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New REIT to Give Wary Investors an Entry Point: Cannabis Weekly

The deal bodes well for both cash-starved cannabis companies and investors.

(Bloomberg) -- This month, cannabis will get another publicly traded real estate investment trust -- a sign of how the industry is growing up.

Subversive Real Estate’s merger with Inception REIT is part of a $183 million transaction to turn the special purpose investment vehicle into a real estate investment trust, giving it tax benefits and readying it to acquire more properties. The transaction, expected to close at the end of this month, will make it the second publicly traded cannabis REIT, following Innovative Industrial Properties.

The deal bodes well for both cash-starved cannabis companies and investors who want an in to the fast-growing industry -- but are skittish about the perceived taint of marijuana. It lets cannabis companies that can’t get bank loans sell real estate and lease it back, giving them a shot of cash that can be used to improve their products. Investors, meanwhile, get a new “cannabis adjacent” asset to invest in.

“We unlock capital for operators,” Subversive Chief Executive Officer Richard Acosta said. Amid the pandemic, cannabis firms are more focused on efficiency, he said, and his company aims to help them achieve that by taking “hard assets off the balance sheets.” They can then use the cash to produce more or ramp up production.

One company, Flower One Holdings, got a $39 million, seven-year term loan at 10.5% in exchange for Subversive’s option to buy a 455,000 square-foot cannabis cultivation and production facility in North Las Vegas, Nevada.

These sale-leaseback deals are gaining traction. Major multi-state operator Curaleaf Holdings Inc. just sold a Florida property, and will offload another in the fourth quarter. Jushi, Columbia Care and Cresco Labs have also recently done sale-leasebacks.

“I always thought that consumer-goods companies didn’t need to own real estate,” Curaleaf Chairman Boris Jordan said in a phone interview. “And we’re not a real estate company. Our business is manufacturing branded cannabis.”

A recent E&Y survey found that, as a result of Covid-19, 78% of executives at large companies across industries expect to divest assets within the next two years.

And as the performance of one cannabis REIT shows, there’s plenty of interest in cannabis companies’ real estate. Unlike other commercial real estate like restaurants and hotels, battered by Covid-19, cannabis properties may have better prospects since dispensaries have stayed open in lockdowns, and the industry will need to expand if new states legalize.

Now, it just remains to be seen -- in the flip-side world of cannabis -- how these financial instruments distribute risk. That’s because most real estate is viewed as a hard asset that generally increases in value, although the global pandemic has created some disruption this year in property values. But with cannabis, legal issues are a wild card.

If marijuana becomes federally legal, companies might no longer need to grow their products in the same states they sell them. This would mean that cultivation plots and processing facilities in multiple states could suddenly become redundant.

Subversive, Acosta said, has taken this into account by buying only the properties that it sees as the most attractive, or those with potential alternative uses.

Flower One’s facility in Nevada, for example, is the largest in the state, he said. “It is a future-proof asset in our view.”

© 2020 Bloomberg L.P.

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