PENN’s transaction has implications for most gamers – all positive – but none potentially more significant than for ASCA.



Obviously from our comments today, we think ASCA is the most likely pursuer of PENN’s real estate strategy.  In fact, we think it is actually likely – only the timing is uncertain.  Even if it’s not for two years – following the opening of Mojito Point in Lake Charles – the market is right for ascribing value now.  While the stock is already up 16% today, we don’t think the market has gone far enough today.  We project total company value at $49 to $70 with a $59 midpoint in two years.  Discounted, the midpoint value is still $47.  And that’s with EBITDA/EPS projections below Street consensus.


Why does it make sense for ASCA?  While leverage is not necessarily low, ASCA generates a huge amount of free cash flow.  The balance sheet is in good shape.  ASCA owns a lot of real estate.  The only development is Mojito Point in Lake Charles which will open in 2014.  That is probably the only real hold up and the reason why we are projecting a 2 year timeline of consummation.  ASCA’s management team is up there with PENN as the two most focused on creating shareholder value and they are great operators.  Leverage, while somewhat high at 5.5x will drop considerably following the opening of Mojito Point.


Even if ASCA decides against this strategy, investors should and will likely focus on free cash flow rather than EV/EBITDA following the PENN announcement.  This bodes well for ASCA’s valuation.  Even after the big move today, the FCF yield for 2013 is still 18%.  The stock could support a yield that is half that in our opinion.  So without a transaction (and our $47 valuation), ASCA could still be worth $35-40 with the re-value.  We're not ready to go quite that high but the theoretical case can be made.  Stay tuned.





Assuming a structure similar to PENN’s OPCO/PROPCO design, we came up with a value of $49-70/share off of our 2015 projections.

  • Big picture assumptions
    • ASCA has assets that will meet REIT requirements for a tax-free spin
    • Ability to obtain an IRS ruling and get approval from all the jurisdictions in which they operate in
  • ASCA 2015 forecast
    • $1.5BN of net revenue
    • $504MM of property-level EBITDA
    • $446MM of Adjusted property-level EBITDA
    • Net debt of $1.9BN
    • 34MM shares outstanding
    • Adjusted EBITDA of $225MM
    • 5.5x leverage or total debt of $1.24BN at a cost of 6.5%
    • $15MM of overhead and other expenses
    • AFFO:  $130MM
    • 90% payout ratio gets you a dividend of $3.46
    • Similar to PENN, we think ASCA should be valued at a 7-9% yield or a 12x implied 2015 EV/EBITDA multiple ($38-$49/share). 
    • Adjusted EBITDA of $221MM
    • Remaining debt at OPCO of $760MM or 3.4x leverage at a cost of 6.5%
    • Maintenance of $77MM or 5% of net revenue
    • Based on today’s $19 share price, ASCA trades at roughly 7x 2013E EBITDA
    • We believe that ASCA OPCO should trade at a material discount of 5.0-6.5x ($10-$20/share).
      • A $10-$20 valuation would represent a 20-10% FCF yield 

FL: Footwear Sales Growth

With Foot Locker (FL) putting up a solid quarter this week, Wall Street's concerns over slowing sales have been put to rest. Hurricane Sandy has affected inventories as well as future comp prospects, but we think Foot Locker still has potential for further upside in performance through year-end. We’re targeting $3 earnings per share for next year and think it’s entirely possible for Foot Locker to do that while still growing margins. We remain bullish on FL.


FL: Footwear Sales Growth - FL FW sales chart



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.

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


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

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. 

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