#286 - Joe Pohlen - Co-Founder of Cardinal Senior Living - Building a Better Future For Seniors in Assisted Living

Chris Powers: Joe, welcome to the show. 

Joe Pohlen: Thanks for having me, Chris. 

Chris Powers: I have to say I'm one.

I'm excited to have you here. You know how I feel about you. You're one of the most outstanding leaders. You have something about you that's just a gift, contagious to be around. If you have yet to listen to episode 146, listen, that was episode one with Joe. He's back for a repeat. We talk a lot about the early part of his career there so that we won't go through all that again, but I'm excited to have you here and excited about where this conversation goes.

Joe Pohlen:  Thanks so much for having me in Fort Worth. I've circled this on my calendar for a while now, so let's get to it. Let's do it. 

Chris Powers: We were chatting; an excellent place to start is 146. We talked a lot about Covid and what happened through there, and we can maybe pick up on learnings from that now that it's been a couple of years, but you said assisted livings down across the country, and maybe since 2017, it's been in decline.

Let's start there. What's going on? 

Joe Pohlen:  Yeah. When I say in decline, I'm talking about the quality of service, and that's what you're receiving and what is happening in the industry. You're seeing the lengths that employees stay in their job down significantly. You're seeing people wanting to get into the career and wanting to do this and get their C&A that's down significantly.

People are waiting longer and longer to move into assisted living, so when they move in, they're already in worse physical conditions, so they need more services. Obesity's increasing, so being able to shower someone and care for them is becoming more challenging. And then, the states are trying to find ways to keep people out of nursing homes and push them into assisted living through some of the Medicaid programs.

So, the care staff's becoming more challenged, the needs are increasing, and our industry's going through something right now where if you put it in a wind tunnel for, say, costs are going up, we're pushing out higher rent increases, we're pushing out higher costs than we've ever had.

So the cost is increasing, and the quality of care is decreasing. And frankly, that's what I spend all my time thinking about how to deliver a product we're proud of. And our goal is simple; we want to operate communities where we put our loved ones, and that's our primary underwriting requirement.

We get sent lots of buildings, and that's the one that gets things kicked off. And what will we do as an industry and a company to turn that around and provide higher levels of care? 

Chris Powers: I want to unpack a few things, and then we can go through some of the ways you think we can get back on track.

First, you said the government is pushing people out of nursing and more into assisted living. Did I say that right? 

Joe Pohlen:  That's correct. 

Chris Powers: What does that mean and why?

Joe Pohlen:  So the two most significant things I get asked all the time is, am I in the nursing home business? And I'm not in the nursing home business; I'm in the assisted living business.

Chris Powers: Okay. What's the difference?

Joe Pohlen:  So, an assisted living, our payer is private pay. So that's someone who has saved up money, or they're getting money from their children or their church, social security, paying us each month, and they're on a month-to-month rental agreement. And if I'm doing an excellent job, I can increase my prices and be paid for an excellent job.

On the nursing home side, you're still caring for people who are elderly and need help. But the significant payers there are Medicare, Medicaid, and insurance companies, which cap how much you get paid each month per day in the nursing home business. Although it looks similar to assisted living, it's apples and avocados.

Chris Powers: As my assumption is, the government would rather see people go into assisted living so that they don't have to pay for them. 

Joe Pohlen:  Correct. So Medicaid in the states is dealing with the issue where more and more people need senior living services. Their budgets are capped, so how will they care for those people?

And the most logical way to do that is the people who don't need a lot of care are put in a setting where, The cost is less, which is assisted living. We don't staff near what a nursing home does, and the cost to provide services is lower than in a nursing home.

Chris Powers: And even within assisted living. If I go to your website and I'm botching it a bit, but there's like patient care, then there's dementia care.

Joe Pohlen:  That's correct. So when you move a loved one into our community, the vast majority of the time, it's not a lifestyle choice but a need-based choice. One of the things you see with Alzheimer's and dementia is people are a wander risk, and they don't know where they are and might need to find out if they leave the house.

In the northern climates, people can freeze to death outside,e. We call that elopement. It happens in senior living buildings all the time. Someone who's an elopement risk would be in a memory care wing or a part of the building that's fully secured, so they won't be able to leave unless the staff member's with them, they take them, or a family member takes them, that's more expensive.

We staff that part of the building higher, and then there's the assisted living side, which we have care levels 1, 2, 3, 4, 5. So depending on how much care your loved one needs is how much you pay. 

Chris Powers: You mentioned obesity is increasing. What things does an older person have to deal with besides the struggle of being overweight?

Like, explain it to me from your perspective. What are the things the average ordinary citizen like me doesn't think about when they think about an obese loved one entering your buildings? What happens? 

Joe Pohlen:  So, if you're looking for a job, Chris, you can come work here in our assisted living buildings.

And the training we do on that is we'd come in and put gloves on your hands, like work gloves. We'd put glasses on, like workshop glasses, cover them with Vaseline, and put earmuffs on you. Then we'd have you going through your daily tasks and what you must do, and you'll learn very quickly that non-verbal communication, such as touch, is essential.

Patience is essential. You get agitated easily when people try to explain things, and you can't hear. And you also pick up very quickly that fancy dancing fountains and beautiful Taj Mahal assisted living is insignificant, and it's the care you're interacting with.

If you go through that process and lay it out to its logical conclusion about taking a shower, you think about how much assistance you need. So this was one of my first learnings in assisted living.

Chris Powers: I was going to ask this next. So go with it. 

Joe Pohlen:  So when I tried to get into the business, what I did is I just called everyone I knew and said, I want to be in assisted living.

Who should I talk to? Who should I talk to, get many nos, and bounce around to many people? I ended up connecting with an old nurse who ran a 12 bed. Medicaid assisted living out of a house, an old house. And I asked her, saying, Hey, can I don't need to learn the business? I'm a real estate guy.

I'm going to do great things in assisted living. And the nurse is like, I'll teach you. And I was like, okay, well, let me know. And she's like, well, Shift starts at 6:30 on Saturday. Come on down. You gave me the address, and I was 26 at the time and went out with my friends the night before, and then my alarm went off at 5:30. I was like, oh man, I just like went to bed. I threw on my nice sweater and fancy shoes, and I just drove to her thing, and I was expecting she would like to show me the manual on how to do assisted living.

