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Power REIT: Near-Term Catalyst Has (Finally) Arrived

Feb. 06, 2019 5:00 AM ETPower REIT (PW)38 Comments
Todd Merkle profile picture
Todd Merkle


  • After years of disappointment and waiting, there is finally light at the end of the tunnel for long-suffering Power REIT shareholders.
  • The “non-call period” on the company’s $3.6 million of 7.75% perpetual preferred stock expires on February 28, 2019, at which point it may be repaid in whole or in part.
  • I project Power REIT to soon have approximately $2 million of cash in addition to a $2.25 million unencumbered asset (Tulare Solar) on its balance sheet.
  • The repayment of the preferred is expected to be the catalyst for the long-awaited re-initiation of a substantial (tax-sheltered) common stock dividend of up to $.45/share annually (implied value: $9.00/share).
  • Alternatively, at this point the company can be (and arguably should be) easily liquidated or sold, thereby maximizing value for shareholders (implied value $11.40/share).

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The Company

Power REIT (NYSE:PW) today can best be described as a very simple, “coupon clipping” cash-generating machine. It owns four major assets, all in the form of landholdings that have been leased on a long-term basis:

  1. 112 miles of land underneath a railroad leased to Norfolk Southern (NSC) that runs through parts of Pennsylvania, West Virginia and Ohio (the “Railroad”),
  2. 447 acres of land leased to an operating solar project near Bakersfield, California (“Regulus Solar”),
  3. 100 acres of land leased to operating solar projects near Fresno, California (“Tulare Solar”), and
  4. 54 acres of land leased to an operating solar project in Salisbury, Massachusetts (“Salisbury Solar”). Power REIT has no operational control or responsibility whatsoever with respect to these assets. Its business is, therefore, quite simple. It collects ground rent payments.

Importantly (as I will discuss later), the Railroad represents (by far) the lion’s share of the equity value and cash-generating capability of Power REIT, with a $915,000 annual net lease payment and no debt.

Back to Basics After an Ugly Decade for Shareholders

For most of its life, specifically the 43-year period from 1967-2010, the company was a “boring” single asset REIT whose only property was the Railroad. During this period, the company simply received the $915,000 annual rent payment from Norfolk Southern and then turned around and paid it out as a dividend to shareholders. This amounted to a reliable $.50-.55 per share annual dividend distribution. The arrangement worked well for the company and its shareholders as well as for Norfolk Southern. Beginning

This article was written by

Todd Merkle profile picture
Value investor, Equities, REITs, Real EstateTodd Merkle spent eight years on Wall St. covering real estate investment banking clients for large bulge bracket firms. Mr. Merkle also spent ten years overseeing commercial real estate investments for a publicly traded real estate company, including as its Chief Investment Officer. Most recently, Mr. Merkle has been investing through a private vehicle in, among other things, public and private opportunistic real estate investments.

Analyst’s Disclosure: I am/we are long PW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (38)

Interesting blurb from the proxy intro letter from Lesser: "Currently the market for utility scale solar ground leases does not appear attractive for investment given the efficiency of capital in the solar sector. Accordingly, Power REIT is currently evaluating a new area of focus for investment. We hope to report more details in the near future."

Will be interesting to see what the new focus is.
It was just announced what PW's new "focus" will be; they'll be targeting cannabis-related real estate. This Lesser character is a clown. He has no real focus or investment acumen, and instead just jumps on the latest fad hoping to dupe investors. First he converted Pittsburgh & West Virginia RR into a renewal energy REIT hoping he can piggyback off of the hype and dollars going into green energy. He failed at that, and now is just trying to do the same thing with the current fad, cannabis. PW shareholders would have been far better off had Lesser never entered the equation and they just stayed as Pittsburgh & West Virginia RR. May have been no growth, but at least there would not have been widespread value destruction and elimination of one of the most reliable dividends around.
The press release didn't say they are focusing on cannabis-related real estate, but CEA (controlled environmental agriculture) which can include cannabis but this also includes "urban farms" which are urban or semi-urban properties redeveloped to produce large quantities of a single crop i.e. lettuce or tomatoes. They did announce a couple of acquisitions to what sounds like growers for dispensaries.

I don't see any problem with this, regardless of your personal views of the legalization of weed, legal growing of both marijuana and hemp is undoubtedly a booming industry and there is also a lot of foolish capital flowing into the business. If you're going to be anywhere in that business I think a landlord is probably one of the safest places. Most dispensaries run at a loss because of oversupply and a bunch of clueless small business owners not knowing how to be competitive, there will clearly be a wave of consolidation and bankruptcies to rationalize that market before long.

The company made what sounds like two accretive acquisitions it sounds like for cash, nothing but good news there.
"...regardless of your personal views of the legalization of weed, legal growing of both marijuana and hemp is undoubtedly a booming industry and there is also a lot of foolish capital flowing into the business."

I actually do not have any negative personal views about legalized marijuana whatsoever. You seem to have completely missed the crux of my comment.

My issue is that Lesser is incompetent and just jumps onto whatever the latest craze is hoping he can just ride the wave. He did that previously when he converted PWRR into a renewable energy REIT hoping to capitalize on the green energy fever, and he's doing that now again with cannabis. The indisputable fact is the guy is not competent and cannot be trusted. Just look at how much value he has destroyed here alone.
System Trader profile picture
Anyone familiar with litigation knows that is something you do only when you have to and have a strong case. It is evident from this article that the company management exercised bad judgment in this matter. We cannot now assume the company management will do the sensible thing.

