Part 1 of Deciphering the Nexus of Healthcare and Real Estate: a Conversation with Ryan Mingus
Dec 15, 2023
Austin Hair - Real Estate Developer
Are you curious about the intersection of healthcare and real estate? Join us in part one of our interview as Ryan Mingus, managing director at Tusk Partners, unravels the complexities of this dynamic sector. We traverse the journey from his humble beginnings in dentistry to his first-hand experiences of the Great Financial Crisis and COVID-19's impact on healthcare. The intricate dance of private equity, mergers, acquisitions and how they sculpt the healthcare landscape will be laid bare before you. We'll also take a detour to 2008, examining the parallels between then and now.
Brace yourself as we plunge into the fascinating dynamics of economy and dentistry. Discover how 2021's low interest rates and high demand for adult orthodontics spurred the industry, only to be thwarted by rising interest rates in 2022. We dissect the repercussions on DSO valuations, and the ripple effects on deal structures and commercial real estate sales. Through it all, find out how sellers are holding out and what the future may hold for price stabilization. So, fasten your seat belts for a thrilling exploration of healthcare real estate.
Are you curious about the intersection of healthcare and real estate? Join us in part one of our interview as Ryan Mingus, managing director at Tusk Partners, unravels the complexities of this dynamic sector. We traverse the journey from his humble beginnings in dentistry to his first-hand experiences of the Great Financial Crisis and COVID-19's impact on healthcare. The intricate dance of private equity, mergers, acquisitions and how they sculpt the healthcare landscape will be laid bare before you. We'll also take a detour to 2008, examining the parallels between then and now.
Brace yourself as we plunge into the fascinating dynamics of economy and dentistry. Discover how 2021's low interest rates and high demand for adult orthodontics spurred the industry, only to be thwarted by rising interest rates in 2022. We dissect the repercussions on DSO valuations, and the ripple effects on deal structures and commercial real estate sales. Through it all, find out how sellers are holding out and what the future may hold for price stabilization. So, fasten your seat belts for a thrilling exploration of healthcare real estate.
The goal of this show is to help healthcare organizations scale by leveraging real estate strategies and interviewing high-level healthcare executives who are actively in the trenches in order to pull out lessons learned along the way. If you'd like a free site selection analysis from our team, or you'd like to learn more about how we're acquiring real estate through our fund on the blockchain, visit us at wwwreuniversityorg and drop us a line that's RE as in real estate universityorg. Well moving forward.
Speaker 2:
We are going to be breaking up our podcast recordings into two episodes, starting with this one, and I'm really excited about this interview with Ryan Mingus because we dive a lot into how interest rates have finally made their way through the markets and are starting to really compress multiples. So it's an interesting time for sure, and, without further ado, please enjoy our episode with Ryan Mingus. Hello, welcome back to Helping Healthcare Scale. I'm your host, austin Hare, and today I'd like to welcome our guest, ryan Mingus. He's the managing director at Tusk Partners, and Tusk is a lower middle market healthcare M&A advisory firm with a specialization in dentistry. And, ryan, thank you for coming on the show.
Speaker 3:
Yeah, thank you for having me, austin. Yeah, similar to seeing you at the DEO the other day and hearing your story. It is always funny to hear how people will get into the world of dentistry when they aren't dentists. But that being said so I started out as an economics and finance major and undergrad graduated in 2008, and when I moved to New York City to work on Wall Street, there weren't as many jobs as I'd hoped for, so this was right.
Speaker 2:
So, yeah, let's back it up a little bit. We'd just love to hear your story about how you got into all this, because I always find everybody's got like a fascinating and unique story right After the GFC or right in the middle of the great financial crisis.
Speaker 3:
Yeah, I was actually up there chatting with an alumnus from my school just asking for pointers and just getting the lay of the land, and it was the day that the market crashed 780 points Wow, In 85, they jumped. So when you walk out of here, we were on Broad Street down near Wall Street. Like when you walk outside, be careful and look up. No way, yeah.
Speaker 2:
So this is how long into your career, like how many days had you been working there?
