The Bottom Line: HRA Sees ‘Crazy’ Pricing from Competitors

Harbor Retirement Associates (HRA) is focused on high-end communities and programming for residents — and that can help defend against competitors that resort to deep discounts in some markets.

But even luxurious services and amenities can only go so far. The Vero Beach, Florida-based operator has 34 communities, some of which have applied strategic concessions to help attract residents away from competitors offering “crazy prices,” according to HRA CFO Chris Collins.

“When you have other companies going in and doing what I’m going to call crazy things with prices, it does put pressure on us,” Collins told Senior Housing News during a “Bottom Line” interview. “While we won’t go down to the crazy prices I’ve seen in some of the markets, we do have to make some concessions to get to critical mass.”


Bottom Line is a new interview series from SHN aiming to connect with senior living CFOs to gain greater insight into today’s financial risks and opportunities, and to learn how these leaders are helping guide their companies into an exciting but sometimes uncertain future.

For HRA, one challenge has been balancing the rising cost of labor with the needs of outside equity partners, not all of which are native to the senior living industry. Another is the sheer rate of new competition popping up in some of the provider’s markets.

Read on for Collins’ takes on these and other topics. The following interview has been edited for clarity:


Has senior living gotten more operationally and financially complex over the last few years? And if so, how does that place new demands on you as a CFO?

I would say yes to both, operationally and financially.

It’s getting more complex because we’re trying to change perceptions that we’re just offering a hospitality model. HRA is rolling out different dining venues, different life enrichment programs. But care is always going to be part of the equation. And I came from skilled nursing, which is really patient-based and not resident-based. So, I’ve seen it even more operationally complex.

Financially, where it’s becoming more complex is that we have different equity sources. So, the base accounting for assisted living and memory care is, in my mind, pretty simple. But now we’re reporting to the different equity sources that have a lot of financial analysts to dig into numbers. So, it’s getting used to the way they’re looking at the numbers.

When you started with HRA in 2012, where was the company and what were your priorities?

In 2012, HRA had 17 communities: 15 of them were leased, and two of them were managed. To put that into context, today we have 34 communities with 16 being leased and 18 managed.

When I first came aboard, there was a change in the ownership structure. We just had a new COO come aboard, Sarabeth Hanson, and a new CFO, Tom Mitchell, and then I joined as a controller about two months later. We were focused on growth, and my number one priority was to gear up the department to be able to handle that growth.

Can you talk about a few moments of challenge or change, and what you did to work through those moments?

One of the biggest challenges was going from a mainly leased portfolio to more of a managed portfolio, where we had to report to different equity partners. With the leased portfolio, we owned the P&L and we rented the buildings. Any questions came from within.

But then as we started bringing on the new equity sources, it was changing the mindset of the accounting department and operations team. Now we’re answering more to an equity source and not just to a landlord.

The equity sources, they’re not always from the senior housing space. So, they come in wanting to look at certain metrics that you’re like, I never thought about it that way.

What sort of metrics are they interested in?

Some of the equity sources might have come from multifamily, for example, so they’re looking more at square foot type metrics regarding units. They’re looking more at the facility itself and optimizing the actual facility.

How are you thinking about cost and expense for the remainder of this year and into next year?

When it comes to cost and expense, I have three areas I mainly focus on.

The first one is labor, which seems to be everybody’s number one focus. I’m also focused on the cost to acquire that labor, because with turnover in this industry traditionally higher, you have to look at different ways to get the proper people in the door to make your business successful.

Another one is [resident] referral fees. The way I look at the referral companies, they’re almost like a new competitor coming into the market to get that resident. And our referral fees have jumped up quite a lot over the last 18 months.

And then the last one I always look at is the insurance, be it health or liability. While you can put all the great programs in place, a lot of times you don’t control what’s going on with the insurance and the cost of it. For example, there could be legislation in the state you’re in that negatively impacts your premiums.

Looking ahead, are there any items on the balance sheet that are of concern, or where you expect to make significant investments or reduce costs?

On the balance sheet, I don’t see any areas of particular concern. What we are finding is equity sources are wanting more skin in the game. So, as we get new development, the amount of equity we’re having to put in is going up a little bit more than it has in the past.

