The SHB Interview: Scott Stewart, Founder, Capitol Seniors Housing

Developer launches a public relations campaign to heal the wounds to the seniors housing industry caused by COVID-19.

By Jeff Shaw

From the point of view of many inside the seniors housing industry, the sector has taken a beating from the press during the COVID-19 pandemic. Stories of coronavirus outbreaks at skilled nursing facilities dominated the headlines in March and April, and private-pay seniors housing was often conflated with nursing homes.

Scott Stewart wanted to fight the negative perception of seniors housing, believing it to be the safest place a senior could live thanks to all the precautions being taken. He launched People of Seniors Housing (POSH), a nonprofit public relations campaign, to highlight all the good things happening in the industry during the pandemic.

The longtime real estate executive is the founder and managing partner of Washington, D.C.-based Capitol Seniors Housing (CSH). The company acquires and develops seniors housing properties nationwide, seeking to either renovate or lease up the assets then sell within a five- to 10-year period. 

CSH’s current portfolio is 35 communities with four more under development, totaling approximately 1,800 assisted living units, 600 memory care units, 1,000 independent living units and 500 active adult units.

Seniors Housing Business spoke with Stewart about CSH, POSH and why he continues to believe in the strong future of the seniors housing industry.

SHB: Walk me through your career history, including how and why you decided to create Capitol Seniors Housing.

Stewart: I’m from the Midwest, and I went to University of Michigan. I graduated there in 1985 and went to work for Eastern Airlines, God rest its soul. I was an account executive, then later a sales manager.

After that I went to business school. I wanted to pivot out of marketing and sales and get into real estate. I ended up here in Washington, D.C. right at the start of the recession of 1990, so the timing was pretty atrocious.

I had a multitude of different real estate opportunities before I settled on one with Security Capital Group, based in Santa Fe, New Mexico, but the office I worked for was in Atlanta. It worked with pretty much every sector of real estate.

The company hit a brick wall during the European debt crisis of the late 1990s, and with that a lot of the debt that was out there was called. The company got broken apart. It was very similar to what you saw with Trammell Crow in the 1980s — you had this exploding superstar that made all these little stars. There’s a great history of folks that started at Security Capital.

One of those stars, Rob Stuckey, landed at Carlyle Group and became head of the real estate department. I went knocking on his door to see if he needed somebody to help him out with the background I had in real estate. Lo and behold, Carlyle Group did.

I was working there for a while, but then was tapped on the shoulder with an opportunity to work at Sunrise Senior Living in 2002. The company had just gone public, it was local, it seemed very interesting. The side benefit was that it was altruistic, being in seniors housing.

I went there to run Sunrise’s acquisitions department and found out fairly quickly that the job wasn’t a great fit. Sunrise went almost overnight from being an owner-operator into a management services provider. The company jettisoned all its real estate and focused on operations. That served to really kick-start this whole seniors housing real estate industry, but I was a sticks-and-bricks guy and wanted to get back to that side of the business.

The good thing is I didn’t burn any bridges when I left Carlyle. I stayed in good contact with Stuckey — we’d go running every Friday, rain or shine, and catch up on matters. I mentioned to him that the move to Sunrise may not have been the greatest career move for me, but the seniors housing industry was very interesting to me.

He asked what was interesting about seniors housing. I said it was high yielding and recession-proof.

Carlyle was in a mode to diversify asset classes, so he encouraged me to grab a couple folks and come on over. That was the birth of Carlyle Seniors Housing in 2003.

SHB: What were you trying to do with this new company?

Stewart: Our goal there was to go out and opportunistically acquire seniors housing communities. There were a number of them on the market, and there wasn’t a whole lot of competition.

Carlyle Seniors Housing was a joint venture with the Carlyle Group as the capital partner. With that, we devised the game plan. Sometimes it was a change of operator or a  capital expenditure refresh, that kind of stuff. More resources went into the operations as well as sales and marketing.

We were able to buy about half a dozen properties in a short period of time. Our timing was pretty good because in the rest of the real estate industry cap rates were getting compressed. Institutional investors were looking for ways to deploy capital. They looked at seniors housing.

The waters were actually pretty warm. When capital started moving into the sector, we saw our own cap rates drop and were able to harvest that value before the five-year time horizon we had. We were able to put some points on the board, and went to acquire more and more properties.

[Average private-pay seniors housing capitalization rates fell from a high of nearly 12 percent in 2002 to less than 9 percent in 2007, according to reporting by CBRE.]

Everything was going great, then the Great Recession hit. Like everybody else, we stopped looking for acquisitions and started working on the nuts and bolts of asset management. That’s where we honed that skill. Instead of pounding the pavement for new opportunities, we were able to take a break, focus on the operations and really appreciate how the whole model works.

