Cannabis Musings - February 10, 2025
Wait, did it just get *worse*?
Friends, what are we supposed to make of the recent hits to the the cannabis industry? For example, the winddown of investment firm Navy Capital, and cannabis fintech firm Safe Harbor Financial announcing that it will “temporarily pause” principal payments on its debt (days after the retirement of its CEO). Back in December, cannabis REIT (sale-leasebacks, where the REIT buys the property and leases it back to the seller, are akin to lending, despite what the accountants say) Innovative Industrial Properties disclosed a default by MSO tenant PharmaCann on eleven leases. That default was recently resolved by restructuring payments, cutting some leases, and giving PharmaCann five months to refinance its senior debt in a cannabis capital markets environment that some may have called a “Literal Leviathan of Loan Liability Limbo”.
Oh, and Tilray just swapped $22 million of its debt for equity. Ayr Wellness has seen more turmoil in its executive suite. Senators. James Lankford (R-OK) and Pete Ricketts (R-NE) filed the “No Deductions for Marijuana Businesses Act”, to ensure that Tax Code Section 280E’s limitations on operating deductions remain in place if cannabis were rescheduled to Schedule III (which is 50% of the two things that rescheduling would do). The head of the Department of Government Efficiency unironically said that it’s a “great idea” to mandate drug testing of federal employees. Rep. Andrew Clyde (R-GA) wants to change the rescheduling process to stack the deck against cannabis. Russell Vought, the new director of the Office of Management and Budget, and co-author of Trump Administration policy roadmap Project 2025, is outspoken in his opposition to cannabis reform, state and federal. And major state reform efforts have stalled in places like Hawaii and Florida.
And that’s just in the last few weeks. Oy gevalt.
Where the heck do we go from here? It’s not like things were great last year, but all of a sudden, it’s a veritable parade of horribles. There are definitely bright spots out there, companies public and private side that are growing conservatively and thriving, but they’re few and far between. To me, what distinguishes those who are succeeding in this industry are the ones that didn’t take on too much debt to fuel growth. That’s a little reductive, admittedly – plenty of factors contribute to success (or, at least, not failing), but if I had to boil it down to one thing, it’d be fiscal responsibility. As we’ve discussed ad nauseum, when the equity spigot dried up in 2019, companies turned to debt (and sale-leasebacks of real property) to fund their early-stage Blitzscaling. That hasn’t worked out too well.
Just as the Piper is signaling that they’re coming back to get paid, the political environment for the industry appears to have turned ugly. There were many takes that a Trump Administration could be ‘good for cannabis’, but so far, it sure doesn’t seem that way. The one light at the end of the tunnel – the slow, forward progress of federal cannabis policy – appears to be being threatened by a politician with a particular agenda, wielding a 20 lb. Halotron fire extinguisher.
It certainly doesn’t help to also have one of the most prominent cannabis banks – Safe Harbor – run into apparent financial trouble. It’s not like our industry has that many banking solutions. Even though we’ve seen more FDIC-insured banks make their way into the industry (Western Alliance and East West have quietly banked the industry for a number of years now, and Valley National Bank has been making a splash more recently), their offerings are limited.
And how many of the pioneering cannabis investment firms are still actively putting capital to work in the industry? It’s not for a lack of trying – their support and hard work were critical to creating the foundation for a multibillion-dollar industry. But the institutional asset managers that are leaving the industry aren’t really being replaced (see, also, investment banks). I’ve seen many smart, dedicated people who really care about the plant quit as of late, tired of banging their head against the proverbial wall fighting, well, everything, every single day. It’s no surprise that licensed cannabis companies are chasing so-called “intoxicating hemp” while the going is good, for however that will last. (Will hemp survive the Farm Bill renewal? Will states still allow these products? Will hemp drinks have staying power, or mimic hard seltzer, bagel stores, and cupcakes?)
I’m not smart enough to predict whether this is a short-term reversion or an augur of (more) long-term malaise, and I’m honestly not sure what can be done about it. Although some of the industry’s problems are of its own making (particularly the irrational exuberance), many of them are way out of its control and would take a Herculean effort to overcome (like getting enough Senators who are at the mercy of partisan voters in primary elections to take the political risk of backing cannabis reform). We’ve gotten to where we are solely as a matter of grace on the part of the federal government, as we like to say around here, but if that ‘don’t ask, don’t tell’ protection erodes, an industry that’s already running on fumes will be at risk of cracking. The industry cannot afford to lose control of the narrative.
Nor naronim farlozen zich oif nisim (“only fools rely on miracles”).
Be seeing you.
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© 2025 Marc Hauser. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. The foregoing represents my own views and not those of Jardín.