AYRSF - AYR Strategies

[Gregmal]

Interesting situation here. Thought I'd start a separate topic. Elevator pitch... SPAC deal that turned into a vertically integrated marijuana roll up. Profitable and projecting robust growth. Led by former GS and BofA directors. Really not too interested in the marijuana stuff other than to short it but came across this as something with rather crazy earnings and revenue projections(ones they've just re-affirmed), and currently, a reasonable valuation. I've long thought, as it started with vaping, that these sectors could easily be rolled up by the right people. Any idiot who's ever smoked some dope thinks they can run these businesses, and thus proceed to start them, which IMO gives business minded people a big edge.

 

Earnings just released today. Projecting 140M 2020 EBITDA against $650M market cap

 

https://www.globenewswire.com/news-release/2019/08/14/1902147/0/en/Ayr-Strategies-Reports-Financial-Results-and-Recent-Operational-Highlights.html

 

https://d1io3yog0oux5.cloudfront.net/_8f4144addfeb7eb4d9b169f13134d242/ayrstrategies/db/641/5318/pdf/AYR_-_Investor_Presentation+-+July+26%2C+2019+-+FINAL.pdf

[movys]

We are short Canadian MJ producers, but are long AYR, as it is an entirely different market and ballgame.

 

The guidance actually looks achievable to us, as it is based on existing levels of demand and simply requires that the company complete their cultivation capacity expansion, which is already nearing completion.  AYR is one of the rare examples of a profitable company in this space that generates cash and is all about smaller scale, profitable growth, as opposed to swinging for the fences with huge greenfield projects that have enormous capex needs and massive execution risk.

 

They got a bit over their skies with their 2020 guidance in their prospectus before they de-SPAC'd (which was only due to delayed recreational approval in MA), but current guidance requires nothing heroic at all, and if they come even remotely close to it, this stock will be much much higher than where it is today.

 

I think some investors are concerned that the regulatory delay in MA could persist, but demand is so strong there and AYR is one of only 3 licensed wholesalers in the state, that even if regulatory approval never comes, it only represents a 5%/10% hit to their rev/ebitda guidance for 2020.  They literally received orders in MA for twice their available capacity in August.

 

Recent uplist to the CSE will increase liquidity and there was insider buying a few weeks ago. 

 

Happy to discuss further as we've gone pretty deep into this one.  We are also long the warrants, which are remarkably trading close to their intrinsic value even though they don't expire until Dec 2021.

[Spekulatius]

Won’t cannabis prices collapse, like they did in California, after it gets legalized? I don’t think they will remain with limited competition for long. In the end, I regard cannabis as an agriculture business and more or less commodity. It remains to be seen, if the players can get price premiums via branding.

 

These projections look good, but don’t they always for SPACS? The success base rate for SPACS is just awful.

[Foreign Tuffett]

SPAC + roll up + cannabis = probably a pass for me.

[movys]

Won’t cannabis prices collapse, like they did in California, after it gets legalized? I don’t think they will remain with limited competition for long. In the end, I regard cannabis as an agriculture business and more or less commodity. It remains to be seen, if the players can get price premiums via branding.

 

These projections look good, but don’t they always for SPACS? The success base rate for SPACS is just awful.

 

Just to be clear, cannabis has been recreationally legal in MA since Nov. 2018, when the first adult-use dispensaries opened.  AYR's 3 dispensaries (which currently sell medical cannabis) have already received their recreational licenses.  They are simply waiting for the local municipalities to approve them.  The question about pricing is a good one, as CA and WA have seen prices collapse.  MA is an entirely different ballgame, however, because the supply/demand economics are massively in favor of the supplier.  Originally there were 41 retail recreational licenses granted and that has moved up to the mid-60s now.  Critically, the majority of the incremental licenses have been issued to companies that are not vertically-integrated.  Of the 41 retail licenses originally issued, 19 were cultivation licenses.  Now that we're in the mid-60s, the number of cultivation licenses remains 19, and most of the 19 have not even been built out to 100k sqft.  This has resulted in a bottleneck in the supply chain, as all the recently licensed recreational dispensaries are forced to buy wholesale from the three licensed wholesalers (one of whom is AYR). 