At the same time, we took on another capital partner in Harvard Management Co.,  the group that manages the $41 billion university endowment, the largest in the world, on behalf of Harvard University. We partnered with Harvard Management and did a lot of the similar things we were doing with Carlyle, buying properties on an opportunistic basis, effectuating the business plan, then harvesting that value within a seven-year period from acquisition.

When we took on that other capital partner we switched the name to Capitol Seniors Housing. We wanted to keep the “CSH” and tip our hat to the Capitol Building right down the street. Harvard eventually shifted the management of its funds over to Bain Capital, so now Bain Capital is our second partner.

People saw the success that folks were having in the space, so a lot of competition came in. That served to drive up the price of existing seniors housing opportunities.

I stayed in really good contact with Joe McElwee and his team, the folks who ran the Northeast development program for Sunrise. I convinced him and his group to come on over to this company. With them we were able to begin our plan to become developers of seniors housing and build the wonderful communities that we’re still building today.

We created what we call the Bill of Rights — a healthy list of must-haves in each of our communities. That includes everything from a first-floor memory care unit with an expansive garden attached to it, to a certain ratio of parking, great landscaping, oversized porte cochère, and so on. We wanted to create what we thought were the best seniors housing communities in the country. To a large extent, we’ve done that.

Our focus is singularly on seniors housing. We’re not involved in multifamily, self-storage or hotels. For 18 years, we just honed in on being seniors housing investors.

Paired up with private equity groups, we’ve kept that focus. Private equity wants to buy it, fix it and sell it. Now we’re more build it, lease it and sell it. Our focus from when we find an opportunity to when we sell to the end user is typically a seven- to 10-year period.

SHB: What does a CSH community look like today?

Stewart: In our typical building that we’re constructing, it’s about 85 units and 80,000 square feet on about 3.5 acres. We tend to favor going for high-barrier-to-entry markets. 

We don’t mind that it takes a year to 18 months to get the entitlements at a particular location since that serves to keep the “tourists” out — folks coming in to make a quick hit. It keeps the market as competition-free as possible.

SHB: Is the focus still on development today then?

Stewart: We are about 80 to 90 percent new development. We’ve gotten really good at development.

We realize that skills are exportable to other markets, and we think there’s a healthy list of new submarkets that we still want to go to and do our thing there.

Intense planning

SHB: What makes a market perfect for development?

Stewart: We stick to the fundamentals — the demographics, how many qualified caregivers, how many seniors, median household income, median household value. 

What are the other things that you want for a site? 

You want visibility. You don’t want to be isolated. You want it near retail, near schools. You want it to be part of the community. At the same time, while we’re answering all those demographic questions, we look at the competitive landscape.

We also want to be part of the major MSAs (metropolitan statistical areas). You’ve got Boston, New York City, D.C., Southeast Florida, the Bay Area, Seattle and Southern California. We also have a presence in markets like Chicago, Atlanta and Dallas, but opportunities in those markets have a higher level of scrutiny due to the lack of barriers to entry. 

SHB: How do you choose your operators?

Stewart: The best operators are the regional ones with somewhere in the neighborhood of 30 communities. Most of our operators can drive by all of their communities rather than fly to them. We like that.

They tend to have more of a rubber-meets-the-road perspective. They know the community, they know the competition, they tend to know the answers to your questions off the top of their heads. That’s been a winning formula for us.

It’s all about the operator. It’s one of those real estate sectors where you could argue that location is secondary to the operator. Part of the original plan of our new development is deciding who we want to put in the captain’s chair.

Embrace community

SHB: What have you been able to do from the investor end of things to help those operators deal with the COVID-19 pandemic?

Stewart: We jumped on it. We like to think that we understood what we were coming up against very quickly. We didn’t wait on the CDC (Centers for Disease Control and Prevention), WHO (World Health Organization), state government or anybody to tell us what we should be doing. We relied heavily on our operators who know their way around flu season pretty well, and used that as a basis for what we should do in early March.

Then there are all these curveballs, like lack of personal protective equipment (PPE). Both of our capital partners helped out on that front.

My head of asset management here is Kyle Henderson — he manages the relationships with the operators. We brought them all on a Zoom call, just a screen full of 15 folks representing all our operators across the country. It was the healthiest exchange of information I’ve ever seen. 

It was a great moment in a firestorm to see that cooperation. These were competitors on a day-to-day basis freely sharing information, strategies, testing protocols and where to get PPE. We thought we’d be pulling teeth, but ended up officiating who gets to talk next because everybody was champing at the bit to share their story or case study. It made us feel great and proud about the industry to know we’re all in this thing together. It was quite a sight.

