Going from self storage to assisted living facilities is quite a jump to make. Why would anyone ever want to make that jump? Joe Pohlen is here to walk us through how he made that decision. He’ll also explain how to get the most value while providing the best care for the residents. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Pohlen Real Estate Background:
- Co-Founder at Cardinal Senior Management
- In 2012 formed a group and started buying apartment complexes, self storage and senior housing
- Started buying single family homes while in college and renting them to fellow students
- Began work as a court appointed receiver and became specialized in turning around struggling bank assets
- Based in Grand Rapids, Michigan
- Say hi to him at http://cardinalseniormanagement.com/
- Best Ever Book: Modoc
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Joe Pohlen. How are you doing, Joe?
Joe Pohlen: Doing well, Joe. How are you doing today?
Joe Fairless: I am doing well, nice to have you on the show. A little bit more about Joe – he is the co-founder at Cardinal Senior Management. He also does apartment investing. He started buying single-family homes while in college and renting them to fellow students, and in 2012 formed a group that started buying apartment communities, self-storage and senior housing.
He’s based in Grand Rapids, Michigan, and he is currently on the road right now, he pulled over to talk to us, and he’s in Lancaster, Pennsylvania, where he said he has a bunch of apartments.
With that being said, Joe, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Joe Pohlen: Yes. I went to college in Grand Rapids, Michigan. While in college, I got into student housing, where I bought a single-family home, rented out the bedrooms to my friends, and then after a year we moved to another house and have roommates, and kept doing that for about seven years and built a student housing portfolio.
After college I was a court appointed receiver for a couple of years – that was during the economic recession – and got into buying distressed and turnaround opportunities in apartments, both student housing and traditional apartments, and also sell storage. Recently, in 2015, I sold off our self-storage and used the funds to get into senior housing, and senior housing has been my primary focus since 2015, where me and a partner own and operate about 550 beds of what’s called in Pennsylvania “personal care”, but what most of the listeners in their states would probably recognize as assisted living. That’s a little about my background.
Joe Fairless: So you sold off your self-storage and used the funds to get into senior housing… I’d love to focus our conversation on what you’re doing now with senior housing, but without talking up senior housing for this question, why did you get out of self-storage?
Joe Pohlen: Well, to be honest, I actually was offered a price that I couldn’t refuse on the complexes that we had. There were groups that were moving into our area that were regional players who were really hungry to get their hands on some self-storage assets that we had, and it just made sense at the time to sell those.
Joe Fairless: So now you’re focused on senior housing – what were the reasons why you wanted to get into senior housing?
Joe Pohlen: You know, honestly I had a moment where I was sitting around, looking at what we did and I was really drawn to the caring compassion side of the senior housing. I always enjoyed spending time with my grandparents and I felt every time I was in any of my friends’ senior housing buildings a sense of purpose, in that there was something more than just the financial side of it, and the financial side of it was really strong.
I specialized in purchasing struggling assets, and the senior housing assets that we purchased were in need of a turnaround and I felt I could be of value, and that’s what drew me to senior housing.
Joe Fairless: I’m very much looking forward to digging in to the senior housing aspect of things, so tell us about maybe a deal that you bought that was struggling, why they were struggling and what you did to turn it around?
Joe Pohlen: I’ll give you an example of one of the senior housing buildings that we bought, the first two that we bought. It was a second-generation owner; I don’t believe the person who inherited the business their real passion was ever senior housing. A lot of the senior housing operators who are mom-and-pop operators are second or third-generation business owners, and they don’t view sales and marketing in senior housing as like a bad connotation. A lot of the operators don’t really believe in a really stout sales and marketing department; they don’t partner with third-party referral sources like A Place For Mom or Caring.com.
The building that we saw was an older building, but the staff was really, really strong; the staff interacted with the families and residents well, but was only about 78% full. We felt there was a huge opportunity there to implement some really strong sales and marketing procedures such as just a script, doing assessments on-site before taking an application.
We went ahead and implemented a couple of those sales strategies and now our building is over 95% full, and that turnaround drastically increased obviously the value of the business, and has been good for everyone involved.
Joe Fairless: In addition to a script that you provided the staff, there has to be some other things, from maybe like cap-ex improvements or some other operational things that you did that have helped it.
