POWER REIT 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 Annual Report on Form 10-K for the year endedDecember 31, 2021 that we filed with theSecurities and Exchange Commission onMarch 31, 2022 (the "2021 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 aMaryland-domiciled Real Estate Investment Trust (REIT) that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (CEA) inthe United States . We are focused on making new acquisitions of real estate within the CEA sector related to food and cannabis production in the form of greenhouses. We are structured as a holding company and own our assets through twenty-five direct and indirect 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 ofPittsburgh & West Virginia Railroad ("P&WV") that closed onDecember 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 toNorfolk 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. Prior to 2019, our focus was on the acquisition of real estate assets related to transportation and renewable energy infrastructure. In 2019 we expanded the focus of our real estate acquisitions to include CEA properties inthe 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 ofSeptember 30, 2022 , 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 263 acres of land with approximately 2,211,000 square feet of existing or under construction greenhouses. We are actively seeking to grow our portfolio of CEA for food
and cannabis production. 19 Recent Developments
During the nine months endedSeptember 30, 2022 , we added to our portfolio of CEA properties by acquiring a new greenhouse property inNebraska for crop cultivation. In addition, we amended existing cannabis leases to increasePower REIT's investment with a corresponding increase in rental income and entered into new cannabis leases to replace tenants on vacated properties. Due to the significant price compression of the wholesale cannabis market, many of our cannabis tenants are currently experiencing financial challenges. The Trust has offered certain of its cannabis tenants relief by amending leases to several of our tenants whereby monthly cash payments are restructured over the course of the lease to lower rent payments during 2022 and increase rent payment in the future. These amendments were structured to not affect the total amount of rent from these leases. As ofSeptember 30, 2022 , the Trust has executed ten of
these lease amendments. As previously disclosed on a Current Report on Form 8-K filed with theSecurities and Exchange Commission onJuly 18, 2022 , cannabis licensing forPower REIT's property located inMichigan has been delayed based on a lack of cooperation fromMarengo Township where the property is located. As part of securing cannabis licenses from theMichigan Cannabis Regulatory Agency ("CRA"), a Certificate of Occupancy ("CO") must be submitted where applicable. Pursuant to theMarengo Township zoning map, the Property is zoned Agricultural and was given a Marijuana Overlay, which according to the Marengo Township Ordinance does not change the underlying zoning. As such, the Property does not require a CO and the CRA agreed in writing to accept a simple two sentence letter (the "CO Letter") as an alternative to providing a CO. PW Marengo pursued the agreed upon CO Letter fromMarengo Township which was initially unwilling to cooperate which ultimately led to the initiation of two litigations againstMarengo Township . After commencement of the litigation process, we ultimately secured the CO Letter from theMarengo Township Supervisor confirming that the property does not need a CO. The CO Letter is in the form that the CRA previously agreed to accept. Based on the receipt of the CO Letter, the CRA licensing process moved forward and onAugust 9, 2022 , CRA performed a pre-licensure inspection and identified that no deficiencies existed. In addition to the CRA approval we received, we are required to secure the approval of theMichigan Bureau of Fire Services ("BFS"). Unfortunately, after receiving the CRA pre-approval for the property, the attorney for the Township sent an email to the CRA indicating the facility was not in compliance with the Township requirements which resulted in a withdrawal of the application to CRA which can be re-submitted once the issues withMarengo Township are resolved. Despite having to withdraw the application to the CRA, we have been able to continue the process with the BFS. The process was fairly involved and required justifying the level of the hazards as reasonable for operation. OnNovember 4, 2022 , we received an approval of our plans from BFS which is subject to a final physical inspection which will take place once we are finalizing the license. OnOctober 24, 2022 , PW Marengo submitted an application to theMarengo Township ConstructionBoard of Appeals ("CBA") as another potential path towards the resolution of the dispute. We are currently awaiting a date for the CBA meeting which could resolve the issue that is causing the licensing delays. The CBA is currently scheduled forNovember 21, 2022 . We continue to try to work with the Township to establish a path forward but will continue to pursue a parallel track in litigation including a court ordered mediation process. See "Legal Proceedings" for more information regarding the litigation. See "Legal Proceedings" for more information regarding the