US casino operators, Boyd Gaming (BYD) or Pinnacle Entertainment (PNK), may announce the next REIT property assets spin-off in 2015. This is following Penn National Gaming’s (PENN) successful divestiture of its real property assets division into a REIT named Gaming and Leisure Properties (GLPI) in November 2013. During the third quarter earnings, PNK and BYD’s management said that they were reviewing potential REIT spin-offs.
The above chart shows that PENN’s spun-off unit, GLPI, resulted in a higher multiple. This was due to higher profit margins. It led activist shareholders to pressure PNK and BYD to pursue similar spin-offs. All of these casino companies are part of ETFs—like the VanEck Vectors Gaming ETF (BJK).
US casino operators are considering REIT spin-offs to achieve higher valuations. Real estate is a main income source. REITs distribute at least 90% of their taxable earnings to shareholders.
Anthony M. Sanfilippo, CEO of PNK, commented that “We believe the separation would provide a lower weighted average cost of capital and an attractive financial platform to take advantage of future opportunities to create long term shareholder value within the casino gaming industry and the broader leisure and entertainment sector.”
Keith Smith, CEO of BYD, said, “There are various aspects of our capital structure that make potential value creation through a real estate investment trust challenging at this time.”
In a research report, J.P. Morgan said, “As with PENN’s strategic rationale, PNK sees the separation as a means to a lower weighted average cost of capital, a platform to engage in M&A/consolidation of a maturing industry and other industries, and return its free cash flow to equity holders in a tax-efficient way.”
In the next part of this series, we’ll discuss why Las Vegas’ visitor volume increased.