Starboard Makes Its Mark On All Four Corners Of Darden With November Real Estate Spinoff

After successfully tossing out the entire board of directors at Darden (DRI) last year, Jeffrey Smith’s Starboard Value fund quickly moved on executing its agenda. After all, a dominating win like that sort of gives one that kind of mandate. One of the first moves was eliminating the ‘interim’ tag from CEO Gene Lee. Next came the expected operational changes aided by PR stunt boots on the ground research waiting tables, but the big decision by the new chiefs was regarding the company’s vast real estate portfolio. In June, the company announced plans to spin off a chunk of its real estate into a separate company after first entering into a series of sale leaseback agreements. Beginning in January next year, the company expects to formally elect and hope to obtain REIT status with the idea that REITs trade at a higher market multiple. Thus is shareholder value born. The board formally approved the plan last week and the new company, Four Corners Property Trust, will be distributed on November 9th to shareholders as of November 2nd. The new company will trade under the ticker ‘FCPT’ and DRI shareholders will receive one share of FCPT for every 3 DRI shares owned.

According to the Form 10, Four Corners will own 424 restaurants in the US, with nearly all of them (418) being leased to subsidiaries of Darden. The other 6 are LongHorn Steakhouses in the San Antonio area and represent the company’s ‘restaurant business’, a ploy to help sell this deal for tax purposes. The leases will be triple net and ‘are expected to have attractive rent coverage ratios, fixed rent escalations and multiple renewal options at Darden’s discretion.’ Over time, Four Corners expects to expand its portfolio into other restaurants not tied to Darden, but it remains to be seen whether or not they can execute on that front.

Darden will receive over $350m in proceeds from Four Corners which it will use to pay down some of its debt. In total, the company expects to retire about $1b in debt from this deal and from other sale leaseback transactions. The move represents a shift by the company to a more ‘asset light’ model, effectively ceding control of its locations and remodels. It also socks its restaurants with rent payments. In the past, those considerations had been more important to restaurant operators, but more feel comfortable bearing those risks today in exchange for the higher stock prices and cleaner balance sheets.

The spinoff faced many questions after the IRS raised concerns about real estate spinoffs back in September. Darden has opted to move forward anyways, but if the IRS raises any concerns about the tax free status post-spin, it will create a hefty liability for the company. Overall, shareholders have been happy with Starboard in the driver seat and the stock has risen nicely under their leadership. Hopefully, this coming real estate spinoff will be another value creating block of Starboard’s ownership legacy.

Disclosure: Author holds no position in any stock mentioned.