BETHESDA, MD. — Government Properties Income Trust (NASDAQ: GOV) has agreed to purchase all of the outstanding shares of First Potomac Realty Trust (NYSE: FPO) in a deal that is valued at $1.4 billion. The all-cash transaction, which includes the assumption of debt, is expected to close before the end of 2017.
First Potomac shareholders will receive $11.15 in cash per share, or about $683 million in aggregate, at the close of the transaction. This represents a premium of about 9.3 percent to First Potomac’s 30-trading day volume weighted average price, based on a period ending April 24, 2017.
The remaining transaction value includes the expected repayment of about $418 million of FPO debt and an assumption of about $232 million of FPO mortgage debt, as well as the payment of transaction fees and expenses. FPO has agreed it will not pay any distributions to its shareholders before the transaction closes. GOV’s distributions to its shareholders will not be impacted by the transaction.
First Potomac maintains an office and industrial portfolio of properties that are located primarily in the metropolitan Washington, D.C., area. FPO’s portfolio includes 39 properties (74 buildings) with about 6.5 million square feet that was 92.2 percent leased as of March 31, 2017. Government and other investment-grade-rated tenants represented about 43.9 percent of FPO’s total annualized rental income as of March 31, 2017. FPO had been publicly seeking a sale for several months.
“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,” says David Blackman, president and CEO of GOV. “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.”
GOV expects to realize about $11 million of annual general and administrative expense savings by combining the companies. GOV had $4.1 billion in consolidated gross assets as of March 31, 2017. This included 113 properties (170 buildings) totaling about 18 million square feet. Its portfolio is 94.1 percent leased.
The transaction is subject to the approval by FPO shareholders and other customary conditions. 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 with proceeds from the sale of properties. Pending the completion of GOV’s long-term financing plan, the company may use borrowings under its existing revolving credit facility and a new 364-day, fully committed bridge loan facility for up to $750 million.
Wells Fargo Securities / Eastdil Secured is acting as exclusive financial advisor to FPO, while Hogan Lovells US LLP is acting as legal advisor. Citigroup is acting as financial advisor to GOV, while Sullivan & Worcester LLP is serving as legal counsel. Joint lead arrangers for the bridge loan facility are Citigroup, Bank of America NA, Morgan Stanley and UBS Investment Bank.
GOV is a REIT that primarily owns U.S. properties that are leased to the U.S. government and other government tenants. GOV’s stock price closed at $21.89 per share on Tuesday, June 27, up from $19.65 per share on Dec. 12, 2016, the REIT’s first day on the market.
FPO is a REIT that focuses on owning, operating, developing and redeveloping office and business park properties in the greater Washington, D.C., region. FPO’s stock price closed at $11.12 per share on Tuesday, June 27, up from $9.06 one year ago.
— Nellie Day