The following discussion and analysis is based on, and should be read in
conjunction with, the Consolidated and Combined Consolidated Financial
Statements and the related notes thereto of the Trust as of and for the years
ended December 31, 2022 and December 31, 2021.
We are an internally managed 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. In 2019, we
expanded the focus of our real estate activities to include CEA properties in
the form of greenhouses in the United States. CEA is an innovative method of
growing plants that involves creating optimized growing environments for a given
crop indoors. Power REIT is focused on CEA in the form of a greenhouse which use
approximately 70% less energy than indoor growing, 95% less water usage than
outdoor growing, and does not have any agricultural runoff of fertilizers or
pesticides. We believe greenhouse cultivation represents a sustainable solution
from both a business and environmental perspective. Certain of our greenhouse
properties are operated for the cultivation of cannabis by state-licensed
operators. During 2022, we acquired a greenhouse focused on the cultivation of
tomatoes. We typically enter into long-term "triple net" leases where our
tenants are responsible for all costs related to the property, including
insurance, taxes and maintenance.
As of December 31, 2022, the Trust's assets consisted of a total of
approximately 112 miles of railroad infrastructure plus branch lines and related
real estate, approximately 601 acres of fee simple land leased to seven utility
scale solar power generating projects with an aggregate generating capacity of
approximately 108 Megawatts ("MW"), and approximately 263 acres of land with
2,211,000 square feet of existing or under construction greenhouse/processing
space.
On March 31, 2022, Power REIT completed its first acquisition with the focus on
the cultivation of food crops, through a newly formed wholly owned 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. The MillPro
property is configured for the cultivation of tomatoes and during 2022 grew a
preliminary crop. Unfortunately, the market for tomatoes compressed and the
tenant was unable to meet its financial obligations. We remain optimistic that
we acquired this property at an attractive basis and that a new tenant can be
secured to put the facility back into operation in the future.
Our primary objective is to maximize the long-term value of the Trust for our
shareholders. To that end, our business goals are to obtain the best possible
rental income at our properties in order to maximize our cash flows, net
operating income, funds from operations, funds available for distribution to
shareholders and other operating measures and results, and ultimately to
maximize the values of our properties.
To achieve this primary goal, we have developed a business strategy focused on
increasing the values of our properties, and ultimately of the Trust, which
includes:
? Raising capital by monetizing the embedded value in our portfolio to enhance
our liquidity position and, as appropriate reducing debt levels to strengthen
our balance sheet;
? Selling off non-core properties and underperforming assets;
? Seeking to re-lease properties that are vacant or have non-performing tenants
?Raising the overall level of quality of our portfolio and of individual
properties in our portfolio;
? Improving the operating results of our properties; and
?Taking steps to position the Company for future growth opportunities.
Improving Our Balance Sheet by Reducing Debt and Leverage; Maintaining Liquidity
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Leverage
We continue to seek ways to reduce our leverage by improving our operating
performance and through a variety of other means available to us. These means
might include selling properties, raising capital or through other actions.
Liquidity
As of December 31, 2022, our consolidated balance sheet reflected $2.85 million
(after taking out $1million restricted cash) in cash and cash equivalents. We
believe that this amount and future net cash provided by operations, property
sales, and other sources of capital, should provide sufficient liquidity to meet
our liquidity requirements in the short term, including for one year from the
filing of this Annual Report.
Capital Recycling
In the later part of 2022, we commenced property reviews to establish a plan for
the portfolio and, if appropriate, will seek to dispose of properties that we do
not believe meet financial and strategic criteria given economic, market and
other circumstances. Disposing of these properties can enable us to redeploy our
capital to other uses, such as to repay debt, to reinvest in other real estate
assets and development and redevelopment projects, and for other corporate
purposes. Along these lines, in early 2023 we completed sales of assets for
total gross proceeds of $2.5 million (See Subsequent Events). We also have
several properties that we are marketing for sale and/or lease which have been
classified as "Assets Held for Sale."
Improving Our Portfolio
We are currently seeking to refine our property holdings by selling properties
and/or re-leasing them in an effort to improve the overall performance going
forward.
Taking Steps to Position the Company for Future Growth Opportunities
We are taking steps designed to position the Trust to create shareholder value.
In connection therewith, we have implemented processes designed to ensure strong
internal discipline in the use, harvesting and recycling of our capital, and
these processes will be applied in connection with seeking to reposition
properties.
