Zak Eisenberg is the Vice President of Merritt Healthcare Advisors, which provides investment banking services to healthcare services organizations. In his role, he manages the strategic development and execution of ASC, surgical hospital, and physician practice transactions. Zak specializes in sourcing and analyzing transactions and capital and negotiating and structuring investments. Previously, he was a Biofund Venture Analyst at New Orleans Bioinnovation Center, a biotech and life science-focused venture capital firm, and led the analysis team at a renewable energy-focused private equity firm.
Here’s a glimpse of what you’ll learn:
- [1:58] Creating and measuring real estate asset value
- [10:24] How to position healthcare practices to maximize value
- [17:56] Considerations for obtaining capital and selling real estate
- [23:18] Zak Eisenberg explains how real estate unlocks equity and expands operations
In this episode…
Healthcare transactions are often complicated by varying valuation methodologies and rapidly changing financial landscapes. How can healthcare practices maximize their real estate and operational value amid fluctuating market conditions?
According to Zak Eisenberg and Robert King, maximizing valuations for healthcare businesses involves both short-term and long-term strategic improvements. Practices can enhance value by optimizing billing cycles, adding service lines like imaging or clinical trials, and building management infrastructure. Business owners can increase value through long-term, institutional-grade leases and accurate financial documentation. Sale-leaseback transactions are another effective strategy, unlocking real estate equity to fund operational growth or reduce financial risk.
In part two of the Transaction Healthcare webinar series, Chris Raphaely talks with Zak Eisenberg of Merritt Healthcare Advisors and Robert King of SkyView Advisors about increasing healthcare practice valuation. Together, they explore strategies for obtaining capital, timing market transactions, and aligning business goals with long-term investments.
Resources mentioned in this episode:
- Zak Eisenberg on LinkedIn
- Merritt Healthcare Advisors: Website | Email
- Chris Raphaely on LinkedIn
- Cozen O’Connor
- Robert King on LinkedIn
- SkyView Advisors
Quotable Moments:
- “Interest rates and cost of capital are the primary drivers for real estate valuations and lease terms.”
- “The pathway towards value for a practice has many more options because it is the center of the physician universe.”
- “Operating businesses have projections that are quite variable compared to real estate, where future projections are more predictable.”
- “Investors want sellers of businesses to stay on for 4-6 years generally to maximize value.”
- “Selling real estate to reduce debt and risk is becoming more common due to the increased cost of refinancing.”
Action Steps:
- Develop a long-term strategic plan: Planning 10-20 years ahead is crucial for healthcare practices to maximize value, especially considering factors like retirement and market trends. This proactive approach ensures businesses are well-positioned for future transitions and can capitalize on opportunities as they arise.
- Enhance operational efficiency: In the short term, practices can focus on cost-cutting and improving billing and collection processes to increase revenue. By addressing inefficiencies and optimizing operations, businesses can improve their financial health and appeal to potential investors.
- Diversify service lines and ancillary businesses: To enhance value, practices can explore new service lines, such as adding clinical trials or setting up ambulatory surgery centers. Diversification broadens the service offerings and creates additional revenue streams, making the practice more attractive to investors.
- Strengthen the executive management team: Having a robust C-suite and management infrastructure in place signals maturity and stability to investors. A strong management team can drive growth, implement strategic initiatives, and manage operations effectively, thereby increasing the practice’s valuation.
- Improve real estate appeal and lease quality: For practices with real estate assets, maintaining curb appeal, avoiding deferred maintenance, and securing long-term, institutional-grade leases can significantly enhance property value. These measures attract institutional investors and ensure the real estate contributes positively to the overall valuation.
Sponsor for this episode…
This episode is brought to you by Merritt Healthcare Advisors.
Merritt Healthcare Advisors is an investment bank with a unique focus on healthcare providers and their businesses.
Merritt leverages the healthcare industry expertise of its owner-operators, clinicians, investors, and advisors to develop surgical facilities that perform safe, efficient, and cost-effective procedures.
To learn more, visit https://merritthealthcare.com/.
