Is it time for Penn National Gaming to cash out of the Las Vegas Strip?
Some say the time might never be better.
Penn, the giant among U.S. regional operators—41 casinos owned or operated in 19 states—said on its latest earnings call that it’s received “unsolicited interest” in some of the 34 acres on the corner of Tropicana Avenue and Las Vegas Boulevard where its 1,470-room Tropicana stands.
“We’re continuing to engage in those conversations,” CFO B.J. Fair said. “We’ll see where they take us.”
With interest in Strip real estate higher than it’s been at any point since the end of the recession, and deep-pocketed private investors providing the catalyst—think of the multiples Bellagio, the Rio and Circus Circus have fetched in recent weeks—Penn is likely to find itself with a number of options, all of them attractive, as Stifel Financial analyst Brad Boyer told GGB News.
“Obviously, it’s a great location. And there’s a lot of buzz around the south Strip right now, with the Raiders coming in, and people are probably looking at that land and saying, ‘Hey, we can come in here and make a go of something.’”
Boyer is told the real estate alone could be worth as much as $20 million an acre—a hefty incentive for publicly traded Penn to subdivide it and keep the Trop, which, interestingly enough, is the last major resort the company wholly owns.
“Clearly there’s a greater value in that land than any multiple you can put on the operation,” Boyer said. “Most of the conversations I hear are about carving up individual land parcels and trying to engage third parties in that.”
Then again, things are changing at Penn National, long-time CEO Tim Wilmott is retiring, and it’s possible the leadership is looking more toward a future that lies in what Boyer terms a “hyper-localized focus”: building loyalty from the bottom up, keying on synergies at the property level, enhancing the service quotient, leveraging technology to market more effectively.
“Which tells me they would be interested in selling the whole thing if the right offer came along,” Boyer says.
Certainly the gaming landscape is changing in profound ways, too, and there’s a growing sense that with the nationwide expansion of legal sports betting, vast opportunities await to connect with customers via all kinds of new interactive platforms, and the industry has barely scratched the surface.
“I would call it an evolution of our thought process,” Fair said on the call. “Given this conversion of interactive between sports betting and (internet) casinos, we think that it’s going to be even more important for us to have a very localized on-channel approach where you’re engaging with guests both digitally as well as in brick-and-mortar casinos. It doesn’t mean that the Las Vegas hub-and-spoke won’t work or isn’t working. It just means that we believe that we’re going to be very focused on moving customers around our network, and that’s going to happen at a more local level and across the interactive activities that we’re offering our customers in markets where it’s legal.”
Locals have always been the sweet spot for Penn anyway, as reflected in a third quarter in which same-store strength combined with jurisdictional expansion and the growth of sports wagering to drive a 77 percent increase in total adjusted EBITAR on revenues that topped $1.35 billion, an increase of better than 71 percent.
The company’s “West” segment, which includes the Trop and M Resort Spa Casino, farther south in the suburb of Henderson, performed admirably, too, but it’s a relatively small part of the story, accounting for around 12 percent of total revenues year to date.
The company also is focused on reducing long-term debt, which stands currently, in interest-bearing terms, at around 5.6 times on a lease-adjusted basis. The goal, as stated on the earnings call, is to get that to 5.0 by the end of next year.
“It makes sense to probably just unload (the Trop), that’s my read of it,” says Boyer.
To a gaming operator, that could be a tough sell: an aging casino hotel, one of the oldest remaining on the Strip, capable of generating, as a guesstimate, maybe $60 million a year in EBITDA. Then again, some smart East Coast money just paid $516 million for the off-Strip Rio in a short-term sale-leaseback arrangement with Caesars. The Trop certainly would be attractive to a private REIT on similar terms. And there is that prime location.
“There is this notion in the real estate world that this is irreplaceable real estate,” said Boyer. “There is only one Las Vegas Strip. That’s why Blackstone paid 17 times (rent) for Bellagio.”
Circus Circus and its sizable land bank went to Phil Ruffin at a 13x multiple in a deal valued at $825 million, a real estate play primarily with a lot of similarities to the Tropicana. Conservatively speaking, say, at 12x, the Trop could easily sell for north of $700 million. That’s a tidy premium of around 25 percent-30 percent to what Penn paid for it four years ago and reinvested in it. And that’s without entirely factoring in the value of the land. With that in mind, would upwards of $800 million be out of the question?
As Penn COO Jay Snowden put it on the call, and rightly so, “Nothing’s done until it’s done.”
But the Tropicana is definitely for sale, and somebody’s going to buy it, and it’s a safe bet it’ll be sooner rather than later.
In related news, the company has shown some geographic gains and losses around the country. Third-quarter results pointed to positive results in many areas, even as some locales suffered. Overall revenues grew 7.5 percent, but dropped 19 percent at Plainridge Park in Massachusetts. The company also expanded sports betting opportunities and added properties in Louisiana and Detroit.
Snowden said the company had some “unsolicited interest” in its Illinois-based slot route operator, Prairie State Gaming, and yes, those land holdings at Tropicana Las Vegas. “We’re continuing to engage in those conversations,” Snowden said. “We’ll see where they take us. We’re encouraged by some of those conversations, but nothing’s done until it’s done.”
Penn National CEO Tim Wilmott added that the “fluidity of these discussions” make it impossible to put a timetable on any conclusion.
Penn’s net income rose 4.6 percent to $43.7 million during the three-month period, while cash flow increased 15.2 percent to $407.9 million.
“Our results for the quarter reflect the consistency of the consumer that we have seen over the last year,” Wilmott said in a statement. He said the company’s expected cash flow was lower due to “a greater-than-expected impact from a new competitor in the northeast.”
Wilmott said the Wyomissing, Pennsylvania-based giant was able to balance some of the impact “by strong performances in other markets.”
Stifel analyst Steven Wieczynski said Penn National’s operating results in the quarter “were pretty much right down the middle,” adding that the company “continues to execute on its strategies of driving profitable revenue growth and further refining the cost structure across its portfolio.”
Penn National expanded its sports betting operations by opening facilities at a casino in Iowa and at two in Indiana. The gaming giant also opened a sportsbook at the Meadows Casino near Pittsburgh, and one of the company’s “skin” partners has launched online sportsbooks in West Virginia and Indiana and will soon be live in Pennsylvania.
The company also acquired Margaritaville Bossier City in Louisiana and Greektown in Detroit both in partnership with real estate investment trust VICI Properties. Penn National also launched its internet gaming operations in its home state.
“We are very encouraged by early market share results from these operations and are excited about the new growth opportunity,” Wilmott said. “Our industry leading regional casino footprint positions us well to capitalize on the rapidly expanding sports betting and iGaming markets in a way that maximizes shareholder value.”
Jefferies gaming analyst David Katz called the company’s quarterly results “as-expected” but added his focus is on where Penn National progresses moving forward.
