Once more, that word REIT, so strange to the casino world less than three years ago, has emerged with Gaming & Leisure Properties offering to buy Pinnacle Entertainment’s real estate.
GLPI has been the industry’s only real estate investment trust since it was spun off by Penn National as a public company late in 2013.
At the time, GLPI’s growth plan was to invest $500 million a year buying the real estate of other casino companies, giving the sellers a cash infusion and freeing them to become what is commonly known in lodging as asset-light operators.
Some real estate-rich operators were immediately speculated to become candidates for replicating PENN’s spin off, and were encouraged by activist investors who wanted casinos to get the much higher valuations accorded to REITs.
Not much has happened since then. The biggest move, GLPI buying Meadows casino outside Pittsburgh for $465 million, fell apart and is now in litigation as GLPI sued claiming it was mislead about the property’s decline in business.
And the casino operators most often mentioned as candidates to spin off REITs—Pinnacle, Boyd Gaming, Isle of Capri—did not follow PENN’s lead.
Now, that might change quickly.
Pinnacle accelerated the process by saying it had decided to create a REIT that would be free to acquire entertainment properties beyond casinos. Boyd, while not committed, revealed that it has spent considerable time and money studying a REIT conversion.
Then GLPI pulled off its stunner—offering to buy Pinnacle’s properties, leaving shareholders to own 100 percent of the operating company and being offered a little over a half share in GLPI for every share of PNK that they own.
All of a sudden, it dawned on investors that there was a quicker, less expensive route for companies like PNK, ISLE and BYD to enjoy a REIT structure.
GLPI was quick to point out the advantages of avoiding the DIY approach to creating a REIT:
• Enjoy the benefits of REIT ownership without the time and expense of having to establish a separate company from scratch.
• Speed regulatory approval.
• Have a full REIT management team already in place rather than having to create one.
• Avoid having to sell $700 million in stock as PNK has indicated it would have to do to establish the financial structure a REIT requires.
• Create the third largest triple-net REIT by enterprise value.
• And, of course, build long-term shareholder value.
For its part, GLPI expects to add to earnings immediately as it receives $358 million in annual rent from PNK.
Whether PNK accepts the $4.1 billion offer is uncertain.
Immediate reaction was that a deal ought to be done, but that GLPI should pay a higher price. GLPI said its offer values PNK at $34 share. Several analysts suggested that $40 would be more like it.
Orange Capital, an activist shareholder that has encouraged PNK to pursue a REIT spin off, said the deal significantly undervalues Pinnacle. It values the company at 11.3 times projected 2016 EBITDA compared to the 15 times that REIT peers trade at. Each valuation point higher would add $5.70 to the stock price, the firm noted.
We’ll know soon where PNK and GLPI go next. It wouldn’t be surprising if PNK pursues a higher price and a bargaining begins.
What is clear, however, is that GLPI has shown the investment world that there is another less costly and complicated way for the likes of Boyd, Isle of Capri and other multi-property casino companies to go the REIT route.
And, GLPI wouldn’t be shy to point out, it’s the one vehicle out there to accomplish that.
