Pelorus Fund Archives - Green Market Report

Debra BorchardtApril 25, 2022
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Cannabis investors have seen stock prices tumble even as cannabis companies report increasing sales. Green Market Report recently asked some leaders in the cannabis industry how they felt about the market in general despite the market pessimism.

Brandon Pollock, CEO and Co-founder of Theory Wellness

Theory Wellness, Inc. is an independently owned and operated vertically integrated cannabis brand. The company operates retail, cultivation, and product manufacturing across Massachusetts and Maine, including the cannabis-infused seltzer brand Hi5. 

  • Leading analysts have recently projected reduced short-term cannabis industry growth, with a less than optimistic outlook for federal reform. Do you agree with this projection?

From our view, no, we feel as optimistic as ever about the growth and future of regulated cannabis and have no concerns about the trajectory of the market. In our view, stock market prices are not a good indication of actual on-the-ground performance and the expectations of many independent operators. Especially on the East Coast, we’re expecting explosive growth in the next few years as New York, New Jersey, and Connecticut implements adult-use sales. On the Federal side, it’s only a matter of time before cannabis becomes legal, as it is one of the policies most supported by the American populace.

  • What may be causing the current market pessimism? 

Generally, it seems this pessimism has risen from the sluggishness of Federal reform coupled with the underperformance of publicly traded cannabis companies. We’ve seen multiple large-scale multi-state operators (MSOs) posting revenue misses or struggling with profitability. From our view, we are slightly surprised by how much the market seems to value Federal changes in law, as many organizations are not prepared to handle such a monumental shift in the first place, and many businesses ascribe significant value to the moats they build around themselves on a state-by-state basis – especially in markets with limited numbers of licenses. 

  •  Do you agree with analysts who are saying that the current landscape will help MSOs consolidate the industry? If so, what is the projected industry impact? 

We would generally disagree – many consolidation strategies and deals are based on using stock as currency, and with depressed stock prices and heightened uncertainty of the future, many independent operators will be wary of deals that may have looked attractive twelve months ago. The only exception may be increased activity from smaller publicly traded companies combining all stock transactions with larger counterparts.

  • When can we expect market projections to turn back around? Federal legalization prospects?

On a macro scale, both are contingent on one another. The larger MSOs betting big on legalization cast the most considerable shadow over the industry. Until legalization starts to loom, market forecasts may not brighten. However, we still believe that smaller independent operators in the industry might be running with a narrative contrary to the gloomy forecast surrounding the largest operators.

Andrew Thut, Chief Investment Officer at 4Front Ventures

Headquartered in Phoenix, AZ, 4Front Ventures Corp. (CSE: FFNT) (OTCQX: FFNTF) is a national, vertically integrated multi-state cannabis operator with operations in strategic medical and adult-use cannabis markets, including California, Illinois, Massachusetts, Michigan, and Washington. 

  • Leading analysts have recently projected reduced short-term cannabis industry growth, with a less than optimistic outlook for federal reform. Do you agree with this projection?

It’s true that MSOs and cannabis stocks, in general, have sold off over the last year, but there’s a bigger question here: are companies struggling from a business perspective? Right now, there is a risk-asset sell-off and overall market volatility. As such, growth stocks like those involving MSOs, for example, have been selling off. Perceptions around the larger cannabis markets have also been under pressure recently. Take sentiment around California as an example; challenges such as pricing pressures, oversupply, and the illicit market continue to affect confidence in the sector. We feel differently here at 4Front, and see the huge opportunity to take advantage of those same perceived challenges and have focused accordingly. Production of low-cost, high-end products with scale efficiencies is a proven 4Front strategy that will allow us to build real value in the largest cannabis market in the world, while challenging public perspective along the way. 

  • What may be causing the current market pessimism? 

Our view is that current market sentiment is due to SAFE banking and cannabis liberalization being stalled, temporarily we believe, at the federal level. Legalization and liberalization will be major steps forward, but at the end of the day, they won’t transform enough of the sector to prevent risk-asset sell-off; ultimately, strong and reputable companies will be the ones to do that. Meanwhile, we can’t just sit idly by and wait for wide-sweeping federal reforms to be enacted. When Biden won, there was a lot more optimism that such reforms would be enacted – but with a split Congress, intense party allegiances, and the unwillingness of politicians to work with their counterparts across the aisle, reform measures have stood in limbo. This has led to disillusionment among investors, which has further hindered industry momentum. Whether you’re talking about 4Front, the folks at Cresco, Trulieve or another top-performing MSO, we are all going to continue focusing on building robust businesses, optimizing our production processes, building consumer awareness and loyalty, and strengthening our fundamentals. 

