Office Properties Income Trust and Diversified Healthcare Trust to Merge

Office Properties Income Trust and Diversified Healthcare Trust announced that they will merge to create a diversified REIT with a “broad portfolio, defensive tenant base, and strong growth potential,” the companies said in the dual announcements. Special committees of the boards of trustees of both REITs, comprising independent and disinterested trustees, unanimously recommended the action. The two boards unanimously approved the merger.

Office Properties will be the surviving entity and take the name Diversified Properties Trust on the close of the transaction, trading on Nasdaq. The combination will bring needed diversity to Office Properties in a difficult office sector market.

“Pursuant to the merger agreement, DHC shareholders will receive 0.147 shares of OPI for each common share of DHC based on a fixed exchange ratio resulting in OPI shareholders owning approximately 58% of the combined company, and DHC shareholders owning approximately 42% of the combined company,” the announcements said. This results in an implied value of $1.70 per Diversified Properties share, which is a 20% premium to the average closing price of its common shares for the 30 trading days that ended April 10, 2023.

Office Properties board of trustees said that it planned to reset cash distribution to $0.25 per share per quarter, or $1.00 per share per year, starting with the second quarter of 2023. “The new distribution rate will increase financial flexibility for OPI through the closing of the transaction and for the combined company post-closing,” the company said.

The new rate is a 267% increase on a pro rata basis of Diversified Properties’ current distribution level of $0.01 per share per quarter, or $0.04 per share per year. “The new distribution rate will increase financial flexibility for OPI through the closing of the transaction and for the combined company post-closing.”

The OPI management team will run the company and the RMR Group will provide property management. Shareholders have to approve the deal and the merger is expected to close in Q3 of this year.

“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,” Office Properties President and COO Christopher Bilotto said in a statement. “OPI also expects to benefit from access to additional capital sources, including from low-cost government-sponsored sources, such as Fannie Mae and Freddie Mac. In addition, the distribution reset will provide OPI with increased financial flexibility, and the merger is expected to be accretive to OPI’s normalized funds from operations and cash available for distribution beginning in the second half of 2024.”

“The merger with OPI greatly benefits DHC both strategically and financially,” said Diversified Healthcare President and CEO Jennifer Francis. “Strategically, the combined company will be in immediate compliance with debt covenants, have immediate access to multiple capital sources through its greater scale and diversity to address upcoming debt maturities and increase liquidity to continue funding the ongoing SHOP recovery and capital improvement plan. Financially, the transaction immediately reduces DHC’s leverage and is immediately accretive to DHC’s normalized funds from operations and cash available for distribution, and the expected pro rata annual distribution represents a 267% immediate increase for DHC shareholders.”