Penn, GLPI relationship remains secure despite separation


The marriage between Penn National Gaming and Gaming and Leisure Properties is unbreakable despite a two-year separation.

Some marriages might be rocky, but this is a gaming industry Valentine's Day story.

Penn National spun off Gaming and Leisure Properties as a real estate investment trust in December 2013, turning over ownership of 21 of the company's resorts and racetrack casinos. Penn leased the properties back from Gaming and Leisure Properties and is paying rent to operate the businesses.

The companies have separate boards and management, are both publicly traded and are growing at their own pace.

In the past year, regional gaming giant Penn spent $360 million to buy the Tropicana Las Vegas, is building a $390 million Indian casino near San Diego, opened a $250 million racetrack casino in Massachusetts and spent a undisclosed price for an Illinois-based video lottery terminal route operator.

Gaming and Leisure Properties has deals to acquire the Meadows Race Track and Casino near Pittsburgh for $440 million and 14 casinos owned by Pinnacle Entertainment for $4.75 billion. Both transactions are expected to close by midyear.

Both companies discussed additional expansion opportunities earlier this month.

Penn's new video lottery terminal business could be exported into other states over the next three to five years. The company is exploring casino development opportunities in Georgia and Texas, but Penn executives hold out little hope the potential new markets will legalize gaming.

Meanwhile, Gaming and Leisure Properties CEO Peter Carlino said the REIT has no plans to move beyond casinos into other industries. There are still single- and multiproperty casino companies available for purchase, he said.

"We don't see anything and I see no reason to go elsewhere," Carlino said. "Frankly, we've got a book of things that we're looking at, some of which are pretty exciting."

Since Valentine's Day is a day for love, analysts expressed their affection for Penn and Gaming and Leisure Properties.

Penn National has predictable earnings, according to the investment community. Regional gaming markets — even with softness in some parts of the country — are on an upswing.

"As regional gaming revenues continue to improve, we should see strong flow through to same-store earnings as Penn and other operators generally have cut costs and improved operational efficiency over the past few years," Wells Fargo Securities gaming analyst Cameron McKnight said.

A day after Penn executives predicted positive signs for the 2016 first quarter, the comments were supported by good January gaming reports from several states, including Pennsylvania and Illinois.

"Overall, despite concerns about a U.S. economic recession, trends in regional gaming appear to be solid," Union Gaming Group analyst Christopher Jones said.

Credit Suisse gaming analyst Joel Simkins said Penn's bottom line will benefit from its newest facilities, including the Tropicana and the San Diego-area casino, which is expected to open this summer.

"We still see lower gas prices and rising wages as positives for Penn's core consumer, however, we will be monitoring any wealth effect related to market volatility," Simkins said.

Gaming and Leisure Properties also has its fans.

The company told investors this month its funds from operations were $80.6 million in the fourth quarter and $321.8 million for the year. The investment community uses that reporting figure as a closely watched measure in the REIT industry. It takes into account net income and adds back items such as depreciation and amortization. REITs don't pay federal income taxes but are required to distribute at least 90 percent of their taxable earnings to shareholders.

"On one hand, you have an equity yielding 8 percent," Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said. "Furthermore, you have the impending Pinnacle acquisition, which should serve as a compelling rent diversification and growth catalyst, with the potential to strengthen shareholder returns over longer-term time horizons."

Gaming and Leisure Properties is now the casino industry's only REIT.

MGM Resorts International is creating MGM Growth Properties, which will initially own the real estate and buildings of 10 of the company's casinos, including seven on the Strip. The difference from Gaming and Leisure Properties' structure is that MGM Resorts plans to retain 70 percent ownership in the REIT. Fitch Ratings Service gaming analyst Alex Bumazhny said in January he likes the MGM REIT plan because the casino operator is maintaining control.

Meanwhile, Caesars Entertainment Corp. has the only other pending gaming industry REIT. The company plans to split its bankrupt operating division, Caesars Entertainment Operating Co., into a REIT and management company if a federal judge approves the reorganization.

Boyd Gaming Corp. said more than a year ago it was exploring the REIT concept but has seemingly dropped the idea.

There hasn't been any public discussion concerning Gaming and Leisure Properties picking up Penn's newest projects, such as the Tropicana and the Massachusetts casino.

Penn is focused on revamping the Tropicana's casino floor, implementing the company's player rewards system and adding new restaurants.

GLPI is focused on completing current deals. The company told investors is expects to finalize the Pinnacle transaction in April. The Federal Trade Commission completed its inquiry and shareholder and state regulatory approval is pending. It is also seeking an operator for Pittsburgh casino.

Carlino said Gaming and Leisure Properties is open to other marriages.

"There are other things out there on the horizon that we're working very hard with," he said. "When we run out of opportunity we'll let you know. For the moment we see no reason to go elsewhere."

Howard Stutz's Inside Gaming column appears Wednesdays and Sundays. He can be reached at hstutz@reviewjournal.com or 702-477-3871. Find on Twitter: @howardstutz