  • Do you agree with analysts who are saying that the current landscape will help MSOs consolidate the industry? If so, what is the projected industry impact? 

We agree with those analysts who believe the current landscape will help MSOs consolidate the industry. Smaller companies with less capital and less efficient processes will benefit from being acquired by larger companies that have optimized production and scaling capabilities. In the case of 4Front, we feel the innovative automation processes we’ve developed in California at our state-of-the art Commerce facility could easily be applied to a broader portfolio and an even larger footprint, realizing nearly immediate value in a consolidated model. We know that other operators have similarly improved their processes, which will lead to further inevitable consolidation. Increased consolidation will bring greater efficiencies and innovation, which will ultimately benefit consumers as prices will be more affordable and there will be more refined, higher quality, consistent products on the market. 

  • When do we expect market projections to turn back around? Federal legalization prospects?

Even as the House just passed SAFE banking for the sixth time, it is yet again doubtful that the Senate will follow suit before the midterms. Without SAFE banking, US institutional investors are still locked out of the market. Their hands are tied. But on the flip side, this presents a huge opportunity for retail investors, who under normal circumstances would only hear about companies like 4Front after all institutional money has already flowed in.

I have spent a lot of time on the buy-side in the small-cap space, and what we’re seeing in U.S. cannabis is truly unique. No other industry has as many quality high-growth companies with solid fundamentals and sustained profitability with such low valuations. With that in perspective, investors’ concerns about the future of cannabis are a bit shortsighted. Investors need to focus on well-run, well-capitalized, promising cannabis companies with good long-term prospects, and then adopt a buy and hold strategy. Eventually, the wider market will care – and when it does, it will care a LOT. To get ahead, I think investors need to think about 4Front and the other MSOs as they would a business in any other sector: you’re buying a share of a business – is the business solid? At 4Front, we’re growing and doing it in a way that supports the bottom line; on top of this, investors should keep the following in mind: cannabis is a kicker that will provide a huge upside when inevitable regulatory reform passes.

Robert McEvoy, Vice President of Customer Success, Corporate Development, and Government Affairs at Agrify Corp.

Agrify Corp. is a rapidly growing developer of premium grow solutions for the indoor agriculture marketplace. 

  • Leading analysts have recently projected reduced short-term cannabis industry growth, with a less than optimistic outlook for federal reform. Do you agree with this projection?

The notion that cannabis outlooks are less than rosy is inconsistent with national acceptance perspectives, high-profile celebrity involvement, and increased M&A and investment activity. Looking ahead, more and more states are actively considering implementing adult-use sales, establishing medical programs, or expanding existing markets. Over the last year, New Jersey and New York have taken significant steps in launching adult-use programs projected to be multi-billion dollar markets for each state. States such as Ohio and Oklahoma have not only built robust medical industries but have created profitable single-state operators primed for expansion in and out of state. Further, the new wave momentum of purpose-built companies and products that focus on social equity, sustainable agriculture, and delighting an increasingly segmented customer base, is fostering a fertile environment for existing brands to be reborn, and providing new-to-world products an inclusive space to succeed.

  • What may be causing the current market pessimism? 

Short-term cannabis faced two impactful circumstances back-to-back over the last two years: a vaporizer crisis fueled by illicit products making consumers sick, and a global pandemic resulting in lockdowns and supply chain problems. That said, state regulators’ mistrust of unfamiliar vaporizer products was met with credible lab-based testing and transparency in operator quality control programs – each of which bolstered consumer confidence and highlighted bad actors, both legal and illegal. Counterfeit and cheap products have penetrated non-regulated consumer channels for centuries, so I can’t realistically call adverse reactions to carelessly made, non-tested illicit products with harmful additives an unforeseen circumstance. However, accurate and informative health and safety campaigns should have been carried out more responsibly, particularly by state agencies tasked with helping the public differentiate between safe, lab-tested products and non-compliant mystery oil. Regarding the pandemic, clearly its global presence and reach were unexpected – but beginning in February 2020, operators throughout the industry had a choice: either acknowledge and proactively plan for an unknown timeline of the virus’ impact, or continue business as usual with minimal adjustments, troubleshooting as time goes on. A large part of succeeding in this industry is accepting unpredictability and remaining operationally nimble.

