My dear fellow Hermits 👋
Welcome back to 🧙♂️ The Hermit 🧙♂️
ICYMI:
💼 Hermit Portfolio: June Update
📈 Investment Thesis: Cardlytics CDLX 0.00%↑
🧗 Our Investing Journey: 3 Investing Books
If you haven’t yet, subscribe to get access to this post, and every new post for free
About LIMES $ETR:LIK
Limes Schloss Kliniken operates private hospitals for psychiatry, psychotherapy, and psychosomatics services in Germany, Switzerland, and Lichtenstein.
It focuses on the treatment of stress-related illnesses and mental and emotional disorders, such as depression, acute burnout, affective disorders, trauma/PTSD, anxiety disorders, attention deficit hyperactivity disorder, psychosis, chronic pain, obsessive-compulsive disorder, sleep disorder, somatoform disorder, and personality disorder.
Limes was founded in 2005 and is headquartered in Cologne, Germany.
Expect a full investment thesis on the company soon.
Transcript, Commentary and Bonus Content
Introduction
Welcome, my fellow hermits.
This is the podcast version of The Hermit, a place dedicated to exploring the universe of investable listed microcaps.
Today's conversation is dedicated to Dr. Gert Frank, a former investment banker and consultant turned owner-operator of Limes Schloss Clinics.
Limes is a high-end mental health clinic space based in Germany, Switzerland, and more recently in Liechtenstein.
Dr. Frank operates four different clinics and is set to launch clinic number five this year and (clinic) six in 2025.
Limes was founded in 2005, but Dr. Frank only dedicated himself fully starting in 2017-2018.
He IPO'd the company in a very silent IPO back in 2019. And then within two years from his get-go (2018), by 2020, he managed to go breakeven in his first clinic which provided funding for his second, third, and fourth current clinics.
The company started as a self-financed project thanks to Dr. Frank and he pushed through with both personal loans and capital injections until the company made a profit.
As a German company, it is also extremely conservative when it comes to its financing but Dr. Frank pushes for a very aggressive strategy in both terms of operations and clinic functioning allowing for the second clinic to break even only six months after it started operating.
The process of getting a clinic running in Germany is quite complex but Dr. Frank provides a number of tips that he discovered along the way. He is a witty and funny individual but most importantly he is an example of a great man and a great manager.
Please do not take this as financial advice. This podcast is for educational purposes only. Do your own research and consult a financial advisor before making any investment decisions.
Please enjoy the podcast.
Understanding the Business Model (02:38)
Q: So let's talk a little bit about the overall business model and the value chain for Limes. Can you talk a little bit about going out there, finding a castle, leasing it for a very long time, and operating it?
A: Okay, you're right. We are renting these castles.
But the core business for us is... Our businesses are psychiatric clinics. We like to help people with medical issues. We are not in the wellness segment, but we are not, let's say, in the hardcore segment.
People who are working for a bank or lawyers or housewives from somebody. You can fall into depression or you have some trauma issues from former times that will come up.
And the alternative is first doing nothing and second is going to public entities to public clinics. Whether this will help you… question mark, because everybody is there and if you're not everybody you need something special like a restaurant.
I mean you can go to a giant restaurant for 6€ or for 60€.
It’s clear it depends on the target group and we are concentrating our service to let's say 4% of the population that's it and not more.
So we mostly have people who are paying cash or they have private insurance so that we can offer much more (better) service.
People who are coming to us normally have a short time capacity. They are willing to pay more. They want to have more intensive treatments. They want to recover in a short time. And therefore, they are paying more. And they are used to eating nice food. And they are used to it to be in a nice environment.
Customer Experience in Nature (04:54)
Q: Can you describe to people out there (listening) what these clinics look like? Because they are absolutely gorgeous.
A: I would say we have no wine glasses on the table, first thing we have no bar, hahaha.
I mean, they're always surrounded by nice landscapes.
In Mecklenburg, we have 120 hectares around the clinic, no neighbors.
In Bad Brückenau, it's the former summer castle of the Bavarian king Ludwig I. We also have very nice there so we have the nicest property there and it looks nice you can see it on our videos on the website.
Same for Absee, it was built a 140 years ago or so by a star architect during that time. He built also Neuschwanstein, so it's a really nice location.
For us, it's very important that we have a property that will support the healing process.
We are talking about mental diseases. If you're not feeling good, it will have an issue (impact). If you are in nature, it will have an issue (impact). If you smell wet grass or fresh air from the hills, it has an impact.
The experts call this a healing environment. So this is an important point.
Owning vs Renting these Properties (06:43)
Q: We discussed these in a previous chat, but can you briefly explain the difference between leasing these properties and owning the properties?
A: Leasing and owning, I'm not a specialist on these questions hahahaha
If you rent something, you're renting. We are not leasing it. So we are renting it and we are buying it.
