Breaking Down Power REIT (PW) Financial Health: Key Insights for Investors

Understanding Power REIT (PW) Revenue Streams

Understanding Power REIT’s Revenue Streams

The revenue for Power REIT during the three months ended September 30, 2024, was approximately $1,426,112, compared to $488,531 for the same period in 2023. For the nine months ended September 30, 2024, the revenue was $2,480,073, an increase from $1,684,559 in 2023.

Revenue Breakdown by Sources

The revenue streams can be categorized as follows:

• Lease income from direct financing lease (railroad): $228,750 for Q3 2024, $686,250 for nine months 2024.
• Total rental income: $1,138,504 for Q3 2024, which includes:
  • From Regulus (solar farm): $200,780 in Q3 2024.
  • From Colorado cannabis tenants: $13,000 in Q3 2024.
  • Security deposit recognized as rental income due to leases in default: $924,724 in Q3 2024.
• Other income primarily consisting of interest income: $58,858 for Q3 2024.

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rate from Q3 2023 to Q3 2024 is calculated as follows:

Percentage Increase = [(Q3 2024 Revenue - Q3 2023 Revenue) / Q3 2023 Revenue] 100

Thus, the percentage increase is approximately:

[(1,426,112 - 488,531) / 488,531] 100 = 192.2%

For the nine-month figures, the percentage increase is:

[(2,480,073 - 1,684,559) / 1,684,559] 100 = 47.3%

Contribution of Different Business Segments to Overall Revenue

During the nine months ended September 30, 2024:

• Lease income from direct financing lease (railroad) contributed $686,250.
• Total rental income contributed $1,628,922, which includes:
  • From Regulus (solar farm): $602,338.
  • From Colorado and California cannabis tenants: $101,860.
  • Security deposit recognized as rental income: $924,724.
• Other income contributed $164,901.

Significant Changes in Revenue Streams

Notable changes in revenue streams include:

• A significant increase in rental income recognized from security deposits due to leases in default, amounting to $924,724 in Q3 2024.
• Increased reliance on a limited number of tenants, with approximately 92% of consolidated revenue coming from two properties during the nine months ended September 30, 2024.

A Deep Dive into Power REIT (PW) Profitability

A Deep Dive into Profitability Metrics

For the nine months ended September 30, 2024, total revenue amounted to $2,480,073, compared to $1,684,559 for the same period in 2023. This represents a year-over-year increase of 47.2%.

During the third quarter of 2024, revenue reached $1,426,112, a significant increase from $488,531 in the third quarter of 2023, marking a growth of 192.1%.

Gross Profit Margin

The gross profit for the nine months ended September 30, 2024, was calculated at $2,480,073 in revenue minus total expenses of $24,772,353, leading to a gross profit margin of approximately -100% for the period. This figure reflects substantial operational challenges and impairment expenses.

Operating Profit Margin

Operating profit for the nine months ended September 30, 2024, was - $21,547,182, resulting in an operating profit margin of approximately -868.8% when compared to total revenue. The operating loss is primarily attributed to high impairment expenses of $18,194,384.

Net Profit Margin

The net loss attributable to common shareholders was $22,036,803 for the nine months ended September 30, 2024, translating into a net profit margin of approximately -888.5%.

Trends in Profitability Over Time

Comparing the nine months ended September 30, 2024, with the same period in 2023, the net loss increased from $13,042,842 to $22,036,803. This indicates a worsening trend in profitability.

Comparison of Profitability Ratios with Industry Averages

The industry average for net profit margin in the real estate investment sector typically ranges from 10% to 20%. In contrast, the subject company's net profit margin is significantly below this range, highlighting operational inefficiencies and financial distress.

Operational Efficiency Analysis

Operational efficiency has been severely impacted, with total expenses recorded at $24,772,353 for the nine months ended September 30, 2024. Key expense components included:

• Interest expense: $3,031,826
• Depreciation expense: $817,194
• Impairment expense: $18,194,384

Notably, impairment expenses surged compared to $8,235,136 recorded for the same period in 2023, indicating a significant decline in asset valuations.

The operational efficiency metrics indicate that the company is facing significant challenges in managing its expenses relative to its revenues, leading to deteriorating profitability ratios.

Debt vs. Equity: How Power REIT (PW) Finances Its Growth

Debt vs. Equity: How Power REIT Finances Its Growth

As of September 30, 2024, Power REIT's total liabilities were approximately $38.67 million, which includes long-term debt of approximately $20.04 million and current loan liabilities totaling about $17.0 million.

The company is currently facing liquidity challenges, with an accumulated deficit of $46.5 million and a net loss attributable to common shareholders of $22 million for the nine months ended September 30, 2024.

Debt Levels

Power REIT has a significant amount of debt on its balance sheet. The current loan liabilities include:

• $16.3 million related to the Greenhouse Loan, which is currently in default.
• $456,000 from a term loan that was paid off following the sale of property in January 2024.

