Real Estate Holdings More Than Side Dish for Fast Food Giant <b></b>

Oak Brook, Illinois-McDonald's Corp. leads a double life. In addition to selling fast food, it's one of the country's largest real estate companies.

The fast-food giant owns most of the land under its 12,800 U.S. restaurants-a strategic advantage that gives the company more control over its store base and franchisees than its competitors have. And property and equipment constitute the largest share of McDonald's assets, valued at about $17 billion after accumulated depreciation and amortization.

About three years ago, McDonald's created a stir on Wall Street when it confirmed that it had flirted with the idea of spinning off its property holdings into a real estate investment trust (REIT) and using the proceeds to fund a huge stock buyback program.

Though McDonald's executives never followed through on the REIT idea, they did decide that sinking a lot of money into real estate wasn't the best use of the company's cash. So McDonald's began leasing restaurant sites and letting franchisees own the buildings. "It's a program we expect will increase the company's returns on new restaurants," says a company spokesperson.

Here's how, according to an analysis by John S. Glass, an analyst with New York City-based Deutsche Banc. Alex Brown Inc.:

A hypothetical McDonald's restaurant with $1.5 million in annual sales generates about $169,000 in pretax franchise profit for the company, which, under the old system, makes money by collecting royalties and rent. By contrast, under the new system, McDonald's-leasing the land and having the franchisee own the building-gives up some rental income, and its pretax profit falls to $121,000.

The upside is that the company doesn't incur about $450,000 in capital expenditures, enabling it to boost its return on investment to 24 percent, vs. about 18 percent under the old system, according to Glass. By forgoing ownership of new franchised restaurants, McDonald's freed up about $285 million in capital last year and $230 million in 1999.

The program is available only in the United States, limiting the company's impact, because the U.S. market is essentially saturated and the company is building most of its restaurants overseas. Only 175 of the 1,606 restaurants added last year were in the United States. -Crain's Chicago Business

Editor's Pick

Related Topics

Business News

She Lost Her Job as a Disinformation Scholar at Harvard — and Claims Facebook May Have Had Something to Do With It

Dr. Joan Donovan alleges Harvard stopped her research after receiving donations from the Chan Zuckerberg Initiative. Harvard denies the claim.

Business News

Bank Accidentally Deposits $86 Million Into Woman's Account, Freezes Her Assets

The incident occurred at the Malaysian bank, Maybank.

Business News

Hawaiian Airlines Stock Soars Over 192% After $1.9 Billion Acquisition

Alaska Airlines announced that it had purchased the smaller airline on Monday.


Why Every Entrepreneur Should Consider Starting a Podcast

This article sheds light on the power of podcasts, particularly for entrepreneurs, outlining steps to launch a successful podcast.


I've Spent Decades Studying How Mentors Make You Successful. Here's How You Find the Right Ones.

After teaching thousands of students and executives, building a personal board of advisors — or a group of mentors — is the one piece of advice I give to everyone. Here are five of the most important things to know about building your board of mentors.