Power REIT — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts below are in thousands of dollars unless otherwise noted. The interim financial statements are unaudited.
Business context
Power REIT owns transportation and energy infrastructure real estate through subsidiaries. Its portfolio included railroad property leased to Norfolk Southern (NSC), land leased to an operating solar farm in Massachusetts, and land near Fresno, California, leased to solar projects still under construction. The railroad lease generated approximately 91% of consolidated Q3 revenue. Power REIT elected REIT tax treatment and states a policy of distributing at least 90% of ordinary taxable income.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $251 | $229 | $753 | $686 |
| Net income (loss) | $(181) | $18 | $(393) | $(34) |
| Basic and diluted earnings (loss) per share | $(0.11) | $0.01 | $(0.24) | $(0.02) |
| Cash dividends per common share | — | $0.10 | $0.10 | $0.30 |
- Q3 revenue included $229 from railroad lease interest income and $22 of rental revenue. Nine-month figures were $686 and $67, respectively.
- Operating cash flow was $(140) for the first nine months, versus $(106) in 2012. Investing cash outflow was $1,550, primarily for land acquisition. Financing provided $1,638, including $1,584 of debt proceeds and $219 of net equity proceeds, offset by $165 of dividends paid. Cash declined $52 to $314.
- At September 30, total assets were $12,232, including $11,756 of real estate assets. Total equity was $9,130. Reported debt comprised $29 current, $1,650 related-party long-term, and $862 other long-term debt. Cash was $314; accounts payable were $555.
- The related-party PWTS notes total $1,650, carry rates stepping up to 8.5% on the A note and 13.0% on the B note after six months, and mature in 18 months. The $750 PWSS bank term loan bears fixed 5% interest, has a 10-year term, and amortizes over 20 years. Municipal debt was approximately $115. The filing lists approximately $1,681 of principal payments due in 2015.
Material changes from comparable periods
Q3 revenue increased $22 year over year, largely reflecting PWSS, acquired in December 2012. Q3 results shifted from income to loss as expenses rose to $433 from $211. Management attributed the change principally to $78 higher litigation expense, $49 of PWTS acquisition costs, approximately $40 of higher property tax and interest costs associated with acquisitions, and a $55 increase in general and administrative expense, including equity compensation and audit-firm transition costs. For the nine-month period, revenue increased $67 while net loss widened to $393 from $34, with litigation expense increasing to $701 from $366.
PWTS acquired approximately 100 acres near Fresno during Q3. Total land on the balance sheet increased to $2,606 from $1,056 at year-end 2012. The Trust issued 22,105 shares through its ATM offering during the first nine months, receiving approximately $222 net; it sold no shares in Q3 or from quarter-end through the filing date.
Outlook, risks, and unusual items
- Management expected PWTS solar tenants to reach commercial operations in early 2014, with annual rent of $157.5 thereafter. PWTS had no Q3 revenue contribution; interim rent was expected beginning October 1, 2013. Management expected its revenue contribution to reduce the railroad’s share of consolidated revenue to approximately 79% once it began contributing.
- Management said it continued to seek renewable-energy real estate acquisitions, but noted there could be no assurance of success. It expected substantial NSC litigation expenses to continue during the remainder of 2013 and said expenses and revenues would generally rise as the business expanded.
- Dividends were temporarily suspended in Q2 2013; management expected to reinstate them once NSC litigation costs diminished. The filing does not specify a timetable or distribution amount.
- Power REIT and its railroad subsidiary are litigating with NSC and its sub-lessee over alleged lease defaults, disputed payments, access to records, and the treatment of amounts owed. NSC’s records indicated approximately $16.6 million of disputed indebtedness at December 31, 2012; the company says the amount is understated. The subsidiary’s supplemental counterclaims assert more than $8 million in additional amounts, before potential interest and damages. These disputed amounts are not recorded in the GAAP financial statements. No outcome is assured.
- Litigation costs were $220 in Q3 and $701 year to date; approximately $1.4 million had been incurred cumulatively by September 30, of which $470 remained payable. NSC continued to pay quarterly base rent of $228.75, but the company cautioned that continued payments are not assured.
- On November 6, 2013, the Trust filed a preliminary prospectus supplement for a proposed offering of up to 150,000 shares of 7.75% Series A preferred stock, with a $25 liquidation preference. No preferred shares were outstanding as of the filing.
- Management reported disclosure controls as adequate and effective and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Progress and potential outcome of the NSC/WLE litigation, including recovery of disputed amounts and legal costs, and implications for the lease and continued base rent.
- PWTS construction and commercial-operation timing, commencement and collection of interim and contracted rents, and the resulting revenue contribution.
- Cash needs, debt terms and 2015 maturities, including refinancing or repayment plans for the related-party notes.
- Whether and when common dividends resume, and the status, terms, and proceeds of the proposed preferred-stock offering.
- Continuing dependence on railroad lease revenue and the company’s ability to finance acquisitions while managing litigation expenses and operating costs.