Best stock to invest in – Power REIT: Why David Should Defeat Goliath

Best stock to invest in

by Al Speisman, Esq.

Al Speisman, Esq.

is a micro-cap Real Estate Investment Trust with assets generating
consistent, secure cash flow.  Power REIT’s assets consist of
long-term railroad infrastructure as well as 600 acres of land
leased to solar farms. Power REIT’S current underlying value of
$11.07 per share is delineated in a shareholder
on Power
REIT’S Web-Site
. This valuation does not factor in potential
success in Power REIT’s pending Federal Appeal.

A recent article

appearing in Value Investors Club lists Power REIT’s Net Asset
Value at $10.62 per share plus a “lawsuit optionality value” of
$1.09 or a total current valuation of $11.71 per share.  The
Value Investors Club analysis assumes a 15% probability of success
in the appellate litigation.  I believe this greatly
under-estimates Power REIT’s chance of success, and the company has
a strong chance of prevailing on its appeal.  The potential
damage recoveries should it succeed are huge.

The Case

Power REIT has a CEO with vision, persistence and patience: David
Lesser.  Mr. Lesser has been involved for several years in
pursuing Norfolk Southern on potential lease violations and
defaults. The Power REIT/Pittsburgh & West Virginia Railroad
(PWV) litigation with Norfolk/Wheeling has been going on for five
years. The Appellant Brief (PW), the Appellee Brief
(Norfolk/Wheeling), and Appellant Reply Brief (PW) have been filed
with the Third Circuit Court of Appeals (Federal Court).

Power REIT’s appeal with Norfolk Southern and Wheeling & Lake
Erie Railway (Case No 16-1195) is ripe for a decision. The case
“will be submitted on the briefs” to an Appellate panel of three
justices on Thursday, January 19, 2017.  As is the norm in the
vast majority of 3rd Circuit cases, “there will be no
oral argument.”  It is reasonable to believe that the appellate
decision should be forthcoming during the First Quarter of 2017.

My summary of Power REIT’s position on the appeal follows.  My
primary source is Attorney 

Steven A. Hirsch

’s Amended Appellant Brief and Reply Brief.  It is
enlightening to review both of these in conjunction with the
original lease document.  Mr. Hirsch’s
and the outstanding job he has done preparing the
appeal both lead me to believe it has an excellent chance of

The Lease

My overall assessment is that the lease itself is the key to this
case, and the lease is the “blueprint of the deal.” 

Power REIT’s subsidiary, Pittsburgh and West Virginia Railway (PWV),
owns 111.21 miles of rail line going between Pennsylvania and
Ohio.  It also owns 5 short branch lines comprising an
additional 20.38 miles.

In 1962, PWV entered into a 99-year renewable lease with Norfolk
Southern (hereinafter “Norfolk”) with a fixed base rental of
$915,000 per year plus “Additional Rent.”  Additional Rent
includes, among other things, “deduction-based additional rental.”
(Federal tax deductions for depreciation, amortization, etc.) 
Norfolk is also obligated to pay all expenses Pittsburgh & West
Virginia Railroad incurs when they come due and assumes “all
obligations” Pittsburgh & West Virginia Railroad incurs relating
to Pittsburgh & West Virginia Railroad performing its legal
duties and protecting its rights under the terms of the lease.

Key lease provisions include:

  • Leasing of Pittsburgh and West Virginia Railway’s property
    including the 111 mile stretch of Railroad and the 5 short
    branch lines (limited exceptions excluded). (See Section 1.)
  •   Pittsburgh and West Virginia Railway property that
    Norfolk Southern determines to be not “necessary or useful”
    may be sold, leased or otherwise disposed of” by Norfolk
    Southern and shall be an indebtedness to Pittsburgh and West
    Virginia Railway. (See Section 9.)
  • When lease terminates, whether by failure to renew or by
    default, leased property “shall be returned to Lessor in the
    same condition as it (was) in at the commencement of the term
    of this lease, reasonable wear and tear excepted….” (See
    Section 11.)
  •  Norfolk Southern shall return enough property at the
    termination of the lease to run the railroad for one year with
    such property being in unchanged condition. (See Section 11.)
  • A default under the Lease requires Pittsburgh and West
    Virginia Railway to provide 60-day written notice to cure.
    Upon determination of default, Pittsburgh and West Virginia
    Railway is entitled to the return of its property. (See
    Section 12b.)
  •  Damages from a default of the lease include Interest
    at 6% from date of default, reasonable attorneys’ fees and
    expenses. Also, all remaining indebtedness becomes due when
    the lease is terminated. (See Section 11.)
  •  Indebtedness between Norfolk Southern and Pittsburgh
    and West Virginia Railway is capped at 5% of the value of
    Pittsburgh and West Virginia Railway’s total assets “as long
    as any of the obligations of lessor (Pittsburgh and West
    Virginia Railway) which have been assumed by lessee (Norfolk
    Southern) remain outstanding and unpaid.” (See Section 16a.)

