Pelorus Archives - Green Market Report

StaffMay 11, 2022
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The Daily Hit is a recap of the top cannabis business stories for May 11, 2022.

ON THE SITE

Ascend Wellness Holdings

Ascend Wellness Holdings, Inc. (CSE: AAWH.U) (OTCQX: AAWH) reported its financial results for the first quarter ending March 31, 2022. Total revenue of $101.2 million decreased 0.8% quarter-over-quarter and increased 33.4% year-over-year. Ascend stock jumped over 5% in trading to close at $3.20. Ascend also reported that it had a net loss of $27.8 million or a loss of $0.16 per basic and diluted common share during the quarter, compared to a net loss of $16.5 million in the fourth quarter of 2021. Read more here.

MedMen Surrenders Assets to Ascend Wellness

MedMen Enterprises Inc. (CSE: MMEN) (OTCQX: MMNFF) finally agreed to close the deal to sell its New York assets to Ascend Wellness (OTC: AAWH). The two companies had initially agreed to the transaction, but then MedMen was accused of having “buyer’s remorse” by Ascend when it tried to pull out of the deal. The two companies then engaged in a nasty legal battle with MedMen accusing Ascend of greasing politicians‘ hands in the state. Read more here.

Harborside Inc. and Pelorus Equity Group

Pelorus Equity Group completed the second and final tranche of its previously announced $77.3M non-dilutive real estate debt financing with Harborside Inc. (CSE: HBOR) (OTCQX: HBORF). The initial funding included three individual loans to Harborside, Urbn Leaf Holdings Inc., and Loudpack JV Corporation with a second tranche made available upon the final closing of the three-way merger. The proceeds were used primarily to retire certain existing loans and provide additional working capital. Read more here.

Agrify Beats Revenue Estimates

Agrify Corporation (Nasdaq: AGFY)  announced financial results for the first quarter ended March 31, 2022, as revenue increased 271% to $26 million for the first quarter versus $7 million for the prior-year period. This was also higher than Agrify’s fourth-quarter revenue of $25.3 million and beat the Yahoo Finance average analyst estimate for revenues of $25..3 million. The stock price was up by over 6% in early trading to lately sell at $2.60. Read more here.

Goodness Growth

Goodness Growth Holdings, Inc. (CSE: GDNS) (OTCQX: GDNSF) reported financial results for its first quarter ended March 31, 2022. Goodness Growth had total revenue in the first quarter of $15.6 million, an increase of 18.2% as compared to the same time period in 2021. The net loss in the quarter was $14.6 million versus a net loss of $6.9 million in the first quarter of 2021. Read more here.

GMR Women’s Leadership Awards: Narim Jarrous

Narmin Jarrous manages operational planning and positioning for all developmental strategies within the Exclusive Brands organization, while also leading the teams’ Social Equity efforts, determined to lift up communities that have been disproportionately impacted by the prohibition of marijuana. Read more here.

Psychedelic Medicine Patents

One of the most important aspects of the psychedelics business—and one that is becoming more contentious—is about securing and protecting the patent for the specific molecule or synthetic that a psychedelics company is banking on because it can essentially protect the investment of millions of dollars a startup spends on setting up and running clinical trials, hiring expensive medical staff and other business development expenses. Read more here.

Targeting Female Cannabis Brands (VIDEO)

On April, 28, 2022, the Green Market Report hosted its first Women’s Summit in New York City. This panel was titled “Targeting Female Brands” and featured a stellar lineup of successful women including Cannaclusive Founder Mary Pryor, Humble Boom Founder Solanje Burnett, CMO of Trube Tokes Kymberly Byrnes and moderated by Politico’s Mona Zhang. More here.

IN OTHER NEWS

Harborside Inc.

Harborside Inc. (CSE: HBOR) (OTCQX: HBORF), a California-focused, vertically integrated cannabis enterprise, today announced it opened two new retail stores in California, bringing its total retail store count to 13, with a new Harborside-branded store in San Francisco, and a new Urbn Leaf-branded store in La Mesa, located in San Diego County. Read more here.

