SAN ANTONIO -- Undercut by a downward spiral in the master limited partnership (MLP) markets, an under-pressure CST Brands Inc. is shifting course for now.
On Wednesday, the three-year-old retail spinoff of Valero Energy Corp. unveiled a sale-leaseback strategy to resuscitate underleveraged real-estate as part of an effort to assuage concerned shareholder activists who recently have criticized leadership for failing to improve company value.
Through the sale-leaseback venture, a vehicle that worked effectively for former fellow Texas retailer Susser Holdings Co., CST expects to generate greater liquidity, with plans to invest the new income into large-store ground-ups.
“The company expects the venture will substantially enhance its new-store return on investment from unleveraged returns of 15% to over 30%” within the next few years, CST said in a news release. By 2017, the operator of approximately 1,900 convenience stores expects revenue generated from sale-leasebacks to finance a growth strategy that includes 120 new builds over the next two years, and 350 new ground-ups over five years.
“While there is more work ahead to complete the transaction,” said CST’s CEO and president Kim Lubel, “we expect the real-estate venture to significantly lower CST’s cost of capital and provide an attractive financial platform to accelerate new store growth, help fund future acquisitions and potentially purchase existing real estate from CST and CrossAmerica Partners as well.”
The move comes as two shareholder groups have questioned CST’s operational game plan, and Wall Street has begun questioning how the retailer will stoke its languishing stock, especially when compared to other publicly-traded c-store chains, including Casey’s General Stores, Speedway and Alimentation Couche-Tard.
“The CST of today is certainly stronger than when it was under Valero,” Wells Fargo analyst Bonnie Herzog told CSP Daily News. “But there are additional steps we would like CST to take to win the confidence of Wall Street.
“Today’s announcement is another step in the right direction,” she added. “They have found a solution with their real-estate given what’s happen in the MLP world.”
MLP Freefall
For 2014 and much of 2015, CST could do no wrong in the eyes of both shareholders and c-store observers. While growth in its stock was mediocre, CST’s leadership team, led by Lubel, built a strong employee culture and made some headline-grabbing acquisitions.
Perhaps most important was its move last August to acquire the general partner of CrossAmerica, the former Lehigh Gas, a decision that enabled CST to tap the favorable tax advantages of an MLP.
While the MLP structure remains promising, the bloom is off the rose, crippled by depressed crude oil markets and macro-economic factors.
Through mid-October, MLPs, after a multi-year string of exorbitant returns, were in freefall as investors doubted the ability of MLPs to continue to pass on the bulk of earnings to shareholders. By end of 2015, MLPs were down 32.6% in a flat stock market.
But MLP fallout is not the only factor dogging CST. Over the past two months two stakeholders--Houston-based JCP Investment Management LLC and New York City-based Engine Capital LP--have raised concerns that CST’s overall retail platform is undervalued, that same-store sales are disappointing and that the company has failed to exercise a clear long-term strategy.
In response, CST’s leadership team has pointed to several positive initiatives, from store acquisitions to new builds to a recently unveiled branding strategy with new exterior and interior store colors and graphics.
Herzog of Wells Fargo, who still ranks CST as a "buy" stock, said that while the operator is making positive strides, the company has failed to articulate a clear strategy.
“It’s true that none of us have patience on Wall Street,” Herzog said. “But investors do appreciate a sound long-term strategy. And because CST’s story has been so convoluted and complicated … and because they have not been as transparent as the investment community would like to see, they have not won over the confidence and trust that they are seeking.
“I am still optimistic about CST, but they have to drive faster growth. Hopefully, this new structure will help accomplish this. But it’s the first of [additional] steps they’ll have to take.”
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.