Tom Konrad Ph.D., CFA
I first wrote about Power REIT (NYSE MKT:PW) in 2012, when the tiny real estate investment trust unveiled its plans to become what would have been the first Yieldco by investing in the land underlying solar and wind farms… before the term ‘Yieldco’ had even been invented. In the years since, the company made some progress buying land under solar farms. According to the most recent shareholder presentation, they now own land under seven solar farms totaling 601 acres and 108 MW, in addition to their legacy railroad asset.
These assets produce Core Funds From Operations (FFO, a cash flow metric commonly used in among REITs as a measure of the company’s ability to pay a dividend) of $0.60 per share. When the dividend is reinstated (more on that below) we can expect that it will be between 70% and 100% of Core FFO, or $0.40 to $0.60 per share. As a microcap REIT, I would expect the yield of be in the 7 to 8 percent range, justifying a stock price of between $5 and $8.50. The stock has recently been trading at the low end of this range, or $6.50 to $7.00.
Other Yieldcos (the mostly non-REIT companies that invest in solar and wind farms and use the cash flow to pay dividends) currently have yields between 4% (NextEra Energy Partners (NYSE:NEP)) and 7.5% (8point3 Energy Partners (CAFD)). As I recently wrote, I believe CAFD’s dividend is unsustainable, so 7.5% is a good high end estimate for the yield on a microcap Yieldco. When PW resumes its dividend, it should be worth $6 to $8 a share if valued as a Yieldco.
A Yieldco Wrapped in a Legal Enigma
Based on its potential to pay a dividend, Power REIT seems fairly valued or mildly undervalued.
But nobody is looking just at the potential dividend. The big story about Power REIT is its appeal in a civil case against the lessees of its railroad asset. I’m not going to spill any more ink about this legal case, as I’m not a lawyer and I have no idea what the chance of a successful outcome might be. What I do know is that, if the appeal fails, Power REIT is reasonably valued today. I also know that if Power REIT were to prevail in any way, the benefits to shareholders could be enormous. The debt that the lessees owe Power REIT (but which they claim is not payable) is worth more than Power REIT itself. Add in legal fees and back interest, and it’s easy to see the stock price tripling. You can read about the details of the case in one of my articles here, or a more recent piece by an attorney (Al Speisman) who thinks Power REIT has a good chance of winning, here.
Why No Ruling Yet?
There is no set time frame for an appellate court ruling, but the case has now been under consideration for five months. To me, that means that there are at least some aspects of the case that Third Circuit Court of Appeals finds hard to decide. If the case were simple, the Court could have ruled already.
A case that is hard to decide must have a chance of going either way. That means the judges must be considering overturning at least part of the District Court’s ruling (which went almost entirely against Power REIT.)
The debt (settlement account) is worth about $9/share. Legal costs (which Power REIT argues are reimbursable under the lease are another dollar or two per share. Back interest could dwarf everything else, but I consider the chance of Power REIT being awarded any back interest to be low. There is also the possibility that PW will have an opportunity to sign a new lease for the railroad, which could also benefit the company.
What are the chances of Power REIT winning anything in its appeal? We don’t know, but those chances seem to be rising the longer the Court of Appeals takes to rule. Denying Power REIT’s appeal might have been an easy decision. Overturning part or all of the District Court’s ruling requires more deliberation. The Federal judges are still deliberating.
No news is good news.
The upside is measured in stock price multiples. Should we expect a double? A triple? Or “just” a 50% increase? The chances of upside are increasing. At the current price, the downside is minimal. There could even be some upside from increased certainty around the company’s future and tax write-offs in the case of a loss.
What’s not to like?
Disclosure: Long PW, PW-PA, NEP. Short calls on CAFD.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.