UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

001-36312

(Commission File Number)

 

POWER REIT 

(Exact name of registrant as specified in its charter)

 

Maryland   45-3116572
(State of Organization)   (I.R.S. Employer Identification No.)
     
301 Winding Road, Old Bethpage, NY   11804
(Address of principal executive offices)   (Zip Code)

 

(212) 750-0371

(Registrant’s telephone number, including area code)

 

N/A

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered

Shares of Beneficial Interest, $0.001 par value

 

 

NYSE American

 

7.75% Series A Cumulative Redeemable

Perpetual Preferred Stock,

Liquidation Preference $25 per Share

 

NYSE American

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company   [X]
Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes [X] No [  ]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

1,912,939 common shares, $0.001 par value, outstanding at July 29, 2020.

 

 

 

     

 

 

TABLE OF CONTENTS

 

         Page No.
     
PART I – FINANCIAL INFORMATION  
   
Item 1 Financial Statements (Unaudited) 3
Consolidated Balance Sheets (Unaudited) 3
Consolidated Statements of Operations (Unaudited) 4
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) 5
Consolidated Statements of Cash Flows (Unaudited) 6
Notes to Unaudited Consolidated Financial Statements 7
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 18
     
Item 4 Controls and Procedures 18
     
PART II – OTHER INFORMATION 19
     
Item 1 – Risk Factors 19
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 19
     
Item 3 – Defaults Upon Senior Securities 19
     
Item 4 – Mine Safety Disclosures 19
     
Item 5 – Other Information 19
     
Item 6 – Exhibits 19
     
SIGNATURE 20

 

  2  

 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

POWER REIT AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    (Unaudited)        
    June 30, 2020     December 31, 2019  
ASSETS            
Land   $ 7,778,644     $ 6,928,644  
Greenhouse cultivation facilities, net of accumulated depreciation     2,315,080       1,619,687  
Construction in progress - greenhouse cultivation facilities     4,842,686       -  
Net investment in direct financing lease - railroad     9,150,000       9,150,000  
Total real estate assets     24,086,410       17,698,331  
                 
Cash and cash equivalents     10,219,212       15,842,504  
Prepaid expenses     79,205       14,626  
Intangible assets, net of accumulated amortization     3,470,884       3,589,453  
Deferred rent receivable     997,380       546,187  
Other assets     16,975       16,700  
TOTAL ASSETS   $ 38,870,066     $ 37,707,801  
                 
LIABILITIES AND EQUITY                
Deferred revenue   $ 106,660     $ 29,342  
Tenant security deposit     691,872       114,378  
Accounts payable     73,238       54,993  
Accrued interest     80,895       84,313  
Current portion of long-term debt, net of unamortized discount     594,389       564,682  
Long-term debt, net of unamortized discount     23,545,095       23,797,191  
TOTAL LIABILITIES     25,092,149       24,644,899  
                 
Series A 7.75% Cumulative Redeemable Perpetual Preferred Stock Par Value $25.00 (175,000 shares authorized; 144,636 issued and outstanding as of June 30, 2020 and December 31, 2019)     3,492,149       3,492,149  
                 
Equity:                
Common Shares, $0.001 par value (100,000,000 shares authorized; 1,912,939 shares issued and outstanding at June 30, 2020 and 1,872,939 at December 31, 2019)     1,913       1,873  
Additional paid-in capital     11,944,737       11,821,486  
Accumulated deficit     (1,660,882 )     (2,252,606 )
Total Equity     10,285,768       9,570,753  
                 
TOTAL LIABILITIES AND EQUITY   $ 38,870,066     $ 37,707,801  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  3  

 

 

POWER REIT AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2020     2019     2020     2019  
REVENUE                                
Lease income from direct financing lease – railroad   $ 228,750     $ 228,750     $ 457,500     $ 457,500  
Rental income     735,441       262,528       1,238,643       525,055  
Misc. income     10,931       4,333       66,367       7,649  
TOTAL REVENUE     975,122       495,611       1,762,510       990,204  
                                 
