Pegasus Co-Founder: Senior Living Must Be Brilliant on Basics But Pursue Innovation

Senior living providers have spent the past six months honing their infection control plans — and for Pegasus Senior Living co-founder Chris Hollister, there’s no substitute for focusing on the fundamentals.

“You can get into all these complicated rules and shut everything down, but we have to figure out a way as a society, as a world and as an industry to go forward and use common sense and just be brilliant on the basics, as my partner Steven Vick says,” Hollister said during a recent appearance on the Senior Housing News podcast, Transform. “Two or three people not wearing a mask, two or three people going to a big party and coming into your building, that can do a whole lot of damage.”

Hollister is no stranger to executing on the basics and paying attention to detail. Industry veterans Vick and Hollister formed the Dallas-based provider in 2018 after Welltower asked them to take over the leases of 36 former Brookdale Senior Living (NYSE: BKD) communities. Since then, they’ve become specialists in the art of the community turnaround.

Although Pegasus is gearing up for a difficult fall and winter with Covid-19, Hollister believes that common sense and consistency go a long way in keeping residents healthy and safe — and, in maintaining move-ins during the pandemic. And Covid-19, as well as his own family’s situation, have prompted him to reevaluate the industry’s value proposition and the appeal of small-house senior living. He foresees a period of struggle and recovery for the industry, followed by a flourishing of innovation within about three years.

Highlights of Hollister’s podcast interview are below, edited for length and clarity. Subscribe to Transform via Apple Podcasts, SoundCloud or Google Play.

On the challenges of dealing with Covid-19:

I think the most challenging part of Covid has been mental health. Obviously, everyone’s expenses are up. And in March through July, it was quite difficult to move people in. But the sense of isolation and lack of communal dining and activities has made senior living a challenging place right now. And it’s challenging for everyone. It’s challenging for our residents, it’s challenging for our team members, it’s certainly challenging for families. People being alone, that has caused wear-and-tear on their psyches. And I think we’ve tried to get through that as best we can, and we have done some innovative things.

We have been very fortunate to have Dr. Sandy Petersen as our clinical head. Dr. Petersen has a passion for seniors, and is a recognized expert, specifically in dementia. But one thing we’ve done through Sandy is, we have worked with an outside group to provide mental health services via telemedicine. It’s been a very popular program.

We’ve also tried to follow the rules of the law, but at the same time, be creative in what we can do to open things back up. One of those is therapeutic dining. For people who are losing weight or just having other signs of depression, we can, in small groups where allowed, bring people in for a small group meal, with the appropriate protocols. But I think everyone’s had to figure out a way to balance the risk of Covid with other risks, because if people aren’t moving, and they’re isolated, they’re more likely to fall, and they’re more likely to lose weight due to not eating right.

We’re also working with a group to potentially bring in physical therapy, an iPad-based learning algorithm that helps people get out of pain and work on their balance. It’s an innovative company, and that’s in a pilot right now. But I think everybody is looking and searching for ways to get through this, keep people as healthy as we can, balance the risk of Covid with the other inherent risks of being isolated, and try to move things forward as best we can.

On how having an in-house medical expert has helped mitigate the disease’s effects:

Through Dr. Petersen, we very quickly got on top of testing and PPE. I think we were probably on the vanguard of being on the front-end of that. We have more than 3,000 residents. But we haven’t been hit very hard by Covid, even where we have had it in the buildings. We put in protocols with cleaning, quarantine isolation of people affected, staffing where you have people in quadrants so you know where they have been in the building. Even where we’ve had it, we’ve been pretty good about keeping it at bay and turning it back. So, I’m very proud of that.

Dr. Petersen — as someone who’s been in this [industry] a long time — is very good at looking at key performance indicators and metrics, but also the people side of the business. PPE and testing, that is more standardized now. So, all of us, including Dr. Petersen, are able to focus more on programming on a daily basis. We’re very excited about our Connections program, which we have branded for the memory care units in about half of our buildings. We are using her theory of neuroplasticity in daily programming.

So, I think that’s been a very positive thing in our ability to look at assessments, people and programming in a deeper way, as opposed to just reacting to the pandemic.

How Pegasus is preparing for the fall and beyond:

I’m an eternal optimist, but coupled with realism. I think it could be quite a challenging winter.

One thing we’re doing this year — as we do every year, but with even more diligence now — is making sure everybody gets their flu shot. We’re putting that in place and staying diligent on the basics. This business is like golf. It’s about the basics, and doing the same swing every time. I do think that the industry, and the world, have learned that a modicum of common sense and consistency goes a long way. If everyone wears a mask, washes their hands, keeps from touching their faces and stays six feet apart, this thing can’t really grow. And you can get into all these complicated rules and shut everything down, but we have to figure out a way as a society, as a world and as an industry to go forward and use common sense and just be brilliant on the basics, as my partner Steven Vick says. Two or three people not wearing a mask, two or three people going to a big party and coming into your building, that can do a whole lot of damage, so there’s no substitute for consistency.

