Can't hold it in: First CZR starts dicking around with the idea that they're going to create value by carving their real estate holdings out into a separate Real Estate Investment Trust (leasing the properties back to the casino operations).
Now, I hear that there's a battle for board seats at MGM among those proponents who think the current board has overlooked a ripe opportunity to create shareholder value with a similar move.
For Judas' sake, what's next ... they're going to figure out how to create derivative securites from the REITS?
Now, don't get me wrong ... my finance training is from a school that was the genesis of a lot of wonderful and imaginative financial wizardry, most of which I have great respect for. (In case you wonder, I'm talking Wharton, not Hogwart's ... though many have difficulty telling the two apart).
But anytime someone tells you that they're going to take 2+2 and create 6, the appropriate reaction is skepticism (not avid greed).
There actually is some sound logic that can explain why certain business disassemblies make sense from a shareholder perspective. The prospective separation of ebay and Amazon is a key example.
But, unfortunately, some have latched onto the fundamentals of REIT valuation and decided that you do get 2+2=6 if you simply split out captive real estate into it's own company. This works if the real estate has intrinsic value that makes it attractive in a multi-use scenario.
An example of this are shopping malls. Reconfiguring defunct shopping mall property as an office complex (among other possibilities) in market that is bidding up office space isn't at all beyond imagination.
But I invite you to look at most any defunct casino property and check the value at which it was "re-purposed" (if it was, at all). Anybody know how many cents on the dollar Revel or Showboat are going for?
It's a ridiculous fallacy that you can simply stake a REIT sign in front of any business property and create value. CZR will only wake up to that fact after market realities ultimately force them to take huge write-downs on these REITs, likely more than wiping out the wealth they dream of creating today with a stroke of a pen.
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Posted by: harry.porter@verizon.net
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