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Spin-Off City Lower taxes, lower borrowing costs, and more freedom to grow. Those are the some of the reasons companies form real estate investment trusts. But some analysts (and others) argue real estate investment trusts (REITs) are fundamentally unfit for the gaming industry. By Marjorie Preston
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n November 2013, Penn National became the first gaming company to split itself in two. By spinning off its most of it property assets into a real estate investment trust, or REIT, the Pennsylvania-based gaming company created a new, wholly separate publicly traded entity called Gaming & Leisure Properties Inc. As part of the strategy, GLPI then took ownership of 21 of Penn’s 29 casinos and racinos, and leased them back to the original company through triplenet lease agreements. And the point of this whole chess game? For one thing, a considerable tax advantage, says Ron Kuykendall, of the National Association of Real Estate Investment Trusts, NAREIT. “The REIT is required by law to pass at least 90 percent of taxable income to shareholders through dividends, and for every dollar, it gets a deduction from its corporate tax,” says Kuykendall. “Practically speaking, the REIT can take a full tax deduction and pay no corporate taxes.” Second, in the marketplace, the promise of regular dividends may make REITs a more attractive investment proposition. Third, REITs have lower borrowing costs than gaming companies, so a spin-off adds borrowing power and frees management to concentrate on growth. Finally, as a separate entity in the role of “supplier,” a gaming-related REIT may be able to sidestep regulations limiting the number of casinos it can own in a given jurisdiction—a strategy first tested when GLPI acquired the property assets of 14 Pinnacle Entertainment casinos in eight states. UNITE HERE, the casino workers’ union, fought the deal in Indiana, saying the law limits casino ownership to two properties in the jurisdiction. If the deal—which is still not final—proceeds as planned, GLPI would own three. 30
Global Gaming Business MARCH 2016
A Good Fit for Gaming? In 2012, after Penn National announced its REIT, shares gained 28 percent, the biggest surge in four years. The hype has fizzled since then. In January, Fitch Ratings reported GLPI shares had declined 30 percent from a 52-week high in mid-2015; in an accompanying note to investors, Fitch analyst Alex Bumahzny said REITs in general may be a poor fit for the gaming sector be-
“We are focused on leveraging our unique position as the only standalone gamingfocused REIT.” —GLPI Chairman Peter Carlino
GLPI recently bought the Meadows racino outside of Pittsburgh, which it will own and operate