EXPERT OPINION: A Conversation with Bill Pettit
February 26, 2013
In this "Expert Opinion" interview, Bill Pettit, President and Chief Operating Officer, Merrill Gardens, discusses surviving the Great Recession, memory care, assisted living, Health Care REIT, and more.........
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Bill Pettit is the President and Chief Operating Officer of the R. D. Merrill Co. and Merrill Gardens. Pettit joined Merrill Gardens in 1992 after 18 years in the banking industry. He was instrumental in the formation of the company, starting with one community in 1993. He directed the rapid growth and timely execution of acquisitions, and developed the policies that speak to the Merrill Gardens commitment to quality.
Under Pettit’s leadership, the Better Business Bureau named Merrill Gardens the Business of the Year for the company’s commitment to residents, team members and community service. The Family Business Institute named Merrill Gardens a Washington State Family Business of the Year three times in the past ten years. The company was chosen based on innovative business strategies, company performance, and contributions to the community. Merrill Gardens received a Finalist Award in the American Business Awards in the Innovative Business Practices category.
Pettit received a bachelor’s degree from Princeton in 1971 and a M.B.A. from the University of Oregon in 1973.
Pettit is the Chairman of the Executive Board of the American Seniors Housing Association.
President and Chief Operating Officer
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Read the interview transcript:
I’m here with Bill Pettit. He's the president of Merrill Gardens, one of the largest privately-owned senior housing companies in the country. Bill, it's a pleasure to have you with me.
Now, Merrill Gardens survived the great recession in what I would say pretty good shape. What was the hardest thing to overcome during those two to three years?
I think in some respects, Steve, one of the hardest things for us as a firm was watching the seniors go through a lot of the uncertainties and uneasiness created by the recession. It seems to me that it started out pretty simple. We had a real significant problem with real estate values and seniors were able to kind of absorb that. It certainly hit them hard with the impact of real loss of equity. There was a point in time where the seniors that we dealt with during that period of time, that they held on and they kept deferring thinking that real estate values would come back, because it represented a significant portion of their net worth.
But then it rolled into two other financial areas for them that no one really expected because no one expected the duration and the severity of that recession. It hit them first and foremost after the real estate collapse, it hit them in their fixed income investments. Here, pre-recession they're picking up four, five percent on their CDs or Treasury investments and then those all rolled. When they rolled, they didn't roll to 3.5%, they rolled to one percent or less. So in that case they went through not only watching this collapse in their net worth on real estate equity, but then it hit them in real terms, in terms of 70, 80 percent loss of cash flow out of fixed income investments.
On top of that as they moved, in some cases, into dividend-paying stocks, then they got hit with the volatility in the financial markets over Europe and other segments.
Not to mention the stock market crashing about 50%.
Yeah, so all of that for us and our team was probably harder to watch them go through. In our case, we've always been pretty conservative, so we weren't having any difficulty with the operations of the company. We never had any layoffs. In fact, we continued to develop through the recession. Sure, we had some impact on occupancies, we saw our occupancies pre-recession go from an average of 95, 96 percent to, I think at the trough we hit 89%. And now it's back at 94. So we're in solid financial position in our firm if we're anywhere in that high 80% occupancy range.
So we didn't have any financial challenges. I think more than anything else it was the challenge for a lot of our team members watching our residents—and they care a lot about going through what they were going through.
As a result of the recession, did you change any of your development strategies?
Oh, sure. I mean, we wound up during the recession, we only developed one building a year, whereas realistically we probably would have done two or three from that standpoint. But we cut back and we deferred some projects which we later picked up to develop, which are now complete.
But in terms of the type of building we had on tap to build, we basically built what we had planned pre-recession. Some of what we're doing now post-recession is a little different.
Post-recession have you changed the number of units per building? Have you changed the size of the units and the mix of IL, AL and memory care?
That's a good question. The answer to the first couple is no. We haven't changed the size of our buildings and we have not changed the size of the units, from that standpoint. We can talk about why, but one of the things we also have done, which is a little different than a lot of the industry is we typically will build a building between 70 and 150 units. Our model has always been to license all the units in a building. So, when seniors come to live with us, we don't have segregated care. So, if they come to live with us and they want a two-bedroom or a one-bedroom or a studio, they can select that. When they need care, we just give it to them in their apartment. That's been kind of our style, it's worked very well over a couple of decades. And we believe, in our view, that's a good way to provide care for seniors.
So, we're not even changing the mix of units. Now, what's interesting is that, post-recession, we're seeing far more seniors coming to us older and within a much closer timeframe for a need for services, if not already in need of services. And I believe, at least it's my thesis, a lot of that is a function of the deferral that was going on by these independent seniors, who had made up their mind to come to senior housing, but because of the uncertainties created by the recession, kept deferring and deferring and deferring.
And got older and older.
Yeah. Pre-recession, we would typically see an independent senior for three years with us before they needed services and now we're seeing independent seniors coming to us, but sometimes either in immediate need of services, even though they don't think they do, or sometimes within six months to a year versus the three years pre-recession.
Since the recession, and the recession technically has been over for a few years, have development costs started to go up?
