HCA expects a large gain from the sale of its medical office building operator, MedCap Properties, to a joint venture of GE Commercial Finance and Health Care Property Investors.

The deal, which ranks among the largest medical office transactions, is valued at more than a half billion dollars, twice what MedCap paid for HCA's medical office portfolio nearly three years ago. HCA founded MedCap, a private company, in 2000 with other investors and retained 48% ownership.

Low interest rates and a sagging non-medical real estate market have elevated prices for medical office properties (Aug. 11, p. 34).

HCA spokesman Jeff Prescott said the hospital company had not calculated its profit.

The joint venture, HCP Medical Office Portfolio, acquired 100 medical office buildings from MedCap, Nashville, for $460 million. MedCap and its 23 employees will become part of Health Care Property Investors (HCPI), a public company based in Newport Beach, Calif., which has a one-third stake and will manage the properties. MedCap President and Chief Executive Officer Charles Elcan, the son-in-law of HCA co-founder and chairman emeritus Thomas Frist Jr., will manage HCPI's medical office portfolio.

Separately, HCPI acquired five buildings from MedCap that are under construction on HCA hospital campuses, valued at $67 million. They will be transferred to the joint venture upon completion.

Another eight MedCap properties worth $49 million were transferred to a joint venture of HCPI and senior MedCap management. The venture will issue shares convertible to cash or shares of HCPI stock.

To free up cash, HCA sold 116 buildings on its hospital campuses to MedCap in December 2000 for $250 million. At the time, the company did not recognize a gain or a loss on its balance sheet. Since then, a few properties were added or removed in the MedCap portfolio. All but 12 are on HCA hospital campuses, with significant holdings in Dallas, Denver, Houston, Las Vegas and Nashville. HCA leases 19% of the space, and average occupancy is 87%.

HCPI and GE officials said the price was fair.

The "medical office (sector) is somewhat of a hot asset class right now," said Kevin McMeen, a senior vice president in real estate at GE, which expanded its presence in the market by forming the joint venture with HCPI in June. This was the venture's first transaction. "But it's a good, solid portfolio of assets associated with outstanding hospitals."

HCPI President and CEO James Flaherty III said the deal enhances his company's relationship with HCA and provides a "significant competitive position in Nashville, the strategic capital for the healthcare services sector."

Copyright © 2003 by Modern Healthcare