A number of factors weighed in to leave TA with a net loss of $1.6 million at the close of the fourth quarter 2015.
TravelCenters of America LLC (TA) has announced financial results for the three months and the year ended Dec. 31, 2015. The results show that an increase in expenses and a decrease in gross fuel margin, despite an increase in fuel sales volume and nonfuel revenues, left the company to experience a net loss at the quarter’s end.
The company has taken on a number of new projects in a short period of time, but it is expected that growth is on the horizon and the company is confident that it will remain one of the country’s top industry operators.
Fourth Quarter 2015 Business Commentary
Fuel sales volume increased 45.3 million gallons, or 9.1%, compared to the 2014 fourth quarter: a 50.5 million gallon increase from sites acquired since the beginning of the 2014 fourth quarter, offset by a 5.2 million gallon decrease in same site volume. Fuel revenue declined by $429.8 million, or 32.4%, due to significantly lower market prices for fuel compared to the 2014 fourth quarter.
Fuel gross margin declined $35.4 million, or $0.088 per gallon, to $103.3 million, or 19 cents per gallon, primarily due to a favorable purchasing environment in the 2014 fourth quarter that did not recur in 2015.
During both 2015 and 2014, TA purchased fuel under certain agreements which provided that TA would share in the economic benefit of a federal program that provides fuel tax credits to blenders of certain renewable fuels, only if such program were to be approved by the U.S. federal government. This program was approved, and retroactively applied, in December of each 2015 and 2014. As a result, TA recognized benefits in fuel gross margin of $8 million, or $0.015 per gallon, in the 2015 fourth quarter and $6.9 million, or $0.014 per gallon, in the 2014 fourth quarter. The 2015 government approval also included a prospective approval of this credit to Dec. 31, 2016, and as such, TA currently expects to recognize similar benefits during the year 2016, rather than solely in the fourth quarter as has occurred in 2014 and 2015.
Nonfuel revenue for the 2015 fourth quarter increased $55 million, or 13.8%, compared to the 2014 fourth quarter: approximately 25% of this increase, or $13.6 million, was due to an increase in same site revenue and approximately 75%, or $41.4 million, was due to sites acquired since the beginning of the 2014 fourth quarter.
Nonfuel gross margin for the 2015 fourth quarter increased by $22.4 million, or 10.3%, compared to the 2014 fourth quarter: approximately 50%, or $10.8 million, was due to an increase in same site nonfuel gross margin and approximately 50%, or $11.6 million, was due to sites acquired since the beginning of the 2014 fourth quarter.
Nonfuel gross margin as a percentage of nonfuel revenue for the 2015 fourth quarter was 53.2%, a 1.8 percentage point decline compared to the 2014 fourth quarter. This decline is principally attributed to the inclusion of additional standalone convenience stores in the 2015 period, because nonfuel gross margin percentage in TA’s store operations is typically lower than the nonfuel gross margin percentage for TA’s truck service and restaurant operations; store revenue in the 2015 fourth quarter represented 38.5% of total nonfuel revenue versus 33.8% in the 2014 fourth quarter.
Site level operating expenses increased $24.9 million, or 12.2%, compared to the 2014 fourth quarter: approximately 25% of this increase, or $6.3 million, was due to an increase in same site expenses, and approximately 75%, or $18.6 million, was due to sites acquired since the beginning of the 2014 fourth quarter.
Selling, general and administrative expense increased $6.3 million, or 22.6%, compared to the 2014 fourth quarter, principally as a result of expenses related to accounting, finance and operational staffing increases primarily associated with TA’s acquisition activities which included the acquisition of three travel centers and 170 convenience stores during 2015.
Real estate rent expense increased $7.2 million, or 13.1%, compared to the 2014 fourth quarter, principally as the result of a $397.4 million sale leaseback transaction announced in the 2015 second quarter, of which TA had completed $279.4 million of sales prior to Dec. 31, 2015, as well as rent expense related to $99.9 million of purchases of improvements by Hospitality Properties Trust (HPT) at leased properties during 2015 as part of TA’s ongoing capital improvement program.
