Power REIT — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013; filed April 1, 2014. This is an annual report, not a standalone fourth-quarter report. Power REIT is a Maryland REIT investing in transportation and energy-infrastructure real estate, with a growing focus on renewable-energy sites.
Business context and portfolio
- At year-end, the portfolio comprised approximately 112 miles of railroad infrastructure leased to Norfolk Southern Corporation (NSC), 54 acres leased to a 5.7 MW Massachusetts solar farm, and 100 acres leased to California solar farms with approximately 20 MW of capacity.
- The railroad lease provides fixed annual base cash rent of $915,000, paid quarterly. Massachusetts land rent was $80,800 for the lease year ending November 2013, escalating 1% annually. California tenants owe aggregate annual cash rent of $157,500 under 25-year leases.
- Revenue remained highly concentrated: NSC-related payments accounted for approximately 88% of consolidated 2013 revenue, versus 100% in 2012.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $1.044 million | $915,000 |
| Net loss | $(481,477) | $(321,739) |
| Loss per share, basic and diluted | $(0.29) | $(0.20) |
| Net margin | Approximately (46%) | Approximately (35%) |
| Operating cash flow | $(370,799) | $2,131 |
| Investing cash flow | $(1.550) million | $(928,086) |
| Financing cash flow | $1.633 million | $310,025 |
| Cash at year-end | $78,113 | $365,944 |
Revenue increased approximately 14%, principally reflecting the Massachusetts and California properties. The net loss widened by about $160,000. Litigation expense was $955,749, up from $700,357; stock-based compensation increased to $145,200 from $41,529. Lower general and administrative expense ($182,592 versus $404,919) partly offset these increases. The filing provides no operating-margin measure; the net margins above are calculated from reported revenue and net loss.
Total assets were $12.046 million and total liabilities were $2.974 million at December 31, 2013. Reported debt was approximately $2.506 million, including $1.650 million of related-party debt; total liabilities also include accounts payable and accrued interest. Cash was low relative to reported short-term obligations, including $406,758 of accounts payable, $55,231 of accrued interest, and $29,636 of current debt. Operating cash outflow and property acquisitions were funded principally through borrowing and equity issuance.
Material changes, outlook and notable items
- During 2013, the company acquired the California solar-land property for $1.55 million. Management said it expected renewable-energy and other infrastructure properties to contribute a larger share of revenue as the portfolio grows.
- The company suspended common dividends beginning in the second quarter of 2013 because of ongoing litigation costs. It said it expected to consider reinstatement once those costs diminish; payment remains subject to board discretion and available cash.
- Management expected substantial general and administrative expense in 2014 due to the NSC litigation and anticipated further expense growth as it implemented its business plan. No quantified earnings or dividend guidance was provided.
- In January 2014, Power REIT announced a term sheet for a potential solar-project land acquisition requiring an estimated $9.5 million investment if the project proceeds. In March 2014, it completed approximately $2.5 million of 7.75% Series A cumulative redeemable perpetual preferred stock issuance; the offering was continuing. These are subsequent events, not 2013 results, and the preferred stock ranks senior to common shares.
- NSC and its sub-lessee are litigating lease-related matters with Power REIT and its railroad subsidiary. Power REIT’s claims include disputed additional rent, lease-related indebtedness, legal-cost reimbursement, and amounts tied to property dispositions. The company cited NSC records showing approximately $16.6 million of indebtedness at December 31, 2012, while asserting the figure was understated; a further claim estimated additional amounts exceeding $8 million, before possible interest and damages. These disputed sums were not recorded as GAAP receivables. NSC continued paying quarterly base rent of $228,750 through the fourth quarter of 2013.
- Power REIT reported approximately $1.6 million of cumulative litigation expenses through year-end, of which about $274,000 remained payable. The litigation outcome and recovery of expenses or disputed amounts were uncertain; a summary-judgment decision was pending at filing.
- California acquisition bridge notes from an affiliate of the CEO had an 18-month maturity and stepped-up rates: 8.5% on the $1.155 million A Note and 13.5% on the $495,000 B Note after their initial six months. Management intended to refinance them. The filing also discloses related-party legal services and affiliate financing.
- The independent auditor changed during the year: BDO resigned in March 2014 after an acquisition impaired its independence; CohnReznick audited the 2013 statements. The auditors issued unqualified opinions on their respective years. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Key facts for investors to verify
- Current status and expected cost of the NSC litigation, including the motion for summary judgment, disputed lease claims, and whether base rent continues to be paid.
- Whether the disputed railroad receivables and claims are recoverable, and how any resolution would affect reported earnings, cash, or lease continuity.
- Liquidity and refinancing plans for the affiliate bridge notes, especially the substantial 2015 maturity, and the terms of any replacement financing.
- Whether the proposed $9.5 million solar investment proceeds, its funding source, and its expected returns and risk allocation.
- Preferred-stock issuance, continuing dividend obligations, and the conditions and timing for any common-dividend reinstatement.
- Concentration in NSC, cash available for operations, and progress toward diversifying the portfolio and revenue base.