Exhibit 10.45
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 May 9, 2022.
TABLE OF CONTENTS
| 2 |
POWER REIT AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, 2022 | December 31, 2021 | |||||||
| 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 | ||||||||
| Accounts receivable | - | |||||||
| Prepaid expenses and deposits | ||||||||
| Intangible lease asset, net of accumulated amortization | ||||||||
| Deferred debt issuance cost, net of amortization | ||||||||
| Deferred rent receivable | ||||||||
| Other assets | - | |||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Deferred rent liability | ||||||||
| Tenant security deposits | ||||||||
| Prepaid rent | ||||||||
| Intangible lease liability, net of accumulated amortization | ||||||||
| 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 as of March 31, 2022 and shares issued and outstanding as of December 31, 2021) | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| 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 March 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 Quarters Ended March 31, 2022 and 2021
(Unaudited)
| Additional | Retained Earnings | Total | ||||||||||||||||||
| Common Shares | Paid-in | (Accumulated | Shareholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit) | Equity | ||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ||||||||||||||||
| Net Income | - | - | - | |||||||||||||||||
| Cash Dividends on Preferred Stock | - | - | - | ( | ) | ( | ) | |||||||||||||
| Stock-Based Compensation | ( | ) | - | - | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
POWER REIT AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Amortization of intangible lease asset | ||||||||
| Amortization of debt costs | ||||||||
| Amortization of below market lease | ( | ) | - | |||||
| Stock-based compensation | ||||||||
| Depreciation | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable | ( | ) | - | |||||
| Deferred rent receivable | ( | ) | ||||||
| Deferred rent liability | ||||||||
| Prepaid expenses and deposits | ||||||||
| Other assets | - | |||||||
| Accounts payable | ( | ) | ||||||
| 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 for cash | - | |||||||
| Payment of debt issuance costs | ( | ) | - | |||||
| Proceeds from long-term debt | - | |||||||
| Principal payment on long-term debt | ( | ) | ( | ) | ||||
| Cash dividends paid on preferred stock | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net 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 | $ | $ | ||||||
| Reclass of deferred debt issuance costs to liability upon loan draw | $ | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
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 31, 2022.
Power REIT (the “Registrant” or the “Trust”, and together with its consolidated subsidiaries, “we”, “us”, or “Power REIT”, unless the context requires otherwise) is a Maryland-domiciled, internally-managed real estate investment trust (a “REIT”) that owns a portfolio of real estate assets related to transportation, energy infrastructure and Controlled Environment Agriculture (“CEA”) in the United States.
Power REIT 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-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.
On
March 31, 2022, Power REIT acquired a
During
the three months ended March 31, 2022, 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 % of its ordinary taxable annual income must be distributed to shareholders. As of December
31, 2020, the last tax return completed to date, the Trust has a net operating loss of $
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”).
| 7 |
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 similar to basic net income per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. The dilutive effect of the Trust’s options is computed using the treasury stock method.
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| 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 allocates the purchase price on a relative fair value basis. For the three months ended March 31, 2022, and 2021, all acquisitions were considered 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, its 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 if acquired as raw land. When property is acquired with improvements, the land price is established based on market comparables and market research to establish a value with the balance allocated to improvements for the land. | |
| ● | Improvements – When a property is acquired with improvements, the land price is established based on market comparables and market research to establish a value with the balance allocated to improvements for the land. The Trust also evaluate the improvements in terms of replacement cost and condition to confirm that the valuation assigned to improvements is reasonable. Depreciation is calculated on a straight-line method over the useful life of the improvements. |
| 8 |
| ● | Lease Intangibles – The Trust recognizes lease intangibles when there’s an existing lease assumed with the property acquisitions. In determining the fair value of in-place leases (the avoided cost associated with existing in-place leases) management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy. In estimating carrying costs, management includes reimbursable (based on market lease terms) real estate taxes, insurance, other operating expenses, as well as estimates of lost market rental revenue during the expected lease-up periods. The values assigned to in-place leases are amortized over the remaining term of the lease.
The fair value of above-or-below market leases is estimated based on the present value (using an interest rate which reflected the risks associated with the leases acquired) of the difference between contractual amounts to be received pursuant to the leases and management’s estimate of market lease rates measured over a period equal to the estimated remaining term of the lease. An above market lease is classified as an intangible asset and a below market lease is classified as an intangible liability. The capitalized above-market or below-market lease intangibles are amortized as a reduction of, or an addition to, rental income over the estimated remaining term of the respective leases.
