Darden Restaurants plans to split in two by the end of this year, but the spinoff of the Olive Garden and LongHorn Steakhouse restaurants’ real estate won’t help the company’s “brand renaissance” efforts, analysts and industry experts say.
Selling Darden’s restaurant real estate has been a prime target of activist investors for 18 months and would follow a trend of companies such as Sears and Bob Evans doing the same, according to those who follow the industry.
Executives at Darden hope to use more than $1 billion from the spinoff to pay down debt. Darden’s plan would move about 430 of its restaurants into a independent and publicly traded real-estate-investment trust. About 150 other pieces of property it owns would be sold as well. Most of those are Olive Garden properties.
Olive Garden has stopped the trend of declining same-store sales at restaurants, and Darden CEO Gene Lee has said the company is trying to rely less on steep discounting to lure customers.
“This is a pure financial move,” said Hedgeye restaurant-sector analyst Howard Penney. “And right now Olive Garden needs capital, and they don’t plan to use it for that.”
Creating a real-estate-investment trust is a plan that will impact back-office accountants more than customers and employees at the restaurants, said Chris Muller, a restaurant-industry professor at Boston University.
“You won’t notice anything different when you walk into a restaurant, and it won’t really do much to help Olive Garden and LongHorn Steakhouse improve sales,” Muller said. “The whole casual business is kind of stuck, so Olive Garden still needs to find a way to improve.”
But selling all those assets would fundamentally transform Darden Restaurants, ditching a key part of the strategy that helped it grow from a small chain into a leading national restaurant company, he said.
“The company was built on owning real estate,” Muller said. “One of the reasons that they were able expand so quickly was that they were able to buy properties for pennies on the dollar.”
Under the plan, Darden plans to lease back to properties on long-term deals, similar to what Red Lobster did with its restaurants.
Darden will be paying rent to a new landlord for its properties, and the company will be able to deduct much of the rent from taxes, something it couldn’t do when it owned the properties.
But investors are demanding that companies such as Darden become much more focused, paring down assets in favor of focusing on running restaurants, he said. Investors have been pushing McDonald’s, one of the world’s most prolific real-estate companies, into selling its properties as well.
“Companies are looking to become asset-light, so the return on equity is better for investors,” he said. “The market doesn’t want Darden to be a real-estate company.”
Separating large retailers and restaurants from their real-estate holdings has become a popular move in recent years, said Joshua Harris, director of the Dr. P. Phillips Institute for Research and Education in Real Estate at the University of Central Florida.
“The commercial-real-estate markets have recovered, and price of commercial real estate is above the peak that it was before the recession,” Harris said. “It’s being fueled by low interest rates, so these stores and restaurants see this as a good time to sell the assets that they have.”
Selling real estate wouldn’t have made as much sense during the Great Recession, Harris said, but pressure on consumer sales and high real-estate prices have created a scenario where selling property makes more sense, he said.
Last summer, Golden Gate Capital spun off the real-estate holdings of Orlando-based Red Lobster in a $1.5 billion deal, recouping most of its $2.1 billion investment in the seafood-restaurant chain.
Activist investor Barington Capital Group started prodding Darden to sell its expansive real-estate portfolio back in December 2013. Another hedge fund Starboard Value, which eventually engineered the takeover of Darden’s board of directors in December, said Darden’s real estate was valued at up to $4 billion, including what it owned in Red Lobster.
Darden has also put its Orlando headquarters building on the market, after building it for about $150 million in 2009.
karnold@orlandosentinel.com or 407-420-5664
