Office Properties Income Trust To Merge With Healthcare REIT To Reduce Exposure To Offices
A publicly traded office owner is trying to boost its standing with investors by merging with a healthcare and senior housing operator and diminishing its exposure to the troubled office market.
Office REIT Office Properties Income Trust has agreed to acquire Diversified Healthcare Trust in an all-stock merger transaction that would create a new entity called Diversified Properties Trust, the companies announced Tuesday.
The merger will lower OPI’s exposure to the “weakening office market,” OPI President Christopher Bilotto said in a statement.
"The merger establishes the combined company as a larger, more diversified REIT, better positioned for long-term growth and value creation for OPI shareholders," Bilotto said. “Against a challenging backdrop for traditional office assets, this merger provides OPI access to stabilized cash flows from DHC’s medical office and life science portfolio and NOI growth potential from its senior housing portfolio."
OPI has 160 office properties in its portfolio spanning roughly 21M SF, and has so far focused on owning and running buildings with a single tenant with strong credit, such as government agencies, according to its website. The merger would add DHC's 105 healthcare, life sciences and senior housing properties spanning 8.8M SF to the company, for a combined portfolio value of $12.4B, according to an investor presentation.
In the deal, DHC shareholders would receive 0.147 shares of OPI for each common share of DHC. Under the arrangement, OPI shareholders would own about 58% of the combined company, with DHC shareholders owning approximately 42%.
Both REITs are managed by RMR Group, and each has its own challenges. OPI is facing a difficult financing market for office properties, 41% of the leases in its portfolio expire by 2026, and its current dividend payout rate is "unsustainable," according to the presentation. The company plans to reduce payouts to 25 cents per share per quarter as part of the merger.
Diversified Healthcare Trust, which trades as DHC, is in violation of its debt covenants with $700M in debt set to mature next year. Its 25,000-unit senior housing portfolio has struggled with occupancy, which sat at 76% at the end of 2022, according to the presentation.
JPMorgan Chase has agreed to provide a $368M bridge loan to help finance the merger, although the companies hope to try to fund the transaction through other means, according to the presentation. The combined company would have roughly $5B in debt, while OPI and DHC's combined market capitalization as of Tuesday afternoon was less than $1B.
OPI's stock dropped by more than 25% in trading Tuesday following the announcement, while DHC's stock was down 4%. The combined company would trade on the Nasdaq and be headquartered in Newton, Massachusetts.
Investors have pummeled the share prices of office REITs, beginning with the onset of the pandemic and accelerating last year as interest rates spiked. Office REITs have seen their average value by 17% so far in 2023 and by more than 47% over the past 12 months, according to Nareit.