FSD Pharma Inc.

FSD Pharma Inc. (NASDAQ:HUGE) (CSE:HUGE) (FSE:0K9A), a life sciences holding company dedicated to building a portfolio of assets and biotech solutions, has closed the sale of non-core assets for $16.4 million. The company has sold its former cannabis processing facility, located in Coburg, Ontario, which it acquired for $5.5 million in November 2017. The property includes a 26.1-hectare parcel of land and a 50,800 square meter building. Read more here.

 

 

 


Debra BorchardtApril 11, 2022
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Pelorus Equity Group completed the second and final tranche of its previously announced $77.3M non-dilutive real estate debt financing with Harborside Inc. (CSE: HBOR) (OTCQX: HBORF). The initial funding included three individual loans to Harborside, Urbn Leaf Holdings Inc., and Loudpack JV Corporation with a second tranche made available upon the final closing of the three-way merger.  The proceeds were used primarily to retire certain existing loans and provide additional working capital.

Harborside’s Merger

Harborside had previously announced the completion of its acquisition of LPF JV Corporation, a leading manufacturer, cultivator, and distributor of award-winning cannabis brands in California. The acquisition of Loudpack follows Harborside’s acquisition of UL Holdings Inc. (“Urbn Leaf”) completed on March 1, 2022 and Harborside’s acquisition of Sublimation Inc. (“Sublime”) completed on July 2, 2021. Following the completion of the acquisitions, the Company plans to be renamed StateHouse Holdings Inc. The second tranche of the Rollup Financing was funded upon completion of the StateHouse Holdings Transaction.
“Pelorus has been a tremendous financial partner as we worked to reach this important milestone,” said Ed Schmults, CEO and a director of Harborside. “Their ability to provide access to customized financing, as well as considerable sector knowledge and a deep network of experts is unparalleled. Their solutions proved to us why so many of the top players in the industry are turning to them for cannabis finance solutions.”

“At such a pivotal time in the cannabis market’s evolution, we are proud to bring our strategic partners customized lending solutions to meet their goals,” said Dan Leimel, CEO of Pelorus Equity Group and Manager of the Pelorus Fund. “We were incredibly pleased to complete this funding with Harborside, Urbn Leaf and Loudpack to support their initiatives to transform the California market landscape, and we look forward to a strong partnership with them as they grow.”

Loudpack cannabis

Financing Rates

The Rollup Financing contains a nominal interest rate of 10.25%, along with specified origination, closing, and other transaction fees, and will be secured by certain real estate assets and cannabis licenses of Harborside, Urbn Leaf, and Loudpack. The Rollup Financing is subject to debt-service ratio requirements, interest reserves, certain cross-corporate guarantees and defaults, subordination agreements and inter-creditor agreements, along with a general corporate guarantee from Harborside.

Mr. Leimel added, “Our ability to structure funding solutions on complex transactions sets Pelorus apart in the cannabis lending sector. As the industry grows and more of the top cannabis players are in need of funding to support their M&A and expansion plans, we are ready to bring our asset-based lending solutions to those looking to quickly scale their operations in some of the world’s most exciting cannabis markets.”

 


StaffMarch 8, 2022
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Privately-held mortgage real estate investment trust company Pelorus Equity Group has provided $16.975 million in non-dilutive real estate debt financing to Royal Emerald Pharmaceuticals for the purchase of a new facility located in Desert Hot Springs, California. Royal Emerald is a DEA-registered, specialty pharmaceutical company working to research and produce federally compliant THC and CBD-based medicine for veterans and first responders. As one of the first pharmaceutical companies in the nation to receive federal licenses to research, manufacture, import, and distribute substances with THC and CBD, Royal Emerald will be able to ship its medical cannabis products across state lines and into international jurisdictions upon completion of the Desert Hot Springs Facility.

