Notes
to Unaudited Consolidated Financial Statements
1
– GENERAL INFORMATION
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.
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 for the fiscal year ended December 31, 2022 filed with the SEC on March 31, 2023.
The
Trust is structured as a holding company and owns its assets through twenty-four 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. As of March 31, 2023, the Trust’s
assets consisted of approximately 112 miles of railroad infrastructure and related real estate which is owned by its subsidiary Pittsburgh
& West Virginia Railroad (“P&WV”), approximately 501 acres of fee simple land leased to a number of utility scale
solar power generating projects with an aggregate generating capacity of approximately 88 Megawatts (“MW”) and approximately
263 acres of land with approximately 2,211,000 square feet of existing or under construction CEA properties in the form of
greenhouses.
On
January 6, 2023, a wholly owned subsidiary of Power REIT, sold its interest in five ground leases related to utility scale solar farms
located in Tulare County, California for gross proceeds of $2,500,000. The purchaser is an unaffiliated third party and the price was
established based on an arm’s length negotiation. The properties were acquired by Power REIT in 2013 for $1,550,000.
During
the three months ended March 31, 2023, the Trust accrued a quarterly dividend of approximately $163,000 ($0.484375 per share per quarter)
on Power REIT’s 7.75% Series A Cumulative Redeemable Perpetual Preferred Stock.
The
Trust has elected to be treated for tax purposes as a REIT, which means that it is exempt from U.S. federal income tax if a sufficient
portion of its annual income is distributed to its shareholders, and if certain other requirements are met. In order for the Trust to
maintain its REIT qualification, at least 90% of its ordinary taxable annual income must be distributed to shareholders. As of December
31, 2021, the last tax return completed to date, the Trust has a net operating loss of $24.8 million, which may reduce or eliminate this
requirement.
2
– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The
Trust considers all highly liquid investments with original maturity of three months or less to be cash equivalents. Power REIT places
its cash and cash equivalents with high-credit quality financial institutions; however, amounts are not insured or guaranteed by the
FDIC. Amounts included in restricted cash represents funds held by the Trust related to debt service payment reserve required by the
Debt Facility. See Note 5 for further discussion of the debt service payment reserve requirement. The following table provides a reconciliation
of the Trust’s cash and cash equivalents and restricted cash that sums to the total of those amounts at the end of the periods
presented on the Trust’s accompanying Consolidated Statements of Cash Flow:
SCHEDULE
OF CONSOLIDATED STATEMENTS OF CASH FLOWS
| | |
March 31, 2023 | | |
December 31, 2022 | |
| | |
| | |
| |
| Cash and cash equivalents | |
$ | 4,306,664 | | |
$ | 2,847,871 | |
| Restricted cash | |
| 1,000,000 | | |
| 1,000,000 | |
| Cash and cash equivalents and restricted cash | |
$ | 5,306,664 | | |
$ | 3,847,871 | |
Basis
of Presentation
These
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”).
Principles
of Consolidation
The
accompanying consolidated financial statements include Power REIT and its wholly-owned subsidiaries. All intercompany balances have been
eliminated in consolidation.
Income
(Loss) per Common Share
Basic
net income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income (loss) per common share is computed similar to basic net income (loss) 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.
The
following table sets forth the computation of basic and diluted Income (loss) per share:
SCHEDULE
OF COMPUTATION OF BASIC AND DILUTED INCOME PER COMMON SHARE
| | |
2023 | | |
2022 | |
| | |
Three Months Ended | |
| | |
March 31, | |
| | |
2023 | | |
2022 | |
| | |
| | |
| |
| Numerator: | |
| | | |
| | |
| | |
| | | |
| | |
| Net income (loss) | |
$ | (339,046 | ) | |
$ | 997,880 | |
| Preferred Stock Dividends | |
| (163,207 | ) | |
| (163,207 | ) |
| Numerator for basic and diluted EPS - income (loss) available to common shareholders | |
$ | (502,253 | ) | |
$ | 834,673 | |
| | |
| | | |
| | |
| Denominator: | |
| | | |
| | |
| Denominator for basic and diluted EPS - Weighted average shares | |
| 3,389,661 | | |
| 3,367,531 | |
| | |
| | | |
| | |
| Basic and diluted income (loss) per common share | |
$ | (0.15 | ) | |
$ | 0.25 | |
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, the Trust acquired one property and the acquisition is accounted for as an asset acquisition. There were no
acquisitions during the three months ended March 31, 2023. 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 evaluates 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. |
| |
● |
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 20
years for greenhouses and 39
years for auxiliary buildings, except for PW CA Canndescent, LLC which was determined the buildings have a useful life of 37
years. For each of the three months ended March 31, 2023 and 2022, approximately $604,700
and $288,500
depreciation expense was recorded, respectively.