 

This dynamic is likely to persist for the next few years, as most of the cultivation licenses have not been built out fully and most owners lack the capital to do so and are burning cash (capital markets are now effectively closed to Cannabis companies).  But don't take my word for it.  We know what's being planned because anyone wanting to build out more cultivation capacity has to submit plans to the regulator and just a handful of vertical integration cultivation plans have actually submitted plans.  In CA/WA, the market saw a massive influx of supply, which is what drove pricing down.  In MA, the opposite problem exists.  Suppliers are unable to meet current demand and those few with coveted wholesale licenses are positioned excellently to take advantage of the robust demand.

 

I pressed the CFO on this specific risk recently and she told me that big buyers want to secure forward contracts with AYR.  Apparently, just last week someone asked AYR to lock in 20% of their entire distillate production on a forward basis for the year.  Note also that once AYR's dispensaries start selling recreationally, AYR will direct its wholesale capacity to those stores first, which will expand AYR's margins substantially as recreational pricing is 20-25% higher than medical.

 

Hope this helps.

[movys]

SPAC + roll up + cannabis = probably a pass for me.

 

I get it, it checks all the stay-away boxes.  But that's also the opportunity. 

 

The Cannabis Box

Clearly the valuations for the Canadian producers are beyond ridiculous (CGC with negative $500m EBITDA and a $10B mkt cap?!), but the societal consensus is clearly shifting towards a place where cannabis will be viewed as just another vice, perhaps one less poisonous than those already legal and regulated for decades...at which point the opportunity set is clearly massive.  Cannabis solves a problem better than alternative products (give you a buzz with no calories/hanger, is cheaper, give chronic pain relief with minimal side-effects, no addition risk, etc., and I believe this space will be fertile hunting ground for growth investors ever the next decade.

 

The SPAC box

 

With that in mind, I have come to the conclusion that the cannabis industry is the perfect setup for a SPAC.  Private companies in the space would love to cash out but have been skeptical of the volatility and crazy valuations of most cannabis stocks.  Most of these companies are money losers, don’t have cash to spend and have incredibly high hurdles to jump in order to trade publicly.  A SPAC with $100-150 million in cash is therefore uniquely positioned to secure what looks like great private companies due to having this bankroll.

 

If it were easier for cannabis companies to tap equity markets in a more traditional IPO, built-in skepticism about cannabis SPACs would be more logical, but SPACs have effectively been the only path thus far, and therefore warrant more serious consideration.

 

The Roll-up box

Here I would just note that mgmt has been clear that any acquisitions will be limited to EBITDA-positive companies in adjacent states, and the consolidation opportunity has become much more attractive over the past few months, as capital markets have effectively closed to cannabis companies and asset prices have plummeted.  That said, I would describe AYR's M&A strategy as more akin to doing a few, small, tuck-ins, as opposed to large-scale M&A that entails serious integration risk.

[Spekulatius]

Thanks for the answers, movys. I live in MA and the response to legalization of cannabis is definitely muted. I know that a permit for a marijuana grower in my town was voted down. There seem to be plenty of folks in Lowell downtown to get hold of the stuff, LOL.

 

Of course, ai do wonder if over the longer run, more wholesale licenses will be granted. I do not see reason why not. Perhaps there is a limited time window when pricing will be great.

 

CA was a different situation because there were already a lot of illegal marijuana growers competing before this was legalized for recreational use. I do believe that MA is further behind because there weren’t many illegal grows that went legit on day one.

[Gregmal]

SPAC + roll up + cannabis = probably a pass for me.

 

The words to the right of = are a bigger piece of the thesis than the ones of the left. It in some ways reminds me of HTL. Lot of "surface dirt". Maybe a diamond in the rough. The acquisition model is very similar too.

