Darden Restaurants Inc., whose entire board was replaced last year in a proxy fight, will split off about 430 properties and transfer them to a real estate investment trust, following through on a promise made by its new bosses.
The REIT, which will be publicly traded, will lease back the properties to Darden, according to a statement on Tuesday. Darden, the owner of Olive Garden and other casual-dining chains, also is selling about 75 individual restaurants under separate deals. More than 30 of those properties have already been sold or are under contract, the company said.
Starboard Value, the hedge fund run by Chief Executive Officer Jeffrey Smith, won a proxy contest with Darden last year, leading to the board shake-up. The company also got a new CEO last October, when Gene Lee took the helm. A key tenet of the activist investor’s campaign was the idea of better exploiting the company’s property. Proceeds from the real estate deal should help Darden retire about $1 billion of debt.
“While a significant amount of work remains in order to proceed with the REIT transaction, we believe this plan will result in a more optimized capital structure and will create long-term shareholder value,” Lee said in Tuesday’s statement.
Darden shares rose as much as 5.8 percent after the announcement, then settled down later in the session. They closed at $69.39 in New York, little changed from the day before. The stock has gained 18 percent this year.
Darden drew Starboard’s ire when it sold off its Red Lobster chain to Golden Gate Capital in 2014 and ignored the investor’s requests to split off the its real estate. Starboard and another activist shareholder, Barington Capital Group, had lobbied Darden to consider those options.
Now that Darden is offloading the properties -- which include the roughly 500 sites where it owns both the land and the buildings -- the focus can return to shaping up operations, said Brian Vaccaro, an analyst at Raymond James Financial Inc. That includes cost cutting at Olive Garden, its largest chain.
“This is going to take a couple of quarters to finalize and complete, then it’s really about operations and improving execution,” he said. “It’s going to be Gene Lee putting forth his operational plan.”
REITs have become an increasingly popular option for both retailers and restaurant chains in recent months. Sears Holdings Corp. is creating a REIT that will acquire stores and then lease them back to the department-store chain. That effort is expected to generate $2.6 billion in cash -- a crucial windfall for a company that has posted 12 straight quarterly losses.
Bob Evans Farms Inc. also announced plans this month to pursue a real estate deal. Investors applauded the move, which will involve selling or spinning off its restaurant properties. Even McDonald’s Corp., the world’s largest restaurant chain, is under investor pressure to consider the idea. Hedge-fund manager Larry Robbins has said the company could unlock at least $20 billion in value by converting to a REIT. But McDonald’s has given no indication it wants to go that direction. For one thing, the company generates billions in profit from the rent it charges franchisees.
Darden, which also operates the LongHorn Steakhouse and Bahama Breeze chains, has made other changes since Starboard took control of the board. The company recently debuted a “back-to-basics” menu at Olive Garden in an attempt to return the chain to its Italian roots. That included a new line of breadstick sandwiches.
Olive Garden’s same-store sales rose 3.4 percent in the quarter, topping analysts’ estimates and bolstering profit at the parent company. The chain saw restaurant traffic drop in April and May, but sales were lifted by higher prices.
Darden, based in Orlando, Florida, posted earnings of $1.08 for its continuing operations, a figure that excludes some items. Analysts had estimated 93 cents on average, according to data compiled by Bloomberg.
“Margins and store level profitability were quite a bit better,” Vaccaro said.