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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
(Commission File Number)
(Exact name of registrant as specified in its charter)
| | ||
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
| N/A |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| American | ||||
| American |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
common shares, $0.001 par value, outstanding at November 15, 2021.
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
POWER REIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| September 30, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Land | $ | $ | ||||||
| Greenhouse cultivation and processing facilities, net of accumulated depreciation | ||||||||
| Greenhouse cultivation and processing facilities - construction in progress | ||||||||
| Net investment in direct financing lease - railroad | ||||||||
| Total real estate assets | ||||||||
| Cash and cash equivalents | ||||||||
| Prepaid expenses | ||||||||
| Intangible assets, net of accumulated amortization | ||||||||
| Deferred rent receivable | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable – related party | - | |||||||
| Accrued interest | ||||||||
| Deferred rent liability | ||||||||
| Tenant security deposits | ||||||||
| Prepaid rent | ||||||||
| Current portion of long-term debt, net of unamortized discount | ||||||||
| Long-term debt, net of unamortized discount | ||||||||
| TOTAL LIABILITIES | ||||||||
| Series A | ||||||||
| Equity: | ||||||||
| Common Shares, $ par value ( shares authorized; shares issued and outstanding at September 30, 2021 and at December 31, 2020) | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings (accumulated deficit) | ( | ) | ||||||
| Total Equity | ||||||||
| TOTAL LIABILITIES AND EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 3 |
POWER REIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| REVENUE | ||||||||||||||||
| Lease income from direct financing lease – railroad | $ | $ | $ | $ | ||||||||||||
| Rental income | ||||||||||||||||
| Rental income – related parties | - | - | ||||||||||||||
| Other income | ||||||||||||||||
| TOTAL REVENUE | ||||||||||||||||
| EXPENSES | ||||||||||||||||
| Amortization of intangible assets | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Property taxes | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Interest expense | ||||||||||||||||
| TOTAL EXPENSES | ||||||||||||||||
| NET INCOME | ||||||||||||||||
| Preferred Stock Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | $ | $ | $ | ||||||||||||
| Income Per Common Share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | ||||||||||||||||
| Weighted Average Number of Shares Outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
| Cash dividend per Series A Preferred Share | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
POWER REIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2021 and 2020
(Unaudited)
| Additional | Retained Earnings | Total | ||||||||||||||||||
| Common Shares | Paid-in | (Accumulated | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit) | Equity | ||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Issuance of Common Shares for Cash | - | |||||||||||||||||||
| Stock-Based Compensation | - | - | - | |||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock Issuance Costs | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock Issuance Costs | - | - | ( | ) | - | ( | ) | |||||||||||||
| Stock-Based Compensation | - | - | - | |||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | |||||||||||||||||
| Additional | Retained Earnings | Total | ||||||||||||||||||
| Common Shares | Paid-in | (Accumulated | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit) | Equity | ||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock-Based Compensation | - | |||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock-Based Compensation | - | - | - | |||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Balance at September 30, 2020 | ( | ) | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
POWER REIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of debt costs | ||||||||
| Stock-based compensation | ||||||||
| Depreciation | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Other assets | ( | ) | ( | ) | ||||
| Deferred rent receivable | ( | ) | ( | ) | ||||
| Deferred rent liability | ||||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accounts payable – related party | - | |||||||
| Tenant security deposits | ||||||||
| Accrued interest | ( | ) | ( | ) | ||||
| Prepaid rent | ( | ) | - | |||||
| Net cash provided by operating activities | ||||||||
| Investing activities | ||||||||
| Cash paid for land, greenhouse cultivation and processing facilities | ( | ) | ( | ) | ||||
| Cash paid for greenhouse cultivation and processing facilities - construction in progress | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing Activities | ||||||||
| Net proceeds from issuance of common stock | - | |||||||
| Principal payment on long-term debt | ( | ) | ( | ) | ||||
| Cash dividends paid on preferred stock | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | $ | $ | ||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | $ | ||||||
| Preferred stock issuance for purchase of greenhouse cultivation and processing facility | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. GENERAL INFORMATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, and with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the Trust, 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 24, 2021.
Power REIT (the “Registrant” or the “Trust”, and together with its consolidated subsidiaries, “we”, “us”, “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 was formed as part of a reorganization and reverse triangular merger of P&WV that closed on December 2, 2011. P&WV survived the reorganization as a wholly-owned subsidiary of the Registrant.
The
Trust is structured as a holding company and owns its assets through twenty-three wholly-owned, special purpose subsidiaries that have
been formed in order to hold real estate assets, obtain financing and generate lease revenue.
During
the nine months ended September 30, 2021, the Trust raised gross proceeds of approximately $
On February 3, 2021, we issued additional shares of Power REIT’s Series A Preferred Stock as part of a transaction to acquire a property located in Riverside County, CA (the “Canndescent Property”) through a newly formed wholly owned subsidiary (“PW Canndescent”). See Note 3.
During
the nine months ended September 30, 2021, the Trust paid quarterly dividends of approximately $
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
| 7 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).”
Principles of Consolidation
The accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances have been eliminated in consolidation.
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 similarly 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 Trust’s options is computed using the treasury stock method.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net Income | $ | $ | $ | $ | ||||||||||||
| Preferred Stock Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Numerator for basic and diluted EPS - income available to common Shareholders | $ | $ | $ | $ | ||||||||||||
| Denominator: | ||||||||||||||||
| Denominator for basic EPS - Weighted average shares | ||||||||||||||||
| Dilutive effect of options | ||||||||||||||||
| Denominator for diluted EPS - Adjusted weighted average shares | ||||||||||||||||
| Basic income per common share | $ | $ | $ | $ | ||||||||||||
| Diluted income per common share | $ | $ | $ | $ | ||||||||||||
Real Estate Assets and Depreciation of Investment in Real Estate
The Trust expects that most of its transactions will be accounted for as asset acquisitions. In an asset acquisition, the Trust is required to capitalize closing costs and allocate the purchase price on a relative fair value basis. For the nine months ended September 30, 2021, all acquisitions were considered to be asset acquisitions. In making estimates of relative fair values for purposes of allocating purchase price, the Trust utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The Trust also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible acquired. The Trust allocates the purchase price of acquired real estate to various components as follows:
| ● | Land – Based on actual purchase price adjusted to an allocation of the relative fair value (as necessary) if acquired separately or market research/comparable if acquired with existing property improvements. | |
| ● | Improvements – Based on the allocation of the relative fair value of the improvements acquired. Depreciation is calculated on a straight-line method over the useful life of the improvements. | |
| ● | Lease Intangibles – The Trust considers the value of an acquired in-place lease if in excess of the value of the land improvements and the amortization of the lease intangible is over the remaining term of the lease on a straight-line basis. | |
| ● | Construction in Progress (CIP) - The Trust classifies greenhouses or buildings under development and/or expansion as construction-in-progress until construction has been completed and certificates of occupancy permits have been obtained upon which the asset is then classified as an Improvement. |
| 8 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Power REIT has several leases with tenants whereby the tenants are responsible for implementing improvements to Power REIT’s properties and Power REIT has committed to fund the cost of such improvements. Power REIT capitalized the costs of such property improvements but has determined not to capitalize interest expense based on a determination that the amount for each project would not be material and each project has a relatively short construction period.