Speaker 3:
I hadn't worked at all. I had a job with Bloomberg in probably May, right before graduation of 2008, and then was moving to New York in June to start, and before I got even to New York they pulled the job. So I was just determined to move there anyway. So finance is the route that I wanted to take. Sales is always hiring and it's a great skill set. So I got a job with Johnson and their medical device division in the it was all five boroughs, long Island and Connecticut and that's how I fell into healthcare by way of sales. I got trained up by J&J and their sales school and went to that route.
Speaker 3:
Then I ended up working for a company that owned surgery centers ambulatory surgery centers. They were a client of mine that I was repping in and that's when I started to get a real feel for how the healthcare system works, like what the real business is behind the healthcare system. Ambulatory surgery centers were largely pager based but there's a lot of fee for service elements, so it lends itself well to the dental world and it was higher end work and out of network and things like that. So I never really got into the nitty gritty hospital system world. It was consumers like healthcare, then went and got my MBA and after that really focused on the management and consulting side of healthcare, did ambulatory surgery center M&A, mergers and acquisitions for about four years and then found my way into dental because I started to see the writing on the wall with private equity coming into the space and this was probably 2016 found my way into dental.
Speaker 3:
So I've been at Tusk now for four years here in this role. I've been in dental for about nine years total eight years total and focused purely on mergers and acquisitions, representing sellers that are interested in partnering with private equity backed DSOs, or we've had the fortunate pleasure of representing a couple people that were quote platform opportunities and anywhere between four and $10 million of EBITDA that warranted an initial investment from a private equity group to form a new entity, a new DSO. So we've done a lot of those deals over the years as well. So that's my background and how I got into dental.
Speaker 2:
Yeah, it's interesting like you got started right there in almost like the worst time I gave your career and then we've seen that twice, I feel like, in the past three years.
Speaker 3:
Unfortunately.
Speaker 2:
Yeah, it feels like when we had the lockdowns I don't want to say COVID, because it wasn't only COVID that caused all the craziness, is really the lockdown. So, like when we had the lockdowns, then we saw all the markets corrected or pulled back, what 30% over 30%? And everything just pause, and that felt like the recession that people have been calling for a long time. But then they cranked the spigot on, printed a ton of money, lowered interest rates, everything just shot back up and then they did the exact opposite at the end of 21. And then that correct like from 21 to like, I guess, maybe like November of 21,. I think it's when they announced the hikes or the retreat hikes, and it was like this kind of like slow, drawn out, painful process for a year and a half versus like COVID was like a straight down thing. But the reason I bring it up is because does it feel like the same thing to you, like being in the thick of it? They're just getting started in 2008. But like comparing them to now, good question.
Speaker 3:
I never thought about it. I don't know if I knew enough back then to even know what signals were out there in the ether for me to draw from to in this situation. I don't, and, from what everybody tells, for all that I've been consuming when trying to understand the landscape right now, is, this is not. The foundation in which this, this tumultuous market is on right now is much stronger than the foundation of the tumultuous market that 2008 was sitting on. There are a lot less bank regulations back then that ultimately allowed for much deeper cuts into the financial system, specifically the banking system, which is the largest contributor to the volatility that we experienced in 2020 or 2008,. Rather, and that doesn't appear I'm not don't quote me that, I'm just I'm reading the the the clip notes of everything that I've been consuming, and it sounds to me like we're not at risk of this really deep recession that the foundational system right now, the foundation in which this recession is teetering on, is much stronger and hopefully we get that soft landing or no landing at all.
Speaker 2:
Yeah, obviously it's impossible to predict these types of things, but you made an interesting comment off camera that I've stated as well, which is when the public markets go, private markets follow, and we saw that happen to the T back in really much 22. I remember having the same conversation and say look, the public markets have been just getting crushed, but the multiples are still at all time highs when we're looking at dental acquisitions specifically. And so you think it's there, think it's gonna follow suit, and sure enough it did, and I just love to get your take on. So you've been in this what is it nine years now? You said yeah.
Speaker 2:
Yeah, Like where were we at the highs and how has that changed to now?
