Pegasus Senior Living CEO Chris Hollister hopes the Dallas-based company will double its number of communities under management within five years — and he sees memory care as a particular opportunity for growth ahead.
Assisted living services are the bulk of what the company offers at its nearly 40 communities throughout the U.S. Hollister sees many opportunities to expand those communities to include new memory care units.
“If you have an 80-, 100-unit assisted living [community], you’re going to be able to probably keep a dozen, 15 memory care units full,” Hollister told Senior Housing News during his recent appearance on SHN+ TALKS. “That’s what we’re most bullish on.”
Pegasus also recently hired its longtime consultant Dr. Sandra Petersen in a new full-time role to lead the company’s clinical functions, starting Jan. 1. She originally joined Pegasus shortly before the pandemic began in 2020 to aid the rollout of the company’s signature memory care program, Connections.
Pegasus is also a partner of real estate investment trust Welltower (NYSE: WELL), and Hollister sees more opportunities to take on communities through that relationship.
“The southeast and mid-Atlantic states would be areas we would be happy to deal with,” he said. “We’re not as keen to grow in certain states that are further away.”
We are pleased to share the recording and this transcript of the SHN+ TALKS conversation with SHN+ members. Read on to learn about:
— How Hollister sees Pegasus and Welltower growing together in 2022
— Why Hollister is particularly bullish on memory care as a product type
— What Pegasus is doing to attract and keep workers
The following has been edited for clarity.
[00:01:05] Tim: How are leads, move-ins, and occupancy holding up as we head into the end of the year? I also want to know, are you seeing more traction in one product type versus another right now?
[00:01:40] Chris: Any operator right now would, I think, honestly tell you it’s been a challenging environment, but I’m cautiously optimistic. I think we are coming out of the worst of Covid, and we are seeing traction. We’ve had some good months. We chose to mandate the vaccine, effective 11-1. We have about 98% compliance with that.
I think that is sort of our defense because Covid cases are starting to go up again.
We really have three things: We have independent living, assisted living, and memory care. Assisted living is the bulk of what we offer. We’re very bullish on memory care. Part of our strategy with Welltower is to convert or expand memory care in quite a few of our locations … which would put a number of memory care locations in our communities well into the mid-20s. We’re very bullish on memory care.
We’re seeing particularly when you have assisted living … if you have an 80-, 100-unit assisted living, you’re going to be able to probably keep a dozen, 15 memory care units full. That’s what we’re most bullish on.
Independent living, we’re right at 90% [occupancy]. We have three big cruise ships on land, two in Dallas Fort-Worth and one in Leawood, Kansas, that have done very well.
Assisted living, with the acuity and the labor challenges, is probably the one that needs the most work right now. We had a lot of acuity and health-related move-outs, but we are recovering nicely here in November, and we think that’s an aberration to the upward trend over the last four or five months.
[00:03:33] Tim: How’s the expense picture looking these days, and what do you find yourself spending the most money on? Is it staffing, or is it something else right now?
[00:03:58] Chris: We had a strategic planning session up in the Colorado Rockies in August, and I found this cartoon. There were two elephants in the room, and the chair of the board was saying, “Unfortunately, there’s now a second elephant in the room.”
Covid was the first elephant, and now the labor shortage — some would call it a crisis — is the second elephant. That is clearly what we’re spending the most money on. We’ve driven pretty healthy rate increases going into the new year, and I think any honest operator will tell you the top three things that they’re worried about are labor and how to address this, particularly with younger people, and how to attract them to the sector.
[00:04:44] Tim Pegasus was formed as a company with turnarounds in mind. I think I called you turnaround artists back then. Are you still focused as much on turnarounds?
[00:05:13] Chris: Well, we’re certainly turnaround specialists. I think we do want to grow. Welltower has been great. They have shown a lot of confidence in us, and are making the necessary investments in these communities to keep us competitive.
We won’t be this shiny new penny on the end of the block, but it’s all about the software in this sector, how you’re taking care of people, and whether you are living up to the promise.
