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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Numerator
for basic and diluted EPS - income available to common Shareholders
|
|
$
|
409,695
|
|
|
$
|
143,400
|
|
|
$
|
591,724
|
|
|
$
|
270,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Denominator:
|
|
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|
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|
|
|
|
|
|
|
|
|
|
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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
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|
|
|
-
|
|
Denominator
for diluted EPS - adjusted Weighted average shares
|
|
|
1,976,050
|
|
|
|
1,870,192
|
|
|
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1,955,568
|
|
|
|
1,870,165
|
|
|
|
|
|
|
|
|
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|
|
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Basic
income per common share
|
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$
|
0.21
|
|
|
$
|
0.08
|
|
|
$
|
0.31
|
|
|
$
|
0.14
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Diluted
income per common share
|
|
$
|
0.21
|
|
|
$
|
0.08
|
|
|
$
|
0.30
|
|
|
$
|
0.14
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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.
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○
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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.
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POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
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○
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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.
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○
|
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.
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
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|
$
|
150,000
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|
Assets
subject to depreciation:
|
|
|
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Improvements
(Greenhouses / Processing Building)
|
|
|
710,424
|
|
|
|
|
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Total
Assets Acquired
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$
|
860,424
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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
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$
|
400,000
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Construction
in Progress
|
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1,550,000
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Total
Assets Acquired
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$
|
1,950,000
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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).
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
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|
2022
|
|
|
675,374
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|
2023
|
|
|
1,168,297
|
|
2024
|
|
|
715,777
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|
Thereafter
|
|
|
21,208,698
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|
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
|
|
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.
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.