Here’s Why Select Income REIT Is Soaring While Government Properties Income Trust Is Plunging

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What happened

Real estate investment trust Government Properties Income Trust (NASDAQ: GOV) agreed to acquire Select Income REIT (NASDAQ: SIR) in an all-stock deal. Upon closing of the transaction, the combined REIT will be renamed Office Properties Trust.

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Select Income REIT's shareholders will receive 1.04 shares of Government Properties Income Trust for each share of Select Income they own. In addition, since Select Income REIT owns 45 million shares of another REIT, Industrial Logistics Properties Trust (NASDAQ: ILPT), it will distribute these to shareholders at a rate of 0.502 for one.

So what

Generally speaking, when any type of acquisition is announced, the acquiring company's shares fall while the company being acquired rises, as most acquisitions are done at a premium. However, today's moves are a bit more extreme than usual. As of 2:00 p.m. EDT on Monday, Select Income REIT is up by about 13%, while Government Properties Income Trust is down by a staggering 22%.

In a nutshell, the market seems to think that Select Income REIT shareholders are getting a pretty good deal. Based on Friday's closing prices, the deal values Select Income's shares at a massive 46% premium. On the other hand, investors might feel that Government Properties Income Trust is overpaying for the acquisition.

Now what

The transaction, if all goes well, is expected to close by early 2019 at the latest. However, it is subject to approval by both companies' shareholders, and based on the reaction reflected in Government Properties Income Trust's stock price, this isn't necessarily going to be an automatic approval.

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Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.