Also, there is no reason to think the CEO is about to sell the company and give up his cushy $200 K annual stock compensation.

Finally, a 5% dividend yield is something that might be assigned to a growing REIT with extra cash flow to put to work. That is not the case here and it is an illiquid microcap.

ST, yes Lesser is the problem here. He's simply in over his head and is not competent enough to run this company. Regarding his $200k in stock compensation, I agree that it is egregious given PW has no operations and is just a land holding company that collects checks. That being said, I can't imagine his stock comp would stand in his way of selling the company if a good offer comes in. You have to put it in context of Lesser has not sold a single share, and there is no common stock dividend so he gets no cash from his stock compensation. Until/unless he sells, either via individual open market sales (which he has not done a single one of to date) or through a full sale of the company, he has no means of monetizing his comp package and thus has not really been benefiting from the $200k per annum in stock comp.
System Trader profile picture
You make a good point. Alternatively, he could monetize by redeeming the preferred and initiating a dividend on the common, as the author of this article suggests. Either way it is fair to expect some bump on the stock price, but I think hopes for $9/share will be disappointed.
I agree, $9/share is a pipedream.
grew profile picture
I don’t see how you can get a 6% cap rate on an asset that has no ability to increase rates. That Norfolk contract is a liability at higher interest rates. Company is lessers piggy bank. I’m long the preferreds at a slight premium to liquidation and will continue to acquire as the common is a value trap
Thanks for the article. I've followed this company on and off for a couple of years but did not know all of the background.

You present an interesting catalyst but I went back through the company's filings and did not see any mention of this non-call period ending at the end of the month. When/where was this reported?

Your article also assumes that the board and insiders are aligned with shareholders which may not be true. Using cash and borrowings to redeem the preferred only makes sense to people who do not own the preferred. How do we know that insiders don't also own the preferred or even own more preferred than common? Whichever security you own the same cash flows go to each of them and if they reinstate the dividend the company has no growth opportunities. In other words why would the board and insiders not be ok with the status quo?
Tom Konrad, CFA profile picture
@UncleLongHair We know who owns the common and preferred through the insider filings. The most (only) important insider is David Lesser who owns 468,050 shares of the common, worth over $5 million at current prices. All the preferred together is only worth $3.6 million. I also know from my conversations with Lesser when it was issued that he wasn't very interested in the preferred- he put a little in his kid's education accounts, but for himself, he was going for the big win, not steady income. Buying preferred is simply not his style.

As for how we know the non-call period is ending, it's in the description of the preferred itself. www.quantumonline.com/... It was originally reported in the offering document in 2014 (I wrote about it here, although the link to the offering document is broken now seekingalpha.com/...
Tom Konrad, CFA profile picture
Looks like Seeking Alpha has made my article on the preferred exclusive. Here's the link on my own website: www.altenergystocks.com/...
My gut tells me that Lesser won't redeem the preferreds unless he can issue new preferreds at a substantially lower interest rate and use those proceeds to retire the Series A. Perhaps he can now given the litigation is in the past, but who knows. I don't think he'll want to use cash at hand or issue asset-backed debt to retire the Series A, as he likely wants to use any excess cash he has on acquisitions. But that is just my guess. To me, the best catalyst (and only way I'd be willing to wade back into PW) is if Lesser decides to waive the white flag on PW and leave the company to instead focus his energies on MILC and his other businesses, and then a new management team comes in to right the ship. I'm not overly optimistic that will happen anytime soon, but perhaps Lesser's lack of open market purchases for the past several months indicates his interest in PW has waned and he is focusing on MILC. But again, that could simply be wishful thinking.
Tom Konrad, CFA profile picture
Thanks for the article. I'm no longer a holder of PW as of about a year ago, but still own some preferred. Your theory on the likely call has me reducing my preferred holdings opportunistically. I'm not convinced enough to get back in PW, though. I don't like how much Lesser has been paying himself while he has done so little for other shareholders over the last couple years since he lost the lawsuit. I also note that he has stopped buying the shares in the open market (last purchase in October 2017 at $6.13. Why didn't he buy any in the $5 range last year?). If he really did plan to reinstate the dividend, I would expect to see him buying as opposed to just keeping his stock based compensation.

One thing to note on the loss carry-forward, preferred shareholders have used a little of it. The last five preferred dividends have been all return of capital, and a little bit before that. My oldest (Jan 2016) remaining holdings have received $2.41 worth of return of capital. With 144,600 preferred shares outstanding, that has used about $350,000 of the loss carry forward. Not really meaningful when it comes to your analysis, but it has been a nice side benefit to holding the preferred. Hate to see it called.
"I don't like how much Lesser has been paying himself while he has done so little for other shareholders over the last couple years since he lost the lawsuit."

I agree with you 100%. I thought the lawsuit was a huge mistake from the get go (sold my PW stake shortly after he initiated the lawsuit), but even that aside, he hasn't done any value creating activity since while he has been upping his stock-based comp. It seems he is putting more of his attention on his other project MILC. The old PW when it was boring old Pittsburgh & West Virginia Railroad would have been better off, and more prosperous for shareholders, if Lesser never pushed his way into control.
DL has restarted buying PW commons, I have noticed that from the Form 4 filings recently. May not mean anything, but wanted to mention it.
grew profile picture
todays news makes all the more sense as to why he was buying
edexter profile picture
they could look at whlr. they need to expand into something real estate if they are not going to sell. looks like whlr debt can be bought way below par.
Interesting article, thanks.
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