Rob Sechrist, President of Pelorus Equity Group- Interview Series

Number one, you have to have experience to be able to enter into the industry, and so that starts off with understanding how to operate or to grow cannabis. I would go work for a company first to get my understanding of what's going on. It's such a complicated and nuanced industry that without knowing how it works, from growing, extracting, testing, distributing, etc., go learn that business. That doesn't cost you anything but time.

Robert Sechrist

Not many have dared to venture into financing the cannabis sector, let alone where real estate is concerned. Local zoning regulations are steep and may change from time to time. You have to understand the zones in each state, county, and city, what kind of licenses are available there and who owns the property. Then again, you have to deal with red-tape that comes into play once you start transacting with marijuana businesses.

The Pelorous Equity Group has taken a plunge into this uncharted waters. We spoke to the President of the Group, Robert Sechrist about the journey and lessons that have been learned along the way.

Meet Robert.

As an intro, how did your career path lead you to commercial real estate in the cannabis industry?

After graduating from college, I went into medical sales where I developed entrepreneurial plans and raised capital for businesses in my spare time. Soon after, I launched my first business, an action sports company, and after growing it to 2.4 million in annual sales and 30 employees, I sold it. What I realized is all of that work to do just 2.4 million in sales with about 10% of gross profit was an enormous amount of work, and that I needed to do three things: larger transactions, shorter sales cycle, and get paid at closing. That’s when I went into real estate transactions. International deals were my focus for many years, until my best friend and co-founder Dan and I teamed up to form Pelorus in 2010. We've now done more than 5,000 transactions for over $1 billion dollars.

Almost everyone shies away from providing financing for the legal cannabis industry. What inspired you to take up this challenge?

After working in the lending world for decades, Dan and I saw an opportunity when our local Congressman, Dana Rohrabacher, passed the Rohrabacher-Blumenauer Amendment in 2014. We realized that cannabis was the largest newly created asset class for lending in the country, and after analyzing the space for a couple of years, we originated our first transaction in 2016. Shortly thereafter we became the first dedicated lender to the sector. We were often the first to do a lot of things in lending, both in product types and asset types, so this was something that was intriguing to us. We also believe in the many benefits cannabis brings to the U.S. and wanted to be a part of getting people off of opiates. So we had a vested interest on that side as well.

Local zoning regulations are a headache for municipalities across the country in states with regulated cannabis programs. For first timers, the learning curve is very steep and usually leads to complicated zoning ordinances. What can be done to improve the current situation?

That is a very complicated question, and we struggled with it as well for many years. Finally, we hired the best-in-class people to build our own proprietary database. We now know – in each state, county, city, or each of these zones – what types of licenses there are, who owns the licenses, their addresses, who owns the properties where they're situated, who the lenders are, 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. We were the first to discover that this is about a $50 billion asset class once all the properties are built out across the country, and about two and a half billion of that has already been lent today.

For people trying to figure it out themselves, you want to use an attorney. These are big dollars that are going into this, and you want to use specialists. Our database is proprietary, and we do not share it. That's a competitive advantage for working with us.

With the amount of complexity and upfront financial burden that is required to secure cannabis real estate, the playing field is tilted to favor large multi-state operators. How can smaller businesses (legacy operators) get past this hurdle?

Number one, you have to have experience to be able to enter into the industry, and so that starts off with understanding how to operate or to grow cannabis. I would go work for a company first to get my understanding of what's going on. It's such a complicated and nuanced industry that without knowing how it works, from growing, extracting, testing, distributing, etc., go learn that business. That doesn't cost you anything but time.

Next, when you are ready to go off on your own, utilize those contacts that you've built over time in the sector and go lease a property. You don't need to buy a property to get started in the industry, which takes off a significant chunk of capital that's required. The other strategy I would suggest would be to team up with somebody that has more capital.

Which has been your greatest project to date and what was the one lesson that you learned from executing this project?

To date, we've done 60 transactions for about $333 million, and about 25 of those have paid off already. We think all of our borrowers' projects are amazing. There are some really amazing stories, and they all have different nuances to those stories.

One of them is our recently announced roll up of Harborside, Loudpack, and Urbn Leaf. We believe that this particular brand, with their facilities and management team that's been put together from all three companies, is going to be one of the strongest operators in the country, if not the world, even though they're only in California. California is the largest market in the world, with the most users under one compliance, and we think that this is a very strong transaction.

Last year Pelorus Group achieved 434% YoY growth. Given the difficulties that most businesses encountered last year (pandemic period), what are some factors that you can attribute to this success?

This particular asset class is one that is going to do less worse in an economic or real estate downturn than traditional businesses. On top of that, the cannabis sector was deemed an essential business through the pandemic. It also has a completely separate supply chain from top to bottom. They have their own cultivation, testing, manufacturing, distribution and retail. So they were able to operate throughout the pandemic without having the same level of issues from an operational side.

In addition, the product is something that is going to do well regardless of the economy, because it's a relatively low purchase price, and most people are going to continue spending small amounts of money.

There must be some investor opportunities in financing cannabis real estate. Right?

We operate the largest privately held mortgage REIT in the sector. We have over a quarter of a billion dollars in assets under management, and our investment vehicle is private, meaning that our share price never changes. This means that there is no volatility on the balance of your principal investment – what you're going to get back when you redeem out of our fund. In addition to that, our target yield for our fund is 15% net IRR. We've achieved that every single year we've been in full operations, and we just achieved 15.8% for the last year.

Our thesis is the conservative approach to being invested in the cannabis industry. We have a high-yielding, cash-flowing investment that is secured by real estate, makes monthly distributions with the tax advantage. It saves 20% on your federal tax rate, and your state taxes are only paid in the state that you're domiciled. So if that is a no-tax state, that is an extremely beneficial tax structure. About 50% of our investors are from no-tax states like Nevada, Texas, and Florida.

It was such an honor to pick the brain of Robert from the Pelorus Equity Group.

Thank you for the great interview and for all of the work that you have done to help move this industry forward, readers who wish to learn more should visit Pelorus Equity Group.