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POWER REIT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

03/24/2021 | 05:21am EDT

The following discussion and analysis is based on, and should be read in conjunction with, the Consolidated and Combined Consolidated Financial Statements and the related notes thereto of the Trust as of and for the years ended December 31, 2020 and December 31, 2019.



We are an internally managed real estate investment trust ("REIT") that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture ("CEA") in the United States. In 2019, we expanded the focus of our real estate acquisitions to include CEA properties in the United States. CEA is an innovative method of growing plants that involves creating optimized growing environments for a given crop indoors. CEA in the form of a greenhouse uses approximately 70% less energy than indoor growing and 95% less water usage than outdoor growing and does not have any agricultural runoff of fertilizers or pesticides. We typically enter into long-term triple net leases where our tenants are responsible for all costs related to the property, including insurance, taxes and maintenance.

Our growth strategy focuses on identifying attractive real estate opportunities that exhibit attractive risk adjusted yields on investment relative to traditional real estate sectors. We are currently focused on making new acquisitions of real estate within the CEA sector related to cannabis cultivation. We believe there will be continued strong demand for cannabis related CEA in the form of greenhouses which we believe is the sustainable business model that can produce plants at a lower cost in an environmentally friendly way. We believe a convergence of changing public attitudes and increased cannabis legalization momentum in certain states creates an attractive opportunity to invest in cannabis related real estate. We expect that acquisition opportunities will continue to expand as additional states legalize.

We believe there is strong demand for capital from licensed cannabis cultivators that do not have access to traditional financing sources such as bank debt. Our construction financing and sale leaseback solutions provide attractive financing that allows cannabis operators to add additional growing capacity and/or invest in the growth of their business. Our tenants that are cannabis operators are able to achieve strong rent coverage based on the growing capacity of their facilities and the current wholesale price of cannabis. In addition, we believe our unique and flexible lease structure for cannabis operators, which typically includes a period of higher rent in the initial years of the lease and a reset to a lower rent for the remainder of the lease term provides strong protection to our investment basis while setting the tenant up for long-term success in the event cannabis prices decrease or federal legalization of cannabis is enacted.

During 2020, we acquired nine CEA properties in Colorado and Maine totaling approximately 187,000 square feet of greenhouses and cultivation/processing buildings representing a total capital commitment of approximately 17.9 million (consisting of purchase price and development costs but excluding transaction costs). Power REIT entered into seven new triple-net leases and three amendments with state-licensed medical cannabis operators related to these acquisitions which generate straight-line annualized rent of approximately $3.4 million, representing a yield in excess of 18% on invested capital.

As of December 31, 2020, the Trust's assets consisted of a total of approximately 112 miles of railroad infrastructure plus branch lines and related real estate, approximately 601 acres of fee simple land leased to seven utility scale solar power generating projects with an aggregate generating capacity of approximately 108 Megawatts ("MW"), and approximately 41 acres of land with 216,278 square feet of greenhouse/processing space for medical cannabis cultivation. We are actively seeking to grow our portfolio of real estate related to CEA for food and cannabis cultivation.


Results of Operations

Acquisitions in CEA real estate drove a 129% growth rate in 2020 Net Income and a 114% core FFO per share growth compared to 2019.

Results of Operations for the Year ended December 31, 2020 as compared to the year ended December 31, 2019

Our total revenue for the fiscal years 2020 and 2019 was approximately $4,273,000 and $2,181,000 respectively. Net income attributed to common shares for the fiscal year 2020 was approximately $1,892,000 compared to $667,000 for 2019. The difference between our 2020 and 2019 consolidated results was principally attributable to the following: an increase in rental income of $2,051,000, an increase in misc. income of $41,000, an increase in general and administrative costs of $119,000, an increase in property tax of $5,000, an increase in depreciation expense of approximately $103,000, and an increase in interest expense of approximately $639,000 due to the loan agreement entered into on November 25, 2019.

