Curaleaf expects margins over 30%, openings slow for iAnthus & more

By Mike Regan , Equity Research Analyst

Curaleaf foresees margins “well above” 30%, moves to de-risk stock … 

Our key expectation for Curaleaf was for the guidance for 2020, as we last noted in our review of the Grassroots Cannabis deal, and Curaleaf did not disappoint.

On the Massachusetts company’s analysts call to discuss the latest earnings, Executive Chair Boris Jordan gave guidance of $1.0 billion-$1.2 billion and EBITDA margins “well north” of 30%, assuming certain acquisitions close on Jan. 1, 2020, which, after doing the math, yields EBITDA of more than $300 million-$360 million.

Consensus expectations actually came down to an average of $305 million at a 30.7% margin from $321 million and 32.2% going into the call.

It is important to note the new guidance assumes no recreational sales until they actually open stores, such as in Massachusetts or Illinois.

… and engages in leaseback financing

The other interesting note from Curaleaf was its raise of $28.3 million of nondilutive financing via a sale-leaseback of six facilities, at what was termed on the conference call a “low-double-digit” cap rate.

The added interest expense from the leaseback will pressure EBITDA margins since lease expense is included in that metric while depreciation for an owned property is not – implying that perhaps the margins are even higher than expected.

A 14% cap rate would imply about $4 million of annual lease expense to hit the EBITDA line going forward.

The fact that lessors view enough stability to the cash flows to consider buying and leasing back cannabis properties is a further sign of industry maturation, and it provides nonequity and nondilutive financing options for cannabis companies.

Openings slow for iAnthus

The New York-based company reported second-quarter earnings with a miss on revenue, offset by better cost control and a smaller-than-expected EBITDA loss.

Revenue for the second quarter of $19.2 million was 8% less than consensus expectations of $20.9 million, though the company maintained cost control and posted an EBITDA loss at $4.7 million.

On the conference call, CFO Julius Kalacevich gave guidance for $15 million-$20 million per quarter of capital expenditures, which implies $55 million-$65 million for the year, below consensus expectations of $70 million.

Part of this may be stem from a slowdown in dispensary openings: COO Patrick Tiernan said the company expected to have 17 dispensaries open in Florida by January 2020, which is a reduction from the previous target of 20 by the end of 2019 noted on the May 31 call.

Harborside announces 5% buyback and guidance, walks from deals

Oakland, California-based Harborside (CSE: HBOR) is allocating capital in a very shareholder-friendly way by initiating a buyback (we believe it’s possibly only the second in the cannabis sector) and walking away from deals that no longer make sense given the value offered in the company’s shares.

With its second-quarter results, Harborside announced its intention to repurchase 5% of its shares and noted that it will not proceed with the Agris, FLRish and Airfield deals given the sellers’ desire to renegotiate after the drop in the stock price – again highlighting the risk of deals struck with volatile equity.

Harborside also gave guidance for revenue of $55 million-$57 million for 2019 and to be “EBITDA profitable.”

Given revenue of $24.7 million and an EBITDA loss of $100,000 in the first half of 2019, the company is guiding to:

  • Revenue of $30 million-$32 million.
  • Revenue growth of 21%-30% half-over-half.
  • Basically break-even on EBITDA for the second half of 2019.

HBOR shares have dropped 54% since going public in June at CA$6, closing at CA$2.86 on Aug. 30 after increasing 17% in response to the news.

The choice by management to allocate capital to their own business – which they already know and control – instead of buying another company is a positive sign on the fiduciaries and their stewardship of investors’ capital.

We will do a deeper dive into Harborside’s second-quarter results and operations in the near future.

More deal-contingent equity at Tilray 

Tilray, based in Nanaimo, British Columbia, agreed to acquire Four20 Investments for up to CA$110 million in Tilray stock, with CA$70 million in stock at close and potentially CA$40 million subject to certain milestones.

The interesting aspect is the all-equity structure with what seems to be fixed-dollar terms: The sellers won’t be exposed to the fluctuation in TLRY shares between now and the close date, expected by the end of March 2020.

As described in our recent note on capital structure complexity, such a deal will complicate the calculation of Tilray’s shares outstanding until close in six months. As of the Aug. 29 closing price of CA$26.74, the deal will add 2.6 million-4.1 million shares.

But declines in the stock price will increase total shares, while a rise will decrease them.

State Flower sells interest below 3.0X sales

Terrascend agreed to buy 49.9% of the firm that owns the State Flower brand for $2.85 million, with an agreement for the balance based on revenue. Terrascend, based in Toronto, is also providing a $3.75 million line of credit, which yields a total acquisition value of $9.46 million.

Per data from Headset, State Flower’s revenue for the trailing 365 days is $3.23 million, yielding a 1.77X trailing sales multiple on the equity alone and 2.93X including the line of credit. As shown in our most recent comp table, 2.93X is near the lower end of the multiples for vertically integrated operators.

While the deal is small, we are reporting it given that it provides an enterprise value/sales comp for part of a premium brand with a cultivation facility.