Power REIT — 2012 Form 10-K Summary
Business context and reporting period
Power REIT is a Maryland REIT focused on transportation and energy infrastructure real estate, particularly land leased to renewable-energy projects. This annual report covers the year ended December 31, 2012; the filing also reports fourth-quarter results. At year-end, its assets comprised railroad property leased to Norfolk Southern Corporation (NSC) and approximately 54 acres leased to an operating 5.7 MW solar farm in Massachusetts. The solar property was acquired on December 31 and contributed no 2012 operating results.
Financial performance, cash flow and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $915,066 | $915,078 |
| General and administrative expense | $536,448 | $277,855 |
| Litigation expense | $700,357 | — |
| Net income (loss) | $(321,739) | $637,223 |
| Basic and diluted EPS | $(0.20) | $0.40 |
| Cash from operating activities | $2,131 | $644,508 |
| Cash dividends per share | $0.30 | $0.40 |
Fourth-quarter revenue was approximately $228,757 and the net loss was $288,263, or $(0.18) per share, compared with net income of $167,864, or $0.10 per share, in fourth-quarter 2011. Year-end cash was $365,944, down from $981,875. Total assets were $10.64 million, liabilities $1.28 million, and shareholders’ equity $9.35 million. Current assets were $382,786 and current liabilities $367,289.
Year-end debt included an $800,000 related-party bridge loan and municipal debt with $121,905 principal outstanding; the balance sheet also shows $11,978 as current debt and $115,489 as long-term debt. The bridge loan financed the solar-property acquisition. The filing does not provide a conventional operating margin measure.
Material changes versus the prior period
- Revenue was essentially unchanged, but the company moved from 2011 net income of $637,223 to a 2012 net loss of $321,739, principally because of $700,357 in litigation expense and higher general and administrative costs.
- Operating cash flow fell to $2,131. The filing attributes the low amount in part to working-capital movements, including increased accounts payable.
- Power REIT acquired the Salisbury solar land for approximately $1.06 million in recorded land value. The cash-flow statement reports $928,086 paid for land and $127,467 of debt assumed in the acquisition.
- The annual dividend declined from $0.40 to $0.30 per share. A $0.10 dividend declared in January 2013 was paid on January 25.
Outlook, commentary, risks and unusual items
- Management expected the solar lease to begin contributing in the first quarter of 2013. It provides for annual cash rent of $80,800 for the December 2012–November 2013 period, with 1% annual escalations; $89,494 was expected to be recognized on a straight-line basis in 2013. Assuming no acquisitions, P&WV was expected to account for more than 90% of 2013 revenue.
- Management expected substantial 2013 general and administrative costs, including continued litigation costs and expenses related to the expanded business plan. The filing gives no earnings or dividend guidance and says dividends remain at the board’s discretion.
- Power REIT and P&WV are litigating with NSC and its sub-lessee over the 99-year railroad lease, alleged defaults and approximately $16.6 million of disputed lease-related indebtedness. The indebtedness and related additional rent are not included in GAAP balance-sheet or operating-statement amounts because their timing and character are disputed. NSC continued paying quarterly base rent through the filing date; the outcome and any recovery of legal costs remain uncertain.
- In the fourth quarter, the company expensed $63,000 of previously capitalized costs and a $25,000 deposit related to a loan facility it no longer pursued. It also terminated an energy-park land option, expensing $10,000 of a deposit and recording the remaining $5,000 as receivable.
- After year-end, the company entered an at-the-market offering that permits issuance of up to $5.4 million of common shares for acquisitions and working capital, with potential shareholder dilution. The bridge loan was extended through June 30, 2014, with an option through January 31, 2015; its rate is 5% through June 30, 2013 and 8.5% thereafter.
- Other key risks include heavy reliance on a small number of tenants and assets, access to future capital, litigation-related financing constraints, lessee default, REIT qualification and the possibility of dividend reductions. The company also disclosed related-party arrangements: a CEO affiliate provided the $800,000 secured loan, and a CEO’s spouse was a partner at the law firm paid $536,580 in 2012; a further $335,442 had been billed but remained unpaid. Independent trustees approved the arrangements as fair and reasonable.
Most important facts for investors to verify
- Current status and potential financial consequences of the NSC litigation, including the disputed $16.6 million indebtedness and reimbursement of legal expenses.
- Whether NSC continues to pay base rent and whether the fixed $915,000 annual lease income remains secure.
- Solar lease collections, 2013 straight-line revenue recognition and the bridge loan’s balance, rate reset and repayment or extension terms.
- Cash available after operating costs, litigation spending and dividends, and the company’s financing needs and any share issuance under the $5.4 million offering.
- Whether the company can diversify its revenue base, manage rising overhead and maintain REIT qualification and distributions.