The Benefits of Using Private Credit over Equity Rob Sechrist the President of the Polaris Equity Group, an asset management company that lends to owners of commercial buildings with cannabis-related businesses in them joins Dan Humiston . They discuss how Polaris Equity Group differentiate itself from other debt lending companies by only securing their loans with real estate and not encumbering accounts receivable or providing any value to other ancillary collateral. Produced by PodConx MJBulls - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Rob Sechrist - https://www.linkedin.com/in/rob-sechrist-7597686/ Polaris Equity Group - https://pelorusequitygroup.com/ Recorded on Squadcast - https://squadcast.fm/
The Benefits of Using Private Credit over Equity
Rob Sechrist the President of the Polaris Equity Group, an asset management company that lends to owners of commercial buildings with cannabis-related businesses in them joins Dan Humiston . They discuss how Polaris Equity Group differentiate itself from other debt lending companies by only securing their loans with real estate and not encumbering accounts receivable or providing any value to other ancillary collateral.
MJBulls - https://podconx.com/podcasts/raising-cannabis-capital
Dan Humiston - https://podconx.com/guests/dan-humiston
Rob Sechrist - https://www.linkedin.com/in/rob-sechrist-7597686/
Polaris Equity Group - https://pelorusequitygroup.com/
Recorded on Squadcast - https://squadcast.fm/
[00:00:00] Today at MJ Bulls, we are joined again by Rob Secrest, the president of Polaris Equity Group. Well, Rob, welcome back to the show.
Well, thanks for having me again. It's good to be.
Well, it's been a little time since you were here last, and I thought maybe to kick things off we'd give everyone who missed your interview, that was a couple years ago, maybe if you could give us a quick Polaris equity fund elevator pitch.
Sure. So, Polaris is a. Asset manager that focuses on cannabis related investments, and primarily that's through our private credit fund that we lend to owners of commercial buildings with cannabis related businesses in them. We were the first dedicated vendor to the sector in 2016, the first to launch the Polars Fund in 20.
The first to have a private mortgage rate in 20, in 2020 and the first to get investment grade rated first to bring institutional investors. Today we've done 73 [00:01:00] transactions for 540 million with 38 payoffs. And we're the leading bridge lender and, and we also have a fully stabilized lending product as well.
In the space and we're happy to be here and, and talk about some of the misconceptions and, and, and deconflict a lot of the things that people generalize out there.
Say half a billion dollars. Is pretty impressive number, for such a long time with cash being so cheap, so many cannabis companies got kind of reckless and they were using equity for things that are normally should be funded by debt. And I thought maybe if you could just take a minute to, to tell our listeners, traditionally there are a lot of things.
Are of course, funded with equity, but there are a lot of things that are traditionally funded with debt. What are some of those things that most companies, that in, in the real world were funding with debt?
Well, So I, I would go back a little bit further than that is that there was no debt providers in the beginning. And so originally [00:02:00] in this sector, you only had equity to work with. And so, it, it, I think that it, that it's easy to generalize in this sector, but a lot of times you're forced into boxes just because of compliance and or.
More reputational risk or moralistic risk reasons. And so most companies prior to us being here, were having to do everything out of it, out of pure equity. And when we were able, when we emerged into the space, we were able to provide an alternative so that you were not having to give up.
Equity at the worst possible point when you're just getting started. And so that, there's different types of, of debt providers out there. We only are secured by real estate, so that's, that's our lane that we go down. There's people that are providing corporate notes to companies and things like that, or, or off of receivables.
We're not in that business.
Okay. That makes sense. That makes sense. And there are a lot of companies now or more companies than ever that are now providing debt. I know you were one of the early, [00:03:00] early ones. What kind of sets you apart? Like what are some of the criteria that you use to fund your projects that that sets you apart from other, other debt lending companies Within the.
Sure. So in the lane of secured by real estate, there's a couple of different MO lending models, and we think of it as kind of a political spectrum from as close as you can be to tr traditional real estate lending to BDC corporate debt model. And so we're as close as you can be to the traditional real estate model.
We're securing the real estate. We're underwriting based on the cost basis of that property, the replacement cost, and we do not give any value to any other ancillary collateral, such as the the license, which we do collateralize, but we don't give that any value on our lending basis. And we don't we do not encumber the accounts receivable and we don't give any enterprise value for the company.
[00:04:00] So that's a very different model than several of our, our, many of our peers out there have utilized the, the, the basis of all four of those things, the real estate. The license accounts receivable and enterprise value of the company and have a significantly higher lending basis. Typically 140, 150, maybe 180% higher than what we would utilize, and that's great for borrowers.
