The latest round of start-ups aims to unlock the secrets of operational success.
By Jane Adler
The combination of increased industry competition and the long-awaited arrival of aging baby boomers is driving a wave of senior living start-ups among operators and developers.
Industry executives with operating experience are launching management companies amid a surge of new construction. Owners and investors are looking for new approaches. They’re eager to partner with start-ups run by experienced managers to quickly fill new projects and boost occupancy at old ones.
At the same time, multifamily developers sense an opportunity ahead as baby boomers retire. These builders are creating new divisions headed by seniors housing pros ready to tweak old formulas to attract younger retirees.
“It’s a cycle,” says David Schless, president of the American Seniors Housing Association (ASHA), Washington, D.C. “The opportunity is there.”
Similar to patterns in other industries, executives at big senior living companies routinely break off to form their own firms. What stands out now are the common themes among the start-ups.
The new operating companies are focused on technology to maximize efficiency. Employee training and recruitment is a top priority amid the current labor crunch.
In addition, a number of the new start-ups — both operators and developers — have a regional strategy. Clustering properties together concentrates market power and reduces management headaches. “Critical mass is essential,” says Schless.
Pegasus Senior Living is a good example of the new start-ups.
Turnaround experts Chris Hollister and Steven Vick launched Dallas-based Pegasus Senior Living last fall. Vick is CEO and Hollister is president. Hollister has been in the industry since 1986. He was a board member at Sunrise Senior Living and co-founded Southern Assisted Living, which was sold in 2006 to Brookdale Senior Living (NYSE: BKD).
Vick also has a long tenure in senior living. He developed the Sterling House brand and helped turn around Assisted Living Concepts. He founded Signature Senior Living, which he sold two years ago.
“We’re entrepreneurs,” says Hollister. “We wanted to jump back into the market.”
The timing was right when Welltower (NYSE: WELL), the big healthcare REIT, asked Vick and Hollister to take over the management of 36 properties operated by Brookdale. The buildings are spread across the country and mostly consist of assisted living units. The average monthly rent, including care services, is approximately $4,500.
Occupancy at the Welltower buildings is about 80 percent, says Hollister. The goal is to stabilize and improve the properties. Pegasus’ strategy is to provide expertise from the top but manage the properties locally. “We want our executive directors to think of themselves as the CEO of their own business,” says Hollister.
Retooling the model
Other changes are underway at the Pegasus properties. The operator has introduced hybrid branding, which combines the local name of the building and a tagline, “Pegasus Senior Living.”
Other start-up operators have a similar co-branding strategy. Alternatively, start-ups are creating multiple brands to target specific markets and price points.
Pegasus is upgrading the buildings in its portfolio as needed, another common trend among new operators. They expect owners to spend capital to modernize older buildings to make them more competitive.
Pricing at the Pegasus buildings is being re-evaluated, says Hollister. Pricing for independent living and memory care is mostly all-inclusive. Assisted living has five pricing levels based on care requirements. A new resident assessment tool is being introduced to help determine more accurate pricing of care levels.
Mobile technology for caregivers to chart resident progress and communicate with families will eventually be introduced.
Pegasus currently has about 2,500 employees at its communities and 40 workers at its headquarters. “We are hiring constantly,” says Hollister, noting that the industry’s biggest challenge is finding good labor.
Like other start-ups, Pegasus plans to expand. The company announced a partnership in early June with Omega Communities of Birmingham, Alabama, to manage two new communities under development. The new properties are in Lady Lake, Florida, and McDonough, Georgia. Both offer about 160 units of independent living, assisted living and memory care.
Pegasus will also manage two existing Omega properties. The Fountains of Hope in Sarasota, Florida, includes 106 units of assisted living and memory care. The Springs at South Biscayne in North Port, Florida, features 133 units of assisted living and memory care.
Start-up operators are no longer willing to settle for a simple 5 percent management fee, sources say. Veteran property managers with a solid track record want performance incentives.
“This is a tough way to make a living only for a management fee,” says Hollister. Pegasus has a RIDEA agreement with Welltower. The REIT Investment Diversification and Empowerment Act of 2007 (RIDEA) allows REITs and operators to share property revenues.
Pegasus’ arrangement with Omega includes performance incentives. Pegasus also plans to co-invest in new Omega developments. “Management drives value,” says Hollister. “Managers need upside.”
Operators in demand
Senior living executives see an opportunity in operations. Sona Senior Living is a new operating company recently launched by former Five Star Senior Living Chief Executive Officer Bruce Mackey and Chief Operating Officer Scott Herzig. Sona is based in Boston.
“I’m amazed at the number of calls we get,” says Kai Hsiao, CEO of Eclipse Senior Living based in Lake Oswego, Oregon. “If you’re a good operator, it’s a seller’s market.”
Hsiao launched Eclipse in November 2017. He was previously senior managing director at HCP (NYSE: HCP), the big healthcare REIT. Prior to that, he was president and CEO at Holiday Retirement, a large seniors housing operator.
A number of top Holiday executives followed Hsiao to Eclipse. The company occupies the office space that once belonged to Holiday, which relocated to Florida. “We were able to bring back the old band,” says Hsiao.
Eclipse has a headquarters staff of about 90, and more than 5,000 employees overall.
The company already manages more than 100 communities with more prospective assignments in the pipeline. “We did not expect to grow this fast,” says Hsiao. He expects another 20 communities to come on board by the end of the second quarter.
Eclipse operates two brands: Embark for independent living, and Elmcroft for assisted living and memory care.
The healthcare REIT Ventas (NYSE: VTR) and HCP, along with Apollo Global Management are the big seniors housing owners working with Eclipse. “They saw our track record at Holiday Retirement and thought we could repeat it,” says Hsiao. Ventas owns a 34 percent stake in Eclipse, according to press reports.
