Mr. Tyson Macdonald reports

NOVA NET LEASE REIT ANNOUNCES JOINT VENTURE WITH NEVADA INVESTOR GROUP

Nova Net Lease REIT has, through certain of its subsidiaries, entered into a joint venture with a Nevada real estate investor group. The JV partner is contributing two properties with an aggregate value of approximately $15.7-million (U.S.) into the joint venture.

Highlights

The joint venture acquired a portfolio consisting of two facilities in Nevada comprising a total of 98,500 square feet for an aggregate purchase price of approximately $15.7-million (U.S.).

• The joint venture is structured as a limited partnership with Nova Net Lease acting as the general partner and receiving a 15-per-cent LP interest in the joint venture.
• The JV partner will receive approximately $8.9-million (U.S.) of limited partnership units priced at $1.25 (U.S.), which are ultimately exchangeable for units of the real estate investment trust on a one-for-one basis. The JV partner units will receive a fixed 6-per-cent annual distribution, with any excess cash flow of the joint venture after debt service, joint venture expenses and distributions to the JV partner units to be distributed to the REIT's U.S. operating partnership. Cash flow to the REIT is expected to add approximately three U.S. cents of pro forma adjusted funds from operations per unit, inclusive of the currently outstanding Class B units in the REIT's U.S. operating subsidiary.
• The joint venture will have a three-year term.
• Upon conversion of the JV partner units to REIT units, the acquisition properties would increase the size of the REIT from one property to three and pro forma total assets from approximately $12-million (U.S.) to approximately $28-million (U.S.).
• The joint venture is expected to be immediately accretive on a pro forma basis to the funds from operations and adjusted funds from operations of the REIT.
• The tenant of the acquisition properties, Deep Roots Harvest Inc., is a leading vertically integrated cannabis operator which has served the Nevada market since 2015. The JV partners own a majority of the equity interest in Deep Roots.

Description of the acquisition properties

The acquisition properties consist of: (i) a mixed-use facility that serves as the headquarters of Deep Roots, and contains cultivation, manufacturing and dispensary operations; and (ii) a stand-alone retail building that contains dispensary operations. The attached table includes key characteristics of the acquisition properties.

                                 ACQUISITION PROPERTIES

Location          Facility size     Year built                                Current use
                         (sq ft) 

Mesquite, Nev.           88,500           2015   Headquarters, cultivation, manufacturing
                                                                and dispensary operations
West Wendover, Nev.      10,000           2020                      Dispensary operations

Following the acquisition, the REIT's portfolio including the acquisition properties is composed of three properties in two states, with aggregate square footage of approximately 170,000.

Acquisition financing

The total acquisition cost of approximately $16.2-million (U.S.) (including closing costs) will be satisfied by a combination of: (i) a mortgage loan registered against the acquisition properties of approximately $5.6-million (U.S.) aggregate principal amount from a federally regulated U.S. bank; (ii) approximately $1.8-million (U.S.) of a $2.0-million (U.S.) mortgage on the REIT's existing Kalamazoo property and approximately $8.9-million (U.S.) of JV partner units at a price of $1.25 (U.S.) per unit.

Structure of the joint venture

The joint venture is structured as a limited partnership with the JV partner receiving an 85-per-cent interest and Nova Net Lease receiving a 15-per-cent interest and acting as the general partner. The JV partner units will receive a 6-per-cent annual fixed distribution, equal to 7.5 U.S. cents per unit. Nova Net Lease is entitled to all excess cash flow of the joint venture following debt service, partnership expenses and fixed distributions to the JV partner units. The JV partner units are issued at a price of $1.25 (U.S.) and may be exchanged by the JV partner at any time on a one-for-one basis for Class B units in Nova Net Lease's U.S. operating partnership, which are economically equivalent to the REIT units. The joint venture has a three-year term, at the end of which either party may request a termination of the joint venture so long as the JV partner units have not been converted to Class B units. The foregoing summary is qualified in its entirety by the terms of the limited partnership agreement governing the joint venture, which limited partnership agreement will be available on SEDAR+ no later than Jan. 1, 2024.

Accounting treatment

Due to the structure of the transaction, Nova Net Lease will account for the joint venture under the equity accounting method. On a pro forma basis, assuming full conversion of all JV partner units, Nova Net Lease would have approximately $28-million of assets in the portfolio, approximately $3.5-million of international financial reporting standard rental income and adjusted funds from operations per unit of approximately 2.5 U.S. cents.

Management commentary

"We are delighted to bring on Deep Roots as a tenant and their investors as partners as we look to build scale and momentum for Nova," said Tyson Macdonald, chief executive officer of Nova Net Lease. "Deep Roots has built a strong single-state business in the cannabis industry, delivering almost 10 years of consistently profitable operations, making them the ideal tenant for Nova. We appreciate the commitment from their investor group in choosing to invest in Nova's strategy for continued growth. The conversion price under the terms of the limited partnership reflects our new partner's appreciation for the strong underlying value per unit, as well as the significant upside potential of Nova."

The addition of the Deep Roots portfolio adds to the initial asset contributed to the Nova Net Lease platform, a 70,000-square-foot vertically integrated operation in Kalamazoo, Mich., tenanted by Cloud Cannabis and contributed by investors in Cloud.

Mr. Macdonald added: "Cloud Cannabis continues to be a strong tenant with one of the strongest operations in the Michigan market.

"We have been operating in a challenging capital markets environment, which has increased the difficulty among all market participants to effectively raise capital," said Mr. Macdonald. "In spite of those challenges, we are excited to close this transaction, setting the stage for further growth."

Added Potter Polk, chief investment officer of Nova Net Lease, "With a robust pipeline, we are working to build a unique portfolio tenanted by some of the strongest current operators in the industry."

Keith Capurro, one of the principal investors of the JV partner and CEO of Deep Roots, concluded: "After a thorough process of examining how to best maximize the value of our real estate holdings, we believe that Nova's strategy for growth presents the best opportunity for tax-efficient long-term growth. We have confidence in the management team's ability to execute and are excited to be coming on as a partner."

About Nova Net Lease REIT

Nova Net Lease is a real estate investment trust focused on increasing unitholder value through the acquisition and ownership of cannabis-related properties in the United States.

We seek Safe Harbor.