This article is republished with permission from REITCafe.
This week, Las Vegas casino operator Wynn Resorts became the latest gaming company to post lower-than-expected second-quarter earnings. The firm blamed the poor results largely on sluggish performance in Macau and Las Vegas, both of which have been affected by the Chinese government’s anti-corruption initiative that is keeping high rollers away from gambling tables. In Nevada, gaming revenues were down 1.1 percent during 2014, and revenues declined 2 percent on the Las Vegas strip last year.
Many gambling stocks are losing value and weighed down by debt, with limited options for new financing. Wynn has made no announcement about a real estate investment trust (REIT), but the earnings situation is prompting a number of casino companies to consider spinning off their real property assets into REITs. To date, one gaming company has formed a REIT that is growing through acquisitions, and several others are considering similar moves to unlock value and boost their stock prices.
| TREPP-i Survey Loan Spreads (50–59% LTV)* |
| This Week | Previous Week | Previous Month | End 2014 | End 2013 | |
| Industrial | 149 | 152 | 151 | 138.5 | 170 |
| Multifamily | 146 | 148 | 148 | 139.8 | 166.7 |
| Office | 158 | 160 | 155 | 148 | 175 |
| Retail | 150 | 153 | 152 | 139.8 | 175 |
| Average Spread | 150.75 | 153.25 | 151.5 | 141.5 | 171.7 |
| 10-year Treasury Yield** | 2.20 | 2.27 | 2.40 | 2.17 | 3.04 |
The first gaming REIT was formed in late 2014, when Pennsylvania-based casino operator Penn National Gaming spun its real estate into Gaming and Leisure Properties Inc. (GLPI). Last week, GLPI announced the $4.75 billion acquisition of the real estate owned by regional gaming operator Pinnacle Entertainment (PNK). Pinnacle had previously considered a REIT spin-off, but opted for the sale instead. The transaction is expected to close in early 2016, after which the properties will be leased back to PNK. The deal will bring GLPI’s portfolio to 35 casino-hotels in 14 states.
Activist investors are encouraging MGM Resorts, which owns 14 resorts/casinos in Las Vegas, as well as other properties in the United States and other countries, to spin off its property into a REIT. MGM, which has been hit by a downturn in the Macau gaming market, has a significant development pipeline and needs financing for projects that include the Park project sports arena and an expansion of Mandalay Bay, both in Las Vegas, as well as new hotel-casinos in Maryland, Massachusetts, and Macau.
Caesar’s Entertainment (CZR) has proposed a REIT as part of its reorganization. It has created two subsidiaries, Caesar’s Acquisition and Caesar’s Entertainment Operating Company (CEOC). CEOC, which holds $18.4 billion of the larger company’s $22.8 billion in total debt, filed for Chapter 11 bankruptcy protection in January. The parent company plans to split CEOC into a REIT and an operating company. Through bankruptcy, CZR hopes to eliminate almost $10 billion in CEOC debt. The deal is currently mired in legal uncertainty.
Boyd Gaming also has indicated that it is considering a REIT spin-off. Boyd is one of the few gaming companies to post better-than-expected second-quarter earnings.
In today’s environment, where corporate managers are seeking new ways to increase value, REITs may be the future of the gaming industry. Nevertheless, REIT spin-offs can be challenging, and the long-term success of the gaming companies after spin-off is uncertain. If the real estate is separated from the operating companies, the two new companies may have goals that do not align well, raising concerns about their ability to succeed together. Gaming REITs seem like an attractive option today, but if gaming company shares recover, REIT conversions will become less likely.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** - 10 yr. Treasury Yield as of 7/31/2015.
