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More Restaurant Chains Cooking Up Plans to Cash In on Real Estate

Wendy’s and Bloomin’ Brands Latest To Cash Out To Build or Buy New Units and To Pay Down Debt
August 12, 2015
With CRE property values near or exceeding their eight-year-ago peak valuations, several restaurant chains have cooked up plans to cash out on some of their owned eateries.

This past week, Wendy’s International Inc. and Bloomin’ Brands, owner of Outback Steakhouse, Carrabba's Italian Grill and Bonefish Grill among others, have joined other restaurant chains in announcing plans to sell hundreds of their owned restaurants.

The announcements follow similar moves by Darden Restaurants Inc. and Bob Evans Farms Inc. to placate shareholders by capturing some of the gains from increased property values through spin-offs into new REITs.

The twist to Wendy’s and Bloomin Brands' strategy is that they are exploring out right sales or sale/leasebacks of their properties.

Wendy’s Selling 540 Restaurants

The planned sale of 540 of its restaurants is the second of a three-part plan by the chain to upgrade its portfolio through new openings, an extensive remodeling program and the sell-off of other properties.

This year, Wendy’s International expects to open 80 new restaurants, the highest number in the past eight years. In addition it is on target to “re-image” 450 of its eateries. This past week, it re-opened its 1,000th upgraded restaurant under a plan it calls Image Activation.

"We remain on track with our goal to reimage at least 60% of our North American system-wide restaurants by the end of 2020,” said Todd A. Penegor, CFO and senior vice president of Wendy’s International.

Its portfolio repositioning also included this year the sale of its remaining Canadian restaurants to franchisees.

The chain is now beginning the next phase with the planned sale of 540 domestic restaurants through 2016.

“Interest in these restaurants is extremely strong at our full asking prices, and we expect the sale of these 540 restaurants will result in pre-tax cash proceeds of approximately $400 million to $475 million,” Penegor said. “We intend to buy and sell restaurants opportunistically to act as a catalyst for growth by further strengthening our franchisee base, driving new restaurant development, and accelerating Image Activation adoption.”

Wendy’s CFO said the chain still plans to maintain a much-lower level of owned properties.

“We are committed to maintaining an ownership level of about 5% of the total system going forward,” he said.

The Wendy's system includes approximately 6,500 franchise and company-operated restaurants in the U.S. and 28 countries.

By 2017, Penegor said he expects the fast-food chain will realize $170 million in total rental revenue from the real estate that it owns and leases, an increase of about $100 million compared to the 2014 total.

“We feel good that we've been monetizing our existing real estate... So we've been able to create rental income streams into the future, which is to enhance the quality of our earnings moving forward," Penegor said. "It's nice to have monetized the rental income stream, while still having that underlying asset on the control of the Wendy's company books.”

Bloomin’ Brands: Selling To Retire Maturing Debt?

Tampa-based Bloomin’ Brands has a CMBS called PropCo that owns 258 of its properties. PropCo is facing an April 2017 maturity on a loan that currently has a $464 million outstanding balance. The owner of casual dining chains said it has engaged a banking partner to help it consider options for this real estate. The company operates more than 1,500 restaurants in 48 states and 20 countries.

Regarding the real estate in its mortgage-backed securities, David Deno, executive vice president and CFO of Bloomin’ Brands, said it may still decide to refinance the loan early but it is not clear what a prepayment penalty might be or whether it would be worth paying.

“We are looking at all alternatives except owning the property,” Deno said. “We’re looking at all different structures in the financing and the sale and leaseback (and) who we do it with. It is too early to say exactly which structure we will be choosing, but I can guarantee you... that we are well ahead of this and examining all different kinds of alternatives. Yes, we believe we can do better on the interest rate, but I’ll leave it at that.”

Darden Spin-Off Moving Ahead

Meanwhile Darden Restaurants Inc. this week approved a plan to transfer 424 restaurant properties across 44 states representing five of Darden’s brands into Four Corners Property Trust Inc.

Four Corners will leaseback substantially all of these restaurant properties to Darden through a series of triple-net leases with an average initial term of approximately 15 years.

"We believe that Four Corners will be positioned to provide an attractive dividend to shareholders and grow through acquisitions, diversification, capital investments and rent escalation,” Darden said in a filing on the spin-off with the U.S. Securities & Exchange Commission.

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