Chris Powers: And she was helping you with your underwriting model? 

Joe Pohlen:  Yeah. She was going to show me Excel and going to show me how much money we can all make in assisted living and confirm all the ideas I had in my head. And I showed up, and I did make it on time. I did show up on time, and she's like, well, it's shower day, and I had, and she's like, this is how you shower someone.

She taught me like she had just trained me as a shower aid. How do you wipe someone who's gone to the bathroom? Because older adults have very fragile skin. So there's a whole process that you use shaving cream to help clean them so you don't rip the skin. I gave showers to people with dementia, and as I got, everything I was wearing was the wrong thing.

I had this cashmere sweater that got ruined, and people weren't enjoying the shower, and I didn't do a great job, and I was like, man, this is hard. But when you shower someone, it is so different than when you take a shower. And I have never looked at assisted living bathrooms the same.

So when I shower, I like the hotel room, is what you think about. Imagine if someone's overweight, you've got a wheelchair, you've got a lift, you've got the resident, and you've got two staff members, maybe even a third staff member. The temperature's a huge deal, and space is a huge deal.

It's a different thing that you have to consider—so going back to your question about obesity, the width of doorways, distance to dining rooms, and the biggest one being bathrooms.

Chris Powers: And their dignity. Trying to do all that is something we'll talk about, and again, why I have the utmost respect for you.

The dignity of these people as they go throughout the day. As you said, it's elementary to get impatient, and I want to skip a step when these people are already challenged. Before we even started, you said that 70% of patients in assisted living don't ever have visitors or family come to see them.

So they're already alone and trying to make these otherwise uncomfortable situations comfortable but something they can at least be proud of in their last decade or years.

Joe Pohlen:  So, the model at Motto at Cardinal is care, compassion, dignity, and safety, and that's what we do for our residents.

And probably the most powerful moment I've had in senior living was I was at a building; the head of nursing was there; her name's Bridget and she was working with a family and it was a daughter who was coming to pick her mom up and bring her mom to her birthday lunch. And the daughter was concerned and had a high-stress situation; she was being snippy with the staff and snippy with Bridget.

And Bridget knew what was going to happen. But it was significant for the daughter and her mother to make dinner or do lunch. And they went and did lunch at her favorite place, and they had cake and did the whole thing. And that is outside of the care plan. And when mom came back, the daughter was a little snippy, and the resident had incontinence that came from all of that.

And after getting snipped at by the daughter, Bridget spent 40 minutes with our staff cleaning up the mother. And I looked at her, and I was like, will you tell the daughter about this? And she's like, no, we're protecting the mother's dignity, that the resident wouldn't want that information shared with her daughter.

It could be the last birthday they ever spent together. And I was like, wow. I mean, you took that crap. And you knew what was going to happen. And the nurse is like, that's what we do for a living. And I remember driving home that day and telling my wife, I was like, these are the people I want to work with.

It gets me so fired up that people like this exist. And there are people out there who were put on this planet to care for older people. They walk all around us as they exist, and when you see one of them in action doing what they do, it moves you, makes you want to be a better person, and drives you.

And that's my mission at Cardinal to put those people in a place where they can fulfill their mission of caring for older adults.

Chris Powers: I wrote down the note right before you said that, and my note is the day that you showed up to your first day on the job probably changed your life forever.

When you had to do the showers, because it's easy for real estate guys, and I'm using Wall Street, but to get a fancy spreadsheet look at the industry is like this massive opportunity. And, look, you have to do it profitably, and there's nothing wrong with that. But the thing that separates you, and I think the people that do it well in this industry, is while they have to run a profitable business, even just you saying as you talk about them as loved ones, not like, I can hear in your like lingo and, then what you just finished with is like, I wanted to work with these people.

It became my mission. You dressed up all fancy. It may be good that you wore your nice sweater and expensive clothes and learned a lesson that day. But could something change in you that day that you showed up and started having to give showers and seeing the other side of this industry?

Joe Pohlen:  So when I was on that first training day, I thought, man, this is tough. And, she made me do eight showers, which is like, that's a lot for someone trained to do it for someone on their first day of no experience like that's more or less boot camp there. And she cared for many older adults with Down Syndrome, so they weren't even verbal.

So there were a lot of combative residents. And one woman gave me the business, making it very difficult for me. And I was serving her lunch afterward, and things that I calmed down. And she looked at me, and she just smiled, and she said, I love you. And I was. Oh, I'm like, that's why people do this.

Why would someone choose this as their career when you could work at a gas station or Amazon warehouse and make the same amount of money? Why do people do this at all? And then when I felt that, I was like, oh, that's why people become caregivers. Like that's what this is all about.

Chris Powers: Why do you think more people aren't coming into the industry and that the length of their career isn't lasting? Is it a changing culture? Is there anything you see of why this needs to trend in the right direction?

Joe Pohlen:  I have my thoughts and ask many people this question because I need to know if I have all the correct answers.

And I come from a suburban middle class in Michigan, and that's how I grew up. And we didn't take care of our grandparents. Like I never saw my grandparents naked, I never showered, gave them baths, or helped them eat. That was all hidden from me or wasn't shown like that's just part of our culture.

And you're seeing many new people coming, and I have spent little time around older adults. It's a hard job, and it's driven, our culture's driven by, no one sees it or thinks they could make a career out of it. 

Chris Powers: You said I never helped shower my grandparents or clean them up.

And sadly, as you said, I'm just sitting here thinking like family does that for family. Does that happen in other parts of the world?

Joe Pohlen:  Yeah. What we're working on. My wife is from Central America, so all my extended family on my wife's side still live in Nicaragua, and we go there, so I have a remote connection to a different culture.

And we've started recruiting people from Nicaragua, doctors, nurses, people that work in call centers. Their English is excellent, but they might need a healthcare background. And you'll interview someone, and I do all the interviews myself, and I'll ask, I'll explain to them like, this is what we do, this is what the business is, this is what Cardinal's about.