Intangible assets related to leasing costs consist of leasing commissions and legal fees. Leasing commissions are estimated by multiplying the remaining contract rent associated with each lease by a market leasing commission. Legal fees represent legal costs associated with writing, reviewing, and sometimes negotiating various lease terms. Leasing costs are amortized over the remaining useful life of the respective leases. | |
| ● | 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. The value of CIP is based on actual costs incurred. |
Depreciation
Depreciation
is computed using the straight-line method over the estimated useful lives of
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.
Revenue Recognition
The Railroad Lease is treated as a direct financing lease. As such, income to P&WV under the Railroad Lease is recognized when received.
Lease
revenue from solar land and CEA properties are accounted for as operating leases. Any such leases with rent escalation provisions are
recorded on a straight-line basis when the amount of escalation in lease payments is known at the time Power REIT enters into the lease
agreement, or known at the time Power REIT assumes an existing lease agreement as part of an acquisition (e.g., an annual fixed percentage
escalation) over the initial lease term, subject to a collectability assessment, with the difference between the contractual rent receipts
and the straight-line amounts recorded as “deferred rent receivable” or “deferred rent liability”. Collectability
is assessed at quarter-end for each tenant receivable using various criteria including past collection issues, the current economic and
business environment affecting the tenant and guarantees. If collectability of the contractual rent stream is not deemed probable, revenue
will only be recognized upon receipt of cash from the tenant. During the three months ended March 31, 2022 and 2021, the Trust wrote
off approximately $
| 9 |
Lease revenue from land that is subject to an operating lease without rent escalation provisions is recorded on a straight-line basis.
Intangibles
A
portion of the acquisition price of the assets acquired by PW Tulare Solar, LLC (“PWTS”) have been allocated on the Trust’s
consolidated balance sheets between Land and Intangibles’ fair values at the date of acquisition. The total amount of in-place
lease intangible assets established was approximately $
A
portion of the acquisition price of the assets acquired by PW Regulus Solar, LLC (“PWRS”) have been allocated on The Trust’s
consolidated balance sheets between Land and Intangibles’ fair values at the date of acquisition. The total amount of in-place
lease intangible assets established was approximately $
A
portion of the acquisition price of the assets acquired by PW CA Canndescent, LLC (“PW Canndescent”) have been allocated
on The Trust’s consolidated balance sheets between Land, Improvements and Intangibles’ fair values at the date of acquisition.
The amount of in-place lease intangible assets established was approximately $
Intangible
assets are evaluated whenever events or circumstances indicate the carrying value of these assets may not be recoverable. There were
The following table provides a summary of the Intangible Assets and Liabilities:
| For the Three Months Ended March 31, 2022 | ||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||
Amortization / Addition to Revenue | Amortization / Addition to Revenue | Net Book | ||||||||||||||
| Cost | Through 12/31/21 | 1/1/22 - 3/31/22 | Value | |||||||||||||
| Asset Intangibles - PWTS | $ | $ | $ | $ | ||||||||||||
| Asset Intangibles - PWRS | $ | $ | $ | $ | ||||||||||||
| Asset Intangibles - Canndescent | $ | $ | $ | $ | ||||||||||||
| Asset Intangibles Total | $ | $ | $ | $ | ||||||||||||
| Liability Intangible - Canndescent | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 10 |
The following table provides a summary of the current estimate of future amortization of Intangible Assets for the subsequent years ended December 31:
| 2022 (9 months remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ |
The following table provides a summary of the current estimate of future addition to revenue for Intangible Liability for the subsequent years ended December 31:
| 2022 (9 months remaining) | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total | $ |
Net Investment in Direct Financing Lease – Railroad
P&WV’s
net investment in its leased railroad property, recognizing the lessee’s perpetual renewal options, was estimated to have a current
value of $
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. |
| 11 |
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, prepaid expenses, 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 March 31, 2022 and December 31, 2021.
3 – ACQUISITIONS
2022 Acquisitions
On
March 31, 2022, Power REIT, through a newly formed wholly owned subsidiary, PW MillPro NE LLC, (“PW MillPro”), acquired a
The following table summarizes the preliminary allocation of the purchase consideration for the PW MillPro properties based on the relative fair values of the assets acquired:
| Greenhouse |
Housing Facility | |||||||
| Land | $ | $ | ||||||
| Assets subject to depreciation: | ||||||||
| Improvements (Greenhouses / Processing Facilities) | ||||||||
| Total Assets Acquired | $ | $ | ||||||
4– DIRECT FINANCING LEASES AND OPERATING 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 lease terms ranging between
During
the three months ended March 31, 2022 and 2021, the Trust wrote off approximately $
Historically, the Trust’s revenue
has been concentrated to a relatively limited number of investments, industries and lessees. As the Trust grows, its portfolio may
remain concentrated in a limited number of investments. During the three months ended March 31, 2022, Power REIT collected
approximately
| 12 |
The aggregate annual cash expected to be received by the Trust on all leases related to its portfolio as of March 31, 2022, is as follows for the subsequent years ended December 31:
| 2022 (9 Months Remaining) | $ | |||
| 2023 | $ | |||
| 2024 | $ | |||
| 2025 | $ | |||
| 2026 | $ | |||
| Thereafter | $ | |||
| Total | $ |
5 – 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 certain 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 certain lender for $
On
December 21, 2021, Power REIT entered into a Debt Facility with initial availability of $
| 13 |
The approximate amount of principal payments remaining on Power REIT’s long-term debt as of March 31, 2022 is as follows:
| Total Debt | ||||
| 2022 (9 months remaining) | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Long term debt | $ | |||
Summary of Stock Based Compensation Activity
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 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 March 31, 2022, the aggregate number of shares of Common Stock that may be issued pursuant to outstanding awards is currently .
