The sale/leaseback that helped sink Red Lobster involved the July 2014 sale of premium real estate underneath 500 of its stores, which generated $1.5 billion. But that money didn’t go back into Red Lobster; it went instead to the private-equity firm to finance its purchase of the chain, Red Lobster's press release said. That firm was San Francisco-based Golden Gate Capital, with $10 billion in assets.
Golden Gate had paid $2.1 billion to buy Red Lobster in May 2014, so the real estate sale was crucial to the firm’s financing.“Red Lobster is an exceptionally strong brand with an unparalleled market position in seafood casual dining,”Josh Olshansky, managing director at Golden Gate, said at the time, a press release announcing the dealshows.
The $1.5 billion sale crippled Red Lobster. After the real estate was sold, Red Lobster had to pay rent on stores it had previously owned, significantly increasing its costs. According to the bankruptcy filing, by 2023 its rents totaled $200 million a year or approximately 10% of its revenues.
Asked about the negative impact the sale/leaseback had on Red Lobster, a Golden Gate spokeswoman declined to comment.
The company that bought the properties, American Realty Capital Partners, got a very good deal, the press release announcing the sale/leaseback said. It characterized the Red Lobster stores it had purchased as“irreplaceable locations” and“high-qualityreal estate located at main intersections in strong markets,” but noted the properties were sold “at below replacement cost.” Under the terms of the sale, Red Lobster would also see regular rent increases of 2% a year, the release noted.
American Realty Capital Partners was acquired by Realty Income in 2021. Realty Income did not respond to a request for comment on the sale/leaseback.
The sale of the Red Lobster stores hurt the company several ways. First, it meant the chain would not benefit from any upside in the commercial real estate market.In addition, the new owner of the real estate did not appear to give Red Lobster good deals on rents. As Red Lobster’s CEO noted in a bankruptcy court filing, “A material portion of the Company’s leases are priced above market rates.”
As is typical in private-equity buyouts, Golden Gate’s purchase of Red Lobster significantly increased the chain’s debt, adding higher interest costs to its burden.In 2017, Moody’s Ratings, an independent ratings agency, downgraded Red Lobster to a negative outlook from stable. Moody’s cited the chain’s “persistently high leverage,” or debt.
“Carrying a lot of debt and not owning your real estate puts companies at a disadvantage,” said Andrew Park, senior policy analyst atAmericans for Financial Reform, a nonprofit and nonpartisan organization advocating for a stable and ethical financial system. “Red Lobster is yet another example of that private-equity playbook of harming restaurants and retailers in the long run.”
In 2020, Golden Gate exited its Red Lobster investment, selling to Thai Union Group, a Bangkok-based company, and an investor group. Thai Unioncalls itself the “world’s seafood leader” and its brands include Chicken of the Sea tuna products and King Oscar sardines. Terms of the transaction were not disclosed.
Regarding the bankruptcy, a company spokesman provided a statement saying, “ThaiUnion has a been a supplier to Red Lobster for more than 30 years, and we intend for that relationship to continue. We are confident that a court-supervised process will allow Red Lobster to restructure its financial obligations and realize its long-term potential in a more favorable operating environment.”
Bankruptcies of companies like Red Lobster have a multiplier effect on the overall economy and contribute to a sense of unease among consumers and workers, said RobertReich, a former labor secretary under President Bill Clinton.
“One of the reasons people feel so insecure is you’ve got in the background, behind the curtain, a lot of these financial games that ultimately are making the very rich richer, and hurting America’s working and middle class,” Reich said in an interview. “All of the people who were supplying Red Lobster, all of the people who are essentially providing services to Red Lobster, the small businesses in the communities affected by mass layoffs, they are next in line, they are experiencing the ripple effect.”
Red Lobster’s employees are bearing the brunt of the collapse. Austin Hurst is one, a former grill master at a Red Lobster in Arizona. In an interview, he said he learned from a friend his store had closed and has not heard from his manager or any higher-ups at the company.He said he was told his store had been profitable until about 3 months ago.
“About a month before the close, the district manager came in and was like, ‘Yeah, this Red Lobster is looking really bright. And you guys are going to stay open for sure,’” Hurst recalled.
Hurst said he was offered a job at another Red Lobster location but it requires a longer commute and pays $17 an hour, down from the $19 he was making before.
Sen. Edward Markey, a Democrat from Massachusetts, where eight hospitals operated by bankrupt Steward Health Care are, recently held hearings on private equity and health care. He has also proposed legislation that would require greater transparency from health care entities owned by private-equity firms, including the disclosure of sale/leaseback arrangements as well asfees collected by the private-equity firm, and dividends paid by the health care entity to the private-equity fund.
“My legislation is quite simple,” Markey said in an interview. “To make sure that these financial shenanigans don’t have a profound impact upon communities across our country, the Department of Health and Human Services has to determine whether or not the sale of the land underneath these hospitals and then having that land rented back to the hospitals isn’t having a negative impact on the provision of health care in that community.”
Private equity is emerging in all parts of our economy, Markey added, but its most profound impact is in health care. “The more private equity gets into the hospital business,” he said, “the more this is just a preview of coming atrocities affecting our health care system.”
