Item
1A. Risk Factors.
An
investment in Power REIT’s securities involves significant risks. Anyone who is making an investment decision regarding
Power REIT’s securities should, before making that decision, carefully consider the following risk factors, together with
all of the other information included in, or incorporated by reference into, this document. Additional risks and uncertainties
not currently known to us or that we currently deem immaterial may also have a material adverse effect on our business, operations
and future performance. If any of the circumstances contemplated in the following risk factors were to occur, Power REIT’s
business, financial condition, results of operations and prospects could all be materially adversely affected. In any such case,
you could lose all or part of your investment.
Risks
Related to our Operations
Our
business strategy includes growth plans. Our financial condition and results of operations could be negatively affected if we
fail to grow or fail to manage our growth or investments effectively.
Power
REIT is pursuing a growth strategy focused on infrastructure properties that qualify as real estate for REIT purposes. Our prospects
must be considered in light of the risks, expenses and difficulties frequently encountered by companies in significant growth
stages of development. General and administrative expenses, including expenses related to tax, legal and audit have been high
and are expected to continue to be high, due to the complex organization of Power REIT, expenses related to growth and our litigation
matter now complete more fully discussed below in this Risk Factors section and in Item 3, Legal Proceedings. We cannot assure
you that we will be able to expand our market presence in our existing markets or successfully enter new markets or that any such
expansion will not adversely affect our results of operations. Failure to manage potential transactions to successful conclusions,
or failure more generally to manage our growth effectively, could have a material adverse effect on our business, future prospects,
financial condition or results of operations and could adversely affect our ability to successfully implement our business strategy
or pay dividends.
Even
if we are able to execute our business strategy, that strategy may not be successful.
Even
if the Company is able to expand its business as it intends, its investments may not be successful due to a variety of factors,
including but not limited to asset under-performance, higher than forecast expenses, failure or delinquency on the part of the
Company’s lessees, changes in market conditions or other factors, any of which may result in lower returns than expected
and may adversely affect the Company’s financial condition, results of operations and ability to pay dividends.
We
operate in a highly competitive market for investment opportunities and we may be unable to identify and complete acquisitions
of real property assets.
We
compete with public and private funds, commercial and investment banks, commercial financing companies and public and private
REITs to make the types of investments that we plan to make in the U.S. infrastructure sector. Many of our competitors are substantially
larger and have considerably greater financial, technical and marketing resources than us. For example, some competitors may have
a lower cost of funds and access to funding sources that are currently not available to us. In addition, some of our competitors
may have higher risk tolerances or different risk assessments, allowing them to pay higher consideration, consider a wider variety
of investments and establish more effective relationships than us. Furthermore, many of our competitors are not subject to the
restrictions that our REIT status imposes on us. These competitive conditions could adversely affect our ability to make investments
in the infrastructure sector and could adversely affect our distributions to stockholders. Moreover, our ability to close transactions
will be subject to our ability to access financing within stipulated contractual time frames, and there is no assurance that we
will have access to such financing on terms that are favorable to us, if at all.
Because
we may distribute a significant portion of our income to our stockholders or lenders, we will continue to need additional capital
to make new investments. If additional funds are unavailable or not available on favorable terms, our ability to make new investments
will be impaired.
Because
we may to distribute a significant portion of our income to our shareholders or lenders, our business may from time to time require
substantial amounts of new capital if we are to achieve our growth plans. We may acquire additional capital from the issuance
of securities senior to our common shares, including additional borrowings or other indebtedness, preferred shares (such as our
Series A Preferred Stock, which we have recently begun issuing) or the issuance of other securities. We may also acquire additional
capital through the issuance of additional common shares. However, we may not be able to raise additional capital in the future,
on favorable terms or at all. Unfavorable business, market or general economic conditions could increase our funding costs, limit
our access to capital markets or result in a decision by lenders not to extend credit to us.
To
the extent we issue debt securities, other instruments of indebtedness or additional preferred stock, or borrow additional money
from banks or other financial institutions, we will be additionally exposed to risks associated with leverage, including increased
risk of loss. If we issue additional preferred securities that rank senior to our common shares in our capital structure, the
holders of such preferred securities may have separate voting rights and other rights, preferences or privileges, economic and
otherwise, more favorable than those of our common shares, and the issuance of such preferred securities could have the effect
of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for common shareholders.
Any
inability to access additional financing on terms that are favorable to us may adversely affect our ability to grow and our business
generally.
The
Company’s investment portfolio is, and in the future may continue to be, concentrated in its exposure to a relatively few
number of investments, industries and lessees.
As
of December 31, 2017, the Company had four investments, consisting of its ownership of its four investment subsidiaries: P&WV,
PWSS, PWTS and PWRS. Payments from NSC to P&WV under the Railroad Lease represented approximately 47% of Power REIT’s
consolidated revenues for each of the twelve months ended December 31, 2017 and 2016, Payments from PWRS’s tenant represented
approximately 41% of Power REIT’s consolidated revenues in each of the twelve months ended December 31, 2017 and 2016. As
the Company grows, its portfolio will likely still remain concentrated in a limited number of investments for a substantial period
of time.
