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 2020 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. We are structured as a holding company and own our assets through twelve 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 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 ofMarch 31, 2021 , 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 52 acres of land with 327,000 square feet of existing or under construction greenhouses leased to medical cannabis operators. We are actively seeking to grow our portfolio of CEA for food and cannabis production. During the quarter endedMarch 31, 2021 , we raised gross proceeds of approximately$36.7 million and issued an additional 1,383,394 common shares through a rights offering that closed onFebruary 5, 2021 . The offer commenced in December, 2020 whereby shareholders of record as ofDecember 28, 2020 could purchase one additional share at$26.50 per share for every share owned. Recent Developments
During the first quarter endedMarch 31, 2021 , we added to our portfolio of CEA properties by acquiring four new properties and expanding one of the leases
on a newly acquired property. 15 OnJanuary 4, 2021 , through a newly formed wholly owned subsidiary,PW CO CanRE Grail, LLC , ("PW Grail"), we completed the acquisition of two properties totaling 4.41 acres of vacant land ("Grail Properties ") approved for medical cannabis cultivation in southernColorado for$150,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 21,732 square foot greenhouse and processing facility for approximately$1.69 million . Accordingly, PW Grail's total capital commitment is approximately$1.84 million . Concurrent with the acquisition, PW Grail entered into a 20-year "triple-net" lease (the "Grail Project Lease") withThe Grail Project LLC ("Grail Project ") which will operate a cannabis cultivation facility. The lease requiresGrail Project to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, theGrail Project's Lease provides four, five-year renewal options. The rent for the Grail Project Lease is structured whereby after a six-month free-rent period, the rental payments providePower REIT a full return of invested capital over the next three years in equal monthly payments. After the 42nd month, rent is structured to provide a 12.9% return of the original invested capital with 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 of the original invested capital and will increase at a 3% rate per annum 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 allColorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant's cannabis and cannabis-infused products from theGrail Properties . The lease also has personal guarantees from the owners of theGrail Project . The Grail Project Lease is structured to provide an annual straight-line rent of approximately$350,000 , representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed byJuly 2021 . OnFebruary 23, 2021 , we amended the Grail Project Lease making approximately$518,000 of more funds available to construct an additional 6,256 square feet to the cannabis cultivation and processing space. Once completed, our total capital commitment will be approximately$2.4 million . As part of the agreement,PW Grail and Grail Project have amended the Lease ("Grail Amended Lease") whereby after an eight-month period, the additional rental payments provide PW Grail with a full return of its original invested capital over the next three years and thereafter, provide a 12.9% return increasing 3% per annum. The additional annual straight-line rent of approximately$105,000 represents an estimated yield on costs of over 18% over our investment. OnJanuary 14, 2021 , through a newly formed wholly owned subsidiary,PW CO CanRE Apotheke, LLC , ("PW Apotheke"), we completed the acquisition of a property totaling 4.31 acres of vacant land ("Apotheke Property") approved for medical cannabis cultivation in southernColorado for$150,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 21,548 square foot greenhouse and processing facility for approximately$1.66 million . Accordingly, PW Apotheke's total capital commitment is approximately$1.81 million . Concurrent with the acquisition, PW Apotheke entered into a 20-year "triple-net" lease (the "Apotheke Lease") withDom F, LLC ("Dom F") which will operate a cannabis cultivation facility. The lease requires Dom F to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Apotheke Lease provides two, five-year renewal options. The rent for the Apotheke Lease is structured whereby after an eight-month free-rent period, the rental payments