WASHINGTON, DC—Tuesday morning the Orlando, Fla.-based Darden Restaurants announced it was spinning off 430 of its restaurants -- a group that includes the ubiquitous Olive Garden – into a separate REIT.
There are many trends underlying this decision.
1) Shareholders that are growing bolder in the "advice" they issue companies. Last year activist shareholder Starboard Value staged a coup that led to new management being put in place. Monthly traffic at these restaurants, though, reportedly has not improved that much since then, although sales have. (via Reuters).
2) The recognition by companies of the many benefits of a REIT structure.
3) The recognition by many companies that a REIT structure is not always the best option and that other plays – such as a sale leaseback – might be a better fit. Here I am presuming that Darden's executive management has been mulling over the advantages and disadvantages of a spin off since it was first proposed – as far as we know – last December at another shareholder's urging. A Barron's article from that time period tells of Barington Capital's proposal to split the company into two restaurant groups: one for the legacy brands and the other for higher-growth names.
The one trent I would highlight here, though, is the door that the Internal Revenue Service recently opened to such transactions.
As DLA Piper wrote in January:
"The Internal Revenue Service recently released a private letter ruling regarding the treatment of certain assets as qualifying “real estate” for real estate investment trust (REIT) purposes. That ruling effectively enabled the taxpayer to convert from a corporation to a REIT.
"The IRS ruling is significant because it represents an expanded willingness of the IRS to treat non-conventional assets related to real estate as qualifying real estate assets for REIT purposes.
Since then, a number of less-than-conventional asset classes have been spun off into a REIT, such as data center Equinix, retailer Sears (with less than favorable results one might add) and Windstream Holdings. A number of other companies are considering such a move, including Bob Evans restaurants.
To be sure this is not a new trend. Last year saw a number of non-traditional companies move into REIT status. An IRS that is perceived to view such transactions as favorable, though, appears to be adding some momentum to the trend.
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