EXPENSES                                
Amortization of intangible assets     59,284       59,285       118,569       118,570  
General and administrative     104,166       102,273       253,500       218,048  
Property tax     10,105       5,557       14,657       11,113  
Depreciation Expense     29,612       -       56,262       -  
Interest expense     292,202       115,038       587,682       231,770  
TOTAL EXPENSES     495,369       282,153       1,030,670       579,501  
                                 
NET INCOME     479,753       213,458       731,840       410,703  
                                 
Preferred Stock Dividends     (70,058 )     (70,058 )     (140,116 )     (140,116 )
                                 
NET INCOME ATTRIBUTABLE TO COMMON SHARES   $ 409,695     $ 143,400     $ 591,724     $ 270,587  
                                 
Income Per Common Share:                                
Basic   $ 0.21     $ 0.08     $ 0.31     $ 0.14  
Diluted     0.21       0.08       0.30       0.14  
                                 
Weighted Average Number of Shares Outstanding:                                
Basic     1,912,939       1,870,192       1,906,126       1,870,165  
Diluted     1,976,050       1,870,192       1,955,568       1,870,165  
                                 
Cash dividend per Series A Preferred Share   $ 0.48     $ 0.48     $ 0.97     $ 0.97  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  4  

 

 

POWER REIT AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2020 and 2019

(Unaudited)

 

                Additional           Total  
    Common Shares     Paid-in     Accumulated     Shareholders’  
    Shares     Amount     Capital     Deficit     Equity  
                               
Balance at December 31, 2019     1,872,939     $ 1,873     $ 11,821,486     $ (2,252,606 )   $ 9,570,753  
Net Income     -       -       -       252,087       252,087  
Cash Dividends on Preferred Stock     -       -       -       (70,058 )     (70,058 )
Stock-Based Compensation     40,000       40       75,118       -       75,158  
Balance at March 31, 2020     1,912,939     $ 1,913     $ 11,896,604     $ (2,070,577 )   $ 9,827,940  
Net Income     -       -       -       479,753       479,753  
Cash Dividends on Preferred Stock     -       -       -       (70,058 )     (70,058 )
Stock-Based Compensation     -       -       48,133       -       48,133  
Balance at June 30, 2020     1,912,939     $ 1,913     $ 11,944,737     $ (1,660,882 )   $ 10,285,768  

 

                Additional           Total  
    Common Shares   Paid-in     Accumulated     Shareholders’  
    Shares     Amount     Capital     Deficit     Equity  
                               
Balance at December 31, 2018     1,870,139     $ 1,870     $ 11,616,154     $ (2,919,268 )   $ 8,698,756  
Net Income     -       -       -       197,245       197,245  
Cash Dividends on Preferred Stock     -       -       -       (70,058 )     (70,058 )
Stock-Based Compensation     -       -       63,954       -       63,954  
Balance at March 31, 2019     1,870,139     $ 1,870     $ 11,680,108     $ (2,792,081 )   $ 8,889,897  
Net Income     -       -       -       213,458       213,458  
Cash Dividends on Preferred Stock     -       -       -       (70,058 )     (70,058 )
Stock-Based Compensation     2,800       3       47,124       -       47,127  
Balance at June 30, 2019     1,872,939     $ 1,873     $ 11,727,232     $ (2,648,681 )   $ 9,080,424  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  5  

 

 

POWER REIT AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Six Months Ended June 30,  
    2020     2019  
Operating activities                
Net Income   $ 731,840     $ 410,703  
                 
Adjustments to reconcile net income to net cash provided by operating activities:                
Amortization of intangible assets     118,569       118,570  
Amortization of debt costs     17,055       12,595  
Stock-based compensation     123,291       111,081  
Depreciation     56,262       -  
                 
Changes in operating assets and liabilities                
Accounts payable, related party     -       (1,374 )
Other assets     (275 )     (275 )
Deferred rent receivable     (451,193 )     (71,155 )
Prepaid expenses     (64,579 )     (34,954 )
Accounts payable     18,245       16,901  
Security deposit     577,494       -  
Accrued interest     (3,418 )     (3,454 )
Deferred revenue     77,318       76,889  
Net cash provided by operating activities     1,200,609       635,527  
                 
