Power REIT — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report; it does not provide standalone fourth-quarter results.
Business context
Power REIT is a Maryland REIT focused on U.S. transportation and energy-infrastructure real estate. At year-end, its portfolio comprised approximately 112 miles of railroad infrastructure and 601 acres leased to solar projects with aggregate capacity of about 108 MW. The railroad is leased to Norfolk Southern under a long-term lease; the solar properties are leased to operating projects. The company reported four investment subsidiaries and is seeking further infrastructure and renewable-energy acquisitions.
Financial performance and position
| Metric | FY2016 / Dec. 31, 2016 | FY2015 / Dec. 31, 2015 |
|---|---|---|
| Revenue | $1.976 million | $1.970 million |
| GAAP net income (loss) | $247,183 | $(450,755) |
| Net loss attributable to common shareholders | $(32,687); $(0.02) per share | $(730,626); $(0.42) per share |
| Core FFO attributable to common shares (non-GAAP) | $1.061 million; $0.60 per share | $979,000; $0.56 per share |
| Net cash from operating activities | $884,170 | $(225,003) |
| Cash and cash equivalents | $717,104 | $435,870 |
| Total assets | $21.215 million | $21.313 million |
Revenue increased approximately 0.3%. The GAAP earnings improvement reflected lower interest expense and the absence of 2015 losses on debt extinguishment and interest-rate swaps, partly offset by higher litigation costs. FY2016 litigation expense was $483,306 versus $359,015 in 2015. Core FFO, a company-defined non-GAAP measure, increased 8.4%; it excludes specified items including litigation, stock compensation and certain amortization and financing costs.
At year-end, reported current and long-term debt carrying amounts totaled approximately $10.21 million; the debt maturity schedule reports approximately $10.62 million of principal, including $344,114 due in 2017 and $8.67 million thereafter. The principal financing is $10.15 million of fixed-rate PWRS bonds at 4.34%, maturing in 2034. Other debt includes a PWSS term loan at 5% and municipal financing. The balance sheet reports total liabilities of $10.44 million. Series A preferred stock carrying value was $3.49 million, with a 7.75% cumulative dividend.
Operating cash flow improved to $884,170. There were no acquisitions in either 2016 or 2015. Financing cash outflows in 2016 were approximately $603,000, mainly debt principal payments and preferred dividends. The company paid approximately $280,000 of preferred dividends; common dividends have been suspended since the second quarter of 2013.
Material changes, outlook and key risks
- Results: Revenue was broadly unchanged, while GAAP net income moved from a loss to a profit. Common shareholders nevertheless remained in a small loss after preferred dividends.
- Concentration: P&WV and PWRS accounted for approximately 46% and 41% of 2016 consolidated revenue, respectively. The portfolio and revenue base remain concentrated in a small number of properties and tenants.
- Railroad litigation: The dispute with Norfolk Southern and sub-lessee WLE concerns the lease, additional rent, property dispositions and amounts allegedly owed. A trial-court ruling found for Power REIT on claims against the Trust and awarded NSC nominal damages of $1 against P&WV; punitive damages were denied. Power REIT and P&WV appealed, and briefing was complete by August 2016. The appeal outcome remains uncertain.
- Disputed amounts: NSC records showed approximately $16.6 million of indebtedness owed to P&WV as of December 31, 2012; NSC had not provided a later amount. P&WV disputes the amount and collectability. The company also claimed additional amounts exceeding $8 million related to property dispositions. These disputed receivables and indebtedness are not recognized as net GAAP receivables; the filing says related receivables are fully reserved.
- Management outlook: No quantitative earnings or acquisition guidance is provided. Power REIT plans to pursue additional qualifying infrastructure and renewable-energy investments. Management expected remaining G&A expenses to increase in 2017 and beyond, and said 2017 litigation costs were difficult to project.
- Other risks: Continued litigation could increase costs, impede financing or growth, and jeopardize lease-related cash flows. The company warns of tenant concentration, limited access to capital, leverage, REIT qualification and distribution requirements, and dependence on its CEO, who is its only officer or employee.
- Controls and governance: Management concluded disclosure controls and internal control over financial reporting were effective, but acknowledged limited segregation of financial-reporting duties because the CEO is primarily responsible. The auditor issued an unqualified opinion on the financial statements; it did not attest to internal-control effectiveness.
Important facts for investors to verify
- Current status and outcome of the Third Circuit appeal, and any subsequent developments in the Norfolk Southern dispute.
- Whether NSC continues quarterly base rent of $228,750 and whether any disputed additional rent or litigation costs are recoverable.
- Debt balances, scheduled principal and interest payments, refinancing capacity, and available liquidity relative to litigation and operating needs.
- Tenant/project performance and the continuing revenue concentration in P&WV and PWRS.
- Conditions for resuming common dividends, preferred-dividend coverage, and compliance with REIT distribution requirements.
- Progress on acquisitions, related-party arrangements, and management’s capacity to execute its growth plans.