Pinnacle Entertainment plans to split off casinos into a REIT

7 November 2014

Pinnacle Entertainment, Inc. ended gaming industry speculation Thursday by announcing plans to split off the regional casino company’s properties into a real estate investment trust.

If successful — Las Vegas-based Pinnacle said the process could take up to a year to complete — the company will become two publicly traded entities.

Pinnacle would serve as the operating company and manage the casinos through lease agreements. The yet-to-be-named real estate investment trust — commonly referred to as a REIT — would own the properties.

Pinnacle operates 15 casinos in eight states, including two small casinos in Northern Nevada. The company doubled in size last year when it acquired regional gaming rival Ameristar Casinos for $2.8 billion.

Pinnacle CEO Anthony Sanfilippo said during a conference call with analysts the REIT would be able to diversify beyond gaming and include other forms of entertainment.

By law, REITs don’t pay federal income taxes. With real estate as their primary source of income, REITs must distribute at least 90 percent of their taxable earnings to shareholders.

Analysts had a mixed view of the REIT plans.

Buckingham Research gaming analyst Brian McGill said the announcement should raise the multiple for other regional companies, since Pinnacle will be looking to make acquisitions.

“That said, there is still uncertainty surrounding the transaction being completed,” McGill said.

Investors sent shares of Pinnacle down $2.42 or 9.44 percent to close at $23.22 on the New York Stock Exchange.

Macquarie Securities gaming analyst Chad Beynon said the announcement was “simply an intention to pursue this avenue.”

The REIT conversation overshadowed Pinnacle’s third-quarter earnings release.

Pinnacle reversed a net loss from a year ago when the company was in the middle of completing the Ameristar acquisition and was opening a new resort in Baton Rouge, La.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said rumors of the REIT conversion has been part of Pinnacle’s story for several quarters.

“We sense management elected to fire its first formal REIT bullet in an effort to potentially mitigate a sharp sell-off in shares in response to lackluster third quarter,” Wieczynski said.

Under the plans, Pinnacle shareholders would receive shares in the REIT in a tax-free spinoff. The company plans to sell $1 billion in stock to pay down debt. The company’s board approved a cap of 9.8 percent on stock ownership during the REIT process.

Sanfilippo said in a statement the company’s board approved the split, but several regulatory approvals and “a number of hurdles must be cleared” before the transaction can be finalized.

“We believe the separation would provide a lower weighted average cost of capital and an attractive financial platform to take advantage of future opportunities,” Sanfilippo said.

He said the REIT process would have little disruption to the day-to-day operations of the company’s casinos.

The REIT separation was first proposed in March when Orange Capital, a New York-based hedge fund, bought a 4 percent stake in Pinnacle. The activist investment group asked management to consider the idea.

In a statement, Pinnacle said said it “conducted substantial analysis” of the REIT feasibility. “A significant amount” of work still has to be completed. At an investment forum in September, Sanfilippo said the company hired advisers to help decide if a REIT made sense for shareholders.

Last year, Penn National Gaming, Inc. split off 21 of its 29 casinos and racetracks into Gaming and Leisure Properties, a publicly traded REIT. The properties are leased back to Penn through a management contract.

Boyd Gaming Corporation CEO Keith Smith said last week the company spent $3 million so far to investigate a potential REIT split.

J.P. Morgan gaming analyst Joe Greff said Pinnacle is taking the same strategic approach to the REIT as Penn National, which is its largest regional casino rival.

“Pinnacle sees the separation as a means to a lower weighted average cost of capital, a platform to engage in mergers and acquisitions and consolidation of a maturing industry and other industries, and return its free cash flow to equity holders in a tax-efficient way,” Greff said.

Pinnacle said it hopes to have a favorable response from the Internal Revenue Service by the end of the year as to guidance on various technical tax matters related to the spinoff.

In the third quarter that ended Sept. 30, Pinnacle said its net income was $12.5 million, or 21 cents per share. A year ago, the company’s net loss was $180.4 million, or $3.07 per share.

Net revenue for Pinnacle grew 35.7 percent to $568.3 million.

Sanfilippo said the company’s challenged regional markets “stabilized” during the quarter.

“We are optimistic this will continue given the encouraging trends we experienced in October,” Sanfilippo said.

Related Links
Boyd Gaming Gaming Vendor Information
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