McDonald's REIT Could Be a Sizzler

This would be a huge payoff for the fast-food chain's shareholders. McDonald's already pays an annual dividend of 67 cents, which amounts to a 2% yield. McDonald's also has said it will return $5 billion to $6 billion to shareholders in 2006 to 2007 in the form of dividends and share repurchases. But a $20 billion special dividend would amount to a whopping $15.70 a share payout.

So what would a McDonald's REIT look like? As a REIT, the majority of the company's income would have to come from real estate sources, such as rents or interest on mortgages. Only 5% could come from sources such as franchise service fees or other non-real-estate business. That would mean McDonald's would spin off a real estate entity that owned a basket of the "golden arch" properties -- perhaps all the franchise locations, all the company-operated sites, or some combination of the two.

"The REIT couldn't make money from hamburgers," says Taylor. "It would make money from rent. They'd own the store and lease it to a McDonald's operating company."

Currently, about 73% of the company's global restaurants are franchises; in the U.S., it's 85%, according to McDonald's. The company owns 37% of the land underlying its restaurants, with the rest leased. Although fees can vary, franchises pay the company, on average, a service fee of 4% of sales in the U.S., and average rent of 9% to 10% of sales. The percentages are often higher globally and in high-priced real estate markets like Manhattan.

In the past, McDonald's weighed several options for REIT conversion, according to a McDonald's official involved in the proceedings. But in the end, none were chosen. "We concluded that the incremental value that potentially could be created was not significant enough to offset the direct costs that would be involved," the official says.