Joe Pohlen: Well, one thing I think is kind of a secret for senior housing – and some of your listeners might have experienced this when they’ve been looking for one of their loved ones – is they’ll come in and they’ll ask how much the apartment costs, how big is the apartment, but that’s not what they’re trying to find out; what they’re really trying to find out when they come in looking for assisted living care is “Are you going to love my mom?” That’s what their true focus is, and I see a lot of people who get into senior housing, they really focus and they try to take an approach that’s similar to self-storage or apartments, where you add the dancing waterfall and the granite countertops and it looks like a country club, but in reality what you’re doing is you’re serving individuals who it’s the last few years of their life; a lot of time their hearing is gone, their eyesight is bad, they can’t even appreciate those things that you think as a business owner or a building owner that you’re really investing in… Whereas what the families and the residents are really getting and looking for is that caring compassion from the staff, and unfortunately, the line of work that I’m in in senior housing is notorious for treating staff like human sausage and just really not providing the tools and the dignity for the staff to succeed, and you see it when you go in the buildings, you can just feel that energy.
I’m a big believer that if you’re gonna turn around a senior housing building, focusing on the culture and the way the staff interacts with the residents is more important than large cap-ex projects. That’s something that I am quite a bit different than a lot of other senior housing investors, and I believe that, frankly, has lead to my success in the industry in buildings where a lot of others have not been successful.
Joe Fairless: How do you create a culture? You said you inherited some good ones, but you still have to perpetuate that, so how do you do that?
Joe Pohlen: I believe you have to practice a system of open finance where everyone in the building understands what the rent roll is, how many residents are in the building, and each department understands how much money that they are spending. And you really treat your staff as partners of yours in the business, and you create a team environment by which it’s obvious how [unintelligible [00:08:57].19] increases are awarded, and showing your staff that as your building succeeds, they can succeed as well.
Joe Fairless: Wow, that’s something I hadn’t heard before. How do you communicate the finances to your staff?
Joe Pohlen: What we did is we created a dashboard system, and the dashboard system, when our staff meets – and just to give you an idea size-wise, most of our buildings are around 100-120 beds, so on any given day you’ve got anywhere from 100-120 residents, and you grow on a staff of about 50-70 in a building of that size, where you’d have one executive director, and then we have seven departments. Each department – maintenance, nursing, dietary – has a department head.
So what we do is we meet every morning in a standup meeting and then each department has access to their dashboard, which shows what their budget is to spend on labor and supplies for the coming month and where they are at that time during the month. With that information, they can make decisions on who to hire, who to give merit-based pay increases to, and how to move and take full control of their department.
We really see each building as the head administrator is the CEO, and each of the department heads are a vice-president who are in charge of their department. By democratizing that kind of power and decision-making down to the department head level, then the department heads can see the effects of their decisions, and even though a lot of our department heads don’t have a business background or even thought that they were ever gonna be in a business situation, if we can make our P&L’s and our budgets simple to understand, then in that situation they can take ownership of those decisions.
Joe Fairless: So help me understand the potential profit opportunity for senior living, and maybe within one case study… Because when I hear 50-70 staff members for 100 beds, I’m thinking “Wait a second, I have five staff members for 100 apartments”, and you’ve got 50 for 100 beds, and I’m thinking the expenses gotta be through the roof, not to mention everything else… So what are the numbers on a deal like a 100-bed community?
Joe Pohlen: For example, one of our buildings, our goal is to run and our budgets are all based off of running at a 35% margin, so that’s our goal. If everyone follows their budget, that’s where they end up.
On a 120-bed building – and I can only speak for my buildings, of course – we have a rent roll of, let’ say $750,000. So then 35% of that would be like $262,000 would be your NOI for that month, if everyone hits budget. The rest of it is used in expenses. It’s a sizeable operation running each of these senior housing buildings.
Joe Fairless: Yes, it is. Is that a typical range? Because when I do $750,000 divided by 120, I get $6,250/bed/month.
Joe Pohlen: That would include their levels of care. The way senior housing is built in our area and how we build it is you pay an amount for your room and board rates, and then based on your care level needs – if you’re a two-person transfer, or if you need extra assistance – you would pay [unintelligible [00:12:46].04] each month, and that amount could be as high as about $2,400/month.
Joe Fairless: And what type of expenses are the largest variables for you on a monthly basis?
Joe Pohlen: One of the things when I talk to people who are thinking about getting into it, the largest expense is labor, and it’s the one that can get the most out of control. You have to find a way to manage your labor. In this line of work you’re dealing with life and death; we’re averaging across all of our buildings probably close to a dozen deaths per month, and it’s really easy for people to kind of lose track of their time and what they’re supposed to be doing, and it’s labor.
The whole business that we’re in is make sure you have good occupancy, you’re keeping up on your levels of care and you’re watching labor. Everything else tends to take care of itself; you obviously have utilities and property taxes and raw food costs, but the biggest most variable cost that will make or break you is your labor.