Assets
Held for Sale
Assets
held for sale are measured at the lower of their carrying amount or estimated fair value less cost to sell. As of March 31, 2023 and
December 31, 2022, the Trust has three properties that are considered assets held for sale. See Note 6 for discussion of our assets
held for sale.
Impairment
of Long-Lived Assets
Real
estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” A property to
be held and used is considered impaired only if management’s estimate of the aggregate future cash flows, less estimated capital
expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value of the property.
This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects
of demand, competition and other factors.
If
there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated
capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider
a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived
asset are under consideration or when a range of possible values is estimated.
The
determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the
balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in
the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether
the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value
of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the
property.
Assessment
of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be
able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of
such costs. There is no impairment of long-lived assets during the three months ended March 31, 2023 and 2022.
Revenue
Recognition
The
Railroad Lease (“P&WV 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, 2023 and 2022, the Trust wrote
off a net amount of approximately $0 and $218,000, respectively, in straight-line rent receivable against rental income based on its
current assessment of collecting all remaining contractual rent on the greenhouse property leases. These tenants rent payments will be
recorded as rental revenue on a cash basis. Expenses for which tenants are contractually obligated to pay, such as maintenance, property
taxes and insurance expenses are not reflected in the Trust’s consolidated financial statements unless paid by the Trust.
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 $237,000, which was being amortized over a 24.6-year period prior to its sale during the first quarter
of 2023. For each of the three months ended March 31, 2023 and 2022, approximately $0 and $2,400 of the intangibles were amortized.
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 $4,714,000, which is amortized over a 20.7-year period. For each of the three months
ended March 31, 2023 and 2022, approximately $56,900 of the intangibles was amortized.
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 $808,000, which was to be amortized over a 4.5-year period.
For the three months ended March 31, 2023 and 2022, approximately $0 and $44,900 of amortization expense was recognized. A below-market
lease intangible liability was recorded upon acquisition in the amount of approximately $179,000 and was to be amortized over a 4.5-year
period. Addition to revenue for the amortization of the liability in the amount of approximately $0 and $9,900 was recognized for the
three months ended March 31, 2023, and 2022, respectively. The lease intangibles for PW Canndescent were fully impaired during the last quarter of 2022 based upon tenant default.
Intangible
assets are evaluated whenever events or circumstances indicate the carrying value of these assets may not be recoverable. There were
no impairment charges recorded for the three months ended March 31, 2023, and 2022.
The
following table provides a summary of the Intangible Assets and Liabilities:
SCHEDULE
OF INTANGIBLE ASSETS
| | |
For the Three Months Ended March 31, 2023 | |
| | |
Cost | | |
Accumulated Amortization
Through
12/31/22 | | |
Accumulated Amortization
1/1/23 – 3/31/23 | | |
Net Book Value | |
| | |
| | | |
| | | |
| | | |
| | |
| Asset Intangibles – PWRS | |
$ | 4,713,548 | | |
$ | 1,981,639 | | |
$ | 56,872 | | |
$ | 2,675,037 | |
The
following table provides a summary of the current estimate of future amortization of Intangible Assets for the subsequent years ending
December 31:
SCHEDULE
OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
| | |
| | |
| 2023 (9 months remaining) | |
$ | 170,616 | |
| 2024 | |
$ | 227,488 | |
| 2025 | |
$ | 227,488 | |
| 2026 | |
$ | 227,488 | |
| 2027 | |
$ | 227,488 | |
| Thereafter | |
| 1,594,469 | |
| Total | |
$ | 2,675,037 | |
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 $9,150,000, assuming an implicit interest rate of 10%.
