McDonald's

McDonald’s will not be spinning off its massive real estate holdings, choosing to focus on engineering a turnaround through cost-cutting and returning cash to shareholders.

The burger giant’s CEO Steve Easterbrook said the company had given “serious consideration” to the idea of creating a real estate investment trust — promoted by hedge-fund manager Larry Robbins — but determined it would not be in the best interest of shareholders.

“The potential upside is not compelling, and the future value at risk too great,” Easterbrook told investors at a meeting in New York on Tuesday.

As Reuters reports, real estate is an important part of McDonald’s business. The company collects rents from franchisees and those payments increased 26% from 2009 to 2014. Last year, when sales and profits dropped, rents accounted for more than 22% of McDonald’s total revenue.

Robbins, the CEO of McDonald’s shareholder Glenview Capital Management, has said the fast-food chain could unlock at least $20 billion in value by converting to a REIT. Investors like REITs because, by law, they must pay out at least 90% of taxable earnings to shareholders as dividends.

Darden Restaurants, the owner of Olive Garden, created a REIT this year. But according to Bloomberg, “the option made less sense for McDonald’s, which generates billions from the rent it charges franchisees.”

“Any potential value creation from a REIT is outweighed by the significant financial and operational risks to our business and the continued progress of our turnaround,” McDonald’s Chief Administrative Officer Pete Bensen said in a statement.

The turnaround plan, laid out in May, is aimed at transforming McDonald’s into a “modern progressive burger company.” In a sign that the plan may be gaining traction, McDonald’s last month announced a gain in U.S. sales after seven consecutive quarters of declines.

Easterbrook, who took over as CEO in March, now expects to reduce overhead expenses by $500 million a year and the company is also raising its quarterly dividend by 5% to 89 cents a share.

“Everything we said we’d do in May, we’ve done, and now we’re going further,” Easterbrook said Tuesday.

On Wednesday, Moody’s Investors Service downgraded McDonald’s Corp.’s senior unsecured rating to Baa1 from A3. Baa1 is three notches above junk status.

The downgrade was a result of McDonald’s announcement that it plans to return $30 billion to shareholders in the three-year period to end 2016, and will fund $10 billion of that total with fresh debt.

“Overall, Moody’s views this debt financed share repurchase initiative as McDonald’s maintaining an aggressive financial policy towards shareholders that will result in significantly higher debt levels, weaker credit metrics, and further limit its financial flexibility.” Moody’s Senior Credit Officer Bill Fahy said in a statement.

, , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *