Power REIT — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Power REIT is a Maryland REIT investing in transportation and energy-infrastructure real estate. At quarter-end, its portfolio included approximately 112 miles of railroad infrastructure and 630 acres leased to solar projects with about 105 MW of aggregate generating capacity.
Financial results
Amounts below are in thousands of dollars, except per-share data.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $462 | $251 | $760 | $503 |
| Net loss | $(699) | $(100) | $(642) | $(210) |
| Loss per common share, basic and diluted | $(0.42) | $(0.06) | $(0.38) | $(0.13) |
| Core FFO available to common shares | $147 | $172 | $346 | $328 |
| Core FFO per common share | $0.09 | $0.10 | $0.21 | $0.19 |
Q2 revenue grew 84% year over year, while the net loss widened to $699. For the six-month period, revenue rose 51% and the net loss widened to $642. Core FFO is a company-defined, non-GAAP measure; management excludes selected litigation, acquisition, financing, amortization, stock-compensation, and swap items, and it may not be comparable with other REITs’ measures. No profit or margin percentage is reported in the filing.
- Cash flow, six months: Operating activities provided $358, versus $25 used in 2013. Investing activities used $9,134, principally for land ($4,420) and intangibles ($4,714). Financing activities provided $9,317. Cash increased by $541 to $619.
- Balance sheet: Total assets were $22,559 at June 30, versus $12,046 at December 31, 2013. Total liabilities were $10,783, versus $2,974; equity was $8,526, versus $9,072.
- Debt and liquidity: The balance sheet reported $7,700 of other long-term debt, $1,650 of related-party current debt, and $30 of current long-term debt. Cash was $619. In April, the company entered a $26.2 million, five-year credit facility and drew approximately $6.941 million, including bank fees, to support the Regulus acquisition and potential additional acquisitions. Rates are LIBOR plus 3.50% for the first three years and plus 4.00% thereafter. A related-party $1.65 million loan remained outstanding.
- Dividends and equity: Series A preferred dividends were $0.48 per share for both Q2 and the six-month period; no common dividend was reported for 2014. The company had sold 130,000 preferred shares for $3.25 million gross proceeds by June 30. The preferred shares carry a 7.75% cumulative rate and are redeemable at par on or after February 28, 2019.
Material changes and management commentary
- The April 2014 acquisition of approximately 447 acres in Kern County, California, for about $9.184 million added land leased to a solar project under construction. The project was targeting commercial operations in December 2014; the lease provides for initial annual rent of approximately $735,000, escalating 1% annually after operations begin, under a triple-net structure.
- Management attributed the Q2 year-over-year loss deterioration principally to $361 of acquisition expenses, $213 of unrealized swap loss, $106 of additional interest expense, and $81 of finance expense, partly offset by higher rental income and $93 lower litigation expense. For the six months, management cited $365 of acquisition costs, $213 of swap loss, $144 of additional interest expense, and $81 of finance expense, partly offset by lower litigation expense.
- The interest-rate swap generated a $213 unrealized loss and was recorded as a liability. The company said it had not completed the steps required for hedge accounting, so fair-value changes are recognized in earnings.
- Management expects substantial litigation expenses to continue during the remainder of 2014. No specific full-year financial guidance is provided. The filing cautions that interim results are not necessarily indicative of full-year results.
Risks, contingencies, and unusual items
- Railroad litigation: Power REIT and subsidiary P&WV are litigating with Norfolk Southern Railway and its sub-lessee over alleged lease defaults, disputed additional rent, legal-fee reimbursement, and railroad-related indebtedness. NSC records showed approximately $16.6 million owed as of December 31, 2012; P&WV says that amount is understated, and the disputed amount is not recognized in the GAAP balance sheet. P&WV also estimated additional claims exceeding $8 million, excluding potential interest and damages. The court denied the Trust’s summary-judgment motion on June 19, 2014, while also denying most of the opposing parties’ request to supplement their claims. The court expected a final ruling by February 2015, subject to change.
- Litigation costs totaled approximately $1.918 million cumulatively through June 30, 2014, with approximately $219 payable. The company expenses these costs as incurred and cannot assure reimbursement from NSC or a favorable outcome. The opposing parties’ allegation that Power REIT is a successor in interest could also lead to liability and expenses if resolved against the company.
- Related-party matters: The $1.65 million bridge loan is from an affiliate of Chairman and CEO David H. Lesser. A spouse of the CEO is a partner at the law firm retained for corporate and litigation matters; the company paid that firm approximately $401 in the first half of 2014, with another approximately $450 billed but unpaid at quarter-end. Independent trustees approved the arrangements as fair and reasonable.
- The company is a REIT and states that it must distribute at least 90% of ordinary taxable annual income, subject to other qualification requirements.
Important facts for investors to verify
- Current status, potential exposure, and financial outcome of the railroad litigation, including the disputed indebtedness and additional claims.
- Regulus project progress toward commercial operations and commencement of its expected rent stream.
- Credit-facility borrowing capacity, debt maturities and costs, and exposure to floating interest rates despite the swap.
- Cash needs and the sustainability of operations given recurring losses, acquisition spending, litigation costs, and preferred dividends.
- Basis and comparability of management’s Core FFO adjustments, particularly the treatment of acquisition and financing costs.