“The opportunity to partner with Royal Emerald is truly a one-of-a-kind transaction for us,” said Dan Leimel, CEO of Pelorus Equity Group, and manager of the Pelorus Fund. “This new high-tech facility will be built to the strict requirements of the regulated pharmaceutical industry and will be the site of exciting new THC and CBD-based medical research to provide much-needed alternative therapeutics to veterans and first responders. We believe their work will be hugely impactful on the development of the pharmaceutical market within the U.S. cannabis market, with potential international export opportunities available as well.”

The facility was once a Kmart retail location. With this money, Royal Emerald said that the site will undergo an extensive renovation and be remodeled turning the 94,000 square foot building into a high-tech cannabis cultivation and medical research facility.

“Our mission is to address the significant issue that existing pharmaceutical pain management practices have created for patients nationwide, especially our military veterans and first responders,” said Mark Crozier, Chairman, and Founder of Royal Emerald Pharmaceuticals. “Thanks to our partnership with Pelorus, we are able to achieve the next step of this mission with our new facility. The support we have received from the Pelorus team is unparalleled, and we greatly appreciate the confidence they have placed in us.”

Developing medicines for veterans is a personal mission for Crozier, who is a disabled veteran and retired first responder.  Crozier started Royal Emerald Pharmaceuticals to combat the medical issues our veterans and first responders face during and after their service. Veterans and first responders can suffer from PTSD, depression, sleep apnea, chronic pain, and much more as a direct result of their sacrifice, stress, and devotion to protecting our great nation.

Mr. Crozier added, “We believe in the power of alternative therapeutics derived from botanicals, including cannabis, to treat and support those that have undergone significant physical and emotional harm. Our veterans and first responders deserve effective pain management options that safely address their complex needs, and we believe we can lead the way in providing this support. We are also excited to support our local community, as our new innovative facility, will provide meaningful employment opportunities with a job fair coming later this year.”


StaffFebruary 11, 2022
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Cannabis lending group Pelorus Equity Group closed on its previously announced $77.3 million non-dilutive real estate debt financing with Harborside Inc. (CSE: HBOR) (OTCQX: HBORF).  The initial funding of $45.35 million, the first of two planned tranches, includes three individual loans to Harborside, Urbn Leaf Holdings Inc., and Loudpack JV Corporation. The company said the proceeds will be used primarily to retire certain existing loans and provide additional working capital.

“We are extremely proud to be an important partner during this transformational event in the California market,” said Dan Leimel, CEO of Pelorus Equity Group, and manager of the Pelorus Fund. “The impact of the StateHouse Holdings transaction will be hugely beneficial towards the overall development of the legal cannabis space within the state of California. By partnering with leading companies in the space we have expanded the lending options available for cannabis operators and become the preferred partner for some of the largest players in the industry with our flexible capital and solutions for complex transactions.”

The money will clearly go towards Harborside’s acquisition of Urbn Leaf, and Loudpack. Once that is completed Harborside is expected to be renamed StateHouse Holdings.

“We are pleased to welcome Pelorus as our financial partner as we combine operations with Loudpack and Urbn Leaf to create StateHouse Holdings, a new market leader in California,” said Matt Hawkins, Chairman and interim CEO of Harborside Inc. “Pelorus’s willingness and ability to work with us to customize the financing was critical in enabling us to ideally structure our transactions, illustrating why they are the go-to player in cannabis finance.”

“The growth that Pelorus has seen over the past two years has been incredible, and seeing this loan, the first in our new lower cost stabilized lending program, come to fruition is a great day for us,” said Travis Goad, managing partner of Pelorus Equity Group. “We expect this new program will be a best-in-class option for operators and look forward to driving the progression of the market by collaborating with companies to develop effective and price sensitive solutions.”

Pelorus said that the second tranche of the Rollup Financing will be funded upon completion of the StateHouse Holdings Transaction and at a time of StateHouse Holdings choosing. The Rollup Financing contains a nominal interest rate of 10.25%, along with specified origination, closing and other transaction fees, and will be secured by certain real estate assets and cannabis licenses of Harborside, Urbn Leaf and Loudpack.


