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Pinnacle Entertainment, Inc (PNK): Parag Vora’s Bet on Real Estate Pays Off Big Time

One of the top gainers in Monday intraday trading is Pinnacle Entertainment, Inc (NYSE:PNK). The stock of the casino operator spiked by 20% at the beginning of the day and is currently trading about 14% in the green. The jump of the price comes on the back of an announcement made by the Gaming and Leisure Properties Inc (NASDAQ:GLPI) real estate income trust (REIT), according to which, it offered to acquire the real estate assets owned by Pinnacle Entertainment in a deal worth $4.1 billion. The deal will most benefit one particular investor, Parag Vora of HG Vora Capital Management. Mr. Vora has been bullish on Pinnacle for quite some time, being the largest shareholder among institutional investors at the end of 2014. Moreover, his stake is the largest position in the fund’s equity portfolio as of the end of 2014.

Parag Vora - HG Vora Capital

In November 2014, Pinnacle Entertainment, Inc (NYSE:PNK), after pressure from some investors, agreed to pursue a tax-free spin-off of its real estate into a separate publicly traded REIT. In the event the transaction with Gaming and Leisure Properties passes through, it would lead to the creation of the third-largest triple-net REIT by enterprise value. The shareholders of Pinnacle would receive $36 per share, which represents a 30% premium over Pinnacle’s closing price last Friday. At the end of December, Mr. Vora held 5.50 million shares of the company, valued at around $122.38 million. At the price offered by Gaming and Leisure Properties, the investor’s position is valued at $198 million, which represents an impressive return on his investment, especially if we take into account that this value involves only the real estate assets of Pinnacle.

However, it is important to mention that Mr. Vora was not betting on Pinnacle as a future M&A target. In an interview around a month ago, Mr. Vora said that he liked Pinnacle Entertainment, Inc (NYSE:PNK) because it could reach a free cash flow of $5.00 per share in the next five years and because the company made a successful acquisition of Ameristar Casinos in 2013, paying $2.8 billion financed with low-cost debt. In addition, the investor said that he expected the stock to reach $50 per share within the next four years. If Mr. Vora has not changed his mind about the company since the interview in late January, the big question is whether he would be satisfied with a smaller payoff that involves a lower risk and a shorter period of time, or he would like to stick with Pinnacle for the long-term.

Another investor that would probably support the deal is Daniel Lewis of Orange Capital. Orange owned 2.58 million shares of Pinnacle Entertainment, Inc (NYSE:PNK) as of the end of 2014 and last April, Mr. Lewis urged the company to consider a spin-off of its real estate into an independent publicly traded real estate investment trust. In addition, Joshua Friedman and Mitchell Julis’ Canyon Capital Advisors upped its stake by 32% during the fourth quarter to 2.77 million shares.

Pinnacle has been among the largest stakes in HG Vora’s equity portfolio for over a year as the stake has represented around 20% of the total portfolio value. In fact, Mr. Vora likes to invest in companies that have an exposure to real estate, being either REITs or companies that own a significant real estate portfolio. Aside from Pinnacle, two other top picks in the fund’s equity portfolio were Life Time Fitness, Inc. (NYSE:LTM) and Macy’s, Inc. (NYSE:M), all three holdings amassing 47% of its $568.13 million portfolio.

Life Time Fitness, Inc. (NYSE:LTM)

In Life Time Fitness, Inc. (NYSE:LTM), Mr. Vora cut his stake by 35% during the fourth quarter to 1.41 million shares with an aggregate value of $79.55 million. Life Time Fitness is a developer and operator of large, multi-use sports and athletic, professional fitness, family recreation and spa centers in a resort-like environment. The stock appreciated by 21% between the end of August, when Vora initiated his stake in the company, and the end of 2014. The stake was initiated amid talks about Life Time Fitness, Inc. (NYSE:LTM)’s plans to spin-off its real estate into a REIT, which explains Mr. Vora’s decision to purchase shares. However, a couple of days ago, a report by Wall Street Journal stated that Life Time Fitness had been in talks with two private equity firms regarding a potential bid to acquire the company. Among other shareholders that would benefit from the acquisition of Life Time Fitness, Inc. (NYSE:LTM) is David Einhorn‘s Greenlight Capital, which initiated a stake during the fourth quarter, disclosing holding 1.84 million shares in its last 13F filing.

On the third spot is Macy’s, Inc. (NYSE:M), in which HG Vora disclosed a new position that contains 1.0 million shares, valued at $65.75 million. Even though Macy’s has not announced any plans regarding its vast real estate portfolio, it might do so in the near future, since a spin-off of real estate into a REIT has proven to be an effective way to increase shareholder value among many companies. Another retailer, Sears Holdings Corp (NASDAQ:SHLD), announced that it plans to spin-off its real estate portfolio as a measure to stop the stock’s consistent declines. Nevertheless, Macy’s, Inc. (NYSE:M)’s stock gained some 8% in the last 52 weeks and the company reported a 10% annual growth in EPS for 2014 to $4.40 and revenue growth to $27.93 billion from $27.69 billion in 2013. Among funds that we track, Robert Bishop’s Impala Asset Management was the largest shareholder of Macy’s, Inc. (NYSE:M), holding 1.68 million shares as of the end of last year.

Disclosure: None