Pelorus Capital Group is a leading provider of commercial real estate loans for the cannabis sector and its Pelorus Fund – which is a private mortgage real estate investment trust (mREIT) – is changing the commercial real estate lending landscape in the cannabis sector. To learn more about the company Pulse 2.0 interviewed Pelorus Equity Group President Rob Sechrist.
Rob Sechrist’s Background
After graduating from college, Sechrist went into medical sales where he developed entrepreneurial plans and raised capital for businesses in his spare time.
“Then, I went on to found Stinger Wakeboards, an international action sports manufacturing company, where I served as CEO,” said Sechrist. “After growing the company to $2.4 million in annual sales and 30 employees, I decided to sell it, and that’s when I first gained my appreciation and love for entrepreneurship. Launching the company was a ton of work for the amount of money we generated, but a valuable learning experience. That said, what I realized is that all of that work for just $2.4 million in sales with about 10% of gross profit wasn’t worth it and that I needed to move towards larger transactions.”
In 2010, Sechrist founded Pelorus Capital Group LLC with his best friend Dan Leimel. And now the company is known as the leading provider of value-add bridge and fully stabilized commercial real estate loans for cannabis businesses and owners with cannabis-related real estate.
“There, I also served as the co-manager of the Pelorus Fund, a privately held mortgage real estate investment trust with specialty lending to cannabis-use and cannabis-related properties,” Sechrist added. “Today, Pelorus has completed 73 commercial real-estate loan transactions and deployed $545 million to cannabis businesses and real estate owners, comprising nearly 4,473,000 sq. ft. in 10 states across the U.S – equivalent to 15-20% of all cannabis-use properties in the U.S.”
In his role at Pelorus, Sechrist is responsible for driving the company’s strategy in new markets, developing alliances with private and institutional investors, forming equity partnerships, and overseeing the Pelorus Fund’s assets under management (AUM).
“With 25 years of real estate experience, I have made it a priority to remain steadfast in my commitment to offering innovative lending solutions that bolster the cannabis industry while consistently producing attractive yields to investors. I also really enjoy educating landlords with cannabis real estate, operators, and investors on adopting a more nuanced and long-term outlook on the sector,” Sechrist continued.
Challenges Faced
What are some of the challenges you face in building the company? “With adult-use cannabis now legal in 23 states and the District of Columbia, and more states coming online, on the cursory level one would think there is all upside. However, being in the cannabis sector certainly comes with immense challenges,” Sechrist acknowledged. “In the past year, the U.S. Senate failed to pass federal reforms like SAFE Banking and that’s been coupled with Federal Reserve rate hikes, supply chain issues and other inflationary pressures. The bear market has hit many companies hard and put a wet blanket on stock prices. This market volatility has also greatly increased the cost of capital.”
Plus at the same time, the cannabis sector is growing and market valuations don’t match up. There is a record-high demand for cannabis-ready real estate, but there is also a lack of capital in the space to go around that is impeded by the lack of federal banking laws – which has made securing financing for expansion and improvement projects difficult.
“For entrepreneurs in the space, these challenges and a need for faster financing options have often resulted in operational delays, costing cannabis owners and operators millions in lost sales or higher rents,” Sechrist noted. “From our inception, we set out to come up with creative ways around these challenges by breaking the model and coming up with innovative lending solutions that work for both cannabis operators and our investors.”
Core Products
What are Pelorus Capital Group’s core products and features? “Pelorus Capital Group is a pioneer in cannabis lending that has been working hard to change the commercial real estate landscape. Through the Pelorus Fund, we provide value-add bridge commercial real estate loans and have been on a mission to ease burdens for owners and operators while drawing in a new class of investors eager to get in the marketplace. We have been dedicated to finding more streamlined ways to finance new construction and improvement projects for cannabis operators and landlords with cannabis-ready real estate, and have a plethora of competitive advantages to offer,” Sechrist explained. “One of the greatest advantages we provide operators is our ability to process draw approvals quickly – about 20 to 50% faster than going with a traditional lender – which saves property owners considerable time during the construction period. We’re able to approve construction draws in an average of one to three days and one agreement can cover the financing of the entire project. Our total cost of lending is typically lower, and our quicker draws mean both owners and operators can generate revenue sooner.”
The firm’s digital platforms enable them to understand the supply dynamics of cannabis-related property across the county. And they can easily take a look at location, market saturation, property type, and size: details that are essential to accurately assess risk and value.
“When you can get an accurate view of the landscape in an instant, you are in a much better position to move quickly and act with confidence. This is a big differentiator, especially for cannabis companies that have millions at stake and limited options; it’s all about who can get them the right financing, fastest,” Sechrist pointed out.
Significant Milestones
What have been some of Pelorus Capital Group’s biggest milestones? “Pelorus was the first dedicated lender in the cannabis sector, the first to become a private mortgage REIT (mREIT) and the first to be issued an FDIC warehouse line of credit. We also were the first private lender to get an investment grade rating, the first to issue an unsecured bond with institutional investors, and the first to update our fund to a billion dollars,” Sechrist replied. And most recently, we broke an industry barrier when our Fund’s 7% Senior Secured Notes were assigned an A rating from Egan-Jones, the highest credit rating issued to date in the cannabis industry–two steps above the previously highest rating of BBB+.
