Adam Jackson
Many multistate cannabis operators are shouldering significant financial burdens, yet some have been able to close significant equity deals in recent weeks.
A new report from Zuanic & Associates analyzed the debt profiles of 20 U.S. multistate operators, spotlighting the financial health of some the largest cannabis corporations in the country.
The firm’s findings paint a complex picture of the industry, highlighting both the opportunities and challenges faced by these companies.
“With Canopy Growth and Columbia Care announcing equity raises this week, we review the debt leverage of 20 MSOs and wonder who could be next,” Pablo Zuanic wrote.
The equity offering route, while advantageous for some, might not be feasible for all MSOs, Zuanic added, pointing to debt restructurings.
There’s a challenge, though: A number of these companies are already paying more than 20% of their sales in net interest expense. That doesn’t leave a lot of room for growth.
A closer look
Trulieve Cannabis Corp. and Curaleaf Holdings lead the pack for carrying the highest net debt with $631 million and $489 million, respectively. However, the raw number only tells part of the story. The crux lies in understanding the debt in relation to sales, EBITDA, and operating cash flow, Zuanic noted.
When observing the net debt-to-sales ratio, different companies stand out:
- StateHouse Holdings leads with 1.24x.
- Vext Science, iAnthus Capital Holdings, Acreage Holdings, Ayr Wellness, and Schwazze follow, with ratios ranging from 0.95x to 0.8x.
When comparing net debt to EBITDA, Green Thumb Industries, Verano Holdings, and Schwazze top the list, with robust EBITDA margins of 36%, 35%, and 33%, respectively. On the other end of the spectrum, companies like Planet 13, iAnthus, and StateHouse had EBITDA margins below 3%.
“This difference in margins can drastically alter the risk profile of a company,” Zuanic asserted.
MSOs with a net debt-to-EBITDA multiple exceeding 5x are deemed over-levered, and several cannabis companies fall under this banner, including:
- 4Front Ventures
- Acreage Holdings
- iAnthus
- StateHouse
- Tilt
- Vext
Another criterion is the net debt-to-operating cash flow. A concerning picture emerges here, with several MSOs reporting negative operating cash flow for the 12 months through the second quarter of 2023.
“We realize debt analysis must look at the maturity profile of the debt as well as the runway for sales growth, EBITDA margin expansion, and OCF improvement,” Zuanic notes.
Stretching the horizon
Zuanic’s report also sheds light on a more comprehensive net debt definition, incorporating short-term income tax payables, gross leases, and derivative liabilities, including earnouts. Under this definition, Curaleaf bears the highest broad net financial net debt at $1.24 billion, followed by Cresco at $692 million and Trulieve at $679 million.
When related to sales over the last 12 months, 4Front Ventures tops the list with a 2.1x ratio, trailed by StateHouse at 1.7x. Several other MSOs exceed a 1x ratio, signifying high leverage.
Factoring in EBITDA margins provides additional insight into these companies’ risk profiles. Zuanic suggests that companies, such as Ascend Wellness, Columbia Care, and Jushi, among others, could be looking to raise equity, given their respective metrics.
However, debt restructuring might not be a silver bullet for all. For several MSOs, the net interest cost is already on the higher side. For example, in the second fiscal period, Goodness Growth’s net interest expense represented a staggering 38% of sales.
“We realize the equity path may not be available to all (either due to very low valuation multiples and/or lack of investor interest), and the only option may be debt restructuring,” Zuanic cautioned. “But at some of these companies, net interest expense accounts for a good chunk of sales already, so they may not have much room to maneuver.”
