Penn National Jumps on Breakup Plan to Create Casino REIT

Penn National Gaming Inc., the operator of 29 casinos and racetracks, surged to its highest price since 2008 after announcing plans to split into two public companies by placing most properties into a new real estate investment trust.

The shares gained 28 percent to $48.23 at the close, after the Wyomissing, Pennsylvania-based company said yesterday it will spin off at least 17 properties into the first casino-focused REIT. Executives said they would encourage other casino companies to do the same, sending shares of MGM Resorts International and Pinnacle Entertainment Inc. higher.

Penn National will continue to run most of its casinos and tracks, according to a statement. Its investors will receive a dividend of about $5.35 a share plus stock in the REIT. Other casino companies will probably consider similar moves to free up capital, said Joseph Greff, a JPMorgan Chase & Co. analyst.

“This could be a trend within the gaming sector to distribute profits on a more tax efficient basis,” New York-based Greff wrote in an investor note. He rates the shares the equivalent of buy.

Today’s percentage jump in Penn National shares was the biggest in four years. Pinnacle Entertainment surged 7.1 percent to $12.65 and MGM advanced 2.9 percent to $9.64.

Unlock Value

Chairman and Chief Executive Officer Peter Carlino will hold those same positions at the REIT and remain chairman of Penn National. Tim Wilmott, Penn National’s chief operating officer, will become CEO of the casino company. Chief Financial Officer Bill Clifford said on a conference call today that he would be CFO of one of the two separate companies after refinancing all debt next year, including tendering for Penn National’s bonds.

The casino operation will pay the REIT about $450 million a year in rent, the company said. The split, subject to regulatory approval, is expected in the second half of 2013, with the REIT effective in January 2014.

“This process will unlock the tremendous value of our real estate portfolio,” Carlino said today on a conference call. “This is just strictly our view of how we can best take the assets we have and make the most of them.”

Pursue Acquisitions

Carlino, 66, built Penn National via acquisitions and construction from a single horse-racing track near Harrisburg, Pennsylvania. REITs, with their primary income from real estate, don’t pay federal income taxes. They’re required by law to distribute at least 90 percent of their taxable earnings to shareholders as dividends.

The split will lower Penn National’s cost of capital, Carlino said today on the conference call. Both the REIT and the operating company will continue to pursue acquisitions and developments, and may form partnerships on projects, he said. The property company can own non-U.S. assets, and may eventually expand into non-gambling real estate, executives said.

As two entities, Penn National may be able to overcome regulatory hurdles in some states that limit the number of casinos owned or operated by a single company, Clifford said.

Separately, Penn National unveiled plans yesterday for a casino in Philadelphia, making it one of six bidders for the single license to be awarded by the state Gaming Control Board. The company seeks to build a $480 million Hollywood Casino near the city’s sports complex, according to a statement.

Adelson’s Plans

Penn National said it received a private-letter ruling from the Internal Revenue Service related to the split’s tax treatment. Penn National has completed its work with the IRS and doesn’t expect to need further approvals, Clifford said on the call.

Jonathan Litt, founder and chief executive officer of LandandBuildings, a Greenwich Connecticut-based hedge fund focused on real estate, released a report in September suggesting Las Vegas Sands Corp. might be worth double its $44 a share stock price by splitting into separate casino, retail and hotel companies, taking advantage of REIT structures. The casino company can grow faster without being attached to real estate, he said.

Sheldon Adelson, chairman and CEO of Las Vegas-based Sands, said on a Nov. 1 conference call that he would consider selling or spinning off the company’s retail properties.

Excluding mortgage REITs, property trusts have raised record amounts of cash through equity and debt sales in the past three years as investors seek yields higher than those offered by U.S. government notes.

REIT Shareholders

Penn National’s REIT shareholders are expected to receive the property company’s income as an ordinary dividend -- estimated at $2.36 per share, based on 2013 earnings guidance. The company forecast 2013 profit of $2.62 a share on revenue of $3.2 billion and adjusted earnings before interest, tax, depreciation and amortization of $905.1 million.

Casinos in Baton Rouge, Louisiana, and Perryville, Maryland, will also be owned by the REIT and held in a taxable subsidiary. Eight other tracks and casinos, including four joint ventures, will remain owned by Penn National. Two Ohio racetracks, pending relocation, will become part of the REIT.

Penn National received a settlement from Fortress Investment Group LLC and Centerbridge Partners LP after the private-equity companies abandoned a leveraged buyout in July 2008. The firms paid a $225 million breakup fee and invested $1.25 billion in interest-free preferred stock.

Fortress, which holds $975 million of the preferred, agreed to reduce its holdings to facilitate the planned split. The private-equity firm can exchange its stake for $67 a share, or 14.6 million common shares.

Wells Fargo Securities and Bank of America Merrill Lynch are serving as financial advisers to Penn National. Wachtell, Lipton, Rosen & Katz is serving as legal counsel to Penn National and Skadden, Arps, Slate, Meagher & Flom LLP is also advising for tax matters.

(Visit to access today’s call.)

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