In addition, the company has long-term debts, which include:

• $6.51 million from the 2015 PWRS Loan.
• $14.25 million from the PW PWV Loan.

Debt-to-Equity Ratio

The debt-to-equity ratio is a critical indicator of financial health. As of September 30, 2024, the equity was approximately $9.77 million, resulting in a debt-to-equity ratio of approximately 3.95 (calculated as total liabilities of $38.67 million divided by equity of $9.77 million). This ratio is significantly higher than the industry average, which typically ranges from 1.0 to 2.0 for real estate investment trusts (REITs).

Recent Debt Issuances and Refinancing Activity

Power REIT recently entered into a forbearance agreement with the lender for the Greenhouse Loan, which was effective on May 10, 2024, and has been extended to January 31, 2025. The loan originally had a commitment of $20 million but was reduced to $16 million. The company is actively seeking to manage its debt obligations while exploring asset sales to improve liquidity.

Equity Funding

Power REIT has raised equity through the issuance of common and preferred shares. As of September 30, 2024, the company had:

• 336,944 shares of Series A Cumulative Redeemable Perpetual Preferred Stock, valued at $8.49 million
• 3,389,661 common shares outstanding, with additional paid-in capital totaling $47.80 million

The total equity stood at $9.77 million as of the same date.

Table: Debt and Equity Overview

Assessing Power REIT (PW) Liquidity

Assessing Liquidity and Solvency

As of September 30, 2024, the liquidity position of the company can be evaluated through various financial metrics and cash flow statements.

Current and Quick Ratios

The current assets and current liabilities as of September 30, 2024, are as follows:

Analysis of Working Capital Trends

Working capital, defined as current assets minus current liabilities, indicates a negative trend:

• Working Capital as of September 30, 2024: ($14,604,358)
• Working Capital as of December 31, 2023: ($14,786,000)

This indicates a slight improvement in working capital but still signifies significant liquidity challenges.

Cash Flow Statements Overview

The cash flow statements for the nine months ending September 30, 2024, reveal the following:

As of September 30, 2024, the cash and cash equivalents, along with restricted cash, totaled 2,395,642, a decrease of 1,709,242 from the prior year.

Potential Liquidity Concerns or Strengths

The company faces substantial liquidity concerns, highlighted by:

• Current loan liabilities totaling approximately 17,000,000
• Accumulated deficit of (46,525,104)
• Net loss attributable to common shareholders for the nine months ended September 30, 2024, was (22,036,803)

Despite recent property sales aimed at improving liquidity, the ongoing default on the Greenhouse Loan and the associated legal challenges present significant risks to financial stability. The company must navigate these challenges to maintain operations and ensure future liquidity.

Is Power REIT (PW) Overvalued or Undervalued?

Valuation Analysis

As of September 30, 2024, the financial metrics for valuation analysis of the company are as follows:

• Price-to-Earnings (P/E) Ratio: The current stock price is approximately $1.50, and the trailing twelve months (TTM) earnings per share (EPS) is reported as -$6.50, resulting in a P/E ratio of NA (not applicable due to negative earnings).
• Price-to-Book (P/B) Ratio: The book value per share is approximately $2.89, leading to a P/B ratio of 0.52 (calculated as stock price of $1.50 divided by book value per share of $2.89).
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: The enterprise value is calculated as market capitalization plus total debt less cash. With total debt at approximately $17 million and cash at $2.4 million, the enterprise value is approximately $15.1 million. The EBITDA for the last twelve months is approximately -$1 million, resulting in an EV/EBITDA ratio of NA.

Stock Price Trends

The stock price over the last 12 months has exhibited significant volatility:

Dividend Yield and Payout Ratios

As of September 30, 2024:

• Dividend Yield: The company did not declare any dividends in 2024. The cumulative undeclared dividend per Series A Preferred Share is approximately $1.45.
• Payout Ratio: Given that there were no dividends declared, the payout ratio is not applicable.

Analyst Consensus on Stock Valuation

Analysts have varied opinions regarding the stock valuation:

• Buy: 1 Analyst
• Hold: 2 Analysts
• Sell: 3 Analysts

Analysts are cautious about the company's financial health, primarily due to the high accumulated deficit of approximately $46.5 million and the significant net loss attributable to common shareholders of approximately $22 million for the nine months ended September 30, 2024.

In summary, the company appears to be undervalued based on its P/B ratio, but the overall financial health and negative earnings significantly affect its valuation metrics. Analyst sentiments are mixed, reflecting the uncertainties surrounding the company's future prospects.

Key Risks Facing Power REIT (PW)

Key Risks Facing Power REIT

Power REIT faces a variety of internal and external risks that significantly impact its financial health. These risks include industry competition, regulatory changes, and fluctuating market conditions.