The
Company is exposed to risks inherent in this sort of investment concentration. Financial difficulty or poor business performance
on the part of any single lessee or a default on any single lease will expose the Company to a greater risk of loss than would
be the case if the Company were more diversified and holding numerous investments, and the underperformance or non-performance
of any of its assets may severely adversely affect the Company’s financial condition and results from operations. The Company’s
lessees could seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination
of our lease agreements and could cause a reduction in the Company’s cash flows. Furthermore, the Company intends to concentrate
its investment activities in the infrastructure sector, including energy and transportation, which will subject the Company to
more risks than if the Company were diversified across many sectors. At times, the performance of the infrastructure sector may
lag the performance of other sectors or the broader market as a whole.
We
may incur additional indebtedness, which may adversely affect our financial condition and limit our ability to pay dividends.
Our
governing documents do not limit us from incurring additional indebtedness and other liabilities. On a consolidated basis as of
December 31, 2017, we had approximately $10.0 million of indebtedness and other liabilities, a substantial portion of which is
secured. We may incur additional indebtedness and become more highly leveraged, which could harm our financial condition and potentially
limit our ability to pay dividends.
We
cannot assure you that we will be able to pay dividends regularly.
Our
ability to pay dividends is dependent on our available cash, our ability to operate profitably and our ability to generate sufficient
cash from our operations and distribute them up from our subsidiaries. We cannot guarantee that we will be able to pay dividends
on a regular basis.
If
our acquisitions or our overall business performance fail to meet expectations, the amount of cash available to us to pay dividends
may decrease.
We
may not be able to achieve operating results that will allow us to pay dividends at a specific level or to increase the amount
of these dividends from time to time. Also, restrictions and provisions in any credit facilities we enter into or any debt securities
we issue may limit our ability to pay dividends. We cannot assure you that you will receive dividends at a particular time, or
at a particular level, or at all.
The
issuance of securities with claims that are senior to those of the common shares of the Company, including the Company’s
Series A Preferred Stock, may limit or prevent the Company from paying dividends on its common shares. There is no limitation
on the Company’s ability to issue securities senior to the Company’s common shares or incur indebtedness.
The
Company’s common shares are equity interests that rank junior to the Company’s indebtedness and other non-equity claims
with respect to assets available to satisfy claims against the Company, and junior to preferred securities of the Company that
by their terms rank senior to common shares in the Company’s capital structure, including the Series A Preferred Stock.
As of December 31, 2017, the Company has incurred debt in connection with its real estate acquisitions, and has issued approximately
$3.5 million of its Series A Preferred Stock. This debt and these preferred securities rank senior to the Company’s common
shares in the Company’s capital structure. The Company expects that in due course it may incur more debt, and issue additional
preferred securities, as it pursues its business strategy.
In
the case of indebtedness, specified amounts of principal and interest are customarily payable on specified due dates. In the case
of preferred securities, such as the Company’s Series A Preferred Stock, holders are provided with a senior claim to distributions,
according to the specific terms of the securities. In contrast, however, in the case of common shares, dividends are payable only
when, as and if declared by the Company’s Board of Trustees and depend on, among other things, the Company’s results
of operations, financial condition, debt service requirements, obligations to pay distributions to holders of preferred securities,
such as the Series A Preferred Stock, other cash needs and any other factors that the Board of Trustees may deem relevant or that
they are required to consider as a matter of law. The incurrence by the Company of additional debt, and the issuance by the Company
of additional preferred securities, may limit or eliminate the amounts available to the Company to pay dividends on its common
shares.
Our
ability to pay dividends is limited by the Maryland law.
Our
ability to pay dividends is limited by the laws of Maryland. Under applicable Maryland law, a Maryland real estate investment
trust generally may not make a distribution if, after giving effect to the distribution, the entity would not be able to pay its
debts as those debts come due in the usual course of business, or the entity’s total assets would be less than the sum of
its total liabilities plus (unless the entity’s charter provides otherwise) the amount that would be needed if the entity
were dissolved at the time of the distribution to satisfy the preferential rights upon dissolution of stockholders whose preferential
rights are superior to those receiving the distribution. Accordingly, we may not be able to make a distribution on our common
shares or Series A Preferred Stock if, after giving effect to the distribution, we would not be able to pay our debts as they
come due in the usual course of business or (in the case of our common shares) our total assets would be less than the sum of
our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders
of the Series A Preferred Stock, or (in the case of our Series A Preferred Stock), our total assets would be less than the sum
of our total liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of the holders
of any outstanding securities with rights or preferences senior to those of the Series A Preferred Stock.
The
ability of the Registrant to service its obligations and pay dividends depends on the ability of its wholly-owned subsidiaries
to make distributions to it.