Depreciation
Depreciation
is computed using the straight-line method over the estimated useful lives of up to
Covid – 19 Impact
We are monitoring Covid-19 closely. Our operations have been affected by the COVID-19 outbreak due to manufacturing and supply chain disruptions for materials which also may be experiencing delays related to transportation of such materials which is impacting construction timeframes. The ultimate severity of the outbreak and its impact on the economic environment is uncertain at this time.
Impact of New Accounting Standards
The Company has evaluated all recent accounting pronouncements and believes either they are not applicable or that none of them will have a significant effect on the Company’s financial statements.
Fair Value
Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Trust measures its financial assets and liabilities in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
| ○ | Level 1 – valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds. | |
| ○ | Level 2 – valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and certain corporate obligations. Valuations are usually obtained from third party pricing services for identical or comparable assets or liabilities. | |
| ○ | Level 3 – valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
| 9 |
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, 2021 and December 31, 2020.
3. ACQUISITIONS
On
January 4, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Grail, LLC, (“PW Grail”), completed
the acquisition of two properties totaling
On
January 14, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Apotheke, LLC, (“PW Apotheke”),
completed the acquisition of a property totaling
On
February 3, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CA CanRE Canndescent LLC, (“PW Canndescent”),
completed the acquisition of a
The following table summarized the preliminary allocation of the purchase consideration for the Canndescent Property based on the relative fair values of the assets acquired:
| Land | $ | |||
| Assets Subject to Depreciation: | ||||
| Improvements (Greenhouses / Processing Facilities) | ||||
| Acquisition Costs Capitalized | ||||
| Total Assets Acquired | $ |
On
March 12, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Gas Station, LLC, (“PW Gas Station”),
completed the acquisition of a property totaling
On
April 20, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Cloud Nine, LLC, (“PW Cloud Nine”),
completed the acquisition of two properties totaling approximately
| 10 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
On
May 21, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE Walsenburg, LLC, (“PW Walsenburg”),
completed the acquisition of a
The following table summarized the allocation of the purchase consideration for the Walsenburg Property based on the relative fair values of the assets acquired:
| Land | $ | |||
| Improvements (Greenhouses / Processing Facilities) | ||||
| Acquisition Costs Capitalized | ||||
| Total Assets Acquired | $ |
On
June 11, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CanRE OK Vinita, LLC, (“PW Vinita”), completed
the acquisition of a
The following table summarized the allocation of the purchase consideration for the Vinita Property based on the relative fair values of the assets acquired:
| Land | $ | |||
| Improvements (Greenhouses / Processing Facilities) | ||||
| Acquisition Costs Capitalized | ||||
| Total Assets Acquired | $ |
On
June 18, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW CO CanRE JKL, LLC, (“PW JKL”), completed the
acquisition of a property totaling
On
September 3, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW MI CanRE Marengo, LLC, (“PW Marengo”),
completed the acquisition of a
| 11 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
The following table summarized the allocation of the purchase consideration for the PW Marengo Property based on the relative fair values of the assets acquired:
| Land | $ | |||
| Improvements (Greenhouses / Processing Facilities) | ||||
| Acquisition Costs Capitalized | ||||
| Total Assets Acquired | $ |
The
acquisitions described above are accounted for as asset acquisitions under ASC 805-50, Business Combinations – Related Issues.
Power REIT has established a depreciable life for the property improvements of
Concurrent
with the closing of the acquisitions, Power REIT entered into leases with tenants that are licensed for the production of medical
cannabis cultivation at the facilities. The combined annual straight-line rent from these nine acquisitions and one expansion is approximately
$
4. LONG-TERM DEBT
On
December 31, 2012, as part of the Salisbury land acquisition, PW Salisbury Solar, LLC (“PWSS”) assumed existing municipal
financing (“Municipal Debt”). The Municipal Debt has approximately
In
July 2013, PWSS borrowed $
On
November 6, 2015, PWRS entered into a loan agreement (the “2015 PWRS Loan Agreement”) with a lender for $
On
November 25, 2019, Power REIT, through a newly formed subsidiary, PW PWV Holdings LLC (“PW PWV”), entered into a loan agreement
(the “PW PWV Loan Agreement”) with a lender for $
| 12 |
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 September 30, 2021 is as follows for the subsequent years ending December 31:
| Total Debt | ||||
| 2021 (3 months remaining) | ||||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Long term debt | $ | |||
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 payments. The Trust’s leases
for its railroad, solar farms and greenhouse cultivation facilities have an average lease term ranging between
The aggregate annual cash to be received by the Trust on all leases related to its portfolio as of September 30, 2021 is as follows for the subsequent years ending December 31:
| 2021 (3 months remaining) | $ | |||
| 2022 | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| Thereafter | $ | |||
| Total | $ |
| 13 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Increase in Authorized Preferred Stock
On
January 7, 2021, the Trust filed Articles Supplementary with the State of Maryland to classify an additional unissued shares
of beneficial interest, par value $ per share, 7.75% Series A Preferred Stock, such that the Trust shall now have authorized an
aggregate of shares of Series A Preferred Stock, all of which shall constitute a single series of Series A Preferred Stock.
