Frontier Management has made it a practice to raise resident rates by 5% to 7% each year — and Covid-19 is not about to change that.
When the novel coronavirus reared its head in late February, many senior living providers scrambled to procure personal protective equipment (PPE) and boost staffing levels. But that came at a great and unexpected cost, with some companies paying thousands or even millions of dollars to secure crucial lifesaving equipment. That included Portland, Oregon-based Frontier, which has seen a sizable short-term increase to the cost of doing business.
But having buildings with positive cash flows helped mitigate the overall hit to expenses. In fact, the onset of the Covid-19 pandemic has only “reinforced” CEO Greg Roderick’s view that senior living providers should not shy away from pushing rates higher each year as Frontier does.
“If I’ve ever had a reason to raise the rental rates, this has been the one,” Roderick said Tuesday during his appearance on SHN TALKS. “Fortunately for us, we did that in January, and that helped us throughout these surge pay and additional costs we’ve had.”
While Frontier’s 2020 rate increases happened to be well-timed, Roderick is open to further increases if the pandemic drags on and necessitates it. With occupancy falling due to Covid-19, there has been some debate as to whether rate growth will go negative in 2020. The industry as a whole has made a concerted effort in recent years to avoid discounting, however, with owners and operators recognizing that raw occupancy does not drive a successful business if it does not translate to gains in net operating income.
Frontier is firmly in the camp that rates annually is a good practice even when there isn’t a pandemic to contend with. The company has 108 communities in 15 states, with more than 12,000 residents and staffers under its direction. Growing rates helps the company grapple with minimum wage increases, and to pay its employees a competitive wage. It also helps communities implement the kind of services and amenities that prospective residents want.
“There’s no other form of revenue, besides being full and getting the rental rates that you need to sustain that attractive community,” Roderick said. “It’s important that we achieve those rental rate increases in order to keep the people we have and maintain the quality of service.”
Among the biggest challenges Frontier has faced so far are the rising costs associated with keeping employees safe and on the job.
Frontier spent $1.6 million on surge pay for its associates in the month of April alone, among other expenses. About 80% of Frontier’s communities implemented a pay increase of between $1 and $7 per hour, based on local market conditions.
“The cost of surge pay has been real,” Roderick said. “We’ve had to pay people more money to come to work.”
As an owner of the company, Roderick himself has written some checks to cover the increased expenses, but the company’s overall financial position is secure, he said. Having rates set appropriately is a key factor, he emphasized.
Even for a company of Frontier’s size, Roderick said there is usually little pushback from residents or their families regarding rate increases. The company has fielded less than a dozen complaints from people unhappy with rates this year.
And by staying ahead of rental rates, Frontier has been able to avoid a compression of its margins, Roderick added.
Skyrocketing demand for PPE has also forced some providers to rely on backchannels for supplies, often at a much higher cost than normal — though Roderick believes the cost to providers of acquiring PPE will lessen by the fall.
At the same time, the Covid-19 pandemic has slowed the rate of move-ins to Frontier’s communities, impacting its revenue. In the second quarter, move-outs eclipsed move-ins to some extent across the company’s portfolio, Roderick said.
Much of that has to do with the infection control protocols Frontier put in place at the outset of the pandemic. New residents must submit to health screenings, a quarantine period and twice-a-day health checks to move into a Frontier community. But even with those protocols, new move-ins and deposits are still there, just at a lower rate than before.
“We’re still moving in probably 30 or 40 people a week into our communities, and we’re still taking about 50 or so new deposits a week” Roderick said. “That’s down about 50% [from normal levels].”
Though no Frontier buildings have been at risk of missing mortgage, insurance, payroll or vendor payments so far, Roderick does not believe the higher costs and lower revenues associated with Covid-19 are sustainable in the long-term. But, if the pandemic should stretch longer than anticipated, the company could look at implementing a “surge assessment fee” to help maintain current staffing and pay levels.
“You’re looking at $200 to $300 per month for a month like [April], and that would cover all those types of fees,” Roderick said. “We haven’t implemented that, but we’re certainly being mindful and thoughtful of that.”
Getting back on track
Beyond getting move-ins back on track and reigning in costs, Frontier’s next big challenge is returning to some semblance of normalcy.
Roderick believes that many states will begin loosening stay-at-home restrictions gradually over the next 30 days. As people venture back out into the wider world, Roderick is optimistic they’ll bring with them more mindful practices regarding social distancing and handwashing.
“My personal hope is that by mid-fall, we’re kind of back to how it was, just more mindful and more thoughtful about handwashing and distancing,” Roderick said.
He is also hopeful that rapid testing will be the predominant form of Covid-19 detection by then, and that testing will be so ubiquitous that it can be done as a condition for entry into most businesses or public spaces. And while it may take weeks or months for at-home testing to be widely available at a cost most can afford, Frontier is not standing idly by, either.
Even as Covid-19 bears down on the industry, the company is pre-leasing at communities in California and South Carolina, with plans to start pre-leasing at another Texas community in July.
Crucial to these efforts has been the virtual tours Frontier ramped up at the outset of the pandemic. To help with marketing during the pandemic, Frontier uses OneDay, an app that creates branded video content to increase resident engagement in around 2,000 communities across the nation.
“Even though the number of leads are down about 150 a week right now, company wide … over 80% of our communication like this [results in] deposits,” Roderick said. “So, we’re doing quite well on that front, we just need our numbers to come back to what we’re used to.”
Frontier also is continuing to grow, with development projects still on track around the country. The provider is also fielding calls related to taking over the operations of existing communities; currently, these inquiries are not predominantly in regard to distress situations, although Roderick anticipates that Covid-19 will eventually give rise to more of those opportunities.
And, interesting development opportunities are also on the radar. Roderick recently reviewed a development in California that would involve senior housing and student housing with shared amenities, close to a college campus. With universities under stress due to Covid-19, more such projects could take shape in the coming years.
Despite the operational challenges and uncertainties presented by Covid-19, development continues to look attractive from an investment return standpoint thanks to low interest rates, the low price of petroleum and other materials, and demographics, he noted.
The good news, Roderick said, is that demand for senior living services have not evaporated despite all of the lofty challenges facing the industry.
“Our industry has a great opportunity to show that we’re resilient, and frankly, that we’re relatively recession-proof,” Roderick said. “This is a great time to shine and showcase all the things that are happening within our communities, which are open and vibrant while being safe and careful.”