Speaker 3:
Yeah, going to go back to the public markets follow, or the private markets follow public markets. We started to see things our economy taking a hit in 2022, late 2022, and we've been feeling it most of this year, more or less At least all been worried about this recession to hit or take root. We started seeing the dental world last year. There were a couple of DSOs called anywhere between $50 million to $250 million worth of EBITDA a handful of DSOs that fit in that range that went to market that were not rewarded in the same way that they expected to because they had in their mind valuations that groups were getting in 2021.
Speaker 3:
To answer your question, the highs were 2021. It was the perfect storm of low interest rate pent up demand on the buy side, really performing businesses on the dental side, especially in the orthodontics space, with the boom of adult orthodontics in the Zoom era, when folks started working from home and started staring at themselves on camera all day long. Everybody wanted a visible line and they had the disposable income to do it. Orthodontics in particular had the best year ever in late 2020 through mid 2021. Just perfect storm to the high.
Speaker 2:
Did that drop off back to baseline? And then the orthodontics space.
Speaker 3:
Yes, gauge is a platform that sits on top of a practice management system has put out some data from 2022 that shows meaningful decreases in orthodontics nationwide on average. Everything's an average. I'm sure there are winners and there were losers, but most of that was attributed to drop-off in adult ortho spend from 2021. Okay, let me say 2021 was the highs and just because it was that perfect storm and then you've got, 2022 is when the interest rates started to really creep up.
Speaker 3:
Yeah, that impact deals at the top end of the market those 52 call it $250 million worth of EBITDA DSOs that are going out, that are trying to capitalize and find their new private equity sponsor. People that thought they were going to get a 15X were coming back with 12Xs. Some limited partners or investors were like we're not going to take that. We'll just wait it out until multiples go back up To be determined whether they ever get back to 2021, but I would not be holding my breath just because that feels like a once in three lifetime opportunity for somebody to just a perfect storm like that.
Speaker 2:
Yeah, it makes sense if you think about cost of capital going up and deal probably like price average multiples dropping by 15 percent, because it wouldn't completely offset the interest rate of hikes. But it gets close in terms of if you're financing these deals you get a 15 percent reduction in price. Does it come pretty close to offsetting going from 4 to 8 percent interest rate or not really?
Speaker 3:
They are not just multiples haven't just compressed a little bit but also the structure of the changes.
Speaker 3:
They let's say a deal is a million dollars of EBITDA. Somebody offers them this is 2021, let's say they get a 7X on that for easy math and their lender lets them put six times leverage on that deal for cash. So they're going to put $6 million worth of cash at close on that deal and then the seller is going to roll a million dollars worth of equity into that DSO. Now, with the cost of capital going up, maybe now they're only allowed to put four turns of leverage on that. So if they want to keep their multiple the same, their cash at close goes from 6X7 cash at close to 4X7 cash at close, and in which case, yeah, they maintain the same valuation multiple that got them to the $7 million of enterprise value or 7X, but it went from being the vast majority in the form of cash to just over 50 percent coming in cash. So that's what buyers are doing to. In addition to lowering their multiple, they're also decreasing the percentage of cash at close, the reduced amount of leverage they have to put on the deal.
Speaker 2:
So in that specific example I think you said a million dollars in EBITDA, it's selling for a 7X, so they were able to essentially get 6 million in cash which the sellers, the buyers, financed, borrowed from the bank and then they would roll a million dollars worth of their equity into the parent company. Is that? And then now it's you have to roll, you get 4 million at closing which is borrowed from the bank and then you're rolling 3 million dollars into the parent company. Is that like the difference?
Speaker 3:
That's an example that we've seen some buyers oh really it would be less than that it actually be.
Speaker 2:
yeah, you get like a 4 million and roll. You wouldn't even get the full 7 million. So before it was like if you got 7 million you'd get 6 in cash roll of 1. Now you're only gonna get what? 6 million, and then that would be 3 in cash roll 3?
Speaker 3:
Yeah, if you drop the multiple by 15% now you're only getting a 6X, and not all that's coming in the form of not as much of it is coming in the form of cash.
