Over $50 million of cannabis sale-leasebacks were priced in the third quarter of 2023, spanning both coasts. Institutional buyers continue to communicate confidence in the sector, especially strong credits, multistate operators and established operators with tenure of multiple grow cycles.
While in recent months, unit pricing for regulated cannabis products has declined in certain states at the wholesale level, driven by a variety of factors, institutional confidence in the cannabis sale-leaseback market remains strong.
Through Q1 2022, the cannabis sector exhibited a general trend of cap rate compression, in line with the broader sale-leaseback market. However, that trend has reversed over the last six months. The rising interest rate environment across the board has expectedly widened cap rates, with cap rates increasing 100-150bps vs. the Q4 2021 pristine pricing environment. Widening has been more muted in primary markets.
Overall sale-leaseback transaction volume has remained robust in the face of a third consecutive quarterly decline in M&A activity and continued interest rate increases. Though Q3 2022 did not register some of the single outsize transactions that colored previous quarters, it matched the previous quarter’s record deal count of 237 transactions. Aggregate dollar volume totaled $5.1 billion.
We continue to evaluate the cannabis sale-leaseback landscape as we see the narratives of increasing interest rates and an inflationary environment go up against secular positive drivers of growing multi-national operators and increasing legalization initiatives.
The sale-leaseback remains an attractive capital solution especially for the cannabis industry, given the industry’s capital constrained nature. While there are some reports of top MSOs cutting capex plans in the face of rising costs of capital, the rising interest rate environment only enhances the sale-leaseback’s position as a non-dilutive financing alternative.
David Rosenberg is a principal with SLB Capital Advisors, which specializes in sale leaseback transactions to fund buyouts and business expansion.