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Best of Howard Stutz

Gaming Guru

Howard Stutz

N.Y. investment fund proposes REIT for Pinnacle casino holdings

22 April 2014

LAS VEGAS -- A New York-based investment fund, which owns 4.4 percent of Pinnacle Entertainment, Inc., wants the Las Vegas-based regional gaming operator to spin off its casinos into a real estate investment trust.

In filing with the Securities and Exchange Commission Monday, Orange Capital said it believes Pinnacle could be more valuable to shareholders by splitting the company into a trust, referred to as a REIT.

“Based upon management’s track record and its past communications with investors, we believe Pinnacle is open to ideas that enhance shareholder value,” Orange Capital managing partner Daniel Lewis said in a letter to Pinnacle CEO Anthony Sanfilippo and the company’s board members.

Pinnacle operates 14 casinos in nine states, including two small Northern Nevada properties.

Last year, Penn National Gaming, Inc. spun off the real estate associated with 21 of the company’s 29 casinos and racetracks into Gaming & Leisure Properties Inc. Penn National operates the casinos on a lease agreement with the REIT.

In March, hedge fund Elliot Associates acquired a 5 percent ownership stake in Boyd Gaming Corporation, leading analysts to speculate that the investor will encourage Boyd’s properties to be spun off into a REIT.

By law, REITs don’t pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute at least 90 percent of their taxable earnings to shareholders.

Gaming & Leisure Partners paid out $1.05 billion in dividends this year to shareholders, or $11.92 per share.

Pinnacle released a statement that acknowledged the filing from Orange Capital, but didn’t take a stand on splitting into a REIT.

“The company is committed to driving value for all Pinnacle shareholders and will continue to take actions and review all strategies to achieve this important objective,” the company said in its statement. “Pinnacle values the views of its shareholders and regularly engages in a dialogue with its shareholders to solicit feedback on its strategy and performance with the goal of enhancing value. The board of directors and management team of the company regularly review its strategic priorities and opportunities, and assess a variety of value creating options.”

Last year, Pinnacle completed a $2.8 billion buyout of regional gaming rival Ameristar Casinos, which doubled the size of the company.

Pinnacle said the company’s share price is up about 65 percent since the deal was announced in December 2012.

Orange Capital said that despite the Ameristar deal, the company “is valued at a significant discount to (its) closest peer, the combined Penn National Gaming, Inc., and its real estate owner, Gaming &Leisure Properties Inc.

“We believe there is a compelling case for Pinnacle to separate its owned real estate into an independent publicly listed real estate investment trust,” Lewis wrote. “We believe the entities on a combined basis would have an improved credit profile with less exposure to the volatile high-yield debt markets.”

A year ago, Orange Capital was supportive of a proxy fight led by investor Jason Ader against slot machine manufacturer International Game Technology. Orange Capital owned 1.4 percent of IGT’s stock.

In the letter to Pinnacle, Orange Capital said it has certain derivative agreements that could increase the company’s holdings to 6.7 percent.

After news of the SEC filing was released, investors drove shares of Pinnacle up $1.24, or 5.62 percent, to close at $23.32 on the New York Stock Exchange Monday.

Macquarie Securities gaming analyst Chad Beynon told investors that REIT conversion was “unlikely” for Pinnacle because the company has several properties described as net operating losses, which are cash shields from federal taxes.

“We are positive on Pinnacle for noncatalytic reasons such as continued synergies from the Ameristar deal, cash generation and deleveraging and positioning in properties with healthier demographics in relation to peers,” Beynon said.
N.Y. investment fund proposes REIT for Pinnacle casino holdings is republished from