The “inconsistent” performance of the senior housing properties in Diversified Healthcare Trust’s portfolio is one reason that the Newton, MA-based real estate investment trust’s previously announced merger with Office Properties Income Trust continues to be “the best path forward for DHC,” the REIT’s president and CEO, Jennifer Francis, said Tuesday in a statement. An investor group, however, does not agree.
Francis said that the REIT’s senior housing operating portfolio “is generally improving” but “remains inconsistent from month-to-month and difficult to predict.”
“With $700 million of debt maturing over the next 12 months and the pace of the SHOP recovery being critical to our ability to refinance this debt, this uncertainty is one of the many reasons why we are confident that the previously announced merger with Office Properties Income Trust is the best path forward for DHC,” she said.
DHC, with a senior living operating portfolio that included 237 communities with a collective 25,346 living units as of April, announced that month that it had entered into an agreement to merge with OPI to form a new REIT named Diversified Properties Trust.
The transaction is expected to close during the third quarter, creating a $12.4 billion investment portfolio with 539 properties — senior housing, offices, medical office buildings, life science and other properties — across 40 states and Washington, DC
The proposed transaction will be submitted to both REITs’ shareholders for their consideration. One shareholder is publicly pushing for alternatives.
In a public letter posted Tuesday, Flat Footed and its affiliates expressed their intention to vote against the merger. According to the letter, Flat Footed and affiliates own approximately 7.4% of the outstanding common shares of DHC, making it one of the company’s largest shareholders.
“We believe the board of trustees has failed DHC’s stakeholders by pursuing the proposed merger, which would unnecessarily burden the company with OPI’s rapidly declining commercial office properties,” the shareholders wrote. The deal, they said, disproportionately benefits OPI and the RMR Group “at DHC’s direct expense.”
DHC is managed by The RMR Group, an alternative asset management company with more than $37 billion in assets under management as of March 31.
According to Flat Footed, DHC should stay the course with its senior housing properties because such properties “are widely expected to continue their post-pandemic rebound, driven by a once-in-a-lifetime favorable supply and demand dynamic.”
Flat Footed said The RMR Group “clearly shares our optimism” for DHC’s SHOP portfolio, citing:
- RMR Group CEO and President Adam Portnoy’s recent $44 million acquisition of AlerisLife, the operator of more than 100 DHC’s SHOP properties, representing 86% of all properties managed by AlerisLife. Portnoy owns AlerisLife through a separate company.
- OPI’s plans to raise more than $1 billion in new, post-merger government-sponsored enterprise debt, “which could only be utilized by using profitable DHC SHOP assets as collateral.”
Flat Footed said it believes that DHC actually needs an additional $250 million, not $700 million, in liquidity to get past its 2024 maturities. The shareholders suggest that DHC use its $450 million revolving credit facility, supported by more than $1 billion in collateral, to extend the revolver past January. Additionally, the shareholders said that DHC should monetize a fraction of the REIT’s “numerous and valuable unencumbered assets” to pay off a portion, or all, of its maturing debt.
“In sum, DHC is uniquely positioned to capitalize on the rapidly growing senior housing market, which has yet to be reflected in its share price. And there is no basis to dampen DHC’s prospects by burdening it with OPI’s dying commercial office portfolio and looming debt refinancings,” Flat Footed said. “By simply selling a small portion of its assets, DHC should be well-positioned to pay down its near-term notes, extend its revolving credit facility, and maximize value for all DHC stakeholders.” Flat Footed said.
