Cresco Labs (CRLBF) announced it has raised $46.3 million in non-dilutive capital in a sale-and-leaseback agreement with Innovative Industrial Properties.
The binding agreement includes the sale of Cresco’s Joliet and Kankakee properties located in Illinois. Combined, the two properties have about 100,000 square feet in total.
While this partially solves one of the concerns shareholders have concerning, the company’s diluting of its stock to make acquisitions, the more weighty matter is the company waiting for approval of three major acquisitions that remain on hold, which continues to suppress the share price of Cresco.
Terms and purpose of the deal
Cresco has signed “a binding agreement to sell its Joliet and Kankakee, Illinois properties to Innovative Industrial Properties, Inc. for approximately $46.3 million.”
Included in the sales price is funding for “additional tenant improvements at the Kankakee property.”
At the time of the closing of the sale, which is expected to be in some time within the next 30 days, Cresco Labs will enter into a triple-net lease agreement with IIP that will last for an unspecified but significant period of time.
The two facilities will continue to operate as a licensed cannabis cultivation and processing facility.
Cresco Labs CEO Charlie Bachtell believes the purpose of the sale and agreement is to capitalize expanding its Illinois operations as the state prepares to legalize recreational marijuana on January 1, 2020.
Bachtell added that the Illinois cannabis market is estimated to climb to a range of $2 billion to $4 billion in annual sales when it reaches its full potential. He sees this as a means to grab market share and boost revenue in the years ahead.
Some of the capital will be allocated to increase its production capacity in Illinois, and scale its retail dispensary network in order to meet expected high demand from medical and recreational cannabis consumers.
One of the better things I see with this move is that it has substance to it, in the sense that it is visible and should result in an improvement in revenue and market share for Cresco Labs over time, assuming it executes its strategy successfully.
It’s also becoming more important for the market to see capital raised that isn’t dilutive to existing shareholders. That has becoming more important as the industry matures.
With three major deals uncertain, this gives shareholders something tangible that can be counted on.
Pending merger deals
Probably the major negative catalyst for Cresco Labs is the ongoing waiting period to get approval for three potential acquisitions in its pipeline.
The major announced acquisition was Origin House on April 1, which was covered widely in the media. Cresco offered about $850 million for Origin. After a predictable initial boost from the offer, Origin House has not dropped to a market value of only $347 million as I write.
Part of that is from regulatory uncertainty, and the other is the decline in positive market sentiment for the cannabis. The deal was expected to be closed by the end of June.
In March the company said it was buying Florida-based VidaCann for $120 million in stock and cash. VidaCAnn has a medical cannabis license in Florida to operate 30 retail dispensaries, with 20 of them expected to be operational by the end of 2019. The medical cannabis market in Florida is projected to be at close to $1.7 billion by 2022.
This still also remains on hold as the company waits for approval.
Last, Cresco recently announced it has acquired Tryke for $282.5 million. It has six retail stores located in Arizona and Nevada. It represents the Reef Dispensary brand.
In 2018 Tryke generated revenue of $70.4 million and a healthy EBITDA of $24.6 million.
What’s interesting in all of this is Cresco Labs, for now, appears to be ignoring regulatory concerns and continuing on with making offers for companies that will provide it with long-term scale.
The obvious problem is whether or not regulators decide the MSOs are gaining too much market share and limit their upside potential.
The capital raise for Cresco in association with the Illinois cannabis market was a good move. It appears to the potential to compete strongly in the state when recreational cannabis is legalized on January 1, 2020. The problem is the company isn’t going to get much of a boost from this in the near term because the pending acquisitions account for approximately 50 percent of its future revenue estimates. The longer it takes for them to be approved, the more the market is going to increase in its concern that there may be a negative outcome for Cresco.
On the other hand, this is building a pent-up situation, that if resolved in the positive for Cresco, its share price is going to soar; that will be especially true if approvals for the three acquisitions come close together.
Another possible scenario would be a split decision, where one or two are approved, and the other deals rejected. Even that would be a positive when compared to where it’s at now, but the market value of the company wouldn’t be near what it would be if all the acquisitions are approved.
There remains a lot of risk for Cresco, but the reward is also very high. At the price it’s trading at now, it would be worth it in my opinion to take at least a small position in Cresco.
Even under the worst-case scenario where none of the deals were approved, the company as it stands today still has a lot of growth left in it.