Power REIT — 2011 Form 10-K
Business context and period. This annual report covers the year ended December 31, 2011; quarterly figures are included, including fourth-quarter results. Power REIT was formed through a December 2, 2011 reorganization and reverse merger, with Pittsburgh & West Virginia Railroad (P&WV) becoming its wholly owned subsidiary. Its only operating asset and income source is P&WV’s railroad property, leased in its entirety to Norfolk Southern Corporation (NSC). The 99-year triple-net lease provides fixed annual cash rent of $915,000, with renewal options in perpetuity on the same terms.
Financial results and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $915,000 | $915,000 |
| General and administrative expenses | $277,855 | $150,990 |
| Net income | $637,223 | $764,010 |
| Net income per share | $0.40 | $0.51 |
| Cash dividends per share | $0.40 | $0.50 |
| Cash and cash equivalents at year-end | $981,875 | $48,961 |
| Total assets | $10,134,586 | $9,198,961 |
| Total liabilities | $9,995 | None reported |
Net margin was approximately 69.6% in 2011, versus 83.5% in 2010, reflecting higher expenses against unchanged revenue. Operating cash flow was approximately $644,500, based on net income and reported working-capital changes. Cash increased by $932,914, including $926,382 of financing proceeds and $637,975 of dividends paid. The company reported no conventional debt; the balance sheet shows $9,995 of accounts payable. The $9.15 million net investment in the capital lease is recorded as an asset.
Material changes and management commentary
- Expenses rose by approximately $126,900 year over year. Management attributed the increase principally to legal and consulting costs for the reorganization and expanded business plan, and legal costs associated with a prior shareholder proxy contest. It expects compliance and business-development costs to continue rising.
- Shares outstanding increased from 1,510,000 at year-end 2010 to 1,623,250 at year-end 2011. The 2011 rights offering generated net proceeds of $951,762; the financial statements separately report $926,382 in net financing proceeds.
- Management intends to expand into transportation and energy infrastructure and expected to establish an UPREIT structure in 2012. The filing provides no quantified earnings or acquisition guidance.
- After year-end, the company placed a refundable $15,000 deposit on land intended for an energy park. Acquisition remained subject to due diligence and closing conditions; any potential income increase was conditional on acquisition and full development.
Risks, disputes, and unusual items
- Revenue concentration: 100% of consolidated revenue comes from the NSC lease. Rent is fixed and does not adjust for inflation or operating performance. NSC is responsible for property maintenance under the triple-net lease.
- Litigation and disputed settlement account: NSC sued in December 2011 seeking a ruling on lease defaults and reimbursement of legal expenses. P&WV counterclaimed, including that the settlement account is debt immediately due. NSC’s records show a principal balance of $16,236,809 at December 31, 2011, up from $15,882,651 in 2010. Because its amount, term, and character are disputed and the settlement date is indeterminate, the balance and related changes are excluded from the financial statements. NSC continued making quarterly base-rent payments. Outcomes and recovery of legal costs are uncertain.
- REIT status and distributions: Power REIT intends to qualify as a REIT and generally must distribute at least 90% of ordinary taxable income. REIT distributions are generally taxable to shareholders as ordinary income.
- Related parties: The company paid $87,863 in 2011 legal fees to a firm where the CEO’s spouse is a partner. An affiliate of the CEO acquired 69,419 shares in the 2011 rights offering; an affiliate also provides office space at no cost.
- The financial statements received an unqualified audit opinion. The auditor did not express an opinion on internal-control effectiveness; management concluded controls were effective as of year-end.
Important facts for investors to verify
- Developments and possible financial impact of the NSC litigation, including the settlement-account balance and any enforceable reimbursement or payment claims.
- Whether the energy-park land is acquired, the terms and funding of development, and whether it generates distributable income.
- Progress, costs, and financing of the planned UPREIT structure and broader acquisition strategy.
- Ability to maintain REIT qualification and distributions while expenses rise; the filing states no quantified outlook.
- How the company plans to address its dependence on a single tenant and a fixed, non-escalating lease payment.