Power REIT — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited. Power REIT is a Maryland REIT seeking investments in energy and transportation infrastructure. Its sole current income-generating asset is its wholly owned subsidiary, Pittsburgh & West Virginia Railroad (P&WV), whose railroad property is leased to Norfolk Southern Corporation (NSC) under a 99-year lease.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest income from capital lease | $229,000 | $229,000 | $458,000 | $458,000 |
| General and administrative expense | $186,000 | $102,000 | $284,000 | $162,000 |
| Non-recurring litigation expense | $141,000 | — | $224,000 | — |
| Net income (loss) | $(98,000) | $127,000 | $(51,000) | $295,000 |
| Diluted net income (loss) per share | $(0.06) | $0.08 | $(0.03) | $0.19 |
- NSC’s base rent is fixed at $915,000 annually, paid quarterly; the lease provides for additional rent, including reimbursement of certain taxes and qualifying expenses. The filing reports no revenue growth versus the comparable periods.
- Management’s non-GAAP adjustment adds back litigation costs: six-month 2012 net income was $173,000, or $0.11 per diluted share, versus GAAP loss of $51,000. Management says the legal costs are non-recurring, but notes further costs may arise. This measure is not a substitute for GAAP results.
- Cash and cash equivalents were $723,000 at June 30, 2012, down from $982,000 at year-end 2011. Total assets were $10.013 million, including a $9.150 million net investment in the capital lease. Accounts payable were $102,000 and dividends payable were $162,000; shareholders’ equity was $9.749 million. The balance sheet reports no debt.
- For the first six months, operating cash flow was $(97,000), versus $271,000 in 2011; dividends paid were $162,000, versus $313,000. Cash declined by $259,000 to $723,000. The filing provides no clear operating margin measure.
- Quarterly dividends were $0.10 per share, unchanged from Q2 2011; six-month dividends were $0.20 per share. Shares outstanding were 1,623,250.
Changes, outlook, and risks
- Compared with Q2 2011, revenue was unchanged while G&A and litigation expense rose, and the company moved from net income to a net loss. Management attributes higher expenses to litigation, annual-meeting costs related to a proxy challenge, and business expansion.
- P&WV is litigating with NSC and its sub-lessee over property sales, lease interpretation, reimbursement of legal fees, amounts allegedly owed, and whether the lease is in default. NSC continued paying base rent during the litigation. P&WV believes legal costs are recoverable as additional rent, but has expensed them and has not recognized disputed potential recoveries. A favorable outcome is not assured.
- NSC records showed $16.24 million of principal indebtedness owed to P&WV at December 31, 2011, compared with $15.88 million a year earlier. The amount, term, and character are disputed, so no value is recognized in the financial statements.
- The REIT is seeking diversification. It placed a $15,000 deposit on land intended for a potential energy park and a $25,000 deposit related to a prospective acquisition credit line; neither acquisition nor financing is assured. A $100 million shelf registration became effective in May, but no securities had been issued and the company reported no immediate issuance plans.
- After quarter-end, on August 13, the company granted options covering 166,000 shares and 30,000 restricted shares. The awards vest over three years; the filing reports approximately $320,000 of unrecognized compensation cost after the grants.
- Management stated that disclosure controls were adequate and effective and reported no material change in internal control over financial reporting. The filing cautions that forward-looking statements are subject to risks and uncertainty.
Important facts for investors to verify
- Developments and potential financial impact of the NSC litigation, including whether disputed additional rent or indebtedness will be recoverable or recognized.
- Continued payment of base rent and the lessee’s ability to meet its obligations under the long-term lease.
- Cash needs, dividend coverage, and whether the proposed credit line and energy-park investment proceed on acceptable terms.
- Potential dilution and compensation expense from the post-quarter equity awards and any future shelf offerings.