Hedge fund says bid for Pinnacle real estate too low

The hedge fund that initially sought to move regional casino operator Pinnacle Entertainment into a real estate investment trust said it was encouraged by this week’s acquisition offer from rival Penn National Gaming’s spinoff, but believes the $4.1 billion price was too low.

Meanwhile, Pinnacle announced Friday that it added to its board of directors a long-time gaming company executive who is now lead trustee for a publicly traded REIT.

New York-based Orange Capital, which owns 5.9 percent of Las Vegas-based Pinnacle, said this week’s offer from Gaming and Leisure Properties Inc. to acquire the real estate associated with Pinnacle’s 15 regional casinos “dramatically undervalues” the company.

In a statement, the hedge fund — which suggested Pinnacle move its casinos into REIT — said the GLPI offer was based on 11.3 times the company’s cash flow. Orange Capital believes the figure should be higher and Pinnacle leadership should continue talks with GLPI.

“We urge Pinnacle’s board to continue its pattern of shareholder-friendly actions by immediately engaging with GLPI with the goal of consummating a sale of (Pinnacle’s real estate) at fair market value,” the company stated.

REITs, 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.

Pinnacle said last year it was moving forward with the REIT concept, which would divide the casino operator into two companies, a REIT and a management company.

GLPI, which was spun off from Penn National in 2013, offered to buy Pinnacle’s real estate and lease the casinos back to the company for $358 million a year in rent.

Pinnacle shareholders would receive $36 a share and 0.5517 shares of GLPI for each share of Pinnacle. Shareholders in Pinnacle would continue to own the operating company.

GLPI said the plan would allow Pinnacle to complete its REIT structure without having to sell $700 million in stock.

In a statement, Pinnacle said it would “carefully review and evaluate GLPI’s proposal to determine the course of action that it believes is in the best interest of the company and its shareholders.”

Moody’s Investors Service gaming analyst Keith Foley said in a research note the proposed GLPI-Pinnacle deal was “indicative of things to come” in the casino industry. He said the sale-leaseback model proposed by GLPI would be the first of its kind for gaming companies.

“Sale-leasebacks would provide U.S. gaming companies with cost-effective way to address their upcoming debt maturities,” Foley said. “And for some, sale-leasebacks could prove to be one of few available sources of capital.”

Foley suggested the GLPI offer would allow Pinnacle to avoid adding to its long-term debt.

“Most (casino companies) really can’t afford to pay much more in interest, and large debt maturities are beginning to appear on the horizon,” Foley said.

Orange Capital, which headed by activist investors Daniel Lewis and Russell Hoffman, said it was willing “to participate on terms that would be beneficial to all shareholders” in regards to Pinnacle’s financing needs.

On Friday, Pinnacle named former Harrah’s Entertainment executive Chuck Atwood to its board of directors. Atwood, who worked for Harrah’s from 1979 to 2008 and held several finance and development positions, is currently lead trustee for Equity Residential, a New York Stock Exchange-listed REIT.

Atwood was Harrah’s chief financial officer from 20001 to 2006.

In a statement, Pinnacle Chairman James Martineau said the board was seeking a new member with gaming and REIT experience.

“We believe we have found the ideal candidate in Chuck,” Martineau said.

Atwood and Pinnacle CEO Anthony Sanfilippo both worked for Harrah’s (now Caesars Entertainment) during the same time period.

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