Because
the Registrant holds its assets through its wholly-owned subsidiaries, its ability to service its debt and other obligations,
and to pay dividends on its preferred and common shares, is dependent upon the earnings of those subsidiaries and their ability
to make distributions to the Registrant. To the extent any of the Registrant’s subsidiaries are ever unable, through operation
of law or otherwise, to make distributions to the Registrant, and as a result the Registrant is unable to service its debt or
other obligations or pay dividends, our business and the prices of our securities may be adversely affected. In addition, in such
circumstances, the Registrant may be forced to issue additional equity or debt, at unfavorable terms, in order to have the cash
on hand with which to maintain its compliance with Internal Revenue Service rules that require the Registrant to distribute 90%
of its taxable income to its shareholders or lose its REIT status. Or, if such equity or debt funding is unavailable, the Registrant
may lose its REIT status.
We
are dependent upon Mr. David H. Lesser for our success. On occasion, his interests may conflict with ours.
We
are dependent on the diligence, expertise and business relationships of our management team to implement our strategy of acquiring
and benefitting from the ownership of infrastructure-related real property assets. This is particularly true at the current time,
when we have only a single individual, David Lesser, comprising our management team. Were Mr. Lesser unable to function on behalf
of the Company, including in his roles as CEO and Chairman, the Company’s business and prospects would be adversely affected.
Moreover, Mr. Lesser has other business interests to which he dedicates a portion of his time that are unrelated to Power REIT.
Although Mr. Lesser is one of our major shareholders, on occasion, those other interests of his may conflict with his interests
in Power REIT, and such conflicts may be unfavorable to us.
In
addition, on occasion, Mr. Lesser may have financial interests that conflict, or appear to conflict, with the Company’s
interests. For example, an affiliate of Mr. Lesser’s has provided bridge funding for two of the Company’s acquisitions.
Although a majority of our disinterested trustees must approve, and in those instances did approve, Power REIT’s involvement
in such transactions, in any such circumstance, there may be conflicts of interest between Power REIT on one hand, and Mr. Lesser
and his affiliates and interests on the other hand, and such conflicts may be unfavorable to us.
From
time to time, our management team may own interests in our lessees or other counterparties, and may thereby have interests that
conflict or appear to conflict with the Company’s interests.
On
occasion, our management team may own interests in our lessees or other counterparties. Although our Declaration of Trust, as
amended, restated and supplemented (and which we occasionally refer to herein as our “charter”) permits this type
of business relationship and a majority of our disinterested trustees must approve any such transaction, in any such circumstance,
there may be conflicts of interest between Power REIT on one hand, and the relevant member or members of our management team on
the other hand, and these conflicts may be unfavorable to us.
Most
of our renewable energy lessees will likely be structured as special purpose vehicles, and therefore their ability to pay us is
expected to be dependent solely on the revenues of a specific project, without additional credit support.
Most
of our lessees will likely be structured as special purpose vehicles (“SPVs”), whose only source of cash flow will
be from the operations of a single energy facility. If the energy facility fails to perform as projected, the SPV lessee might
not have sufficient cash flow to make lease or interest payments to us. While we would expect the lenders or other parties connected
to such SPVs to step in and continue to make payments to us, there can be no assurance that such parties would do so, rather than,
for example, liquidating the facility. Further, if the facility materially underperforms or if energy supply contracts are cancelled,
there may be little value in such SPV lessees, and our investments in real estate relating to their facilities may become impaired.
Some
losses related to our real property assets may not be covered by insurance or indemnified by our lessees, and so could adversely
affect us.
Our
new leases will generally require our lessees to carry insurance on our properties against risks customarily insured against by
other companies engaged in similar businesses in the same geographic region, and to indemnify us against certain losses. However,
there are some types of losses, including catastrophic acts of nature, acts of war or riots, for which we or our lessees cannot
obtain insurance at an acceptable cost. If there is an uninsured loss or a loss in excess of insurance limits, we could lose the
revenues generated by the affected property and the capital we have invested in the property, assuming our lessee fails to pay
us the casualty value in excess of such insurance limit, if any, or to indemnify us for such loss. Nevertheless, in such a circumstance
we might still remain obligated to repay any secured indebtedness or other obligations related to the property. Any of the foregoing
could adversely affect our financial condition or results of operations.
Legislative,
regulatory, accounting or tax rules, and any changes to them or actions brought to enforce them, could adversely affect us.
We
and our lessees are subject to a wide range of legislative, regulatory, accounting and tax rules. The costs and efforts of compliance
with these laws, or of defending against actions brought to enforce them, could adversely affect us, either directly if we are
subject to such laws or actions, or indirectly if our lessees are subject to them.
In
addition, if there are changes to the laws, regulations or administrative decisions and actions that affect us, we may have to
incur significant expenses in order to comply, or we may have to restrict or change our operations. For example, changes to the
accounting treatment of leases by both lessors and lessees under accounting principles generally accepted in the United States
(“GAAP”) could change the presentation of information in our financial statements and as a result affect the perception
of our business and our growth plans. Changes to Internal Revenue Service interpretations of “real assets” or changes
to the REIT portion of the Internal Revenue Code could affect our plans, operations, financial condition and share price.
