TravelCenters Makes $397M Sale-Leaseback Deal
WESTLAKE, Ohio — TravelCenters of America LLC (TA) inked a deal with Hospitality Properties Trust (HPT) for sale leasebacks of 30 of its travel centers for approximately $397 million.
Under the agreement, TA will also purchase five travel centers it currently leases from Hospitality Properties Trust for about $45 million.
The announcement appears to be a change of heart for TA. On March 13, CEO Thomas O'Brien stated during the company's 2014 fiscal fourth-quarter earnings call that he had looked into the possibility of sale leasebacks often, but no move was imminent. O'Brien was responding to a late February letter issued to the company by RDG Capital Fund Management, a TA shareholder that advised the travel center operator to conduct sale leasebacks, as well as spin off its vehicle repair business, to boost its stock price.
In the letter, RDG estimated the sale leasebacks could be worth up to $400 million, which certainly proved to be accurate.
Despite O'Brien's March comments, on Monday he noted sale leasebacks are a great move for TA for five reasons:
1. TA expects to receive net cash proceeds (before transaction costs) of approximately $352 million. These proceeds are expected to be used to fund TA’s ongoing expansion program.
2. A significant part of the gains to be realized from these transactions will result from sales of travel centers that were developed, or acquired and redeveloped, by TA. TA believes the gains it expects to realize upon completion of these sales evidence the successes of TA’s expansion program. Under generally accepted accounting principles, these gains will be amortized as a reduction of rent expense during the lease terms for the leased sites.
3. Five of the travel centers to be sold to Hospitality Properties Trust and leased back by TA are currently being developed by TA at an estimated cost of up to approximately $118 million. By obtaining a forward commitment for TA’s cost of development, the risk sometimes associated with so-called “greenfield development” is partially mitigated. Although TA will not realize gains from the sale of these new development sites, the rent for these sites will be set based upon the cost of development rather than the possibly higher values of these five sites after they are built and their financial results are stabilized.
4. TA was able to arrange a closing schedule for the sales of the existing 25 locations being sold to Hospitality Properties Trust to match expected property purchases by TA. As a result, TA expects most or all of the gains it realizes upon these sales will qualify for “like kind exchange” tax deferred treatment.
5. The restructuring of TA’s current leases in connection with these transactions has several additional benefits. TA’s historical lease with Hospitality Properties Trust for 144 travel centers was scheduled to expire in 2022 with no contractual renewal options. This lease will be expanded and subdivided into four approximately equal-sized leases expiring in 2026, 2028, 2029 and 2030, respectively, and each of these four leases will include contractual renewal options for up to 30 additional years. TA’s obligation to pay Hospitality Properties Trust approximately $107 million of previously deferred rent that was due in 2022 has been subdivided and extended to the new lease maturity dates between 2026 and 2030. Also, the terms of TA’s lease with Hospitality Properties Trust for 40 Petro-branded sites that expires in 2024 with 30 years of contractual extension options remain materially unchanged.
“The agreements announced [late Monday] represent the results of a lot of hard work that TA and HPT began to conceptualize almost one year ago. I believe they represent clear wins for both companies. I also believe these agreements are strong evidence of TA’s success in creating value by buying and redeveloping travel centers," said O'Brien.
Hospitality Properties Trust is TA's largest shareholder, currently owning 8.9 percent of TA's outstanding shares.
Westlake-based TravelCenters of America operates 251 travel centers in 43 states. It also operates convenience stores and gasoline stations under the Minit Mart brand name.