Power REIT — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 14, 2015. Power REIT is a REIT focused on transportation and energy-infrastructure real estate. Its portfolio included approximately 112 miles of railroad infrastructure and 601 acres leased to solar projects with approximately 108 MW of generating capacity.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $496,126 | $461,850 | $986,895 | $759,946 |
| Net income (loss) | $281,894 | ($701,349) | ($139,762) | ($643,377) |
| Net income (loss) attributable to common shares | $211,927 | ($762,377) | ($279,697) | ($704,405) |
| Core FFO attributable to common shares | $221,189 | $138,965 | $455,989 | $338,717 |
- Q2 revenue increased about 7%; six-month revenue increased about 30%. Rental income rose to $262,420 in Q2 from $233,075, primarily reflecting acquired solar properties and the Regulus project’s transition to commercial operations.
- Q2 basic and diluted earnings per common share were $0.12, versus a loss of $0.46 in Q2 2014. Six-month loss per share was $0.16, versus $0.42 in 2014.
- Management-reported Core FFO per common share was $0.13 for Q2, up 54%, and $0.26 for six months, up 30%. Core FFO is a non-GAAP measure; the company’s adjustments include litigation, acquisition, stock-compensation, financing-cost amortization and swap valuation items.
- Q2 results included a $244,821 unrealized gain on the interest-rate swap, recorded through earnings because the swap did not qualify for hedge accounting. Six-month results also included $439,425 of debt-cost amortization, including a write-off associated with the credit-facility amendment.
- Net cash used in operating activities was $11,961 for the first half, versus $357,385 provided in the prior-year period. No investing cash flows were reported in the first half of 2015; cash declined by $305,811 to $348,570. Preferred dividends paid were $139,935.
- At June 30, cash was $348,570 and total assets were $21.69 million. Total liabilities were $10.71 million. Balance-sheet debt, including the $1.65 million related-party borrowing, was approximately $9.25 million. That related-party borrowing was classified as current and matures in January 2016. The company reported no common-share dividend in the presented statements; Series A preferred shares carry a 7.75% cumulative dividend, with $0.48375 per share declared for payment in September.
Changes, outlook and significant matters
- The Q2 earnings improvement versus 2014 principally reflected $30,000 more rental income, $63,000 lower general and administrative costs, no comparable acquisition expense (versus $360,707 in Q2 2014), a $458,000 favorable swing in swap valuation and $29,000 lower litigation expense.
- For the first half, general and administrative expense and litigation expense declined year over year. However, interest expense increased to $714,031 from $250,397, and the company remained loss-making for the six-month period.
- The February 2015 credit-facility amendment reduced the facility commitment from $26.2 million to $11.8 million and the unused fee from 0.75% to 0.25%. The facility has a five-year term, with pricing of 350 basis points over LIBOR for the first three years and 400 basis points thereafter. The company said it was actively pursuing additional renewable-energy and infrastructure acquisitions; no quantified financial guidance was provided.
- Railroad litigation is a major contingency. In April 2015, the court granted the railway parties’ summary-judgment motion and dismissed P&WV’s claims. A trial on the railway parties’ two remaining claims against P&WV and Power REIT occurred in August 2015; the court hoped to issue a final ruling in Q4 2015. The company was evaluating legal options and the prospects of an appeal. It disclosed potential liability and expense if the company is found to be a successor under the railroad lease.
- P&WV says the railway parties owed approximately $16.6 million as of December 31, 2012, and estimates additional amounts exceeding $8 million, plus potential interest and damages. These disputed amounts are not included in GAAP balance-sheet assets or income. Litigation costs of approximately $2.83 million had been incurred cumulatively through June 30, 2015; approximately $448,000 was in accounts payable. Recovery of those costs is uncertain.
- Related-party matters include the $1.65 million loan from an affiliate of the CEO and legal services from a firm whose partner is the CEO’s spouse. Approximately $484,000 of legal fees and costs had been billed but unpaid at June 30. The filing says independent trustees approved the arrangements.
- Management assessed disclosure controls as effective at June 30, 2015 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Final outcome of the railroad litigation, possible appeal, and any resulting liability, lease impact or recovery of disputed amounts and legal costs.
- Ability to meet near-term obligations, particularly the January 2016 related-party loan maturity, given limited cash and negative first-half operating cash flow.
- Underlying recurring performance excluding the unrealized swap gain and the substantial noncash debt-cost amortization; assess the company’s Core FFO adjustments against GAAP results.
- Credit-facility terms, outstanding balance, interest-rate hedging and capacity to finance planned acquisitions.
- Preferred dividend requirements, related-party balances and legal-fee accruals, and the effect of future litigation and financing costs on liquidity.