POWER REIT PW
September 29, 2016 - 12:46pm EST by
cfavenger
2016 2017
Price: 7.75 EPS 0 0
Shares Out. (in M): 2 P/E 0 0
Market Cap (in $M): 13 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Micro Cap
  • NOLs
  • Litigation
  • upside optionality
  • REIT
  • Railroad
  • Solar
 

Description

 
Summary:
  • Oddball micro-cap REIT with very safe assets consisting of long-term railroad infrastructure and utility-scale solar land leases
  • Strong initial impressions of CEO as shareholder value driven; highest ratio of management quality to market cap I've ever seen
  • Common stock is significantly mis-priced at 50% discount to fair value assuming CEO follows through with his talk re: realizing value
Valuation: 
  • PW Common: 11.71 = Tax adjusted 7% dividend yield ($10.62) + lawsuit optionality value ($1.09)
 
Description:
 

 

  • Power REIT was formed in the 1960s to hold 112 miles of railroad infrastructure and real estate under long term lease to the Norfolk and Southern Railroad.  NSC has a 99 year lease that became effective in 1964 subject to unlimited renewals on the same terms at NSC's option.  The railroad lines in Pennsylvania and West Virginia sit in the heart of the Marcellus Shale.  NSC pays PW $915k/yr in base rent plus certain additional rent which is the subject of litigation (see below).
  • Power REIT also owns 600 acres of real estate under utility scale solar projects.  These are 20+ year leases to projects with multi-decade PPAs where PW has a senior claim on project cash flows ahead of project debt lenders.  Thus they are highly secure cash flows.
  • PW estimates its current NAV at $11.07 which appears credible.  They key assumptions are:
    • Rail assets capitalized at 4%.  NSC unsecured debt trades at 3-500bps.  If NSC were to break the lease it would be liable for $17MM in deferred payments.
    • Solar land assets capitalized at 6.5%.  This seems reasonable for very secure long-term assets.
    • Diluted sharecount of 1.784MM includes vested and unvested options
    • Zero value for potential lawsuit assets or NOL if lawsuit unsuccessful
  • With debt of 10MM and preferred stock of 3.6MM, total debt+ preferred of 13.6MM versus assets of 34.9MM produces a reasonably conservative total debt/assets of 40%
  • PW has been in litigation for years with NSC over an alleged breach of its lease obligations.  PW believes that NSC owes the company $17MM in damages and $3-4MM in reimbursed legal expenses.  PW lost at the trial court level and is currently appealing to the Federal Third Circuit.  Trying to place probabilities around the success of appeal is a difficult endeavor.  But all of the potential optionality here is in PW's favor.  Of the potential trial outcomes:
    • PW loses: In this case PW will take a $17MM NOL.  This will effectively shield PW income from taxes for decades.  Although PW is a REIT and pays no taxes at the company level, dividends would be classified as a non-taxable return of capital.  
    • PW wins: $20MM taxed at 35% is worth 7.30/share which is the current share price of the company
  • Litigation expenses to date forced the company to suspend dividends.  These expenses are now behind PW and they should resume the dividend in short order. 
  • Annualized FFO is approximately 0.59/share. 
    • Although these are very safe long-term cash flows, PW should trade at some discount for its micro-cap illiquid nature. 
    • On the other hand, in the base case where PW loses its appeal, dividends will be untaxed return of capital for approx. 20 years.  
    • .59 FFO at a 90% payout ratio but scaled up by 40% for tax-equivalence at a 7% yield = 10.62 fair value
    • A 15% probability of lawsuit success on appeal adds $1.09 in probability adjusted value for total fair value of $11.71 - 62% above today's price
      • There is some double counting here because if the lawsuit is successful there won't be NOLs and thus dividends will be taxable but if they win the lawsuit and you are long you will be happy and not quibbling about these methodological details
  • David Lesser, the current CEO, seems highly impressive for the head of a micro-cap company.  He is a former Merrill Lynch investment banker who seems highly focused on delivering shareholder value.  He understands that the economics of a micro-cap company are unsustainable.  Going forward, over the next few years PW will either:
    • PW will get a valuation which allows it to grow on shareholder value accretive basis, or,
    • They will find a way to monetize the public listing (i.e., a reverse merger), or,
    • Failing the above two options, they could liquidate 
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Lawsuit resolution
  • Dividend reinstatement
  • Potential liquidation
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    Description

     
    Summary:
    • Oddball micro-cap REIT with very safe assets consisting of long-term railroad infrastructure and utility-scale solar land leases
    • Strong initial impressions of CEO as shareholder value driven; highest ratio of management quality to market cap I've ever seen
    • Common stock is significantly mis-priced at 50% discount to fair value assuming CEO follows through with his talk re: realizing value
    Valuation: 
    • PW Common: 11.71 = Tax adjusted 7% dividend yield ($10.62) + lawsuit optionality value ($1.09)
     
    Description:
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

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