Power REIT — Third Quarter 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Figures are in thousands of dollars except per-share data. Power REIT is a Maryland REIT whose only current income-producing asset is its wholly owned Pittsburgh & West Virginia Railroad subsidiary (P&WV), leased to Norfolk Southern Corporation (NSC) under a 99-year lease.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Railroad lease income | $229 | $229 | $686 | $686 |
| General and administrative expense | $69 | $55 | $354 | $217 |
| NSC litigation expense | $142 | — | $366 | — |
| Net income (loss) | $18 | $174 | $(33) | $469 |
| Diluted earnings (loss) per share | $0.01 | $0.11 | $(0.02) | $0.29 |
| Cash dividend per common share | $0.10 | $0.10 | $0.30 | $0.30 |
- Net margin was approximately 7.9% for Q3 2012 and negative 4.8% for the first nine months, based on reported lease income.
- Operating cash flow was $(106) for the first nine months of 2012, versus $456 in 2011. Dividends paid were $325; financing cash flow was $(325), compared with $474 provided in 2011, which included $950 of financing proceeds.
- Cash declined from $982 at year-end 2011 to $551 at September 30, 2012. Total assets were $9,830, including a $9,150 net investment in the railroad capital lease. Shareholders’ equity was $9,615; accounts payable and dividends payable totaled $214. The filing reports no recorded debt.
Changes, outlook, and risks
- Revenue remained unchanged year over year because base rent is fixed at $915 annually, paid quarterly, with no base-rent increases under the lease. NSC continues to pay base rent during the litigation.
- Net income fell substantially from Q3 2011 and the nine-month period turned to a loss, primarily reflecting litigation costs and higher G&A. Litigation expense was $142 in Q3 and $366 year to date; the filing says management believes these costs are reimbursable as additional rent, but no recovery was recorded pending litigation.
- Power REIT and P&WV are litigating with NSC and its sub-lessee over lease interpretation, alleged default, property-sale proceeds, additional rent, and amounts owed. The case was in active discovery; management cautioned that no favorable outcome is assured. NSC records cited in the filing indicate more than $16 million of indebtedness owed to P&WV, excluding interest, but the amount and terms are disputed and the liability is not recognized in the financial statements.
- The Trust is seeking to diversify into energy and transportation infrastructure. It placed $15 in deposit on land intended for an energy park and $25 with a bank in connection with a potential acquisition credit line; neither the acquisition nor financing is assured. A $100 million shelf registration became effective in May 2012, but no securities had been issued and management reported no immediate issuance plans.
- The REIT intends to distribute at least 90% of ordinary taxable income to maintain its tax status. No specific earnings or cash-flow guidance is provided. Management described disclosure controls as adequate and effective.
Important facts for investors to verify
- Developments and potential financial effects of the NSC litigation, including the claimed more-than-$16-million debt and recovery of legal costs or other additional rent.
- Cash availability and the sustainability of dividends given negative year-to-date operating cash flow and the decline in cash.
- Whether the prospective line of credit and energy-park acquisition proceed, and their terms, funding needs, and expected cash flows.
- Exposure to a single tenant and a fixed base-rent stream with no contractual base-rent increases.