The last couple of months have been an exciting time for TravelCenters of America LLC (TA). The 12/5/2018 sale of its standalone convenience centers raised $331 million. The proceeds from that sale of non-core assets have enabled TA to better focus on its travel center business. The sales proceeds are being put to work with the 1/17/2019 purchase of 20 of its leased travel center properties from Hospitality Properties Trust (HPT). These deals have substantially reduced the risk for the TravelCenters of America 8% Senior Notes (TANNZ) baby bonds. This article provides 10 reasons for income investors to consider TANNZ. The major risks are also highlighted.
What is TANNZ?
TANNZ is a par $25 unsecured debt issue maturing on 10/15/2030. It has an 8% coupon and interest is paid quarterly. At a recent price of $24.44, TANNNZ is now trading at a cash yield of 8.2% and a yield to maturity (calculated from my Panick High Yield Report Excel model) of 8.4%. See prospectus for additional details. TANNZ is currently callable at par, but call risk is not a concern with the issue trading below par. TANNZ is a smaller issue with only $100 million par value outstanding. The average daily trading volume is about 8K shares. Limit orders and patience are recommended when trading. Note that bond owners never receive a K-1. Bond interest is never considered a qualified dividend for tax purposes.
How does TANNZ compare to TANNI and TANNL?
TravelCenters of America 8.25% Senior Notes (TANNI), TravelCenters of America 8% Senior Notes (TANNL), and TANNZ are very similar baby bonds. They are all unsecured debt issues with equal seniority. All are currently callable at par $25. The coupons and maturities vary slightly. TANNI has an 8.25% coupon and matures on 1/15/2028. There is currently $110 million par value of TANNI outstanding. See prospectus for additional details. TANNL has an 8.0% coupon and matures on 12/15/2029. There is currently $120 million par value of TANNI outstanding. See prospectus for additional details.
1. Strong liquidly
Liquidity is always an important consideration for income investors. TA reported Q3 2018 cash of $86 million. Including the completion of the property purchases that are now in progress, TA will own 52 unencumbered travel center properties with a book value of $568 million. This is detailed on page #5 of the 1/17/2019 investor presentation. TA has plenty of access to capital if needed. They could easily use these 52 properties to obtain secured loans of over $400 million if desired.
2. Solid 3.8x interest coverage
As noted on page #5 of the 1/17/2019 investor presentation:
Pro forma for this transaction, TA's Adjusted EBITDA (1) increases from $71.0 million to $114.2 million for the 12 months ended September 30, 2018."
See AlsoPercentage Increase Calculator
Interest expense was $7.5 million for Q3 2018 or $30 million on an annualized basis. The interest coverage is, therefore, 114/30 = 3.8x.
3. Moderate 3.5x balance sheet leverage
As per page #5 of the 1/17/2019 investor presentation, pro forma balance sheet leverage has been reduced to only 3.5X
Pro forma for this transaction, TA's Total Debt to Adjusted EBITDA ratio (1) improves from 6.8x to 3.5x for the 12 months ended September 30, 2018."
4. Property values alone provide 2.4x asset coverage for the debt.
As noted in item #1, TA will own 52 unencumbered travel center properties with a book value of $568 million. This property value alone is enough to easily cover the $320 million of longer-term debt. Note that the actual property value is likely to be substantially higher than the book value. 20 travel center properties were just purchased for $308.2 million in the 1/17/2019 acquisition. This purchase values travel center properties at about $15 million each. This implies a fair market value of approximately $780 million for the 52 unencumbered travel center properties. (Property Value)/(long-term debt) is, therefore, 780/320 = 2.4x.
The above calculation does not even include the substantial value of the business itself excluding the real estate owned. TANNZ, TANNL, and TANNI are clearly well covered by assets.
5. Stable and recession-resistant business model
While few businesses are completely recession proof, travel centers are a recession-resistant business. Travel centers cater to the trucking industry. Many basic necessities such as food, fuel, and other consumables are transported by trucks. The barriers to entry are high for the travel center business. A large plot of strategically located (near a major highway exit) land is required to build a travel center.
6. Established national brands
TA has leading nationally known brands with Travel Center locations in 43 states and Canada. TA is the largest publicly-traded travel center play. They provide a wide range of services for truckers including low cost fuel, parking, restaurants, convenience stores, and trucking repair services.
7. Moderate insider ownership
Directors and executive officers as a group own 1.5 million shares of TA representing a 3.8% stake in the company. This is detailed on page #47 of the proxy filing. It's always comforting for debt holders to see significant insider ownership of the more junior common stock.
8. All rental leases extend past the maturity of TANNZ
A per page #40 of the 3/16/2018 proxy statement, TA leases travel center properties from HPT through 5 leases. Those 5 leases were set to expire between 12/31/2029 and 6/30/2032. Each lease also has two renewal options of 15 years each (see footnote on page #40). The term of each lease was extended by an additional 3 years as part of the 1/17/2019 agreement with HPT. Therefore, none of the property leases will be up for renewal prior to the 10/15/2030 maturity of TANNZ.
This is an important consideration. TANNZ holders do not need to worry about base rental increases impacting the profitability of TA. Only minor increases in the rent are permitted when property improvements are made. The 1/16/2019 purchase agreement for $308.2 million with HPT also lowered annual rental payments by $43.1 million. In addition, the deferred rent owed to HPT was reduced from $150 million to $70.5 million. TA appears to have gotten a very good deal in this transaction.
9. The TA stock price has been rallying
TA stock has been rallied approximately 30% since the 1/17/2019 purchase agreement with HPT was announced. A surging common stock price is favorable for debt holders.
10. Some capital gain potential
At a recent price of $24.44, TANNZ is trading at a small discount to par $25. I follow many baby bonds at my Panick High Yield Report service. It's very hard to find good quality high yielding baby bonds such as TANNZ that trade at a discount to par. TANNZ closed above par as recently as 9/27/2018. I don't expect the current discounts for TANNI and TANNZ to last for long.
What are the major risks?
See page 20-34 of the 10-K annual report filed on 2/28/2018 for a detailed discussion of risk factors. I have highlighted a few of the major risk factors here. Travel stops catering to truckers are a recession-resistant business, but few businesses are completely recession proof. The US economy is currently booming, but some experts think we could be headed for a recession. TA sells a combination of high margin items such as truck repair services as well as low margin fuel. Quarterly results may vary due to fluctuations in fuel margins.
TA has significant potential conflicts of interest with related parties including HPT and RMR. Some TA senior executives including 2 Board members are also employed at HPT and The RMR Group Inc. (RMR). I believe that these conflicts of interest are less important for baby bond investors than for equity investors.
Conclusions
The TANNZ baby bond offers income investors an attractive 8.4% yield to maturity. TANNZ also trades at a slight discount to par and that discount may not last for long. The credit risk has been reduced by the sale of standalone convenience stores and recent purchase agreement for 20 travel center properties.
The Panick High Yield Report is focused on high-yield preferred stocks, baby bonds, bonds, REIT's, BDC issues and other undervalued, high-yield opportunities. Members receive an advance look at all my articles as well as continued coverage. Please read our outstanding subscriber reviews here. A 2-week free trial is now available. New members joining now will also receive a special 10% discount. The Panick Report is especially known for our very active and friendly chat board where almost 300 members ask questions and discuss high yield trading ideas as news breaks.
