Adam Torres and Rob Sechrist discuss Pelorus Capital Group.
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Show Notes:
Pelorus Capital Group prices first-ever securitization backed by collateral in the cannabis sector. In this episode, Adam Torres and Rob Sechrist, Co-Founding President of Pelorus Capital Group, explore what this securitization could mean for the future of the cannabis sector.
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About Rob Sechrist
Rob is the President of Pelorus Equity Group and Co-Manager of the Pelorus Fund (a cannabis-use CRE mortgage REIT) with more than twenty years of experience in the real estate finance industry. Since the formation of Pelorus in 2010, he has raised more than $750,000,000 in secured real estate transactions. Rob’s primary role at Pelorus Equity Group is developing strategic alliances with private and institutional investors, forming equity partnerships, and coordinating the company’s growth into new markets. Today Pelorus funds millions a month primarily using the Pelorus Fund or syndications with family offices and other various debt and equity partnerships. Rob earned a BA from San Diego State University. Licenses include California Real Estate Broker’s License, NMLS License, and designated expert witness as an asset-based lender. He is also the CEO of JRS Capital USA, Inc., a real estate and technology investment firm based out of Newport Beach, California. Currently a member of Gen Next and a donor to the Gen Next Foundation. Rob is married and has a son.
About Pelorus Capital Group Inc.
Pelorus Capital Group offers a range of innovative transactional solutions addressing the diverse needs of real estate investors and portfolio managers.Their flexible acquisition and bridge lending programs are the direct result of their involvement in more than 4,700 transactions of varying size and complexity. Since 1991, our principals have participated in more than $1 billion of real estate investment transactions using both debt and equity solutions. We draw on our extensive experience to rapidly understand an opportunity, structure a logical solution and execute a timely close.
Full Unedited Transcript
Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres. And if you’d like to be a part of our community, head on over to missionmatters. com forward slash community. All right. So today is a special episode. We’re bringing Rob Sechrist on the line, who is a co founding president over at Polaris Capital Group.
And I’m proud to announce we got a big announcement today. They just. Completed the first ever securitization of cannabis linked real estate assets. What does that mean? If you’ve never invested in that space? Well, we’re going to do a deep dive into that today, but first off, Hey, Rob, just want to say welcome to the show.
Well, thanks for having me. It’s good to see you. All right, Rob. So man, it’s been a long time. I feel like the last time you were on the show, I don’t even know if we were doing video at that point. It’s probably like two, three years ago. I think I’m right on that. Right. So you’re welcome back to the show. I should say.
Yeah, that’s a hundreds of podcasts ago and events ago. So I, unfortunately I don’t remember the specifics of that particular one. So all good, man. Well, I do cause I looked it up before this and, you know, a couple of thousand later, but but I’m excited to get into your news today. I mean, it’s big news for the industry, for investors, for I mean, political landscape, there’s a lot of things going on, but we’ll pull back for a moment.
start this episode the way that we start them all with what we call our mission matters minute. So Rob, we at mission matters, we amplify stories for entrepreneurs, executives, and experts. That’s our mission. Rob, what mission matters to you? So for us. What we’re trying to do is educate investors about this sector, and we want to get people the information that they need to make before they make the decision to enter into the sector.
It is a very nuanced space. You and I have talked about it before and recently in the panel that we spoke on on and just trying to. provide the data points and clear up the misinformation that so many people have been potentially making judgments on or decisions on to go into the sector. And they really don’t know the true landscape.
And that’s that’s what our mission is. Great. Love bringing mission based individuals and entrepreneurs online to share, you know, why they do what they do, how they’re adding, you know, true value into the marketplace, which is exactly what you’re doing. So great to have you back on. And I guess just to get us kicked off here, let’s maybe go a little bit further back in time before we get into today’s news.
Like how did you get involved or interested in, in the real estate space specifically linked to cannabis? Yeah. So prior to entering into the cannabis sector, we are an asset manager that primarily focused on private credit to residential fix and flip lenders construction. We did all types of asset classes, but that was the bulk of the transactions that we did.
