Exciting Launch of 9% Offshore Note Set Scheduled for This Week

You can also listen to this podcast on iono.fm here.

SUREN NAIDOO: Hello there. We’re exploring the investment opportunities in the US medical real estate market. Joining me in this special podcast is Justin Clarke, the Chief Operating Officer at OrbVest. Hi, Justin. Where are you joining us from?

JUSTIN CLARKE: Hi, Suren. It’s great to be online. I’m currently in Ballito, KZN – your old hometown, if I’m not mistaken, Suren.

SUREN NAIDOO: [Chuckling]. It’s amusing because you’re speaking from there, but soon we’ll be going global.

You serve as the COO of OrbVest. While the title is quite clear, could you elaborate on your role and how long you’ve been with the company?

JUSTIN CLARKE: Suren, I got involved in medical real estate after leaving private property, where I co-founded the company with several others. Post-exit, I started looking at real estate, especially in the US market.

At the same time, I have spent the last 30 years delving into technology.

What intrigued me was the possibility of alternative assets like commercial real estate that the average investor typically cannot access due to their traditionally blue-chip nature.

I was inspired to create a platform that allows the average investor to engage in commercial real estate.

I oversee operations with our team based in Cape Town, and we’ve now expanded our team significantly in the US.

We are involved not only in asset management, but have also begun managing properties – I believe we’ve taken over around eight of our assets thus far. We’re building a growing team on the ground there. But that’s probably a story for another time.

SUREN NAIDOO: Thank you for that insight. You have quite a background in both the property and PropTech sectors, considering the various platforms you’ve worked with.

Now, shifting focus to the subject of this podcast, OrbVest and its latest offerings. Your company has been active in the US for approximately six years, with team members who have decades of experience in real estate – even in the US market.

The US is currently making headlines globally with its new president, Donald Trump. What’s your perspective on the current state of the US economy under this new administration?

JUSTIN CLARKE: Suren, we have plenty of interactions with Americans. My colleagues consistently convey that most Americans are quite optimistic about the new administration.

This is evident in the polling data following Trump. It seems to stem from two main factors – and we won’t delve too much into politics.

There’s significant activity focused on reducing government size, particularly targeting what we call the ‘pork fat’ to cut government spending and waste, elements that we grapple with in South Africa. But ultimately, I think both the border issue and fiscal reforms have gained popularity under the new administration.

We certainly feel the positive atmosphere. People are energized, taking action, and the real estate market is buzzing. Of course, the real estate market is influenced by interest rates.

SUREN NAIDOO: Since this is a business podcast, we’ll steer clear of politics. However, as you mentioned, there is significant support for the Trump administration in the US.

Let’s discuss specifics regarding commercial property, particularly the medical real estate sector. What does it currently look like? I know the Federal Reserve has paused its rate-cutting cycle; can you provide insights from that perspective?

JUSTIN CLARKE: Indeed. While no one possesses a crystal ball, it’s clear that some chaos may unfold in the short-term. We believe – based on the data we analyze – that the economy might slip slightly into a recession.

However, what often goes unnoticed is that this could actually benefit us. A recession would give the Fed the opportunity to lower rates, and we still anticipate that rates may drop three times by year-end.

As reshoring continues, so too does the demand for commercial real estate.

With this wave of optimism building, we’re already observing a tremendous interest in office spaces. Remember, there’s a trend back towards traditional office work.

Many large corporations – driven by federal mandates – are encouraging employees to return to the office. Overall, we believe enormous growth will follow the recession, positively impacting the commercial real estate sector.

SUREN NAIDOO: You mentioned commercial real estate, but OrbVest primarily operates in the medical commercial sector; a traditionally defensive sub-sector. Could you shed some light on that?

JUSTIN CLARKE: Certainly, that’s quite intriguing. Discussions surrounding Obamacare and the Democratic administration’s efforts to curtail healthcare spending are common.

However, if you analyze the relationship between GDP and healthcare expenditure in the US, it’s apparent that healthcare spending has consistently outpaced GDP for nearly a century. In fact, I’d go so far as to say it has done so ‘consistently.’

An illustration of this is that in 2022, healthcare spending constituted about 17% of GDP and is projected to rise to 19% by 2032, reaching roughly $7.7 trillion in expenses.

This highlights the considerable and seemingly uncontrollable expenditure in healthcare, driven largely by the typical American’s diet and lifestyle, which is a significant contributing factor. Additionally, advancements in healthcare technology mean higher costs for superior healthcare than what was available a century ago.

These two factors contribute immensely to rising healthcare expenditure as a component of GDP, which in turn fuels demand profoundly.

I’d like to break this down further as it’s crucial to understanding the medical office space and why we maintain our unwavering focus on medical real estate, regardless of the recent turbulent years.

A second factor impacting demand is population growth in America. The cohort aged 65 and older is expanding rapidly due to baby boomers retiring. It’s well-known that older people tend to spend significantly more on healthcare than younger demographics.

