Power REIT — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2013. Financial statement amounts are in thousands of dollars unless otherwise noted. Power REIT is a REIT focused on transportation and energy infrastructure real estate, including renewable-energy properties.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior balance date |
|---|---|---|
| Revenue | $251 | $229 |
| Net income (loss) | $(111) | $47 |
| Basic and diluted EPS | $(0.07) | $0.03 |
| Operating cash flow | $2 | $75 |
| Cash and cash equivalents | $191 | $366 at Dec. 31, 2012 |
| Total assets | $10,487 | $10,637 at Dec. 31, 2012 |
| Total debt | $915 | $927 at Dec. 31, 2012 |
| Cash dividend per common share | $0.10 | $0.10 |
Revenue increased about 10%, but the Trust swung to a loss. The implied net margin was approximately negative 44% versus positive 21% in Q1 2012. Litigation expense rose to $240 from $83 and was the main driver of the decline. G&A expense was $107 versus $99; property tax and interest expense were $3 and $12, respectively, compared with none reported in the prior-year quarter. The solar property contributed revenue for the first time in Q1 2013; railroad-related revenue remained approximately 91% of consolidated revenue.
Cash decreased by $175 during the quarter: $2 of operating cash flow was more than offset by $177 of financing outflows, including $165 of dividends and $12 of debt repayment. Current assets were $196 and current liabilities $473, a working-capital deficit of approximately $277. Shareholders’ equity was $9,105, down from $9,354 at year-end.
Business, debt and financing
- The railroad property is leased to Norfolk Southern under a 99-year lease with renewal options. Base cash rent is $915 annually, paid in quarterly installments; the tenant is responsible for operations and maintenance.
- Power REIT’s 54-acre Massachusetts property is leased to an operating 5.7 MW solar farm. The lease calls for $80.8 of cash rent for the year ending November 30, 2013, with annual 1% escalations; rent is recorded straight-line.
- The $800 related-party bridge loan from an affiliate of the Chairman and CEO was extended during the quarter through June 30, 2014, with a borrower option to extend to January 31, 2015. It is secured by the property and a parent guarantee; the rate is 5% for the initial six months and 8.5% thereafter. The approximately $115 municipal loan bears 5% interest.
- A $100 million shelf registration was effective, and a March 2013 ATM supplement authorized up to $5.4 million of common-share sales, subject to a 3% agent fee. No shares were sold under the ATM in Q1. From April 1 through May 10, the Trust sold 11,966 shares and received approximately $120 net of fees.
Outlook, risks and unusual items
- Management expects substantial NSC litigation expenses to continue through the remainder of 2013 and expects G&A and revenue to increase as the business expands. The filing provides no quantified earnings or revenue guidance and cautions that expansion may not succeed.
- The Trust and its subsidiary are in litigation with NSC and its sub-lessee concerning the railroad lease, alleged defaults, reimbursement of legal costs, inspection rights, and the timing and amount of lease-related indebtedness. Fact discovery was mostly complete; expert discovery was underway.
- NSC’s records indicate approximately $16.6 million of disputed indebtedness owed to P&WV as of December 31, 2012. The Trust says the amount may be understated. This amount is not recorded in the GAAP balance sheet or income statement because when it is due is disputed. Recovery, collectability, and litigation outcome are uncertain.
- NSC continued making base rent payments during the litigation, but the Trust cautions that continued payment is not assured. P&WV incurred $240 of litigation expense in Q1 2013 and believes the lease requires NSC to reimburse it; NSC has refused, and recovery is uncertain. The Trust records these costs as incurred.
- On May 1, 2013, the Trust announced a term sheet to acquire about 100 acres in California for approximately $1.6 million, subject to due diligence and other conditions. The land is intended for long-term leases to planned solar farms totaling about 20 MW; the transaction was expected to close in Q2.
- Management reported disclosure controls as adequate and effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Current litigation status, likely duration and cost, and whether NSC will continue base rent payments or reimburse legal costs.
- The legal and accounting treatment, amount, timing, and potential recoverability of the disputed $16.6 million lease-related indebtedness.
- Cash needs and dividend sustainability given the quarterly loss, low operating cash flow, working-capital deficit, and continuing legal costs.
- Bridge-loan extension and interest-rate terms, related-party conflict considerations, and the timing of principal repayment.
- Whether the California solar-land acquisition closes, its financing and lease terms, and the extent to which new assets reduce revenue concentration.
- ATM share sales, associated dilution and fees, and use of proceeds.