Power REIT — Q2 2021 Form 10-Q
Business context and period. Unaudited results for the three and six months ended June 30, 2021. Power REIT owns railroad, solar-land and controlled-environment agriculture (CEA) properties; it is expanding chiefly into cannabis cultivation real estate, generally under long-term triple-net leases. At quarter-end, its portfolio included about 112 railroad miles, 601 acres leased to solar projects totaling approximately 108 MW, and 111 acres with about 533,000 square feet of existing or under-construction greenhouses leased to 16 regulated cannabis operators.
Financial performance and position
- Q2 revenue: $2.268 million, up 133% from $975,000. Rental income was $2.035 million; railroad direct-financing lease income was $229,000.
- Q2 earnings: Net income was $1.540 million versus $480,000; income attributable to common shareholders was $1.376 million versus $410,000. Basic/diluted EPS was $0.42/$0.41, compared with $0.21/$0.21.
- First-half revenue and earnings: Revenue was $4.089 million versus $1.763 million; net income was $2.648 million versus $732,000; common-shareholder income was $2.321 million versus $592,000. Basic/diluted EPS was $0.77/$0.74 versus $0.31/$0.30.
- Drivers and costs: Management attributed revenue and profit growth primarily to rental income from newly acquired properties. Q2 expenses rose $233,000 year over year, mainly from higher G&A and depreciation. First-half expenses rose $410,000, including $286,000 more depreciation and $142,000 more G&A. The filing does not report a conventional operating margin.
- Core FFO, non-GAAP: Q2 Core FFO available to common shares was $1.678 million, or $0.51 per share, versus $555,000, or $0.29. First-half Core FFO was $2.953 million, or $0.97 per share, versus $907,000, or $0.48. These are management-defined non-GAAP measures and may not be comparable with other REITs’ measures.
- Cash flow: First-half operating cash flow was $3.157 million versus $1.201 million. Investing used $15.842 million, chiefly for property acquisitions and construction; financing provided $35.913 million, primarily from common-share issuance. Cash rose $23.228 million to $28.829 million.
- Debt and liquidity: Debt principal was $24.148 million, with $656,000 due in the next 12 months; balance-sheet debt, net of discount, was $23.553 million. The filing says anticipated cash rent over the next 12 months was $14.185 million and management believed available resources would fund operations and commitments; additional acquisitions may require financing. Aggregate scheduled future rentals were $202.974 million, including $144.098 million thereafter.
- Equity and preferred distributions: A rights offering generated approximately $36.7 million gross and issued 1,383,394 common shares at $26.50 each. Common shares outstanding rose from 1,916,139 at year-end to 3,322,433 at June 30. First-half preferred dividends were $326,412; the Series A preferred stock carries a 7.75% rate.
Material changes and notable transactions
During the first half, Power REIT acquired eight properties and expanded a lease on a newly acquired property. The portfolio additions included Colorado and Oklahoma cannabis properties, a California greenhouse acquisition, and construction and upgrade commitments. Management reported combined annual straight-line rent of approximately $4.6 million from the eight acquisitions and one expansion; many projects remained under construction at quarter-end, with expected completion dates extending from 2021 into January 2022. The new leases are generally 20-year triple-net leases, with tenant responsibility for property expenses, personal or affiliate guarantees in most cases, and rent escalators. Certain leases permit rent to reset lower if cannabis is federally legalized.
Assets increased to $85.294 million from $40.539 million at December 31, 2020, reflecting the acquisitions, construction spending and equity proceeds. Total equity increased to $50.694 million from $11.718 million. The Canndescent acquisition was partly funded with 192,308 Series A preferred shares valued at approximately $5.0 million.
Outlook, risks and other matters
- No formal earnings or revenue guidance is provided. Management intends to use operating cash flow, equity issuance and secured borrowing to fund needs, and says current resources are sufficient for operations and existing commitments. Further acquisitions could require additional capital; financing may not be available on favorable terms.
- Key execution and operating exposures include completing construction and upgrades, tenant ability to pay rent, maintaining required cannabis licenses and complying with state and local regulations. Federal cannabis legalization could reduce rent under specified lease provisions. Management said it had not experienced a direct COVID-19 impact but continued to monitor possible effects on tenants and rent payments.
- The filing says there were no material changes to risk factors from the 2020 Form 10-K. It also notes ongoing litigation; outcomes and potential financial effects are not predictable, and defense costs and management distraction have already affected the business. No clear quantified contingency value is provided.
- Related-party matters warrant attention: an affiliate of CEO David Lesser provides administrative support, and MILC, whose CEO and chairman is also David Lesser, agreed to finance or invest in certain tenant/operators. The company states independent trustees approved these arrangements as fair and reasonable. A total of approximately $106,000 of first-half rental income came from the related tenants described.
- Management assessed disclosure controls as effective at June 30, 2021, and reported no material changes in internal control over financial reporting. Subsequent to quarter-end, the company declared a preferred dividend of $0.484375 per share, payable September 15, 2021.
Important facts for investors to verify
- Construction completion, remaining capital commitments and actual rent commencement for the new CEA properties, compared with the projected straight-line rents and yields.
- Tenant concentration, licensing and operating status, rent collection, guarantees and tenant/operator capacity to meet long-term obligations.
- Cash available after acquisition and construction commitments, the distinction between debt principal and net carrying value, and potential need for further equity or secured borrowing.
- Related-party financing and tenant relationships, including applicable approvals, terms and any conflicts of interest.
- Litigation developments and any material changes in COVID-19, cannabis regulatory or federal legalization risks.