Real Estate Execs On Maximizing Cannabis Capital Efficiency Via REIT Relationships

At the Benzinga Cannabis Capital Conference Thursday, Rob Sechrist, president of Pelorus Equity Group and co-manager of The Pelorus Fund, Anthony Coniglio, CEO of Newlake Capital Partners Inc NLCP and Robert Holmes, CEO of Viridescent Realty Trust participated in a panel discussion of the critical role real estate investment trusts (REITs) are playing in laying the foundation for the future cannabis industry.

Role Of REITs In Cannabis: Real estate isn’t always considered an exciting play on a high-growth market like cannabis, but most companies in the cannabis space are relying on real estate for cultivation or to operate retail dispensaries.

Related Link: Why MSO Uplistings Could Be The Next Major Cannabis Stock Catalyst

“In the cannabis industry, when you’re looking to actualize these licenses the largest asset that any of these operators, whether it be a dispensary, a marijuana-infused products kitchen or a cultivation, it’s going to be the real estate that’s behind it,” Coniglio said.

The U.S. cannabis industry is in a difficult position when it comes to raising capital due to the illegality of cannabis on a federal level, making real estate an even more critical part of the equation, he said. 

“As far as the REIT structure, it’s what we will be lending against or purchasing and leasing back to the entities so that they can raise a significant amount of capital so that they can operationalize their industry,” Coniglio said.

Capital Efficiency: Holmes said cannabis companies can utilize a REIT structure to improve capital efficiency.

“Using your hard-earned capital, your hard-raised capital, to invest in a hard asset like commercial real estate that has limited upside potential for your investors is a decision that you should be thinking as an operator long and hard about. I think investors are providing capital to cannabis operators so they can grow sales, so they can grow EBITDA and they can really get an exponential return on their business, not to have that capital tied up into a hard asset like real estate that has limited upside potential,” Holmes said.

Sechrist said the decision of whether or not to cash out a company’s equity in its real estate often has a lot to do with where a company is in its growth phase.

“If you’ve got enough cash flow that you don’t need to sell those assets, then you have different decisions to make,” he said.

What Cannabis REITs Are Looking For: Pelorus is focused exclusively on experienced cannabis operators to mitigate risk, Sechrist said. 

“Somebody that’s just starting up, that’s not going to work. Go lease a property first, prove the business model is working,” he said.

Coniglio said Newlake looks at a range of factors in assessing potential cannabis partners.

“We do look at the whole package, collateral probably being the largest [factor]. The second largest is going to be the experience of the team,” Coniglio said.

Holmes said Viridescent has to be extremely comfortable with a potential tenant given the long-term relationships they establish.

He said they prioritize portfolio diversification, the ability of the business to raise capital, the positioning and flexibility of the property itself and properties in limited licensing jurisdictions.

“These jurisdictions allow us to get much more comfortable because we know that that property’s best use is cannabis, particularly on the cultivation side. In these limited licensing jurisdictions, the likelihood of the use being cannabis for a very long time will persist,” Holmes said.

To see more of this panel discussion or any of the other presentations at the Benzinga Cannabis Capital Conference, access on-demand video recordings of the event at this link.