Summary of Stock Based Compensation 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, 2021 | ||||||||
| Restricted Stock Forfeited | ( | ) | ||||||
| Restricted Stock Vested | ( | ) | ||||||
| Balance as of March 31, 2022 | ||||||||
During the three months ended March 31, 2022, shares of unvested restricted stock was forfeited upon one previous board member’s resignation from the board.
Stock-based Compensation
During the quarter ended March 31, 2022, the Trust recorded approximately $ of non-cash expense related to restricted stock granted compared to approximately $ for the quarter ended March 31, 2021. As of March 31, 2022, there was approximately $ of total unrecognized share-based compensation expense, which expense 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.
Preferred Stock Dividends
During
the quarter ended March 31, 2022, the Trust paid a total of approximately $
| 14 |
7 - RELATED PARTY TRANSACTIONS
A
wholly-owned subsidiary of Hudson Bay Partners, LP (“HBP”), an entity associated with our CEO and Chairman 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 Sustainable Ventures Corp., formerly Millennium Investment and Acquisition
Company Inc. (“MILC’). David H Lesser, Power REIT’s Chairman and CEO, is also Chairman and CEO of MILC. MILC, through
subsidiaries, established cannabis and food crop cultivation projects and currently is the tenant in the Trust’s Colorado, Oklahoma,
Michigan and Nebraska properties. Power REIT has entered into lease transactions with the related tenants in which MILC has controlling
interests. Total rental income recognized for the three months ended March 31, 2022 from the affiliated tenants in Colorado, Oklahoma,
Michigan and Nebraska was $
Effective
March 1, 2022, the Sweet Dirt Lease was amended (the “Sweet Dirt Lease Second Amendment”) to provide funding in the amount
of $
Under the Trust’s Declaration of Trust, the Trust may enter into transactions in which trustees, officers or employees have a financial interest, provided however, that in the case of a material financial interest, the transaction is disclosed to the Board of Trustees or the transaction shall be fair and reasonable. After consideration of the terms and conditions of the transaction with IntelliGen Power Systems, the lease transactions with subsidiaries of MILC, and the reimbursement to HBP described herein, the independent trustees approved such arrangements having determined such arrangement are fair and reasonable and in the interest of the Trust.
8 - SUBSEQUENT EVENTS
On April 1, 2022, Power REIT (“Power REIT” or the “Trust”), through a wholly owned subsidiary of the Trust (“PropCo”), filed a Complaint, Petition for Writ of Mandamus and Jury Demand against the Township of Marengo, Michigan. The Complaint was filed in the United States District Court – Western District of Michigan – Southern Division and the Case Number is: 1:22-cv-00321. The Complaint is an action for equitable, declaratory and injunctive relief arising out of Township’s false promises, constitutional violations by the Township’s deprivation of Plaintiffs’ civil rights through its refusal and failure to comply with its own ordinances and state law as well as a common dispute resolution mechanism. On April 7, 2022, the Trust filed a Motion for expedited trial and on April 21, 2022, the Township of Marengo, Michigan filed a reply brief.
On April 8, 2022, JKL2 Inc., Chelsey Joseph, Alan Kane and Jill Lamoureux (collectively the “JKL Parties”) filed a complaint in District Court, Crowley County Colorado (Case Number: 2022CV30009) against PW CO CanRe JKL LLC, Power REIT and David H. Lesser (the “Power REIT parties”) and Crowley County Builders, LLC and Dean Hiatt (the “CC Parties”). The complaint is seeking a judgement against the Power REIT Parties for (i) fraudulent inducement and (ii)breach of duty of good faith and fair dealing and (iii) civil conspiracy and (iv) unjust enrichment. On May 2, 2022, PW CO CanRe JKL LLC commenced an eviction process against JKL2 Inc. for failure to pay rent when due and will be counter-claiming seeking damages for unpaid rent. The Trust does not believe it has material exposure to the claims brought by the JKL Parties beyond the costs associated with the litigation.