So we, we have the skill set. We’d originated thousands of transactions for billions of dollars. When our local congressman Dana Roebucker in 2014 passed the most consequential legislation to ever pass today. which is the Roebuck or Blumenauer Amendment was in the name at the time, defunded the Department of Justice from any prosecution of a cannabis related business.
That legislation meant that regardless that this, that this industry is federally illegal, that Congress had used the power of the purse to take away the ability to prosecute regardless if the executive branch was pro or against cannabis. And so, That passed during the Obama administration, and it was a standalone amendment that was upheld during the, the Trump administration had to be renewed each year, which was renewed with overwhelming bipartisan support.
Mm-Hmm. . And, and then it was eventually moved into the omnibus spending bill, so it does not need to be renewed each year. So, yeah. It’s that’s the forefront. And once that passed, we realized that this is the largest. Newly created asset class that we feel comfortable lending on. And today we know that that asset class is probably going to be about 50 billion worth of real estate assets.
Once all 50 States have been gone recreational. Now let’s I, to kind of set. Set a primer here just for maybe some of our audience that they may be investors. They may have invested in commercial and a lot of other, you know, areas, but maybe give us a primer on just what it means. When we’re talking about, you know real estate that’s backed or that’s, you know, cannabis related, like give us a primer on that, please.
Yeah. So, so Polaris is, is an asset manager that focuses today on solely lending to owners of commercial real estate. With licensed cannabis use tenants and so we’re basically still just a real estate lender But we’re what we would call ourselves today as a specialty Purpose lender or specialty use lender for solely that asset class and the reason that investors are coming to us is to To diversify their allocation into secured lending cash flowing funds out there and this asset class cannabis is going to be less impacted in a real estate or economic downturn than most other asset classes would be and that’s because cannabis is basically Going to be purchased regardless if there’s a war or if the stock is highly volatile, people are still going to purchase.
This is about a 27 to 30 billion a year of revenue each year. And it’s still growing in granted. People might buy slightly less or less cannabis, but they’re still going to be buying as opposed to. Other types of real estate transactions or, or classes, there may not be as many fixed foot homes that are selling you know, as we go through a real estate down cycle, or there might not be as many you know, tenants in some commercial properties out there as things, as the economy starts to move around and shake around a little bit.
But we believe that this is a good diversification for investors. And that’s why we only do cannabis, because we figured that. They already have enough exposure to other real estate asset classes. And they’re purely coming to us for this diversification in this sector. Now for real estate lenders in general, whether, you know, they’re lending for commercial for industrial, I mean, whatever residential, like there’s always inherent risks and lending money.
Right. And then the, for the individuals that are, that are also. So investing in that, in that paper, in that collateral. So I’m just curious. So what kind of like, tell us a little bit about the methodology of the thought process that goes into lending on these types of, of assets or this type of real estate.
Sure. So the way we approach this is. We only lend to existing operators with a proven track record. So we de risk that aspect of it. And then we only lend to bank quality sponsors that their personal or corporate guarantees would support the transaction form a cashflow perspective, quiddity perspective, and net worth perspective.
So we’re getting double digit rates on our transactions from, from bank quality type sponsors. And we’re lending off of a cost basis and are typically lending, you know, between 50 to 60 percent loan to cost basis. We believe that that’s the most true metric to look at this particular asset class and you know, we’re secured firstly position on all of our, our transactions.
We only value the real estate, but we do wrap up the tenant operator license and we do wrap up other collateral. We just don’t give it any value. So we believe that this asset class is significantly more. Robust and secure than traditional asset classes. And these properties are not sold to once the property has been stabilized or built out, this is a highly cash flowing property and they just are continuing to get it more and more efficient.
Our borrowers typically do 10 to 15 times more income. Per month in a, in a non cannabis tenant. Now it takes an enormous amount of build out to do that type of income, but they’re not going anywhere. They’re just want to then try to reduce their cost of debt, which we also have a fully stabilized loan within our, our existing fund that we can drop them down to, to reduce that rate for them.
