Penn National sees REIT acquiring rivals' casino properties
Penn National Gaming Inc., the casino operator spinning off properties into a real estate investment trust, will call competitors "10 seconds" after its deal closes to see who's willing to sell their resorts.
"This idea will absolutely revolutionize and open up capital for gaming companies that's not available today," chief financial officer Bill Clifford said in a Dec. 13 interview in New York. "Gaming companies could become asset-light, where the only capital they need to raise in order to operate casinos will be the cost of the furniture, fixtures and equipment, and gaming license."
If successful, Penn National would lead the casino industry down a path pursued by hotels, offices, malls and timber plantations. The pitch: the other casinos could free up capital, allowing them to fund expansions, reduce debt or return cash to shareholders, Clifford said. Companies would then lease-back from Penn National's REIT and continue operating the casinos as before.
Penn said on Nov. 15 it planned to split into two public companies in the second half of 2013 by placing most of its properties into a REIT to be owned by existing shareholders. REITs pay investors pretax earnings as dividends.
"If the price is right, I think people will definitely consider selling to the Penn REIT," said Joel Simkins, an analyst at Credit Suisse Group in New York, who rates the stock outperform. "Some publicly traded companies may have a handful of assets that they look to monetize," along with some of the more than 100 closely held gaming properties in the U.S., Simkins said.
Casino companies with the most U.S. properties include Caesars Entertainment Corp., MGM Resorts International, Boyd Gaming Corp., Ameristar Casinos Inc., Pinnacle Entertainment Inc., Station Casinos LLC and Isle of Capri Casinos Inc.
While Penn can't approach other owners until the spinoff is completed under Internal Revenue Service rules, it will "be picking up the phone 10 seconds after the spin is effective and begin having conversations, setting up meetings, and try to engage their interest in doing a transaction with us," Clifford said.
To be sure, other casino companies are likely evaluating whether they can replicate a REIT spinoff themselves, rather than sell assets to a rival, said Joseph Greff, a JPMorgan Chase & Co. analyst in New York.
Still, most U.S.-focused casino companies today don't have Penn's combination of low debt, high cash taxes and strong free cash flow yields that make its spinoff strategically smart, Greff said. More highly levered rivals would struggle to generate sufficient cash to pay both rent and service debt. Many have accumulated losses resulting in lower tax burdens that make the REIT tax benefits less compelling, he said.
Similar moves have already succeeded in the hospitality industry, where REITs such as Host Hotels & Resorts Inc. own and lease hotels while operators including Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. have sold real estate to focus on managing properties. Gaylord Entertainment Co. earlier this year sold its hotel brands and management business to Marriott and converted to a REIT now called Ryman Hospitality Properties Inc.
Penn needs approval from casino regulators in the 19 jurisdictions that it operates before splitting the company, a process executives say they're confident of achieving by the fourth quarter of 2013. The company received a private-letter ruling from the IRS related to the spinoff's tax treatment that took more than 18 months, clearing a key hurdle to proceed.
Wyomissing, Pennsylvania-based Penn's shares have surged 32 percent since the Nov. 15 announcement. CEO Peter Carlino built Penn National via acquisitions and development from a single horse-racing track near Harrisburg, Pennsylvania, into the operator of 29 casinos and racetracks across North America. They include the Sanford-Orlando Kennel Club in Longwood, its only facility in Florida.
Clifford, 55, has been Penn's CFO since 2001. He was previously CFO at Sun International Resorts Inc., developer of the Atlantis resort in the Bahamas, and earlier served as controller at Las Vegas casinos including Treasure Island.
Both the REIT and the operating company will continue to pursue acquisitions and developments, Clifford said, and the two entities may partner on some projects. The REIT will have a lower cost of capital, allowing it to potentially pay more while still getting a better return than the casino operating company, he said.
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