As McDonald’s approaches the third anniversary of declining
sales, some analysts have been asking whether shareholders could get better
returns if the company placed its U.S. properties in a publicly traded
real-estate investment trust. McDonald’s has always maintained the importance
of owning its own property. But executives responding to recent queries haven’t
ruled out the possibility of spinning off its real estate, with Chief Financial
Officer Kevin Ozan saying last month that it will consider all
financial options to boost shareholder value, and update investors in November.
Hedge fund chief Larry Robbins, of Glenview
Capital Management, said in a March letter to investors that McDonald’s could
unlock at least $20 billion in value if it were to spin off its U.S. real
estate. Many investors like REITs because they tend to trade at higher
multiples than retail companies and pay little or no tax on their earnings as
long as they distribute most of their profits through dividends. Doing so
enables companies to collect an upfront sum that can be used to buy back shares
or pay down debt.
That could make such a move attractive to McDonald’s top
management, especially since the fast-food chain’s shares—at $92.87 as of
Monday’s close—are down more than 10% from their all-time closing high in April
Publicly traded Arcos Dorados Holdings Inc., McDonald’s
largest franchisee, which owns more than 2,100 McDonald’s throughout Latin
America and the Caribbean, last month said it is planning to outright sell or
sell and then lease back some of its non-core real-estate assets, such as
office buildings and distribution centers as part of a broad cost-cutting plan.
But some analysts say the arguments against a McDonald’s REIT far outweigh
those for it. For starters, the burger giant derives huge revenue from its real
estate. Rental income from franchisees accounted for more than a fifth of
McDonald’s $27.4 billion in total revenue last year—when overall revenue fell
2.4% and profit dropped 15%—and represents a growing part of its business. Rent
payments from franchisees have risen 26% over the past five years to $6.1
billion last year.
Sara Senatore, an analyst at Sanford Bernstein who has
studied McDonald’s real estate, estimates its world-wide property, including
the U.S., is worth more than $42 billion. In the U.S. alone, home to more than
14,000 McDonald’s restaurants, she estimates that the company’s real estate is
worth between $25 billion and $35 billion. McDonald’s current market value is
around $87.5 billion after the recent broad market downturn. But she and others
note that selling off the property would introduce new costs for McDonald’s,
which could have to start paying rent on the roughly 1,500 U.S. restaurants it
operates on its own.
Real estate has been a backbone of McDonald’s business
almost since its founding. All that property has attracted outside interest
before. Nearly a decade ago, activist investor Bill Ackman pushed
McDonald’s to spin off some its real estate, but other shareholders didn’t get
behind his plan and he ultimately dropped it.
Splitting off the real estate would involve other
complications. In some cases McDonald’s owns the land and building for its
restaurants outright. In others, it rents the building from another landlord
and subleases it to franchisees. In the latter case, McDonald’s pays its
landlords a market rent of about 5% of the restaurants’ sales and then charges
its franchisees 10%.
McDonald’s franchise-disclosure documents, given to
prospective operators, spell out that structure, saying that the company
applies a finance fee on top of the monthly base rent “to produce an
appropriate return for McDonald’s.” Franchisees, whose relations with
McDonald’s already are strained, also likely would balk, said John
Gordon, founder of restaurant consulting firm Pacific Management
They fear a REIT might have more incentive to jack up rent
over time than McDonald’s, which wants to maximize rent but also wants
franchisees to be financially healthy so its business can thrive. McDonald’s
sometimes gives rent breaks to franchisees who remodel or add new equipment,
something a REIT wouldn’t do.
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