Sometimes things can happen fast on Wall Street, and the rest of the world has to catch up. That's exactly what's going on today with the 19% dividend yield you'll likely see listed for Office Properties Trust (OPI 3.61%). The real estate investment trust (REIT), which just announced an interesting merger, has already warned investors that a new, lower dividend payment is coming.
Here's what you need to know.
That was then, this is now
The most recent quarterly dividend payment from Office Properties was $0.55 per share in February. That amounts to $2.20 per share per year, which leads to a huge 19% dividend yield based on the stock's recent prices. Before you run out and buy some shares, though, the REIT has already announced that the annual dividend will be lowered to $1 per share, or $0.25 per quarter, starting in the second quarter. In fact, it just described the old payment as "unsustainable."
Image source: Getty Images.
To be fair, assuming the stock price remains where it is today, the dividend yield after the cut will still be pretty high at around 11%. But shareholders who bought the REIT before the cut will see a material decrease in the income they receive, and, frankly, the stock price nosedived over the past year, losing over 60% of its value. This has been a pretty rough investment.
There's way more to the story
That dividend cut, which was likely inevitable given management's comments, is actually only one small piece of a much larger and more interesting story. You see, the dividend cut was revealed at the same time that it was announced that Office Properties would be buying Diversified Healthcare Trust (DHC 2.10%). There's not a huge amount of overlap between the two REITs, as Diversified Healthcare owns, as its name implies, healthcare assets (in fairness, roughly 43% of net operating income is tied to medical office buildings).
The combined entity will be known as Diversified Properties Trust. Both Office Properties and Diversified Healthcare are externally managed by the RMR Group (RMR 1.82%). The merger isn't expected to close until the third quarter of 2023, so Office Properties' dividend is being cut before the deal will have been fully consummated.
In the presentation discussing the deal, both REITs are listed as having "challenges." For Office Properties the list includes the unsustainable dividend rate, structural headwinds in the office sector, a challenging financing environment for office assets, and the expectation of rising expenses. For Diversified Healthcare the list includes restrictive debt covenants, a sizable near-term debt maturity, high leverage and limited liquidity, and additional capital needs to fund a business turnaround. While it's not exactly clear which REIT is in a worse spot, it does seem like Diversified Healthcare is facing a more material time constraint given the $700 million in debt it has coming due in mid-2024.
So a cynic might suggest that this merger is really just a bailout of Diversified Healthcare, noting that shareholders will actually see a dividend increase compared to what they were previously being paid. But given the dividend cut at Office Properties, you could easily suggest it was a bailout of that REIT, too, as it needs the increased financial flexibility the reduction will afford. In the end, however, it might actually be a way for RMR Group to salvage as much value as possible from its position as the external manager of two troubled REITs. Basically, the merger means it will continue to get paid its management fees, though RMR kindly offered to forgo the "contractual termination fee associated with the DHC business management agreement and property management agreement specific to this transaction."
Stay away
Normally when there's a merger or acquisition, at least one company is operating from a position of strength. That just doesn't seem to be the case here, with both Office Properties and Diversified Healthcare facing material headwinds. Putting two troubled REITs together seems more likely to create a larger troubled REIT than solve the problems either one is facing alone. The biggest winner, at the end of the day, is likely going to be RMR Group. Dividend investors probably shouldn't get involved in this still-unfolding story.
