Industry Pulse (November 2006)

NEWPORT BEACH, Calif. – As press time approached, Healthcare Real Estate Insights^™ learned that massive Health Care Property Investors Inc. (NYSE: HCPI) has entered an agreement to gain full control of a portfolio of medical office buildings (MOBs) it has owned jointly with GE Healthcare Financial Services for the past several years. According to a recent earnings conference call and an SEC filing, the agreement calls for HCP – as the real estate investment trust (REIT) is most commonly referred – to acquire GE HFS’s two-thirds interest in the 59-building, 4 million square foot portfolio for $141 million. The transaction is expected to close Nov. 30. During the conference call, HCP executives noted that after the closing the company’s ownership stake in the portfolio would accrete from 33 percent to 44 percent with no additional investment. HCP then plans to offer the remaining 56 percent ownership stake to “a new institutional investor.” Jay Flaherty, HCP’s CEO, said during the conference call that GE HFS had, from the beginning of the joint venture, planned to exit within three to five years. When two entities teamed up in the venture, the portfolio contained more than 100 properties. Since then, however, some of the properties have been sold. HREI^™ hopes to learn more about the pending transaction and potential new joint venture offering for a coming edition.

OCEANSIDE, Calif. – It’s back to the drawing board for officials in the Tri-City Healthcare District in northern San Diego County. That’s because voters in the health district narrowly turned down a $596 million bonding request on Nov. 7 that would have led to the construction of a new 335-bed Tri-City Medical Center facility in Oceanside. The project also would have included upgrades to about one-third of the current hospital, including the emergency department. The plan also called for adding an outpatient services building. Even though 64.5 percent of the voters cast ballots in favor of the measure, dubbed Proposition T, that came up short of the 66.7 percent necessary for passage. Health district officials say a new hospital is needed to comply with California’s Senate Bill 1953, which requires all hospitals to meet strict seismic safety guidelines by 2013. Arguments against Proposition T were mainly aimed at Tri-City officials and the board, as opponents stated in official referendum documents that the district is not run in a financially prudent manner. Shortly after the measure was defeated, health district officials stated that they were prepared to look at other means of funding the needed upgrades. They also to plan to ask the state whether the hospital would need to close by 2013 if the seismic upgrades are not made by that time.

SAN ANTONIO – San Antonio-based Christus Santa Rosa Health Care recently announced that it is planning a new 150-bed, $130 million hospital in Westover Hills, a fast-growing area on the west side of San Antonio. The future Christus Santa Rosa Westover Hills hospital is scheduled to open along Highway 151, near the entrance to Sea World, in December 2008. Included in the hospital would be an emergency room, an obstetrics department, inpatient surgery, family medicine, urgent care, imaging, and outpatient surgery services. The campus would also include a 60,000 square foot medical office building (MOB) scheduled to open in 2007. Officials say the hospital will be the first full-service acute-care facility in the Westover Hills area. The project, according to Christus Santa Rosa officials, is being driven by the area’s population growth. According to local reports, the area near the future hospital currently has about 300,000 residents, with 60,000 additional residential lots in the planning stages west of Westover Hills. The architect on the project is Dallas-based KHS Architects; the general contractor is San Antonio-based Vaughn Construction.

BOLIVIA, N.C. – Novant Health of Winston-Salem, N.C., recently acquired 73 acres of Brunswick County-owned land in the small town of Bolivia in anticipation of building a new 92-bed, $100 million replacement hospital. Brunswick County is located in the far southeastern corner of North Carolina. The future hospital would replace the existing Brunswick Community Hospital, which Novant took control of in March 2006. The acquisition price for the land was a reported $3.6 million. According to Novant officials, the eight-hospital system was prepared to file a Certificate of Need (CON) application with the state before the Nov. 15 deadline. Novant Health is planning for a new hospital that would have all private patient rooms within a facility of more than 200,000 square feet. The campus would also include an MOB. Novant officials note in news releases that Brunswick County is the fifth fastest-growing county in the state after it experienced a 21 percent increase in population between 2000 and 2005. The state is expected to rule on the CON by summer 2007.

OCONOMOWOC, Wis. – Sure, there’s been plenty written about the six-year, ongoing struggle of Milwaukee-based Aurora Health Care to build a new 88-bed hospital in the developing Pabst Farms mixed-use project in a growing area of Waukesha County, just outside of Oconomowoc. But it now looks as if Aurora will finally be able to proceed with its plans for the $166 million hospital and outpatient clinic on 43 acres. That’s because Oconomowoc aldermen in recent weeks approved a rezoning that will pave the way for the project. Aurora officials have long said that if the system gained approval for the hospital, it would release land for the development of a 110-acre upscale shopping mall proposed by Chicago-based General Growth Properties Inc. (NYSE: GGP). As it turns out, the hospital will be able to proceed because Oconomowoc aldermen decided to use an obscure legal maneuver that allows cities to make zoning changes to land that lies just outside of its borders. In this case, the site of the proposed hospital is in the town of Summit, just off U.S. Interstate 94 and state Highway 67. The rezoning settles a 5-year lawsuit that Aurora had filed against the city in which it sought $59 million in damages. Construction could start as early as spring 2007.

THE WOODLANDS, Texas – About 45 local doctors have signed up to invest a total of $4.8 million in a future $60 million medical park in The Woodlands, north of Houston. Construction is expected to begin in 2007 on the medical park, which is slated to include a 40-bed surgical hospital, a 40-bed rehab hospital and an MOB. The project will be built on a 9-acre parcel in a growing area where The Woodlands Development Co. recently acquired 400 acres for additional residential development. The newly formed Southwest Health Group of physicians will be the majority owner of the surgical hospital. For the overall medical park project, the physicians’ group is partnering with Dallas-based Cirrus Group LLC. The new medical project is expected to compete with other local hospital systems with facilities in The Woodlands, such as St. Luke’s, Memorial Hermann, Conroe Regional Medical Center and Houston Northwest Medical Center. However, Southwest Health Group says the area is growing so rapidly that there is room for the future project. The medical park is expected to open in the second quarter of 2008.

ALLENTOWN, Pa. – Count Lehigh Valley Hospital in Allentown among many hospitals feeling the effects of rising healthcare construction costs. According to hospital officials, the cost of a future and ongoing expansion has increased 33 percent in the last year or so. The expansion project now has an estimated price tag of $241.3 million, a $60 million increase over the original plans. Actually, hospital officials recently added more facilities to the expansion plan in order to keep up with demand. However, officials indicate that about $12.6 million of the additional costs are directly related to increases in the price of construction materials. The hospital’s board recently approved an extra $59.8 million to fund the expanded project. An 890-car parking deck and a medical office building on the east side of the campus are nearly complete, while work is expected to begin soon on the remaining projects. In all, the hospital would add 450,000 square feet and a 480-space parking deck. Lehigh Valley is not hurting financially, as the hospital has posted successive annual surpluses of more than $74 million in fiscal years 2004 and 2005. This comes at a time when 27 percent of Pennsylvania’s hospitals reported deficits in 2005. q