ORLANDO, Fla., June 23, 2015 (hospitalitybusinessnews.com) — Darden Restaurants, Inc. announced today that its Board of Directors approved a strategic real estate plan to pursue a separation of a portion of the Company’s real estate assets. The separation would be achieved through a combination of selected sale leaseback transactions and the transfer of a portion of its remaining real estate assets to a new real estate investment trust (“REIT”) that will be separated by a spin-off, split-off or similar transaction, resulting in the REIT becoming an independent, publicly-traded company (the “REIT Transaction”).
The Company’s Board reached this decision after considering various strategic alternatives resulting from the extensive real estate evaluation process Darden conducted, along with the support of its legal and financial advisors. This evaluation included asset suitability screening, market rent analysis on a property-by-property basis and prospective portfolio quality and diversification analysis.
“This strategic real estate plan is the result of a comprehensive review of alternatives to best take advantage of our real estate portfolio,” said CEO Gene Lee. “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. 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 acquisitions of other properties.
“Importantly, we expect this real estate plan to create minimal distraction for team members in our restaurants and have no impact on guests or the recent improvements we have been making in our day-to-day operations,” concluded Mr. Lee.
Strategic Real Estate Plan Details and Rationale
Under the plan being pursued, Darden will transfer approximately 430 of its owned restaurant properties to the REIT, with substantially all of the REIT’s initial assets being leased back to Darden. The leases are expected to have attractive rent coverage ratios, fixed rent escalations and multiple renewal options at Darden’s discretion. The potential REIT would be well positioned to expand through real estate acquisitions of other businesses.
In addition, the Company has been marketing selected properties for individual sale leasebacks. To date, the company has listed 75 properties, and over 30 of these properties have been sold or are under contract. The Company expects an average cash capitalization rate of approximately 5.5% for all 75 properties, and expects to close most of these transactions by the end of August. In addition, the Company is seeking to sell and lease back its Orlando Restaurant Support Center property and buildings under a long-term contract with multiple renewal options at the Company’s discretion.
After receiving proceeds from the completion of the strategic real estate plan, the Company expects to retire approximately $1 billion of its debt over time and maintain its investment grade credit profile.
Additional Details about the REIT Transaction
While Darden has conducted substantial analysis of the feasibility of implementing the REIT Transaction, a significant amount of work remains and there can be no assurance the Company will be able to successfully complete the transaction and establish a REIT. Below is an outline of key process milestones, as well as a preliminary execution timetable and financial information related to the REIT Transaction.
- Satisfaction of various tax conditions
- Identification and appointment of REIT leadership
- Negotiation and execution of leases between the REIT and Darden, as well as other separation arrangements
- Securities and Exchange Commission (“SEC”) filings related to the REIT Transaction
- Debt financing transactions required to finalize the capitalization of the REIT and Darden
The Company currently expects to complete the REIT Transaction by the end of calendar 2015, after which the election to be treated as a REIT for U.S. federal income tax purposes would be made effective January 1, 2016. Following the election of REIT status, the REIT will be required to distribute the earnings and profits allocated to it from the Company and earnings and profits generated in the taxable year ending December 31, 2015. The dividend will be paid in a combination of cash and REIT stock, which Darden expects will consist of approximately 20% cash and 80% REIT stock. In addition, going forward, Darden expects that the REIT will distribute at least 90% of its annual taxable income as dividends. The spin-off transaction is expected to be tax-free to Darden’s shareholders, except for any cash paid in lieu of fractional shares.
JP Morgan and Moelis & Co. are serving as financial advisors to the Company in the transaction. Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal advisor to the Company.
Temporary REIT Protection Shareholder Rights Plan
In order to preserve the Company’s ability to effect a pro rata dividend of the REIT shares in connection with the proposed REIT Transaction, the Company’s Board adopted a short-term shareholder rights plan (the “Rights Plan”) to deter any person from acquiring ownership of more than 9.8% of the Company’s outstanding common stock during the period leading up to the REIT Transaction.
Although the Company terminated its prior rights plan last November, the new rights plan is designed for the limited purpose of accomplishing the REIT Transaction, and is narrowly tailored for that purpose even in contrast to other rights plans adopted in connection with REIT transactions. The Rights Plan will expire upon the earliest of (i) June 23, 2016, (ii) the first business day after the closing of the proposed REIT Transaction, or (iii) the time at which the Rights are redeemed or exchanged under the Rights Plan. Under the Rights Plan, any person or group that acquires beneficial ownership of 9.8% or more of the Company’s common stock without Board approval would be subject to significant dilution. However, the Rights Plan will not prohibit tender or exchange offers for all of the stock of the Company, as if no rights plan existed.