Hoping to up their profits, the owner of Olive Garden and LongHorn Steakhouse plan to shift to an “asset-light” model of ownership, something the restaurant industry is starting to see more and more often. On June 23rd, Darden Restaurants Inc. announced it would transfer 430 of 1,500 restaurants to a publicly traded real-estate investment trust and lease them back. Darden’s actions to try and increase profits by removing assets from their balance sheet are considered the boldest by restaurant operators. Transferring restaurants to REITs lets Darden collect an upfront sum that can help pay down debt and improve return on invested capital. The majority of the restaurants transferred are planned to be Olive Gardens, but Darden has also listed 75 restaurants for individual sale, having sold 30 already.
Between the 60’s and the 80’s, it wasn’t uncommon for chains to buy real estate because it was inexpensive, however, in the 90’s, commercial real estate became really expensive and some restaurant models, like Chipotle, found ways around owning their own real estate while still becoming very successful. REITs pay little or no tax on their earnings as long as they distribute the profits as dividends to investors, which is why they’re popular, but the move doesn’t come without risk. Signing a 20 year lease, customary in commercial real estate, limits the flexibility for restaurant owners, having to obtain approval from a landlord for things like remodeling, rebuilding, or shutting down underperforming restaurants. Regardless of what is happening, they’re locked in to paying rent.
While there is some risk involved, Darden restaurants sales are solid. Darden also says that it’s going to use $1 billion from the REITs proceeds to pay down its current debt. Darden’s sales are on the rise, as its quarterly earnings were reported at 82 cents a share, up form the 65 cents a share from last year.