litigation. Due to the uncertainty around timing for securing the necessary regulatory approvals for marijuana cultivation, the lease withMarengo Cannabis LLC was amended onJune 27, 2022 to restructure monthly rent payments over the course of the lease such that rent payments are scheduled begin in January, 2023. The rent was restructured such that the total rent over the life of the lease does not change. Due to the uncertainty of the timing for receipt of cash rent, the Trust concluded in the first quarter of 2022 that income from this lease will be considered on a cash basis rather than on a straight-line basis until there is more certainty regarding the ability to pay rent based on commencement of operations. At this time, given the further delays, it is unexpected that rent will commence inJanuary 2023 and we are exploring options related to a further restructuring. OnJanuary 1, 2022 ,PW CO CanRE Grail LLC ("PW Grail"), a wholly owned subsidiary entered into a new triple-net lease (the "Sandlot Lease") with a new tenant,The Sandlot, LLC ("SL Tenant"). The term of the Sandlot Lease is 20 years and provides four options to extend for additional five-year periods and it was agreed upon to increase the construction budget by$71,000 .Power REIT's total commitment to this project is approximately$2,432,000 . OnJune 1, 2022 , the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and an additional guarantor was added to the lease. Revenue recognition for the Sandlot Lease is currently being handled on a cash-basis but no rental income is expected as the tenant has ceased operations at the property. 20 OnJanuary 1, 2022 , the Walsenburg Lease was amended ("Walsenburg Lease Amendment") to provide funding in the amount of$625,000 for the addition of processing space and equipment that will be housed on anotherPower REIT property pursuant to a sublease. The term of the Walsenburg Lease Amendment is ten years with no renewal options. Revenue recognition for the Walsenburg Lease and its amendments is currently on a cash basis but no rental income is expected as the tenant has ceased operations at the property. OnMarch 1, 2022 , the Sweet Dirt Lease was amended (the "Sweet Dirt Lease Second Amendment") to provide funding in the amount of$3,508,000 to add additional items to the property improvement budget for the construction of a Cogeneration / Absorption Chiller project to the Sweet Dirt Property. The term of the Sweet Dirt Lease Second Amendment is coterminous with the original lease and is structured to provide an annual straight-line rent of approximately$654,000 . A portion of the property improvement, amounting to$2,205,000 , will be supplied byIntelliGen Power Systems LLC which is owned by HBP, an affiliate ofDavid Lesser ,Power REIT's Chairman and CEO. As ofSeptember 30, 2022 ,$1,102,500 has been paid toIntelliGen Power Systems LLC for equipment supplied. OnJuly 15, 2022 , the Sweet Dirt Lease was amended (the "Sweet Dirt Lease Third Amendment") to restructure the rent schedule. The annual straight-line rent of the Sweet Dirt Lease did not change. OnMarch 31, 2022 ,Power REIT , through a newly formed wholly owned subsidiary,PW MillPro NE LLC , ("PW MillPro"), entered into a 10-year "triple-net" lease (the "MillPro Lease") withMillennium Produce of Nebraska LLC ("MillPro"), a subsidiary of Millennium Sustainable Ventures Corp., of whichDavid Lesser is CEO and Chairman. The term of the MillPro Lease is ten years with four, five-year renewal options. Revenue recognition for this lease was on a straight-line basis for Q2 but has been adjusted to a cash-basis recognizing the security deposit as rental revenue. No further rental income is expected as the tenant has ceased operations at the property.Power REIT is exploring strategic alternatives for the property including seeking a replacement tenant. OnMay 1, 2022 ,PW CO CanRE MF LLC ("CanRE MF"), a wholly owned subsidiary of the Trust, entered into a new triple-net lease (the "EB Lease") withElevate & Bloom, LLC ("EB Tenant") for one of the two subdivided lots owned inOrdway CO and previously occupied byPSP Management LLC ("PSP") which was evicted. The term of the EB Lease is 20 years and provides two options to extend for additional five-year periods.Power REIT's total commitment to this project is approximately$1,282,000 and as ofSeptember 30, 2022 ,$543,800 has been funded. The EB Lease also has financial guarantees from affiliates of the EB Tenant. The EB Lease is structured to provide an annual straight-line rent of approximately$239,000 . OnJune 1, 2022 ,PW CO CanRE Apotheke LLC ("CanRE Apotheke") amended its lease with its tenant (the "Apotheke Tenant") to provide$364,650 for additional improvements to the property leased to the Apotheke Tenant as well as to restructure the timing of lease payments. The additional revenue on an annualized straight-line basis is approximately$62,000 . However, based on the history of payments, revenue recognition for the CanRE Apotheke property is currently being handled on a cash-basis due to rent arrearages. The Trust may commence straight-lining based on an ongoing assessment of the ability of the tenant to pay rent. OnSeptember 7, 2022 , 19977, LLC assigned its lease withPW CO CanRE JAB LLC ("PW JAB") toJackson Farms, LLC (the "Tam 18 Assignment"). Simultaneous with the assignment, the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and two additional guarantors were added to the lease. OnSeptember 8, 2022 ,Green Leaf Lane, LLC assigned its lease with PW CO CanRE Mav 5 LLC ("PW Mav 5") toJackson Farms, LLC (the "Mav 5 Assignment"). Simultaneous with the assignment, the lease was amended to restructure the timing of the rent payments but the total straight-line rent over the life of the lease is unchanged, and two additional guarantors were added to the lease. 