As we move forward, that’s probably six months to a year away for us. I took over as CEO in April. Steven Vick — shout out to Steven, he was in our office last Friday — had some health issues, and I bought him out. He’s a great guy, still a great friend, and a pioneer in the industry. I’ve sort of gotten my sea legs and we’ve brought in some new people: Rich Williams, who ran senior living in North Carolina, Virginia and Maryland area for 14 years, and worked with me in Southern Assisted Living. We have new regionals. We right now have all of our senior staff in place, so that’s quite an accomplishment.
We’re just trying to focus on getting the right people on the bus, and that’s what we’ve been doing. I think we do now, and we’re really excited going into 2022 to see some occupancy growth, improvement, quality and all the way around deliver on the mission.
[00:06:48] Tim: It sounds like you might have some more of these turnarounds in your future. Do you think that Covid-19 has changed how an operator would undertake a turnaround?
[00:07:25] Chris: That’s a great question. I think there are some overused words, and one of them in business is culture. It’s overused but it can’t be ignored, particularly with people.
I just turned 60 this year. I’ve been in the sector since 1986. I think if you go back, nursing homes are so constrained by what they can charge because the government is really their payor source in a large measure. We are private-pay, and the skillsets of … being a turnaround company that is focused on lowering expenses in this old school overlord way, I don’t think those skillsets are what is needed in the modern age. Not just for turnarounds, but for assisted living in general.
We have to look at the hospitality and restaurant space, and other fields, and take care of people the right way. That’s a different skill set. We’re going to have to drive rates to pay for the wages. We did a high single-digit rate increase for most communities, and we’ve gotten extremely few complaints about that because people read the news, and they see what’s happening in their communities, probably in their businesses in some instances. As long as they know it’s going to the caregivers that are taking care of their loved ones, they’re much more understanding about that.
With wages going up anywhere from 10% to 20% — probably in Washington state more than that — you have to get to where you’re driving higher rates, and people are going to go along with that as long as you’re taking care of people the right way, which is harder still with the labor turnover. We’re talking about ROTC: recruiting, onboarding, training and careers. If you look at other hospitality and service providers, the C is the one we lag in in health care.
[00:09:58] Tim: Since the start of the pandemic, Pegasus has relied on some in-house expertise in Dr. Sandra Petersen, who I believe started with you shortly before the pandemic as a memory care consultant. She pivoted to leading your Covid response. What role is she playing in that these days, and what is she doing at Pegasus?
[00:10:44] Chris: Dr. Petersen has been a critical part of our success. Steven Vick had a long-standing relationship with her, and when I took over, I was just delighted that she wanted to stay, and she actually is going to join us full-time on January 1, leading our clinical efforts.
As you may know, Dr. Petersen has a theory of neuroplasticity that integrates with our Connections program of getting people up and moving and doing things across their body. Obviously, Alzheimer’s is a fatal disease, but there are ways to work with people to have them have joy in the moment. If you can do that and show the families you’re doing that, that’s the prescription for long-term success.
[00:11:54] Tim: I did not know that she was joining you full time. It’s good to break some news on this.
[00:11:59] Chris: Absolutely.
[00:12:02] Tim: As you look ahead, how do you think the rest of the pandemic is going to play out?
[00:12:47] Chris: It’s been a sobering time. This is my third big wave I’ve ridden. As I said, I’ve been in it since 1986. In the late ‘80s, a lot of people thought it was going to be an easy business. People from rehab and nursing and hospitals were diving into it. It got overbuilt in the early 2000s, then recovered and grew until the Great Recession.
I think we’re in the wake of an overbuilding moment cyclically as supply and demand tends to get out of balance, at least for a few years, and come back, particularly in Sunbelt locations.
I think with the unbelievable work that science has done for us around the world to deliver these very highly effective vaccines with very limited downside, I think [Covid cases] are going to creep up over the winter, particularly with unvaccinated populations. But with most of our employees vaccinated, the vast majority of our residents vaccinated, I think the winter will be a lot less bad than last winter.
