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Why Pinnacle’s REIT enhances shareholder value

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PNK’s REIT plan

Last month, the board of directors at Pinnacle Entertainment (PNK) approved a plan to divide the company’s operating and real estate assets into two publicly traded entities:

  • a gaming operations company, or OpCo
  • a PropCo (property company) or REIT that would own, acquire, and lease real estate assets

PNK’s board reached this decision after reviewing various alternatives designed to maximize long-term shareholder value, including alternate financing, capitalization, and strategic paths.

Hedge fund’s REIT proposal

On April 16, 2014, Orange Capital, a hedge fund that owns roughly 4.3% of PNK, filed an SEC Form SC 13D that outlined a proposal for PNK to spin off its real estate assets. As shown in the chart above, the company’s pro forma valuation indicates that the spin-off could create a 77% increase in PNK’s stock price.

Orange Capital’s managing partner Daniel Lewis said, “It is our view that the company’s acquisition of Ameristar Casinos Inc., and the subsequent balance sheet deleveraging program [have] generated meaningful value for its shareholders. However, despite the successful Ameristar transaction, the company is valued at a significant discount to Pinnacle’s closest peer, the combined Penn National Gaming Inc. (PENN) and its real estate owner, Gaming & Leisure Properties Inc. (GLPI). . .In light of the successful PENN-GLPI spin-off transaction in 2013, we believe there is a compelling case for Pinnacle to separate its owned real estate into an independent, publicly listed real estate investment trust (‘REIT’ or ‘PropCo’), which would be distributed to shareholders via a tax-free spin-off (‘PropCo Transaction’).”

PNK management’s take

Pinnacle Entertainment CEO Anthony M. Sanfilippo commented, “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. As we work to execute the REIT transaction, we will remain focused on completing the Ameristar integration and fully leveraging the financial and scale benefits of that transaction while also maintaining our focus on operational excellence to maximize our financial performance.”

PNK, PENN, and GLPI are part of the VanEck Vectors Gaming (BJK) exchange-traded fund. Investors can gain access to the leisure industry through ETFs like BJK and the Consumer Discretionary Select Sector SPDR Fund (XLY).

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