On
January 15, 2022, Power REIT’s subsidiary, PW CanRe Cloud Nine LLC (“PW Cloud Nine”), filed for the eviction of its
tenant Cloud Nine for failure to pay rent when due. On February 11, 2022 the court granted a Writ of Restitution for the eviction of
Cloud Nine LLC. Cloud Nine LLC has appealed the eviction ruling. The appeal is still pending as of the date of this filing. The case
is pending in Crowley County Colorado District Court (Case Number: 222cv30004). Cloud Nine has deposited $
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On
May 3, 2022, the Registrant declared a quarterly dividend of $per share on Power REIT’s
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 Annual Report on Form 10-K for the year ended December 31, 2021 that we filed with the Securities and Exchange Commission on March 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 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 in the form of greenhouses.
We are structured as a holding company and own our assets through twenty-five 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.
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 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.
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As of March 31, 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.
Recent Developments
During the three months ended March 31, 2022, we added to our portfolio of CEA properties by acquiring a new greenhouse property in Nebraska which will grow tomatoes. In addition, we amended two existing cannabis leases to increase Power REIT’s investment with a corresponding increase in rental income and entered into a new cannabis lease to replace a tenant which had vacated a property.
On January 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 the Tam 7 Property pursuant to a sublease. The term of the Walsenburg Lease Amendment is ten years with no renewal options and is structured to provide an annual straight-line rent of approximately $120,000.
On January 1, 2022, PW Grail entered into a new triple-net lease (the “Sandlot Lease”) on the same economic terms as the former 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. The Sandlot Lease also has financial guarantees from affiliates of the SL Tenant. The SL Tenant intends to operate as a licensed cannabis cultivation and processing facility. The annual straight-line annual rent is approximately $462,000.
Effective March 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 by IntelliGen Power Systems LLC which is owned by HBP, an affiliate of David Lesser, Power REIT’s Chairman and CEO. As of March 31, 2022, $1,102,500 has been paid to IntelliGen Power Systems LLC for equipment supplied.
On March 31, 2022, Power REIT, through a newly formed wholly owned subsidiary, PW MillPro NE LLC, (“PW MillPro”), acquired a 1,121,513 square foot greenhouse cultivation facility (the “MillPro Facility”) on an approximately 86-acre property and a separate 4.88-acre property with a 21-room employee housing building (the “Housing Facility”) for $9,350,000 and closing costs of approximately $88,000 located in O’Neill, Nebraska. As part of the transaction, the Trust agreed to fund improvements including the replacement of Energy Curtains for $534,430. Simultaneous with the acquisition, PW MillPro entered into a 10-year “triple-net” lease (the “MillPro Lease”) with Millennium Produce of Nebraska LLC (“MillPro”), a subsidiary of Millennium Sustainable Ventures Corp., of which David Lesser is CEO and Chairman. MillPro will operate the MillPro Facility cultivating tomatoes. The lease requires MillPro to pay all property related expenses including maintenance, insurance and taxes. The MillPro Lease is structured to provide an annual straight-line rent of approximately $1,099,387, representing an estimated yield on costs of 11%. After the initial 10-year term, the MillPro Lease provides four, five-year renewal options. The rent for the MillPro Lease is structured whereby after the initial 10-year term, the monthly rent increases by 10% at the first renewal option, and 5% at each successive renewal option (second, third, and fourth).
The acquisition described above is accounted for as asset acquisitions under ASC 805-50 Business Combinations – Related Issue. Power REIT has established a depreciable life for the property improvements of 20 years for greenhouse and 39 years for the housing facility.