21 The following table is a summary of the Trust's properties as ofNovember 2022 : Gross Book Value Property Type/Name Acres Size1 Lease Start Term (yrs)2 Gross Book Value3 Per SF Railroad Property P&WV - Norfolk Southern 112 miles Oct-64 99 $ 9,150,000 $ - Solar Farm Land Massachusetts PWSS 54 5.7 Dec-11 22 1,005,538 - California PWTS 18 4.0 Mar-13 25 310,000 - PWTS 18 4.0 Mar-13 25 310,000 - PWTS 10 4.0 Mar-13 25 310,000 - PWTS 10 4.0 Mar-13 25 310,000 - PWTS 44 4.0 Mar-13 25 310,000 - PWRS 447 82.0 Apr-14 20 9,183,548 - 601 107.7$ 11,739,086 $ - Greenhouse - Cannabis3 Colorado JAB 5.20 16,416 Jul-19 20 1,594,582 97 Jackson Farms 2.11 12,996 Jul-19 20 1,075,000 83 Grassland 5.54 26,940 Feb-20 20 1,908,400 71 Green Street 5.00 26,416 Feb-20 20 1,995,101 76 Fifth Ace 4.32 18,000 Sep-20 20 1,311,039 73 Green Mile 2.11 18,528 Dec-20 20 1,311,116 71 Apotheke 4.31 21,548 Jan-21 20 2,061,541 96 PSP 2.09 24,360 Oct-20 20 2,642,943 108 Gas Station 2.20 24,512 Feb-21 20 2,080,413 85 Cloud Nine 4.00 38,440 Apr-21 20 1,872,282 49 Walsenburg 35.00 102,800 May-21 20 4,862,730 47 JKL 10.00 24,880 Jun-21 20 1,781,847 72 Jackson Farms 5.20 15,000 Nov-21 20 1,358,664 91 The Sandlot 4.41 27,988 Jan-22 20 2,239,869 80 Elevate & Bloom 2.37 9,384 May-22 20 418,696 45 Maine Sweet Dirt 6.64 48,238 May-20 20 8,778,222 182 California Canndescent 0.85 37,000 Jan-21 5 7,685,000 208 Oklahoma Vinita Cannabis 9.35 40,000 Jun-21 20 2,588,377 65 Michigan Marengo Cannabis 61.14 556,146 Sep-21 20 23,038,095 46 Greenhouse - Produce3 Nebraaska
Millennium Produce of Nebraska 90.88 1,121,153 Apr-22
10 9,350,000 8
Greenhouse Total 262.72 2,210,745 $ 79,953,917 $ 36
Grand Total $ 100,843,003
1 Solar Farm Land size represents Megawatts and CEA property size represents
greenhouse square feet
2 Not including renewal options
3 Gross Book Value represents acquisition plus improvements funded - does not
include outstanding capital commitments
22
Critical Accounting Estimates
The consolidated financial statements are prepared in conformity withU.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 consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2021 10-K. Cannabis Price Compression The national regulated cannabis market has experienced significant price compression over the last few quarters mainly driven by increased cultivation capacity in certain markets beyond demand as well as the impact from more states legalizing cannabis which has impacted demand in other States. Due to significant price compression in the wholesale cannabis market, many of our cannabis related tenants are currently experiencing financial challenges. We are continually monitoring tenant viability, their ability to pay rent, and are committed to work with our tenants based on making a realistic assessment of their viability. As part of this process, we have entered into lease modifications with certain of our tenants to help them continue to work through the impact of the price compression which in some markets is currently below the cost of production which is not sustainable and should ultimately lead to a price recovery. The Trust's investment thesis is that greenhouse cultivation is the sustainable approach from both an environmental and economic perspective and that the price compression should ultimately help move cultivation towards
greenhouses. Results of Operations
Three Months Ended
Revenue during the three months endedSeptember 30, 2022 , and 2021 was$2,007,645 and$2,547,348 , respectively. Revenue during the three months endedSeptember 30, 2022 , consisted of revenue from lease income from direct financing lease of$228,750 , total rental income including rental income from non-related parties of$1,843,174 , rental expense from related parties of$64,335 and miscellaneous income of$56 . The decrease in total revenue was primarily related to a$628,524 decrease in rental income from related parties, offset by an increase of$92,034 in rental income from unrelated parties, and a decrease in other income of$3,213 . Expenses for the three months endedSeptember 30, 2022 increased by$703,338 as compared to total expenses for the three months endedSeptember 30, 2021 primarily due to an increase in general and administrative expenses of$209,834 due to increased lawyer fees, payroll, stock based compensation netted with a decrease in back office fees, an increase in amortization of intangible assets of$44,888 , an increase in interest expense of$277,285 due to drawing more funds on the Debt Facility and an increase in depreciation expense of$171,383 . Net income attributable to Common Shares during the three months endedSeptember 30, 2022 and 2021 was$419,762 and$1,662,802 , respectively. Net income attributable to common shares decreased by$1,243,040 primarily due to the decrease in rental income along with an increase in depreciation, interest and general and administrative expenses.
