Smith/Packett is one of the nation’s largest senior housing and care development companies in the country, with more than $50 million in new healthcare-related projects annually. To do business like that, the company must be working with large healthcare conglomerates in the fastest-growing markets, right? Think again. The Roanoke, Va.-based firm’s success is derived from simply tapping into markets others have failed to recognize the value of.

James “Piet” Pietrzak, President

Smith/Packett, a private company that started out as a development and certificate of need consulting firm in 1983, specializes in the design, development, financing, marketing, strategic planning, and operation of assisted and independent living facilities, continuing care retirement communities, and skilled nursing centers throughout the Southeast and Mid-Atlantic.

Bigger isn’t always better
The average age of a skilled nursing facility today is 30 years. Few are being built, and many are functionally obsolete and poorly located, but facility operators are facing increasing costs and declining business, making it difficult to take on renovation or construction projects. Smith/Packett has tapped into this market segment and developed a unique business model in which the company partners with small independent operators who typically own between five and 20 facilities.

“Historically, we haven’t done business with major healthcare providers. The smaller providers are the ones who are willing to personally guarantee leases, take risks with us, and be fully dedicated to the success of the new venture,” said Pietrzak.

The president explained that the working capital alone can cost an operator between $800,000 to $1 million, and when you add in 20% to 25% equity on a multi-million dollar project, the costs become insurmountable for a small operation. That’s where Smith/Packett comes in. It handles the strategic and healthcare planning, consulting, certificate of need procurement, facility valuations, market and financial feasibility studies, site evaluations and entitlements, building design and engineering, equity and debt financing, construction management, and representation for acquisitions and divestitures. It funds 100% of the real estate costs and guarantees the construction price, while the operating partners put up the working capital.

Smith/Packett not only develops new senior care facilities and renovates old ones, but it also relocates long-term care services for hospitals divesting that function. “A lot of hospitals have found that they need to stick to what they do best: acute care,” said Pietrzak.

The president cited the John Randolph Medical Center in Hopewell, Va., part of the HCA healthcare system, as a solid example of the firm’s capabilities in this area. The hospital’s three-story long-term care wing was aging, but building a nursing home on campus was not the best use of its space or resources. So, in partnership with Smith/Packett, a new single-story facility was built and is now operated by Commonwealth Care of Virginia, allowing the hospital to exit the long-term care business all together.

“We purchased the right to replace the facility and relocate it to a site right next to the hospital. The day we opened up, we transferred over all of the residents and staff, so it was pretty seamless.”

Because the company doesn’t have pressure from the public marketplace, it has the freedom to create flexible lease terms and partnership structures, including turnkey and fee-for-service, to reap the most benefit for both parties.

And in many of its partnerships, Smith/Packett offers the operators a fixed-price option to buy the newly constructed or renovated facility, which has typically been 70% to 80% of the fair market value. “It’s a fair deal because we are sharing the value created with the operator,” said Pietrzak. The option to buy translates into a constantly changing portfolio for Smith/Packett, which ranges from as many as 40 facilities in one year to as few as 20. Right now, the firm has eight facilities under construction and five it is bringing to next stage of development. At the same time, it will lose four facilities to tenants who are exercising their right to buy this year.

Compared to other real estate investments, Pietrzak explained, senior healthcare and housing is an attractive market segment as it produces a relatively higher rate of return. Although investors are eager to capitalize on such opportunities, they shouldn’t lose sight of the fact that the real estate is only one part of the equation. “The key to Smith/Packett’s success is doing extensive research and analysis and looking at all of the ways to make any project successful, including real estate, operations, and finance,” he said.

“When you structure deals, you have to create incentives for the operators to do their part to make the endeavor successful, and that’s why we share the value of the project and offer operators the opportunity to someday own their facility outright.”