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/
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.
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/
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.
I
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.