POWER REIT CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this "Report") includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "plan," "assume" or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained in this Report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industries and results that might be obtained by pursuing management's current or future plans and objectives are forward-looking statements. You should not place undue reliance on any forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control, including those identified below, under Part II, Item 1A. "Risk Factors" and elsewhere in this Report, and those identified under Part I, Item 1A of the Annual Report on Form 10-K for the year endedDecember 31, 2021 that we filed with theSecurities and Exchange Commission onMarch 31, 2022 (the "2021 10-K"). Our forward-looking statements are based on the information currently available to us and speak only as of the date of the filing of this Report. New risks and uncertainties arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual results, performance, financial condition or achievements may differ from the anticipated results, performance, financial condition or achievements that are expressed or implied by our forward-looking statements, and such differences may be significant and materially adverse to our security holders. Our forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
We are aMaryland-domiciled Real Estate Investment Trust (REIT) that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (CEA) inthe United States . We are focused on making new acquisitions of real estate within the CEA sector related to food and cannabis production in the form of greenhouses. 17 We are structured as a holding company and own our assets through twenty-five wholly owned, special purpose subsidiaries that have been formed in order to hold real estate assets, obtain financing and generate lease revenue. We were formed as part of a reorganization and reverse triangular merger ofPittsburgh & West Virginia Railroad ("P&WV") that closed onDecember 2, 2011 . P&WV survived the reorganization as our wholly-owned subsidiary. Our investment strategy, which is focused on transportation, CEA and energy infrastructure-related real estate, builds upon P&WV's historical ownership of railroad real estate assets, which are currently triple-net leased toNorfolk Southern Railroad ("NSC"). We typically enter into long-term triple net leases where tenants are responsible for all ongoing costs related to the property, including insurance, taxes and maintenance. Prior to 2019, our focus was on the acquisition of real estate assets related to transportation and renewable energy infrastructure. In 2019 we expanded the focus of our real estate acquisitions to include CEA properties inthe United States . CEA is an innovative method of growing plants that involves creating optimized growing environments for a given crop indoors. We are currently focused on making new acquisitions of real estate within the CEA sector related to food and cannabis cultivation. As ofJune 30, 2022 , our portfolio consisted of approximately 112 miles of railroad infrastructure and related real estate leased to a railway company which is owned by our subsidiary, P&WV, approximately 601 acres of fee simple land leased to a number of solar power generating projects with an aggregate generating capacity of approximately 108 MW and approximately 263 acres of land with approximately 2,211,000 square feet of existing or under construction greenhouses. We are actively seeking to grow our portfolio of CEA for food
and cannabis production. Recent Developments
During the six months endedJune 30, 2022 , we added to our portfolio of CEA properties by acquiring a new greenhouse property inNebraska which will grow tomatoes. In addition, we amended two existing cannabis leases to increasePower REIT's investment with a corresponding increase in rental income and entered into two new cannabis leases to replace tenants on vacated properties. Due to the compression of the wholesale cannabis market inColorado , the Trust has offered tenants relief by amending original leases to several of ourColorado tenants whereby monthly cash payments are restructured over the course of the lease to lower rent payments during 2022 and increase rent payment in 2023 or 2024. These amendments do not affect the straight-line revenue calculation from these leases. As ofJune 30, 2022 , the Trust has executed seven of these lease amendments. As previously disclosed on 8K filing datedJuly 18, 2022 , cannabis licensing forPower REIT's property located inMichigan has been delayed.The Michigan Cannabis Regulatory Authority application requires submitting a Certificate of Occupancy or alternative documentation where a Certificate of Occupancy does not exist, Since the property has Agricultural zoning, it is exempt from theMarengo Township building code and the requirement for a Certificate of Occupancy.Power REIT requested a simple