Darden Restaurants Inc. will spin off much of its vast real estate holdings into a real estate investment trust, or REIT, the company said Tuesday, giving investors a long-awaited value initiative.
Darden is also planning sale-leasebacks on an additional 75 properties, which are expected to close by the end of August. The company plans to use funds from its real estate deals to pay off about $1 billion in debt.
“This strategic real estate plan is the result of a comprehensive review of alternatives to best take advantage of our real estate portfolio,” Darden CEO Gene Lee said in a statement. “While a significant amount of work remains in order to proceed with the REIT transaction, we believe this plan will result in a more optimized capital structure and will create long-term shareholder value.”
The move has been expected since September 2014, when a slate from activist investor Starboard Value LP won all 12 seats to Darden’s board of directors. One of the central tenets of Starboard’s proxy fight was a plan to spin off real estate to investors.
The company expects to complete the real estate deal at the end of the year.
Darden will create a separate company, and will transfer ownership of 430 properties to that company, which will lease the properties back to Darden. It will then spin off that real estate investment trust to its shareholders.
The leases are expected to have attractive rent, fixed rent escalations and multiple renewal options at Darden’s discretion, the company said.
The real estate company will then be able to acquire other properties, a key element, given that investors are generally wary of single-company REITs.
The company is spinning off real estate because investors generally place a higher value on real estate companies than they do on restaurants. Starboard and other activists had argued that Darden wasn’t getting credit from investors for its vast real estate holdings.
“We appreciate the valuation differential between restaurant and real estate companies and are excited to create a new company, which we believe will unlock current value while growing through acquisition of other properties,” Lee said.
REITs are required to distribute most of their earnings to shareholders. Darden expects to distribute 90 percent of its REIT earnings to shareholders once the trust is created. Funds from real estate earnings this year will be distributed to shareholders in the form of a dividend that is a combination of REIT stock and cash.
Before completing the real estate spinoff, the company must still satisfy tax conditions, appoint leadership, negotiate leases and other arrangements, file the REIT deal with the U.S. Securities and Exchange Commission, and finance the deal.
Darden said that it already has contracts or deals for 30 of the 75 properties it plans to sell. The company expects an average cash capitalization rate of 5.5 percent. In addition to the 75 properties, Darden is also planning a sale-leaseback of its Restaurant Support Center in Orlando, Fla.