providePower REIT a full return of invested capital over the next three years in equal monthly payments. After the 44th month, rent is structured to provide a 12.9% return of the original invested capital with 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 of the original invested capital and will increase at a 3% rate per annum 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 allColorado 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 Apotheke Property. The lease also has personal guarantees from the owners of Dom F. The Apotheke Lease is structured to provide an annual straight-line rent of approximately$342,000 , representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by September, 2021. OnFebruary 3, 2021 , we acquired a property located inRiverside County, CA (the "Canndescent Property") through a newly formed wholly owned subsidiary ("PW Canndescent"). The purchase price was$7.685 million and we paid for the .85 acre property with$2.685 million cash on hand and the issuance of 192,308 shares ofPower REIT's Series A Preferred Stock. PW Canndescent received an assignment of a lease (the "Canndescent Lease") to allow the tenant ("Canndescent") to operate the 37,000 square foot greenhouse cultivation facility on the Canndescent Property. Canndescent is a premium flower brand for luxury cannabis inCalifornia . The Canndescent Lease requires Canndescent to pay all property related expenses including maintenance, insurance and taxes. The rent for the Canndescent Lease is structured to provide straight-line annual rent of approximately$1,074,000 . 16
The following table summarized the preliminary allocation of the purchase consideration for the Canndescent Property based on the relative fair values of the assets acquired:
Land$ 258,420 Assets Subject to Depreciation: Improvements (Greenhouses / Processing Facilities) 7,426,580 Acquisition Costs Capitalized 92,289 Total Assets Acquired$ 7,777,289 OnMarch 12, 2021 , through a newly formed wholly owned subsidiary,PW CO CanRE Gas Station, LLC , ("PW Gas Station "), we purchased a property totaling 2.2 acres of vacant land ("Gas Station Property") approved for medical cannabis cultivation in southernColorado for$85,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 24,512 square foot greenhouse and processing facility for approximately$2.03 million . Accordingly,PW Gas Station's total capital commitment is approximately$2.1 million . Concurrent with the acquisition, PW Gas Station entered into a 20-year "triple-net" lease (the "Gas Station Lease") withThe Gas Station, LLC ("Gas Station") which will operate a cannabis cultivation facility. The lease requires Gas Station to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Gas Station's Lease provides two, five-year renewal options. The rent for the Gas Station Lease is structured whereby after a seven-month free-rent period, the rental payments providePower REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 12.9% return of the original invested capital with 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 of the original invested capital and will increase at a 3% rate per annum 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 allColorado 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 Gas Station Property. The lease also has personal guarantees from the owners of the Gas Station. The Gas Station Lease is structured to provide an annual straight-line rent of approximately$400,000 , representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by September, 2021.
The acquisitions described above are accounted for as asset acquisitions under
ASC 805-50.
17 The following table is a summary of the Trust's properties as ofMarch 31, 2021 : Property Type/Name Location Acres Size1 Lease Start Term (yrs)2 Rent ($) Gross Book Value Railroad Property P&WV (Norfolk Southern) PA/WV/OH 112 miles Oct-64 99$ 915,000 $ 9,150,000 Solar Farm Land PWSS Salisbury, MA 54 5.7 Dec-11 22 89,494 1,005,538 Tulare County, PWTS CA 18 4.0 Mar-13 25 32,500 310,000 Tulare County, PWTS CA 18 4.0 Mar-13 25 37,500 310,000 Tulare County, PWTS CA 10 4.0 Mar-13 25 16,800 310,000 Tulare County, PWTS CA 10 4.0 Mar-13 25 29,900 310,000 Tulare County, PWTS CA 44 4.0 Mar-13 25 40,800 310,000 PWRS Kern 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
CEA (Cannabis) Property34
Crowley County,
JAB - Tam Lot 18 CO 2.11 12,996 Jul-19 20 201,810 1,075,000
Crowley County,
JAB - Mav Lot 1 CO 5.20 16,416 Jul-19 20 294,046 1,594,582
Grassland - Mav Lot Crowley County,
14 CO 5.54 26,940 Feb-20 20 354,461 1,908,400
Chronic - Sherman Crowley County,