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The following table is a summary of the Trust’s properties as of May 2022:
| Property Type/Name | Location | Acres | Size1 | Original Lease Start | Term (yrs)2 | Rent ($)3 | Gross Book Value4 | |||||||||||||||
| 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 | ||||||||||||||||
| Greenhouse - Cannabis | ||||||||||||||||||||||
| JAB | Crowley County, CO | 7.31 | 29,412 | Jul-19 | 20 | 495,856 | 2,669,582 | |||||||||||||||
| Grassland | Crowley County, CO | 5.54 | 26,940 | Feb-20 | 20 | 354,461 | 1,908,400 | |||||||||||||||
| Chronic | Crowley County, CO | 5.00 | 26,416 | Feb-20 | 20 | 375,159 | 1,995,101 | |||||||||||||||
| Sweet Dirt | York County, ME | 6.64 | 48,238 | May-20 | 20 | 1,947,087 | 10,389,857 | |||||||||||||||
| Fifth Ace | Crowley County, CO | 4.32 | 18,000 | Sep-20 | 20 | 261,963 | 1,364,585 | |||||||||||||||
| PSP | Crowley County, CO | 4.46 | 33,744 | Oct-20 | - | 5 | 3,062,300 | |||||||||||||||
| Green Mile | Crowley County, CO | 2.11 | 18,528 | Dec-20 | 20 | 252,061 | 1,311,116 | |||||||||||||||
| Apotheke | Crowley County, CO | 4.31 | 21,548 | Jan-21 | 20 | 341,953 | 7 | 1,813,893 | ||||||||||||||
| Canndescent | Riverside County, CA | 0.85 | 37,000 | Feb-21 | 5 | 1,113,018 | 7,685,000 | |||||||||||||||
| Gas Station | Crowley County, CO | 2.20 | 24,512 | Feb-21 | 20 | 399,748 | 2,118,717 | |||||||||||||||
| Cloud Nine | Crowley County, CO | 4.00 | 38,440 | Apr-21 | 20 | - | 6 | 2,947,905 | ||||||||||||||
| Walsenburg Cannabis | Huerfano County, CO | 35.00 | 102,800 | May-21 | 20 | 849,504 | 4,502,001 | |||||||||||||||
| 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 | 7 | 2,928,293 | ||||||||||||||
| Marengo Cannabis | Marengo Township, MI | 61.14 | 556,146 | Sep-21 | 20 | 5,119,343 | 8 | 25,523,362 | ||||||||||||||
| Golden Leaf Lane | Crowley County, CO | 5.20 | 15,000 | Nov-21 | 20 | 262,718 | 1,358,664 | |||||||||||||||
| The Sandlot | Crowley County, CO | 4.41 | 27,988 | Jan-22 | 20 | 461,684 | 2,431,511 | |||||||||||||||
| Greenhouse - Produce | ||||||||||||||||||||||
| Millennium Produce of Nebraska | Holt County, NE | 90.88 | 1,121,513 | Apr-22 | 10 | 1,099,387 | 9,884,430 | |||||||||||||||
| Greenhouse Total | 262.72 | 2,211,105 | $ | 14,382,895 | $ | 86,544,717 | ||||||||||||||||
| Grand Total | $ | 16,348,006 | $ | 107,433,803 | ||||||||||||||||||
| 1 | Solar Farm Land size represents Megawatts and CEA property size represents greenhouse square feet. | |
| 2 | Not including renewal options. | |
| 3 | Rent represents annual straight line net rent. | |
| 4 | Gross Book Value represents total capital commitment which includes the initial purchase price (excluding closing costs) plus the budget of construction - the actual amount spent could differ from the total budget. | |
| 5 | Tenant has been evicted as of November 2021 - evaluating potential replacement tenants. | |
| 6 | Tenant received an eviction order in January 2022 and tenant is appealing - see legal proceedings. | |
| 7 | Based on the uncertainty of collectability of rent during 1Q22, a write-off was taken to eliminate the impact of straight-lining rent. Going forward, rent will either be treated on a cash basis or a straight-line basis as applicable. | |
| 8 | Based on the uncertainty of collectability of rent, the Trust has determined not to straight-line rent during 2021. Going forward, rent will either be treated on a cash basis or a straight-line basis as applicable. |
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 consolidated financial statements and the judgments and assumptions used are consistent with those described under Part II, Item 7 of the 2021 10-K.
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Results of Operations
Three Months Ended March 31, 2022, and 2021
Revenue during the three months ended March 31, 2022, and 2021 was $1,985,516 and $1,820,927 respectively. Revenue during the three months ended March 31, 2022, consisted of rental income of $1,756,751, direct financing lease income of $228,750 and other income of $15. The increase in total revenue was primarily related to a $338,016 increase in rental income from transactions with related parties, offset by a $173,196 decrease in rental income from unrelated parties and a decrease in other income of $231. Expenses for the three months ended March 31, 2022 increased by $274,837 as compared to total expenses for the three months ended March 31, 2021 primarily due to an increase in general and administrative expenses of $127,755, an increase in depreciation expense of $92,486 and to a lesser extent, an increase in amortization of intangible assets of $44,887 and an increase in interest expense of $9,727. Net income attributable to common shares during the three months ended March 31, 2022 and 2021 was approximately $834,673 and $944,918, respectively. Net income attributable to common shares decreased by $110,245 primarily due to an increase in depreciation expense, general and administrative expenses, amortization of intangible assets, and the write off in rental income of $217,517 resulting from the adjustment of eliminating the straight-line rent for two failed tenants.
For the three months ended March 31, 2022, and 2021, we paid a cash dividend to our holders of Series A Preferred Stock of $163,207 and $163,210, respectively.