We
have invested, and expect to continue to invest, in real property assets, which are subject to laws and regulations relating to
the protection of the environment and human health and safety. These laws and regulations generally govern wastewater discharges,
noise levels, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. Environmental
laws and regulations may impose joint and several liabilities on tenants, owners or operators for the costs to investigate and
remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability
could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances,
could adversely affect our ability to sell, rent or pledge an affected property as collateral for future borrowings. We intend
to take commercially reasonable steps when we can to protect ourselves from the risks of environmental law liability; however,
we will not obtain independent third-party environmental assessments for every property we acquire. In addition, any such assessments
that we do obtain may not reveal all environmental liabilities, or whether a prior owner of a property created a material environmental
condition not known to us. In addition, there are various local, state and federal fire, health, safety and similar regulations
with which we or our lessees may be required to comply, and that may subject us or them to liability in the form of fines or damages.
In all events, our lessees’ operations, the existing condition of land when we buy it, operations in the vicinity of our
properties or activities of unrelated third parties could all affect our properties in ways that lead to costs being imposed on
us.
Any
material expenditures, fines, damages or forced changes to our business or strategy resulting from any of the above could adversely
affect our financial condition and results of operations.
Changes
in interest rates may negatively affect the value of our assets, our access to debt financing and the trading price of our securities.
The
value of our investments in certain assets may decline if long-term interest rates increase. If interest rates were to rise from
their current historically low levels, it may affect the perceived or actual values of our assets and dividends, and consequently
the prices of our securities may decline.
Furthermore,
to the extent the Company has borrowed funds, a rise in interest rates may result in re-financing risk when those borrowings become
due, and the Company may be required to pay higher interest rates or issue additional equity to refinance its borrowings, which
could adversely affect the Company’s financial condition and results of operations.
Our
quarterly results may fluctuate.
We
could experience fluctuations in our quarterly operating results due to a number of factors, including variations in the returns
on our current and future investments, the interest rates payable on our debt, the level of our expenses, the levels and timing
of the recognition of our realized and unrealized gains and losses, the degree to which we encounter competition in our markets
and other business, market and general economic conditions. Consequently, our results of operations for any current or historical
period should not be relied upon as being indicative of performance in any future period.
We
may not be able to sell our real property assets when we desire. In particular, in order to maintain our status as a REIT, we
may be forced to borrow funds or sell assets during unfavorable market conditions.
Investments
in real property are relatively illiquid compared to other investments. Accordingly, we may not be able to sell real property
assets when we desire or at prices acceptable to us. This could substantially reduce the funds available for satisfying our obligations,
including any debt or preferred share obligations, and for distributions to our common shareholders.
As
a REIT, we must distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our shareholders.
To the extent that we satisfy the REIT distribution requirement but distribute less than 100% of our taxable income, we will be
subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible
excise tax if the actual amount that we pay to our shareholders in a calendar year is less than a minimum amount specified under
federal tax laws. In addition to applicable federal taxation, we may be subject to state taxation.
From
time to time, we may have taxable income greater than our cash flow available for distribution to our shareholders (for example,
due to substantial non-deductible cash outlays, such as capital expenditures or principal payments on debt). If we did not have
other funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or
find alternative sources of funds in order to make distributions sufficient to enable us to pay out enough of our taxable income
to satisfy the REIT distribution requirement and avoid income and excise taxes in a particular year. Any of these outcomes could
increase our operating costs and diminish our available cash flows or ability to grow.
We
may fail to remain qualified as a REIT, which would reduce the cash available for distribution to our shareholders and may have
other adverse consequences.
Qualification
as a REIT for federal income tax purposes is governed by highly technical and complex provisions of the Internal Revenue Code,
for which there are only limited judicial or administrative interpretations. Our qualification as a REIT also depends on various
facts and circumstances that are not entirely within our control. In addition, legislation, new regulations, administrative interpretations
and court decisions might all change the tax laws with respect to the requirements for qualification as a REIT or the federal
income tax consequences of qualification as a REIT.
If,
with respect to any taxable year, we were to fail to maintain our qualification as a REIT, we would not be able to deduct distributions
to our shareholders in computing our taxable income and would have to pay federal corporate income tax (including any applicable
alternative minimum tax) on our taxable income. If we had to pay federal income tax, the amount of money available to distribute
to our shareholders would be reduced for the year or years involved. In addition, we would be disqualified from treatment as a
REIT for the four taxable years following the year during which qualification was lost and thus our cash available for distribution
to our shareholders would be reduced in each of those years, unless we were entitled to relief under relevant statutory provisions.
Failure to qualify as a REIT could result in additional expenses or additional adverse consequences, which may include the forced
liquidation of some or all of our investments.
