Big news for Casino watchers was announced by Pinnacle Entertainment, as they plan to create a Real Estate Investment Trust (REIT) to separate their real estate from the operating company. Shareholders will receive REIT units in a tax-free spin-off sometime in 2016. The street seems a little disappointed by the earnings release, and it may also be a case of buy on the rumour sell on the news, as PNK shares are down almost 8% today.
A question that has been raised regarding casino REIT conversions is whether separation can cause more pressure on a casino operator in a recessionary period. I think that would depend on how the leases are structured. If leases are triple net with no accounting for revenue in the underlying property, rent would be fixed to the operator and cause stress in a low revenue environment. But if leases are structured so that the REIT shares some of the revenue gains/losses in the way rent is paid, some of the revenue risk can be shifted to the REIT. Obviously there’s lots of scope for financial engineering with these transactions, and I’m sure management and its advisers are considering many options. It will be fun to see how this transaction turns out.