In the second in a series of reports about real estate investment trusts in the gaming industry, UNITE HERE released today: House Divided: REIT Dividends vs Casino Reinvestment.
The report examines the record of Gaming and Leisure Properties, Inc., (NASDAQ: GLPI) the gaming industry’s only real estate investment trust.
The GLPI sale-leaseback model, according to the report, saddles operators with high rent burdens that could impair their abilities to reinvest in casinos.
In 2013, Penn National Gaming, Inc. (NASDAQ: PENN) spun-off its real estate assets into the REIT that became GLPI. Since then Congress has passed a law barring companies from undergoing tax-free spin-offs similar to GLPI’s.
Last July, GLPI announced it had entered into an agreement to acquire 14 of Pinnacle Entertainment’s 15 casinos and lease them back to Pinnacle (NASDAQ: PNK) under a Master Lease agreement. The deal requires the approval of gaming regulators in several states, including Indiana, Missouri and Louisiana.
The Master Lease, which is substantially similar to the lease GLPI signed in 2013 with Penn, binds Pinnacle to a 35-year lease obligation, rental payments on which are expected to deprive the company in its first year of nearly 60% of its cash-flow.
Among the report’s findings:
- Penn’s capital expenditures – including spending on property and equipment upkeep – have declined markedly since its November 2013 leaseback transaction with GLPI.
- The leaseback allowed Penn to lower its interest payments to banks and bondholders, but its long-term liabilities have actually increased because of the substantial rental payments to GLPI.
- Both Penn and GLPI suffered recent credit downgrades related to their respective leverage ratios. Moody’s Investor Services downgraded Penn’s corporate family rating in large part because of the expectation that Penn would not be able to reduce its leverage at a sufficient pace. GLPI, meanwhile, was downgraded by Standard and Poor’s, because of the expectation that the REIT’s adjusted leverage would be higher than anticipated.
- One significant factor in GLPI’s rising leverage is its falling share price, which reduces the equity portion of the company’s capital structure. As of Friday’s close, GLPI’s stock was down 27% since the Pinnacle deal was announced on July 22, 2015.
- The lease requires Penn and would require Pinnacle to devote a minimum of 1% of revenues on maintenance capital expenditures. This floor is substantially below industry averages for maintenance capital.
UNITE HERE’s first report in the series, Outlier in REIT Industry, compares the GLPI leaseback model to the large retail REITs and nursing home REITs.
UNITE HERE represents 275,000 gaming, hotel and food service workers in the U.S. and Canada.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160223006502/en/
Contacts:
Kate O’Neil, 504-858-7491
