Big marijuana companies in the United States increasingly are turning to debt as a funding tool, spurred by falling cannabis stock prices and terms that are more attractive than those for real estate sale-leaseback deals.
Multistate operators Curaleaf, headquartered in Massachusetts, and Cresco Labs, based in Chicago, have led the way by announcing debt raises of up to $300 million and $200 million, respectively, in recent weeks.
New York-based Acreage Holdings joined the bandwagon last Friday, announcing it secured up to $100 million through a credit facility with an unnamed institutional lender.
Acreage CEO Kevin Murphy said in a news release the debt funding comes at “a time of limited capital availability for our industry.”
He noted his company had “cemented a relationship with a well-capitalized institutional lender that has the capacity to provide additional credit facilities as necessary.”
Such deals might be a sign of things to come, said Jeff Schultz, a partner at cannabis-focused investment bank Navy Capital in New York.
For starters, falling cannabis stock prices have made equity a less attractive source of funding for marijuana companies.
At the same time, large cannabis companies increasingly have been selling their cultivation, processing and storage facilities and immediately leasing them back as a way to instantly raise tens of millions of dollars.
But such sale-leaseback transactions tend to lock in the asset seller for a much longer period than straight debt deals that are typically, for now, set up with similar interest rates, analysts said.
In addition, the cannabis company continues to incur added expenses leasing back the property.
“The well will eventually run dry on pure sale-leasebacks, so we expect to see more debt financings like the one announced recently by Curaleaf,” Schultz predicted.
That deal is believed to be the largest amount of debt raised in the U.S. marijuana industry.
Debt beckons as equity fades
Recent data bears out a trend toward debt and away from equity.
While equity investment still far outpaced debt in 2019, the overall equity figure was down versus 2018, according to New York-based cannabis data group Viridian Capital Advisors.
Debt raises globally, by contrast, were up almost 30% in 2019 versus the previous year, with much of that activity in North America.
Such trends were particularly noticeable in the latter part of last year.
While equity raises in the last three months of the year amounted to $700 million – or just 8.7% of the year’s total of $8.1 billion – debt financing totaled $110.3 million in December of last year compared with $45.5 million in the same month in 2018, according to Viridian.
“The cannabis industry has for the most part seen that equity financing has all but dried up,” said Brett Hundley, senior analyst at Seaport Global, an investment bank headquartered in New York and New Orleans. “It is clear that the industry is now turning to debt financing.”
The recent string of debt offerings could also be signs that the industry’s current flirtation with sale-leaseback deals might not be a favored option in the long term.
The leases “are usually in place for 15 years, locking in that expensive financing rate, while the recent Curaleaf and Cresco deals were for only a couple of years,” said Mike Regan, an equity analyst for Marijuana Business Daily’s Investor Intelligence.
The shorter term of debt provides more flexibility to possibly refinance at lower rates in a few years instead of “locking in a 14% lease rate for the next 15 years,” Regan added.
Hundley of Seaport Global agreed that debt offers better terms than a typical sale-leaseback transaction.
“Companies would 100% choose debt financing if they could. It’s not even close in my opinion,” Hundley said.
“With leasebacks, you are selling an asset – sometimes a very valuable asset – to access financing at a very high cost and then leasing it back. It’s an expensive way to raise capital.”
Debt still not an easy option for many
All that said, debt deals might still prove difficult for struggling companies.
“We anticipate that tier 1 operators will be able to negotiate materially better terms than the rest of the industry who will also likely seek debt financing, but perhaps on much more onerous terms,” Navy Capital’s Schultz said.
Debt will, however, increasingly be an option for well-run cannabis companies that are nearing profitability, agreed Regan of Investor Intelligence.
“Companies usually need positive EBITDA against which to borrow,” he said. “As more companies in the industry become EBITDA positive, there should be more debt deals. Companies that cannot show positive EBITDA will have more difficulty accessing capital.”
Looking ahead, multistate operators such as Acreage, Cresco, Curaleaf and possibly Arizona-based Harvest Health & Recreation – as well as some cash-heavy Canadian producers – will likely continue to be able to access debt.
Moreover, the apparent availability of such debt should also act as a significant incentive for smaller companies that might face a harder path to profitability.
“I think many companies would have liked to be negative cash flow for the next couple of years and build a business at losses, but this is now acting as a strong motivating factor for them to pivot towards profitability, ” Seaport Global’s Hundley said.
Nick Thomas can be reached at firstname.lastname@example.org