There are many different public companies operating in the cannabis space, ranging from Medical Marijuana Inc.'s (OTC Markets: MJNA) medical applications to MedBox Inc.'s (OTC Markets: MDBX) automated dispensing machines. At the same time, many private companies have been active in setting up dispensaries and grow operations targeting the growing medical marijuana and recreational marijuana markets in the U.S.
In this article, we'll take a look at why investors may want to pay more attention to the real estate that underlies commercial cannabis grow operations and dispensaries throughout the U.S.
Large & Growing Market
The Denver metro area is one of the largest cannabis growing regions in the U.S. accounting for over a million square feet of industrial space, according to the Denver Business Journal. The sudden influx of demand following the legalization of medical marijuana has had a profound impact on the commercial real estate market, and the legalization of recreational marijuana in 2014 could further accelerate growth in the market over the coming years.
In Colorado alone, the medical marijuana market is estimated to be $350 million in size while the legalization of recreational marijuana could expand that figure to over $500 million in 2014 by some accounts. These figures are significantly larger throughout the U.S. where some analysts peg the total market at between $10 billion and $120 billion per year in size, depending on the success of various legalization efforts and the components included in the estimates.
These numbers are poised to expand over the coming years. According to a Gallup poll in late-2013, a clear majority of U.S. citizens (58%) support the legalization of marijuana compared to just 12% back in 1969. Widespread support and the promise of higher tax revenue has helped 20 states legalize medical marijuana over the past several years while four states have pending legislation to legalize the substance, according to ProCon.org.
Capitalizing on the Land
Landlords leasing space to cannabis grow operations often request that rent is paid in cash at prices 30% higher than market rates given the greater risk. Since federal law makes it impossible to obtain financing, many cannabis grow operations can't afford to purchase land outright and are either forced into these unattractive leases or face working capital shortages that can inhibit their ability to capitalize on the industry's rapid growth rates.
Advanced Cannabis Solutions Inc. (OTCBB: CANN) ("ACS") aims to capitalize on these dynamics by purchasing the real estate underlying existing grow operations and leasing it back to them. These sale-leaseback transactions provide growers with additional working capital while providing the company's shareholders with predictable long-term revenues at attractive margins, creating a win-win scenario for both shareholders and customers.
The company provides ancillary services to tenants including equipment leasing, regulatory compliance consulting and advanced logistical support for grow operation. Over the coming quarters, management also plans to introduce customized plant nutrient lines that are provided in bulk to cannabis grow operations at an attractive margin. These additional services are a natural addition to its real estate leasing business that could add significant long-term value.
On January 2, 2014, Advanced Cannabis Solutions announced that it met the minimum requirements for a $5 million convertible debt placement. The offering will provide management with the capital needed to execute upon its business plan and comes at an ideal time as Colorado legalizes the production and sale of recreational marijuana. These developments prompted management to project 200% to 400% growth in 2014 versus 2013.
On January 3, 2014, the company announced that it signed a definitive agreement to acquire property in Pueblo County that is the primary growing location for a premier Southern Colorado dispensary. Management closed on this purchase on January 6th and signed an eight year lease agreement with Organic Solutions Inc. to monetize the property. The lease agreement should generate attractive long-term recurring revenue for shareholders.
Strong Management Team
Advanced Cannabis Solutions has amassed an experienced management team led by President and CEO Robert Frichtel. Mr. Frichtel served as a managing partner of IBC Capital Group, a commercial real estate and finance company, since 2002. He has also consulted for numerous clients throughout the nation that are engaged in the medical marijuana business and has written articles for Bloomberg news regarding the cannabis industry.
Roberto Lopesino Seidita, the company's VP of Business Development, has also operated a consulting business that studies and monitors the medical marijuana market in Colorado and consults to the industry on market pricing and trends. In addition to this practice, Mr. Lopesino Seidita was the owner and manager of North Boulder Wellness Center in Boulder, Colorado, a multi-site medical dispensary and producer of marijuana.
Rounding out the team, Christopher Taylor has served as the company's Chief Financial and Accounting Officer since September 23, 2013. Mr. Taylor has been a licensed CPA in the state of Colorado for the last 20 years and has worked in most aspects of financial management during this time. In 2010, he began assisting medical marijuana businesses and built his practice to include over 50 clients in Colorado, Arizona and Washington.
There are many different opportunities for investors to capitalize on the legal market for medical and recreational cannabis, but the real estate market may be one of the largest, safest, and fastest growing subsets of the market. Advanced Cannabis Solutions is a premiere pure-play in this industry, and with the potential for multiple near-term deals such as the recently executed Pueblo County property, ACS should be added to any cannabis investors short list of stocks to watch.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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