Diversified Healthcare Trust, Office Properties Income Trust Scrap Merger After Shareholder Revolt

Office Properties Income Trust and Diversified Healthcare Trust have called off their planned merger. A vote on the deal that had been scheduled for Wednesday has been canceled.

Since the announcement of the deal in April, it faced stiff opposition. A number of hedge funds with large stakes in DHC, including hedge fund D.E. Shaw, Flat Footed LLC and H/2 Capital Partners, led an opposition proxy campaign against it, urging shareholders to vote against the merger.

Opponents argued that the merger would saddle DHC with weak office properties, while mainly benefiting alternative asset management company RMR Group, which manages both REITs. Under the terms of the deal, RMR would have continued to receive fee income.

In May, DHC CEO Jennifer Francis said there is “substantial doubt regarding DHC’s ability to continue as a going concern” because of its debt. The next month, DHC defaulted on a $450M credit facility, which it called a “non-monetary event of default.”

During the REIT's most recent earnings call in August, Francis characterized the turnaround of DHC's senior housing portfolio as inconsistent and unpredictable.

“As things stand, DHC has insufficient liquidity to fund the capital investments needed to continue the turnaround underway,” Francis said, noting that the merger would allow the combined entity access to capital, especially to deal with its short-term debt maturities.

Opponents of the merger disagreed, saying that other strategies were viable, including aligning a capital spending plan with available cash resources, and selling a number of noncore assets to raise capital and improve liquidity. They argued the deal undervalued DHC's assets and would serve partially as a bailout for OPI.

Proxy advisory firm Institutional Shareholder Services advised against the deal last month, calling it a "take-under" that amounted to a 54% discount on DHC for OPI.

“There appears to be little industrial logic in the combination of DHC and OPI, with little overlap in the tenants between the companies and minimal expected cost savings,” ISS said, adding that RMR's management of both REITs presented a possible conflict.

DHC's portfolio includes more than 370 assets, including more than 27,000 senior housing units, as well as life sciences and medical office properties. OPI's portfolio includes more than 150 office properties totaling about 20.8M SF.

“The parties have agreed that each company will bear its costs and expenses in connection with the terminated transaction pursuant to the terms of the merger agreement, and that neither party will pay any termination fee as a result of the mutual decision to terminate the merger agreement,” the REITs said in identical statements.

OPI stock dropped more than 12% on Monday morning, and is down more than 63% compared with a year ago. DHC stock dropped about 0.75% on Monday morning. Over the last month, it has dropped more than 12%, but year-over-year its share price is up more than 85%.