During 2011, David Lesser became CEO of Pittsburgh and West Virginia
Railway.  He pinpointed the injustices involved in the Norfolk
Southern transactions.

Norfolk Southern attempted to sell certain property and Power REIT
challenged Norfolk Southern, alleging among other things, that it
was entitled to attorney fees for reviewing and acting upon the
proposed sale.  Norfolk Southern, trying to avoid a “default”
under the lease terms, filed a Declaratory Judgment action in
Federal District Court.  The District Court determined by
summary judgment that Norfolk Southern had not defaulted.

A key aspect of the case, which goes to the extent of the damages
recoverable by Power REIT, is whether Norfolk Southern and/or its
sub-lessee, Wheeling & Lake Erie Railway Company, defaulted on
the lease.

Four (4) potential defaults under the lease are being appealed by
Power REIT:

1. Norfolk Southern violated Section 9 of the lease by
failing to pay or record as an indebtedness almost $14 Million
from “dispositions” of Pittsburgh and West Virginia Railway’s

2. Norfolk Southern violated Section 11 by allowing resource
extraction from these unrecorded dispositions, thus permanently
altering Pittsburgh and West Virginia Railway property.  Each
time resource extraction occurs it should be construed as a
“permanent transfer”.

3. Norfolk Southern violated Section 4(b)6 by failing to pay
Pittsburgh and West Virginia Railway’s attorney fees and
litigation costs.

4. Norfolk Southern violated Section 16(a) which imposes a 5% cap
based upon the assets of Pittsburgh and West Virginia
Railway.  The section requires Norfolk Southern to pay any
excess indebtedness in the Transactions/Settlement Account beyond
the 5% cap to Pittsburgh and West Virginia Railway. 
Confirmation of the indebtedness is evidenced by Norfolk
Southern’s course of performance with the IRS.  Norfolk
Southern prepared Pittsburgh and West Virginia Railway’s tax
returns through 2012. Norfolk Southern’s tax returns, as well as
the tax returns prepared by Norfolk Southern on behalf of
Pittsburgh and West Virginia Railway, acknowledge and affirm the
outstanding indebtedness in the Transaction/Settlement Account.
(For greater detail and analysis of the tax treatment involved,
see the Alpern Rosenthal expert report dated 3/29/13 concluding
the Settlement Account on Norfolk Southern’s financials is an
indebtedness/liability to PWV.)  Based upon that report, the
Settlement Account balance exceeded five percent (5%) of the value
of the assets on a market capitalization basis, of each year
ending December 31, 1983 through December 31, 2012.  By
December 31, 2012, the balance of the Settlement Account, per
Norfolk Southern, was $16.66 Million and exceeded five percent
(5%) of the value of Pittsburgh and West Virginia Railway’s assets
by $15.91 Million.

Potential Damages include:

1. Recovery of Power REIT/ Pittsburgh and West Virginia
Railway Attorney Fees: approaching $4 Million.

2. Recovery of Interest:  Section 11, (Termination of Lease)
provides for interest at 6% per annum from date of default.

3. The Transactions Account reflects an admitted indebtedness of
approximately $17 Million as of 2012. Of that amount,
approximately $16 Million exceeds the 5% cap.  No updates of
the current Transactions Account balance have been provided by
Norfolk Southern to Pittsburgh and West Virginia Railway.

