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Circle At Sunrise By Kenneth Bredemeier, Washington Post May 5, 2003
Paul J. Klaassen has achieved the good life, owning one of the priciest homes in Fairfax County, driving a silver Mercedes-Benz sports car, sitting in a light-filled corporate office just feet away from a rooftop patio of spring flowers and shrubbery. The still-boyish-looking Klaassen, 45, has lived the life every entrepreneur dreams of. He turned an initial $16,000 personal investment he and his wife, Teresa, made 22 years ago -- to remodel a boarded-up Oakton nursing home -- into Sunrise Senior Living, now the nation's biggest for-profit senior-housing company. He is the chairman and chief executive, and she is chief cultural officer and an executive vice president. Together, they own 13.2 percent of the company, more than 3.2 million shares now worth nearly $89 million, and live in a $5 million house in McLean. From a Tysons Corner perch, he has created one of the most recognizable brand names in elder care and has carefully cultivated the trust of his clients and their families. Nearly 35,000 residents at 339 housing complexes in the United States, Canada and Britain pay his firm $30,000 to $60,000 a year to live their senior years in well-appointed elegance a significant step above the nursing homes of popular perception. But for all his success, Klaassen, a graduate of Fairfax High School and Georgetown University, still faces many obstacles that could derail his company's growth: the industry's spotty recent financial history, a group of skeptical Wall Street analysts who question his ability to make money over the long haul, consumer groups calling for more federal oversight of his industry and the rising cost of caring for the Western world's aging population. Klaassen, however, keeps the unbridled optimism that built his empire. The company, he predicted, will continue to grow, both through buying other assisted-living operations and building its own. "I'd be shocked if we didn't acquire some more management service contracts this year," he said. 'Quality of Earnings' Investors do not question Klaassen's commitment to grow, but Sunrise's ability to do it profitably. The firm recently bought Marriott International Inc.'s senior-living operation for $150 million, but Wall Street skeptics wonder whether Sunrise will be able to integrate Marriott's bigger operation into its own. And, they ask, when will Sunrise fulfill its promise to transform itself from a company that profits from building new senior housing into one that profits from managing it? Even a critic like James J. Kumpel, an analyst at investment banker Raymond James & Associates in St. Petersburg, Fla., says that Sunrise offers a good product. "I think they are a quality senior-living company, maybe the premier operator of senior living," Kumpel said. "But that's not my job. I don't think it's a good investment." His chief objection is that over the past few years big chunks of Sunrise's earnings have been generated by sales of its properties rather than by profits from its management of properties. "It calls into question the quality of its earnings," he said. "The fundamental problem is you get all the gains at once" from sales "and forever more you've reduced your future income" from managing properties. "The idea was to sell five or six properties a year, but it became 15 or 20." Moreover, he said he is not enamored of the Marriott deal because it includes 17 properties in Florida, a state Sunrise pointedly avoided investment in because Kumpel said it is "a black hole of liability" for health care malpractice claims, a contention Klaassen agreed with. Kumpel's firm, like all of the securities firms cited in this article, has not performed investment banking or other financial advisory business with Sunrise in at least the past two years. Kumpel, referring to Sunrise's stock performance over the past 21/2 years, said: "I generally believe the stock is locked in the [$20 to $30] trading range until we determine how well they absorb the Marriott properties. This looks to be a negative deal until they can prove they can run Marriott's properties better than Marriott did." In a recent report, yet another critic, analyst Douglas Simpson of Merrill Lynch & Co., called Sunrise "a company in transition as it tries to redefine its business model." "At this point, we believe there are simply other health care services stocks with more attractive risk/reward profiles," Simpson wrote. "That said, the reason we don't have a sell rating on the shares is that we are unsure of a negative catalyst to take the shares down further. In the past, Sunrise has reported very low quality earnings, and the stock has remained relatively stable." Move Into Management Intriguingly, while Klaassen disagrees with any contention that his firm is not already a good investment, he has set Sunrise on a course that actually would obviate the sharpest criticisms of his financial stewardship, that the firm's earnings were too weighted toward real estate sales in lieu of management fees from the operation of its homes, which encompass independent and assisted-living facilities as well as those for residents who need skilled nursing and Alzheimer's care. "To those