  • Do you agree with analysts who are saying that the current landscape will help MSOs consolidate the industry? If so, what is the projected industry impact? 

Consolidation is an inevitability of any industry, no matter the commodity or service that is monetized. While MSO acquisitions will continue, so will the development of joint venture partnerships between single state operators creating rapid multi-state market share. There’s an increase in new state initiatives aiming to empower local residents, small to midsize businesses, and regionally popular brands through micro-licenses with future expansion capabilities and uncapped operator counts. In terms of industry impact, why should we think cannabis CPGs would be any different from the multitude of products currently produced by large and small companies alike? Ultimately, the customer is in control of where they spend their money and what they spend it on. The industry will continue to be shaped by operators who listen to their customer base in all aspects, from production practices to lifestyle identity. 

  • When can we expect market projections to turn back around? Federal legalization prospects?

My optimism has never left the market potentials and projections discussion. In fact, with brand licensing, white labeling, contract services, and expanded licensing categories to include onsite consumption and home delivery, more growth opportunities exist today than ever before. As for federal legalization, prospects have never been within industry grasp, and will not be any time soon. I think it is more likely that states with similar programs that share borders will build governmental coalitions to allow for interstate transport, shared resource allocation, and tax collection, placing consequent pressure on the federal government to act before the legislative and executive branches enact reform on their own.

Brooke Butler, VP of Partnerships, Simplifya

Headquartered in Denver, CO, Simplifya is the leading advanced technologies and software platform powering regulatory and operational compliance for owners, operators, insurers, law firms, municipalities, governments; regulatory bodies; and cannabis-related banking and financial institutions with remaining compliant under FinCEN Cannabis Banking Guidance. 

  • Leading analysts have recently projected reduced short-term cannabis industry growth, with a less than optimistic outlook for federal reform. Do you agree with this projection?

While certain parts of the cannabis industry may have experienced a downturn, others like our business saw steady to accelerated growth. There has certainly been disappointment and disillusionment over the Biden administration not enacting legalization at the federal level, but I expect more states to take legalization into their own hands, making federal reform less and less of a growth hindrance. Just because there is currently market volatility and risk-asset sell-off, this does not reflect the overall health of the cannabis sector. In fact, we expect to see continued growth as several key markets such as New York, New Jersey, New Mexico and more are in the process of getting their adult-use programs off the ground and running, increasing consumer access to legal cannabis. 

  • What may be causing the current market pessimism? 

There were high expectations after the 2020 national election that the incoming Biden administration would push for federal reform, at least on some level, but the lack of movement on that front has disappointed a lot of investors. While I personally had a more hopeful outlook for some widespread cannabis reform being enacted at the federal level, I was not surprised by the market reaction and how quickly sentiments changed when it became clear federal reform likely wouldn’t pass before midterms. Even aside from cannabis, the stock market as a whole is performing poorly, and investors have been selling their shares in promising companies that are not yet profitable. Expectations have lowered across the board and this has exacerbated the downward pressure on cannabis stocks. 

Many investors seemed to think federal legalization would be a magic bullet without which the industry would suffer – however we have seen that is not the case. Cannabis companies are still blazing forward, optimizing their strategies and fortifying their business. Due to the hindrances brought on by the lack of federal legalization, cannabis companies have been forced to be agile and tactical to compete, and this has bolstered the sector as a whole. While ultimately we’re striving for federal legalization, to really get capital into the space, legalization alone will not suffice. Institutional investors need effective means of vetting companies to recognize worthy prospects. The way we’ll get there is with more companies utilizing RegTech solutions to demonstrate their compliance and organizational strengths.

  • Do you agree with analysts who are saying that the current landscape will help MSOs consolidate the industry? If so, what is the projected industry impact? 

Yes, I think we will undoubtedly continue to see consolidation in the industry. Interest rates are projected to rise and smaller companies will have an even harder time accruing the capital necessary to build out operations and scale, so they will benefit by being acquired by larger, more established companies. On the flip side, given the fractured regulatory landscape and the fact that interstate commerce is not on the horizon, larger companies will benefit from acquiring smaller companies that already have operations in place in states they want to enter. Larger cannabis companies are not banking on interstate commerce becoming a reality anytime in the imminent future, so they’re opting for M&A to foster growth in new markets.  That being said, I hope we see individual states helping to lower the barriers to entry for social equity licensees and smaller operators so we can establish a balance as the industry continues to grow. M&A should not be the only path forward for small businesses to survive.