Episode Transcript
Intro 0:00
Hello and welcome to Transaction Healthcare. I’m Zak Eisenberg, Vice President at Merritt Healthcare Advisors. Merritt Healthcare Advisors is an investment bank with a unique focus on healthcare providers and their businesses. Transaction Healthcare is a podcast focused on addressing questions and concerns at the intersection of healthcare transactions and business.
Zak Eisenberg 0:26
Zak Eisenberg here, this is a special episode from a webinar we delivered. It was so interesting that we wanted to share this part of it with you on the podcast. It’s brought to you by Merritt Healthcare Advisors. We’re a healthcare focused investment bank. We don’t work on anything else, mostly with provider businesses. Usually, we’re working with physician entrepreneurs, helping them to raise capital or sell their business, or sometimes helping them to buy other practices or invest in other types of ancillary service lines. Now we’re happy to share this part of a webinar featuring Robert King, the director of healthcare real estate at SkyView Advisors, our moderator, Chris Raphaely, who is the co-chair of Cozen O’Connor’s healthcare and life sciences department, and myself.
Chris Raphaely 1:13
So if we, as we move into our three in-depth topics, I want to talk about a little bit about creating value, or kind of measuring value, as well as improving value, and what opportunities are there? So I’ll throw it out to either, either one, and you can, you can answer in turn. You know, just give us a kind of an overview of how your firms value the practices and the real estate assets, and what are the current ranges that you’re seeing in value, if you can kind of put broad, broad brush numbers on it,
Robert King 1:58
Yeah, I’ll Go ahead, if you don’t mind. In terms of valuations, not unlike other commercial real estate sectors, in healthcare real estate standard appraisal methodologies apply replacement cost, market comps, income capitalization, my institutional grade buyers also utilize discount cash flow methods and internal rate of return analysis, but generally cap rate is the key investors are buying a stream of income, so their primary, their primary metric, is looking at what is the return generated by that income stream. Comps and replacement costs are useful tools, but they’re always backward looking and a really and in a really rapidly evolving financial landscape like we have today, they’re of limited use, in my personal opinion. Obviously, capitalization rate of income stream isn’t the sole metric used in assessing the value of an investment leverage, employee, tenant credit, lease term, future cash flows from property improvements, the quality and functionality of the physical plan all play into the determination of value. One thing I would say today is that tenant credit, and this goes to to to to Merritt expertise. 10 of credit is certainly playing an important role in valuations and lease term has truly taken center stage. A lot of lenders and investors in the sector have a risk adverse or at least risk cautious position, and one way of alleviating that position is through lease term. By way, I’ll give you an example. I just did a transaction. We took the physician group’s property to market, put a 10 year lease back on the property, and we were unable to attain the desired valuation, so we extended the term to 15 years, and we achieved a sale price 20% greater than the doctors were originally willing to accept. So the as I said, lease term has taken center stage terms of current valuations. Obviously, we saw a decrease in valuations over the last couple years with the rise in the cost of capital, we went, we went from a historic low of national average 6.2% we’re currently at 7.2% but considering the extreme increase in the cost of debt over the over the same period, which was Over 5% it speaks pretty well to the resiliency of the of the healthcare real estate market sector, so and those current valuations are very much in line with historical valuation rates.
