Interstate Commerce Call Today.
Cannabis Interstate Commerce Webcast:
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We are at a pivotal point in the history of the cannabis market, with thousands of small farms and businesses that have failed or are on the verge of failure. In addition, millions of legal patients and consumers remain stuck in illicit markets due to high prices and poor selection/quality in many state markets. The largest Cannabis ETF is down 90% from its peak in February 2021 as the industry has collapsed on an inefficient system of failed state-siloed markets leading to significant excess legal cultivation capacity.
The status quo is not a path forward for current cannabis investors or industry participants willing to acknowledge that the industry is broken. Not to mention that the current structure of state-soiled markets will disappear with the inevitable federal legalization. Why are we continuing to misalign incentives in cultivation that will soon be non-competitive? The cannabis industry has raised over $20 billion in debt and equity since 2018; the 15 largest publicly traded only have a market value of $11 billion. The industry has lost billions of dollars, and more will be lost if there is no significant reshaping of the industry fundamentals.
From a legal perspective, we are on the cusp of the single most important and least recognized shift in the economics of legal cannabis since WA and CO were first legalized in 2012. Our conversation about the potential for Interstate Commerce will be the first-ever public forum in which state officials from producer and consumer markets discuss interstate commerce (in advance of fed legalization) in real, informed terms, including its pathway, likelihood, and its desirability.
CRONOS 1Q23 Earnings Results
Cronos (CRON) is a Hedgeye Cannabis Best Idea Long.
Cronos reported 1Q23 net revenue of $20.1M, which decreased by $4.9M from a year ago. The decrease was primarily due to lower cannabis flower sales in the ROW segment and a decline in revenue in the U.S. segment. ROW segment net revenue was also impacted by the weakened Canadian dollar and Israeli Shekel against the U.S. dollar. They recorded gross profits of $2.4M, which decreased by $4.5M from last year. Cronos saw an adjusted EBITDA of $(16.8)M in the quarter, which improved by $2.1M from last year. The improvement was primarily driven by decreases in general and administrative expenses and research and development expenses due to the Company's cost savings initiatives.
Their Spinach brand continues to be a bright spot as it holds its number one market share position in the edibles category in Canada. According to Hifyre data, Spinach products held an approximate 15.3% market share in the edibles category expanding to approximately 21.9% within the gummy category alone across the SOURZ by Spinach and Spinach FEELZ sub-brands. The company guided net revenue for FY2023 to be between $100 to $110M. Additionally, the Company is on track to achieve the high-end of the previously identified $10 to $20M in operating expense savings for 2023. Cronos anticipates that cash flow for the last nine months of FY2023 will decline by less than $25M. They expect to be cash flow positive in 2024.
“Optimizing the returns of our industry-leading cash balance has also been a priority for us as we are in a great position to take advantage of the higher rate environment, especially given we have no debt,” continued Mr. Gorenstein. “You are now starting to see the higher interest income flow through our income statement, which is an underappreciated component of our company. Additionally, looking forward to the balance of 2023, we are on track to achieve the high end of the projected $10 to $20 million in cash operating expense savings we announced in February and are committed to further improvements as we target to be cash flow positive in 2024.”
When we think about Cronos, this is the type of company that you buy shares in and put them away for the foreseeable future. They are focused on building brands, which they are successfully doing, while maintaining the strongest balance sheet in the industry. This management team is waiting for their access point into the U.S. market (legalization) and ensuring they are in the best position to take market share when those walls come down. These are far from exciting results, but management continues to execute its plan. This is why we see Cronos as a tail duration long.
IIPR 1Q23 Earnings Results
IIP generated 1Q23 revenues of $76.1M, an 18% increase YoY. The increase was driven primarily by the acquisition and leasing of new properties, additional building infrastructure allowances provided to certain properties that resulted in increased base rent, tenant reimbursements, and contractual rental escalations at certain properties. The company recorded net income of $40.8M, or $1.43 per diluted share. They paid a quarterly dividend of $1.80 per common share on April 14th to stockholders of record as of March 31, 2023, equal to an annualized dividend of $7.20 per share. IIP has a property portfolio comprising of 108 properties across 19 states, with approximately 8.9M rentable square feet, which includes approximately 1.6M rentable square feet under development. The company announced that they acquired an industrial property in Ohio for $20.1M that is expected to comprise 157k square feet upon completion of development and executed a long-term lease with Battle Green Holdings, LLC (Battle Green), pursuant to which IIP agreed to provide reimbursement of up to $21.9 million for completion of the development, with IIP’s total investment in the property expected to be $42.0 million. They also acquired a 58k square foot operational cannabis cultivation facility in Pennsylvania in a long-term sale-leaseback transaction with a subsidiary of TILT Holdings Inc. for a purchase price of $15.0M. They did sell a portfolio of four properties in California previously leased to affiliates of Medical Investor Holdings for $16.2M, which includes a five-year secured seller financing with the buyer of the property for $16.1 million that is interested only and payable monthly.
Rent collection for IIP’s operating portfolio was 98% in the quarter. Contractual rent not collected totaled approximately $1.6M (approximately $1.1M relating to defaulted tenants Parallel and Green Peak for rent in excess of IIP’s security deposits and approximately $470k for rent before the sale of the Vertical portfolio). Management noted that they continue to see momentum in states that span the political spectrum. Missouri officially launched its adult-use program in February with regulated cannabis sales in March totaling over $126M alone. Maryland's adult-use program is also expected to see its first legal sales on July 1. Last month, Delaware became the 22nd state to legalize adult-use cannabis. Meanwhile, adult-use legislation is progressing through the Minnesota legislature, and there are expectations that Ohio and Pennsylvania could legalize adult-use cannabis this year.
During their conference call, management noted that for the past several quarters, they expected investing activity to slow based on the macro-economic headwinds facing the industry. The cost of capital and capital availability has been a huge headwind to the U.S. cannabis industry. Capital raises for U.S. operators were down 86% YoY in 1Q23, and the capital raises that we have seen in 2023, 90%, have been in the form of debt. IIP Managements team spoke positively about SAFE Banking, but they are just chasing headlines with those comments. The company has a very solid balance sheet, is growing nicely, and managing the massive headwinds facing the industry very well.
