Real Estate Sell Off Rumors Follow McD’s
By George Anderson
McDonald’s CEO Jim Skinner says the company is not interested in spinning-off any of its real estate holdings but that doesn’t mean that some of its shareholders don’t have a different idea.
Vornado Realty Trust would appear as likely to fall under that column. The company now owns a 1.2 percent share in McDonald’s and it has created an empire by selling off assets of troubled retailers and other companies.
McDonald’s management remains committed to the course it has set.
In a letter to its franchisees and employees, Mr. Skinner wrote, “We have no intention to undertake a large scale restructuring either through a McOpCo spin-off or a Real Estate Investment Trust (REIT). Neither would be in the best interests of our system or our shareholders.”
He added, “We will deliver value to our system and our shareholders by succeeding at being better, not just bigger. We will stay focused on the Plan to Win – driven by operational excellence, leadership marketing and financial discipline.”
Separately, Mary Kay Shaw, vice president of investor relations for McDonald’s, said, “We constantly evaluate means to create shareholder value but we believe that the best way to build value and business momentum is by moving forward with this successful, strategic plan, which we will do.”
Timothy Ghriskey, president of Ghriskey Capital Partners, said it was “ludicrous” to think McDonald’s was going to get pushed into doing anything.
If a restructuring were to happen it would be a mistake, said Mr. Ghriskey.
“McDonald’s is all about control,” he said. “They control the product, they control the stores … and everybody’s got to tow the line. If this effectively becomes two companies, you’re giving up some control.”
Moderator’s Comment: Will the talk about some shareholders wanting to restructure its business or find ways to leverage its real estate assets slow McDonald’s
momentum? How does Jim Skinner manage the company in this environment? –
George Anderson – Moderator
The most successful real estate short-term plays involve selling underutilized real estate to people who can change the use and thereby pay more for it. So it pays to buy underperforming discount stores and sell them to profitable big-box specialty operators, for example. Most McDonald’s locations are only good for fast food. They can’t be easily converted to something else. And McDonald’s (the franchise company) raises the rent at the end of the lease or buys the business, anyway. I doubt that any other fast food operator could pay substantially higher rents, and I doubt that the locations could be used for some other category that can pay higher rents. (Convenience stores? Gas stations? Not likely.)
There is one change tactic that might be worthwhile to explore: splitting the real estate into a REIT. There might be substantial tax advantages for the shareholders, but to properly hold the core company together, the REIT would have to be controlled by the restaurant company. Coca-Cola split the bottling from the syrup company to create 2 separate assets, but the long-term stock performance of the bottling has been unsatisfactory because of its captive tie to the syrup company.
There is no way Vornado will be successful in convincing McD to sell off any large sums of real estate. The entire franchise business plan is built around McDonald’s owning the land and the physical building with the franchisee owning the interior, contents, etc. McD values the relationships they have with their franchisees to do anything to disrupt this relationship. Their franchise relationship is one of the key reasons they’ve been able to execute a successful turn-around (unlike Burger King), all the while having to deal with the tragic loss of two CEOs in less than a year.