Although
we currently intend to operate in a manner designed to allow us to continue to qualify as a REIT, future economic, market, legal,
tax or other considerations might cause us to lose our REIT status, which could have a material adverse effect on our business,
prospects, financial condition and results of operations, and could adversely affect our ability to successfully implement our
business strategy and pay dividends.
If
an investment that was initially believed to be a real property asset is later deemed not to have been a real property asset at
the time of investment, we could lose our status as a REIT or be precluded from investing according to our current business plan.
Power
REIT must meet income and asset tests to qualify as a REIT. If an investment that was originally believed to be a real asset is
later deemed not to have been a real asset at the time of investment, our status as a REIT could be jeopardized or we could be
precluded from investing according to our current business plan, either of which would have a material adverse effect on our business,
financial condition and results of operations. Further, we may not seek a private letter ruling from the Internal Revenue Service
with respect to some or all of our infrastructure investments. The lack of such private letter rulings may increase the risk that
an investment believed to be a real asset could later be deemed not to be a real asset. In the event that an investment is deemed
to not be a real asset, we may be required to dispose of such investment, which could have a material adverse effect on us, because
even if we were successful in finding a buyer, we might have difficulty finding a buyer on favorable terms or in a sufficient
time frame.
If
we were deemed to be an investment company under the Investment Company Act of 1940, applicable restrictions could make it impractical
for us to continue our business as contemplated and could have a material adverse effect on the price of our securities.
A
company such as ours would be considered an investment company under the Investment Company Act of 1940, as amended (the “1940
Act”), if, among other things, it owned investment securities (including minority ownership interests in subsidiaries or
other entities) that have an aggregate value exceeding 40% of the value of its total assets on an unconsolidated basis, or it
failed to qualify under the exemption from investment company status available to companies primarily engaged in the business
of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
We
do not believe that we are, or are likely to become, an investment company under the 1940 Act. Nevertheless, if we were deemed
to be an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure, could make
it impractical for us to continue our business as contemplated and could have a material adverse effect on our operations and
the price of our common shares.
Net
leases may not result in fair market lease rates over time.
We
expect a portion of our future income to come from net leases, whereby the lessee is responsible for all the costs, insurance
and taxes of a property, including maintenance. Net leases typically have longer lease terms and, thus, there is an increased
risk that if market rental rates increase in future years, the rates under our net leases will be less than fair market rental
rates during those years. As a result, our income and distributions could be lower than they would otherwise be if we did not
enter into net leases. When appropriate, we will seek to include a clause in each lease that provides increases in rent over the
term of the lease, but there can be no assurance that we will be successful in securing such a clause. Some of our investments
may include “percentage of gross revenue” lease payments, which may result in positive or negative outcomes depending
on the performance of the acquired asset.
If
a sale-leaseback transaction is recharacterized in a lessee’s bankruptcy proceeding, our financial condition could be adversely
affected.
In
certain cases, we intend to enter into sale-leaseback transactions, whereby we would purchase a property and then simultaneously
lease the same property back to the seller. In the event of the bankruptcy of a lessee company, a transaction structured as a
sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect
our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property,
and as a result would have the status of a creditor in relation to the lessee company. In that event, we would no longer have
the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the lessee company
for the amounts owed under the lease, with the claim arguably secured by the property, and the lessee company/debtor might have
the ability to restructure the terms, interest rate and amortization schedule of its outstanding balance. If new terms were confirmed
by the bankruptcy court, we could be bound by them, and prevented from foreclosing on the property. If the sale-leaseback were
recharacterized as a joint venture, we and the lessee company could be treated as co-venturers with regard to the property. As
a result, we could be held liable, under some circumstances, for debts incurred by the lessee company relating to the property.
Either of these outcomes could adversely affect our financial condition and results of operations.
Provisions
of the Maryland General Corporation Law and our Declaration of Trust and Bylaws could deter takeover attempts and have an adverse
impact on the price of our common shares.
The
Maryland General Corporation Law and our Declaration of Trust and Bylaws contain provisions that may have the effect of discouraging,
delaying or making difficult a change in control of Power REIT. The business combination provisions of Maryland law (if our Board
of Trustees decides to make them applicable to us), the control share acquisition provisions of Maryland law (if the applicable
provisions in our Bylaws are rescinded), the limitations on removal of Trustees, the restrictions on the acquisition of our common
shares, the power to issue additional shares and the advance notice provisions of our Bylaws could have the effect of delaying,
deterring or preventing a transaction or a change in control that might involve a premium price for holders of the common shares
or might otherwise be in their best interests.
In
order to assist us in complying with limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue
Code, among other purposes, our charter provides that no natural person or entity may, directly or indirectly, beneficially or
constructively own more than 9.9% (in value or number of shares, whichever is more restrictive) of the aggregate amount of our
outstanding shares of all classes. In addition, our Board of Trustees may, without stockholder action, authorize the issuance
of shares of stock in one or more classes or series, including preferred stock. Our Board of Trustees may, without stockholder
action, amend our charter to increase the number of shares of stock of any class or series that we have authority to issue. The
existence of these provisions, among others, may have a negative impact on the price of our common shares and may discourage third
party bids for ownership of our Company. These provisions may prevent any premiums being offered to holders of common shares.
