GreeneStone Healthcare Corp. (OTCBB: GRST) operates medical clinics in Ontario, Canada. GreeneStone adds capacity to an increasingly stretched provincial healthcare system, and provides private alternatives to publicly underserviced niches. Its four medical clinics (three in Toronto, along with a facility in Muskoka, Ontario) offer various medical services, including addiction treatment, colonoscopy, endoscopy, minor cosmetic procedures, and executive health assessment programs. The company currently has more than 60 employees and is headquartered in Toronto.
Greenestone President and CEO Shawn Leon spoke with OneMedRadio about market opportunity for clinics in the unique Canadian healthcare system, and evolving valuation drivers in this space. Mr. Leon caught listeners up on news, highlights from recent earnings reports, and reaching the next company growth milestones. In addition, Mr. Leon mused on the state of healthcare in Canada, and how this landscape is rapidly changing.
Click to view the audio, and read the transcript below.
Matthew Margolis: OneMedRadio welcomes Shawn Leon president of Greenestone Healthcare Corporation, a public company operating medical clinics in Ontario. Greenestone trades under the symbol GRST. Thank you for joining us, Shawn.
Shawn Leon: Thanks for having me Matt.
MM: I want to start with some background, what kind of clinics does Greenestone operate and where are they?
SL: We have two principle lines of business Matt and the first is endoscopy business and the second is a mental health and addiction treatment business. The endoscopy business is about one-third of our business and this is a government paid service, so in other words the procedure is paid for by the government healthcare system. Both of these clinics that we do endoscopy in are in Toronto, one is a rather large 8,000 square foot facility and the other is a 2,000 square foot facility. We do colonoscopies and gastroscopies under that line of business. The other line of business that we have is the addiction treatment business.
We have two facilities, we have an inpatient faculty north of Toronto, beautiful area, cottage country area called Muskoka. The property is 43 acres, that is approximately 50,000 square feet of buildings on it. We have currently set it up for 36 beds capacity but we could obviously extend that with the size of the facility that we have. We also have a 36,000 square foot outpatient and aftercare facility in downtown Toronto and that is where we see patients and we do assessments and we do outpatient and aftercare treatment.
MM: So what extension plans do you have?
SL: The main location for the organic growth of the company for the main location of the company for the endoscopy business is an 8,000 square foot facility, we are currently renovating that facility and adding two more procedure rooms and we are adding a surgery suite, so all of our endoscopists are general surgeons and that would make it very easy for us to have them do general surgery in the operating facility that we have. So we’ll be expanding into the surgery business and that will add more of a private paid option to that endoscopy business which will improve the margins and expand the revenue possibilities.
We are also acquiring a fully operating clinic operated by one of our surgeons, which will expand our locations to three. Of course we always have our eyes open for acquisitions and clinics operating within our geographic area. The facilities for mental health and addiction treatment we’ve always said that the next 24 months we will have grown to 200 beds, we hope to do that through organic growth, building our own beds in facilities and also by acquisition. I think the biggest area growth will probably be in the treatment business, which has the greatest demand, and the least served type of healthcare here in Ontario.
MM: So I want to shift gears for a little bit, in your opinion what is the state of the healthcare system in Canada and where do you think that it’s headed?
SL: Well the situation in Canada is very different than many Americans might think or expect. We do have government healthcare here and it has been here since the 1950s but as the population ages and as costs in the healthcare system go up and more and more people are using the healthcare system the ability for the government to continue to pay for healthcare is more and more effected every year.
So although we have excellent healthcare there is a growing number of services that are not funded by the government and we always have the issue with the cost of government run facilities such as hospitals. The government is now starting to take things that don’t need to be done in a hospital and pushing them into the private sector to cut down on cost and that’s something that’s actively happening in the endoscopy business.
Here in Ontario the government would like to have all of the endoscopies done not in a hospital unless they are necessary and emergency services so that will benefit greatly the businesses like ours. As well as they are cutting services, so something that may have been covered by a government healthcare two years ago may not be covered this year. And in our mental health and addiction business the government doesn’t do a great job in providing great treatment for addiction so therefore they are leaving the door open for private operators to provide a much better service and a much more effective service in that line of healthcare. So again, that opens up a lot of opportunities for us.
The situation in Canada is that it is moving a little bit closer to the way that the American healthcare system works and the fact is that the American system is moving a little bit closer to moving the way that the Canadian healthcare system works. I think we’ll end up somewhere in the middle of both countries.
MM: So, Shawn, let’s turn to company organization and financials. Firstly, what are the advantages of being public and specifically why in the US?
