This article is sponsored by LTC. In this Voices interview, Senior Housing News sits down with LTC Chief Financial Officer — and new co-president — Pam Kessler to learn about how LTC became a unique real estate investment trust (REIT) in senior housing, how the REIT focuses on listening to operators to structure deals and why occupancy, supply and labor are the top short-term challenges in senior housing today.
Senior Housing News: Let’s start at the beginning. Your background, tell us about your journey that led you to LTC.
Pam Kessler: I’ve worked in the real estate industry since my senior year of college, and I cut my teeth helping with market studies and research for appraisals. I graduated from UC Irvine with an economics degree and went to work for Ernst and Young in their real estate audit group. I left there to go work for a client back when you could do that as an auditor. I went to work for KB Home, which is one of the nation’s largest homebuilders.
From there, I launched into “REIT Land” with the Irvine company’s multifamily REIT Irvine Apartment Communities. After I got married, we moved from Orange County to a Northwest suburb of Los Angeles, Westlake Village. I worked for a private developer in Calabasas, California, whose portfolio included pretty much all property types: commercial, industrial multifamily, self-storage, retail, manufactured housing. I think we had everything except for senior housing and skilled nursing.
In 2000, I joined LTC where I was able to combine my love of real estate with a mission for caring and compassion for seniors. I’ve got the best of both worlds. I’ve been very fortunate to be able to combine a mission-driven career with real estate.
What can you tell us about LTC?
LTC went public in 1992, as one of the first health care REITs. During the mid-to-late ’90s, LTC recognized a growing demand for a new property type called assisted living. We financed quite a bit of assisted living development until the music stopped in 2000 under reimbursement pressures from the Balanced Budget Act, and the general overbuilding in senior housing. We spent the next few years selling our older, non-strategic assets, restructuring and releasing properties, deleveraging our balance sheet, and driving down our cost of capital.
When we entered the great financial crisis, we had zero debt and a lot of cash to invest. We were in a very fortunate position. We started investing again in 2009, and have invested over $1.5 billion since then. During that time, we also continued to recycle capital out of older, less strategic assets and into newer properties. We also recognized the growing demand for a new purpose-built property type, stand-alone memory care. Over the past 10 years, we have invested over $350 million in the development of senior housing and skilled nursing properties. We have been very busy.
Currently, we’re a $2-billion health care REIT focused on needs-driven senior housing — assisted living and memory care — and skilled nursing. Our portfolio of 180 properties is roughly split 50/50 between senior housing and skilled nursing, spanning 27 states with 29 different operators.
In May, you became co-president of LTC, alongside CIO Clint Malin. What are your areas of focus, and how do you see your role evolving?
We’ve been taking on more of the day-to-day activities of running the company, as well as providing leadership and guidance in growing the company. This is not something that started with our promotions, but rather has been evolving over the years and will continue to evolve. Wendy (CEO Wendy Simpson) is not stepping down, and she remains a very active CEO from both a strategic level and a leadership role. Additionally, the board is very supportive of our role as co-presidents, and provides guidance and strategic direction. It’s a very collaborative approach at LTC.
In addition to our new roles, we’re retaining our former roles, so we get double duty here, but we’re happy to do that. We will continue to develop talent and bench strength. That is an important part of LTC’s culture, and we want to maintain that.
You’ve been at LTC for two decades. How do you plan to lead the company across this next decade?
We plan to continue the legacy of LTC’s role as a dedicated capital provider and partner to operators in the health care real estate industry. One of the big challenges our industry faces as we enter this decade is senior housing affordability. We’ve been talking about this for years, but I believe the conversation will continue to ramp up. The problem of affordability is big, and it’s going to take collaboration among capital providers, operators and even possibly government through development tax credits, reimbursement or a combination thereof. As a capital provider dedicated to the healthcare industry for the past three decades, we’re going to work with others in our industry to help craft a solution.
We really need to find a solution to this. Seniors are retiring in ever greater numbers, and they don’t all have the same resources in terms of pensions and savings as the generations before them. I think this issue is only going to get more acute. We are a very resourceful industry and I have confidence that we’re going to find a solution here.
Regarding business philosophy, how do you approach partnerships and deals? I mean you, specifically.
I have a very collaborative approach — and working somewhere for 20 years, if the company didn’t have that same approach, I probably would not still be there. We listen to our operators and try to craft a structure that meets their needs. We don’t seek growth for growth’s sake. We’re very selective in our investments, and I firmly believe that our success is tied to our operating partners’ success. As a smaller health care REIT, we can be nimbler and more responsive than some of the larger capital providers.
How is LTC different from other REITs?
In addition to the aspects that we previously discussed, LTC does not seek to be involved in operations. We don’t have any RIDEA transactions, whereby the capital provider — whether that be a REIT or private equity — takes an ownership stake in the operations of health care real estate. This ownership interest results in additional reporting and sometimes interference in operational decision making that some operators find burdensome. We don’t believe the management fee structure results in the best alignment of interests for LTC. We believe operators are most motivated when the results of their efforts and successes are reflected in their bottom-line profits.
Has LTC adjusted its normal course of business due to COVID-19? If so, and I assume so, how?
A little bit. Not as much as you would think. As a long-term capital provider to this industry, we haven’t backed away from underwriting investments in this environment, though we are being more cautious. Given the great unknown regarding how the pandemic will affect cap rates, operating margins, and labor pressure, we are currently focusing on shorter-term and higher-yielding investment structures like mezzanine and preferred equity.
What is the top financing challenge facing senior living today? Long and short term, what are your expectations moving forward?
I believe the biggest long-term challenge is affordability, and the greatest short-term challenge is occupancy, supply and labor. Prior to the pandemic, the senior housing industry was just beginning to come out of the trough occupancy curve that resulted from the recent construction boom. Though historically low interest rates are good for the health care industry, the flip side is they resulted in a temporary oversupply situation that has caused industry-wide occupancy to dip, putting pressure on lease up and margins.
The industry is working hard to reduce and eliminate the spread of COVID-19 in their communities and demonstrate to the public that senior housing is safe, and the preferable option for those seniors needing care and assistance with daily activities. Senior housing operators are incredibly resilient and flexible. I think they’ve done a heroic job caring for a vulnerable segment of our population, keeping them safe and socially engaged during the pandemic.
Editor’s note: This interview has been edited for length and clarity.
LTC is a health care REIT investing in seniors housing and health care real estate, focused on developing relationships while delivering strong returns to shareholders. To learn more about why LTC might be right for you, visit LTCREIT.com.The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact firstname.lastname@example.org.