Since good operators are in demand, Hsiao can pick his partners. “We’re judicious about who we work with,” he says. Hsiao will turn down a business opportunity if an owner is unable or unwilling to invest capital to upgrade its buildings.
What makes Eclipse different is its sales culture, adds Hsiao. Owners come to Eclipse when they are looking for a different result. “We are big on accountability,” he says.
Also, the company has built a proprietary information technology system that combines financial, property and customer relationship management in one format. It is supplemented with other technology such as OnShift, a workforce management software program.
Like other start-ups, Eclipse is investing in worker recruitment and retention. Hsiao thinks the industry has only recently started to address high turnover rates more commonly associated with other sectors such as retail and hospitality. Senior living needs to adopt a new mentality and view staffing as an around-the-clock effort, says Hsiao. Companies need to focus on hiring and training, and recognize those efforts as an ongoing process. “This will be the new norm going forward,” says Hsiao, adding that “our job is to hire people.”
Regionals gain traction
Vitality Senior Living was relaunched last year as Vitality Living, dropping the word “senior” to eliminate any negative connotations, says founder and CEO Chris Guay. Based in Nashville, Vitality Living’s business is concentrated in the South.
The company manages 12 buildings with a handful of others set to open this year and in 2020. The buildings are clustered in Texas, Florida and Tennessee. Its seventh property in the Nashville area is expected to open by the end of 2019.
Vitality has an ownership position in about half of the properties. But like other start-ups, Vitality has only a few third-party management contracts. Joint-venture structures are preferred. “We want to share in the value creation,” says Guay.
The buildings are mostly a mix of assisted living and memory care. But the independent living segment is expanding quickly, says Guay. He spent the majority of his career at Emeritus Senior Living and several years at Brookdale after it purchased Emeritus.
The top managers at Vitality also have seniors housing experience. The company employs about 600 people.
A change in capital partners last year provided Guay with the opportunity to reposition the company. The original investors, West Partners, a family office, were focused on development.
“I saw the winds of change,” says Guay. The relaunched Vitality, backed by Guay and other investors, is not only focused on development, but also on management and turnarounds. “We can grow more strategically,” he says. “Small regional operators have a lot of opportunity.”
Meanwhile, multifamily developers are hiring experienced senior living executives to create housing ventures focused on the aging population.
Passco Companies, an investor and developer with a large holding of multifamily properties, is making a push into the active adult arena. The Irvine, California-based company recently hired Carey Levy to handle development opportunities through Passco Companies Development. He previously managed a portfolio that included seniors housing properties at his position with Irvine-based Granite Investment Group.
Another example is Woodmont Properties, a residential and commercial developer in Fairfield, New Jersey. Woodmont recruited industry veteran Steven Nichols to head a new seniors housing division that was launched last January.
With a background in operations, Nichols was most recently at Brightview Senior Living. He also spent nearly 12 years at Atria Senior Living.
Woodmont plans to develop and operate new senior living properties. “We want to create a brand,” says Nichols. Six development sites have tentatively been identified in the Northeast where Woodmont is active.
Most of the sites are in New Jersey, though locations in New York and Pennsylvania are also being explored. The local market will determine the type of project to be built. These could range from active adult properties to combination projects with independent living, assisted living and memory care. “We are not tied to one model,” says Nichols.
Other developers are taking operations in-house. The Wolff Company, a Scottsdale, Arizona-based developer, launched what it calls a resident experience company last January.
Wolff, a private equity and multifamily developer, offers an independent living brand called Revel. Eight Revel communities are in lease-up and another 10 are planned. Wolff’s new resident experience company will manage the Revel communities.
The strategy is to create innovative environments and programming to support resident well-being, according to a company press release. Niki Leondakis, a veteran of the hospitality and lifestyle industries, will lead the resident experience company. Cory Wolfenbarger, who most recently has overseen Wolff’s senior living portfolio, will lead the new company’s operations.
Tackling nursing care
Savvy operators of skilled and transitional care facilities are also in demand. Occupancies at the properties have been moving up a bit lately but remain relatively low at 83.7 percent as of the first quarter of 2019, according to the National Investment Center for Seniors Housing & Care (NIC), Annapolis, Maryland. The occupancy rate is based on a national sample of about 1,500 properties.
Shortened lengths of stay and managed care contracts have pressured revenue. Also, seniors discharged from the hospital are often now sent home rather than to a nursing home.
Last February, Mark Fritz launched Bridgemoor Transitional Care. It manages four upscale properties in Texas developed by Carmel, Indiana-based Mainstreet, which made a push into transitional care several years ago. Fritz had extensive experience in transitional care operations and was brought in by Mainstreet to launch its management company.
Fritz bought the operations side of the business from Mainstreet when it decided to exit the market. The buildings are now owned by Invesque Inc., (TSX: IVQ), a REIT previously in the Mainstreet family of companies.
Bridgemoor has 380 employees.
The Bridgemoor buildings range in size from 70 beds to 105 beds. The company is focused only on short-term stay patients. The average length of stay is 14 days.
The buildings are relatively new, only about a year old. However, the strategy isn’t necessarily to sell nice accommodations. “That’s self-evident,” says Fritz. He notes that short-stay patients don’t want to be placed in a traditional nursing facility for rehab. “The patient plays a part in this,” he says.
Another factor is cost reduction. Referral sources — managed care companies, physician groups and hospitals — want patients rehabilitated as quickly and safely as possible.
Bridgemoor employs its own therapists instead of outsourcing the work, and can offer up to three hours of therapy a day if that helps get the patient home faster.
The company also tracks patient outcomes and can provide an estimate of how long the stay will last based on the patient’s condition.
Why is it a good time for a start-up? Fritz sums up his response in four words: “We have an opportunity.”