HealthSouth Lost Millions in Failed Sale Leaseback Deal in 2002

The Birmingham News - April 4, 2004

A failed real-estate partnership involving relatives of former high-ranking executives of HealthSouth Corp. in 2002 ended up costing the Birmingham company more than $16.5 million. The complex deal involved HealthSouth selling 14 facilities to an entity known as First Cambridge-HCI Acquisition LLC, which would lease the facilities back to HealthSouth.

The plan then called for First Cambridge-HCI to sell shares to the public in a deal that bears striking similarities to a HealthSouth spin-off called Capstone Capital Corp. that operated in Birmingham in the mid-1990s.

In December 2001, documents show, UBS arranged an $82.2 million loan for First Cambridge-HCI that was backed by HealthSouth. First Cambridge-HCI used the money to buy 14 health care facilities from HealthSouth, then leased the properties in Texas, California, Florida, Arizona, South Carolina and North Carolina back to the Birmingham company for $9.5 million a year.

HCI intended to establish a total portfolio of approximately 25-30 properties within the first three to six months of 2002 and then conduct an initial public offering through UBS Warburg. For arranging the transaction, HealthSouth paid what UBS a "success fee" of $900,000, plus 1 percent of the loan value. The company also paid the investment bankers $375,000 for servicing the loan during its one-year term.

When Health South came under investigation for other matters, the deal unraveled. To reclaim the properties it had sold to First Cambridge-HCI, HealthSouth paid the company $87.5 million. A year earlier, HealthSouth had sold those same facilities to First Cambridge for $81.5 million, resulting in a loss of $7 million on the loan and repurchasing the facilities. It also paid $9.5 million in rent it otherwise would not have had to pay.

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