StaffFebruary 2, 2022
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Private company Pelorus Equity Group has updated the business world with its operational results. The company is known for providing bridge commercial real estate loans for cannabis businesses and owners with cannabis-related real estate. The company’s privately-held mortgage real estate investment trust, the Pelorus Fund, ended the year with $243 million assets under management and $193 million of equity. This amounted to a 434% growth year-over-year in 2021.

“As cannabis operators and landlords with commercial real estate continued to enter the sector,  we saw the need for funding to support build-outs, expansions and upgrades spike in 2021,” said  Dan Leimel, CEO of Pelorus Equity Group and Manager of the Pelorus Fund. “In 2022, we expect to see a sustained need for commercial real estate funding to continue. With our ability to structure asset-based lending solutions for complex transactions, we provide our clients innovative loan programs that enable them to scale their operations, and cross numerous thresholds that most thought were unattainable. In the coming year, we plan to aggressively scale our assets under management while bringing more novel deal structures and lending solutions to some of the largest and fastest-growing cannabis companies.”
Pelorus and Pelorus Fund listed the following 2021 highlights in a statement:
  • Upsized Pelorus Fund’s offering to $1B from its previous $250M offering.

  • Pelorus Fund outperformed its original 2021 growth projections of 300% by 134%.

  • Pelorus saw 434% year-over-year growth, ending the year with $243 million AUM and $193 million of equity – more equity than any other privately held or publicly traded commercial real estate lender in the cannabis space.

  • First in the cannabis industry to secure up to a $20M line of credit with an FDIC–insured bank at 4.75% and no non-usage fees.

  • First to close a bond offering of $42,250,000 aggregate principal amount of its 7% Senior Unsecured Notes in the cannabis sector.

  • Pelorus Fund, along with its Notes, became the first privately held mREIT to receive an Investment Grade BBB+ rating from the Egan-Jones Ratings Company.

  • Pelorus Fund entered into a letter of intent (“LOI”) to complete StateHouse Holdings’ real estate financing of US$77.3M of non-dilutive real estate debt financing.

  • Entered into a $19 million construction financing loan with Item 9 Labs Corp., a vertically integrated cannabis dispensary franchisor and operator that produces premium, award-winning products.

  • Since 2016, Pelorus has originated 59 commercial real estate loan transactions and deployed $244 to cannabis-use real estate owners, comprising nearly 2 million sq. ft. in eight states across the U.S.


Debra BorchardtNovember 30, 2021
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After the market closed on Monday, Harborside Inc.  (CSE: HBOR), (OTCQX: HBORF) announced it was buying California retailer UL Holdings Inc. also known as Urbn Leaf, and  LPF JV Corporation, better known as Loudpack. Loudpack is a manufacturer, cultivator and distributor of award-winning cannabis brands in California.  The newly combined company will be renamed StateHouse Holdings. The company said that it expects to trade the new company on the Canadian Securities Exchange under a new symbol (CSE: STHZ) and the deal is expected to close in the first half of 2022.

Ed Schmults, the current CEO of Urbn Leaf, is expected to be appointed as CEO of StateHouse upon completion of the Urbn Leaf Transaction and will be joining the Board of Directors of StateHouse. Marc Ravner, the current CEO of Loudpack, is expected to be appointed as President of StateHouse upon completion of the Loudpack Transaction and will be joining the Board of Directors of StateHouse. Matthew Hawkins, current Chairman and interim CEO of Harborside, will remain as Chairman of the Board of StateHouse.

“Since reconstituting the Company’s board of directors last year, our team embarked upon an ambitious mission to create a unique platform capable of consolidating California and driving significant growth through added scale. With these transactions, we are working to create a west coast cannabis powerhouse,” said Mr. Hawkins. “California is one of the world’s largest legal cannabis markets, with sales expected to reach $7.4 billion by 2025. StateHouse will have a unique ability to navigate the operating challenges in the state and capitalize on the combined potential of the businesses we are acquiring. We are building what we believe is the ideal platform to consolidate the California cannabis sector, positioning us for long-term growth in both market share and profitability. Ed Schmults, an experienced leader with a proven retail and cannabis track record, is the right person to lead StateHouse into the future.”