two sentence letter fromMarengo Township that theMichigan Cannabis Regulatory Authority had approved in order to meet this requirement butMarengo Township refused to provide the letter which ultimately led toPower REIT filing two litigations againstMarengo Township . As previously disclosed, PW Marengo recently secured the requested statement fromMarengo Township and the application for cannabis licensing has been submitted to theState of Michigan .Power REIT andMarengo Township have agreed to continue with the mediation process to resolve remaining issues. See "Legal Proceedings" for more information regarding the litigation. Due to the uncertainty around timing for securing the necessary regulatory approvals for marijuana cultivation, the lease withMarengo Cannabis LLC was amended onJune 27, 2022 to restructure monthly rent payments over the course of the lease such that rent payments are scheduled begin in January, 2023. The rent was restructured such that the total rent over the life of the lease does not change. Due to the uncertainty of the timing for receipt of cash rent, the Trust concluded in the first quarter of 2022 that income from this lease will be considered on a cash basis rather than on a straight-line basis until there is more certainty regarding the ability to pay rent from commencement of operations. OnJanuary 1, 2022 ,PW CO CanRE Grail LLC ("PW Grail"), a wholly owned subsidiary entered into a new triple-net lease (the "Sandlot Lease") on the same economic terms as the former lease, with a new tenant,The Sandlot, LLC ("SL Tenant"). The term of the Sandlot Lease is 20 years and provides four options to extend for additional five-year periods and it was agreed upon to increase the construction budget by$71,000 .Power REIT's total commitment to this project is approximately$2,432,000 . OnJune 1, 2022 , the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged and an additional guarantor was added to the lease. Revenue recognition for the Sandlot Lease is currently being handled on a cash-basis and the Trust may commence straight-lining based on an ongoing assessment of the ability of the tenant to pay rent. 18 OnJanuary 1, 2022 , the Walsenburg Lease was amended ("Walsenburg Lease Amendment") to provide funding in the amount of$625,000 for the addition of processing space and equipment that will be housed on anotherPower REIT property pursuant to a sublease. The term of the Walsenburg Lease Amendment is ten years with no renewal options. Revenue recognition for this lease amendment is currently being handled on a cash-basis. OnMarch 1, 2022 , the Sweet Dirt Lease was amended (the "Sweet Dirt Lease Second Amendment") to provide funding in the amount of$3,508,000 to add additional items to the property improvement budget for the construction of a Cogeneration / Absorption Chiller project to the Sweet Dirt Property. The term of the Sweet Dirt Lease Second Amendment is coterminous with the original lease and is structured to provide an annual straight-line rent of approximately$654,000 . A portion of the property improvement, amounting to$2,205,000 , will be supplied byIntelliGen Power Systems LLC which is owned by HBP, an affiliate ofDavid Lesser ,Power REIT's Chairman and CEO. As ofJune 30, 2022 ,$1,102,500 has been paid toIntelliGen Power Systems LLC for equipment supplied. OnMarch 31, 2022 ,Power REIT , through a newly formed wholly owned subsidiary,PW MillPro NE LLC , ("PW MillPro"), acquired a 1,121,513 square foot greenhouse cultivation facility (the "MillPro Facility") on an approximately 86-acre property and a separate 4.88-acre property with a 21-room employee housing building (the "Housing Facility") for$9,350,000 and closing costs of approximately$91,000 located in O'Neill,Nebraska . As part of the transaction, the Trust agreed to fund improvements including the replacement of Energy Curtains for$534,430 . Simultaneous with the acquisition, PW MillPro entered into a 10-year "triple-net" lease (the "MillPro Lease") withMillennium Produce of Nebraska LLC ("MillPro"), a subsidiary of Millennium Sustainable Ventures Corp., of whichDavid Lesser is CEO and Chairman. MillPro will operate the MillPro Facility cultivating tomatoes. The lease requires MillPro to pay all property related expenses including maintenance, insurance and taxes. The MillPro Lease is structured to provide an annual straight-line rent of approximately$1,099,387 , representing an estimated yield on costs of 11%. After the initial 10-year term, the MillPro Lease provides four, five-year renewal options. The rent for the MillPro Lease is structured whereby after the initial 10-year term, the monthly rent increases by 10% at the first renewal option, and 5% at each successive renewal option (second, third, and fourth). This acquisition is accounted for as asset acquisitions under ASC 805-50 Business Combinations - Related Issue.Power REIT has established a depreciable life for the property improvements of 20 years for greenhouse and 39 years
for the housing facility.