“Even in a volatile market, we were able to outperform the benchmark U.S. cannabis ETF by 84.58% and drove significant double-digit growth for our investors. We were also successful in further reducing our cash position in Q4 and have addressed the cash drag issue, and are working to offset some remaining balance of lower yield fixed rate stabilized loans, which was another contributing factor to the slightly lower yield of 2022. In this process, the portfolio has transitioned from 100% fixed rate at the beginning of 2022, to 73% fixed rate and 27% floating rate loans.”
Investment Success Stories
When asking Sechrist about investment success stories, he responded that to date the firm has done 73 transactions for $545 million and 38 of those have paid off already.
“We work with a wide range of operators and recognize quality across the sector regardless of size. One common denominator between all of our borrowers is that they each have competitive advantages. These can range from brand affinity, solid margins, operational efficiency, unique products that others don’t offer, good balance sheets, etc. Having a key feature that lets you get a leg up on the competition makes for a great lending opportunity,” Sechrist revealed. “One recent success story is our roll up of Harborside, Loudpack and Urbn Leaf into StateHouse Holdings. We believe that with the facilities and strong management team that have been pulled together from the three companies, StateHouse is positioned to become one of the strongest operators in the country, if not the world.”
Assets Under Management (AUM)
The Pelorus Fund ended 2022 with $377 million in loan commitments and $345 million in assets under management (AUM), marking 41.98% year-over-year growth. And the Pelorus Fund also announced it generated 61.3% total returns to investors who have opted to receive monthly distributions since its inception.
“For Pelorus Fund investors who chose to compound their returns monthly – 40% of its investors – that rate climbed to 83.5%, enabling the Fund to increase the cumulative return over time by reinvesting interest along with the principle. In addition, the Pelorus Fund completed 2022 with a 10.52% net annualized internal rate of return (IRR), an 11.9% year-to-date (YTD) return, a 14.15% life-to-date (LTD) return, and a 13.12% cash yield to date,” Sechrist affirmed.
Total Addressable Market
What is the total addressable market (TAM) size that Pelorus Capital Group is pursuing? “Our total addressable market grows as more states come online. Once all 50 states have legalized cannabis, the total real estate market for cannabis will fall between $35 billion and $50 billion. We’ve ascertained this number through our proprietary database where we’re scraping in over 200 sources of data every month and measuring market saturation and opportunity, amongst a host of other things,” Sechrist analyzed.
Differentiation From The Competition
What differentiates Pelorus Capital Group from its competition? “A major point of difference is that Pelorus focuses specifically on the cannabis industry with the main goal of stabilizing cash flow for its customers. Pivotal to our strategy, we shift the equity capital component to the real estate side of the business, improving the value of customer facilities and lending off of that model. We’ve taken a targeted, conservative approach to our lending, only lending against actual real estate value even though we’re collateralized by the real estate and license, as opposed to our peers, who use either a BDC or sales-leaseback model. With the BDC model, lenders require significant financial covenants, which can hamstring company growth. In a sales-leaseback, typically a 15-20 year agreement, a borrower gives up their most valuable asset and hampers their optionality. While our peers are struggling to deploy capital and having borrowers default on payments, we continue to capture market share, and part of that can be attributed to our particular lending model, which we feel has proven to be the most appropriate model for such a nascent industry,” Sechrist assessed. “Also, we hired the best-in-class people to build our own proprietary database. We now know – in each state, county and city – what types of licenses there are, who owns the licenses, their addresses, who owns the properties where they’re situated, etc. This database was the first of its kind to understand the market from multiple perspectives. We wanted to know the current capacity for any one market, for different types of licenses, and know when the market was going to be approaching saturation.”
Pelorus was the first lender to discover that cannabis is about a $50 billion asset class once all the properties are built out across the country. And out of that figure, only about two and a half billion has already been lent today. The company’s database is proprietary and they do not share it. That has been a competitive advantage for working with Pelorus.
“In addition to our data advantage, we’re unrivaled in our industry experience. The first dedicated lender in cannabis, we’ve been involved in more than 5,000 transactions, and through our sheer experience, knowledge of the space and the relationships we’ve formed, we really understand market dynamics and take a nuanced approach in our lending where we properly assess risk and opportunity. Our numbers are a testament to our operational strength,” Sechrist shared.
Future Company Goals
What are some of Pelorus Capital Group’s future company goals?
“In stark contrast to what we saw shake many cannabis businesses in 2022, we capitalized on our informational edge and deep understanding of the cannabis space to make high-impact investments that delivered value to clients and investors alike. Looking ahead in 2023, the Pelorus Fund expects to achieve a target yield of 12% to 15%,” Sechrist concluded. “We remain steadfast in our commitment to leverage our deep industry experience and proprietary data to grow our AUM and roll out additional innovative financing solutions that help increase available capital to best-in-class cannabis operators in the space.”
