Takeaway: ASCA, PNK, and BYD are the only other candidates in our universe. unlikely for MGM, CZR, LVS, and WYNN

$53 per share is the midpoint of our value range




  • This transaction has been in the works for 18 months and will unlock the value of their real estate. It will allow them to enter markets that they can't currently participate in
  • In order to finalize this deal:
    • They need to get approval from all the states where they do business
    • They need to reach an agreement with Fortress to convert their preferred shares
    • Carlino family needs to come to an agreement on selling down their ownership of PNG
  • There will be no dividend in 2013 since the transaction will not be affected in time, but they wanted to give people an idea of what the REIT would pay based on 2013 projections
  • Following the exchange, Fortess can either sell (up to the time of the spin) or hold onto it. As soon as Fortress sells their non-voting stock, it becomes voting.  The company has agreed to repurchase those shares at $67/share. If Fortress sells the shares in the open market (not to PENN), then the company will have more cash and that could mean a larger distribution.
  • Spinoff of Propco shares is expected to occur sometime in 2H13 and they expect to elect REIT status as of January 2014
  • Hope to break ground on the Ohio VLTs in early 2013. They are relocating their licenses. Expected to open in 1H2014.
  • They do expect to refinance all of their debt securities, including tendering for the bonds
  • This transaction gives them a huge first mover advantage.  Individuals at the REIT will be licensed. Expect that their gaming regulators will be ok with this structure.
  • It is not their intent to pursue non-gaming assets, but they do have that option
  • This also solves some of the gaming regulatory ownership issues
  • Lowers their cost of capital
  • Spread between the multiples triple net lease REITS is usually between 13-14x vs. the 7-8x range that regionals trade at
  • Want to make sure that OPCO has no issues paying rent and remains healthy. Underlying health of the OPCO impacts valuation of the PROPCO cash stream.
  • REIT will share in OPCO growth opportunities.  There can also be downward adjustments in the lease payments to the PROPCO under certain scenarios.
  • Employees will get the same treatment as shareholders in regards to the spin-off
  • REIT will be able to become a source of financing for the gaming industry and can enter into sale-leaseback arrangements with PROPCO
  • Because they would bring down the market cap of the OPCO, it would make it more interesting to acquire smaller casinos and enter into management agreements with tribes.
  • REIT will have a lower cost of capital and cost of debt than OPCO
  • There are a number of jurisdictions where PENN faces the limitation of just being able to own one property
  • There are no adjustments regarding individual properties in the Master Lease 
  • Ohio Casinos pay 20% of monthly net revenues
  • Fixed rent component gets reset every 5 years equal to 4% of the excess (if any) of the average net revenue for such facilities for the trailing 5 years over a baseline
  • REIT will not be able to finance any other building/ greenfield projects that would compete with OPCO
  • Based on their stress tests, under their worst case scenario (lowest historical EBITDA), OPCO still remains viable and able to make rent payments