Just starting to see the—I think the tip of that iceberg. The impact of the recession on construction jobs and on subcontractors was so severe that, even though the recession technically has been over for a couple of years, it's kind of hard to tell them that, because they went through that grinding process for their firms of laying off significant numbers of their staff to deal with the collapse of development. They've been very reluctant to staff up until they're more confident that they have a good book of business ahead of them.
There was also that lag on the finance and capital side, where even though the recession was over, you couldn’t tell the banks that, if you were using traditional bank financing. So there was a lot of time in there after 2009, a good 24 months when, even if you went to a bank with a project, which has been our traditional source of financing for development, they were a little skittish. Change of credit policy, the lag and the effect, the commercial real estate portfolios that they had financed, it was challenging, I think, for a while.
You had a very close relationship with Health Care REIT, really on your more mature property side. For your development, who's financing the construction?
Well, it's commercial banks. We've for 20 years had some very strong relationships with some of the stronger banks who did well during the recession. We also had deep relationships that they supported with customers like us. So U.S. Bank, Bank of America, PNC out of Pittsburgh, all have been rock solid in providing construction financing for us. At the depths of the recession, we really were pretty much with Bank of America. And we worked through with them their underwriting changes that they needed to accommodate financing during the height of the recession.
But we always had it and that's nice.
Now, China's been a hot topic in senior living these days. Can you give me a little update on it? Merrill Gardens and you have become a pioneer in looking into China, can you give us a little update on what you're doing over there?
China is a fascinating challenge and opportunity. I've often said that—we've been over there now full-time for two years, we have an office, we're commencing management operations, and we've been building relationships for the last 24 months.
Basically it's—you take our aging challenges, with the number of seniors we have in the U.S. that are aging and you multiply it times ten. And that gets to China. And then you look at where China is caring for seniors and they're two decades behind us in that context. So, you get this wave of seniors coming through, with China, with improved medical care like here in the U.S. and you have a government that realizes something has to be done to relieve those pressures.
So it's both a challenge and an opportunity. In our view, there are going to be significant differences with how senior housing and care take hold in China from where we are in the U.S. There also are going to be similarities. I mean, I could take the script for what is evolving over in China and almost roll it back to where we were in the late 1980s, early 1990s. Settling on a model of what the effective form of housing is going to be. Settling a model of what the most desired services are going to be. They have real benefit and desire in the sense that Chinese families are willing to pay for it, is going to be pretty significant.
Then you take the seniors themselves and they are different. If you think about it in the context of how we change lives in senior housing today for the seniors that live with us, it basically comes to about five principal elements. One is nutrition, because a lot of U.S. seniors don't have good control or discipline with respect to how they eat, what they eat as they tend to migrate to an age where they're not just taking care of themselves the way they might have as younger adults. That leads to fitness, which is the other element. You take nutrition, you take fitness and those are two significant elements that help determine the quality of your life as you age.
Then you get into a couple of other elements that even we don't recognize the depth of opportunity in senior housing today on, but we talk about and we're getting there, and that's brain fitness. Now, how we keep them thinking and active and stimulated as they are becoming more sedentary, as they age. So you have nutrition, you have physical fitness, you have brain fitness.
One of the singular elements that we bring to seniors is socialization. So many of our seniors today wind up self-isolating in their own home as they age, that their socialization becomes the telephone and it becomes watching TV. It's natural, it's not easy to walk, their eyesight is not as good but there's no reason why they can't still socialize. So it’s between nutrition, physical fitness, brain fitness and socialization.
The last one is really disease management, that's the care portion of it. But all five of those are so instrumental and then you take that, what we do to change lives here in the U.S. and you take that to China and you don't have the nutritional challenges in China for seniors, because their diets have tended to be probably healthier diets in many respects. You don't really, in most cases, have the fitness challenges for seniors in China, because many of them have had a life filled with physical exercise and today, as you drive around, many of the Chinese, you'll see seniors out in parks and seniors on street corners doing tai chi or other forms of exercise.
They don't need the nutrition as much and they don't need the fitness as much. They can use and will benefit from finding ways to continue to maintain their mental fitness in that context and they recognize that they benefit from socialization.
So, as care evolves, at least the initial care models that the early adapters will use there, a lot of it is going to be around the care set. Also giving families a way to deal with this kind of cultural stress in China of having families feel obligated to care for their seniors and torn with the challenges, cultural challenges in China from the one child/one family cultural evolution that occurred a couple of decades ago and then, really, more meaningful in some ways is the relocation of all of these families from agricultural environments where it was the family, plus it was also the village that cared for seniors, into these new mega-cities and the challenges of having grandchildren that are off to work and have to work. There are the challenges of less room and less space and the challenges of caring for seniors in this kind of urban environment that is evolving over there.
So there are solutions, the solutions will still involve, in many cases, families. But in many cases, I think the earlier solutions will be solutions brought by other foreign cultures who have been invited into China to help adapt what they do culturally with seniors to China.
So it would be a mistake to go pick up a United States/North American senior care facility and just transport it to China and think that you're going to have all the same policies, all the same practices and you'll have a great business model over there. It has to be adapted to the reality of the marketplace.
Well, a lot of challenges, but, obviously as you said, it's 10 times larger. So, good luck over there and thanks for the update.