Meet Bill Pettit, president of Seattle-based R.D. Merrill Company, the parent company of Merrill Gardens, which has nearly 30 communities offering independent living, assisted living and memory care across six states. Family-owned and operated for four generations, Merrill Gardens started with a single community and brought Pettit on board from the banking industry to focus on growing and operating the business.
Spotlight on Technology
If you had an executive dashboard giving data on your communities, what would be on it?
Obviously there are certain components that go without saying. We’re going to be tracking occupancy trends. I trust that we’re going to track NOI margins, and then look at margins in care which is the margins in the building as a whole. I think some of the more unique things we’re beginning to track are percentages of overtime that we’re seeing in buildings as early indicators of potential problems. Then the other components that would surface would be cost of dining, both food and staff. We look at effectiveness of sales and how each building performs in the sales process on a number of different metric points. With our new EHR system, we’re beginning to track changes in care in buildings. The same way that I talked about that one building where you’d have a number of high-acuity residents move in, replaced by lower acuity and how that affects staffing — the reverse is also true. A lot of that data is often just down at the building level, but with the analytics we can bring that up and make it visible.
The biggest thing is how you do your reporting. For us as we develop our analytics, we need to filter out data but really isolate trends and key facts. Otherwise, people can be sitting looking at data all day long and not accomplishing anything if they can’t filter out what it really says. We’re big on data collection and reporting, but far more focused on developing reports and a dashboard that allows us to quickly understand where the areas are where we have both opportunity and concern of risk based on the performance of the company.
We sat down with Pettit to learn about the metrics he’s tracking with respect to operations, why he sees great potential in the Chinese market (and why he believes the time to enter is now), and why he sees education as a critical component to solving the senior living staffing crisis.
Tell me about how you got into senior living.
Now that is a story. I spent 18 years in commercial banking on the real estate finance side and commercial banking, and we financed a lot of the early operators in the industry. Then a very old timber family in the Northwest was looking to bring in someone to work with a fourth-generation family chairman. His vision was to keep the timber, but diversify into another industry where they could build an operator presence. At the time in the early 1990s senior housing offered a lot of opportunities for capital to enter the market on a fairly level playing field. There were no consolidators and there was no market-share leader of any significance. Based on the demographics we believed that our long run with a great management team could produce a lot of positive results. So we started by incubating for two or three years, and felt we had the right model and grew from there.
How did they approach you with the opportunity?
I was president of a regional bank at the time, and they were looking for someone with a deep business background who could come in and work with the family chairman, who was an attorney by background. I wasn’t looking for a job, but the one thing that I’d always felt that I’d missed was the chance to build a company, so that was exciting for me.
What attracted you to building your own company? Why did that excite you?
The legacy of leaving something behind as opposed to picking something up that someone else had built. I liked the challenge of finding something that I could start and bring in culture and have room to make mistakes and learn from them. That really defines the 1990s for senior housing. There were a bunch of different models started at the time.
Are there any that you look back on now and think: That was crazy?
From the start, we had selected a segment of senior housing which would serve both independent seniors and the seniors who need assisted living. We stopped short of providing end-of-life care or nursing care because that was a completely different management model.
We were looking for consistency, for the ability to be focused and try to deliver excellence across a broad spectrum of services. Yet we needed enough critical mass in the size of the buildings, and a lot of the thought process at that point in time was focused on seniors not needing a lot of space or amenities because they’re there for the care. Our vision was broader than care in a traditional medical sense; in a supportive sense, it was really a place to socialize. What happens with seniors when they live on their own is they lose contact. Our belief was really a marriage of the congregate model, which was there in the 1980s, and an assisted living model, put together in a package with services that would really attract seniors. We built residential-size units, and equipped the units with kitchens even though we provided meals. Why should residents have to give up cooking for themselves occasionally if they wanted to?
