DineEquity Inc. (DIN), operating under Applebee’s Neighborhood Grill & Bar and IHOP brands, recently penned an agreement to end its lease with Lexington LAC Lenexa L.P., an affiliate of Lexington Realty Trust and property owner of the commercial space, currently occupied by Applebee’s headquarters in Lenexa, Kansas. Per the agreement, DineEquity expects the cash lease termination fee to be paid during the second half of 2011.
Applebee’s will shift its approximately 350 employees to a smaller facility in Kansas City, where it has a significant presence. The earlier facility had more space than required. Moving to a smaller facility will be economically viable for the long-term basis, leading to an approximately 12% internal rate of return. Applebee’s is looking for suitable real estate and aims to move before September 30.
DineEquity is rigorously reviewing all strategic moves to strengthen its balance sheet as well as streamline the cost structure. Following the footsteps of most of the noted restaurant companies in the U.S., DineEquity is also shifting its focus toward franchised operations from company-owned restaurants as a derisking strategy, since expansion through franchising is less capital intensive and income is fixed in the form of fees.
This lease termination was a part of such efforts. Shifting to another local facility will better serve the company’s long-term business strategy of franchise-centric operations. This deal will also likely prove to be beneficial in reducing financing obligations. Through this transaction, DineEquity intends to pay down its debt by approximately $34 million. However, DineEquity also expects to recognize $26 million in pre-tax charges ($16 million after tax) related to the agreement.
The company acquired Applebee’s International in November 2007 in a $2 billion leveraged buyout. Since then, DineEquity has sold a total of 193 Applebee’s company-operated restaurants, which include the sale of 63 company-operated Applebee’s restaurants in Minnesota and parts of Wisconsin and 20 Applebee’s restaurants located in Virginia during the fourth quarter of 2010.
DineEquity’s primary competitors are Brinker International Inc. (EAT) and Denny’s Corporation (DENN). DineEquity currently retains the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock.
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