Joe Fairless: I wanna ask a question about the overall costs and come back to labor. For the overall costs, is one of them rent or do you own the buildings?
Joe Pohlen: We rent our buildings from a landlord. That’s pretty common in this line of work. A lot of REITs participate in that model, where they’ll own a lot of these facilities and then they’ll rent them to you on a triple-net lease. We currently are using a private landlord, we’re not using any REITs, but if someone wants to get involved in this line of work, that is a strategy, where you identify a building for sale, you do all of your underwriting, you do all your negotiations, and then you bring it to a REIT. You can just type into Google “REITs that specialize in healthcare”, there’s a lot of them out there.
You can actually bring the deal to them and they’ll purchase it, and then at the day of purchase turn around and sign a triple-net lease back to you.
Joe Fairless: Because of your background as a real estate investor, does not owning the building – is that like an elbow in the side?
Joe Pohlen: You know what, I know the guys that own our building pretty well and I am so thankful to them for getting us in the business. There’s obviously huge benefits from building ownership from the depreciation and the tax benefits of it, and down the line that would be a goal of mine to own some of these buildings.
One of the things I do like about the triple-net lease option is after you’ve shown yourself to be a quality operator, really how far you wanna grow your company is almost limitless, because there are a lot of real estate investors out there looking for quality operators.
Joe Fairless: Now I wanna ask another question about the labor… So with labor you said that’s the largest expense and can get the most out of control; what are a couple ways – and perhaps you’ve mentioned them, but a couple ways that you don’t allow it to get out of control?
Joe Pohlen: We use ADP as our payroll provider, and we use a program called MakeShift, which is through ADP. What it allows you to do is make your schedules, and it will show you exactly how while making your schedule what your spend will be for the coming week.
One of the issues you have is monitoring who and who will not be on over time… In situations where you can use a med tech, which is kind of a lower cost employee who’s certified to pass medications, where you can use a med tech instead of an LPN, which is someone who’s got a higher certification. So we use that program, and then also most importantly is making sure the people in your building take ownership for the payroll spend.
Those two systems I found to be most helpful, but also, like I said, it’s the biggest part of our business and we are constantly looking for ways to control labor while not sacrificing our culture, and obviously, the level of care that our residents are receiving.
Joe Fairless: And just running the numbers, if you’ve got a property or a community that’s $750,000 monthly rent roll and you’re making 35% of that, times that by 12, that’s over three million dollars in profit a year. Is that around where you’re at?
Joe Pohlen: Well, here’s the thing that’s really exciting about senior housing – if you run it well, it is very profitable. If you aren’t running it well, those numbers can change quite a bit. But yes, that’s our goal and that’s where we’re tracking towards.
Joe Fairless: And where are you at now from an expense ratio standpoint? Are you around the 35% or does it take a little while to get there?
Joe Pohlen: The buildings that we’re talking about – we purchased those back in 2015, and when we took them over, they were running at about a 12% margin, and we’ve gotten those up to about a 28% margin. The big thing about when you’re looking at the margins obviously is those last 7% of occupancy, those last 20 residents are by far your most profitable residents, because the fixed cost of the building rent and the fixed cost of the insurance and the property taxes and the utilities – those are already relatively taken care of.
So the buildings become really profitable once you get up in that 95% to 100% occupied area.
Joe Fairless: But then you’ve still got the variable of the labor, which would increase with that, but the bulk of the expenses, the fixed ones will cover up to 100% occupancy.
Joe Pohlen: Yeah, your biggest labor expenses salary-wise is gonna be your executive director and all of your department heads, so obviously as you go from 60% full, you’re still gonna need a head director or if you’re 100% full you’re still not gonna add another director. So the extra staff that you add to get from, let’s just say, 80% to 95% full, that extra staff is usually at your PCA level or your dietary level. It’s not kind of your upper management level at the property level.
Joe Fairless: Are all of these residents – is that what you call them, patients/residents?
Joe Pohlen: We call them residents.
Joe Fairless: Are all of the residents privately out of pocket, or are you working with the government on getting reimbursed?
Joe Pohlen: Our facility is all private pay. [unintelligible [00:19:18].13] We do have residents who get an aid and attendant benefit; it’s like a tax-free pension from the federal government if you’re a veteran. There’s a whole side to that, but that check goes directly to the families and then they use that to pay for our services. And then a lot of other people have purchased long-term care insurance, so we do sometimes get checks from long-term providers.