Investing activities                
Cash paid for land and greenhouse cultivation facilities     (1,601,655 )     -  
Cash paid for construction in progress     (4,842,686 )     -  
                 
Net cash used in investing activities   $ (6,444,341 )   $ -  
                 
Financing Activities                
Principal payment on long-term debt     (239,444 )     (132,629 )
Cash dividends paid on preferred stock     (140,116 )     (140,116 )
Net cash used in financing activities     (379,560 )     (272,745 )
                 
Net increase (decrease) in cash and cash equivalents     (5,623,292 )     362,782  
                 
Cash and cash equivalents, beginning of period     15,842,504       1,771,011  
                 
Cash and cash equivalents, end of period   $ 10,219,212     $ 2,133,793  
                 
Supplemental disclosure of cash flow information:                
Interest paid   $ 568,987     $ 222,629  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

  6  

 

 

POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

1. GENERAL INFORMATION

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company, as defined below, these unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth herein. All such adjustments are of a normal recurring nature. Results for interim periods are not necessarily indicative of results to be expected for a full year.

 

These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes included in our latest Annual Report on Form 10-K filed with the SEC on March 30, 2020.

 

Power REIT (the “Registrant” or the “Trust”, and together with its consolidated subsidiaries, “we”, “us”, the “Company” or “Power REIT”, unless the context requires otherwise) is a Maryland-domiciled real estate investment trust (a “REIT”) that holds, develops, acquires and manages real estate assets related to transportation, alternative energy infrastructure and Controlled Environment Agriculture (CEA) in the United States.

 

The Trust 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. As of June 30, 2020, the Trust’s assets consisted of approximately 112 miles of railroad infrastructure and related real estate which is owned by its subsidiary Pittsburgh & West Virginia Railroad (“P&WV”), approximately 601 acres of fee simple land leased to a number of utility scale solar power generating projects with an aggregate generating capacity of approximately 108 Megawatts (“MW”) and approximately 26 acres of land with approximately 131,000 sf of existing or under construction greenhouses leased to five separate medical cannabis operators. Power REIT is actively seeking to grow its portfolio of real estate related to CEA for food and cannabis production.

 

During the quarter ended June 30, 2020, the Trust paid a quarterly dividend of approximately $140,000 ($0.484375 per share) on Power REIT’s 7.75% Series A Cumulative Redeemable Perpetual Preferred Stock.

 

The Trust was formed as part of a reorganization and reverse triangular merger of P&WV that closed on December 2, 2011. P&WV survived the reorganization as a wholly-owned subsidiary of the Trust.

 

The Trust has elected to be treated for tax purposes as a REIT, which means that it is exempt from U.S. federal income tax if a sufficient portion of its annual income is distributed to its shareholders, and if certain other requirements are met. In order for the Trust to maintain its REIT qualification, at least 90% of its ordinary taxable annual income must be distributed to shareholders.

 

  7  

 

 

POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).”

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.

 

Income per Common Share

 

Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net income per common share is computed similar to basic net income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The dilutive effect of the Company’s options is computed using the treasury stock method.

 

The following table sets forth the computation of basic and diluted Income per Share:

 

    For the three months ended     For the six months ended  
    June 30     June 30  
    2020     2019     2020     2019  
                         
Numerator:                                
Net Income   $ 409,695     $ 143,400     $ 591,724     $ 270,587  
                                 
Numerator for basic and diluted EPS - income available to common Shareholders   $ 409,695     $ 143,400     $ 591,724     $ 270,587  
                                 
Denominator:                                
Denominator for basic EPS - Weighted average shares     1,912,939       1,870,192       1,906,126       1,870,165  
Dilutive Effect of Options     63,111       -       49,442       -  
Denominator for diluted EPS - adjusted Weighted average shares     1,976,050       1,870,192       1,955,568       1,870,165  
                                 
Basic income per common share   $ 0.21     $ 0.08     $ 0.31     $ 0.14  
Diluted income per common share   $ 0.21     $ 0.08     $ 0.30     $ 0.14  

 

Fair Value

 

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Trust measures its financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

 

  Level 1 – valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.

