Hennie Bezuidenhoudt: How Orbvest hedges risk when investing in US medical properties

There’s no business on earth which doesn’t carry risk, says Orbvest chairman and co-founder Hennie Bezuidenhoudt. But after scouring the global property landscape for suitable offshore investment opportunities, Bezuidenhoudt and his Orbvest colleagues specialised in the US medical property market for good reason. In this insightful interview he explains why – and steps he takes to reduce the risk of an unexpected broadside in this ever changing world. – Alec Hogg

It’s good to be talking with Hennie Bezuidenhoudt the chairman of Orbvest. I was looking through your background, you’ve got a very distinguished academic record, the dux at school is pretty good going but I see you were the dux at university too. How much time did you spend studying at university to be able to be the best student in your year?

Yes. I had high ambitions. I did a lot of work and tried to master what I was doing and I tried to to have a balanced life there as well, so I was fortunate to achieve that.

Why did you study agriculture?

I grew up on a farm in the Free State and that was what I knew and thought this was a very interesting area for me to qualify in and then I made the change to business.

And the financial services in particular. What appealed to you there?

By coincidence, I started to talk to people about healthcare and healthcare funding and that was really interesting to me. The fact that there were fairly high barriers to entry – you needed to understand the funding, the delivery side and then you need to understand the doctors regulations – and it was constantly changing. So many people were involved in R&D and initially my first step was in the funding side. In those days medical aids had problems. They had to look at ways and means to manage their risks and find ways for companies to lower their health care expenses and still provide a comprehensive essential care to the employees.

So you got to know a little bit more – like a consultant – but then you went into the actual real estate side of health care. How did that open up?

Yeah. Initially we started to restructure medical aids and medical aid benefits and when I was doing that I realised that a risk management approach is what the industry was missing. We then started to focus much more on risk management – in the healthcare funding sector – and that entailed initially restructuring the benefits and making provision for what we know today as your savings account. That was the initial step, but when I did that, I realised there’s much more to it. If you limit somebodies benefits and he’s got a serious illness, he’s gonna end up in hospital which will cost a lot more. So then we started to look into disease management. How do we manage these risks? I built up a business in clinical management which was sold in 2003. Because I knew all the doctors and a lot of the service providers, somebody approached me to build a hospital. That’s how I got involved in the real estate side which was even more interesting for me. There are various reasons why I regard medical as a very stable asset class in real estate.

How many of those projects have you built, how big is your real estate portfolio?

My initial steps were in 2006, then it was the negative effects of the GFC and that slowed everything down – in the world – as well as in South Africa. I was looking for that new development that would differentiate myself from the rest. That started with the development of more specialised hospitals in South Africa. From about 2014, I have built eight of these facilities with a substantial pipeline that we are in the process of finalising.

When you say specialised, what are they? What exactly are these facilities and where are they?

They are all over. They are all over the country and are more specialised – in the sense that they more focused on day procedures and in other specialised areas. So it’s more a specialised hospital – which I like – because it’s like building cars. If I build the same model you can build it more cost-effective.

So what brought you into the international arena?

I was concerned about having all my investments in South Africa. I believe that this diversification is an essential element of investing these days. Secondly, it’s good if you can invest in different currencies – especially if you can expose yourself to hard currency investments – with a depreciating Rand.

That’s how you started Orbvest. It does appear to be a very exciting adventure that you’re on – going into the United States – and into the medical area. Do you visit the US often to get a feel of how the medical sector is going?

Absolutely. I try to go there on a quarterly basis for a couple of weeks. I also read a lot of publications. I do a lot of research because that to me is one of the risk areas that we really need to understand – what are the strengths, what’s happening – because healthcare is also going through a transformation. I think healthcare will see dramatic changes coming, we want to understand that and read the trends to position ourselves in terms of assets that have got value for the future. We realised our returns and capital growth only after a five or 10 years.

So what are the big risk issues? We’ve been hearing from people who look at Orbvest – and you’ve got 25 of these projects now – but on the one hand you’ve got Donald Trump saying he’s going to turn the healthcare industry on its head. The Americans spend far more on healthcare than anyone else in the world – think an average of nearly $9,000 per person per year – and then that’s not sustainable, a quarter of their GDP is going to be on healthcare by 2025. There’s lots of concern that – with the disruption and restructuring of the industry – that the investments that Orbvest has made might not be as valuable in future.

I agree with that. I think that is our challenge. Like any business there will always be risk – I haven’t seen any business that’s without risk – and that’s why I personally spend my time to really understand the changes, the affordability issues – and one thing is clear, demand is not gonna change. Demand is driven by a lot of things. Will people get infected? Absolutely. Will people get injured? Absolutely. Will people live longer in the future? We know with ageing there are more expenses and medical problems. Will people be born with genetic weaknesses or defects? Absolutely. So I’ve got no doubt in my mind that demand is not gonna change going forward. So the question is how do we address it? I fully agree – cost effectiveness and cheaper treatment will be essential – and I think that’s what the whole world is driving at the moment. Through research and development, through the convergence of industries – like the IT industry and the ability of computers into healthcare – all of that is going to help us provide solutions to the problem of being more cost effective. So if you position yourself correctly, make sure you understand it, then I believe you will have an asset that will be valuable when you want to sell it in the future.

But how do you do that, how do you protect your investments from this disruption that’s occurring?

To be part of the disruption – understand it – and provide the facilities that will house those disruptive technologies and the integration of that into the current system, because the current system can’t just disappear. There will be a process of transforming ourselves into a new dispensation. We really believe we are on top of that. We’re planning carefully to be part of the new dispensation and not invest in assets that are going to be outdated in a couple of years time.

So how do you do that though, when you say you believe you’re part of that? Give us an example of how you apply it.

