Why Are Casino Companies Exploring Opco/Propco Restructuring?

Gaming stocks from Pinnacle Entertainment, Inc PNK 0.31% to Gaming and Leisure Properties Inc GLPI 0.36% to MGM Resorts International MGM 1.47% have all seen spikes of 10 percent or more in recent weeks on news and/or rumors revolving around a form of corporate restructuring referred to as “opco/propco.”

While casino investors are certainly excited about the big gains related to the news, many likely don’t know exactly what opco/propco restructuring means or why it could be a good alternative for casino companies.

What Is Opco/Propco Restructuring?

There are two critical parts to a successful casino business: the ability to run a gambling operation, and ownership of properties that will attract visitors and house slot machines and table games. Opco/propco restructuring consists of splitting the two parts of the casino business into separate entities.

A company splits all of its properties into one entity, a “propco,” in the form of a real estate investment trust (REIT). The casino operations business would them remain a separate entity, or “opco.”

The idea behind the split is that separating the two entities will create value for shareholders and streamline operations for the two entities.

How It Works

The model for opco/propco restructuring of casino companies occurred back in 2012 when Penn National Gaming, Inc PENN 1.53% announced that it had received permission from the IRS to perform a tax-free spinoff of properties into a new REIT.

In November 2013, Penn Created and spun-off Gaming and Leisure Properties and transferred ownership of all of its real estate assets to the new REIT. After the spin-off was complete, Gaming and Leisure then turned around and leased the properties back to Penn.

Why It Works

There are three major benefits to an opco/propco structure. First, the special tax rules on REITs mean that the propcos do not have to pay federal income tax on rent earned from opcos.

Second, REITs have lower borrowing costs than gaming companies. Last year, there were rumors that Gaming and Leisure would buy Isle of Capri Casinos ISLE 0.66% properties. Gaming and Leisure has an average interest rate of 4.9 percent on its long-term debt, while Isle of Capri’s long-term interest rate is about 7.4 percent.

Finally, by dumping property-related debt from the opco’s balance sheet, the doors are opened for casino companies to freely borrow to fund operations and further develop their casinos.

Looking Forward

Earlier this month, Gaming and Leisure offered to buy Pinnacle’s properties and debt for $4.1 billion dollars. Both companies’ share prices surged on the news.

In addition, MGM shares spiked recently after activist hedge fund Land and Buildings called for MGM to consider opco/propco restructuring that they believe could produce up to 180 percent upside for current MGM shareholders.

If MGM decides to pursue the restructuring, shareholders of other large casino operators such as Las Vegas Sands Corp. LVS 3.75% and Wynn Resorts, Limited WYNN 5.85% will likely be watching closely to see how the transition plays out.

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