Our cash outlays, other than dividend payments on our Series A Preferred Stock, are for general and administrative ("G&A") expenses, which consist principally of insurance, legal and other professional fees, consultant fees, NYSE American listing fees, shareholder service company fees and auditing costs. We further expect that the remainder of our G&A expenses will continue to increase in 2021 and beyond as it further implements its business plan.

During 2020, as a result of Power REIT's acquisition strategy, the contribution to its consolidated revenues related to CEA related real estate has increased as a percentage of our total consolidated revenue. For the fiscal year ended 2020, payments from NSC to P&WV under the Railroad Lease, payments from PWRS's tenant and our CEA tenants contributed approximately 21%, 19% and 52% of consolidated revenue compared to 2019 where payments from NSC to P&WV under the Railroad Lease and payments from PWRS's tenant contributed approximately 46% and 41% of consolidated revenue.

Liquidity and Capital Resources

To meet our working capital and longer-term capital needs, we rely on cash provided by our operating activities, proceeds received from the issuance of equity securities and proceeds received from borrowings, which may be secured by liens on assets. The Trust is exploring a variety of capital sources to fund its significant acquisition pipeline, which is in various stages of negotiations. In December 2020, we commenced a rights offering whereby shareholders of record as of December 28, 2020 could purchase one additional share at $26.50 per share for every share owned. The Rights Offering closed on February 5, 2021 and Power REIT raised approximately $36.7 million and issued an additional 1,383,394 common shares.

Cash Flows

Our cash and cash equivalents totaled approximately $5,601,826 as of December 31, 2020, a decrease of $10,240,678 from December 31, 2019. During the year ended December 31, 2020, the primary use of cash was for working capital requirements and investment activities that included $10,232,408 paid for land and cultivation facilities and $2,087,086 paid for construction in progress for cultivation facilities.

During the year ended December 31, 2020, our net cash generated by operating activities was approximately $2,957,000. During the year ended December 31, 2019, the Trust's net cash generated by operating activities was approximately $1,372,000.

During the year ended December 31, 2020, our net cash used in investing activities was approximately $12,319,000. During the year ended December 31, 2019, the Trust's net cash used in investing activities was approximately $1,799,000.

During the year ended December 31, 2020, our net cash used in financing activities was approximately $878,000 which included $597,840 of payments on long-term debt and $280,230 for dividend payments to the holders of our Series A Preferred Stock. During the year ended December 31, 2019, the Trust's net cash obtained by financing activities was approximately $14,498,000.


With the cash available as of December 31, 2020, we believe these resources will be sufficient to fund our operations and commitments. Our cash outlays, other than acquisitions, property improvements, dividend payments and interest expense, are for general and administrative ("G&A") expenses, which consist principally of professional fees, consultant fees, NYSE American listing fees, insurance, shareholder service company fees and auditing costs.

To meet our working capital and longer-term capital needs, we rely on cash provided by our operating activities, proceeds received from the issuance of equity securities and proceeds received from borrowings, which may be secured by liens on assets. Based on our leases in place as of December 31, 2020, we anticipate generating $7,305,766 in cash rent over the next twelve months. At December 31, 2020, we owed debt in the principal amount of $24,410,186, which has debt service due of $635,501 over the next twelve months. We anticipate that our cash from operations will be sufficient to support our operations; however additional acquisition of real estate may require us to seek to raise additional financing. There can be no assurance that financing will be available when needed on favorable terms.

Preferred Stock

During 2014, the Trust expanded its equity financing activities by offering a series of preferred shares to the public. The Series A Preferred Stock ranks, as to dividend rights and rights upon liquidation, dissolution or winding up, senior to the Trust's common shares. Voting rights for holders of Series A Preferred Stock exist only with respect to amendments to the Trust's charter that materially and adversely affect the terms of the Series A Preferred Stock, the authorization or issuance of equity securities that are senior to the Series A Preferred Stock and, if the Trust fails to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive), the election of two additional trustees to our Board of Trustees. No Series A Preferred Stock was issued during 2020. The Trust had previously closed on the sale of approximately $3,492,000 of its Series A $25 Par Value Preferred Stock pursuant to a public offering prospectus supplement dated January 23, 2014.


