Hoag Memorial Hospital Presbyterian plans to go from tenant to owner at its Irvine hospital, after agreeing to one of the larger property acquisitions seen in Orange County in recent years.
Newport Beach-based Hoag, which opened its 154-bed Hoag Hospital Irvine campus in 2010, has reached a deal to buy the Irvine property from its Irvine-based landlord, Healthpeak Properties Inc. (NYSE: PEAK), according to regulatory filings.
The deal is for $226 million and is scheduled to close in about a year, according to Healthpeak, a real estate investment trust focused on medical properties. Healthpeak’s market cap at press time was around $12 billion.
It would be one of just a dozen land sites or individual properties—and the only healthcare-focused property—in OC to trade at that high of a price over the past decade, according to data from real estate market tracker CoStar Group Inc.
The sale could pave the way for additional expansion at the Irvine facility; the deal includes land adjacent to the hospital, according to Healthpeak, which disclosed the impending sale as a footnote in a recent presentation to investors regarding the state of its operations amid the COVID-19 pandemic.
The deal for Hoag to buy the property was struck at the end of 2019, Healthpeak’s documents indicate.
Hoag had an option to purchase the site until 2024, and was expected to exercise that option, according to prior comments from the REIT’s executive team.
Officials for Hoag, which last week announced plans to end its affiliation with Providence St. Joseph Health (see story, this page), could not be reached for comment on its plans for the site, or the sale.
2010 Opening
The hospital, a block from the San Diego (405) Freeway on Sand Canyon Avenue, originally opened in 1990. It was previously known as Irvine Regional Hospital and run by Dallas-based medical property operator Tenet Healthcare Corp.
Tenet closed the facility in 2009 after its lease at the site ended and coming to a legal settlement with its landlord at the time, Healthpeak, which then was based in Long Beach and called HCP Inc.
Hoag soon stepped up and announced plans to take over the Irvine hospital, at the time putting on hold plans to expand its much larger Newport Beach hospital, which currently counts nearly 450 beds.
Hoag owns its expansive Newport Beach hospital campus, which CoStar records indicate runs some 2.1 million square feet.
A reported $84 million investment from Hoag was made to upgrade the Irvine facility prior to the 2010 opening of the acute care and orthopedic specialty hospital, which includes a five-story patient bed tower that adjoins a three-level central atrium.
Funds went to building new operating rooms, nursing floors and imaging equipment, as well as rebuilt patient rooms, pre- and post-surgery recovery areas and space for advanced medical technologies, according to news reports at the time.
Since then, Hoag has put in tens of millions of additional dollars into the Irvine outpost, which at the time of the 2010 opening ran 244,000 square feet.
Recent additions include the Benjamin & Carmela Du Emergency Pavilion, which opened in 2018. At 13,500 square feet, the facility is five times the size of the original emergency room space.
Hoag also leases the bulk of the Hoag Health Center Irvine, a three-building medical office complex running some 150,000 square feet on the other side of Sand Canyon Avenue. That development opened in 2016 and is owned by another landlord; it is not part of the forthcoming sale.
‘Unique Health System’
Hoag pays Healthpeak’s annual rent of about $14.8 million for Hoag Hospital Irvine, according to the REIT’s financial statements.
Hoag is “the best health system in Orange County and [has a] fantastic location in Irvine,” Healthpeak Chief Executive and President Thomas Herzog told analysts late last year, when discussing a potential disposition of the property. The price being paid is “certainly representative of such a unique health system and market and location.”
Growth Push
Hoag, which reported $1.1 billion in net patient revenues for the 12-month period ending Sept. 30 for its two area hospitals, has been on an expansion push in and out of OC.
It opened a new 40,000-square-foot wellness center at the Foothill Ranch Towne Center at the start of the year, and its Hoag Orthopedic Institute affiliate recently bought Marina del Rey-based Diagnostic and Interventional Surgery Center, a physician-owned, 12,000-square-foot outpatient facility close to Cedars-Sinai Marina Del Rey Hospital.
At the end of 2019, Hoag paid a reported $13 million for a pair of office buildings at the intersection of Jamboree Road and Campus Drive, close to the Newport Beach and Irvine city lines; the nearly 22,000-square-foot buildings are being converted to medical uses.
Hoag Seeks Independence from Providence
A 2012 decision by Hoag Memorial Hospital Presbyterian to align itself with fellow hospital operator St. Joseph Health has not gone as planned, and is taking key decision-making out of Orange County, according to Newport Beach-based Hoag.
Hoag last week filed litigation against Covenant Health Network—a subsidiary of Providence St. Joseph Health—to separate into independent health systems.
“The current structure of our relationship with Providence, we believe, is not in the best interest of our patients, the community, our physicians and team members,” said Robert Braithwaite, president and chief executive officer of Hoag.
“Hoag must be able to keep local resources and decision-making in Orange County to address all the health needs of community members for years to come,” he said in a statement last week.
Providence Questions Timing
The lawsuit does not specify any financial implications of Hoag’s request to dissolve the Covenant partnership, or provide a proposed timeline for doing so.
The litigation is likely to stretch on for some time, and apparently follows a lengthy period of closed-door talks. Hoag said in the lawsuit that it had “made no progress on realigning the relationship after almost a year of attempted negotiations.”
Providence officials question the lawsuit and its timing.
“Now, at a time when all hospitals and health systems are battling the COVID-19 pandemic, the Hoag leaders took legal action to sever its relationship with Providence for reasons that remain unclear,” Erik Wexler, chief executive of Providence St. Joseph Health’s Southern California region and CEO of Covenant Health Network, said in a statement.
The timing’s right, Hoag countered.
“The COVID-19 pandemic underscored our need for independence,” said George Wood, chair of Hoag’s board of directors, in a statement.
2012 Agreement
The 2012 joining of Hoag and St. Joseph under the Covenant umbrella was born out of the belief that the combined resources of the two hospital systems—described as a “regional healthcare affiliation”—could boost their purchasing power and help with cost savings, while also providing more and better services to OC residents, among other reasons.
“Covenant is a promise, a sacred promise to work collaboratively and together to accomplish certain common goals,” Richard Afable, Hoag’s CEO in 2012, said at the time the deal was struck.
One such stated goal: 1 million covered lives in five years.
Problems soon emerged, according to Hoag’s lawsuit, particularly after St. Joseph Health, then based in Irvine, was acquired in 2015 by Providence, a much larger hospital system in Washington with more than 50 hospitals across the country to its name.
St. Joseph operates three hospitals in Orange County: St. Joseph Hospital Orange, St. Jude Medical Center, and Mission Hospital Regional Medical Center.
The 1 million lives covered plan was abandoned, according to the lawsuit, and, among other issues, “Hoag’s affiliation with a Catholic system caused Hoag to lose some level of independence and imposed certain restrictions, in particular around women’s health services” the suit alleged.
“We must be able to maintain Hoag’s unique character and role as Orange County’s most trusted health care network, as well as keep local control of community assets,” Braithwaite said last week.
Wexler said in a statement last week that “our relationship has been strong since 2012.”
“The Hoag leaders’ so-called ‘realignment’ plan would negatively impact patient care, diminish resources and medical expertise available to Orange County,” he said. “We will not be distracted by the misguided and potentially costly legal actions by the Hoag leaders.”
—A. Leigh Corbett