who don't like us," Klaassen said, the company is moving toward the "vast majority" of its earnings coming from contract management. "The good news is we've developed a lot of real estate that's been very good for our shareholders. We've paid off debt, funded growth. Those are real earnings. I'm completely comfortable with the strategy." "Those who say we've been too dependent on property sales," the slightly bearded Klaassen said, "should know that every year that goes by we're becoming more oriented to management services. It's going to become even more so in the next 12 to 24 months." He said the typical 5 to 8 percent management fees that Sunrise collects for operating senior-living homes owned by others, mostly pension funds, insurance companies and other institutional real estate investors, will account for about 90 percent of Sunrise's earnings within two years. "We'll be getting out of ownership of bricks and mortar and into long-term management contracts," Klaassen said. He compared Sunrise's strategy with that of Marriott, a company he said was dear to his heart because the first 25 shares of stock he owned were in Marriott. In the 1990s, Marriott transformed itself from a hotel owner and operator to just an operator. It runs 2,589 lodging properties but owns only nine of them. "I'd like to be the Marriott of senior living," Klaassen declared with a marked sense of enthusiasm. "It's been a great success story. Marriott owns almost none of their hotels and that's what we want to do, to have a recurring revenue stream. "That's why I'm delighted Bill Marriott has joined our board," Klaassen added, referring to Marriott's chairman and chief executive. Marriott sold its senior-living business because it did not fit in with the company's core hospitality strategy. Senior living, Marriott officials have said, is more like a health care business than a hospitality business. By concentrating on management service contracts, Klaassen said, Sunrise will have more predictable earnings and in the end would be "less volatile than owning the buildings" because of fluctuating and "uncontrollable expenses" associated with outright property ownership. Income from management contracts, he said, would also be "a much simpler story for a public company to tell, easier to understand." He has already convinced some stock analysts of the merits of Sunrise's emerging strategy. "We have a buy on it," said Jerry L. Doctrow, a stock analyst for Legg Mason Wood Walker Inc. in Baltimore, even though the firm still rates the stock as "high risk." "The key thing about Sunrise is that it was probably the one company that avoided overbuilding and the lease-up problems of their peers" in the 1990s, Doctrow said. "They are a quality operator, more careful in their site selection." Frank G. Morgan, a health care industry analyst for Jefferies & Co. in Nashville, rates Sunrise stock as a buy. "It's one of the few ways you can play the assisted-living" market, he said. Of the industry, he said, "Sunrise, of all the companies, picked the right spots, larger, more urban, more affluent communities." Meanwhile, stock analyst Joel M. Ray of Wachovia Securities Inc. in Richmond has an "outperform" rating on Sunrise, meaning that he thinks the stock is "attractively valued and the total return will exceed the market over the next 12 months." He predicted that the stock may edge ahead to the range of $30 to $33 per share over the next 12 to 18 months. Shares of Sunrise closed Friday at $27.54. Building a Brand After the Klaassens opened their first three senior-living properties, Paul Klaassen said, "We decided we wanted to build a reproducible building. What architecture would look good at 50,000 square feet? What are the elements of an elegant mansion? What would our residents find appealing? Colonial didn't look good." What the company, still officially Sunrise Assisted Living Inc. until May 12, when shareholders are likely to approve management's sanctioned change to Sunrise Senior Living Inc., opted for was a combination of Victorian architecture with a shingle-clapboard look that Klaassen calls emblematic of "captain's housing in New England." "We didn't want to bring any health care architects into this," he said. "We didn't want any fluorescent lighting. We wanted drywall on the ceilings, wallpaper on the walls, wood trimming." The resulting style has become something of a brand-name logo for Sunrise, a recognizable connection to a corporate name in a fragmented industry where many firms have tried to gain a foothold and Sunrise has become the biggest -- with a 2.5 percent market share, according to industry trade groups. It was a business that was the darling of investors in the 1990s. With Wall Street investment money plentiful and available, numerous senior-living management firms sprouted, often winning quick zoning approval for their projects in smaller communities. At one point, Morgan said, there were 15 publicly traded senior-living firms. Five remain. David S. Schless, president of the American Seniors Housing Association, a D.C.