GEO Investing

Executive Casts, a business focused on delivering content and investor outreach options for public companies through online video, often asks key executives of participating companies about their views on value creation.  It is arguably one of the most important concepts to shareholders and prospective investors.  In the case of Zoned Properties (OTCQX:ZDPY), we were able to get some insight into different ways that the company currently creates and plans to create value.  Discussed in the segments below:

  • The pillars of shareholder value creation
  • Value creation through smart property identification
  • Value creation through rezoning
  • Understanding cap rates and permit changes
  • Mitigating risks in a changing industry

Pillars of Shareholder Value Creation

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Creating shareholder value for us has two focus points: One, in establishing a strong foundation of real assets that we can put on our balance sheet with as low a non-toxic debt as possible. So, we’re establishing these real estate developments with long-term, triple-net leases to improve the net operating income of the property itself while not having a huge amount to pay on the debt side of these properties.

To create value for shareholders, we also look at improving the cash flow of our real estate portfolio to eventually we hope to lead to a consistent and healthy dividend payment to shareholders. So, by focusing on low debt or no debt real estate assets that are developed, we can create strong assets for the balance sheet while also increasing our net operating income. So, our cash flow is coming into the company that we can see down directly to an investor.

Value Creation through Smart Property Identification

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For accomplishing the mission of Zoned Properties in the identifying, developing and leasing of these properties focused on medical marijuana, that can often have very much so premium rental rates compared to traditional real estate. That process includes taking advantage of supply-demand. So, many of the cities and municipalities we focus on for developments and for clients, there are often very few properties in those locations that the local municipality will actually allow to be permitted and operated as a medical marijuana facility. So, in identifying opportunities where those shortages exist or entering into communities where we collaborate on the actual zoning ordinance and laws, we can rezone properties or establish variances for those properties for a client or tenant to use as medical marijuana facility. That immediately, once those local ordinances are changed or permit and variance has been granted to us, immediately increases the value of that property.

Value Creation through Rezoning

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So, in looking at the value that’s added once we rezone or establish an ordinance or rule or regulation change in collaboration with the local municipality, there’s two ways to look at value of those assets and the value that it creates for Zoned Properties: One, is in the actual value of the property itself. Once a permit has been established and connected to that property, Zoned Properties can immediately look at the resell value of that and in the past we have seen three to four times resell value of the asset itself.

The second way is to look at improvement in value of the actual real estate property and then in turn for Zoned Properties and our portfolio is in the cash flow. Once a permit has been established for a building or a parcel of land, we can then take advantage of the shortage of other properties that are located in that area, oftentimes allowing us to reasonably charge a tenant seven or eight times the industry rate for leasing. These facilities that sometimes might lease in the area of 10, 11 or $12 per square foot annually, we lease for 28, 32 or $35 a square foot annually and very reasonably for our tenants. Our goal here is to create a long-term healthy relationship with our tenant operators so that they are never in the position where they could possibly have a default on a rental payment.

Understanding Cap Rate and Permit Changes

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One of the primary ways that Zoned Properties takes advantage of cap rates in the industry is when we look to acquire or develop a property and, then change it’s use and lease that to a medical marijuana operator. So, for example, if we’re looking at a $300,000 property that’s a dentist office, and that property, at $300,000 value of the building, on a general industry cap rate, is at 10%. So, typically you’ll see industry cap rates and, again, as the capitalization of how much cash flow you can pull from the asset, you’ll see between 9 and 11%. So, the $300,000 building and a 10% cap rate should be able to charge that dentist and the dentist office $30,000 a year. What we do at Zoned Properties after we identify and acquire that building, we will work to attach a permit, either a used permit or a compliance permit, so that the medical marijuana tenant can operate out of that facility. And because of the unique aspect and the shortage in properties and buildings where that tenant can operate in the medical marijuana business, we can charge, sometimes, seven or eight times the price per square foot in rent. So, the essence of what we’re doing is we’re acquiring a property, $300,000 at a 10% cap rate and instead of charging the tenant $30,000 a year, we can charge them $120,000 a year. And almost instantly, once that permit is applied using the same cap structure, we’re charging them $120,000 a year. That building is now worth not 300,000 but 1.2 million.

Focus on Mitigating Risks in a Changing Industry

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As the medical marijuana industry evolves and grows on a national and on a state-by-state level, one of the things that will very likely happen is the commoditization of medical marijuana as a product itself. It’s very important that Zoned Properties continues to select sophisticated clients and tenants that will be able to survive the volatility and the changes of the industry. So, as the product commoditizes, so too will the rules and regulations that govern that commodity. We want to make sure that our tenants that are in long-term triple-net-leases with us can not only survive, but can capitalize on other businesses going under as they grab a larger market share.

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