Zak Eisenberg 4:52
No doubt about that. Zak, interesting that. Thanks, Chris. It was just if. Thinking about some of Rob’s responses, it’s always interesting to me how how different valuations are between real estate and operating companies. You know, certainly plenty of qualitative factors in real estate, but as as usual, interest rates and cost of capital is the primary driver for real estate valuations and and lease terms in these other very fundamental issues that don’t really change from cycle to cycle, which, anyways, always fascinating to me on the operating side. I think of it quite differently, certainly, a lot of the valuation methodologies are similar. You know, investors in health care operating businesses, whether you’re talking about a cardiology practice or an ambulatory surgery center, operating business approach things in a similar way. They’re building out a financial projection over, say, a three or five year period, and then they’re discounting those future cash flows back to today’s value. That’s how all all of these investments are valued, and that does take into account cost of capital, etc. But the biggest difference, I think, is that projections are quite variable for operating businesses in comparison to real estate, you really know what your future projections are, more or less with a real estate asset, because you have, you know your lease term, etc, and you know how much it’s going to increase. For operating businesses, it can be quite variable. And so you know this section, it’s called creating value. I think, for operating businesses, it’s it’s very dependent on the type of business. So if it’s an ambulatory surgery center, that looks very different than practice. And Chris, I know, we’ve worked on quite a few transactions together in the in these spaces, the pathway towards value for a practice has many more options, because it is the center of the physician universe, they can invest in a host of different service lines or ancillary businesses, including, say, an ambulatory surgery center and so to me, and when my firm takes a client out to market, we’re not going out with a pre determined value. We showcase the business as positively as possible with, as you know, realistically aggressive, I’d say, financial pro forma as we can. And our job, and the practices job, or the business’s job, is to really convince investors that that projection is realistic. As far as where valuations are, I again, I think it depends where you look, if you’re looking at a very mature industry like ambulatory surgery centers, which is entering its third and fourth decade of growth, those valuations are quite mature. There are some very large national strategics who own a significant portion of that market. And so multiples in that space tend to be between seven to nine times for a for a mature steady state facility on the practice side, it’s a totally different story. It really depends on specialty. And there are a host of other types of healthcare businesses right where this is true. So you know, wound care operators or senior care living facilities, etc. All each have their own unique market dynamics that impact multiple and multiple or the value that’s applied for these businesses. Again, just goes back to how investors are applying value, which is looking at the future pro forma. There’s a high growth sector at the output of that model is is going to be higher, and you’re just taking for the multiple. You’re just taking today’s EBIT dollar, the cash flow of the business over the discounted value that comes out of that model. That’s where this placeholder multiple seven times or 10 times comes from. So, you know, you asked, What? What are multiples? It? It just depends. Yeah, on the space.
Chris Raphaely 9:33
Let’s talk about the then ways to improve valuation, either the multiples or or other other things, obviously an important issue for anybody looking to take a practice and or their real estate out to to market. So, you know, I’ll start it off with Zak. I’ll go back to you Zak from the practice side, and we’ll break it down. I’ll have Zak on. Next couple of questions, talk about the practice, the operating side, and Rob will talk about the real estate side. So what’s the best way to position the operating or the practice to maximize value? I’m sure you guys, you know, have the opportunity to get in and represent a client and maybe give them a couple of, you know, things they can do to really, even in the short term, maybe maximize value.
Zak Eisenberg 10:24
Yeah, look the short term. Obviously, over a longer period of time, you have more options to improve value. So in the short term, there’s less that can be done. Maybe it’s, you know, cost cost cutting, or efficiencies that can be put into place. But generally, we look at a few major buckets when we’re speaking with a practice. The first is the life blood of any practice. Which are the providers? Can they recruit additional providers, additional physicians, etc. The second is new service lines within the clinic. So if they are, you know, a cardiology practice. Do they have image imaging in the clinic? Do they have tilt tables? Do they have all different types of, you know, screening processes as well as, let’s say, clinical trials. That’s another service line. And then we’ll look at ancillary businesses that they can start as well. And that would be for, for, again, our cardiology practice and, you know, real world example, one of our clients, which is a cardiovascular practice, does not have an ambulatory surgery center. When we got engaged with them, we saw that as a huge opportunity. Helped them with a pro forma, and they have broken ground on an AC, and that’s significant value, because as soon as they break ground and they can start proving out the cash flows of that business, they can get credit for the future pro forma. They don’t have to have it operating for several years to get paid for that, because they’re already doing the cases in a hospital. We’re just moving them from a hospital to something that they own. That same practice also has remote patient monitoring, for example, which they weren’t doing, and that was something very easy to slot into their existing clinic operation. But there are many other ways. Often, one of the short just speaking about short term ways, is looking at their billing collection cycle. A lot of practices. They might be contracted to to collect $100 for a particular procedure or particular visit, but they’re only collecting $92 there’s real upside in that 8% delta between what they’re contracted with with, say, you know, United or Blue Cross. Even if you can move that to $95 $96 that’s a huge difference to the bottom line, because all of it drops to the bottom line. There’s basically no cost to that. So those are some of the, I’d say, individual clinic ways. And then with larger businesses, it becomes more about the team, the executive management team. If you don’t have infrastructure at the business, it’s hard to position yourself as, say, a platform company that is investable by a financial sponsor, so having a CEO or a CFO, for example, and then you can think about other things like M&A and development opportunities of opening new clinics or going to small competitors or colleagues in nearby towns that are fitting your practice model. It just depends on where the business is. But just a quick example, if you take two businesses, one has 20 doctors and a C suite and is making $5 million in cash flows or in EBITDA. And then you take a second practice, which is making, let’s say even more, 6 million but it has no C suite and it has eight doctors. The one with 20 doctors will trade for a higher multiple than the one with eight doctors because it has more infrastructure. It’s more diversified in terms of providers, and it’s less risky from the investor standpoint, because for for an investor to invest in the other practice, they would have to come in and invest in all their infrastructure and and that’s cost to that business.
