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TA: Integration Key to Competitive Advantage

Truckstop CEO minimizes sale-leasebacks, nixes repair spinoff; talks acquisition strategy

WESTLAKE, Ohio -- During the truckstop company's fourth-quarter 2014 earnings call, TravelCenters of America LLC (TA) CEO Thomas M. O'Brien put off any talk of sale-leasebacks or the spinoff of its truck-repair business. But he did shed some light on an industry-specific perspective on acquisitions.

TravelCenters of America TA Thomas O'Brien (CSP Daily news / Convenience Stores / Gas Stations)

Responding to an analyst's question about TA shareholder RDG Capital Fund Management's February letter to the TA board recommending those actions, O'Brien said that in company's public disclosures and comments, "[We] have certainly characterized our own real estate as a potential source of liquidity," pointing to the "increasing operating results at those facilities. … Frankly, I think that's a wellspring of shareholder value creation, and so we regularly think about sale-leasebacks when that may be appropriate option for the company."

Regarding the truck-repair business, he said, "My view has been--and has been for a long time--that the best way for us to attract and retain customers and grow not just the size, but the depths of those customer relationships … is the way that we're doing it. I've talked about our integrated or full-service offering as a competitive advantage. … I think there's probably some pretty big risks that would stem from making our offer any less integrated than it is today."

Saying that TA's acquisition "pipeline is reasonably full," O'Brien also offered some unique insights in how a truckstop chain looks at acquisitions compared to a convenience-store chain.

"We look for the best combination of available opportunities," he said. "If you have in mind the thing you want to buy before you identify it, you are going to spend a lot of time looking for that. If instead you work to develop opportunities in a larger space, you see also the combination of c-stores and truckstops and are open to thinking about them and as your head in on straight and you are thinking about them correctly, you'll develop the best or the optimal combination of growth opportunities."

He continued, "We've always kept a pretty good pipeline of potential internal growth acquisitions. And so … capitalizing on opportunities is not a new thing for us because now maybe we are more interested in c-stores than we were three years ago."

But TA isn't looking at network-building the same way most convenience-store chains do.

O'Brien said that while most companies in the convenience-store space seek a "geographic synergy that you get from not having 36 c-stores in 36 states, the truckstop chain's approach to geography is that its market revolves around not one central point, but "the interstate highway system, which is laid out in more or less straight lines across almost every state has at least two going North-South and two going East-West. So, we have to be everywhere, and I think that may afford us the opportunity to cast a wider net than some of those that are in the c-store space that are regional based, because generally speaking, we've got feet on the ground all over the place. And so, maybe that allows us to work on creating opportunities."

During fourth-quarter 2014, TA acquired one travel center for $3.1 million. During 2014, TA purchased four travel centers for $28.7 million and made capital investments of $169.8 million, including $26.8 million to improve locations TA purchased since the beginning of 2011. As of Dec. 31, 2014, TA had entered agreements to acquire two additional travel centers, 26 convenience stores and a quick-service restaurant (QSR) for an aggregate of $41.4 million. During 2015 to date, TA has entered agreements to acquire a parcel of vacant land, a travel center that it previously leased and 19 gas stations and convenience stores for an aggregate of $36.3 million. Since Jan. 1, 2015, TA has completed the purchase of the parcel of land, the two travel centers and the 26 gas stations and c-stores for an aggregate of $47.1 million.

Results for the 65 locations TA has acquired during 2011 through 2014 continued to improve as the capital improvements at those locations were completed and their operations continued to mature. Capital improvements to recently purchased travel centers are often substantial and require a long period of time to plan, design, permit and complete, and once improvements are completed the improved travel centers require a period of time to produce stabilized financial results. TA estimates that the travel centers it acquires generally will reach stabilization in approximately the third year after acquisition, but actual results can vary widely from this estimate due to many factors, some of which are outside TA's control.

For quarterly financials, TA's net income for fourth-quarter 2014 was $34.3 million, a $22.4 million increase over net income for the fourth-quarter 2013 of $12 million. The increase in net income for the 2014 period reflected increased fuel gross margins at comparable sites and improvements in the results of recently acquired sites.

As of Dec. 31, 2014, Westlake, Ohio-based TravelCenters of America's business included 250 travel centers in 43 states and in Canada, 174 of which were operated under the TravelCenters of America or TA brand names and 76 of which were operated under the Petro brand name. And also as of Dec. 31, 2014, TA operated 34 convenience stores with retail gas stations, primarily under the Minit Mart brand name.

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