Fitch: PATH Passage, IRS Guidance Could Dampen REIT Spinoffs

NEW YORK--(BUSINESS WIRE)-- Recent IRS guidance and the passage of Protecting Americans from Tax Hikes Act of 2015 (PATH) may challenge REIT spinoffs but are unlikely to derail REIT plans in the pipeline, according to Fitch Ratings.

The main motivation for REIT spinoffs and similar alternatives is to separate the more valuable real estate from the associated less valuable, more cyclical operations. Given the IRS's recent position, MGM Resorts International (MGM), Caesars Entertainment Operating Co. (CEOC), and possibly, Macy's Inc. (M) are instead contributing their assets to new subsidiaries. Subsequently, a portion of these subsidiaries will be sold or granted to third-party investors, which, if all goes to plan, will trade these subsidiaries at real estate multiples (i.e. 10x-15x EBITDA). Pinnacle Entertainment (PNK) was pursuing a spinoff until it decided to sell its real estate to Gaming and Leisure Properties (GLPI) for 13x EBITDA. These transactions would not require a Private Letter Ruling (PLR) from the IRS.

Issuers that have not announced, but may be contemplating, REIT spinoffs, such as Boyd Gaming (BYD) and Hilton Worldwide (HLT), have likely preserved the option by submitting PLR requests prior to PATH's Dec. 7, 2015 grandfathering threshold. In the event these issuers have not received PLRs and want to pursue transactions similar to Penn National Gaming's (PENN), they will likely need to demonstrate "unique and compelling" circumstances to receive a PLR from the IRS. Further, it is uncertain the IRS will issue grandfathered rulings post-PATH passage and, if they do, how long it will take and whether the level of scrutiny will change relative to when the IRS gave PENN and Darden Restaurants, Inc. (DRI) the go ahead.

Fitch believes companies looking at REIT transactions mainly to take advantage of the multiple arbitrage may wait given the recent declines in GLPI's stock and the regulatory headwinds. The stock is down 30% from the 52-week high in mid-2015. PENN's investors enjoyed a roughly 60% aggregate return since the spinoff announcement, above approximately 50% for the S&P 500 but well below comparable gaming stocks, including Isle of Capri (160%) and BYD (300%). In November 2015, M said it was not doing a REIT transaction because the multiple arbitrage math did not work.

Issuers will likely pursue spinoffs only with a PLR in hand or to follow alternative paths such as the one taken by MGM. We understand that executing a spinoff without a PLR could expose the issuer and its shareholders to potentially severe tax consequences if the IRS deems the distribution a taxable event.

For more information on this topic, see our special report titled, "What Investors Want to Know - The State of REITization in the U.S.," available on Fitch's website at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

What Investors Want to Know - The State of REITization in the U.S.

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876426

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160114005714/en/

Fitch Ratings
Alex Bumazhny, CFA
Director
Corporate Finance
+1 212-908-9179
Fitch Ratings
33 Whitehall Street
New York, NY
or
Stephen Boyd, CFA
Director
U.S. REITs
+1 212-908-9153
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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