Viridian Key Insights

        VIRIDIAN INSIGHTS

• NAVY CAPITAL STRIKES ITS SALES
  • Over the weekend, Navy Capital, a long-standing investor in cannabis, sent a letter to its shareholders announcing they were winding down their investing platform.
  • Viridian did not see the entire letter, but according to a summary posted on LinkedIn by George Allen, Navy listed the following factors in its decision:
    • Cannabis has remained a commodity, with most consumers purchasing based on price and potency.
    • Excessive debt- Operators borrowed heavily expecting booming markets, many of which, like New York, have not developed due to mismanaged rollouts
    • Regulatory Failures – no progress has been made on SAFE banking or rescheduling, stalling growth.
    • Hemp-derived THC sold in convenience stores and liquor stores has provided serious competition for licensed cannabis.
  • We can all add items to the list, but what is striking is that with several elements of cannabis reform arguably closer to realization than ever before and with cannabis stocks now at all-time lows, the decision to close down shop now is a harrowing one. Does this group of highly experienced cannabis investment professionals really see no light at the end of the tunnel?
• A DISAPPOINTING POLITICAL UPDATE
  • If the appointment of an anti-cannabis former DEA agent as acting head of the DEA wasn’t bad enough…
  • This week, Trump’s nominee to head the HHS, Robert Kennedy, stated in his confirmation hearings that he would defer to the DEA on matters relating to rescheduling. Some of us had hoped he would take a more active pro-cannabis role.
  • Trump’s attorney general appointee refused to answer questions regarding her stance on cannabis reform.
  • We never expected rapid action, and in fact, last week’s column explained why very few people outside the cannabis industry really care about cannabis reform. Still, we hold on to the hope that Trump will be a more effective cannabis reform president than his predecessors. (yes, we know that is a low hurdle). It would certainly go a long way for the President to reaffirm his pro-rescheduling/pro-SAFER stance.
• PHARMACAN VS IIPR UPDATE – A NEGOTIATED SOLUTION
  • In the original Viridian analysis copied below, we predicted a negotiated settlement. Any other outcome was reminiscent of the Cold War concept of MUTUALLY ASSURED DESTRUCTION (MAD). For IIPR, failing to find a negotiated solution was a difficult pill to swallow as it would almost certainly have had to cut its dividend and face a potentially elongated and costly re-leasing program. For Pharmacann, the loss of the entire leased portfolio would have likely forced the company to liquidate.
  • Instead, IIPR and Pharmacann agreed on amendments to the leases of 8 of the 11 defaulted properties. Key terms include:
    • Security deposits on the leased properties will be increased and paid over the next 36 months.
    • Base rent reductions from $2.8M to $2.6M on the nine remaining properties
    • Elimination of all rent obligations, amounting to $1.5M per month, on the company’s Massachusetts and Michigan facilities in return for Pharmacann agreeing to work with IIPR on the transitioning of the properties to new tenants. If, by August 2025, the properties have not been transitioned to new tenants, Pharmacann will have no further obligations under the leases.
    • Pharmacann will get new equity capital from certain existing investors
    • Phamacann will issue an interest-bearing secured note to IIPR with a 2035 maturity
    • All of the above modifications are contingent on Pharmacann’s ability to refinance its existing senior secured credit facility, which will mature on June 30, 2025. If it fails to refinance this debt, all of the modifications to the leases will revert to new terms, and the note issued to IIPR will be canceled. The quoted market on Pharmacann’s 12s of 6/25 is currently 70-80, according to Ventum Financial, which indicates considerable market skepticism regarding the company’s ability to refinance this debt.
  • So, for the time being, there appears to be a resolution that allows the parties to continue in a business as usual fashion. However, the smoke has not all cleared. IIPR has given up its cross-default on the Pharmacann leases and has allowed Pharmacann to walk away from two leases. Look for other troubled cannabis companies to come knocking for similar renegotiations. As we point out in our analysis below, Pharmacann is hardly the end of IIPR’s credit problems. See our table below of IIPR tenants that we classify as Stressed/Distressed.

