(part 3) of the Vegas Review Journal article dated August 1st
The REIT will have to find other operators. Conflicts and various state gaming regulations against multiple licenses could keep Penn and Pinnacle out of some management deals. There is a growing list, however, of emerging casino operators.
Golden Entertainment CEO Blake Sartini, fresh off its merger with Lakes Entertainment, is looking to expand and might be interested if Gaming and Leisure comes calling.
"If an opportunity is presented to us, it's something we would certainly want to explore," Sartini said.
Union Gaming Group analyst Christopher Jones said regional gaming valuations are supported "by transaction activity and the focus on real estate value." He said Boyd Gaming Corp., which said last year it was investigating the REIT process, might consider selling some of its regional casinos or spinning off the properties into a REIT.
Jones said Boyd has "less of an appetite" to fold its Las Vegas holdings into a REIT "given the bullish outlook for (cash flow) growth in that market."
The REIT idea was first proposed to Pinnacle in April 2014 when activist investor Orange Capital urged the company to separate its real estate from the casino operations. Pinnacle announced its initial plans in November. Gaming and Leisure entered the picture in March, proposing to save Pinnacle the trouble and $700 million in costs of forming a publicly traded REIT.
After several months of negotiations, the two companies' boards approved a deal that gives Pinnacle shareholders 0.85 per share in Gaming and Leisure for each Pinnacle share they own. Also, Pinnacle shareholders will receive one share of the remaining Pinnacle Entertainment casino operating business. Pinnacle shareholders will own 27 percent of Gaming and Leisure once the transaction closes.
"We created value for our shareholders," Sanfilippo said. "They can keep the stock or turn into cash."
REITs don't pay federal income taxes and distribute 90 percent of their taxable earnings to shareholders.
Moving into a REIT structure won't preclude Pinnacle from expanding. The company retained ownership of its Cincinnati-area racetrack casino and has free cash for additional acquisitions, with or without Gaming and Leisure. Penn National, for example, bought the Tropicana for $360 million, opened the Plainridge Park Casino in Massachusetts for $250 million, and is spending $390 million on a San Diego-area Indian casino — all without Gaming and Leisure.
Wall Street says Gaming and Leisure is still shopping for regional casinos and Chairman Peter Carlino confirmed opportunities exist. Simkins said Pinnacle was one of the last "high quality assets" on the market. Still, other regional properties could be ripe for the taking.
Gaming and Leisure "should be the first call for any potential seller," Simkins said.
(Stack and Heritage Steakhouse). The Mirage also has one of the best high-end villa projects in the market. However, in recent years MGM took all of its international-marketing team and international players out of the property. Overall, the theme is a bit outdated, in our view, and the property could certainly benefit from a refresh. We also note the Mirage’s feature volcano is erupting less frequently.
We estimate The Mirage’s 2015 earnings before interest, taxes, depreciation and amortization (Ebitda) of $145 million. For reference, a purchase of 10 times Ebitda would imply a price target of $1.4 billion. A one-off buyer would likely have to unplug from MGM’s player database, which would impact results. The sale of the Mirage would be a deleveraging event for MGM. The stock is currently trading at 10.7 times our 2015 Ebitda estimate. MGM is due to report second-quarter results on Tuesday, Aug. 4.
Murren, who has been MGM chairman and CEO since 2008 and a company executive for more than a decade, believes REITs are in the gaming industry's near future. Penn National's spinoff won't be "a lone ranger."On Tuesday, GLPI announced a deal to acquire Pinnacle Entertainment's real estate.
Murren said REITs might be the best way for the gaming industry to better market its land. MGM Resorts, for example, controls more than 800 acres on and around the Strip.
"This is not an academic exercise," Murren said. "I believe this is a secular change in this industry and I intend for MGM to be a leader in any change that occurs."
A REIT "is one of 300 different ideas" being discussed and Murren wants an answer by the end of the year.
During the proxy fight, Murren talked with MGM's largest shareholders about ways to grow the company's value. MGM is building the $1.2 billion MGM National Harbor in Maryland and the $800 million MGM Springfield, adding more nongaming attractions in Las Vegas and expanding its footprint in Macau.
The investment community, however, hasn't ascribed value to those efforts.
The company has a "visible pipeline" for growth and is part of the discussion when a state explores gaming expansion. MGM was tied this month to a proposed $1 billion gaming complex in downtown Atlanta if Georgia lawmakers legalize casinos.
Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski told investors he expects MGM to announce a "strategic initiative" sometime after September that "should drive interest levels in the name higher."
He predicted a REIT structure involving MGM's non-Las Vegas resorts in Detroit, Mississippi and the Maryland and Massachusetts projects. Wieczynski speculated a few of the company's Strip resorts could be part of the REIT, but he said that decision hadn't been made.
"There are multiple options out there for MGM to pursue," Wieczynski said.
In June, Litt recycled his REIT idea, using the planned liquidation of the stock controlled by the late MGM founder Kirk Kerkorian as way to draw attention. The effort was largely ignored.
Murren said MGM Resorts is "very engaged" in the REIT issue.
"We know more about this subject than we did two years ago, and quite a bit more than people realize," he said.