Covid-19 Could Cost Senior Living Industry $57 Billion As Operating Expenses Soar

Senior living providers are working around the clock to address an increasing number of Covid-19 cases and prevent further infections — and these efforts come at a steep cost from a dollars-and-cents perspective. The industry as a whole is facing an adverse economic impact of between $40 billion and $57 billion over the next 12 months.

That’s according to a third-party analysis that two industry associations — Argentum and the American Seniors Housing Association (ASHA) — sent last week to Sec. of Health and Human Services Alex Azar. The two groups urged HHS to allocate $20 billion for senior living providers from the Public Health and Social Services Emergency Fund (PHSSEF) established through the $2 trillion CARES Act stimulus package.

Even as they are spending more money on labor, supplies and technology, senior living providers have been forced to cut back on in-person tours and are beginning to see occupancy erosion and a related loss of revenue.

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The good news is that occupancy appears to have remained largely stable during the first weeks of the U.S. Covid-19 outbreak, and well-capitalized providers have been able to absorb rising expenses so far. But the future is uncertain, as elevated expenses can only be supported for so long, and outbreaks of Covid-19 within communities not only bring human suffering but enormous financial repercussions.

Omaha, Nebraska-based Heritage Communities is in a solid financial position, but the provider and the industry as a whole are dealing with uncertainty, Heritage Co-Founder and President Nate Underwood told Senior Housing News.

“The thing that’s hard about this is not having any sense of how long it’s going to be,” he said. “Right now, you’re modeling something that’s a slow decline down a hill, and you don’t know where the bottom is. That can be scary.”

Labor, supplies drive spending

Even in normal business conditions, labor is the biggest expense for senior living providers, accounting for about 60% of standard operating budgets. Covid-19 is driving that even higher.

On average, labor costs are up 8% for senior living communities that have no reported cases of Covid-19 and 18% for communities that do have cases, according to the analysis cited by Argentum and ASHA.

Providers are spending more money than usual on a variety of workforce-related initiatives. For instance, some companies are boosting pay in recognition of the pressures and hazards involved in frontline caregiving.

Portland, Oregon-based Frontier Management has implemented an hourly wage increase of between $1 and $5 at about 75% of its communities, CEO Greg Roderick told SHN. With a portfolio of 106 communities across 17 states — and more than 3,000 full-time employees — that equates to a substantial amount of money.

Another Oregon-based provider, Compass Senior Living, also is instituting bonus pay across its 31 communities. The “appreciation pay” will equal 10% of earned wages for the month of April, and will be paid to full-time, part-time, PRN, salaried and hourly employees — about 1,400 people in all — contingent on no call-offs or tardy arrivals.

Similarly, all non-exempt, hourly employees at the Evangelical Lutheran Good Samaritan Society are receiving a one-time “stability payment” of between $50 and $300 — and, their health care premiums will be fully covered from April through June. The Sioux Falls, South Dakota-based organization, which merged with Sanford Health last year, ranked as the second-largest senior living nonprofit in 2019, with 153 communities.

Expenses related to temporary staffing are also rising dramatically, with agency rates two times higher than usual in some instances, Eric Vanden Hull, vice president of finance with the Good Samaritan Society, told SHN.

The merger with Sanford — a health system with more than 44 hospitals and 28,000 employees — significantly boosted the Evangelical Lutheran Good Samaritan Society’s capital position in terms of cash on hand and revenue cycle management, Vanden Hull said.

“We’ve really come together and put ourselves in a position where we’re able to support some of these … short-term cash outflows,” he said.

With schools closed across the country, senior living providers are also spending money to help support their workers’ child care needs. Wilsonville, Oregon-based Avamere is providing up to $50 a day in child care reimbursement, as well as creating a pool of paid time off that employees can use before tapping their own leave.

Supplies are another major cost-driver as a result of Covid-19. The shortage of personal protective equipment (PPE) is a nationwide crisis, and one that is hitting senior living providers hard. Industry associations are lobbying for senior living communities to be among the sites that are prioritized for PPE, but with demand far outstripping supply, prices have skyrocketed — in fact, PPE prices are as much as 10 times higher than historical norms, Vanden Hull told SHN.

But these prices are well worth paying for life-saving supplies and equipment, if these products can even be located amid ongoing supply chain disruption. In this effort, providers are working together, keeping one another updated on leads and collaborating to procure stockpiles.

“We’re all pretty resourceful and helping each other out … and we’re all chipping in and buying them together,” said Roderick.

Compass Senior Living Co-Founder, Vice President and General Counsel Will Forsyth concurs.

“It’s been frustrating in some ways to not have supplies as readily available as they typically are or should be, but it’s been an instance where we see the goodness of our industry,” he told SHN. “There’s a nice sense of togetherness as we all do our best through this crisis.”

Although labor and supplies are among the biggest cost drivers during the pandemic, expenses are going up elsewhere as well. Many providers are purchasing new technology, for example, to enable telehealth, virtual community tours, and communication between residents and their family members. The Evangelical Lutheran Good Samaritan Society has invested in iPads, Vanden Hull noted.

Providers are just starting to get a clearer picture of how Covid-19 has impacted their financials — the Good Samaritan Society had not yet closed their books on March, so Vanden Hull did not want to venture an estimate as to what spending looked like compared to a typical month.

And, there are some cost savings related to the pandemic as well, with travel expenses down and far fewer events and activities going on in communities. However, there’s no question that Covid-19 is not only a catastrophe in terms of people’s health and wellbeing, but from a financial perspective.

“The cost of maintaining high quality of care and high quality of life for senior living communities has increased up to 73% for senior living communities that remain free of Covid-19 and up to 103% for Covid-19 positive senior living communities,” ASHA and Argentum stated in their letter to Azar.

