Penny Pritzker is bullish on the assisted-living industry, but she doesn't see the need to run with the bulls of Wall Street.
Backed by her family's multibillion-dollar hotel fortune, the 39-year-old Pritzker is making key operational and financial decisions to keep Classic Residence by Hyatt and Encore Senior Living on a conservative growth path in the assisted-living business. Pritzker's family owns the Hyatt hotel chain as well as a substantial portfolio of other holdings.
Pritzker says Wall Street would like to see her merge Chicago-based Classic and Portland, Ore.-based Encore and take the combined company public. But she doesn't plan to go in that direction.
"The investment community is thinking, `What is this anomaly of a private company?' " says Pritzker, who is president of Classic and chair of the executive committee at Encore. "We don't have to go to Wall Street to get capital. We are well-funded."
Pritzker founded Classic in 1987 when she saw the opportunity for explosive growth in assisted living.
The Pritzker family plans to invest more than half a billion dollars in the two ventures through debt and equity financing within the next three years, she says.
The Pritzkers are the sole owners of Classic Residence by Hyatt, in which they have committed $100 million in cash and another $300 million in debt.
Classic has grown to operate 11 senior- and assisted-living communities with 3,000 units in seven states. Backed by the Hyatt brand, the facilities offer units ranging from independent-living suites to those supplying a healthcare component such as skilled nursing or care for various stages of Alzheimer's disease.
Classic is committed to developing another 1,500 units in the next three years.
At Encore, a senior-living company with a major focus on Alzheimer's care, the Pritzker family and senior management committed $30 million in equity, and the Pritzkers secured $100 million in debt financing.
The company operates 37 facilities with more than 2,100 units in nine states. It plans to open three more in the next three months and has 17 in various stages of development.
The Pritzkers acquired a majority stake in Encore in December 1996 when it was part of Portland-based Brim, which was primarily an owner and manager of rural hospitals.
By acquiring a stake in Encore, Pritzker expanded the family's presence in assisted living. Pritzker says she was attracted to Brim because of its successes in the healthcare business.
"Clearly, the one thing (the Pritz-kers) know is the hospitality part of it," says Sheryl Skolnick, an analyst with BancAmerica Robertson Stephens in New York.
Encore's senior management team, which includes five former Brim officers, has $10 million invested in the company.
"(The Pritzkers) would not have invested if there was not a management history in healthcare and a management team that would have put cash along with theirs," says Jim Williams, Encore's president and chief executive officer. Williams founded Brim in 1971 with A.E. "Gene" Brim.
Brim's hospital business is now part of Brentwood, Tenn.-based Province Healthcare Co. Brim launched its first assisted-living project in 1975.
Less than a year after the Pritzkers bought the majority stake in Encore, the company acquired Madison, Wis.-based ElderHaus Concepts in November 1997. Financial terms of the deal weren't disclosed, but the acquisition brought Encore to its current total of 37 facilities. Twenty-seven of those specialize in Alzheimer's care.
Although Encore and Classic operate independently, they are well aware of each other's business because they share board members.
Like other assisted-living companies, Encore and Classic see the graying of America as an indicator of growth potential. The number of people age 65 and older is expected to total about 80 million by 2010, compared with 34 million today, according to the U.S. Census Bureau.
To strengthen the healthcare component of its facilities, Encore is looking to expand its hospital affiliations. The company already has ties with several hospitals, including 659-bed Lee Memorial Health System in Fort Myers, Fla., and 432-bed Tucson (Ariz.) Medical Center.
"We very much want to affiliate with strong hospitals," Williams says. "We would do joint ventures or a range of links with hospitals in major metropolitan areas."
Its current hospital affiliations range from equity partnerships to arrangements like the one at Lee Memorial that involves Encore leasing property on the hospital's campus.
Encore's assisted-living projects have an average of 70 units and cost about $5 million each. Classic favors larger projects in bigger markets. Its facilities typically have 250 to 400 units and cost $50 million and up.
Analysts say Classic's strategy presents some challenges because it involves pricey markets.
"The only constraint on her growth is finding enough properties because she's really going after the upper niche in the market," Skolnick says.
Nearly all residents of assisted-living facilities are private-pay, unlike patients at long-term-care facilities like nursing homes, which mostly are funded by Medicaid.
In the past four years, 15 companies focusing on assisted living as their core business have gone public to raise capital, but their performance has been less than spectacular.
Overall in 1997, the 15 publicly traded companies lost $14.9 million despite a 78% increase in revenues to $908 million, according to WDI Capital Markets, a Hilton Head, S.C.-based research and consulting firm.
"On the whole, you are seeing seven losers and eight winners; it's still pretty close," says Jack Cumming, CEO at WDI.
Despite the erratic profitability in the sector, Pritzker believes her companies are well-positioned.
"Unless you are a well-established company, you could be subject to the whims of the marketplace," Pritzker says. "With one little miss in your numbers, you could have a calamity."
Since neither Encore nor Classic disclose operational financial information, it's difficult to make comparisons with the public companies.
But Pritzker says her companies are doing just fine.
"For us, we are cash-flow driven," Pritzker says. "We own our own projects, and they have a 97% to 98% occupancy."