A captivating statistic I encountered recently indicated that Medicare spending per senior citizen has risen from $12,894 in 2021; and it’s expected to reach $24,000 per person over the next decade – again, looking at that 10-year time frame. This illustrates the steep rise in healthcare costs coupled with the increasing aging population.

Several other elements influence demand. The third factor is that retirees in the US often gravitate towards warmer climates with lower taxes; notably in the South, including states like Florida, the Carolinas, and Texas. This trend of ‘sunbirds’ enhances demand in those regions, prompting us to focus our efforts primarily there.

Medical offices differ significantly from standard offices. The current data shows a high vacancy rate in general offices, adversely impacted by remote work trends. However, the same cannot be said for medical offices.

Typically, medical tenants prefer stability and long-term contracts. It’s common for a physician to enter into a 10-year lease.

Lastly, let me reiterate a point I made earlier – technology is revolutionizing healthcare. It’s astonishing how you can undergo anesthesia in the morning and return home by the afternoon. Major procedures are now performed in outpatient facilities, which aligns perfectly with our specialization. It’s a trend familiar to you, Suren, maybe even experienced yourself in South Africa, as we’re following a similar path albeit at a somewhat slower pace.

In the US, this transition is remarkable. There’s a significant shift of patients from hospitals into outpatient care or doctor’s offices.

Our medical fund encapsulates this trend; we’ve noticed a slight drop from 95% to 93% occupancy. Nevertheless, we’re striving to restore it back to 95% and potentially exceed that. This occupancy rate reflects over 100 medical leases, which emphasizes the divergence between medical and general office spaces.

SUREN NAIDOO: Thank you for that, Justin. Regarding investments, you briefly mentioned ‘the portfolio’. In terms of location, a 90-plus [percent] occupancy rate is encouraging, though you’d naturally seek higher. What does OrbVest present to investors, particularly regarding your latest offerings?

JUSTIN CLARKE: In the past, we focused on single buildings – identifying a property, dividing it, and effectively syndicating it. We’ve transitioned away from that model. We’ve learned the value of real estate ‘funds’ which provide investors peace of mind through a diversified return and risk mitigation. We currently offer only two products.

We have the AccretivPLUS Real Estate Portfolio Limited. This fund operates in the US, and its offshore holding is designed specifically for our international investors.

Today, we have investors from approximately 32 countries worldwide, not exclusively from South Africa.

The AccretivPLUS fund has an asset value exceeding $200 million at present, with equity contributions from investors around $80 million. While it might be challenging to comprehend in rands, the portfolio’s value converts to roughly R3.6 billion.

In this fund, the distributions range between five and seven percent annually, paid quarterly. The goal is to deliver a significantly higher internal rate of return (IRR) over the investment period.

The exciting news, which is why we’re speaking today, is that many individuals are currently hesitating, especially South Africans with considerable offshore funds, feeling uneasy about investing amid recessionary chatter.

The markets have already retraced significantly – I know you’re aware of this. But they find themselves sitting with cash in bank accounts yielding negligible returns.

We’re also in an interesting position with some long-term debt and prefer not to renegotiate at the current high rates. Therefore, we’re introducing a new product issued by the fund, offering a 9% interest rate with a fixed one-year term.

After the one-year period, it can continue with a three-month interest notice period. The Accretiv TI [tenant improvement] Note at 9% interest is a highly attractive investment with robust security.

SUREN NAIDOO: Thank you for elucidating that, Justin. Investors often inquire about security as their top concern, especially since yours is linked to bonds. How is this secured? Perhaps you could clarify the security arrangements alongside any fees or other crucial aspects investors should be aware of?

JUSTIN CLARKE: Certainly. The key takeaway is that the issuer is actually the fund.

The AccretivPLUS portfolio itself acts as the issuer of the note, providing substantial security underlining the investment.

To give you some context, this fund generates $1 million every quarter which is distributed to investors. It’s extremely cash-flow-positive, which is excellent.

Moreover, we have included provisions in the documentation stipulating that the fund’s directors are committed to withholding any distributions to investors as dividends if there are outstanding obligations to bond holders.

This essentially means that no distributions can occur within the fund until bondholders are satisfied. This offers a level of security that surpasses even holding the title.

Lastly, Suren, I’d appreciate it if you could highlight that we’ll be hosting a webinar.

If any of your audience members are interested in further details, the webinar is scheduled for Thursday, April 3rd, at 6 PM South African time.

For further information, please email me at Justin@orbvest.com or support@orbvest.com, and we’ll provide you with a registration link for the webinar.

SUREN NAIDOO: Thank you, Justin. We will have to wrap it up here. I appreciate your time for this special podcast. That was Justin Clarke, the Chief Operating Officer of OrbVest.

Brought to you by OrbVest.

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