On December 31, 2012, as part of the Salisbury land acquisition, PWSS assumed existing municipal financing ("Municipal Debt"). The Municipal Debt has approximately 11 years remaining. The Municipal Debt has a simple interest rate of 5.0% that is paid annually, due on February 1 of each year. The balance of the Municipal Debt as of December 31, 2020 was approximately $70,000.

In July 2013, PWSS borrowed $750,000 from a regional bank (the "PWSS Term Loan"). The PWSS Term Loan carries a fixed interest rate of 5.0% for a term of 10 years and amortizes based on a 20-year principal amortization schedule. The loan is secured by PWSS' real estate assets and a parent guarantee from the Trust. The balance of the PWSS Term Loan as of December 31, 2020 was approximately $551,000 (net of approximately $6,800 of capitalized debt costs).

On November 6, 2015, PWRS entered into a loan agreement (the "2015 PWRS Loan Agreement") with a certain lender for $10,150,000 (the "2015 PWRS Loan"). The 2015 PWRS Loan is secured by land and intangibles owned by PWRS. PWRS issued a note to the benefit of the lender dated November 6, 2015 with a maturity date of October 14, 2034 and a 4.34% interest rate. The balance of the PWRS Bonds as of December 31, 2020 was approximately $8,183,000 (net of approximately $303,000 of capitalized debt costs).


On November 25, 2019, Power REIT, through a newly formed subsidiary, PW PWV Holdings LLC ("PW PWV"), entered into a loan agreement (the "PW PWV Loan Agreement") with a certain lender for $15,500,000 (the "PW PWV Loan"). The PW PWV Loan is secured by pledge of PW PWV's equity interest in P&WV, its interest in the Railroad Lease and a security interest in a deposit account (the "Deposit Account") pursuant to a Deposit Account Control Agreement dated November 25, 2019 into which the P&WV rental proceeds are deposited. Pursuant to the Deposit Account Control Agreement, P&WV has instructed its bank to transfer all monies deposited in the Deposit Account to the escrow agent as a dividend/distribution payment pursuant to the terms of the PW PWV Loan Agreement. The PW PWV Loan is evidenced by a note issued by PW PWV to the benefit of the lender for $15,500,000, with a fixed interest rate of 4.62% and fully amortizes over the life of the financing which matures in 2054 (35 years). The balance of the loan as of December 31, 2020 was $14,994,000 (net of approximately $302,000 of capitalized debt costs).

The approximate amount of principal payments remaining on Power REIT's long-term debt as of December 31, 2020 is as follows:

                  Total Debt

2021                  635,501
2022                  675,373
2023                1,168,431
2024                  715,777
2025                  755,634
Thereafter         20,459,470
Long term debt   $ 24,410,186

Critical Accounting Policies

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make significant judgments and estimates to develop certain amounts reflected and disclosed. In many cases, there are alternative policies or estimation techniques that could be used. We regularly review the application of our accounting policies and evaluate the appropriateness of the estimates that are required to be made in order to prepare our consolidated financial statements. Typically, estimates may require adjustments from time to time based on, among other things, changing circumstances and new or better information.

The accounting policies that we consider to be our "critical accounting policies" are those that we believe are either the most judgmental or involve the selection or application of alternative accounting policies, and that in each case are material to our consolidated financial statements. We believe that our revenue recognition policies meet these criteria. These policies are as follows:

Revenue Recognition

The Railroad Lease is treated as a direct financing lease. As such, income to P&WV under the Railroad Lease is recognized when received.

