ST. LOUIS • Tropicana Entertainment’s deal to sell six of its eight casino properties, including Lumière Place in downtown St. Louis, poses a unique regulatory dilemma for Missouri gaming officials and one that industry executives across the country will monitor closely.
Under the agreement announced this month, Gaming and Leisure Properties Inc. (GLPI), a real estate investment trust that is funding more than 65 percent of the $1.85 billion deal, would buy the real estate and buildings in the portfolio and lease the operations of the casinos to Eldorado Resorts, which is funding the rest of the transaction.
Wyomissing, Pa.-based GLPI already owns the buildings of five of six St. Louis casinos — Ameristar St. Charles, Hollywood Casino, River City Casino, Casino Queen and Casino Argosy Alton. It owns the real estate for each of those facilities, too, except River City Casino - GLPI has a 99-year lease in place for that land with the St. Louis County Port Authority.
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If the deal with Tropicana is approved and GLPI acquires Lumière’s real estate, GLPI would own every casino property in the St. Louis market, which generated more than $1 billion in gaming revenue last year.
“This is the first time something like this has happened so it creates interesting questions of what the impact might be,” said Daniel Holmes, a partner and leader for RubinBrown’s Gaming Services Practice.
Because GLPI doesn’t make operational decisions for any of the casinos it owns — it makes money by leasing those activities to companies such as Eldorado — it hasn’t previously been viewed as anti-competitive by the Federal Trading Commission or the Missouri Gaming Commission.
But state and federal regulators have yet to encounter a case where a single landlord controls all of the real estate in a given market with at least three casinos. Baton Rouge, La., with three gaming properties, is facing the same situation if GLPI’s deal with Tropicana goes through.
Holmes, who is based in Las Vegas, said regulators had historically turned a blind eye to who owned the land because they were concerned only with who would be operating the casinos.
“But now you have this very real problem where all six physical pieces of land are held by the same entity,” he said. “It’s an interesting case study on the future of the REIT concept within the gaming industry and how this could be addressed in other markets. I think if GLPI can do this, it could be full throttle for these REITs and nothing changes. If they are required to sell a portion of the land, it might stall some of the activity in the sector.”
GLPI was spun out from under Penn National Gaming in 2013 in order for Penn National shareholders to squeeze more value out of its real estate assets. Today, GLPI’s portfolio consists of 38 properties that last year generated rental income of $671 million. An aggressive acquisition strategy has allowed GLPI to substantially increase dividend payouts to shareholders, from $62 million in the first quarter of 2015 to $134 million in the fourth quarter last year.
GLPI was the first REIT to specialize in gaming properties, and its success spurred other casino companies such as MGM Resorts and Caesars Entertainment to spin out their own REITs for similar purposes.
“It really was a brilliant stroke by (GLPI founder and CEO) Peter Carlino,” said Rob Heller, president and CEO of Spectrum Gaming Capital, a financial adviser to the gaming industry. “He recognized the gaming industry was sufficiently stable that he could lower costs of capital by splitting up the gaming company into a real estate base and an operating company on top of it — it’s really a strategy that had been successfully demonstrated by the hotel industry about 20 years ago.”
Missouri regulators have approved GLPI deals before but could scrutinize GLPI’s ownership structure even more given their control of the St. Louis market.
Carlino owns more than 5.25 percent of GLPI, which has a market capitalization of more than $7 billion, but also retains a significant equity stake in Penn National, which he founded and remains chairman of its board of directors.
In Missouri, Penn National operates Hollywood Casino in Maryland Heights and the Argosy Riverside Casino in Kansas City. It also operates the Argosy in Alton, across the river from St. Louis. GLPI owns all of those properties.
Late last year, Penn National and Pinnacle agreed to a $2.8 billion merger in which GLPI would acquire all of Pinnacle’s real estate. In the St. Louis market, that means Penn National would gain the River City casino — its third casino locally — but, in a bid to head off regulators concerned about a potentially anti-competitive deal, Pinnacle would transfer operating licenses at its Ameristar properties in St. Charles and Kansas City to Boyd Gaming Corp. The deal is slated to close in the second half of this year.
If and when all the deals are completed, the six St. Louis area casino properties will have a single owner, GLPI, but four operators: Penn National (Argosy, Hollywood, River City), Eldorado (Lumière), CQ Holding Company (Casino Queen) and Boyd (Ameristar).
In 2016, when GLPI was seeking approval to acquire Pinnacle’s properties in the state, members of the Missouri Gaming Commission raised questions about the ownership overlap between the real estate company and the casino operator.
“The REIT investors are there for the dividend. Gaming companies operate very, very differently,” said Brandon Moore, GLPI’s general counsel during 2016 testimony to the commission. “So, yes, we have some overlap between our shareholders. We also have overlap with Sion Properties and a bunch of other publicly traded REITs. We also have some overlap with Boyd, Caesars and MGM … that’s natural.”
Executives with GLPI did not return requests by the Post-Dispatch for comment. In public testimony, they have said they’re in place only to collect rent checks and are contractually prohibited from weighing in on casino operating strategy.
Officials with the Missouri Gaming Commission declined to comment on the matter to the Post-Dispatch beyond saying they’d evaluate the transaction and its effect on Missouri gaming.
“It’s in the very preliminary stages and we can’t comment at this time,” said Ed Grewach, the commission’s lawyer.
Opponents of the deal, such as Unite HERE, a union that represents about 600 area casino employees, argue GLPI owning all of the real estate could drive down employee wages and inhibit future capital improvements.
“Who is going to be investing in the properties themselves,” said Dave Morton, organizing director for Unite HERE’s local chapter. “And if it’s just an operator who doesn’t own the building or land, are they going to be investing in wages or salary? That’s what we have concerns about.”
In 2016 testimony to the Missouri Gaming Commission, GLPI Chief Financial Officer Bill Clifford that’s not likely to be the case, who said the more money an operator spends on capital improvements, the more competitive their casinos will be in a given market.
“The more revenue they generate, the more my rent goes up,” he said. “So the very concept that says I’m going to start turning down capital projects is almost on its face — assumes I’m not going to operate in my economic bests interests.”
Holmes, with RubinBrown, said GLPI’s deal with Tropicana could also create a scenario in which GLPI has significant bargaining leverage when its operator leases expire — typical operating leases last between 30 and 40 years.
“What happens when those leases come up for renewal and (GLPI) has all six operators are negotiating with the same landholder?” he said.
Editor's note: This story has been updated to clarify information relating to River City Casino.