Pam Kessler, CFO of LTC Properties, brings years of finance experience to the REIT. She discusses what a successful operator partner looks like, how to maintain a 24/7 work-life balance and what teams should strive for in producing meaningful work.
Lucas: Welcome to Bridge the Gap podcast with Josh and Lucas. We are at the NIC Conference in San Diego and there’s a lot of energy in this room and we’ve got some big heavy hitters on the podcast today. And I would like to introduce everybody to Pam Kessler. You’re the CFO of LTC. Welcome to the program.
Pam: Thank you. Thank you for having me.
Lucas: We’re very excited to sit down with you because you’ve, you’ve been putting your passion and your work behind this business for a long time.
Pam: 20 years.
Lucas: 20 years.
Pam: In July of 20 years. It went by like that.
Lucas: You started right when you were 18, right? And you just have never turned back.
Pam: Oh, I love you. Flattery will get you everywhere.
Lucas: Well no Josh and have been excited about this because we love LTC. We love the staff there. We’ve had many opportunities to interact with your team and we just have a lot of respect for what you’re doing. So tell our audience a little bit about your background and you know, and you’ve been so loyal to this company for so long and you’ve seen shifts and changes that we’ll get into also.
Pam: Yeah, yeah, for sure. Well, I started in 2000, like I said, which was a pretty tumultuous time for our industry and we can get into that and how we’ve become better and stronger through those challenges. But I actually came up through the finance accounting side, so I graduated with an economics degree and went to work for Ernst and Young. So I was an auditor and then I was in the real estate group there, which is where I kind of got the real estate bug and I left to go work for a client. It’s KB Home now used to be called Kaufman and Brodes, a homebuilder, which is where I met my husband. And then I left there to work for this new structure in real estate that was being formed or kind of reborn. And that’s real estate investment trusts, a REIT. I went to go work for a multifamily REIT and the Irvine company and learned so much there about rates and really loved that structure.
But I had the opportunity to go work for a private developer up in Los Angeles. So I was in Orange County at that time up in Los Angeles who was thinking about taking their asset classes public in a REIT. And I thought, oh, this will be great. I’ll get to do it from the ground up. And while I was there, I’m working on that. It just became apparent that their structure wasn’t conducive to it. They had too many different ownerships. It would, that roll up would have taken probably a decade. I did not have a decade.
But I got a call from a friend who was representing LTC properties. This is in 2000. They were looking for a VP controller position. And I looked at the company’s cash flow statement. I think that’s the most important part of a company and how the financial statement that tells the most about a company is the cash statement. So look at the cash flow statement. Read all the public documents.
And senior housing was the only asset class I had not been involved in before that time. And it really interested me. I thought, you know, the demographics at that time were compelling when we’ve been flashing forward for decades now of what’s going, you know, what’s going to happen as the baby boomers age. And I took a leap and said, I’m going to do this. I’m gonna, you know, get involved in this. This is going to be really interesting.
And it was because shortly after I started was when there was already some pressures going on from the skilled nursing side created by the Balanced Budget Act and the unintended consequences of that cutting reimbursements and all the public operators were in bankruptcy. And we restructured through that and grew our senior housing side, which at that time also senior housing was going through an overbuilding, over supply cycle much as we are right now. And we’ve worked through that and here we are today growing, you know, two and a half billion dollar REIT that’s approximately 50% in skilled nursing and 50% in assisted living and looking forward to more continued growth.
Josh: So fascinating. So you’ve seen a lot of change and you just kind of alluded to that and told us a little bit. We’re definitely in one of those time periods where so much is changing.
Pam: But still things stay the same. What amazes me, the things that caused a problem or exacerbated a problem back in the 2000s are true today. And that’s overleveraged from the operator’s side. The REITS I think have been fairly disciplined and not overleveraged, but the operators, you know, when capital is cheap and someone wants to loan you a lot of money at a cheap rate, they take that. And I think the issues we’re seeing today are stemmed in part from that overleverage on, on those traditional debt and the lease side. I mean this is our leverage and if you take too much money out from your properties and you agreed to pay a lease rate on something that was maybe an inflated value that’s a problem that eventually comes to a head and has to get resolved.