Risks
Related to Our Investment Strategy
Our
focus on the energy and transportation infrastructure sectors will subject us to more risks than if we were broadly diversified
to include other asset classes.
Because
we specifically focus on infrastructure assets, investments in our securities may present more risks than if we were broadly diversified
over numerous sectors of the economy. For example, a downturn in the U.S. energy or transportation infrastructure sectors would
have a larger impact on us than on a company that does not concentrate in one sector of the economy. Factors that may adversely
affect our investments include, but are not limited to, changes in supply and demand for infrastructure consumption, prices of
national and global commodities, government regulation, world and regional events and general economic conditions.
Renewable
energy resources are complex, and our investments in them rely on long-term projections of resource and equipment availability
and capital and operating costs; if our or our lessees’ projections are incorrect, we may suffer losses.
Although
the projection of renewable energy resource availability has been analyzed for decades across different geographies, technologies
and topologies, long-term projections of renewable resource availability at a particular site, the availability of generating
equipment and the operating costs of harvesting such renewable energy are subject to various uncertainties and in many cases must
rely on estimates at best. If any such projections are materially incorrect, our lessees could suffer financial losses, which
could adversely affect our investments. In addition, investments based on a percentage of gross revenue could under-perform our
investment projections, leading to adverse effects on our financial condition and results of operations.
Infrastructure
assets may be subject to the risk of fluctuations in commodity prices and in the supply of and demand for infrastructure consumption.
The
operations and financial performance of companies in the infrastructure sector may be directly or indirectly affected by commodity
prices and fluctuations in infrastructure supply and demand. Commodity prices and infrastructure demand fluctuate for several
reasons, including changes in market and economic conditions, the impact of weather on demand or supply, levels of domestic production
and imported commodities, energy conservation, domestic and foreign governmental regulation and taxation and the availability
of local, intrastate and interstate transportation systems. Fluctuations in commodity prices may increase costs for consumers
of energy-related infrastructure assets and therefore reduce demand for such infrastructure. Further, extreme price fluctuation
upwards or downwards could lead to the development of alternatives to existing energy-related infrastructure and could impair
the value of our investments.
Volatility
in commodity prices or in the supply of and demand for infrastructure assets may make it more difficult for companies in the infrastructure
sector to raise capital to the extent the market perceives that their performance may be tied directly or indirectly to commodity
prices. Historically, commodity prices have been cyclical and have exhibited significant volatility. Should infrastructure companies
experience variations in supply and demand, the resulting decline in operating or financial performance could adversely affect
the value or quality of our assets.
Infrastructure
investments are subject to obsolescence risks.
Infrastructure
assets are subject to obsolescence risks that could occur as a result of changing supply and demand, new types of construction,
changing demographics, changing weather patterns and new technologies. In any such event, there might be few alternative uses
for our investments, and our investments might drop in value.
Renewable
energy investments may be adversely affected by variations in weather patterns.
Renewable
energy investments may be adversely affected by variations in weather patterns, including shifting wind or solar resources and
including variations brought about by climate changes, which would cause earnings volatility for our lessees or borrowers and
which could affect their ability to make lease or other contractual payments to us. Lease payments that are structured as a percentage
of gross revenue typically fluctuate from period to period. Although we believe these fluctuations tend to average out over time,
to the extent that our projections are incorrect because weather patterns change significantly, our financial condition and results
of operations could be adversely affected.
If
the development of renewable energy projects slows, we may have a harder time sourcing investments.
Renewable
energy projects are dependent on a variety of factors, including government Renewable Portfolio Standards (RPS), equipment costs
and federal and state incentives. Changes in some or all of these factors could result in reduced construction of renewable projects
and may make it harder for us to source investments that are attractive to us, and this could have an adverse affect on our business.
Volatility in project development and construction may result in uneven growth and may make it hard to predict with certainty
our growth trends or patterns, which could make our securities less appealing to investors.
Investments
in renewable energy may be dependent on equipment or manufacturers that have limited operating histories or financial or other
challenges.
Although
most wind, solar and other renewable energy projects use technologies that are well understood by the market, many technologies
are undergoing rapid changes and improvements and many have not been tested in operating environments for the expected durations
of our investments. Some manufacturers are new or relatively new and may not have the financial ability to support their extended
warranties. As a result, if the future performance of equipment that is a basis for a lessee’s revenues is lower than projected,
such a lessee may have difficulty making its lease payments to us and our business could suffer.
Risks
Related to Our Securities
There
is a 9.9% limit on the amount of our equity securities that any one person or entity may own.