Our belief was really a marriage of the congregate model, which was there in the 1980s, and an assisted living model, put together in a package with services that would really attract seniors. We built residential-size units, and equipped the units with kitchens even though we provided meals. Why should residents have to give up cooking for themselves occasionally if they wanted to?
You make it sound simple, but at the time it wasn’t the norm.
I don’t know that it wasn’t [the norm]. A lot of the Eastern properties were more buy-in, life care contracts where you enter into a contract and they’ll take care of you from the time you enter until the end of life. The Midwest seemed to focus on a lot of small assisted living buildings [built around care rather than] seniors who were more independent or lower acuity. The West, particularly the Northwest, had a surprising number of companies evolve. The vision seemed to coalesce more around a residential model with social-service emphasis. The moment it was built, it was a residential building. What we’re building today are buildings that I want to move into, not just what my parents would agree to move into. They’re in exciting locations and they’re well featured.
There are a lot of operators that started in the Northwest. Why do you think that is?
From my perspective, the Northwest in particular really conceived the model in the 1990s that seniors preferred much more so than the smaller kind of assisted buildings in the Midwest, and much more so than the life-care contract model. The two dominant models really remain the residential building model, where you build a true residential building to code so you can license it, and the CCRC model, which does provide the extension to end of life care. I think the fact that those models gained such traction early on is a big factor in why that model tended to migrate across the country. We were operating in Washington and California and at the end of the 1990s we acquired Torch Healthcare, which took us into Texas, Oklahoma, Tennessee, Georgia, and Florida. We took our model and found another operator that wasn’t doing well, and installed our service package and approach into it, and so we found more opportunities. I think as our model migrated, we began to compete against buildings which were kind of smaller, 50-to-60 unit purpose-built care buildings, all assisted or the great big life care contract buildings. There is a certain intimacy around a building that has around 100 to 200 units as opposed to a 300- or 400-unit building. I think what people are looking for as they age and transition into this form of housing is really connections. Whether it’s bridge or a walking club or a group that goes out on trips, they seek that connection and we provide that for them.
Is there any extra pressure that comes from a four-generation family business?
I’ll tell you a couple of yard sticks relative to what it’s like working for a family company. Family companies come in all shapes and sizes, and when I was thinking of leaving banking and going to work for a family company, I talked to people I know who are in family companies and I got quite a range of stories. “It’s awful,” to “You know, it’s pretty good.” I think in the end analysis, I jumped in looking for the challenge and the opportunity to have a great capital backing and to build something. And I didn’t know how good it was going to be.
The particular family that I work for may have the wealth and the history of multiple generations in the timber industry, but beyond that, they’re just really good people. They understand the value of people in the industry and even as timber operators, they were the first in the Northwest to use forestry management practices to reforest what they cut. They were the first in the Northwest to actually bring services to the loggers working in their cabs and provide decent sleeping arrangements, , decent food and movies to entertain them in their time off. They understood a lot of the core principles of caring for people. That was a big plus. This turned out to be a phenomenal platform for us to build from on the senior housing side.
The other thing unique to working with a timber family was they have an extraordinary vision for long-term investment. I ran strategic planning for a bank for a couple of years. I thought I knew long-term planning and how to strategically plan, but when you’re a timber family, they plant a crop and they don’t harvest it until the next generation. They’re thinking generations ahead. For us, it’s been a very useful piece that we’ve embraced as part of the senior housing company because we’ve never really been just about growth. We’ve been big, but we also strategically recapitalize.
The assets that we sell, we sell with a purpose because that capital comes back in and we’re building newer and better buildings in locations that we think are going to own the competitive environment for several decades. Things are changing with seniors, so we are able not to sit here and worry about next year’s earnings or look five years out, but instead to make a decision like we did in 2014 to completely replace all of our core technology and operating systems. Not for 2015 and 2016, but really looking at how we facilitate the most cost-efficient way to provide great service to seniors in our buildings out to 2020, 2025. Then every five to 10 years, take a look at what we own and ask ourselves the question: Is that going to be the most competitive product 10 years from now? That’s when we’ve gone in and sold older buildings and had a steady pace of new development with better buildings.
