Fitch: Gaming companies ‘not well-suited’ for real estate investment trusts

Fitch Ratings Service tossed some cold water on plans by several casino companies to separate their properties in real estate investment trusts.

The New York-based bond rating service, in a report to investors Thursday, warned the financial returns might not be as lucrative as once expected. Inherent conflict can surface between the separate business interests of the divided companies — one that operates the resorts and the other owns the real estate and buildings associated with the properties.

"Fitch does not believe gaming companies are well-suited for operating company/property company structures," the ratings service's chief gaming analyst, Alex Bumazhny, wrote in the report, "What Investors Want to Know – The State of REITization."

Bumazhny said the long-term lease agreements signed between the operating and property companies can become a cause of concern, "given the industry's cyclicality and substantial (capital expenditure) needs."

Three companies — MGM Resorts International, Pinnacle Entertainment and Caesars Entertainment Corp. — are in the process of separating all or a portion of their casinos into REIT structures. The model was first accomplished by Penn National Gaming in 2013, when the company spun off Gaming and Leisure Partners as a separate public company, which took ownership of 21 of Penn's 29 racetracks and casinos.

REITs don't pay federal income taxes but are required to distribute at least 90 percent of their taxable earnings to shareholders.

Bumazhny warned that fewer companies, including several outside the casino industry, are exploring REIT transactions because GLPI has seen its stock value decline 30 percent from its 52-week high in mid-2015. Also, recent Internal Revenue Service guidance and the passage of the Protecting Americans from Tax Hikes Act of 2015, changed the Penn-GLPI model.

In an interview, Bumazhny said Macy's Inc. was planning a REIT spinoff similar to Penn-GLPI but halted the process because of the IRS changes.

"GLPI's shares traded really well in the first year," Bumazhny said.

The three gaming companies now involved in the REIT process are taking different paths that don't require IRS approval.

MGM Resorts is creating MGM Growth Properties that will initially own the real estate and buildings for 10 MGM developments, including seven properties on the Strip. The company plans to retain a 70 percent ownership in the REIT.

Pinnacle is selling 14 of its casinos to GLPI for $4.75 billion and will lease back the resorts through a 10-year lease agreement.

Caesars is seeking bankruptcy court approval to place some two dozen casinos operated by its Caesars Entertainment Operating Co., into a REIT with the division still managing the resorts. Caesars Palace is the only Strip property that is part of CEOC.

Bumazhny said the MGM concept was a better move because the company will still have control of the REIT.

"Fitch also maintained MGM's outlook as positive following its REIT transaction," Bumazhny said. "MGM's main credit group will retain the majority of the new REIT, reduce debt and retain two premium assets, the Bellagio and MGM Grand Las Vegas."

He said other companies, such as Macy's, are taking a long look at the MGM model.

The Caesars REIT structure follows the MGM model in the sense that the company will still have an ownership stake in the CEOC property company, although the percentage hasn't been determined. CEOC hopes to eliminate $10 billion of its $19.6 billion debt through the REIT, which is the key element of the Chapter 11 reorganization.

Bumazhny said Pinnacle's deal with GLPI was simply "a sale of assets. It's more of a merger and acquisition."

Pinnacle will continue operating its casinos but GLPI has ran into trouble in the past year trying to find management companies willing to operate any additional properties the REIT acquires. GLPI still hasn't named an operator for the Meadows Racetrack casino near Pittsburgh, which the company is acquiring from Las Vegas-based Cannery Casinos.

"Gaming companies have heavy maintenance capital expenditures, and that can run into trouble with the property side," he said.

In its report, Fitch expressed similar concerns about REITs covering retail businesses, but said the structure was "less problematic" for restaurant companies.

Contact reporter Howard Stutz at hstutz@reviewjournal.com or 702-477-3871. Find @howardstutz on Twitter.