Interest expense increased $1.6 million principally as a result of TA’s issuance in October 2015 of $100 million of bonds due in 2030, offset by a $0.9 million decline in interest expense associated with the sale leaseback transaction described above, which resulted in the qualification as operating leases of certain leased properties that previously were accounted for as financing leases.
Adjusted EBITDAR for the 2015 fourth quarter decreased by $46.2 million, or 35.7%, compared to the 2014 fourth quarter primarily due to the decrease in fuel gross margin, as described above.
Net loss for the 2015 fourth quarter was $1.6 million, or four cents per common share, compared to net income of $34.3 million, or 91 cents per common share, for the 2014 fourth quarter. The change in net income is primarily due to the decrease in fuel gross margin and increases in expenses as noted above, partially offset by an increase in nonfuel gross margin.
Revenues for TA’s travel center segment for the 2015 fourth quarter decreased by $487.2 million, or 29.2%, compared to the 2014 fourth quarter, due to decreases in fuel revenues as a result of lower market prices for fuel despite an increase in fuel sales volume. These decreases were partially offset by increases in nonfuel revenues as a result of sites acquired since the beginning of the 2014 fourth quarter and a 3.3% increase in nonfuel revenues on a same site basis.
Site level gross margin in excess of site level operating expenses for TA’s travel center segment for the 2015 fourth quarter decreased by $42.2 million, or 27.3%, compared to the 2014 fourth quarter. This decrease is in part from same site results, which included a $45.4 million decline in fuel gross margin largely as a result of the favorable purchasing and retail pricing environment in 2014 that did not recur in 2015, partially offset by $10 million, or 4.7%, increase in nonfuel gross margin which outpaced a $7.1 million, or 3.6%, increase in site level operating expenses. The same site decrease was partially offset by increases from sites acquired since the beginning of the 2014 fourth quarter.
Revenues for TA’s convenience store segment for the 2015 fourth quarter increased by $108.3 million, or 261.3%, compared to the 2014 fourth quarter, due to increases in fuel sales volume as a result of sites acquired during 2015, partially offset by decreases in market prices for fuel. Revenues also increased as a result of increased nonfuel revenues primarily due to the sites acquired during 2015.
Site level gross margin in excess of site level operating expenses for TA’s convenience store segment for the 2015 fourth quarter increased by $3.7 million, or 352%, compared to the 2014 fourth quarter: of this increase, $2 million is from same site results, which included a $0.3 million increase in fuel gross margin, a $0.8 million, or 15.2%, increase in nonfuel gross margin and a $0.9 million, or 14.1%, decrease in site level operating expenses. The remaining $1.7 million increase is from sites acquired during 2015.
“The 2015 fourth quarter represented a period of significant activity for TA. Our acquisition of 20 convenience stores, as well as the high level of activity related to the ramp up of these and over 150 other recently acquired locations, are part of a longer-term goal to balance our fuel business between diesel fuel, which principally relies on business demand, and gasoline, which principally relies on consumer demand,” said Thomas O’Brien, TA’s CEO. “Already, during the 2015 fourth quarter, gasoline represented 22.7% of our total fuel sales by volume, up from 16.2% during the full year 2014.
“The most important area of focus for TA during 2016, is expected to be for us to continue to ramp up the financial results of newly acquired locations,” O’Brien added. “As of March 14, 2016, nearly all of the standalone convenience stores we owned as of Dec. 31, 2015, and the travel stores at 25 of our travel centers have been updated to include all brand standard Minit Mart signage and marks and the addition of our private label coffee and other programs. We have also completed our review of gasoline branding at all of the standalone convenience stores (204 as of Dec. 31, 2015) and, as of March 14, 2016, gasoline brand conversions at 83 of these sites and our updating of gasoline brand elements, such as new dispensers and signage designs, at 109 of these sites have been completed. We look forward to realizing the value created by these and other activities during 2016.
