Paul Klaassen looks back on his 27-year reign as CEO
- October 30, 2008
by Brett Lieberman
Before 1981 seniors had few options for living out their twilight years: senior apartments (for those healthy enough to care for themselves), nursing homes
or moving in with family. Those limited choices, though, were about to change. That year’s opening of Sunrise Senior Living Inc. of McLean would ultimately
lead to a revolution in senior living.
Within a few years, the company built its first assisted-living community off Glebe Road in Arlington. Designed from the ground up for older residents, it
drew hundreds of long-term-care industry and policy leaders who came to tour the community, high on a hill with a view of the Washington Monument.
They liked what they saw: draperies, moldings and large areas dedicated to shared space instead of institutional-looking corridors. There were no patients in
the building, just residents. It was referred to as a community, not a facility. And staff provided seniors with assistance in the activities of daily
“That building changed everything,” says Paul J. Klaassen. “It was the first really purpose-built, assisted-living community of its type.”
During the company’s annual meeting later this month, Klaassen will step down after 27 years as CEO. He and his wife, Terry, built the company from a handful
of locations in the Washington area into one of the country’s largest senior living providers. Today, Sunrise has more than 450 residential communities in
four countries with 50,000 residents and 43,000 employees.
Klaassen plans to remain involved as the company’s non-executive chairman. Day-to-day responsibilities will be turned over to new CEO Mark Ordan, Sunrise’s
chief investment and administrative officer. Before joining Sunrise in 2008, Ordan was CEO of the Mills Corp., a shopping center developer. Terry Klaassen
will remain active as the firm’s chief cultural officer in charge of training.
As Paul Klaassen prepares to pass the baton, he leaves a company that has just come through a tough patch. Following an accounting scandal in 2006 and 2007
that prompted an SEC investigation that found accounting errors, Sunrise went though an earnings restatement.
In March, it completed a restatement of results from 1996 through 2005 that reduced earnings by $173 million. Then in September came more bad news: $65
million in losses for the first half of 2008, including a $27.7 million write-off of abandoned project costs. Sunrise’s stock price has taken a beating as
well, losing more than 40 percent of its value in the last year. To cut costs, Sunrise is reducing staff and slowing plans for expansion.
Still, Klaassen leaves with a bullish attitude on Sunrise, senior living in general and what to expect in the next stage of his own life. Virginia Business
sat down with him on an outside patio at a Sunrise community near the company’s headquarters in McLean. An edited transcript of the interview follows.
VB: When you started Sunrise, there was nothing like it. Why did you think you could pull off something new?
Klaassen: One of the blessings of starting a company when you are 23 years old is you don’t think of all those things. We didn’t think we would start a
national movement that would change long-term care in the United States. We simply saw a local need, which was being filled, we felt, badly. We saw an
opportunity for a better long-term-care model: a model that was focused more on the resident and the family, a model that was more attractive in the physical
plant. We saw that nursing homes were caring for people that really didn’t need to be in a nursing home … So with the kind of optimism that entrepreneurs
have that their idea will be accepted, we sold our house and opened the first Sunrise in the Northern Virginia suburbs.
VB: Did you envision a series of Sunrise communities across the region?
Klaassen: We had a second one open within a year and a third one within a year after that … I always envisioned it as a growth company … After three years,
we set about designing a prototype which could be built on three acres anywhere in the country. It had to be reproducible; it had to have timeless appeal.
VB: Sunrise has more that 450 assisted-living communities. How did this growth take place, and where will Sunrise head in the future?
Klaassen: We’ve always seen this as a movement. You don’t do that by having 10 or so locations. In the early ’90s,we sold a quarter of the company to bring
in private equity that allowed us to expand from two-a-year to 10-a-year. We went public in 1996 and were able to go to 20-a-year. A year ago, we hit 30 new
communities a year before the credit crunch. Right now we have about 30 under construction and have been on a pace of 15 to 20 openings a year. That’s the
preferred growth mechanism. We think the next 10 years are a time of new construction. There are still a lot of ZIP codes where high-quality senior living is
not available …
VB: Tell us about changes you’ve seen in the industry.
Klaassen: We in fact have seen in the last 25 years a shift in our consumer … Now it is a boomer — a daughter or a son — helping to arrange care needs for
their parent or loved one … Boomers demand customization. Boomers are demanding better options for themselves and their parents.
VB: Experts warn that Americans are not saving enough for retirement. Do you expect the long-term-care financing model to change?
Klaassen: The number of people who can afford private-pay senior living is at an all-time high. People are paying for senior living through a combination of
income and net worths … We find about 65 percent of seniors can afford a private-pay alternative like Sunrise. [According to a Sunrise official, the cost can
easily run $30,000 a year.]
VB: Overall, how do you see the long-term-care industry changing?
Klaassen: I think we’re going to see over the next 10 years more choices, a weeding out of weaker providers. Less attractive buildings are just not going to
be competitive in the future. Doing senior living well is going to get more complex and more demanding … In the past, even poorly conceived projects could
succeed even if they were only marginally well managed because there was so much demand. As the field becomes more mature, you can’t just get two out of
three things right.
VB: Sunrise has faced a number of challenges from accounting issues. How is the company’s financial health?
Klaassen: I have yet to discover any company that goes in a straight line for five or 10 years, much less 28 years … We’ve opened 50 communities in the last
two years, despite the fact that we’ve had an accounting restatement, which wasn’t about our cash flow. It was a complex joint venture accounting, a
relatively technical issue that affected our timing or recognizing income, but not our cash flow. The credit crunch is affecting us today in that
construction financing is harder to find. We have lots of sites, some of which we have to put on the back burner. We have the equity to put into these
VB: Is the accounting problem the biggest challenge Sunrise has faced?
Klaassen: Certainly not the biggest challenge. Right now the lack of construction financing is probably the biggest challenge we are currently facing.
VB: At 51, you’re still young, particularly by Sunrise standards. Why step aside now?
Klaassen: Moving from CEO to chairman, I’m thinking of as a promotion, not as a stepping down … I see myself as chairman still being very involved in the
design aspect of our product, in the training of our new leaders and very much also in the area of public policy. I’ve been able to grow the company from
zero to over $2 billion. That’s not something many people get to do.
VB: Do you worry that the accounting problems will become your legacy?
Klaassen: I thought about stepping down on the 25th anniversary mark because it was a nice neat number. But then the accounting thing came up, so I said,
“I’m going to see this thing through.” I don’t worry about legacies … I clearly wish that the last two years had been smoother, but I’m really proud of the
work we have done. The big thing we have done here is far bigger than this accounting bump on the road.