in large enterprises. It’s unusual to get such a strong team all together, working together.
I think that the important thing that you’ve picked up from the likes of Martin [Freeman] is we all had a common reason for coming together: that is that we were all looking to solve a problem for ourselves, which was to find some sort of safe investment that we understood offshore.
My background, to answer that question, is real estate. I’ve loved real estate my entire life, and I’ve been involved in property development and [am] most well known for starting or co-founding a company called Private Property, which you may know of, and which we exited recently. It’s sort of an online property portal where you can go and find any property that’s for sale across South Africa. I think that’s really what I’m best known for, Ryk.
RYK VAN NIEKERK: Private Property is a household name and I really think that’s one of the most innovative property companies ever launched in South Africa. But it’s a far cry from doing your own property-development work and being involved intimately in selecting US medical properties and buildings, and offering people the opportunity to invest in those. When did you start to look at US medical properties as a potential investment?
JUSTIN CLARKE: I think what’s most interesting is [that] I wouldn’t say I’m a local or an expert in medical real estate. Thank goodness I’m not charged with the responsibility of finding these buildings. That’s for Machiel Lucas and his team over in Atlanta. But interestingly, I did, as one of my early developments, a medical centre in Umhlanga Rocks Drive in Durban North some 30 years ago. I went past there the other day to have a look at it. It’s a fascinating thing, Ryk, that we always say that if you consider your doctor or your dentist and how long they’ve actually been in the premises where they are at the moment, you’ll find that they don’t move very often. This is of course our hypothesis on medical.
But remarkably, I went to that medical centre in Umhlanga Rocks Drive – and it’s almost untouched in 30 years. It’s certainly getting a little dated, but all the rooms are still very much there. The practice might’ve changed hands, because in 30 years the doctors have died and sold the practices on, but the path [pathology] lab, the pharmacy, the optician, most of the tenants that we put in 30 years ago are absolutely still there. I think it rings true for our hypothesis for America.
Luckily, as I mentioned, we’ve got Machiel and his acquisitions team sitting across in Atlanta, and we’ve offices in Atlanta and they charge for finding these buildings. That’s really the trick. It’s very important that we find buildings that absolutely fit within our criteria.
Remember that these buildings are stable assets, they are profitable.
They generate returns that have to be within a certain range as dictated by our investment committee. We promise our investors returns of 7% to 9% cash-on-cash on their investment and, of course, an IRR [internal rate of return] on exit after five years of between 11% and 17%. The building has to fit into that criteria.
As we know, these buildings are getting much more expensive in the US and there’s an enormous amount of capital that’s now looking for the safe assets in commercial real estate.
RYK VAN NIEKERK: Let’s just explore the medical niche a bit more, because there are many niches within the broader property sector. I’m thinking about storage, engineering or industrial logistics centres. You have many properties where there’s a legal hub or many legal practitioners. There’s of course retail and office segments, as well. Why do you think the medical sector is superior to those?
JUSTIN CLARKE: I think that there are some great niches that all the money is focused on. Retail and office are absolutely off the boil. Investors don’t want to touch those at the moment, unless they’re a significant bargain. But we love medical because you get long leases. I think that’s the first important point. For somebody to do a proper medical installation, Ryk, something like imaging, for example – or radiology as we call it here – you have a significant capital investment. In fact, the machine might be worth more than the building itself.
So the doctor, the group – because most of these radiology practices are in fact big groups that own multiple outlets – want somebody who’s going to invest and put in the Faraday cage in order to fit their equipment. Then they’re stuck there for 25 years. Because of the value of the equipment, they don’t want to move that equipment once it’s been installed.
So they want to sign a long lease and we are absolutely happy to advance the TI [tenant improvement allowance] to install them in order to get them locked into the building. It becomes almost like a triple net lease, where we literally just collect the rent every month, and that’s what you really want in a commercial building.
Of course, it’s not super-exciting and you can’t escalate the rental with inflation or anything like that. But you know that that cheque is going to come in every single month for the next 20 years. I think that really, really gives peace of mind to investors looking for long-term dollar-based returns.
RYK VAN NIEKERK: So it does offer a safe capital preservation-like investment opportunity in addition to hard currency dividends.
JUSTIN CLARKE: Absolutely. I think another thing that’s really important is that, as far as the growth sector is concerned, it’s really nice to be able to be trading in a space where you’ve got that wave behind you – I speak like a true Durbanite. But first of all, we always go into states where there’s a growing population and GDP. If you’ve got growth the chances are you’re going to have more demand.
But then of course, as you have picked up from your discussions with Martin and others, we go into states where there is a growth of [baby] boomers or older population; and with growth and an older population, of course, there is more demand for medical services. So you’ve got that sort of underpinning the value of your investment, more demand coming from more older people moving into an area that is already growing.
