As we previously noted, the company currently owns most of its real estate. Some investors, such as Glenview’s Larry Robbins, think those assets could be better monetized in a publicly traded REIT which typically trade at premium multiples. Not everyone agrees the move will deliver shareholder value though as the company already collects a sizable rent stream, about 20% of its revenue, from its franchisees. Morgan Stanley’s John Glass is in that camp and thinks the odds of the company creating a REIT are remote:
He [Mr. Glass] estimated that McDonald’s U.S. real estate is worth $16 billion to $18 billion and said the combined value of a McDonald’s U.S. REIT and the company itself likely would be around $103 a share—the same as its current price. He also said companies seeking to spin off real estate could be hindered by a recent Internal Revenue Service announcement that it will stop preapproving such deals amid concerns they can be used to avoid paying taxes.
The company is under extreme pressure right now to right the ship. Financial engineering is certainly a valid way to deliver shareholder value, but doesn’t really fix any of its core business issues. New CEO Steve Easterbrook is taking many steps on that front though including cutting operating costs, tweaking the menu and introducing new ideas such as breakfast all day and offering Monster Beverages. These moves seem to be paying off as the company’s most recent earnings report handily beat expectations. Read the transcript for some more details on the ‘turnaround plan’. As a result, some are very optimistic about the name and believe shares will only be going up from here. Others remain less positive.
Regardless, Mr. White correctly notes that ‘somebody is going to be unhappy’ with the company’s final decision and if the company opts to keep its real estate perhaps the situation will get a bit more heated. As always, we will keep you updated when the company finally makes a choice.
Disclosure: Author holds no position in any stock mentioned.
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