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Activist Pushes Pantry To Consider REIT Creation

Tickers in this article: CASY GTY PTRY SUSS

NEW YORK (The Deal) -- The activist investor group that is pushing for a turnaround at convenience store operator Pantry  said it believes all options should be on the table, but one member is especially keen on exploring the possibility of creating a REIT.

That member of the group, Lone Star Value Management's founder and CEO Jeffrey Eberwein, expanded on a Feb. 3 proxy statement filed by activist group Concerned Pantry Shareholders, saying by phone, "We think there's a lot of real estate value here."

Lone Star and JCP Investment Management formed Concerned Pantry Shareholders on Jan. 23 with the goal of electing new board members who would be more proactive in improving what they believe is the company's underperformance. The group wants to put forth three board nominees.

Eberwein cites Cary, N.C.-based Pantry's main competitors, Casey's General Stores  and Susser Holdings , as examples of what a better-performing convenience store chains can achieve in the southeastern U.S. "[Susser and Casey's have] massively outperformed the Pantry, and they trade at much higher multiples," he asserted. "It's dramatic."

Eberwein has several initiatives in mind that he believes Pantry should pursue, but the company would need more financing firepower, so he thinks it should explore a range of options to improve its finances.

"Our team is the type where every option is on the table," he said. "Maybe someone would want to buy or combine with them."

Eberwein said he believes Pantry could use its real estate more effectively. He points to its 1,537 convenience stores that operate primarily under its Kangaroo Express brand in the southeastern U.S., to create value for shareholders and generate capital for operational improvements.

Getty Petroleum Marketing's REIT, Getty Realty  a publicly traded vehicle that holds Getty's gas station and convenience store properties, is an example of the strategy Eberwein is considering.

"Our team would look into creating a REIT to create value for shareholders," he said, explaining that an initial public offering of a trust containing Pantry's real estate assets could provide a better valuation of the company's assets. Once the IPO established a market value, Pantry could either spin the REIT off for shareholders or continue selling shares and use the proceeds to pay down debt.

Paying down debt is also high on Eberwein's to-do list.

"One knock on Pantry is that it has too much debt," Eberwein said. "We think that if they paid down debt, the company's [trading] multiple would go up."

Eberwein singled out the company's $250 million in 8.375% notes as one expensive class of debt, even though those notes are trading above par.

He also said Pantry's bank debt is pricey. "The way this company is financed is a hodgepodge," he continued. "[It has] some capital leases, some operating leases, and some expensive debt. In an ideal world, [Pantry] wouldn't have any capital leases. When a capital lease comes up for maturity, we'd retire it or replace it with cheaper debt."