High Hampton: Low-Risk Play in California’s Nascent Cannabis Industry
December 21st, 2017
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The U.S. cannabis industry is projected to exceed $50 billion over the coming years, according to Cowen & Co. analysts, driven by the ongoing legalization of medical and recreational marijuana throughout the nation. In particular, the legalization of recreational marijuana in California is widely seen as a watershed moment for the industry. Investors looking for exposure have many options, among them High Hampton Holdings Corp. (CSE: HC) (FSE: 0HCN) as a compelling opportunity.
California’s Burgeoning Market
California’s legal cannabis industry is projected to reach $6.5 billion by 2020, according to New Frontier Data, making it the largest cannabis market in the world. After Proposition 64 passed in 2016, the state will legalize the recreational use of cannabis on January 1, 2018, putting it in line with states like Colorado, Oregon and Washington. The state’s enormous tourism industry and historical stance on marijuana could drive the industry’s growth over the coming years.
The state is taking action to ensure that it doesn’t face a shortfall on January 1 – a situation that played out in Nevada and led to a state of emergency. Temporary four-month licenses were issued to support some businesses to boost cultivation in advance of legalization, while the new Department of Tax and Fee Administration is diligently working to collect excise taxes in a timely manner even though federal banks refuse to process marijuana sale proceeds.
Despite these efforts, many growers do not meet the new standards for the cultivation of marijuana and will be forced to relocate their operations to cultivation facilities that have been granted Conditional Use Permits (CUP) from municipal governments. These zoned, permitted cultivation areas are in high demand and scarce, while many experienced cultivators are struggling to raise capital to acquire land and build out facilities.
The City of Coachella has become a leading destination for cannabis cultivation operations that meet these standards. The city established zoning regulations to allow medical cannabis cultivation and processing in January of 2016 and at least nine different cultivation operations are in various stages of approval. There are also signs that the city council will take an even more amenable stance to cannabis in the coming year.
Low-Risk Approach to the Industry
High Hampton Holdings Corp. aims to become the largest global distributor of the most sought-after cannabis products. Based in Canada, the company is focused on low-risk opportunities within and beyond the U.S. cannabis industry. The company is initially investing in real estate that is commercially zoned for cannabis and then engaging in both royalty and leasehold agreements with tenants focused on medical marijuana (non-recreational).
David E. Argudo, CEO of High Hampton Holdings, believes that the legalization of recreational marijuana will create a large opportunity, but it could become a “race to the bottom” as intense competition eats margins. Medical marijuana represents a much higher value product due to stricter standards and the ability to develop strains targeting specific medical conditions. Medical marijuana has also been around for a long time in California and faces lower regulatory risks.
When it comes to management, the team has expertise in capital markets, politics, and cannabis with a ~10% ownership stake in the company. The combination of diverse experience across all relevant areas of the industry, a thorough understanding of local and state regulatory frameworks, and its significant ownership stake translates to a shareholder-oriented focus that’s well positioned to deliver long-term value.
Enormous Potential in California
High Hampton owns a 10.8 acre property in Coachella, California that is free and clear with no substantial debt on its balance sheet. The “CoachellaGro” property was purchased for $1.9 million in 2017, is zoned for cannabis cultivation. Comparable land packages are worth $5.5 million, meaning that the company has already created significant value for shareholders from an asset standpoint.
The company plans to build out a 185,000 sq. ft. closed loop cannabis production facility. After finishing the design, they are in the process of completing the application and anticipate a Conditional Use Permit (CUP) over the near-term. Management anticipates an expected return of $3.25 per sq. ft., which would translate to a payback period of just 2.8 years. Recent developments on the city council could also favorably improve these figures.
Management believes that initial greenhouse facility will open and begin cultivation activities during the later part of next year.
High Hampton Holdings Corp. (CSE: HC) (FSE: 0HCN) represents a unique opportunity in the cannabis industry. With a 10.8 acre property that it owns outright in California, the company plans to build out a medical marijuana cultivation operation with compelling economics. Investors looking for a relatively low-risk play on the burgeoning industry may want to take a closer look at the company as it gears up for operations by mid next year.
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