More from the Leadership Series
I’m curious: Does the long term vision tie in very well to what Merrill is doing in China?
Absolutely. You go to China, and everything’s gotta be bigger or faster, it’s go-go-go-go-go. And yet, we’ve been in China for six years, and it really hasn’t cost us a nickel because we essentially generate feasibility contracts and consulting agreements on the management side and through site selection. Also during that six-year period, we really began to narrow our focus on what we think will be successful. I just can’t take a Merrill Gardens building and plunk it down in China. It’s just not going to work for a variety of reasons. We just opened our first building and we have another one which will open next year. Those are incentive-laden management contracts and then we will build our first project to come out in early 2019.
We’re now moving truly into management, ownership, and execution. We’ve looked at on a 10- to 15-year horizon in terms of our investment there. Dial it back 25 years to the early 1990s and what we did on a smaller scale with a little bit faster timeframe and the same kind of incubation. We want proof of concept and we want to know what works. In the interim, we’re building great relationships. I know there are other North American companies that have gone to China, stuck their toe in the water and said: “This is not for me. I’ll come back when the industry’s got its proof of concept.” Well that’s okay, but I have a different philosophy. I would rather be in China, developing strategic relationships during this period of time, because I think the Chinese nature and culture is to trust people they know. We’ll be there for the next 10 years and we are working with companies like China Life and China Railway and other principals in terms of well-established developers. When I look at a site in Charleston and I’m trying to make it work against the four other competitors in the market I am wondering if I have a slot I can fill. In China, I can go to Shanghai and I don’t have a competitor anywhere.
It’s the wild, wild west.
It really is. It’s fun, and it’s a challenge, but it’s a good long-term play for us.
Let’s come back stateside, to talk about technology and trends. We’ve started to see NIC data show real signs of occupancy pressure on the industry. How do you think operators get through this rough patch?
The gorilla, in terms of serving seniors on an affordable basis, to me is twofold. One: What is the cost of the real estate? Second: What’s your labor cost? We have to, as an industry, effectively deploy technology to more efficiently use the labor hours which we need to provide that kind of service and care to seniors. A lot of the technology we’re deploying now is focused on data and analytics, on the operations or the properties in a way that we can more quickly and readily tell when a property is starting to become less efficient. The kind of data analytics we’ve developed now can tell us not only if they’re becoming more efficient but what’s making the business less efficient. Is it in care? Is it in how we staff? Maintenance and physical plant management? Is it how we’re doing our marketing? Is it in the dining area? Those business analytics give us the ability to develop solutions to those quicker — in other words being able to make a decision in a day that might otherwise take a week, or a decision in a week that might otherwise take a month — those are where you harvest a lot of the margin pieces that can help us absorb this higher labor cost. It won’t necessarily lead to a direct expansion of margins, but it’s going to allow us to maintain cost margin in the face of cost pressure on the labor side.
The other aspect of it is, one of the things that makes this business complex, is the need to run what I call a “dynamic staffing” front. In other words, I don’t care whether it’s dining, or care, your staffing needs are constantly changing. If I have a building on the care side that’s moving out five or six people a month, typically they’re coming out of assisted living. It’s high acuity residents who are moving out. Those are where big hours are on the staffing side in terms of direct care. If I have people coming in that are very light care at the same time, my occupancy is the same, but the hours predicated in serving that population is dramatically different. If you don’t develop methodology to capture the hours that were in place serving the higher acuity population as your lower acuity comes in, on an efficient basis, that’s where you’re going to suffer margin compression. That’s not labor-related, that’s hours-related. How you actually manage the hours in the building.
