Module 5 Discussion Prompt: Research a Company's Buy-Lease Decision

• Due By Class on Tuesday, November 11th, 5:30 pm.
• There is NO Deduction/Penalty for Late Submissions.
• Counts as 5 Points Towards Participation Grade.

Working alone, pick a company and research its real estate holdings, preference to buy-lease the properties they occupy, and assess the real estate's impact on their business. Part 1 asks you to summarize and describe the company's real estate portfolio and the factors influencing its decision to buy or lease space. Based on what you learn, answering Part 1, Part 2 asks you to consider and evaluate the real estate's effect on the business (i.e., risk exposure, business continuity, valuation, performance, and business fundamentals).

You are welcome to choose any company (i.e., other than Unilever, Drechtal, McDonald's, or Starbucks) so long as they are an end-user and the core business is not real estate. I recommend choosing a publicly listed multinational corporation that interests you. Generally, information is more readily available for public companies that file reports with the SEC, which are freely available. For example, Form 10-K annual reports usually provide an overview of the real estate portfolio, mortgages/cost of capital, and risk considerations (https://www.sec.gov/edgar/searchedgar/companysearch.htmlLinks to an external site.).

Part 1. Select a company and describe its real estate holdings and lease-buy preference generally. (You do not need to research individual properties in the company's portfolio.)

• What's in the company's real estate portfolio? Is there a variety of property types, locations/regions, etc.? What's the breakdown between owning and leasing?
• Does the company prefer to rent or buy the properties it occupies? Is their buy-lease preference consistent with its real estate portfolio, and if not, why?
• What are the main strategic, financial, or tax considerations driving the company's real estate portfolio and decisions?

Part 2. Based on your understanding of the company, its business model, real estate holdings, and whether or not they prefer to own/lease their space, what impact does the company's real estate portfolio and preferences have on the company, its business, and its owners/shareholders? A complete answer to Part 2 addresses two questions relating the real estate to (1) the company's performance and risk exposure and (2) the impact it has on business valuation:

• Do you think the company's real estate position makes the company safer or riskier, and why?
• What about the valuation? Does the real estate portfolio and decision to buy or lease make the company easier or more challenging to price, and why?

Hints for Part 2:

• There are implications around diversification and exposure to real estate markets in owning versus leasing (i.e., performance, returns, and variance of returns).
• What is the opportunity cost of owning versus leasing? What are the risks, costs, and benefits between the two, and how does that translate to the business?
• Is it easier or harder to determine a company's value based on its buy-lease preference? It probably depends on how easy or hard it is to price real estate properties on a mark-to-market basis.
• Additional considerations include financing, tax implications, liquidity, balance sheet, branding, competitive position with respect to peers, operations, flexibility, control, security, sustainability, risk management, business continuity, etc.

McDonald's Example:

1. The McDonald's Corporation prefers to own or lease the McDonald's stores and then subleases them to franchisees. The lease agreements stipulate that the franchisee pay a percentage of monthly restaurant revenues. This lessor-franchisee model, which utilized real estate as collateral to raise funds and shift expenses from operations to franchisees, enabled their rapid growth. As the First President and Chief Executive of McDonald's, Harry Sonneborn, once said, "We are not technically in the food business. We are in the real estate business. The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent."
2. From the perspective of an investor/shareholder in McDonald's...

Rubric

2 points for a complete answer to part 1
2 points for a complete answer to part 2
1/2 point for having an effective write-up (clear and free of grammatical errors)
1/2 point for thoughtfulness of your answer (demonstrate knowledge and critical thinking)
Keep in mind that posts are public

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