It has been nearly two months since Diversified Healthcare Trust announced its merger with Office Properties Income Trust, two REITs basically controlled by external manager RMR Group. This was about the most self-serving transaction we have seen in a long time. But at least one DHC shareholder is not going to stand by.
Flat Footed LLC, which with its affiliates owns about 7.4% of DHC’s shares, wants shareholders to vote against the deal, believing DHC should be (will be) worth between $9 and $10 per share if they let their SHOP portfolio continue to improve. The shares closed May 31 at $1.36 per share. That is a huge valuation differential, and it all seems to rest on DHC’s management’s new forecast for its SHOP portfolio, which Flat Footed calculates is worth $2.92 billion based on a 7.1% cap rate for projected 2024 EBITDA. That alone would be worth $12 per share before adjusting for debt. There are other assets as well. It also comes to $117,000 per unit, which is below average, but these are mostly average properties, at best. The 7.1% cap rate is aggressive on projected 2024 NOI, so that $2.92 billion valuation is too high in the real world of today.
DHC’s SHOP portfolio has had, and will continue to have, an uneven recovery from the pandemic. But so has most everyone else. Occupancy in April was at 78%, similar to Brookdale Senior Living, and its NOI margin has been all over the map, from 4.2% in January to 9.9% in April this year. In early May DHC announced for the first time that there was a “going concern issue,” which if true, we are not sure why they waited until after the merger announcement. Hmmm.
We doubt that enough shareholders will rally to the cause to vote against the merger, but it might get better terms, which it should. When the merger was announced, DHC’s shares were at $1.22. They plunged to $0.83 within three weeks, but have since jumped by 103%. Maybe investors are listening, and maybe Flat Footed won’t be caught flat footed again with its investments in companies that have serious conflicts of interest. Stay tuned.