On February 3, 2021, as part of the closing for the Canndescent acquisition, the Trust issued shares of Power REIT’s Series
A Preferred Stock with a fair value of $
Stock Issued for Cash
During
the nine months ended September 30, 2021, the Trust raised gross proceeds of approximately $
Summary of Stock Based Compensation Activity – Options
The summary of stock-based compensation activity for the nine months ended September 30, 2021, with respect to the Trust’s stock options, is as follows:
| Summary of Activity - Options | ||||||||||||
| Number of | Average | Aggregate | ||||||||||
| Options | Exercise Price | Intrinsic Value | ||||||||||
| Balance as of December 31, 2020 | - | |||||||||||
| Plan Awards | - | |||||||||||
| Options Exercised | - | |||||||||||
| Balance as of September 30, 2021 | ||||||||||||
| Options vested at September 30, 2021 | ||||||||||||
The weighted average remaining term of the options is less than one year.
| 14 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Summary of Plan Activity – Restricted Stock
| Summary of Activity - Restricted Stock | ||||||||
| Number of | Weighted | |||||||
| Shares of | Average | |||||||
| Restricted | Grant Date | |||||||
| Stock | Fair Value | |||||||
| Balance as of December 31, 2020 | ||||||||
| Plan Awards | ||||||||
| Restricted Stock Vested | ( | ) | ||||||
| Balance as of September 30, 2021 | ||||||||
Stock-based Compensation
During the nine months ended September 30, 2021, the Trust recorded approximately $ of non-cash expense related to restricted stock and options granted compared to approximately $ for nine months ended September 30, 2020. As of September, 30, 2021, there was approximately $ of total unrecognized share-based compensation expense, which will be recognized through the second quarter of 2024. 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’s 2020 Equity Incentive Plan, which superseded the 2012 Equity Incentive Plan, was adopted by the Board on May 27, 2020 and approved by the shareholders on June 24, 2020. 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. As of September 30, 2021, the aggregate number of shares of Common Stock that may be issued pursuant to outstanding awards is currently .
Preferred Stock Dividends
During
the nine months ended September 30, 2021, the Trust paid a total of approximately $
7. RELATED PARTY TRANSACTIONS
A
wholly-owned subsidiary of Hudson Bay Partners, LP (“HBP”), an entity associated with the CEO of the Trust, David Lesser,
provides the Trust and its subsidiaries with office space at no cost. Effective September 2016, the Board of Trustees approved reimbursing
an affiliate of HBP $
Power
REIT has entered into a synergistic relationship with Millennium Investment and Acquisition Company Inc.
(“MILC’). David H Lesser, Power REIT’s Chairman and CEO, is also Chairman and CEO of MILC. MILC established
cannabis cultivation projects in Colorado, Oklahoma, and Michigan which are related to the May 21, 2021, June 11, 2021, and
September 3, 2021 acquisitions as mentioned in Note 3. Power REIT has entered into lease transactions with the related tenants in
which MILC has controlling interests. Total rental income recognized for the nine months ended September 30, 2021 from the
affiliated tenants in Colorado, Oklahoma and Michigan was $
| 15 |
POWER REIT AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
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 to determine if the transaction is fair and reasonable. After consideration of the terms and conditions of the reimbursement to HBP, and the relationship with MILC described herein, the independent trustees approved such arrangements having determined such arrangements are fair and reasonable and in the interest of the Trust.
8. SUBSEQUENT EVENTS
On September 8, 2021, PW CO CanRE MF LLC (“CanRe MF”), a subsidiary of Power REIT filed an action to evict PSP Management LLC (“PSP”) from two properties in Southern Colorado (“MF Property”). The trial date was set for November 2, 2021 but on November 1, 2021, PSP agreed to turn over possession of the property and thus the hearing was cancelled. CanRe MF is seeking to mitigate its damages and is working to complete the construction and find a replacement tenant for the MF Property.
On
November 3, 2021 the Registrant declared a quarterly dividend of $per share on Power REIT’s
On
November 2, 2021, PW Marengo amended the existing lease with Marengo Cannabis LLC. Pursuant to the lease amendment, PW Marengo is providing
funding for additional improvements to the Marengo Property on the same economic terms as the original Marengo Lease. Power REIT’s
capital commitment related to the additional budget items is approximately $
On
November 5, 2021, Power REIT, through a wholly owned subsidiary of the Trust PW CO CanRE Mav 5, LLC (“CanRE Mav
5”), terminated its lease related to a 5.2-acre (“Mav 5 Property”) property located in Crowley County,
Colorado, with Original Cannabis Growers of Ordway LLC (“Tenant”) initially executed on March 19, 2020. To date, Tenant
has paid total rent, including a release of its security deposit as part of the termination, of $
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “plan,” “assume” or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained in this Report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industries and results that might be obtained by pursuing management’s current or future plans and objectives are forward-looking statements.
You should not place undue reliance on any forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control, including those identified below, under Part II, Item 1A. “Risk Factors” and elsewhere in this Report, and those identified under Part I, Item 1A of the 2020 10-K. Our forward-looking statements are based on the information currently available to us and speak only as of the date of the filing of this Report. New risks and uncertainties arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual results, performance, financial condition or achievements may differ from the anticipated results, performance, financial condition or achievements that are expressed or implied by our forward-looking statements, and such differences may be significant and materially adverse to our security holders. Our forward-looking statements contained herein speak only as of the date hereof, and we make no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
We are a Maryland-domiciled Real Estate Investment Trust (REIT) that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (CEA) in the United States. We are focused on making new acquisitions of real estate within the CEA sector related to food and cannabis production.
We are structured as a holding company and own our assets through twenty-three wholly owned, special purpose subsidiaries that have been formed in order to hold real estate assets, obtain financing and generate lease revenue. We were formed as part of a reorganization and reverse triangular merger of Pittsburgh & West Virginia Railroad (“P&WV”) that closed on December 2, 2011. P&WV survived the reorganization as our wholly-owned subsidiary. Our investment strategy, which is focused on transportation, CEA and energy infrastructure-related real estate, builds upon P&WV’s historical ownership of railroad real estate assets, which are currently triple-net leased to Norfolk Southern Railroad (“NSC”). We typically enter into long-term triple net leases where tenants are responsible for all ongoing costs related to the property, including insurance, taxes and maintenance.
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Prior to 2019, our focus was on the acquisition of real estate assets related to transportation and energy infrastructure. In 2019 we expanded the focus of our real estate acquisitions to include CEA properties in the United States. CEA is an innovative method of growing plants that involves creating optimized growing environments for a given crop indoors. We are currently focused on making new acquisitions of real estate within the CEA sector related to food and cannabis cultivation.
As of September 30, 2021, our portfolio consisted of approximately 112 miles of railroad infrastructure and related real estate leased to a railway company which is owned by our subsidiary, P&WV, approximately 601 acres of fee simple land leased to a number of solar power generating projects with an aggregate generating capacity of approximately 108 MW and approximately 172 acres of land with approximately 1,090,000 square feet of existing or under construction greenhouses leased to seventeen regulated cannabis operators. We are actively seeking to grow our portfolio of CEA for food and cannabis production.
