Investors are still pushing McDonald’s Corp. to spin off its real estate. And, it seems, McDonald’s is more open to the idea.
Earlier this month, hedge fund manager Larry Robbins, CEO of Glenview Capital Management, wrote a letter to the Oak Brook, Ill.-based burger giant, suggesting operations improvements could increase shareholder value by at least $20 billion.
Robbins’ suggestions include converting the company’s vast real estate holdings into a real estate investment trust, or REIT. By making those changes, Robbins suggests McDonald’s could trade at $169 per share — well above the $97 a share it’s currently trading at.
Real estate spinoff demands by investors are nothing new for McDonald’s and seem to come up once every several years. But this time executives seem a little more willing to consider such an idea.
Speaking at the UBS Global Consumer Conference earlier this month, Chief Administrative Officer Pete Bensen suggested the company’s views on real estate are evolving.
“We’re constantly challenging our thinking on the REIT,” Bensen said. “It isn’t something we haven’t seen before. We update our analysis and review it with the board. We’re always looking for ways to increase value.”
That’s a bit different from the company’s traditional stance on real estate, and indeed we even once said ourselves, not that long ago, that McDonald’s wouldn’t ever get rid of its real estate.
Real estate questions are common in the restaurant industry, coming up any time a chain that owns land and buildings starts struggling on Wall Street. In the case of McDonald’s, investors are pushing for what is known as an opco/propco structure, where an operating company (opco) contributes real estate to a property company subsidiary, or propco.
Such arrangements would have a tax benefit for McDonald’s, because REITs don’t pay corporate taxes on income distributed to shareholders. There would also be theoretical stock benefits. McDonald’s is a large, vast holder of real estate. Many of its sites are highly valuable. In many respects, it’s a real estate company that just happens to sell hamburgers.
Robbins in his letter estimates that half of McDonald’s earnings before interest, taxes, depreciation and amortization is coming from its real estate assets.
But, the company’s stock is traded like that of an operating company. REITs, Robbins noted in his letter, are trading at 20x cash flow. Spin off half of that cash flow into a tax-free REIT and McDonald’s shareholder value would balloon.
McDonald’s is currently trading at an enterprise value multiple of 11x.
The biggest concern about a spinoff is the impact on McDonald’s franchising business. Franchising is its most profitable business, and everything the chain does is designed to support that effort.
McDonald’s holds tight control over its system. The company ensures locations remain McDonald’s locations and succeeds in getting the system to remodel and install upgrades to add things like coffee drinks. It charges rent based upon a percentage of revenue at the location and based upon the company’s own investment in that unit.
Spinning off its real estate could introduce a third party into that relationship, which could complicate matters, to say the least. And owning the real estate brings in a massive amount of income.
Still, McDonald’s is looking for some wins. New CEO Steve Easterbrook could well use a real estate spinoff to satisfy investors and give the company some time to right its sales ship, as Crain’s Chicago Business noted.
Most analysts ultimately don’t think McDonald’s will spin off its real estate, even with the renewed pressure. Brian Vaccaro, analyst at Raymond James, suggested that the company’s long-term favorable view of the benefits of real estate ownership isn’t likely to change.
Contact Jonathan Maze at [email protected].
Follow him on Twitter at @jonathanmaze