I think by April, May, we’ll see green shoots. I think it’s going to be endemic and we’ll be dealing with it as a long-term risk and illness the way we do the flu. Hopefully, it won’t then mutate into another more virulent form.
[00:15:17] Tim: You took the reins as CEO of Pegasus earlier this year in April. What’s your vision for where you want the company to be in a year and in five years?
[00:16:41] Chris: In one year, I want us to be performing a lot better for the Welltower portfolio that we have. In five years, we want to approximately double in size with the management company while having a nice cash flow and being recognized as a quality provider. Our mission statement is to celebrate and enhance all lives with integrity and kindness. We’re working with Activated Insights on an [employee satisfaction] survey, and hope to be eventually on the Great Place to Work list.
[00:18:08] Tim: We have our first question from our audience. How do you keep your team upbeat and energized, given that they’re probably worn out from combating Covid and labor challenges over the years?
[00:18:24] Chris: Well, that’s a challenge. To be honest, the answer is it’s difficult.
There’s a mental health crisis in this country, and we’ve tried to offer telemedicine for counseling. We’re doing a lot of things culturally with events, we’re trying to integrate and have for the leadership a bonus plan that is attractive to them. For the line employees, it is a grind. It is difficult to get them motivated when they can go down and work at In N’ Out Burger for $17 an hour, or Amazon.
I think we’ve got to try to connect to the why first. We just hired a new regional and asked her, “What brought you to senior living?” She’s been an accountant for 20 years and didn’t feel that fulfilled doing that, went back to school and got a health care degree. That was the right answer I wanted to hear. You have to first want to be here.
We’re doing a lot. I could go on about recognition programs and trying to do things like paying people … on a sped-up cycle. We’re doing things with benefits through a group that helps them manage their benefits. If they get afflicted with some specific illness, they can look in the network to see the highest rating.
We’re basically throwing everything against the wall to see what sticks, because it’s all hands on deck to try to figure out what drives stickiness and to have people come in and want to stay with the industry and with us.
[00:20:39] Tim: You had mentioned a little bit ago that you want to double the size of your portfolio, and that you wanted to work to create more opportunities to work with Welltower. Can you talk a little about how you see Pegasus and Welltower growing together in the future? What might that look like and what sort of communities would you look to collaborate on?
[00:21:12] Chris: Welltower has been a good partner for us. They’ve shown a lot of patience through Covid. They understand us as operators with the right data structure. They have their ear to the ground more than we do, with what they hear from their other operators. They’re very sympathetic to the struggles we’re going through. At the same time, we have to perform and come out of Covid strongly next year.
We’re based in Grapevine, Texas, downtown, which is a great little town by the airport here in Dallas. It makes it easy to get people into trains, makes it easier for people to fly out. Contiguous states are easy around Texas. The southeast and mid-Atlantic states would be areas we would be happy to deal with. We’re not as keen to grow in certain states that are further away. I guess you always look at each opportunity.
I think clustered opportunities that are 60% to 80% occupied where we feel we can bring value through the culture, — maybe it’s some folks that are new to the sector and have struggled, but if the bones are good and the replacement cost price is attractive — Welltower understands that. They’re long term major owners here, and they see the value opportunistically if things are below replacement cost by bringing in focused operators.
[00:22:44] Tim: Can you talk a little bit about how that alignment works under Welltower’s RIDEA structure?
[00:23:13] Chris: We’re very aligned because we want the management company to be cash-flow positive. We want to create value on the real estate. I think the way we are aligned is very strong. Otherwise, to tweak it or whatever, I’m all ears, but I think we have a very strong alignment with how we’re structured with Welltower.
[00:23:53] Tim: What do you think is the key to a good relationship with a REIT partner?
[00:24:14] Chris: I think transparency is what they’re after.
They are with us as an operator. They add value by bringing ideas. I think you have to set the ground rules of how you communicate across different departments and up and down the organization, but once you get those ground rules set, embrace it, be honest, be open, trust, and then I think both sides will find it is a much more rewarding relationship.