Lease revenue from solar land and CEA properties are accounted for as operating leases. Any such leases with rent escalation provisions are recorded on a straight-line basis when the amount of escalation in lease payments is known at the time Power REIT enters into the lease agreement, or known at the time Power REIT assumes an existing lease agreement as part of an acquisition (e.g., an annual fixed percentage escalation) over the initial lease term, subject to a collectability assessment, with the difference between the contractual rent receipts and the straight-line amounts recorded as "deferred rent receivable" or "deferred rent liability". Expenses for which tenants are contractually obligated to pay, such as maintenance, property taxes and insurance expenses are not reflected in our consolidated financial statements.


Lease Accounting

In February 2016, the FASB issued ASU No 2016-02 "Leases" (Topic 842). The standard requires companies that lease valuable assets like aircraft, real estate, and heavy equipment to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The standard also requires companies to disclose in the footnotes to their financial statement information about the amount, timing, and uncertainty for the payments they make for the lease agreements. This standard is effective for fiscal years and interim periods beginning after December 15, 2018, and the Trust adopted the standard using the modified retrospective approach effective January 1, 2019. The lessor accounting model under ASC 842 is similar to previous guidance, however, it limits the capitalization of initial direct leasing costs, such as internally generated costs.

The Trust elected all practical expedients permitted under ASC 842, other than the hindsight practical expedient. Accordingly, the Trust will retain distinction between a finance lease (i.e., capital leases under existing guidance) and an operating lease and account for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the contracts contain a lease under ASC 842, (b) whether classification of the operating leases would be different in accordance with ASC 842c or (c) whether the unamortized initial direct costs before transition adjustments would have met the definition of initial direct costs in ASC 842 at lease commencement. The Trust did not have a cumulative effect adjustment to retained earnings upon adoption.

As lessor, for each of our real estate transactions, we consider various inputs and assumptions including, but not necessarily limited to, lease terms, renewal options, discount rates, and other rights and provisions in the purchase and sale agreement, lease and other documentation to determine whether control has been transferred to the Trust or remains with the lessee. A lease will be classified as direct-financing if risks and rewards are conveyed without the transfer of control and will be classified as a sales-type lease if control of the underlying asset is transferred to the lessee. Otherwise, the lease is treated as an operating lease. These criteria also include estimates and assumptions regarding the fair value of the leased facilities, minimum lease payments, the economic useful life of the facilities, the existence of a purchase option and certain other terms in the lease agreements. The Railroad Lease continues to be classified as a direct financing lease. Our solar ground leases and CEA property leases continue to be classified as operating leases under Topic 842 and we continue to record revenue for each of these properties on a straight-line basis.

Lease amendments are evaluated to determine if the modification grants the lessee an additional right-of-use not included in the original lease and if the lease payments increase commensurate with the standalone price of the additional right-of-use, adjusted for the circumstances of the particular contract. If both conditions are present, the lease amendment is accounted for as a new lease that is separate from the original lease.

Real Estate Assets and Depreciation of Investment in Real Estate

The Trust expects that most of its transactions will be accounted for as asset acquisitions. In an asset acquisition, the Trust is required to capitalize closing costs and allocate the purchase price on a relative fair value basis.

In making estimates of relative fair values for purposes of allocating purchase price, the Trust utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Trust also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible assets acquired.

The Trust allocates the purchase price of acquired real estate to various components as follows:

  ? Land - Based on actual purchase price adjusted to an allocation of the
    relative fair value (as necessary) if acquired separately or market
    research/comparables if acquired with existing property improvements.
  ? Improvements - Based on the allocation of the relative fair value of the
    improvements acquired. Depreciation is calculated on a straight-line method
    over the useful life of the improvements.
  ? Lease Intangibles - The Trust considers the value of an acquired in-place
    lease if in excess of the value of the land and improvements and the
    amortization of the lease intangible is over the remaining term of the lease
    on a straight-line basis.
  ? Construction in Progress (CIP) - The Trust classifies greenhouses or buildings
    under development and/or expansion as construction-in-progress until
    construction has been completed and certificates of occupancy permits have
    been obtained upon which the asset is then classified as an Improvement.

