Significantly lower market prices for fuel cause fuel revenue declines.
TravelCenters of America reported its second quarter financial results, including for the c-store segment where are up 161.4%, compared to the second quarter of 2015, due to gains in fuel sales volume from the 172 sites it has acquired in the past year.
“During the second quarter of 2016, our plans to offset any decline in diesel fuel sales due to improving truck engine efficiency and a modest recent decline in over the road freight volume with increasing gasoline sales at our growing convenience store business and to increase profits by growing our nonfuel businesses seemed to begin to show results,” said Thomas O’Brien, TA’s CEO. “I believe that many of our acquisitions are not yet performing to their full stabilized potential. I remain confident that the continued improvements in recently acquired sites and businesses, including our recent acquisition of Quaker Steak & Lube restaurants, will prove that our investments have been done at attractive multiples of operating earnings.”
Fuel revenue for the 2016 second quarter declined by $193.9 million, or 17.2%, primarily due to significantly lower market prices for fuel compared to the 2015 second quarter, partially offset by increases in the convenience store segment as a result of newly acquired sites.
Fuel sales volume increased 26.4 million gallons, or 4.9%, in the 2016 second quarter compared to the 2015 second quarter: a 55.5 million gallon increase from sites acquired since the beginning of the 2015 second quarter, offset by a 29.1 million gallon decrease in same site fuel sales volume.
Fuel gross margin increased $5.7 million, or $0.002 per gallon, to $102.0 million, or $0.182 per gallon, primarily due to managing fuel pricing to balance sales volume and profitability.
Nonfuel revenue for the 2016 second quarter increased $54.9 million, or 12.1%, compared to the 2015 second quarter: a $59.2 million increase due to sites acquired since the beginning of the 2015 second quarter, offset by a $4.3 million decrease in same site nonfuel revenue.
Nonfuel gross margin for the 2016 second quarter increased by $25.8 million, or 10.5%, compared to the 2015 second quarter: a $21.9 million increase due to sites acquired since the beginning of the 2015 second quarter and a $3.9 million increase due to an increase in same site nonfuel gross margin.
Nonfuel gross margin as a percentage of nonfuel revenue for the 2016 second quarter was 53.4%, a 0.8 percentage point decline compared to the 2015 second quarter. This decline was due to a change in sales mix as a result of the larger number of standalone convenience stores in the 2016 second quarter results. Nonfuel gross margin percentage in standalone convenience store operations is typically lower than the nonfuel gross margin percentage for travel center operations; standalone convenience store revenue represented 15.2% of total nonfuel revenue in the 2016 second quarter compared to 7.0% in the 2015 second quarter.
Site level operating expenses increased $21.8 million, or 9.8%, in the 2016 second quarter compared to the 2015 second quarter: a $24.1 million increase due to sites acquired since the beginning of the 2015 second quarter, offset by a $2.3 million decrease in same site, site level operating expenses.
Selling, general and administrative expenses increased $5.9 million, or 19.8%, in the 2016 second quarter compared to the 2015 second quarter, principally as a result of increased personnel costs, which resulted from increased staffing required to support the growth of TA’s business, as well as increased spending on marketing and promotional activities.
Real estate rent expense increased $11.4 million, or 21.4%, in the 2016 second quarter compared to the 2015 second quarter primarily due to increased rent resulting from TA’s 2015 and 2016 transactions with Hospitality Properties Trust, or HPT: $5.1 million of this increase was attributable to the sale leaseback transactions to HPT during 2015 and 2016 and $2.1 million was attributable to TA’s sale to, and leaseback from, HPT of improvements at leased sites since the beginning of 2015.
Interest expense, net, increased $1.7 million in the 2016 second quarter compared to the 2015 second quarter, primarily as a result of TA’s issuance in October 2015 of $100.0 million of 8.00% Senior Notes due in 2030.