 

I don't really have much to add as movys is a beast here. Just that it would be a logical fallacy to assume "legal=easy/tons of competition". The uniqueness of each market and incredible regulatory scrutiny on the local level, if anything, for now make it a barrier to entry. It isn't like these things are going to be located on every block, to the right of the liquor store and to the left of the vape shop.

[JRM]

What's the growth strategy here past 2020?  I can't get a good feel for it.  They are currently increasing their growth operations and vertically integrating their dispensary operations.  They even mentioned that they may opportunistically pick up a tuck in acquisition if one of the larger unprofitable operators coughs something up the fits in with their current geography.  Is the plan to increase growth production and sell wholesale?

 

They seem to have a good concentration of dispensaries in Reno and Las Vegas. These seem like pretty incredible locations.  The dispensaries themselves seem very high nice compared to some of the dumps I've seen in Colorado.

 

Also, any idea to the legitimacy of the claim that the CEO can only own 15% of the outstanding shares?  That seems like a ridiculous number and doesn't pass my gut check.  Any idea if this is legitimate given their operating structure?

[JRM]

This is an eye-opening article about the situation in Cambridge, MA.  I had no idea there was a place in the U.S this far left-leaning. I guess the worst case is Sira Naturals waits two years while their business is negatively impacted from other selling recreationally and denting the "medical" sales.  This should be entertaining to watch play out. 

 

https://www.bostonglobe.com/news/marijuana/2019/07/01/follow-money-fight-over-cambridge-pot-policy/GORrl0PgO5J9jRSt1yYsYO/story.html

 

and Somerville: https://somerville.wickedlocal.com/news/20190628/recreational-cannabis-dispensaries-could-open-in-somerville-in-late-2019

 

Additionally, it looks like the lockup period expires 6 months to 12 months following the Qualifying Transaction (May 24, 2019).  Maybe this puts some selling pressure on the shares. 

 

With these risks in mind, this looks like a pretty good risk/reward situation.

[Gregmal]

This is an eye-opening article about the situation in Cambridge, MA.  I had no idea there was a place in the U.S this far left-leaning. I guess the worst case is Sira Naturals waits two years while their business is negatively impacted from other selling recreationally and denting the "medical" sales.  This should be entertaining to watch play out. 

 

https://www.bostonglobe.com/news/marijuana/2019/07/01/follow-money-fight-over-cambridge-pot-policy/GORrl0PgO5J9jRSt1yYsYO/story.html

 

and Somerville: https://somerville.wickedlocal.com/news/20190628/recreational-cannabis-dispensaries-could-open-in-somerville-in-late-2019

 

Additionally, it looks like the lockup period expires 6 months to 12 months following the Qualifying Transaction (May 24, 2019).  Maybe this puts some selling pressure on the shares. 

 

With these risks in mind, this looks like a pretty good risk/reward situation.

 

This is the gift and the curse of investing in this space.

 

But reading between the lines, these guys have the firepower to get though this. Additionally, from just the articles you posted and the arms length knowledge of this business and similar ones like vaping... the "entrepreneurs" that they are talking about giving the head starts? LOL...convicts, high school only educations, basically 30 something year old garage band buddies with an affinity for pot. Think Half Baked. Think the jerk off's in your community who finally have made enough money to be comfortable and decide they want to open restaurants..

 

You could give these guys 10 years head start and once you open the doors to guys from GS or any mid tier investment bank; anyone with a clue how to operate a real business or access capital... nature will take its course.

[movys]

What's the growth strategy here past 2020?  I can't get a good feel for it.  They are currently increasing their growth operations and vertically integrating their dispensary operations.  They even mentioned that they may opportunistically pick up a tuck in acquisition if one of the larger unprofitable operators coughs something up the fits in with their current geography.  Is the plan to increase growth production and sell wholesale?

 

They seem to have a good concentration of dispensaries in Reno and Las Vegas. These seem like pretty incredible locations.  The dispensaries themselves seem very high nice compared to some of the dumps I've seen in Colorado.