Joe Fairless: Got it. So the typical monthly amount – is that about $6,000, would you say? Is that the average?
Joe Pohlen: We have buildings in three different areas, and that’s kind of like the higher end areas. It will go as low as about like $3,500 on the lower end.
Joe Fairless: Got it. Based on your experience as an investor who is focused on senior living, what is your best advice ever for real estate investors?
Joe Pohlen: This is the best advice I have for senior housing and it also is true in the apartments and the student housing – this is a customer service business; these are customers, they’re not tenants, so they are to be treated as customers. I think if you look through the lens at whatever you do, whether it’s self-storage or senior housing or apartments, and you look at it as “What am I providing for my customer and how can I do a great job at that?” is the best advice, in my opinion.
Joe Fairless: Yeah, you’ve done such a wonderful job of explaining the ins and outs of this in the short amount of time that we’ve been talking about it; lots of lessons, and I’ll summarize some of my takeaways at the end.
Are you ready for the Best Ever Lightning Round?
Joe Pohlen: Let’s do it!
Joe Fairless: Alright. First, a quick word from our Best Ever partners.
Break: [00:21:08].20] to [00:22:09].06]
Joe Fairless: Best ever book you’ve read that has educated you on senior housing, if you’ve read any at all?
Joe Pohlen: I’ve never read any books on senior housing. Pretty much everything I’ve learned in senior housing has been from other operators, so that’s how I learned about senior housing.
Joe Fairless: Best ever book in general that you’ve read?
Joe Pohlen: The best ever book I’ve ever read is a book called “Modoc: The True Story of the Greatest Elephant That Ever Lived.” It really has nothing to do with business at all, but it’s just a story of a young boy who travels the world, chasing after a circus elephant that he grew up in and around. It’s just a great story of if you just follow your heart, you can live an amazing life. It’s almost like a book about Forrest Gump.
Joe Fairless: Best ever senior housing deal that you’ve done?
Joe Pohlen: I would say it’s the first deal that we did. That was the one that we bought and it was around 75%-78% occupied and we were able to get that building currently North of 95% full… And it got me into senior housing.
Joe Fairless: What’s a mistake you’ve made on a senior housing transaction?
Joe Pohlen: A mistake that I’ve made is when we’ve taken over buildings and there were employees that it was obvious that they weren’t gonna fit our culture. They didn’t have the attitude that we looked for. We tried to mold positions around them, as opposed to just going ahead and parting ways with them. That I learned from our first deal, and now whenever we take over new deals, if it’s obvious someone’s not gonna fit, we get rid of them immediately.
Joe Fairless: What’s an executive director’s salary range, and then what’s a department head salary range?
Joe Pohlen: The executive director salary range is gonna be anywhere from like $70,000 to $100,000, and then the department head range is usually in the $40,000 to $55,000 range.
Joe Fairless: Best ever way you like to give back?
Joe Pohlen: I’ve been a part of Big Brothers, Big Sisters for about 11 years now, and I really enjoy the one-on-one mentorship with younger people. I believe if you are thinking about doing Big Brothers, Big Sisters and you’re not committed to doing it for longer than five years, I think you probably shouldn’t do it. But if you’re ready to be there for the long-term, I think you can make a real impact on a young person’s life.
Joe Fairless: And what’s the best place the best ever listeners can get in touch with you?
Joe Pohlen: Probably e-mail is the best way. My e-mail is Joe@CardinalSeniorMgmt.com.
Joe Fairless: And you can go to CardinalSeniorMgmt.com, or just click the link in the show notes page and you can see their community in York, Pennsylvania and Kulpmont, Pennsylvania.
Joe Pohlen: Those are the three — we’ve actually just closed the last month on two more properties in Lancaster, Pennsylvania. Those just haven’t been updated on our website yet, but hopefully they’ll be updated soon.
Joe Fairless: Thank you for educating us on senior housing, things to look out for, like the number one expense and the number one variable – labor; how you mitigate the risk or you attempt to control that as much as possible, and that is empowering the staff, so that each department knows how much they’re able to spend, and then empowering them to do their merit-based pay increases, as well as using a good payroll system like ADP.
As you said when you so succinctly summarized the business, you’re looking for a good occupancy, a high level of care, and have good labor. If you’ve got those three things, then you’re gonna be doing pretty well, and then from a high-level business standpoint, running the community at a 35% margin is the goal. When you took over one of them it was 12%, now it’s to 28%, creeping to that 35%.
Thanks for being on the show. I hope you have a best ever day; I really enjoyed our conversation, and we’ll talk to you soon!
Joe Pohlen: Thanks, Joe.