We also were the first folks to come up with “hero pay,” where we gave an extra $2 to $3 per hour to folks working in communities that had COVID in them. We were quick to tell caregivers, “Don’t worry about your paid time off and your sick days. If you don’t feel good, don’t come in.”

SHB: What is People of Seniors Housing (POSH) and what led you to create it?

Stewart: Early in the pandemic, our whole industry was just getting hammered in the press. Hammered. In every newspaper you’d open up or television news program you would watch, they would lead with a story about some seniors housing community and all the difficulties they were having with COVID.

We were looking at the press just giving us body blow after body blow with stories where they conflated the whole industry with skilled nursing, making us look like a horrible place for seniors.

[A Morgan Stanley report from April estimated that the death rate in skilled nursing was double that of assisted living and independent living.]

Meanwhile, we think the opposite, that there’s no place safer. We also didn’t want a lingering perception after COVID was done, a stigma attached to the industry.

Early on, you could see the attention and love going to the caregivers in hospitals, but our caregivers weren’t getting the same kind of attention and respect. I crafted an email, sent it out to roughly 100 contacts that I have in the industry, and said, “We should do something about this.” With that was a call to action to contribute to POSH.

We set up a 501(c)(3) nonprofit. We wanted to have a PR focus, but more immediately we wanted a digital campaign that got the word out to our target market via Facebook, Twitter and Google that our caregivers are heroes too, that seniors housing is the safest place for your seniors to be, and that it’s not all doom and gloom. People are still having fun and rolling with the punches.

You fast forward to today, and we have 6.5 million impressions, 4,500 links and 4,300 other engagements. It’s a very effective campaign. It was directed to the caregivers in the markets as well as the adult children of residents.

Everybody rose to the occasion. When COVID was just rolling through like a freight train, people felt helpless. They were scared, nervous and frustrated. People just wanted to do something. POSH allowed people to combat what’s being said about the industry that would have negative impressions well beyond COVID going into the history books.

The digital campaign will go through the end of the year. POSH has about 150 people in it, representing 45 different groups that all contributed to the POSH campaign.

The POSH campaign has been independent of ASHA and Argentum, though the heads of both of those groups are part of the weekly POSH update distribution.  While the ASHA and Argentum campaigns are more comprehensive, POSH and its direct digital campaign got the messaging out first.

A personal stake

SHB: You’re an adjunct professor at two universities. What do you teach and why?

Stewart: I’m very excited about this class called Alternative Assets that I teach at Georgetown and American University right down the street. I’m entering my eighth year of teaching it. It’s a study of all of the non-core-four real asset classes.

What I teach is seniors housing, self-storage, student housing, specialty retail, boutique hotels and cell tower real estate. It’s a study of how those asset classes differ from an operations and valuation standpoint. It’s 2.5 hours once a week. We talk about current events and how they impact real estate, such as what’s going on with the Fed.

SHB: Tell me a bit about your athletic pursuits.

Stewart: I’ll lead off by saying I hope I’m on the mend rather than looking at retirement. Last year I bit off more than I could chew. I did the Mongolian bike challenge, a 500-mile mountain bike road race through Mongolia. Those are like dog miles. You’ve got a lot of elevation. It was a real tough race. I found myself early on wishing I had trained a little more for it. Mongolia is such a beautiful place.

Within a month I did the Moscow marathon. My buddy did nothing but train for marathons. I had him go ahead of me, and I ended up pushing it and partially tore my Achilles at mile seven. I sent him ahead but carried on. At mile 13 I realized I was halfway done, so I finished the race, which was probably not smart. I have been hurt since then.

I started running as a teenager. I’ve done 45 marathons and five Ironman triathlons. I’m a member of the seven-continents club, meaning I’ve run a marathon on all seven continents including Antarctica.

Now I’ve got one of my daughters into it. I’m encouraging her to join the seven-continents club. She’s already knocked out three, so I want to get on the mend to join her.

SHB: What’s something that people in the industry would be surprised to find out about you?

Stewart: I love this question. This is how I found out that Doug Schiffer was in choir at Tulane University.

The one that not a lot of people know, but I’m also proud of, is I visited all 50 states before the age of 35. I have a kind of wanderlust. 

On that vein, too, I have a credo I’m trying to live by: I want to have visited more countries than my age. So far, I’ve done that as I’ve been to 66 countries. I went down to Haiti for a couple days right before COVID hit.

It’s amazing what you learn just by being in a new place. So much happens just by putting yourself in that location. As I do wind down the athleticism, I’m going to travel to more unique places.

I also currently own and reside in the house in Georgetown where J.F.K. (John Fitzgerald Kennedy) met Jackie O. (Jacqueline Kennedy Onassis) at a dinner party on May 13, 1951.