What Do You Do When an Investment Goes Bad?
By: Tim McPartland,
August 29, 2017
By Tim McPartland
We have had the unfortunate opportunity to answer the above question in the last few weeks with one of our baby bond holdings. The particular issue I refer to is the TravelCenters of America (NASDAQ: TA) 8% Senior Notes due 2029 (NASDAQ:TANNL), but it could have been TANNI or TANNZ, which are also TravelCenter baby bonds. TANNL and TANNZ have coupons of 8%, while TANNI has a coupon of 8.25%. The bonds have all fallen to the $17.50 area during the last couple of months, causing plenty of concern among holders.
TravelCenters is a company that owns full-service travel centers and convenience stores along the interstate highway system all through the United States. Currently it has 239 travel centers in 43 states and 233 convenience stores in 11 states. Additionally, it operates 50 standalone full-service restaurants. The company leases the majority of their travel centers from Hospitality Properties Trust (NYSE:HPT), which is a fairly large real estate investment trust (REIT).
HPT is the largest shareholder of TA, with holdings representing an 8.6% ownership. There have been debates for years over whether HPT is charging TA fair rent for their properties, but we are not going to review that issue here as we are not able to discern all the details on very complicated leases. HPT is managed by the RMR Group, which also provides management services to TA. Certainly, there is an incestuous relationship among the various companies, but we do not believe this is the current issue with the baby bonds.
To the end of searching for the problem, we have reviewed the most recent 10-q filing from TA and found nothing really new and different in the report. The company had net income of negative $3 million on sales of about $1.5 billion for the quarter, but it generated positive cash of $26 million. Total interest expense was $8 million and was all paid to baby bond holders, as baby bonds represent all of the company’s debt.
Now, comparing this to a year ago for the quarter ending 6/30/2016, the company had net income of $3 million and positive cash flow of $24 million on sales of $1.4 billion. TA had cash on hand on 6/30/2017 of $75 million, while a year ago it had $61 million. Shareholder equity fell from $553 million in 2016 to $523 million in 2017. These are not great numbers, but they are for the most part no worse in 2017 than in 2016 when the baby bonds were trading at $25.
Next, we have read read the entire quarterly conference call transcript from 8/8/2017, from just 3 weeks ago. There really was nothing negative in the call that was not already known.
TA does have a lawsuit against Fleetcor and Comdata, who handle credit for the company’s big trucking customers, and TA incurred an extra $5.3 million in expenses during the second quarter because of this lawsuit. The litigation was argued at trial during the second quarter, so some of those expenses will go away in the future, although if TravelCenters loses the lawsuit it will continue to incur incremental expenses of $1 million/month. If TA wins the lawsuit, that will reduce monthly expenses by this amount. Win or lose, the company will reduce expenses going forward.
The company has begun various cost cutting efforts, and management believes the results of these efforts will become more apparent in the current quarter. Of course, we never fully believe management, as they tend to “stretch the truth” from time to time.
Lastly, we reviewed an investor presentation from earlier in the year and found nothing unusual. We learned plenty more about the details of the company, though.
We should also note that Norm Roberts on Seeking Alpha wrote an article on the TA bonds and this may have added fuel to the fire. While Norm has been buying some of the baby bonds, there is plenty of negative sentiment on the TravelCenter common stock and financials in general.
Investors need to understand that in issues like the TA baby bonds, which generally trade with very thin volume, that selling begets more selling. Shares fall, investors panic and more of them sell and it goes on until reason and common sense prevail.
So, we have answered our question on this particular issue. We purchased more shares last week and while we informed a reader that we would not be buying more at this time, we have in fact purchased more in the last 2 days.
The facts remain. The company is cash positive and easily covers their interest payments. It is possible there is good news ahead, whether it be improved operating metrics or a possible positive outcome to the lawsuit with Comdata/Fleetcor. The company is a $5.5 to $6 billion company and we think that financials will improve from here, although simply staying cash positive is good enough for us.
We believe that with current prices in the $17.50 area and current yields in the 11% area, these shares present a great opportunity for us. As always, we don’t make recommendations to individuals, as only each investor knows their own financial position and ability to put funds at risk. We have certainly owned 3 or 4 clunkers over the years, but we think this one will turn out to be a winner for us.
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