The company said in a statement that it believes that StateHouse will have the highest estimated annual revenue and brand market share among its current publicly-listed California cannabis companies. Through the first nine months of 2021, Harborside, on a pro-forma basis including revenue of Sublimation for the entire period, had gross revenue of $57.8 million, while Urbn Leaf and Loudpack had revenue of $45.9 million and $61.4 million, respectively. By that calculation, on a pro forma basis, management estimates that StateHouse would have generated gross revenue of approximately $165 million for the same period.

Forecast Is Pulled

In addition to announcing the big transaction, Harborside also delivered some sobering news to investors. The company said it was withdrawing its previous revenue guidance for 2021 and said it would revisit the forecast after the deal closes. A variety of reasons were given including a decline in wholesale pricing for bulk products in the California market and a decline in retail revenue which was primarily due to a decrease in retail store foot traffic.  Harborside said this was due to the California retail market experiencing a softening in consumer demand and the beginning of commoditization decrease in wholesale revenues as a result of a decline in wholesale pricing for bulk products in the California market. “Operationally, the company also implemented a change in its harvest procedures which delayed flower production in Q3 2021 to allow for the adoption of a perpetual harvest schedule beginning in Q4 2021. The Production Campus also experienced a temporary COVID-19 related supply chain issue with a growing medium (substrate material) which did not meet agreed-upon specifications and thereby caused a short-term reduction in harvest yields.”

Third Quarter Earnings

Harborside reported that total gross revenues were $17.9 million, 10.4% higher sequentially than the previous quarter. However, both retail and wholesale revenues fell sequentially and the difference was only made up through manufacturing revenues, which didn’t exist in the second quarter. The manufacturing revenues came as a result of the Sublime acquisition.

The net income grew to $2.7 million versus the second quarter’s $1.7 million. The increase in net income attributable to Harborside was primarily the result of a one-time gain of approximately $5.3 million in the quarter due to the adjustment of the estimate for uncertain tax liabilities related to Internal Revenue Code section 280E, along with fair value gains in other current assets, derivative liabilities and preferred shares.

Pelorus Lower Coast Financing

Along with the transaction, the company received $77.3 million in rollup debt financing with Pelorus Equity Group who is expected to provide non-dilutive capital, leveraging StateHouse’s significant real estate portfolio. “We’re excited to be able to fund such a significant rollup in the California market,” said Travis Goad, Managing Partner of Pelorus Equity Group. “We think the combined companies will be a formidable player on a go forward basis. This loan is one of our first in our new lower cost stabilized lending program.  We expect this stabilized lending program will continue to be the best-in-class financing option for cannabis operators with cash flowing assets, especially for complex transactions such as this. Pelorus is constantly innovating new financing solutions for the cannabis real estate market.”   

StateHouse Statistics

Following the combination, Statehouse said it would have the following:

  • 15 retail locations, representing the number two retail platform in California under one unified banner with further planned expansion;
  • Nine popular brands, including top-five ranked brands in the pre-roll (Fuzzies and Kingpen), edible (Smokiez) and value flower (Dime Bag) segments, representing the #3 ranked brand house in California
  • Manufacturing facilities with an annual capacity of more than $400 million in branded products revenue at full utilization, with capabilities to produce across all product formats offered by the Company
  • A state-wide distribution network for the Company’s branded products that reaches more than 780 active accounts, including approximately 75% of California dispensaries
  • 230,000 square feet of greenhouse cultivation space, with additional near-term expansion capacity of more than 100,000 square feet of canopy
  • 36,000 pounds of cultivation capacity with 22,000 pounds of additional near-term cultivation capacity

 


Debra BorchardtAugust 9, 2021

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Debra Borchardt, Editor-in-Chief, Green Market Report:

Rob Sechrist is the president of Pelorus Equity Group, a company that you may not be familiar with, but you will soon. This company is a little unique. It’s a mortgage REIT (real estate investment trust), not a traditional REIT. And Rob, why don’t you explain to our audience a little bit about that difference? Because most people are really familiar with their traditional REIT that buys buildings and then takes the lease money and gives that back to the shareholders. This is a little bit different. Can you go into that?

