In a move the gaming industry hasn't seen in some time, Penn National's (PENN) move to split its businesses into two marks a crucial turning point for the company. According the Wall Street Journal:
Shareholders will receive shares in the property company, which will receive around $450 million in rent from the operating company-around half of the operating company's projected cash flow, or EBIDTA. It expects to pay out a special dividend of around $15.40 per share in cash and shares, as well as a regular dividend that it projects will be around $2.36 a share.
Robert LaFleur, a gaming analyst at Cantor Fitzgerald, said that:
if this transaction is seen as an immediate value play for Penn National, then pressure could be put on some of the other companies in the sector to follow suit.
On Friday, shares of the gaming giant rose 28% to close at $48.23/share, the highest level shareholders have seen since mid-2008.
Should potential investors flock to the gaming sector in hopes that such spin-offs could become a new trend? I wouldn't put all my chips on just one number; however, I do think there is one candidate that could very well be in line for such a move.
In my opinion, the next company in-line for a similar spin-off and transition could be Ameristar, Inc. (ASCA) which is based in Las Vegas, Nevada and currently operates a total of eight casinos in seven different markets. There are two ways potential investors and existing shareholder could benefit. On one hand, Ameristar's property company (the potential REIT) could benefit from such things as the rent each month which could subsequently result in higher dividends paid out to shareholders. On the other hand, the operating company could benefit from such things as the income directly generated from gaming operations at its various casinos.
Prior to Friday's close of $19.52, shares of the company were trading at a 6.39% discount to its 50 DMA and a 5.29% discount to its 200 DMA. If we examine the company's most recent quarter, and specifically its Black Hawk property, we'll notice significant jumps in the company's operating income margin, gross operating income and net revenues. Such growth in those specific categories makes Ameristar not only a great growth play, but one that should be considered from an income since the company currently yields 3.00% ($0.50). Ed Sealover of the Denver Business Journal notes that,
over the first nine months of the year, the operating income margin at Ameristar Black Hawk (Denver, Colorado) is up 9.5 percent from the same time period in 2011, net revenues are up 5.6 percent and operating income is up by 16 percent, the quarterly report showed.
Should an investment in the Gaming REIT sector be considered a viable alternative to the names in the Mortgage REIT sector? As a matter of fact, I think they could be, and for two very good reasons. First and foremost, prepayments have demonstrated a sharp increase during the third quarter, which has the potential to demonstrate an even sharper decline in the spreads, profits and the precious high-yields names such as Annaly Capital (NLY), American Capital (AGNC), Chimera Investment (CIM) and CYS Investments (CYS) all currently possess. Second the difference between average yields really would still provide shareholders with a decent stream of income.
For example, Penn National is currently priced at $48.23/share, if we subtract the special dividend of $15.40/share we're left with a share price of $32.83. Given the new share price of $32.83 (or possibly even less at the time of the spin-off) and the proposed dividend of $2.36/share, I currently calculate a forward yield of 7.19%, which isn't too far off the current yields of Annaly (14.10%), American Capital (16.80%), Chimera ($13.70), and CYS (15.30%). In the case of Ameristar, the same outcome could very well occur, if indeed they consider the idea of a spin-off similar to the one Penn National just initiated.