Some big restaurant and commercial real estate news was recently announced by Darden Restaurants. The company, which owns Olive Garden and other popular chains, is spinning off a sizable portion of its real estate into a REIT and forming another publicly traded company as a result.
The company expects to sell about 430 properties to the REIT, which is set for completion by the end of the year and will lease them back to the restaurant operator. It is also selling 75 units in separate deals.
Darden is not the only retail company with this plan. Hudson’s Bay Co., which owns department-store chains Saks Fifth Avenue and Lord & Taylor, announced a deal to sell 42 stores to mall giant Simon Property Group. Sears Holdings Corp. is splitting about 300 stores into a different company this summer to raise money. And certain investors have wanted to do this with McDonald’s for years. Restaurant chain Bob Evans Farms is also considering a similar plan.
Meanwhile, Darden, which other than Olive Garden owns LongHorn Steakhouse, The Capital Grille, Yard House and other chains, posted some very strong year-end and fourth quarter numbers. Earnings hit $105.3 million, up from $86.5 million during the same year-ago period. Same-store sales rose 3.4 percent at Olive Garden, 5.2 percent at LongHorn and 4.4 percent at Capital Grille.
So what to make of this REIT announcement?
It’s obviously going to be something that will generate more cash and make Darden more valuable. The stock has already shot up since the announcement. Plus, it will give the company funds to make its chains more operationally efficient.
Another point is that if a particular LongHorn or Olive Garden location is lagging, the new Darden REIT can always lease it out to a different concept and return strong shareholder value. There are plenty of restaurant concepts looking to expand in the improving economy.
“We’re hearing more of this REIT idea coming into play by larger companies, particularly in the restaurant industry with significant real estate holdings. I’m not fond of it, though, because it doesn’t really provide an investor of the REIT the true market diversification they would be accustomed to in a more traditional REIT. Your credit risk is all with one concept.”