POWER REIT CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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. 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
Power REIT is aMaryland -domiciled REIT that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (CEA) inthe United States .Power REIT is focused on making new acquisitions of real estate within the CEA sector related to food and cannabis production.Power REIT is structured as a holding company and owns its assets through eleven wholly-owned, special purpose subsidiaries that have been formed in order to hold real estate assets, obtain financing and generate lease revenue.Power REIT was formed as part of a reorganization and reverse triangular merger of P&WV that closed onDecember 2, 2011 . P&WV survived the reorganization as a wholly-owned subsidiary of the Registrant. The Company's investment strategy, which is focused on transportation, Controlled Environment Agriculture and energy infrastructure-related real estate, builds upon its subsidiary P&WV's historical ownership of railroad real estate assets, which are currently triple-net leased to NSC. As previously disclosed in a Form 8-K and accompanying Press Release datedJuly 15, 2019 ,Power REIT has expanded its focus on real estate acquisitions to include Controlled Environment Agriculture. CEA is an innovative method of growing plants that involves creating optimized growing environments for a given crop indoors.Power REIT intends to focus on CEA related real estate for growing food as well as cannabis.
On
The Property was acquired for$1,000,000 and is 3.04 acres with an existing 32,800 square-foot greenhouse and 2,800 square foot processing/distribution building that are both under active construction. The approximate 35,600 square foot facility is approved for medical cannabis cultivation. As part of the transaction, the Trust agreed to reimburse tenant$950,000 of the approximate$1.5 million construction expenses that have been incurred to date and will fund an additional$2.97 million of costs to complete the construction. Accordingly,Power REIT's total capital commitment totals$4.92 million which translates to approximately$138 per square foot for a state of the art Controlled Environment Agriculture Greenhouse ("CEAG"). This plus acquisition expenses will be funded entirely from existing working capital. Propco has entered into a triple-net lease with an operator such that the tenant is responsible for paying all expenses related to the property, including maintenance expenses, insurance and taxes. The lease is structured to provide a straight-line annual rent of approximately$920,000 , representing an estimated yield of over 18.5%. The term of the lease is 20 years and provides two options to extend for additional five-year periods. The lease also has financial guarantees from affiliates of the tenants. The tenant intends to operate as a licensed cannabis cultivation and processing facility. 15 The rent for the Lease is structured whereby after a six month deferred-rent period, the rental payment providesPower REIT a full return of invested capital over the next three years in equal monthly payments. After the deferred-rent period, rent is structured to provide a 12.9% return based on the original invested capital amount with annual rent increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return on the original invested capital amount and will increase at a 3% rate per annum based on a starting date of the start of year seven. The lease requires the Tenant to maintain a medical cannabis license and operate in accordance with allMaine and state and local regulations with respect to its operations. The lease prohibits the retail sale of the Tenant's cannabis and cannabis-infused products from the Property.
The acquisition is accounted for as an asset acquisition under ASC 805-50.
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As ofJune 30, 2020 , the Trust's assets consisted of approximately 112 miles of railroad infrastructure and related real estate leased to a railway company which is owned by its subsidiaryPittsburgh & West Virginia Railroad ("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 26 acres of land with 131,000 square feet of existing or under construction greenhouses leased to medical cannabis operators.Power REIT is actively seeking to grow its portfolio of Controlled Environment Agriculture for food and cannabis production. Revenue during the first six months of 2020 and 2019 was approximately$1,763,000 and$990,000 respectively. Net income attributable to Common Shares during the first six months of 2020 and 2019 was approximately$592,000 and 271,000, respectively. The difference between our 2020 and 2019 results were principally attributable to the following: a$714,000 increase in of rental income from newly acquired properties, a$59,000 increase in miscellaneous income, offset by a$56,000 increase in depreciation expense, a$35,000 increase in general and administrative expenses and a$356,000 increase in interest expense.
The Trust's 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, trustees' fees, NYSE American listing fees, insurance, shareholder service company fees and auditing costs.
To meet its working capital and longer-term capital needs,Power REIT relies on cash provided by its operating activities, proceeds received from the issuance of equity securities and proceeds received from borrowings, which are typically secured by liens on acquired assets. 16
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
report contains supplemental financial measures that are not calculated pursuant
to U.S. generally accepted accounting principles ("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 Company'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 Company's
asset portfolio and inappropriately affect the comparability of the Company'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. Management believes
that, for the foregoing reasons, these adjustments to net income are
appropriate. The Company believes that Core FFO is a useful supplemental measure
for the investing community to employ, including when comparing the Company to
other REITs that disclose similarly adjusted FFO figures, and when analyzing
changes in the Company'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 Company'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)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Core FFO Available to Common
Shares $ 555,252 $ 256,110 $ 906,901 $ 512,833
Core FFO per Common Share 0.29 0.14 0.48 0.27
Weighted Average Shares
Outstanding (basic) 1,912,939 1,870,192 1,906,126 1,870,165
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net Income Attributable to
Common Shares $ 409,695 $ 143,400 $ 591,724 $ 270,587
Stock-Based Compensation 48,133 47,127 123,291 111,081
Interest Expense - Amortization
of Debt Costs 8,528 6,298 17,055 12,595
Amortization of Intangible Asset 59,284 59,285 118,569 118,570
Depreciation on Land
Improvements 29,612 - 56,262 -
Core FFO Available to Common
Shares $ 555,252 $ 256,110 $ 906,901 $ 512,833
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