In
order to assist us in complying with limitations on the concentration of ownership of REIT stock imposed by the Internal Revenue
Code, among other purposes, our charter provides that no natural person or entity may, directly or indirectly, beneficially or
constructively own more than 9.9% (in value or number of shares, whichever is more restrictive) of the aggregate amount of our
outstanding shares of all classes. If a person were found to own more than this amount, whether as a result of intentionally purchasing
our securities, developments outside such person’s control or otherwise – for example, as a result of changes in the
Company’s capital structure, the inheritance of securities, or otherwise – then, among other things, the transfers
leading to the violation of the 9.9% limit would be void and the Board of Trustees would be authorized to take such actions as
it deemed advisable to insure the undoing of the transfers.
Factors
could lead to the Company losing one or both of its NYSE listings.
The
Company could lose its common shares listing or its Series A Preferred Stock listing, both on the NYSE, depending on a number
of factors, including a failure by us to continue to qualify as a REIT, a failure to meet the NYSE ongoing listing requirements,
including those relating to the number of shareholders, the price of the Company’s securities and the amount and composition
of the Company’s assets, changes in NYSE ongoing listing requirements and other factors.
Low
trading volumes in the Company’s listed securities may adversely affect holders’ ability to resell their securities
at prices that are attractive, or at all.
Power
REIT’s common shares are traded on the NYSE MKT under the ticker “PW”. The average daily trading volume of Power
REIT’s common shares is less than that of the listed securities of many other companies, including larger companies. During
the 12 months ending December 31, 2017, the average daily trading volume for the Company’s common shares was approximately
5,400 shares. Power REIT’s Series A Preferred Stock is traded on the NYSE MKT under the ticker “PW PRA”. The
Series A Preferred Stock has been listed since March 18, 2014, it has not yet achieved significant trading volumes over a material
amount of time and even if an active and liquid trading market for the Series A Preferred Stock develops, it may not be sustained.
Nevertheless, because the Series A Preferred Stock has no maturity date, investors seeking liquidity may be limited to selling
their shares of Series A Preferred Stock in the secondary market. During the 12 months ended December 31, 2017, the average daily
trading volume for the Company’s Series A Preferred Stock was approximately 115 shares. In part due to the relatively
small trading volume of the Company’s listed securities, any material sales of such securities by any person may place significant
downward pressure on the market price of the Company’s listed securities. In general, as a result of low trading volumes,
it may be difficult for holders of the Company’s listed securities to sell their securities at prices they find attractive,
or at all.
The
price of the Company’s securities may fluctuate significantly and this may make it difficult for holders to sell the Company’s
securities when desired or at prices that are attractive.
The
market value of the Company’s securities will likely fluctuate in response to a number of factors, including factors that
are beyond the Company’s control. The market value of the Company’s securities may also be affected by conditions
affecting the financial markets generally, including the volatility of trading markets. These conditions may result in fluctuations
in the market prices of stocks generally and, in turn, the Company’s securities, as well as sales of substantial amounts
of the Company’s securities in the market, in each case to a degree that could be unrelated or disproportionate to any changes
in the Company’s operating performance. Such market fluctuations could adversely affect the market value of the Company’s
securities. A significant decline in the price or prices of Company securities could result in substantial losses for security
holders and could lead to costly and disruptive securities litigation.
Our
ability to issue preferred stock in the future could adversely affect the rights of existing holders of our equity securities.
Our
charter permits our Board of Trustees to increase the number of authorized shares of our capital stock without the approval of
holders of our common shares or Series A Preferred Stock. In addition, our charter permits our Board of Trustees to reclassify
any or all of our unissued authorized shares as shares of preferred stock in one or more new series on terms determinable by our
Board of Trustees, without the approval of holders of our common shares or Series A Preferred Stock. Future reclassifications
or issuances by us of preferred stock, whether Series A Preferred Stock or some new series of preferred stock, could effectively
diminish our ability to pay dividends or other distributions to existing equity security holders, including distributions upon
our liquidation, dissolution or winding up.
The
issuance of additional equity securities may dilute existing equity holders.
The
issuance of additional equity securities may result in the dilution of existing equity securities holders. Although the Company
expects to deploy additional equity capital principally for the purpose of making accretive transactions, and in such cases may
not dilute the economic value of equity securities held by existing holders, such additional issuances may dilute existing equity
securities holders’ percentage ownership of the Company, and the percentage of voting power they hold, depending on the
terms of the newly issued equity securities.
Our
preferred stock is subject to interest rate risk.
Distributions
payable on our Series A Preferred Stock are subject to interest rate risk. Because dividends on our Series A Preferred Stock are
fixed, our costs may increase upon maturity or redemption of the securities. This might require us to sell investments at a time
when we would otherwise not do so, which could affect adversely our ability to generate cash flow. To the extent that our Series
A Preferred Stock may have call or conversion provisions that are in our favor at a given time, such provisions may be detrimental
to the returns experienced by the holders of the securities.
Inflation
may negatively affect the value of our preferred stock and the dividends we pay.
Inflation
is the reduction in the purchasing power of money, resulting from an increase in the price of goods and services. Inflation risk
is the risk that the inflation-adjusted, or “real”, value of an investment will be worth less in the future. If and
when the economy experiences material rates of inflation, the real value of our Series A Preferred Stock and the dividends payable
to holders will decline.
