Travelcenters of America (TA) - Spunoff from Hospitality Properties Trust (HPT)

Found an excellent post detailing the spinoff of Travelcenters of America (TA) from Hospitality Properties Trust (HPT). Unfortunately, I am already over a month late on this one and it has seen a tremendous surge from $28-29 to over $38 on Friday. Still worth watching, analyzing and potentially buying. I don't have time right now but I'll get back to this one. For now, check out the post link above.

Update

A reader posted a comment to this entry and I thought it deserved inclusion.

An excellent post?? It's an awful post. It doesn't detail the huge lease commitments to HPT (+$150MM/pa and rising)and fools you into thinking there's "no debt". It doesn't detail the onerous restrictions HPT placed on TA (like that HPT has to finance every deal and has right of first refusal everywhere), doesn't discuss all the insider conflicts, doesnt say what happens when the lease expires. And the low multiples referred to are not substantiated. There's no company guidance and limited historical info. Read the S1, it's impossible to conclude what normalized cash flow is without making stupid assupmtions, like basing multi year forecasts on one nine month period. Stock is up from all the folks who read the blog and bought the stock without doing homework. I'm not short TA and am not even saying that it's necessarily a bad idea but I am saying that there's a lot more to the story including a lot of negative stuff and that it is not as cheap as Harper makes it out to be. Read Feb20 Wall Street Journal article "TravelCenters Aims to Please--Its Ex Owners" and of course read the S1--
http://www.financials.com/custom/cbig/filing.cfm?filingid=1382&csymbol=TA

This reader does have a point. I try to post references to all spinoffs I come across, good or bad, and if you've read my blog you'll know that I think most are bad. After having a chance to review (briefly) the situation I would have to agree that the initial writeup didn't cover all of the issues. Reviewing the S1, there are a number of issues, highlighted by the reader above, that do need to be addressed. Honestly, I just don't have time right now to really crunch all the numbers out but I have extracted some of the more relevant data from the S1. I highly recommend you go through the S1 yourself to reach a decisive conclusion.

From the S1.

We were formed for the benefit of Hospitality Trust and not for our own benefit. Our formation allows Hospitality Trust to acquire and retain ownership of 146 travel centers without adverse tax consequences to Hospitlity Trust. Because we were formed to benefit Hospitality Trust, some of our contractual relationships and the terms of our initial business operations may provide more benefits to Hospitality Trust than to us.

...

Our creation was, and our continuing business will be, subject to conflicts of interest, as follows:

•

Two of our directors were trustees of Hospitality Trust at the time we were created.



•

Upon completion of the spin off we will have five directors, one of whom, Mr. Barry Portnoy, also will be a trustee of Hospitality Trust and the majority owner of Reit Management, one of whom, Mr. Arthur G. Koumantzelis, is a former trustee of Hospitality Trust, and one of whom, Mr. Thomas O'Brien, is a former executive officer of Hospitality Trust.



•

Mr. O'Brien who will be active in our senior management activities is also an employee of Reit Management. Another Reit Management employee, John R. Hoadley, is our treasurer and will also be active in our senior management activities. Reit Management is the manager for Hospitality Trust and we will purchase various services from Reit Management pursuant to a management and shared services agreement.

These conflicts may have caused, and in the future may cause, adverse effects on our business, including:

•

Our lease with Hospitality Trust may be on terms less favorable to us than leases we could have entered as a result of arm's length negotiations.



•

The terms of our management and shared services agreement with Reit Management may be less favorable to us than we could have achieved on an arm's length basis; specifically, our payments to Reit Management of 0.6% of our fuel gross margin and 0.6% of our total non-fuel revenues for shared services, equal to $4.7 million on a pro forma basis for the nine months ended September 30, 2006, may be greater than if these services were purchased from third parties.



•

Future business dealings between us and Hospitality Trust, Reit Management and their affiliates may be on terms less favorable to us than we could achieve on an arm's length basis.



•

We may have to compete with Hospitality Trust, Reit Management and their affiliates for the time and attention of Messrs. Portnoy, O'Brien and Hoadley



...

Minimum Rent. The lease requires us to pay minimum rent to Hospitality Trust as follows:

Lease Year		Annual Rent (000s)			Per Month (000s)
1		$	153,500		$	12,792
2			157,000			13,083
3			161,000			13,417
4			165,000			13,750
5			170,000			14,167
Thereafter			175,000			14,583

In addition, minimum rents may increase if Hospitality Trust funds or reimburses the cost of renovations, improvements and equipment related to the leased travel centers as described below.

Improvements. Hospitality Trust has agreed to provide up to $25 million of funding annually for the first five years of the lease for certain specified improvements to the leased properties. This funding is cumulative, meaning if some portion of the $25 million is not spent in one year it may be drawn by us from Hospitality Trust in subsequent years; provided, however, the entire $125 million of funding must be drawn before December 31, 2015. All improvements will be owned by Hospitality Trust. There will be no adjustment in our minimum rent as these amounts are funded by Hospitality Trust.

...

Income from operations. Our predecessor generated income from operations of $74.3 million for the nine month period ended September 30, 2006, compared to income from operations of $77.2 million for the same period in 2005. This decrease of $2.9 million, or 3.8%, as compared to the 2005 period was primarily the result of the $11.9 million increase in share based compensation expense in the 2006 period. The effect of increased share based compensation expense was somewhat offset by the $4.4 million expense reduction related to claims settlements and the increased gross profit that resulted from increased fuel and non-fuel sales volumes and fuel margins per gallon.