Power REIT — Q1 2017 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2017, compared with Q1 2016; balance-sheet figures are compared with December 31, 2016. Power REIT owns railroad infrastructure and related real estate leased to a railway, plus about 601 acres leased to solar projects with approximately 108 MW of generating capacity. It is pursuing additional infrastructure and renewable-energy real estate investments.
Financial performance and position
- Revenue: $491,310, essentially unchanged from $491,674. Railroad capital-lease income was $228,750 and rental income was $262,527.
- Profit: Net income was $192,218, up from $165,215. After $69,968 of preferred dividends, net income attributable to common shares was $122,250, versus $95,247; basic and diluted EPS was $0.07 versus $0.05. Net margin was approximately 39.1%, compared with 33.6%.
- Expenses: Total expenses fell to $299,092 from $326,459. Litigation expense declined to $730 from $48,355, while G&A and stock-based compensation each increased by about $18,000. Interest expense decreased to $124,521 from $141,385.
- Core FFO: Management-reported Core FFO attributable to common shares was $242,364, or $0.14 per share, down 7.3% and 6.7%, respectively, from Q1 2016.
- Cash flow and liquidity: Operating cash flow was $436,860, compared with $172,594. Cash increased by $353,860 to $1,070,964. Cash flow included a $348,132 increase in prepaid rent. The filing reports no separate margin guidance or liquidity forecast.
- Debt and balance sheet: Total assets were $21.71 million and total liabilities were $10.76 million at March 31, 2017. Reported current and long-term debt totaled approximately $10.21 million. Debt was primarily fixed-rate: PWRS bonds carry 4.34% interest and mature in 2034; the PWSS term loan carries 5.0% interest. Total equity was $7.46 million.
- Preferred stock: The company paid approximately $70,000 in Q1 dividends on its 7.75% Series A preferred stock and declared another $0.48375-per-share dividend, payable June 15, 2017.
Material changes versus Q1 2016
Revenue was nearly flat, while common-share net income rose approximately 28%, principally reflecting lower litigation and interest expenses, partly offset by higher G&A and stock compensation. Core FFO declined, in part because its calculation excludes items such as amortization and stock-based compensation. Weighted-average common shares increased to 1,784,938 from 1,742,688.
Outlook, risks and unusual items
- Management stated that Power REIT is actively seeking renewable-energy and other infrastructure real estate acquisitions. The filing gives no quantified earnings or cash-flow guidance.
- Railroad-lease litigation with Norfolk Southern Corporation (NSC) and Wheeling & Lake Erie Railroad remained material. The trial court had awarded NSC nominal damages of $1 against P&WV, while ruling for Power REIT on claims against it; Power REIT and P&WV appealed, and the appeal was fully briefed by August 2016. The filing provides no later appellate decision.
- P&WV’s disputed claims include more than $8 million of additional amounts alleged to be owed, excluding potential interest and damages. The filing also cites approximately $16.6 million of lease-related indebtedness recorded by NSC as of December 31, 2012; this amount is disputed, has not been updated by NSC, and is not recorded in the GAAP balance sheet. P&WV has incurred approximately $3.5 million of cumulative litigation expense and may not recover it.
- NSC continued paying quarterly base rent of $228,750, but the company cautioned that continued payments are not assured. Any material interruption would affect rental income and liquidity.
- Management reported that disclosure controls were effective as of March 31, 2017, with no material quarter-to-quarter changes in internal control over financial reporting. Adoption of the new revenue and lease accounting standards was expected in future periods; the effects were not then estimable.
Important facts for investors to verify
- Check the current status and outcome of the Third Circuit appeal, and whether any litigation costs or disputed lease amounts were subsequently recovered or recognized.
- Confirm continued receipt of NSC’s $228,750 quarterly base rent and the status of the disputed lease-related indebtedness.
- Review the cash-flow contribution from prepaid rent and the timing of the company’s debt service, preferred dividends, and planned acquisitions.
- Reconcile the filing’s Core FFO table: its reconciliation labels the comparative period “2015,” although the statements and other FFO table identify the comparison as Q1 2016.