Why Office Properties Income Trust Stock Is Tanking Today

What happened

Shares of Office Properties Income Trust (OPI 3.61%) had tumbled more than 12% by 10:30 a.m. ET on Tuesday. Weighing on the office REIT was news that it had terminated its controversial merger with Diversified Healthcare Trust (DHC 2.10%). 

So what

Office Properties Trust and Diversified Healthcare Trust announced plans to merge in an all-stock deal in April. The transaction would have created a diversified REIT with office and healthcare properties. The companies believed the combination would put them in a better position to navigate their challenges. 

However, the deal would have merged two troubled REITs with significant weaknesses. Office Properties is facing significant upcoming lease maturities, a difficult financing environment, and the need for large investments to enhance its office properties to attract tenants. Meanwhile, Diversified Healthcare Trust faces substantial near-term debt maturities, high leverage, limited liquidity, and a sluggish recovery for its operated senior housing portfolio. 

These significant issues caused intense opposition to the merger. A proxy advisory firm called the industry logic behind the deal "deeply flawed," leading it to recommend that investors vote against the transaction. Because of that, the two companies likely wouldn't get enough shareholder support to approve the deal. That led them to terminate the merger. 

Now what

Office Properties Trust's decision to terminate its merger with Diversified Healthcare was the right move. The deal would have merged two troubled entities, which would have made the combined company even weaker.

The office REIT can now focus on addressing its issues. It needs to actively manage lease expirations in a very tough office market so it can continue to generate cash flow to deleverage its balance sheet and fund redevelopment projects.

It faces a long and uncertain road to recovery. Because of that, it's still not worth buying despite the merger termination, even though it offers a hefty dividend yield despite cutting its payout earlier this year.