Dining Out For Dividends

The Four Corners portfolio was originally formed through a selection of 424 high-quality Darden restaurant properties with stable cash flows and strong rent coverage. Under the terms of the spin-off, Darden distributed all of the outstanding Four Corners shares pro rata to Darden's shareholders.

Summary

  • Darden was able to commence the spin just in time, as a U.S. House amendment to a Congressional tax bill was legalized preventing similar tax-free REIT spin-offs.
  • The bill essentially forced companies that wanted to spin off their real estate into a REIT to be taxed.
  • I am more attracted to the dining chain than the landlord.

Darden Restaurants (DRI) reported solid Q1-18 results last week: Total sales were $1.9 billion, an increase of 12.9%, and adjusted diluted net earnings per share were $.99, an increase of 12.5% (from last year's diluted net earnings per share). The company returned approximately $180 million of capital to shareholders with $100 million in share repurchases and approximately $80 million in dividends.

Darden’s recent acquisition of the Cheddar’s Scratch Kitchen chain (HQ’d in Texas) caused a slight decline in profits due to Hurricanes Harvey and Irma. The two storms temporarily closed hundreds of restaurants and may have resulted in nearly $5.6 million in lost profits.

Darden bought the 165-restaurant Cheddar’s chain for $780 million in April, hoping for a young, high-growth restaurant to counter mature brands such as Olive Garden. On the recent earnings call, Darden’s CEO (Gene Lee) explained:

"We are laser focused on integrating Cheddar’s. We think Cheddar’s is an incredible opportunity for long-term growth, and so we are not even contemplating or thinking about doing anything else until that brand is fully integrated, it is firing and has really a good growth platform where it’s contributing at a much higher growth rate than Olive Garden and to add to our overall growth rate, so that’s the focus. Once we have visibility that that has been done successfully, then we’ll look at the platform and determine what our next move is."

Just under two years ago, Four Corners Property Trust (FCPT) completed its spin-off from Darden into an independent public company trading on the NYSE. The company began trading as a C-Corp. and became a REIT effective January 1, 2016.

Darden was able to commence the spin just in time, as a U.S. House amendment to a Congressional tax bill was legalized preventing similar tax-free REIT spin-offs.

Representative Kevin Brady was the key Republican behind the provision in the bill which put the brakes on REIT spin-offs, a popular tool used by many activists as a means to separate real estate and operating assets.

The bill essentially forced companies that wanted to spin off their real estate into a REIT to be taxed - the distribution of either the real estate or operating assets would no longer be tax-free.

Darden was not the only company to REIT spin, others such a Sears(NASDAQ:SHLD) and Hilton (NYSE:HLT) were able to unload the real estate (into a REIT) before the window closed.

Darden was able to pay down ~$1bn of debt subsequent to the spin-off, partially funded by the Four Corners transaction; following the spin-off, Darden had no debt maturities until 2035.

Four Corners Today

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