• PHARMACANN VS IIPR – OUR ORIGINAL ANALYSIS
  • On December 19, 2024, PharmaCann defaulted on its obligations to pay rent for December under six of its eleven leases with IIPR for properties located in Illinois, Massachusetts, Michigan, New York, Ohio, and Pennsylvania.
  • Since the defaults, little new information has been released. Pharmacann announced the closing of its Michigan cultivation facility at the end of January 2025, but no substantive negotiations have been disclosed.
  • Although PharmaCann paid December rent in full (totaling $90,000) under its other five leases with IIPR (all retail locations), as a result of cross-default provisions, the company was also in default under these leases.
  • IIPR said what you would expect them to say: “continuing discussions with Pharma Cann regarding the Leases and expects to enforce its rights under the Leases aggressively, which may include, but is not limited to, commencing eviction proceedings as IIP deems necessary.”
  • Information from IIPR’s 3^rd quarter financial supplement gives us some interesting data points:

• • Can PharmaCann argue that it is paying excessive rental rates? The chart above clearly shows that PharmaCann’s base rent per square foot of space is the highest of the top ten IIPR tenants by a considerable margin. Does this mean they are being overcharged?
  • Not so Fast! Yes, PharmaCann is paying the highest rent/sq ft, but the table above also shows that IIPR has the largest invested dollars per square foot in the PharmaCann leased properties.
  • Viridian calculated an approximate average cap rate by dividing the total annualized base rent by the IIPR committed investment for each tenant. On this basis, PharmaCann’s cap rate of 14.4% is higher than the average but only the fourth highest of the ten. Note: Cannabist’s low cap rate of 12.9% is probably due to the fact that nearly 30% of the IIPR’s committed investment on Cannabist properties are for retail locations that generally carry lower cap rates.
  • Why is PharmaCann so out of line on Investment / Sq ft.? Approximately 38% of IIPR’s investment in PC properties is accounted for by a $139.5M, 239k sq ft facility in Hamptonburgh, NY. This facility was acquired In 2016 at $596/ sq ft! Another 9% of investment is attributable to a Massachusetts facility at $526 per sq ft that was acquired in 2018. The real story seems to be that back in the heady days of 2016-2018, PharmaCann and IIPR did a few deals at prices that, in retrospect, seem crazy. In their defense, the state markets in question seemed poised for massive expansion and the term “wholesale price compression” had not yet entered the vocabulary. Both IIPR and PC agreed to terms that do not work in 2024, as the lease rates on these properties arguably prevent anyone from being profitable in the context of current prices and operating costs. PC has already shut down the Michigan facility; it is probably losing money in MA, and NY needs significant rental reductions to make sense.
• SO WHAT NOW?
  • From IIPR’s point of view: In q3’24, IIPR’s Adjusted Funds from Operation (AFFO) of $64.3M was $2.25 per diluted share. IIPR paid a $1.90 dividend amounting to 84% of AFFO/sh. (note this payout ratio has gone up for each of the last 4 quarters). PharmaCann’s quarterly lease payments are approximately $12.2M, which means that if IIPR cannot quickly resolve this issue, it may have to reduce its dividends.
  • Similarly, if IIPR evicts PharmaCann, significant lease rate haircuts are likely to be required to get new tenants into the facilities. The process also has an uncertain time horizon, potentially requiring dividend cuts.
  • Selling the properties, even to a cannabis buyer, would require massive write-offs. If IIPR were able to sell the properties at $300/sq ft (higher than its average of $281), it would incur a $128M loss. Much of this pain has already been taken in the stock price reduction.
  • From PharmaCann’s point of view: Loss of the NY facility would likely cost the company its RO status, and the impact of the loss of the entire cultivation portfolio would probably result in the company’s liquidation.
  • PharmaCann likely needs to bargain for lower lease rates and possibly a deferral of near-term lease payments. PharmaCann’s financial picture is unknown, but if the company is to continue operations, it must agree on at least the bulk of these properties. If Chapter 11 were available to cannabis companies, a likely scenario would be that the company would reject several of the leases where the economics do not make sense. Unfortunately, that option is not available in court, but perhaps some variant of it will enter the negotiations.
• THE MOST LIKELY SCENARIO IS THAT THE PARTIES COME TO A NEGOTIATED SETTLEMENT.
  • IIPR will likely have to offer both lower base lease rates and some deferral of payments.
  • In return, PharmaCann may need to offer equity warrants as an incentive. PC may also need to extend the maturities of the leases, offering IIPR more time to amortize its losses.
  • The process is tricky, though. IIPR cannot be seen as offering significant rent reductions, or it will snowball through its entire portfolio.
• THE TIP OF THE ICEBERG?
  • The table below shows the total investment that IIPR has in other names that we view as less than stellar credits. We do not know the private companies in the portfolio (other than Pharmacann since it has already defaulted), so the names in the table are restricted to companies whose credit quality we rank every week.