Lot 6 CO 5.00 26,416 Feb-20 20 375,159 1,995,101
Original - Mav Lot Crowley County,
5 CO 5.20 15,000 Apr-20 20 256,743 1,358,664
Sweet Dirt 495 York County, ME 3.06 35,600 May-20 20 919,849 4,917,134
Sweet Dirt 505 York County, ME 3.58 12,638 Sep-20 20 373,055 1,964,723
Fifth Ace - Tam Lot Crowley County,
7 CO 4.32 18,000 Sep-20 20 261,963 1,364,585
Monte Fiore - Tam Crowley County,
Lot 13 CO 2.37 9,384 Oct-20 20 87,964 425,000
Monte Fiore - Tam Crowley County,
Lot 14 CO 2.09 24,360 Oct-20 20 490,700 2,637,300
Green Mile - Tam Crowley County,
Lot 19 CO 2.11 18,528 Dec-20 20 252,061 1,311,116
Grail Project - Tam Crowley County,
Lot 4 & 5 CO 4.41 27,988 Jan-21 20 454,602 2,360,112
Apotheke - Tam Lot Crowley County,
8 CO 4.31 21,548 Jan-21 20 341,953 1,813,893
Riverside
Canndescent County, CA 0.85 37,000 Feb-21 5 1,073,318 7,685,000
Gas Station - Tam Crowley County,
Lot 3 CO 2.20 24,512 Mar-21 20 399,748 2,118,717
CEA Total 52.35 327,326 $ 6,137,432 $ 34,529,327
Grand Total $ 8,102,543 $ 55,418,413 1 Solar Farm Land size represents Megawatts and CEA property size represents square feet
2 Not including renewal options
3 Rent represents straight line net rent
4 Gross Book Value represents total commitment
Note: Size, Rent and Gross Book Value assume completion of approved construction
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 condensed consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7
of the 2020 10-K. Results of Operations
Three Months Ended
Revenue during the three months endedMarch 31, 2021 and 2020 was$1,820,927 and$787,388 respectively. Revenue during the three months endedMarch 31, 2021 consisted of revenue from lease income from direct financing lease of$228,750 , rental income of$1,591,931 and miscellaneous income of$246 . The increase in total revenue was primarily related to a$1,088,729 increase in rental income from newly acquired properties netted with a decrease in other income of$55,190 . Expenses for the three months endedMarch 31, 2021 increased by$177,498 as compared to total expenses for the three months endedMarch 31, 2020 primarily due to an increase in general and administrative expenses of$14,194 and an increase in depreciation expense of$169,401 . Net income attributable to common shares during the three months endedMarch 31, 2021 and 2020 was approximately$944,918 and$182,029 , respectively. Net income attributable to common shares increased by$762,889 primarily due to the increase in rental income which was offset by an increase in depreciation expense. 18
For the three months ended
Liquidity and Capital Resources
Our cash and cash equivalents totaled approximately$37,071,322 as ofMarch 31, 2021 , an increase of$31,469,496 fromDecember 31, 2020 . During the three months endedMarch 31, 2021 , the primary increase of cash was due to financing activities such as the rights offering that closed onFebruary 5, 2021 through which, we raised$36,598,055 , ($36,659,941 netted with offering expenses of$61,886 ), netted with a decrease of cash due to the acquisition of land and construction in progress payments. With the cash available as of May, 2021, 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. To meet our working capital and longer-term capital needs, we intend to rely on cash provided by our operating activities, proceeds received from the issuance of equity securities and proceeds received from borrowings, which are typically secured by liens on assets. Based on our leases in place and rental income as ofMarch 31, 2021 , we anticipate generating$11,257,063 in cash rent over the next twelve months. AtMarch 31, 2021 , we owed debt in the principal amount of$24,344,619 , of which$644,365 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.
19
A reconciliation of our Core FFO to net income for the three months ended
CORE FUNDS FROM OPERATIONS (FFO)
(Unaudited)
Three Months Ended March 31,
2021 2020
Revenue $ 1,820,927 $ 787,388
Net Income $ 1,108,128 $ 252,087
Stock-Based Compensation 66,158 75,159Interest Expense - Amortization of Debt Costs 8,527
8,527
Amortization of Intangible Asset 59,285
59,285
Depreciation on Land Improvements 196,051
26,650
Core FFO Available to Preferred and Common Stock 1,438,149
421,708 Preferred Stock Dividends (163,210 ) (70,058 )
Core FFO Available to Common Shares$ 1,274,939 $
351,650
Weighted Average Shares Outstanding (basic) 2,755,502
1,899,313 Core FFO per Common Share 0.46 0.19 Growth Rates: Revenue 131 % Net Income 340 % Core FFO Available to Common Shareholders 263 % Core FFO per Common Share 142 %
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