During the nine months ended September 30, 2021, we raised gross proceeds of approximately $36.7 million and issued an additional 1,383,394 common shares through a rights offering that closed on February 5, 2021. The offering commenced in December, 2020 whereby shareholders of record as of December 28, 2020 could purchase one additional share at $26.50 per share for every share owned.
Recent Developments
During the nine months ended September 30, 2021, we added to our portfolio of CEA properties by acquiring nine new properties and expanding one of the leases on a newly acquired property.
On January 4, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Grail, LLC, (“PW Grail”), we completed the acquisition of two properties totaling 4.41 acres of vacant land (“Grail Properties”) approved for medical cannabis cultivation in southern Colorado for $150,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 21,732 square foot greenhouse and processing facility for approximately $1.69 million. Accordingly, PW Grail’s total capital commitment is approximately $1.84 million. Concurrent with the acquisition, PW Grail entered into a 20-year “triple-net” lease (the “Grail Project Lease”) with The Grail Project LLC (“Grail Project”) which will operate a cannabis cultivation facility. The lease requires Grail Project to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Grail Project’s Lease provides four, five-year renewal options. The rent for the Grail Project Lease is structured whereby after a six-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 42nd month, rent is structured to provide a 12.9% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Grail Properties. The lease also has personal guarantees from the owners of the Grail Project. The Grail Project Lease is structured to provide an annual straight-line rent of approximately $350,000, representing an estimated yield on costs of over 18%. The project is currently under construction and is targeted to be completed by year end.
On February 23, 2021, we amended the Grail Project Lease making approximately $518,000 of more funds available to construct an additional 6,256 square feet to the cannabis cultivation and processing space. Once completed, our total capital commitment will be approximately $2.4 million. As part of the agreement, PW Grail and Grail Project have amended the Lease (“Grail Amended Lease”) whereby after an eight-month period, the additional rental payments provide PW Grail with a full return of its original invested capital over the next three years and thereafter, provide a 12.9% return increasing 3% per annum. The additional annual straight-line rent of approximately $105,000 represents an estimated yield on costs of over 18% over our investment.
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On January 14, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Apotheke, LLC, (“PW Apotheke”), we completed the acquisition of a property totaling 4.31 acres of vacant land (“Apotheke Property”) approved for medical cannabis cultivation in southern Colorado for $150,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 21,548 square foot greenhouse and processing facility for approximately $1.66 million. Accordingly, PW Apotheke’s total capital commitment is approximately $1.81 million. Concurrent with the acquisition, PW Apotheke entered into a 20-year “triple-net” lease (the “Apotheke Lease”) with Dom F, LLC (“Dom F”) which will operate a cannabis cultivation facility. The lease requires Dom F to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Apotheke Lease provides two, five-year renewal options. The rent for the Apotheke Lease is structured whereby after an eight-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 44th month, rent is structured to provide a 12.9% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Apotheke Property. The lease also has personal guarantees from the owners of Dom F. The Apotheke Lease is structured to provide an annual straight-line rent of approximately $342,000, representing an estimated yield on costs of over 18%. The project is currently under construction and is targeted to be completed by year end.
On February 3, 2021, we acquired a property located in Riverside County, CA (the “Canndescent Property”) through a newly formed wholly owned subsidiary (“PW Canndescent”). The purchase price was $7.685 million and we paid for the .85 acre property with $2.685 million cash on hand and the issuance of 192,308 shares of Power REIT’s Series A Preferred Stock. PW Canndescent received an assignment of a lease (the “Canndescent Lease”) to allow the tenant (“Canndescent”) to operate the 37,000 square foot greenhouse cultivation facility on the Canndescent Property. Canndescent is a premium flower brand for luxury cannabis in California. The Canndescent Lease requires Canndescent to pay all property related expenses including maintenance, insurance and taxes. The rent for the Canndescent Lease is structured to provide straight-line annual rent of approximately $1,074,000.
The following table summarized the preliminary allocation of the purchase consideration for the Canndescent Property based on the relative fair values of the assets acquired:
| Land | $ | 258,420 | ||
| Assets Subject to Depreciation: | ||||
| Improvements (Greenhouses / Processing Facilities) | 7,426,580 | |||
| Acquisition Costs Capitalized | 99,789 | |||
| Total Assets Acquired | $ | 7,784,789 |
On March 12, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Gas Station, LLC, (“PW Gas Station”), we purchased a property totaling 2.2 acres of vacant land (“Gas Station Property”) approved for medical cannabis cultivation in southern Colorado for $85,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 24,512 square foot greenhouse and processing facility for approximately $2.03 million. Accordingly, PW Gas Station’s total capital commitment is approximately $2.1 million. Concurrent with the acquisition, PW Gas Station entered into a 20-year “triple-net” lease (the “Gas Station Lease”) with The Gas Station, LLC (“Gas Station”) which will operate a cannabis cultivation facility. The lease requires Gas Station to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Gas Station’s Lease provides two, five-year renewal options. The rent for the Gas Station Lease is structured whereby after a seven-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 12.9% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Gas Station Property. The lease also has personal guarantees from the owners of the Gas Station. The Gas Station Lease is structured to provide an annual straight-line rent of approximately $400,000, representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by December, 2021.
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On April 20, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Cloud Nine, LLC, (“PW Cloud Nine”), we purchased two properties totaling 4.0 acres of vacant land (“Cloud Nine Property”) approved for medical cannabis cultivation in southern Colorado for $300,000 plus acquisition costs. As part of the transaction, we agreed to fund the immediate construction of an approximately 38,440 square foot greenhouse and processing facility for approximately $2.65 million. Accordingly, PW Cloud Nine’s total capital commitment is approximately $2.95 million. Concurrent with the acquisition, PW Cloud Nine entered into a 20-year “triple-net” lease (the “Cloud Nine Lease”) with Cloud Nine LLC (“Cloud Nine”) which will operate a cannabis cultivation facility. The lease requires Cloud Nine to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Cloud Nine’s Lease provides two, five-year renewal options. The rent for the Cloud Nine Lease is structured whereby after a seven-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 13% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Cloud Nine Property. The lease also has personal guarantees from the owners of the Cloud Nine. The Cloud Nine Lease is structured to provide an annual straight-line rent of approximately $553,000, representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by December, 2021.
