McDonald’s told investors today that it will sell an additional 4,000 company-operated restaurants to franchisees to generate more value for shareholders, but will not spin off its real estate into a investment trust, as some had urged.
The company also announced that it intends to cut general-and-administrative expenses by $500 million by the end of 2017, a $200 million increase from the initial target. McDonald’s indicated that the savings will come in part as a result of the refranchising effort, since it will have fewer restaurants to staff, market and otherwise run.
The sale of company-run units will be a first step toward lifting the proportion of franchised McDonald’s restaurants to 95 percent, executives said. Traditionally, the rule of thumb for franchisors had been to operate one-third of the system and franchise two-thirds.
Since its early days, McDonald’s has opted to own most of the real estate upon which both franchised and company-run stores are built. The sites are rented to the franchisees, an arrangement that created a major revenue stream for the corporation and made it one of the nation’s largest landlords.
A similar arrangement had been followed by Darden Restaurants’ brands, particularly Red Lobster. After Red Lobster was spun off to Golden Gate Capital, its real estate was sold and leased back to the company.
Darden recently announced the formation of a real estate investment trust, a publicly owned entity with major tax advantages. The REIT in effect acts a separate company, leasing property to the businesses on its plots.
Bob Evans Farms, another chain that chose to own most of its real estate, has been selectively selling its restaurants and leasing back the sites.
Investors prefer REITs or sales-leaseback deals because the mechanisms enable their holdings to realize the value of underlying real estate. Dollars locked up in the form of land holdings are freed up to benefit investors or be reinvested.
Today’s announcements were viewed by McDonald’s as material enough to its finances to prompt a halt in the trading of its stock.
The plans were aired at the company’s annual investment day, when analysts are usually given a look at new menu items and other initiatives for the brand.
This year’s investment day has the twist of coinciding with a major demonstration and employee walkout coordinated by Fight for $15, the union-backed movement to raise the minimum wage to $15 an hour. McDonald’s headquarters in Oak Brook, Ill., has been a major target of prior Fight for $15 actions.