[00:25:10] Tim: You had mentioned a little bit ago that you’ve been hiring some regional leaders, and I’ve noticed that too. Can you talk more specifically about your regions and how you break those up and assign folks to lead those?
[00:25:40] Chris: One of our challenges is we’re not geographically concentrated. We go all across the United States — California, it’s like a world unto itself with the regulations, and we have a new director just for the communities we have in California.
I think where we differ perhaps is because of the high-touch needs we have as a turnaround. I would always question if you can have a regional effectively manage 12, 15, even 20 communities. I just think they’re putting out fires all the time on their phone. They have to be in the building, they have to be there, to be present, to see, to dig in … not like a regional senior VP, where I’m over regionals and I’m just looking at budgets. They have to get in there and understand the individual challenges of that community.
We’re having a big kickoff meeting in December. We’re bringing all the regionals in. We have separate health and wellness directors, and separate salespeople. I think we are anxious to get all of that working better to where there’s better communication.
Hopefully, we can calm down on the labor side. We just did this wage banding to try to manage the agency, and I think our regionals are very, very keen on that. The three drivers for us are occupancy growth, labor management, and then really looking at our average rates. That’s the three-legged stool for success in ’22.
[00:27:53] Tim: I’ve heard that some operators are having such great staffing troubles that it’s impeding occupancy growth. They can’t staff these beds, but they can fill them, which seems like a unique problem. It doesn’t sound like you’re having a problem like that, but can you tell us a little bit more about the pressures you are seeing on the staffing side?
[00:28:32] Chris: I think where it shows up with us is in agency staffing. In certain markets, they’re doing triage, so they can raise their rates. It’s not just two or three times; it may be four times what you want to pay for a caregiver.
We’re not out of the woods on that yet, but I think just in the last 30 days and going forward in the fourth quarter, we’re going to see progress on that.
At NIC, Lawrence Summers, the economist, said at the opening session that “the cure for high prices is high prices.” Meaning, you’re going to have to raise wages, and you’re going to have to raise your rates, and that’s what we’re doing. I think we still have some tough months ahead, but I do think it’ll settle down in 2022.
Tim: Do you think that this is just a permanent floor for the pay typically offered in senior living?
[00:30:12] Chris: I think it is a permanent raise. I think it’s a paradigm shift. The big three events in my life were the fall of the Berlin Wall in ’89, 9/11, and now Covid in terms of negative events or shocks to the system.
Covid has been a shock to the system. Working at home, that probably could have worked over the last five years. I didn’t even know about Zoom before Covid. We’ve been amazed, frankly, how well it works. We still have our home office, which we call the Grapevine Operations and Training Center. We use it as a meeting place, really.
Now if you’re a caregiver, you can’t [work from home], but you can go home and drive for Uber Eats and set your own hours and make $20 an hour. People are finding ways to not have a 9:00 to 5:00 job, which makes 9:00 to 5:00 jobs and caregiving frankly less attractive if it’s for the same money. So, we have to be creative, we have to get people to get the why.
[00:32:00] Tim: What has Pegasus tried so far to attract new staff? What has worked so far, and is there anything that you thought maybe would work and hasn’t had such an effect?
[00:32:24] Chris: Even pre-Covid, we had a big-time increase in the benefits … we had increased PTO as well. Split shifts is something we’re looking at. It hasn’t been going on long enough to give you an ROI on it. I know going forward we will try to provide those ROIs, and to try and figure out what has worked, but frankly, it’s just a little too early right now to say.
Overall, will I do that for $12 an hour in Mississippi? No. You raise it to $15, and now I’m interested. But I don’t care if you build a modular $100,000 per unit building, your margins are probably going to be compressed just because you’re going to have to pay more, and that is a challenge for the sector right now.
[00:33:40] Tim: How are you using technology in your operations these days? How has that changed over the past couple of years?
