Ladies and Gentleman: Presenting the World’s First Casino REIT!
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Penn National Gaming (NASDAQ: PENN) recently announced plans to be the first company to create a casino focused REIT. The associated tax advantages will allow Penn to strategically begin returning capital to shareholders. The plan is to split Penn into two publicly traded companies, one for its operations and another – the REIT – for its property.
The way the current deal is proposed is that current Penn shareholders will receive shares of the new REIT on a one-to-one basis. Then, REIT investors will receive a special dividend of around $15 per share, which will be 35% cash and 65% stock. The REIT would then lease the assets back to the operating company. This speculated lease structure would involve a triple net lease that equals north of $450 million in rent revenue. The split should help both companies access cheaper capital and have fewer regulatory restrictions. Penn is one of the top five casino stocks hedge funds love (see our entire Top Ten here).
Penn's 23x trailing P/E, compared to its forward P/E of 17x suggests that investors still might be overlooking the casino stock. The yield on Penn’s new REIT looks to be very promising. Penn expects to pay out around $2.35 in dividends per share annually, putting the theoretical dividend yield to 7.5% for the new REIT shares. This may even be on the conservative side, as the new casino REIT may well trade higher on a multiples basis. The current 2012 price-to-FFO multiple for Penn as a whole comes in around 7x, and the current pricing of the casino REIT would put it trading at 12x FFO. Compare this with the U.S. REIT universe that trades with an average P/FFO multiple of 15x in 2012, and we believe we could see an even higher yield after everything is said and done.
Pinnacle Entertainment (NYSE: PNK) is another gaming stock that could consider unlocking value for investors by taking advantage of a REIT status. The 3Q results for Pinnacle showed EPS of $0.30, beating consensus of $0.18. Unlike the other casino stocks listed below, Pinnacle and Penn are primarily regional operators. Pinnacle may likely see less growth than other major casino operators given its lesser exposure to the rapidly growing Chinese and Singaporean markets, but it has posted itself in key markets in the U.S. which are insulated from Las Vegas’ slowdown. Although Pinnacle does not currently pay a dividend it has amassed some $150 million in cash, and a theoretical 3% dividend yield would only require around $25 million.
MGM Resorts' (NYSE: MGM) 3Q results showed that its Vegas segment was a drag on the company, much like its peers in the casino sub-industry. EBITDA for 3Q came in 10% below expectations for the U.S. segment, while Macau property EBITDA was relatively in line. MGM’s overexposure to Las Vegas makes it less appealing than Wynn or Las Vegas Sands, not to mention its industry high 50% debt-to-equity status. Even so, MGM is one of billionaire John Paulson’s top picks; he is the top fund owner of the casino stock and has over 3% of his 13F invested in MGM (check out John Paulson’s newest stock picks).
Wynn Resorts (NASDAQ: WYNN) is the only other casino stock listed that pays a dividend besides Las Vegas Sands. Wynn currently pays a yield of around 1.8%. Wynn’s 3Q results saw EPS come in at $1.48, compared to consensus of $1.34 on better than expected Macau EBITDA segment results. Wynn recently announced a special dividend of $7.50, which does not include its regular quarterly dividend of $0.50. Wynn also has plans to boost its quarterly dividend by 100% starting in 2013.
Las Vegas Sands (NYSE: LVS) is one of the top casino stocks that might be pushing for a REIT conversion. This casino company currently pays the highest dividend yield of our five stocks listed at a 2.3%. Like Wynn, Las Vegas Sands also announced a special dividend, one that equals $2.75 per share. Given its strong free cash flow situation, Las Vegas Sands is also boosting its dividend – by 40% to $0.35 per share quarterly. Las Vegas Sands has one of the better balance sheets and some of the best growth prospects, hence its premium P/E of 25x.
We believe that there is still value to be found in Las Vegas Sands' shares, as the company has opportunities to unlock value by monetizing non-core assets, or even exploring REIT conversion. Billionaire investor and founder of Citadel Investment Group Ken Griffin was one of the key firms loving Las Vegas, having upped his stake over 50% (see Ken Griffin’s newest picks).
In considering how to play this realm, we believe that Penn may be setting the precedent with its first-in-industry plans to form a casino REIT. The stock is up over 25% in the last week on the news, despite having the lowest five-year expected earnings growth rate (7%) of all five stocks listed, and one of the lowest net profit margins (9%). We believe that other casino stocks will explore similar moves to unlock value, with Las Vegas Sands being one of the top candidates.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!