The McDonald's Corp. has been advised by industry analysts and a hedge fund expert to consider the possibility of spinning off its U.S. real estate, amid declining sales figures.
Analysts are now looking into the possibility of McDonald's placing its U.S. real estate portfolio in a publicly traded real estate investment trust (REIT). This move will hopefully bring better returns for the company's shareholders, reports the Wall Street Journal (WSJ). The Golden Arches has always placed importance in owning its own property, wherein in the U.S. alone, the company's real estate portfolio is estimated at somewhere between $25 billion and $35 billion. This is based on a study conducted by Sara Senatore, an analyst at Sanford Bernstein, who looked into McDonald's real estate properties. McDonald's current market value is around $87.5 billion after the recent broad market downturn.
Last March, Hedge fund manager of Glenview Capital Management, Larry Robbins, wrote in a letter addressed to investors, that McDonald's could unlock at least $20 billion in value if it were to spin off its U.S. real estate, according to Bloomberg. Robbins reportedly suggested the changes after the fast food giant welcomed its new CEO, Steve Easterbrook. The hedge fund expert also wrote that McDonald's real estate could contribute $25 a share toward the $169 target price. He even added that REITs are usually valued at higher multiples to earnings before interest taxes, depreciation and amortization (Ebitda).
Robbins explained, "Give that REITs are trading at almost 20x Ebitda, we do not believe this is reflected in McDonald's current Ebitda valuation and we believe management efforts to monetize or illuminate this could unlock at least $20 billion of value."
However, a few experts are also against the suggested spin off, stated WSJ. According to some analysts, the fast food chain derives a huge income from its real estate properties. A fifth of McDonald's $27.4 billion revenue last year reportedly came from rental income from franchisees. Over the past five years, the rent payments have reportedly increased to 26 percent, with a total of $6.1 billion rental income last year. In case the Golden Arches would push forward with the suggested spin off, McDonald's will need to contend with new cost elements such as paying rent to approximately 1,500 U.S. restaurants that the company operates. Analyst Senatore said, "Adding lease costs at a time when there's been a deterioration in McDonald's fundamentals doesn't make a lot of sense."
Meanwhile, a spokesperson for McDonald's mentioned that the company will continue to review options presented, according to WSJ. The spokesperson said, "We continue to evaluate opportunities to further enhance value for all shareholders and addressing our operational issues is our first and most critical priority."
