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Why AQR Capital bought a stake in Gaming and Leisure Properties


Mar. 20 2014, Published 9:00 a.m. ET

AQR Capital and Gaming and Leisure Properties

AQR Capital initiated new positions in Vodafone Group plc (VOD), Gaming and Leisure Properties (GLPI), and Allegion plc (ALLE). Positions were increased in Facebook, Inc. (FB), Omnicom Group (OMC), and LSI Corporation (LSI). The firm opened a brand new position in Gaming and Leisure Properties (GLPI) that accounts for 0.12% of the fund’s 4Q portfolio. Gaming and Leisure Properties is the first gaming-focused REIT, which was spun off from Penn National Gaming (PENN) in November 2013.

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GLPI is in the business of acquiring, financing, and owning real estate property to be leased to gaming operators in “triple net” lease arrangements, pursuant to which, the tenant is responsible for all facility maintenance, insurance required in connection with the leased properties, and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities, and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.

GLPI expects to grow its portfolio by aggressively pursuing opportunities to acquire additional gaming facilities to lease to gaming operators, including Penn. GLPI also anticipates diversifying its portfolio over time by acquiring properties outside the gaming industry to lease to third parties. On November 15, 2012, Penn National Gaming announced its intention to pursue a plan to separate its operating assets and real property assets into two publicly traded companies—an operating entity Penn National Gaming (PENN), and a newly formed entity GLPI—that will become a publicly traded REIT for federal income tax purposes.

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Under U.S. tax law, REITs don’t pay any federal income tax, provided they distribute 90% of their profits to shareholders. The transaction, which was tax-free to Penn National shareholders, saw each Penn National shareholder receive 1.35 shares in GLPI, plus, a special cash dividend of $3.33 per share of Penn National stock. The special dividend of $1.05 billion, or approximately $11.84 per share, was paid on February 18, 2014, in a combination of cash and stock.

Based on Penn National Gaming’s current real estate portfolio, GLPI is expected to initially own the real estate associated with 19 casino facilities, which have a total of over 2,900 acres of land and 6.6 million square feet of building space, including two facilities currently under development in Dayton and Youngstown, Ohio. GLPI would lease back to Penn National Gaming, 17 of these casino facilities and own and operate two gaming facilities in Baton Rouge, Louisiana, and Perryville, Maryland. The CEO of Penn National Gaming, Peter M. Carlino said, “Our plan is to create two well capitalized companies with strong free cash flow that are positioned for growth in the gaming and REIT sectors.”

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An article in the Philadelphia Inquirer cited an investigative report from the Massachusetts Commission that said, “Penn National believes that the weak economy and the saturation in the casino marketplace, as more and more states legalize gaming in search of new sources of tax revenues to solve their budget difficulties, continue to negatively impact the domestic gaming industry.” The domestic gaming industry is also fragmented, with opportunities for consolidation. In December, GLPI entered into an agreement to acquire the real estate assets associated with the Casino Queen in East St. Louis, Illinois, for $140 million. The resort, built in 2007, had approximately 1.7 million guest visits during the past 12 months. Plus, GLPI will provide Casino Queen with a $43 million term loan, which will completely refinance and retire all or substantially all of Casino Queen’s outstanding long-term debt obligations.

GLPI posted fourth-quarter net income of $9.2 million, or $0.08 per diluted common share. Net revenue for the three months ended December 31 was $113.8 million. The company expects total rental income of approximately $477 million, including approximately $421 million from Penn and approximately $13 million from Casino Queen. The company declared a quarterly dividend of $0.52 per common share, which is expected to be paid on March 28, 2014.


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