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. |
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, 2023 and December 31, 2022.
3 – GOING CONCERN
The Trust’s objectives when managing its capital
are to ensure that there are adequate capital resources to safeguard the Trust’s ability to continue operating and maintain adequate
levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders. Our
management evaluates whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to
continue as a going concern within one year after the date that the financial statements are issued.
For the quarter ended March 31, 2023, the Trust determined
that there was substantial doubt as to its ability to continue as a going concern as a result of net losses incurred, expected reduced
revenue and increased property maintenance expenses. As of March 31, 2023, the Trust had approximately $4.3 million of non-restricted
cash available and with the potential sale of certain assets, we believe these resources will be sufficient to fund our operations and
commitments. The focus on selling properties, the potential to enter into new leases and improve collections from existing tenants and
the potential to raise capital in the form of debt or equity, should alleviate the substantial doubt about the Trust’s ability
to continue as a going concern. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity and the
failure to do so could negatively impact our future operations.
4
– ACQUISITION AND DISPOSITION
2023
Disposition
On
January 6, 2023, a wholly owned subsidiary of Power REIT, sold its interest in five ground leases related to utility scale solar farms
located in Tulare County, California for gross proceeds of $2,500,000. The purchaser is an unaffiliated third party and the price was
established based on an arm’s length negotiation. The properties were acquired by Power REIT in 2013 for $1,550,000 and recognized
a gain on sale of approximately $1,040,000.
SCHEDULE
OF FAIR VALUE OF ASSETS DISPOSITION
| | |
| | |
| Land | |
| 1,312,529 | |
| Acquired lease intangible assets | |
| 237,471 | |
| Total real estate investments | |
| 1,550,000 | |
| Less acquired lease intangible amortization | |
| (91,349 | ) |
| Net book value of property upon sale | |
| 1,458,651 | |
2022
Acquisitions
On
March 31, 2022, Power REIT completed its first acquisition with the focus of cultivation of food crops, through a newly formed wholly
owned indirect subsidiary, PW MillPro NE LLC, (“PW MillPro”), and acquired a 1,121,513 square foot greenhouse cultivation
facility (the “MillPro Facility”) on an approximately 86-acre property and a separate approximately 4.88-acre property
with a 21-room employee housing building (the “Housing Facility”) for $9,350,000 and closing costs of approximately
$91,000 located in O’Neill, Nebraska. As part of the transaction, the Trust agreed to fund $534,430 to upgrade the facility
but as of December 31, 2022, $0 construction in progress has been funded, and the tenant has ceased operations at the property.
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 when acquired:
SCHEDULE OF FAIR VALUE OF ASSETS ACQUIRED
| | |
Greenhouse | | |
Housing Facility | |
| Land | |
$ | 344,000 | | |
$ | 19,520 | |
| Assets subject to depreciation: | |
| | | |
| | |
| Improvements (Greenhouses / Processing Facilities) | |
| 8,794,445 | | |
| 283,399 | |
| | |
| | | |
| | |
| Total Assets Acquired | |
$ | 9,138,445 | | |
$ | 302,919 | |
5
– 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 5 and 99 years. Payments from the
Trust’s leases are recognized on a straight-line basis over the terms of the respective leases or
on a cash basis for tenants with collectability issues. During the three months ended March 31, 2023 and 2022, the Trust wrote
off a net amount of $0 and approximately $218,000, respectively, in straight-line rent receivable against rental income. Total revenue
from its leases recognized for the three months ended March 31, 2023 and 2022 is approximately $923,000 and $1,986,000, respectively.
Due
to significant price compression in the wholesale cannabis market, many of our cannabis related tenants are currently experiencing financial
challenges including an inability to pay rent. The Trust has offered certain of its cannabis tenants’ relief by amending leases
whereby monthly cash payments are restructured over the course of the lease to lower near term rent payments and increase rent payments
in the future.
