Welcome to the CrossAmerica Partners Third Quarter 2020 Earnings Call. My name is Keisha, and I will be your operator for today's call. At this time all participants are in a listen only mode. Later we will conduct the question-and-answer session [Operator instructions]. Please note that this conference is being recorded.

I will now turn the call over to Jon Benfield. You may begin..

Thank you, operator. Good morning, and thank you for joining the CrossAmerica Partners Third Quarter 2020 Earnings Call. With me today are Charles Nifong, CEO and President and other members of our executive leadership team. I should point out that today's call will follow some presentation slides that we will utilize during this morning's event.

These slides are available as part of the webcast and are posted on the CrossAmerica Web site.

Before we begin, I would like to remind everyone that today's call, including the question-and-answer session, may include forward-looking statements regarding expected revenue, future plans, future operational metrics and opportunities and expectations of the organization.

There can be no assurance that management's expectations, beliefs and projections will be achieved or that actual results will not differ from expectations.

Please see CrossAmerica's filings with the Securities and Exchange Commission, including annual reports on Form 10-K and quarterly reports on Form 10-Q, for a discussion of important factors that could affect our actual results.

Forward-looking statements represent the judgment of CrossAmerica's management as of today's date, and the organization disclaims any intent or obligation to update any forward-looking statements. During today's call, we may also provide certain performance measures that do not conform to U.S. generally accepted accounting principles or GAAP.

We have provided schedules that reconcile these non-GAAP measures with our reported results on a GAAP basis as part of our earnings press release. Today's call is being webcast, and a recording of this conference call will be available on the CrossAmerica website for a period of 60 days. With that, I will now turn the call over to Charles..

Thank you, Jon. I appreciate everyone joining us this morning. As always, we thank you for your interest in the partnership and hope that you're all well. During today's call, I will briefly go through some of the operating highlights for the third quarter.

I will also provide some color on the continuing impacts from COVID-19, along with a few other updates, similar to what I provided in our first and second quarter earnings call. Jon will then review in more detail the financial results.

Before I begin going through the operating highlights, I wanted to note that we have announced the appointment of Eric Javidi as our Chief Financial Officer. Eric has an extensive amount of experience in the energy industry, most recently with Southcross Holdings in Houston.

Before joining Southcross Holdings, Eric was a Managing Director at Kayne Anderson Capital Advisors and in energy investment banking with several large institutions. With this announcement, Jon Benfield, who was interim CFO, has been appointed Chief Accounting Officer.

I want to welcome Eric to our team and also say thank you to Jon for his hard work during this challenging period of time. We are fortunate to have both of these talented individuals as part of our management team. Now if you turn to Slide 4, I will briefly review some of our results from the quarter.

For the third quarter of 2020, our wholesale fuel volume increased 26% when compared to the third quarter of 2019, largely due to the acquisitions and exchanges that were completed over the past months, offset by the impact of COVID-19.

We experienced a strong increase in overall volume for the quarter relative to last year and also saw a strong increase in our wholesale fuel margin per gallon year-over-year, driving our wholesale fuel gross profit up 47% for the quarter.

In terms of volume, given the changes in our business and asset mix, the overall volume comparison to prior quarters in our business and asset mix, the overall volume comparison to prior quarters is not particularly useful.

As I did in prior quarters, I will provide some color on same-site volume performance to provide more insight on business conditions. In terms of same site year-over-year volume performance, weekly volumes at the start of the quarter were off in the low double digits on a comparable week year-over-year basis.

Since then, weekly fuel volumes have generally improved on a year-over-year comparable week basis. In recent weeks, same-site year-over-year comparable week volumes have been off in the mid- to high single-digit ranges compared to the prior year.

Volume performance varies by geography with certain Northeastern and Midwestern states being off significantly more than what I just stated, and some Southern states off significantly less. Alabama, for example, was actually up in same-store volume year-over-year in September.

Our wholesale fuel margin of $0.094 per gallon, an increase of 18% year-over-year, was primarily driven by our dealer tank wagon fuel margins, which, as a reminder, our variable fuel margin accounts with certain of our third-party wholesale dealers and also how we supply our company-operated and commission retail sites.

The percentage of our wholesale fuel gallons that is variable, our dealer tank wagon price, also increased with our recent retail and wholesale acquisition. It is now approximately 28% of our overall gallons compared to 18% for the third quarter of 2019.

As in the prior quarter, the strength of our variable rate margins helped offset the loss in volume we experienced through to COVID-19. In terms of margin, the margin environment during the quarter was generally good, in line with what would be considered good in a historically normal range of margins.

If you look at our rental gross profit for the third quarter, we reported $13.7 million, down 14% year-over-year due primarily to the termination of leases at sites in connection with the retail and wholesale acquisition. We now retail operate these sites.

And in place of rental income, we record retail fuel and merchandise revenue along with the associated operating expenses with these revenue streams. In terms of rent, we saw a decline in rent collection issues during the quarter. August and September rent collection was in line to slightly better than our historical performance.

We have seen little in the way of rent relief requests related to COVID since the June time period. On the retail side, when comparing the performance of the retail sites for the quarter for the comparable period before these sites were in the partnership, inside sales at our company-operated sites have remained strong throughout the quarter.

On a comparable week year-over-year basis, our inside store sales have continued to be up in the range of the high single digits. Volume performance, again, on the same-store year-over-year comparable week basis has been off in the mid- to high single-digits range, in line with what I mentioned earlier in my comments on the wholesale segment.