 

  8  

 

 

POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

  Level 2 – valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third party pricing services for identical or comparable assets or liabilities.
     
  Level 3 – valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

 

In determining fair value, the Trust utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as considering counterparty credit risk.

 

The carrying amounts of Power REIT’s financial instruments, including cash and cash equivalents, deposits, and accounts payable approximate fair value because of their relatively short-term maturities. The carrying value of long-term debt approximates fair value since the related rates of interest approximate current market rates. There are no financial assets and liabilities carried at fair value on a recurring basis as of June 30, 2020 and December 31, 2019.

 

3. ACQUISITIONS

 

On January 30, 2020, through a newly formed wholly owned subsidiary, PW CO CanRe Mav 14, LLC, Power REIT completed the acquisition of a greenhouse property in southern Colorado (“Maverick 14”). Maverick 14 was acquired for $850,000 and is 5.54 acres with an existing greenhouse and processing facility totaling approximately 8,300 square feet approved for medical cannabis cultivation. The purchase price plus acquisition expenses of $10,424 was paid with existing working capital. As part of the transaction, the Trust agreed to fund the construction of 15,120 square feet of greenhouse space for $1,058,400 and the tenant has agreed to fund the construction of approximately 2,520 additional square feet of head-house/processing space on the property. Accordingly, Power REIT’s total capital commitment is $1,908,400 plus acquisition expenses. As of June 30, 2020, the total construction in progress that was funded by Power REIT is approximately $846,200.

 

On February 20, 2020, through a newly formed wholly owned subsidiary, PW CO CanRE Sherman 6, LLC, Power REIT completed the acquisition of a property in southern Colorado (“Sherman 6”). Sherman 6 was acquired for $150,000 plus $724 in acquisition expenses and is 5.0 acres of vacant land approved for medical cannabis cultivation. As part of the transaction, the Trust agreed to fund the construction of 15,120 square feet of greenhouse space and 7,520 square feet of head-house/processing space on the property for $1,693,800. Accordingly, Power REIT’s total capital commitment is $1,843,800 plus acquisition costs. As of June 30, 2020, the total construction in progress that was funded by Power REIT is approximately $1,114,600.

 

On March 19, 2020, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Mav 5, LLC completed the acquisition of a property in southern Colorado (“Maverick 5”). Maverick 5 was acquired for $150,000 and is 5.2 acres of vacant land approved for medical cannabis cultivation. As part of the transaction, the Trust has agreed to fund the construction of 5,040 square feet of greenhouse space and 4,920 square feet of head-house/processing space on the property for $868,125. On May 1, 2020, Power REIT amended the lease with a Maverick 5, making an additional $340,000 available in funding for land improvements at the property. The amended lease results in additional straight-line annual rent of approximately $63,000. Accordingly, Power REIT’s total capital commitment is $1,358,125. As of June 30, 2020, the total construction in progress that was funded by Power REIT is approximately $708,900.

 

  9  

 

 

POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

On May 15, 2020, through a newly formed wholly owned subsidiary, PW ME CanRE SD, LLC, Power REIT completed the acquisition of a 3.04 acre property in York County, Maine for $1,000,000. The property includes a 32,800 square-foot greenhouse and 2,800 square foot processing/distribution building that are both under active construction. As part of the acquisition, Power REIT reimbursed Sweet Dirt $950,000 related to the partially built greenhouse and fund up to approximately $2.97 million of additional costs to complete the construction. Accordingly, Power REIT’s total investment in the property is approximately $4.92 million plus acquisition expenses of $45,500. As of June 30, 2020, the total construction in progress that was funded by Power REIT is approximately $335,000.

 

The acquisitions described above are accounted for as asset acquisitions under ASC 805-50. Power REIT has established a depreciable life for the property improvements of 20 years.

