Power REIT 10-Q Summary: Quarter Ended September 30, 2014
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2014, for Power REIT, a Maryland-domiciled real estate investment trust. The company focuses on acquiring and managing real estate assets related to transportation and energy infrastructure, specifically railroad lines leased to Norfolk Southern Railway (NSC) and land leased to utility-scale solar projects. As of the reporting date, the portfolio included approximately 112 miles of railroad infrastructure and 601 acres of land leased to solar projects with an aggregate capacity of 108 MW.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2014 | Nine Months Ended Sep 30, 2014 | Dec 31, 2013 (Balance Sheet) |
|---|---|---|---|
| Total Revenue | $491,000 | $1,251,000 | N/A |
| Net Loss | $(303,000) | $(945,000) | N/A |
| Loss Per Share (Basic/Diluted) | $(0.21) | $(0.63) | N/A |
| Core FFO (Non-GAAP) | $254,000 | $600,000 | N/A |
| Cash and Equivalents | N/A | N/A | $758,000 |
| Total Assets | N/A | N/A | $22,580,000 |
| Total Liabilities | N/A | N/A | $10,907,000 |
| Long-Term Debt | N/A | N/A | $7,693,000 |
Note: Financial statement figures are in thousands. The company reported a net loss for the period but positive Core Funds From Operations (FFO) after adjusting for non-recurring and non-cash items.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased from $251,000 in Q3 2013 to $491,000 in Q3 2014, driven primarily by $241,000 in additional rental income from newly acquired solar properties (specifically the PWRS acquisition in April 2014).
- Expense Increases: Net loss widened due to significant increases in interest expense ($94,000 increase), finance expense ($99,000 increase), and unrealized losses on interest rate swaps ($61,000 increase). Litigation expenses also rose by $124,000 quarter-over-quarter.
- Balance Sheet Expansion: Total assets grew from $12.0 million at year-end 2013 to $22.6 million at September 30, 2014, reflecting the acquisition of land and intangible assets. Total liabilities increased from $3.0 million to $10.9 million, largely due to new debt financing and the issuance of Series A Preferred Stock.
- Capital Structure: The company issued 138,499 shares of Series A Preferred Stock, raising gross proceeds of approximately $3.46 million. No common stock dividends were paid in 2014, whereas $0.10 per share was paid in 2013.
Outlook, Risks, and Management Commentary
- Acquisition Strategy: Management continues to pursue acquisitions in solar, wind, and transmission infrastructure. The PWRS solar project (82 MW) is under construction with commercial operations targeted for December 2014.
- Litigation Risk: The company is engaged in ongoing litigation with NSC regarding the Railroad Lease. P&WV claims NSC owes approximately $16.6 million (as of Dec 2012) plus additional amounts estimated to exceed $8 million. The court expects a final ruling by February 2015. Litigation expenses are significant and expected to continue.
- Internal Controls: Management disclosed that disclosure controls and procedures were not effective as of September 30, 2014. Material weaknesses include ineffective segregation of duties (CEO handles all financial reporting), lack of resources for complex reporting, and lack of independent review.
- Related Party Transactions: The company utilizes legal counsel where a spouse of the CEO is a partner and holds related-party debt from an affiliate of the CEO to fund acquisitions.
Investor Verification Checklist
- Litigation Outcome: Verify the status of the NSC lawsuit and the potential recoverability of the $16.6M+ indebtedness and legal fees.
- Internal Control Remediation: Assess the plan to address material weaknesses in financial reporting and segregation of duties.
- Debt Covenants: Review terms of the $26.2M credit facility and related-party notes to ensure compliance with covenants given the current net loss position.
- Preferred Stock Dividends: Confirm the sustainability of the 7.75% dividend on Series A Preferred Stock given the GAAP net loss.
- Project Completion: Monitor the timeline for the PWRS solar farm to achieve commercial operations and begin full rental payments.