Industry Competition

The competitive landscape in the real estate investment trust (REIT) sector, particularly in the cannabis and Controlled Environment Agriculture (CEA) industries, poses significant challenges. As of September 30, 2024, approximately 92% of the Trust’s consolidated revenue was derived from just two tenants. Norfolk Southern Railway and Regulus Solar, LLC accounted for 49% and 43% of consolidated revenue, respectively. This concentration makes the Trust vulnerable to the financial performance of these key tenants.

Regulatory Changes

Regulatory shifts in cannabis laws can directly affect the profitability of tenants operating in this space. The Trust’s tenants have been experiencing severe financial distress due to significant price compression in the wholesale cannabis market since 2022. This has resulted in diminished collections from the CEA portfolio, which is projected to remain a risk as regulations evolve.

Market Conditions

Current market conditions have led to a substantial decline in rental income. For the nine months ended September 30, 2024, total revenue was $2,480,073, compared to $1,684,559 during the same period in 2023, indicating a $795,514 increase primarily due to the recognition of security deposits as rental income. However, the overall financial health remains precarious with net losses increasing from $13,042,842 in 2023 to $22,036,803 in 2024.

Operational Risks

Operational risks are heightened by the current liabilities exceeding current assets. As of September 30, 2024, the Trust reported current loan liabilities of approximately $17.0 million, including $16.3 million related to the Greenhouse Loan, which is currently in default. The Trust has acknowledged substantial doubt regarding its ability to continue as a going concern due to ongoing net losses and reduced revenue.

Financial Risks

The Trust’s financial health is further strained by an accumulated deficit of $46.5 million as of September 30, 2024. The inability to manage its debt obligations effectively could lead to foreclosure actions, especially considering that property taxes are delinquent and could cause further liabilities.

Mitigation Strategies

To address these risks, Power REIT has implemented several strategies, including:

• Focusing on selling properties to improve liquidity, with net proceeds from recent sales expected to assist in servicing the Greenhouse Loan. For instance, the sale of the Salisbury property generated approximately $662,000 in unrestricted cash.
• Entering into a forbearance agreement with the lender regarding the Greenhouse Loan, extending the expiration to January 31, 2025.
• Exploring opportunities to re-lease properties that are currently vacant or have non-performing tenants.

Future Growth Prospects for Power REIT (PW)

Growth Opportunities

The company has identified several key growth drivers that are expected to enhance its financial performance in the coming years.

Key Growth Drivers

• Market Expansion: The Trust is focusing on expanding its portfolio with an emphasis on high-demand sectors such as renewable energy and controlled environment agriculture (CEA). This includes leveraging existing assets like solar farms and greenhouses.
• Acquisitions: The Trust is actively seeking opportunities to acquire underperforming assets that can be repositioned for higher returns, particularly within the cannabis sector and related fields.
• Product Innovations: Investments in technology to improve the operational efficiency of existing properties are underway, which is expected to reduce costs and increase rental income.

Future Revenue Growth Projections

For the nine months ended September 30, 2024, total revenue was $2,480,073, a significant increase from $1,684,559 in the same period of 2023. This growth was largely driven by:

• Lease income from direct financing lease (railroad): $686,250
• Total rental income: $1,628,922, including $602,338 from solar farms and $101,860 from cannabis tenants.
• Other income mostly from interest, totaling $164,901.

Earnings Estimates

Net loss attributable to common shareholders for the nine months ended September 30, 2024, was $22,036,803, compared to $13,042,842 in the same period of 2023. However, the decrease in net loss from $10,185,943 in Q3 2023 to $488,222 in Q3 2024 indicates improving operational efficiency.

Strategic Initiatives and Partnerships

The company is exploring strategic partnerships to enhance its market position, especially in the renewable energy sector. Recent initiatives include:

• Seller financing arrangements that provide additional liquidity, such as the $1,250,000 financing in conjunction with selling properties, which is structured to yield increasing interest over time.
• Engagements with lenders to restructure existing loans, including a forbearance agreement that extends until January 31, 2025.

Competitive Advantages

The Trust benefits from several competitive advantages, including:

• A diversified asset portfolio with significant investments in renewable energy and CEA sectors, which are poised for growth.
• Strong relationships with key tenants such as Norfolk Southern Railway and Regulus Solar, which accounted for 49% and 43% of consolidated revenue, respectively, during the nine months ended September 30, 2024.

As of September 30, 2024, the Trust's accumulated deficit stood at $46,525,104, reflecting the challenges faced due to the high operational costs and defaulted leases. However, the strategic focus on asset sales and partnerships is expected to bolster liquidity and operational capacity moving forward.

Article updated on 8 Nov 2024

Resources:

• Power REIT (PW) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Power REIT (PW)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View Power REIT (PW)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.