IAG JANUARY 2015 - page 29

Whatremains to its largestunit,CaesarsEntertainmentOperating
Co., is a disparate collection of commercial casinos in 20 regional
markets together with the former LondonClubs International estate
of eight UK casinos and a casino in South Africa. The company
has management contracts with casinos owned by Indian tribes
in three states, investments and operating deals with two casinos
and a racino in Ohio, a casino it runs in Windsor, Ontario, two in
Cairo inherited from LCI, and a piece of a casino in Uruguay. This
agglomeration generates the majority of parent CZR’s revenues,
61.7% of them, according to the latest available results, down 13%
year on year through the first ninemonths of 2014. CEOC improved
its perennial operating loss bymore than 60% over this period, but
its debt service over the next 12months will exceed $1.8 billion. The
corporation as awhole posted a net loss through 30thSeptember of
$1.79 billion after interest payments of $1.95 billion andwas looking
at forkingover another $737.9million for debt servicebefore the year
was out. Arrayed against these obligations was possibly $1.8 billion
or so inproperty EBITDA for the entire year.
CZR is looking at more than $2.4 billion in interest payments in
2015, with CEOC, its largest subsidiary, in negative operating cash
flow to the tune of $548million. In 2016, some $1.28 billion of debt
is scheduled tomature, $1.22 billion of it belonging to CEOC. This
balloons to $7.3 billion in 2017, 99% of it CEOC’s. In 2018, $5.24
billion comes due.
Analyst Chad Beynon of Macquarie Securities, speaking recently to
The Press of Atlantic City
, called the CEOC restructuring the most
complex “that has ever goneon in the gamingworld”.
Actually, the model was laid out more than a year ago by Penn
NationalGaming, a listed regional operator (Nasdaq: PENN)with 19
casinos in 12US states. InNovember 2013, PENN announced it was
spinning off its considerable landholdings as a separate company,
Gaming& Leisure Properties Inc., whichwould trade onNasdaq as
a real estate investment trust. With the completion of the deal early
in 2014, GLPI became the landlord for PENN’s casinos, their fixed
rents serving as the principal source of GLPI’s income. PENN was
out of the property business, which allows it to focus onmaximizing
operating revenues, and theacquisition, financinganddispositionof
all that property was vested in a highly liquid subsidiary that can do
so atmuch higher profitmargins and generally with cheaper access
to capital.
What CZR proposes for Caesars Entertainment Operating Co. is
almost identical.
Of course, real estate investment trusts are nothing new, and
there are several types of them. Basically, toqualify, a companymust
incorporate as a REIT, must hold at least 75% of its assets in real
estate,must derive at least 75% of its gross income from real estate
andmust return 90% of its income to shareholders in the form of
dividends. In exchange, theREITpays no tax on its profits.
GLPI defines its strategy as one of “aggressively pursuing
opportunities to acquire additional gaming facilities to lease to
gaming operators, which may include Penn, and also anticipates
diversifying its portfolio over time, including by acquiring properties
outside the gaming industry to lease to thirdparties”.
After a year in operation, the company has a market cap nearly
three times as large as its parent and trades at more than twice
PENN’smultipleon anEV/EBITDAbasis.
“Overall, we see theGLPI spin-off as a positive for the industry,”
says FitchRatings Service.
Not surprisingly, others are exploring the possibilities, among
them, BoydGamingCorp. (NYSE: BYD), whichoperates 21 casinos in
eight states, andPinnacleEntertainment (NYSE: PNK), which recently
announcedplans to separately list the landunder its 14 casinos.
“As with PENN’s strategic rationale, PNK sees the separation
as a means to a lower weighted average cost of capital, a platform
to engage in M&A/consolidation of a maturing industry and other
industries, and return its free cash flow to equity holders in a tax-
efficient way,” says J.P.Morgan.
“TheentranceofREITs into thegaming
sectorwill potentiallydriveup tradingEV/
EBITDAmultiples, providenew sourcesof
capital (e.g. salesand lease-backs), create
better transparencyon thevalueofphysical
casinoassetsand thegaming licensesand
possibly increase tolerance forhigher
leverage,” saysFitchRatingsService.
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