We may continue to seek to acquire, in an opportunistic, selective and
disciplined manner, properties that have operating metrics that are better than
or equal to our existing portfolio averages, and that we believe have strong
potential for increased cash flows and appreciation in value. Taking advantage
of any acquisition opportunities would likely involve some use of debt or equity
capital. We will pursue transactions that we expect can meet the financial and
strategic criteria we apply, given economic, market and other circumstances. In
addition, we are exploring the potential to use our existing corporate structure
for strategic transactions including potentially merging assets or companies
with the Trust.
Results of Operations
Results of Operations for the Year ended December 31, 2022 as compared to the
year ended December 31, 2021
Our total revenue for the fiscal years 2022 and 2021 was $8,517,720 and
$8,457,914 respectively. Net loss attributed to common shares for the fiscal
year 2022 was $14,906,310 compared to net income attributed to common shares of
$4,491,656 for 2021. The difference between our 2022 and 2021 consolidated
results was principally attributable to an impairment expense in the amount of
$16,739,040 related to the challenges within the cannabis cultivation industry
and estimating a reduction of property values within our portfolio. Rental
income increased $210,311 as a result of converting rent recognition on
defaulted leases from a straight line to a cash basis which was offset with
decrease in rental income from related parties of $143,135. Other income
decreased by $7,370, depreciation expenses increased by $638,439, amortization
expense decreased by $27,929 and interest expense increased in the amount of
$618,100. The increase in general and administrative expense of $638,021 was
primarily due to an increase in payroll, audit and tax, and legal expenses. For
the fourth quarter, 2022, we started to incur property maintenance costs
including property tax accruals due to the tenants defaulting on leases and
ceasing operations at our properties which totaled $878,020.
Our expenses, other than dividend payments on our Series A Preferred Stock, are
for general and administrative ("G&A") expenses, which consist principally of
insurance, legal and other professional fees, consultant fees, NYSE American
listing fees, shareholder service company fees and auditing costs as well as
property related expenses that are not covered by tenants.
59
During 2022, revenue has been concentrated from certain tenants. For the fiscal
year ended 2022, Power REIT collected approximately 57% of its consolidated
revenue from four properties. The tenants are NorthEast Kind Assets, LLC ("Sweet
Dirt"), Fiore Management LLC ("Canndescent"), Norfolk Southern Railway and JAB
Industries, Ltd ("JAB"), which represent 22%, 10%, 11% and 14% of consolidated
revenue respectively. During the twelve months ended December 31, 2021, Power
REIT collected approximately 48% of its consolidated revenue from four
properties. The tenants are NorthEast Kind Assets, LLC ("Sweet Dirt"), Fiore
Management LLC ("Canndescent"), Norfolk Southern Railway and Regulus Solar LLC
which represented approximately 15%, 12%, 11% and 10% of consolidated revenue
respectively.
Liquidity and Capital Resources
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, proceeds received from borrowings, which may be secured by
liens on assets as well as proceeds from the sale of assets.
During 2021, we raised gross proceeds of approximately $36.7 million in proceeds
from a non-dilutive Rights Offering of our common shares and entered into a debt
financing agreement, as described below:
? On February 5, 2021, we closed our Rights Offering and raised gross proceeds of
$36,659,941 by issuing 1,383,394 common shares at the subscription price of
$26.50, pursuant to the exercise of rights issued to the holders of our common
shares of record on December 28, 2020.
On December 21, 2021, a wholly owned subsidiary of Power REIT entered into a
Debt Facility (the "Debt Facility") with initial availability of $20 million. On
March 13, 2023 we entered into a modification of the terms of the Debt Facility
which is 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.
- A $160,000 fee will be charged by the bank for the modification.
On January 6, 2023, we closed on the sale of an unencumbered portfolio of solar
ground leases for gross proceeds of $2.5 million (See Subsequent Events).
Cash Flows
Our cash and cash equivalents and restricted cash totaled $3,847,871 as of
December 31, 2022, an increase of $676,570 from December 31, 2021. During the
year ended December 31, 2022, the primary use of cash was for working capital
requirements and investment activities which was offset by proceeds from a new
long term debt facility.
During the year ended December 31, 2022, our net cash generated by operating
activities was $6,840,237. During the year ended December 31, 2021, the Trust's
net cash generated by operating activities was $8,000,559. The difference was
due to the decrease in net income generated by tenants defaulting on leases.
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During the year ended December 31, 2022, our net cash used in investing
activities was $20,955,110. During the year ended December 31, 2021, the Trust's
net cash used in investing activities was $42,097,290. The difference was due to
a decrease in the amount of acquisitions the Trust made in 2022 compared to
2021.