There are some positive things happening on the testing front. This new Abbott test, as I understand it, is perhaps not a game-changer, but it is a very positive thing if we’re able to get instantaneous results with 97% accuracy. And on the vaccine, I’m more realistic. I heard there are 130 groups working on a vaccine. If you have that many shots on the goal, someone’s going to have a breakthrough, maybe two or three.

So, I certainly think by the spring there’s going to be pretty good [odds] — maybe not 50/50 — but there is optimism that there is going to be a vaccine available by then. So, getting through, say, November to April then becomes the crux of the issue, and that’s the bridge we have to cross. Hopefully, we can have protocols as an industry and at Pegasus to mitigate any spread within these buildings.

Memory care is the most challenging with the most vulnerable people, and independent living is less-so. But they’re also more mobile, so people can decide to move home, and we’ve certainly seen that.

I was talking to a colleague yesterday about her experience and, even with the fact that communal dining is not robust, or even with activities being curtailed, people still want and need senior living. And people get to a point where they’re also isolated in their home. I was talking to another friend in the industry who opened two new ILs, and they have had like 50 move-ins in both of them in the last three months. So, I think there is demand. I think it’s bottled up, but it’s going to start coming forward. And I’m hopeful if we get a vaccine, things will start turning up here, certainly in the new year at some point.

How Covid-19 might affect senior living turnarounds in the future:

We have learned a lot about turnarounds. We’ve always known it’s about the people, but I think the challenge at Pegasus is that we’re so geographically diverse, but thinly, as opposed to a Brookdale or a Sunrise, which have depth of operations and markets across the country.

I think we’ve learned that we need to have smaller regions to give regional people more time to focus. And these are 15- to 20-year-old buildings. We’ve learned about how to do CapEx, how to look at a whole comprehensive plan. And we’ve learned that there’s challenges. I think some of these markets are still quite challenged: Atlanta and Denver, specifically, would be two that I would highlight as having been quite overbuilt.

I think the industry is still going to go through a tough time, and I’ve been fairly vocal about the fact that I think there has been almost irrational exuberance over the last few years, with so many new people getting into the sector and so much new construction, but also still using demographics based on people aged 75-plus. I think we’re going to go through a tough time anyway, with turnarounds and deals not working to the satisfaction of various sponsors. And I think the pandemic is going to exacerbate that.

Until 2022, I think we’re going to be going through a period of quite a few workouts, but those workouts have opportunities. I think we’ll try to be selective. We have plenty to do right now with our current portfolio with Welltower (NYSE: WELL), and we want to make sure we complete that mission. But at the same time, we would love to be able to look at other opportunities at some point. I think we’re probably six months away from looking at anything major, and that would depend on how the next phase of the pandemic goes.

On the preferences of the baby boomers and appeal of small-house communities:

That is the big question. I know our friend and visionary Bob Kramer has put a lot of thought into that. And this idea that the baby boomers are going to want to go back to the commune, or to a smaller setting, that is a big question. The middle market and affordability are big questions.

I think modular housing and lower-cost construction techniques are going to be something that are going to come into vogue. I think co-ops or other forms of senior housing, particularly on the IL side, could be something that gains traction.

I shared with you offline my family’s situation of trying to find [senior housing] for my father, who does not have Alzheimer’s, but dementia, and is now getting more physically weak. We’re looking at a small board-and-care home. Not to be a traitor to my assisted living brethren, but it lowers the risk of Covid and it’s less expensive. I had a local referral source here — who is sort of a local A Place for Mom — vet several of these places and find the best one run by an RN.

For my family, affordability, access and being able to visit him, that option is pretty appealing. And it’s been a bit of an eye opener. [As senior living providers], what’s our value proposition, and how can we compete with that? How can we make sure that we’re as affordable as possible? Small scale, input from the residents, innovative hospitality, a focus on nutrition and physical activity — we really think life enrichment is a key that can be a differentiator, and that people want to be more active. Nothing against bingo, but you need life enrichment directors that are a little more on their game. That’s probably a position that needs to be paid more, that needs to be vetted more carefully, and generally be a driver, as we move in people that do care more about lifestyle, staying active and healthy, and the kinds of things that are important to baby boomers.

Back in the ‘90s, I had a community that was essentially a bunch of cottages, or like 10 board-and-care homes on one campus. You run into issues with walking distances, and it’s less efficient in most ways. And even if it’s less expensive to build, you still have higher operating costs. And as the cost of labor goes up, your margins are going to go down. Back in the day we were trying to get to 40% margins. After management fees in some markets, we still can. But certainly, there’s been margin compression, particularly as minimum wages have gone up, labor rates have gone up, and so forth.

So, this is a complex topic, and there are going to be a lot of people trying a lot of different things. At this point, I think it will be 2023 and later when you start seeing that. I think we’re going to go through a tough couple of years here as a sector. I compare it in a way to a forest fire. I mean, I think there are going to be a lot of projects on the drawing board that may not go forward. There are going to be new owners. So, I think we have to get through the next couple of years and heal as an industry. And then hopefully, some of these new ideas can start moving forward as capital becomes more comfortable with innovative models.

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