OnMay 1, 2022 ,PW CO CanRE MF LLC ("CanRE MF"), a wholly owned subsidiary of the Trust, entered into a new triple-net lease (the "EB Lease") withElevate & Bloom, LLC ("EB Tenant") for one of the two subdivided lots owned inOrdway CO and previously occupied byPSP Management LLC ("PSP") which was evicted. The term of the EB Lease is 20 years and provides two options to extend for additional five-year periods.Power REIT's total commitment to this project including land purchased is approximately$1,282,000 with$750,283 remaining to be funded. The EB Lease also has financial guarantees from affiliates of the EB Tenant. The EB Tenant intends to operate as a licensed cannabis cultivation and processing facility. The EB Lease is structured to provide an annual straight-line rent of approximately$239,000 , representing an approximately 18.6% unleveraged FFO yield on invested capital. OnJune 1, 2022 ,PW CO CanRE Apotheke LLC ("CanRE Apotheke") amended its lease with its tenant (the "Apotheke Tenant") to provide$364,650 for additional improvements to the property leased to the Apotheke Tenant as well as to restructure the timing of lease payments. The additional revenue on an annualized straight-line basis is approximately$62,000 which represents approximately 17% unleveraged FFO yield. However, based on the history of payments, rent for this property is currently being treated on a cash basis and not on a straight-line basis. Revenue recognition for the CanRE Apotheke property is currently being handled on a cash-basis and the Trust may commence straight-lining based on an ongoing assessment of the ability of the tenant
to pay rent. 19 The following table is a summary of the Trust's properties as ofAugust 2022 : Property Gross Book Type/Name Location Acres Size(1) Lease Start Term (yrs)(2) Rent ($) (3) Value (4) Railroad Property P&WV - Norfolk Southern PA/WV/OH 112 miles Oct-64 99$ 915,000 $ 9,150,000 Solar Farm Land Salisbury, PWSS MA 54 5.7 Dec-11 22 89,494 1,005,538 Tulare PWTS County, CA 18 4.0 Mar-13 25 32,500 310,000 Tulare PWTS County, CA 18 4.0 Mar-13 25 37,500 310,000 Tulare PWTS County, CA 10 4.0 Mar-13 25 16,800 310,000 Tulare PWTS County, CA 10 4.0 Mar-13 25 29,900 310,000 Tulare PWTS County, CA 44 4.0 Mar-13 25 40,800 310,000 Kern PWRS County, CA 447 82.0 Apr-14 20 803,117 9,183,548 Solar Farm Land Total 601 107.7$ 1,050,111 $ 11,739,086 Greenhouse - Cannabis Crowley 19977 10 County, CO 2.11 12,996 Jul-19 20 201,810 1,075,000 Crowley JAB County, CO 5.20 16,416 Jul-19 20 294,046 1,594,582 Crowley Grassland County, CO 5.54 26,940 Feb-20 20 354,461 1,908,400 Crowley Green Street County, CO 5.00 26,416 Feb-20 20 375,159 1,995,101 York Sweet Dirt County, ME 6.64 48,238 May-20 20 1,947,087 10,389,857 Crowley Fifth Ace County, CO 4.32 18,000 Sep-20 20 261,963 1,364,585 Crowley PSP - Tam 14 County, CO 2.09 24,360 Oct-20 20 - (5) 2,531,025 Crowley Green Mile County, CO 2.11 18,528 Dec-20 20 252,061 1,311,116 Crowley Apotheke County, CO 4.31 21,548 Jan-21 20 - (8) 2,178,543 Riverside Canndescent County, CA 0.85 37,000 Feb-21 5 1,113,018 7,685,000 Crowley Gas Station County, CO 2.20 24,512 Feb-21 20 399,748 2,118,717 Crowley Cloud Nine County, CO 4.00 38,440 Apr-21 20 - (7) 2,947,905 Huerfano Walsenburg County, CO 35.00 102,800 May-21 20 - (8) 4,502,001 Vinita Craig Cannabis County, OK 9.35 40,000 Jun-21 20 - (8) 2,650,000 Crowley JKL County, CO 10.00 24,880 Jun-21 20 - (9) 2,928,293 Marengo Marengo Township, Cannabis MI 61.14 556,146 Sep-21 20 - (8) 25,523,362 Green Leaf Crowley Lane County, CO 5.20 15,000 Nov-21 20 262,718 1,358,664 Crowley The Sandlot County, CO 4.41 27,988 Jan-22 20 - (8) 2,431,513 Elevate & Crowley Bloom - Tam 13 County, CO 2.37 9,384 May-22 20 238,581 (6) 1,281,559 Greenhouse - Produce Millennium Produce of Holt Nebraska County, NE 90.88 1,121,153 Apr-22 10 1,099,387 9,884,430 Greenhouse Total 262.72 2,210,745$ 6,800,039 $ 87,659,653 Grand Total$ 8,765,150 $ 108,548,739 1 Solar Farm Land size represents Megawatts and CEA property size represents greenhouse square feet. 2 Not including renewal options. 