Why Investors Love Caesars' REIT Plan, Casino Workers Don't

Caesars Entertainment Corporation’s (NASDAQ:CZR) plans to restructure operations of its bankrupt unit, Caesars Entertainment Operating Co. (CEOC), has made headlines again.

Notably, the company’s shares rallied nearly 5% in yesterday’s trading session in spite of the news that a casino workers’ union regards the restructuring as a risky venture.

CEOC Action Plans

Notably, in Jan 2015, CEOC voluntarily filed for reorganization under Chapter 11 of the United States Bankruptcy Code.

Per the restructuring plan, CEOC will alter its corporate structure by separating all of its U.S.-based gaming operating assets and real property assets into two companies, an operating entity (OpCo) and a newly formed, publicly traded real estate investment trust (REIT) that will directly or indirectly own a newly formed property company (PropCo).

History

Caesars Entertainment (formerly known as Harrah’s Entertainment) was taken private in 2008 by private equity firms Apollo Global Management and TPG Capital in a leveraged buyout worth around $30 billion. However, it launched an initial public offering in 2012 and began trading again.

The global financial slowdown had a severe impact on the U.S gambling and casino industry. This accompanied with the highly leveraged nature of the buyout kept the gaming company under pressure. Moreover, the company’s high spending on property renovation to boost traffic has hurt profits significantly. Caesars Entertainment was thus not able to rake in profits for a very long time, failing to recover from its debt load since recession.

The company has thus been striving to clear its debts through the sale of assets and deals with creditors. The company has also been trying to manage its finances by spinning off divisions and dividing its casinos, trademarks and businesses.

Hurdles

Notably, as per a recent Bloomberg report, a casino workers’ union has termed Caesars Entertainment proposal to spin assets of its bankrupt operating unit into a REIT too risky. The union is strictly against casino REITs and fears that Caesar Entertainment’s REIT will be an extremely indebted business susceptible to the slump in the gambling industry, given the company’s high debt level.

Meanwhile, the plan to convert to REIT has also been reportedly opposed by a group of U.S. lawmakers, last month.

Investors Still Backing it

However, notwithstanding the criticism, investors seem to be in favor of the company’s move to shift to a REIT as reflected by the positive movement in its share’s price. We hereby take a look at some of the other factors that have added to the optimism.

Notably, a REIT is a corporate structure that is permitted to pay at least 90% of its taxable income in the form of dividends to shareholders, which lowers income tax liability. Thus, Caesars Entertainment’s efforts to capitalize on a seemingly more favorable tax environment through this move bode well.

Also, we note that the restructuring plan will help pay off long-term debt and annual interest. Further, providing significant recoveries to creditors, the plan will ensure uninterrupted operations across the company's network of properties. The proposed transactions would reduce CEOC's debt by approximately $10 billion while annual interest expenses are likely to be reduced by approximately 75%.

The restructuring plan would thus help in creating a sustainable capital structure for CEOC that will be financially supported by Caesars Entertainment.

Bottom Line

Of late, several companies in the gambling industry have opted to restructure their operations. In Nov 2014, the board of directors of Pinnacle Entertainment Inc. (NASDAQ:PNK) approved a plan to separate its operating assets and real estate assets into two publicly traded companies. In Nov 2013, Penn National Gaming (NASDAQ:PENN) spun off its real property assets into an REIT named Gaming and Leisure Properties.

Though, the business overhaul is not likely to hold off bankruptcy, the REIT plans should certainly offer a tax benefit. Thus, it is to be seen whether Caesars Entertainment’s efforts to deleverage its indebted unit and attaining a sustainable capital structure reap the desired benefits.

Caesars Entertainment currently has a Zacks Rank #3 (Hold). A better-ranked stock in the sector is Monarch Casino & Resort Inc. (NASDAQ:MCRI) with a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

PINNACLE ENTRTN (PNK): Free Stock Analysis Report

MONARCH CASINO (MCRI): Free Stock Analysis Report

PENN NATL GAMNG (PENN): Free Stock Analysis Report

CAESARS ENTERTN (CZR): Free Stock Analysis Report

Original post

Zacks Investment Research