During the year ended December 31, 2022, our net cash generated in financing
activities was $14,791,443 which included $16,000,000 of proceeds from a new
debt facility, payments on long-term debt of $674,979, payment of debt issuance
costs of $43,958 and payments for dividend payments to the holders of our Series
A Preferred Stock of $489,620. During the year ended December 31, 2021, the
Trust's net cash used in financing activities was $31,666,206.
With the cash available as of December 31, 2022 and the sale and potential sale
of certain assets, 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 professional fees,
consultant fees, NYSE American listing fees, insurance, shareholder service
company fees and auditing costs as well as property related expenses that are
not covered by tenants.
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, proceeds received from borrowings, which may be secured by
liens on assets as well as proceeds from the sale of assets. Based on our leases
in place as of December 31, 2022, we anticipate generating approximately
$1,800,506 in cash rent excluding assets held for sale and approximately
$8,500,000 in sales of at least two properties, however there can be no
assurance that the properties will be sold or if sold that they will be at
favorable prices. At December 31, 2022, we owed debt in the principal amount of
$39,100,104, which has debt service due of $1,168,819 over the next twelve
months. We anticipate that our cash from operations and property sales should be
sufficient to support our operations and our debt service obligations; To the
extent we need to raise additional capital to meet our obligations, there can be
no assurance that financing will be available when needed on favorable terms.
Preferred Stock
During 2014, the Trust expanded its equity financing activities by offering a
series of preferred shares to the public. The Series A Preferred Stock ranks, as
to dividend rights and rights upon liquidation, dissolution or winding up,
senior to the Trust's common shares. Voting rights for holders of Series A
Preferred Stock exist only with respect to amendments to the Trust's charter
that materially and adversely affect the terms of the Series A Preferred Stock,
the authorization or issuance of equity securities that are senior to the Series
A Preferred Stock and, if the Trust fails to pay dividends on the Series A
Preferred Stock for six or more quarterly periods (whether or not consecutive),
the election of two additional trustees to our Board of Trustees. The Trust had
previously closed on the sale of approximately $3,492,000 of its Series A $25
Par Value Preferred Stock pursuant to a public offering prospectus supplement
dated January 23, 2014.
On January 7, 2021, the Trust filed Articles Supplementary with the State of
Maryland to classify an additional 1,500,000 unissued shares of beneficial
interest, par value $0.001 per share, 7.75% Series A Preferred Stock, such that
the Trust shall now have authorized an aggregate of 1,675,000 shares of Series A
Preferred Stock, all of which shall constitute a single series of Series A
Preferred Stock.
On February 3, 2021, as part of the closing for the Canndescent acquisition, the
Trust issued 192,308 shares of Power REIT's Series A Preferred Stock with a fair
value of $5,000,008 less $2,205 of costs.
The Series A Preferred Shares have no stated maturity, are not subject to any
sinking fund or mandatory redemption and will remain outstanding indefinitely
unless we redeem or otherwise repurchase them or they are converted.
Preferred Dividend Arrearages
As of December 31, 2022, the Trust has 336,944 aggregate outstanding shares of
Series A Preferred Stock of (par value $25.00 per share). During the fourth
quarter of 2022, the Trust did not declare a dividend on its Series A Preferred
Stock. Dividends on the Series A Preferred Shares are cumulative and therefore
will continue to accrue at an annual rate of $0.4844 per share per quarter. As
of December 31, 2022, the cumulative amount of unpaid dividends on our issued
and outstanding Series A Preferred Shares totaled approximately $163,000 or
$0.4844 per share.
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Borrowings
On December 31, 2012, as part of the Salisbury land acquisition, PWSS assumed
existing municipal financing ("Municipal Debt"). The Municipal Debt has
approximately 10 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 December 31, 2022 was approximately $58,000.
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 December 31, 2022 was
approximately $490,000 (net of approximately $1,400 of capitalized debt costs).
On November 6, 2015, PWRS entered into a loan agreement (the "2015 PWRS Loan
Agreement") with a 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. The balance of the PWRS Bonds as of December 31,
2022 was approximately $7,393,000 (net of approximately $258,000 of capitalized
debt costs).
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 are 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 December 31, 2022 was $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 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. Debt issuance expenses of approximately $275,000 were
capitalized at the origination of the loan and amortization of approximately
$53,000 has been recognized during the year ended December 31, 2022. As of
December 31, 2022, $16,000,000 has been drawn against this Debt Facility and is
outstanding compared to $0 outstanding at December 31, 2021.