Liquidity and Capital Resources
Our cash and cash equivalents totaled $1,938,889 as of March 31, 2022, a decrease of $1,232,412 from December 31, 2021. During the three months ended March 31, 2022, the decrease of cash was primarily due to the acquisition of land and construction in progress payments.
With the cash available as of May 2022 coupled with the availability of the Debt Facility, 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 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 lien on assets. Power REIT is currently focused on non-dilutive capital sources, such as debt and the potential to issue additional preferred stock, in order to fund property improvements for our existing portfolio as well as additional acquisitions.
Based on our leases in place and rental income as of March 31, 2022, we anticipate generating $13,646,229 in cash rent over the next twelve months. At March 31, 2022, we owed debt in the principal amount of $35,203,111, of which $683,755 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 months ended March 31, 2022, and 2021 is included in the table below:
CORE FUNDS FROM OPERATIONS (FFO)
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 1,985,516 | $ | 1,820,927 | ||||
| Net Income | $ | 997,880 | $ | 1,108,128 | ||||
| Stock-Based Compensation | 109,100 | 66,158 | ||||||
| Interest Expense - Amortization of Debt Costs | 21,976 | 8,527 | ||||||
| Amortization of Intangible Lease Asset | 104,172 | 59,285 | ||||||
| Amortization of Intangible Lease Liability | (9,925 | ) | - | |||||
| Depreciation on Land Improvements | 288,537 | 196,051 | ||||||
| Core FFO Available to Preferred and Common Stock | 1,511,740 | 1,438,149 | ||||||
| Preferred Stock Dividends | (163,207 | ) | (163,210 | ) | ||||
| Core FFO Available to Common Shares | $ | 1,348,533 | $ | 1,274,939 | ||||
| Weighted Average Shares Outstanding (basic) | 3,367,531 | 2,755,502 | ||||||
| Core FFO per Common Share | 0.40 | 0.46 | ||||||
| Growth Rates: | ||||||||
| Revenue | 9 | % | ||||||
| Net Income | -10 | % | ||||||
| Core FFO Available to Common Shareholders | 6 | % | ||||||
| Core FFO per Common Share | -13 | % | ||||||
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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 March 31, 2022 were effective.
Changes in Internal Control over Financial Reporting:
During the fiscal quarter ended March 31, 2022, 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.
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”) in the District Court, Crowley County, Colorado, Case #2021CV30015. 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 in the amount of $87,841 per month since July 2021. On November 1, 2021, PSP agreed to turn over possession of the property to CanRe MF. CanRe MF is seeking to mitigate its damages by completing the construction and finding a replacement tenant for the MF Property.
On January 15, 2022, Power REIT’s subsidiary, PW CanRe Cloud Nine LLC (“PW Cloud Nine”), filed for the eviction of its tenant Cloud Nine for failure to pay rent when due. On February 11, 2022 the court granted a Writ of Restitution for the eviction of Cloud Nine LLC. Cloud Nine LLC has appealed the eviction ruling. The appeal is still pending as of the date of this filing. The case is pending in Crowley County Colorado District Court (Case Number: 222cv30004). Cloud Nine has deposited $25,000 cash bond with the court and on April 29, 2022 PW Cloud Nine LLC filed a motion to increase the bond amount to reflect the full amount of unpaid rent (currently $582,926.05) and continuing rent obligations of $83,275.15 per month.
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On April 1, 2022, Power REIT (“Power REIT” or the “Trust”), through a wholly owned subsidiary of the Trust (“PropCo”), filed a Complaint, Petition for Writ of Mandamus and Jury Demand against the Township of Marengo, Michigan. The Complaint was filed in the United States District Court – Western District of Michigan – Southern Division and the Case Number is: 1:22-cv-00321. The Complaint is an action for equitable, declaratory and injunctive relief arising out of Township’s false promises, constitutional violations by the Township’s deprivation of Plaintiffs’ civil rights through its refusal and failure to comply with its own ordinances and state law as well as a common dispute resolution mechanism. On April 7, 2022, the Trust filed a Motion for expedited trial and on April 21, 2022, the Township of Marengo, Michigan filed a reply brief.
On April 8, 2022, JKL2 Inc., Chelsey Joseph, Alan Kane and Jill Lamoureux (collectively the “JKL Parties”) filed a complaint in District Court, Crowley County Colorado (Case Number: 2022CV30009) against PW CO CanRe JKL LLC, Power REIT and David H. Lesser (the “Power REIT parties”) and Crowley County Builders, LLC and Dean Hiatt (the “CC Parties”). The complaint is seeking a judgement against the Power REIT Parties for (i) fraudulent inducement and (ii)breach of duty of good faith and fair dealing and (iii) civil conspiracy and (iv) unjust enrichment. On May 2, 2022, PW CO CanRe JKL LLC commenced an eviction process against JKL2 Inc. for failure to pay rent when due and will be counter-claiming seeking damages for unpaid rent. The Trust does not believe it has material exposure to the claims brought by the JKL Parties beyond the costs associated with the litigation.
