Cannabis’ Missing Middle

The Search for Yield Plus Equity Upside

The biggest problem with investing in the cannabis sector has always been timing. With news breaking that SAFE Banking was yet again blocked in Congress, the question looms: what if it takes forever for Federal reform to happen?

Investors like me who are bullish on the future of cannabis face a conundrum. The publicly traded cannabis stocks trade on Canadian exchanges or over the counter exchanges and are illiquid and volatile due to little institutional investor participation, as most are unable or unwilling to invest in an industry that is Federally illegal.

Cannabis REITs are alternatives to cannabis stocks that “touch the plant.” They own the underlying real estate, but don’t conduct operations, thus allowing them to trade on major US exchanges. But those stocks have their own set of problems. The principle one being that they are preying upon the lack of institutional capital that cannabis companies have and are saddling these companies with expensive sale/leasebacks that increase their cost to produce cannabis. This is problematic as cannabis prices in many places are headed down not up. You are not setting your customers up for success when you are driving their costs up, while their revenues go down. Not to mention that many of the facilities that the cannabis REITs own may become worthless in an environment where interstate commerce is allowed.

And even worse than the cannabis REITs are the hard money lenders who charge outrageously high rates such as 36% interest rates that basically destroy any long-term hope for growth. This really isn’t being bullish on the cannabis industry; it is taking advantage of cash strapped companies that have no access to capital.

The problem is one of extremes, either you buy problematic illiquid cannabis stocks, and accept limited liquidity and wild volatility, or you prey upon cannabis companies for their lack of access to capital.

There is a missing middle in cannabis. Why aren’t there more options where investors can earn a company friendly yield and then get equity like upside through warrants or a conversion feature? This way, investors can be patient about Federal reform, and companies have access to lower cost debt, albeit with some dilution on the way up.

Frustrated after SAFE Banking did not get into the America Competes Bill, this past June, I decided I was going to shift the strategy of my cannabis investing. The definition of insanity is doing the same thing over and over and expecting different results. I focused my investing on finding those get paid while you wait investment opportunities.

Since then, I have invested in four deals, all a little different. All of them have yield and equity upside. The first was a private cannabis company that needed help restructuring its short-term debt that was costing them 36% a year. I led an investment that cut its interest rate in half and received warrants as well.

Then I invested in Glass House’s preferred equity investment, and it is now my biggest investment. I believe that this is the best investment I’ve made from a risk/reward standpoint since standing on the courthouse steps in Atlanta, GA buying foreclosed homes in 2011. This preferred equity pays a 20% yield and has warrants as well.

My third investment was in Grown Rogue, a rarity in cannabis that produces actual free cash flow while competing in the toughest unlimited license markets. My investment in Grown Rogue pays a 9% yield but is supercharged to convert into an approximately 6% equity stake in the company.

Finally, I just invested in another convertible deal in a small cannabis company that will pay 8% and converts into equity at an extremely attractive valuation and catalyzes a brand-new asset acquisition as well.

What this all means is that over 40% of my cannabis fund is now in high yielding investments that combined give my overall cannabis portfolio an 8% yield. The best part is that I can use this yield to invest in cannabis equities or to fund future yield plus equity investments as well.

I still own cannabis equities and will continue to invest in them in the future. My strategy on cannabis public equities is focused on what I call “small ball.” These include Glass House (OTC: GLASF), MariMed (OTC: MRMD) and Goodness Growth (OTC: GDNSF). But the opportunities I’m most excited about are those in the missing middle. Who doesn’t like the idea of getting paid while you wait?