Analysts spent much of last Wednesday evaluating the pros and cons of a potential sale and leaseback of MGM Grand Las Vegas.
A day later, the resort’s across-the-street neighbor stole the attention.
Penn National Gaming Chief Operating Officer Jay Snowden said on Thursday the company had received “some unsolicited interest” over the Tropicana Las Vegas and the land associated with the hotel-casino.
Snowden, who becomes CEO in January, told analysts on Penn’s third quarter conference call that “accelerating” ways to bring down the company’s debt has been a motivating factor much of this year.
That’s one reason the Tropicana’s 34 acres at the southeast corner of Tropicana Avenue and the Strip sparked interest from the investment community, even though Snowden and current CEO Tim Wilmott said any potential deal is far from being completed.
Stifel Financial gaming analyst Steven Wieczynski said the ongoing mergers and acquisitions market in the gaming industry fuels the potential for a transaction.
“Considering the immense value of the Tropicana’s underlying real estate and the multiples at which (real estate investment trust) deals have been transacted in recent months, we view the current landscape as ripe for a deal,” Wieczynski said.
Penn National operates 41 gaming properties in 19 states, a majority of which are owned by real estate investment trusts, primarily Gaming and Leisure Properties, which spun off from Penn in 2013. This year, Penn completed deals with VICI Properties for Greektown in Detroit and Margaritaville Bossier City in Louisiana.
In the third quarter, Penn said it paid $222.6 million in rent to the company’s REIT landlords.
VICI, which spun off from Caesars Entertainment, has been seeking other operating partners. The REIT recently struck lease deals in Ohio with Hard Rock International and Jack Entertainment.
Also, Las Vegas saw two recently announced deals as a way to improve cash flow; Caesars’ sale-leaseback transaction for the Rio with Imperial Companies for $516.3 million and MGM Resorts International’s $4.25 billion sale and leaseback of Bellagio to the Blackstone Real Estate Income Trust.
MGM Resorts said last week it hopes to announce a similar sale-leaseback of its flagship MGM Grand Las Vegas by the end of the year. It’s that prospect that made Tropicana a potential play.
During the conference call, Penn management said its focus is on a “hub-and-spoke model.” The emphasis is to offer customers a variety of options from a singular property, such as the convergence of the casino with interactive gaming and sports betting.
Analysts took those comments to mean that a sale of Tropicana Las Vegas is not entirely out of the picture. Penn acquired the resort for $360 million in 2015 and has since spent more than $200 million to upgrade the Rat Pack-era property. The resort has 1,467 hotel rooms and a 50,000-square-foot casino.
Penn also owns M Resort, which is south of Las Vegas off Interstate 15 in Henderson. The 390-room boutique hotel-casino that serves the locals market was acquired by Penn in 2011 after the company bought the resort’s $860 million in debt from the Bank of Scotland for $231 million.
“Management’s updated thinking about its overall network of assets seems to be that moving profitable customers around between its various channels … will generate higher returns than trying to drive regional gamblers to Las Vegas, thereby lessening the need for a Strip asset,” Wieczynski said.
SunTrust Bank gaming analyst Barry Jonas told investors that in his conversations with Penn officials during the Global Gaming Expo, “(Penn) management noted that having a Strip presence was not necessarily an imperative.”
Jonas said Penn’s goal is to bring down the company’s nearly $2.5 billion in long-term debt over the next 12 months. During the third quarter, Penn paid down $100 million of debt.
On the conference call, Snowden said there was also an “unsolicited interest” in Prairie State Gaming, the company’s Illinois-based slot machine route operation. He said the recent Strip deals and transactions involving other Illinois operators may have sparked the interest.
In both cases, the deals were done at “very attractive multiples,” such as the Bellagio’s at 17.3 times the rent that MGM will pay Blackstone annually.
“We’re continuing to engage in those conversations,” Snowden said. “We’ll see where they take us. We’re encouraged by some of those conversations, but nothing’s done until it’s done.”
#exclusive – Potential deal for Tropicana Las Vegas grabs investment community’s interest. –@howardstutz, CDC Gaming Reports. https://t.co/ioaQTgTgO0 @TropLV #CDCgaming
— CDC Gaming Reports (@CDCNewswire) November 4, 2019
Jefferies gaming analyst David Katz told investors that Penn’s dependence on leased properties would increase the company’s capital structure metrics and raises costs for any financing.
“Management has been clear that its intent is to focus on leverage reduction – with which we agree – which could include the sale of remaining owned assets,” Katz said. “The outcome should be accretive.”
Wilmott, who is retiring at the end of December, said “given the fluidity of these discussions, it’s impossible to put any kind of timetable on this.”
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