Does being a hospitality-focused company like HRA change the way that you invest in your communities or budget for your operations?

When we build our budgets, we’re building our budgets mainly off our rates, because we offer what we feel is a very good product. And like you said, it’s hospitality based. So, we’re looking to get top-tier rates in the market we’re in, and then that flows down so we can build a budget without always looking to nickel and dime every area.

Does it reduce financial pressure, since you are developing a product that’s geared toward the high end?

Not always, because even though we are on the high end, and we are looking for a high-end rate, we also are dealing with increased competition and increased development out there. When you have other companies going in and doing what I’m going to call crazy things with prices, it does put pressure on us. While we won’t go down to the crazy prices I’ve seen in some of the markets, we do have to make some concessions to get to critical mass.

There’s one market we’re in where prices are maybe running $5,500 to $6,000, according to market studies. A competitor might come in and offer $3,000, all-in. There’s another market we’re in where a competitor right down the street is now offering four months free.

What can you do on the financial side to compete with someone like that?

You have to lean on your operation side of the business. If you’re giving quality service, then the price isn’t going to matter all the time. You’re going to lose some people, but there are some people, especially in the market we’re shooting for, that are looking for top-notch hospitality. And someone who is cutting prices, they’re not going to have that hospitality focus like we are.

Have margins been under pressure at all this year?

Margins have been under pressure, with the biggest thing being labor.

For example, when I started in the skilled nursing world back in 2009, our average wage for the company I came from was maybe $8 an hour for a caregiver. Wages have gone up between 50% and 70% since then, which I think is fully justified, given the work that caregivers do. But it definitely puts a squeeze on margins. Even pro formas that we were putting together maybe five years ago for new development, wages have gone up probably 40% or 50% since then.

What kind of pressure does that put on you, as CFO, to try to make the margins work?

Since we’re going from leased to more managed properties, we have outside sources pushing us for the margin. Yes, you want to pay more, but you have to scale it in such a way that it works for your investors, too.

How do you define a healthy margin?

To me, a healthy margin is a margin allows us to cover the debt service and cover the lease payments, and allow us to cover any covenants and may come along with both.

How is the availability and cost of capital at the current moment? Do you expect any tightening of debt or equity in the near term?

We’re not really seeing a let-up in the amount of capital out there that wants to be involved in the space. We’re talking to people almost daily that are interested and want to get into the development side of this business.

As far as a tightening up, in today’s economy, it’s hard to guess because of the political situation in Washington, D.C. So right now, it’s still wide open. People want to get into the business and we haven’t seen it tighten up at all. And the rates are very attractive for the new development side.

What are your thoughts about the current landscape for mergers and acquisitions?

On mergers and acquisitions side, we just had two of our communities sell, and we’re seeing top dollar for them. We’re seeing mid-6%, 7% cap rates being paid for existing buildings, and in some cases where they’re not even stabilized yet. People are making bids on buildings that may not even be on the market at this point.

So, I think that side of the business is still pretty strong. And everybody’s looking to four or five years from now, when the baby boomers come of age and hopefully bring the census back in line with the units being built right now.

What about new development?

It actually surprises me how strong it still is. Some of these markets are just being flooded by people building new. We had a market in Texas where we went in two years ago, and there were five competitors. Now, they are 17 within a 10-mile radius. And we’re seeing that in other areas. We’ll go in where it looks like a good market, and maybe we know other people are going to come in. But then you start seeing five to 10 new competitors pop up, and it makes it hard.

How is HRA thinking about growth in the next three to five years?

Right now, we have four communities that are set to open in the next six months. We have four more that are probably 12 to 18 months out, and three more in the pipeline that should be done within 30 months.

Our goal and plan is to do four to five new developments a year. We’re also always looking for acquisition opportunities, but we prefer the new development side because we can instill the HRA culture from day one and build on that culture.

What about mission versus margin? Do you ever feel like you are fighting to protect a margin, while others in the organization are freer to focus on things like mission?

I don’t feel that. We put out a top-notch product that our residents and their families love, and they’re going to be willing to pay a little bit more for that. If you get a higher rate, then it gives you the flexibility to maybe raise your food PRD up to give great hospitality or to raise your life enrichment budgets up. So, I don’t feel there is a conflict between the two.

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