Item 1A. Risk Factors.
The Trust’s results of operations and financial condition are subject to numerous risks and uncertainties as described in the 2021 10-K, which risk factors are incorporated herein by reference. The following information updates, and should be read in conjunction with, the information disclosed in Part I, Item 1A, “Risk Factors,” contained in the 2021 10-K. You should carefully consider the risks set forth in the 2021 10-K and the following risks, together with all the other information in this Quarterly Report on Form 10-Q, including our consolidated financial statements and notes thereto. If any of the risks actually materialize, our operating results, financial condition and liquidity could be materially adversely affected. Except as disclosed below, there have been no material changes from the risk factors disclosed in the 2021 10-K.
The investment portfolio is, and in the future may continue to be, concentrated in its exposure to a relatively few numbers of investments, industries and lessees.
As of March 31, 2022, we owned twenty-six property investments, through our ownership of our twenty-five subsidiaries: Pittsburgh & West Virginia Railroad, PW PWV Holdings LLC, PW Salisbury Solar, LLC, PW Tulare Solar, LLC, PW Regulus Solar, LLC, PW CO CanRE JAB LLC, PW CanRE of Colorado Holdings LLC, PW CO CanRE Mav 5 LLC, PW CO CanRE Mav 14 LLC, PW CO CanRE Sherm 6 LLC, PW ME CanRE SD LLC, PW CO CanRE Tam 7 LLC, PW CO CanRE MF LLC, PW CO CanRE Tam 19 LLC, PW CO CanRE Grail LLC, PW CO CanRE Apotheke LLC, PW CA CanRE Canndescent LLC, PW CO CanRE Gas Station LLC, PW CO CanRE Cloud Nine LLC, PW CO CanRE Walsenburg LLC, PW CanRE OK Vinita LLC, PW CO CanRE JKL LLC, PW MI CanRE Marengo LLC, PW CanRE Holdings LLC, and PW MillPro NE LLC.
Historically, the Trust’s revenue has been concentrated to a relatively limited number of investments, industries and lessees. As the Trust grows, its portfolio may remain concentrated in a limited number of investments. During the three months ended March 31, 2022, Power REIT collected approximately 66% of its consolidated revenue from five properties. The tenants are NorthEast Kind Assets, LLC (“Sweet Dirt”), Fiore Management LLC (“Canndescent”), Norfolk Southern Railway, Walsenburg Cannabis LLC and Regulus Solar, LLC which represent 19%, 14%, 12%, 11% and 10% of consolidated revenue respectively.
We are exposed to risks inherent in this sort of investment concentration. Financial difficulty or poor business performance on the part of any single lessee or a default on any single lease will expose us to a greater risk of loss than would be the case if we were more diversified and holding numerous investments, and the underperformance or non-performance of any of its assets may severely adversely affect our financial condition and results from operations. Our lessees could seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of our lease agreements and could cause a reduction in our cash flows. Furthermore, we intend to concentrate our investment activities in the CEA sector, which will subject us to more risks than if we were diversified across many sectors. At times, the performance of the infrastructure sector may lag the performance of other sectors or the broader market as a whole.
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If our acquisitions or our overall business performance fail to meet expectations, the amount of cash available to us to pay dividends may decrease and we could default on our loans, which are secured by collateral in our properties and assets.
We may not be able to achieve operating results that will allow us to pay dividends at a specific level or to increase the amount of these dividends from time to time. Also, restrictions and provisions in any credit facilities we enter into or any debt securities we issue may limit our ability to pay dividends. We cannot assure you that you will receive dividends at a particular time, or at a particular level, or at all.
PWRS, one of our subsidiaries, entered into the 2015 PWRS Loan Agreement (as defined below) that is secured by all of PWRS’ interest in the land and intangibles. As of March 31, 2022, the balance of the 2015 PWRS Loan was approximately $7,801,000 (net of unamortized debt costs of approximately $275,000). PWSS, one of our subsidiaries, borrowed $750,000 from a regional bank which loan is secured by PWSS’ real estate assets and is secured by a parent guarantee from the Trust. The balance of the PWSS term loan as of March 31, 2022 is approximately $514,000 (net of approximately $3,400 of capitalized debt costs which are being amortized over the life of the financing). PWV, one of our subsidiaries, entered into a Loan Agreement in the amount of $15,500,000 that is secured by our equity interest in our subsidiary PWV which is pledged as collateral. The balance of the loan as of March 31, 2022 is $14,761,000 (net of approximately $291,000 of capitalized debt costs). Power REIT entered into a Debt Facility with initial availability of $20 million. The facility is non-recourse to Power REIT and is structured without initial collateral but has springing liens to provide security against a significant number of Power REIT CEA portfolio properties in the event of default. As of March 31, 2022, $11,500,000 was drawn on the Debt Facility. If we should fail to generate sufficient revenue to pay our outstanding secured debt obligations, the lenders could foreclose on the security pledged. In addition, Maryland law prohibits the payment of dividends if we are unable to pay our debts as they come due.