Our
Series A Preferred Stock has not been rated and is junior to our existing and future debt, and the interests of holders of Series
A Preferred Stock could be diluted by the issuance of additional parity-preferred securities and by other transactions.
Our
Series A Preferred Stock has not been rated by any nationally recognized statistical rating organization, which may negatively
affect its market value and a holder’s ability to sell it. It is possible that one or more rating agencies might independently
determine to issue such a rating and that such a rating, if issued, could adversely affect the market price of our Series A Preferred
Stock. In addition, we may elect in the future to obtain a rating of our Series A Preferred Stock, which could adversely affect
its market price. Ratings reflect only the views of the rating agency or agencies issuing the ratings, and they could be revised
downward or withdrawn entirely at the discretion of the issuing rating agency if in its judgment circumstances so warrant. Any
such downward revision or withdrawal of a rating could have an adverse effect on the market price of our Series A Preferred Stock.
The
payment of amounts due on the Series A Preferred Stock will be junior in payment preference to all of our existing and future
debt and any securities we may issue in the future that have rights or preferences senior to those of the Series A Preferred Stock.
We may issue additional shares of Series A Preferred Stock or additional shares of preferred stock in the future which are on
a parity with (or, upon the affirmative vote or consent of the holders of two-thirds of the outstanding shares of Series A Preferred
Stock, senior to) the Series A Preferred Stock with respect to the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up. Additional issuance of preferred securities or other transactions could reduce the pro-rata assets
available for distribution upon liquidation and you may not receive your full liquidation preference if there are not sufficient
assets. In addition, issuance of additional preferred securities or other transactions could dilute your voting rights with respect
to certain matters that require votes or the consent of holders of our Series A Preferred Stock.
Holders
of Series A Preferred Stock have limited voting rights.
The
voting rights of a holder of Series A Preferred Stock are limited. Our common stock is the only class of our securities carrying
full voting rights. Voting rights for holders of Series A Preferred Stock exist only with respect to amendments to our charter
(whether by merger, consolidation or otherwise) that materially and adversely affect the terms of the Series A Preferred Stock,
the authorization or issuance of classes or series of equity securities that are senior to the Series A Preferred Stock and, if
we fail to pay dividends on the Series A Preferred Stock for six or more quarterly periods (whether or not consecutive), the election
of additional trustees. Holders would not, however, have any voting rights if we amend, alter or repeal the provisions of our
charter or the terms of the Series A Preferred Stock in connection with a merger, consolidation, transfer or conveyance of all
or substantially all of our assets or otherwise, so long as the Series A Preferred Stock remains outstanding and its terms remain
materially unchanged or holders receive stock of the successor entity with substantially identical rights, taking into account
that, upon the occurrence of an event described in this sentence, we may not be the surviving entity. Furthermore, if holders
receive the greater of the full trading price of the Series A Preferred Stock on the last date prior to the first public announcement
of an event described in the preceding sentence, or the $25.00 liquidation preference per share of Series A Preferred Stock plus
accrued and unpaid dividends (whether or not declared) to, but not including, the date of such event, pursuant to the occurrence
of any of the events described in the preceding sentence, then holders will not have any voting rights with respect to the events
described in the preceding sentence.
The
change of control conversion and delisting conversion features of our Series A Preferred Stock may not adequately compensate a
holder of such securities upon a Change of Control or Delisting Event (as such terms as defined in regard to our Series A Preferred
Stock), and the change of control conversion, delisting conversion and redemption features of our Series A Preferred Stock may
make it more difficult for a party to take over our company or may discourage a party from taking over our company.
Upon
a Change of Control or Delisting Event, holders of our Series A Preferred Stock will have the right (subject to our special optional
redemption rights) to convert all or part of their Series A Preferred Stock into shares of our common stock (or equivalent value
of alternative consideration). If our common stock price were less than $5.00 (which is approximately 61% of the per-share closing
sale price of our common stock on March 24, 2014), subject to adjustment, holders will receive a maximum of 5 shares of our common
stock per share of Series A Preferred Stock, which may result in a holder receiving value that is less than the liquidation preference
of the Series A Preferred Stock. In addition, the foregoing features of our Series A Preferred Stock may have the effect of inhibiting
a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control
of our company under circumstances that otherwise could provide the holders of shares of our common stock and Series A Preferred
Stock with the opportunity to realize a premium over the then current market prices of those securities, or that holders may otherwise
believe is in their best interests.
We
may issue additional Series A Preferred Stock at a discount to liquidation value or at a discount to the issuance value of shares
of Series A Preferred Stock already issued.
We
may offer additional Series A Preferred Stock at prices or yields that represent a discount to liquidation value, or that represent
a discount to the price paid for or the yield applicable to shares of Series A Preferred Stock previously issued and sold. Such
sales could adversely affect the market price of the Series A Preferred Stock.