Travel Centers of America (Stock: TA) operates two ‘travel center’ brands, TA and Petro. Travel centers are also known as ‘truck stops’ that offer parking bays, fuelling lanes, food services and resting amenities. They currently operate 214 outlets under the Petro and TA brands and have another 33 run as franchises.
In 2007 Hospitality Property Trust (“HPT”) purchased TA for 1.9B and spun off the TA operations to their shareholders while still holding the real estate of the truck stops (“TA Lease”). On May 2007 HPT and TA purchased Petro on the same deal, such that HPT would lease the Petro (“Petro Lease”) real estate back to TA to operate. More on this to follow in the Corporate Structure section.
In 2008, Travel Centers of America also purchased 17 travel centers from Burns Bro Travel Stops and rebranded them as TA.
Since 2011 they have been on a spending spree and have spent approximately $217M to acquire and refurbish 26 stores. In Nov 2013 they signed a Securities Purchase Agreement with Girkin Developments LLC to purchase 31 convenience stores under the brand Minit Mart for approximately $67M. They are also in the last stages of purchasing two travel for approx. $11M and believe this to be finalized by 2014.
TA was profitable and on the rise in 2011 and 2012 but in 2013 they have started to slide again and the board believe it’s due to the volatility in the fuel prices early in 2013 and the adverse financial position and overall activity in the trucking industry. They believe this lack of activity to carry on going forward as the trucking industry is highly correlated with the US economy.
On Dec 11 2013, TA released notice that they are offering 6,500,000 shares at $9.25 to collect approximately $56.4M after costs on Dec 16, 2013. There is also 975,000 shares being offered as a one month delayed option to the underwriters for an additional 8.5M. They plan to use the proceeds to fund growth strategies and other general business purposes.
REIT Management & Research LLC (“RMR”) holds a business management and shared services agreement over TA. REIT also holds contracts to manage a number of other businesses, including Hospitality Property Trust and Affiliates Insurance Company.
Hospitality Property Trust (“HPT”) is the largest shareholder and leases 184 of the properties to TA through the ‘TA Lease’ and ‘Petro Lease’.
Affiliates Insurance Company (“AIC”) is owned by 8 businesses that hold 12.5% each including TA. The 7 other shareholders of AIC is are other interrelated companies all controlled by RMR. TA has invested 5.2M into AIC and the program is designed to improve their financial results by obtaining better coverage’s at lower costs.
Petrol Travel Plaza Holdings (“PTP”) is a joint venture between Tejon Development Corporation and TA that own 2 travel center locations. The split is 60/40 to Tejon Development Corp. but TA earns management fees for operating the businesses.
Risks associated with interrelated companies
- Conflict of interest between TA, AIC and HPT all being managed by RMR.
- Share Award plan for management as incentives, dilutes shares and potential conflict of interest being the board and management team
- The agreement with HPT is most worrying as the rental of the real estate is vital to the business and does favor HPT. The rental agreement is scaling and increases as revenue passes a certain threshold.
- The HPT leases outsource all liability to TA including the two franchised stores that are subleased.
- Petrol products and storage give rise to potential environmental costs such as a potential Environmental Contingent Liabilities of $6.2M in the future that is currently an ‘off the balance sheet’ item.
- The rental agreement with HPT restrict any shareholder to a maximum holding of 9.8% without prior consent. This restricts any potential takeover bid.
- TA received $150M value of rent deferred during 2010. The deferred rent is to be paid in two payment: $107,085M at the end of 2022 and $42,925M in July 2024. There is no interest expense on these figures.
- As per the deferred rental agreement no dividends are to be paid until the $150M has been paid off therefore no dividends for the foreseeable future.
- TA doesn’t have fuel storage systems in place therefore interruptions to supply or price spikes directly affect revenues. They do not hedge any of the exposure and hold no more than 3 days fuel supply at any site.
- Low margins on fuel, therefore declines in revenues and or increases in expenses hurt the bottom line.
- Most of the labor costs are fixed and flexibility in times of adverse conditions are poor.
- The trucking industry is taking measures to improve fuel efficiency and thus demand for diesel is decreasing.
- The travel centers need regular maintenance and capital expenditure to keep them functioning and up to date.
- They have 200M overdraft facility that ends in 2016. There is a potential that the banks do not extend this and thus potential shortage of funds. With sufficient collateral and lender participation they potentially have access to another 100M.
- PTP (joint venture between TA and Tejon Development Corporation) has approximately $18.1M in debt that is ‘off the balance sheet’ as it is in PTP accounts; they however have $17.2M recorded as assets. TA are not liable for the loan but if PTP runs into trouble the assets might be worth less.
