Turnaround experts launch a new venture with a big starting portfolio.
By Jeff Shaw
Welltower (NYSE: WELL), the largest seniors housing REIT in the country, made quite a splash in June when the company announced it would take 36 of its formerly Brookdale Senior Living-operated properties and give it to a new player: Pegasus Senior Living.
If you hadn’t heard of the new operator before, there’s a good reason. It didn’t exist yet.
Two longtime industry veterans launched the company specifically to manage the 36 Welltower properties under a RIDEA lease.
Steven Vick will serve as the company’s CEO and chairman. Vick launched his career at Sterling House and Assisted Living Concepts before founding Signature Senior Living. He also helped found the customer relationship management (CRM) software company that is now sold to seniors housing communities as MatrixCare.
Chris Hollister will serve as president and vice chair of the company. His history includes long stints with operators Southern Assisted Living and Sunrise Senior Living.
Vick and Hollister are both known as turnaround experts, which is why Welltower entrusted them with the 36 struggling Brookdale properties, totaling approximately 4,000 units and employing approximately 2,500 people. The duo also has a combined 25 years of experience working directly with the REIT in previous positions.
Seniors Housing Businessspoke with both Vick and Hollister about the new company and their vision for the future of senior living.
SHB:What led up to that decision to launch Pegasus?
Chris Hollister:Recently, Steven has been more active as an operator than I have, and he’s also done bigger things. Welltower essentially called him in April and said, “We have some properties in our portfolio we’d like you to help with.”
We’ve been friends for 20 years. We were riding bikes in Dallas and he told me he’d gotten that call and had been talking to them for a few weeks. I told him I’d be happy to work with him and help him, so he brought me in.
SHB:Did that call come from just out of the blue?
Steven Vick:Yes. It was great because Hollister and I were a little bit bored and we’d like to do something.
SHB: What’s happened since the announcement? Is Pegasus truly “launched” or is that process ongoing?
Hollister:We’re going close in three tranches based on the license transfer process. So we should have all 36 closed and under the Pegasus banner by Feb. 1. That’s the goal.
Vick:Between the two of us, we’ve visited all the buildings. Brookdale has a lot of great employees and a lot of residents. Occupancies generally range from 80 percent to 100 percent in this portfolio. In those communities below par we believe we can improve things by focusing on each as a specific challenge with specific answers.
Brookdale has a different approach than we do. They’re constrained by being a large company. When you just look at the difference between [Brookdale CEO] Cindy Baier and an executive director, there are a lot of people in between. When Chris and I show up at a property, there might be one or two layers between them and us. Consequently, that comes with limitations, but it also comes with being flexible, dynamic and supportive. It’s something we get a big kick out of.
SHB:Pegasus will launch as an ASHA 50 operator from its inception, with 36 properties and about 4,000 units. How do you steer the ship when it’s already starting out that large from day one?
Vick:The past has been a good experience for me. In 2002, I took over 185 properties based in Portland, Oregon. I thought I was too far away from the properties in New Jersey, so we moved the whole operation to Dallas. Within six months we started the turnaround. They had never made any money, but they finally started to.
You have to balance the margin and the mission. All margin and no mission is bad, and all mission and no margin is bad.
I see Chris and my job as creating the bookends of what’s right and wrong, what’s good and bad, what’s acceptable what’s not acceptable.
Hollister:I don’t think it would be possible without the tremendous credibility and network we have.
We brought on Matthew Thornton, a 25-year operator. He’s had a tenure with Steven and Assisted Living Concepts, as well as Legend Senior Living. He’s just a tremendously experienced operator, and a registered nurse so he gets the care side of the business.
We also are bringing in Britta Edwards. She’s with Brookdale right now, but joining us. She’s a 25-year veteran of this industry and has done everything in various regional capacities.
We’re hiring all sorts of regional people, all with experience in the sector.
SHB:Brookdale is an established operator, despite it’s shortcomings, and REITs are usually conservative. What is the experience level of Pegasus beyond Chris and Steven?
Hollister:Many of our team members have worked for Steven previously at Assisted Living Concepts, Sterling House and/or Signature Senior Living, and a few with me at Southern Assisted Living. In our view the most important employees in the company are the executive directors and the associates on site.
Our philosophy is to support them with world-class tools but to listen and collaborate with them. We believe these are 36 local businesses and we will be successful to the extent we can maintain many of the fine leaders already in place, and fill holes with new leaders in those few places where it leadership is lacking.
In our home office we have already hired most of our senior team, all of whom have many years of experience in senior living. Our top three operating executives have anywhere from 20 to 30 years of experience directly in senior living. We are hiring regional teams now all with deep on site experience in senior living with proven track records of success.
SHB:To an outsider, how do you answer the concern that Welltower is taking a risk on an unproven entity, and could be risking even further struggles with these communities?
