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Report on Business Cannabis Professional Sale-leaseback agreements on the rise in U.S. cannabis industry, as MSOs look to free up capital

HIGHLIGHTS
  1. Curaleaf sold six properties to a REIT called Freehold Properties for approximately US$28.3-million, which it will now occupy as a tenant.
  2. Multiple MSOs are signing sale-leaseback agreements to unlock capital from real estate, as traditional bank lending remains a challenge.
  3. REIT tied to Acreage raised US$141-million last week in a private placement.

Curaleaf Holdings, Inc. will likely own little of its own real estate in the near future, says Curaleaf CFO Neil Davidson, as the company looks to extract capital from its property portfolio through sale-leaseback arrangements and re-deploy it into operations.

On Monday, the U.S. multi-state operator (MSO) announced that it had sold six properties to a newly-formed real estate investment trust (REIT) called Freehold Properties for approximately US$28.3-million. As part of the transaction, Curaleaf has signed 10-year leases on the properties: two dispensaries in Florida, a dispensary and a cultivation site in Massachusetts, and a dispensary and a cultivation site in New Jersey.

"We’re interested in cultivation, we’re interested in processing and retail of cannabis and our expertise lies in cannabis, not real estate. From our vantage point, we saw a good opportunity to monetize on some properties that we had purchased at what was a low double digit cap rate that makes sense to us, so we were opportunistic,” Mr. Davidson said in an interview.

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Curaleaf and Freehold entered into a triple-net lease, meaning Curaleaf will continue to pay expenses associated with the property, including property taxes and maintenance. Mr. Davidson did not provide additional details on the terms of the lease.

Curaleaf is not the only U.S. MSO reconfiguring its real estate portfolio through sale-leaseback agreements. These agreements allow companies to leverage their real estate to raise money, even when traditional mortgages are unavailable, which is largely the case in the U.S. where federally chartered banks cannot lend to cannabis firms.

In March, MedMen Enterprises Inc. sold two retail stores in California and a cultivation asset in Nevada to Treehouse Real Estate Investment Trust for US$18.4-million, then leased the properties back. Treehouse, a collaboration between MedMen and investment firm Stable Road Capital, raised US$133-million in January for cannabis real estate investments, starting with acquiring properties from MedMen.

In July, Trulieve Cannabis Corp. sold a large industrial property in Massachusetts to Innovative Industrial Properties, Inc. for US$3.5-million. As part of the sale-leaseback agreement, IIP also agreed to provide Trulieve with a “reimbursement" of up to US$40-million for tenant improvements to the building.

IIP, the only cannabis-focused REIT listed on the New York Stock Exchange, has a portfolio of more than 20 industrial and greenhouse buildings across the U.S. that are occupied by cannabis producers, including MSOs like Vireo Health Inc. and PharmaCann LLC (which is merging with MedMen). As of the end of June, the company had invested US$229.4-million in cannabis-related properties and had committed an additional US$57.4-million to reimburse tenant improvement work.

Just last week, a REIT called GreenAcreage Real Estate Corp., which has ties to Acreage Holdings Inc., raised US$141-million through a private placement. It intends to use the proceeds for sale-leaseback agreements, starting with Acreage properties.

“Access to capital for cannabis companies has been a challenge, particularly when you go and look for real estate, you can't use a traditional source for that, so we would typically use cash as opposed to a financing mechanism to buy property,” said Mr. Davidson of Curaleaf.

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“What this [deal with Freehold] does is it signals that the markets are realizing that there’s good returns in doing these real estate investment trusts, specifically around cannabis," he said.

The sale-leaseback strategy has yet to take hold in Canada, where banks are starting to lend to cannabis firms, using property as security. But it could form part of LP financing strategy moving forward, particularly as producers focus more on operations and less on amassing square footage.

When asked about potential sale-leaseback agreements on an earnings call earlier this month, Canopy Growth Corp. CEO Mark Zekulin said, “I think it is something we’d look at, as we look at any sort of financing instruments, but we are not in a hurry, we will wait for the right opportunity.”

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