Monday 23 January 2017

McDonald's abandons its plans to spin off excess properties into REIT

Leslie Patton and Craig Giammona

Published 15/11/2015 | 02:30

McDonald's CEO Steve Easterbrook speaks during an interview on CNBC at the New York Stock Exchange, November 11, 2015. REUTERS/Brendan McDermid
McDonald's CEO Steve Easterbrook speaks during an interview on CNBC at the New York Stock Exchange, November 11, 2015. REUTERS/Brendan McDermid

McDonald's Corporation, the world's largest restaurant chain, has decided not to create a real estate investment trust, a proposal touted by some investors as a way to unlock value from its massive property holdings. Instead, it's escalating cost-cutting efforts and returning more money to shareholders.

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Last week it emerged that McDonald's Irish operations was planning to introduce a waiter service at its restaurants, as operations here grew with revenues increasing by 3pc to €80.8m.

The sales spike last year was attributable to growth in existing outlets along with the revenues generated at three new locations: Kilkenny, Ballincollig and Dublin Airport.

The company gave the idea of a REIT "serious consideration" but is focused instead on its current turnaround plan, CEO Steve Easterbrook told investors last week.

Easterbrook, who assumed the CEO role in March, has been working to pull the fast-food chain out a prolonged sales slump. The 48-year-old, who previously announced plans to cut costs and return more cash to shareholders, now expects to reduce overhead expenses by $500m a year.

His comeback effort got a boost last month when McDonald's announced a gain in US sales after seven consecutive quarters of declines.

"We don't believe it serves the best interests of shareholders to pursue a REIT," Easterbrook said during the meeting. "The potential upside is not compelling, and the future value at risk too great."

Shares rose slightly after the announcement. They have gained 21 pc this year, propelled by optimism that Easterbrook can reinvigorate the chain.

McDonald's also is selling more of its company-owned restaurants to franchisees, insulating itself from swings in the costs of commodities and labour. The chain is re-franchising about 4,000 locations and eventually wants to have about 95pc of its restaurants in the hands of independent owners. McDonald's previously planned to sell 3,500 restaurants.

McDonald's recently sold two US sites for about $30m and plans to sell another two in the current quarter for a gain of about $100m. McDonald's is ready to take these steps in cases where a restaurant isn't the best use of the property.

McDonald's also is pushing to simplify its kitchen operations and improve order accuracy and service. It has eliminated food items and changed its drive-through menu to make it easier for customers to order.

A move to offer breakfast all day, meanwhile, has exceeded expectations. McDonald's undertook the change in October after years of customers asking for Egg McMuffins and other breakfast fare beyond morning hours.

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