by Lawrence Meyers | November 21, 2012 9:20 am
Remember that classic scene in Lost in America, where Albert Brooks begs the casino owner to just give back all the money his wife lost, trying to convince him that it would be great public relations to be the casino that gives money back to its gamblers?
Well, it looks like Albert might finally get his wish.
Penn National Gaming (NASDAQ:PENN) is going to split into an operating company and a real estate investment trust — in other words, it’ll pay a dividend.
Why would Penn take such a bold step? The answer lies in the differences that the gaming and hospitality sectors have been seeing during the past couple years.
Gaming revenue at domestic casinos has been modest, at best. In many cases, companies like MGM Resorts (NYSE:MGM) and Las Vegas Sands (NYSE:LVS) have been struggling on the gaming revenue side, and even Wynn Resorts (NASDAQ:WYNN) has its challenges. This is because the economy remains weak and people aren’t thrilled to gamble their money away.
On the other hand, the hospitality business has been going strong. With RevPAR, ADR and occupancy metrics rising by impressive amounts off the lows of the financial crisis, it has been a good time to own hotels. Demand is increasing while supply has been relatively flat. That’s a great place to be if you own a hotel.
By splitting its operations, management believes it can take advantage of the real estate side of the equation and create more value there should gaming continue to lag. Indeed, the casino side will pay the real estate side $450 million annually in rent.
Meanwhile, the REIT can also go a-hunting for properties anywhere in the world via acquisition. Its rental income from the casino side also will increase because Penn will be able to open up new casinos in states that had ownership limitations, expanding its gaming base.
Even better, the company will save as much as $150 million in real estate taxes. Nice.
Current Penn National investors will pick up a $5.35 dividend per share and get stock in the REIT next year. Going forward, the REIT expects to pay out an annual dividend of around $2.35 per share.
So, will other casinos follow suit?
I don’t see MGM being able to do this. It has $13.8 billion in debt, and I’m guessing there are so many encumbrances on all the various tranches from all the different creditors, that a spinoff could never happen. Nor do I see this move coming from Las Vegas Sands. Much of its EBITDA is generated internationally. Sands has been trying to monetize its other assets in order to generate more growth, not distribute the profits to shareholders.
Churchill Downs (NASDAQ:CHDN) might do so with its racetracks, but I don’t think its assets are substantial enough, and the same goes for Boyd Gaming (NYSE:BYD). And don’t make me laugh regarding Caesar’s Entertainment (NYSE:CZR) which itself is a spinoff — and holding almost $20 billion in debt.
So if you blow your nest egg on roulette, but own the Penn REIT, you actually can get a kinda-sorta rebate from the casino.
And I think it’s the only one that will be there.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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