Las Vegas' Tropicana resort sold to pay the rent

Las Vegas

FRANK Sinatra hung out there. The Godfather was filmed there. And the iconic Las Vegas resort even invented the swim-up blackjack table.

But last Friday night, Penn National Gaming announced it is selling the Tropicana for US$307.5 million - about US$52.5 million less than it paid for the famous property on the Strip just five years ago.

The troubled sale could be a sign of things to come for the casino industry. In recent years, some big operators - including Penn National - spun off their properties to real estate investment trusts (Reits).

That gave them a liability they never had before: rent. Now, with their properties shuttered by Covid-19, relationships with the new landlords are getting tested.

With the doors closed, casino operators have been racing to tap credit lines and slash costs, but the next steps could be more asset sales and debt restructuring, said Jason Ader, chief executive officer of SpringOwl Asset Management and a former casino analyst. The Tropicana deal, he said, "is the perfect example of what else could happen".

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Penn National, headquartered in Pennsylvania, pioneered the idea of creating a Reit to own casinos and lease them back to operators.

In 2013, the company spun off most of its real estate - and much of its debt - to Gaming & Leisure Properties, the buyer of the Tropicana. It pays that company rent for the casinos it runs.

Caesars Entertainment and MGM Resorts International followed suit with Reits of their own, and the structure helped fuel a surge in casino dealmaking. But the sales, spinoffs and subsequent mergers have also led to new liabilities.

After a series of purchases, Penn National owns or manages 41 casinos and horse tracks, such as the Ameristar in Indiana and the Margaritaville in Louisiana. All are now closed to help prevent the spread of the virus.

The company's long-term debt and lease obligations have surged to US$11 billion, the highest for Penn National. Last year, the company doled out about US$870 million for rent.

Before the crisis, Penn National's chief executive officer Jay Snowden had been looking to sell just the vacant land behind the Tropicana to a developer who could exploit the value of the property. Instead, the company hatched the deal with Gaming & Leisure, which gives Penn National credit toward about five months in rent payments beginning in May.

Gaming & Leisure will put the resort on the market over the next two years, and Penn National could get as much as 75 per cent of any sale over US$308 million, depending on when it occurs.

Along with the sale announcement, Mr Snowden withdrew Penn National's 2020 financial estimates and said the company would put 26,000 employees on unpaid furlough from Wednesday.

"Penn National is a family, and we deeply regret the hardship this will place on you and your loved ones," he said in a statement. "We are extremely motivated and focused on reopening our properties as soon as it is safe and legal to do so."

In the meantime, the sale has bought the company breathing room. Steven Wieczynski, a casino analyst with Stifel Nicholas & Co, estimates that the company can last for about seven months with its casinos closed. BLOOMBERG