Government Properties Income TrustGOV recently announced a definitive merger agreement with Select Income REIT SIR in an all-stock deal. The surviving entity - Government Properties Income - will be renamed Office Properties Income Trust and will be traded under the ticker symbol "OPI", upon the deal's closure.
However, Government Properties' shareholders did not take the merger news on a positive note, as evident from the company's staggering share prices. At the close of the trading session on Sep 17, shares of the company slipped 24.8% to $12.69 per share.
Notably, within six months of the merger's closure, OPI will likely dispose properties, valued nearly $750 million, to bring down leverage levels. The transaction is subject to closing norms and shareholders' approvals from both companies, following which it is expected to close latest by early 2019.
In a stock-for-stock exchange, Select Income's shareholders will receive 1.04 shares of Government Properties for every common share of Select Income held, based upon a fixed exchange ratio. Post merger, Government Properties' shareholders will own nearly 52% of OPI, while shareholders of Select Income will own 48% of the new entity.
Government Properties will sell its 27.8% stake in Select Income amounting to 24.9 million shares. Also, Select Income has controlling interest in another REIT - Industrial Logistics Properties Trust ILPT - with 45 million shares of the company. This will be distributed to Select Income shareholders, as special dividends, at the rate of 0.502 shares of Industrial Logistics for each Select Income share held.
Lastly, OPI targets to pay 75% of cash available for distribution in annual dividends, in the range of 50-60 cents.
Post-Merger Portfolio & Benefits
The merger will create a REIT specifically focused on owning, operating and leasing office buildings to single tenants and high-credit quality tenants like government entities. The combined portfolio will offer additional scale, wide diversity and a broader investment strategy.
In fact, the post-merger portfolio will consist of premium office buildings with 92% occupancy rates. Further, the portfolio of 213 properties, spanning 30.2 million square feet of space, will have an undepreciated gross value of $6.1 billon. It is geographically diversified across 38 states and the District of Columbia.
Notably, the share-distribution arrangement will simplify capital structure across Government Properties, Select Income and Industrial Logistics Properties by eliminating cross ownership.
Government Properties carries a Zacks Rank #3 (Hold), at present.
Stock to Consider
A better-ranked stock in the REIT space is VICI Properties VICI . It carries a Zacks Rank of 2 (Buy) and the Zacks Consensus Estimate for its 2018 funds from operations (FFO) per share has been revised upward by a cent to $1.50 over the past 60 days. Also, shares of the company have gained 11.9% in the past six months.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.