Power REIT — Form 10-Q Summary
Reporting period: The financial statements and discussion cover the three months ended March 31, 2015, with comparison to Q1 2014. The filing text’s cover-page line says “quarterly period ended March 31, 2014,” which conflicts with the 2015 statements and should be verified. The filing was signed May 11, 2015.
Business context
Power REIT owns U.S. transportation and energy-infrastructure real estate. At March 31, 2015, its portfolio included approximately 112 miles of railroad infrastructure leased to Norfolk Southern Railway and 601 acres leased to solar projects with approximately 108 MW of generating capacity. The company is seeking further renewable-energy and infrastructure acquisitions.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Q1 2014 / December 31, 2014 |
|---|---|---|
| Total revenue | $490,769 | $298,096 |
| Net income (loss) | $(67,462) | $57,975 |
| Net income (loss) attributable to common shares | $(137,430); $(0.08) per share | $57,975; $0.03 per share |
| Operating cash flow | $143,851 | $373,973 |
| Cash and cash equivalents | $641,748 | $654,381 |
| Total assets | $22.59 million | $22.34 million |
| Total liabilities | $11.52 million | $11.18 million |
Revenue rose approximately 65%, principally reflecting $193,000 of additional rental income from acquired properties, including the Regulus solar project, which began commercial operations in November 2014. Expenses increased to $558,231 from $240,121. Higher interest expense, the swap’s unrealized loss, amortization, and preferred dividends contributed to the common-share loss; lower litigation expense partly offset those increases.
Management-reported Core FFO available to common shares was $224,703, or $0.13 per share, versus $199,752, or $0.12 per share, in Q1 2014. Core FFO is a non-GAAP measure with company-specific adjustments. The filing’s stated Core FFO growth percentages appear inconsistent with the reported dollar and per-share values; verify the calculation.
Debt included approximately $6.70 million outstanding under a five-year credit facility, $1.65 million of related-party notes, and other property debt. The related-party notes mature in January 2016 and carry stepped-up rates of 8.5% and 13.5%. The credit facility bears interest at LIBOR plus 3.5% for its first three years and LIBOR plus 4.0% thereafter. The interest-rate swap liability was $711,906. The filing does not provide a clear consolidated debt total after distinguishing current and long-term classifications; balance-sheet debt line items sum to approximately $9.28 million. Cash declined by $12,633 during the quarter. Preferred dividends paid were approximately $70,000; the company declared another $0.48375-per-share quarterly preferred dividend payable June 15, 2015.
Material changes, outlook, and risks
- Rental income increased with the addition of acquired solar properties, while cash from operations fell from the prior-year quarter.
- The company recorded a $183,866 unrealized swap loss. It said the swap was not designated for hedge accounting, so fair-value changes were recognized in earnings.
- After quarter-end, on April 22, 2015, the court granted Norfolk Southern and Wheeling & Lake Erie summary judgment against P&WV, dismissing all of P&WV’s claims. A trial on remaining issues was anticipated in Q3 2015; Power REIT said it was assessing legal options and the prospects of an appeal.
- The railroad dispute is a significant contingency. P&WV reported that NSC’s records showed approximately $16.6 million owed as of December 31, 2012, an amount not recorded on the balance sheet because of the dispute; P&WV believes it is understated. P&WV also estimated additional amounts owed in excess of $8 million, excluding potential interest and damages. These disputed amounts are not recognized as assets or revenue in the financial statements.
- Litigation costs were approximately $4,000 in Q1 2015; cumulative costs were approximately $2.71 million, of which approximately $545,000 was payable at quarter-end. Recovery from NSC is uncertain and may require a successful appeal.
- Related-party matters include the $1.65 million loan from an affiliate of the CEO and legal services from a firm whose partner is the CEO’s spouse. The company reported independent-trustee approval of the arrangements.
- Power REIT’s REIT status requires distribution of at least 90% of ordinary taxable annual income, subject to other qualification requirements. Management stated disclosure controls were effective as of March 31, 2015, with no material quarterly change in internal controls.
Important facts for investors to verify
- Confirm the correct reporting-period date, given the conflicting cover-page text.
- Review the full court docket and subsequent developments, including any appeal, trial outcome, and potential effects on the railroad lease or liabilities.
- Assess the recoverability and accounting treatment of disputed railroad-related amounts and litigation costs.
- Reconcile debt balances, maturities, related-party terms, and interest-rate swap exposure; monitor liquidity given operating cash flow and cash balances.
- Check the Core FFO reconciliation and reported growth percentages, and distinguish this non-GAAP measure from GAAP earnings and cash flow.