Chris Raphaely 14:42
Okay? And Rob, how about on the real estate side, devaluation?
Robert King 14:49
Oh, first echo exact just said is, I mean, there’s limited things you can do in the short term on the real estate side. I’ll mention a few, but so the crucial issue becomes tough. Planning and timing do again, back to that long term lease thing owners should be evaluating the sale 10 to 20 years before events such as retirement of senior partners take place. Planning, planning has very important. I can’t tell you the number of clients who come to me and say, Well, I want to retire in five years, so I’ll sell my building and lease it back now for five years. It’s doable, but it’s not the way to maximize value. The term of that lease is key. Again, planning 1015, even 20 years ahead for for that for that life event of retirement is key. Post sale of the practice to private equity or other investors, also a great time to consider a sale lease back of the real estate as a new lease is usually put in place when private investors come in and buy the practice, not always, but usually. A couple of things you can do in the short term is the quality of the lease itself is very important. Good way to maximize value. Triple Net institutional grade leases will attract institutional capital, which is cheaper capital, lower cost capital, and those investors may be willing to pay more for the asset quality, accounting and documentation is key. Often, the accounting on the real estate is mixed with the practice. The two have to be segregated in order to derive what the value of the real estate is. Plus the ability to deliver quality, complete and reliable documentation during the transaction process is crucial. You know, the inability to do so can result in months of delay in the process, or it can lead to it faltering completely, excuse me, as with all real estate curve appeal is important. Avoiding deferred maintenance and just having a well kept physical plant is a good way to create value. This will sound self serving, but I apologize I was going to say this will sound self serving, but retaining experience and expert advisors to to advise on the process can certainly maximize value. I’m sorry. Go ahead. Go ahead. Yeah, sure.
