Analysts favor Caesars move to put key unit into REIT

Two analysts support Caesars Entertainment Corp. placing its largest operating division into a real estate investment trust to deal with its gaming industry-high debt load, though the company might have backed away from the concept.

Fitch Ratings Service said in a report, however, the spinoff won’t prevent Caesars from having to go through bankruptcy reorganization to restructure its $22.8 billion debt.

Caesars revealed the idea of a real estate investment trust — commonly referred to as a REIT — in a filing with the Securities and Exchange Commission last week.

Caesars, which has been in talks with banks and lenders to reduce the debt, said it would place Caesars Entertainment Operation Co. into the REIT. The division controls the largest portion of the company’s nearly 40 resorts nationwide.

“Such a maneuver, if executed, can increase CEOC’s value by an estimated 13 percent,” Fitch gaming analyst Michael Paladino said in a report late last week to investors. “With the company’s cash, CEOC could be worth roughly $11 billion, compared with $9.7 billion without the spinoff.”

The division operates Caesars Palace, Caesars Atlantic City, Harrah’s Reno and many of the company’s regional properties. The resorts also owe about 80 percent of the company’s overall debt.

Under the concept, two companies would be created: a REIT to own the hotel-casinos and an operating company to manage the resorts.

In the SEC filing, however, Caesars said the REIT concept “has been superseded by the numerous proposals that have been, and continue to be, transmitted” as part of the ongoing talks between Caesars and its lenders.

Paladino hopes the REIT isn’t off the table. He said a bankruptcy reorganization is still going to be required to get the company out of its hole. He doubted that the prearranged bankruptcy plan, reportedly set for some time in January, could be accomplished.

“Ultimately, we continue to hold that a lengthy bankruptcy process is a more likely route,” Paladino said. “Our view reflects the complexity of Caesars’ capital structure, the subjective nature of valuing CEOC and pending lawsuits.

“We think getting a quick resolution through a prepackaged bankruptcy or a debt exchange remains a challenging proposition,” he said.

According to the SEC filing, first-lien bondholders would receive 93.8 percent recovery on their investment through the REIT. Second-lien and unsecured bondholders would receive a minimum amount of equity, but they would have to “vote as a class in favor of the restructuring.”

KDP Investment Advisors gaming analyst Barbara Cappaert said in a research note the value returned to first-lien bondholders “would come on the backs of more junior creditors.”

She said it was likely Caesars would avoid making an interest payment on second-lien notes due next month.

“This would save the company just over $260 million which could be used in the bucket of value available for the entire restructuring,” Cappaert said.

She was also supportive of the REIT concept.

“The plan confirms our belief that bank debt holders will be made whole,” Cappaert said said. “We could see some movement to give more value to first lien bondholders.”

The gaming industry has embraced REITs, which, by law, don’t pay federal income taxes. With real estate as their primary source of income, REITs are required to distribute at least 90 percent of their taxable earnings to shareholders.

Last year, Penn National Gaming split off 21 of its 29 casinos and racetracks into Gaming and Leisure Properties, a publicly traded REIT. The properties are leased back to Penn through a management contract.

Two weeks ago, Pinnacle Entertainment announced plans to split off the company’s 15 casinos in eight states into a REIT.

Also, Boyd Gaming Corp. said this month it spent $3 million so far to investigate a potential REIT split.

“Based on Penn’s experience and Pinnacle’s stated time-frame, we think it would take Caesars more than a year to execute a spinoff, after or at the tail-end of the bankruptcy process,” Paladino said. “A spinoff would create more value at CEOC that can be spread across creditors.”

Caesars has said in SEC filings that CEOC would run out of cash by next year and needs to be restructured to manage its debt payments. The company has been in talks with the banks and lenders since September, but two hedge funds have abandoned the discussions.

Caesars’ other major operating division is Caesars Growth Partners, which is publicly traded on Nasdaq as Caesars Acquisition Co.

The business, 58 percent owned by Caesars Entertainment, includes The Cromwell, The Linq, Bally’s Las Vegas, Planet Hollywood Resort, Harrah’s New Orleans, a 41 percent interest in Horseshoe Baltimore and Caesars Interactive Entertainment.

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