One of the challenges, frankly, for our industry is we have a real absence of training sources to teach that kind of operations management. It may be closest to what you might see in a restaurant environment, which has cycles for days where they have to staff that service level which is going to be highly volatile. How do you choose to deploy your cooks and your wait staff and your reception? One of the things we face as a challenge in the industry is just bringing in and training sound operating executives to run these buildings. The history of this industry is we get compassionate people and we promote compassionate people right on up the line, and compassion is an essential element to what we do. But we also need to have talented operating executives who know how to manage a dynamic staffing model, who know how to use technology and data analytics in a way to point out problems, risk, and opportunities on a much more accelerated basis.
So where do we find those people? That’s the million dollar question.
Well I think it first comes down to hiring people who aspire to more than care. In other words, when we hire them, their vision is: I want to excel -you tell me how, point me in the direction and maybe you can give me the resources to do it, but I want to learn. The other thing is, frankly, we have to start partnering with schools and training sources that prep in the new thought process of how to use data analytics and distributed software applications to lead in the direction of decisions.
On our side, we’ve been partnering work with Washington State University, developing a senior housing program that just focus on teaching students the strong foundations of operations as opposed to clinical specialties like gerontology care or psychology of aging. Those are all components, but in the end I need people in this industry that know how to run a building. At Merrill we’ve invested over $1 million in the last couple years in a learning management system for every team member. Each person has a path and coursework that we will deliver through that learning management system with required content. Our commitment to them is they are constantly going to be learning. As we look at them, we not only know when they’re tested, but we know what their test results are, and we know whether they need additional testing or whether they truly excel. That allows us to identify people on their own teams who are committed enough and interested enough to want to learn, and who have the skillset to be leaders and to use the material that we have developed in a productive way.
With occupancy pressures being so tough, it may be that the last thing people are going to be doing is investing more in technology. Do you think that’s short-sighted?
I think that’s reality. We have roughly 150 companies that operate 10 communities or more in the industry, and we have 3,000 companies in the industry that operate one or two communities. Investment in technology is not something that those small companies can afford. We spent over $6 million of capital investing recently in ours, and I think Atria has spent over $20 million from that standpoint on a bigger platform.
What’s your definition of leadership?
My definition of leadership would be someone who has a clear vision, is able to articulate that vision for success, and then develops the culture in the company that nurtures leaders and instills in them the culture that’s designed to make the company a success. There’s accountability and responsibility. Ultimately, there has to be development and patience to developing.
During your senior housing career, what’s the biggest challenge you’ve faced?
I would have to say staffing. In the end, well throughout my career, senior housing has grown in fits and starts, and in the 1990s it was crazy with every single capital source falling in love with assisted living and assuming that all you had to do was build a building and people would fill it up. So the industry went through a crisis. There was so much supply being built and there weren’t enough trained leaders to really lead all of that supply, which is why we went from 12 to 14 public companies down to two in 2000. Most of us who were dealing with that kind of training resource shortage basically wound up taking risk. We took people who we had not yet developed and pushed them into roles on the best-athlete strategy and basically took risks for their careers. Some of them successfully, some of them unsuccessfully, and it wasn’t their issue. It was more of ours in terms of training and developing them. Now I think the big constraint again is resurfacing, which is still how we train, develop, recruit, and source staff.
Do you take it personally when someone doesn’t flourish in his or her role?
Honestly, I’ve always operated with the belief that if we hired somebody and they haven’t been successful, that’s a management failure, because we either haven’t articulated the mission to them effectively or we haven’t supported them or we shouldn’t have hired them in the first place. Yet we took them and told them they’re going to be part of our team, and when that went away, it’s not their fault, it’s ours. It’s a sign of an opportunity we missed. I do take that personally.
…I’ve always operated with the belief that if we hired somebody and they haven’t been successful, that’s a management failure, because we either haven’t articulated the mission to them effectively or we haven’t supported them or we shouldn’t have hired them in the first place.
What’s the biggest risk you’ve taken in your career?
