FRI – FCPT = +18%

December 21, 2015 09:00 AM
FRI – FCPT = +18%

FRI – FCPT = +18%

On Oct. 21, 2015, Darden Restaurants (DRI)—with a stock value of $64.09 and market capitalization of $8.2 billion—announced details related to the planned spin-off of Four Corners Property Trust Inc., a separate publicly traded real estate investment trust (REIT). Four Corners stock was distributed on Nov. 9, and Darden’s shareholders will receive one common share of Four Corners Property for every three common shares of Darden held. The new Four Corners is expected to be listed on the NYSE under the ticker symbol FCPT.

Darden Restaurants is the #1 casual-dining operator (in terms of revenue), with about 1,535 restaurants in the United States and Canada. Its flagship chain is the  Italian-themed concept Olive Garden. Olive Garden caters to families by offering mid-priced menu items, themed interiors and primarily suburban locations. Darden also operates the LongHorn Steakhouse chain, with about 430 outlets. Other dining concepts include The Capital Grille (upscale steakhouse), Bahama Breeze (Caribbean food and drinks), and Seasons 52 (casual grill and wine bar). 

Four Corners Property Trust Inc., a REIT, will be a pure play in the restaurant industry and will comprise 418 Darden’s corporate-owned restaurant properties. The REIT’s portfolio initially will consist primarily of Olive Garden restaurants. The spin-off is likely to trade at a discount to a diversified REIT peer group; however, it can diversify its asset portfolio by making acquisitions in other real estate assets. Thus, Four Corners management is expected to focus on growing the real estate portfolio to expand beyond Darden properties. 

We value Darden using sum-of-the-parts methodology and arrive at a consolidated intrinsic value of $75.50 per share. We value new Darden (post-spin) at $67.75 per share using a CY2016E EV/EBITDA multiple of 11.0x. Our fair value estimate for Four Corners Property Trust is $7.75 per Darden share. We estimate the intrinsic value for Four Corners Property Trust by valuing LongHorn (FY2016E EBITDA multiple of 13.0x) and 418 fee simple properties (avg. rent/sq. ft. of $27.50 & cap rate of 7.1%) leased back to Darden. This suggests a sum-of-the-parts valuation of $75.50, implying a potential upside of 18% from the recent price of $64.09.

About the Author

Joe Cornell is a chartered financial analyst, a finance MBA and the author of McGraw-Hill’s “Spin-Off To Pay-Off.” As the founder and publisher of Spin-Off Research (www.spinoffresearch.com) he is widely-regarded to be among the foremost experts in this specialized area. @spinoffresearch