EXPERT OPINION: A Conversation with Scott Stewart

Scott Stewart,
Founder and Managing Partner,
Carlyle Seniors Housing

In this "Expert Opinion" interview, Scott Stewart talks about the recent acquisitions and subsequent sales for Carlyle Seniors Housing, and the developing opportunities in today’s market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Listen now     Watch the video      Read the transcript

Scott Stewart is the Founder and Managing Partner of Carlyle Seniors Housing, LLC (CSH), a national seniors housing investment firm.  CSH is an affiliate of The Carlyle Group (Carlyle), one of the world’s largest private equity groups with over $75.0 billion under management.  Both CSH and Carlyle are headquartered in the same Washington, DC offices. CSH was formed in the fall of 2003 with a mission to opportunistically acquire, develop and own independent living facilities, assisted living facilities and continuum of care retirement communities (CCRCs) in major U.S. markets.  CSH contemplates utilizing third party managers to operate the facilities on a fee or joint venture basis. To date, the company has amassed a nationwide portfolio of assets valued at over $750 million.  CSH has also realized a combined $101.0 million gross profit for Carlyle’s investors with the timely sale of certain assets in just over a four-year period.   This track record has enabled the company to post an overall, portfolio IRR in excess of 52%.  Prior to forming CSH, Mr. Stewart ran the Acquisitions Group for Sunrise Senior Living, one of the country’s largest seniors housing service providers.  Before that, he headed up the acquisitions, development and construction efforts for Homestead Village, Security Capital Group’s extended-stay hotel company. Mr. Stewart is a graduate of The University of Michigan (BBA) and Harvard Business School (MBA).


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Contact Information:
Scott Stewart, Founder and Managing Partner
Carlyle Seniors Housing, LLC
1001 Pennsylvania Avenue, NW Suite 220 South
Washington, DC, 20004
Phone:  202.277.1855

Watch the video of the interview:


Read the interview transcript:
Steve Monroe:
I’m here today at the NIC Conference in Chicago with Scott Stewart.  He’s a managing director of Carlyle Seniors Housing.  Scott, Carlyle Seniors Housing has made some very opportunistic acquisitions and subsequent sales of those properties over the past several years.  We’ve written about these and we’ve written about the great returns you achieved.  Are you beginning to see some of those same kind of opportunities developing in today’s market?

Scott Stewart:
Not like the ones you mentioned, Steve.  We thought that the tail end of last year the banks would be bringing forth a new batch, a plethora of opportunities—it just hasn’t transpired.  The main reason I think is because the owners of the assets and the banks, they don’t want to book these losses, they don’t want to give up the ghost, they don’t want to admit that they’ve got a problem on their hands and therefore aren’t bringing opportunities to market.

So we’re not seeing the opportunistic deals that we saw back in 2000 to 2003.  Hopefully, that will change here.

Steve Monroe:
But are acquisitions coming to you?  Are potential sellers or any lenders contacting you about acquisitions?

Scott Stewart:
We’re seeing decent deal flow, but not to the extent that we were hoping for, that we thought we were going to see in the last year.

Steve Monroe:
So sellers in your mind are not getting realistic in pricing?  Or are you just not finding the properties that you want?

Scott Stewart:
Not seeing the properties that we want.  Our strategy has changed, like everybody’s in the past couple of years, or 18 months, I’d say.  And we want to go back to what had been successful at the start of this program six years ago, which is to buy properties at a discount to replacement cost and we’re just not seeing those yet.  Same time, we’re very patient and waiting for those to transpire.

Steve Monroe:
Well, there’s a lot of properties on the market that are being bought at a huge discount to replacement cost that are probably going to be of lower quality—I mean, if you’re looking at the little higher level?

Scott Stewart:
That’s right, that’s right.  Maybe I should contact you for those opportunities, too.

Steve Monroe:
Well, you never know.  But, Scott, Carlyle is not just a buyer.  You are also sellers.  And you still have properties in your portfolio.  In a more normal capital markets environment, you probably would have sold them.  Just not the right time to sell right now?

Scott Stewart:
It’s not.  The obvious answer is the credit markets are still frozen.  I think that higher volume will create a better selling scenario for us.  In the meantime, though, we focused in on all the assets we bought focused, focused on the fundamentals.  That’s good markets, good sub-markets, job growth, number of qualified seniors, qualified caregivers in a five-mile radius.  Class A properties, purpose-built within the past five to 10 years.  And, as a result, even though we haven’t been very active on the buying and selling front, we’ve taken our assets we have in our portfolio, even though we’re holding onto them longer, we’ve polished them up.  We are now seeing the best operational performance in our entire portfolio than we have in six years.