On May 21, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Walsenburg, LLC, (“PW Walsenburg”), we purchased a 35-acre property that includes four greenhouses plus processing/auxiliary facilities (“Walsenburg Property”) approved for medical cannabis cultivation in Huerfano County, Colorado for $2.33 million plus acquisition costs. As part of the transaction, the Trust will fund approximately $1.6 million to upgrade the buildings and construct additional greenhouse space resulting in 102,800 square feet of greenhouse and related space. Accordingly, PW Walsenburg’s total capital commitment is approximately $3.9 million. Concurrent with the acquisition, PW Walsenburg entered into a 20-year “triple-net” lease (the “Walsenburg Lease”) with Walsenburg Cannabis LLC (“WC”) which will operate a cannabis cultivation facility. The lease requires WC to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Walsenburg Lease provides two, five-year renewal options. The rent for the Walsenburg Lease is structured whereby after a sixth-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 13% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Walsenburg Property. The lease also has personal guarantees from the owners of WC. The Walsenburg Lease is structured to provide an annual straight-line rent of approximately $729,000, representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by November, 2021.
The following table summarizes the allocation of the purchase consideration for the Walsenburg Property based on the relative fair values of the assets acquired:
| Land | $ | 945,000 | ||
| Improvements (Greenhouses / Processing Facilities) | 1,355,000 | |||
| Acquisition Costs Capitalized | 47,636 | |||
| Total Assets Acquired | $ | 2,347,636 |
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On June 11, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE Vinita, LLC, (“PW Vinita”), we purchased a 9.35-acre property that includes approximately 40,000 square feet of greenhouse space, 3,000 square feet of office space and 100,000 square feet of fully fenced outdoor growing space including hoop houses (“Vinita Property”) approved for medical cannabis cultivation in Craig County, OK for $2.1 million plus acquisition costs. As part of the transaction, the Trust, agreed to fund $550,000 to upgrade the facilities. Accordingly, PW Vinita’s total capital commitment is approximately $2.65 million. Concurrent with the acquisition, PW Vinita entered into a 20-year “triple-net” lease (the “Vinita Lease”) with VinCann LLC (“VC LLC”) which will operate a cannabis cultivation facility. The lease requires VC LLC to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Vinita Lease provides two, five-year renewal options. The rent for the Vinita Lease is structured whereby after a seven-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 13% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Oklahoma and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the Vinita Property. The lease also has personal guarantees from the owners of VC LLC. The Vinita Lease is structured to provide an annual straight-line rent of approximately $503,000, representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by November, 2021.
The following table summarizes the allocation of the purchase consideration for the Vinita Property based on the relative fair values of the assets acquired:
| Land | $ | 50,000 | ||
| Improvements (Greenhouses / Processing Facilities) | 2,050,000 | |||
| Acquisition Costs Capitalized | 44,328 | |||
| Total Assets Acquired | $ | 2,144,328 |
On June 18, 2021, through a newly formed wholly owned subsidiary, PW CO CanRE JKL, LLC, (“PW JKL”), we purchased a property totaling 10 acres of vacant land (“JKL Property”) approved for medical cannabis cultivation in Ordway, Colorado for $400,000 plus acquisition costs. As part of the transaction, the Trust agreed to fund the immediate construction of an approximately 12,000 square feet of greenhouse and 12,880 square feet of support buildings for approximately $2.5 million. Accordingly, PW JKL’s total capital commitment is approximately $2.9 million. Concurrent with the acquisition, PW JKL entered into a 20-year “triple-net” lease (the “JKL Lease”) with JKL2 Inc. (“JKL”) which will operate a cannabis cultivation facility. The lease requires JKL to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the JKL Lease provides two, five-year renewal options. The rent for the JKL Lease is structured whereby after an eighth-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years in equal monthly payments. After the 43rd month, rent is structured to provide a 13% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Colorado and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the JKL Property. The lease also has personal guarantees from the owners of JKL. The JKL Lease is structured to provide an annual straight-line rent of approximately $546,000, representing an estimated yield on costs of over 18%. The project is currently under construction and should be completed by January, 2022.
On September 3, 2021, Power REIT, through a newly formed wholly owned subsidiary, PW MI CanRE Marengo, LLC, (“PW Marengo”), completed the acquisition of a 556,146 square foot greenhouse cultivation facility on a 61.14-acre property in Marengo Township, Michigan (“Marengo Property”) for $18.392 million plus acquisition costs. As part of the transaction, the Trust agreed to fund $2.9 million worth of improvements and upgrades for the facility. Accordingly, PW Marengo’s total capital commitment is approximately $21.4 million. Concurrent with the acquisition, PW Marengo entered into a 20-year “triple-net” lease (the “Marengo Lease”) with Marengo Cannabis, LLC (“MC”) which will operate a cannabis cultivation facility. The lease requires MC to pay all property related expenses including maintenance, insurance and taxes. After the initial 20-year term, the Marengo Lease provides two, five-year renewal options. The rent for the MC Lease is structured whereby after a ten-month free-rent period, the rental payments provide Power REIT a full return of invested capital over the next three years. After the 46th month, rent is structured to provide a 15% return of the original invested capital with increases of 3% rate per annum. At any time after year six, if cannabis is legalized at the federal level, the rent will be readjusted down to an amount equal to a 9% return of the original invested capital and will increase at a 3% rate per annum on a starting date of the start of year seven. The lease requires the tenant to maintain a medical cannabis license and operate in accordance with all Michigan and local regulations with respect to its operations. The lease prohibits the retail sale of the tenant’s cannabis and cannabis-infused products from the MC Property. The lease also has personal guarantees from the owners of MC. The MC Lease is structured to provide an annual straight-line rent of approximately $4,287,000, representing an estimated yield on costs of over 20%. The project is currently under construction and should be completed by August 2022.
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The following table summarized the allocation of the purchase consideration for the PW Marengo Property based on the relative fair values of the assets acquired:
| Land | $ | 244,000 | ||
| Construction in Progress | 18,148,000 | |||
| Acquisition Costs Capitalized | 194,567 | |||
| Total Assets Acquired | $ | 18,586,567 |
The acquisitions described above are accounted for as asset acquisitions under ASC 805-50 Business Combinations – Related Issue. Power REIT has established a depreciable life for the property improvements of 20 years for greenhouses and up to 55 years for buildings.
