TORONTO – Nova Net Lease REIT, a real estate investment trust with investments in cannabis-related properties in the U.S., entered into a unit purchase agreement with Bluebird Real Estate Holdings LLC, an affiliate of DRN Holdings LLC, pursuant to which Bluebird will acquire all of the Class A units of Nova Net Lease Operating LLC from Verdant Growth Properties Corp., a wholly owned subsidiary of the REIT. The Class A Units represent all, or substantially all, of the REIT’s assets. Bluebird is purchasing the Class A Units for total gross proceeds of US$3.71 million, which is US$0.50 per Class A Unit.
After providing for liabilities, unpaid transaction costs and administrative costs, the REIT expects to distribute its net assets to the holders of the REIT’s outstanding units and subsequently terminate the REIT in accordance with the REIT’s declaration of trust. The Liquidating Distribution, net of costs to terminate the REIT, is estimated to be between $0.40 and $0.43 per REIT unit. The Unit Purchase Transaction is expected to be completed in January 2025, and the Liquidating Distribution and termination of the REIT is expected to be completed within 30-60 days of such date.
Transaction Rationale
The Unit Purchase Transaction and the subsequent termination of the REIT have been carefully considered, and the reasons set out below highlight why the REIT believes they are in the best interests of Unitholders.
Cannabis Market Conditions and Cost of Capital – The arbitrage opportunity identified at the time of the REIT’s IPO between capitalization rates and public company valuations has significantly eroded. When the REIT completed its IPO, two key comparable cannabis REIT companies, Innovative Industrial Properties REIT (“IIPR”) and NewLake Capital Partners, traded at 37.5x FFO (2.7% equity yield) and 26.2x FFO (3.8% equity yield), respectively, according to FactSet. This was identified as a significant spread to cannabis real estate capitalization rates, which were observed to be approximately 10-13% by the REIT’s management. As of November 14, 2024, IIPR is trading at 12.5x FFO (8.0% equity yield) and NewLake is trading at 8.4x FFO (11.9% equity yield), according to FactSet. The REIT’s cost of capital and resulting liquidity has been significantly impaired on an absolute basis and relative to initial expectations at the time of the IPO.At the same time, capitalization rates for well-qualified tenants have also compressed. At the time of the IPO, management of the REIT observed such capitalization rates to be in the range of 10-13%. Now, management, the appraisers and other industry experts are observing capitalization rates in the range of 8-11%. These changes in the market conditions and the applicable cost of capital have completely eroded the Arbitrage Opportunity, in the view of the special committee of the Board of the REIT. Consequently, the Special Committee and the board concluded that it was necessary to consider strategic alternatives to the operation of the REIT’s business.
Lack of Access to Capital – The Special Committee, with the assistance of its financial advisors, through conversations with the board and management, investment banks, and industry experts, understand that the current conditions in the capital markets have resulted in a lack of capital being available to small and micro-cap companies in the cannabis and cannabis adjacent industries. Since the REIT’s IPO, real estate and cannabis equity financings are down from their long-term averages approximately 79% and 92%, respectively, in the Canadian public capital markets. The REIT requires additional capital to grow, and it must grow for its underlying business to be viable. The lack of access to capital that the REIT has consistently faced following its IPO has inhibited its growth and rendered the operation of the REIT’s business in the status quo to be unviable.
Waiting for Markets to Return Not Practically Feasible – Following several discussions with industry experts, major stakeholders, and advisors, the Special Committee concluded that it was not feasible to wait for markets to return to their pre-IPO levels. The strong feedback was that it would take significant time for markets to return and given the cash flow break even operations of the REIT, the opinions expressed further led the Special Committee to explore a plan that saw the sale of the Class A Units and termination of the REIT.
Attractive Value Relative to Market Price – The consideration the Unitholders are projected to receive in connection with the Transaction represents a premium of approximately 344% to 378% to the closing price of the REIT units on the CSE on November 14, 2024, the last trading day immediately prior to the announcement of the Unit Purchase Agreement, and a premium of approximately 456% to 498% to the 30-day VWAP of the REIT units on the CSE for the period ended November 14, 2024.
Transaction Details
Pursuant to the Unit Purchase Transaction, Bluebird will acquire all of the Class A Units of the Operating Partnership from Verdant for a purchase price of US$0.50 per Class A Unit and total proceeds of approximately US$3.71 million. The purchase price of US$0.50 per Class A Unit represents a premium of approximately 595% to the 30-day volume weighted average price per REIT unit ended November 14, 2024.
Following the closing of the Unit Purchase Transaction, the REIT expects to make the Liquidating Distribution to Unitholders within 30 to 60 days. Following the Liquidating Distribution, all REIT Units will be cancelled, and the REIT will be terminated in accordance with the declaration of trust.
To be approved and subject to a quorum being met, the Transaction resolution must receive the affirmative vote of (i) two-thirds of the votes cast on the Transaction resolution by the Unitholders present in person or represented by proxy at a meeting of shareholders, and (ii) a simple majority of the votes cast on the Transaction resolution by the Unitholders excluding votes cast by interested unitholders, determined in accordance with Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. The Unit Purchase Transaction is subject to other customary conditions. The Unit Purchase Transaction is not subject to a financing condition but does require lender consent.
The Unit Purchase Agreement provides for, among other things, customary representations and warranties, and board support. The completion of the Unit Purchase Transaction depends on a limited number of conditions being satisfied or waived, including, among others: (i) the Transaction resolution being approved by the Unitholders; and (ii) the required consents being received, including consent by the lender.
The Unit Purchase Agreement will be available on the SEDAR+ website within 10 days. Copies of the REIT’s management information circular and certain related documents will be sent to Unitholders and filed with Canadian securities regulators and will also be available on the SEDAR+ website.
In conjunction with the signing of the Unit Purchase Agreement, the Board of Directors released, without cause, Tyson Macdonald as CEO, and named its CFO, Stacy Riffe, as CEO to complete the Transaction and wind down all activities of the REIT. The Board of Directors thanks Mr. Macdonald for his time as CEO and appreciates his efforts leading up to the signing of the Unit Purchase Agreement.
Board of Trustees Recommendation and Fairness Opinion
The REIT’s board of trustees, after consultation with its financial and legal advisors, and on the unanimous recommendation of the Special Committee, has unanimously resolved to approve the Transaction and unanimously recommends that Unitholders vote for the Transaction.
Evans & Evans provided a fairness opinions to the Special Committee that, based upon and subject to the assumptions and limitations described in their respective opinions, the consideration to be received by Unitholders pursuant to the Transaction is fair, from a financial point of view, to Unitholders.
Advisors
Goodmans LLP and Hodgson Russ LLP are acting as legal counsel to Nova.
Evans & Evans has provided a fairness opinion to the Special Committee of Nova’s board of trustees.
About Nova
Nova Net Lease REIT is a cross-border real estate investment trust which has investments in cannabis-related properties located in the United States through its operating partnership.
About Bluebird
Bluebird is a private real estate company based in Nevada.
