The idea of acquiring property as a backbone for any business is a strategy used by many people in years gone by but there is now a growing argument that businesses should consider unlocking some of their real estate asset value. McDonald’s, along with many other US companies, is under increasing pressure to at least consider spinning of part of its $42 billion real estate portfolio. So, what are the pros of cons of a sale and lease back and will McDonald’s take the plunge?
McDonald’s real estate portfolio
While these are just estimates at the moment, experts believe that the McDonald’s real estate portfolio in the US alone is worth upwards of $20 billion with a worldwide portfolio worth in excess of $40 billion. These are properties which have been acquired over the years with many of them purchased at but a fraction of their value today. As the company struggles to grow profits some investors are putting pressure on the management to look at liquidating part of its portfolio of McDonald’s stores.
Massive windfall
It is debatable at this moment in time how much McDonald’s would receive if it was to liquidate its real estate portfolio. There are obviously costs to take into consideration as well as the difficult economic situation which would not help when selling large amounts of property. However, the company is currently worth in excess of $85 billion and a potential $40 billion cash injection would go down very well indeed!
Reduced income
Many people may not be aware but McDonald’s actually generates around 20% of its $27 billion annual turnover from the rent it charges franchisees. While the company does not own all of the property assets in which McDonald’s franchise businesses are located it does have a significant exposure. The idea of a sale and lease back is one which has been considered by many companies over the years with supermarkets in the UK particularly strong advocates of this strategy – although the rental income argument is very different as they don’t operate a franchise model.
It is also worth noting that while the McDonald’s group is based on a franchise set up the company does run a number of its own business outlets. A potential sale and lease back would obviously incur rent from day one and potential rental increases going forward.
Tax situation
Due to investment vehicles known as Real Estate Investment Trusts (REITs) there are some tax benefits to transferring real estate into such arrangements. Whether or not this would take the focus away from the underlying McDonald’s business is debatable. Analysts have already highlighted a number of “headwinds” approaching such as the minimum wage, growing competition and pricing pressure.
Conclusion
Historically UK supermarkets have regularly made use of tax efficient sale and lease back arrangements whereby they sell part of their store portfolios and then immediately lease them back on a long-term arrangement. These situations tend to create a short-term windfall but individual companies will need to decide whether the long-term cost implications override the short term windfall. In theory, it will depend upon how any sale proceeds are invested.