[00:34:09] Chris: I think probably the number one thing is going to electronic assessments where your caregivers have a PDA in their hand, and are able to document on the spot. I’m not quite ready to announce that we’re moving to a new operator-focused operating platform. It’s a digital dashboard. We’ll all have it on our phones, and we think it’s a game-changer.
Having the basics of a vigorous Wi-Fi [setup] is important. Things in technology that help you with communication, and social media — I think we’re about to launch that next year. We’ve had a full-time life enrichment person, and really want to gravitate now to Instagram and TikTok, as well as to Facebook, which we’ve been on to tell those stories better, recognize people better.
Those aspects of technology tied to making people happier, communicating better, recognizing your employees, I think are the ones that are going to have the highest ROI today.
[00:35:53] Tim: TikTok, that’s very interesting, I guess you have to brush up on your dance moves.
[00:36:09] Chris: The grandkids will be on it. If the grandkids are on it, the parents are going to see it, and it trickles up, I think. We’ve got to try and see what happens.
[00:36:49] Tim: What do you make of the middle market? Is that on your radar? Are you currently doing some of that in your communities now?
[00:37:16] Chris: We’re in Albertville, Alabama, which is a chicken factory town; areas of North Atlanta; less affluent areas of Seattle; out in the desert of Southern California; upstate New York — we’re in a range of markets that would be characterized from lower-middle, middle-market to upper-middle, or high incomes. I think across that spectrum, we’re going to have to, as an industry, convince people that our value proposition is worth paying $500 more a month.
It is going to constrain people, but there’s tremendous wealth in this country. You look at the real estate boom, and one of the upsides of 6% inflation rate is that real estate values go up. The stock market is at an all-time high and there is tremendous wealth that is still there.
The middle market is a bit of a unicorn, given where the wage rates are, where they’re going to go, where they’re going to stay.I think the middle market will grow deeper, not because we are going to be able to somehow slash prices. People will say, “I simply have to spend more money to get this care my mom needs, since she can’t live at home anymore and be safe.”
[00:39:21] Tim: Why do you feel bullish about memory care?
[00:39:53] Chris: The idea that people 75, 80 years old are going to move into assisted living is one of the fallacies that’s driven this overbuilding from people new to the sector. I started out in feasibility analysis. We used the age 75-plus metric in 1986. It’s 85-plus now.
Part of the context of my vision is just the fact that we have a fair number of assisted living that we don’t have memory care where we’re converting, and it’s built-in demand. I’m going to still challenge the overbuilt markets. I personally think freestanding memory care is a challenging platform. It’s good to have IL and AL and memory care on campus, but demographically, the memory care, particularly after 2025, is going to be very robust.
[00:42:12] Tim: What about active adult? How do you feel about that as a product type? Would Pegasus ever dabble in something like active adult?
[00:42:28] Chris: I’m fascinated by it. There’s one right by my house here in North Dallas. It literally looks like an apartment complex with no children. I don’t personally understand the value proposition of that, but I’m fascinated. That is a product that, if you do it right, you can get people not for 18 months, or 2 years, but for 15 years.
I have some thoughts on that. Whether or not that would be something to put onto Pegasus or not, would be a discussion with Welltower.
Everybody’s now trying to figure it out, “Where do I go? What do I do?” A lot of them are starting to retire or semi-retire. Pickleball is huge. Where can I go where I have a lower maintenance, lower-cost lifestyle and I feel connected to the community, but I don’t want to be out on a pasture somewhere? I want to be where there’s restaurants and bars and music and I’m still learning, and there’s wellness.
[00:44:27] Tim: We have another audience question: “What is the demographic event after 2025 that Chris is referencing?” I’m assuming you meant the aging of the baby boomers.
[00:44:47] Chris: I’m a rock and roll guy. I’m always thinking of the Stones and those guys. Mick Jagger is still on tour. Until Mick Jagger is no longer on tour, you’re not going to see baby boomers moving into senior living. If you ask Mick Jagger about assisted living, he’d probably hit you with the microphone.
