Liquidating Cannabis REIT with a Catch

Two posts ago I talked about “seasoned liquidations” and I just happened to have found exactly that. Nova Net Lease REIT is selling its main asset, Class A Units of an operating partnership, for $3.71m USD, or $0.50 per share, after undergoing a strategic review. This represents a 456-498% premium to the 30-day VWAP. Nova will then wind down its REIT and subsidiary corporation and make a liquidation distribution to shareholders relatively quickly in the next month or two in the amount of US $0.40-$0.43/unit. In the press release the distribution is to be expected in 30-60 days following the completion of the sale and in the circular it just says first quarter of 2025. This could provide upside of between 12% - 22%. Its trading OTC at $0.3526 as ticker NNLRF and on the Canadian Securities Exchange at $0.375 with ticker NNL.U. The only problem: I haven’t been able to get any order filled as the volume is dreadful so I thought I’d just share it anyways as a good case study for finding inefficient mis-pricings in the smaller market areas. And maybe someone reading this will be able to get a buy in before the distribution.

Nova owned a cannabis industrial investment property as well as a JV that held two cannabis investment properties. This is the organizational chart with what they sold.

From reading the documents, they effectively had a 35% economic interest in the LLC they sold. So after this sale, they are going to be left with Verdant Growth Properties Corp. and the REIT at the top, both of which are going to be wound down. If you look on page 74-75 on the circular PDF, you can see the financial advisor’s liquidation value calculations for the LLC which comes to roughly the distributable amount.

The transaction was announced in November and unitholders held a meeting to vote on the transaction December 20. The shareholders voted to complete the sale and it closed on January 9. Management stated $0.40-$0.43 in the press release was the estimated distribution and in the Fairness Opinion that amount is given as more precisely $0.42/share in US dollars.

Based on the net difference between $0.50 per share and expected payout of $0.42, the estimated liquidation costs are about $596,000, which seems about right for a relatively quick/small liquidation. They also released the CEO when the agreement was entered into and replaced him with the CFO with no additional compensation. Also, not that it matters much, but I don’t think I have seen the financial advisor, or someone who works for the financial advisor, provide a fairness opinion and they themselves own a stake in that company.

The spread is available because the liquidity is tiny. I am a little disappointed I haven’t been able to get my ordered filled but I know there will be plenty more of these to play and hopefully someone can take advantage of the spread.