Newton REIT to Acquire First Potomac Realty Trust for $1.4 Billion

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David Blackman

NEWTON, MA- Government Properties Income Trust (Nasdaq:GOV) announced that its Board of Trustees has unanimously approved a definitive merger agreement to acquire all of the outstanding common shares of First Potomac Realty Trust (NYSE:FPO) for an aggregate transaction value of approximately $1.4 billion, including $11.15 per FPO common share in cash and the repayment or assumption of FPO debt.

This transaction is subject to the approval of at least a majority of FPO’s common shareholders and other customary conditions and is expected to close prior to year end 2017.

David Blackman, President and Chief Operating Officer of GOV, made the following statement:

“The acquisition of FPO enables GOV to expand its business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington, D.C. market area. The metropolitan Washington, D.C. market area is one of the largest office markets in the U.S. and the nation’s largest beneficiary of spending by the U.S. government. Outside of the metropolitan Washington, D.C. market area, GOV will continue to focus on acquiring, owning and operating office properties that are majority leased to government tenants.”

David Blackman

“In addition to this transaction providing GOV with new potential growth opportunities, we expect to realize approximately $11 million of annual general and administrative expense savings compared to FPO on a stand alone basis. We are also pleased that we were able to achieve an attractive per share purchase price.”

GOV believes FPO has high quality office and industrial properties that are well located primarily in the metropolitan Washington, D.C. market area. FPO’s portfolio includes 39 properties (74 buildings) with approximately 6.5 million square feet that was 92.2% leased as of March 31, 2017 (including two joint venture properties which are 50% and 51% owned by FPO). As of March 31, 2017, government and other investment grade rated tenants represented approximately 43.9% of FPO’s total annualized rental income.

As of March 31, 2017 and pro forma for GOV’s acquisition of FPO, GOV’s portfolio and selected operating metrics would have been:

  • $4.1 billion of consolidated gross assets;
  • 113 properties (170 buildings) with approximately 18.0 million square feet that are 94.1% leased for 4.9 years based on weighted average annualized rental income;
  • 71.7% of total annualized rental income from government and other investment grade rated tenants;
  • 59.9% of total annualized rental income from government tenants;
  • properties located in 31 states and Washington, D.C.; and
  • 54.3% of total annualized rental income from the metropolitan Washington, D.C. market area.

The cash consideration to be paid to FPO shareholders will be $11.15 per FPO common share, or approximately $683 million in aggregate. The remaining transaction value includes the expected repayment of approximately $418 million of FPO debt and assumption of approximately $232 million of FPO mortgage debt, and the payment of transaction fees and expenses, net of FPO cash on hand. FPO has agreed that it will not pay any distributions to its shareholders before the closing of the transaction. GOV’s distributions to its shareholders will not be impacted by the transaction.

GOV expects to finance this transaction on a long term basis with the sale of common shares, additional debt, including senior unsecured notes, mortgage financing and/or bank debt, and/or with proceeds from the sale of certain properties. Pending the completion of GOV’s long term financing plan, GOV may use borrowings under its existing revolving credit facility and under a new 364 day, fully committed bridge loan facility (subject to certain customary conditions) for up to $750 million to finance the transaction.

Based on GOV’s preliminary estimate of 2018 net operating income attributable to the FPO properties (including the estimated pro-rata net operating income from two unconsolidated joint venture properties) and subject to completion of GOV’s accounting analysis, GOV believes that the estimated acquisition cap rate is approximately 7.0%. GOV believes this transaction will be accretive to GOV’s normalized funds from operations per share after 2018 and approximately leverage neutral on a debt to gross assets basis after completion of GOV’s long term financing plan.

This transaction is subject to the approval of at least a majority of FPO’s common shareholders and other customary conditions. As part of the agreed transaction terms, GOV has the option to pursue the acquisition of FPO in a tender offer for all of the outstanding FPO common shares, which may decrease the time required to close the transaction. The transaction is expected to close prior to year end 2017.

Citigroup is acting as exclusive financial advisor to GOV and Sullivan & Worcester LLP is serving as legal counsel to GOV. Joint Lead Arrangers for the bridge loan facility are Citigroup, Bank of America, N.A., Morgan Stanley and UBS Investment Bank.

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