Power REIT — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; unaudited. Power REIT is a Maryland REIT focused on transportation and energy infrastructure real estate. Its portfolio included about 112 miles of railroad infrastructure and 601 acres leased to solar projects totaling approximately 108 MW.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $502,000 | $496,000 | $994,000 | $987,000 |
| Net income (loss) | ($37,000) | $282,000 | $129,000 | ($140,000) |
| Net income (loss) attributable to common shares | ($107,000) | $212,000 | ($11,000) | ($280,000) |
| Basic and diluted EPS | ($0.06) | $0.12 | ($0.01) | ($0.16) |
| Core FFO available to common shares (non-GAAP) | $310,000 | $221,000 | $555,000 | $456,000 |
| Core FFO per common share (non-GAAP) | $0.18 | $0.13 | $0.32 | $0.26 |
Revenue was nearly flat year over year. Q2 expenses rose to $539,000 from $214,000, driven mainly by litigation expense of $299,000 versus $120,000 a year earlier. Interest expense declined by about $71,000, and general and administrative expense fell by about $28,000. The 2015 quarter included a $245,000 unrealized gain on an interest-rate swap, which also contributed to the year-over-year earnings comparison. No comparable swap item was recorded in 2016. The filing does not provide a clearly stated operating margin.
For the first half, cash provided by operating activities was $555,000, compared with cash used of $12,000 in 2015. Financing activities used $229,000, including $140,000 of preferred dividends and $89,000 of debt principal payments. Cash increased by $327,000 to $763,000. The operating cash flow included a $410,000 positive change in prepaid rent; investors should consider this working-capital contribution when assessing cash generation.
At June 30, 2016, total assets were $21.7 million and total liabilities were $11.0 million. Debt, net of issuance costs, totaled $10.4 million, including $341,000 current and $10.1 million long-term. Cash was $763,000. The principal financing is a $10.15 million bond obligation secured by land, with a fixed 4.34% rate and 2034 maturity; other loans carry fixed 5.0% rates. Series A preferred stock totaled $3.49 million. The company paid approximately $140,000 in preferred dividends during the first half; a subsequent quarterly preferred dividend of $0.48375 per share was declared for payment September 15, 2016.
Changes, outlook, and risks
- Management reported Core FFO growth of 40% for Q2 and 22% for the first half; Core FFO per share increased 39% and 23%, respectively. These are non-GAAP measures defined by management and may not be comparable with other REITs’ measures.
- Common shares outstanding increased from 1,742,688 at year-end 2015 to 1,784,488 at June 30, 2016. The filing provides no formal financial guidance or quantified outlook. Management said it is pursuing renewable-energy and other infrastructure real estate acquisitions.
- The principal contingency is ongoing litigation with Norfolk Southern (NSC) and Wheeling & Lake Erie over the railroad lease. The trial court awarded NSC $1 in nominal damages on certain claims against P&WV, denied punitive damages, and found for Power REIT on claims against it. Power REIT and P&WV appealed; the appeal was fully briefed on August 10, 2016. Litigation expense was approximately $299,000 for Q2 and $3.4 million cumulatively through June 30. Recovery of legal costs from NSC depends on prevailing on appeal and is uncertain.
- NSC continued to pay base rent of $228,750 per quarter, but the company cautioned that continued payment is not assured. A disputed amount of approximately $16.6 million owed under the railroad lease, based on NSC records as of December 31, 2012, is not recognized in the GAAP balance sheets; P&WV believes the amount is understated. P&WV also estimated additional claims exceeding $8 million, excluding possible interest and damages.
- Management stated that disclosure controls were effective at June 30, 2016 and that no material change in internal control over financial reporting occurred during the quarter. The filing identifies related-party arrangements, including legal services from a firm whose partner is the CEO’s spouse and office space provided at no cost by an affiliate of the CEO.
Investor verification priorities
- Review the Third Circuit appeal and assess the potential effects on the railroad lease, disputed claims, and recovery of litigation costs.
- Verify the status and continuity of NSC’s quarterly base rent and the treatment of disputed lease-related amounts not recognized under GAAP.
- Assess recurring cash generation apart from working-capital movements, including the sizable prepaid-rent contribution to first-half operating cash flow.
- Review debt amortization, upcoming principal obligations, preferred dividend requirements, and liquidity relative to cash and current debt.
- Reconcile management’s Core FFO adjustments to GAAP results and consider the impact of litigation costs and other exclusions.