 

Concurrent with the closing on the acquisitions, Power REIT entered into leases with tenants that are licensed for the production of medical cannabis cultivation at the facilities. The combined straight-line annual rent from these four acquisitions is approximately $1,877,000. Each tenant is responsible for paying all expenses related to the properties including maintenance, insurance and taxes. The term of each lease is 20 years and provides two options to extend for additional five-year periods. The leases also have financial guarantees from affiliates of the tenant.

 

The following table summarized the allocation of the purchase consideration for Maverick 14 based on the fair values of the assets acquired:

 

Land   $ 150,000  
Assets subject to depreciation:        
Improvements (Greenhouses / Processing Building)     710,424  
         
Total Assets Acquired   $ 860,424  

 

  10  

 

 

POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

The following table summarizes the allocation of the purchase consideration for Sweet Dirt based on the fair values of the assets acquired:

 

Land   $ 400,000  
         
Construction in Progress     1,550,000  
         
Total Assets Acquired   $ 1,950,000  

 

4. LONG-TERM DEBT

 

On November 6, 2015, PWRS, one of the subsidiaries of the Trust, borrowed $10,150,000 pursuant to a bond offering (the “PWRS Bonds”). The PWRS Bonds are secured by land and intangibles owned by PWRS and have a total obligation of $10,150,000. The PWRS Bonds carry a fixed annual interest rate of 4.34% and matures in 2034. During 2015, the Trust capitalized approximately $441,000 of expenses related to the PWRS Bonds of which approximately $97,000 was paid in cash and approximately 344,000 was incurred through issuance of debt. This amount is amortized over the life of the PWRS Bonds. As of June 30, 2020, and December 31, 2019, the balance of the PWRS Bonds was approximately $8,421,000 (net of unamortized debt costs of approximately $314,000) and $8,538,000 (net of unamortized debt costs of approximately $325,000), respectively.

 

On July 5, 2013, PWSS, one of the subsidiaries of the Trust, borrowed $750,000 from a regional bank (the “PWSS Term Loan”). The PWSS Term Loan carries a fixed interest rate of 5.0%, a term of 10-years and amortizes based on a twenty-year principal amortization schedule. In addition to being secured by PWSS’ real estate assets, the term loan is secured by a parent guarantee from the Trust. The balance of the PWSS Term Loan as of June 30, 2020 and December 31, 2019 is approximately $565,000 (net of approximately $8,000 of capitalized debt costs which are being amortized over the life of the financing) and $579,000 (net of approximately $9,500 of capitalized debt costs which are being amortized over the life of the financing), respectively.

 

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, with the next payment due February 1, 2021. The balance of the Municipal Debt as of June 30, 2020 and December 31, 2019 is approximately $70,000 and $77,000 respectively.

 

On November 25, 2019, Power REIT, through a newly formed wholly owned subsidiary, completed a financing that is intended to provide capital for acquisition of additional properties on an accretive basis. The financing is in the form of long-term fixed rate bonds with gross proceeds of $15,500,000. The bonds carry a fixed interest rate of 4.62% and fully amortize over the life of the financing which matures in 2054 (35 years). The bonds are fully secured by the equity interest in Power REIT’s indirect wholly owned subsidiary – PWV. The total debt issuance costs of approximately $312,200 are amortized over the life of the financing. The balance of the loan as of June 30, 2020 and December 31, 2019 is $15,082,000 (net of approximately $307,000 of capitalized debt costs) and 15,168,000 (net of approximately $311,000 of capitalized debt costs).

 

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POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

The approximate amount of principal payments remaining on Power REIT’s long-term debt as of June 30, 2020 is as follows for the subsequent years ended December 31:

 

    Total Debt  
2020 (six months remaining)   $ 364,934  
2021     635,502  
2022     675,374  
2023     1,168,297  
2024     715,777  
Thereafter     21,208,698  
Long term debt   $ 24,768,582  

 

5. LEASES

 

Information as Lessor Under ASC Topic 842

 

To generate positive cash flow, as a lessor, the Trust leases its facilities to tenants in exchange for monthly payments. The Trust’s leases for its railroad, solar farms and greenhouse cultivation facilities have an average lease term of ranging between 20 and 99 years. Payments from the Trust’s leases are recognized on a straight-line basis over the terms of the respective leases. Rental revenue recognized for the six months ended June 30, 2020 is approximately $1,696,000.