3 Rent represents annualized straight line net rent. 4 Gross Book Value represents total capital commitment which includes the initial purchase price (excluding closing costs) plus the budget of construction - the actual amount spent could differ from the total budget. 5 Tenant was evicted as of Nov 2021-evaluating potential replacement tenant. 6 Replacement tenant for half of PSP property- refer to Footnote 4. 7 Eviction order granted in January 2022 and tenant is appealing - see legal proceedings. 8 Based on the uncertainty of collectability of rent, a write-off was taken to eliminate the impact of straight-lining rent. Going forward, rent will either be treated on a cash basis or a straight-line basis as applicable. 9 Eviction proceedings is in process. 10 An assignment of Lease Agreement was signed to change the name of the tenant from JAB to 19977 LLC for the Tam 18 property. Note: Size, Rent and Gross Book Value assume completion of approved construction 20 Critical Accounting Policies The consolidated financial statements are prepared in conformity withU.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2021 10-K. Cannabis Price Compression The national regulated cannabis market has experienced significant price compression over the last few quarters mainly driven by increased cultivation capacity in certain markets beyond demand as well as the impact from more states legalizing cannabis which has impacted demand in other States. We are continually monitoring tenant viability, their ability to pay rent, and are committed to work with our tenants based on making a realistic assessment of their viability. As part of this process, we have entered into lease modifications with certain of our tenants to help them continue to work through the impact of the price compression which in some markets is currently below the cost of production which is not sustainable and should ultimately lead to a price recovery. The Trust's investment thesis is that greenhouse cultivation is the sustainable approach from both an environmental and economic perspective and that the price compression should ultimately help move cultivation towards
greenhouses. Results of Operations
Three Months Ended
Revenue during the three months endedJune 30, 2022 , and 2021 was$2,232,953 and$2,267,848 , respectively. Revenue during the three months endedJune 30, 2022 , consisted of revenue from lease income from direct financing lease of$228,750 , rental income of$2,004,199 and miscellaneous income of$4 . The decrease in total revenue was primarily related to a$336,209 decrease in rental income from unrelated parties, offset by an increase of$305,310 in rental income from related parties, and a decrease in other income of$3,996 . Expenses for the three months endedJune 30, 2022 increased by$559,872 as compared to total expenses for the three months endedJune 30, 2021 primarily due to an increase in general and administrative expenses of$103,849 , an increase in amortization of intangible assets of$44,888 , an increase in interest expense of$169,099 and an increase in depreciation expense of$242,005 . Net income attributable to Common Shares during the three months endedJune 30, 2022 and 2021 was$781,722 and$1,376,493 , respectively. Net income attributable to common shares decreased by$594,771 primarily due to the decrease in rental income along with an increase in depreciation, interest and general and administrative expenses.