Will you tell me if you have any experience caring for older people? Do you have a healthcare background? And you'll hear multiple times people say, no, I don't have a healthcare background, never went to school, but my father was ill with cancer. And I showered, showered, bathed, fed, managed all his medications, cleaned his wounds, and did everything they liked.

So I don't have any experience, and I'm like, you've got plenty of experience. Like you're going to be okay. Like you're going to be just fine. Our industry gets a lot of turnover in the first 90 days. And I think a lot of it is you're told what it's like, but the first time you see a naked older person that you have to clean up after they have an accident, people are just like, oh hell no.

Like, that's not me. Whereas if you've done it before, it's second nature. You have children, and like that first diaper you do, it's like, oh my goodness. But very quickly becomes like, this is normal. Humans have been doing this for a long time like this is human. They did it plenty before I showed up, and they'll be doing plenty of time after I'm gone.

It is natural and part of the human experience.  

Chris Powers: What does it say about our culture? Not everybody, but as a society, may be harsh, but we don't care about fulfilling that role in the family. Is that our culture? Is it selfishness? I think about this a lot. What does that say about Americans? 

Joe Pohlen:  There's a little bit also on this, which is people don't want their children doing that for them. So this isn't driven solely by the children not wanting to care for the parent at home. It's driven the other way too. And I would put myself in; I want to have enough financial resources or put myself in a position where my son isn't doing it when I need services.

That's a paid-for service. And I believe in the industry, and I believe in a wealth-functioning society. If we aren't going to be a society that cares for our elderly at home, we need a well-run assisted living function. That part of this is a necessity for our culture. Cause we're not going to be able to change the culture, and suddenly, people are caring for their loved ones at home in the United States.

We must build an infrastructure we're proud of as a country. 

Chris Powers: You said you spent all day thinking about this problem and how to improve it. And as we move into that part, when I think of charitable organizations, you hear of many charitable organizations that help, especially kids, people starting life.

And then I think of health-related charitable organizations that might be on cancer or specific health issues. And maybe the issue is different from a charitable thing; it's a good thing. I'll start with what the everyday citizen can do to improve this problem, and we can start the conversation there.

Joe Pohlen:  Volunteering at an assisted living building.

Chris Powers: Are they going to have to be given showers?

Joe Pohlen:   No, just come to the activities. 70% of our residents need to get visitors. You could swing by any assisted living building and talk to the activities director. And I mean, classically, you can call Bingo, but there are a lot of church services at our senior living buildings.

There are coffee clutches in the morning. You can go sit down and talk to residents, and you can come to get lunch with the resident. There are two things that people need, and they need care and companionship, and both are incredibly important for the well-being of an individual living in our building.

We provide care services. So that's what we bill on, and we bill on time. We have a care plan. It's tough for us to provide companionship that our activities department runs, and the goal here is to have residents become friends with each other, but having someone sit with a resident three or four hours a day.

We have a hundred residents in the building. You can't make the math work to run companionship through the business model like companionship has to be provided. The wider community, whether that's your church or your social group, or your family or friends that you make, is vital for your success there.

Chris Powers: I have to shout out to my mom if you're listening to this. I know you love Senior Assisted Living podcast episodes, but she was part of this thing called The Good Time Singers growing up, and I remember every week she would dress up in her deal, and 20 girls from around town would sing songs at the elderly homes.

And it never really dawned on me that they were providing the service.

Joe Pohlen:  And I would make the argument for anyone thinking about doing this, you're going to get more out of this than you put in making friends with someone in their eighties. Our assisted living building still has World War II vets that are becoming smaller and smaller. Still, a massive part of our community's history is in assisted living buildings and visits. 

Chris Powers: I wrote another note earlier, but we were kicking around an idea like a year ago. There needs to be a podcast where you only interview people over 80, and I have an 89-year-old coming on in a few weeks.

That's a phenomenal story. But yeah, just the depth of wisdom and the level at which they can speak to live is just a breath of fresh air. 

Joe Pohlen:  Yeah. Being able to work in this industry has been a blessing. I work in our corporate office. I spend a lot of time on the computer and spreadsheets and stuff outside the business, and I try to get a couple of days a week into the buildings, and it's so much more enjoyable to sit in the buildings and chat with residents and do that part of the business.

And I've learned so much from our residents, and there's an advantage to sitting with someone who may only have a few years left, and you can learn a lot. 

Chris Powers: I still need to go here. We'll finish there, but I'm predicting it with your several facilities. You just recently sold those facilities but have retained management, so the care will still be the same, but it's put you at a point in time, and I'm marrying this up with this comment you made about how you think about this problem each day.

You're now getting another clean slate. You still have current buildings to manage, but you've probably thought about this issue more than anybody. And as you look at how Cardinal will progress forward, let's spend. However much time we need to spend talking about what doesn't need to be happening in the industry and how you're thinking about solving some of these problems.

Suppose you have thought about how to solve them. You mentioned high labor costs and people entering unhealthier facilities than ever. You stack the deck to present this issue that is a real issue. How are we going to solve it? How's Joe going to solve it? 

Joe Pohlen:  So I'll back it up on just our buildings in Pennsylvania, the way that structure worked as I started Cardinal, no real experience.

My business partner had experience, but we needed more money. We're trying to get the Cardinal off the ground, and we met up with three individuals who had experience in the space. They didn't want to be in the operations anymore, but they saw the opportunities and bought seven buildings and triple net leasing them to me.

So my business partner and I were just tenants of theirs, and we'd run the business. So we'd collect all the rent from the residents, pay all the employees, pay our landlord, and then whatever was left was for us. And in there, we promoted structure. So if they ever got to the point where they wanted to sell, they could sell the assets.

And we went through Covid. We talked about that in Episode 146 coming out of Covid. We were quite a bit ahead of where all of our competitors were, and we came out and ended up in a significantly stronger position than we were pre Covid. Our landlords saw that as an opportunity. They reached out to us and laid out the plan that we've reached our investment horizon with this. We're going to look for a sale.