 

Also, any idea to the legitimacy of the claim that the CEO can only own 15% of the outstanding shares?  That seems like a ridiculous number and doesn't pass my gut check.  Any idea if this is legitimate given their operating structure?

 

The growth story post-2020 is centered around the expansion of their recreational dispensary footprint via M&A.  They are in the market for attractively located existing operators in adjacent states that will allow them to enter the market with a vertically integrated and EBITDA-positive operation already in place.  Of course, organic growth is also expected.  The wholesale business in MA is exploding currently but that is not a long-term strategy.  The model is to own more recreational dispensaries that will be supplied by their own cultivators.  This is higher margin business, although their wholesale margins are still quite good because they sell primarily high-quality flower, which has retained its pricing as opposed to lower quality flower.  Wholesale pricing in MA should continue to hold because additional cultivation is coming online more slowly than everyone expected (people are having trouble growing and big buyers are asking AYR to secure forward contracts). 

 

Canadian laws around takeover bids prohibit Sandelman from buying stock on the open market given his current 15% ownership.  There is a path to owning more shares, but it would likely involve issuing a formal tender offer.  He addressed the issue on the last call to proactively explain why he was absent from the list of insiders purchasing shares in June and July.  He is the company's largest shareholder and alignment is a non-issue.

[movys]

This is an eye-opening article about the situation in Cambridge, MA.  I had no idea there was a place in the U.S this far left-leaning. I guess the worst case is Sira Naturals waits two years while their business is negatively impacted from other selling recreationally and denting the "medical" sales.  This should be entertaining to watch play out. 

 

https://www.bostonglobe.com/news/marijuana/2019/07/01/follow-money-fight-over-cambridge-pot-policy/GORrl0PgO5J9jRSt1yYsYO/story.html

 

and Somerville: https://somerville.wickedlocal.com/news/20190628/recreational-cannabis-dispensaries-could-open-in-somerville-in-late-2019

 

Additionally, it looks like the lockup period expires 6 months to 12 months following the Qualifying Transaction (May 24, 2019).  Maybe this puts some selling pressure on the shares. 

 

With these risks in mind, this looks like a pretty good risk/reward situation.

 

This is the gift and the curse of investing in this space.

 

But reading between the lines, these guys have the firepower to get though this. Additionally, from just the articles you posted and the arms length knowledge of this business and similar ones like vaping... the "entrepreneurs" that they are talking about giving the head starts? LOL...convicts, high school only educations, basically 30 something year old garage band buddies with an affinity for pot. Think Half Baked. Think the jerk off's in your community who finally have made enough money to be comfortable and decide they want to open restaurants..

 

You could give these guys 10 years head start and once you open the doors to guys from GS or any mid tier investment bank; anyone with a clue how to operate a real business or access capital... nature will take its course.

 

The issue of economic empowerment candidates was addressed briefly on the Q2 call, where the CFO said she felt an agreement with City Council was likely given the talks taking place.  The critical piece here is that AYR is effectively insulated from these regulatory setbacks because they hold one of the 3 wholesale licenses in MA.  Further delays in converting their medical dispensaries to rec while other rec dispensaries continue to open?  No problem.  Who do you think is going to supply those newly opened rec dispensaries?  AYR has something of a stranglehold on the market now because there aren't enough wholesale suppliers to satisfy demand.  This is why the 2020 guidance is only marginally impacted if recreational approval for AYR's MA dispensaries never materializes.

 

And fully agree on Gregmal's points about the "entrepreneurs." 

[JRM]

Thanks for the replies.  Ironically I'm traveling to Reno in a few weeks.  I'm curious to see what the environment is like compared to what I've seen in parts of Colorado.

[Guest 1ion]

Just joined COBF...didn’t expect to see post on Ayr Strategies (thought it was too off the radar). Anyways, I’m shareholder of AYR.A and warrant holder of their other SPAC, Mercer Park Brand Acquisition Corp. which is focused on acquiring brands.

