EXPERT OPINION: A Conversation with Curt Schaller

Curt Schaller Curt Schaller,
Partner,
Focus Healthcare Partners

In this "Expert Opinion" interview, Curt Schaller discusses the formation of his new private equity investment company with partner Paul Froning, the types of investment opportunities they will be looking at, the time horizon for these investments and why this is a great time to be a buyer.

Listen Now     Read the Transcript


Curt Schaller is a co-founder and principal of Focus Healthcare Partners LLC, a private investment and asset management firm targeting the healthcare real estate sector. Focus seeks to make direct equity, mezzanine debt and preferred equity investments in senior housing, skilled nursing, medical office and hospital properties as well as investments in special situation opportunities including distressed and discounted debt.

Mr. Schaller has held leadership positions with several firms in the healthcare real estate industry, most recently serving as Senior Managing Director for GE Healthcare Financial Services’ real estate investment group. In this role, he was responsible for managing the group’s $6.5 billion debt business. Mr. Schaller joined GE via its purchase of Merrill Lynch Capital in February 2008. As National Director of Originations with Merrill Lynch Capital’s Healthcare Finance Group, he grew its annual originations volume from under $200 million in 2003 to nearly $2 billion in 2006. He was also integrally involved in the team’s strategic planning, syndication efforts and portfolio management.

Prior to joining Merrill, Mr. Schaller was a Senior Vice President for GE Healthcare Financial Services and managed its senior housing investment team. While at GE, the group’s healthcare real estate investment portfolio grew from less than $500 million in 2001 to $1.5 billion in 2003. Prior to GE’s acquisition of Heller Financial in September 2001, Mr. Schaller held several positions with Heller Healthcare Finance. As an investment officer and underwriter he was responsible for originating and underwriting debt and equity transactions as well as portfolio management. Before joining Heller in 1997, his professional experiences included real estate development, accounting and real estate advisory services.

Mr. Schaller received bachelor degrees in real estate and finance from the University of Wisconsin in 1991.

Contact Information:
Mr. Curt P. Schaller, Partner
Focus Healthcare Partners LLC
190 S. Lasalle St., Suite 1220
Chicago, IL 60603
P 312.286.1241
cschaller@focushp.com
 

Interview Transcript:
Steve Monroe, managing editor of The SeniorCare Investor, interviews Curt Schaller, partner at Focus Healthcare Partners.

Steve Monroe:
I’m here today with Curt Schaller, he’s a partner at Focus Healthcare Partners, a new company that he just started. Curt, you and Paul Froning just formed Focus. You’ve got a wealth of industry knowledge and contacts after several years at Merrill Lynch Capital Healthcare and GE Healthcare Finance. How do you plan to put all that experience to work in the seniors housing industry.

Curt Schaller:
Well, I’m fortunate Paul has a tremendous amount of experience, as well, with Fortress and Brookdale and JER and other spots. Paul and I, what we really want to do is take advantage of what we think could be the greatest investment climate since the early 90s, the RTC [Resolution Trust Corporation] days. And utilizing our experience and our contacts and our reputations to hopefully source some deals off-market, some attractive opportunities that will generate great returns. And this is, I really think is going to be one of the best investment climates we’ve seen in 20 years. With a partner like Paul, I think we’re going to be in a great position to do it.

Steve Monroe:
And have you put together your financial sponsors and how you’re going to get the capital to put in the industry? Besides your own capital.

Curt Schaller:
Yeah, Paul and I are going to invest in every transaction we participate in. And, ultimately, our goal is to raise a fund. But we understand what the climate is right now. There’s not a lot of capital out there that’s interested in investing in discretionary pools.

But we’ve talked to enough people, we’ve had enough good conversations with different financial sponsors. We’re at the point we’re out there looking at deals. And it’ll be a deal-by-deal basis. And we’re completely comfortable with that. I think, ultimately, you’re going to see the, a traditional real estate opportunity fund investor-based comeback and at that point, we’ll probably go out and raise a fund.

Steve Monroe:
Okay. And you mentioned you think this is one of the best times in maybe 15, 20 years in terms of value and opportunities. A lot of people think the name of the game the next 12 to 18 months is going to be the purchase of secured debt in seniors housing. Are you actively looking at debt opportunities now or in the near future?

Curt Schaller:
We actually did look at a couple of debt opportunities. But I don’t think we’re going to necessarily see that gusher of debt opportunities here in the next 12, 18 months. I think LIBOR rates, short-term rates are going to stay low. We heard Ben Stein yesterday with some of his predications. So I think as long as LIBOR rates stay as low as they are, it’s going to really [weigh] a lot of decisions that banks are ultimately going to have to make in terms of dealing with some troubled loans. And I don’t think 12 to 18 months is going to be enough time.

Steve Monroe:
Now, is that going to delay the loans…because it’s easy for their borrower to cover their cost?

Curt Schaller:
Absolutely, absolutely. They’ve got a lot of loans that are covering, but are bad loans.

