MJBulls: Cannabis investing and cannabis fundraising

Pelorus Equity Group | Travis Goad | Cannabis Investor Series 2022

Episode Summary

Lending to cannabis companies with real estate as collateral. The Cannabis Investor Series sponsored by PodConx is back for the Fifth year.  This year, the Series will again feature the cannabis top investors and lenders, reviewing how the current macroeconomic cycle is affecting investing in these sectors, what to expect in 2023 and sharing investment opportunities and strategies.  In today's episode, Dan Humiston is joined by Travis Goad from Pelorus Equity Group. Produced by PodConx MJBulls - https://podconx.com/podcasts/raising-cannabis-capital Dan Humiston - https://podconx.com/guests/dan-humiston Travis Goad - https://podconx.com/guests/travis-goad Pelorus Equity Group - https://pelorusequitygroup.com/ Recorded on Squadcast - https://squadcast.fm/

Episode Notes

Lending to cannabis companies with real estate as collateral.

 The Cannabis Investor Series sponsored by PodConx is back for the Fifth year.  This year, the Series will again feature the cannabis top investors and lenders, reviewing how the current macroeconomic cycle is affecting investing in these sectors, what to expect in 2023 and sharing investment opportunities and strategies.  In today's episode, Dan Humiston is joined by Travis Goad from Pelorus Equity Group.

 Produced by PodConx

MJBulls - https://podconx.com/podcasts/raising-cannabis-capital

Dan Humiston - https://podconx.com/guests/dan-humiston

Travis Goad - https://podconx.com/guests/travis-goad

Pelorus Equity Group - https://pelorusequitygroup.com/

Recorded on Squadcast - https://squadcast.fm/

 

Episode Transcription

Dan Humiston: [00:00:00] Today at MJ Bulls, we're continuing the fifth annual Cannabis Investor series. Sponsored by Pod Connects the cannabis industry's exclusive network of cannabis podcasts that actually allows cannabis companies to advertise. Go to pod connects.com to connect to more cannabis listeners on today's show.

We're joined by Travis Goig, the managing partner at Polaris Equity Group. Travis, welcome to the show. 

Travis Goad: Uh, 

thank you for having me. Happy 

to be

here. 

Dan Humiston: Well, I'm excited that you're, and I'm, I'm really excited that we have a company that's lending money in this space and . I think having more companies lending money is an important step towards legalization, and you're not just dabbling in cannabis.

You're all in as a private commercial. Mortgage re, you've done over 70 deals and lent over 350 million . As I mentioned in previous years, most of our guests were cannabis VC firms. Travis? Why now is not a good time to sell off a [00:01:00] lot of equity to fund project? 

Travis Goad: So we are the longest 

running commercial real estate, uh, focused 

lender in 

the 

cannabis sector. We closed our first deal in 

2016, and we're structured as a 

commercial mortgage reit, and that means all of 

our. Capital's fully discretionary, 

myself and my partner Dan sit on the credit 

committee

And so you 

get a streamline process dealing with us. We've actually closed over 500 

million in transactions since inception, and today we have

about 370 

million in aum. 

Dan Humiston: So a slight, slight nuance there. Well, I think it's a big nuance. Three 50 to 500 million. I'm glad you let us know that. Yeah. I know now is not a good time to sell off equity, but maybe explain why.

Travis Goad: Well, because right now valuations are 

low across the

board. I mean, when you see what's happening in the 

cannabis sector, cannabis 

because so few investors 

can 

actually 

invest in cannabis, the liquidity just isn't 

there. So when you have s and p and broader 

market selling off 20% in a 

year, It means that these [00:02:00] less liquid 

markets have 

to sell off more. And so if you look at

a lot of the cannabis names, you know they're down 40

to

60% 

year to date. , and part of it 

is there are some challenges facing the industry in the US 

specifically with. To ad and specifically 

with just the delays and regulations rolling 

out in order for these companies to hit their numbers. but a lot of it is just 

disconnected from the underlying growth and the revenue 

and, 

and what these companies are producing versus their, their valuations 

today. And a lot of that has to 

do with the macro headwind. So if you're borrowing today, 

and 

for us, you have to

own your 

real estate assets, but if you own your real 

estate assets, we can 

lend you. 

against 

those and, and, and, make it less dilutive for, for you and your

investors. 

Dan Humiston: Yeah, it makes sense. It makes sense. , sometimes cannabis companies are unhappy down the road when they realize how much equity they've given up. They would've been a lot cheaper to borrow the money. what are some things that borrowers should consider besides just interest rates?

Travis Goad: a couple big [00:03:00] things. You, you, you need to

make sure that 

the, the, 

lender out there actually has capital deployed. 

in this environment. there are lenders out there

who have deployed 

capital in the past, but have been unable to access 

capital 

today. And so you wanna make sure that they're, they actually have dry 

powder to 

put 

to 

work and something that they could actually close and perform under transactions.

like to say that for the longest time,

cuz we've been doing it the 

longer than anybody 

else since 2016, 

my biggest competitor was a fake term sheet. So, you know, 

there was a lot of people out

there that would write term 

sheets and claim they have money And they couldn't perform. And so one. 

Dealing with a reputable

lender, that does what they say they're gonna do and can perform is, 

is, is critical. two, dealing with a lender that's

is

specific in the space 

that understands the challenges that cannabis companies face, understand the 

nuances and 

regulation shifts, and, and there's always gonna 

be something over the 

term of your loan that's gonna 

pop up that is probably unforeseen. And that's something that when somebody, all they do 

is 

cannabis.