4. An additional $14 Million in dispositions have been identified
by Pittsburgh and West Virginia Railway but have not been recorded
by Norfolk Southern in the Transactions Account.

5. If the Court determines a Norfolk Southern default has
occurred, under Section 11, Pittsburgh and West Virginia Railway
is also entitled terminate the Lease and to “such machinery,
equipment, supplies, motive power, rolling stock and cash as will
be sufficient to enable Lessor to operate the demised property for
a period of one year after the return thereof….”. A key variable
in determining the amount owed to Pittsburgh and West Virginia
Railway would require analysis of Wheeling & Lake Erie Railway
Company’s detailed financial statements.

6. If the Court rules Norfolk Southern has defaulted, the entire
property reverts back to Pittsburgh and West Virginia
Railway.  The rental established of $915,000 per year was
established in 1962 and does not escalate and is likely
significantly below the current market value.

7. What Pittsburgh and West Virginia Railway could actually lease
the property for in today’s market is speculative. Norfolk
Southern and Wheeling & Lake Erie Railway have refused to
provide operational and income data to Pittsburgh and West
Virginia Railway (also a potential default based on a failure to
comply with a contractual right contained in the lease that allows
Pittsburgh and West Virginia Railway to inspect the  books
and records of Norfolk Southern).  However, based upon
discussions with railroad consultants, a generic valuation
range may be in the range of $1 Million per track mile.
Pittsburgh and West Virginia Railway has a total of 131.59 track
. Note that in recent years, Wheeling & Lake Erie
Railway has experienced significant traffic growth as a result of
Marcellus Shale activity.

8. One could speculatively project that with either a new or
renewed lease, annual revenues to Pittsburgh and West Virginia
Railway would be between $5 Million to $10 Million per
annum.  That projected valuation does not include potential
mineral rights on Pittsburgh and West Virginia Railway land.


Litigation, especially Appellate Litigation, can have a life of its
own. Recent articles written on Power REIT have predicted a
probability of success in the area of 10 to 15 percent. However,
after extensive review of the ongoing litigation, including in depth
review and analysis of the facts and pending appellate briefs before
the 3rd Circuit Court of appeals, I sincerely belief that David
(Pittsburgh and West Virginia Railway) should defeat Goliath
(Norfolk Southern) based on the merits of the case. Ultimately there
is no way to know if the appeal will be successful….


1) Price (1/13/17):  $6.88.  Shares Outstanding (in
M) 1.78 Million.  Market Cap:  12.28 Million. Core Funds
from Operations Annualized (FFO) .50 to .60.  Net Asset Value
(NAV):  $10.62 to $11.07 (assumes Power REIT loses appeal)

ABOUT THE AUTHOR: Al Speisman is the principal of Speisman Law,
LLC. As an investor, he focuses on undervalued, micro-cap
companies. He received his M.B.A. from Northwestern University’s
Kellogg Graduate School of Management with concentrations in
finance and accounting. Mr. Speisman earned his Juris Doctorate
degree from The John Marshall Law School.

DISCLOSURE: Al Speisman is a significant shareholder in Power
REIT.  On January 3, 2017, he filed an Amended


DISCLAIMER:  Al Speisman is not employed with
Power REIT.  Nor is he a Board Member. The above article
should not be construed as legal or financial advice.  It’s
strictly the opinion of the author.  For specifics regarding
Pittsburgh and West Virginia Railway’s legal position on the
appeal, Power REIT’s appellant briefs should be reviewed in detail
in conjunction with the lease. The appellee brief filed on behalf
of Norfolk Southern/Wheeling should also be reviewed. These, as
well as other documents, are readily available on Power REIT’s
website: Go to PWV
Litigation Update under the “Investor Relations” tab.

Other sources of articles online to consider reviewing when
evaluating Power REIT as an investment include, but should not be
limited to, the most recent Power REIT Investor Presentation on
Power REIT’s website:, Tom Konrad’s numerous
articles on Power REIT, several articles published with Seeking
Alpha, Forbes On Line,, and most recently
Value Investors Club (VIC).

Investors are also encouraged to participate in dialogue on
this article via
as well as via the Seeking Alpha post of this article.

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