Steve Monroe:
I was going to ask that.  Cap rates have gone up, but if your portfolio assets, your cash flow has gone up, how has the relationship between the two worked in terms of value?

Scott Stewart:
They’re directly related.  It’s made us change our strategy from the standpoint that we are cash flow focused.  Really, we just want to get—when we underwrite a new opportunity, we have a desired return that we try to achieve.  In the past, we’ve been successful in buying properties at the right time.

Steve Monroe:
Selling them at the right time.

Scott Stewart:
Yeah.  Walking through the front end of our game plan, our business plan for each asset.  But the market was just so compelling, we sold them well ahead of schedule.

This time, we’re playing it out.  We’re two-to-five-year holders and a lot of the assets we have, we are going to hold onto for five years.  Because, again, we don’t see the selling market to be all that great.  So what that’s necessitated us to do is to get the return more from cash flow.

The silver lining here is the fact that interest rates are at an all-time low and debt that was secured is all LIBOR-based.  So our cash flow, as a result of that, has been pretty remarkable on virtually all our properties.  And that is contributing a larger impact into our overall return than the difference between what you can make by buying and selling.

Steve Monroe:
So your operators are doing well, they’re doing better than a couple of years ago.  Is there any geographic difference, any areas where census and cash flow has increased more than other areas?

Scott Stewart:
Not really.

Steve Monroe:
California?  You still have business in California?

Scott Stewart:
We still have assets in California.  New York.  Focused in on core markets.  Again, the strategy that we came up with which emulates the greater game plan for all of Carlyle real estate disciplines is to focus in on key markets and buy Class A type of properties.

So we haven’t seen—the tide has risen across the country, it’s been remarkable.  And our operators have performed very well.  That’s another thing that’s really, I think, helped us out is that, over the past two years, we have had to change out operators on 10 of our properties.  We were more national operator-focused and now we’re much more regional-focused.  We have 18 properties operational, seven operators.  Chelsea is our largest operator and they have 10 properties that they manage in the Northeast.  And the CEO of Chelsea, Herb Heflich, said it best, you can’t really predict this stuff.  It’s like, you can have property in the middle of Vermont performing better than one that’s in …

Steve Monroe:
Suburban New Jersey.

Scott Stewart:
Suburban New Jersey, exactly.  So we’re not seeing a geographic difference.

Steve Monroe:
So do you think that having the smaller, more local operators manage your facilities, has that been one of the principal reasons that they’re performing well, because they’re so close to the local market?

Scott Stewart:
That’s it, that’s exactly it.  Think about it, they know their backyard.  They know all their competition.  They know—not only their competition, they know all the key employees of the competition, they know what the rates are, they know what the occupancy level is at any given time.  And they’re flat.  They make decisions on the fly, they don’t have to phone into the central office and wait for the front-end of the month to price things, they just manage on the go.  And that’s very important for us.

Steve Monroe:
How about lastly, I know you’ve not been doing any acquisitions, but capital.  Do you have access to all the capital you want if a good acquisition arises?

Scott Stewart:
You know, we got in the business we’re in, we got in to buy, sell and manage properties.  We haven’t been doing a whole lot of buying, we haven’t been doing a lot of selling the past two years.  So we have focused in on the management and getting those results we just talked about.

On the acquisition front, we have been dormant for about 18 months and…

Steve Monroe:
As had most everyone else.

Scott Stewart:
As has most everybody else, yes, exactly.  And so while we have the equity standing by, we haven’t tested the debt markets to find out how unsettled they’re going to be.

Steve Monroe:
You’ve dealt with the debt markets before, how do you think they will be?

Scott Stewart:
Well, I think that they’re going to require more equity, they’re going to give us tougher terms, and all that’s going to have downward pressure on terms.  That’s an adjustment we’re going to make internally.  We’re not going to be seeing 25%- plus IRRs all the time, it’ll do down to the 15% to 20% range.  But, you have to focus on fundamentals – seniors housing, basketball, whatever, you’ve got to focus in on fundamentals.  Banks will, I think, appreciate that and make loans to qualified operators.

Steve Monroe:
Well, I hope you see some opportunities next year, both on the acquisition side and values at some point start to rise and we may see you as a seller.

Scott Stewart:
That’s right.  Hope to report that next time.

Steve Monroe:
All right, thank you very much and enjoy the rest of the conference.

Scott Stewart:
Thanks a lot, Steve.