There are approximately 6000 truck stops in America but TA believes there are only around 1900 that compete on similar services
There are two main competitors to TA, Love’s Truck Stops (“Love’s) whom have over 300 stores and Pilot Flying J (“Flying J”) that operates over 650. Both businesses are privately held and looking to expand rapidly with stores opening up throughout 2014.
According to Forbes the revenue of Flying J is approximately $29.23B and Love’s is approximately $22.04B. These figures are substantially higher than the approximate $8.0B TA achieved the last 4 quarters.
Since both TA’s major competitors are privately owned there is limited information regarding value and comparable ratios.
Using approximate revenues as per Forbes there is a substantial difference between TA and its competitors. TA stores (214) only include company owned and operated and thus does not include the franchise stores.
These outlets are on prime real estate beside state highways. Due to the sheer size of these the barriers to entry are quite high to compete on full service travel centers. TA owns 30 outlets outright including the land.
They hold an agreement with Daimler, the largest truck manufacture in USA, to provide warranty repairs at most locations. This is an exclusive deal until 2019.
The benefit of having the sister company hold the leases and being the largest shareholder it is in HPT’s best interest that TA becomes profitable.
- Franchise system can increase revenues without invested capital
- 1Million franchise fee
- Royalty fees between 2-4% on non-fuel revenue.
- Sublease – Currently 6 sites are being subleased to franchisees
- Earlier this year Pilot Flying J has taken some heat with truck companies due to discrepancies found in over 2400 accounts for fuel rebates. Pilot Flying J has offered a settlement of approximately 85M but there are a number of truck companies that are looking to reject this offer.
- The 30 stores they have acquired since 2011 are significantly underperforming, large part due to being new businesses. A majority of the purchases have gone through full refurbishments and have not had the time to establish themselves. Comparing their results to established stores there is substantial room for growth. Thomas O’Brien, CEO, estimates it takes 2-3 years to full establish a site.
- There is a deal with Shell to roll out 200 lanes of natural gas based in 100 different locations. They expect to open the first lane sometime in early 2014.
- TA is lacking in revenue compared to its competitors on a store on store basis. This was seen in more detail in the ‘Competitors Scene’ section and therefore if over time the differences were to converge to be more in line with its competitors that would increase profitability substantially.
The current Market Value is approximately $260M yet the book value of equity is $375M including $24M intangibles. The Price to tangible book value (P/TBV) is 0.74.
The liquidation value after adjustments made to the 30 Sept 2013 statements comes out to $7.02/share or $226M. These statements do not include the cash inflow from the share offering on December 16 or the potential purchase of Minit Mart.
|Cash, Cash Equivalents, Marketable Securities||126,862,000||100.00%|
|Other Current Assets||47,810,700||90.00%|
|Total Current Assets||499,675,200||94.81%|
|Property, Plant and Equipment||529,766,750||85.00%|
|Other Long Term Assets||31,116,600||90.00%|
Looking at TA’s balance sheet the first thing that you notice is the substantial amount of liabilities ($834M). This includes the $150M deferred rent and $110M senior notes.
In Jan 2013 they issued $110,000 of senior notes that are due 2028. The interest rate tied to these bonds were 8.5% suggesting TA possess significant credit risk.
The price to earnings figure is 15.2 suggesting the market is still optimistic about their future performance.
In my liquidation calculation I have chosen to discount Property, Plant and Equipment by 15%. This a tricky valuation since land normally appreciates but the fittings on the land depreciate through wear and tear. They hold prime real estate therefore one would imagine value to increase over time greater than the deprecation of its fittings but to be conservative and take into consideration ‘liquidation fees’ I have discounted it by 15%.
TA has dedicated significant amount of resources to purchase and renovate travel centers in the hopes that they will bear fruit in the future. Currently the new stores are lagging behind and this could possible carry on for the next couple of years or more. TA’s balance sheet is very poor with significant long term debt. In saying this I believe the growth prospects are high and at the right price this could be a good purchase.
However, the problems with TA go deeper than it’s financial status. The unwieldy management and ownership structure and deferred rent liabilities act as a drag on any meaningful improvement in the balance sheet. By our calculations if these liabilities were absent, the company as it is would be worth close to $3B in the market based on their improved cash flow. There is a case to be made for an activist investor to take over the company and recapitalize it. However, the management of HPT and the real estate funds that own these properties are not known for shareholder friendliness and have enacted numerous barriers to activist investors. In my opinion the stock needs to fall well below $7/share before giving the business further consideration and even then a lot depends on the progress on paying down the liabilities.