American Cannabis Market Offers Opportunity for Multiple Winners

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During Q2, three American MSOs are projected to have generated quarterly revenue in excess of $100 million, with Curaleaf and Trulieve expected to surpass Green Thumb Industries, the first company to have achieved that milestone during Q1. Trulieve derives almost all of its revenue from Florida, while Curaleaf and GTI are more diversified. Neither company breaks out revenue by market, but Illinois and Pennsylvania appear to be driving GTI’s growth, with a substantial contribution from Nevada as well. Curaleaf’s composition is shifting after its recent acquisition of Select, which added substantial exposure in California and other Western states. It cites its current top 5 states as Massachusetts, Florida, Arizona, New Jersey and Nevada.

While these three MSOs are the largest, their total share of the U.S. market is not dominant. Even with Curaleaf’s pending Grassroots acquisition, which will expand its leadership position, the $1 billion in revenue that analysts currently project for 2021 would be less than 5% of the overall legal market. It’s important to understand that there isn’t just one market in the U.S. Instead, there are many different markets, with some states permitting adult-use while others limit cannabis to medical. Each state offers different dynamics. For instance, New York, currently a medical-only market, has 10 licenses. On the other hand, Oklahoma, also a medical-only market, has open licensing and currently thousands of licenses. We have profiled several state markets this year.

American cannabis operators will struggle to achieve market dominance in any given state. An outlier, of course, is Trulieve in Florida. Based on production assets, Cresco Labs and GTI are likely to have very high share in Illinois. Many states with limited licenses control the market to the extent it would prevent dominant market share. New York restricts its 10 medical cannabis providers to just four dispensaries each. Pennsylvania is a rapidly growing market that also caps the number of dispensaries any provider may operate. At the same time, states that have relatively open licensing can be so competitive that it will be difficult to have high share within the market. A good example of this is Oregon.

Looking ahead, leading MSOs are likely to expand their share of the market. Those that are best capitalized and can generate positive cash flow fall into this camp. Many companies that aren’t as well capitalized or with cost structures that remain too high will cede some market share. Recent announcements by Acreage Holdings, Harvest Health & Recreation and MedMen reinforce this point. Readers can stay on top of this trend by monitoring the Public Cannabis Company Revenue & Income Tracker, which breaks out profitability and revenue levels.

Several companies have been able to access substantial debt over the past year or so, including Columbia Care, Cresco Labs, Curaleaf, GTI, Harvest Health and Trulieve. Some have also been able to obtain substantial capital from sale-leasebacks, particularly through Innovative Industrial Properties, which speaks regularly of its core tenants and its desire to expand its relationship with them. The REIT just raised another $259 million dollars. IIP’s public company tenants include Cresco Labs (5 properties), GTI (3 properties), MJardin (1 property), Trulieve (2 properties) and Vireo Health (4 properties).

While the retrenchment of several public companies that expanded too rapidly will likely reward those that have grown more prudently, we note that there are several private MSOs that will benefit as well. We think a great place to start one’s search for these companies is IIP’s tenant list, which includes private operators Ascend Wellness, Emerald Growth Partners, Grassroots (pending acquisition by Curaleaf), Green Leaf, Green Peak Innovations, Holistic, King’s Garden, LivWell, Maitri Genetics, Parallel, PharmaCann, The Green Solution Colorado (pending acquisition by Columbia Care), The Pharm and Vertical. Note that we have interviewed several of these companies.

While we don’t expect the total U.S. market to be dominated by a few companies, we do anticipate that several leading MSOs will become quite substantial in size over the next few years as they gain share in a rapidly growing market. Most of the growth is likely to be organic, but we anticipate tuck-in acquisitions as well as expansion into new markets, particularly California, where most of the larger MSOs have not yet moved aggressively.

Cresco Labs, with its headquarters in Chicago, is one of the largest vertically-integrated multi-state cannabis operators in the United States. With experienced management, access to capital and a demonstrated growth strategy, the company has been busy with its integration of Origin House, allowing the company to leverage California to grow its Brand further. Concurrently, Cresco Labs has been benefiting from very positive sales growth trends in Illinois, Pennsylvania and Ohio. The company’s strategic footprint includes 6 of the 10 largest U.S. states.

Get up to speed by visiting the Cresco Labs Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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