Red Lobster in The Red
Red Lobster, a U.S.-based restaurant chain with around 700 locations, has been part of the triple-net lease investment pool since 2014 when Nicholas Schorsch acquired the properties of about 500 seafood restaurants from Darden Restaurants Inc. in a $1.5 billion sales leaseback deal. Despite Schorsch's involvement in an accounting scandal that derailed his career, various REITs that own Red Lobster properties appear to be holding up after the restaurant chain filed for Chapter 11 bankruptcy protection, securing $100 million in financing commitments from existing lenders.
https://www.sec.gov/news/press-release/2019-133
The company is investigating its majority owner Thai Union's role in an "endless shrimp" promotion that caused $11 million in losses. Broadstone Net Lease Inc. and Four Corners Property Trust Inc. own 18 Red Lobster properties each, while Realty Income Corp., the largest net lease REIT, owns about 200 locations. The CEO of Realty Income, Sumit Roy, believes that Red Lobster hasn't been well-run and questions whether an operator could manage the business to a reasonable level of margins. Jordan Flannery, a REIT analyst with Cohen & Steers, notes that credit risks, bankruptcies, and restructurings are regular occurrences in the net lease sector.
Red Lobster plans to reduce its locations and pursue a sale of substantially all its assets during the bankruptcy proceedings. Under a triple-net lease, the tenant is responsible for paying all operating expenses, property taxes, and insurance, making net-lease real estate one of the most popular sectors for nontraded REITs after the 2008 credit crisis and real estate crash.
Pros and Cons of Real Estate Holdings as an Investment
Pros:
1. Potential for long-term appreciation: Real estate values tend to increase over time, providing investors with the opportunity for capital gains.
2. Steady income stream: Rental properties can generate consistent cash flow through rental income.
3. Tangible asset: Real estate is a physical asset that can be seen and touched, providing a sense of security for investors.
4. Tax benefits: Real estate investments may offer tax deductions for expenses such as mortgage interest, property taxes, and depreciation.
5. Hedge against inflation: As inflation rises, so do property values and rental income, helping to protect investors' purchasing power.
Cons:
1. High upfront costs: Acquiring real estate often requires a significant initial investment, including down payments, closing costs, and renovation expenses.
2. Liquidity issues: Real estate is not as liquid as other investments, such as stocks or bonds, making it more difficult to quickly access funds when needed.
3. Management responsibilities: Owning and managing rental properties can be time-consuming and requires dealing with tenants, repairs, and maintenance.
4. Market fluctuations: Real estate markets are subject to fluctuations based on local economic conditions, which can impact property values and rental income.
5. Concentration risk: Investing heavily in a single property or geographic location can expose investors to higher risk if that market experiences a downturn.
Pros and Cons of REITs
Pros:
1. Liquidity: REITs are traded on stock exchanges, making them more liquid than direct real estate investments and allowing investors to buy and sell shares easily.
2. Diversification: REITs typically own a portfolio of properties, providing investors with exposure to various property types and geographic locations, reducing concentration risk.
3. Professional management: REITs are managed by experienced real estate professionals, relieving investors of the day-to-day responsibilities of property management.
4. Accessibility: Investing in REITs requires a lower upfront capital commitment compared to purchasing physical real estate, making them accessible to a wider range of investors.
5. Potential for steady income: REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, providing investors with a regular income stream.
Cons:
1. Market volatility: REIT stock prices can be affected by general stock market fluctuations, even if the underlying properties are performing well.
2. Interest rate sensitivity: REITs can be sensitive to changes in interest rates, as higher rates can make their yields less attractive compared to other income-generating investments.
3. Limited control: REIT investors have no direct control over the properties or management decisions, as they are made by the REIT's management team.
4. Taxation: While REITs are not taxed at the corporate level, dividends are taxed as ordinary income at the investor level, which may be less favorable than the tax treatment of other investments.
5. Potential for dilution: REITs may issue new shares to raise capital for acquisitions or development projects, potentially diluting the value of existing shares.