[00:45:52] Tim: That will be our new industry bellwether, whether Mick Jagger retires. [laughter] But you make a great point about how active he still is, because I’m assuming there are lots of potential residents who are probably like him.
What is your thinking on raising rates? When you do, it sounds like you have a transparent discussion with the residents. Tell me more about how that process goes.
[00:46:59] Chris: Most people recognize it because they [see the labor shortage when they] read the news or when they go into their local Starbucks. So, we have had very little what I will call blowback or concern about high-single-digit rate increases.
If you go back to when I got in … in the late 80s, early 90s, it was one size fits all, and charging $3,500 back then for assisted living. People very quickly figured out you have to have levels of care, and even when you have those levels, needs change so quickly.
It goes back to the labor, because when you have turnover, it limits those relationships that are so vital between your caregivers and your residents, and their ability to know them.
[00:49:13] Tim: Do you think the industry just basically has to accept lower margins for the time being, or is there anything that you can do now or in the not too distant future to try to get your margins back out a little bit?
Chris: Well, in general, I don’t think about operating margin percentages.
A margin, by its very definition, is a formula of expenses over revenue, or net operating income over revenue. We’ve always focused more on net operating income per resident per month. If you look at the NIC data, that’s somewhere around $1,500, but with AL and memory care, it can be over $2,000.
We actually have our own term … called USC, “unique singles and couples.” We look at net operating income per unique single and couple, and it captures that metric better because they do two people in a room, oftentimes in memory care. We’re trying to get that number up. If you put it in those terms, it’s easier to understand every expense line you can translate into, well, how much is that per resident per month? What will it save if we do this?
We haven’t done this yet, but if we go into next year and we still see this labor thing persisting after we’ve done our wage bands, that may be something that we look at as a tool. I don’t think it’s got to be permanent.
[00:53:03] Tim: I’ve seen providers explore more ancillary services, especially in the past few months. Does Pegasus source much or any of its revenue from ancillary services? How do you think that will play in Pegasus’ offerings in the future?
[00:53:43] Chris: Well, we’re working with a group for rehab and physical therapy. We’re looking at some other ideas on that as well, and some other groups. We don’t get a lot of money off of that. We think that’s best for them to focus on that. I know there’s a group in the industry that does massage therapy. That is a revshare model, and we’re talking to them. I think that would be great if we can figure out how to model it.
Overall, I think we do so much already. That’s what makes this challenging. We’re running a restaurant, a hospitality, a health care community, and there’s so much we’re doing already. I don’t see us as doing a lot on ancillary because we have our plate so full right now.
[00:54:50] Tim: How do you think this current period stacks up against some of these other previous periods of disruption?
[00:55:24] Chris: This one is sadder, and more emotional. It wasn’t really emotional in the early aughts when the sector simply got overbuilt. It wasn’t emotional in the Great Recession.
We had a community that lost 11 people to Covid over New Years’ of 2021, in two or three days. That is an emotional tear at the heart of everybody involved. Our people had to go through that, and we had to help them get through it. Luckily — knock on wood — that should not happen this year, given the defense of the vaccine.
[00:57:03] Tim: Covid-19 was a “black swan” event. But do you think it’s possible to build a company that can withstand these shocks better, and if so, how do you do that?
[00:57:32] Chris: It’s culture, it’s people, it’s paying more, it’s figuring out ways to use technology to communicate better, getting paid for what you do. I think clustered regional approaches are probably best, and I think we can do that even on a national scale because we are clustered in the markets that we’re in quite well. We’re just all over the country doing it.
I’m still optimistic. Quality care is still in high demand, and by and large, our families have been quite reasonable and understanding. I think there’s still opportunity. I think people need to be sharper, particularly folks new to the sector. Don’t go to market just because somebody said it, you’ve got to try to get a second opinion, and don’t use 75-plus for assisted living.
[00:58:58] Tim: Great. Well, Chris, thanks for talking with me today. This has been fantastic.
[00:59:35] Chris: Thanks, Tim.
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