  • They are done with the IRS. They do not need to go back for any more approvals from the IRS
  • Suppose TX comes along, it may be the case that PROPCO is the best source of financing but it's unclear now
  • Growth prospects for OPCO given the new competition - especially when and if National Harbor comes online. They have incorporated that into their expectations though when structuring the lease payments. There are also opportunities in MA and PA for OPCO. International opportunities are open to OPCO. They will also have the 2 Ohio tracks coming online in 2014.
  • Bill Clifford will definitely spearhead the financing for both companies but will not be CFO of both companies
  • Total debt range: $3.75-4.25BN. The higher end number anticipates buying the shares from Fortress ($417.5MM)
  • Additional overhead between both entities? Yes - since there will be 2 separate management teams and support staff. There are also some landlease deals on existing properties where they do not own 100% of the land.  They don't expect corporate overhead to be anywhere near $25MM.
  • Financing of greenfield projects like MA?
    • REITS typically keep their debt fairly stable and then issue more equity for acquisition needs
    • OPCO will pursue financing starting around 3x or more if they have an existing asset to leverage. OPCO generally wants to stay under 5.0x
    • If the MA opportunity gets financed outside of PROPCO, and it may since there are JV properties, they wouldn't take leverage over 5x
  • Triple net structure?
    • 80% is a traditional payout ratio
    • Why NNN structure? Wanted to make sure that OPCO had control of its own destiny to run the assets the right way and from a PROPCO structure, a non-NNN structure requires a lot more overhead.
  • Expected lower cost of capital on the new debt but don't want to disclose
  • Two assets in the taxable REIT subsidiary? Why? 
    • In order to qualify for a tax free spin and these two fit the bill
    • For example, the assets in the TRS can't own a hotel
  • What other opportunities can they pursue now that they can't currently pursue?
    • Non-gaming deals - although those are low on the todem pole now
    • They just announced the PA opportunity
    • They also see themselves as a source of capital for others.  You can bet if TX happens that they will talk to PNG and their partners and other companies.
  • Why is Net revenue for PROPCO higher than rent? Because it reflects Perryville and Baton Rouge revenues
  • Non-Columbus/Toledo assets-rent will be fixed for 5 years, so any upside goes to OPCO.  After 5 years then there is a reset. The tracks at Ohio will also be subject to that calculation after 5 years. For Columbus and Toledo it;s an 20/80 split.
  • Dividend for them will grow faster than at most lodging companies.  2014 REIT dividend will go up a lot. 
  • Regulatory approval process is a highly information intensive review. 
  • The germination of the idea to do this spin began 18 months ago
  • It's also a lot easier to grow a $430MM EBITDA company than a $900MM company
  • It would be a big challenge for them to acquire entire gaming company and split it into a REIT and OPCO
  • PENN has no NOLs 
  • Think that they will close the transaction in 4Q next year. There is a provision in the bonds that allows them to tender at T+50.
  • They are giving Fortress the ability to sell their shares in the open market at $67 or sell back to PENN.  It's really a function of where the stock is.
  • There will be two overlapping Directors but the Boards will be independent. 
  • They apply a simple multiple on the rent stream to come up with a 5.5x adjusted leverage ratio
  • The REIT can technically own international assets but the rules may not be favorable. Depends on the situation.
  • Have some assets in mind that they think can be liberated
  • The two Ohio casinos are also under a triple net lease structure, just at a much higher rate. Let PROPCO participate in the upside going forward. The $450MM of rent does include the two Ohio Casinos.
  • In 2014, when the 2 Ohio tracks come online, there will be an adjustment to the rent calculation at 4% of net revenues for those 2 tracks. 
  • The different between the $450MM of rental payments from OPCO and the $459MM projection is that the PROPCO projection includes EBITDA from Perryville and Baton Rouge, less overhead and land lease payments.


Takeaway: We remain bearish on BWLD, DRI, TXRH, and cautious on the casual dining sector.

Industry data continues to suggest that casual dining restaurant companies are at risk of missing consensus expectations in the fourth quarter.



Knapp Track


According to Malcolm Knapp, estimated Casual Dining comparable restaurant sales growth for October 2012 was -0.9%.  The sequential change, in terms of the two-year average trend from September to October, was -80 bps. 


Guest counts declined -2.8% versus October 2011.  The sequential change, in terms of the two-year average trend, was -55 bps.  While these results are disappointing, they are not as bad as had been feared intra-quarter.  We remain negative on the casual dining category.



Restaurant Value Spread


The Restaurant Value Spread, or the spread between CPI for Food Away from Home versus CPI for Food at Home, updated for October CPI data released this morning, is implying that inflation at restaurants continues to outstrip inflation in the grocery aisle.  We believe this is a negative for casual dining pricing trends.








We continue to believe that consensus is far too bullish on casual dining top-line trends.  Anemic real wage growth is just one of many macroeconomic headwinds that we believe merit caution going forward.  Consensus is assuming a strong recovery in industry same-restaurant sales in 4Q12 and 2013.  Accelerating negative declines in traffic growth suggest that trends could deteriorate further from here.




Howard Penney

Managing Director


Rory Green




HOLX: Lots To Like

In the past, we’ve been bullish on Hologic (HOLX) and we think the time has come to go long the stock again. We added HOLX to our Real Time Alerts yesterday based on the stock’s potential for long-term growth and the company’s new business model following the GPRO acquisition that relies less on lumpy capital equipment sales and offers more exposure to physician utilization uptick and birth recovery themes. 


HOLX: Lots To Like - HOLX   levels 11 16 12

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NKE: Another Reason To Own

Takeaway: Nike should never have bought Cole Haan and Umbro, but with a net positive swing of $1bn in FCF, it is making the best of its mistakes.

