[Updated] Diversified Healthcare Trust to Merge with Office Properties Income Trust

Diversified Healthcare Trust (Nasdaq: DHC) is merging with Office Properties Income Trust (Nasdaq: OPI), the companies announced this morning.

The deal will see OPI acquire all the outstanding common shares of DHC to create a combined entity to be called Diversified Properties Trust.

Under the deal, Diversified shareholders will receive 0.147 shares of OPI for each common share of DHC, representing an implied value of $1.70 per common share of DHC. That is a 20% premium to the average closing price of DHC shares for the 30 trading days ending April 10, 2023.

The merger would create a new company with 539 properties in 40 states and Washington D.C., totaling about $12.4 billion in total assets. As of December 31, 2022, Diversified’s approximately $7.1 billion portfolio included 379 properties in 36 states and Washington, D.C., and encompassed 27,000 senior living units.

After the transaction closes OPI shareholders are slated to own approximately 58% of the new company, while DHC shareholders will own about 42% of it. OPI’s executive management team, including President and COO Christopher Bilotto and CFO Matt Brown, are set to lead the newly combined real estate investment trust (REIT).

If all goes according to plan, the deal will close in the third quarter of the year.

The merger with OPI “provides a tremendous opportunity to address the challenges confronting DHC,” Diversified CEO Jennifer Francis said during a conference call Tuesday morning.

The combined company will be managed by the RMR Group and headquartered in Newton, Massachusetts. RMR CEO Adam Portnoy was also behind the recent acquisition of AlerisLife, which took the senior living operator private.

Companies seek to solve near- and long-term challenges

With the merger, the two companies are looking to solve challenges both for the near and distant future.

“The strategic merger solves the near-term challenges of DHC and the long-term challenges of OPI, with the combined company’s scale, diversity, access to capital; and by the recovery and NOI growth expected in the senior living portfolio,” Francis said during the conference call.

Diversified has $700 million worth of debt maturing next year, but “no ability to refinance it,” she noted. Although the properties in the company’s senior housing operating portfolio (SHOP) are seeing a “sharp recovery” this year, that turnaround necessitates “considerable capital” allocations — and it’s “not happening as quickly as is necessary.”

Those pressures — coupled with the fact that rescue financing would be “punitive and expensive rescue” and that the REIT’s current annual dividend of four cents per share is unlikely to increase until 2025 — make the merger “the best solution to address these challenges,” Francis noted.

Occupancy for Diversified’s SHOP segment registered at 76.3% in the fourth quarter of 2022. About 53% of the segment is made up of assisted living and memory care units, while 41% of it is independent living and active adult apartments and just over 5% is skilled nursing units.

For OPI, the merger carries benefits including greater scale and diversity, more access to capital sources and “attractive unencumbered” life science and medical office buildings, and increased liquidity “to fuel capital improvements at OPI office properties.”

Most compelling to the combined company is the expected growth and evolution in senior living, Bilotto said during the call with investors and analysts Tuesday.

“Anticipated stabilized year returns within the segment are 25%, far outpacing most options for capital deployment further,” Bilotto said. “With over 40 senior living renovations completed through year end 2022 and an additional 21 senior living renovations currently in planning or under construction, we anticipate near-term benefits through increased occupancy and rental growth.”

Additionally, both companies say that, by merging, they can realize approximately $2 million to $3 million of cost savings and synergies annually.

Once the deal closes, the leaders expect to access about $1 billion dollars in available debt financing, with more potentially to come as the company’s SHOP segment improves.

The office REIT is seeing tenant retention levels of around 50% in 2023, and expects that trend to continue this year. The company also anticipates spending $100 million in recurring capital expenses.

“We were really seeing pressure on the dividend, and we were forced with a [dividend] cut no matter what, [which is] no different than what we’re seeing with other office REITs out there,” Brown said. “So the combined company really positions us to have a much more sustained dividend with a growth profile as the SHOP segment continues to recover, and I really think it sets us up for growth in the future.”

Tim Regan contributed reporting and writing for this article

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