Olive Garden Parent Makes Big Bet on Fine Dining

Good morning and Happy Cinco de Mayo. Although many Americans celebrate this occasion by indulging in margaritas and tacos, it is worth noting that the holiday actually commemorates the Mexican army's victory over French forces at the Battle of Puebla in 1862.

Speaking of food…Darden Restaurants, which owns Olive Garden and The Capital Grille, is making a big bet on upscale dining with its $715M acquisition of Ruth's Chris Steak House. Meanwhile, despite being a month overdue, the $229B budget deal announced by NY Gov. Hochul failed to include a plan to tackle the state's affordable housing crisis.

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Darden Restaurants' $715M Ruth's Chris Deal: A Bet on Upscale Dining

Darden Restaurants (DRI) is set to acquire Ruth's Hospitality Group (RUTH), the parent company of Ruth's Chris Steak House, for $715M, expanding its fine-dining portfolio.

Delicious acquisition: The addition of Ruth's Chris Steak House will complement Darden’s vast array of restaurant brands, such as The Capital Grille, Seasons 52, and Eddie V's, while strengthening its foothold in the fine dining segment. Ruth's Chris boasts 154 locations worldwide, including 80 company-owned or operated restaurants and 74 franchised restaurants. The chain, which had an average annual restaurant volume of $6.2M in fiscal 2022, generated systemwide sales of over $860M last year.

Get what you pay for: The deal is expected to deliver pre-tax synergies worth between $5–$10M within the first year of the acquisition and $15–$20M in the second year. Total acquisition and integration expenses are expected to be between $55–$60M. Darden also noted that its latest acquisition doesn’t have much overlap with its existing restaurant chains and expects that its strategy and operating philosophy aligns well with Ruth's Chris, which should ensure a smooth transition.

Sustainable market: Darden's Ruth's Chris acquisition is set to finalize in June 2023, bolstering its strategy to offer elevated dining experiences in the fine-dining segment. CEO Rick Cardenas expects sales growth in fine-dining to outpace casual-dining through 2026, due to high-income customers who maintain or increase spending. Darden's net sales rose by 14%, reaching $2.9B in the 3 months ending 02/26/23.

➥ THE TAKEAWAY

Affordable luxuries: Darden Restaurants' pricing strategy has given Olive Garden and LongHorn Steakhouse an edge over casual-dining competitors, and the executives have also noted that their existing fine-dining brands, The Capital Grille and Eddie V's, continue to attract high-income diners who are not scaling back on spending. The acquisition of Ruth's Chris Steak House is a long-term investment based on the belief that fine-dining sales growth will continue to outpace casual-dining until 2026, despite inflation

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NY Housing Agenda Demolished After $229B Budget Deal Reached

Following a month-long delay, NY Gov. Kathy Hochul revealed a $2B budget agreement that will do little to address the state's affordable housing crisis, leaving the CRE industry little to feel optimistic about.

What $2B will buy in NY: Though the newly approved spending plan features funding for the state's transit agencies, revisions to the state's bail laws, and the establishment of new charter schools, most of the governor's housing agenda proposals were cut down by opposing lawmakers, all but guaranteeing a slower pace for new housing development in the state, especially near or in NYC.

What got shot down: It’s safe to say that the announcement left housing advocates feeling a bit deflated. The NY state legislature overrode a series of Hochul's proposed measures to incentivize development, override local zoning laws, and build 800,000 new homes throughout the state. The legislature's reluctance to comply with the housing agenda took weeks of negotiations and resulted in no new housing initiatives.

REBNY roundly disappointed: Allies like the Real Estate Board of New York (REBNY) were hoping for a substantial extension to a tax abatement popularly known as 421a that allows under-construction projects to qualify for tax breaks. The industry believed that the extension would construct 32,000 new housing units. Although REBNY pushed for the extension, lawmakers did not incorporate it within the final budget agreement. The abatement expired in June 2022.

What’s this about bail? The final budget will modify NY bail laws by removing the “least restrictive means” standard. Accused defendants can be held in jail before their trial based on increased jail discretion for judges. The removal of the “least restrictive means” law contradicted progressive lawmakers' aims to cap tenant-friendly rent hikes and impede property owners from evicting tenants without adequate cause.

➥ THE TAKEAWAY

Better luck next time: Although the New York state budget agreement provided some funding for transit agencies and a minimum wage hike, little to nothing will be done to combat the affordability crisis, which has already resulted in many New Yorkers moving out of the state. Although a housing summit was suggested and talks might resume, NY housing advocates, developers, and renters can do nothing but reluctantly wait to see what happens next.

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• The coming slowdown: Developers are struggling to start new apartment projects, leading to a significant slowdown in new constructions in the first four months of 2023—which should make it easier for existing buildings to raise rents.

• Declining activity: JLL's Q1 earnings took a hit due to the banking crisis, rising interest rates, and lower commercial space demand, turning negative.

• From Canada with love: Hines, with $96B in AUM, is pitching international investors on a 462-unit Canadian apartment building in Calgary that was completed during the pandemic, which it expects to fetch around $147M.

• Rest in peace: Steven Fisher, a Fisher Brothers senior partner who served as the chairman of the construction arm of the family company, passed away at the age of 63 on May 1st.

• Navigating NY: New York's office values have dropped 30% since their pre-pandemic peak, according to CBRE. However, there may be opportunities for investors to take advantage of the distress in the CRE industry.

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• Dry powder: Single-family rental company Invitation Homes (INVH) is looking to buy smaller firms ‘stuck’ with smaller inventory as its Q1 net income jumps 30% YoY to $120M, despite a projected US housing shortage of 6.5M homes.

Multifamily insurance premiums are soaring across the country—especially in coastal states—due to a perfect storm of macroeconomic headwinds. While average insurance costs sit slightly above 20% nationwide, cities like West Palm Beach and Houston are looking at 45% and above.

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