INN got an inside look at a US-focused cannabis SPAC that’s in the process of transitioning to the real estate investment trust model.
A Toronto-based company is set to become the first cannabis operation to transition to the real estate investment trust (REIT) model.
At the start of October, Subversive Real Estate Acquisition REIT LP (NEO:SVX.U,OTC Pink:SBVRF) announced to the market a qualifying transaction that will allow it to finish the process of becoming a special purpose acquisition company (SPAC).
SPACs have seen a rise in popularity in recent years — especially in the cannabis industry — but REIT LP is the first known cannabis SPAC to pursue a REIT operational model.
A REIT is a company that operates a network of real estate assets that generate income based on their rent and production. For REIT LP, this means it will ultimately get a portion of the gains generated by the companies using the real estate locations in its portfolio.
REIT LP completed its public listing on the NEO Exchange back in January after raising US$225 million as part of its public debut.
Richard Acosta, CEO of REIT LP, told the Investing News Network (INN) he wants his REIT to focus squarely on assets located in areas with recreational cannabis markets and dense urban factors.
The executive explained his firm can afford to target recreational markets in the US without the risk of facing off against exchange regulators. With the NEO, REIT LP has found an exchange that allows its SPAC vehicle to list and lets it pursue the fractured US market.
In a SPAC, a company raises capital from an investor pool with the promise that it will find an acquisition target; the target is acquired via a qualifying transaction and the company’s operations then begin.
REIT LP’s qualifying transaction amounts to US$182.8 million in property acquisitions throughout the US cannabis market. If it goes through, the company will begin operating as a REIT with 15 properties in California, Florida, Nevada, Arizona, Maryland, Michigan, Ohio, Pennsylvania and Washington.
Following the acquisitions, the company will have a new breakdown for its real estate asset markers. According to REIT LP, 81.2 percent of its portfolio will then consist of industrial locations, with 11 percent being retail and 7.8 percent being a combination of the two.
“We spend a lot of time reminding ourselves that we are real estate investors before we have anything to do with cannabis,” Acosta said.
He explained the company may find assets that elevate value from a pure cannabis perspective, but REIT LP can’t adhere to these metrics exclusively. One of the guiding principles for Acosta and the company is to not overpay for assets as a way to deliver shareholder value.
The NEO-listed company isn’t the first to employ the REIT model with the cannabis industry in mind, but that group isn’t too big at the moment. In 2019, INN spoke with Innovative Industrial Properties (IIP) (NYSE:IIPR) CEO Paul Smithers about his own REIT.
“We’re strictly a real estate company and I think there’s a certain group of investors that like that. It’s a little more stability than a company that is perhaps growing,” Smithers said at the time.
IIP only seeks real estate assets to be used for the medical cannabis industry in the US, whereas REIT LP plans to heavily target recreational assets.
When INN spoke to IIP, there were rumors of cannabis operators toying with the idea of implementing REITs based on their own extensive networks of cannabis real estate assets across the country. To date, no real businesses have come forward with such plans.
SPAC momentum continues in cannabis space
When asked what is behind the SPAC craze of 2020, Acosta told INN he believes more and more people are looking at the investment vehicle as an “efficient pathway to go public.”
Acosta explained that the SPAC model is exciting for new industries like cannabis because of the investment pitch made to potential shareholders.
As mentioned, in a SPAC a company raises money from investors, then finds an acquisition target and finally completes a qualifying transaction to start operating. The transaction must be completed within very specific parameters determined by the company, otherwise the capital goes back to the investors.
“You’re identifying a target, you’re taking it back to the market and you’re trying to excite a new shareholder base, right? Typically of other institutions and retail investors. The more dynamic and interesting story, the better,” Acosta said.
Recently, a fellow cannabis SPAC CEO told INN that the novel SPAC model offers investors a free look of sorts into a market — a desirable proposition in an emerging industry such as cannabis.
Acosta is keeping a close eye on the results of the upcoming presidential election in the US, as are most cannabis industry participants with even a passing interest in the US market.
He told INN the result of this election has the potential to “open the floodgates for the industry.”
When asked about his feelings on the result of the election, Acosta explained that whatever the outcome of the race is, the country is likely set to see its market geography expand thanks to state ballots on the legalization of cannabis for medical or recreational use.
This sentiment goes along with the notion that the cannabis business in the US is an unstoppable effort that will only grow in numbers from here on out. The difference-maker will be how much attention the industry gets from federal lawmakers and how that may impact regulation changes.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.