Speaker 2:
And then the other thing too. So those are the deals that are getting done. And the other thing the worst thing in commercial real estate and then I'm involved in residential and short-terminal real estate as well is just the sheer volume has dropped so much. Residential real estate sales are down 40%. Commercial I think commercial is very segmented. There's a huge difference between retail, like what we do, versus multi-family apples and oranges, but there's still a huge drop in volume of sales. And so it's, you've got. It's just it's hard to really gauge what the price like, where the stabilized price, will be, because by one end, yeah, we see prices reduce a little bit, but by the other end, there's still a ton of people that are just holding on and not selling. And so the question becomes these people who are not selling.
Speaker 2:
We're talking off camera the phrase how long can you carry the piano? Right, if you've got, if you've already, if you're a residential, you've already moved and you have two mortgages, now how long can you carry the piano? You listed your house for sale. You want to sell it for a certain price. You're not getting it. Maybe like you take it off market and that's. It's been about a year, like really a little bit more really heightened interest rate hike. So you've now been holding on to two properties for a year.
Speaker 2:
Hypothetically, at what stage do you start to drop that, to start your price in order to sell? Or do you simply hold onto this asset and rent it out because you got a great interest rate and same thing in dental real estate, like you're not going to get the same price that you got a couple of years ago? We've seen, we haven't. We've seen maybe 10% drop in prices, so not really not far off of what you guys are seeing on the M&A side.
Speaker 2:
And what's working in the favor of the sellers is that if you don't have a distressed tenant, then you don't need to sell if you don't want to, and so you can continue to hold that indefinitely. So it's okay. We've got a huge drop in sales volume, so there's a lot of deals or a lot of assets sitting on the sidelines that haven't sold yet. The question is is there enough pressure to sell ever, right? Or is it a situation where these people can just continue to hold forever? And I only bring it up so that we can get engaged. We don't really know where the stabilization is. I can see a case for us being close to the bottom, but maybe not fully there. I'm just curious what your thoughts are from the M&A space.
Speaker 3:
Yeah, the difference between our world and real estate is these people are operating casual, positive businesses.
Speaker 4:
If we're going to represent them.
Speaker 3:
They're probably pulling down after they would have paid themselves a clinical wage. 20 percent EBITDA margins on really top assets Specialists oftentimes a lot higher, we've seen just so. These people are running businesses that are turning off a lot of cash. Generally speaking, not a ton of debt on these businesses relative to the debt service doesn't kill them. Now the groups that have grown really fast and have six locations and we've got out over there skis they're in trouble. But the people that have a great asset that are not in a rushed sell, I don't think that they're missing out on anything. But I don't necessarily think that they're going to be rewarded for waiting either, because I don't anticipate multiples ever getting back to 2021.
Speaker 4:
So you're saying we've stabilized.
Speaker 3:
Yeah, things have begun to stabilize.
Speaker 3:
I think 2024 is the year of buyers and sellers having to come to terms and close the gap to get deals done, and perhaps sellers are eventually going to get comfortable taking a number lower than what they expected to take because they're anchored on a number that is just never going to come back.
Speaker 3:
But I do think that there's always going to be people out there that if they want to sell their business and they want to maximize the valuation, and selling to a DSO is their only option, because they've created such an attractive asset and an expensive asset that no solo doctor could buy them out. Because we do not do doctor to doctor transactions, but DSO is their only option. Those people are still calling us because they say I want to sell my business, I want to be done in five years. Everything I've read and talked and all my peers that I've talked to said that they're going to require a five-year employment agreement because I'm a pretty meaningful clinical producer in the business. If you're telling me that markets likely aren't going to go back up and if they do, it's not going to be, still not going to be back to 2021 levels I might as well get the ball going right now, because still premium valuations for premium assets right now.
Speaker 2:
Thanks for listening to part one of our episode with Ryan Mingus. Part two will be released here in a couple of days.
Speaker 4:
If you need help finding the perfect location for your practice or you're ready to invest in commercial real estate, email us podcast at leadersrycom. That's podcast at leadersryre as in real estatecom, or go to leadersrycom and fill out our form. See you next time.