It was at the time, in 1999, when we incubated our company by adding and building a few strategic properties. We were sitting at 18 communities and we heard about this little company in Texas, which was one of the markets we wanted to move into, and they were backed by venture capital but didn’t know anything about the industry. They had 18 communities. So we doubled the size of the company and integrated two completely different cultures. For us, it gave us scale, but we were doing it at a time when the industry was frothy. Overall the acquired portfolio was about 60% occupied when we took over and at the same time we had a plan to build five new buildings each year for the next three or four years. As a result, we cut off our development plans to focus on the assets that we bought and ultimately we sold those assets in 2007 for an incredible profit. They operated at 93% to 95% occupancy the whole time we owned them. As a step in building a company, that was a big risk for us. Other than that, we’re pretty conservative about how we look at this business. As I said before, we’re not focused on growth so much as we’re focused on quality.
What’s the best piece of advice you’ve received in your career?
It actually came from a guy I worked for in banking, years ago. I was the chief financial officer of a major regional bank. We had just encountered a huge energy-related lending crisis. I was looking at our balance sheet and realizing that there was a good chance in about six months we weren’t going to be able to roll the volume of national CDs that we had at maturity and had no other access. Right at that time, a 20-year veteran CEO out in California came up and replaced our CEO. I told him, “We’re going to need to do a deal. We’re not going to make it.” He looked at me and said “Nah, I’m here, we’re not going to need to do a deal.” So I said okay, I’ll go over some of the numbers with you when you have the chance. About thirty days later, he came back and he said, “We need to do a deal.” I looked at him and said, “So tell me, with a 20-year tremendous track record and being CEO of a very successful regional bank, why did you leave there and come to us when you now know we have a problem that we have to solve?” He looked at me and said, “The best advice I’ve ever gotten was: Once every seven to 10 years, take a new challenge.” He had done that several times. For me, I have enjoyed 42 years in two different industries. I’ve never looked back and regretted it. Every seven to 10 years or so, there’s a major change that I’ve been able to work on that’s re-energized me and given me more interest.
How do we attract young people to this industry?
Educate. I’m still struck by what I saw when I taught for five years at Washington State University. The students are juniors and seniors in the hospitality program; their mind is already made up that they want a hospitality career. So we introduce them to a course on senior housing, and one of the first questions we ask them is: “So tell us, what is senior housing?” Inevitably, the vast majority of them say that’s end-of-life care where people go to die. I want to be on the hospitality side where I’m dealing with all the cool guys and all the activity. By the end of the course, we have not only changed that perception, but we’ve also typically converted somewhere between 10% to 20% of any individual class towards progressively thinking about a career in senior housing. Young people don’t focus on old people. Young people confuse career opportunities and what can be enriching and what the environment really looks like. You take them into some of our buildings today, I don’t care if it’s Aegis or Leisure Care or Merrill Gardens—they’re stunned by it. I think the secret is letting people know how much growth we have in this industry, the kind of career positions they can develop. It’s not just caregiving and handling.
Does this conversation with the students track well with other industries they’re looking to go into?
It didn’t used to, but it does now just with the evolution of staffing. Our favorite discussion question in the hotel school where we teach is: Okay, go to Marriott and in about 12 years, you may get a shot at your first property management conversation. You come to senior housing as a career, and you can see that shot in five or six years. What’s more, you’re going to have a lot more fun along the way because there’s a lot less structure in terms of how you go about building a team and executing. On the flip side of that, we have a general manager who worked as a manager in a big hotel and she’s had success with us. I asked her one day, “So you’ve been on both sides, which do you like better?” She said hands down she prefers senior housing because in a hotel, “I wear a uniform. People come to me because I’m wearing a uniform, not because of who I am.” They may come because of what my job title is, but they come and my interaction with them is there, it’s done, it’s over. Senior housing, people come to me because of who I am, what they know I can do. I have a real relationship, and that’s important.”