- Scott Picken
- Real Estate
In this week’s episode of Rational Radio, Martin Freeman, a successful South African entrepreneur and nowNew York-based CEO of Orbvest, unpacked the strategy behind the $200m fund that’s yielding 8% a year. He shared a fascinating story of a team that have successfully transported their SA template of investing in highly specialised buildings that host medical professionals.- Alec Hogg
Listen to the podcast here: https://omny.fm/shows/rational-perspective/sa-entrepreneurs-open-orbvest-to-others-us-medical
Martin Freeman is now based in New York you’re in South Africa at the moment.
I am yes I’m visiting my offices.
You guys have got quite an extraordinary story. I guess many people in the country will remember you as an entrepreneur who started Bayport and then went into other things. You went to the United States and then with together with a couple of other South African entrepreneurs started Orbvest, with a very specific intention. I guess to start with, to look after your own money…. but just unpack what you guys are doing over there.
Firstly, thank you for having me on your show today. My story is that I am a serial entrepreneur and have been starting businesses and growing people in the businesses for over 30 years and I grow into large scale. So my journey with all this began in 2012 when I was privileged to attend an executive management program at Harvard in the US and became interested and determined to invest in real estate in the USA. I met my current partners at this time, who were also following a similar journey of helping South Africans invest in real estate in the US over the past five or six years. We have carved out a niche where we are interested in stable income producing real estate assets – specifically in healthcare needs. We’ve assembled a portfolio under management of over $200 million.
The United States? It’s a huge market. I can understand when you say medical services because one of your colleagues – has done very well in that here in South Africa but where do you even begin in a big market like that?
You’re absolutely correct. The starting point is you have to define an area of focus and you have to say where you want to invest in the world. I think it’s clear to most people that the US remains a very dominant economy and a powerhouse. And the next part of it is which niche. Initially my team were also involved in houses to rent and in the USA and there’s a reason why we’ve ended up settling on healthcare. And once you’ve settled on your strategy the next is which part of America. We are very decisive, we go for metropolitan areas where it’s landlord friendly where there’s a growing population. That’s the way you start. However you are correct, it takes a long time to build relationships and a network on the ground and to make sure that you partner with the right people. We have the experience and what’s most amazing is that we’ve been generating 8 percent cash on cash dollar dividends for our investors around South Africa and the world – going on six years. Bearing in mind we also we have investors from nearly 10 countries who invest into these properties along with South Africans.
You’ve been doing it for six years. You’ve been investing into medical properties and that’s in US dollar terms. It seems like a fantastic return when you have a look at what inflation is in the US. Why is it that that you can generate those kind of returns and just how risky is it?
Well the first thing is why health care. What I always like to say to people is think about your doctor or your dentist, anywhere in the world. How many times have they moved in the last 10 years and the answer is generally once or never. They are very stable tenants so you end up with tenants who have long leases. It’s a very sound investment. The building has been there for the past 10, 20 years. It’s going to be there for another 20 years.
We have been generating these returns, because we found through our partners on the ground, where we can add value to it. We have very stable tenants. What’s most interesting is when I was in South Africa, which I think most your listeners will appreciate, I was a private client of two banks and I was always informed that you will be able to earn five or six percent overseas and euros or dollars was a great performance.
We’ve been doing it for five, six years and people can also invest as little as five thousand dollars. So it’s an amazing opportunity. They’re able to generate these kind of returns that are very stable in a great asset class in the USA, because they invest directly in the building not into the fund. So they are in each separate building which is ring fenced. We would like to continue to help thousands, tens of thousands of South Africans all build a portfolio in the USA without having the associated risk.
But we’ve seen so many people getting ripped off from South Africa. If it’s not the Steinhoff and now there’s a cloud over Tongaat and in the United States you’ve had Bernie Madoff. How do people know that you guys are legit?
So what we do is each property is separate and it’s own little vehicle. We’ve got the methods to be able to invest completely into the USA. We’ve been doing this a long time and it goes into a separate structure where you are an investor in that. You want to put five thousand dollars into a building, you choose your building. You don’t have to go into every building. You pick and choose. Number two, we disclose all the revenue that comes in – like you owned a building in South Africa – every month every quarter. Whatever’s left over from a profit perspective goes out as dividends. Because these are already income producing assets, it’s not likely that they’re going to change much. Your revenues are pretty much picked for the next seven to 12 years. That’s how long these leases are. And so are your expenses because as you said the US has got such low inflation, they have very stable buildings. Your payment and your dividends are stable and that’s the reason why we’ve got hundreds of raving fans in South Africa who continue to just sing our praises.
How did you hit onto this idea?
I would say that through my journey of actually wanting to invest in the USA I met my partners. They actually had gone through the various asset classes. The truth is that we had two very strong partners in the business namely Justin Clarke from Private Property and Hennie Bezuidenhout’s been doing real estate in South Africa. And Hennie will tell you himself that he has never lost a tenant through a recession or a downturn which one of the key reasons you mentioned about the risk of going over to the US.
I’ve immigrated to the US because I intend to propel this business to a billion dollar portfolio from the current levels. And just like everyone else I’m just as concerned about giving your money to someone in America. It doesn’t work that way with us. We’ve got a team of salespeople and consultants who personally hold your hand. I am in America. You can have my number. You can come and meet me and see. I’m the guy on the ground with our reputation who says I’m here to look after your money. Try us even if you want to go in at only three thousand dollars. You’ve got nothing to lose. We will prove to you that it is a very slick operation.
Who do you have on the ground here in South Africa?
