Power REIT — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; unaudited. Power REIT is a Maryland REIT owning railroad, solar-land and controlled-environment agriculture (CEA) real estate, with a stated focus on greenhouse acquisitions for food and cannabis cultivation.
Business context and portfolio
At September 30, 2022, the portfolio included approximately 112 miles of railroad infrastructure, 601 acres of solar land with about 108 MW of generating capacity, and 263 acres supporting approximately 2.21 million square feet of existing or under-construction greenhouses. The March 2022 acquisition of a 1.12-million-square-foot Nebraska greenhouse was its first food-crop-focused acquisition.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $2.008 million | $2.547 million | $6.226 million | $6.636 million |
| Net income | $583,000 | $1.826 million | $2.526 million | $4.474 million |
| Net income attributable to common shareholders | $420,000 | $1.663 million | $2.036 million | $3.984 million |
| Basic/diluted EPS | $0.12 / $0.12 | $0.50 / $0.49 | $0.60 / $0.58 | $1.27 / $1.24 |
| Core FFO available to common shares | $1.140 million | $2.072 million | $3.884 million | $5.025 million |
| Core FFO per common share | $0.34 | $0.62 | $1.15 | $1.61 |
Revenue declined approximately 21% in Q3 and 6% for the nine-month period. Net income attributable to common shareholders fell approximately 75% in Q3 and 49% year to date. Management cited lower rental income and higher G&A, depreciation, amortization and interest expense. Q3 rental income from related parties was reported as negative $64,335; the filing attributes the year-over-year revenue decline primarily to a reduction in related-party rental income.
Net income as a percentage of revenue was approximately 29% in Q3 2022 versus 72% in Q3 2021, and 41% for the first nine months of 2022 versus 67% in 2021. Core FFO is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $6.553 million, compared with $6.082 million in 2021. Investing cash outflow was $20.361 million, versus $37.836 million; financing cash inflow was $14.859 million, versus $35.429 million.
- Cash and cash equivalents were $4.222 million at September 30, up $1.051 million from December 31, 2021. The company attributed the increase primarily to borrowing under its debt facility.
- Debt was reported at $38.386 million net of discounts on the balance sheet: $2.783 million current and $35.603 million long term. The debt schedule reports approximately $39.168 million of remaining principal. The company drew $16 million on a $20 million facility during the first nine months.
- The debt facility carries a 5.52% interest rate and requires a debt-service coverage ratio of at least 2.00 to 1.00; Power REIT reported compliance at September 30. An October 28 amendment extended the amortization period used for the coverage calculation from five to ten years and added a six-month debt-service reserve requirement.
- Preferred dividends paid were approximately $490,000 during the first nine months. Management said available cash and facility availability may fund near-term operations and commitments, depending on rent collections.
Material changes, outlook and risks
- Ten cannabis leases had been amended to reduce near-term cash payments and increase later payments without changing total stated rent over the lease terms. Management said wholesale cannabis price compression was creating financial difficulties for tenants.
- Several tenants or properties face significant collection or occupancy uncertainty. MillPro in Nebraska, Sandlot and Walsenburg tenants had ceased operations, with no further rental income expected from those tenants at the time of filing. Apotheke had rent arrearages; Marengo’s scheduled January 2023 rent commencement was considered unlikely given licensing delays. Power REIT was seeking a replacement tenant for MillPro and exploring options for other affected leases.
- Michigan cannabis licensing remained delayed amid disputes with Marengo Township. The state regulator’s process had been interrupted; the Bureau of Fire Services had approved plans subject to final physical inspection, while the company continued administrative and litigation paths to resolve local issues.
- Construction timing and costs faced supply-chain, material-price and labor pressures, which the company also associated with COVID-19 effects. The filing provides no quantified full-year earnings or revenue guidance.
- Revenue concentration increased: four properties accounted for approximately 56% of nine-month consolidated revenue, compared with 36% from three properties in the prior-year period. The largest listed contributions were Sweet Dirt (22%), Canndescent (13%), Norfolk Southern Railway (11%) and Regulus Solar (10%).
- Related-party risks include leases with entities affiliated with CEO and Chairman David Lesser, and Sweet Dirt project equipment supplied by an entity affiliated with him. Independent trustees approved the disclosed arrangements. The company also disclosed litigation involving former tenants, the Marengo Township dispute and a claim against the company and its CEO; it said it did not believe the JKL claims created material exposure beyond litigation costs.
Important facts for investors to verify
- Subsequent rent collections, arrears, cash-basis lease revenue and the status of ceased-operations tenants, including MillPro, Sandlot and Walsenburg.
- Progress toward a replacement tenant for the Nebraska greenhouse and resolution of Michigan licensing and township disputes.
- Debt-facility availability, covenant compliance, reserve funding, future principal payments and liquidity needs relative to committed property improvements.
- Whether cannabis tenant amendments preserve expected total rent in practice, and the impact of continued price compression and portfolio concentration.
- Developments in disclosed litigation and the governance and economic terms of related-party leases and construction arrangements.