Now, maybe clear up any misconceptions about money or banking as it relates to like the, like the cannabis industry, specifically to real estate, like how does all that piece work? Yeah, so I think the number one is is that that there’s no banking in this in the sector. And that is just simply untrue.
So in the more than 2000 transactions that we’ve looked at since 2016, we’ve never seen a transaction. Where the borrower, the property co owner, or the tenant of that, which would be cannabis related business, didn’t have banking in place and why that’s important is that so much rhetoric flies around that there’s no banking in.
There’s 684 banks that were listed on FinCEN’s website for the end of last year that were doing cannabis related deposits. And that’s about 15 percent of all the banks in the country. I think there’s about 4, 500 banks or so. And so what the misconception is, is why that there’s a cash buildup. And it’s not because there’s no banking, it’s because the credit cards are processed on the federal system, or what they call the rails.
And so You’re not allowed to use credit cards to process transactions. And, and now you can’t even use ATMs if there’s one inside the shop either. So what happens is that you have a buildup of transactions happening at the dispensary where they’re having to pay with cash and that cash is then being used downstream.
to pay vendors and other people, and then they got to go bank that that cash. Anytime you have cash, you’re going to have what’s called a suspicious activity report or something commonly referred to as SARS. Anytime it’s more than 10, 000, the bank’s got to do for more scrutiny. Cannabis has had an mSARS, marijuana SARS, in place, and any bank in the country can use that mSARS, SARS to, to, Deposit those funds.
Now, if they get it wrong, it’s not worth losing their banking license. So unless you built out a compliance department to board those cannabis deposits, you’re just not going to do it. And that’s, that’s why there’s only 15 percent and that’s actually down from over 700. Banks previously, so the numbers actually going down from the high watermark.
And it’s, it’s a lot of paperwork and a lot of things to do to, to be able to board those deposits. Yeah. So circling back to maybe the real estate side of things, like I know you mentioned some of those values and that there it’s pretty, it’s secure, but let’s just, you know, take me through if, if something did happen to a property for some reason, and they did default and like, like, what do you do with the property after that?
I’m assuming there’s like licenses and other things involved. Like what, what happens next? So, so nothing is different from the collateral perspective on the real estate side. We would foreclose on that. And we would perceive just like any other lender. What’s different here in unique in this sector or for our fund is that we have additional collateral in a, in more than what we valued that property at.
And so the tenant has to have a license that’s issued by the state. That makes it so that they can actually generate income with cannabis related business income. And so in all of our transactions, we, even if that tenant is unrelated, we’ve secured that license in the event that we did have to foreclose.
Some states, those licenses may be only worth tens of thousands of dollars. And some of the, some states, those licenses could be worth tens of millions of dollars. Regardless, you need the license to operate the property. So if we foreclose on a property, we would replace the tenant with another cannabis use tenant, because that’s the highest and best use.
That’s what it’s built out for. And we would utilize that license. And now we would be the owner of that license, or we would have the equivalent of that exchange. Are there any strategic advantages or things that you feel that make Polaris Capital Group like stand out in this space versus maybe some others?
Yeah. So we were the first to be the dedicated lender to the sector. In 2016, we were the first to launch a dedicated fund. We were the first to convert to a private mortgage rate. We were the first to get FDIC insured Warehouse, not a First Man . Yeah. We were the first to bring to, to, to get investment grade rated.
We’re the first to do a an an institutional bond offering. And then we were recently the first to do a securitization. So that, that, I mean, that’s a lot, that’s a lot of firsts here. And I think that’s also a great segue. So, I mean, I’m, I’m just thrilled to have, you know, played, played our little part in this journey, as I mentioned, bringing you on the show and and really just amplifying and bringing light to these stories, which it’s, it’s awesome to do.
So the first ever securitization backed by collateral in the cannabis sector. This is a big deal. What does this mean for the industry? Yeah. So what, how do you want to think about this is today we’re, we’re managing about 415 million and what we did is we took about 70 million of that portfolio of notes and we, we isolated those into a separate vehicle and of that, we sold 45 million of those 70 million of notes.
