Power REIT — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. Power REIT owns railroad infrastructure and land leased to solar projects; at period-end its portfolio included approximately 112 railroad miles and 601 acres leased to solar projects with about 108 MW of generating capacity.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $493,642 | $491,323 | $986,245 | $982,633 |
| Net income | $207,492 | $197,184 | $422,139 | $389,402 |
| Net income attributable to common shares | $137,434 | $127,216 | $282,023 | $249,466 |
| Basic and diluted EPS | $0.08 | $0.07 | $0.15 | $0.14 |
| Core FFO available to common shares (non-GAAP) | $246,243 | $243,505 | $503,780 | $485,870 |
| Core FFO per common share | $0.13 | $0.14 | $0.28 | $0.27 |
- Net margin, calculated as net income divided by revenue, was approximately 42.0% for Q2 and 42.8% for the first half of 2018.
- First-half operating cash flow was $625,344, down from $844,201 in 2017. Cash increased by $367,913 to $1,514,643 at June 30; financing cash outflow was $257,431, including $117,315 of debt principal payments and $140,116 of preferred dividends.
- Total assets were $21.80 million and total liabilities $10.02 million. Debt on the balance sheet totaled approximately $9.79 million, including current and long-term portions. Debt is primarily fixed-rate: the $10.15 million PWRS bond obligation bears 4.34% and matures in 2034; other disclosed loans carry 5.0% rates.
- Series A preferred stock has a 7.75% cumulative dividend. A quarterly dividend of $0.484375 per preferred share was declared July 5, payable September 15, 2018.
Changes versus prior comparable periods
- Q2 revenue increased about 0.5% year over year; net income rose about 5.2% and common-share income about 8.0%. First-half revenue increased about 0.4%, net income about 8.4%, and common-share income about 13.1%.
- Management attributed the first-half improvement principally to lower general and administrative expense (about $14,000), lower interest expense (about $8,000), and lower litigation expense (about $4,000).
- First-half Core FFO increased about 3.7%, although Q2 Core FFO per share declined to $0.13 from $0.14.
- Cash and cash equivalents rose from $1.15 million at December 31, 2017 to $1.51 million at June 30, 2018. Total liabilities decreased slightly from $10.05 million.
Outlook, risks, and unusual items
- No quantified earnings or acquisition guidance is provided. Management says it is actively pursuing qualifying renewable-energy and infrastructure real estate investments.
- The long-running dispute with Norfolk Southern (NSC) and Wheeling & Lake Erie was affirmed against P&WV on appeal in August 2017. The court awarded NSC nominal damages of $1 and denied punitive damages. The company reports no litigation expense in the first half of 2018 and says NSC continued quarterly base rent payments of $228,750.
- Management states that the disputed indebtedness accrued by P&WV is deemed uncollectable following the litigation outcome and will be written off for tax purposes; it was not recorded in the GAAP financial statements. P&WV will track it as a potential termination fee payable upon lease termination. The filing cites approximately $16.6 million of indebtedness based on NSC records as of December 31, 2012, with no more recent update provided.
- Power REIT reports that disclosure controls were effective as of June 30, 2018, with no material change in internal control during the quarter. It cautions that forward-looking statements are subject to risks and actual results may differ materially.
- The company relies on operating cash flow, equity issuance, and secured borrowings for working capital and longer-term needs. REIT qualification requires distribution of at least 90% of ordinary taxable annual income, subject to other requirements.
- Related-party arrangements include office space provided at no cost by an affiliate associated with the CEO and $6,000 paid during the first half for administrative and accounting support; independent trustees approved the arrangements as fair and reasonable.
Important facts for investors to verify
- Whether NSC continues making base rent payments and how the disputed indebtedness/termination-fee treatment may affect future cash flows.
- Cash flow sustainability, given lower first-half operating cash flow and ongoing debt service and preferred dividends.
- Debt repayment schedule, covenants, collateral, and the terms of the fixed-rate borrowings.
- Progress, funding requirements, and expected returns for prospective renewable-energy acquisitions; the filing provides no quantified outlook.
- REIT distribution and qualification requirements, and the potential effect of taxable income items not reflected in GAAP earnings.