SL: I think it was an advantage for us to be public and listed and traded in the US because I think that many of the investors in the US understand healthcare companies far more than they do in Canada only because there’s been a history of government healthcare here where there were not many privately run healthcare companies. That’s obviously changing and growing, but that’s something that is still a little bit foreign to the Canadian investor and the American investor is much more adept in knowing about companies that are profit companies in the healthcare system so we felt that it would be better to be listed in the US.
We also are listed as a public company because we know that there is a tremendous amount of growth opportunity and not just in Canada and not just the US and we hope to continue to expand and grow, therefore, we will need to have access to capital and obviously being a public company it is much easier for us to make acquisitions where current owners of business would continue to have equity by having shares in the company. So it’s just a very well for this company and for our particular sector in the industry.
MM: What recent news do you have?
SL: I think the big news for us is that we focus on getting our balance sheet in order and continue to grow our business. We’re really turning the corner into providing fundamentals of a business that are typically measured such as income and revenues that continue to grow and expand and of course the balance sheet is always very important so there is a concerted effort to clean up our balance sheet and get rid of any debt that we have and to focus on that for the next six months.
That is really a little deviation from where we were six months ago where we were just focused on growth and increasing revenue, we’ve gone to a very comfortable level of revenue now and where we should be profitable in the second quarter, we should we profitable in this quarter. We hope to in the next six months have a squeaky clean balance sheet and a large increase in revenue and be poised for the acquisitions and the growth that I spoke about earlier.
MM: Shawn, you touched on revenues so in 2012 you reported a 230% increase in revenues, what drove the increase?
SL: So first, that was primarily the addition of the mental health and addiction treatment business. We derived most of that increase out of a new line of business, a growth that we have accomplished since we started in 2010 and this healthcare business has been very large and very fast, we obviously will not be able to keep up that rate of growth organically unless we have another acquisition although our rate of growth will continue to be very good and that 230% was great and we hope to continue to grow the business very rapidly, and I don’t think we’ll have that same type of increase this year since we’re halfway through the year unless we have another acquisition. Our increases this year will be more in the order of 50% growth but we still feel that that is a great accomplishment for the company.
MM: What factors can we look at around valuation?
SL: What happens in our business, and I focus on the addiction treatment business for a minute. Typically, earnings are a way of looking at valuations for a business and in our case we have a simple correlation between earnings and the number of beds that we have. A typical addiction treatment center may generate in the area of $100,000 of income per bed that they have and that at a 10 multiple would be $100,000 of net income. So, we say that a bed is worth a $1 million, in the 06 and 08 time frame in the US there were a large number of treatment centers that were acquired by some of the large private equity firms and the price per bed that was being paid at the time was between $1 and $1.4 million per bed.
Those numbers softened due to recessionary years after 2008, I think some of those transactions would be in the $5-700,000 range but we as a conservative valuation on a bed would say that a bed is worth $500,000, so if a company has 100 beds then we would have a $50 million dollar valuation and if we went to the $1 million mark which is not so conservative then we would have a $100 million valuation, so we look at our company being 36 beds and growing to 200. We look at sort of going from $36 million to $2oo million and that is a really easy way to look at the valuation. The income tends to be pretty steady across the sector and we are in that private bed space where the revenue that is charged for a stay in one of our beds is ample to generate that kind of income.
MM: Give us some highlights form your most recent earnings report.
SL: Well the interesting thing about our earnings is that the two biggest factors in our expense side of our income statement are labor costs, which are by far the majority of our income costs and our facility costs. This has been a focus for us in reducing our labor costs and our facility costs and I think that if we factor in the labor costs and the facility costs together with the increased revenue those are the main components of making us a profitable company.
We continue to increase revenues, which is key obviously, and we are on track for the containment of our facility costs and reducing our facility costs with these new leases that we’ve signed in the past couple of months. And also, with a plan to implement the acquisition of our property in WHAT, we will replace a rental payment with a mortgage payment which would be $30,000 per month less and that will show a significant gain to us.
The labor costs are the one big component that really need to be very contained and we’ve been overly generous so to speak in hiring and paying for great people in order to get our business up and running and we’re finding that we’re fine tuning that group of employees to the best and so far these reductions of labor have not quite shown themselves in the first quarter but I think that they’ll start to show in the second quarter and continue to show how we’re reducing and containing in the 3rd quarter.
MM: So, lastly, in your opinion will there continue to be market opportunity in these kinds of clinics?
SL: Absolutely, I think that the opportunity will be very, very good for the next 20 years as our baby boom population grows older and requires more and more care. I think operating medical clinics in general will be a good business.
MM: That was a company snapshot with Shawn Leon, president of Greenestone Healthcare Corporation a public company operating medical clinics in Ontario. Greenestone will be presenting at the upcoming OneMedForum on June 26th and 27th. Greenestone trades under the symbol GRST. For OneMedRadio this is Matthew Margolis signing off.