The move toward real estate investment trusts (REITs) accelerated last week as the most successful (and first) REIT made an aggressive move on a competitor at the same time speculation arose about MGM Resorts considering a similar restructuring. Caesars Entertainment has already announced a REIT structure to allow it to emerge from bankruptcy (see USA).
Gaming and Leisure Properties Inc., the REIT set up by operator Penn National Gaming to own Penn properties and lease them back to the company’s operating division, has made an offer to buy the real estate assets of Las Vegas-based regional operator Pinnacle Entertainment.
The proposed transaction would create the third-larges REIT by enterprise value. Pinnacle shareholders would receive GLPI shares with an aggregate value of $36 a share—a 30 percent premium over Pinnacle’s closing price as of March 6.
Pinnacle, which operates 15 regional casinos in eight states, has not yet responded to GLPI’s offer. Pinnacle announced plans last year to split the company into an operating company and an REIT. Under the new proposal, that REIT would be Penn’s division.
REITs are welcomed by the gaming industry, as they do not pay federal income taxes. REITs, however, are required to distribute a minimum of 90 percent of taxable earnings to shareholders. Penn National Gaming split 21 of its 29 casinos and racetracks into Gaming and Leisure Properties, a publicly traded REIT, back in 2013. Penn then leases the properties through a management contract.
In an interview with Bloomberg, Penn National Chairman and GLPI CEO Peter Carlino said he approached Pinnacle in January about the deal, but did not receive a response. “GLPI’s straightforward proposal has a much faster path to completion and much less risk going forward,” Carlino said. “Our proposed transaction would create both immediate and longer-term value for the shareholders of both companies.” Carlino said the transaction would relive Pinnacle of the need to sell $700 million in stock to create the REIT.
In a Reuters interview, Carlino said GLPI is going the hostile-takeover route because Pinnacle has refused to discuss the proposal. “Notwithstanding the attractiveness of this offer, Pinnacle has again refused to engage, which is why we are bringing our value-enhancing proposal directly to their shareholders,” he said.
Analysts gave the proposal a thumbs-up as a good potential move for Pinnacle. “Given that Pinnacle has a fairly diverse investor base and no dominant insider shareholders, we believe the board and management will have to seriously consider this offer,” said Credit Suisse gaming analyst Joel Simkin in a Bloomberg interview.
Shares of Pinnacle jumped 25 percent the morning of the announcement.
Meanwhile, it appears there is a reasonable chance MGM joins the ranks of three other casino companies next year, into a REIT. MGM Resorts International CEO Jim Murren said his company had no plans to turn their casinos and resorts into a REIT, but did not dismiss the idea.
When asked outright on the issue by Shawn Kelley, a Bank of America/Merrill Lynch gaming analyst, he said, “We look at this all the time. We’re pitched by every bank that is out there in terms of whether or not we should do that.” Murren continued, “There’s nothing definitive. There’s nothing to report, but we do look at these type of corporate transactions.”
Deutsche Bank gaming analyst Andrew Zarnett referred to REITs as the industry’s “latest and greatest” idea. However, he doesn’t think it makes sense for MGM. “Given the tax basis, something management acknowledged, as well as the financial leverage on the domestic balance sheet, we see the likelihood of this as rather low,” he said.
MGM is on an uptick though, as its Strip resorts saw an increase of 7 percent in the fourth quarter of last year. Through the first two months of 2015, not too much has really changed for the company, as they anticipate revenue for the May 2 fight between Manny Pacquiao and Floyd Mayweather Jr. at the MGM Grand Garden Arena “will break every record,” according to Murren.
MGM Resorts long-term debt of $12.9 billion has been classified as manageable. It has new resorts popping up in Springfield, Massachusetts and Macau, in addition to the $350 million, 20,000-seat sports arena on the Strip behind New York, New York. “MGM’s balance sheet is in far better shape today, and we remain constructive on its pipeline,” Credit-Suisse gaming analyst Joel Simkins said.
“Those who have followed us a lot know that we’re an active corporate finance organization,” Murren said. “ We’ve done just about everything that’s been done out there.”