So we’ve got four offices. One in New York, we’ve got an office in Atlanta, who’s been in the game for 25 years. We’ve got two offices in South Africa in Centurion in housing and also our main office in Cape Town and the individuals involved. Bearing in mind that they have mainly been dealing with high net worth individuals for the past six years. And they’re skilled at being able to explain all the issues all concerns. I’ve heard it so many times over the years and how to make sure the money goes in compliance. You get paid out on a quarterly basis and we really do keep very close to our clients. We don’t intend to be everything for everyone but for those people who want to earn a solid dividend and I believe that 8 percent is an amazing performance bearing in mind that’s also only the cash on cash component. When we sell the building in five years time at a profit, that brings your overall returns to between 12 and 17 percent in dollars which is really superb. So you get to invest like the big investors and players in the world and generate and earn the same returns as they would.
Okay. So it’s a great return. You’ve got a lot of cash invested yourself. You’ve got other wealthy partners. Why are you opening it up to the public? I’m trying to find the catch in this….
This is very simple. In order to build a massive real estate portfolio you need equity. And in order to acquire these buildings we can and we have been approached by a lot of the very big players to take large amounts from them and invest into a portfolio with them. But for us, I’ve always built very wide distributions. And secondly we honestly believe in our legacy – if we can help thousands of clients not only in South Africa, but from around the world to build their own portfolios, what an amazing thing to be able to do. So…. to understand a typical deal, you get a medical office building it’s 12 million dollars, 8 million dollars is debt and 4 million is equity, 65:35 which is conservative. Then what happens is we raise that four million dollars. If you break it down you could think about it as 40 people each putting 100000 dollars into that ring fenced property real estate. However, we bring it right down to the lower levels, because we have a 70 percent reinvestment rate. That’s why I say, once people put a small amount in and try it, they actually come back and want to reinvest again and again. This has been going on for six years. So to all your listeners, I was the biggest skeptic in the world. How can you generate these kind of returns? You absolutely can. You’ve got nothing to lose even four to three thousand dollars and it comes back in dollars.
So if the rand weakens you get hard currency returns?
Absolutely. So one of our big things is to earn dollars offshore while you live in South Africa. And wouldn’t that be great. I mean think about our people that invested five years ago in the rand was ten eleven and twelve. Look at their returns now. So they’ve earned 12, 15, 17 per cent total returns which is a combination of the cash on cash and then the profit at the end and they’ve added depreciation in the rand.
And as I say, you know the other part of the business is we also do trips. People come over and we say come and look and touch the buildings. It’s amazing – South Africans own real estate you’re in such a safe asset class. And when they do and they come back and they invest we are very proud to say at this point I think we are sitting on about 100 percent conversion rate when people go over because they just wanted to do it. They just don’t know how to do it and they’re not given the opportunity.
You said the hundreds of South Africans you’ve invested with you already. What’s the typical profile?
So the typical profile is any person who has disposable income of even 5000 dollars. We have people from $5 000 right up to literally a million dollars. So we’ve got the ultra high networth guys who can do a million dollars per project. The bulk of our individuals are between 50 to 100 thousand and then we have people who over time have consistently invested 5000 dollars in every single project. My view would be to let them invest consistently and if we have a project every two three months wouldn’t it be great to own a portfolio of 10 medical office buildings in America each producing cash on cash great dividends for yourself.
How many projects do you have?
We’ve got 21 medical buildings so far and we have nearly one million square foot under management.
And can you sell – let’s just say I invest into one of the 21. Is there a secondary market?
So the normal real estate investment model is you invest and then you hold for five years. What has actually happened is that every single time someone has wanted to sell, the rest of the investors want to buy them out immediately. Because your biggest risk is when you put your money in on day one of the first or the second year when one of those call it 40 50 or 100 investors once you obviously sell the others obviously you want to grab it immediately because not only do they get the additional returns of the cash but they close it to the exit which means they get the better return cross they are close to also getting the profit. And so we’ve had a very very successful secondary market which we didn’t expect.
So the exit would be when you actually sell one of those to someone? You bought 21 buildings and you gonna be buying a whole lot more. If you’re going to become a billion dollar portfolio from 200 at the moment and when you get to the end of that period about five years you sell it to somebody else and reinvest. Why didn’t you just keep building?
Great question and it’s really up to the investors themselves because bearing in mind the investors own the investment and so we will obviously be guided by market conditions and also the exit. Very often most investors want to bank it and actually taste the fact that they’ve earned a profit. Don’t forget in America it is an amazing thing whereby it’s called the 10/31 you can roll your investment and not pay the relative taxes in the USA. It’s completely legal. It is used by all the real estate players in the US or you can simply pay your dividend tax and take it. So to answer your question after five years we could hold it further.
But most people would like to sell it and invest into another property as long as there is enough property which there absolutely is in the USA all the time reeks of buying and selling. And as long as we have a presence on the ground that we are able to acquire them, this model will continue to grow and grow. What separates us is that we bring that same amount of equity every month of the years going forward for the next five ten years to acquire real estate. Irrelevant of what is happening in the USA.
Martin Freeman is the chief executive of Orbvest and as you heard…..When I came across him I couldn’t believe it. And I started listening more and doing a little bit more research. Martin’s own track record is pretty impressive. Hennie Bezuidenhout’s the chairman of the company, is very well know in South Africa. Really what they’ve done is just taken a model that they perfected in South Africa and taken it to the United States and well 8 percent returns – good stuff.
About the author
Scott Picken is a South African-born real estate investor and entrepreneur. He is the co-founder of Wealth Migrate, a fintech company that offers real estate investments on its online marketplace through crowdfunding.