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Culture War Roundup for the week of May 13, 2024

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The recent discussion about Red Lobster (link) focused on analyzing how the $20 all you can eat shrimp bankrupted the company because it was too good of a deal and analyzing the declining social trust to keep it afloat.

Everyone in the comments has fun linking this to their favorite hobbyhorses. Here's mine talking about a cool idea for a legal system I was thinking about.

Great story everyone. But one question, is this actually true?

Some Xsocial users are linking the company's demise to private equity:

Quote https://x.com/windcomecalling/status/1790889866844422528

while this is a very funny idea, the reality is much more depressing: they made like $2 billion in revenue that year. the loss from endless shrimp was basically a rounding error—the thing that actually bankrupted them was private equity

Hmm.

Quote https://x.com/edzitron/status/1790493687572754654

Their ceo is a lawyer-MBA and they were bought by a Thailand-based private equity group that makes most of its money selling canned seafood, and they've been downsizing the company consistently since Thai Union Group took control in 2020

They also launched an insane permanent all you can eat shrimp deal that killed revenue. Thai Union basically ran the company into the ground.

Seems like the private equity group is deliberately running the company into the ground, and using the unlimited deal as a cover story. Another case of corporate greed destroying a profitable company and generally being evil.

Great story. But one question, is this actually true?

This analysis is another interesting angle on it, quote https://x.com/cunha_tristan/status/1791807133886861317

Golden Gate bought Red Lobster for 2.1 billion, and then sold off a bunch of real estate for almost that much. Although at one point they actually bought back a little bit of it, which is weird.

But then after selling the real estate, they sold the restaurant business to new investors. They sold the initial 25% of it for over $500 million.

Which seems to show that the real estate and the restaurant businesses were more valuable split up than together. It seems like the restaurants owning their real estate was dragging down the value of the real estate, it was worth much more split off. Which would make sense if the restaurants were poorly run, that business was being subsidized by the real estate portfolio.

The land was more valuable than the company. Private equity bought the company to sell the land to someone who could make more money with it.

This is.... Georgism???

Great story. But one question, is this actually true?

I honestly don't know.

Here's a 2015 article showing Golden Gate Capital made the transaction the last tweet is talking about:

Golden Gate Capital, which bought Red Lobster from Darden Restaurants Inc. for $2.1 billion, and then sold that real estate to VEREIT for $1.5 billion, has now agreed to acquire $204 million of Red Lobster real estate back from the firm.

The narrative seems plausible and would be an interesting twist. But perhaps it's too good of a story.

Does anyone have more source/knowledge of this kind of corporate dealing? Is private equity delivering the Georgist promise?

Fast food chains like McDonald’s make most of their money by picking really good real estate locations. Red Lobster may have been doing the same, and once their mediocre business stopped being profitable they decided to simply transition to real estate. The “losses” may be beneficial in terms of tax deductions for the parent company, the business being maintained for that reason while they are in it for the real estate. From some googling,

Red Lobster's customer base tends to be older, with a significant portion of their customers falling into the 50s and 60s age range

Okay, so the writing was on the wall. That was 10 years ago. They made their business decision to maximize how much money enters their pockets. The idea that the chain’s demise was caused by unsavory bottom feeding prawns proles is a silly WSJ (the opposite of SJW) fiction that allows the corporation leaders behind the scenes to shift blame to, I don’t know, poor people who like sea food deals. Gah, if only there were a way to prevent them from sharing shrimp! That didn’t smell fishy to anyone? Hook line and sinker people fell for it.

McDonald’s is in part a ‘real estate’ business because of its franchising system, wherein it acts as landlord to franchisees. McDonald’s therefore both makes money the usual way franchised restaurants do and on rent for those same franchise owners.

Red Lobster was not franchised. When it was sold in 2014, every single Red Lobster restaurant was owned and operated by the company itself. From an article from the time:

…Golden Gate, which bought the chain for $2.1 billion in 2014. At that time, virtually all of the real estate under Red Lobster restaurants was owned by the chain, which has no franchisees.

