Power REIT

What is Power REIT?

Power REIT ($PW) is a real estate investment trust – REIT – that owns land and infrastructure related to Renewable Energy and Transportation (railway) – the legacy business – and since July 2019 it has started its expansion into cannabis infrastructure (land and greenhouses). 

$PW has a market capitalisation of around $140MM and only one employee, the CEO David H. Lesser who owns 30% of the company. Moreover, the rest of the management board own roughly 20% of the stock. 

What is the Business of Power REIT?

Power REIT legacy business is shaped by the 112 miles railroad (from Oct-64) which provides $915k annually and the contract lasts until 2063. In addition to this, there is a $17 million termination fee upon default or failure to renew. 

Apart from that, Power REIT has 601 acres rented to companies in the renewable energy sector, obtaining $1.05MM annually for the 7 investment (contracts last 20 years from 2013-2014) where tenants have a significantly greater investment than Power REIT and PPA signed

In July 2019, the company changed its strategy and announced it would primarily be acquiring greenhouses, which has become its main asset ever since. Power REIT’s greenhouses composed of around 75% of its total revenue generated in the 1Q21.

The company’s lease structures are very attractive, Power REIT uses the “triple-net” lease structure. The lease requires the lessor to pay all property-related expenses including maintenance, insurance and taxes. 

Power REIT competitive advantage and the threat for it

Cannabis remains illegal on the federal level, restricting the capital sources cannabis companies can obtain, like financing from banks. Consequently, as more states legalize, but cannabis remains illegal federally, Power REIT will gain more potential for market growth. Lack of cannabis legalization on the federal level will allow them to continue earning significant yield premiums for their properties relative to other real estate sectors. 

Obviously, there is a big chance that cannabis will be legalised at a federal level, at this point, Power REIT will lose some of its competitive advantages. It will start to charge its current tenants 9% instead of 12.9% and it will not be able to ink so lucrative deals as it is doing currently.

Power REIT return of capital employed
Source: Company

Rent structure:

  • 6 months of free rent from closing or expansion funding 
  • Monthly rent starting in month 7 to return 100% of capital over 36 months 
  • Thereafter to provide a 12.5% unleveraged yield increasing at 3% per annum 
  • At any time after year 6 if cannabis is legalized at the federal level the rent readjusts to 9% increasing at 3% per annum. Otherwise, it would continue at 12.5-12.9% 

The average straight-line rental yield on the new properties is around 19%. This huge return is possible because cannabis is legal at the state level but it is illegal under federal law. Consequently, it is difficult for the business to obtain credit from banks at an attractive rate. The tenants of Power REIT are legitimate businesses, but they remain very small with low credit quality.

All this circumstances males the ideal scenario for Power REITS, allowing it to obtain very high yields.

Core FFO Power REIT
Source:Company

Why Power REIT is an interesting business?

Power REIT is earning massive yields by owning greenhouses leased to cannabis operators. High yields combined with a low cost of capital result in extremely accretive acquisitions. These deals should produce significant earnings growth over the next several years. Its low multiple and ample acquisition pipeline demonstrate Power REIT’s value proposition.

  • Acquisition pipeline of in excess of $100 million at various stages of negotiations 
  • Existing portfolio of CEA assets have potential expansion opportunities 
  • Power REIT is generating massive yields on property acquisitions, straight-line rental yields average 19%.
  • Very attractive valuation relative to the only cannabis REIT peer, Innovative Industrial Properties.

Power REIT maintains a very low cost of capital relative to its yields. It has funded its acquisition with a mix of preferred equity, issuance of common shares and debt.

Source of capitalCost% of capitalWACC
Common equity4.60%81%3.726%
Debt5.1%14%0.714%
Preferred stock7.75%5%0.3875%
4.8275%

In January, it obtained $37MM from a stock issuance, it has spent $11M in the last 4 months, so it still has around $26MM dry-powder for future acquisitions in the coming months.

Its main comparable is $IIPR (Innovative Industrial Properties) which is considerable bigger than $PW and it is obtaining straight-line rentals between 11-15% compared to 19% obtained by Power REITs.

In the REITs industry, the main valuation multiple is Price to FFO. Currently, P/FFO is 29 for $IIPR and 19 for $PW. Moreover, $PW is growing faster than IIPR and inking better deals.

MORAM - Power REITs forecasted revenue
Source:MORAM

Power REIT dividends

REITs are required to distribute 90% of their taxable income as dividends, but Power REIT does not have to that as it carries a $17 MM net operating loss that eliminates this requirement at the moment. We expect that PW starts paying a dividend in the coming quarters.

Conclusion

We believe that Power REIT is an attractive company in the current environment, as these are the ideal conditions for it. It is noteworthy to take into consideration that is an investment to keep an eye on it. If cannabis is legalised under federal law or if the competitors of such a lucrative business increase, the returns that Power REIT obtains and its growth pace would be severely damaged.

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