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What marijuana investors should watch for in the year ahead


Anthony Coniglio (Courtesy photo)

The marijuana industry was a roller-coaster ride in 2023, characterized by both highs and lows.

As cannabis operators look at the landscape for 2024, several key themes will likely emerge.

From legislative and regulatory changes to market sensitivity and price stabilization to M&A dynamics, it will be crucial to remain cautious of hurdles that the marijuana sector will face and stay on top of the five areas that are expected to shape the industry in 2024:

  • SAFER Banking and Section 10.
  • Equities sensitivity.
  • Continued stabilization with little new capital formation.
  • M&A on a tuck-in basis.

Rescheduling

Earlier this year, cannabis companies saw meaningful gains following the U.S. Department of Health and Human Services’ recommendation to the Drug Enforcement Agency that marijuana be rescheduled from Schedule 1 to Schedule 3 of the Controlled Substances Act – the same category as Tylenol with codeine.

If rescheduling were to occur, it would eliminate the burdensome Section 280E of the federal tax code, enabling cannabis operators to take most standard business tax deductions and credits available to mainstream companies.

Rescheduling would be a significant milestone for the marijuana industry, but right now, there is no consensus on when or how this would occur.

Most legal experts expect the DEA to announce a proposed rule followed by a period of hearings and potential lawsuits.

As uneven investor expectations are fulfilled or missed on a weekly basis, this could lead to meaningful swings in cannabis equity valuations.

Patience will be important during this phase, particularly as the administrative procedures play out and final rules are set.

SAFER Banking and Section 10

In September, the Senate Banking Committee voted to pass the SAFER Banking Act by a bipartisan vote of 14-9.

The act would allow financial institutions to provide state-regulated marijuana businesses with access to critical banking services – including bank accounts, credit cards and checks – without fear of retribution by federal regulators.

The measure also includes key updates to the bill such as directing financial institutions to develop banking relationships in their communities and expanding Federal Deposit Insurance Corp. unbanked and underbanked surveys to small and medium-sized businesses.

SAFE Banking has passed the U.S. House of Representatives seven times on a bipartisan basis.

Bipartisan support in the Senate Banking Committee for the renamed SAFER Banking bill elevated hopes for the bill to become law.

However, with Mike Johnson’s election as speaker of the U.S. House of Representatives in October, hopes diminished that the bill would become law.

The most viable path forward for the legislation during this Congress might be Republican interest in Section 10 of the SAFER Banking Act.

Section 10 focuses on prohibiting banking regulators from favoring certain industries through banking regulation and enforcement.

The Department of Justice launched an initiative in 2013 – Operation Choke Point – that investigated the relationships between U.S. banks and the businesses involved with firearms dealers, payday lenders and other companies.

While Operation Choke Point ended in 2017, legislators would like to establish a law to prevent such regulatory overreach in the future.

Many view Section 10 as the path for such legislation.

If Section 10 language is strengthened without losing too much support from lawmakers, SAFER Banking might have a chance of getting floor time from the more conservative leadership in the House.

Absent this development, it looks unlikely that leadership will allow the bill to reach the House floor.

Equities sensitivity

Equities in the cannabis industry will likely continue to be sensitive to shifting regulatory catalysts, which have the potential to generate both significant positive and negative swings in the market.

With the unknowns of the SAFER Banking Act and rescheduling looming, leaders and investors in the space should be ready for continued high levels of equities sensitivity.

The outcome of such regulatory changes could significantly influence investment decisions and business strategies, making it imperative for stakeholders to closely monitor, adapt and stay nimble.

Additionally, the industry’s need to recapitalize balance sheets will result in some equity dilution, but investors should benefit from companies’ improved financial health resulting from such actions.

Continued stabilization with little new capital formation

The cannabis sector will likely experience further price stabilization resulting in a more predictable price environment, which can be beneficial for both operators and consumers.

However, in states where marginal capacity is eroding, pricing power will likely move back to the cannabis operators.

It is unlikely a lot of new capital will enter the cannabis sector in 2024 to create meaningful new entrants.

Even if the DEA agrees with the Department of Health and Human Service recommendation to reschedule marijuana, most institutional investors will wait until a final rule before providing new capital to the sector.

Upon such a final rule, the table will be set for investment, which might go first to the operators with scale advantages and demonstrated operational capabilities.

M&A on a tuck-in basis

2023 was another lackluster year for cannabis M&A, and it is unlikely that we’ll see a significant shift in 2024.

Companies worked hard in 2023 to focus on cash flow and debt extension.

It is doubtful they will be excited to take on a target’s debt load or risk distraction with M&A integration activities.

Even with a successful rescheduling process, we would expect most companies to utilize the 280E relief to bolster their balance sheets versus an M&A binge.

There is also an opportunity for some small-scale M&A, where operators take advantage of improving financial situations and potentially higher-equity valuations to execute small tuck-in acquisitions.

The future of the cannabis industry will depend on its ability to navigate these regulatory challenges and seize emerging opportunities as the market continues to mature.

Anthony Coniglio is the president, CEO and a board member of Connecticut-based NewLake Capital Partners, which provides real estate capital to state-licensed marijuana operators. He can be reached at info@newlake.com.

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