McDonald's investors and analysts have been salivating over the equity in McDonald's real estate portfolio for decades.
Many think that McDonald's should follow the lead of other companies and spin off their
real estate assets into a real estate investment trust (REIT). Theoretically investors would
buy shares in the REIT thereby "monetizing" McDonald's unrecognized McDonald's real estate values.
During the November 2015 meeting with analysts McDonald's management told investors
they had wisely decided there would be no REIT and as it just wasn't a good fit for the
system. However, management did disclose that by the end of 2015 the company will have
sold four McDonald's locations for about $130 million. This may be the first time in history
that McDonald's has publicly discussed such transactions. I assume past transactions were
detailed in financial disclosures but the specifics were not broadcast.
When Ray Kroc and Harry Sonneborn developed their approach to McDonald's real estate
it was with the intention that there would be a McDonald's store at any specific location in perpetuity. They knew they couldn't build much of a chain if established stores were to come and go every 20 or 30 years. They either bought the property or secured leases with extensive options.
This strategy had an added benefit - franchises could be bought and sold with the buyer confident they were acquiring a long term business - creating more equity for the seller.
But a real estate formula that's worked well for 50 plus years is changing and Operators
should be aware of this evolution.
I won't try to predict what McDonald's management will do but I know how Wall Street analysts think and MCD shareholders are pretty predictable. Going forward analysts will
be expecting a certain amount of activity in McDonald's real estate sales. The substantial
sale prices of the four locations in 2015 will be the baseline. If management doesn't
produce a comparable annual line item analysts will ask "why not?".
Individual McDonald's shareholders will now drive-by their local McDonald's wondering if
that location shouldn't become a mixed-use office tower.
And the REIT issue will not disappear. When McDonald's share price has a downturn or is merely flat or dividends don't grow investors will again want to revisit the REIT idea. A management team and board of directors who are not getting results for shareholders
might be unable to resist.
This not meant to alarm all McDonald's Operators since it will not involve a lot of stores.
At least in the saturated USA McDonald's can't build total sales and income by shutting
down stores in large numbers. And, while many McDonald's properties have increased in value, there will only be a few where the resale value exceeds the future income stream
as a McDonald's restaurant. But, things are gradually changing.
2016 should be the year that McDonald's Operators become more involved and more know-ledgeable about the properties they are renting. Nothing could be worse for an Operator's equity than questions about a store's long term existence. Nothing could be worse for a store's cash flow than having the owners of an independent REIT making decisions about store rent and other occupancy costs.
Bloomberg reports on the November meeting HERE