Josh: Yeah, I could see that. And obviously as the economy seems to be a little bit cyclical, I guess that problem has been cyclical as well. So you guys, if I’m not mistaken, one of your taglines as of recent is REIT Done Differently. Can you kind of explain that? I mean it seems like there’s some creative things you guys are trying to do to be different. Kind of explain that of like what has been the tradition, how are you different?
Pam: Sure. I think REITS have been traditionally looked at as being an inflexible capital provider. I think, you know whether that’s true or not true, I don’t think we’re all the same. I think maybe some REITS are maybe more, this is the document and you have to live by it and we’re not gonna change anything. And that’s not the way LTC has approached business because we do look at it as a partnership and a longterm one at that. And we know in long term relationships and partnerships, things change and you’ve got to, it’s a living, breathing. The lease is a living, breathing document that you know, as you add properties in, as you grow or take properties out as maybe your operators repositioning and focusing on core markets and assets they liked at one time or fit into their business model, maybe today don’t and they want to divest. And if you, if you’re not flexible in that and you, you know, there’s nothing that compels you as the landlord to, to accommodate that request other than a long term partnership and relationship and you want to do more business and you want it, you want the win-win, right?
We’re all looking for that win-win where we all make money together and we serve our residents and they’re happy. Everybody’s happy and successful in their businesses and lives. And that’s what we strive for. So we listened to our operators and partners and their needs and try to craft a structure that is something that works for them and makes them get up every morning and you know, be excited and work hard and not have to worry about where their financing is coming from. Having a REIT partner and us in particular is very beneficial to an operator because they don’t have to worry about any potential REIT capitalization event having a partner that maybe wants to monetize and get out and then you know, you potentially losing the operations of that building if it gets sold to a company or private equity that doesn’t want to keep you in as the operator.
You know, your operators are in the business to operate and some of them like to make money in real estate. And so we’ve listened to that, to some of our operators say we would like to stay in and have an ownership stake in the real estate of this and we’ve created joint ventures to address that, which we had never done that in the past. That’s something within the past decade we’ve done that I think is, you know, very forward thinking and addressing the requests of our operators. We haven’t done RIDEA, which is where the REIT actually takes a part of the operations. We are not operators and if you have part of operations, you’re probably involved in operations a lot more than you would have as a triple net lease capital provider or even a lender.
I mean lenders aren’t into dictating what the rental rates should be in a building and I’m not sure that all the operators really want that. You know, they would like a capital partner, but they are the experts in the operations and most want to be free to make those operating decisions. So I think from the triple net lease structure, there’s plenty of operators out there that are comfortable with that and they want to reap the rewards of their hard work. They build up operations, they make money in operations and maybe they don’t want to share that with their, you know, their capital partner. And that’s a triple net lease structure. All the bottom line and yours to the operator.
Josh: So what are some of the common challenges that are starting to arise that it seems like are impacting all of your operators or the majority of them? And what are you hearing?
Pam: So, the thing that’s happened recently with the supply and, and the overbuilding, it’s a short term overbuilding. I mean, I think that the demographics going out are compelling and that’s why we’ve been building. But for right now there’s been this protracted lease up, so, you know, property not making performa, not hitting the occupancy rates when they thought they would, which has, has been problematic. And but to the good side of that is the building has kind of subsided. There’s still construction starts, but they’re a lot lower than they were. We’re starting to see, we think we’ve kind of troughed and we’re starting to see occupancy across the board rise. So we’re hopeful that that will continue.
One of the trends we’ve seen well over the past two decades that I’ve been here. And I think it will continue: the new technology and advances in healthcare have made our target demographic healthier and able to live independently longer, which is a great thing from a society standpoint. But the flip side of that is there when they are in need of services, they’re coming in at an older age. I think we’re up to like 83 now is like the average entrance. And there are more frail, multiple, you know, kind of multiple chronic conditions that are creating, you know, the need for assistance. So that’s kind of pushed off this wave that we keep saying everybody says, oh, next year, oh, in two years. And, and that keeps getting pushed out and I think that will continue to happen. I think it’s, we all were supposed to live to be a 100, right? Well, hopefully we live to be a 100 in a very healthy condition. And you know, quality of life is important.
Josh: Well, it seems like there’s a lot of contributing factors to the challenges of particularly around occupancy. You touched on the sometimes oversupply. I think we’ve talked on people are waiting longer before they enter, particularly assisted living and even independent living. With those particular challenges, do you think we’ve heard some talk from different operators that particularly some of the older communities that they’ve been operating successfully for years are now really starting to slide off and some of that they attribute to newer competitors and over supply coming in. But also that product type a seems to be changing as we’re kind of getting some different demographics and the adult children are having much more say in the placement. So they are feeling like their, their amenity packages or the structure of their community or their services need to be updated. Are there ways that you as a REIT are able to be there for that operator to help them sometimes when they just need to reposition their product a little bit? So tell us, are you seeing that one, and then two, how are you guys kind of coming alongside to help that?
Pam: Yeah, we have, one of the things we did earlier on when we started seeing, and even before that we’ve made capital available to our operators, but we really went through our entire portfolio and looked at where our areas and properties that maybe need a big renovation or rehab to make themselves competitive, remain competitive in their market. Because you do have that brand new building that’s down the street from you. That’s, you know, you need to be able to compete. And for us, we don’t want it to be, it’s for lack of a good physical plant as why our operator’s not competitive? You know, we want them to be competitive from a physical plant standpoint. So that’s, that’s us putting capital into the building, making that available to our operator. And obviously we want from a care model, we want our operator to be, you know, competitive and, and that’s when we’re, when we’re looking at our operators of what stands out, you know, what, what are they offering that’s different in their marketplace.
And I know you guys have had Lynne Katzman on and we are huge Lynne Katzmann fans.
Josh: Us too.
Pam: Oh she’s, she’s amazing. And her Connect for Life program I think is something that’s really innovative and she’s definitely a leader in this industry. And a lot of people look to, you know, what’s, what’s Lynn doing, what’s Lynn think? And certainly I think there’s no one size fits all. Everything is market specific. Healthcare is delivered locally, regionally based and what’s what works in one market might not work in another. We’re are operators. We found the ones that are most successful are your regionally-based ones because they are the sharpshooters in their market. They know their market better than anyone else and they’re not stretching themselves thin trying to know everything in all 50 states or even, you know, 10 or 20 states. That’s a lot. You know, five, a handful of States, five or six states to be, you know, the best provider in those markets we found is a recipe for success.
Lucas: Josh, we’ve talked about past and we’ve moved to present. Let’s talk about the future a little bit. We’ve talked about the demographics, those demographics have been coming for decades. It is really here where we, I mean, I could be wrong, but I’m thinking it’s still maybe about five years out when really start to see-
Pam: -Yeah, where you start really peaking
Lucas: -yeah on age and income qualified people, really the demand. But we keep hearing that they’re gonna want something different, something new. Any thoughts on that perspective?
Pam: Yeah, well, I think they’re going to look at a lot of things. When you’re looking, you’re talking to those that are still like more independent, they’re looking for amenities and lifestyle and so you need to be able to offer those. But they also want to age in place. Nobody wants to have to move again. Don’t tell me I’m gonna have to move again in five years if I have an event that, you know, I’m needing more care. So you also have to, in addition to amenities, be able to offer the care, you know, you have to be able to provide that. If you want to keep that resident and have them age in place, you have to do both. And I, that’s a tall order. That’s not, it’s nothing that we take lightly. And that I think is the challenge for operators is to be able to do both well, because if you’re just a, if you’re just focusing on the care, the frailty and the care aspect, you will also miss kind of the, the beginning wave. You want to, you might, your occupancy will suffer because you will have the rapid turnover if you’re just taking very, you know the older and more frail in need of a lot of care. You’ve kind of need to balance that out, I think with those residents that are more amenity focused and not needing as much care.
Josh: Yeah. And you know, we’ve talked about, you know, you overlay those challenges with trying to keep the product, the community priced at a point where the care, the amenities, the rent is at a point where it’s as affordable as possible. That’s such a big challenge. Are your operators talking about that? Is that worry them at all for the future?
