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.
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