Key takeaways from Barington Group's 84-page Darden proposal (Part 8 of 9)
Tax impact on real estate holdings
Lastly, Barington recommends Darden move the company’s real estate from the restaurant business. Owning property allows a restaurant to save on rent. In other words, it’s like generating additional income. However, this is tax-inefficient because that additional income (or savings) will be taxed at a corporate rate, which means less money in investors’ pockets.
Creating a REIT
A separation of Darden’s real estate into a publicly traded REIT (real estate investment trust) should provide shareholders with the most immediate and tax-efficient path to unlocking the value of the company’s substantial real estate assets, notes the activist hedge fund. Plus, investors are typically willing to pay more for a return on a real estate than a restaurant business because they’re considered less risky.
As an example, Penn National Gaming (PENN)—which owns, operates, or has ownership interests in gaming and racing facilities with a focus on slow machine entertainment—announced in November 15, 2012, its intention to form a REIT from its internal real property assets. Immediately after the announcement, PENN rose 28.2% for the day.
A REIT comprised only of Darden’s real estate properties may look quite risky from an individual investment standpoint, so investors may not receive its full value initially. But it also means an opportunity if Darden could turn its mature brands around. Plus, it could open up opportunities to acquire more restaurant properties in the future to increase shareholders’ dividends.
On December 9, 2013, Gaming and Leisure Properties Inc. (GLPI)—a spinoff of PENN—announced its first acquisition when acquiring a riverboat casino complex. Joel Simkins of Credit Suisse said, “This lease [the acquisition of the riverboat casino complex] serves as a case study that GLPI can roll up smaller, single-asset properties.” Darden’s post-spinoff REIT could become a specialized REIT that only invests in restaurant properties.
Disposing a REIT is a way to unlock value
While the REIT structures used by Loblaws and Canadian Tire aren’t available under U.S. REIT rules, they nonetheless show that value can be unlocked by creating a REIT. On the day of its announcements, Loblaws’ share price rose 13.7% and Canadian Tire’s rose 11.2%.
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