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The newest type of REIT...Casinos



November 16, 2012 – Comments (2) | RELATED TICKERS: PENN

OK, we have prisons, data centers, gas stations...and now casinos.  One company after another seems to be converting either completely or partially into "tax-efficient" vehicles like MLPs and REITs lately.  Today a company in yet another sector announced that it's taking the leap...gaming.  Penn National Gaming (PENN) announced today that it is planning to convert into two companies, one of which will be a REIT that owns all of the organization's real estate and leasts it to a Penn National operating company.  Not surprisingly, shares of PENN soared nearly 30% on the news of this move.

According to what I've read, current PENN shareholders will receive one share of the new REIT and $15.40/share in a taxable dividend...$5.35 in cash and the rest in more REIT shares.  Initially each REIT share will be paid in dividends annually $2.36 per share.

One Barclays analyst was quoted saying that they value the new company at a whopping $67 to $76 per share, significantly higher than today's $48.23/share and that's after the huge pop.  The stocks of a number of other regional casino operators soared on this news as well today as investors speculated that they might make smiliar moves.

If you ask me, all of these conversions to REITs and MLPs are great for investors, but probably not so much for the government.  One has to wonder if Uncle Sam will eventually say enough is enough and pull the plug on the whole thing like the Canadian government did in the infamous (at least to income investors) Halloween Massacre several years ago when all sorts of non-real estate companies began converting into CANROYs.  Perhaps the U.S. government will recognize the need for yield-generating investments in the zero interest rate world that it has created and look the other way.  Time will tell.  One way or another taxes are going to likely increase in the future and eliminating or restricting REIT / MLP conversions has to be something that politicians are considering.  As someone who loves special situations and is a yield hound, I hope not, but you never know.

Penn National splitting casino, real estate businesses


2 Comments – Post Your Own

#1) On November 16, 2012 at 4:35 PM, Lulupoopsalot (65.02) wrote:

Hmmmm....Is this something Sears and other companies with large real estate holdings but questionable balance sheets might be looking into for their future as well?  I have no clue...that's why I'm asking :D

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#2) On November 16, 2012 at 5:41 PM, Schmacko (88.00) wrote:

This is from the PENN national gaming site and is much more detailed.

To me it reads the new shares will be distributed via a $15.4 dividend is non-taxable.  You get $5.35 in cash + 1 share of the new REIT, which would have an implied value of $10.05.

The REIT will pay 90% of its taxable income as a dividend, which based on 2013 guidance would be $2.36/share.... though since the split wouldn't happen til the end of 2013 I don't know if you could expect to see a dividend next year or not. 

The link also talks about the rental agreement between the two entities - The REIT gets something like $450 mil in rent per year.

It also talks about how the Fortress Investment Group would have to give up its series B redeemable preferred stock for 14.6 million non voting shares and then would be guaranteed at least $67/share for 6.2 million of those shares so that it's ownership of the REIT will fall below 10%.

I don't know I think this something that one can wait to purchase til later.  I wouldn't be at all suprised if they shares fell back down at least 10% from the pop here.  It also seems like there's been a casino building boom in the country lately, which makes me think I wouldn't want to hold on to the actual casino operating side of the split.  I know their Charelstown casino is going to be losing business as soon as the new casino goes up in National Harbor Maryland.... 

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