Chain Restaurants' Property Values Often Exceed Market Cap

Many publicly-traded restaurant chains are now worth less than the property they own, according to a fantastic Bloomberg report from this morning. The article attributed this strange phenomenon to two factors: a gradual rebound in commercial real estate values and lingering weakness in the restaurant industry, which is especially sensitive to changes in consumer income. Together, they have led the paper values of some companies, including Ruby Tuesday's and Cracker Barrel, to fall below the total value of the property on their balance sheets, sometimes dramatically so. Ruby Tuesday's owns $1 billion of real estate but only has a market cap of $468 million.

The disjunct between these companies' property and stock values has attracted "activist investors," who have been buying shares in the hopes that they will be able to convince the companies to sell land for a quick profit. Such a move would not necessarily entail closing restaurants. A chain could sell property at a profit and use the money from the sale to pay for a lease on the exact same land, a financing technique called "sale-leaseback." This could free up deadweight capital for investments with a potentially higher payoff, like advertising and menu development.

Bloomberg argued that many restaurant chains are facing this strange bind at the moment, but not publicly-traded restaurant companies are in peril. Jim Cramer wrote a piece for Seeking Alpha last week endorsing five restaurant stocks, including Darden Restaurants, owners of Olive Garden, as good buys, if you're in the market for a slice of gustatory empire.