Rob Sechrist, President, and Co-founder of Pelorus Equity Group:  

Sure. Debra, thanks for having me. I’m happy to explain the difference. Most people are unfamiliar that there’s more than one type of REIT that traditional REIT owns properties, like IIPR. A mortgage REIT simply means that that is a lender that’s able to get the same tax advantages of a traditional REIT. Those tax advantages, just to re-clarify are 20% savings on your federal taxes. You only pay state taxes in the state that you’re domiciled.

GMR: 

Your company specifically focuses on the cannabis industry and what you guys do is help cannabis companies that need money to build out their facilities, which can be a really expensive endeavor for a cannabis company. How are you approaching these cannabis companies with this help?

Sechrist: 

Our background is what we call value-added lending. In our world “value add” means that we are improving the property with a portion of our loan is going back into the property with a pre-approved budget. Typically, it’s going to be tenant improvements. It could be ground-up construction, but this is the largest newly created asset class in the country. We’ve extrapolated the data that it’s about $50 billion real estate asset class that just magically appeared. When that asset class was created by the legislature, in each of these states, those properties actually in order for them to be legal the real estate needs to be approved and that side is one element of it. It has to be built out. It has to be a purpose for cannabis use tenant, and then the tenant, the cannabis use operator must also be approved by the state. Those two elements, once they’re plugged together, that is a legalized property and now you’re on your way and it’s one of the 50 billion.

GMR:

To your point with cannabis, it isn’t so easy to just go to a bank and get a construction loan. So you’ve put up all this money to buy this building. You’ve spent all this money to get these licenses and these applications approved. A lot of these companies have spent millions just to get to basically square one. That’s really just the first inning of the ball game. They still have to build out these facilities, which is even more money. A lot of times, they’re kind of starting to get tapped out at that point and they can’t just go to a typical bank and say, “Hey, we got to build out this building. We’re a legit company. We’re not doing things that are illegal.” But the banks are just like, “No way.” The major banks want nothing to do with this, right?

Sechrist:  

The major federal banks are not in the sector. The state banks and credit unions, there are 684 that are doing deposit relations for tier-one plant-touching operators and businesses. And of those banks, there’s probably a few dozen that are actually lending, but the banks are difficult to get loans in general. They certainly are not in the value add lending space at this time. And more importantly is that when you go to build a cannabis facility, typically these properties, the tenants are doing 10 to 15 times more revenue per month than a non-cannabis use tenant. And why I’m giving that and focusing on that is that to be focusing purely on your rate and points for the loan, as opposed to the speed of getting that property up and stabilized is very shortsighted. You want to get your property built as quickly as possible.

Our average borrower takes about 12 months to build and stabilize their property. And we’re typically processing 50 to 100 draws for the borrower to be reimbursed for the expenses that they’ve put out for the pre-approved budget. So for example, if your facility is doing one to $2 million a month or has the ability to do that, and you want to save a couple of percent, and even if it was a 10% difference between our rate and a bank rate, that premium might be a million dollars or $2 million in a year. But if you’re doing one to 2 million a month, that premium is absorbed, if we save them one month. Typically, we’re going to save at least 20% compared to other private lenders best in class and probably six months with a bank. And so it’s a no-brainer once you analyze it.

Unfortunately, the cannabis use borrowers are so focused on brands. They have so many things going on, compliance, inventory, genetics, all the stuff that they’re trying to deal with. A lot of them haven’t worked with a construction loan before, and they have only done their own home mortgage. The only thing they ever knew at that time was the rate and the points. So they’re not aware that you need a high-performance loan and they might get into a loan and realize, “This isn’t even going anywhere. I have to advance the money. I’m not getting reimbursed fast enough.” Usually the project comes to a stop. That is not the situation you want to be in. Plus Pelorus is the first dedicated holistic lender for the cannabis sector back in 2016. And we look at the cannabis use properties as a holistic approach. A bank does not do that.

