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Government Properties to Acquire First Potomac for $1.4B

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In a notable development in the office real estate market, Government Properties Income Trust (GOV - Free Report) disclosed a deal to acquire all of the outstanding common shares of First Potomac Realty Trust , for around $1.4 billion, including debt. The combined company would have $4.1 billion of consolidated gross assets, per Government Properties press release.

Per the deal, shareholders of First Potomac would receive $11.15 in cash per share at the transaction close. This denotes a 9.3% premium to the company’s 30-trading day volume weighted average price ended Apr 24, the last trading day prior to the media speculation about a potential sale of First Potomac, but a discount of 1.8% to the closing price of $11.35 on Jun 27. Subject to nod from First Potomac shareholders and other customary norms, the deal is expected to close by the end of this year.

Notably, First Potomac has premium office and industrial properties in suitable positions, mainly in the metropolitan Washington, D.C. market area, which largely benefits from the spending of the government. Also, the market area has emerged as one the largest office markets in the U.S.

Moreover, as of Mar 31, 2017, First Potomac’s portfolio, which included 39 properties (74 buildings) with around 6.5 million square feet, was 92.2% leased. Around 43.9% of the company’s total annualized rental income as of the same date was contributed by government and other investment grade rated tenants. This makes the company a strategic buy for Government Properties, which primarily owns properties throughout the U.S. that are mostly leased to government tenants.

In fact, per Government Properties’ management, this acquisition would help expand Government Properties’ horizon, as well as focus on owning, acquiring and operating office properties leased to both government and private sector tenants in the region. However, outside the metropolitan Washington, D.C. market area, the company would continue to target properties that are mostly leased to government tenants. Furthermore, with this move, the company is likely to “realize approximately $11 million of annual general and administrative expense savings” compared to First Potomac on a stand-alone basis.

Currently, Government Properties carries a Zacks Rank #2 (Buy). The stock has witnessed positive estimate revisions for full-year 2017 funds from operations (FFO) per share, in the past 30 days.

Notably, year to date, the company’s shares climbed 1.4%, but underperformed the Zacks categorized REIT and Equity Trust – Other industry’s gain of 5.7%.

 

On the other hand, First Potomac carries a Zacks Rank #3 (Hold).

Other Key Picks

Other top-ranked stocks in the real estate space include Liberty Property Trust (LPT - Free Report) and PS Business Parks, Inc. (PSB - Free Report) . Both the stocks carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Liberty Property Trust and PS Business Parks have long-term growth rates of 6% and 5%, respectively.

Note: All EPS numbers presented in this write up represent funds from operations (FFO) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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