Somewhat uplifting but this writer couldn't know about the huge difference betwen the super experienced manangment team McDonalds had in 2003 as compared to the Larry, Moe, and Curly act we have in Oak Brook today.
So much of the value of MCD is its real estate holdings that continue to appreciate regardless of sales. Leases to the operators that are tied to a "base sales" provides reliable revenue streams regardless of sales. Constant reinvestments into this real estate further secures the value. Thus, when MCD began doing "top leases" of the dirt and now allowing hedge funds to own the real estate it is my thought that they began to cut away the muscle mass of value. All in the name of growing market share. I don't know enough about it to know if its a good thing or not but it seems to me that they have opened the door to "financial engineering" and putting the brightest future in the hands of those outside the MCD culture. Competitors that didn't even exist ten years ago are forcing MCD to do things that would never have been given any consideration at all. Actions to keep the price of the stock up, I think, are the actions being dictated by Wall Street pro's and not by sound corporate operations for our particular business. It is a fair bet that the MCD stock price will remain good but the hamburger business could get much harder and less profitable at the store level. It is near impossible for the operators to know what MCD is really thinking but my opinion is that they are thinking far less about their operators and the stores and much more about the "financial engineering" aspect of being a public company. My opinion is that the MCD stock is a "BUY". The stores, not so much.
The real estate side of the McDonald's business is cloaked in secrecy and is hidden under several decades of layering with constantly changing entities. But, I don't think it's accurate to say that hedge funds are a factor.
There is however a private real estate investment trust (REIT) owned by a group of McDonald's suppliers. Originally it was six of the larger suppliers and McDonald's Corp. but McDonald's sold their interest back to the other owners in 2003. Doing so eliminated any need for McDonald's to disclose anything about the REIT. The the other owners are private companies with no disclosure requirements.
The REIT's name is System Capital Corp. but has had numerous subsidiaries over the years such as Golden Funding, Supplier Managers Acceptance Corp., Golden Managers Acceptance Corp., System Capital Real Property Corp., Golden Improvements Corp., Jobber Managers Acceptance Corp., and Jobber I Corp.
McDonald's Operators will remember Golden Mac, now managed by Chase but likely still funded by System Capital.
When it comes to McDonald's real estate Operators should not be paranoid about hedge funds, be paranoid about the people who supply your hamburger patties and apple pies.
You are correct Richard on all your comments, but to give you a great example of a misguideance of Top Brass, is that Mc Donald's is not owning the new sites going into the ground, and instead are letting developers structure the deals , backed my McDonalds corporate guarantee to the lease eliminating the NNN value they could reap,
I see nothing wrong with McDonald's leasing property instead of tying up capital by purchasing land. It's the clandestine way in which the handle their real estate portfolio that's annoying.
In the 1950s and 1960s, as a young company, McDonald's leased many of the land and buildings. By the 1970s the company was prosperous enough to purchase the real estate whenever possible. This meant there would be a McDonald's at that location in perpetuity.
But in the 1970s and 80s there was real estate inflation that no one had ever seen before. Property owners were less willing to sell land and give up future equity growth. And for McDonald's, owned properties increased in value but that increase could not be reflected as a corporate asset.
So it makes sense for McDonald's to use cash for other purposes and negotiate a deal with a landlord based on a fixed lease payment, mark it up, and charge the Operator a percentage of sales.
In situations where the land can be purchased it's easy to have the supplier owned REIT use their cash to buy it and lease the property to McDonald's. Then the owners of the REIT can enjoy the properties' equity growth. Who benefits from that equity growth? We'll probably never know because it's a private entity. A good guess? - the owners of the suppliers, current McDonald's executives, past McDonald's executives, McDonald's board members, etc. But that's just a guess.
The problem for McDonald's Operators is, when McDonald's was spending their own capital to buy properties they were motivated to negotiate for a lower price, hence lower Operator rent. Under the current arrangement they are negotiating lease arrangements with their supplier partners. The REIT came into existence about the same time the Operator rent % on new stores went from high single digits to mid-double digits.