And normally we are signing rental contracts for a longer duration because we need a longer time to... to have a good level of occupancy. Normally we need a contract of 20 years plus 5 (extension option). So that's the normal level. It's good for both sides.
We have indexed contracts, so there are no surprises to increase the rent if we make more money than expected.
If you're making lower (less), you will never get lower rent hahaha
But yeah, it's indexed and so both parties are on the safe side.
The bigger exception is Absee (Salzburg). We bought it because the property was so nice that I said, okay, I don't want to have the same problems that Lindlar (Cologne), that the property developer will go bankrupt or will have problems. So the price was attractive. And I think that the money, the Limes money we will invest to... to make this property very nice to the Limes level, it would also be good for the Limes shareholders.
Obtaining a Clinic License (08:48)
Q: One of the things I find extremely interesting about the business model is the VAT. Since Limes treats mental health conditions, it technically qualifies as a hospital, if I'm not mistaken.
Can you talk a little bit about VAT, in the cases of Germany, Switzerland, and Liechtenstein?
A: You mean the license process or what do you mean?
Q: The licenses and operating it being not tax-free, but added value tax-free with it being a hospital.
A: Yeah, we always try to get, I mean, it's necessary to have a license. That's clear.
So we are not a wellness hotel with some medical doctors in the cellar.
Q: And a wine club hahaha
A: We are a clinic and we have a psychiatry and mental disease clinic and then the next step is to get the status as (an) acute clinic.
So that the people can come directly to us and the insurance company, they will pay after the treatment, during the treatment.
If you're not in an acute clinic, then you have first to deal with the insurance company. It's much more complex.
And the third level is that you're so good that you can educate new psychiatrists in your clinic. And we have (that) for Mecklenburg and now we have this education license from the government. So that's it so far.
Q: If I'm not mistaking, you do need to hire personnel before you obtain these licenses. One would think that's very expensive.
A: Yes, that's the big gambling. And that's really tremendous for market hurdles.
So, I mean, as I said, first you have to find a property. Then you have to make it nice but you cannot finance it via banks because the bank will say “okay if you get no license then we have a ruin here”. So the license is very important.
Before you get the license you have to hire the people but a clinic with no doctors and no nurse cannot get a license. The building will not get a license from the government so you have to hire the people.
Not all at once, but let's say 20/30 people you have to hire, and then apply for a license and you never know how long it will take.
And this is a big gambling, so it could be ruining (bankrupting) you before the first day of opening.
Q: Yeah, a little bit of gambling when it comes to licensing.
A: Yeah, yeah, yeah. So this is always a big surprise for potential competitors. And if you then are financed by private equity or venture capital or capital from banks, you will have a lot of stress.
And you have to know the process. If you do it the first time in your life, then it's totally different as you do it the seventh time or sixth time.
(Talking about the government process) People can look at the internet or they call their partners in Munich. Do you know Limes brand? Were there any problems in the past? No, not yet. Okay. They are brand new, I don't know them, but they hired some doctors.
The hurdles are much bigger.
Customer Journey (12:58)
Q: Can we talk a little bit about the customer experience and discovery? How do clients find the Limes brand or the Limes Clinics?
A: Normally the old way is via the network of medical doctors the old way, they know each other from university clubs from study times and so on but this has totally changed.
Now it's 80% from the internet. If you concentrate on educated people, they know how to solve problems. If they have a problem, they go to the internet and look at which type of clinics are in the market and so on.
So we are getting, I would say, 90% of our patients from the internet.
Q: What about their stay? What does a customer do when they first enter the clinic? Do they need to do paperwork? Do they just stay there?
A: No, the paperwork is done before. You have to send all your documentation first via the clinic to the insurance companies and so on.
Normally if a customer comes to us at first they will get a cup of tea or a glass of water that's it.
Then somebody will bring them to the room and he will ask if the room is fine, if not they can get another room in their level.
The next day will start with some check-ups: body check-ups, (clinical) history, and so on.
On the second or third day we are planning together with the guest or patient, we say guest, his targets for the time he is with us. And then we will bring some therapists to him, and we will structure the process of the stay.
Q: Like a personalized treatment for each patient.
A: Yes.
Q: How long does an average patient stay in the clinic?
A: Some two months, I would say on average. But we have patients that are 9 months, or 8 months, or 6 months.
We have patients who are leaving within one week. They came and said, okay, I have to go. So the average is 2 months. And it's quite normal, it's more or less market level.
And it depends on the disease. If you are indicating (treated) for trauma, it takes a lot of time to solve it.
Q: Can you briefly talk about the point we talked about when it comes to the bureaucracy of staying? How long does the onboarding take? So from discovery from a client to going to the clinic? What's that like?
A: It depends also a little bit on the status of the patients. If first you call this and normally then he can, if he's paying cash, he can come the next day.