• WILDCARD? CRONOS. In 2021, Cronos paid approximately $110M for options to acquire around 10% of PharmaCann, exercisable when regulatory changes enabled this ownership. Cronos is still cash-rich and may cut some deal to take a more significant future stake in PC through more options or a Canopy USA type structure. This would only be a possibility in the context of negotiating lower lease rates that shore up the profitability of PC.
• GAUGING THE RISK OF THE 2026 DEBT MATURITY BUBBLE
  • Much has been made of the upcoming wave of cannabis debt maturities in 2026. The sheer size is undoubtedly intimidating. The companies pictured on the graph below collectively have about $2.5B of debt maturing in 2026. (IAnthus maturities are actually in 6/27, but close enough!). Putting that figure into perspective, $2.5B is greater than the total capital raised for the cultivation & retail sector for any year since 2018 except for 2021.
  • Viridian is generally more constructive about the issue than most other industry observers. We observe that in the high-yield bond market, it is virtually never the case that debt is paid off in cash. It is generally refinanced, OR the company is forced to restructure. Obviously, given the lack of prepack bankruptcy (or any bankruptcy for that matter), restructuring is rightfully a prospect to be feared in cannabis.
  • So, how do we gauge the risk of something going wrong in 2026? Refinancing risk is a peculiar mixture of market psychology and financial realities. In the weeks to come, we will explore further the metrics that can help evaluate the risk.
  • The graph below shows two relevant data points:
    • The blue bars show the market-implied asset coverage of total liabilities. We arrive at this by looking at the equity as a call option on the asset value of the firm, with a strike price of its liabilities, and with assumed maturities (2026) as well as volatility assumptions (30%) and risk-free rate (4.25%). This gives us all of the elements of the Black-Scholes option pricing formula except for the current asset value. By iterating the solution of the BS model, we can find the market’s assumption for asset value. The importance of this data point should be obvious. For companies with under 1x asset coverage of liabilities, debt providers are genuinely making an equity bet. They do not have adequate asset value coverage to fall back upon.
    • The red dot represents the percentage of market cap that 2026 debt maturities represent. Clearly, the larger the debt maturities relative to the market cap, the more difficult we would expect refinancing to be. Companies on the right side of this graph represent high risk. They have less than 1x asset value coverage, and the maturing debt is a multiple of the market cap. Companies in this position represent approximately $800M of the maturing debt.

• MSO VALUATION AND FINANCIAL FLEXIBILITY DEPICTED BY FOUR GRAPHS. BOTTOM LINE: MSOs ARE TRADING AT HIGHER VALUATION MULTIPLES AND HAVE HIGHER LEVERAGE THAN STANDARD MEASURES INDICATE!
  • The four graphs below seek to map the financial options available to eighteen of the largest MSOs based on their Valuation, Leverage, and Liquidity. We have updated our measures to look at 2025 EBITDAR estimates as we believe most investors are now looking to these values in their valuations.
  • The first two graphs present different versions of EV/EBITDA on the vertical axis and Debt/EBITDA on the horizontal axis.
  • The first graph presents our latest view of the most appropriate valuation and financial statement-based leverage metrics: Adjusted EV / 2025 EBITDAR and Adjusted net debt / 2025 EBITDAR. In calculating Adjusted Net Debt, we make several key assumptions: 1) Leases that are included on the balance sheet are considered debt. We view most leases in the cannabis space as equivalents to equipment loans or mortgage loans. While it is true that a lease default does not necessarily trigger a cascade of events leading to bankruptcy, the distinction is often meaningless in cannabis due to the mission-critical nature of many long-term leases and the absence of bankruptcy protection in cannabis. 2) We consider any accrued taxes (including uncertain tax liability accounts listed as long-term liabilities) in excess of the most recent quarterly tax expense to be debt. Our calculation of enterprise value is now market cap plus debt plus leases plus tax debt minus cash. We now use EBITDAR rather than EBITDA since lease expense is taken out prior to EBITDA.
  • The second graph utilizes EBITDA and employs the traditional calculations of both debt and enterprise values, leaving out leases and taxes.
  • Our adoption of new metrics tends to make the companies look less cheap and more leveraged.
  • Surprisingly, nine of the companies on the enhanced metric chart are still above 3x leverage, which we have identified as the boundary of sustainability in a 280e environment. Four companies now exceed 4x leverage, which we believe will be close to the maximum sustainable post 280e.
  • Jushi and TerrAscend appear as leverage outliers using the new metrics relative to AYR and Cannabist, which seemed more leveraged using standard measures.
  • TerrAscend and, particularly, Glass House are valuation outliers. We have been positive on Glass House for quite a while, but the multiple spread to the nearest competitor is straining our resolve. We note GLASF’s $25M at the market equity issuance facility as another factor likely to restrain price appreciation.