7 comments:
Somewhat uplifting but this writer couldn't know about the huge difference betwen the super experienced manangment team McDonalds had in 2003 as compared to the Larry, Moe, and Curly act we have in Oak Brook today.
So much of the value of MCD is its real estate holdings that continue to appreciate regardless of sales. Leases to the operators that are tied to a "base sales" provides reliable revenue streams regardless of sales. Constant reinvestments into this real estate further secures the value. Thus, when MCD began doing "top leases" of the dirt and now allowing hedge funds to own the real estate it is my thought that they began to cut away the muscle mass of value. All in the name of growing market share. I don't know enough about it to know if its a good thing or not but it seems to me that they have opened the door to "financial engineering" and putting the brightest future in the hands of those outside the MCD culture. Competitors that didn't even exist ten years ago are forcing MCD to do things that would never have been given any consideration at all. Actions to keep the price of the stock up, I think, are the actions being dictated by Wall Street pro's and not by sound corporate operations for our particular business. It is a fair bet that the MCD stock price will remain good but the hamburger business could get much harder and less profitable at the store level. It is near impossible for the operators to know what MCD is really thinking but my opinion is that they are thinking far less about their operators and the stores and much more about the "financial engineering" aspect of being a public company. My opinion is that the MCD stock is a "BUY". The stores, not so much.
Great comment!
The real estate side of the McDonald's business is cloaked in secrecy and is hidden under several decades of layering with constantly changing entities. But, I don't think it's accurate to say that hedge funds are a factor.
There is however a private real estate investment trust (REIT) owned by a group of McDonald's suppliers. Originally it was six of the larger suppliers and McDonald's Corp. but McDonald's sold their interest back to the other owners in 2003. Doing so eliminated any need for McDonald's to disclose anything about the REIT. The the other owners are private companies with no disclosure requirements.
The REIT's name is System Capital Corp. but has had numerous subsidiaries over the years such as Golden Funding, Supplier Managers Acceptance Corp., Golden Managers Acceptance Corp., System Capital Real Property Corp., Golden Improvements Corp., Jobber Managers Acceptance Corp., and Jobber I Corp.
McDonald's Operators will remember Golden Mac, now managed by Chase but likely still funded by System Capital.
When it comes to McDonald's real estate Operators should not be paranoid about hedge funds, be paranoid about the people who supply your hamburger patties and apple pies.
So we are renting stores and we don't know whos our landlord?
You are correct Richard on all your comments, but to give you a great example of a misguideance of Top Brass, is that Mc Donald's is not owning the new sites going into the ground, and instead are letting developers structure the deals , backed my McDonalds corporate guarantee to the lease eliminating the NNN value they could reap,
I see nothing wrong with McDonald's leasing property instead of tying up capital by purchasing land. It's the clandestine way in which the handle their real estate portfolio that's annoying.
In the 1950s and 1960s, as a young company, McDonald's leased many of the land and buildings. By the 1970s the company was prosperous enough to purchase the real estate whenever possible. This meant there would be a McDonald's at that location in perpetuity.
But in the 1970s and 80s there was real estate inflation that no one had ever seen before. Property owners were less willing to sell land and give up future equity growth. And for McDonald's, owned properties increased in value but that increase could not be reflected as a corporate asset.
So it makes sense for McDonald's to use cash for other purposes and negotiate a deal with a landlord based on a fixed lease payment, mark it up, and charge the Operator a percentage of sales.
In situations where the land can be purchased it's easy to have the supplier owned REIT use their cash
to buy it and lease the property to McDonald's. Then the owners of the REIT can enjoy the properties' equity growth. Who benefits from that equity growth? We'll probably never know because it's a private entity. A good guess? - the owners of the suppliers, current McDonald's executives, past McDonald's executives, McDonald's board members, etc. But that's just a guess.
The problem for McDonald's Operators is, when McDonald's was spending their own capital to buy properties they were motivated to negotiate for a lower price, hence lower Operator rent. Under the current arrangement they are negotiating lease arrangements with their supplier partners. The REIT came into existence about the same time the Operator rent % on new stores went from high single digits to mid-double digits.
Thanks for Details on the Real Estate!!
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