The hurdle is he has to have a telephone meeting via video call with the medical director first.
We do it a little like triage. We check the patients because we are responsible also for the patients who are already in the clinic.
If these new patients do not disturb the patients who are already in the clinic in a way that could be accepted, then they can join us the next day.
If you have insurance, then there are two ways. The first is an acute case. Then he needs support (justification) from his medical doctor, from his private medical doctor. There's acute. He has to get help immediately. He can come to us also the next day.
If he is not acute, it will take, I would say, four weeks with the insurance company for everything to be ready.
So from the first call to check-in, I would say between four and six weeks normally.
Q: What percentage of the patients or guests in this case are acute when it comes to this symptom?
A: I would say... 15-20%. But we have in some clinics, we have nearly 50% paying cash, so they have no problems getting in the next day.
They don’t want to go through a bureaucratic system, (instead of going on an) expensive holiday I will invest in the mental health of my husband or my wife.
Getting to know Dr. Frank (18:51)
Q: Who is Dr. Gert Frank? Can you tell us a little bit about yourself?
A: I cannot see him hahaha
That's an interesting question, yeah. Do you like special answers for it?
Q: I'll give you (a multiple choice) ABC options and you can choose one.
A: No, I've been in this business now for eight years and every day is nice (an adventure) for me.
It is a lot of fun to work with these people together, building new clinics and achieving very nice results. It’s a lot of fun.
And due to my background, I worked as an investment banker, I have a profound know-how in finance. I worked as a marketing consultant. I found my own medical company. I was a board member there for 20 years. I know how to drive the rounds.
If there are some problems I rely on this experience. My nerves are very strong. So I will give some backup to the other people so that they can solve it.
If the company has also a sound financial background, you can go this way.
If you go up to the hill and you have something in your backpack, then you are not nervous. You can go up and you cannot come down.
Q: You've done the rounds, as you pointed out.
A: Yes. It's necessary. A lot of people are forgetting that it will take a long time to come to the top.
It needs resources from people, financial resources, and patience and enthusiasm to go this way. If it's missing, you will be not successful.
Origins of Limes and its culture (20:56)
Q: One of the reasons I invested some time ago in your company was actually the way you started and the way you financed the entire thing.
The transition from Geratherm to this clinic that you believed in when you were probably the only one who believed in it at the time.
A: Yeah, that's always the same. If you start something and you go to the bank and say, okay, you want to have money, you want to have money and you have no clinics and nobody gives you any money. Even venture capitalists know nothing.
So it was clear.
So you have to start in one corner and then go in the right direction. That's it.
I had some supporters on the way, it was clear. But on an individual basis.
For me, it was a very good experience that you meet people and they know you a little bit, not so much, and the next day there's a check in the envelope, that's something.
Q: I think that mentality though has continued on, and it sort of is reflected in how you compensate your board.
Can you talk a little bit about that? About board compensation and the long-term view?
A: That's an intimate question hahahaha
Q: Board compensation including the people helping you: advisory and supervisors. How are they compensated?
A: First you have the Aufsichtsrat (supervisory board). So the Aufsichtsrat is getting some expenses paid back and that's it. So that's not very much (money).
I'm working only on the success base, I will get some shares every year, that's it.
At the time I said, okay I will work only for shares and they said you are crazy. If this will not work then you will earn nothing and I said okay some shares for 80€ that's fine. That now is a little bit more.
The salary then… if you see it on the retrograde basis, it was okay.
During that time it was crazy, but every time I was from my side, I was totally convinced that I'm working in the right direction.
If you look around, if you ask the people, if you look around and see all these things coming with mental diseases (it was quite evident).
For me, it was clear that the market is missing care for the top segment. (It was missing) a trademark where people can go there and say okay I cannot solve every problem but if I have the money for it and it's not so much money if you go to Robinson Club or to Club Med on holidays it's the same daily rate.
There are a lot of hotels in Madrid and elsewhere where you have to pay 1000€ per night. And sometimes you will get no rooms and we have 300 rooms.
So we are not in a luxury business, but we provide a much higher level than the state is offering.
Beyond Limes: Paracelsus Recovery (24:39)
Q: That, for me, is the entire picture of Limes. But there's a little bonus tip for Limes and it's called Paracelsus. Can you talk a little bit about Paracelsus?
A: Paracelsus? Yeah. Where should I start? Where should I end? It's the same. I mean, it's the same direction.
It started, I think, 10-15 years ago with our (the current) CEO. We had Paracelsus. He was the founder with his parents of the competitor and they had a very famous friend with problems.
He had problems finding somewhere to go and then they organized all these doctors and all the necessary stuff with nurses in their house. And this was the start of this pop-up clinic.
