Shares of Massachusetts-based real estate investment trust Select Income REIT (SIR 22.64, +2.58), trade 12.9% higher in reaction to this morning’s news that the company would merge with fellow Newton, MA-based REIT Government Properties Income Trust (GOV 13.47, -3.42, -20.3%). 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.
The two parties announced their entry into a definitive agreement to merge, creating a REIT focused on owning, operating and leasing office buildings primarily leased to single tenants and high credit quality tenants like government entities.
Per the terms of the deal, 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 fellow Newton, MA-based REIT, Industrial Logistics Properties Trust (ILPT 21.34, -1.92, -8.3%), 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.
The New Company:
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. (RMR 94.20, -1.85, -1.9%). OPI will be listed on the Nasdaq and the ticker symbol “OPI” has been reserved for the company’s common shares. 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.