TA Rejects Sale Leaseback & Spinoff Talk

WESTLAKE, Ohio — TravelCenters of America LLC (TA) has no intention of conducting sale leasebacks of its real estate assets, nor will it spin off its truck repair business, CEO Thomas M. O’Brien confirmed during Friday’s 2014 fiscal fourth-quarter earnings call.

On Feb. 25, activist group RDG Capital Fund Management sent a letter to the company stating that enacting both approaches could nearly double the value of the company’s “undervalued” stock, from the current $14 per share to as much as $27 per share.

“Although TA operates the No. 3 travel center chain and the No. 1 truck repair services business nationwide, RDG believes TA is undervalued because the market fails to recognize the company's valuable real estate assets and misperceives TA as a slow-growth, low-margin, commodity-oriented fuel company rather than the higher margin, growing chain of 359 quick-service restaurants, 218 full-service restaurants, 34 convenience stores and 240 truck repair facilities that contribute the majority of TA's profits,” RDG wrote in its letter.

When questioned by an analyst on Friday's call, O’Brien affirmed his company “treats all shareholder communications with a great deal of importance.”

He said TA has looked into the possibility of sale leasebacks often, but no move is imminent. “Our real estate is a source of liquidity,” he said. “It’s a wellspring of shareholder value.”

As for spinning off its truck repair business, O’Brien seemingly rejected the idea more quickly, stating the “best way to grow a customer base is the way we are doing it.” The chief executive also noted that “there are risks associated with making our offer less integrated than it is today.”

O’Brien was more open to another Wall Street analyst’s suggestion that TA switch from a limited liability company (LLC) to a C corporation, which could possibly add TA’s stock to market indexes such as the Russell 2000, forcing financial institutions to purchase the company’s stock and hence enhance its value on the New York Stock Exchange.

An LLC is designed to combine the benefits of sole proprietorships and partnerships. It is not a corporation, but instead an unincorporated business entity. By comparison, C corporations make up a majority of small and large U.S. companies. To become a C Corp, a business must have management and a board of directors and file any required documents yearly.

“There are some positives and some negatives [about becoming a C Corp],” said O’Brien. “We have thought about it from time to time. It is not on my radar, but may be something we should consider.”

A GROWING C-STORE FOOTPRINT 

Although the company’s primary business is travel centers operating under the TravelCenters of America, TA and Petro Stopping Centers brand names, the Westlake-based company is pleased with the 31 Minit Mart convenience stores it acquired in late 2013, which are significantly adding to the bottom line.

TA will continue to look at opportunities in the c-store space, according to O’Brien. In fact, the company purchased 26 c-stores and gas stations on March 10, which are primarily located in Minnesota and Kentucky. Once closed, these c-stores will be converted to the Minit Mart brand name.

O’Brien also revealed TA is under contract to purchase an additional 19 c-stores in Missouri. He did not provide additional details about this transaction.

STRONG EARNINGS

TA’s overall fourth-quarter earnings were quite strong. For the quarter ended Dec. 31, the company achieved a net profit of $34.3 million, nearly triple the $12-million profit it made in the same quarter in 2013.

The CEO cited three reasons why TA’s earnings were so strong:

• Success of 65 acquisitions made since 2011, which have significantly added to its earnings;
• Gross fuel margins, which rose 65 percent year over year to $138.7 million in TA’s fourth quarter; and
• Internal growth projects, such as RoadSquad Connect heavy truck maintenance services and Reserve-It advanced truck parking reservations.

Non-fuel gross margins also showed excellent growth in TA’s fourth quarter, rising nearly 13 percent year over year to $218.2 million. Consumers with more money in their pockets due to lower gas prices specifically boosted the bottom line at TA’s quick-service restaurants, O’Brien relayed. Coffee sales were also strong.

Looking at 2015’s first quarter ending March 31, O’Brien, like many other CEOs in the c-store industry, acknowledged fuel margins will not match the level reached in 2014’s fourth quarter. However, he concluded he is “feeling pretty good” when comparing first-quarter fuel margins to the same period in 2014.