Is REIT Spinoff In The Cards For Boyd Gaming?

A subclass of spinoff that has proven popular, especially under activist pressure has been the spinoff of real estate assets into a publicly traded REIT. Civeo’s (CVEO) spin from Oil States (OIS) was one example, though the company has now opted against REIT status, as was Penn National Gaming’s (PENN) spin of Gaming & Leisure Properties (GLPI). Now, another casino operator may be following in Penn’s footsteps.

The Las Vegas Review-Journal reports that Boyd Gaming(BYD) CEO Keith Smith disclosed during last week’s earnings conference call that the company has been exploring the possibility of a REIT spinoff.

Boyd Gaming CEO Keith Smith said Thursday the company is working with advisors to understand the feasibility of the process. Boyd Gaming operates 22 casinos in eight states.

“The evaluation of whether to form a real estate investment trust takes a considerable amount of time and thoughtful consideration, so this will not be a quick process,” Smith said during a conference call with analysts to discuss the company’s third quarter earnings.

“There are various aspects of our capital structure that make potential value creation through a real estate investment trust challenging at this time,” Smith said.

Boyd Gaming has spent $3 million so far on the evaluation.

In March, hedge fund Elliott Associates disclosed an activist stake in the company prompting speculation that they would push for a REIT spinoff.  Elliott has made no public statement on its intentions, but news that the company is exploring this may well be a result of conversations between the fund and management. The Review-Journal article from March sheds some light on what challenges the capital structure might cause.

The challenge is Boyd’s current ownership structure. About 30 percent of outstanding shares are controlled by Bill Boyd, who founded the company with his father, Sam Boyd, and family members.

Janney Montgomery Scott gaming analyst Brian McGill said he thought a REIT conversion wouldn’t fly based on the company’s model. The Boyd family would have to significantly reduce its ownership stake.

“For the REIT spin to work, no individual can own greater than 10 percent of shares outstanding,” McGill said. “That said, we think it would take exceptionally long, if ever, for the pieces to fall into place.”

In addition to the structural challenges, the unimpressive performances of Penn and Gaming & Leisure Properties since their spin may consign this potential spin to the cutting room floor.

Disclosure: The author holds shares of CVEO