Power REIT — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Power REIT is a Maryland REIT focused on transportation and infrastructure real estate. At quarter-end, its portfolio included about 112 miles of railroad infrastructure leased to a railway company and 601 acres leased to solar projects with approximately 108 MW of capacity.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $495,611 | $493,642 | $990,204 | $986,245 |
| Net income | $213,458 | $207,492 | $410,703 | $422,139 |
| Net income attributable to common shares | $143,400 | $137,434 | $270,587 | $282,023 |
| Basic and diluted earnings per common share | $0.08 | $0.08 | $0.14 | $0.15 |
| Core FFO available to common shares | $256,110 | $246,243 | $512,833 | $503,780 |
| Core FFO per common share | $0.14 | $0.13 | $0.27 | $0.28 |
Net income margin was approximately 43.1% in Q2 2019 versus 42.0% in Q2 2018; for the first six months, approximately 41.5% versus 42.8%. Core FFO is a company-defined non-GAAP measure; Power REIT reconciles it to common-share net income in the filing.
Cash flow and liquidity: Six-month operating cash flow was $635,527, compared with $625,344 a year earlier. Financing activities used $272,745, including $132,629 of debt principal payments and $140,116 of preferred dividends. Cash increased by $362,782 to $2,133,793 at June 30, 2019.
Debt and balance sheet: Total assets were $22.25 million and total liabilities $9.67 million. Debt on the balance sheet was $9.44 million, comprising $406,043 current and $9.03 million long-term. The principal borrowings carry fixed rates of 4.34% and 5.0%; the $10.15 million bond obligation matures in 2034. Preferred stock carrying value was $3.49 million. Shareholders’ equity was $9.08 million.
Changes versus comparable periods
- Q2 revenue was nearly flat, up about 0.4%; net income rose about 2.9% and common-share income about 4.3% year over year.
- Six-month revenue was up about 0.4%, while net income declined about 2.7% and common-share income about 4.1%. Six-month Core FFO increased about 1.8%, although Core FFO per share declined from $0.28 to $0.27.
- Management attributed the six-month change in results principally to approximately $4,000 more miscellaneous income, $20,000 higher G&A expense, and $8,000 lower interest expense. G&A and property-tax expenses rose; interest expense fell.
- Cash at period-end increased from $1.77 million at December 31, 2018. Net debt declined modestly from year-end.
Outlook, commentary, risks and unusual items
- No quantified earnings, revenue, or acquisition guidance was provided. Management said it was actively seeking renewable-energy and other infrastructure real estate investments. The company relies on operating cash flow, equity issuance, and borrowings to fund working capital and longer-term needs.
- On July 12, 2019, after quarter-end, the company acquired two southern Colorado properties for $1.77 million plus acquisition costs, using existing working capital. The 7.31-acre properties include greenhouse and processing facilities and are intended for licensed cannabis cultivation and processing.
- The properties were leased under two cross-collateralized, cross-defaulted 20-year triple-net leases, with two five-year renewal options and tenant-affiliate guarantees. Rent includes a six-month free-rent period, then a structure designed to return invested capital over the next three years; from month 43 it provides a 12.5% return on original investment, increasing 3% annually. If cannabis becomes federally legal after year six, rent resets to a 9% return, also with 3% annual increases. This investment introduces tenant, regulatory, and cannabis-sector risks.
- Power REIT declared a $0.484375-per-share quarterly dividend on its 7.75% Series A preferred stock, payable September 15, 2019. It reported paying about $140,000 in preferred dividends during the first half. The filing states REIT qualification generally requires distributing at least 90% of ordinary taxable annual income.
- Management stated disclosure controls were effective at June 30, 2019, with no material changes in internal control over financial reporting during the six months. The filing refers readers to the risk factors in the March 25, 2019 Form 10-K and cautions that forward-looking statements are subject to risks and may not be updated.
Important facts for investors to verify
- Review the Colorado acquisition’s lease guarantees, tenant credit, rent commencement and collection, and exposure to changing cannabis laws.
- Confirm debt amortization and upcoming principal obligations, as well as the ability to fund acquisitions and preferred dividends from operating cash flow.
- Assess the concentration of revenue in the railroad and existing solar leases, and the prospects and financing required for portfolio expansion.
- Reconcile Core FFO with GAAP results and consider the impact of its exclusions, including stock compensation and intangible-asset amortization.
- Review the incorporated 10-K risk factors and the conditions for maintaining REIT tax status.