 So they put the buildings up for sale, ended up selling at the end of the year, end of 2022, and all the real estate got sold to a different group. And that group has the operations, and they hired us as a third-party manager to run them for them.

They're a nursing home operator who wants to get into the skilled nursing space, the; they're a skilled nursing operator that wants to get into an assisted living space. So they're going to learn from us, and we're going to work together to provide excellent care for the residents. It's a standard model in assisted living where a private equity group or REIT will own the real estate and then lease it to an operator like us.

Now that we've had a deal go complete cycle, we've explained what we've done. We took occupancy from 70% and got it into the nineties. We successfully navigated C; we built a sales platform. We were able to drive all the metrics that real estate people care about and have a successful exit. So right now at Cardinal, it's what do we do next?

That model for us at Cardinals is a broken model where the real estate, on the real estate side, where all the values are created, and the operations side is where all the works. 

Chris Powers: And will you dive into that? How values spread across the Yeah, so. I don't mean to interrupt, but go through how value is distributed, why you don't like it, and what you will do about it.

Joe Pohlen: Yeah, so senior living is valued, really, on EBITDA, earnings before interest, taxes, depreciation, amortization, and rent. Rent is what you send to your landlord, and that's how buildings are shopped. It's like how much cash this building generates, and buildings that don't generate any cash and are struggling, which are the buildings that we go after, trade on a price-per-unit basis.

And in today's market, where there's not a lot of debt, not a lot of equity in our space going, and not a lot of operators who want turnarounds because a lot of people have enough turnarounds on their hands already, the price is low on a price per unit. So the model is you buy on a price per unit, stabilize operations, and get a building from not generating cash because most of our costs are fixed.

Chris Powers: When you say buy per unit, the real estate group buys on a price per unit?

Joe Pohlen:  Yes. Not the operator. Well, what happens typically is the operator finds it. Okay. They underwrite it and then bring it to their real estate group. I got it. And they say this is what I can get it for.

It is what I can do there. Will you buy it and rent it to me? Because I don't have any money. 

Chris Powers: But why wouldn't the groups buy real estate? That's the easiest part.

Joe Pohlen:  Well, the kinds of people who operate assisted living buildings, like their mindset in the way they see the world, the way those businesses start is different from out of the real estate.

They start other operating companies. So this is just how it's always been done. And it's costly to buy a senior living building that's a hundred units, which could be 12, 15 million. And you're an operator, And you can grow if you have a good track record, and you could get 30 buildings from a reit.

The REIT then buys the asset and signs a lease with you. You get hit with rent escalators every year. And that model is how our industry's built, where a group owns the real estate, and a different group does the operations. And the problem we're running into in senior housing or assisted living right now is who will train the next generation of caregivers because there need to be more caregivers to fill all the spots.

So as an operator, I can raise my wages and try to steal good people from my competitors. And when the hospitals want people, they raise their prices even higher than me. And then it comes that but doesn't solve the actual problem, which is there need to be more caregivers to do it. So someone has to train those caregivers.

Is that the responsibility of the government? Is that the responsibility of the operator? Is that the responsibility of the real estate owner? And when the real estate owner and the operator need aligned incentives, and the operator is like making monthly money, there's no incentive to invest for the long term.

On the real estate side, they're detached from the operations. How do they judge their ROI on investing in training for a new generation of caregivers? And that model we see in our industry doesn't work for me. So the solution at Cardinal is finding a way to align all the real estate, the operations, and the management within side one company.

Chris Powers: Are the leases? You said they're triple net leases. How long are they?

Joe Pohlen:  Typically, what I've signed was 15-year leases.

Chris Powers: So, that could be good. If you get NOI up, it's not like it's a restaurant-type lease where it's a percentage of sales, whereas you're more successful, you're giving a percentage up.

Joe Pohlen:  Correct. It's a lot of work to invest in one of these buildings, and under the guise of you can get switched out if you miss a lease covenant or something like that. 

Chris Powers: So I come to you, well, your real estate partners; they said it's time. And I say, yeah, I will give you a dollar for it all.

How do you determine what's going on? What I know, like on a lease, you could say the cap rate is 6%; that's what the building's worth. And business is generating X and EBITDA, and it's a multiple of that. Is that typically how it happens, or is it a little bit more than that?

Joe Pohlen:  Let's use an example of a portfolio where the rent is 6 million and the operator's bringing in 8 million.

So the landlord could sell the asset for 6 million in income, but because they can force the operator out, they can sell it for 8 million. And then someone who sees that and wants all 8 million comes in and pays the price for that 8 million cash flow. 

Chris Powers: So you said that doesn't work for me.

We got to align it all. I already have one idea, but you might have already thought of it, but let's keep going in that direction. So in your mind, maybe the Cardinal of the future has a real estate arm that owns real estate, owns the operating company, and what was the third? Did you say? Real estate operations and management and manage operations and management. And you control it all?

Joe Pohlen:  Yep. 

Chris Powers: Is that fair? 

Joe Pohlen:  Yeah. 

Chris Powers: My first idea is to retain employees so they don't go to hospitals. Have you entertained the idea of maybe giving certain employees, I don't know if you're, you're not promoting, I guess you're going to have promotes in the real estate, but some piece of the upside of the real estate so that they're incentivized to want to stay there and keep a community and a good staff.

Joe Pohlen:  well, you hit on another big part of this: the promotion, which comes more or less on sale.

Which, I don't ever want to go through that again. That wasn't very pleasant. It was nice to go through the process and do the sale. I didn't know what I was doing, but the people working in those buildings decided that I would work with them for the rest of my career. I built real connections with those individuals, and I could tell them like, Hey, I get decision-making here.

You keep doing a good job. And we get to work together for as long as it works well. In buying something broken, turn it around, sell it, and I can't say that anymore. And the company I admire the most about how they built stuff is Chick-fil-A. And I remember you had the guy on from; he was from Chick-fil-A.

He was like one of the original Chief marketing officers. 

Chris Powers: Yeah. For Steve Robinson. 

Joe Pohlen:  And he said something that was really. Powerful to me that they made a promise to the people who run those buildings or run their locations. They made a promise, and they could say, over 27 years, we've always kept that promise.

