Recreational Cannabis REIT To Go Public Via Blank Check Company

A new real estate investment trust will set a couple of firsts next month when it becomes the first REIT to go public through a special purpose acquisition company, or SPAC, and becomes the first publicly traded recreational cannabis REIT.

Scheduled to go public through Subversive Real Estate Acquisition REIT, a blank check company that raised $225M earlier this year, the yet-unnamed new company will be the first REIT to be taken public through a SPAC, which has become an increasingly popular investment vehicle into public markets.

A SPAC is a shell company that is set up to go public, even though it doesn’t have any operations. Money poured into these “blank check companies” by shareholders is used to acquire another company, thus taking it public in a reverse merger. After the acquisition, the company is usually listed on one of the major stock exchanges.

Though it will follow California-based Innovative Industrial Properties in becoming the second publicly traded cannabis REIT overall, the Subversive-launched REIT will be the first to focus primarily on properties servicing the growing recreational cannabis industry, according to Subversive Real Estate Acquisition REIT CEO Richard Acosta.

That means it will favor properties in states where marijuana has been legalized, like California, and will be listed on the recreational cannabis-friendly NEO exchange in Canada.

“It’s certainly a very West Coast-heavy portfolio, and that’s really by design,” Acosta said. “We’re seeing the growth in the industry coming from the recreational markets as opposed to the medicinal markets.”

Marijuana is legal in 11 states, including Washington, Oregon and California, and only medicinal cannabis use is allowed in a separate 33. Acosta and others expect ample growth in the adult-use segment as recreational use becomes legal in more states. Globally, cannabis sales are on pace to rise almost 40% this year, according to BDSA. 

For now, though, the federal illegality of cannabis is a hindrance to cannabis companies and real estate investors like Subversive. U.S. stock exchanges usually don't accept a listing if the company is involved in business illegal under federal law, steering many recreational cannabis-related companies, including Acosta's, toward Canadian exchanges like NEO, according to Loeb & Loeb Vice Chair Mitchell Nussbaum, a SPAC expert.

The U.S. cannabis industry also faces banking and other capital constraints, making forming a public REIT a big difference-maker, according to Acosta. But that process also comes with challenges, he and Nussbaum said.

“What they’re doing is something really not easy to do," Nussbaum said. “I’ve had conversations with people who have wanted to do REITs in the past, but it definitely involves some heavy-duty creative structuring to get the benefits of the REIT in a SPAC structure.”

Acosta said it is his understanding that Subversive's deal is the first instance of a SPAC turning into a REIT, which Nussbaum confirmed.

“Now that I’ve gone through it, I realize why,” Acosta said. “It’s really hard to control a dozen different people and counterparties and have them all kind of line up for one transaction.”

Subversive's initial transaction involves 15 properties and multiple sellers, including Inception REIT, a private cannabis REIT led by Acosta. The SPAC has agreed to acquire 10 properties for $97.4M and originate or acquire five first-lien mortgages for $85.4M, with Inception REIT's portfolio making up two of the properties and one of the mortgages.

Eight of the properties are in California, with other large properties including a 455K SF industrial cultivation and manufacturing facility leased to cannabis company Flower One in north Las Vegas.

The SPAC also expects to acquire two additional properties following its initial transaction, making a portfolio of about 1.6M SF. By value, about 81% of its initial assets will be industrial, 11% retail and 7.8% a hybrid of industrial and retail.

In addition to its listing under the NEO tickers SVX.U and SVX.RT.U, Subversive is also listed on the U.S. over-the-counter bulletin board service under SBVRF. Last week, it announced bonus benefits to initial investors that would trigger upon a dual listing on a U.S. exchange or cannabis legalization in the U.S. 

Acosta said he wouldn't be surprised if more cannabis REITs join his and IPP, despite the complexity in setting his up. 

“I wouldn’t be surprised if you have another entrant or two in due time,” Acosta said. “There is a lot of property servicing the cannabis industry.”