Crop Infrastructure: An Investment in North American Cannabis
May 16th, 2018
The cannabis industry is projected to reach $50 billion by 2026, according to Cowen & Co., driven by the legalization of adult-use and medical cannabis across a growing number of states. Despite the significant growth rates, many cultivators and processors have struggled to raise capital to finance the variety of goods and services that they need due to federal regulations that prevent mainstream lending institutions from participating in the sector’s growth.
Crop Infrastructure Corp. (CSE: CROP) aims to solve these issues by providing land, infrastructure, and equipment to individual operators to increase accessibility, efficiency, scalability, and sustainability. At the same time, the company’s investors benefit from recurring revenue from long-term lease agreements and management fees from tenant growers, making its structure similar to a real estate investment trust (REIT) in many ways.
Turnkey Solutions for Cannabis
Crop Infrastructure specializes in providing turnkey greenhouse projects to licensed cannabis producers and processors. These projects consist of 12 greenhouse buildings that are each 3,640 sq. ft. With 1,350 plants per greenhouse, each project is capable of generating over 2,000 pounds per month or approximately $2.76 million in monthly wholesale revenue. These revenues expand by approximately 25% once factoring in the high-grade concentrates and edibles that are produced in a state-of-the-art extraction facility on site.
Management is initially focused on the Washington State market where there are 1,284 producers and processors and 436 retailers doing about $3.12 billion in annual sales, according to 502Data. After completing it’s first MEGA Greenhouse Project, the company will be well-positioned to expand this footprint across all legal jurisdictions across the United States and Canada. The tenant grower’s product is currently being sold in over 60 dispensaries in Washington State under various different brands.
In mid-March, the company announced that six of the 12 greenhouses are under construction at the first Washington project. Management intends to immediately lease these greenhouses to licensed tenant growers along with brand licensing. The company will then move on to the second phase of development for the second set of six greenhouses. Once completed the 12 greenhouses are projected to yield over 24,000 lbs per year, which is grown using $0.02/kw hour electricity, some of the lowest cost power in North America.
In early-May, the company also agreed to advance up to $2 million to Humboldt Holdings LLC for land and equipment purchased and the development of a 30,000 sq. ft. greenhouse project intended for lease and brand licensing by Humboldt to licensed cannabis tenant growers in exchange for a 30 percent interest in the company. The California-based property consists of a 10,000 sq. ft. existing cannabis greenhouse and existing building permits to expand.
Stable, Recurring Income for Investors
The cannabis industry may be rapidly growing from a top-line perspective, but it’s a difficult market for investors looking for bottom-line profitability. Many cultivators and retailers have been forced to raise equity capital and reinvest any revenue to expand, while those in the United States are still subject to significant political risk, particularly under the Trump administration. Investors have few “safe” options from both an asset and risk standpoint.
Crop Infrastructure aims to fill this void by purchasing real estate, building infrastructure, and leasing it to licensed cannabis producers and processors. In exchange, the company receives a 60 percent preferential payback via lease and management fees on greenhouse infrastructure and related equipment until its deployed capital is returned in full. Once that happens, the company applies an indefinite 30 percent land management fee that provides the company with an ongoing income stream.
Investors in the company’s stock benefit from stable, recurring income from lease and management fee agreements, as well as real estate assets that provide a solid core. The company benefits from the cannabis industry’s growth, but there’s little political risk since it’s solely involved in leasing real estate/infrastructure. By working with high-quality established tenant growers, the company aims to reduce any ancillary risk factors and ensure stable, long-term relationships.
Crop Infrastructure Corp. (CSE: CROP) represents a compelling investment opportunity in the North American cannabis industry. By taking a REIT-like approach, the company aims to capitalize on the growth of the cannabis industry without the uneven income and political risks. Investors may want to consider the company as an addition to their cannabis portfolio as it completes its initial Washington State project and sets its sights on additional North American opportunities, such as the new opportunity in California.
For more information, visit the company’s website or download their investor presentation.
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