We want to make sure that we provide all the money that is necessary or make sure that all that is encapsulated in our loan that gets the property acquired, built out with the tenant permits and the equipment to make sure that, that tenant can actually start operating. A bank would not provide all those features to that loan. And so you might have a situation where the tenant doesn’t have the money because the property is not cash flowing yet. And they’re not able to go raise that equity that’s necessary for the equipment to build it out. And this equipment is enormously expensive. Some of the equipment as a whole, for the project might be more than the purchase price of the building. And so if you are trying to go raise that money for equipment for a building you don’t even own, it’s a very difficult challenge. So you want to have a solution that is holistic in the approach. And we were the first to do that.

GMR:

One of the things that kind of differentiates Pelorus is your rates are quite high, but to your point, you’re getting the money to the client faster, correct?

Sechrist:  

We offer high-performance loans to achieve what the borrowers looking to do. 100% closing ratio of all the transactions that we’ve ever done. I don’t know if any other lender can say that. More importantly, or just as important as closing is to make sure that the facility gets up and running and built as quickly as possible. And so you need to look at that ratio of what is the pricing savings that you would get with a lower pricing loan as opposed to what is the opportunity revenue that we lost by not penetrating the market and not getting this facility up and running as quickly as possible. So as today, most of the cannabis community knows who we are and knows that this is the place that they want to go to get a facility built.

GMR:

How much money have you guys raised today?

Sechrist:

We’ve deployed more than $185 billion. We’ve got about $60 million going out in the next 30 days or so. So we’ll be to $250 million here in the very near future.

GMR:

You’re working with some pretty big names. I saw you’re doing a deal with Acreage Holdings (OTC: ACRHF) for a fairly large amount.

Sechrist: 

We did a deal with Acreage Holdings in the fourth quarter of last year. By the way, they are big enough that they could have gone to an institutional rate. So in that specific scenario, their board came to the realization that they needed to look at the entire cost of the capital, not just the pricing of the loan and they quickly determined in the end that was the direction to go after. Our pricing does shock people, but that’s because you’re buying a high-performance loan and there’s a lot to go into process, an unlimited amount of draws in one to three days. Nobody else can do that. That is so important. And that’s what you need to be focused on. If you want to go and take your time and have the lowest cost, and it really doesn’t matter how long it takes for that facility, then you probably want to start with another lender.

GMR: 

That’s pretty interesting. Now, we’ve seen a lot of situations in Canada with regards to overbuilding. Some of the companies like Canopy Growth (NASDAQ: CGC) has shut down some of their indoor facilities. Do you feel that because the United States is so early on in its legalization, that we’re not going to be in that kind of situation, that we have companies that could get overbuilt with regards to facilities?

Sechrist:    

So two comments there. In Canada, as far as we know, there’s nobody that had built a hundred thousand or a million square foot facilities that were at scale in the entire country and anywhere in the world. So you have people that are trying to scale from zero to a thousand or whatever on the first try and by the time that facility gets built, you realize we didn’t build this correctly, and you have to write that whole facility off. So, they didn’t have a learning curve and they made mistakes up in Canada that I don’t think that you’ll see duplicated. And certainly not to that same extent, that happened up there. One was, is that you really only had a gray market or illegal market operators that were mostly operating outdoors. Some of them might’ve had some indoor greenhouses, but they would have been tens of thousands of feet, not hundreds of thousands or millions of square feet.

When you go to that scale, you have different challenges that you’re trying to deal with. And if you get it wrong, you’ve already built the facility, before you realize we didn’t configure this properly. And it’s actually less expensive to sell this property and to go somewhere else. We started analyzing the sector because we realized that our skills in value add lending were immediately applicable to the sector. We analyzed it and we originated the first transaction in 2016. We only did small transactions to make sure that not only were we learning what the borrowers needed to do, but they were learning as well.

