Raising rates can be a scary prospect for operators trying to recover occupancy in the age of Covid– but for Greg Roderick, CEO of Frontier Management, the alternative is even scarier.
The Portland, Oregon-based organization is enacting a 10% rent increase across its portfolio in 2022 while raising care rates by about 10% to 20%. Roderick believes that to go any lower, the company would have to enact sweeping changes to its operational model, likely by cutting services and therefore affecting quality.
“Things would have to change drastically with a 5% or a 7% increase,” Roderick told Senior Housing News, referring to more typical levels of annual rate increases. “We would have to change our model.”
That is a story playing out across the industry as senior living providers set their 2022 budgets, as reflected in comments during recent Q3 2021 earnings calls. On the whole, operators have spent more on wages, supplies and utilities essentially since March 2020 simply due to the pandemic, with no signs that these pressures will evaporate in the months ahead. And while government funding helped offset those pressures in the past, providers cannot count on that funding filling the gap in the future.
Given these pressures and the state of operational budgets across the industry, Roderick sees rate increases in the 5% to 7% range as a “bare-bones minimum” to maintain standards. Frontier is not the only operator that came to that conclusion when setting their own budgets, and Roderick said he is aware of other operators enacting similar rate increases for 2022.
Of course, raising rates is easier for operators with a larger cushion of occupancy. And in that regard, Frontier has had a banner year in 2021 by adding more than 10% of average occupancy, with memory care a standout in that regard. Today, Frontier’s overall occupancy stands at around 70%, and although occupancy has been “spotty” in the past month, the company’s new deposits still eclipse its move-outs, according to Roderick.
‘It’s becoming unhealthy’
One of the driving forces behind Roderick’s thoughts on rates is the fact that operating a senior living community costs significantly more today than it did just a couple years ago. And that has led to an “unhealthy” compression of margins.
With the staffing shortage still at hand, many operators have had to use agency staffing to fill gaps in their operations. But that also comes with a hefty price tag.
“The agencies are having a hard time finding staffing for short-term positions, and they’re paying them more,” Roderick said. “Then, you get the markup.”
Roderick estimates that has resulted in a 20% to 40% increase in wages, depending on the market. And that is just staffing. Other line items blowing up budgets for 2022 include utility costs, gas costs, food and property insurance, which Roderick said are all seeing cost increases north of 25%.
Faced with all of those different budgetary pressures, Roderick sees a binary choice for operators: They can either raise rates to meet the cost of doing business, or they can trim services. But what they can’t do is wait for expenses to fall back down to earth.
“Wages aren’t going to come back down, property insurance likely won’t be coming back down, groceries are likely not coming back down,” Roderick said. “It’s a reset, but we’re moving forward.”
Margins were around 50% when Roderick joined the senior living industry three decades ago; and by the time Roderick founded Frontier in the year 2000, they had fallen to about 35% to 40%. These days, Roderick has seen margins “come down so far to where you’re just gasping at the end of every month.”
“It’s becoming unhealthy,” he added. “We [as an industry] have to pivot our business models to get back to reasonable margins that allow for a mortgage to be made without the support of investors every month.”
As far as how operators can raise rates by as much as 10% without a resident mutiny, Roderick said transparency is key. Whenever Frontier raises rates, the company’s leadership is also careful to explain exactly why they are doing so, and what the alternative might look like.
“They’re not going to be able to see that caregiver every single day if we don’t adjust our rental rates accordingly,” Roderick said. “It’s either a choice between higher quality in every way or low or minimal quality.”
This approach has helped Frontier avoid much pushback from residents or their families despite the 10% increase for 2022.
“We’re doing it intelligently,” he said. “We’re being responsible and they know it.”
Looking ahead
In addition to raising rates and building more occupancy in 2022, Roderick and Frontier are also focused on staffing. Although Roderick sees staffing as a big challenge, he also believes it is an opportunity — especially if operators have more room in their budgets.
He added that he sees 2022 as “the year of the caregiver,” and believes the senior living industry can make inroads with workers by paying them more, giving them a better work environment and helping them maintain a healthy work-life balance.
“That’s the opportunity, in my opinion: to grow a stronger culture with better pay and far better benefits,” Roderick said.
At the same time, Frontier has grown its senior living portfolio to 137 communities — and while Roderick said Frontier is at a “great size,” he still sees room for growth with the company’s major partners down the road, which include Welltower (NYSE: WELL). Frontier also has worked with DigitalBridge Group, formerly known as Colony Capital. DigitalBridge recently sold all its senior living properties, but the identity of the buyer has not been disclosed.
One of Roderick’s current focuses is Frontier’s memory care segment, and the company has so far recovered a good amount of occupancy during the pandemic. And he sees an opportunity to improve that segment further in the months and years ahead given current lower levels of new supply and openings.
“It’s really just re-leasing up the existing inventories, and with aging and demographics, it continues to look positive,” he said.
In the meantime, Frontier is busy growing its portfolio of senior living communities, with a handful of communities under development or construction in states including Mississippi, Florida, Texas and Tennessee.
“Trends look to be positive,” Roderick said. “And we are looking for what we’d like to think is a very strong fourth quarter.”
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