The following table is a summary of the Trust’s properties as of November 12, 2021:
| Property Type/Name | Location | Acres | Size1 | Lease Start | Term (yrs)2 | Rent ($) | Gross Book Value | |||||||||||||
| Railroad Property | ||||||||||||||||||||
| P&WV - Norfolk Southern | PA/WV/OH | 112 miles | Oct-64 | 99 | $ | 915,000 | $ | 9,150,000 | ||||||||||||
| Solar Farm Land | ||||||||||||||||||||
| PWSS | Salisbury, MA | 54 | 5.7 | Dec-11 | 22 | 89,494 | 1,005,538 | |||||||||||||
| PWTS | Tulare County, CA | 18 | 4.0 | Mar-13 | 25 | 32,500 | 310,000 | |||||||||||||
| PWTS | Tulare County, CA | 18 | 4.0 | Mar-13 | 25 | 37,500 | 310,000 | |||||||||||||
| PWTS | Tulare County, CA | 10 | 4.0 | Mar-13 | 25 | 16,800 | 310,000 | |||||||||||||
| PWTS | Tulare County, CA | 10 | 4.0 | Mar-13 | 25 | 29,900 | 310,000 | |||||||||||||
| PWTS | Tulare County, CA | 44 | 4.0 | Mar-13 | 25 | 40,800 | 310,000 | |||||||||||||
| PWRS | Kern County, CA | 447 | 82.0 | Apr-14 | 20 | 803,117 | 9,183,548 | |||||||||||||
| Solar Farm Land Total | 601 | 107.7 | $ | 1,050,111 | $ | 11,739,086 | ||||||||||||||
| CEA (Cannabis) Property34 | ||||||||||||||||||||
| JAB - Tam Lot 18 | Crowley County, CO | 2.11 | 12,996 | Jul-19 | 20 | 201,810 | 1,075,000 | |||||||||||||
| JAB - Mav Lot 1 | Crowley County, CO | 5.20 | 16,416 | Jul-19 | 20 | 294,046 | 1,594,582 | |||||||||||||
| Grassland - Mav 14 | Crowley County, CO | 5.54 | 26,940 | Feb-20 | 20 | 354,461 | 1,908,400 | |||||||||||||
| Chronic - Sherman 6 | Crowley County, CO | 5.00 | 26,416 | Feb-20 | 20 | 375,159 | 1,995,101 | |||||||||||||
| Sweet Dirt 495 | York County, ME | 3.06 | 35,600 | May-20 | 20 | 919,849 | 4,917,134 | |||||||||||||
| Sweet Dirt 505 | York County, ME | 3.58 | 12,638 | Sep-20 | 20 | 373,055 | 1,964,723 | |||||||||||||
| Fifth Ace - Tam Lot 7 | Crowley County, CO | 4.32 | 18,000 | Sep-20 | 20 | 261,963 | 1,364,585 | |||||||||||||
| PSP - Tam 135 | Crowley County, CO | 2.37 | 9,384 | Oct-20 | 20 | - | 425,000 | |||||||||||||
| PSP - Tam 145 | Crowley County, CO | 2.09 | 24,360 | Oct-20 | 20 | - | 2,637,300 | |||||||||||||
| Green Mile - Tam 19 | Crowley County, CO | 2.11 | 18,528 | Dec-20 | 20 | 252,061 | 1,311,116 | |||||||||||||
| Grail Project - Tam 4 | Crowley County, CO | 2.20 | 21,732 | Jan-21 | 20 | 350,457 | 1,842,449 | |||||||||||||
| Apotheke - Tam 8 | Crowley County, CO | 4.31 | 21,548 | Jan-21 | 20 | 341,953 | 1,813,893 | |||||||||||||
| Grail Project - Tam 5 | Crowley County, CO | 2.21 | 6,256 | Feb-21 | 20 | 104,145 | 517,663 | |||||||||||||
| Canndescent | Riverside County, CA | 0.85 | 37,000 | Jan-21 | 5 | 1,073,318 | 7,685,000 | |||||||||||||
| Gas Station - Tam 3 | Crowley County, CO | 2.20 | 24,512 | Feb-21 | 20 | 399,748 | 2,118,717 | |||||||||||||
| Cloud Nine - Tam 27/28 | Crowley County, CO | 4.00 | 38,440 | Apr-21 | 20 | 552,588 | 2,947,905 | |||||||||||||
| Walsenburg Cannabis | Huerfano County, CO | 35.00 | 102,800 | May-21 | 20 | 729,007 | 3,876,600 | |||||||||||||
| Vinita Cannabis | Craig County, OK | 9.35 | 40,000 | Jun-21 | 20 | 502,561 | 2,650,000 | |||||||||||||
| JKL | Crowley County, CO | 10.00 | 24,880 | Jun-21 | 20 | 546,392 | 2,928,293 | |||||||||||||
| Marengo Cannabis | Marengo Township, MI | 61.14 | 556,146 | Sep-21 | 20 | 4,287,180 | 21,375,260 | |||||||||||||
| Marengo Cannabis Phase 2 | Marengo Township, MI | - | - | Nov-21 | 20 | 832,163 | 4,148,102 | |||||||||||||
| Golden Leaf Lane - Mav 5 | Crowley County, CO | 5.20 | 15,000 | Nov-21 | 20 | 262,718 | 1,358,664 | |||||||||||||
| CEA Total | 171.84 | 1,089,592 | $ | 13,014,634 | $ | 72,455,487 | ||||||||||||||
| Grand Total | $ | 14,979,745 | $ | 93,344,573 | ||||||||||||||||
1 Solar Farm Land size represents Megawatts and CEA property size represents greenhouse square feet
2 Not including renewal options
3 Rent represents straight line net rent
4 Gross Book Value represents total capital commitment
5 Tenant has been evicted - see Legal Proceedings
Note: Size, Rent and Gross Book Value assume completion of approved construction
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Critical Accounting Policies
The consolidated financial statements are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results may differ from the original estimates, requiring adjustments to these balances in future periods. The critical accounting estimates that affect the condensed consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2020 10-K.
Results of Operations
Three Months Ended September 30, 2021 and 2020
Revenue during the three months ended September 30, 2021, and 2020 was $2,547,348 and $1,115,586 respectively. Revenue during the three months ended September 30, 2021, consisted of lease rental income of $2,315,329, direct financing lease income of $228,750 and other income of $3,269. The increase in total revenue was primarily related to a $1,432,704 increase in rental income from newly acquired properties and a decrease in other income of $942. Expenses for the three months ended September 30, 2021 increased by $181,815 as compared to total expenses for the three months ended September 30, 2020 primarily due to an increase in depreciation expense of $187,148, an increase in general and administrative expenses of $70,874, an increase in property tax expense of $420 and a decrease in interest expense of $76,627. Net income attributable to common shares during the three months ended September 30, 2021 and 2020 was approximately $1,662,802 and $506,006, respectively. Net income attributable to common shares increased by $1,156,796 primarily due to the increase in rental income related to acquisitions which was offset by an increase in depreciation expense, general and administrative expenses and the write off in rental income of $320,492 resulting from the eviction of the PSP tenant on the MF Property (see Legal Proceedings).
