Penn National Adds Month of Liquidity in Tropicana Deal With GLP, Says Analyst

Posted on: March 30, 2020, 09:01h. 

Last updated on: March 30, 2020, 10:10h.

Penn National Gaming (NASDAQ:PENN) said last Friday it’s selling the real estate assets of the Tropicana Las Vegas and the ground lease of an asset in Morgantown, Pa. to Gaming and Leisure Properties (NASDAQ:GLPI) for $337.5 million worth of rent credits, a move one analyst views as vital to the operator’s near-term survival prospects.

Penn National’s Tropicana sale provides needed liquidity at an important time, says one analyst. (Image: Las Vegas Review-Journal)

As reported last October, some analysts, using other Las Vegas Strip real estate deals as templates, speculated Penn could fetch up to $20 million an acre, or as much as $700 million, for the Tropicana. With the $337.5 million price tag, the operator took a modest loss based on the roughly $10 million per acre it paid for the 35-acre property in 2015.

Still, Stifel analyst Steven Wieczynski views the transaction as important to bolstering Penn’s near-term liquidity while cementing an already-solid relationship with GLP.

More importantly for PENN, even though some might argue they didn’t get the ‘full price’ for their real estate associated with the Tropicana, we believe what is more important right now is firming up additional liquidity and showing the market how long their business is sustainable without operations,” said the analyst.

Wieczynski estimated that prior to the Tropicana sale, Penn had 166.7 days worth of liquidity, a number that’s been boosted to 202.6 as a result of the deal. That original forecast jibes with what other analysts mentioned regarding the operator’s survival time frame should domestic gaming properties remain closed due to the COVID-19 pandemic.

Extreme Scenario

Down almost 54 percent year-to-date, Penn stock is one of the most battered gaming equities. Investors are punishing the shares, as all operators face a zero-revenue situation because of temporary closures forced by the coronavirus outbreak.

Like other operators, Penn, which runs 41 casinos in 19 states, is unable to offer any visibility as to when its venues will reopen. The company also pulled its 2020 financial guidance as a result. It’s expected that the operator will provide analysts and investors with an update on May 7.

Wieczynski believes the “market has currently priced in an extreme downside scenario” with Penn stock. Indeed, the name is recently volatile, slumping from the 52-week high of $39.18 to a low of $3.75 in a matter of weeks.

After hitting that 52-week low, the stock proceeded to more than triple, eclipsing a $15 handle, but has since given back about 27 percent of those gains.

Favorable Risk/Reward

With the new liquidity lifeline via the Tropicana transaction and an attractive valuation, among other factors, Penn offers investors a compelling risk/reward setup, according to Wieczynski.

“We continue to believe a relatively healthy US consumer; a maniacal margin focus; upside from a recently implemented universal player loyalty program; a commitment to reducing lease-adjusted leverage to 5.0x; and an approachable valuation all position PENN to deliver superior shareholder returns over the intermediate to longer term,” he said. “With all of that said, we encourage investors to remain buyers of the shares, as we believe current levels present a compelling long-term risk/reward setup, all else being equal.”

The analyst has a “buy” rating and a $37 price target on the stock, meaning it needs to more than triple from current levels to reach that forecast.