Pinnacle Entertainment has signaled its intention to follow in the footsteps of Penn National Gaming and convert into a real estate investment trust. It’s 
somewhat clearer cut than the convoluted Penn/Gaming & Leisure Properties split, with Pinnacle’s property company retaining all the real estate, which would be leased back to the operating company. “Like with [sic] PENN’s strategic rationale, PNK sees the separation as a means to a lower weighted avg. cost of capital & a platform to engage in M&A/consolidation of a maturing industry,” wrote J.P. Morgan analyst Joseph Greff. Pinnacle’s operating company will retain $554 million in debt, minus the loss incurred in the sale price of Lumiere Place.
Numerous steps remain before this is a done deal, including identifying and appointing senior executive leadership of PropCo. Pinnacle CEO Anthony Sanfilippo is a casino-operations man from way back, so it would make sense for him to stay with that half of the bifurcated company. The transaction is not expected to close until 2016.
The news comes on the heels of a soft 3Q14 for Pinnacle, with cash flow $6 million below Wall Street‘s expectations. Deutsche Bank‘s Carlo Santarelli read the EBITDA tea leaves and was fairly scathing, saying that “the [Ameristar] synergy story is essentially over” and that, regarding a cash-flow shortfall in the Louisiana market, “we do not anticipate this result will be well received.” Belterra Park was blamed for weaker-than-expected results in the Midwest. Greff noted that Pinnacle was weighted down by “one-time charges in the quarter were related to severance, Colorado referendum expense, and Lake Charles team member retention program costs.”
As for the REIT news, he wrote, “While the event is clearly a positive for the stock and answers the call from investors to split the Company, meaningful heavy lifting remains.” Among the goodies for shareholders will be the issuance of $1 billion in equity. “As noted, we believe the announcement will serve as a near term positive catalyst for shares, to state the obvious, however, given the numerous hurdles that remain, the equity raise, and an activist base that just got the catalyst, we expect medium term trading to be more muted,” Santarelli added.
* Casino pitchman Donald Trump, feeling his oats, is making oft-familiar noisezzzzzzzz …
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