Focus on Canvas, they can 

understand those issues and help 

you address them and, and

and deal

with kind of 

the, you [00:04:00] know, the growth trajectory of

this 

space. three 

it's also understanding what are your

covenant

packages 

, what you have to adhere to on a go 

forward basis. We lend against the value of

the. So We give typically a more conservative debt amount. So we'll lead 

lend between 60 and 75% 

of the value of that real estate. So the hard 

and soft cost that went into that And because we're at a lower basis, we're 

able to offer 

effectively a very covenant light 

loan to our sponsors that let them have flexibility to grow their

business and 

expand it to new. There are other lenders

out there 

that have much more 

of 

a corporate lending model, and those corporate

lending

shops could give you 

more if they if they have capital 

today, they could give you up to 150 to 180% of the value of 

your real estate. But what they would do in exchange is tie 

you up with a lot of 

corporate covenants.

In most cases, they're going to want a board seat. Every

major 

decision's gonna go through them, and you're effectively getting 

a, new

controlling 

party in 

your company. [00:05:00] And so there's a real cost 

to 

getting that 

extra capital, and, and so understanding your structures, 

understanding 

how these companies look at it is very critical.

Dan Humiston: Wow. Yeah. I think that's sort of read between the lines. Careful, careful. What you wish for on that one. That would not be good. Investing. Let's talk about investing for a minute. Investing in cannabis we all know is. what are some of the tools that you use to like minimize your risk?

Travis Goad: So 

we lend against hard assets. So if you're coming at it from 

investor perspective and how we look at the space is that there's a real asset that has real value 

because you can 

generate revenue and it's a highly specific build out. 

I would comp. Cannabis assets very closely to 

cold storage facilities, data centers, lab spaces, other

types of specialty use real estate, but that have significant 

demand for that use.

And so 

from an 

investor perspective, in a really early 

stage industry, which we're in the very first innings, they 

tend to 

be very [00:06:00] volatile. There's, you know, and we saw the first round in 2018 where equity valuations

balloon, but 

none 

of 

these companies could make any money. and then kind of that 

reset going into 2019 and you 

kind of see the progression of the industry. It's just very volatile in illiquid

space and there's not as much kind of capital available to it. So we just think a 

more conservative approach is the best way to 

do it. And we, if you want 

exposure to cannabis, we think our model is

one of the best ways to 

do it. You're senior secured. Hard collateral 

asset that there's real 

demand and use for, and you're still getting mid-teens 

yields for 

that risk.

And in some cases, we have 

warrants and, uh, some equity kickers as well on some of our loans. So 

you, you're in a senior secured 

position making near equity like 

yields. and you have some 

sweeteners to the upside. So

it 

kind of

ins insulates you a little bit about a lot of volatility you've

seen 

in the equity space.

And so, even though equity's been all over the board over 

the last couple of 

years, you know, up 

and down, our portfolio's been performing fantastic. 

We're [00:07:00] still

collecting monthly interest and and paying our investors. So our investors did very well during that timeframe. 

Dan Humiston: I think I saw some pla something that I read that your investors.

On average, we're receiving like 15% of since the time you've been doing this. Did I read that incorrectly?

Travis Goad: No, that's correct. Not only

15%, 

but monthly distribution. So this isn't just an IRR that we solve 

for that is projected on, on kind of mark to 

market Our, our borrowers pay interest 

every month and 

as a mortgage rate, we have to 

distribute the bulk of 

that interest to our investors.

And 

so, it's. something, you get a check every

month.

Now, a 

good portion of our

investors choose to 

reinvest, which 

again, is, it's a, another ability to help

compound that. So you're getting mid-teens yields

that you can ultimately 

compound monthly under our structure. So it's been a very popular product. A lot of 

our investors reinvest. we think in this 

situation, 

showing cash returns is, is very critical for this. 

Dan Humiston: Yeah, it's almost unheard of . [00:08:00] It's almost unheard of. And before we wrap up, I know you operate in all the legal markets. Are there any markets that you, that are particularly interesting to you right now or maybe to different states that you're, that you're targeting?

Travis Goad: So we, we think a 

lot of these markets 

are very interesting. Our goal as 

we grow is to have a diversified book. So we want some smaller

operators as 

borrowers, we 

want some larger operators as borrowers. I'm sure 

you 

A week and a half ago we closed the 

Terrace and transaction, which was about a 46 million loan, to a tier one mso,

I mean 

their New Jersey and Maryland, assets.

So those were our first. 

two properties in both New Jersey and Maryland. So we are very happy

to kind of 

expand more into these East 

coast markets. So we think each market has its own pros and cons as far as how it 

was 

legal. demand 

structures, et 

cetera. so, so we price our 

loans accordingly and enter it. but there's not one market 

where we won't go in or, I mean, 

there's markets we're definitely more cautious on. [00:09:00] And then there's 

markets that we, we, 

we think we're a little bit more bullish on, 

as well, 

kind of given the construct. So, we like New Jersey, we like Maryland and, and we'll continue to look in the northeast and southeast markets as well.

Dan Humiston: That sounds great. That sounds great. I'm glad you mentioned that transaction, I had that in my notes. I wanted to make sure we touched on that before we left, before we wrapped up the tariff and transaction. We'll have links to Polaris Equity Group in the show notes. So if you're looking for lending or if you're an investor, uh, just click the links in the show notes and I'm sure somebody from Travis team will be happy to speak with you.

Travis, it's great getting to know you today. Thanks for being on the show.

Travis Goad: like Great getting to know you as well, and thanks for having me.