IRS may not like the idea
Boyd Gaming and a new minority owner may be following a moneymaking strategy that succeeded last year for Penn National Entertainment. In November, Penn National completed a tax-free spinoff off its 19 businesses to a publicly traded real estate investment trust, or REIT.
On March 10, investment firm Elliott Associates announced it was taking a 5 percent stake in Boyd. Share values jumped at the move; Bloomberg says it indicates Elliott will try to replicate the Penn National gambit.
With gaming at near-saturation levels nationwide, the value for shareholders of traditional gaming operators could lie in the land the casinos occupy.
“Record low interest rates are certainly propping up real estate values, and that is not something that is unique to gaming properties,” said Telsey Advisory Group analyst Christopher Jones, who predicts that Pinnacle Entertainment will also explore a REIT spinoff. “The window is probably getting ready to close” for REIT conversions as the Federal Reserve considers rate increases, he said.
The Las Vegas Review-Journal reports Elliott has made a fortune buying distressed or undervalued companies; that history suggests the hedge fund will be an active investor, and possibly steer Boyd management into adopting a real estate investment trust to add to the company’s value.
REITs do not pay federal income taxes, and are required to distribute at least 90 percent of their taxable earnings to shareholders as dividends. Because Boyd has $1.1 billion in net operating losses, it does not currently owe any money at tax time. Macquarie analyst Chad Beynon said the IRS would not approve of any business plan that would allow Boyd to retain its operating losses.
“If it were that easy, we would live in a tax-free world and own penthouses on Park Avenue,” Beynon wrote in a March 12 note. “Clearly, REIT conversion or ‘REITional gaming’ is not that simple.”
Janney Montgomery Scott analyst Brian McGill also is doubtful an REIT would work, as it would require that the Boyd family reduce its ownership stake. “For the REIT spin to work, no individual can own greater than 10 percent of shares outstanding,” McGill said. “That said, we think it would take exceptionally long, if ever, for the pieces to fall into place.”
Boyd has 22 properties in eight states with annual revenues of about $2.9 billion and carries $4 billion in debt.