So we scaled with small facilities, 10,000 square feet, 20,000. Now, we do 100,000 square feet and larger, but we worked our way up to understanding the market. Secondly, we also built the first proprietary database where we analyze each of the cannabis operators that are licensed within each state. We identify who they are, what types of licenses they have and we associate what properties they’re in. We look at the average build cost, the average price per square foot of the universe of properties. For each of these types of licenses. So we know the size of the capacity of the market is existing. We also look at some other things with other technology we look at to understand, “Is this market reaching capacity from a production size? Is it oversupplied? Is it under-supplied?”

We’re monitoring all of that stuff. So we’re using data and facts to analyze this. Typically in most lending sectors of the country, there would be a hedge fund, or there would be a third party doing this and spending millions of dollars to analyze this. Well, we needed that data. So we had to make the investment ourselves and so today we have a very robust, what we call the big data project that we pull all that data and extrapolate it to help us make our decisions.

GMR:

I was wondering with regards to risks, so risks for your investors. In this situation, you’re lending money to these companies to build out their facilities. What is the risk that they potentially aren’t able to complete that facility, whether they’ve run into other problems elsewhere? Certainly, it’s the cannabis industry. We’ve seen lots of situations blow up pretty quickly. Are you, or have you seen anything like this, and have you seen other companies willing to then jump in and take over? What is your situation with that?

Sechrist:

We’ve originated more than 5,000 of these types of transactions. Whether you’re a cannabis company building a facility or somebody else building a facility, that’s an issue that we have to de-risk or look at. The way that we start is we first start with a feasibility review of the budget to make sure that, that budget is sufficient, regardless of who the contractor is. If we had to replace the contractor, that there’s sufficient capital, and it’s also reviewed to make sure the water’s there, the permits are in place, the electricity has ample to supply that for what we’re building, etc. We take that budget and we run it through our data to make sure that it’s sufficient, no matter who we use for the budget, that there’s enough capital. Then we build a contingency as well, just in case there are some overruns.

We start with that aspect and then as we are going through that project, actually the borrower has to advance the money first. Then we go and verify that the invoices have been paid. We get proof of payment. We get lien releases from the contractors to make sure that they can’t lien the project. Once all that’s been reviewed and completed, then we do a physical inspection to verify that those went into our property and you get a percentage of completion. So we’ve de-risked that and we’re prepared to fund that project and complete that project, whether it’s with our borrower, that contractor, or if we take it ourselves. So that’s on the property side. As far as the tenant or operator side, we also analyze to make sure that we’ve got a path through to replace that tenant ourselves, if necessary, if the borrower failed and if the tenant failed.

We have the ability to complete the building and we have the ability to replace the tenant. As far as our portfolio, we haven’t seen a situation where the tenant has not been able to be replaced. We don’t have any transactions that we’ve had to replace the tenant yet. We do have one of our borrowers that replaced another facility next door, not ours, but they did it in 90 days. We use that as a case study to make sure that what we’re thinking is as possible and what the timelines are. And once these facilities are built out, they have the power, the water, the infrastructure, the general configuration, isn’t going to change that much. Most of our facilities start with indoor cultivation, and then they might have some processing or some extraction, and some other things in there.

Once you’ve got kind of that layout, different operators reconfigure within those rooms, but the general gist of it, it’s going to be the same. Commercial properties are a lot easier to reposition walls and things than in residential houses where everything’s load-bearing. So it’s a different situation.

GMR:

Absolutely. So what are the plans for Pelorus for the rest of the year? Are you guys going to continue to raise money? I would assume keep lending.

Sechrist:

We’re scaling the company. We continue to add to our team. We just opened a New York office to get a presence on the East Coast. Our goal is to get to a billion dollars assets under management. Our investments in the company, from our team and our people that we work with are positioned on that on growth and to maintaining our position as the number one value add lender and the first and the most experienced in the sector.

GMR:

Well, there will certainly be a lot of activity happening in the Northeast, now that all the legalization is happening in New Jersey, in New York. Rob, thank you so much for taking time out of your very busy day to talk to Green Market Report.

Sechrist:                                       Thank you so much.

 


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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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