Pam: You’ve hit on I think probably the biggest challenge for our industry as we look to the future and the baby boomers that are coming because they don’t all have the means to afford that brand new building with, you know, high rents and, but they’re going to need care. And how do we provide that at an affordable level? And yes, operators are definitely talking about that and we, there’s not a solution yet. I suspect some of it’s going to be, we talked about the older buildings. Okay. So the older buildings, the people then that are coming that might not have the money for the amenities and the lifestyle but that are needing care. The older product type might be something that’s more affordable. If the care model can run in it, and I suspect that that’s going to enter may say something probably controversial, but it will probably take some public funds as well.
So we have a little bit of Medicaid is in the assisted side. We typically think of Medicaid as serving the long term care community and skilled nursing to the effect, to the extent that there are long term care residents in skilled nursing that are not in need of a lot of care but are there because that’s where they can be cared for with public assistance. That’s not from a tax payer perspective. That’s not an efficient use of our capital if it, if that can be done cheaper and more efficiently in an assisted living facility, than our assisted living community, that’s what we should be doing. And I don’t think we’ve turned our collective thought to that yet from a policy standpoint. But I think the coming demographic wave may force that change. So we may start to see more public assistance in assisted living.
There’s a few states that do it pretty well. Illinois for one has the supportive living program, SLP is what they call it for short. And so they are being very efficient in that caring for their Medicaid residents in assisted living because they know it’s cheaper than skilled nursing. Other States are not as, it’s not as prevalent. You know, sometimes it might be only 2 or 3% of the building is Medicaid or less. Some have none. But that is, that’s a big challenge for our industry.
Josh: It is. And I think you touched on it, while it may be controversial, it’s a point that we’ve gotta be willing to discuss on the public assistance. And I think there has been a few states, very few that seem to have done that Medicaid. Many states it’s called the waiver program or they’ve got a cool name for it. But you know, in most states the program has not been, I would say provider friendly because, you know, they oftentimes don’t reimburse for the room and board only the actual care. And we all know one of the great advantages of the value proposition of a community is the community, right? And then I think something that policy makers are going to have to figure out is, is how they don’t create so much typical bureaucratic red tape that it adds administrative cost burden as so many of these programs do because you know, many of the states that I talked to my friends in that they’re trying to utilize those Medicaid dollars, the reporting process and the access and the billing things, they have to hire another FTE to just meet those things. So, you know, it’s, it’s one of those kinds of things that I think a partnership between the private and the public sector to really get at the, at the same table and work out solutions using the great technology and resources that are out there to help even the processing of all of that be more accessible for the providers and those participants in those plans. That I think is one of those secret ingredients that is lacking right now.
So this is great discussion, but I have to kind of move into a different area here. I couldn’t pass up the chance. You are obviously a very successful female leader and I know we’ve talked with several great female leaders, much like you mentioned our friend, your friend Lynne Katzman, and I always like, Lucas always likes to hear and our, I think our audience loves to hear talk to us your perspective on balance and that balance with family and leadership from your perspective from a female leaders perspective, if you don’t mind.
Pam: Yeah. And it’s funny, you know, when people point out that I’m female, obviously I know I’m female, but I don’t think of myself in that role in business. I’ve just always been, I’ve loved business, I’ve always been a business person. And so I don’t think of it in that context, but in terms of balance, and I think this is important for my male colleagues as well, because their role in the workplace and home has shifted and evolved as for a woman.
So we all want to have that work life balance. We all want to be more involved in our children’s lives. It’s not what we’ve learned. And this is a great thing for our generation is it’s not an either/or. Past generations, it was an either/or. You’re going to be a career person or you’re going to be a family-person and usually couldn’t do both. Now not only can you do both, I think it’s expected. You know, I tell our people I work with all the time, so, your child has a play. You, you know, schedule your day so that you can be there at that plate. That’s important, you know, and I’ve, I’ve tried to do that. You have to be mindful of your responsibilities at work. You know, if you schedule the meeting, you’re at that meeting. You schedule a podcast, you’re at their podcast, right?