McDonald’s’ model isn’t typically attempted by most modern restaurant chains, even those that do franchise, because shareholders tend to prefer that excess profits are reinvested in growth or returned to them rather than used to buy commercial real estate which the investors could buy exposure to themselves to the extent that they want to.

Looks like the private equity is the “real estate company” and Red Lobster is the leaser*

https://www.businessinsider.com/red-lobster-endless-shrimp-bankruptcy-private-equity-debt-real-estate-2024-5

In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm. To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back

"The thing that private equity does is just unload assets and monetize assets. And so they effectively paid for the purchase of Red Lobster by selling the real estate," he said. "It'll probably be fine, generally, but there's going to come a time in which your sales fall, your profitability is challenged, and your debt looks too bad, and then suddenly those leases are going to look awfully ugly."

"Once they sell the real estate, then the private-equity company is golden, and they've made their money back and probably more than what they paid," she said, noting that this was a common theme in other restaurants and retailers and adding: "The retail apocalypse is all about having your real estate sold out from under you so that you have to pay the rent in good times and in bad."

Yeah, but the whole reason this approach is even viable is because when Red Lobster was both real estate company and restaurant operator, investors valued it at less than the sum of its parts. Since the late 1980s conglomerates have fallen out of fashion because asset managers of all kinds prefer to deal with pure play companies (especially outside big tech) and to handle allocation themselves. The big Japanese conglomerates often trade at very poor multiples compared to Western businesses not only because of the state of the Japanese economy but because when you buy into one you’re buying into like 15 arbitrary and often barely related business areas. By contrast in the American equity market an investor can more easily measure and tailor their exposure to real estate, oil, railroads, video games, b2b SaaS and so on. Those looking for a preset diversified portfolio can buy an index or buy big holding companies like Berkshire or the public PE firms that have exposure to many different kinds of business.

Private equity is just the corporate raiding/hostile takeover meme of the 1980s updated for the 21st century. Most medium and large private companies are very poorly run, the same way most major corporations were until the late 1980s. A combination of M&A and MBB consulting (mock them freely, but the sad thing is they were once necessary) dealt with most of the low hanging fruit in public markets, and takeover defense is now much better anyway, but in private companies things are still bad. PE is not typically a bad thing, and makes for more successful businesses that do more business and employ more people more often than not. Purely extractive moves still happen, but they’re disproportionately subjects of reporting and PE is now so well developed that (especially with higher rates) an extract what you can, sell-for-parts approach is less and less of a viable way to invest clients’ capital.

That said, selling corporate owned real-estate is a good thing for most businesses. There’s a reason why almost no major corporations other than super rich tech companies in the suburbs own their own corporate headquarters; when you own your premises, you’re a real estate company in addition to doing whatever else you do. Conglomerates are almost always undervalued by markets, it makes more sense for most companies to sign long leases, to focus on their core business as a pure play, and to leave real estate to asset managers and real estate developers who are valued on that basis and have expertise in that market.

when you own your premises, you’re a real estate company in addition to doing whatever else you do.

You say that like it's a bad thing! Real estate in major American cities has been one of the most profitable investments of the last 50 years!

A big business like Red Lobster could even do some weird things to manipulate the market. Like

  1. open a business that attracts a lot of loud, low-class customers to lower the value of nearby real estate
  2. buy up all that real estate
  3. close the red lobster and start a fancy coffee shop or art gallery instead
  4. profit!

This is awesome! I think we've found a new business model for Chuck-E-Cheese.

Red Lobster isn’t located in the areas with strong real estate markets. Those are all Gateway markets (defined as NYC, San Fran, LA, Boston, Miami) mostly coastal. Not 4th tier cities and exurbs where Red Lobster largely operates.

I’m not sure large pubcos are that much better run. Instead, I think unfortunately Marty Lipton convinced Delaware that anti takeover measures were somehow consistent with shareholder primacy when in reality they just protect management ensuring it can screw the shareholders.

