Weekly Sector Credit – Cultivation & Retail Sector

• • The median Debt/ 2025 EBITDA for the cultivation & retail sector is now 3.50x, a level that would be unsustainable if companies were actually paying their 280E taxes. Instead, in typical cannabis fashion, the can is being kicked down the road by accruing but not remitting these balances. We are not sure how it all works out. Likely, the amounts will be negotiated down and, at the very least, won’t be due tomorrow, so perhaps that’s a win? Our calculations show that as long as institutional lenders require short maturities, 3.5x is close to the boundary level of leverage even after 280E.
  • Liquidity is a better news item. The median free cash flow adjusted current ratio is now 1.03x. It is not super comfortable, with “plenty of cash in the bank” level, but indicative of operator efforts to restrain capex. It shows that at least half of the sector is prepared to make it through the year without requiring outside financing – quite an achievement given the capital-intensive nature of the business.
  • The size metrics show the considerable room for and need for consolidation. The median total assets and market cap are only $44M and $16M, respectively. You would be hard-pressed to find another major American industry where the most prominent players are as small as in cannabis. We expect the industry, over time, to become hourglass-shaped, with a limited number of generally much larger companies on the top, a slew of craft-scale companies on the bottom, and not many in between.