Historically,
the Trust’s revenue has been concentrated to a relatively limited number of investments, industries and lessees. During the three
months ended March 31, 2023, Power REIT collected approximately 92% of its consolidated revenue from three properties. The tenants were
NorthEast Kind Assets, LLC (“Sweet Dirt”), Norfolk Southern Railway, and Regulus Solar, LLC which represent 46%, 25% and
21% of consolidated revenue respectively. Comparatively, during the three months ended March 31, 2022, Power REIT collected approximately 66%
of its consolidated revenue from five properties. The tenants were 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.
The
following is a schedule by years of minimum future rentals on non-cancelable operating leases as of March 31, 2023 for assets and assets
held for sale where revenue recognition is considered on a straight-line basis:
SCHEDULE
OF MINIMUM FUTURE RENTALS ON NON- CANCELABLE OPERATION LEASES
| | |
Assets | | |
Assets Held for Sale | |
| 2023 (9 months left) | |
$ | 764,960 | | |
$ | 2,877,530 | |
| 2024 | |
| 894,312 | | |
| 2,657,942 | |
| 2025 | |
| 903,077 | | |
| 1,700,544 | |
| 2026 | |
| 912,192 | | |
| 1,252,473 | |
| 2027 | |
| 921,265 | | |
| 1,290,047 | |
| Thereafter | |
| 6,545,296 | | |
| 19,641,517 | |
| Total | |
$ | 10,941,102 | | |
$ | 29,420,053 | |
6
– 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 9 years remaining. The Municipal Debt has a simple interest
rate of 5.0% that is paid annually, due on February 1 of each year. The balance of the Municipal Debt as of March 31, 2023 and December
31, 2022 is approximately $51,000 and $58,000 respectively.
In
July 2013, PWSS borrowed $750,000 from a regional bank (the “PWSS Term Loan”). The PWSS Term Loan carries a fixed interest
rate of 5.0% for a term of 10 years and amortizes based on a 20-year principal amortization schedule. The loan is secured by PWSS’
real estate assets and a parent guarantee from the Trust. The balance of the PWSS Term Loan as of March 31, 2023 and December 31, 2022
is approximately $482,000 (net of approximately $700 of capitalized debt costs)
and $490,000 (net of approximately $1,400 of capitalized debt costs), respectively.
On
November 6, 2015, PWRS entered into a loan agreement (the “2015 PWRS Loan Agreement”) with a certain lender for $10,150,000
(the “2015 PWRS Loan”). The 2015 PWRS Loan is secured by land and intangibles owned by PWRS. PWRS issued a note to the benefit
of the lender dated November 6, 2015 with a maturity date of October 14, 2034 and a 4.34% interest rate. As of March 31, 2023 and December
31, 2022, the balance of the 2015 PWRS Loan was approximately $7,386,000 (net of unamortized debt costs of approximately $252,000) and
$7,393,000 (net of unamortized debt costs of approximately $258,000), respectively.
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 $15,500,000 (the “PW PWV Loan”). The PW PWV Loan is secured
by pledge of PW PWV’s equity interest in P&WV, its interest in the Railroad Lease and a security interest in a deposit account
(the “Deposit Account”) pursuant to a Deposit Account Control Agreement dated November 25, 2019 into which the P&WV rental
proceeds is deposited. Pursuant to the Deposit Account Control Agreement, P&WV has instructed its bank to transfer all monies deposited
in the Deposit Account to the escrow agent as a dividend/distribution payment pursuant to the terms of the PW PWV Loan Agreement. The
PW PWV Loan is evidenced by a note issued by PW PWV to the benefit of the lender for $15,500,000, with a fixed interest rate of 4.62%
and fully amortizes over the life of the financing which matures in 2054 (35 years). The balance of the loan as of March 31, 2023 and
December 31, 2022 is $14,565,000 (net of approximately $282,000 of capitalized debt costs) and $14,615,000 (net of approximately $285,000
of capitalized debt costs).
On
December 21, 2021, Power REIT entered into a debt facility with initial availability of $20 million (the “Debt Facility”).