• The third graph looks at leverage through the lens of total liabilities to market cap. We believe this is the single best measure of leverage because it is a direct reflection of the market’s assessment of the value of a company’s assets in excess of its liabilities and is sensitive to changes in market perception of a company’s future.
  • On the bottom left are companies with Adj EV/2025 EBITDAR of under 7x and total liabilities to market cap under 2x. The group includes Vext, GTI, Trulieve, and Curaleaf. Companies in this quadrant are right to consider stock repurchases or using cash in acquisitions. They can afford some additional debt and can take advantage of the ongoing dislocation in equity prices.
  • In the middle, between 2x and 5x total liabilities/market cap, we see Verano, Cresco, and MariMed.
  • On the right lies Jushi and Ascend. Ascend has now entered our high-risk zone of over 10x. AYR, 4Front, Cannabist, and Schwazze are now off the chart to the right, signaling profound credit risk. Our recent work using option modeling of equity prices showed that the market believes each of these companies has significantly less asset value than liabilities.

• The fourth graph introduces the free cash flow adjusted current ratio liquidity measure into the mix. Companies with less than 1x on this measure will likely have to raise capital next year. Surprisingly, eight of the companies fall into this bucket (including Schwazze, not pictured).
• The bottom left group, including Curaleaf, Verano, and TerrAscend, has low leverage but is below the critical 1x liquidity level. Companies in this range should consider taking advantage of the robust debt market to bolster liquidity.
• On the top left, we find companies with adequate liquidity and low market leverage, including both GTI and Planet 13.
• Companies in the lower middle-to-right generally have constrained liquidity and high leverage, a potentially dangerous combination in a capital-constrained environment. Aside from Curaleaf, Verano, and TerrAscend, mentioned above, seven other companies have less than 1x free cash flow adjusted current ratios, including Schwazze, AYR, Jushi, Cannabist, TerrAscend, Ascend, and 4Front. These companies are high-risk with both high market leverage and low liquidity. Some of these companies score lowly on our liquidity measure because we have elected to count excess tax debt as a current liability.

• EV/LTM MULTIPLES ARE NOW SIGNIFICANTLY LOWER THAN BEFORE THE ORIGINAL HHS RESCHEDULING ANNOUNCEMENT ON 8/30/23
  • We continue to believe that at current levels, U.S. MSOs have enormous upside potential. The graph below shows the multiples reached after a number of past legislative/regulatory events. It makes clear that a doubling of prices is a reasonable assumption. We recommend a balanced portfolio that leans toward the companies in the top half of the Viridian Credit Tracker model ranking.
  • Despite the challenges to growth discussed above, we believe that many companies have become stupidly cheap. We recommend a “don’t step in the doggy do do” strategy. With refinancing risks made worse by cratering stock prices, this is no time to be a hero. Focus on building a diversified portfolio of companies ranked in the top 10 in our credit rankings. Put them in your portfolio and follow the total liabilities to market cap indicator that we recommended several weeks ago, as well as the credit tracker rankings. And resist the urge to look at the stock prices every day!

• MSO STOCK LIQUIDITY CONTINUES AT ITS LOWS
  • The average daily dollar volume of $11M for the week ending 1/24/25 is the second lowest it has been for over a year.
  • The Days to Trade Market Cap (DTTMC) series depicts the number of days it would take to trade the market cap of a stock or group of stocks. The current DTTMC of 1298 implies that an investor who acquired a 5% position in the stock, assuming he wanted to be less than 25% of the average daily dollar volume, would require 260 days to trade out of his position! Extremely low trading liquidity is a clear impediment to institutional investment.

• GIVING CREDIT WHERE CREDIT IS DUE
  • The chart below shows our updated 1/24/25 credit rankings for 31 U.S. cannabis companies. The number below the ticker symbol indicates the change in credit ranking since last week, where a negative number suggests credit deterioration, while a positive indicates improvement.
  • The blue squares show the offered-side trading yields for each Company. The prices shown have become a bit dated, so we will consider them only indicative. We expect updated pricing to reflect the dislocations observed in the equity market.
  • AYR has become the poster child of the 2026 debt “tsunami.” We generally don’t think the 2026 issues are nearly as severe as the press has made out, but AYR may be an exception. There are no near-term debt triggers because the company’s maturities have substantially been pushed out to December 2026. However, the approximately $300 million of 2026 maturities now represent 5.7x the company’s market cap, compared to 1.1x on 11/1/24. The 5.7x exceeds the level of maturity AYR faced at the end of 2024 before it conducted a somewhat disastrous restructuring/refinancing deal. Our latest work on asset coverage of liabilities did not provide comfort. AYR’s total liabilities to market cap implies a market belief that the company’s assets are only worth less than 60% of its liabilities. Several weeks ago, Tilray announced that AYR’s interim CEO had joined the Tilray board. Does that signal an upcoming transaction? It seems hard to believe they could announce one piece of news if the other would be forthcoming. But a transaction doesn’t seem totally crazy to us. This week, AYR’s CFO resigned to “pursue other interests,” sure, right.