 

The aggregate annual cash to be received by the Trust on all leases related to its portfolio as of June 30, 2020 is as follows for the subsequent years ended December 31:

 

    Total  
2020 (six months remaining)   $ 1,493,876  
2021   $ 5,921,568  
2022   $ 6,275,144  
2023   $ 5,819,737  
2024   $ 3,633,474  
Thereafter   $ 79,275,779  
Total   $ 102,419,578  

 

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POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

6. EQUITY AND LONG-TERM COMPENSATION

 

Summary of Stock Based Compensation Activity – Options

 

The summary of stock based compensation activity for the six months ended June 30, 2020, with respect to the Trust’s stock options, was as follows:

 

Summary of Activity - Options                  
          Weighted     Aggregate  
    Number of     Average     Intrinsic  
    Options     Exercise Price     Value  
Balance as of December 31, 2019     106,000       7.96       -  
Plan Awards     -       -       -  
Options Exercised     -       -       -  
Balance as of June 30, 2020     106,000       7.96       2,203,740  
Options vested at June 30, 2020     106,000       7.96       2,203,740  

 

The weighted average remaining term of the options is approximately 2.12 years.

 

Summary of Plan Activity – Restricted Stock

 

The summary of Plan activity for the six months ended June 30, 2020, with respect to the Trust’s restricted stock, was as follows:

 

    Number of     Weighted  
    Shares of     Average  
    Restricted     Grant Date  
    Stock     Fair Value  
Balance as of December 31, 2019     24,033       6.14  
Plan Awards     40,000       8.41  
Restricted Stock Vested     (17,367 )     7.10  
Balance as of June 30, 2020     46,666       7.73  

 

Stock-based Compensation

 

During the first six months of 2020, the Trust recorded approximately $123,000 of non-cash expense related to restricted stock and options granted compared to approximately $111,000 for the first six months of 2019. As of June 30, 2020, there was approximately $360,000 of total unrecognized share-based compensation expense, which expense will be recognized through the third quarter of 2022. The Trust does not currently have a policy regarding the repurchase of shares on the open market related to equity awards and does not currently intend to acquire shares on the open market.

 

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POWER REIT AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

 

Power REIT’s 2020 Equity Incentive Plan was adopted by the Board on May 27, 2020 and approved by the shareholders on June 24, 2020. The plan is the successor of the prior 2012 Equity Incentive Plan. It provides for the grant of the following Awards: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) SARs; (iv) Restricted Stock Awards; (v) RSU Awards; (vi) Performance Awards; and (vii) Other Awards. The Plan’s purpose is to secure and retain the services of Employees, Directors and Consultants, to provide incentives for such persons to exert maximum efforts for the success of the Trust and to provide a means by which such persons may be given an opportunity to benefit from increases in value of the common Stock through the granting of Awards. The aggregate number of shares of Common Stock that may be issued pursuant to Awards is currently 239,117.

 

Preferred Stock Dividends

 

During the first six months of 2020, the Trust paid a total of approximately $140,000 of dividends to holders of Power REIT’s Series A Preferred Stock.

 

7. RELATED PARTY TRANSACTIONS

 

The Trust and its subsidiaries have hired Cohen, LLP (“Morrison Cohen”) as their legal counsel with respect to general corporate matters and the litigation with NSC. The spouse of the Trust’s Chairman, CEO, Secretary and Treasurer is a partner at Morrison Cohen. During the six months ended June 30, 2020, Power REIT (on a consolidated basis) did not pay any legal fees and costs to Morrison Cohen.

