Diversified Healthcare Trust and Office Properties Income Trust have called off their planned merger, the companies announced late Friday.
The merger had faced opposition from proxy advisory firms Egan-Jones, ISS and Glass Lewis as well as shareholders Flat Footed (represented by Herrick) and hedge fund D.E. Shaw, all of which recommended that shareholders vote against the merger.
Votes on the merger were supposed to take place Aug. 30 during special shareholder meetings for both Newton, MA-based real estate investment trusts, but the REITs convened and then immediately adjourned those meetings to continue discussions with shareholders. The votes were rescheduled for Sept. 6, but those meetings now have been canceled.
In separately issued but identical press releases, both DHC and OPI said that the agreement to terminate the merger plans was mutual and approved by their respective special committees and boards.
“The parties have agreed that each company will bear its costs and expenses in connection with the terminated transaction pursuant to the terms of the merger agreement, and that neither party will pay any termination fee as a result of the mutual decision to terminate the merger agreement,” the REITs said.
DHC and OPI first had announced their intention to merge in April. As part of the deal, OPI was to acquire all of the outstanding common shares of DHC in an all-share transaction. OPI was to be the surviving entity and was to change its name to Diversified Properties Trust upon closing of the deal. The combined company was to be led by members of the OPI executive management team, among them President and Chief Operating Officer Christopher Bilotto and Chief Financial Officer and Treasurer Matthew Brown.
Since the plan was announced, DHC President and CEO Jennifer Francis repeatedly has said that the merger was the best solution to address several near-term challenges faced by the REIT and that it would result in increased liquidity to fund the turnaround and capital improvement plan for DHC’s senior housing operating portfolio.
In May, a month after the intent to merge was announced, Francis said during the REIT’s first-quarter earnings call that current conditions raised “substantial doubt” about the firm’s ability to continue as a going concern as a stand-alone company. At the end of June, DHC announced that a “non-monetary event of default” had occurred under its $450 million credit facility.
During a second-quarter earnings call in August, Francis said that if the merger did not close as expected in the third quarter, then DHC would be forced to defer capital investment in its portfolio, significantly delaying the turnaround in its senior housing operating portfolio and forcing it to raise “expensive rescue financing.”
But three proxy advisory firms and two shareholders raised several concerns about the plans, saying that more strategic options might be available to maximize shareholder value and address DHC’s debt as the senior living industry rebounds from pandemic challenges. Alternatives put forth included divestiture of noncore assets and moderation of capital expenditures.
Concerns expressed also included that DHC’s assets may have been undervalued and that the merger was more advantageous to OPI and The RMR Group, the alternative asset management company that manages DHC, OPI and AlerisLife, the parent company of Five Star Senior Living, a primary operator in DHC’s senior housing operating portfolio.
As of June 30, according to an Aug. 1 presentation, 119 of the 230 senior living communities in DHC’s senior housing operating portfolio were operated by Five Star. Other operators, according to the presentation, included Cedarhurst Senior Living, Charter Senior Living, IntegraCare Senior Living, Life Care Services, Navion Senior Solutions, Northstar Senior Living, Oaks-Caravita Senior Care, Omega Senior Living, Oaks Senior Living, Phoenix Senior Living, Stellar Senior Living and The RMR Group.
DHC’s senior living portfolio also includes 27 communities with triple net leases, with tenants including Brookdale Senior Living.
