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Penn National Gaming Inc. (PENN), the operator of 29 casinos and racetracks, surged after announcing plans to split into two public companies by placing 17 of its properties into a real estate investment trust.

The company will continue to run most of the casinos and tracks, while the properties will be spun off to shareholders as the first casino-focused REIT, according to a statement (PENN) yesterday from the Wyomissing, Pennsylvania-based company.

Penn National investors will receive a dividend of about $5.35 a share plus stock in the REIT. The casino operation will pay the REIT about $450 million a year in rent, the company said. Other casino companies will probably consider similar restructurings to unlock value, according to Jonathan Litt, founder and chief executive officer of LandandBuildings, a Greenwich Connecticut-based hedge fund focused on real estate.

“The best way to realize value is to break up,” Litt said in an interview. “Management teams will look at the potential of deals like this and seriously consider converting into REITs.”

Penn National jumped 22 percent to $46 in extended trading following the announcement yesterday, from a close of $37.61 in New York. The shares are down (PENN) 1.2 percent this year.

Chairman and Chief Executive Officer Peter Carlino will hold those same positions at the REIT and remain chairman of Penn National. Tim Wilmott, Penn’s chief operating officer, will become CEO of the casino company. The split, subject to regulatory approval, is expected in the second half of 2013, with the REIT effective in January 2014.

‘Transformational’ Deal

“This proposed transaction would be transformational for Penn National and its shareholders, and presents a direct path toward unlocking the tremendous value of our real estate asset portfolio,” Carlino said in the statement. “Our plan is to create two well-capitalized companies with strong free cash flow that are positioned for growth in the gaming and REIT sectors.”

Carlino, 66, built Penn National via acquisitions and construction from a single horse-racing track near Harrisburg, Pennsylvania. REITs, with their primary income from real estate, don’t pay federal income taxes. They’re required by law to distribute at least 90 percent of their taxable earnings to shareholders as dividends.

The company said it received a private-letter ruling from the Internal Revenue Service related to the split’s tax treatment.

Adelson’s Plans

Litt, the real estate investor, released a report in September suggesting Las Vegas Sands Corp. (LVS) might be worth double its $44 a share stock price by splitting into separate casino, retail and hotel companies, taking advantage of REIT structure. The casino company can grow faster without being attached to real estate, he said.

Sheldon Adelson, chairman and CEO of Las Vegas-based Sands, said on a Nov. 1 conference call that he would consider selling or spinning off the company’s retail properties.

Excluding mortgage REITs, property trusts have raised record amounts of cash through equity and debt sales in the past three years as investors seek yields higher than those offered by U.S. government notes.

Penn National’s REIT shareholders are expected to receive the property company’s income as an ordinary dividend -- estimated at $2.36 per Penn share, based on 2013 earnings guidance. The company forecast 2013 profit of $2.62 a share on revenue of $3.2 billion and adjusted earnings before interest, tax, depreciation and amortization of $905.1 million.

Casinos in Baton Rouge, Louisiana, and Perryville, Maryland, will also be owned by the REIT and held in a taxable subsidiary. Eight other tracks and casinos, including four joint ventures, will remain owned by Penn National. Two Ohio racetracks, pending relocation, will become part of the REIT.

LBO Settlement

Separately, Penn National unveiled plans yesterday for a casino in Philadelphia, making it one of six bidders for the single license to be awarded by the state Gaming Control Board. The company seeks to build a $480 million Hollywood Casino near the city’s sports complex, according to a statement.

Penn National received a settlement from Fortress Investment Group LLC (FIG) and Centerbridge Partners LP after the private equity companies abandoned a leveraged buyout in July 2008. The firms paid a $225 million breakup fee and invested $1.25 billion in interest-free preferred stock.

Fortress, which holds $975 million of the preferred, agreed to reduce its holdings to facilitate the planned split. The private-equity firm can exchange its stake for $67 a share, or 14.6 million common shares.

(Penn National will host a conference call with investors at 8:30 a.m. New York time. Dial +1-212-271-4651 or www.pngaming.com to access webcast.)

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