Red Lobster 2016 Annual Report Download - page 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
DARDEN RESTAURANTS, INC. • 2016 ANNUAL REPORT 35
modified retrospective transition method, depending on the area covered in
this update. Early adoption is permitted. We have not yet selected a transi-
tion date nor have we determined the effect of the standard on our ongoing
financial reporting.
NOTE 2
REAL ESTATE TRANSACTIONS
As a result of a comprehensive evaluation for the monetization of our real
estate portfolio, we undertook strategies to pursue sale-leaseback transac-
tions of individual restaurant properties and our corporate headquarters and
to transfer 424 of our restaurant properties into a REIT, with substantially all
of the REIT’s initial assets being leased back to Darden.
SALE-LEASEBACKS
During fiscal 2015, we implemented a plan to pursue sale-leaseback
transactions of 64 restaurant properties. Fourteen of the transactions closed
in the fourth quarter of fiscal 2015, and the remaining 50 transactions
closed in fiscal 2016. The 64 individual sale-leasebacks generated net pro-
ceeds of $238.0 million, resulting in deferred gains totaling $49.0 million
which will be amortized over the expected leaseback periods on a straight-line
basis. Additionally, during fiscal 2016, we completed the sale-leaseback of
our corporate headquarters, generating net proceeds of $131.0 million,
resulting in a deferred gain of $6.3 million, which will be amortized over the
expected leaseback period on a straight-line basis.
REIT TRANSACTION – SEPARATION OF FOUR CORNERS
On June 23, 2015, we announced our plan to separate our business into two
separate and independent publicly traded companies. We accomplished this
separation on November 9, 2015, with the pro rata distribution of one share
of Four Corners Property Trust, Inc. (Four Corners) common stock for every
three shares of Darden common stock to holders of Darden common stock.
The separation, which was completed pursuant to a separation and distribu-
tion agreement between Darden and Four Corners, included (i) the transfer
of 6 LongHorn Steakhouse restaurants located in the San Antonio, Texas
area (the LongHorn San Antonio Business) as well as 418 restaurant proper-
ties (the Four Corners Properties) to Four Corners, which were subsequently
leased back to Darden; (ii) the issuance to us of all of the outstanding com-
mon stock of Four Corners and corresponding pro rata distribution to our
shareholders of the outstanding shares of Four Corners common stock as a
tax-free stock dividend; and (iii) a cash dividend of $315.0 million received
by us from Four Corners from the proceeds of Four Corners’ term loan bor-
rowings. We requested and received a private letter ruling from the Internal
Revenue Service on certain issues relevant to the qualification of the spin-off
as a tax-free transaction.
Our shareholders’ equity decreased by $435.4 million as a result of
the separation of Four Corners. The components of the decrease, principally
comprised of the net book value of the net assets that we contributed to
Four Corners in connection with the separation, included $834.8 million in
net book value of fixed assets, $84.4 million consisting primarily of deferred
tax liabilities, offset by the $315.0 million cash dividend received by us from
Four Corners.
AGREEMENTS WITH FOUR CORNERS
We entered into lease agreements with Four Corners, pursuant to which we
leased the Four Corners Properties on a triple-net basis with terms compar-
able to similar leases negotiated on an arm’s-length basis. Under the lease
agreements, our subsidiaries are the tenant, while Four Corners is the land-
lord. The leases are triple-net leases that provide for an average initial term
of approximately 15 years with stated annual rental payments and options
to extend the leases for another 15 years. Under the lease agreements, the
rent is subject to annual escalations of 1.5 percent, as well as, in most of the
leases, a fair market value adjustment at the start of one of the renewal options.
We entered into franchise agreements with Four Corners pursuant to
which we provide certain franchising services to Four Corners’ subsidiary
which operates the LongHorn San Antonio Business. The franchising services
consist of licensing the right to use and display certain trademarks in con-
nection with the operation of the LongHorn San Antonio Business, marketing
services, training and access to certain LongHorn operating procedures. The
fees and conditions of these franchising services are on terms comparable
to similar franchising services negotiated on an arm’s-length basis.
DEBT RETIREMENT
During fiscal 2016, utilizing the proceeds of the Four Corners cash dividend,
cash proceeds from the sale-leasebacks of restaurant properties and our
corporate headquarters and additional cash on hand, we retired approximately
$1.03 billion aggregate principal of long-term debt (see Note 7 for
additional details).
NOTE 3
DISPOSITIONS
On July 28, 2014, we closed on the sale of 705 Red Lobster restaurants.
All direct cash flows related to operating these businesses were eliminated
at the date of sale. Our continuing involvement has primarily been limited
to a transition services agreement, pursuant to which we provide limited,
specific services for up to two years from the date of sale with minimal
impact to our cash flows. In total, we have recognized a pre-tax gain on the
sale of Red Lobster of $854.8 million, which is included in earnings from
discontinued operations in our consolidated statements of earnings.
For fiscal 2016, 2015 and 2014, all gains on disposition, impairment
charges and disposal costs, along with the sales, costs and expenses and
income taxes attributable to these restaurants, have been aggregated in
a single caption entitled “Earnings (loss) from discontinued operations, net
of tax expense (benefit)” in our consolidated statements of earnings for
all periods presented. No amounts for shared general and administrative
operating support expense or interest expense were allocated to discontin-
ued operations. Assets associated with those restaurants not yet disposed
of, that are considered held for sale, have been segregated from continuing
operations and are included in assets held for sale on our accompanying
consolidated balance sheets.