Effective 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 was established.
On March 13, 2023 the terms of the Debt Facility were amended which is
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.
- A $160,000 fee will be charged by the bank for the modification.
62
The amount of principal payments remaining on Power REIT's long-term debt as of
December 31, 2022 is as follows:
Total Debt
2023 1,168,819
2024 715,777
2025 16,755,634
2026 797,628
2027 841,452
Thereafter 18,820,794
Long term debt $ 39,100,104
Critical Accounting Estimates
Critical accounting policies are those that require the application of
management's most difficult, subjective, or complex judgments, often because of
the need to make estimates about the effect of matters that are inherently
uncertain and that might change in subsequent periods. In preparing the
consolidated financial statements, management has made estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
consolidated financial statements, and the reported amounts of revenue and
expenses during the reporting periods. In preparing the consolidated financial
statements, management has utilized available information, including our past
history, industry standards and the current economic environment, among other
factors, in forming its estimates and judgments, giving due consideration to
materiality. Management has also considered events and changes in property,
market and economic conditions, estimated future cash flows from property
operations and the risk of loss on specific accounts or amounts in determining
its estimates and judgments. Actual results may differ from these estimates.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make significant judgments and
estimates to develop certain amounts reflected and disclosed. In many cases,
there are alternative policies or estimation techniques that could be used. We
regularly review the application of our accounting policies and evaluate the
appropriateness of the estimates that are required to be made in order to
prepare our consolidated financial statements. Typically, estimates may require
adjustments from time to time based on, among other things, changing
circumstances and new or better information.
The accounting policies that we consider to be our "critical accounting
policies" are those that we believe are either the most judgmental or involve
the selection or application of alternative accounting policies, and that in
each case are material to our consolidated financial statements. We believe that
our revenue recognition policies meet these criteria. These policies are as
follows:
Asset Impairment
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.
In 2022, we recorded approximately $16.7 million in non-cash impairment charges.
We did not record any noncash impairment charges on our long-lived assets in
2021. Any decline in the estimated fair values of our assets could result in
impairment charges in the future. It is possible that such impairments, if
required, could be material.
63
For further information, see Note 2 to the consolidated financial statements
appearing following Item 16 of this document, which is incorporated herein by
reference.
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. This
Annual Report contains supplemental financial measures that are not calculated
pursuant to U.S. GAAP, including the measure identified by us as Core FFO. 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. Core FFO is a non-GAAP financial
measure and should not be substituted for net income.
Core FFO: Management believes that Core FFO is a useful supplemental measure of
the Trust's operating performance. 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 the Trust's asset portfolio and
inappropriately affect the comparability of the Trust's period-over-period
performance. These items include non-recurring expenses, such as those incurred
in connection with litigation, 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. FFO does not include gains and losses on sales of operating real estate
assets or impairment write downs of depreciable real estate, which are included
in the determination of net loss in accordance with GAAP. Accordingly, FFO is
not a comprehensive measure of our operating cash flows. Therefore, management
uses Core FFO and defines it as net income excluding such items. Management
believes that, for the foregoing reasons, these adjustments to net income are
appropriate. The Trust believes that Core FFO is a useful supplemental measure
for the investing community to employ, including when comparing the Trust to
other REITs that disclose similarly adjusted FFO figures, and when analyzing
changes in the Trust's performance over time. Readers are cautioned that other
REITs may use different adjustments to their GAAP financial measures than we do,
and that as a result, the Trust's 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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CORE FUNDS FROM OPERATIONS (FFO)
Years ended December 31,
2022 2021
Revenue $ 8,517,720 $ 8,547,914
Net Income (Loss) $ (14,253,483 ) $ 5,144,490
Stock-Based Compensation 682,259 382,328
Interest Expense - Amortization of Debt Costs 87,430 35,106
Amortization of Intangible Lease Asset 371,804 399,733
Amortization of Intangible Lease Liability (29,776 ) (35,951 )
Depreciation on Land Improvements 1,505,470 867,031
Impairment Expense 16,739,040 -
Core FFO Available to Preferred and Common Stock 5,102,744 6,792,737
Preferred Stock Dividends (652,827 ) (652,834 )
Core FFO Available to Common Shares $ 4,449,917 $ 6,139,903
Weighted Average Shares Outstanding (basic) 3,377,676 3,178,215
Core FFO per Common Share 1.32 1.93
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POWER REIT 