“At the same time, we remain committed to maintaining our position as the leader in the travel center industry from the perspective of professional drivers, fleets and consumers. In the 2015 fourth quarter, our RoadSquad Connect, RoadSquad Onsite, Reserve-It! parking and diesel exhaust fluid programs all contributed to the increase in our travel center segment’s same site nonfuel gross margin.
“While we have taken on a lot of activity in a relatively short period of time, I remain confident that we have the personnel, financial, branding and other resources required to successfully execute all of it, to achieve a ramp up of financial results from recently acquired locations and to continue to capitalize on our marketing and branding initiatives, while we retain the capacity to take on new potential acquisitions,” O’Brien said.
Acquisition and Development Activity
TA’s 2015 fourth quarter activities included the acquisition of 20 standalone convenience stores in three separate transactions for an aggregate purchase price of $52.3 million, as well as $26.9 million of investments to improve recently acquired locations.
Since its acquisition program began in 2011, and through year end 2015, TA has acquired 37 travel centers and 201 standalone convenience stores. As of Dec. 31, 2015, TA’s investments in the 37 travel centers and 201 standalone convenience stores acquired totaled $320.9 million and $388.3 million, respectively. TA estimates that it will invest an additional $24.6 million to complete the expansion and renovation of certain of these travel centers and $19 million to complete the rebranding, expansion and improvements of certain of these convenience stores.
As of Dec. 31, 2015, TA had agreed to purchase an additional 24 convenience stores for purchase prices aggregating $32.8 million, and expects to invest an additional $4.7 million to rebrand, and at some locations, expand and improve them. Since Dec. 31, 2015, TA has completed the acquisition of seven of these locations, in Illinois and Missouri, for an aggregate of $13.9 million and has entered new agreements to acquire an additional 16 convenience stores in Wisconsin and Illinois for $23.3 million; TA expects to invest an additional $3.8 million in these 16 locations to rebrand, renovate and or expand them. TA also has an agreement to acquire certain assets of Quaker Steak & Lube (QSL) restaurant business, including the brand, all of its owned and leased properties and its franchise agreements for $25 million. Currently, there are 53 QSL locations in 16 states. TA expects to complete these pending acquisitions during 2016; but these purchases are subject to conditions and may not occur, may be delayed or the terms may change.
Capital improvements to recently purchased travel centers are often substantial and require a long period of time to plan, design, permit and complete; and, after being completed, the improved travel centers require a period of time to become part of TA’s customers’ supply networks and produce stabilized financial results. TA estimates that the travel centers it acquires generally will reach stabilization in approximately the third year after acquisition. Capital improvements to recently acquired standalone convenience stores are typically less capital intensive than travel centers and therefore, the convenience stores TA acquires generally reach stabilization in approximately one year after acquisition. Actual results for both travel centers and convenience stores can vary widely from these estimates due to many factors, some of which are outside TA’s control.
As of Dec. 31, 2015, TA had begun construction of four travel centers and has plans to develop an additional travel center. These five development properties, which TA expects to sell to and lease back from HPT upon their completion, are on land parcels TA owns. Through Dec. 31, 2015, TA has invested $55.5 million (including land costs) in these five travel center sites. TA estimates that the remaining development and equipment costs of these five travel centers as of Dec. 31, 2015, was $57.7 million. Since Dec. 31, 2015, TA completed the construction of one of these travel centers and expects to complete its sale to HPT during the first quarter of 2016. TA currently expects development of two of these travel centers to be completed during the first half of 2016 and development of the other two travel centers to be completed during the second half of 2016 or first half of 2017.
On Monday, March 14, 2016, at 10 a.m. Eastern Time, TA hosted a conference call to discuss its financial results and other activities for the three months ended Dec. 31, 2015. Following management’s remarks, there was be a question and answer period.
A replay of the conference call will be available for about a week after the call. To hear the replay, dial 412-317-0088. The replay pass code is 10079066.
A live audio webcast of the conference call was also be available in a listen only mode on TA’s website at www.ta-petro.com. The archived webcast will be available for replay on TA’s website for about one week after the call. The transcription, recording and retransmission in any way of TA’s fourth quarter conference call is strictly prohibited without the prior written consent of TA.