You can trust us. You can trust that when you're constantly buying and then selling, buying and selling, you can't make a 20-year promise with someone who will run that building. And people don't get into senior care to make money, and they don't run assisted living buildings to make a hundred thousand dollars a year and get a $300,000 bonus when it sells.

And then, they got to work for another company. They're put on this earth to care for older people, and that's what they want to do. Structuring, promoting, and others like that are great for real estate people, but more is needed for someone who runs an assisted living building. What they care about is autonomy.

 They care about trust. They care that you're going to have their back and that you're going to tell them the truth like that's what matters to them. And the buy, flip, and sell model doesn't allow them to get what they want. When we went through Covid, it was horrid, and you can hear more about that in the previous episode; we talked about 26 critical positions in our company, and 23 of them stayed throughout all of Covid. 

We announced that the real estate selling and this whole thing, we lost like 15 people that like couldn't handle the uncertainty and went and worked other places. Announcing the sale was more disruptive to our business than Covid was on the leadership side. And I want to build a model where that's; I don't have to do that. 

Chris Powers: So, some permanent capital or permanent financing. It could be more of a family business culture, which will last for generations. And lead to employees with, as you said, trust, showing them a long-term time horizon—a place where they can build a whole career without worrying.

And that creates a moat around what you might have said, like hospitals that raise wages and people balance, and you want to create a family atmosphere that people feel is their forever home.

Joe Pohlen:  Yeah. That's my dream. And the challenge with that is, yeah, I was going to say, it sounds obvious. 

Chris Powers: Why is it challenging to pull off?

Joe Pohlen:  That is different than how any assisted living or skilled nursing buildings or companies are built. They're built on the remodel, all the capital providers, the funds, and the seven-year fund life. It is a space for family offices' long-term capital, and we have something in senior living, the HUD loans, where you can get 80% L T V based on the appraisal.

No personal guarantee. 35-year money, one and a half percent below market and interest rates. There is a vehicle where you can finance these things with outstanding long-term debt. The federal government is trying to incentivize this behavior, not trading in and out of assets and assisted living.

You're an industrial, and I don't know much about industrial, but the tenant and the industrial-like don't care who the owner is. 

Chris Powers: Yeah, I mean, on the discussion we're having, absolutely not. They do, but we're discussing something else. 

Joe Pohlen:  Whereas, like, if you signed a lease for your mom to be in a building and you thought the staffing level was going to be this and you thought this person was going to, and these were the policies and procedures that you believed your loved one would be taken care of, and then it changes.

And as someone else comes in new and moving, your elderly loved one could result in their death, and then you have to accept this change. That's not great for the residents. 

Chris Powers: Yeah. My heart doesn't fill with butterflies when I imagine Blackstone caring for my parents one day.

Joe Pohlen:  Yeah, well, exactly. 

Chris Powers: It's funny. I could be wrong here, but I'm just observant. We've gone through this period of the last 30 years with private equity. Where we're, every business is now, how much juice can we squeeze out of it? And we see the ramifications on society, and you'd call it greed or just a flawed business model, high debt, lots of turnovers, and changing ownership over and over.

But you're starting to, and again, maybe it's just on Twitter too much, but you're starting to see many more folks wanting to hold businesses forever. At Fort Capital, we're looking for ways to create permanent vehicles to hold assets. 10, 20, 30 years because you can operate from such a better advantage when thinking in decades.

There are people I like to say in decades, but I could also show you properties that turn over. Still, I would say I have a vision for the industry and industrial, and so I can think far out, but the challenges of constantly turning over buildings, and as you said, I don't think our tenants care who the owner is to the degree of what you're providing.

But they care because one of our value adds is so many absentee owners out there that don't build relationships with tenants that could care less about. That's just like, pay your rent and shut up. And if we're a few weeks late on maintenance, we don't want you complaining too much.

You could bring a lot of personal care just from that level. We're not taking care of somebody's life, but the world is just moved to a spot, and maybe it's with information out there that there's just. The hospitality or hospitable of people or industries is becoming; every industry has to be more hospitable.

It's becoming table stakes. And when I hear about what you're thinking and the long-term vision, there's probably no other industry, and I'm as capitalist as capitalist comes, but it seems to me. Government intervention is not the correct answer, but you start dealing with seniors in their health in the last part of their life, and it's become a Wall Street hot potato that looks pretty right for disruption.

Joe Pohlen:  You comment capitalism, and in the irony of the whole thing is I would venture to guess that if Cardinal bought assets and held them for 40 years, The return would be better than if Cardinal was buying assets every three or four years and selling them, paying the taxes, doing the full recapture, paying all the fees, and then buying new assets, turning around, selling them, buying, turning.

That capitalism is a system built for the expansion of capital, and that's best done in our industry, in my opinion, over a long time horizon, like the debts there for it, the return on operations from the compounding effect of training as it because The thing about assisted living, You're moving your loved one into our building or any building based on who you think will love your loved one the way you want them loved.

You're not moving them in because it's steel or wood construction; you're not moving them in because it was built in 2019 or 1980. You're moving it in because you believe that that director of wellness, that dietary aid, that housekeeper, that care aid, that executive director, that team there, is going to care for your loved one.

That's why you're moving them in. And that's why in our space, you can see older buildings getting higher rates and higher occupancy than newer ones because the building doesn't matter much. So the compounding effect of a long-term hold where you're compounding that culture, you're compounding the training, you're building a reputation, you actually can get paid for that investment.

So that's why the irony is that holding forever will result in more capital appreciation than buying and selling all the time. 

Chris Powers: So you mean to tell me that people aren't saying we picked this building because the fountain out front was seven feet? The pool was shaped like the size of Texas, and Bingo Night was, had a $500 gift card every weekend.

Joe Pohlen:  They say, I get this all the time. They're like, the amenities are just for the kids. The amenities are for the kids. I'm like, no, they're not. I've been on tours. The kids don't care about the amenity. The kids are looking for the same thing. The loved ones looking for, like, will I get quality care?

