A McSpinoff? Is McDonald’s Considering A Real Estate Spinoff?

With Darden (DRI) announcing a real estate spinoff, analysts and investors are flocking to find other targets which could benefit from monetizing real estate assets through a REIT conversion. One reason REITs are attractive is that they tend to trade at higher multiples than other sectors so in theory, a separation ‘unlocks’ value by creating a higher sum of the parts valuation. That has been especially true recently given the current low interest rate environment, although what happens if and when that changes remains to be seen.

One popular target is Macy’s (M), but another being tossed around is fast food behemoth McDonald’s (MCD). The burger joint owns an extraordinarily high amount of its land and buildings leading some to speculate that a REIT spinoff would unlock a tremendous amount of value. Earlier this year, Glenview Capital’s Larry Robbins wrote an investor letter highlighting the fund’s investment in McDonald’s and one of the big ideas was the potential to monetize its real estate. While there were certainly other compelling components to the investment, Mr. Robbins argued that a real estate spinoff could unlock over $20b of value, no small amount even for an $85+b market cap company.

The WSJ had a piece yesterday highlighting the pros and cons of a REIT spinoff at the Golden Arches. While recognizing that a spin could re-energize the company’s sagging shares, the move could also have some downsides. Real estate generates over 20% of the company’s total revenues and have actually been a growing component over the past few years. Additionally, the company would be forced to start paying rent on the many restaurants which it currently operates, introducing a new expense at a time when the business is under pressure. As if that is not enough for management to worry about, the piece highlights a few other structural challenges to the idea as well.

The idea isn’t new – a young Bill Ackman actually pushed for a MCD real estate spinoff way back in 2005 – but management has successfully resisted the move. Even though current management has vocalized support for shareholder enhancing activities, John Gordon, founder of restaurant consulting firm Pacific Management Consulting Group, thinks the company will ‘slow roll this forever’. The company claims to be focusing on turning around its operations instead of trying to financial engineer additional shareholder return. Well, they didn’t actually say that last part, but I would guess they wanted to. Fixing the core business is always best and should be appealing to all investors. After a few years of declining sales and seemingly on the wrong side of numerous broader trends, the question is if management can actually do anything about it. If not, alternative ideas, like REIT conversions, start to become a lot more attractive. Longtime CEO Don Thompson stepped down earlier this year and new CEO Steve Easterbrook might be open to trying new things. Whether or not a real estate spinoff is one of them remains to be seen…

Disclosure: Author holds no position in any stock mentioned.