The DSO field is preparing for a more active second half of the year as executives look to a potentially more optimistic economy, according to Henry Moomaw, CFO at Irving, Texas-based U.S. Oral Surgery Management.
Some DSOs began shifting expansion strategies earlier this year and focusing on other areas of growth to wait out ongoing economic challenges, including inflated supply costs and higher costs of capital. Richard Hall, CEO of USOSM told Becker's in February that macroeconomic conditions were one of the biggest challenges facing DSOs, predicting these conditions would continue until the second half of 2024.
Despite these obstacles, Becker's has reported on several DSOs gaining new investments this year to fuel their growth, including Tempe, Ariz.-based Gen4 Dental Partners, which secured a $315 million credit facility in May, and Great Neck, N.Y.-based The Smilist, which closed on a $285 million in April.
USOSM also gained a $150 million credit expansion from its lenders in August to support future growth.
Mr. Moomaw recently spoke with Becker's to discuss this trend and what DSOs can expect of the economy later this year.
Editor's note: Responses were lightly edited for clarity and length.
Question: Many DSOs have gained new capital recently to fuel expansion efforts despite economic challenges, including USOSM. Can you share some insight on why this is happening?
Henry Moomaw: That's correct. Last July, we went out with our existing lenders and sought an upsize to give us more growth capabilities throughout the rest of last year and certainly this year and even into next year. We got a $150 million additional [delayed-draw term loan] from our existing lenders, and that currently sits at about $120 million. We've only dipped into about $30 million of it, so there is a ton of dry powder available in that DDTL through the rest of this year and into next year.
We've seen a lot of our competition getting new funding this year. I think we were just ahead of the game on that. We beat it a little bit and got a little bit better terms than our competition, and we actually worked with our lenders and did an amendment that actually reduced some of the components of our interest rates, again proving the strong support we have from our existing group of lenders. We're in really good shape for the future with $120 million available in the DDTL and an additional $30 million with a revolver we have in place that we've never touched. So there's $150 million in capital available to us as needed.
Q: Are DSOs preparing for better economic conditions toward the latter half of 2024?
HM: I think that's exactly the expectation. It's been a downturn for the past six plus months. I think it'll open up and I think part of that will be just the general economy. The economy has always typically spurred during an election year as well, so it is common that they may reduce interest rates later this year. There was some initial expectation that would have happened earlier this year, but it did not because the interest rates are still pretty high.
The general expectation now is that you'll start seeing reductions in interest rates later in the year, and that may just generally square the economy and boost the capital markets as well. You may see more deals on the sale side from DSOs, some combinations may happen as well. We certainly believe the general M&A market resurgence will also pick up. Historically, the last half of the year is much more vibrant from an M&A perspective than the first half of the year. [More than] 60% of our deals in a year are done in the latter half of the year versus the first half of each year.
Q: Have specialty DSOs fared better during this tough economic climate?
HM: That's probably a fair statement. You're not distracted by the multiple specialties and how the macroeconomic conditions are affecting each different specialty in different ways. One of the things we're hearing on the [general dentistry] side is that their patient flow is down, and part of the reason their patient flow is down is the fact that they're understaffed. They have challenges with sourcing dental hygienists. That's a unique factor specific to general dentistry we don't have. We addressed some turnover issues we had in 2023 with regards to surgical technicians, increased the compensation packages for them and have really done a good job to quell that turnover early this year. Throughout this year, we've seen a significant drop in the turnover and that's helped us.