The amenities are for the developer who is, like, my loved ones getting old. I will build a place I would want my mom to live in. It's like that's the model. The amenities are just built for the architect and the developer. 

Chris Powers: How would we structure a long-term hold?

Joe Pohlen:  You structure it in a.

Where you have one vehicle that owns all three management operations, real estate buys assets in this market, buys on a price per unit, and deploys enough capital to properly turn the building around because the best deals require a cash burn. To get in there, do what needs to be done, train the staff correctly, do any deferred maintenance that needs to be done, stabilize the asset, take it to HUD, recapture your cash, and do it again.

That's the mob.

Chris Powers: I remember when you told me about the HUD loan, and that was a eureka moment for me. We can't gloss over that again. So the way you said it to me was you get to buy a business with a real estate loan.

Joe Pohlen:  What I love about assisted living, from my real estate background, is that it's an operating business valued on N O I.

Using this formula, ten quality staff members that you find to come work in your building and stabilize the labor spend and knock down OT might result in $200,000 a year in expense savings. You throw an eight cap on it, like, what does that do to the value? I mean, find 14 elderly residents paying 5,500 a month and move them into your building where almost all your costs are fixed.

Like you can do the math on what that does to the NOI, you have so many more levers to pull to increase the EBITDA, the NOI in assisted as opposed to really any other asset class I've been a part of where the building could go from losing 300,000 a year to making a million dollars a year in 18-24 months without really much CapEx spend on it.

So that model of being able to buy, get to HUdlad. And HUD is just for anyone out; a HUD lender got HUD loans like you say, as they call it HUD because all four-letter words are taken. It's a whole process. Like they do inspections, they make sure all the CapEx is done. You got to plan a whole bunch of, and they have all these rules and regulations around bathroom sizes.

It is not easy to get to HUD, but if you have a strategy for it and a back office built to handle these types of loans, it is a good product if your goal is to hold long-term. 

Chris Powers: You can hold them for 35 years once a refinance. That loan's suitable for 35 years.

Joe Pohlen:   Yeah. 35-year term. And then you can, if, like, if you got a HUD loan today and interest rates dropped 2% ten years from now, you can do a refinance with a single piece of paper.

It's a 25 basis point to refinance it. And you go right down to the current interest rate. 

Chris Powers: The government's pretty stupid on many things, but this is one thing I like that they do. 

Joe Pohlen:  Yeah, I mean, there's the idea of government, like there are lots of pieces to that, and I think you got to figure out as a business owner, as an entrepreneur, like you got all these puzzle pieces and like your job is to put them together and figure out how to make it work.

And the HUD loans are a massive piece of that. 

Chris Powers: I want to finish on structure, but then I want to return to operations and management. So you said I would create a vehicle where the real estate, the operations, and the management were all in one. To clarify, what's the difference between operation management?

Are we talking about the same thing? Is that three different revenue streams? 

Joe Pohlen:  So what you could do is you could be an operations company that leases buildings. And you manage some of them and then hire a third party to manage others. And all the employees are employed by the operating company.

The license with the state is held at the operations company level, and that company pays all the bills. So in our structures, it's a Prop co, Op co, and then a management company that charges a fee.

Chris Powers: And just again, I'm sorry for the dumb questions, but what's the split of work between Op Co and management?

Joe Pohlen:  Really, the management company does all of the work for the Op co, except all the employees who work in the building work for that Op Co. Most of the time, the management company also owns the operating company.

Chris Powers: I'm going to ask it a different way. Okay. Because it's, they sound like they're the same.

So I'm an operator, and I find a building and lease it from you. By definition, as an operator, aren't I already the person in the building doing the everyday thing, like what is the management bringing to me that I'm not already, what are the things that, where do the operator's job end and the manager's job begin and why do they, if the Op co-owns the management company in a lot of situations, why do they split them up?

Joe Pohlen:  So sometimes the management company owns the Op Co. Sometimes the real estate company owns the Op Co. Very rarely is it three parties. Most likely, it's two parties. Where is my deal in Pennsylvania? Before the transaction, there was a real estate company. I own the Op co, and I own the management company. After it's sold, the person who bought it, Owns the real estate company.

They own the operating company. And then I am the third-party manager.

Chris Powers: Okay, so in the operating company, where does the division of Labor End begin in that relationship? 

Joe Pohlen:  The division of labor on the operating and management company sides is if you're in the building, you're on the Op co.

If you're out of the building, you're on the management. 

Chris Powers: Okay. I can fire dumb questions at you for days.

Joe Pohlen:  No, I appreciate the questions cause I spend so much time in the business that talking to someone outside is nice.

Chris Powers: But are there three revenue streams than in that regard? Or do the Management Co and the Op co, if the same group owns them?

It's just looked at as one revenue stream going that way. Like, would you break it up into three? 

Joe Pohlen:  Yeah, I'd break it up into three, but it all rolls into the same ownership. Cause the management company makes a 5% fee off of revenue. The operating company makes the difference between the EBITDA and the rent.

That's where the management company makes the difference. And then the real estate company makes the money on the rent. 

Chris Powers: Okay. Is there a brand name company in the industry where you can expect the same service no matter where you go? Or is it very fragmented?

Joe Pohlen:  It's been tried multiple times to do a national brand. Brookdale's the largest senior living operator in the country; they're a publicly traded company and a management company. They lease a lot of buildings, and they own only a handful. They've had a tremendous amount of ups and downs and struggles.

They tried to create a national brand with Brookdale Sunrise Senior Living and attempted to do something similar. The jury is still out on if you can make a national brand. A few people have tried, and it could have been better. The future will be super regional operators with a regional presence and enough scale to provide proper back office support, but you specialize in your state.

The state licenses assisted living, so when you switch states, everything changes. And you've seen many operators who've failed because they've grown too fast, gone into too many states, and not respected the hyper-local part of our business. 

Chris Powers: How much scale do you need for a back office?

Is it like several doors or revenue, or how do you think about what's enough? 

Joe Pohlen:  So we have seven buildings. We're running in Pennsylvania, and we have nine that we're running in Michigan, a little over 1200 beds of seniors. We've got around 600 employees, and five people are in our corporate and management offices.

