Power REIT — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Power REIT is a Maryland REIT focused on transportation, energy-infrastructure and controlled-environment agriculture (CEA) real estate. Its portfolio included railroad property, about 601 acres leased to solar projects, and about 263 acres with approximately 2.21 million square feet of existing or developing greenhouses.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Total revenue | $1.986 million | $1.821 million; up 9% |
| Net income | $998,000 | $1.108 million; down 10% |
| Net income attributable to common shareholders | $835,000; $0.25 basic and diluted EPS | $945,000; $0.34 basic and $0.33 diluted EPS |
| Net margin | 50.3% of revenue | 60.9% of revenue |
| Core FFO available to common shareholders | $1.349 million; $0.40 per share | $1.275 million; $0.46 per share |
| Cash from operating activities | $3.098 million | $1.205 million |
| Cash and cash equivalents | $1.939 million | $3.171 million at December 31, 2021 |
| Debt | $35.203 million principal; $34.458 million net carrying value | $23.197 million net carrying value at December 31, 2021 |
Net income margin is calculated as net income divided by revenue. Q1 revenue included $1.757 million of rental income and $229,000 of railroad direct-financing-lease income. Total expenses rose to $988,000 from $713,000, including higher general and administrative costs, depreciation and intangible amortization. The filing reports no conventional operating-margin measure.
Investing activities used $15.551 million, principally for property acquisitions and construction; financing activities provided $11.221 million, including an $11.5 million draw on the debt facility. Cash declined by $1.232 million during the quarter. Management expected cash from operations and available facility capacity to support operations and commitments; it estimated $13.646 million of cash rent over the next 12 months. Of principal debt, $683,755 was due within 12 months. The debt facility requires a debt-service coverage ratio of at least 2.00:1; the company reported compliance at quarter-end.
Material changes and developments
- Revenue increased $165,000 year over year, mainly reflecting $338,000 of rental income from related-party tenants, partly offset by lower rental income from unrelated parties.
- Common-shareholder income fell $110,000, which management attributed to higher expenses and a roughly $218,000 write-off of straight-line rent receivable related to two CEA leases. Basic weighted-average shares increased to 3.368 million from 2.756 million.
- Core FFO available to common shareholders rose about 6%, but Core FFO per common share fell about 13%, to $0.40. Core FFO is a non-GAAP measure and may not be comparable with other companies’ measures.
- On March 31, Power REIT acquired a Nebraska greenhouse and employee-housing property for $9.35 million plus approximately $88,000 in closing costs, and committed $534,430 for improvements. The 10-year triple-net lease to Millennium Produce of Nebraska, an entity affiliated with the CEO and chairman, provides approximately $1.099 million in annual straight-line rent; management cited an estimated 11% yield on cost.
- The Sweet Dirt lease amendment added a $3.508 million improvement budget and approximately $654,000 in annual straight-line rent. A CEO-affiliated company is supplying part of the project; $1.103 million had been paid to it by quarter-end. The Walsenburg lease amendment funded $625,000 of additions and provides approximately $120,000 annual straight-line rent. A new 20-year Sandlot lease provides approximately $462,000 annual straight-line rent.
- Five properties generated about 66% of Q1 consolidated revenue. The five tenants individually represented 19%, 14%, 12%, 11% and 10%.
Outlook, risks and unusual items
- No formal earnings or full-year guidance is provided. Management said additional acquisitions may require additional financing and cautioned that financing may not be available on favorable terms. It was focused on non-dilutive funding, including debt and potential preferred-stock issuance.
- Tenant and collection risks are significant. Cloud Nine’s eviction order was on appeal; unpaid rent was reported at approximately $583,000, with continuing rent obligations of about $83,275 per month. A separate Ordway tenant had failed to pay rent, and the company was pursuing damages and a replacement tenant. Rent recognition on certain leases was changed or written off based on collectability assessments.
- Litigation includes a company action against the Township of Marengo, Michigan, and claims by JKL parties against Power REIT, its subsidiary and the CEO. The company said it did not believe the JKL claims created material exposure beyond litigation costs. Management noted litigation can be costly and its ultimate outcomes cannot be predicted.
- Related-party arrangements merit attention: the CEO and chairman also leads Millennium Sustainable Ventures, whose affiliates tenant several properties, including the newly acquired Nebraska greenhouse. Independent trustees approved the disclosed arrangements as fair and reasonable. The Sweet Dirt project also involves a company affiliated with the CEO.
- Other disclosed risks include tenant and industry concentration, cannabis-sector regulatory and competitive uncertainty, secured debt and possible springing liens on CEA properties upon default, and potential limits on dividends. The company also reported construction delays related to COVID-19 supply-chain and transportation disruptions.
- The company paid approximately $163,000 in Series A preferred dividends during the quarter and declared another $0.484375 per preferred share, payable June 15, 2022. The filing does not state a common-share dividend declaration for this period.
Key facts for investors to verify
- Tenant rent collections, the recoverability of receivables, and the status and economics of Cloud Nine, the Ordway properties and other troubled leases.
- Related-party lease terms, project costs and payments to CEO-affiliated counterparties, including the Nebraska greenhouse lease and Sweet Dirt equipment purchase.
- Cash needs for committed improvements and acquisitions, remaining debt-facility availability, the 2.00:1 coverage covenant, and the effect of debt service on liquidity and distributions.
- Progress and financial exposure in the Marengo and JKL litigation, as well as the Cloud Nine appeal and eviction proceedings.
- Whether portfolio and tenant concentration, cannabis regulation and competition, or construction delays affect future rent collection and the company’s acquisition plans.