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. The Debt Facility has a 12 month draw period and
then converts to a term loan that is fully amortizing over five years. The interest rate on the Debt Facility was 5.52% and throughout
the term of the loan, a debt service coverage ratio of equal to or greater than 2.00 to 1.00 must be maintained. On October 28, 2022,
the terms of the Debt Facility were amended such that the amortization period was extended from 5 years to 10 years for the calculation
of debt service coverage ratio and a 6-month debt service payment reserve requirement of $1 million was established. On March 13,
2023 the Debt Facility entered into an additional modification of which the terms are summarized as follows:
| - |
The total commitment is reduced from $20 million to $16 million. |
| - |
The interest rate is changed to the greater of: (i) 1% above
the Prime rate and (ii) 8.75%. |
| - |
Monthly payments on the Debt Facility will be interest only
until maturity. |
| - | A
portion of the proceeds from the sale of assets within the Borrowing Base for the Debt Facility
will be required to pay the outstanding loan amount. |
| - |
The maturity date of the Debt Facility is changed to December
21, 2025. |
| - | The
Debt Service Coverage ratio will be 1.50 to 1.00 and the test will be performed on an annual
basis and is eliminated until the calendar year 2024. |
| - | The
definition of assets included in the Borrowing Base for the Debt Facility no longer eliminates
assets where tenants are in default for failure to make timely rent payments. |
| - |
An agreed upon minimum liquidity amount shall be maintained
in the amount of $1 million. |
| - |
A $160,000 fee will be charged by the bank for the modification. |
As
of March 31, 2023, $16,000,000 has
been drawn against this Debt Facility. Debt issuance expenses of approximately $0
and $44,000
have been capitalized during the three months
ended March 31, 2023 and 2022, respectively. Amortization of approximately $13,000
and $13,400
has been recognized for the three months ended
March 31, 2023 and 2022, respectively and approximately $46,000
deferred debt issuance costs were re-classed as contra liability upon the loan commitment reduction for the three months ended
March 31, 2023; approximately $176,000
deferred debt issuance costs were re-classed as contra liability upon the loan draw for the three months ended March 31, 2022.
The balance of the loan as of March 31, 2023 and December 31, 2022 is approximately $15,755,000
(net of approximately $245,000
of unamortized debt costs) and approximately $15,735,000
(net of approximately $265,000
of unamortized debt costs). During the three months ended March 31, 2023, the Trust also recognized $160,000 loan modification
expense in connection with the March 13, 2023 modification.
The Trust is in compliance of all loan covenants as of March 31,
2023.
The
amount of principal payments remaining on Power REIT’s long-term debt as of March 31, 2023 including the modified repayment schedule
for the Debt Facility is as follows:
SCHEDULE
OF LONG TERM DEBT
| | |
| | |
| 2023 (9 months remaining) | |
| 1,088,346 | |
| 2024 | |
| 715,777 | |
| 2025 | |
| 16,755,634 | |
| 2026 | |
| 797,628 | |
| 2027 | |
| 841,452 | |
| Thereafter | |
| 18,820,754 | |
| Long term debt | |
$ | 39,019,591 | |
7
– ASSET HELD FOR SALE
The
Trust has aggregated and classified the assets and liabilities of three properties (Canndescent, Walsenburg and Sweet Dirt) as held
for sale in our Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022. The assets and liabilities of assets held for sale were as follows:
SCHEDULE
OF ASSETS AND LIABILITIES OF ASSETS HELD FOR SALE
| | |
| | |
| |
| | |
March 31, 2023 | | |
December 31, 2022 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| Land | |
| 1,175,148 | | |
| 2,487,677 | |
| Greenhouse cultivation and processing facilities, net of accumulated depreciation | |
| 12,542,351 | | |
| 12,542,351 | |
| Intangible lease asset, net of accumulated amortization | |
| - | | |
| 146,121 | |
| Accounts Receivable | |
| 252 | | |
| - | |
| Deferred rent receivable | |
| 399,284 | | |
| 327,923 | |
| TOTAL ASSETS – Held for sale | |
| 14,117,035 | | |
| 15,504,072 | |
| | |
| | | |
| | |
| LIABILITIES | |
| | | |
| | |
| Accounts payable | |
| 71,502 | | |
| 143,827 | |
| Tenant security deposits | |
| 537,000 | | |
| 537,000 | |
| Prepaid rent | |
| - | | |
| 37,161 | |
| Accrued Property Tax | |
| 105,770 | | |
| - | |
| TOTAL LIABILITIES – Held for sale | |
| 714,272 | | |
| 717,988 | |
On
January 27, 2023, PW SD and Sweet Dirt entered into a Purchase and Sale Agreement to sell the property leased to Sweet Dirt for total
consideration of $7,037,000 which has not closed as of March 31, 2023 which was the deadline. On March 31, 2023, the Sweet Dirt
lease was amended to restructure the timing of rent payments but maintain the same overall yield. On March 31, 2023, the Purchase and
Sale Agreement was amended to allow for a 60-day extension for closing and the purchaser provided a $300,000 non-refundable deposit.