For the three months ended
Six Months Ended
Revenue during the six months endedJune 30, 2022 , and 2021 was$4,218,469 and$4,088,775 , respectively. Revenue during the six months endedJune 30, 2022 , consisted of rental income of$3,760,950 , direct financing lease income of$457,500 and other income of$19 . The increase in total revenue was primarily related to a$643,326 increase in rental income from transactions with related parties, offset by a$509,405 decrease in rental income from unrelated parties and a decrease in other income of$4,227 . Expenses for the six months endedJune 30, 2022 increased by$834,709 as compared to total expenses for the six months endedJune 30, 2021 primarily due to an increase in general and administrative expenses of$231,604 , an increase in depreciation expense of$334,491 , an increase in interest expense of$178,826 and to a lesser extent, an increase in amortization of intangible assets of$89,775 . Net income attributable to common shares during the six months endedJune 30, 2022 and 2021 was$1,616,395 and$2,321,411 , respectively. Net income attributable to common shares decreased by$705,016 primarily due to an increase in depreciation expense, general and administrative expenses, amortization of intangible assets, an increase in interest expense and the write off in rental income of$302,000 resulting from the adjustment of eliminating the straight-line rent for five tenants.
For the six months ended
Liquidity and Capital Resources
Our cash and cash equivalents totalled$1,191,708 as ofJune 30, 2022 , a decrease of$1,979,593 fromDecember 31, 2021 . During the six months endedJune 30, 2022 , the decrease of cash was primarily due to the increase in expenses and construction in progress payments. With the cash available as ofJuly 2022 coupled with the availability of the Debt Facility, 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 legal and other professional fees, consultant fees, NYSE American listing fees, insurance, shareholder service company fees and auditing costs. 21
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 from borrowings which may be secured by lien on assets.Power REIT is currently focused on non-dilutive capital sources, such as debt and the potential to issue additional preferred stock, in order to fund property improvements for our existing portfolio as well as additional acquisitions. Based on our leases in place and rental income as ofJune 30, 2022 , we anticipate generating$11,959,403 in cash rent over the next twelve months. AtJune 30, 2022 , we owed debt in the principal amount of$34,992,031 , of which$1,706,498 is due in 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.
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. Core FFO
is a non-GAAP financial measure. Core FFO should not be construed as a
substitute for net income (loss) (as determined in accordance with GAAP) for the
purpose of analyzing our operating performance or financial position, as Core
FFO is not defined by GAAP. The 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. 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 our asset portfolio and inappropriately affect the
comparability of the Trust's period-over-period performance. These items include
non-recurring expenses, such as 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. We believe that Core FFO is a useful supplemental measure
for the investing community to employ, including when comparing us to other
REITs that disclose similarly Core FFO figures, and when analyzing changes in
our performance over time. Readers are cautioned that other REITs may use
different adjustments to their GAAP financial measures than we use, and that as
a result, our 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.
22
A reconciliation of our Core FFO to net income for the six months ended
CORE FUNDS FROM OPERATIONS (FFO)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Revenue $ 2,232,953 $ 2,267,848 $ 4,218,469 $ 4,088,775
Net Income $ 944,928 $ 1,539,695 $ 1,942,808 $ 2,647,823
Stock-Based Compensation 109,100 86,815 218,200 152,973
Interest Expense -
Amortization of Debt Costs 21,818 8,528 43,794 17,055
Amortization of Intangible
Lease Asset 104,174 59,286 208,346 118,571
Amortization of Intangible
Lease Liability (9,926 ) - (19,851 ) -
Depreciation on Land
Improvements 388,520 146,515 677,057 342,566
Core FFO Available to
Preferred and Common Stock 1,558,614 1,840,839 3,070,354 3,278,988
Preferred Stock Dividends (163,206 ) (163,202 ) (326,413 ) (326,412 )
Core FFO Available to Common
Shares $ 1,395,408 $ 1,677,637 $ 2,743,941 $ 2,952,576
Weighted Average Shares
Outstanding (basic) 3,367,261 3,312,001 3,367,396 3,033,751
Core FFO per Common Share 0.41 0.51 0.81 0.97© Edgar Online, source
