Power REIT — Form 10-Q Summary
Reporting period: First quarter ended March 31, 2020. The interim financial statements are unaudited. Power REIT is a Maryland REIT with railroad, solar-land and controlled-environment agriculture (CEA) assets, and is expanding its CEA portfolio, including properties intended for medical cannabis cultivation.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $787,388 | $494,593 |
| Net income | $252,087 | $197,245 |
| Net income attributable to common shares | $182,029 | $127,187 |
| Basic / diluted earnings per common share | $0.10 / $0.09 | $0.07 / $0.07 |
| Core FFO available to common shares (non-GAAP) | $351,650; $0.19 per share | $256,723; $0.14 per share |
| Net cash provided by operating activities | $600,837 | $321,837 |
| Net cash used in investing activities | $2,702,996 | $0 |
| Cash and cash equivalents at period-end | $13,611,811 | $2,009,129 |
Revenue increased approximately 59% year over year; net income rose approximately 28%, and common-share income approximately 43%. The filing attributes the improvement principally to about $241,000 of income from newly acquired properties and $52,000 more miscellaneous income, partly offset by increases of $179,000 in interest expense, $34,000 in general and administrative expense, and $27,000 in depreciation. Interest expense was $295,480 versus $116,732. Net margin was approximately 32% of revenue, compared with approximately 40% in Q1 2019.
At March 31, total assets were $38.31 million and total liabilities were $24.99 million. Debt carrying value, net of unamortized discounts and costs, was approximately $24.31 million, comprising $579,626 current and $23.73 million long term. The debt schedule reports approximately $24.95 million of remaining principal, including $546,088 due in the remaining nine months of 2020. Cash declined $2.23 million during the quarter, primarily as investing outlays exceeded operating cash generation. The company paid approximately $70,000 in preferred dividends; the Series A preferred dividend was $0.484375 per share.
Portfolio, acquisitions and material changes
- During the quarter, Power REIT acquired three southern Colorado properties for medical cannabis cultivation. The properties include one existing greenhouse and vacant land, with construction planned for additional greenhouse and processing space.
- Total investment and construction commitments for the three properties were approximately $4.77 million plus acquisition expenses, funded from existing working capital. At quarter-end, construction in progress was $1.54 million.
- The leases are triple-net, generally have 20-year terms with two five-year extension options, and include tenant-affiliate financial guarantees. Combined straight-line annual rent is approximately $894,000. Rent includes six- or nine-month deferral periods; subsequent rent is structured to provide a 12.5% or 12.9% return on original invested capital, with 3% annual increases. Lease terms provide for rent adjustment if cannabis is legalized federally after year six.
- At quarter-end, the portfolio included approximately 112 miles of railroad infrastructure, 601 acres leased to solar projects with about 108 MW of aggregate generating capacity, and about 23 acres with 90,200 square feet of existing or under-construction greenhouses.
- Common shares outstanding increased from 1,872,939 at year-end to 1,912,939 at March 31, primarily reflecting 40,000 restricted shares issued as stock-based compensation. The filing reports $75,159 of stock-based compensation expense.
Outlook, risks and other disclosures
The filing gives no specific earnings, revenue or dividend guidance. Management said it is pursuing additional CEA real estate investments for food and cannabis production and expects to use operating cash flow, equity issuance and borrowing to meet working-capital and longer-term capital needs. Management reported no direct COVID-19 impact to date, but was monitoring potential effects on the portfolio, business plans and tenants’ ability to pay rent; the ultimate impact was uncertain.
Key risks include the general risks incorporated from the company’s latest Form 10-K, uncertainty around COVID-19, and cannabis-related operating and regulatory exposure. Tenants must maintain medical cannabis licenses and comply with applicable regulations; leases prohibit retail sales at the properties. The company’s debt includes fixed-rate obligations, including bonds bearing 4.34%, 5.0% and 4.62% rates, with maturities ranging from 2034 to 2054. Management stated disclosure controls were effective as of March 31, 2020, with no material quarterly change in internal control over financial reporting.
Related-party disclosures: an affiliate associated with the CEO provides office space at no cost and administrative and accounting support for $1,750 per month beginning January 1, 2020, up from $1,000. The CEO’s spouse is a partner at the company’s legal counsel; no fees or costs were paid to that firm in Q1 2020.
Important facts for investors to verify
- Whether the three CEA projects meet construction schedules and total committed costs, and when deferred rent begins and cash rent is collected.
- Tenant licensing, financial-guarantee strength, rent-paying capacity and exposure to cannabis regulation or changes in federal law.
- COVID-19 effects on tenants and collections after the filing date; the filing reports no direct impact only through its reporting period.
- Debt principal repayment requirements, availability of liquidity, and funding needs for remaining construction commitments and future acquisitions.
- How Core FFO is defined and reconciled: it is a company-defined non-GAAP measure and may not be comparable with other REITs’ measures.