There can be no assurance as to when or if the sale will close.
8
– EQUITY AND LONG-TERM COMPENSATION
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, 2023, the aggregate number of shares of Common
Stock that may be issued pursuant to outstanding awards is currently 150,917 which is subject to adjustment per the Plan.
Summary
of Stock Based Compensation Activity – Options
On
July 15, 2022, the Trust granted non-qualified stock options (“options”) to acquire 205,000 shares of common stock at a price
of $13.44 to its independent trustees, officers and an employee. The term of each option is 10 years. The options vest over three years
as follows: in a series of thirty-six (36) equal monthly installments measured from the Vesting Commencement Date on the same date of
the month as the Vesting Commencement Date which is August 1, 2022.
The
Trust accounts for share-based payments using the fair value method. The Trust recognizes all share-based payments in our financial statements
based on their grant date fair values and market closing price, calculated using the Black-Scholes option valuation model.
The
following assumptions were made to estimate fair value:
SCHEDULE
OF STOCK BASED COMPENSATION VALUATION ASSUMPTION OF ACTIVITY OPTIONS
| Expected Volatility | |
| 63 | % |
| Expected Dividend Yield | |
| 0 | % |
| Expected Term (in years) | |
| 5.8 | |
| Risk Free Rate | |
| 3.05 | % |
| Estimate of Forfeiture Rate | |
| 0 | % |
The
Trust uses historical data to estimate dividend yield and volatility and the “simplified method” as described in the SEC
Staff Accounting Bulletin #110 to determine the expected term of the option grants. The risk-free interest rate for the expected term
of the options is based on the U.S. treasury yield curve on the grant date. The Trust does not have historical data of forfeiture and
used a 0% forfeiture rate in calculating unrecognized share-based compensation expense and will account for forfeitures as they occur.
On January 31, 2023, 6,250 options were forfeited by an employee who is no longer employed by the Trust.
The
summary of stock-based compensation activity for the three months ended March 31, 2023, with respect to the Trust’s stock options,
is as follows:
Summary
of Activity – Options
SCHEDULE
OF SHARE BASED COMPENSATION STOCK OPTION ACTIVITY
| | |
| | |
Weighted | | |
| |
| | |
Number of | | |
Average | | |
Aggregate | |
| | |
Options | | |
Exercise Price | | |
Intrinsic Value | |
| Balance as of December 31, 2022 | |
| 205,000 | | |
$ | 13.44 | | |
| - | |
| Options Forfeited | |
| (6,250 | ) | |
| 13.44 | | |
| | |
| Balance as of March 31, 2023 | |
| 198,750 | | |
| 13.44 | | |
| - | |
| | |
| | | |
| | | |
| | |
| Options exercisable as of March 31, 2023 | |
| 45,139 | | |
$ | 13.44 | | |
| - | |
The
weighted average remaining term of the options is 9.29 years.
Summary
of Stock Based Compensation Activity – Restricted Stock
On
July 15, 2022, the Trust granted 22,400 shares of restricted stock to its officer (20,000 shares) and independent trustees (600 shares
each). The restricted stock vests over 36 months for the officer and quarterly over four quarters for the trustees and is valued based
on the market price of the common stock on the grant date.
