Description

TravelCenters of America (“TA”): $13.00

Investment Memo
March 2, 2020

Investment Thesis

We believe that TravelCenter of America (“TA”) is a buy at $12/share or 2.3x 2020E EBITDA because the company’s new CEO is proven executive who has promised to meaningfully change the cost structure of the business, fuel gross margins should be higher over the next few years due to the reinstatement of the biodiesel tax credits and an improved balance sheet due to the ~$70MM of cash the Company will receive from the US Government.

Potential Returns

At a 5x multiple on 2020E EBITDA (the three publicly traded gas station companies trade for an average of 9.5x 2020E EBITDA) , TA could trade to $55 per share or an increase of ~300%

Company Overview

TA operates 232 travel centers (truck stops) and franchisees operated an additional 29 travel centers in 44 states in the US and Canada. The travel centers provide fueling services, truck repair and maintenance services, restaurants (both full-service & QSR) and various customer amenities. Of the non-fuel revenue, 41% of it comes from store/retail, 36% comes from truck service and 23% comes from restaurant.

There are ~6,000 truck stops in the US but only 3 national players, Pilot Flying J, Love’s and TA. 

Investment Highlights

• Jon Pertchik was hired as the new CEO in December 2019. Jon joined TA from InTown Suites where he doubled EBITDA and had prior roles under companies owned by Starwood Capital, TPG and Carl Icahn, among others. One of the largest criticisms of TA’s prior management was lack of cost discipline, particularly regarding SG&A overhead. During our initial conversations with Jon, he has stated that TA represents one of the most compelling opportunities of his career. We believe that his solid track record, focus on organizational structure, costs, and capital management are all crucial attributes to his potential success at TA. We believe that by mid-2020 Jon will announce a meaningful cost-savings program (for the purposes of our model we assume $10MM in SG&A savings but believe the number could be higher).

• When the US government finalized its 2020 budget, a credit for distributing biodiesel became retroactively effective and remain effective through 2023. We will get to the impact of the retroactive reinstatement later, but it is very meaningful to the earnings power of the business going forward. Since the end of 2016, the US government had let the tax credit expire and then had retroactively reinstated (for 2018 it took two years). Prior to 2017 the credit had a positive impact on TA’s fuel margin. To put it in perspective, TA’s fuel margin per gallon in 2017 - 2019 averaged $0.16. Meanwhile in 2015/2016 when the fuel credit was in effect, TA’s fuel margin per gallon averaged $0.19. As you can see from the table below, even a $0.01 increase in fuel margin per gallon has a meaningful impact on TA’s earning power.

• Improved Balance Sheet: As discussed above, the US government retroactively reinstated the biodiesel tax credit for 2018 and 2019. The result of the reinstatement means that the government will send $72 million in cash to TA during 2020. This is equal to 70% of the company’s current market cap or approximately $8.90 / share. The cash will come into the company throughout 2020 and is expected to be fully paid by Q4. 

Potential Additional Upside

• TA has committed to opening 20 IHOP restaurants at their truck in 2020 with an additional 74 options to open more IHOPs in the following years. The IHOPs will replace TA’s existing private label brands. Management thinks that the conversion will be both a driver of increased traffic (from both truckers and cars) but also ticket size/attachment. The Company is targeting 20% returns on the $1.1MM investment for a new IHOP. TA has opened one IHOP in a truck stop outside of Atlanta in the middle of the 4th quarter and the early results suggests that the return on investment is at least in-line with the 20% target and could easily exceed the goal. If TA opens all 94 IHOPs and the returns are in-line with targets, the IHOP transaction could generate an additional $21MM of EBITDA or a 22% vs. 2019 EBITDA.

• Further growth in the franchise business: Starting in 2019, TA’s management decided to re-emphasize their franchise efforts. During the year, TA signed 12 new franchise agreements. Four opened in 2019 and the remaining 8 will open throughout 2020. On the fourth quarter call, the Company announced that it was actively negotiating with an additional 11 travel centers, in late state discussion with another 5 and have another 130 in various phases of application and diligence process. For TA, the benefits are obvious, they get to grow their network without having to put any capital into the ground and earn a franchise fee of $250,000. For the franchisee, the benefit is that most of the large fleets can only buy their fuel from one of the big 3 truck stop companies (Pilot, Love’s and TA). By joining the TA network, they are giving up some economics but they gain traffic that they previously had no access to. 

• Opportunity to potentially lower its cost of capital: Of the 232 travel centers that TA operates, they own 51 properties. In January 2020, the Company took out a $17MM mortgage loan secured by a travel center in Rhode Island. The book value of the property was $10MM vs. an appraised value of $25MM. Following the transaction, TA had another 50 travel center locations that are unencumbered by debt and had an aggregate book value of $523MM. Additionally, the loan had an interest rate of 3.85% which is well below the double digit lease rate TA currently pays their lessor, SVC. While not an immediate priority, we could foresee a situation where TA monetizes the rest of its owned assets at this lower interest rate and tries to buy back more properties from SVC. In early 2019, TA used the proceeds from the sale of their convenience store business to buy back 20 locations from SVC for $308MM which resulted in $43MM of lease expense savings. 

Risks

• TA’s business is almost entirely tied to U.S GDP and U.S trucking volumes. If the country enters a recession, trucking will slow and TA will see lower traffic and given the high degree of operational and financial leverage, TA’s earnings will suffer in a downturn.

• TA has some onerous related party / governance issues. The most glaring issue is that the Company currently pays $15MM to the RMR Group, a publicly-traded company that manages a number of REITs (including TA’s largest lessor, SVC). It is unclear what value TA is receiving for this payment and TA is able to buyout the agreement with RMR for 2.5x the trailing 12 months payment. However, in our conversations with the TA management they have been reticent to pull the plug. We think the reason for the lack of action on this front is that RMR effectively controls the TA board. In addition, TA has a rule that no shareholder can own more than 5% of the Company and with the current market cap of $100MM, there might not be many funds who want to do the work in order to take a position.

Catalyst

Q1 earnings call when the new management makes announcement re: cost cuts / you can see the improved fuel gross margins