And then, of course, ultimately there is this very interesting technological change, which I think is even noticeable in South Africa, where you tend not to go into the blood-and-bandages hospital system for your procedure. As soon as the insurance company, your medical aid, can get you out of the hospital, they will. If necessary, they’ll put you into a step-down facility or a day surgery. Of course this is exactly the niche that we are focused on.
We like medical office buildings. We do not invest in hospitals, and there is a trend worldwide where the amount of patients that are going into hospital – in other words, inpatients – is decreasing, and the amount of patients that are being treated in step-downs or in day surgeries is increasing. Obviously we call those ‘outpatients’. So we go for the outpatient facilities.
In the States, to give you an idea, Ryk, it’s a massive market. Kind of 36 000-odd buildings are medical office buildings or categorised as medical office buildings already, so we have significant scope to grow.
RYK VAN NIEKERK: You say 36 000 of these are medical buildings?
JUSTIN CLARKE: Yes, 36 000. About half a trillion dollars worth of real estate is dedicated to medical office buildings.
RYK VAN NIEKERK: And you have made investments in how many of these properties?
JUSTIN CLARKE: We are very small if you think about it in terms of number, but we’re sitting on probably 35 – or we’ve just launched 34 and 35. So our acquisitions are around US$400 million [R5.6 billion] at the moment. We’ve got a plan of growing that to a billion dollars in the next four years.
RYK VAN NIEKERK: Are these buildings hard to come by, or are you just very selective?
JUSTIN CLARKE: I think you can certainly find them on the market – but can you find buildings that generate the sort of returns and have the criteria that we demand for our investors? That is much, much more difficult. We probably get one or two buildings out of every 40 that we look at into the investment committee. So that is the trick.
I think another very important point, Ryk, is that by building a reputation in the US – which we’ve managed to do over the last seven years – we are now getting off-market opportunities. Once something gets offered by the brokers to the market at large, the price really, really goes up. It becomes an auction because there’s so much money chasing these buildings. So yes, they are becoming much harder to find. Luckily, after a little quiet period over the middle of the year, we now have three properties on our platform, which is quite unusual.
RYK VAN NIEKERK: I checked on your website and these opportunities are listed as Medical 33, Medical 34 and Medical 35. I think it refers to the individual properties. But just take us through these three opportunities. Why are they attractive in your view?
JUSTIN CLARKE: Let’s look – 33 actually is unfortunately oversubscribed. So that one will come off in the next day or so. But let’s talk about 34, Medical 34. That’s our 34th building. In fact, it’s two buildings. We do like this because we like to be able to spread over multiple tenants. You’ll notice that almost all our buildings are multi-tenanted. The beauty of that is that if you lose a tenant it’s not the end of the world; it doesn’t really affect your returns.
In this case we have gone for New City at Cincinnati. It is in two really, really good areas of Cincinnati which are the two sort of most upmarket suburbs. So Kenwood Crossing and Red Bank Village – if anybody knows much about the city of Cincinnati – are two beautiful buildings. Once again, we like buildings that don’t necessarily have an elevator. We like buildings that are proper structure, concrete and brick, as opposed to what we called ‘stick’ – which is a timber fabrication that they like in some states in America. Yes, they just choose solid, nice buildings. There’s a small amount of vacancy, round about 5%, which gives us a bit of value add. Remember, you don’t pay for vacancy when you acquire these buildings. All the rest of the tenants are very solid, have been there for a long time.
I think altogether there are 14 tenants occupying 67 000 square feet and in metres that’s about 6 700 square metres. Those are 95% occupied – very, very solid buildings. That one we put on about a week ago, it has some really nice national tenants – Fresenius, a big dialysis group in the US. That is an absolute-credit tenant. I won’t get into too much detail. It’s also got DaVita, which interestingly is also a dialysis national group that services around 200 000-odd dialysis patients a day, which is quite phenomenal.
With big groups like that you know that the tenant standing behind the lease is solid, your income is solid. And of course it gives your investor peace of mind that that dividend is absolutely going to be solid.
The cool thing about these is they’re over 8% cash-in-cash. That means we can comfortably pay our quarterly dividend – 2% a quarter. Remember this is US dollars, it’s not South African rand. We don’t do this through FDI [foreign direct investment]. This is in fact a complete offshore investment, and we anticipate 12% to 14% RoRs [returns on revenue] on these two buildings in Cincinnati, so that’s a super one for us to find.
And then the second one is also great. This is in Atlanta, where we actually have our offices, as I mentioned earlier. It is a dental portfolio. Again, there are two buildings – one that we acquired actually early on in the year called Great Expressions, altogether a mix of eight tenants; it’s a smaller portfolio. It’s about or 2 700 square metres.