For the three months ended September 30, 2021 and 2020, we paid a cash dividend to our holders of Series A Preferred Stock of $163,209 and $70,058, respectively.
Nine Months Ended September 30, 2021, and 2020
Revenue during the nine months ended September 30, 2021, and 2020 was $6,636,123 and $2,878,096 respectively. Revenue during the nine months ended September 30, 2021, consisted of rental income of $5,942,358, direct financing lease income of $686,250, and other income of $7,515. The increase in total revenue was primarily related to a $3,821,090 increase in rental income from newly acquired properties and a decrease in other income of $63,063. Expenses for the nine months ended September 30, 2021, increased by $592,097 as compared to total expenses for the nine months ended September 30, 2020, primarily due to an increase in general and administrative expenses of $212,882, an increase in depreciation expense of $473,452 netted with a decrease in property tax expense of $1,628 and a decrease in interest expense of $92,611. Net income attributable to common shares during the nine months ended September 30, 2021, and 2020 was $3,984,213 and $1,097,730, respectively. Net income attributable to common shares increased by $2,886,483 primarily due to the increase in rental income related to acquisition which was offset by an increase in depreciation expense, general and administrative expenses and the write off in rental income of $320,492 resulting from the eviction of the PSP tenant on the MF Property (see Legal Proceedings).
For the nine months ended September 30, 2021, and 2020, we paid a cash dividend to our holders of Series A Preferred Stock of $489,621 and $210,174, respectively.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $9,277,605 as of September 30, 2021, an increase of $3,675,779 from December 31, 2020. During the nine months ended September 30, 2021, the increase of cash was primarily due to financing activity in the form of the rights offering that closed on February 5, 2021 through which we raised $36,494,866 ($36,659,941 netted with offering expenses of $165,075), netted with a decrease of cash due to the acquisition of land and construction in progress payments.
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With the cash available as of November, 2021, we believe these resources will be sufficient to fund our operations and commitments. Our cash outlays, other than acquisitions, property improvements, dividend payments and interest expense, are for general and administrative (“G&A”) expenses, which consist principally of legal and other professional fees, consultant fees, NYSE American listing fees, insurance, shareholder service company fees and auditing costs.
To meet our working capital and longer-term capital needs, we intend to rely on cash provided by our operating activities, proceeds received from the issuance of equity securities and proceeds received from borrowings, which are typically secured by liens on assets. Based on our leases in place and rental income as of September 30, 2021, we anticipate generating $15,784,277 in cash rent over the next twelve months. At September 30, 2021, we owed debt in the principal amount of $23,834,250, of which $666,190 is due in the next twelve months. We anticipate that our cash from operations will be sufficient to support our operations; however additional acquisition of real estate may require us to seek to raise additional financing. There can be no assurance that financing will be available when needed on favorable terms.
FUNDS FROM OPERATIONS – NON GAAP FINANCIAL MEASURES
We assess and measure our overall operating results based upon an industry performance measure referred to as Core Funds From Operations (“Core FFO”) which management believes is a useful indicator of our operating performance. Core FFO is a non-GAAP financial measure. Core FFO should not be construed as a substitute for net income (loss) (as determined in accordance with GAAP) for the purpose of analyzing our operating performance or financial position, as Core FFO is not defined by GAAP. The following is a definition of this measure, an explanation as to why we present it and, at the end of this section, a reconciliation of Core FFO to the most directly comparable GAAP financial measure. Management believes that alternative measures of performance, such as net income computed under GAAP, or Funds From Operations computed in accordance with the definition used by the National Association of Real Estate Investment Trusts (“NAREIT”), include certain financial items that are not indicative of the results provided by our asset portfolio and inappropriately affect the comparability of the Trust’s period-over-period performance. These items include non-recurring expenses, such as one-time upfront acquisition expenses that are not capitalized under ASC-805 and certain non-cash expenses, including stock-based compensation expense, amortization and certain up front financing costs. Therefore, management uses Core FFO and defines it as net income excluding such items. We believe that Core FFO is a useful supplemental measure for the investing community to employ, including when comparing us to other REITs that disclose similarly Core FFO figures, and when analyzing changes in our performance over time. Readers are cautioned that other REITs may use different adjustments to their GAAP financial measures than we use, and that as a result, our Core FFO may not be comparable to the FFO measures used by other REITs or to other non-GAAP or GAAP financial measures used by REITs or other companies.
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A reconciliation of our Core FFO to net income for the three and nine months ended September 30, 2021 and 2020 is included in the table below (in thousands):
CORE FUNDS FROM OPERATIONS (FFO)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 20211 | 2020 | 20211 | 2020 | |||||||||||||
| Revenue | $ | 2,547,348 | $ | 1,115,586 | $ | 6,636,123 | $ | 2,878,096 | ||||||||
| Net Income | $ | 1,826,011 | $ | 576,064 | $ | 4,473,834 | $ | 1,307,904 | ||||||||
| Stock-Based Compensation | 114,677 | 66,161 | 267,650 | 189,452 | ||||||||||||
| Interest Expense - Amortization of Debt Costs | 8,527 | 8,527 | 25,582 | 25,582 | ||||||||||||
| Amortization of Intangible Asset | 59,285 | 59,285 | 177,856 | 177,854 | ||||||||||||
| Depreciation on Land Improvements | 226,915 | 39,767 | 569,481 | 96,029 | ||||||||||||
| Core FFO Available to Preferred and Common Stock | 2,235,415 | 749,804 | 5,514,403 | 1,796,821 | ||||||||||||
| Preferred Stock Dividends | (163,209 | ) | (70,058 | ) | (489,621 | ) | (210,174 | ) | ||||||||
| Core FFO Available to Common Shares | $ | 2,072,206 | $ | 679,746 | $ | 5,024,782 | $ | 1,586,647 | ||||||||
| Weighted Average Shares Outstanding (basic) | 3,322,433 | 1,915,200 | 3,129,978 | 1,909,151 | ||||||||||||
| Core FFO per Common Share | 0.621 | 0.35 | 1.611 | 0.83 | ||||||||||||
1 net of a $320,492 ($.10 per share) non cash adjustment to rental income resulting from the termination of the lease with PSP (see Legal Proceedings)
| Growth Rates: | ||||||||||||||||
| Revenue | 128 | % | 131 | % | ||||||||||||
| Net Income Attributable to Common Shareholders | 229 | % | 263 | % | ||||||||||||
| Net Income per Common Share (diluted) | 96 | % | 121 | % | ||||||||||||
| Core FFO Available to Common Shareholders | 205 | % | 217 | % | ||||||||||||
| Core FFO per Common Share | 77 | % | 94 | % |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining adequate disclosure controls and procedures (as defined Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely decisions regarding required disclosure. A control system, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Because of the inherent limitations in all control systems, internal controls over financial reporting may not prevent or detect misstatements. The design and operation of a control system must also reflect that there are resource constraints and management is necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls.