  • When do we expect market projections to turn back around? Federal legalization prospects?

It is difficult to surmise when optimism will return to the market, as you never know with politics how things are going to shake out, but I do think people will look to see if and how cannabis reform is framed and discussed leading up to the midterm elections. The election results, as well as the rhetoric candidates use to discuss cannabis, will give us a clearer projection on what the path to federal legalization will look like. Outside of federal legalization efforts, you have to keep an eye on SAFE Banking; if that passes, it would make a huge positive impact on market sentiment.

Rob Sechrist, President of Pelorus Equity Group and Co-Manager of the Pelorus Fund

Headquartered in Newport Beach, CA, Pelorus Equity Group is the largest privately held provider of value-add bridge commercial real estate loans to entrepreneurs operating cannabis-use properties. The Company’s Pelorus Fund, a private mortgage real estate investment trust (“mREIT”), offers a range of innovative transactional solutions addressing the diverse needs of real estate investors and portfolio managers.

  • Leading analysts have recently projected reduced short-term cannabis industry growth, with a less than optimistic outlook for federal reform. Do you agree with this projection?

Yes and no. Last year, we experienced 434% year-over-year growth, and many other ancillary businesses also saw astounding growth in the sector. With operators moving into new states, much of our growth was fueled by a surge in build-outs, expansions and improvements. Some analysts in the marketplace may be failing to take a hard look at the long-term growth that we expect to see when these buildouts are operational. On paper, that revenue is not yet online for many of the operators, but it will be. So while there’s a mix of companies that are currently seeing sustainable growth and others that are lagging behind, this is only part of the story. Analysts should consider innovative companies that have not yet achieved growth but are expected to in the near future. Long term, we are confident that the sector will be one of the best growth opportunities in a generation. 

  • What may be causing the current market pessimism? 

Though the cannabis industry has added hundreds of thousands of jobs, millions in tax dollars, and large-scale infrastructure projects without receiving government handouts, the current administration appears reluctant to use any remaining political capital on driving cannabis legislation. Unfortunately, despite the public comments supporting cannabis reform during the run up to the last election, government inertia in this sector is far from surprising; it’s certainly caused a lot of disillusionment and pessimism, which has been holding back the industry as a whole. One way for the current administration to signal to the country that they are pro-cannabis would be to reinstate the Cole Memo, which was rescinded in 2018. The Cole Memo laid out key guidelines for what federal representatives should focus on in enforcing cannabis, which created a sustainable framework where legal cannabis industries and federal enforcement agencies could peacefully coexist. The rescission brought more uncertainty and fear in the eyes of investors; if the government were to reinstate, this would bring about more optimism in the cannabis space. 

  • When do we expect market projections to turn back around? Federal legalization prospects?

Perhaps this is a bit bleak, but I think the prospect of federal legalization will likely only be attainable once the next administration, whether it be Democrat or Republican, has majority control of both the House and the Senate. The stark divide between parties has unfortunately become a defining characteristic of modern American politics, and as a result, progress for cannabis on the federal level has been at a standstill. In the meantime, we need to keep educating investors and shift general rhetoric away from the notion that federal legalization will be a catch-all to uplift this industry. There are many cannabis companies that have managed to thrive without federal legalization and this demonstrates the ingenuity and agility that characterizes much of the sector. If investors focus more on company fundamentals and specific state legislative actions that open the doors to more prosperity in the cannabis space, there will be revitalized optimism

 


StaffOctober 20, 2021
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The privately-held cannabis  mortgage real estate investment trust (mREIT) Pelorus Equity Group has increased it $250 million to $1 billion. So far, Pelorus has completed 58 commercial real-estate loan transactions and has  deployed $225MM to cannabis businesses and real estate owners.

“Pelorus intends to use the net proceeds from the increased offering to continue to be the best-in-class non-bank real estate lending solution for cannabis owners and operators across their companies’ life cycles,” said Travis Goad, managing partner of Pelorus Equity Group. “This will include a new stabilized lending program with three- to five-year amortizing loans to quality sponsorship, and be offered to current borrowers upon construction completion, as well as to new borrowers that meet the company’s underwriting criteria.”

The Pelorus portfolio now totals 1,850,000 sq. ft. in eight states across the U.S. The company also said it has the has the potential to approve construction draws to reimburse the borrowers in an average of one to three days and with one agreement covering the financing of the entire project.