In reviewing our retail segment financial performance, it is important to remember that the wholesale segment supplies our retail segment on a DTW or a variable margin basis.

So the overall fuel profitability of these sites is split between our wholesale and retail segments, and the DTW fuel margin to our retail sites makes a meaningful contribution in our wholesale segment and our overall profitability. For the third quarter, we did see an increase in both our operating and G&A expenses compared to the prior year.

The increase in operating expenses was primarily driven by the increase on our average company-operated site count year-over-year from 27 sites to 150 sites.

Contributing to the increase in G&A for the third quarter was an $800,000 increase in management fees related to the increase in headcount associated with acquisitions and exchanges completed this year. Our adjusted EBITDA was $30 million and distributable cash flow was $29.7 million for the third quarter of 2020.

If you turn to Slide 5, we completed our sixth and final asset exchange with Circle K on September 15. With this exchange, we received 23 properties and Circle K received the real property for four sites. We also received a cash payment of $6.7 million in connection with the closing of the final asset exchange.

With the six total asset exchanges, CrossAmerica received 191 properties and Circle K received the real property for 56 US convenience and retail fuel stores, along with 17 company-operated convenience sites in the Upper Midwest.

During the third quarter, as part of our real estate optimization plans, we divested seven properties for a total of $3.8 million. For the nine months ended September 30, 2020, we sold 20 properties for a total of $13.3 million.

We continue to have an active pipeline of properties to divest, and the real estate team has not let COVID stop their progress on this important initiative. Finally, I wanted to take a moment to, again, thank everyone in the organization for their efforts during the quarter and throughout this unusual and difficult year.

Of all the new terms added to our vocabulary this year, I like essential workers the best as it applies to everyone in our organization and illustrates the importance of the work we do. Throughout the pandemic, day in and day out, everyone in the organization, essential workers all have been there to keep fuel supply to millions of end consumers.

To the team members listening in, thank you. With that, I'll turn it over to Jon for a more detailed financial review of the quarter..

Thank you, Charles. If you would please turn to Slide 7, I would like to review our third quarter results for the partnership. We reported adjusted EBITDA of $30 million for the third quarter of 2020, which was an increase of 3% when compared to the same period of 2019.

Our distributable cash flow for the third quarter of 2020 was $29.7 million versus $25.7 million for the third quarter of 2019, reflecting an increase of 16% year-over-year.

Our distributable cash flow for the third quarter benefited from the performance of our wholesale segment, lower cash interest and a current tax benefit from bonus depreciation on the eligible assets acquired in the sixth tranche of the asset exchange and capital expenditures.

Our distribution coverage on a paid basis for the third quarter of 2020 was 1.50x, an approximately 5% improvement versus 1.42x for the third quarter of 2019. Our distribution coverage on a trailing 12-month basis was 1.24x, which was an approximately 9% improvement over the 1.14x that we experienced for the 12 months ended September 30, 2019.

As Charles touched on earlier, our operating expenses increased over $14 million for the third quarter of 2020 compared to the third quarter of 2019, driven by the increase in our average company-operated site count as a result of the April 2020 acquisition of retail and wholesale assets.

Excluding rent expense, operating expenses at our company-operated sites increased $11.5 million or 426%. Our average company-operated site count increased 456%, and so our operating expenses, excluding rent expense, on a per site basis decreased 4%. Additionally, a greater percentage of our company-operated sites are leased than in the prior year.

And so the rent component of operating expenses at our company-operated sites increased $3.3 million. If you would please turn to the next slide, Slide 8. We ended the quarter with a leverage ratio as defined under our credit facility of 3.83x and remain in compliance with our financial covenant ratios.

Despite the additional borrowings to fund the retail and wholesale acquisition during the second quarter, along with the negative impacts of COVID-19 and higher capital expenditures, we were able to improve our leverage from 3.96x as of June 30, 2020, and 4.70x as of December 31, 2019. We have sufficient liquidity to execute our plans.

And as of October 29, we had $235 million available on our credit facility, an increase of $32 million compared to our availability at June 30, 2020, and $143 million compared to our availability as of December 31, 2019.

The partnership paid to distribution of $0.525 per unit during the third quarter of 2020 is attributable to the second quarter of 2020 for a total of almost $20 million. And as I noted on the previous slide, this resulted in a coverage ratio of 1.24x on a paid basis for the 12 months.

In regards to our capital spending during the third quarter, we did see an increase in our growth-related capital expenditures as a result of dispenser EMV upgrades and rebranding of certain sites due to our fuel initiatives. Much of this spend was effectively funded by our real estate optimization plan that Charles discussed earlier.

Also, it is important to note, for site brand conversions, we generally are reimbursed by suppliers for a substantial portion, and in some cases, all of the upfront spend, either over a period of time post-conversion or after final project completion.

We expect this growth spending to continue into the fourth quarter as we invest in our sites for the long term. In conclusion, as we enter the final months of 2020, we believe we have positioned ourselves well.

We continue to operate in a challenging environment, but we have continued to improve both our coverage and leverage ratios and manage our balance sheet as we see the benefits from the asset exchanges, our acquisition of retail and wholesale assets and our other strategic initiatives. With that, we will open it up for questions..

Operator:.

This is Charles again. Well, it looks like everyone's still tuned in to or trying to figure out the election results. So we thank everyone that was listening on the call today. We appreciate each of you joining us. If you do have follow-up questions, feel free to reach out to us. Thank you, and good day..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..