The average lease period on these buildings is 6.7 years. If you’re investing for five years, the average lease is higher than the investment period. Certainly we believe that the one tenant that is expiring – that is a relatively small percentage of the building – we can extend because they’ve been there for a very long time. So that’s super interesting. And again, it fits within our criteria. We are able to pay out comfortably 2% per quarter on that building cash-on-cash. A little bit of a low RoR, 12% to 13%, but it’s solid.
The interesting thing is that a lot of these buildings on the dental portfolio are triple net a lot of the tenants, which means that all of the costs are covered by the tenant. So there’s no lumpiness in terms of your expenses and your building has a very consistent income coming from these tenants. You know exactly what your expenses are because they are covering the expenses, and effectively those all pass through to the tenant. So I really like that [Medical] 35 [building] from that respect.
RYK VAN NIEKERK: Looking at the pictures on the site, they’re definitely not bad looking as well. But you also have another investment opportunity, and it’s called the OrbVest Triple Net One Portfolio, or NNN 1. It allows investors to invest in more than one property. Tell us about this offering.
JUSTIN CLARKE: I think, Ryk, this really came from our South African investors because we have had had more IFAs or [independent] financial advisors that are looking to put clients that are pensioners who really depend on this income. We felt very uncomfortable putting them into single buildings because there’s a risk in a single building. Quite simply, you’ve got fewer tenants to spread your risk among. So, as you’ve spoken about previously, we launched a very successful product called ODH [OrbVest Diversified Holdings], which is a diversified spread among all our buildings. And that has developed into this thing which we call ‘triple net’.
So what we are doing is to acquire, under one investment, eight buildings – and we go for very specific types of buildings. These are buildings that are occupied by only one tenant. I’ll give you an example, and I’ll choose a name. This doesn’t necessarily mean that we’ve particularly got one of these.
Many of your listeners will be very familiar with CVS [Pharmacy] or Walgreens or, for that matter, DaVita or one of those. These clients have multiple outlets across the US, literally thousands of outlets and they don’t see real estate as being their core business, so they want to be responsible for that building, they want the building to look like it is theirs. They want to maintain it in a certain way. It must be branded and it must feel like the same CVS that you go to anywhere across the US. But then they want somebody to actually own the building so they don’t have to have the capital locked up in that investment.
So this does provide an opportunity. We look for these, and in this particular portfolio our average lease period we want on these buildings is 12 years. So the investment is for five years, like on the others. But when we sell it we want to make sure that there’s enough lease period [left] that we can sell it for the same price we bought it at, or better. So quite simply it’s a combination of eight buildings that are leased to corporate tenants, the likes of a CVS or a Walgreens, and they are triple net. In other words, we don’t have any risk of any maintenance issues apart from maybe a roof or HVAC [heating, ventilation and air conditioning] as they call their air conditioning. That means that it’s very, very consistent regular income. And that’s of course what our investors are looking for.
So that’s the new one. And a triple net one, as I say, we launched also about 10 days ago or maybe two weeks ago now.
RYK VAN NIEKERK: And the terms are petty much similar to the other investments: a minimum of around $5 000 [around R71 000], and the investment term around five years.
JUSTIN CLARKE: That is correct. The cash-and-cash return is slightly lower on those, just because they are generally more expensive. You pay the premium for the triple net and for the corporate investor. So those are 7%, a little bit less than 2% a quarter, and you get 10% in US dollars, which is great. With the single buildings or the small portfolios, as I mentioned earlier, you potentially get a slightly higher return. But if you are really looking for a core investment, if you’re looking for something that is very secure, then this is the sort of thing that we put together for those type of investors.
RYK VAN NIEKERK: I see Simon Brown will host a webinar to discuss some of these opportunities further, and I think that is an excellent opportunity for listeners who want to ask questions to put them to you and the OrbVest team. That takes place on September 28. The information will be available on Moneyweb. Will you participate in that webinar?
JUSTIN CLARKE: Oh, absolutely. This is a great way of getting information across because there’s a lot to understand, and we certainly put everything out there in those meetings. Simon will obviously host the meeting and [we will] answer all the questions. So for anybody who’s interested, Tuesday September 28 is the next one with Simon. I would invite anybody who wants more information, Ryk, to be there. Alternatively of course they can WhatsApp or call our support staff on 021 948 2130, or simply just go onto the website at OrbVest.com, and someone will be able to at least help steer you through the process.
RYK VAN NIEKERK: Justin, thanks for your time today. That was Justin Clarke. He’s the chief operations officer at OrbVest.
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