Over the past year the cannabis sector experienced its first sustained contraction in capital markets transactions and capital availability. Here are the numbers according to the Viridian Cannabis Deal Tracker. In 2019 the number of capital raises declined by 12.6% and the total capital raised fell by 17.8%. So far in 2020, the decline has been even more significant. Through the first 8 months of 2020, the number of capital raises fell by 52.5% and the total dollars raised shrank by 72.9% compared to the same period in 2019.
What caused this sharp decline?
- Disappointing financial results from Canadian LPs and MSOs causing Canadian/U.S. equities analysts to lower forecasts and stock ratings
- As public stock prices began to fall, companies were forced to raise capital at increasingly dilutive levels, if at all
- Numerous capital and M&A deals were cancelled or re-priced
- Public cannabis companies, long the most aggressive acquirors, were weakened with falling stock prices and shrinking cash balances
- Management cracks began to appear as inexperienced operators faced a challenging capital markets environment for the first time
- The lack of progress on key U.S. industry legislative initiatives, particularly the SAFE Banking Act.
The Sale-Leaseback Transaction Emerges in Cannabis
As capital availability has dried up cannabis companies have looked for alternatives to generate growth capital. Several larger, vertically integrated operators have looked to their balance sheets to free up assets, in particular the real estate underlying their cultivation, processing and manufacturing businesses. The emergence of the “Sale-Leaseback” transaction in cannabis has arrived.
A sale-leaseback traditionally involves a company selling the real estate it owns and subsequently leasing it back from the investor/buyer, thereby freeing up capital. This transaction provides several key advantages:
- Can return the full value of the real estate asset’s capital back to the company, vs. traditional financing which may only bring a percentage of the asset’s value
- Provides off balance sheet financing
- Shrinks liabilities on the balance sheet
- Can provide much less dilutive financing and lower cost of capital
Over the past nine months the cannabis industry has seen several high-profile recent transactions that illustrate this trend.
- July 2020: Multistate cannabis operator Columbia Care Inc. (NEO:CCHW) (OTC: CCHWB) announced that it had sold the its dispensary, cultivation and manufacturing facilities in Vineland, New Jersey, totaling approximately 54,000 square feet to San Diego- based Innovative Industrial Properties (NYSE: IIPR) in a sale-leaseback deal valued up to $14 million. This is the second sale-leaseback deal New York based Columbia Care has done in 2020.
- July 2020: Multistate cannabis operator Cresco Labs Inc. (CSE: CL) (OTCQX: CRLBF) announced that it had sold its Fall River, Massachusetts-based property which covers 118,000 square-feet of industrial space, including cultivation space, a processing facility, and dispensary.to San Diego- based Innovative Industrial Properties (NYSE: IIPR) for $28.8 million.
- March 2020: Multistate cannabis operator Green Thumb Industries (CSE: GTII) OTCQX: GTBIF) announced it has sold an Illinois cultivation and processing facility to San Diego- based Innovative Industrial Properties (NYSE: IIPR) in a sale-leaseback deal valued up to
$50 million. This is the largest of three sale-leaseback deals Chicago-based Green Thumb has done with the California real estate investment trust.
- February 2020: Grassroots Cannabis announced that it signed a $19.7 million sale- leaseback deal with NewLake Capital Partners, whereby NewLake is buying and leasing back 10 marijuana retail stores in six states from Grassroots.
- October 2019: Innovative Industrial Properties (NYSE: IIPR), the real estate investment trust (REIT) completed a sale-leaseback deal with multistate dispensary company PharmaCann, paying $18 million plus transaction costs for a 48,000-square-foot industrial property in Dwight, Illinois.
- October 2019: Acreage Holdings, Inc. (CSE: ACRG.U) (OTC: ACRGF) (FSE: 0VZ) and GreenAcreage Real Estate Corp announced the closing of a series of sale-and-leaseback transactions for the sale of certain properties and facilities from Acreage Holdings to GreenAcreage for an aggregate of approximately $18 million to Acreage Holdings and approximately $23 million overall including payments to a third-party seller. The locations funded and closed today include facilities in Massachusetts, Florida and Pennsylvania.
- August 2019: Curaleaf Holdings (OTC: CURLF) announced that it entered into a sale- leaseback transaction with Freehold Properties valued at approximately $28.3 million for six of its properties in Florida, Massachusetts and New Jersey.
Capital is the fuel for any company in an emerging industry. We will continue to see a more diverse range of financing for cannabis companies as legal and legislative initiatives emerge and businesses mature. For now, sale-leaseback transactions have become an attractive option to unlock cash on the balance sheet by removing ownership of real estate assets.
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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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