 

A wholly-owned subsidiary of Hudson Bay Partners, LP (“HBP”), an entity associated with the CEO of the Company, David Lesser, provides the Trust and its subsidiaries with office space at no cost. Effective September 2016, the Board of Directors approved reimbursing an affiliate of HBP $1,000 per month for administrative and accounting support based on a conclusion that it would pay more for such support from a third party. Effective January 1, 2020, the Board of Directors approved increasing the amount paid to HBP to $1,750 per month based on an increased work level and the conclusion that it would pay more for such support from an unaffiliated third party for the same functions. A total of $10,500 was paid pursuant to this arrangement during the first six months ended June 30, 2020 compared to $6,000 paid during the first six months of 2019.

 

Under the Trust’s Declaration of Trust, the Trust may enter into transactions in which trustees, officers or employees have a financial interest, provided however, that in the case of a material financial interest, the transaction is disclosed to the Board of Trustees or the transaction shall be fair and reasonable. After consideration of the terms and conditions of the retention of Morrison Cohen described herein, and the reimbursement to HBP described herein, the independent trustees approved such arrangements having determined such arrangement are fair and reasonable and in the interest of the Trust.

 

8. SUBSEQUENT EVENTS

 

On July 28, 2020, the Registrant declared a quarterly dividend of $0.484375 per share on Power REIT’s 7.75% Series A Cumulative Redeemable Perpetual Preferred Stock payable on September 15, 2020 to shareholders of record on August 15, 2020.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 a Maryland-domiciled REIT that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (CEA) in the 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 on December 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 dated July 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 May 15, 2020, Power REIT (the “Trust”) added to its portfolio of CEA properties by acquiring one property located in York County, ME (the “Property”) through a newly formed wholly owned subsidiary of the Trust (“PropCo”).

 

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.

 

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The rent for the Lease is structured whereby after a six month deferred-rent period, the rental payment provides Power 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 all Maine 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. Power REIT has established a depreciable life for the greenhouse of 20 years.

 

On May 1, 2020, Power REIT amended the lease with a Maverick 5 in southern Colorado, making an additional $340,000 available in funding for land improvements at the property. The amended lease results in additional straight-line annual rent of approximately $63,000, which translate to a greater than an 18% yield.

 

As of June 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 subsidiary Pittsburgh & 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.

 

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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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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, the Trust is not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Management is responsible for establishing and maintaining adequate disclosure controls and procedures (as defined in Rules 13a- 15(f) of the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of the inherent limitations in all control systems, internal controls over financial reporting may not prevent or detect misstatements. The design and operation of a control system must also reflect that there are resource constraints and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls.

 

Our management assessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on our evaluation, we believe that our disclosure controls and procedures as of June 30, 2020 were effective.

 

Changes in Internal Control over Financial Reporting:

 

During the fiscal quarter ended June 30, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Risk Factors.

 

The Trust’s results of operations and financial condition are subject to numerous risks and uncertainties as described in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 30, 2020, which risk factors are incorporated herein by reference. You should carefully consider these risk factors in conjunction with the other information contained in this report. Should any of these risks materialize, the Trust’s business, financial condition and future prospects could be negatively impacted.

 

During 2020, a global COVID 19 pandemic emerged which has had broad financial impact on most industries and countries. To date, the Trust has not experienced any direct impact from the COVID 19 crisis. The Trust continues to monitor COVID 19 and the potential financial implications on its assets and business plans as well as on its tenants and their ability to pay rent. There can be no assurance what ultimate impact COVID 19 will have on Power REIT on a going forward basis.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

Not Applicable.

 

Item 4. Mine Safety Disclosures.

 

Not Applicable.

 

Item 5. Other Information.

 

Not Applicable.

 

Item 6. Exhibits.

 

Exhibit Number

 

Exhibit 31.1   Section 302 Certification for David H. Lesser
     
Exhibit 32.1   Section 906 Certification for David H. Lesser
     
Exhibit 101   Interactive data files pursuant to Rule 405 of Regulation S-T, for the quarter ended June 30, 2020: (i) Consolidated Statements of Operations, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Cash Flows and (iv) Notes to the Consolidated Financial Statements

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

POWER REIT

 

/s/ David H. Lesser  
David H. Lesser  
Chairman of the Board &  
Chief Executive Officer, Secretary and Treasurer  
Date: July 29, 2020  

 

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