On December 18 the House and Senate passed a $1.1 trillion omnibus tax & spending bill that averted a shutdown of the US government. President Obama signed it into law the same day. Included in the bill were provisions to close a loophole allowing casinos, hotels, and other businesses to generate billions in cash by spinning off physical assets in real estate investment trusts (REIT) in a tax-free transaction. Senator Harry Reid of Nevada gutted that provision saving big players and donors like Caesars and MGM a lot of money but costing the Treasury about $1 billion in potential future tax payments. The senator’s move was seen as a way to preserve planned transactions and those already in progress.
REITs can dramatically alter the balance sheet of a casino company, transferring all real estate along with its long term debt away from the core business. When a company uses the vehicle they usually end up with an operating company who pays rent to the REIT. The REIT is usually floated as a public traded company.
Recent major REIT moves include Penn National Gaming creating Gaming and Leisure Properties Inc. (GLPI) in late 2013. The company spun off real estate and continued to operate 18 casinos while GLPI picked up new ones it operates itself. REIT’s can take on a life of their own as can be seen by GLPI taking on 15 properties of competitor Pinnacle Gaming this year. Board members and even unions often oppose the moves, but when an REIT offers shareholders more than they can get otherwise, the deals usually go through.
Sometimes the deal takes time. The board of MGM fought earlier this year to remain in control of their assets against a shareholder who wanted to “do the deal”. Land & Buildings Investment Management LLC owned less than 1% of the company but positioned itself over the REIT issue to nearly unseat the present board and install its own people in favor of the move to spin off MGM properties. Founder Jonathan Litt gave up the fight in May, but in October MGM announced they planned to form MGM Growth Properties (MGP) and spin off 10 properties.
Caesars would likely become the the most affected beneficiary of Senator Reid’s action on the bill. Their operating company is struggling to emerge from an $18 billion bankruptcy restructuring, and if successful (and the process doesn’t bankrupt the parent company) would likely form their own REIT. About half a dozen other major corporations will benefit from the 54 word addition, partially crafted by lobbyists.
The author of the provision altered by Reid, Rep. Kevin Brady is quoted widely as saying, “We just weren’t interested, I think on both sides of the aisle, in disrupting transactions, mid-transaction,” Brady said after voting on the legislation.