The most senior tranche at a lower rate to institutional type investors. And so number one is, is that we picked up the yield spread on that, the Delta between what was sold the rate that was sold to those investors. And what is the note rate? So that that comes in as a premium to our our fund members But we also brought in that capital which we get to redeploy At a higher rate as well And so this is a is a very typical model for any private mortgage rate in the country And this is a standard specialty finance vehicle that is utilized but The cannabis sector makes it, makes it different.
And the reason is, is that the compliance, the hurdles to get institutionals and even non cannabis friendly banks to be able to participate this and clear that path is massive because there really is no institutional capital in the space. Most of the stocks are not traded on the major big stock exchanges like the New York Stock Exchange or NASDAQ.
They’re over the counter and the institutional investors really can’t participate in those. So we found another path. We did a bond offering as well, where we cleared the same path too, which is a slightly different strategy. So we’ve cleared a path for institutionals to start entering into the space prior to there being any major legislation that deconflicts state policy from federal policy and we’ve got that path.
And so what that does is it brings more capital and invest brings will allow us to push out bring, reduce our cost of capital, which ultimately will be able to reduce the cost of the capital to our borrowers, but yet still maintain the double digit return yields to our investors. And so this is a major accomplishment.
We will be continuing to utilize the structure we expect to issue, you know, hundreds of millions of dollars a year and just not mix and match the right blend of securitization to our equity mix of the fund and still keep it a reasonable level of how we mix those products up. Do you see this almost as the, a sign that the industry is maturing and, you know, by, by even market demand, as you mentioned, some of those political things haven’t happened yet, but by even market demand that the industry is maturing.
I don’t know if I would say it as the industry is maturing more so as that. We have some amazingly talented people. Travis led this on our team. We have amazing people that, that team members internally that supported them and we have amazing third parties, legal teams investment banks.
And without those people and those expertise, I think that that is more the Genesis. We created the market, which didn’t exist. Just like we created the market with our fund when those investors didn’t exist for the retail investors. So it’s not that the industry is maturing. It’s that we’re creating the market and the demand that didn’t exist.
Which will allow the industry to start maturing, man. That’s exciting stuff. I want to go further into the, into the, the political side that you mentioned. So some people thought that this couldn’t happen or maybe wouldn’t happen without, you know, some change in legislation or something else. But you were still obviously able to make it happen.
Talk a little bit maybe about the political landscape and just like how this is evolved. Yeah. So I think that the first thing to clarify is that. The only reason that that cannabis is illegal today at the federal level is because it’s there’s a cannabis prohibition and it’s similar to alcohol prohibition.
So. If that if and when that prohibition is ended at the federal level It just makes it so cannabis is not illegal at the federal level So it’s still not legal nationwide each state is going to have their own say what the rules and regulations are to issue those licenses And how things work. So I think that that’s the number one first distinction to understand the only way that you would have federal legalization at the federal level is with a, you know, a constitutional amendment that forced that to be the case.
So I think that that’s the number one thing to think about. Now, what other people don’t realize is that because you’ve got this disparity between state regulations and federal regulations. As you move higher and higher rungs of banking and, and custodial of securities and things like that, you get to a situation where financial institutions and agents and third parties just simply can’t work in the sector or hold these securities.
Fidelity, Schwab, Pershing clearinghouses because it’s federally illegal and they just can’t take the potential exposure. And so that’s what needs to be cleared up. And there is legislation that is going through in various different forms. The most recent piece of legislation is the Safe Banking Act. Now, it may not get to clear up all the things that I just mentioned, but it’s chipping away at getting some of those things established.
It’s ironically talks about safe banking and basically the gist of this bill is you can’t treat a cannabis to any different canvas, deposit or any different than a traditional banking deposit Which I just don’t think that I personally don’t think that many more banks are going to enter the sector just because the just because this legislation passes Because of the compliance is still necessary to to complete but it will make it so that the cost of the it will make it so that Other aspects make banking easy and less expensive and that you your cannabis depositors will more Will be have the same products and rates as traditional banking, deposits and so that’s massively beneficial We are meeting with elected officials I met with the co sponsor steve dames a month ago and and the breaking news at that point was he did have the votes to get Through the Senate past 60 votes.
