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Penn National Gaming spin-off creates huge mortgage filing

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It's not every day you see a $1.25 billion mortgage filed in two local courthouses in the same week.

But that's what turned up in both Dauphin and Lebanon counties in March, a product of a complicated company spin-off for Berks County-based Penn National Gaming Inc.

In November, the company spun off Gaming and Leisure Properties Inc. as a separate, publicly traded, tax-free real estate investment trust to own much of the land where the company's 28 properties sit.

Both mortgages filed locally were for the Hollywood Casino at Penn National Race Course property, which straddles the two counties in the Grantville area.

The spin-off took almost a year from the time it was announced in November 2012, but its birth can be traced to Penn National's failed sale in 2007.

How it happened

According to Gaming and Leisure Properties' investor presentation in February, when the company failed to complete its sale to Fortress Investment Group and Centerbridge Partners in 2008, it decided to search for different ways "to increase shareholder value."

As a result of the deal dying, Penn National Gaming received a $225 million termination fee and affiliates of the four equity purchase partners — Fortress, Centerbridge, Wachovia Bank and Deutsche Bank — purchased $1.25 billion of the company's redeemable preferred equity.

In the investor presentation, Penn National said it repurchased the $1.25 billion in preferred equity which would have been redeemed in July 2015.

That investment became the company's real estate investment trust, which typically tempts investors with high levels of continuing current income and long-term growth, according to the National Association of Real Estate Investment Trusts's website.

It is the only real estate investment trust in the gaming industry, according to the new company, which trades on the Nasdaq under the ticker symbol GLPI.

The local impact

Prior to the spin-off, Penn National had 28 properties — including the local Hollywood Casino. The 181-acre property with the race track and casino is located entirely in Dauphin County.

However, the property also includes an additional 393 acres surrounding the course that is available for expansion or development, said Chris Rogers, vice president and senior corporate counsel for Penn National Gaming. Part of that property lies in East Hanover Township, Lebanon County, prompting the need for the mortgage to be filed there as well as in Dauphin.

The company has paid no real estate transfer tax in Dauphin County, according to Dauphin County Recorder of Deeds Jim Zugay, because the deed has not been filed yet. A mortgage does not require the payment of a transfer tax, but a deed transfer would.

There also has been no transfer tax paid in Lebanon County. Rogers said a transfer tax was paid on some of the properties, but he couldn't break down which ones and how much tax was paid.

The mortgage papers filed locally identify Penn Tenant LLC as the mortgagor with Bank of America as the collateral agent. Penn Tenant is a wholly owned subsidiary of Penn National Gaming and is the parent of the various subsidiaries that lease properties from GLPI pursuant to the master lease, according to Rogers.

According to a Securities and Exchange Commission filing, the mortgage amount of $1.25 billion is a new credit facility Penn National entered into in contemplation of the spin-off. It includes a $500 million Term Loan A with a maturity of five years, a $250 Term Loan B with a maturity of seven years and a $500 million revolving credit facility with a maturity of five years.

Separating the companies

Of those 28 total Penn National properties, real estate ownership for 17 of them has been transferred to Gaming and Leisure Properties.

The properties were then leased back to Penn National Gaming, with a rent of $421.6 million in 2014, according to Joe Jaffoni, a Penn National spokesman. Penn National now operates the properties, with Gaming and Leisure Properties serving as the landlord. Penn National's ownership stake includes the gaming licenses of the properties, a gaming management contract and the gaming equipment.

There are also two properties under development in Ohio that were transferred to the new real estate company, Rogers said.

Two casino properties, one in Louisiana and another in Maryland, are now owned and operated by Gaming and Leisure Properties.

Part of the facilities were used to pay off former debt and related fees and expenses in the spin-off deal.

Executives from Penn National Gaming and Gaming and Leisure Properties were not made available for this report.

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