If you want max proceeds. , but at what cost. And so many of these borrowers are finding out that the covenants and the things that they signed up to, to be able to evaluate a company on, on enterprise value that is not necessarily profitable, they might have had to come up with some structures to, to, to model out that maybe 25% growth per quarter or something like that, that if you're not meeting those, you're in covenant default.
If you're in covenant default. Then you're in a situation where the lender may or may not be willing to continue to advance those additional [00:05:00] proceeds that might be part of that loan. Or you might be another, you could be another, other issues there. So, that's a covenant default. It's not a payment default, but it's not a great situation.
But it's a great thing for the borrower if they wanted max proceeds and they signed up for that. Our borrowers had to decide, do we take less proceeds and have more flexibility so that we can, as, as the markets and things change, that we have the ability to refinance or, or restructure or do other things with our assets?
Or do we sign up and go max proceeds today and hope that everything works out? And that's a, that's a significantly different model. And some people didn't have the choice. They had to go max.
Yeah, I would say, I would think that your approach would be a lot more efficient and timely, especially if people are under the gun as far as how, how quickly they, they needed their their funding. It seems like if you just, you would, you could get the appraisal on the property and that seems about the, about all [00:06:00] you need to do versus the other one where there seems like there'd be a lot more work.
Yeah, we still underwrite to the same. We look at all those other things though as well. So even though we don't encumber it, we are, we look for the most experienced operator, strongest sponsor in a great property. But we also look at all the underlying pieces there as well. So, it's not like, we can just get a appraisal and, and crank out funding a transaction.
This is such a specialized lending asset that we really have to understand what they're, who they are. What they're doing, how are they doing it? Are they outlier to, what is our data metrics from the 2000 transactions that we've seen? Are they outlier to the positive or to the negative? And if they are, why?
And we have to understand, we need to understand that deviate, that that deviation, no matter which way it goes. Because we need to understand are they underperforming because of lack of understanding or they're missing something [00:07:00] or they just don't know their numbers yet and they're calculating their basises off of what other people are not, is not the norm, or to the other side if they're outlying in the positive side.
Why are they outlined to the positive side? Are they not counting their numbers accurately? What is it? And so it takes our team a lot of analytics to figure that out. But the problem is, is that nobody has the same baseline of the formula to underwrite that as a standard. Pro, pro
I see. Yeah,
and every business and every transaction is different.
And so it's really not that not that streamlined of a process to get that figured out. Once we've collected the data and, and built it into our database, we have those analytics for the entire country. We have every single cannabis operator mapped. We know who owns those licenses, what types of licenses they are, where they're located geographically.
Who owns the real estate and we're tracking all of that energy costs, price per pound, all of that stuff. And then even more granular than that so we can see what's happening out there in real [00:08:00] time. And so we have the most accurate data analytics to understand the sector. I think anybody in, in the country.
Well, I think from an investor standpoint, all that is probably very reassuring that you would take the extra effort and, and go beyond the appraisal to understand and then, and then your, it has in institutional knowledge of the industry adds another comfort feeling. I, I'm sure that makes a big difference.
Now as far as investors go, Where do you get your funding? Is there opportunities for people to invest with, with within your organization?
Sure. In, in, and I'm gonna answer that question, but just on the, on the follow up to the last one. Traditionally, when you lend on a, a pharmacy or a gas station or whatever it might be, you didn't need to be an expert in a gas station or a pharmacy. But in this sector, we had to become experts in that underlying business.
Regarding our fund, our fund is, is primarily retail investors. We manage about 365 million. And I would say I think we have [00:09:00] about 1100 investors. And that. That the easiest way to contact us is to go to our website or to email, us@florisequitygroup.com. You can email IR for investor relations at Polaris, p e l o r us equity group.com to request information.
But basically our fund is just structured as a secured private mortgage rate, so you get the tax advantage of that mortgage rate, and we make monthly distributions with a target yield between 12 and 15% net irr. We've done that every, every single year we've been in full operations and at investors are.
Oh my gosh. Well, in case anybody missed the, the his information, I'm gonna have all their information in the show notes. So if you wanted. To learn more about either getting some financing or if you wanted to talk about possibly investing, just click the links in the show notes. I'm sure either Rob or somebody from [00:10:00] his team will be happy to, to help you with that.
And Rob, this is good. I mean, we need this for the industry to normalize our industry and, and, and, and. That is just one seems like most industries is just, is just like a basic, basic component. It's great that you're here, it's great that you're doing what you're doing. Keep it up. Thanks for being on the show today.
Thanks a lot. Appreciate it.
but.