Darden (DRI) Price Target Raised to $80 at KeyBanc on Value Creation from Potential Spin-Off

KeyBanc maintained an Overweight rating on Darden Restaurants (NYSE: DRI) and raised its price target to $80.00 (from $70.00). Analyst Christopher O'Cull thinks a spin-off of real estate assets is probable and will create value.

"Since the board of directors was reconstituted in October 2014, the Company has made evaluating options for its real estate portfolio a priority; therefore, we believe there is a high probability that Darden could announce plans to separate its real estate and non-real estate holdings during the next several months," said O'Cull.

"Working with the KBCM REIT research team, we evaluated the potential benefits for shareholders of a tax-free spin-off of Darden’s real estate to a REIT entity (PropCo). Following a spin-off, shareholder value is expected to be created by PropCo distributing at least 90% of its annual taxable income as dividends, pursuing additional real estate transactions to diversify its income base, and reducing its cost of capital from the business model and growth prospects associated with REIT status. These attributes, along with the fact that REITs do not pay corporate taxes, have historically resulted in premium valuations for REITs (Triple Net currently 16x EV/ EBITDA) relative to restaurant stocks (CDR segment currently 10x). Assigning a higher valuation multiple to the rental income under a REIT structure than the “lost” operating income of the restaurant company could create an additional $5-$7 per Darden share of value; additionally, PropCo could be spun off with plenty of debt capacity providing fuel for further growth/tenant diversity," added the analyst.

For an analyst ratings summary and ratings history on Darden Restaurants click here. For more ratings news on Darden Restaurants click here.

Shares of Darden Restaurants closed at $64.18 yesterday.

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