Chris Raphaely 17:29
So we, Rob touched on it a little bit, but, but we’ll, we’ll deal with it head on. Now, let’s talk about timing. You know what key elements should physician consider when determining whether to seek capital for their practice and or sell their real estate? So let’s just talk about, you know, those considerations first, and we’ll kick it off with Zak,
Zak Eisenberg 17:56
yeah, and I was just thinking about again something Rob was bringing up in terms of planning, it’s not something I can emphasize more. Most of our clients come to us six months before they want to actually sell and to run a full process. It really at least takes 12 months, and realistically, we like to really start speaking with people three to five years before they’re ready to Rob’s point, because, especially for creating value, it’s very difficult to put new initiatives into place without that. But yeah, Chris, I think as far as timing of those processes and how to time it with the market, let’s say, or etc. I think it really is a personal decision about what time in life is good for owners of these businesses. Now that being said, you certainly want to be thinking about a process well before retirement. First of all, many years ahead of time to Rob’s point, five years plus, because in especially for the operating businesses, investors or even systems or strategics typically want the sellers of these businesses to stay on, call it four to six years generally. And so you need to have that kind of time horizon to maximize your value. Is if you tell them you want to leave in two years or three years, you can bet your valuation will be hurt by that. But outside of that, I think of timing and really outside of the macro environment, and much more about the micro environment of the of the practice or the individual business, and how is that business doing it? The trajectory is on an upward trend, even if you haven’t achieved everything that you think you can. Your Own. That’s probably the best time for you to go out, because you have momentum and a all things again, being equal, we went through an example earlier. If three businesses all making the same amount of money, the one that has the uptrend in revenue and uptrend in profitability is going to sell better than the one that is flat lining, and, of course, better than the one that is looking at a downward trend. So oftentimes, we will come across clients who, you know, will say, or potential clients who will say, Well, you know, I am interested in transaction, but I have all this, you know, potential growth, and I really want to have all that in place by the time I sell, or have all that realized. And part of the issue with that is, it’s a, it’s a bit of a cash 22 because there’s some, some opportunity loss and time loss from not going to market and having a partner who can hopefully help you grow faster, that’s usually, to me, one of the best reasons to go through a process. You know, aside from wanting to put some money in your pocket, that’s a that’s an okay reason, but I think one of the best reasons is creating long term sustainability as well as a pathway towards additional growth. That is a really, very strong rationale for bringing on, say, a financial partner or an operating partner to help you achieve that. If you, if you complete all of your objectives before you go to market, it gives up, it takes away some time where you could be working and maybe growing faster with that that group. But also, by that point, do you have any growth left? And are you now in more of a flat line position, which is maybe less attractive,
Robert King 21:56
similarly to what Zak just said, you know, the macro economic landscape in the healthcare, real estate market landscape, very important. But what we find is is practice, operational considerations, life cycle of the practice, how far the physicians from retirement? Retirement is always on top of the charts. Motivation for sale. Also, recently, we’ve seen reduction of debt and real estate risk coming to the fore. This historically wasn’t an issue due to low cost capital for years and years we’ve had but times have changed. Refinancing is more expensive. A lot of practices are choosing to sell their real estate to reduce that debt and that any risk associated with real estate ownership. Um, also coming to the fore is accessing trapped equity in the real estate to expand operations. Uh, medicines, capital intensive, no doubt about it, new new technologies, upgrading workforce, expanding services, the sale lease back of the real estate can unlock that trapped equity in the facility for deployment into the operations. So we see a lot of that as a motivating factor these
Zak Eisenberg 23:18
days. And just to add to that, Chris, I agree with Rob. We’ve seen more and more, I’d say, sophisticated practices who I think, have reacted to a market that is and investors who are scrutinizing operations more than they ever have. It really also, particularly post COVID, a lot of practices that survived COVID have many operations and operational expertise in place that they did not have before COVID. They needed it to survive and and now they’re many of them are thriving, but it’s also increased scrutiny from investors, because I think a lot of investors had a very tough time with portfolio companies through COVID and exposed a lot of operational weaknesses in those businesses. So we are seeing more and more practices that are waiting longer to mature, which for us is is a great thing, and it’s something we always advise clients, like we were talking about earlier, there’s a lot more you can do, and there’s a much larger market of potential investors. When your company has matured as a business, and you have that operational team, you have those compliance checks in place, you have that billing and collections team in place, and you’re doing a lot of the things that that other businesses would do when you grow out of, I’d say, this partner or Mom and Pop mindset, where you’re working and making a lot of money, but working in your very local clinic and expand to have more business people. On the team who can help drive vision of the company and take take that business in a different direction. And the real estate is a great way to do that, as well as when we didn’t talk about this, but also to attract new partners. Rob, I know we were talking about that the other day. It can be used as, really a carrot for attracting new recruits. And anyway, I think, I think lots of practices are being much more creative with how they they utilize their real estate.
Outro 25:29
And that wraps up another episode of Transaction Healthcare. Hit the subscribe button to get notified when we release new conversations. And if you are someone interested in learning more about these topics, visit us at merrittadvisory.com, or send us an email at contactus@merrittadvisory.com.