“Our Company launched its $100MM offering in 2018, and then in 2020, upsized it to $250MM, but with the 300% growth we’ve experienced in 2021, we continue to see an acceleration of institutional interest in our thesis and core strategy,” said Dan Leimel, CEO of Pelorus Equity Group and manager of the Pelorus Fund. “As more owners and operators look for quicker draws to generate revenue sooner and a steady flow of deals in our pipeline and investors enter the emerging sector, we expect to have more than $250MM assets under management by the end of the year and for our growth to only continue to accelerate at a rapid pace over the next year. We look forward to continuing to capitalize on our deep understanding of the sector, industry relationships and firsthand experience in cannabis commercial real estate to make more high-impact investments that deliver added value to both our clients and investors.”


Debra BorchardtSeptember 29, 2021
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Cannabis real estate loan company Pelorus Equity Group has announced that its Pelorus Fund, a private mortgage real estate investment trust has closed a private placement of $42,250,000 aggregate principal amount of its 7% Senior Unsecured Notes due September 30, 2026. Possibly the even bigger news is that Pelorus, along with its Notes, received a BBB+ rating from Egan-Jones Ratings Company. This puts Pelorus on par with Innovative Industrial Properties (NYSE: IIPR), which also has a BBB+ rating.

“We’ve been experiencing great success from the transactions we’ve funded in the cannabis space, and are committed to keeping that momentum going,” said Dan Leimel, CEO of Pelorus Equity Group and manager of the Pelorus Fund. “Most banks are reluctant to offer capital to cannabis-related businesses, but our team has been forming strong partnerships with industry players for years now. Not only do we differentiate ourselves by forming trusted relationships, but we also continue to bring first-of-its-kind lending solutions to market that benefit the entire cannabis ecosystem.”

Pelorus said it plans to use the money from the offering for its operations which will include a new stabilized lending program with three- to five-year amortizing loans to quality sponsorship. It will be offered to current borrowers upon construction completion, as well as to new borrowers that meet the company’s underwriting criteria.

Leimel added, “I want to commend our team for achieving this first-of-its-kind win for the cannabis sector. Our BBB+ ratings reflect a critical achievement in the current growth phase of our Company, as well as our fiscal stewardship, robust portfolio, corporate governance, and  financial strength.”

Piper Sandler & Co. acted as the placement agent for this offering. Dentons served as counsel to the Company and Morrison & Foerster LLP served as counsel to the placement agent in connection with the Notes offering.

Pelorus Loans In Action

Last month Pelorus announced that it entered into a $19 million construction-financing loan with Item 9 Labs Corp. (OTCQX: INLB). The Pelorus’ loan money will be used to finance the acquisition of 44 acres of adjacent land next to Item 9 Labs’ 19,200 sq. ft. facility in Arizona, which has been operational since 2017. The loan will also be used to finance the master site development. Construction of phase 1 consists of three additional steel buildings and two greenhouses. This initial expansion adds 9,600 sq. ft. for indoor cultivation, 9,600 sq. ft. of lab and packaging, and a 9,600 sq. ft. head house to support the addition of the two 18,000 sq. ft. greenhouses. The total expansion will consist of six more buildings – one will be for expansion of the company’s lab and support space for the finished product, and the other five will be for indoor cultivation. Once complete, the Item 9 Labs site will comprise 640,000-plus sq. ft. of cannabis operations.

The collective loan balance across Item 9 Labs’ subject properties in Arizona and Nevada provides for a principal amount of approximately $19 million at an annual interest rate of 16% over a term of 18 months. Construction is expected to be completed over the next three years and will increase Item 9 Labs’ capabilities to meet the growing consumer marketplace and wholesale demands in Arizona and Nevada. 

Pelorus moved quickly on our complex transaction and was able to help navigate multiple hurdles on the way to closing when other previous potential lenders failed to perform. With the Pelorus team by our side, supporting our growth plans, we’re in a sound position to complete our expansion and capture more market share,” said Bobby Mikkelsen, CFO of Item 9 Labs Corp.

To date, Pelorus has completed 55 commercial real-estate loan transactions and deployed $204 million to cannabis businesses and real estate owners, comprising 1,750,000 sq. ft. in eight states across the U.S. With the ability to approve construction draws in an average of one to three days, and with one agreement covering the financing of the entire project, the Pelorus Fund helps to stabilize cash flow for its clients so they can remain focused on their core business goals and objectives.


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