I think the raw classical economics argument for prohibiting most forms of takeover defense isn’t completely wrong, but it also isn’t entirely correct. Im based in the UK which bans many of the major tactics used in the US, and I don’t think UK pubcos are run better than American ones on the whole, but I think to me the biggest issue I have with US public companies is super voting shares. These were illegal in London until about 5 years ago; every share had to have the same voting power to be (in practice) eligible for a primary listing in London and for inclusion in indices. They changed it under pressure from the government because British tech companies were IPOing in the US to preserve founder control. I think it’s a hugely negative development in ECM for shareholders, banks and the wider public.

Of course, there are a lot of other restrictions on UK pubcos. That is, there is more differences between UK pubcos compared to say Delaware ones. Also, would be interesting since some UK pubcos are England and Wales PLCs whilst others are Jersey.

That said, selling corporate owned real-estate is a good thing for most businesses. There’s a reason why almost no major corporations other than super rich tech companies in the suburbs own their own corporate headquarters; when you own your premises, you’re a real estate company in addition to doing whatever else you do. Conglomerates are almost always undervalued by markets, it makes more sense for most companies to sign long leases, to focus on their core business as a pure play, and to leave real estate to asset managers and real estate developers who are valued on that basis and have expertise in that market.

Would I be correct in saying that’s mostly just the west? My impression is that in Japan at least, and maybe other Asian countries too, vertical integration is much higher. I would be surprised if Toyota/Panasonic/Yamato etc. don’t own their own land. Certainly they used to: during the bubble Sony’s real estate holding were worth more than the rest of the company put together.

I would be surprised if Toyota/Panasonic/Yamato etc. don’t own their own land.

Toyota's most recent annual SEC filing indicates that it owns land worth 1.4 billion dollars, or 1.9 percent of its assets. "Of Toyota's principal facilities and organizations, all are owned by Toyota Motor Corporation or its subsidiaries. However, small portions, all under approximately 20 percent, of some facilities are on leased premises."

In comparison, GM owns land worth 1.3 billion dollars, or 0.47 percent of its assets. It has "rent expense under operating leases" of 350 million dollars per year, or 0.20 percent of its revenue.

Slight nitpick. But using listed real estate value on SEC findings will not be accurate. Those will be at historical costs not current market value and is depreciated. It’s a lot like prop 13 in California. If Toyota bought the land the factory sits on in the 1970’s then the land will be listed at 1970 prices.

It’s also obvious in this discussion that companies that need physical footprints will have exposure to real estate. There are many different flavors of corporate leases but many of them are functionally no different than owning real estate. A 300 year lease with pass thru of maintenance, property taxes, etc is in terms of economics no different than owning the property with a mortgage.

Leases have a mathematical property that is a lot like delta in options. Options are not the same as owning equity but delta is a measure of the options price movement to the underlying equity. Similar shorter term leases have little exposure to the underlying real estate while longer term leases can be indistinguishable from owning real estate. Most of these leaseback deals are long term and would essentially have a lot of delta.

Is midtwit leftist Twitter that bad?

They “made” $2 billion. No the had revenue of $2 billion.

It’s just looks like a constant gotcha with no desire to understand what is going on.

The real estate deal had nothing to do with Georgism. If you google the deal it’s just as sale-leaseback. A sale lease-back is much more like taking out a mortgage on your real estate than a true sale. For various reasons corporations like to do these things. Red Lobster took property they owned and then sold it to someone else but then had to make rent payments and usually these type of deals would have RL paying most operating costs and property taxes. A sale leaseback is a little bit like debt most of the time for the buyer of the real estate and occasionally turns into owner real estate (like if Red Lobster goes bankrupt then the buyer of the sale-leaseback suddenly own a bunch of real estate without a tenant they need to figure out how to reposition). Basically a corporate bond collateralized with real estate.

If the leases have actual value as in the real estate went up in value and someone would rent it for a higher price you occasionally see the leases resold for profit to (Red Lobster in this case) a new business (in this case an expanding restaurant chain) but most of the time the landlord takes a big L and has a pain point of figuring out what to do with the property.