Picture gets bleaker over time

Despite some bad outbreaks at some skilled nursing facilities and senior living communities around the country, many providers were able to keep Covid-19 at bay through March. However, cases continue to proliferate around the country, and senior living providers are not being spared; about 80% of respondents to a Senior Housing News survey said it’s only a matter of time before Covid-19 strikes one of their communities. So, costs will almost certainly continue to spike in the coming month as providers shift from trying to prevent outbreaks to combating them.

Move-ins continued in many locations during the second half of March, with some providers even clocking occupancy increases. However, New York City-based real estate investment trust New Senior (NYSE: SNR) experienced a 30% decline in move-ins, compared with January and February averages. Across the industry, moving residents in has already become more difficult, and will become even more challenging for communities that experience Covid-19 outbreaks.

Staffing pressures will also be exacerbated as Covid-19 cases become more widespread. And, bonus payments and other workforce-related spending will become harder to sustain the longer the pandemic lasts.

“I think we’re all hoping this lasts another month or two at most with the additional payroll expense, and eventually supplies are just going to run out,” Roderick said.

But without any guarantees that the situation will materially change by July, providers are taking steps to shore up their financial positions.

Many are hoping to tap into the federal stimulus package, which allocated $100 billion to health care providers. But while senior living appears to be eligible for this money, there is still tremendous uncertainty about how to access these funds and how much will likely flow to the industry — hence, the ongoing push from ASHA and Argentum for a $20 billion allocation.

Providers with fewer than 500 employees may be eligible for a different stimulus initiative, known as the payroll protection program (PPP). These smaller providers are advised to work with their bank partners to apply for the PPP, which got off to a rough launch late last week.

Money is also available at the state and local level. Roderick is hopeful that a $10 million coronavirus worker safety fund from an organization called SAIF can be a source of support in Oregon.

As a nonprofit, the Evangelical Lutheran Good Samaritan Society is working overtime to identify and apply for grants, Vanden Hull said. This brings its own organizational and administrative headaches, however, as the provider has had to refine its data collection procedures to capture the specific types of information that these grant applications demand.

Operators are also in close contact with their capital partners, many of which are taking steps to assist from a strategic and logistical perspective — including through the acquisition of PPE — while also granting special flexibilities in light of the Covid-19 cash crunch.

“One of the things we’ve done is, we go back to relationships with lenders that we have,” Heritage Communities’ Underwood said. For Heritage buildings that are not financed via HUD or Fannie Mae, the provider is exploring the potential to go to interest-only payments for a period of time or to take advantage of lower interest rates.

Heritage Communities is well-positioned to support immediate expense pressures, Underwood said. The company, which operates 13 communities, began building up its cash reserves last year, anticipating an end to the historically long U.S. economic boom. For instance, Heritage did an opportunistic refinancing of a project in Grand Island, Nebraska, taking out about $3 million that went “right into reserve,” Underwood said.

Heritage also benefits from the fact that the company is not facing rent payments on triple-net leases, he added.

But for those providers that are in leases, real estate investment trusts are also adapting to doing business in a pandemic. Chicago-based Ventas (NYSE: VTR) established a rent deferral program for operators in triple-net leases.

“Under the program, certain senior housing care providers who are Ventas tenants can defer 25% of their April 2020 payment obligation until the earlier of October 1, 2020 or receipt of government assistance,” the REIT stated in a document filed with the SEC. “All amounts deferred are required to be used for operating expenses to care for seniors at Ventas communities.”

The REIT expects the total deferred amount to be between $3 million and $9 million.

The Ventas program may indeed be crucial in helping some operators weather the next few months, but the rent still will eventually come due, noted Ryan Haller, an industry veteran who spent several years with Avamere and now is running a senior living consulting practice called Orchard Hill Partners.

“This is not a forgiveness of rent, people are going to have to come out on the other side of this,” Haller told SHN. “They’re going to have to figure out how they’re going to make essentially the equivalent of a balloon payment of rent, and that won’t happen until probably October. And when that’s going to happen, I think you’re going to see a lot of issues.”

In other words, time is not on anyone’s side when it comes to Covid-19, but the pandemic could spell doom for thinly capitalized, highly leveraged providers. It’s a possibility also floated by equity analysts who watch the space.

“Coverage has deteriorated in recent years due to supply growth, expense increases, fixed rent bumps, and tenant-specific issues,” Green Street Advisors Analyst Lukas Hartwich wrote in a March 16 note on potential Covid-19 impacts on the industry. “Current coverage is below market and will likely be addressed via rent cuts and SHOP conversions.”

Green Street estimates that senior housing rents need to be about 20% lower in order to reach “sustainable” coverage of 1.3x — and this is without factoring in Covid-19 effects.

“I do believe that we will see companies of all sizes go out [of business],” Haller said. “ … If you were tied to the hip to [a REIT] and you had ratcheting up lease rates every single year … already you’re a little bit exposed … this may hasten your demise.”

Worst-case scenarios are bleak if the Covid-19 crisis is prolonged, but there are also bound to be other twists and turns as the situation continues to evolve.

For instance, even if move-ins slow or effectively halt, voluntary move-outs might also be much less frequent than in a typical year.

Already, April move-out notices for New Senior are 20% lower than the comparable March metric, the REIT announced last week. And, some senior living providers are beginning to admit hospital overflow patients. Many questions are still unanswered about how senior living providers will be paid for taking these patients, but doing so could be another route toward maintaining occupancy and keeping at least some revenue coming in.

With so many unknowns, planning is difficult, but maintaining a positive and proactive approach is key, Underwood said.

“When you’re in a situation like this, you focus on what you can control and not what you can’t,” he said.

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