Hollister:Steven Vick is arguably the most seasoned operator in the sector, with highly successful tenures with several national and regional platforms. Steve Morton and I partnered at Southern Assisted Living to establish a dominant regional brand that included four separate add-on acquisitions with numerous properties that needed expertise to drive performance.
We both approach this endeavor with humility coupled with confidence and determination. All operators are facing challenges with oversupply and rising wages.
Companies are led by people and our team could not be described as unproven. We believe we can create a positive environment that empowers and rewards local leaders coupled with state-of-the-art systems to improve performance while delivering quality care and service. But it will take time and a lot of effort.
SHB:The agreement with Welltower is a RIDEA lease, which seems to be growing in popularity with the REITs over triple-net agreements. Is this your preference as well, and why or why not?
Hollister:It is our preference. We believe it aligns the interest of the capital partner and the operating partner better. Welltower is absolutely our full-on partner in this opportunity. We’re very grateful for the confidence the REIT has shown in us. We’re excited about improving the lives of these residents and improving these communities.
SHB:Are the Welltower communities still your entire portfolio, or have you been looking at other properties? Do you plan to start looking at acquisitions/development in the future?
Vick:We’re going to create a foundation, a team that will balance the margin and the mission. We’re going to have fun doing that, and we’ll create some value.
As for future growth, we’ll see. There’s a lot of opportunity out there. I try not to be preoccupied by all the possibilities. For now, we’re going to create a great management team.
Hollister:We are not looking at development as a primary strategy. Down the road it might become an adjunct to the core strategy. We are looking for new opportunities and believe there are a lot of communities that we could hopefully improve.
SHB:You are both turnaround experts. What are your plans to right the ship at these communities?
Vick:It’s a conversation at the local level. As an executive director, what do you need to do to be full? Full buildings are happy buildings. It’s a very competitive market with lots of pressure in the labor market. We’re going to put some money into capital expenditures and deferred maintenance, and spend that judiciously and appropriately.
Hollister:There are a lot of wonderful people at Brookdale and these communities all have good bones. The locations are generally solid, they have generally good layouts.
We believe very strongly in local autonomy in decision-making. These are local businesses. It’s about networking, being part of the local community. For example, we allow each executive director to name his or her own building.
SHB:What’s your long-term goal for Pegasus as a company?
Hollister:Our long-term goal is to create a very credible, viable company that’s known for celebrating and enhancing the lives of residents and being a great place to work. In five years, we’re trying to create a self-replicating model that will work even if we step aside after a few years.
Vick:The short-term and long-term goals are similar. Welltower asked us to take these assets and improve their value. Where it goes from there is yet to be seen.
We committed to a minimum of five years to this project. We’re high-energy guys. I couldn’t even fathom the word “retirement,” but I was on a sabbatical for a year-and-a-half. Full retirement is not in my DNA.
We don’t have an objective of getting out. We’re going to create this. I hope that we’re prudent in putting it together and adding value, and we’ll see where it goes.
SHB:What is the biggest challenge facing seniors housing today?
Vick:It’s not one answer, but if there were it would be labor.
You’ve got 10,000 seniors turning 65 every day. Healthcare is local. If we put the right team together and incentivize them appropriately and do our job with pricing and value for that price, we’ll add value.
Hollister:Affordability for the middle markets. Steven was the innovator of that at Sterling House in the 1990s with a single-story, attractive but inexpensive product to build.
It starts with the design of the building. If land costs are reasonable, we prefer to keep the building single story and not get crazy on the construction. You have more flexibility if you don’t build the Taj Mahal.
In the Atlanta market we are seeing some great new assets, but some spent way more on the real estate than others and it hasn’t translated to performance. The simpler, smaller buildings stay fuller.
You have to lead the market. If you’re known for quality care, you’ll compete even if you’re not the bright, shiny penny. We might have to cut rates somewhat to compete, though.
Vick:When we did our first Sterling House in 1991, we said “affordable assisted living starting at $1,200 per month.” People said “That’s not affordable.”
If our average resident stays with us three years, and it’s $3,000 to $4,000 a month, a lot of people say that’s not affordable. But if you have $50,000 to $75,000 of net worth, you could afford assisted living.
Our model is to have the number of units at or about 100 per building. That gives the opportunity to have affordability options.
SHB:What’s something people in the industry would be surprised to learn about you both?
Hollister:We are local. Healthcare is local. We’re going to dig deep on that — local food, local recipes, local folks, local residents. We want to be local.
Vick:Some people say business is business and personal is personal. I think it’s all personal.
When a resident moves in, it’s personal to me. When I terminate an employee, that’s not business, it’s personal. I take it all at that level. The commitments we make, the promises we make to the residents and employees, I take that personally.
There’s an emotional benefit and an emotional detriment. You’re emotionally invested in a building and people and residents. When a person dies we have to celebrate that we were able to make his or her life better in the months we were able to be with that individual. With employees, I love career ladders; a lot of folks we’re hiring used to be executive directors and are now moving up to regional positions. That’s cool.
It’s all business, but it’s all personal