Best stock to invest in – Power REIT: No News Is Good News

Best stock to invest in

Tom Konrad Ph.D., CFA

I first
about Power REIT (NYSE
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
, 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

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