A Seattle-based senior living provider is looking into to enhancing the efficiency—and revenue generation capabilities—of its management platform, and it’s taking a technology-fueled approach.
Merrill Gardens attributes its 2010 pioneering of the RIDEA structure to “forward thinking,” and in the summer of 2013 made another strategic move by divesting 38 properties with a focus on tech-heavy investments in its remaining 18-property portfolio.
The company still has 10 of its newest—and what the company considers its most valuable properties—in a RIDEA venture with Health Care REIT, with intentions to bring more properties into that venture in the future, says Bill Pettit, president and chief operating officer of the R.D. Merrill Co. with responsibility for Merrill Gardens.
As the first company to do a RIDEA deal with a REIT, Merrill Gardens decided to break down where it was making money—and where it was not—following the move from complete ownership to a 20% interest.
“In our joint venture with Health Care REIT, we were making a lot of money, as were they, on real estate and operating cash flows,” Pettit says. “But when it got to executing the management contract we had, we weren’t making any money. We weren’t losing any money, but we were spending a lot of effort.”
As the company began strategically looking toward 2020, says Pettit, it realized that greater efficiencies in management would increase its competitiveness.
“We needed to be able to invest more effectively in technology and to really rethink and retool how we manage properties, so that 10 years from now, if management fees went from 5% to 4%, we could still be there making money on the management side and not just on the real estate investments we have,” he says.
At the time, Merrill Gardens had 56 properties with another 12 in development and decided that the most efficient way to make the technology changes and to retrain around a re-engineered management platform would be with a smaller company.
“Just about every application and process in our management platform is being retooled as part of this exercise,” Pettit says. “That’s why, when we looked at it, we asked ‘Do we want to do this 56 times over, or with a smaller group, and then bring new communities in?’ It just made for more sense, looking out to 2017, to get this done and over with in about 18 months rather than three, four, five years.”
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The $173 million sale of the 20% interest in June 2013 brought $100 million of fresh capital into Merrill Gardens, he says, with the remaining portfolio’s average age dropping from around 15 years to under five. The estimated cost of the re-engineering dropped from around $5-6 million to approximately $1.5 million.
Some of Merrill Gardens’ inefficiency came from how the company was built, according to Pettit.
“We found that across the spectrum, from human resources to accounting to maintenance to how we did our marketing, and even to how we provided support to the communities, we were touching things a number of different times,” he says. “The cash flows were so significant out of the real estate that we never really focused, as we were growing, on whether we were re-engineering the process to maintain efficiency.”
For example, when the company would hire someone new, that person’s information would all be collected through a paper system and then sent to Seattle, where it would get reviewed and entered into the corporate system, and then sent back to the community where the person had been hired.
Merrill Gardens now has new accounting and HR systems that create a “far more efficient” process, Pettit says, and is in the process of converting its purchasing system to an automated one.
Once everything’s been done, Pettit says he believes the company will be “far more capable” of managing its assets more effectively and will then step back into the acquisition market of existing assets. Most of Merrill Gardens’ concentration has been focused on development, because there’s no pressure on operations.
“When the new properties start coming on, in the next year, then we’ll have that behind us and we’ll be in better shape not only to take on those properties but also to support Health Care REIT in acquisitions,” he says.
Written by Alyssa Gerace