Now that doesn’t mean that it’s going to pass because there are still, it still needs to get to a floor vote. Not just pass the committee vote and they’re working on what’s called section 10, 10 language right now. I just met recently with Cory Garner. And he is still supportive of that. And so we’re talking directly with these people and doing what we can to bring.
The bandwidth and the support that we have across all of our borrowers in our context in the industry to help help push this through. We want that meaningful legislation passing our business model works without anything passing, but we would benefit enormously. And so would the entire industry with any.
Meaning full legislation to pass. Let’s dive a little bit further and and Polaris Capital Group. So I know we mentioned throughout this conversation, what you’re investing in, but maybe talk a little bit more about the investors or the type of investors that you typically work with. Yeah. So our fund is, is comprised of, of about a thousand retail investors.
Primarily I’d say about 95 percent are retail investors. And the rest are what I would call institutional size check writers, which might be small family offices, feeder funds, fund to funds foundations and things like that. And basically we had, we realized that, you know, going after institutional investors in the beginning or, or family offices, it, it was too new, too, too unproven of a strategy to, to really.
You know, more than a half a decade ago. Today, we have five years of audited financials and all the, and the, the asset center management, the track record to bring those investors in. But now it’s still challenging to come in as a direct LP, but we could find a path for the larger institutional sized check writers.
Through some of our other structures that we have, but basically our investors are just simply looking for, you know, to receive a double digit return yield, monthly distributions with the benefit of a qualified REIT dividend tax advantage. That’s something that’s very attractive when you have an asset class that is diversified from traditional real estate asset classes that, like I said earlier, is less impacted in a real estate or economic downturn.
It’s great. So Rob, first off, man, I just have to say, really appreciate you making some time out to come back on the show. And to break this news, like happy to bring this to our audience. But it just have to ask, I mean, what’s next, what’s next for you? What’s next for Polaris Capital Group. I don’t know, but I don’t know how many more firsts we can do, but the advantage is when you’re the first one there, you get to make all the firsts.
The only one we weren’t first for going was for going public, and that’s because we didn’t want to go public. We think that it’s better to remain private. You know, what’s next for us? You know, we do plan on issuing some more securizations in the future. You know, I don’t I don’t have any big headlines to break of anything else.
We’ve been working on the securitization for a long time and been waiting to make the announcement for for quite some some period of time. So we’re happy that it’s out in public domain now, and, you know, we look forward to To utilizing this and just really trying to, to bring these sources and these, this amount of capital to an industry that is starved for capital.
And, and, and frankly, just in lending in general right now is a, is a downturn of, there’s just a constraint, a constraint on capital out there. If somebody is watching this or listening to this and they want to follow up and continue the dialogue and learn more about Polaris Capital Group, what’s the best way for them to do that?
Yeah. So for people invested in interested in becoming an investor, if you’re an accredited investor, which is requirement, you can email us at IR for investor relations at Polaris, cg. com. And but Polaris is P E L O R U S and then cg. com. Choose an email. You can also look us up online and find us.
And then for borrowers that’s if email us at info at polar cg. com And for for our lending format where we only work with experienced operators Our minimum loan size is typically 10 to 30 in the sweet spots between 10 to 30 million An existing operator most of the borrowers know us and come to us directly And we, unfortunately we don’t have the ability to take calls from everybody that has questions.
You’ve got to email us your loan requests and we’ll go from there. So fantastic. And we’ll put all the, we’ll put that in the show notes. So meaning the website and all that good stuff, so people can check it out. And speaking of the audience, if this is your first time with mission matters, into an episode.
We’re all about bringing on business owners, entrepreneurs, executives, and experts and having them share their mission, the reason behind their mission. You know, what value are they adding to the marketplace and how are they making a difference? If that’s the type of content that sounds interesting or fun or exciting to you, we welcome you hit that subscribe button.
We have many more mission based individuals coming up on the line and we don’t want you to miss a thing, Rob, again, congrats. So happy for all the progress you’re making and the good you continue to do. Thanks again for making some time for us and coming back on the show. Thank you. Good to see it. Bye.