Weekly Sector Credit – Cultivation & Retail Sector

• • This week’s credit sector report is a final look at sector credit stats before the 1^st quarter numbers begin to roll in.
  • Leverage for many companies remains unsustainable in a 280E environment. Median Debt/ 2025 EBITDA is 3.54x, a number that is borderline ok post 280E but well above the 2.3x we calculate to be the sustainable limit for plant-touching companies under 280E.
  • The good news is that through trimming expenses and reducing capex, the median free cash flow adjusted current ratio is now 1.02x, indicating that at least half of the 79 companies in the sector are able to cover their short-term liabilities without needing additional funding.
  • Another good news item is the total liabilities to market cap median of 1.81x, which is well below the critical level of 5x, where we begin to see less than 1x asset value coverage of liabilities. Cultivation & Retail sector companies have more leverage than they can sustain over the long haul, but they still have reasonable asset value coverage.
  • The biggest cautionary indicator is the -.03x annualized funds from operations/ total liabilities. After tax cash flow is still negative for more than half of the companies in the sector.
  • Investors need to look at the gestalt of the credit indicators in their portfolio companies. Too much leverage? Maybe it’s ok in the short run, as long as asset coverage is still ok. Negative cash flow is ok in the short term, but make sure to see how this is impacting liquidity. The overall lesson is that looking at a single credit stat like debt/EBITDA is likely to give a very incomplete picture.