The
summary of stock-based compensation activity for the three months ended March 31, 2023, with respect to the Trust’s restricted
stock, was as follows:
Summary
of Activity – Restricted Stock
SCHEDULE
OF SHARE BASED COMPENSATION RESTRICTED STOCK UNITS AWARD ACTIVITY
| | |
Number of | | |
Weighted | |
| | |
Shares of | | |
Average | |
| | |
Restricted | | |
Grant Date | |
| | |
Stock | | |
Fair Value | |
| Balance as of December 31, 2022 | |
| 28,182 | | |
| 21.64 | |
| Plan Awards | |
| - | | |
| - | |
| Restricted Stock Forfeited | |
| - | | |
| - | |
| Restricted Stock Vested | |
| (4,008 | ) | |
| 23.65 | |
| Balance as of March 31, 2023 | |
| 24,174 | | |
| 21.30 | |
Stock-based
Compensation
During
the three months ended March 31, 2023, the Trust recorded approximately $94,800
of non-cash expense related to restricted stock and approximately $132,000
of non-cash expense related to options granted compared to approximately $109,000
of non-cash expense related to restricted stock for the three months ended March 31, 2022. As of March 31, 2023, there was
approximately $515,000 of total unrecognized share-based compensation expense for restricted stock and approximately $1,224,000
of total unrecognized share-based expense for options, which expense will be recognized
through the third quarter of 2025. 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 three months ended March 31, 2023, the Trust accrued a total of approximately $163,000 of dividends to holders of Power REIT’s
Series A Preferred Stock.
9
– 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, provided the Trust and
its subsidiaries with office space at no cost. Effective September 2016, the Board of Trustees approved reimbursing an affiliate of HBP
$1,000 per
month for administrative and accounting support based on a conclusion that it would pay more for such support from a third party. The
amount paid has increased over time with the approval of the independent members of the Board of Trustees. Effective February 23, 2021,
the monthly amount paid to the affiliate of HBP increased to $4,000.
A total of only $8,000 was
paid pursuant to this arrangement during the first quarter ended March 31, 2022 compared to $0 paid
during the first quarter ended March 31, 2023. During the first quarter of 2022, the Trust eliminated this recurring related party transaction
and implemented payroll through Power REIT.
Power REIT has a
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 or affiliates, established
cannabis and food crop cultivation projects and entered into leases related to the Trust’s Oklahoma, Michigan and Nebraska properties
and MILC is a lender to the tenant of one of the Trust’s Colorado properties. As of March 31, 2023, these properties are currently
not operational and the Trust is evaluating alternatives related thereto. Total rental income recognized for the three months ended March
31, 2023 from the tenants that are affiliated with MILC in Colorado, Oklahoma, Michigan and Nebraska was $0
compared to total rental income recognized for
the three months ended March 31, 2022 from the affiliated tenants in Colorado, Oklahoma, Michigan and Nebraska of $212,376,
$125,640,
$0
and $0
respectively.
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. A portion of the property improvement
budget, amounting to $2,205,000,
will be supplied by IntelliGen Power Systems LLC which is owned by Hudson Bay Partners, LLC, an affiliate of David Lesser, Power REIT’s
Chairman and CEO. On January 23, 2023, the Sweet Dirt lease was amended to restructure the timing
of rent payments but maintain the same overall yield and eliminate the funding of remaining capital improvements for the cogeneration
project, which includes eliminating payments that were expected to be paid to Intelligen Power Systems, LLC, a related party. As
of March 31, 2023, $1,102,500
had been paid to IntelliGen Power Systems LLC
for equipment supplied.
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 Hudson Bay Partners, IntelliGen Power Systems and the lease transactions with subsidiaries and affiliates of MILC, the
independent trustees approved such arrangements having determined such arrangement are fair and reasonable and in the interest of
the Trust.
10
– CONTINGENCIES
The
Trust’s wholly-owned subsidiary, P&WV, is subject to various restrictions imposed by the Railroad Lease with NSC, including
restrictions on share and debt issuance, including guarantees.