Government Properties Income Trust and Select Income REIT have entered a definitive agreement to merge which will create a real estate investment trust, or REIT, focused on owning, operating and leasing office buildings primarily leased to single tenants and high credit quality tenants like government entities. The surviving company in the merger will be GOV and it will change its name to Office Properties Income Trust, or OPI, upon closing the merger. OPI will continue to be managed by the operating subsidiary of The RMR Group Inc.
OPI will be listed on the Nasdaq and the ticker symbol “OPI” has been reserved for the company’s common shares. On an adjusted basis, OPI will own a portfolio of high quality office buildings with the following characteristics:
- 213 properties containing 30.2 million square feet with undepreciated gross assets of $6.1 billion;
- 66% of OPI’s annualized rent paid by tenants that are investment grade rated(2);
- Weighted average remaining lease term, by revenue, of 6.1 years;
- Occupancy of 92%; and
- Properties diversified across 38 states and the District of Columbia.
Mark Kleifges, GOV’s Managing Trustee and Chief Financial Officer, made the following statement about the announcement: “This transaction addresses a number of the challenges that GOV has been facing, including a high dividend payout ratio, a concentration of near-term lease expirations and a high tenant concentration. We believe GOV shareholders will benefit from this transaction by having a well-covered dividend set to a long-term sustainable level, extending and better laddering the lease expiration schedule, increasing scale and enhancing diversification. OPI also plans to sell assets post closing to further strengthen its credit metrics.”
David Blackman, SIR’s Managing Trustee, President and Chief Executive Officer, said that “GOV, SIR and ILPT have complicated ownership structures, with GOV as SIR’s largest shareholder and SIR as the controlling shareholder of ILPT. This transaction will eliminate the cross ownership and increase ILPT’s public common share float, which may benefit SIR shareholders who receive a distribution of ILPT shares. Further, OPI will have increased scale, greater diversification and a broader investment strategy, which we believe will create a leading national office REIT focused on buildings leased to single tenants and high credit quality tenants like government entities.”
The merger will be a stock for stock exchange whereby SIR shareholders will receive 1.04 shares of GOV for each common share of SIR based upon a fixed exchange ratio. Following the merger, GOV and SIR shareholders will own approximately 52% and 48% of OPI, respectively.
As a condition of the merger, GOV will sell all 24.9 million of the common shares it owns in SIR. Also as a condition of the merger, after receiving shareholder approval for the merger and prior to its closing, SIR will distribute as a special dividend all 45 million of the common shares it owns in ILPT to SIR shareholders. ILPT is a REIT that is focused on owning warehouse distribution and e-commerce fulfillment facilities throughout the United States. These actions will eliminate the cross ownership among GOV, SIR and ILPT.
SIR shareholders will receive approximately 0.502 shares of ILPT for every one share owned of SIR. Based upon closing prices on September 14, 2018, SIR shareholders will receive $11.69 per share from the ILPT share distribution and $17.57 per share in GOV for a total of $29.26 per share.
OPI expects to pay an annual dividend between $0.50 and $0.60 per share, which is based upon a target dividend payout ratio of 75% of projected cash available for distribution. There is no plan to change the current dividend at GOV or SIR prior to closing.
OPI expects to sell properties valued at up to $750 million to reduce leverage to a target debt to Adjusted EBITDA ratio of 6.0x to 6.5x within six months of the closing of the merger.
The transaction is expected to close in late 2018 or early 2019, subject to customary closing conditions, including GOV and SIR shareholder approval.
Citigroup Global Markets Inc. is acting as exclusive financial advisor to a special committee of GOV’s Board of Trustees comprised of the disinterested Independent Trustees and Sullivan & Worcester LLP is acting as legal advisor to GOV in this transaction. UBS Investment Bank is acting as exclusive financial advisor to a special committee of SIR’s Board of Trustees comprised of the disinterested Independent Trustees and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to SIR in this transaction.