Cannabis

This is not really a hard tangible asset, however, I am intrigued by the Emerging asset class.

Now I am personally not a big proponent of smoking the thing because I feel it takes the edge you need to excel and it surrounds you with lazy people. But that’s the most political I’m going to get.

Problem is investing in this stuff… most people trying to get in as operators are potheads 😉

I mean every Uber driver these days dreams of opening up a dispensary.

Where are we at in Legalization?

Its just a matter of time till Mary Jane is legalized in most states. And at ten. And most states are cool with medical marijuana.

Michigan voted for it and North Dakota against it.

Its safe to say that the social stigma that marijuana is harmful is going away.

Still, it still has the perception of attracting a bad bunch of people and still operates as a cash business. It is banned from most residential and school zones today and likely to stay that way.

What are the Tradewinds that help it?

Its big tax revenue for governments.

The risks?

The Federal Government can Trump the states.

Marijuana is still a Schedule 1 drug (LSD, Cocaine, etc) for some reason. Per Federal law, it is absolutely illegal and no prescriptions can be written for it.

I think its safe to suggest that many authorities from the DEA to local sheriffs are at odds at enforcing the changing laws as they balance the high costs to enforce it.

Speaking of Trump… President Trump will likely legalize marijuana making the Cannabis industry all but certain. Like the big banks adopting a futures market for BitCoin. After all, a low pot is coming from Canada who has the best manufacturing and growers and this would screw Mexico’s drug cartels (if those walls ever get built).

If there is an ideal location you could expect cannabis vendors to overpay for rent (2-3x)

In 2017, Aspen reported $11 million (M) in cannabis revenues, compared to $10M for alcohol.

It’s most noticeable in tourism areas that cater to outdoor activities like skiing. Alcohol impairs skiing – not to mention leaving a hangover. But skiing while stoned is very common.

In 1998 in the first-ever Olympic snowboarding competition, Gold medalist Ross Rebagliati was found guilty of having THC in his blood. Yes: he was stoned when winning gold medals.

Health conscious consumers are favoring pot over alcohol. 

Now I’m very against driving under the influence but this is where most people think being stoned over drunk.

Drunk drivers can blow into a breathalyzer as soon as they get pulled over. Stoners can’t because THC can only be measured reliably with a blood test.

Getting completely stoned can be pulled over and be far above the legal limits but, by the time they get measured, be comfortably legal

Colorado (Ground Zero for Weed vs Booze) alcohol dropped (-15%) last year. MolsonCoors (NYSE: TAP), which is based in Colorado, reported sales were down 5% yr/yr in Q1 2018. In fact, North America sales have been falling $100M per quarter.

Bars are losing revenue while, pot dispensaries aren’t picking up the slack. It’s illegal to smoke pot in the dispensaries or in bars.

This means people buy and go home, instead of going out. This plays into the whole reason why Netflix is so popular as the cost-effective (and safer) route.

Issues that operators face

  • Politics aforementioned
  • Difficult to get lending – some banks have an outright ban
  • It’s the wild wild west – similar to the Crowdfunding sites where companies are jockeying for dominance to be the eBay or Amazon of the space
  • Financing – Institutional banks are struggling to lend to cannabis ventures when laws and regulations are up in the air. Right now you can get short 2-3 years loans but that’s about it.
  • Need a lot of cash for unexpected capital needs
  • Recently the Governor of Colorado legalized ‘tasting rooms’ at cannabis dispensaries. He just vetoed it. Not coincidentally, the wine lobby has spent $100M over the last decade lobbying against cannabis. They know a threat when they see one.

Insurance for the same reasons its difficult to get bank financing

To Invest In Cannabis

  1. Repurposed industrial space to store inventory as well as growing Cannabis
  2. Buy the ETF like MJ
  3. Give an unsecured loan or invest in a Fund that funds operators
  4. Invest in a syndication/private placement

Other Insights from the Hui:

1) I think there is a 3-10 year (to 2028) window of profits.  The big guys (pharma, Phillip Morris) will move in and standardize the industry.  This is why I have turned to real estate and such right now.  My portfolio is skewed toward cannabis right now, but I am building around it with the syndication and turnkeys that we have discussed.  I am rolling my profits into more stable investments with hopes that big windfalls will come along.
[Weed, other emerging and more lucrative asset classes, flipping houses are perhaps a way to generate more capital to then roll into more timeless assets that generate long term income (that can be turned over to a half-witted trust fund child down the road)]
2. The industry is divided into 2 levels:  the pothead who is now able to operate and the sophisticated company.  There are lots of entities in the industry.  Dispensaries are typically shadier and selling their specific products.  I’m not a fan of them as investments.  Farms are divided into the guy that can grow in his backyard and large performing farms.  With right management farms are okay investments. I have invested in 2 farms.  The first I earned 55% in 16 months and we sold to a public company in Vegas.  The second farm started producing in March. I earned 25% from the first 3 grows, then when it was fully operational, we had a total crop failure.  I could have been at 75% or so, but will end up at 25% for year 1, which is fine.  For those reasons, though, I tend to stay out of farms going forward.  Too many variables outside my control.
[Something to keep in mind is the taxes. Are you getting the depreciation on equipment?]
3. I am looking at exactly what you said: private equity or unsecured loans and particularly in the professional and/or ancillary areas of the industry.  For example, I am borrowing money from my insurance policy at 4.5% and loaning it at 12% to a company that is cloning hemp plants.  That company is run by a medical doctor, a geneticist, and a former medical device salesman.  I am invested in 2 CBD companies, which is almost an unlimited market, and my latest investment is in the testing area.  In CA, there is a glut for testing, so I think this is an incredible market, so I am excited about the potential there.  These companies are all just now generating revenues, so I haven’t seen returns yet, but they will vary.  Some will produce cash flows, I expect 60-75% would be attainable.  Some companies are just trying to be acquired. I think 9-12X initial investment is kind of the target for those.
[Definately hear your other point that this is a 3-10 year window. MHP and Weed investors are very like-minded investors. When I put out the Moberly MHP development deal, it was very polarizing where some people were completely put off my the asset class and location where others were like this is exactly what I was looking for!!! If you can make the intro via email that would be great. In the future I would be interested in co-investing with you mostly to learn it myself.]

Other Resources:

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