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Darden’s real estate play

Tracey Samuelson Jun 23, 2015
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Eaten at the Olive Garden lately? You probably thought more about the bread sticks than who owns the building — fair enough. However, Darden Restaurants, which owns the Olive Garden, Long Horn Steakhouse and some other chains, announced Tuesday that it’s going to spin off its real estate into something called a REIT — a real estate investment trust — and then lease the properties back.

REITs are everywhere, says Michael Grupe, with the National Association of Real Estate Investment Trusts. “If you work in an office building, for example, there’s a good chance that that property is owned by a REIT. If you live an apartment building, it may very well be owned by a REIT.”

Spinning off the properties only to lease them back may sound like a strange, circular kind of logic, but it’s actually a smart move, says Susan Wachter, a professor at the University of Pennsylvania’s Wharton School.

She says investors tend to like REITS because they have a steady source of income — typically rents — and they pay lots of that income back to investors.

“Investors are not willing to pay much for the volatile restaurant business,” she says. “But the real estate is far more predictable, and therefore Darden is able to raise more capital this way.”

Wachter says it makes sense for Darden to take the money it raises from the REIT, pay down some debt and then focus on its restaurant business, while letting people who know real estate focus on the properties.

“It’s the old Adam Smith, specialize, specialize and specialize,” she says. “Not location, location, location.”

Companies like McDonald’s and Macy’s are under pressure to do something similar, while Sears is also pursuing a similar strategy.

John Glascock, at the University of Connecticut, thinks Sears should have done it years ago.

“Probably over half the Sears out there would already be shut down,” he says. “Those [properties] would probably be something else much more productive, but when they kept them together, it’s tempting to say, ‘Well, I own the land, it’s only costing me opportunity cost. It’s not costing me real cash, let me try one more quarter.’ ”

Glascock says real estate can wind up subsidizing the bad decisions of the company it’s tied to, but separate, each side has to stand on its own. 

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