For the three months ended
Nine Months Ended
Revenue during the nine months endedSeptember 30, 2022 and 2021 was$6,226,114 and$6,636,123 , respectively. Revenue during the nine months endedSeptember 30, 2022 , consisted of total rental income including revenue from related parties of$578,991 , revenue from non-related parties of$4,960,798 , direct financing lease income of$686,250 and other income of$75 . The decrease in total revenue was primarily related to a$91,541 decrease in rental income from transactions with related parties, a$311,028 decrease in rental income from unrelated parties and a decrease in other income of$7,440 . Expenses for the nine months endedSeptember 30, 2022 increased by$1,538,047 as compared to total expenses for the nine months endedSeptember 30, 2021 primarily due to an increase in general and administrative expenses of$441,438 due to increased legal, audit and stock based compensation expenses, an increase in depreciation expense of$505,874 , an increase in interest expense of$456,111 due to the draw on the Debt Facility, and an increase in amortization of intangible assets of$134,663 . Net income attributable to common shares during the nine months endedSeptember 30, 2022 and 2021 was$2,036,157 and$3,984,213 , respectively. Net income attributable to common shares decreased by$1,948,056 primarily due to an increase in depreciation expense, general and administrative expenses, amortization of intangible assets, an increase in interest expense and a decrease in rental income from both, related and unrelated parties.
For the nine months ended
23
Liquidity and Capital Resources
Our cash and cash equivalents totaled$4,221,982 as ofSeptember 30, 2022 , an increase of$1,050,681 fromDecember 31, 2021 . During the nine months endedSeptember 30, 2022 , the increase in cash was primarily due to the second draw on the Debt Facility. With the cash available as ofNovember 2022 coupled with the availability of the Debt Facility, we believe these resources may be sufficient to fund our operations and commitments in the near term depending on rent collections. 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 rely on cash provided by our operating activities, proceeds received from the issuance of equity securities and proceeds from borrowings which may be secured by liens on assets.
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.
24
A reconciliation of our Core FFO to net income for the nine months ended
CORE FUNDS FROM OPERATIONS (FFO)
(Unaudited)
Three Months Ended September 30, Nine Months Ended June 30,
2022 2021 2022 2021
Revenue $ 2,007,645 $ 2,547,348 $ 6,226,114 $ 6,636,123
Net Income $ 582,970 $ 1,826,011 $ 2,525,778 $ 4,473,834
Stock-Based Compensation 205,710 114,677 423,910 267,650
Interest Expense -
Amortization of Debt Costs 21,817 8,527 65,611 25,582
Amortization of Intangible
Lease Asset 104,173 59,285 312,519 177,856
Amortization of Intangible
Lease Liability (9,925 ) - (29,776 ) -
Depreciation on Land
Improvements 398,298 226,915 1,075,355 569,481
Core FFO Available toPreferred and Common Stock 1,303,043 2,235,415
4,373,397 5,514,403
Preferred Stock Dividends (163,208 ) (163,209 )
(489,621 ) (489,621 )
Core FFO Available to Common Shares$ 1,139,835 $ 2,072,206
Weighted Average Shares Outstanding (basic) 3,386,252 3,322,433
3,373,681 3,129,978
Core FFO per Common Share 0.34 0.62 1.15 1.61
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