 

I think long term the cannabis/oils market has a lot of potential but it’ll be very difficult to pick winners, both in cultivation or brands. But at least for the next couple years I like the Ayr setup. Especially in Massachusetts. I figure they’re trading at about 10% 2020 FCF yield with more conservative assumptions than they originally had during SPAC process. Wouldn’t be surprised if they overachieve. My only worry (as they said on Sept 5th conference) is capital markets are closed (not bad for Ayr) and deals are shifting from cash to stock. As long as Ayr’s stock trades as low as it does (I think worth ~C$26) I worry they’ll do a acquisition with it.

 

I also have a speculative position in Mercer Park Brand warrants (BRND.WT). Although they haven’t found acquisitions yet (so could lose everything if they don’t do deal) I think incentives are that deal will at least get done - sponsor has majority of investment through warrants. Doesn’t take much imagination to see warrants at $6.5+ (vs $0.70’s now) once deal does get announced/done. They can call warrants early if stock goes to $18 which would equal $6.5 for warrants. Ayr Strategies warrants hit $14.5...granted now cannabis market is very bearish. Also seems based on valuations that brand companies are more valued by the market place. Small synergy for Ayr and BRND will be if they get brands they can throw them in Ayr sites and maybe provide the flower?

 

Any thoughts?

[Gregmal]

https://ir.ayrstrategies.com/news-events/press-releases/detail/21/ayr-strategies-announces-5-share-buyback-the-maximum

 

How bout that shit?

[Jurgis]

What is the legality of buying stock of (Canadian) cannabis companies in US? Isn't it theoretically illegal although probably no one likely will enforce it in practice?

[Lance]

https://ir.ayrstrategies.com/news-events/press-releases/detail/21/ayr-strategies-announces-5-share-buyback-the-maximum

 

How bout that shit?

 

Gregmal - I’m convinced you’re a time traveler from the future. 

 

Thanks

Lance

[Gregmal]

Lance,

 

Appreciated, but I'm just a bag holder in this name for now...

 

Although I will say, this is the first time Ive ever seen a post SPAC company commit to a buyback this quickly. Mr. Sandelman, I applaud your efforts.

[villainx]

Just seems strange for rapid growth and m/a strategy orientation to have buyback.  Hope it points to careful planning versus opportunities not materializing?

[Guest 1ion]

Just seems strange for rapid growth and m/a strategy orientation to have buyback.  Hope it points to careful planning versus opportunities not materializing?

 

Given Ayr is one of the few cash flow positive cannabis companies as a going concern and the ridiculous valuation it’s trading at, it’d be impossible to find a private deal as attractive as buying back their own stock. Also think they’re trying to demonstrate prudent capital allocation which is scarce in the industry. At the end of the day, they say the goal is to drive shareholder value. M&A, buybacks, capex, etc are all levers to driving that shareholder value. To drive value with M&A they need their stock to trade at a more appropriate valuation otherwise acquisition would be suicide from diluting shareholders or taking high yielding debt. Suffice to say, I’m of the "points to careful planning" position.

[JRM]

Maybe the buyback was intended to offset any additional selling pressure when the lockup periods end (November 29 and May 29). 

[Gregmal]

I think the buyback is just a simple message to the market that they are serious about delivering for shareholders, and that they believe the stock is very cheap. If not there is no reason to go ahead with one this early or make further comment about how they'd do a much larger one if allowed. Granted Sandelman got a nice deal on his shares, but given his ownership and the potential here I think everything is very much aligned. There arent really too many times you see a setup like this. It isn't crazy to connect the dots to a $60-$70 stock several years out if a few things go their way.

[spartansaver]

Why is everyone saying this is profitable? I'm seeing losses and a bunch of adjustments just to get this thing to AEBITDA positive.

 

How does the biological asset line in COGS work? I keep re-reading it and my brain can't understand it.

[Spekulatius]

Why is everyone saying this is profitable? I'm seeing losses and a bunch of adjustments just to get this thing to AEBITDA positive.

 

How does the biological asset line in COGS work? I keep re-reading it and my brain can't understand it.

 

In addition, the base rate for Success with SPAC vehicles is terrible.