Pegasus Launches Turnaround Effort for 36 Former Brookdale Properties

Newly formed operator Pegasus Senior Living is trying to accomplish a difficult feat right out of the gate: taking over a portfolio of 36 underperforming properties from Brookdale Senior Living (NYSE: BKD) and turning them around in a tough operating environment.

To accomplish this, Pegasus co-founders Steven Vick and Chris Hollister say that their extensive experience in senior living will be helpful but not enough. They also need to bring fresh approaches and an entrepreneurial spirit to their new venture.

The new chapter for Vick and Hollister began last spring. That’s when real estate investment trust Welltower Inc. (NYSE: WELL) turned to Vick, asking whether he would be willing to take on management of the Brookdale communities, which the Toledo, Ohio-based REIT then owned on a triple-net lease basis.

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The timing was good. After long careers in senior living, Vick and Hollister had been cooling their heels in Dallas but were also considering options for re-entering the industry.

“Steven and I have been friends and colleagues for 25 years, and we have common approaches to the industry,” Hollister told Senior Housing News. “We both felt there was going to be an opportunity to get in and improve properties, given that [some markets] are overbuilt.”

The duo agreed to work with Welltower, which in late June announced that it would transition management of the Brookdale properties to the new operating company, in a joint venture. At the time, the Brookdale portfolio consisted of 37 communities, but one has since been dropped from the transaction, Hollister and Vick told SHN.

Assembling a team

The deal is being closed in batches, with the first set to close by Nov. 1. The whole transaction should be completed in early 2019, with Feb. 1 as the target date. Meanwhile, the Pegasus effort is taking shape, with Vick and Holliser assembling a team and devising a turnaround strategy for the portfolio.

Vick has taken on the CEO position at Pegasus, and Hollister will be president. They have established a headquarters office in Dallas and have hired about two-dozen people to work there and regionally throughout the company.

In making these hires, they’ve been able to draw from a deep well of industry connections made over the course of decades. A certified public accountant, Vick co-founded Sterling House in 1991, which went on to ultimately become Alterra Healthcare Corporation and was acquired by Brookdale. From 2002 until its acquisition by Extendicare in 2005, Vick served as CEO of Assisted Living Concepts, a publicly traded operator with more than 180 communities. He then founded Signature Senior Living, which developed and operated 17 assisted living/memory care communities in Texas.

Hollister co-founded Southern Assisted Living in 1995. He served as CEO while the company grew to more than 40 communities; it was acquired by Brookdale in 2006. Since 2016, Hollister has served on the board of directors of Sunrise Senior Living — a position he will now give up, due to his connection with Pegasus.

Hollister and Vick both sold companies to Brookdale while the senior living giant was in the process of achieving its massive scale. Today, Brookdale is slimming down, and Pegasus’ new hires include some former Brookdale employees who are attracted to a leaner operation with a startup mentality.

“As Brookdale is losing properties, they have to right-size their [general and administrative expenses] as well,” Vick said. “Brookdale has a number of good people … and those that want to take on the entrepreneurial spirit and join us are excited about it.”

Full buildings are happy buildings

The Pegasus portfolio is geographically dispersed. There is a Pacific Coast chain stretching from Seattle down to Southern California, another cluster running from Texas eastward to Atlanta, and scattered properties in other states, including Colorado and Kansas.

Most are multi-story buildings with a mix of independent living and assisted living and were built around 20 years ago. Their occupancy has declined to the 80%-90% range in the face of “shiny new buildings down the street,” Hollister said.

Capital investments are required to make the buildings more competitive, and Welltower will contribute financially to this effort, Hollister said. The renovations might include repositioning some units to meet demand for memory care in certain markets.

In addition, all 36 buildings will be transitioned onto the MatrixCare electronic health records platform, which Vick played a role in developing. As CEO of Assisted Living Concepts in the early 2000s, he recognized that paper-based systems were inefficient and expensive. In some cases, workers were Scotch-taping receipts to mail them into the home office. The company was spending more than $70,000 a year on FedEx charges. To solve this issue, Vick developed software that ultimately got acquired and bolted on to the MatrixCare platform.

Boosting revenues will be another crucial element in turning these properties around. This involves setting the right base rents, as well as using technology to track service provision and help set appropriate rates for care.

“We’ve got to meet or beat the market on base rates, and then have a tool to get paid [appropriately] for services,” Hollister said.

In setting rents, he and Vick believe they’ll have more flexibility than Brookdale did when it was managing the buildings. For instance, Brookdale has between 15 and 20 buildings throughout the Seattle area, so it had to worry about the entire market when it was determining what rents to charge. With only a few buildings, Pegasus will not have to worry so much about how its rents at one location might affect another location.

In another break from Brookdale, Vick and Hollister plan to locally brand each building, relying on community-level leaders to help select an appropriate name. In some cases, a community might keep its present name, and in some cases it might choose a new one. The phrase “by Pegasus Senior Living” will follow each community’s name. Pegasus was chosen as the company name because the mythical winged horse has inspirational connotations and also is associated with Dallas.

On the expense side, labor is the standout item. With labor markets tight and wages rising, it’s a tough challenge that providers across the country are facing. Pegasus wants to retain high-quality employees that have been at the communities, and then find ways to incentivize and financially reward both line staff and building leaders — including executive directors — based on their performance.

But retaining a great workforce is not an entirely separate challenge from boosting occupancy and renovating physical plants. These efforts should all feed other in something of a virtuous circle.

“Full buildings are happy buildings,” Hollister said.

Looking forward

Further in the future, Vick and Hollister think that Pegasus will be able to play a more important role in the increasingly integrated U.S. health care system. Welltower is poised to be a key partner in this. The REIT has been on the leading edge of efforts to put senior living and care communities at the heart of larger efforts to improve health outcomes and reduce spending.

For instance, Welltower is engaged in a joint venture with nonprofit health system ProMedica, which acquired the massive skilled nursing and assisted living operator HCR ManorCare earlier this year.

Welltower CEO Tom DeRosa has been outspoken in his belief that other health system-senior living tie-ups and partnerships will be coming, in large part because senior living providers can keep large populations of seniors out of the hospital, while improving their health and wellbeing.

“We’re absolutely aligned with what Tom has said,” Hollister said.

Pegasus could grow larger in the future, with opportunities coming from Welltower or other parties if the company can succeed in this initial endeavor, Vick and Hollister said. However, they have no ambition to become the largest operator out there or to achieve a certain size — their focus in on the job ahead of them.

“We’re going to jump in with both feet and figure out what works for each building, and address the pay and labor, wages, rent and the care,” Vick said. “We’re entrepreneurs, and we like a challenge.”

Written by Tim Mullaney

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