A deal involving Pinnacle Entertainment is the latest example of a casino company separating its gambling operations from its real estate to generate cash.
Las Vegas-based Pinnacle announced this week it would sell most of its casino-hotels to a real estate investment trust, Pennsylvania-based Gaming and Leisure Properties Inc., in an all-stock deal valued at $4.7 billion.
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Pinnacle Entertainment Inc. will then lease the properties for at least 10 years, with five-year renewals, starting at $377 million a year. It makes Pinnacle a renter responsible for property taxes, insurance and maintenance costs, with Gaming and Leisure as its landlord.
It's an option considered by companies beset by weighty debt and limited financing options, but Pinnacle CEO Anthony Sanfilippo said this deal wasn't about pressure on its balance sheet but more about timing — selling while the real estate is valuable.
With this deal, Gaming and Leisure will now own 35 casino-hotels in 14 states. The company is also taking on $2.7 billion worth of Pinnacle's debt. Pinnacle shareholders will also get shares of Gaming and Leisure.
Analysts say the structure isn't for everyone, and it's time-intensive and complex. But for some companies, it frees up cash and makes future financing more flexible.
"It's not a thing you snap your fingers and do," said Keith Foley with Moody's Investors Service.
Some traditional gambling companies have faced a challenging financing environment. The industry struggled through the recession. Since then, competition has increased as casinos have spread and betting alternatives have proliferated.
"They've got a lot of debt, and this is basically one way to reduce your debt or finance with more flexibility going forward," Foley said.
Pinnacle's situation wasn't as dire, since its debt was already highly rated and the company was in no rush to pay it off, Foley wrote in a March report.
Sanfilippo said the deal does give the company the ability to have a long-term strategy and "leaves both companies very healthy."
Other casino companies have considered making such a shift.
Real estate investment trusts, or REITs, benefit from not being taxed on corporate income as long as the vast majority of that income is given back to shareholders.
Caesars Entertainment Corp. has said it plans to split its operating division that's under bankruptcy protection into a REIT, with one company owning the property and the other paying rent, if its creditors and the court approve its plan.
MGM Resorts International has said it's looking into whether the structure might work for its business but hasn't decided. Earlier this year, it rebuffed calls from one of the company's investors that said the conversion would make MGM considerably more valuable to investors.
Gaming and Leisure was spun-off from Penn National Gaming Inc. in 2013, forming an entirely separate publicly traded company that has since been Penn National's landlord at 18 casino properties, including the M Resort Spa Casino in Henderson, just outside Las Vegas.
That hasn't kept Penn National from building and buying casinos, including the $250 million slot parlor it opened last month in Massachusetts. It also spent $360 million to purchase the 58-year-old Tropicana casino-hotel on the Las Vegas Strip.
Penn National spokesman Eric Schippers said the company didn't need a landlord in those cases, and shareholders would be better off if the company wasn't paying rent on either property, owning them outright instead.
As for Pinnacle, it will still own its Belterra Park racetrack in Ohio, the Heartland Poker Tour, its stake in Retama racetrack in Texas, and 450 acres of undeveloped land in Louisiana.