McDonald’s at a crossroads: Will it change its real estate structure?

By Money Times

Oct 19, 2015 05:07 AM EDT

The world's biggest fast-food chain, McDonald's Corporation, is close to making a decision on what to do with its massive US real-estate holdings.

McDonald's director Miles D. White told the Wall Street Journal that "the Board and management haven't made a decision yet, but we had a lot of review and lot of debate."

The company spokeswoman Heidi Baker confirmed Mr. White's comments. According to Bloomberg, McDonald's senior leaders will discuss on business strategy at an investor meeting in November.

McDonald's has about 14,300 U.S. restaurants, of which about 90 percent are franchised. Even though the company had affirmed the importance of owning its property, but with its sales fall-off  recently, some investors and analyst have suggested McDonald's Corp to spin off the US holdings, likely as a real-estate investment trust or REIT.

The investors and analyst claimed that it would benefit shareholders.

The company's directors and executives have evaluated this option considering the long-term role of real estate in sustaining McDonald's performance.

This option has been examined before Steve Easterbrook became chief executive in March. The review about this option involved an evaluation by outside consultants and financial advisors.

The option to spin off real estate holdings had been conducted by other restaurants that face the same problem of sales slumping.

For example, Darden Restaurant Inc was splitting off about 430 properties and transferring them to a REIT. The real estate investment trust then allows the company to lease back the properties.

However in McDonald's case, the idea of creating real estate investment trust are seen as less likely. This option worked for Darden, but it is different from McDonald's. Darden Restaurant Inc don't do franchising.

Although the decision is not made yet, John Glass, an analyst at Morgan Stanley said that the company was unlikely to pursue the option.

McDonald's real estate delivers great part of its revenue. Over the past five years, rent payment from franchises had risen 26% translating to a revenue of $6.1 billion in 2014, or more than a fifth of McDonald's $27.4 in total revenue in a year when overall sales fell.

The analyst estimated that McDonald's US real estate is worth $16 billion to $18 billion and the combined value of McDonald's US REIT and the company itself would be around $103 a share.

Just this month, the McDonald's franchise owners disappointed by McDonald's All Day Breakfast program. According to Time, a recent survey showed that McDonald's franchise owners view this program as nothing but bringing chaos in the kitchen and not bringing in big bucks.

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