Pegasus Senior Living has made progress turning around the nearly three dozen former Brookdale Senior Living (NYSE: BKD) properties it took over last year — having grown occupancy and built out leadership teams, the operator is anticipating a wave of CapEx in the year ahead.
All of this is aimed at positioning Pegasus to potentially take on other turnarounds while seizing additional opportunities down the road, Co-Founder and current Vice Chair Chris Hollister told Senior Housing News.
Hollister is an industry veteran, with nearly three decades of experience under his belt. In building his own company in the 90s and working with other large operators in the years that followed, he’s seen many real estate cycles develop — and he sees some similarities now to those that have occurred before but also some unique challenges playing out. Meanwhile, he’s got his eye on growing opportunities, particularly with regard to the middle market.
Landlord Welltower (NYSE: WELL) tapped Pegasus Senior Living to manage the former Brookdale properties in the summer of 2018. Dallas-based Pegasus has so far assumed management of 35 communities in the 36-property portfolio. The operator in May also agreed to manage four Florida properties developed by Omega Communities, with two of those communities currently open, and another two under development.
Today, Pegasus manages 37 communities, with two more Omega communities in Florida and one more Welltower property in New York on the way.
Pegasus co-founders Hollister and Steven Vick have spent the better part of this year writing and updating comprehensive strategic plans for all of those communities.
“We’ve got a lot of good people in place at the site level and the regional level. We feel good about our budgets for 2020,” Hollister told Senior Housing News. “I think we’re poised to become, hopefully, very good at turning [communities] around and having the expertise to do that.”
Tools of the turnaround
Taking over a portfolio of underperforming properties from Brookdale Senior Living (NYSE: BKD) and turning them around in a tough operating environment is no small feat. But Pegasus has employed a number of strategies that seem to be bearing fruit more than a year later.
Occupancy for the portfolio is currently in the low 80s, Hollister said, up from “just under 80 when we took it over.” And Pegasus has benefitted from an influx of fresh faces in recent months, including Southeast Regional Director of Operations Alex Germain-Robin and executive directors Tommy Saxon and Matt Ritter.
More generally, Pegasus has paid significant attention to staffing the communities with an “operational triad” of an executive director, salesperson and clinical director — all of whom are aided by a business office manager. Part of that strategy is informed by Hollister’s belief that, in turning around a property, the most important factor to consider is leadership.
“Even with older buildings against the new and shiny, if you have the right leadership, it’s pretty amazing what you can get done,” he said. “Having people that know their local market, are committed to that market and have the experience to manage the businesses is the key.”
Hiring a good leader can also lead to a cascade of new workers. A good leader may bring with them a cadre of loyal followers who have worked with them in the past, a trend that has played out at Pegasus to some degree.
“Some of the regionals we’ve hired in the past few months have people who want to come work for them because they have solid relationships,” Hollister added.
Hiring the right people for the right job can be easier said than done — especially for turnaround properties, which are more challenging to manage and staff than those that are stabilized.
“It’s a whole other level of challenges, like hiring a Navy SEAL versus a soldier,” Hollister said. “That’s why we have a one-to-six ratio, on average, on our operational team, because all of these are high-touch, very intense situations.”
Pegasus isn’t done looking for new talent just yet. Pegasus still needs to fill some regional health and wellness roles, and it’s always on the lookout for quality sales and clinical staffers, Hollister added.
The company is also preparing for an influx of CapEx in 2020. Many of the former Brookdale buildings are around 16 to 18 years old, and are in need of a general facelift. Some even have the original furniture and carpets, Hollister said.
Much of the work will include refreshing common areas, making employee break rooms more appealing, adding state-of-the-art fitness equipment, restriping parking lots and upgrading kitchens.
While Welltower declined to specify exactly how much CapEx spending was on the way, Hollister said it would be substantial, and is aimed at making the communities competitive and market-ready.
Pegasus isn’t dead-set on growing in the months and years ahead, but it isn’t opposed to the idea, provided the opportunity is right.
“We’re not dying to go do more,” Hollister said. “But we have built a team that is capable of doing more.”
In surveying the senior living industry today, Hollister sees some similarities to two times when the senior living industry experienced a downturn: the first being the early 2000s, and the other being right after the Great Recession in 2008.
Hollister is no stranger to the ebbs and flows of the senior living industry. He first got into the business in 1986, and in 1995 co-founded Southern Assisted Living — a company that grew to more than 40 communities before it was acquired by Brookdale in 2006. Hollister also was on the board of directors of Sunrise Senior Living between 2014 and 2018.
“History doesn’t repeat itself, but it rhymes,” Hollister said. “I do think we’re overbuilt, clearly, in most of the major markets.”
Specifically, Hollister sees developers and owners flocking to markets where demand is robust but available land is scarce and expensive. This often prompts them to open their communities in the surrounding suburban areas — a good strategy if you’re the only one, but less so if you’re just one of many.
“If you get it right and fill it up, you get [private equity] returns in three to five years, and everybody’s trying to go do that so the money keeps piling in,” Hollister said. “I think there’s an aspect to this that, in a way, makes it potentially more challenging than the other [real estate] cycles.”
The issue is often complicated by new senior housing players like multifamily or commercial real estate firms which, while well-funded, lack an operating platform, he added. That’s not to say there aren’t some that are successful with this approach, it’s just that there are many more that aren’t.
“They’re reading all the trends, and they maybe they go to NIC, but they don’t really know enough people to get the full story of how much people are hurting,” Hollister said. “They need to be extraordinarily careful with their feasibility analysis and listen very intently to what’s really happening as they do their market research.”
That’s not to say the market outlook is all bad. Some opportunities Hollister has his eye on include middle-market senior housing, which he identifies as the best business prospect for the industry in the years ahead. While millions of baby boomers will reach retirement age over the next decade, some current senior living price points are too high to attract them all.
“There’s going to be a lot of people that have a need for [senior care], that they don’t have six grand a month,” Hollister said. “To me, that’s the biggest opportunity.”
Active adult is another product type that Hollister sees as opportunistic. As with middle-market senior housing, the challenge will be finding a formula that works for developers, owners and investors.
And for Pegasus, there is another looming opportunity: to become known throughout the industry as the leading turnaround artists.
“We’re seeing some progress,” Hollister said. “And if we can continue that, we think there’s a lot of opportunities become sort of the fix-it specialists for things that haven’t quite worked as well as the capital providers had planned.”