So it's one person who's paying for it, and you have 15 people around you: Butler, cook, everything…
The founder sold (similar business models) two, three times, now the owner is a big family from Dubai.
And he founded 10 years ago, Paracelsus. It's the same concept. So the idea is we have some very nice villas/penthouses in Zurich and if a client is calling (calls) us and he wants to solve some problems. It's very discreet nobody will see the patient nobody knows the real name and so on.
And Zurich is a perfect place if you are famous and you walk along the Zurich lake nobody will look at you because if George Clooney is working there nobody will contact him.
That's clear.
So it's a perfect place for very famous, very wealthy international clients.
We have no Swiss clients. It's always international clients from Australia, from the US, from England, from all over… They have special issues and they are paying a lot to be secure there and it's totally discreet.
And the guests, or the clients, most of them are under 40.
Yeah, so we are not in a geriatric business. We don’t host these old, fat, rich people who have some problems with their blood pressure, no, that’s not our model.
On average, they stay there for two months. If you're at their level a small expenses would mean you have to pay one million euros.
(Paracelsus) is 420,000 CHF per month. Two months. And normally they are coming by their own jet.
It was an opportunity for Limes during Covid time. Before (this period the clinic) was very successful but immediately due to corona they had no guests. People had to be at the airport 14 days in quarantine (before entering) and then back 14 days the whole business model imploded.
So I said, okay, we cannot offer you the sum you expected (when they purchased 51%), but we will help you, we can support you. And this was the start of a very good partnership.
And for Limes, Paracelsus was the perfect business on top.
At Limes we have normal pants, more or less.
Q: And you have fancy pants hahaha
A: But, yeah, and Liechtenstein is in between a little bit.
So it's perfect for us if you're in the, not in the luxury segment, but in the prime segment. So we are owners of the most expensive exclusive clinic worldwide.
That's something. That’s a start, (especially) if you go from top to bottom.
Q: That's the perfect conclusion.
A: It's a different business model. It's more a little bit like a project business. It's not so stable.
Sometimes during wintertime, there are no guests and for the summertime, you have full occupancy.
For these people, they need help and they are very happy if they find something where they get the right support, the medical support.
As a normal (regular) person, it's not easy to say, okay, I'm suffering under of this condition.
But if you are famous, that's (even) more difficult.
So next time, worldwide, he'll be on the first page of every press (release) now.
Or if somebody says, okay, he isn't playing to Zurich because he's totally drunk,or I don't know, he's taking drugs for 10 years and now his brain is totally gaga and he has to work four weeks from now on the stage, or something like this.
They need a place for treatment.
Zurich is on the international level. They have very good access to very good doctors and medical staff. You have arabic speaking people there you every language you can think about…
Q: Yeah it's an international hub.
A: It's not possible in Munich, not possible in Hamburg, but in Zurich it is possible.
Q: So, neutral territory, Switzerland, being a friend of everyone.
A: Neutral territory.
Closing remark (31:15)
Well, that concludes the first ever The Hermit podcast episode. I hope you thoroughly enjoyed Dr. Frank's comments.
And, you know, if you want to comment, if you want to leave a like, that would be much appreciated.
Feel free to reach out as well if you want to talk about Limes, Dr. Frank, or anything related to microcaps.
I'm always available for you.
Bonus Comments
Here are a few updates that come directly from Dr. Frank on clinic development:
Lindlar clinic’s previous owner filed for bankruptcy and a new French PE player came in and bought it out. They had to change piping and materials, so it’s upside down now. The new owners seem very aligned as they spent a substantial amount of money reforming it (about 50M€). The clinic should be operational and transferred to Limes in Q1 2025. It will be the largest Limes clinic with 128 beds and, Dr. Frank, expects it to be the #1 resort of its kind.
Alpinum clinic was a change of pace. The deal changed to model to purchasing a failing clinic instead of starting it from scratch. They reformed the operations headed and are now breaking even. The deal is fully paid (cash+earnout). By purchasing the PropCo they don’t need to optimize rent and end with less pointless discussions and higher margins. If Dr. Frank can find similar deals, he will probably take them. The downside is the not-so-tight balance sheet, not a lean operation-only model.
Abstee clinic next to Salzburg seems to be on track to open at the end of 2024. Orders for decoration and backup technicals are signed and paid. They already spent about 4-5M€ on the setup. The facility will focus on treating young adults. It can fit about 50 patients simultaneously (50 beds) at capacity including rooms meant for families (2 adults + 2 kids).
Bad Brückenau has a small modification planned that would add 10 beds to its current capacity of 60 beds. However, there’s an ancient oak tree (1,000 years old?) blocking any execution. Given the position of the Green Party in Germany, this is not likely to change and Dr. Frank could even consider changing sites.
Limes Schloss Clinics $LIK - The Prime Mental Healthcare Provider w/ Dr. Frank