My opinion would be reading those tweets actively makes you less intelligence and gives you zero information on what is actually going on.

It’s just looks like a constant gotcha with no desire to understand what is going on.

Yeah.

The real estate deal had nothing to do with Georgism.

If the leases have actual value as in the real estate went up in value and someone would rent it for a higher price you occasionally see the leases resold for profit to (Red Lobster in this case) a new business (in this case an expanding restaurant chain) but most of the time the landlord takes a big L and has a pain point of figuring out what to do with the property.

I see a similarity between them:

Georgism incentivizes maximizing profit over real-estate by increasing the rent. Low income usages can't pay the rents. Some implementations (??) make the land owner set the price they're taxed on and they'd be forced to sell to any purchaser at that price.

But here someone bet the land was under-utilized, bought the company with the goal of selling hte land to someone who can make more money with it. I'm not sure about the implementation of whether the previous owners of Red Lobster knew this was the plan and were okay with it.

Overstated it seems. Hyperion commented on this take, do you have a similar view to them?

The firm who bought the real estate almost certainly took a giant loss on the deal.

People who buy NNN leases are buying cash flows tied to the leases betting that Red Lobster will stay in business and pay rent for probably something like 30 years. The buyers of these are much more like a mortgage bank than they are a land speculator. These are basically now junk bonds in default where the owner of the leases now own a bunch of restaurants without tenants they are going to need to spend a lot of money renovating (Tenant improvements) to recover any value.

I don’t know how many times I need to say this but in the real estate world these things are not “owning” real estate the same way a normal person would think about it.

These are the same people who would buy bonds backed by Pepsi but Pepsi just went bankrupt and your trying to figure out what you can liquidate to recover some value.

I think Georgism is silly. Private markets are always trying to redevelop properties into better use cases that increase rents. I think Georgism fails because develops largely profit by pushing for projects that will increase the value of their land and therefore increase rents. By taking away that profit developers have less incentive to be boost land values.

Good summary of the competing narratives.

My take... What's with all the talking points about how it's somehow evil to buy a company and then sell it for parts? Why shouldn't an owner be able to buy a failing restaurant, sell the real estate, and then let the restaurant fail? Or more, accurately, if I buy something I should be able to do what I want with it.

Is Red Lobster such a valuable institution that owners must be forced to prop it up with infusions of capital? You know, for the good of society.

We need more zombie corporations going under, and less hand-wringing when they do. Failing companies failing is the engine of creative destruction, and therefore growth.

I think it depends on the details. For example, is the company actually failing right this minute or not?

Doing productive things with a doomed business deep in the red is different from strip-mining a struggling company's assets because you think you could make more money speculating on their real estate value. Or taking a company with a reputation for high quality products, reducing the quality, and profiting off the reputation that the previous owners built up.

Some companies deserve to die (I work for one). But in general people admire building things and disapprove of destroying them.

Why shouldn't an owner be able to buy a failing restaurant, sell the real estate, and then let the restaurant fail?

Sounds fine, until your area loses its hospital because PE came in and did something similar (it's a growing problem in healthcare). Lots of organizations you wouldn't want to lose are sitting on valuable real estate and operating with razor thin margins or other similar sins.

Sure, hospitals are different. As always there are specific exceptions to general principles.

There is no need, however, to protect a failing Red Lobster as a cultural institution.

Is it? Maybe hospitals suck. I wonder if you really need a maternity war combined with a cancer war combined with an ER.

Maybe splitting some of these up into smaller offices would better in the long run.

I think people haven't fully grappled with the implications of Evolution. And maybe don't understand how capitalism works. I barely do either.

Here are some talking points I see:

Why shouldn't an owner be able to buy a failing restaurant, sell the real estate, and then let the restaurant fail?

There's the inconvenience of being reorganized. All the employees on the healthcare plan, who've moved across the country for this job for their family, who've put effort and sweat every day to make the company better (and other such sympathetic narratives), are suddenly shuffled into the labour market without their consent.