Our management assessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on our evaluation, we believe that our disclosure controls and procedures as of September 30, 2021 were effective.
Changes in Internal Control over Financial Reporting:
During the fiscal quarter ended September 30, 2021, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, the subject of claims and suits arising out of matters related to our business. In general, litigation claims can be expensive, and time consuming to bring or defend against and could result in settlements or damages that could significantly affect financial results. It is not possible to predict the final resolution of the current litigation to which we are party to, and the impact of certain of these matters on our business, results of operations, and financial condition could be material. Regardless of the outcome, litigation has adversely impacted our business because of defense costs, diversion of management resources and other factors.
On August 11, 2021, our wholly owned subsidiary, PW CO CanRe MF LLC (“CanRe MF”), filed a breach of contract claim against PSP Management LLC (“PSP”) which is our tenant at a property (the “MF Property”) owned by CanRe MF in Ordway, CO pursuant to a lease (the “MF Lease”). CanRe MF also named a principal owner individually as guarantor of the MF Lease in the litigation. PSP has not completed the construction of the MF Property as required by the MF Lease. CanRE MF is seeking damages related to cost over-runs and failure to pay rent as well as costs of collection and interest. PSP has failed to pay rent due for July 2021, August 2021, September 2021, October 2021 or November, 2021 in the amount of $87,841.22 per month.
On September 8, 2021, CanRe MF filed an action to evict PSP from the MF Property. The trial date was set for November 2, 2021, but on November 1, 2021, PSP agreed to turn over possession of the property and thus the hearing was cancelled. CanRe MF is seeking to mitigate its damages by evicting PSP so that it can complete the construction and find a replacement tenant for the MF Property.
Item 1A. Risk Factors.
The Trust’s results of operations and financial condition are subject to numerous risks and uncertainties as described in the 2020 10-K, which risk factors are incorporated herein by reference.
During 2020, a global Covid 19 pandemic emerged which has had broad financial impact on most industries and countries. To date, the Trust has experienced delays in construction at our properties which may adversely impact our tenants’ ability to commence operations and generate revenue, including but not limited to delays caused by:
| ○ | construction moratoriums by local, state or federal government authorities; | |
| ○ | delays by applicable governmental authorities in providing the necessary authorizations to continue construction or commence operations; | |
| ○ | reductions in construction team sizes to effectuate social distancing and other requirements; | |
| ○ | infection by one or more members of a construction team necessitating a partial or full shutdown of construction; and | |
| ○ | manufacturing and supply chain disruptions for materials sourced form other geographies, which may be experiencing shutdowns and/or restrictions on transportation of such material. |
The Trust continues to monitor COVID 19 and the potential financial implications on its assets and business plans as well as on its tenants and their ability to pay rent. There can be no assurance what ultimate impact COVID 19 will have on Power REIT on a going forward basis.
Competition for the acquisition of properties suitable for the cultivation or production of regulated cannabis and alternative financing sources for licensed operators may impede our ability to make acquisitions or increase the cost of these acquisitions, which could adversely affect our operating results and financial condition.
We compete for the acquisition of properties suitable for the cultivation of regulated cannabis with other entities engaged agricultural and real estate investment activities, including corporate agriculture companies, cultivators and producers of cannabis, private equity investors, and other real estate investors (including public and private REITs). These competitors may prevent us from acquiring desirable properties, may cause an increase in the price we must pay for properties, or may result in us having to lease our properties on less favorable terms than we expect. Our competitors may have greater financial and operational resources than we do and may be willing to pay more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations governing cannabis by state and federal governments, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties or enter into leases for such properties on less favorable terms than we expect, our prospect for growth of profitability and ability to generate cash flow and make distributions to our stockholders may decrease.
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Increased competition for properties as a result of greater clarity of the federal regulatory environment may also preclude us from acquiring those properties that would generate attractive returns to us.
By way of example, Congress introduced or re-introduced several proposed bills in the current legislative cycle focused on the regulated cannabis industry, including but not limited to, the Marijuana Opportunity Reinvestment and Expungement Act (the “MORE Act”), the Secure and Fair Enforcement (SAFE) Banking Act (the “SAFE Banking Act”) and most recently in July 2021, a preliminary draft of the Cannabis Administration and Opportunity Act (the “CAO Act”). If it became law, the MORE Act, which was passed by the U.S. House of Representatives in the prior legislative cycle and re-introduced in May 2021, would, among other things, remove cannabis as a Schedule I controlled substance under the Controlled Substances Act of 1970 (the “CSA”) and make available U.S. Small Business Administration funding for regulated cannabis operators. If it became law, the SAFE Banking Act would, among other things, provide protection from federal prosecution to banks and other financial institutions that provide financial services to state-licensed, compliant cannabis operators, which may include the provision of loans by financial institutions to such operators. In April 2021, the SAFE Banking Act was reintroduced again for the fourth time in the U.S. House of Representatives and passed; the bill is expected to be reintroduced in the U.S. Senate for consideration. In July 2021, a preliminary draft of the CAO Act was introduced, which would, among other things, remove cannabis as a Schedule I controlled substance under the CSA, provide deference to states to determine their own cannabis policies, transfer regulatory responsibility of cannabis to the U.S. Food and Drug Administration and certain other federal regulatory agencies, and establish a federal taxation framework for regulated cannabis sales.
If any of the proposed bills in Congress became law, there would be further increased competition for the acquisition of properties that can be leased to licensed cannabis operators, consolidation of cannabis cultivation facilities for more cost efficient, larger scale production and manufacturing may occur, and such operators would have greater access to alternative financing sources with lower costs of capital. These factors may reduce the number of operators that wish to enter into lease transactions with us or renew leases with us or may result in us having to enter into leases on less favorable terms with tenants, each of which may significantly adversely impact our profitability and ability to generate cash flow and make distributions to our stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
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INSERT PSP LITIGATION COPY FROM ABOVE ONCE FINALIZED
Item 6. Exhibits.
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q for the quarter ended September 30, 2021 to be signed on its behalf by the undersigned thereunto duly authorized.
| POWER REIT | |
| /s/ David H. Lesser | |
| David H. Lesser | |
| Chairman of the Board & | |
| Chief Executive Officer, Secretary and Treasurer | |
| Date: November 15, 2021 |
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