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 25, 2019.
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 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.
The
Trust is structured as a holding company and owns its assets through five wholly-owned, special purpose subsidiaries that have
been formed in order to hold real estate assets, obtain financing and generate lease revenue. As of September 30, 2019, 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 solar power generating projects with an aggregate generating capacity of approximately 108 Megawatts (“MW”) and
approximately 7.3 acres of land with 18,612 sf of greenhouses leased to a medical cannabis operator. Power REIT is actively seeking
to grow its portfolio of real estate related to Controlled Environment Agriculture for food and cannabis production.
During
the nine months ended September 30, 2019, the Trust paid quarterly dividends totaling approximately $210,000 ($0.484375 per share
per quarter) 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.
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”).”
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No 2016-02 “Leases” (Topic 842). The standard requires companies that lease valuable
assets like aircraft, real estate, and heavy equipment to recognize on their balance sheets the assets and liabilities generated
by contracts longer than a year. The standard also requires companies to disclose in the footnotes to their financial statements
information about the amount, timing, and uncertainty for the payments they make for the lease agreements. This standard is effective
for fiscal years and interim periods beginning after December 15, 2018, and the Company adopted the standard using the modified
retrospective approach effective January 1, 2019. The lessor accounting model under ASC 842 is similar to existing guidance, however,
it limits the capitalization of initial direct leasing costs, such as internally generated costs.
The
Company elected all practical expedients permitted under ASC 842, other than the hindsight practical expedient. Accordingly, the
Company will retain distinction between a finance lease (i.e., capital leases under existing guidance) and an operating lease
and account for its existing operating leases as operating leases under the new guidance, without reassessing (a) whether the
contracts contain a lease under ASC 842, (b) whether classification of the operating leases would be different in accordance with
ASC 842c or (c) whether the unamortized initial direct costs before transition adjustments would have met the definition of initial
direct costs in ASC 842 at lease commencement. The Company does not have a cumulative effect adjustment to retained earnings upon
adoption.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718),” which expands the
scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The adoption
of ASU 2018-07 on January 1, 2019 did not have a significant impact on our Consolidated Financial Statements.
Principles
of Consolidation
The
accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances
have been eliminated in consolidation.
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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○
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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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○
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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.
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POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
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 September 30, 2019 and December 31, 2018.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation.
3.
ACQUISITIONS
On
July 12, 2019, through two new wholly owned subsidiaries, PW CanRe of Co. Holdings, LLC and PW CO CanRE JAB, LLC, Power REIT completed
the acquisition of two greenhouse properties in southern Colorado. One property was acquired for $1,075,000, is 2.11 acres and
has an existing greenhouse and processing facility totaling 12,996 square feet. The other property was acquired for $695,000,
is 5.2 acres and has an existing greenhouse and processing facility totaling 5,616 square feet. The total combined purchase price
of $1,770,000 plus acquisition expenses of $21,565 was paid with existing working capital.
The
acquisitions are accounted for as asset acquisitions under ASC 805-50. Power REIT has established a depreciable life for the greenhouses
of 20 years. The Company recognized depreciation expense of approximately $17,700 related to the greenhouses for the nine months
ended September 30, 2019.
Concurrent
with the closing on the acquisitions, Power REIT entered into leases with a tenant that is licensed for the production of medical
marijuana at the facilities
The
combined straight-line annual rent is approximately $331,000 although the rental payments are accelerated such that Power REIT
will receive a full return of capital over the first 42 months of the lease. The tenant is responsible for paying all expenses
related to the properties including maintenance, insurance and taxes. The term of each of the leases is 20 years and provides
two options to extend for additional five-year periods. The leases also have financial guarantees from affiliates of the
tenant.
The
following table summarizes the allocation of the purchase consideration based on the fair values of the assets acquired:
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Land
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$
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140,577
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Assets subject to depreciation:
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Improvements (greenhouses)
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1,650,988
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Total Assets Acquired
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$
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1,791,565
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POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
4.
LONG-TERM DEBT
On
November 6, 2015, PWRS 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 September 30, 2019 and December 31 2018, the balance of the PWRS Bonds was approximately
$8,532,000 (net of unamortized debt costs of approximately $331,000) and $8,870,000 (net of unamortized debt costs of approximately
$348,000), respectively.
On
July 5, 2013, PWSS 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 September 30, 2019 and December 31, 2018 is approximately $585,000 (net of approximately $10,000 of capitalized
debt costs which are being amortized over the life of the financing) and $605,000 (net of approximately $12,000 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 12 years remaining. The Municipal Debt has a simple interest rate of 5.0% that is paid annually,
with the next payment due February 1, 2020. The balance of the Municipal Debt as of September 30, 2019 and December 31, 2018 is
approximately $77,000 and $83,000 respectively.
5.
EQUITY AND LONG-TERM COMPENSATION
Summary
of Stock Based Compensation Activity – Options
The
summary of stock based compensation activity for the nine months ended September 30, 2019, with respect to the Trust’s stock
options, was as follows:
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Summary of Activity - Options
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Weighted
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Number
of
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Average
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Aggregate
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Options
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Exercise
Price
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Intrinsic
Value
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Balance as of December
31, 2018
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106,000
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7.96
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-
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Plan Awards
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-
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-
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-
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Options
Exercised
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-
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-
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-
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Balance as of
September 30, 2019
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106,000
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7.96
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-
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Options vested
at September 30, 2019
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106,000
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7.96
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231,080
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The
weighted average remaining term of the options is approximately 2.87 years.
POWER
REIT AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements
Summary
of Plan Activity – Restricted Stock
The
summary of Plan activity for the nine months ended September 30, 2019, with respect to the Trust’s restricted stock, was
as follows:
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Summary of Activity - Restricted Stock
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Number
of
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Weighted
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Shares
of
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Average
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Restricted
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Grant
Date
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Stock
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Fair
Value
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Balance as of December
31, 2018
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54,033
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6.23
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Plan Awards
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2,800
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5.80
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Restricted
Stock Vested
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(25,433
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)
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6.22
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Balance as of
September 30, 2019
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31,400
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6.20
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Stock-based
Compensation
During
the first nine months of 2019, the Trust recorded approximately $158,000 of non-cash expense related to restricted stock and options
granted compared to approximately $159,000 for the first nine months of 2018. As of September 30, 2019 there was approximately
$195,000 of total unrecognized share-based compensation expense, which expense will be recognized through the second quarter of
2021 equating to a weighted average amortization period of approximately 2 years from the issuance date. 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.
Preferred
Stock Dividends
During
the first nine months of 2019, the Trust paid a total of approximately $210,000 of dividends to holders of Power REIT’s
Series A Preferred Stock.
6.
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 nine months ended September 30, 2019, 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. A total of $9,000 was paid pursuant to this arrangement during the nine
months ended September 30, 2019.
David
Lesser, CEO, paid expenses on behalf of the Company in the amount of $1,374 during 2018 which is disclosed as accounts payable
– related party in the consolidated balance sheets. The amount is noninterest bearing, unsecured, and due on demand. During
the nine months ended September 30, 2019, the accounts payable – related party was repaid.
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.
7.
SUBSEQUENT EVENTS
On
October 28, 2019, 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 December 15, 2019 to shareholders of record on November 15, 2019.