Last April 11, Diversified Healthcare Trust announced a merger (sale) with Office Properties Income Trust whereby DHC shareholders would receive $1.70 in OPI shares for each DHC share, then worth about $1.20 per share. Within weeks the shares plunged by 33% to $0.80 per share. They had been as low as $0.61 per share on December 22, 2022. We suppose management must have been desperate.
Something didn’t smell right to a few investors, and shareholder Flat Footed LLC raised the red flag that this was not a deal in the best interests of DHC shareholders. And they fought it. They were not the only ones who decided the merger was not in the best interests of DHC shareholders. Now, three leading independent proxy advisory firms – Institutional Shareholder Services, Glass, Lewis and Egan-Jones Ratings – have all stated that the transaction is not in the best interest of DHC shareholders. We also stated that something was fishy.
DHC’s share price has now increased to $2.97 per share, which would indicate that investors also believe this was a bum deal and will get rejected. The shareholder meeting to vote is scheduled for August 30. Most institutional investors like to follow what the proxy advisory companies recommend, as it gives them cover if one of their shareholders thinks a merger is a mistake, or if the deal ends up going bad. Rarely do these proxy firms advise against a transaction, and even more rare is it for all three to recommend against.
The main reason why some investors think the REIT is undervalued is because little credit is being given for the seniors housing portfolio within DHC being on the upswing, like it is for most of the sector. If the trajectory continues, the value should go up as well. It seems that the proxy companies did not like the process, the consideration relative to the current price, the lack of a competitive sales process, and… the many conflicts of interest.
Banc of America Securities is advising DHC, the same advisor that provided the fairness opinion for Brookdale Senior Living’s acquisition of Emeritus nine years ago, which resulted in erasing 90% of Brookdale’s value. Hmmm.
