CST Responds to Critics With New Real Estate Venture

SAN ANTONIO — CST Brands Inc.’s board of directors has authorized company management to pursue a potential real estate venture.

CST has been evaluating alternative financial structures to monetize its new-to-industry real estate and fund its accelerated new store growth plan.

“After reviewing various alternatives, with the assistance of its financial and legal advisors, the company has decided to pursue a real estate venture structure to achieve these goals,” CST stated in a news release. “Through sale/leaseback leverage, the company expects the venture will substantially enhance its new store return on investment from unleveraged returns of 15 percent to over 30 percent under the new venture structure (after the customary maturity period of one to three years). Beginning in 2017, the company expects that new stores will be constructed as build-to-suit locations directly funded by the venture.”

According to Kim Lubel, chairman, CEO and president of CST, the convenience store operator expects the real estate venture to significantly lower CST’s cost of capital and provide an attractive financial platform to accelerate new store growth, help fund future acquisitions and potentially purchase existing real estate from CST and master limited partnership sister company CrossAmerica Partners LP as well. 

"We expect this innovative structure will free up substantial capital that will enhance the company’s ability to pursue its strategic growth initiatives, while also providing an opportunity to unlock additional long-term value for CST stockholders from potential upside in the company’s ownership interest in the real estate venture,” Lubel said. 

RBC Capital Markets has been retained as financial advisor to CST in connection with the potential transaction. The company expects the venture will initially be established with a strong foundation of recently constructed convenience stores. In addition, CST’s pipeline of future new-to-industry construction in the United States is estimated to be in the range of $1.1 billion to $1.2 billion in real property construction during the next five years.

CST's announcement comes after two venture capital firms, Engine Capital LP and JCP Investment Management LLC, both sent letters to the retailer in December recommending the company either dramatically improve operations or put itself up for sale due to weak shareholder returns since it was spun off from Valero Energy Corp. on May 1, 2013. Both venture capital firms are CST shareholders.

Although CST did not mention either venture capital firm by name in its Wednesday news release, it did provide an “Update on CST’s Efforts to Enhance Shareholder Value.”

CST stressed it is “focused on enhancing shareholder value” and “encouraged by the recent results and believes there is substantially more growth ahead for CST.”

Specifically, CST stated it is working to boost shareholder returns in three ways:

• Maximizing profitability of the existing network by optimizing fuel and merchandising volume and margins;
• Enhancing the company’s store portfolio through strategic acquisitions in attractive markets and disposals of select non-core legacy locations; and
• Prudent use of capital, including continued return of cash to stockholders and efficient funding of its growth plan.

In Wednesday's news release, CST did not mention any possibility of the company putting itself up for sale.

San Antonio-based CST Brands Inc. operates approximately 1,900 locations throughout the Southwestern United States, New York and Eastern Canada.