A group of cannabis investors just raised $225 million to buy up real estate in a tough market. Here's how they put the deal together.

Jeremy Berke

Feb 21, 2020, 19:12 IST

A group of cannabis investors just raised $225 million to buy up real estate in a tough market. Here's how they put the deal together.

REUTERS/Rafael Marchante

A worker smiles as she shows cannabis plants at the Tilray factory in Cantanhede, Portugal April 24, 2019.

Subversive Real Estate Acquisition REIT LP is the newest cannabis-focused real estate investment vehicle in town.
The fund's CEO, Richard Acosta, told Business Insider that they raised $225 million over a two-week period in December through a SPAC, or special purpose acquisition vehicle.
SPACs are an increasingly common strategy used by investors to go after cannabis operators.
Acosta says they're looking at all types of deals, from distressed to "well-capitalized" cannabis operators.
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Picking the right investment horse to back in the cannabis craze is a difficult proposition, but if there's one strategy that has stood out in a tough market, it's real estate.

To that end, Subversive Real Estate Acquisition REIT LP raised $225 million through a public offering in January on Toronto's NEO Exchange. The fund picked the Canadian market since most cannabis and cannabis-related companies are barred from the major US exchanges.

The money was raised in a two-week period during the December holiday season, a notoriously tough time to raise capital, Richard Acosta, the fund's CEO, told Business Insider in an interview.

While the company has yet to make its first investments, Acosta says it will skew toward industrial real estate - things like cultivation facilities - and retail assets, like dispensaries.

Acosta said he's getting lots of inbound calls and he's not ruling out distressed investments given the state of the industry.

"We're looking to partner with the better credits, and management teams we're willing to invest in," Acosta said.

Part of the challenge, on that front, is doing diligence on their tenants - and the parent companies - that they choose to partner with.

'Distressed, stressed, and those that seem fine'

"Distressed, stressed, and those that seem fine and seem well-capitalized, we're assessing all of those opportunities," Acosta said. "Based on the phone calls we're getting, some operators expect the landscape to get worse before it gets better."

Listing on the NEO, Acosta says, will serve as an "incubator" so the company can switch to a US exchange if federal policies relating to cannabis shift.

The fund was developed through a partnership with three companies, including Subversive Capital, which manages a $575 million cannabis industry-specific SPAC also listed on the NEO Exchange; Inception Companies, an LA-based cannabis investment fund; and Canaccord Genuity, a Toronto middle-market investment bank that's led the most cannabis-related deals in recent years.

Acosta previously led Inception Companies' cannabis-focused REIT.

Courtesy of Richard Acosta

Subversive Real Estate Acquisition REIT LP Richard Acosta.

The money was raised through a blind pool, or special purpose acquisition vehicle (SPAC). Put simply, SPACs pool money from investors - in this case, $225 million - into a public company. Once public, the SPAC can go out and make acquisitions or investments based on a strategy defined by the company's managers.

Why a SPAC?

A REIT, in simple terms, is a company that makes money off of commercial real estate investments, either owning or operating buildings itself, or financing the acquisition of real estate.

Acosta and his backers put the two strategies together to chase after cannabis opportunities.

SPACs are an increasingly common structure used to invest in cannabis companies because most traditional investors, like pension-backed hedge funds or private equity firms, are reticent to get involved in the industry since cannabis is federally illegal in the US.

Silver Spike Capital, another cannabis-focused SPAC, raised $250 million in a public offering led by Credit Suisse in August, Business Insider previously reported. And Citigroup's Canadian arm led Bespoke Capital's $350 million cannabis SPAC last summer as well.

"It goes back to where the capital markets are," Acosta said. "You see where the stocks have gone in the last 12 months. There really is no IPO market, right? I don't think you'll see any large scale IPOs in cannabis for the next couple quarters."

Acosta has a point. Though some cannabis companies have seen their stocks rise in the past week, one index of marijuana stocks lost about 50% of its value in 2019, after a slew of disappointing quarterly returns. And the industry has been hit with a wave of layoffs, corporate restructuring, and bankruptcies.

Some companies, like MedMen, have seen their shares crater well below $1 and have fired their founding executives.

'The market has sharply corrected'

Cannabis-focused REITS like Innovative Industrial Properties have generally outperformed the stocks of major cannabis cultivators and retailers in recent months.

"The industry in the eyes of investors really has to prove itself, right?" Acosta said. "I think we overshot on valuation. And I think the market has sharply corrected."

Acosta says he evaluated raising the money through a traditional IPO, or initial public offering, but went the SPAC route because it "lends itself to speed of execution."

"We were able to raise that money in December, it was effectively a two-week roadshow," Acosta said. While Acosta wouldn't directly disclose the fund's investors, he said it's largely US and Canadian institutional investors, with some retail investor participation as well," Acosta said.

In his view, "entering the market at a time of recalibration" is what resonated with investors most on the roadshow, he said.