Net income attributable to common shareholders for the 2016 second quarter was $3.5 million, or $0.09 per common share, compared to net income attributable to common shareholders of $3.8 million, or $0.10 per common share, for the 2015 second quarter. The change in net income attributable to common shareholders is primarily due to costs associated with recently acquired sites that have not yet reached their expected stabilized financial results. The higher expenses experienced during the 2016 second quarter were partially offset by increases in total gross margins in excess of site level operating expenses.
Travel Centers Segment
Revenues from TA’s travel center segment for the 2016 second quarter decreased by $270.4 million, or 18.1%, compared to the 2015 second quarter, principally due to lower market prices for fuel and decreases in fuel sales volume.
Site level gross margin in excess of site level operating expenses for the 2016 second quarter increased by $1.2 million, or 1.0%, compared to the 2015 second quarter: a $7.1 million increase in nonfuel gross margin, due to a favorable change in a mix of products and services sold, partially offset by a $5.2 million decrease in fuel gross margin and a $0.7 million increase in site level operating expenses.
Convenience Stores Segment
Revenues for the 2016 second quarter increased by $121.4 million, or 161.4%, compared to the 2015 second quarter, due to increases in fuel sales volume from 172 sites acquired since the beginning of the 2015 second quarter, partially offset by decreases in market prices for fuel and a 6.0% decrease in same site fuel sales volume due to retail pricing strategies to improve profits. Revenues also increased as a result of increased nonfuel revenues from sites acquired since the beginning of the 2015 second quarter.
Site level gross margin in excess of site level operating expenses for the 2016 second quarter increased by $7.2 million, or 210.4%, compared to the 2015 second quarter: $7.0 million of this increase is from sites acquired since the beginning of the 2015 second quarter and $0.2 million primarily from a same site increase in fuel gross margin.
Investment Activity
On June 22, 2016, TA entered a First Amendment to Transaction Agreement with HPT to, among other things, replace one of the development properties that TA had agreed to develop and then sell to, and lease back from, HPT with two existing travel centers owned by TA, and amend the Petro Lease to extend its term to 2032. On June 22, 2016, TA sold these two travel centers to HPT, for an aggregate of $23.9 million, and amended the TA Lease 1 and TA Lease 3 to add these properties. The minimum annual rent under the TA Lease 1 and TA Lease 3 increased by $1.1 million and $0.9 million, respectively, as a result of the completion of these sale and lease back transactions. The $11.8 million gain from the sale of these two properties was deferred and will be amortized on a straight line basis over the terms of the related leases as a reduction of rent expense.
On June 30, 2016, in connection with the Transaction Agreement, as amended, TA sold a development property to HPT for $22.3 million, and amended the TA Lease 2 to add this property. The minimum annual rent under the TA Lease 2 increased by $1.9 million as a result of the completion of this sale and lease back.
As of June 30, 2016, the sale and lease back of the two remaining development properties pursuant to the terms of the Transaction Agreement, as amended, is expected to be completed before June 30, 2017.
Acquisition and Development Activity
From the beginning of 2011, when TA began its acquisition program, to June 30, 2016, TA has invested $784.5 million to purchase and improve travel centers, standalone convenience stores and standalone restaurants. For the twelve months ended June 30, 2016, these investments have produced gross margin in excess of site level operating expenses of $79.3 million, or, on a sequential basis, $9.8 million, or 14.1%, greater than gross margin in excess of site level operating expenses for the twelve months ended March 31, 2016.
TA’s 2016 second quarter investment activities included the acquisition of five standalone convenience stores for $10.0 million and 50 standalone restaurants, 39 of which are operated by franchisees of TA, for an aggregate purchase price of $26.8 million, as well as $12.9 million of improvements made to these and other recently acquired locations.
As of June 30, 2016, TA had completed development of one travel center expected to be sold to and leased back from HPT during the third quarter of 2016, and had one other travel center under construction that is currently expected to be completed during the first quarter of 2017. As of June 30, 2016, TA had invested $27.0 million (including land costs) for these two development properties and estimates a remaining development cost of $18.1 million.
TA intends to continue to selectively acquire and develop additional locations and to otherwise expand its business.