Particularly when the company is on net-profitable. A narrative that this perfectly fine business that's meeting people's needs is deemed "unvaluable" by corporate spreadsheets and then gutted to make room for some high-end fancy business. Rich people are willing to pay more than poor people, and now this veers into gentrification arguments.

if I buy something I should be able to do what I want with it

There's also aesthetic quality to this.

Buying a rare painting from a private collector and then burning it is legal and unimpeachable, and yet I still feel there is something lost, an aesthetic duty to the commons. Memories, sentimental memories lost to the wind. Perhaps less so with a property like Red Lobster.

There's the inconvenience of being reorganized. All the employees on the healthcare plan, who've moved across the country for this job for their family, who've put effort and sweat every day to make the company better (and other such sympathetic narratives), are suddenly shuffled into the labour market without their consent.

If the company isn't making money, there's an argument that these people's working lives are being wasted. Moving across the country with family, effort and sweat every day to make the company better, all in service of something that is valued as a net negative to society. It's not a charity, it's not a social cause, this isn't a job that gives society virtues immeasurable. It's a mid-casual restaurant chain that could be easily replaced with another. It's losing money because it isn't worth anything, and I hope workers get to work at places that are worth something, even if they're mid-casual restaurant chains.

There are other practical problems here, kicking people off insurance and making them find new jobs and all the hardship and drama. But that's not really the responsibility of the PE guys. Ideally, the government taxes those guys on the wealth they've freed up and made more efficient, and we use those tax monies to provide for the social good of the people effected. Something like this even happens in real life, we just spend a tremendous amount of money on all the wrong programs and welfare.

Buying a rare painting from a private collector and then burning it is legal and unimpeachable

In the UK there is a system for protecting beautiful old houses, fully or partially. You are permitted to do whatever you like with a ‘listed’ house provided that you don’t damage the listed parts of the building. So you can knock down and rebuild the back of the building but you can’t damage the Georgian facade, for example.

There are occasional shenanigans but in general the system seems to work quite well, and strikes a good balance between ownership rights and protecting the public heritage. I wouldn’t be surprised if there were similar systems for notable works of art.

The united States has such deed restrictions as well, and changes require historical society approval.

This sucks when there is a roof leak, and directly contributes to why historical buildings rot away.

I can't speak for the US, but I haven't heard of such cases in the UK. Obviously old buildings can get damp, but I've never heard of somebody not being able to repair their house because it's listed. Might cost a bit more, but listed houses are usually expensive and owned by richish people in the first place.

This is.... Georgism???

No, it's just regular arbitrage. arbitrage would work the same Georgism or not. The whole point of Georgism, is that, if done perfectly, it only has distributional effects, it doesn't change the economic efficiency of the outcome. It is a pure transfer with no distortionary effects.

Ah, I have a very shallow model of Georgism.

Specifically I got it confused with the argument that it pushes low-value companies out of high-value land (as a pro).

pushes low-value companies out of high-value land (as a pro).

If by 'value' you mean a market value people are willing to pay for, then that is true. But, this is a distributional effect. It's like how if we had let the plains Indians own all that prime farmland on the prairie, it could just be used by them to hunt buffalo, but if they had to pay a land tax, they could never afford it. Both outcomes are Pareto efficient, under certain extreme, frictionless, assumptions. However, the distributional consequences are very different, with the land owners rents being totally redistributed to the tax collecting government and these distributional consequences determine what is produced, it's just both outcomes are as economically efficient.

But, this is a distributional effect. It's like how if we had let the plains Indians own all that prime farmland on the prairie, it could just be used by them to hunt buffalo, but if they had to pay a land tax, they could never afford it.

You know, I think you just made one of the most powerful arguments against Georgism I've seen. At least for leftists that I've seen that support it.

What would giving native's back their land matter if the land value was all taxed away? I guess if they were their own nations that didn't have to share with white people it would be different, but you can't get to that scenario now without ethnically cleansing white people or allowing minority rule by the natives. Both things allegedly the worst crimes imaginable for the left if white people do them, but somehow righteous if 'indigenous' people do it.

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