Power REIT — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. Power REIT owns railroad infrastructure leased to Norfolk Southern and land leased to solar projects in Massachusetts and California, and is seeking to expand its renewable-energy real estate portfolio. Amounts below are in thousands of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / December 31, 2013 |
|---|---|---|
| Revenue | $298 | $251 in Q1 2013 |
| Net income (loss) | $57 | $(111) in Q1 2013 |
| Basic and diluted EPS | $0.03 | $(0.07) in Q1 2013 |
| Core FFO, a non-GAAP measure | $199; $0.12 per share | $167; $0.10 per share in Q1 2013 |
| Net cash from operating activities | $375 | $2 in Q1 2013 |
| Cash and cash equivalents | $3,085 | $78 at December 31, 2013 |
| Total assets | $15,179 | $12,046 at December 31, 2013 |
| Total liabilities | $3,382 | $2,974 at December 31, 2013 |
| Debt disclosed on balance sheet | $2,494: $1,650 related-party current debt, $30 current portion, and $814 other long-term debt | $2,507, including $1,650 related-party debt |
Revenue rose $47, principally from rental income at acquired properties. Expenses fell to $241 from $362, including litigation expense of $113 versus $240. Interest expense increased to $50 from $12. The filing does not present a separate operating margin measure. Operating cash flow included significant working-capital movements, including increases in accounts payable and deferred revenue; it should not be read as solely recurring cash generation. Financing activities provided $2,632, mainly from $2,645 net preferred-stock proceeds, partly offset by $13 of debt principal payments. Ending cash increased by $3,007. No common dividend was paid in Q1 2014, versus $0.10 per share in Q1 2013.
Material developments, outlook, and risks
- Preferred-stock offering: The company sold 108,060 shares of 7.75% Series A cumulative redeemable preferred stock for $2,702 gross proceeds. The shares rank senior to common shares and are redeemable at $25 per share on or after February 28, 2019.
- Debt and related-party financing: A $1,650 bridge loan from an affiliate of the CEO funded the California property acquisition. Its A and B notes carry stepped-up rates of 8.5% and 13.5%, respectively, after the first six months, and have an 18-month maturity. The company also had a $736 bank term-loan balance and approximately $103 of municipal debt at March 31.
- Subsequent acquisition and credit facility: On April 14, 2014, a subsidiary entered a $26.2 million, five-year credit facility, priced at 350 basis points over LIBOR for the first three years and 400 basis points thereafter. The filing says it would fund part of the Kern County acquisition and could help refinance the bridge financing; it does not specify facility borrowings outstanding. That day, the company acquired approximately 450 acres in California for about $9.2 million, excluding transaction costs, and leased the land to a solar project under construction. Initial annual rent is approximately $735, with 1% annual escalations under a triple-net lease. Management also reported interest-rate hedging strategies.
- Railroad litigation: Power REIT and subsidiary P&WV are litigating with Norfolk Southern and its sub-lessee over the railroad lease, alleged defaults, disputed rent and indebtedness. P&WV cites approximately $16.6 million of indebtedness as of December 31, 2012, based on records provided by NSC, and estimates additional amounts related to property dispositions exceed $8 million, before potential interest and damages. These disputed amounts are not recognized in the GAAP financial statements. A summary-judgment decision was pending; further discovery was expected to continue into 2014. Q1 litigation expense was $113, and $454 of cumulative litigation costs was payable at March 31. Recovery of costs or disputed amounts is uncertain.
- Management outlook: Management expected substantial NSC-litigation expenses to continue through the remainder of 2014 and said working-capital and longer-term needs are funded through operations, securities issuance and borrowings. No quantified earnings or dividend guidance is provided. Management’s Core FFO excludes litigation costs, acquisition expenses, stock compensation and amortization; the measure may not be comparable with other REITs’ measures.
- Other risks and controls: The filing refers investors to the risk factors in the 2013 Form 10-K. 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
- Progress, outcome, potential costs and recoverability of amounts asserted in the NSC litigation, including the status of the pending summary-judgment motion.
- Actual draw, pricing exposure, covenants and use of proceeds under the $26.2 million facility, and how it affects refinancing of the related-party bridge loan.
- Whether the Kern County project reaches and sustains commercial operation, and whether lease payments begin and are collected as expected.
- Cash available after litigation, debt service and preferred dividends, and the company’s ability to meet REIT distribution requirements.
- Underlying support for Core FFO and the extent to which operating cash flow depends on working-capital changes.