Government Properties, Select Income REIT to Merge

NEWTON, MASS–Two REITs — Government Properties Income Trust and Select Income REIT — have entered a definitive agreement to merge to create a single REIT that will focus on the office asset class.

The company will change its name to Office Properties Income Trust, or OPI, and it will continue to be managed by the operating subsidiary of The RMR Group Inc.

It will be listed on the Nasdaq and the ticker symbol “OPI” has been reserved for the company’s common shares.

Mark Kleifges, GOV’s Managing Trustee and Chief Financial Officer, was blunt about the benefits of the transaction, noting that it 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. He also said that OPI plans to sell assets post closing to further strengthen its credit metrics.

A Complicated Relationship

GOV, SIR and SIR’s Industrial Logistics Properties Trust, a REIT that owns warehouse distribution and e-commerce fulfillment facilities throughout the US, have complicated ownership structures, with GOV as SIR’s largest shareholder and SIR as the controlling shareholder of ILPT.

As part of the merger, GOV will sell all 24.9 million of the common shares it owns in SIR. And 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.

“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,” David Blackman, SIR’s Managing Trustee, president and CEO said.

SIR shareholders will receive 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.

Selling $750M in Properties

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 after the merger closes.

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 financial advisor to a special committee of GOV’s Board of Trustees and Sullivan & Worcester LLP is acting as legal advisor to GOV in this transaction. UBS Investment Bank is acting as financial advisor to a special committee of SIR’s Board of Trustees and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal advisor to SIR in this transaction.