We’re surprised to see that Apax Partners emerged as the victor for buying Cole Haan at a price of $570mm from Nike, as they outmaneuvered TPG – which counts former Cole Haan CEo Matt Rubel as its CEO. No one is more qualified to offer insight into that business than Rubel given that he is the one who staged its turnaround before he left Cole Haan for Payless in 2005.


This is a complex sale, as the biggest issue in our opinion is the extent to which Cole Haan can still use Nike technology such as Air and Lunar in the product after Nike lets the brand go. There has to be some transitional agreement, but nothing will be in perpetuity. Without Nike, Cole Haan has a challenge on its hands. Rubel knows this, and therefore was likely against bidding up against what ended up being a rather rich price for Cole Haan.


The bottom line is that combined with Umbro, Nike is getting $795mm on a combined basis for two brands that are losing money. That is precisely $1 for every dollar in revenue generated by the brands last year. In the end, Nike is getting $795mm in cash, plus eliminatig a $43mm operating loss. If we take the proceeds, add back the operating loss, and then $160mm in working capital avoidance, we’re looking at a net positive swing in cash flow right around $1bn. That’s about 10mm shares Nike can repurchase, or 2.3% earnings accretion at current levels.


Nike would have been better off to never have bought these businesses in the first place. But it definitely made the most of unwinding the mistakes. 

WMT: Buying Again

Yesterday, we added Walmart (WMT) back into our Real Time Alerts after the selloff. The decline can be blamed on the perception that earnings were weak combined with the slew of Foreign Corrupt Practices Act violations the company is facing globally. We think concerns will blow over and the stock is close to its TAIL line of support at $66.12 a share. There’s plenty of room for upside for WMT and we’re buyers. The FCPA violations will amount to tens of millions or maybe even a hundred million bucks. For a company like Walmart, this means nothing.


WMT: Buying Again  - image003


WMT: Buying Again  - image004

Moving Past The Noise

Client Talking Points

The Slowdown Continues

Corporate earnings continue to slow in addition to global growth. Moving into Q4, when companies report, expect a lot of misses. Any company that didn’t guide lower into the next quarter has to really prove they can beat the Street by a longshot. The market certainly has lost confidence in the ability of corporations to put up solid numbers, so testing 1300 on the S&P 500 soon isn’t some kind of crazy pipe dream. We can go a lot lower here so anyone screaming that stocks are “cheap” should realize that cheap can get a whole lot cheaper.

Political Dysfunction

President Obama meets with Congressional leaders today to kick off negotiations on the Fiscal Cliff. Obama won’t give wealthy Americans a break on taxes where as Republicans in the House want everyone to enjoy the benefits of a tax cut. Neither side is likely to budge, so you can imagine how well this will work out.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

After a long downward slide, TCB has finally turned the corner. The margin has stabilized after the balance sheet restructuring. Loans are growing thanks to the equipment finance business. Non-interest income is more likely to go up than down going forward, a reversal from the past 18 months. Credit quality has a tailwind from a distressed housing recovery in TCB’s core markets: Minneapolis, Detroit and Chicago. On top of this, the CEO, Bill Cooper, is one of the oldest regional bank CEOs, which raises the probability that the bank will be sold. Expectations are bombed out at this point, so we think it’s time to move from bearish to bullish on TCB.


There is improving visibility on 20%+ EPS growth with P/E of only 11x with better content leading to market share gains. New orders from Canada and IL should be a catalyst. Additionally, many people in the investment community are out in Las Vegas at the annual slot show (G2E) and should hear upbeat presentations by management.


While political and reimbursement risk will remain near-term concerns, on the fundamental side we continue to expect accelerating outpatient growth alongside further strength in pricing as acuity improves thru 1Q13. Flu trends may provide an incremental benefit on the quarter and our expectation for a birth recovery should support patient surgery growth over the intermediate term. Supply costs should remain a source of topline & earnings upside going forward.

Three for the Road


“Romancing The Fiscal Cliff” -@JohnBiggs


“If I had only known, I would have been a locksmith.” -Albert Einstein


Hostress Brands, maker of the infamous Twinkie, will close its doors and lay off 18,500 employees. The end of an era.

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