Power REIT has several leases with tenants whereby the tenants are responsible for implementing improvements to Power REIT's properties and Power REIT has committed to fund the cost of such improvements. Power REIT capitalized the costs of such property improvements but has determined not to capitalize interest expense based on a determination that the amount for each project would not be material and each project has a relatively short construction period.

For further information, see Note 2 to the consolidated financial statements appearing following Item 15 of this document, which is incorporated herein by reference.

Funds From Operations - Non-GAAP Financial Measures

We assess and measure our overall operating results based upon an industry performance measure referred to as Core Funds From Operations ("Core FFO") which management believes is a useful indicator of our operating performance. This Annual Report contains supplemental financial measures that are not calculated pursuant to U.S. GAAP, including the measure identified by us as Core FFO. Following is a definition of this measure, an explanation as to why we present it and, at the end of this section, a reconciliation of Core FFO to the most directly comparable GAAP financial measure.


Core FFO: Management believes that Core FFO is a useful supplemental measure of the Trust's operating performance. Management believes that alternative measures of performance, such as net income computed under GAAP, or Funds From Operations computed in accordance with the definition used by the National Association of Real Estate Investment Trusts ("NAREIT"), include certain financial items that are not indicative of the results provided by the Trust's asset portfolio and inappropriately affect the comparability of the Trust's period-over-period performance. These items include non-recurring expenses, such as those incurred in connection with litigation, one-time upfront acquisition expenses that are not capitalized under ASC-805 and certain non-cash expenses, including stock-based compensation expense amortization and certain up front financing costs. Therefore, management uses Core FFO and defines it as net income excluding such items. Management believes that, for the foregoing reasons, these adjustments to net income are appropriate. The Trust believes that Core FFO is a useful supplemental measure for the investing community to employ, including when comparing the Trust to other REITs that disclose similarly adjusted FFO figures, and when analyzing changes in the Trust's performance over time. Readers are cautioned that other REITs may use different adjustments to their GAAP financial measures than we do, and that as a result, the Trust's Core FFO may not be comparable to the FFO measures used by other REITs or to other non-GAAP or GAAP financial measures used by REITs or other companies.

                        CORE FUNDS FROM OPERATIONS (FFO)

                                     The Year Ended                   Three Months
                                      December 31,                 Ended December 31,
                                  2020            2019            2020            2019
Net Income                     $ 2,171,874     $   946,894     $   863,970     $   262,498
Stock-Based Compensation           255,611         205,335          66,159          47,127
Interest Expense -
Amortization of Debt Costs          34,110          26,062           8,528           7,170
Amortization of Intangible
Asset                              237,140         237,142          59,286          59,287
Depreciation on Land
Improvements                       141,720          38,757          45,691          21,046
Core FFO Available to
Preferred and Common Stock       2,840,455       1,454,190       1,043,634         397,128

Preferred Stock Dividends         (280,230 )      (280,232 )       (70,056 )       (70,058 )

Core FFO Available to Common
Shares                         $ 2,560,225     $ 1,173,958     $   973,578     $   327,070

Weighted Average Shares
Outstanding (basic)              1,910,898       1,871,554       1,916,139       1,872,939

Core FFO per Common Share             1.34            0.63            0.51            0.17

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 9,71 M - -
Net income 2021 - - -
Net Debt 2021 - - -
P/E ratio 2021 -
Yield 2021 4,08%
Capitalization 158 M 158 M -
Capi. / Sales 2021 16,3x
Capi. / Sales 2022 10,7x
Nbr of Employees 3
Free-Float 68,3%
Duration : Period :
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Technical analysis trends POWER REIT
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Income Statement Evolution
Mean consensus BUY
Number of Analysts 1
Last Close Price 47,50 $
Average target price 63,00 $
Spread / Average Target 32,6%
Managers and Directors
David H. Lesser Chairman-Trustees Board, CEO, CFO & Secretary
Virgil E. Wenger Independent Trustee
Patrick R. Haynes Independent Trustee
William S. Susman Independent Trustee
Paula Jean Poskon Independent Trustee
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