Lucas: That’s right.
Pam: But you should also likewise schedule your family time too. And we’re now working kind of in this 24/7 cycle. I think the first thing we all do when we get up in the morning is check our email, right? Like, okay, what, you know, did anything, you know, important, do I have to do something right now? And we’re just in tune and we do that before we go to bed, right? We just kinda check off. We check off. So I think the lines have blurred between work and home and it’s all kind of one, one, it’s all of us, it’s what we are. And I think that’s great.
And so for women and for men, I think you should strive to, to have that balance and it is doable. I’m here, Lynne’s here, and we’re all here telling you you can do it.
Josh: I love that answer. And I love the fact that you at a leadership capacity realize the importance of the work life balance is one of our guests called work life harmony, James Lee. And that you need to be intentional about not only scheduling your work priorities but scheduling your family priorities and the fact that you even that vocalized that at the senior leadership level, that speaks volumes to the culture that is created underneath you and into your team. So really appreciate that focus.
Lucas: Yes. And I’m so glad you hit that, Josh. So I want to round out the show with the final comment and question to you, Pam. One of the things with Bridge the Gap podcast is that we’re trying to bridge the gap into a new generation of leaders coming into this space. So let’s talk from your perspective to that economics major, that young person that’s in school right now. And if you had the chance to go into their classroom, more than likely, I would say 99.9% of them didn’t think that senior living could be a great career option for them. What would you say to that person?
Pam: I would say it’s a fantastic career option and I think this generation really, they just don’t want to get up in the morning and go to work. They want their work to be meaningful. And what is more meaningful and fulfilling than caring for our elderly? I mean there’s, we have communities filled with grandma and grandpa’s, right? Mom’s, dad’s, grandma, grandpa. And I’ve gone through the whole gamut with my family and having my, my grandmother moving her into an assisted living community and now my mother and memory care. And so it is a very, very rewarding career. And the sky’s the limit. I mean, there’s not just, I obviously came up as we said through accounting finance, there’s marketing, there’s operations, there’s, there’s the care giving side, right? We haven’t even touched on that. And you know, that’s a big challenge we have is recruiting and retaining talent from the caregiving side. And also from the facility side. So there’s, I think there’s something for everyone in senior housing and this is a great industry.
Josh: I totally agree and I really appreciate and I hope our younger audience that’s growing appreciates the, that you pointed out. You know, I think so often they hear what they’re not or they get compared to another generation. But each generation is different. But one of the positive attributes that you touched on that we have seen is that they are an extremely mission focused group, which I think is our largest opportunity because like you said, it’s a what, what better industry. If you want to be in mission work, so to speak at a variety of capacities so that you can lay your head down at the end of the night, you can get up in the morning and know you’re collecting more than a paycheck.
Pam: Yeah, you made a difference. You made a difference in a lot of lives.
Josh: That’s exactly right. And I will say I’ve been very encouraged. We’ve had the opportunity to speak to a lot of university classes. Very bright, very intelligent and their eyes are wide open at opportunities. I think that’s an opportunity our industry and all of us has ambassadors for our industry we haven’t capitalized on because so many of them have never even heard of senior living.
To your point, Lucas, I think you said like 99% of them would never even know. And that’s, that’s been our experience. You know, you usually will find out of a class of 100 students that are business majors, maybe one of them senior living even on their radar. And so I think integrating and having the dialogue as industry leaders with our universities is a real key, right?
So this has been a great discussion, right ucas?
Lucas: A lot of fun, lot of fun. And our listeners can hear the energy continuing to kind of boil in the background here and we know, Pam, you have meetings and a lot of responsibilities. So thank you so much for taking time to talk with us, a very fun conversation with you.
Pam: Thank you. It’s my pleasure. I appreciate them having me.
Lucas: And we’ll make sure that we connect to LTC in the show notes. And thank you for listening to another great episode of Bridge the Gap.
Lucas: Exactly. Great head and great heart behind the business. TIS insurance. Thank you so much for supporting everything that Bridge the Gap is doing.