• Report says structure would make casinos vulnerable in slump
  • Union critique follows lawmakers’ protest over tax-free plan

Caesars Entertainment Corp.’s proposal to spin assets of its bankrupt operating unit into a real estate investment trust would create a deeply indebted business vulnerable to a downturn in the gambling industry, according to a casino workers’ union.

A Caesars REIT would be riskier than other big, publicly traded real estate trusts, Unite Here! said in a report released Tuesday, the same day the operating unit is due to update a Chicago bankruptcy judge on its reorganization. The union says it has long been opposed to casino REITs.

Under the reorganization proposal, Caesars Entertainment Operating Co., or CEOC, would exit bankruptcy as two separate entities: a REIT that would own land, hotels and casinos, and an operating unit that would rent the properties from the REIT, hold the gambling licenses and run the enterprises. REITs typically pay out all of their earnings as dividends and in exchange don’t pay income taxes.

While Caesars and its creditors have been squabbling for more than a year over the plan, neither side had challenged the REIT concept. 

At $6.05 billion, the Caesars investment trust would have the second-highest debt level of any retail REIT with similar rental contracts, known as triple-net leases, according to Ben Begleiter, the union analyst who put together the report. It would have the highest ratio of debt to earnings before interest, taxes, depreciation and amortization, he said.

CEOC, with casinos in eight states including Nevada and New Jersey, listed about $20 billion in liabilities when it filed for Chapter 11 protection in January 2015.

One Tenant

The REIT would also have only one tenant to rely on for rent, its main source of income. Other trusts, like those specializing in retail or commercial buildings, lease property to many businesses.

“Portfolio diversity is a commonly understood safeguard against debilitating revenue declines resulting from downturns in a single industry or the flagging financial fortunes of a single tenant,” Begleiter said in the report.

Unite and a number of other unions have already objected to the document CEOC filed with the court laying out its reorganization plan, claiming the disclosure didn’t contain enough information about how union pension claims will be satisfied.

In recent years, gambling companies and other non-traditional property owners began organizing REITs to boost profit. Energy Future Holdings Corp., the bankrupt Texas power company, tried to reorganize using the REIT model before running into trouble with state regulators.

Lawmakers’ Critique

The union isn’t the only critic of the Caesars plan. Last month, a group of U.S. lawmakers asked the Treasury secretary to withhold a “private letter ruling” the company would need to carry out the REIT transaction, calling it an unfair taxpayer subsidy.

“Our general take is that REITs for the gaming industry are like oil and water,” Unite Here’s Begleiter said in an interview. “They are bad for the workers and bad for customers and ultimately bad for the company.”

The case is In re Caesars Entertainment Operating Co. Inc., 15-01145, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).

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