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CrossAmerica Continues Efforts to ‘Dealerize’ Its Acquisitions

Income grows as distributor converts company-operated locations

ALLENTOWN, Pa. -- As it converts acquired company-operated stores to lessee-dealer locations, CrossAmerica Partners LP has seen gross rental income grow to a “sizable portion” of its revenues and is “on track to recognize over $80 million this year,” president Jeremy Bergeron said during the company’s second-quarter 2016 earnings call.

CrossAmerica, the general partner of which is a subsidiary of convenience-store retailer CST Brands Inc., San Antonio, controls more than 800 convenience stores and wholesale fuel sales of more than 1 billion gallons annually to nearly 1,200 locations.

In mid-July, it entered into an agreement to acquire certain assets of State Oil Co., Libertyville, Ill., for $45 million. The assets included 59 sites and fuel supply contracts to more than 80 locations in the Chicago market. State Oil was founded in 1947 and has become one of the largest fuel distributors in Illinois, supplying more than 60 million gallons per year.

“The State Oil acquisition allows us to expand our strong relationship with several suppliers in the Midwest market,” Bergeron said. “We expect to close on this transaction later in the third quarter. This is a great acquisition for us because it is one that we can execute and efficiently fold into our existing wholesale operations.”

“By effectively managing our balance sheet and valuable embedded real estate, we believe we can continue to take advantage of acquisition opportunities at attractive multiples to grow in an accretive disciplined fashion,” he continued. “The State Oil transaction does just that, as does the Holiday store acquisition that we completed at the end of the first quarter.”

Bergeron said the 34 Holiday Stationstores contributed “positively” to the business in the second quarter, with strong fuel and inside-store sales.

“We also completed a milestone in the second quarter by completing the integration of the assets we acquired from PMI in 2014 by converting to dealers the last of our company-operated stores acquired in this transaction,” he said.

Bergeron said that in the past year and a half, CrossAmerica has been divesting and integrating those acquired assets to optimize its portfolio.

In May 2014, CrossAmerica (then called Lehigh Gas Partners), purchased PMI, which at the time operated two primary lines of business: convenience stores and petroleum products distribution. CrossAmerica divested PMI’s fuels transportation, residential heating oil and tank wagon commercial fuels businesses.

Company-operated store conversions to the lessee-dealer class of trade continues to be CrossAmerica’s post-acquisition strategy focus. So far this year, it has converted 70 sites, Bergeron said.

“We really have made a concerted effort starting earlier last year, absorbing the PMI assets, acquiring the One Stop chain last year as well as the Erickson oil chain and then the Holiday chain,” he said. “And we continue to make efforts to dealerize them. With the One Stop, which was in West Virginia, and the PMI assets that were in Virginia and West Virginia, we’ve completely dealerized those sites into lessee dealers, so we are getting the good, consistent dealer rent coming into the partnership, finding really good operators to run them inside the store, capturing a very strong wholesale margin there, and really have concentrated our focus in the Upper Midwest market.”

He concluded, “We still think there’s an opportunity to dealerize some more stores, and we look to continue to do that, but we are going to do that in a smart, diligent way. [Our] team is doing a great job of running those stores today. They are bringing in good cash flow for the partnership. But we are going to look for the right dealer, the right opportunity to bring them in to further consistently get those cash flows stabilized over long term.”

For the second-quarter 2016, CrossAmerica reported net income of $3.63 million, compared to net income of $28,000 for the same period in 2015.

CrossAmerica Partners, Allentown, Pa., is a wholesale distributor of motor fuels and owner and lessee of real estate used in the retail distribution of motor fuels. Its general partner, CrossAmerica GP LLC, is a wholly owned subsidiary of convenience-store retailer CST Brands Inc., San Antonio.  Formed in 2012, CrossAmerica is a distributor of branded and unbranded petroleum for motor vehicles in the United States and distributes fuel to more than 1,100 locations and owns or leases more than 800 sites with a geographic footprint covering 29 states.

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