Our model is to push as much as possible. Decision-making to the buildings as possible so that they operate their own business. If you're an executive director of ours, my job is to be a mirror to show you parts of your business that need to be seen to provide you with the data to make the right decisions for your building.

So we practice open book management so any of our executive directors can fully see their entire P & L. We update their dashboard in as close to real-time as possible. They know how much money they're building made and how much building lost; we do calls where they'll see where all the buildings are and levels of profitability.

We don't hide any of that; they can see how much money my business partner and I made and how much we lost. And our attitude on that is if I'm trusting you with the lives of our residents, I can trust you with this data to not give it away to everyone, and it's been successful. We've found our models to find executive directors who were put on this planet to care for older people.

They know that part of the business. And then we can teach them the P&L business part of their job. And we run it as much where they get to decide as many decisions in their building as possible, like what food they eat, what menus and shifts they run in eight-hour shifts or 12-hour shifts.

So that's our model. 

Chris Powers: Would you stick with that model if you found a more permanent business solution for the business?

Joe Pohlen:  Yeah, that's the suitable model. The more decisions you take out of the building, the less autonomy, and then you're incentivizing and attracting the type of administrator that wants to be told what to do as opposed to the one that wants to do a great job.

Chris Powers: Did you devise that plan, or have other companies followed that method? You said some things that I know our Uncle Warren Buffet would like, which is pushing as many decisions to the general manager, and the executive director as possible. But how did you come up with this philosophy of managing the business?

Joe Pohlen:  I don't have a care background, so I've never run a senior living building, and I've never sat in that role and have yet to tell a single executive director in our business how they're supposed to care for older people. If you worked at Cardinal and you could interview dozens of our executive directors and, like Joe, never came here and told us what we need to do, there needs to be a manual.

I like to ask questions, learn, tell them, and brainstorm with the people running it; almost everyone in this industry has their idea. If I had the authority, I would do this because the way corporate does it is idiotic. And now there's some stuff like, well, you think corporate does it that way because it was idiotic.

But all the buildings need a report at the same reporting timeline. And they all need to be; specific systems must be in place for us to work together. But I don't say yes to everything they want to do in the building, but as much as I can. 

Chris Powers: So you don't have any SOPs.

So each building could be run differently with different management techniques, procedures, and processes.

Joe Pohlen:  So, they must do their stand-up meeting every morning. They have to run the software we run and do their performance reviews as we do. There are some standard operating procedures. Still, the big things important to the executive director, like dietary menus and staffing schedules, are the big ones that companies will come in and try to standardize.

But there needs to be proof that doing that results in better care for the residents, more resident satisfaction, and any cost savings whatsoever.

Chris Powers: Okay, That's where we'll focus some attention. We discussed if we have a more permanent vehicle that solves incentive challenges, which incentives drive the world, and that's a great thing to solve first.

But we've talked about high costs, and it could solve employee turnover and retain employees. We've talked about the amenities that are wasted money, both on the CapEx side and the maintenance of it. How would you begin to attack some of the other issues in purely just expense side, operational issues?

Are there ideas of how the business could be run better daily?

Joe Pohlen:  On the cost side, we went with a self-insurance plant and are doing a lot on the health insurance side, but 70% of expenses in assisted living are labor related. Like we are a service business, people want to optimize for price per day for food and housekeeping supplies, but more is needed.

What moves the needle is turnover and staffing, which you must solve to make any dent on the expense side. But the difference between assisted living and skilled nursing is that you can be paid for service quality and get more revenue for being the best in your market at what you do.

And that's where the real value will be on the compounding of care. 

Chris Powers: We discussed this in the last episode, but it came to my mind. What happens when a tenant can't pay rent? 

Joe Pohlen:  So what happens in our business of 10 campaign rent? We move quickly, get them on Medicaid, and enter a nursing home.

Chris Powers: Okay, that's what the government's trying to avoid right now.

Joe Pohlen:  Well, it's frustrating that someone runs out of money in Pennsylvania. They love where they are; their rent's 3,900 bucks a month. They get social security of 1200 bucks, and they have to move out.

And then the state government is paying the nursing home like 6,000 a month when we're doing just fine, getting cared for in our building. Why is the state paying twice as much when the person's not even a proper fit there?

Chris Powers: Okay, you just answered one. Like are there any, if you were to say like there's a way the government could step up into this, like one you just said they could reduce their costs just by leaving people where they are, but are there other things you're hoping to see, whether it's federal support or state support on how to improve this business model?

Or would you rather them stay out of it? 

Joe Pohlen:  We don't have a choice as a country for the federal government not to step in as a payer in assisted living. We have so many people who will need assisted living and care but have no money. And so what's going to happen? Are they, it's all these people who should be in an assisted living or nursing home going to be?

They are going without care and flooding our hospitals through ER visits because no one's managing that person's medication at home. The federal government will end up paying for it one way or the other. They can pay for it in assisted living, where it costs less, or they can pay for it at the hospital, where it costs a whole lot more.

Chris Powers: Back to operating. We've talked a lot about labor. Are there ways to design or get more out of these buildings or units like in a particular space? Are there ways to generate more revenue from how these buildings are laid out or thought through? 

Joe Pohlen:  Yeah. In new construction, the thought needs to be on the price per bed and how much it costs to develop.

The current development model is just entering an excellent market, building the most admirable thing, and trying to capture the highest rents. And then in your 10-year proforma, you're juice and rents 7% a year. But then, when you look at the rent in 10 years, you will need help to afford it.

And then, yeah, it's a huge mess. So doing new construction on the affordable side will be the holy grail of senior living right now. And we worked on that at Cardinal. We developed a tiny house model where there are 420-bed buildings all in the same parcel. We got the staff; we designed it.

The staffing is the most efficient we can get it. It comes out of the ground, and I'll be built in September or opened in September. We're excited about it, but the cost to develop that and the headache and the amount of work to develop that is so different than what you could buy an 80-bed building for in the same market.

So we'll do well on that project but for now. All development plans at Cardinal are shelved until the market changes. 

