Will McDonalds Spin Off its Real Estate

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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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