The future looks bright for marijuana stocks -- assuming they can make it there.
According to various Wall Street estimates, the global pot industry could generate between $50 billion and $200 billion in annual worldwide sales by 2030. With global revenue chiming in at $10.9 billion in 2018, this represents an insane amount of growth still to come.
In addition, with tens of billions of dollars exchanging hands each year in the black market, there's no doubt of the demand that exists for marijuana and derivative products.
But as is common with any next big thing investment, the North American marijuana industry is encountering growing pains. And these growing pains are liable to thin the herd, so to speak.
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There are issues aplenty with the North American cannabis market
To our north, Canadian pot stocks are contending with serious supply issues. Health Canada has struggled to work through a backlog of cultivation, processing, and sales license applications that totaled more than 800 when the year began. Even with a midyear rule change for cultivation license applications, it's unclear when supply constraints will lift to our north.
Furthermore, Canada's largest province by population, Ontario, had a meager two dozen retail dispensaries open for business a full year after marijuana was legalized. Ontario's inability to quickly license retail shops is leaving consumers little choice but to turn to the black market.
Within the United States, high tax rates have been a bothersome problem. In California, the combination of state and local taxes, a 15% excise tax, a wholesale tax on cultivation, and other expenses, such as laboratory testing, are all combining to tax the daylights out of legal purchasers. Perhaps it's no surprise that legal pot sales actually declined in 2018, the year that California opened its doors to adult-use weed sales.
Financing has also been a serious concern in the United States for cannabis stocks. With marijuana being a Schedule I drug (i.e., illicit), banks often choose not to extend basic banking services to weed businesses. This leaves U.S. pot stocks with few means of raising capital, other than diluting their shareholders by issuing stock.
However, this last "growing pain" may now have a solution.
Image source: Getty Images.
Say hello to sale-leaseback agreements, the new financial lifeline for U.S. cannabis stocks
Even though banks have been unwilling to regularly lend to marijuana businesses, and pretty much all cannabis reform measures are set to die once they reach the Senate, pot stocks have found a workaround to this mess through sale-leaseback agreements.
A sale-leaseback involves a marijuana company selling an asset, such as a medical marijuana grow farm or processing center, to a real estate-focused company in exchange for cash. In return, the real estate company then leases the property to the seller, thereby collecting rental income moving forward. This agreement typically allows real estate investment trusts (REIT) to pick up properties at or below market value given the lack of financing options available to marijuana stocks, while at the same time providing much needed capital to pot stocks so they can continue to pay the bills and expand in core markets.
The best known cannabis REIT in existence is Innovative Industrial Properties (IIPR -0.92%), which now has 42 properties in 13 states after beginning the year with a mere 11 assets owned. Though Innovative Industrial has primarily leased to privately held medical marijuana companies, three very well-known U.S. multistate operators have leaned on sale-leaseback agreements to boost their cash on hand without turning to a dilutive share issuance.
On Oct. 22, Cresco Labs (CRLBF 6.83%) wound up selling two Illinois properties to Innovative Industrial for $32.8 million, with IIP also agreeing to provide up to $13.8 million for additional tenant upgrades. Cresco Labs plans to have the maximum 10 stores open in Illinois by the time recreational weed sales commence on Jan. 1, 2020, and this cash infusion from IIP certainly helps. Let's not also forget that Cresco Labs is in the midst of a massive acquisition of Origin House that could prove costly. Without this sale-leaseback agreement, Cresco would potentially have been in a cash crunch.
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One day after Cresco announced its deal, Florida-focused Trulieve Cannabis (TCNNF 10.28%) entered into a triple-net lease agreement with Innovative Industrial Properties for a five-building property in Quincy, Florida. This agreement wound up putting $17 million into Trulieve's pockets, giving it ample capital to continue opening stores in Florida (it already has 40), as well as expand into California, Massachusetts, and Connecticut. Trulieve is easily the most profitable pot stock on the planet, so it's not as desperate for cash as its peers. Nonetheless, this sale-leaseback agreement is a quick, nondilutive way for Trulieve to improve its balance sheet.
We've even seen Green Thumb Industries (GTBIF 5.56%) get in on the action. On Nov. 12, Green Thumb sold its cultivation and processing facility in Danville, Pennsylvania to Innovative Industrial Properties for $20.3 million. IIP also agreed to provide up to $19.3 million in reimbursement to these properties. With Green Thumb having made a number of acquisitions, including in the highly lucrative state of Nevada, it needs a way to fortify its balance sheet. This sale-leaseback agreement is an easy means of doing so without punishing its shareholders with a common stock issuance.
Suffice it to say that investors should expect more U.S. pot stocks to turn to these types of agreements in the near future to raise capital.