-based trade group, said the number of senior-living units climbed steadily in the late 1990s, peaking with 65,879 units being built in 1999. That figure plummeted to 21,495 last year and could fall further this year. "Certainly in some markets it was overbuilt," Schless said. Robert G. Kramer, executive director of the Annapolis-based National Investment Center for the Seniors Housing & Care Industries, said that seniors -- and, just as important, their adult children -- "liked the idea of something that was more residential, less institutional. But there was too much capital coming into the market" and numerous companies "overestimated their ability to grow quickly. If it takes twice as long [to fill a property], will you have the cash to cover your debt service?" Klaassen said that in the 1990s he was content to add about 20 new buildings a year, a strategy that left Sunrise as the sixth-largest provider of senior housing at the end of the decade. Another firm that grew rapidly was Marriott, which started its senior-living division in 1984 and by the end of last year had 126 properties with 23,000 residents. But Marriott also grew disenchanted with the business. Laura E. Paugh, Marriott's senior vice president for investor relations, said the firm initially viewed senior-living properties as an extension of its hotel business and viewed "the health care aspect of it as relatively small." But that changed as its residents aged in place, and Paugh said Marriott came to ask itself: "How can we have a hospitality business in a health care facility?" "We think we underestimated how complicated it all could be. The business became more health care oriented." She said Marriott earned profits most years on the venture but wrote off a total of $42 million in 2000 and 2001 even though it earned $23 million last year, the point at which it decided to sell the operation to Sunrise. Regulated by Residents Sunrise says it is not worried about the health care aspects of the business. It has long-standing relationships with local health care practitioners that come to its facilities as needed to treat individual residents. Moreover, about half of its 39,500 beds are in facilities with multiple levels of care, meaning that many residents can move to another floor of a property if their health declines. Actually, Klaassen said, most of Sunrise's residents spend the last years of their lives in whatever level of care they started, typically six years for those in independent living and 21/2 years in assisted living. Eighty percent of Sunrise residents are women, he said, usually about 83 or 84 years old. They pay $80 to $160 a day for their room and board, almost all of it out of their own pocket or that of their adult children because senior assisted housing typically is not covered by private insurance plans. The federal government covers 6.6 percent of Sunrise costs for seniors under Medicare and the impoverished under Medicaid, chiefly occupants at some of the Marriott facilities Sunrise assumed. A national study of senior assisted living released last week by 48 industry and consumer groups and state regulators called for the creation of a national Center of Excellence on Assisted Living to act as a clearinghouse on best practices at such facilities. Klaassen said that "regulation is a given," but that "the industry as a group believes that state standards should belong at the state level," which is currently the case. No federal law governs assisted living. He said he views regulations "as a minimum standard, or a floor." "The moment that it becomes the ceiling, I think an organization or a company or a provider is really doomed. We take it as necessary, but we believe frankly that a senior and her daughter are a much tougher regulator than some state inspector who comes in two or three times a year for an inspection." As for Sunrise's growth, Klaassen says he is convinced that he knows where to put more Sunrise buildings, or buy more from competitors: metropolitan communities with large numbers of 45- to 64-year-old children of elders who will need senior-living facilities. "It's daughters and daughters-in-law who are the typical impetus" to move a parent in, Klaassen said. "Give me a 53-year-old, first-born daughter whose dad has died" because that person might someday have to move her mother to Sunrise. Such was the case for Marilyn Ehreth, a geriatric nurse, who was faced with finding a place for her mother, Emma Kwako, 90, after she suffered severe hemorrhaging behind one eye and degeneration in the other, leaving her legally blind. "I knew what to look for," Ehreth said. "I interviewed many homes. Sunrise had the most of what I was looking for." Now, Kwako lives in a single-room apartment at Sunrise's Reston facility. She is able to take mile-long walks twice a day in the neighborhood with the aid of a white cane. "I'm very contented with everything," Kwako said. "I feel so fortunate to be here." She gets to play bridge four times a week with Grace Dore, who at 100 is the second-oldest resident at the Reston Sunrise. She is so dexterous she hooks Oriental rug wall hangings as wedding presents for her grandchildren, and she is mentally agile enough for the frequent bridge games. "And if I do say so," Dore said, "I'm the best player here. "There are a lot of nice people here who take care of me," she said. "I like my room. It's very quiet." Still, she lamented. "Of course, it's not home." Copyright
© 2002 Global Action on Aging |
