Power REIT — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 31, 2015. This is an annual report, not a standalone fourth-quarter report.
Business context
Power REIT is a Maryland REIT focused on transportation and energy-infrastructure real estate. At year-end, its portfolio included approximately 112 miles of railroad infrastructure leased to Norfolk Southern and 601 acres leased to solar projects with approximately 108 MW of aggregate capacity. The company had four investments and was seeking further renewable-energy and infrastructure acquisitions.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $1.743 million | $1.044 million |
| Net loss | $1.556 million | $481,000 |
| Net loss attributable to common shares | $1.747 million | $481,000 |
| Basic and diluted loss per common share | $1.03 | $0.29 |
| Net cash used in operating activities | $108,000 | $371,000 |
| Net cash used in investing activities | $2.242 million | $1.550 million |
| Net cash provided by financing activities | $2.926 million | $1.633 million |
Revenue rose approximately 67%, largely from the solar acquisitions, while the net loss widened. The company cited higher acquisition costs ($365,000 versus $49,000), interest expense ($715,000 versus $95,000), and a $528,000 unrealized loss on interest-rate swaps. Litigation expense was $1.050 million, compared with $956,000.
Management-reported, non-GAAP Core FFO available to common shares was $830,000, or $0.49 per share, versus $676,000, or $0.41 per share, in 2013. Core FFO grew 23% overall and 20% per share; it excludes specified litigation, acquisition, noncash and financing items and is not a GAAP measure.
Year-end cash was $654,000 (2013: $78,000); total assets were $22.339 million and total liabilities $11.183 million. Long-term debt, including current maturities, was approximately $9.368 million; liabilities also included a $528,000 swap liability. The company reported $3.492 million of Series A preferred equity, paying a 7.75% cumulative dividend, and paid approximately $191,000 of preferred dividends. Common dividends remained suspended throughout 2014, following suspension beginning in the second quarter of 2013.
Material changes and financing
- Power REIT acquired PW Regulus Solar land in California in April 2014 for approximately $9.2 million, including allocated in-place lease intangibles. The approximately 82 MW project began commercial operations in November; the lease provides initial annual rent of approximately $735,000, escalating 1% annually, on a triple-net basis.
- PWRS acquisition funding included approximately $6.9 million of floating-rate debt at 350 basis points over LIBOR. The company also entered into interest-rate swaps; the swaps were not designated as accounting hedges, so fair-value changes flowed through earnings.
- The company raised approximately $3.492 million net from 144,636 Series A preferred shares by year-end. A related-party PWTS loan of $1.65 million remained outstanding, with maturity extended to January 2016.
- After year-end, the $26.2 million credit facility was amended on February 20, 2015 to $11.8 million, and its unused fee was reduced. The company had been in default at year-end for an unpaid commitment-fee balance of approximately $386,000, but obtained a lender waiver and installment-payment arrangement through June 2016. Stated unused borrowing capacity after amendment was approximately $4.9 million.
Outlook, risks and unusual items
- Management intends to grow the renewable-energy real-estate portfolio and expected general and administrative costs to increase as the business develops. No quantified earnings or revenue guidance was provided.
- Revenue remained concentrated: P&WV contributed approximately 52% and PWRS 33% of 2014 revenue. The company cautioned that loss or underperformance of a major tenant or project could materially affect results.
- Power REIT and P&WV continued litigation with Norfolk Southern and its sub-lessee over the railroad lease, additional rent, property-sale proceeds, legal costs and alleged lease defaults. Summary-judgment motions were argued in December 2014; no ruling or timing was reported. NSC continued paying quarterly base rent of $228,750, but continued payment was not assured.
- P&WV reported that NSC’s records showed approximately $16.6 million of indebtedness owed to P&WV as of December 31, 2012, which NSC had not updated and P&WV considered understated. P&WV also claimed additional amounts exceeding $8 million related to property dispositions, excluding possible interest and damages. These disputed amounts were not recognized as net receivables under GAAP; related receivables were fully reserved.
- Litigation-related expenses totaled approximately $2.261 million through year-end, of which approximately $642,000 remained payable. A spouse of the CEO was a partner at the firm receiving legal fees; independent trustees approved the arrangement.
- The company identified material weaknesses in disclosure controls as of September 30, 2014, involving segregation of duties, technical reporting resources and independent review. Management reported remediation in the fourth quarter and concluded controls were effective at December 31, 2014. The auditor did not attest to internal control effectiveness. CohnReznick resigned in November 2014; MaloneBailey audited FY2014.
- Key risks include concentrated leases, refinancing and floating-rate exposure, limited liquidity, dependence on one executive, related-party financing, REIT qualification requirements, and the uncertain litigation outcome.
Investor verification priorities
- Check subsequent court rulings, the status and costs of the NSC litigation, and whether base rent and any disputed amounts are paid or recovered.
- Review the amended credit facility, fee-payment compliance, remaining availability, maturity schedule and interest-rate swap terms.
- Assess cash generation against debt service, preferred dividends, litigation costs and suspended common distributions.
- Verify the solar tenants’ operating and payment performance, the lease economics, and the company’s revenue concentration.
- Review the audited financial statements and notes for acquisition-intangible accounting, disputed lease amounts, related-party transactions and the effectiveness of the reported control remediation.