Will McDonalds Spin Off its Real Estate

It's been a week since McDonald's rejected Burger King's offer of introducing the McWhooper and acknowledging its advantageous real estate position.

A significant part of McDonald's brand  has been owning its own property. However, counting three years of declining sales, analysts have been weighing the advantages of the fast food chain placing its U.S. properties in a publicly traded real-estate investment trust. Spinning off the company's real estate might boost shareholder value, a financial option worth considering. Chief Financial Officer Kevin Ozan says that he will update investors in November regarding this possibility. Spinning off McDonald's U.S. real estate could unblock at least $20 billion in value.

Transferring properties into a REIT is an option welcomed by many investors as the company would be able to collect an upfront sum that can be used immediately to solve some of its current financial issues.

DEFINITION of Real Estate Investment Trust - REIT'

A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate Source Investopedia.com 

“We continue to evaluate opportunities to further enhance value for all shareholders and addressing our operational issues is our first and most critical priority,” a McDonald’s spokeswoman said.

According to Sara Senatore, analyst at Sanford Bernstein, McDonald's real estate in the U.S. is worth up to $35 billion and over $42 billion world-wide. However, expert analysts say that selling the property wouldn't solve the company's problem. Out of the 14,000 McDonald's restaurants based in the U.S., 1,500 restaurants are fully operated by the company alone, which means that the fast food chain would have to pay rent for all of them. “Adding lease costs at a time when there’s been a deterioration in McDonald’s fundamentals doesn’t make a lot of sense,” Ms. Senatore said.

In most cases, McDonald's owns the land and buildings that it rents to its franchisees and it keeps a healthy balance between the rent costs and the franchisees' financial outcome. Sometimes, the company even provides rent breaks for franchisees who remodel, because McDonald's depends on the prosperity of all its franchisees. Analysts are concerned because REIT would have a completely different approach, which might affect the company's financial dynamics.

McWhopper Rejected

Meanwhile in burger land, Burger King took out two full page ads this week in the New York Times and the Chicago Tribune with a proposal for the fast food giants to combine their signature offerings, the Big Mac and the Whopper, to make a McWhopper in honour of Peace Day.

According to the Associated Press, International Day of Peace was created by the United Nations in 1981 and Sept. 21 was designated as an annual "day of non-violence and cease-fire" in 2001.McDonald’s responded in a Facebook post signed by its CEO, Steve Easterbrook.“We love the intention but think our two brands could do something bigger to make a difference,” Easterbrook wrote.“And every day, let’s acknowledge that between us there is simply a friendly business competition and certainly not the unequaled circumstances of the real pain and suffering of war.” 

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