McDonald’s (MCD) will hang on to its real estate, thank you very much.
The fast-food chain, which has faced enormous pressure from an activist investor to spin off its company-owned U.S. restaurants into a real estate investment trust (REIT), said on Tuesday that after “robust” internal debate, it had concluded such a move would be risky and not offer investors enough upside.
McDonald’s gets a big chunk of its revenue from rent it collects from franchisees and it is loath to let that go. Rent payments to McDonald’s have risen 26% between 2009 and 2014, a helpful cash injection and source of financial stability at a time when its U.S. sales have been uneven. McDonald’s recently reported its first quarter of U.S. comparable sales growth in two years. Last year, rent accounted for almost a quarter of revenue, according to Reuters.
Glenview Capital Management investor Larry Robbins had been pushing McDonald’s for a REIT spinoff, saying the real estate could be worth $20 billion. Speculation about a REIT helped lift McDonald’s shares to all-time highs in recent weeks.
Chief Administrative Officer Pete Bensen said during McDonald’s investor meeting, which was web cast, that any possible benefit that could come from creating a REIT would be outweighed by “significant financial and operational risks” to the business while it effectuates its turnaround, given that it is easier to make changes at restaurants it owns.
McDonald’s, whose sales had been slumping in many key markets for several quarters until its most recent period, has been trying to revive its fortunes by overhauling its menu by offering things like All-Day Breakfast and by reducing the variety in its menu to speed up kitchen operations.
It is also cutting costs and re-franchising more restaurants. On Tuesday, the company said it would re-franchise 4,000 more stores, rather than its previously planned 3,500 as it looks to stabilize its finances with a steadier flow of income from franchisees. (McDonald’s longer term goal is for 98% of stores to be franchises. This will take the chain to 93% franchised.)
It has also changed how it prepares food, to great success: that includes toasting buns longer, searing burgers to make them juicier, and reverting back to butter from margarine in its Egg McMuffins. All these moves gave Mickey D’s a sales boost last quarter, one it expects will persist this quarter.
