Darden to Transfer Real Estate Assets to a New REIT

The plan involves the sale and leaseback 430 restaurant properties currently owned by the company..
Katie Kuehner-HebertJune 24, 2015

Darden Restaurants said Tuesday that it plans to shed much of its real estate in a bid to boost profitability.

The company, owner of the Olive Garden and LongHorn Steakhouse restaurant brands, will transfer approximately 430 owned properties to a publicly held real estate investment trust and then lease them back. The REIT will be created in a spin-off, split-off, or similar transaction.

In addition, Darden has begun marketing selected properties for individual sale leasebacks.

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“This strategic real estate plan is the result of a comprehensive review of alternatives to best take advantage of our real estate portfolio,” Darden CEO Gene Lee said in a press release. “While a significant amount of work remains in order to proceed with the REIT transaction, we believe this plan will result in a more optimized capital structure and will create long-term shareholder value.”

The Wall Street Journal reported that Darden is the first major restaurant owner to consider transferring and leasing assets to a REIT, one of the major initiatives that activist investor Starboard Value LP pushed for in its successful proxy fight with Darden.

The leases on the properties to be transferred to the REIT are expected to have attractive rent coverage ratios, fixed rent escalations, and multiple renewal options at Darden’s discretion. The REIT will be well-positioned to expand through acquisitions of real estate from other businesses, said.

As for the marketing of selected properties for individual sale leasebacks, to date the company has listed 75 properties, more than 30 of these properties have been sold or are under a sale contract. Darden expects an average cash capitalization rate of approximately 5.5% for all 75 properties. It expects to close most of these transactions by the end of August.

In addition, the company is seeking to sell and lease back its Orlando restaurant support center property under a long-term contract with multiple renewal options.

After receiving proceeds from the completion of the strategic real estate plan, Darden expects to retire roughly $1 billion of its debt over time and maintain its investment-grade credit profile.

The company currently expects to complete the REIT transaction by year-end, after which the election to be treated as a REIT for tax purposes would be made effective January 1, 2016. Darden expects that the REIT will distribute at least 90% of its annual taxable income as dividends, as required by law. The dividends will be paid in cash (about 20%) and REIT stock (about 80%).

The spin-off or split-off transaction is expected to be tax-free to Darden’s shareholders, except for any cash paid in lieu of fractional shares.