Steve Monroe:
Because LIBOR is at…25 basis points?

Curt Schaller:
Exactly. But I think the one thing that might actually free up the flow of health care real estate loans is the fact that the overall commercial real estate market is continuing to see pressure and pressure. But, again, the overall market, loan markets are being bailed out by low rates.

Ultimately, without a doubt I think we’re going to see a flood of discounted debt opportunities out there, distressed debt opportunities. But in terms of what Paul and I are trying to accomplish, I think it’d be a couple of years off where you’re going to see a significant flow. I think another part of is the transactions that will happen will likely be larger portfolio sales of loans by large institutions. And then you’ll go to those large institutions to start picking off the health care loans.

Steve Monroe:
Right, okay. And on the equity side, from equity investing, are you looking at startup companies? Are you going to be looking at portfolios? Individual properties?

Curt Schaller:
Our strategy is to look at both individual assets and portfolios, but in terms of startups, although I think the dynamics are great for new construction, the supply-demand characteristics, the fact that the availability of construction debt is so limited, I don’t think we really look at that sector. And also just the timeframe. The startup, the predevelopment construction, the lease-up. We think there’s plenty of good opportunities out there right now that are significantly under replacement cost. That to spend a lot of time focusing on new construction really isn’t the best use of our time.

Steve Monroe:
How about startup companies in terms of a new entity that wants to build, start with a five, 10, 15 property platform acquisition, that kind of thing?

Curt Schaller:
I think in a similar vein Paul and I are going to be looking at very opportunistic deals. So really what we’re looking for are troubled situations. And not necessarily troubled from an operator who has a failure with his business plan, but maybe a situation where the borrower’s done everything they can but they’re just stuck with a bad debt structure.

And so for us it’s going to be more opportunistic than working with a startup venture which is more of a pension fund play.

Steve Monroe:
And when you say a “bad debt structure,” that’s a euphemism for too much debt?

Curt Schaller:
Yeah, exactly, too much debt and also just bad timing in terms of facing a short-term maturity.

Steve Monroe:
What kind of exit strategy for your investments are you looking at and how far out and how are you going to execute the exit?

Curt Schaller:
I think the only realistic exit underwriting you can really have right now is a REIT, a REIT sale, selling to a REIT. In terms of underwriting some sort of takeout from a fund using what used to be traditional—Fannie Mae, Freddie Mac or bank debt—I think that’s really unrealistic. I mean, obviously, Fannie and Freddie are still out there and active, but are they going to be there in the same way in two to three years? And that’s the exit strategy we’re looking at, we’re looking at two to three year holds. Obviously, maybe longer.

So Fannie and Freddie’s there today, but to underwrite it to an execution using their debt I think is unrealistic. And so certainly we’re going to be underwriting a much more conservative exit strategy and I think it’s most likely the REIT market.

Steve Monroe:
Okay and do you have any split you want to do between skilled nursing on one side and the assisted living/independent living on the other or it just doesn’t matter?

Curt Schaller:
Well, we are Focus “Healthcare” Partners. So we’re already focused on health care real estate assets. Senior care, skilled nursing, medical office and hospitals.

Steve Monroe:
Oh, you’ll be in hospitals, too?

Curt Schaller:
And—but, realistically, I think in the next 12-18 months, it’s going to be private paid senior housing market and medical office we’ll be focusing on. With the RUG changes coming down the road and regulatory changes, and other reimbursement changes and ObamaCare brewing, I think skilled nursing and hospitals is a little too hot for us to touch right now.

But, really, that’s going to be down the road, 12-18 months, a whole new slew of great opportunities.

Steve Monroe:
I was going to say, that might be where the opportunity lurks. Health care reform, Medicare and Medicaid get straightened out a little bit, that may be where the opportunity is.

Curt Schaller:
Yeah, there’s going to be change, with reimbursement and Medicare, obviously. And Medicaid budgets tightening. And there’s going to be winners and losers. And it’ll be much like PPS, it’s going to create a lot of investment opportunities.

Steve Monroe:
And then, lastly, do you want to invest with existing operators or would you look at some properties, portfolios and bring in a new operator to run them?

Curt Schaller:
We’ll actually look at both. I think the situations where we’re talking to existing operators are what I mentioned earlier, where you got a good deal with a good operator, but they’re a victim of circumstance. They’ve got an impending maturity. They’re facing a market where they can’t refinance. And so we’ll come in and work with that group, bring capital to the situation, solve their debt problem.

So I think that’s how we operate with existing operators. But if you truly have a busted deal, we’ll absolutely be looking for a strong operator to JV with. We want that operator to be invested in the deal with us to help turn around a broken business plan.

Steve Monroe:
Okay, well, good luck, I hope you find lots of opportunities next year and wish you great luck in doing that.

Curt Schaller:
I appreciate it, thanks, Steve.

Steve Monroe:
Thanks for spending time with us.