The issuance of securities with claims that are senior to those of our common shares, including our Series A Preferred Stock, may limit or prevent us from paying dividends on its common shares. There is no limitation on our ability to issue securities senior to the Trust’s common shares or incur indebtedness.
Our common shares are equity interests that rank junior to our indebtedness and other non-equity claims with respect to assets available to satisfy claims against us, and junior to our preferred securities that by their terms rank senior to our common shares in our capital structure, including our Series A Preferred Stock. As of March 31, 2022, we had outstanding debt in the principal amount of $35.2 million and had issued approximately $8.5 million of our Series A Preferred Stock. This debt and these preferred securities rank senior to the Trust’s common shares in our capital structure. We expect that in due course we may incur more debt, and issue additional preferred securities as we pursue our business strategy.
In the case of indebtedness, specified amounts of principal and interest are customarily payable on specified due dates. In the case of preferred securities, such as our Series A Preferred Stock, holders are provided with a senior claim to distributions, according to the specific terms of the securities. In contrast, however, in the case of common shares, dividends are payable only when, as and if declared by the Trust’s board of trustees and depend on, among other things, the Trust’s results of operations, financial condition, debt service requirements, obligations to pay distributions to holders of preferred securities, such as the Series A Preferred Stock, other cash needs and any other factors that the board of trustees may deem relevant or that they are required to consider as a matter of law. The incurrence by the Trust of additional debt, and the issuance by the Trust of additional preferred securities, may limit or eliminate the amounts available to the Trust to pay dividends on our Series A Preferred Stock and common shares.
From time to time, our management team may own interests in our lessees or other counterparties, and may thereby have interests that conflict or appear to conflict with the Trust’s interests.
On occasion, our management may have financial interests that conflict, or appear to conflict with the Trust’s interests. For example, as of March 31, 2022 four of Power REIT’s properties are leased by tenants in which Millennium Sustainable Ventures Corp., formerly Millennium Investment & Acquisition Company (ticker:MILC) has controlling interests. 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 our May 21, 2021, June 11, 2021, and September 3, 2021 acquisitions and a food crop cultivation project in Nebraska related to our March 31, 2022 acquisition. Total rental income recognized for the three months ended March 31, 2022 from the affiliated tenants in Colorado, Oklahoma, Michigan and Nebraska was $212,376, $125,640, $0 and $0, respectively. Although our Declaration of Trust permits this type of business relationship and a majority of our disinterested trustees must approve, and in those instances did approve, Power REIT’s involvement in such transactions, in any such circumstance, there may be conflicts of interest between Power REIT on one hand, and MILC, Mr. Lesser and his affiliates and interests on the other hand, and such conflicts may be unfavorable to us.
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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.
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.
| 24 |
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.
Item 6. Exhibits.
Exhibit Number |
Exhibit Title | |
3.1 |
||
3.2 |
||
| 3.3 | ||
Exhibit 10.43 |
||
Exhibit 10.44 |
||
Exhibit 10.45* |
Second Lease Amendment related to Walsenburg Cannabis LLC filed herewith. | |
| Exhibit 31.1 | Section 302 Certification for David H. Lesser | |
| Exhibit 32.1 | Section 906 Certification for David H. Lesser |
| 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) |
| 25 |
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 March 31, 2022 to be signed on its behalf by the undersigned thereunto duly authorized.
| POWER REIT | |
| /s/ David H. Lesser | |
| David H. Lesser | |
| Chairman, CEO, CFO, Secretary and Treasurer | |
| Date: May 9, 2022 |
| 26 |
Exhibit 10.45
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, David H. Lesser, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q (this “Report”) of the registrant, Power REIT;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: May 9, 2022 | /s/ David H. Lesser |
| David H. Lesser | |
| Chairman of the Board, CEO, CFO, Secretary and Treasurer | |
| (Principal Executive Officer and Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
In connection with the quarterly report of Power REIT (the “registrant”) on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David H. Lesser, Chairman of the Board, Chief Executive Officer, Secretary and Treasurer, certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant.
| /s/ David H. Lesser | |
| David H. Lesser | |
| Chairman of the Board, CEO, CFO, Secretary and Treasurer | |
| (Principal Executive Officer and Principal Financial Officer) | |
| Date: May 9, 2022 |
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