By JASON BOOTH
The once high-flying shares of Hollywood Park Inc. have been driven to much lower altitudes following President Clinton’s proposal to limit the tax benefits enjoyed by paired-share REITs.
The stock tumbled more than 33 percent early this month, to less than $14 a share. By late last week the stock had stabilized at between $15 and $16 a share.
Prior to its nosedive, the stock had been in a steady climb since the Inglewood-based company announced in early 1997 that it would seek to regain its paired-shared status by the start of 1999.
Paired-share REITs were banned in 1984, but Hollywood Park was allowed to keep operating under the designation. It gave up its status in 1991 to simplify its operating structure, leaving four paired-share REITs in the United States.
Those companies have become popular on Wall Street because they enjoy certain tax advantages not enjoyed by traditional REITs.
Traditional REITs make money from buying properties and collecting rental income on those holdings. But they are not allowed to directly operate properties that generate non-rental income.
Paired-share REITs can operate non-real estate businesses, and funnel the income they generate from those operations through their REIT structure, tax-free.
Until this month, Wall Street expected Hollywood Park to regain its paired-share status, and then get acquired by a much bigger company. But Clinton’s budget proposal would prevent existing paired-share REITs from adding new operations to their tax-free structure.
So even if Hollywood Park were to regain its paired-share status, the tax benefits would only apply to operations it had owned prior to the legislation being passed namely, its casino and racetrack operations.
Hollywood Park declined to comment. An official at Investor Relations Board Inc., which represents the firm, confirmed that Hollywood Park is going ahead with its bid to reinstate its paired-share status.
“They are keeping very tight-lipped. They have got so much pending on the REIT issue that they don’t want to talk about anything that might affect that,” said the official.
The question is whether Hollywood Park can complete its transition, get bought and start buying up new assets before the government takes action.
Richard Klein, an analyst at Ernst & Young Kenneth Leventhal, doubts whether the Clinton proposal will become law this year. He pointed out similar provisions in 1996 that were soundly defeated.
“The threat to Hollywood Park is very real, though I feel that the sell-off is slightly overdone,” said Bryant Riley, president of securities firm B. Riley & Co. in Santa Monica.
Riley put the fair value of the stock at around $17, based on a book value of around $15.