Chris Powers: And remind me again the average age of people coming in. Like when you hear of senior housing and many people say, oh, it's over 65. I can't think of any 65-year-olds in today's world moving in.

That can be kicked much further down the road. Is that true?

Joe Pohlen:  Our average residence's an 87-year-old widow. Okay. I listened to all the earnings calls and the average length of stay in assisted living's 18 months. I went and pulled all the data for our entire company from back to 2018, and it was like 18 months in three days.

Like, so we're like almost precisely at the industry average.

Chris Powers: And that's because they're moving to memory care or because they might be passing or Because they die. They pass. Are there any lingering effects of Covid? Like the rest of the world's gone back to normal? There are a few spots in the country that are more, maybe not out of it like we are, but for the most part, it's over. Are there things sticking around in assisted living that have made it more challenging, or have things gone back to normal? 

Joe Pohlen:  If a resident tests positive for Covid, we return to masks. We do have to follow some protocols that are in place.

We practice infection control policies that are put in place so that there is, if there's a positive case in our building, there's a whole process that we go through. But we haven't had any Covid deaths in quite a while, so that's a great thing for our industry, and that's great. 

Chris Powers: You were talking about development being expensive.

Are there ways to take some of these old office buildings? It's like, you all are perfect. You hardly have any traffic, and you don't require a lot of parking. Has anybody considered redeveloping any of these buildings into assisted living, or is it, not the correct layout? 

Joe Pohlen:  Well, I've not, and I've not run across anyone doing that.

That doesn't mean it's not being done. You can buy an existing senior living building for 60 a door and only build or retrofit something close to that. 

Chris Powers: Is there a reason you're just in Pennsylvania and Michigan? 

Joe Pohlen:  Well, I live in Michigan, and the first deal we ever found was in Pennsylvania, and there's a compounding effect of being in a market.

I'm on the Michigan Assisted Living Board, and I'm on the Pennsylvania Healthcare Association Board. I spend a lot of time in those states, and I know the power players in those states, in those areas. So that's why we're in those states. A market is roughly a thousand beds within a two-and-a-half-hour drive of each other as a market.

And the goal is to build out each market and only look at a new one once you've hit scale in the ones you're in.

Chris Powers: Are there any states you wouldn't go into because of certain regulations or specific things they require, or are all 50 states open for business?

Joe Pohlen:  It would have to, any state that we went to have to have a clear path for us to get to a thousand beds. So we get called all the time off, like, I've got this great deal in Vermont. And it's like, well yeah, it might be a good deal, but like, that's a hundred units, and I can't get that building a sister building to share resources with, and I'll never be able, I don't know how I'll ever get to a thousand in that market.

I can't get there quickly. So we've said no. Well, this has been the wildest thing that's happened in my entire life. I've had to fight for every opportunity. I was just like, yes, anything that came up, I'm like, I was doing wedding venues, and I was doing apartments, and I was doing self-storage, and I was like, if I could make a buck, I was going to do it.

And if anyone would invest a dollar with me, I would do whatever they would invest in. After the deal went full circle, we closed. It was a great return that we posted. The opportunities have been just like huge where for the first time in my life, I'm like, no, no, no, no, no, no, and I've said no.

In the last three months, I've said no more than I've ever said in my entire life. And so the answer is like no other state: we've got to finish Michigan before we do anything else. 

Chris Powers: That is a powerful place to play the game.

Joe Pohlen:  And you helped on this when I was listening to the episodes and talking with you about, you went through a similar process of having to focus for it to become what it could become.

And I said no on any more wedding venues; I was invested in, like, a plastics company I sold out of, and I sold off the majority ownership of all my apartments to someone who's going to like to manage it day to day. And I'm clearing my plate of anything that's not my family—and taking Cardinal to where I want to take Cardinal.

Chris Powers: We're in the same camp. I used to chase the dollar, and I had the hustle to get anything that looked like it made money over the goal line. But you can be busy and feel good, but you need to make more progress. 

Joe Pohlen:  No, no. And yeah, it's all trade-offs. Everything you do is a trade-off.

There is no; doing this is taking away from that.

Chris Powers: We've laid out where we've been, how the industry can improve, and how you will improve it. We discussed real estate being 15 million for a few buildings, which is expensive. And so clearly you'll need some, like, change some money.

Do you have the ideal type of investor? One good thing about this podcast is that many people listen, especially those with capital. How would you describe a great partnership, or who would you like to hit your wagon to?

Joe Pohlen:  Yeah. The type of capital partners we're looking forward to is actual, long-term focused.

Many people say they're long-term, and then there's one little bump in the road, and it's like time to sell. But committed long-term family capital who believes in the power of a family business is the type of people I'd like to attract and people I want to work with for the rest of my career for the next 30 years.

So that's the appropriate partner for a group like Cardsell.

Chris Powers: And that group or groups, as you said, they're, they're not just funding a one-off deal, they're going to participate in the building of a whole organization. 

Joe Pohlen:  Yeah, that's correct. Yeah. And I would make my money like a salary, which would be how I'd make money.

There are no acquisition fees or other fees. It's just and I want to build this business. For this to work, you have to understand the real estate component, but it's not a real estate business, it's an operating business, and I want to treat it that way. 

Chris Powers: And then how do you, like, we didn't bring it home on that, but when you think of permanent vehicles, and if I was an investor and I said, I'm interested in what you're doing, how am I going to get paid?

How am I getting my money back?

Joe Pohlen:  You got to get it to a large enough scale that there are enough people that if you want it out, the other people in could buy some of your shares. And you're making distributions of cash flow along the way. 

Chris Powers: Correct. All right. It is an excellent place to bring it home.

We'll do the trilogy in a couple of years. I'm pumped for what you're doing and excited that you got a sale and to see where you take the business over the next 10, 20, or 30 years. So thanks again for coming down, and let's get a bite to eat.

Joe Pohlen:  Thank you so much, Chris. I had a great time.

Chris Powers: I hope you've enjoyed this episode of the Fort Podcast. Be sure to follow us on your favorite podcast platform or hop over to YouTube to watch full video episodes if that's what you prefer. For more information, you can check out fort pod.com.