Power REIT (NYSE-A:PW), the specialized real estate investment trust (REIT), has closed its previously announced acquisition of a state-of-the-art 556,146 square foot (sq ft) cannabis growing greenhouse in Michigan for US$18.4 million.
The 61-acre facility will be the largest cannabis cultivation facility in the US state and is believed to be one of the largest in the US. It has existing plans in place to add another 330,236 sq ft with further land available.
"This is a very exciting transaction for Power REIT – it is our largest acquisition to-date and one of our more complex transactions," said David Lesser, Power REIT’s CEO.
"Due to our flexible balance sheet and focused investment strategy on greenhouses, we were able to opportunistically acquire this property through a receivership process," he added.
"This property was previously used for cultivating red-bell peppers and demonstrates Power REIT’s ability strategically re-purpose existing greenhouse structures for cannabis cultivation.”
Power REIT will fund capital improvements for the greenhouse to position it for cannabis cultivation and its current capital commitment for the initial phase of improvements is around US$3 million
Under the deal, a wholly-owned subsidiary of Power REIT entered a 20-year “triple-net” lease with Marengo Cannabis LLC, which in turn is a wholly-owned subsidiary of Millennium Cannabis LLC, which allows the use of property as a cannabis cultivation and processing facility.
Millennium Cannabis must pay all property related expenses including maintenance, insurance, and taxes and after an initial 20-year term, the lease provides two, five-year renewal options and has a guarantee from Millennium Cannabis LLC.
After an initial deferred rent period to allow for renovations, the lease stipulates rental payments that mean the full return to the company's subsidiary of its invested capital over the next three years, and thereafter, provides an around 14.7% yield increasing thereafter at a rate of 3% per year.
The lease provides straight-line annual rent of around US$4.3 million, representing an unleveraged core funds from operations (FFO) yield of approximately 20% on the invested capital.
Millennium Cannabis will maintain a medical marijuana license and will operate in accordance with all Michigan and municipal regulations. The lease prohibits the retail sale of cannabis at the property.
In 2008, Michigan became the 10th US state to legalize medical cannabis. During 2020, its first full year of recreational sales, the Michigan market generated US$1 billion in total legal medical and adult-use revenue.
Revenue for 2021 is projected to reach US$1.8 billion, an increase of 80% year-on-year (YoY). This would make Michigan the second largest cannabis market in the country, second only to California.
Power REIT is a specialized real estate investment trust (REIT) that owns sustainable real estate related to infrastructure assets, including properties for controlled environment agriculture (greenhouses for the cultivation of food and cannabis), renewable energy, and transportation.
CEO Lesser explained: "Our dynamic growth is a function of the attractive yields we can achieve with our strategic greenhouse investments coupled with our relatively small size which amplifies the impact of these transactions.
"With a recent stock price of $44.92 and a forward Core FFO run rate of $3.59 per share based on our in-place transactions and without additional growth, Power REIT trades at a 12.5 multiple.
"We believe we can continue to drive significant additional growth through acquisitions by employing non-dilutive capital as well as re-investing capital from our unique lease structure which has a front-loaded rent that returns Power REIT’s invested capital in the early years of leases.
"We believe our potential growth rate driven by acquisitions combined with a relatively low forward Core FFO multiple provides a compelling value proposition for investors. We have an active pipeline of acquisitions and hope to announce additional activity in the near future."
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