One of the things that I am doing – despite reading a lot and talking to industry leaders – is to attend the Singularity University medical faculties exponential medical conference in the United States. That is where all the industry leaders, the medical researchers, universities, the innovators, get together and look at what’s happening and how to integrate it. I learn valuable lessons from that very important group and the days we spent together – to try to understand what’s possible now – and what the future will look like. So to talk about specific things which I think will influence the industry and what I’ve learned from these discussions and interactions is – for instance – the convergence of the IT industry and the healthcare industry will bring a lot of change with distance diagnosis and treatment. For instance, I saw the first virtual hospital in Missouri. So interesting. How will that influence the buildings that we’ve got? Where will this be housed and what will it do to existing providers? How we can position ourselves for that and what’s coming.

A virtual hospital.

That’s right.

What exactly is that?

It’s a building consisting of all the professions – the doctors sitting in the building, all the professional staff – but the diagnosis and treatment is in another facility elsewhere. So it’s all distance treatment and diagnosis.

How is it going to affect the property portfolio? Do they still do procedures?

That is the question of specialisation. The hospitals will change and that’s one of the reasons why we don’t invest currently in normal hospitals because I think they are going to change and they will be specialised hospitals. Whether it’s a day surgery centre, which we like very much – a lot of our buildings accommodate those facilities – you go in the morning you leave in the afternoon. It’s quick and easy. Less chance of infections, a lot cheaper and it’s a modern great facility where people love to go. So that’s the type of thing that we believe will continue to exist – that’s the facilities that we like to invest in.

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What about genomes or genomic sequencing, and the impact that that could have?

Absolutely, part of our future thinking. I refer briefly to my personal experience. A health profile is going to be essential for future treatment and prevention of illnesses. I went to the organisation that’s responsible for these technologies – they can now scan you from head to toe, they can do all the blood tests and they can decode or sequence your genome. That will give you a full health profile. Based on all that information, the artificial intelligence systems will predict what illnesses you will get in the future. All of that will be taken into account. If you’ve got a problem you know perfectly how to diagnose it. So for me – everybody is different – and the “one fits all” approach I think is something of the past, all of this will determine how we react to medicine. Personalised treatment and personalised medicine, I believe, is going to be important for the future. It will be much more effective in terms of developing drugs, in treatments and the basis of that is your genetic blueprint.

So stem cells, using big data 3D printing, all of these new areas could make a dramatic impact on the cost of healthcare which has been something pretty close to your heart.

Yeah, that’s very important. If we look broadly, we’re going to move away from a dispensation of sick care to that of healthcare. Currently the system is based on the fact that we wait until we’ve got a serious problem and then we try to treat it. It’s much better to detect it very early and to prevent it. Know it’s going to happen in two years or five years or ten years time and prevent it by changing your lifestyle, by changing your food, by changing your exercise. I foresee in the longer term that we will have genetic engineering where we can – on a genetic level – fix the weaknesses that causes that problem. So that is where we are going to start managing health instead of managing sickness which will be much more cost effective and effective in the long run.

You’ve got a couple of projects that you’ve opened to investors, you’re now into the 20’s. We had a chat about them on a webinar a couple of weeks ago. But the one in Dallas, Texas – which was described as a trophy project – how does that fit into what we’ve been talking about now in the way that healthcare is changing?

Yeah I think that’s a very interesting question. One of the difficulties that we need to handle at the moment, is the fact that we are in a seller’s market. There’s lots of money in the US chasing these opportunities in healthcare because healthcare is one of the most favourable asset classes – a lot of people like it because of the stability and the returns you get – so it’s getting tougher and tougher to find opportunities where the return is on the levels of about 8% in cash, plus a little bit of capital gains. We’ve changed our strategy slightly because those buildings are simply just not easily available. So looking for opportunities where we are adjacent to, or on campus, or pretty close to campus…..

On campus what do you mean by that?

That’s a hospital campus. Around that hospital, there’s a lot of delivery services that are not part of the hospital but supports the hospital system. So we tried to find commercial real estate close to that and due to the scarcity of medical office blocks these days, we find these buildings and convert them from normal commercial or partially commercial and partially medical into full medical. That gives us the opportunity to repurpose the building and accommodate some of the medical services that are necessary for the hospital to exist. What we love – in those facilities – is to put in our day hospitals and all the services that go with that. Important about this, it also gives the independent practitioners and physicians, the opportunity to provide an equivalent or similar service as a hospital, but in a surgery or a day centre environment.

So that’s what you’ve done in Dallas, you’ve taken a building and customised it?

Customised it, converted and repurposed it, to a building that complies with our investment criteria.

Now the other project that is available at the moment for this investment has attracted a little bit of criticism in that you are taking some of your very first project and paying out the investors there but in keeping it in the family as it were. What’s the thinking here?

That was our first step in America. That was more than five years ago. We could only buy and fund assets that were within our means in those early days. We had to build trust and show people that we know what we’re doing. So the first deal was to buy a couple of smaller buildings and combine them in a portfolio. We’ve now been through the five years – the term is five years – and then we sell and decide what we do. Stay in or exit. A couple of those initial buildings were not part of our strategy (to be close or on campus), so we’ve rolled them over – it’s a good asset – and we don’t want to sell at a lower price. So for us, it would be not in the interest of everybody to sell those buildings, just because they don’t fit into the criteria today. They’re good assets, so we’re keeping them and we will repackage them if people want to invest. It’s still a nice portfolio. One of our tenants is a veteran’s association, which is a government organisation and we believe that we can unlock some value there. The main reason is – due to all the political turmoil currently – we couldn’t finalise the longterm lease agreement which would increase value for everybody. They’re still good assets and we’re confident that they will yield good value.