Power REIT — Q2 2022 Form 10-Q
Business and period: Maryland REIT focused on transportation, solar land and controlled-environment agriculture (CEA) real estate; this unaudited report covers the three and six months ended June 30, 2022. The portfolio included approximately 112 railroad miles, 601 acres leased to solar projects, and 263 acres with about 2.21 million square feet of existing or developing greenhouses.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $2.233 million | $2.268 million | $4.218 million | $4.089 million |
| Net income | $0.945 million | $1.540 million | $1.943 million | $2.648 million |
| Net income attributable to common shareholders | $0.782 million | $1.376 million | $1.616 million | $2.321 million |
| Basic EPS | $0.23 | $0.42 | $0.48 | $0.77 |
| Core FFO per common share | $0.41 | $0.51 | $0.81 | $0.97 |
| Operating cash flow | Not stated separately | Not stated separately | $5.210 million | $3.157 million |
- Q2 revenue declined about 1.5% year over year; six-month revenue increased about 3.2%. Six-month related-party rental income rose $643,000, offset in part by a $509,000 decrease in unrelated-party rental income.
- Common-shareholder income fell about 43% in Q2 and 30% for the six-month period. Management cited higher depreciation, interest, G&A and amortization; the six-month comparison also includes a $302,000 write-off of straight-line rent receivables for five greenhouse leases.
- Six-month Core FFO available to common shares was $2.744 million, down from $2.953 million. Core FFO is a non-GAAP measure defined by the company.
- At June 30, total assets were $99.1 million, cash was $1.192 million, and total liabilities were $39.0 million. Debt principal was $34.992 million, including $1.706 million due within 12 months. The balance-sheet carrying value of debt is lower due to unamortized discounts.
- Cash declined $1.980 million from year-end. Investing outflows were $18.036 million, primarily for real estate and construction; financing provided $10.847 million, including $11.5 million of debt draws. Preferred dividends paid were $326,000 for the half-year.
Material developments and outlook
- In March, Power REIT acquired a Nebraska greenhouse and employee housing facilities for $9.35 million plus approximately $91,000 of closing costs. The greenhouse is leased for 10 years to a related-party tenant to grow tomatoes; stated annual straight-line rent is approximately $1.099 million.
- The company amended leases and committed additional funds for property improvements, including $3.508 million for the Sweet Dirt cogeneration/chiller project. Several Colorado cannabis tenants received rent-payment timing relief; seven lease amendments had been executed by quarter-end.
- Management said cash available in July and the debt facility were expected to be sufficient for operations and commitments. It anticipated $11.959 million in cash rent over the following 12 months, while noting further acquisitions may require additional financing and that financing may not be available on favorable terms. No formal earnings or revenue guidance was provided.
- The $20 million debt facility bears 5.52% interest, converts to a five-year amortizing term loan after its draw period, and requires a debt-service coverage ratio of at least 2.00 to 1.00. The company reported compliance at June 30; the facility is non-recourse initially but has springing liens on CEA properties upon default.
Risks, contingencies and unusual items
- Management reported cannabis-market price compression, tenant financial stress, and COVID-related supply-chain, materials-cost and labor disruptions affecting construction. The company wrote off straight-line rent receivables for five Colorado and Oklahoma leases and will recognize their rent on a cash basis unless collectability improves.
- Revenue is concentrated: five properties generated approximately 65% of six-month revenue; related-party tenants represented 15%. The CEO is also CEO and chairman of Millennium Sustainable Ventures, whose affiliates lease several properties. An affiliate of the CEO is supplying part of the Sweet Dirt project equipment; independent trustees approved the disclosed related-party arrangements.
- Michigan cannabis licensing had been delayed by local documentation issues. The company reported that it later obtained the requested township statement and submitted its licensing application; mediation with the township was to continue.
- Litigation includes tenant eviction and rent disputes, an appeal of a Cloud Nine eviction, the JKL parties’ claims, and matters involving Marengo Township. The company said it did not expect material exposure from the JKL claims beyond litigation costs, but noted litigation can be costly and outcomes are uncertain.
- The company cited cannabis’s federal illegality and changing state and local regulation, tenant defaults, portfolio concentration, secured debt, and potential conflicts of interest as material risks. It reported disclosure controls were effective and no material second-quarter changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether stressed cannabis tenants are paying rent and whether cash-basis revenue recognition or further lease concessions affect cash collections.
- Progress on Michigan licensing, property construction, and the timing and cost of remaining funded commitments.
- Debt-facility availability, covenant compliance, repayment schedule, and refinancing needs relative to the company’s low cash balance.
- Tenant concentration and related-party lease and supplier arrangements, including performance of the Nebraska tenant and Sweet Dirt project.
- Updates on eviction proceedings, lawsuits, rent recoveries and any additional impairment or rent-receivable write-offs.