AYRSF - AYR Strategies

[JRM]

Quickly going through the transcript, a couple of questions:

 

1, how are they coming up with the cash for acquisitions?  Just thinking about dilution, if it comes to that.  They mentioned cash, on free cashflow generation ... but you still want to have some cash at the end of it all.

 

2, PA is going to come online when?  Licensed but not operational, right?

 

3, I guess no more buybacks, that was on the table several months ago, right?

 

Any thoughts on price of acquisition(s)? 

 

 

Yea. I like PA, looks a lot like MA in terms of the market. I would wager Connecticut is one of the others theyre looking to move into. Both should simply be appetizers as they setup for recreational legalization that should occur within the next year or two. Good mix on the financing as well.

 

My guess is the total consideration will be similar to the SPAC deals; a combination of cash, equity, warrants, and debt.  For a company like this I don't think equity dilution is necessarily a bad thing.  This company is off the radar for many large funds due to lack of liquidity.  If they can grow into a larger company with greater liquidity, then maybe the valuation normalizes as well.

 

You have to trust management to allocate capital wisely.

[spartansaver]

Quickly going through the transcript, a couple of questions:

 

1, how are they coming up with the cash for acquisitions?  Just thinking about dilution, if it comes to that.  They mentioned cash, on free cashflow generation ... but you still want to have some cash at the end of it all.

 

2, PA is going to come online when?  Licensed but not operational, right?

 

3, I guess no more buybacks, that was on the table several months ago, right?

 

Any thoughts on price of acquisition(s)? 

 

 

Yea. I like PA, looks a lot like MA in terms of the market. I would wager Connecticut is one of the others theyre looking to move into. Both should simply be appetizers as they setup for recreational legalization that should occur within the next year or two. Good mix on the financing as well.

 

1. They breakout mix (some equity, some seller financing, and some cash on hand)

2. 3/6 dispensaries expected to come online in Jan.

3. I would guess no buybacks as they also plan on entering two more markets which will be announced in coming months.

 

They claim they are paying 2.5x Forward Adj. EBITDA. Seems reasonable, but also based on assumptions around PA. opening up to recreational use and a supply imbalance resulting in strong profits. 

 

[Gregmal]

Quickly going through the transcript, a couple of questions:

 

1, how are they coming up with the cash for acquisitions?  Just thinking about dilution, if it comes to that.  They mentioned cash, on free cashflow generation ... but you still want to have some cash at the end of it all.

 

2, PA is going to come online when?  Licensed but not operational, right?

 

3, I guess no more buybacks, that was on the table several months ago, right?

 

Any thoughts on price of acquisition(s)? 

 

 

Yea. I like PA, looks a lot like MA in terms of the market. I would wager Connecticut is one of the others theyre looking to move into. Both should simply be appetizers as they setup for recreational legalization that should occur within the next year or two. Good mix on the financing as well.

 

1. They breakout mix (some equity, some seller financing, and some cash on hand)

2. 3/6 dispensaries expected to come online in Jan.

3. I would guess no buybacks as they also plan on entering two more markets which will be announced in coming months.

 

They claim they are paying 2.5x Forward Adj. EBITDA. Seems reasonable, but also based on assumptions around PA. opening up to recreational use and a supply imbalance resulting in strong profits.

 

Yea they gave the breakdown regarding financing and to a degree there is a lack of detail on the acquisitions, but all things considered when you look at their guidance on the first round of acquisitions, the skepticism people had, the TTM and all the outside "events", one has to be pretty pleased with the execution and be somewhat favorable, or at least give the benefit of the doubt on these ones.

 

I would also not underestimate the note about the debt markets. This is very positive as debt markets and pot co's typically have not been friendly. This could be a major advantage for them.

 

Buybacks I was under the impression they weren't really executing at these prices anyway, at least not to the degree they were in single digits. Given the run, and current share price, not a terrible time to use the shares as currency especially if its a potentially accretive deal and 2.5 adj EBITDA is hard to argue with, again, if they can execute.

 

All in all I think with something like this you have to be flexible and straddle between taking things with a grain of salt, and getting to granular. I just try to get an idea of where their heads are at, and loosely what they are trying to do. Executing will be key. But so far the track record is impressive.

[JRM]

Another interview with CEO.

 

https://seekingalpha.com/article/4375890-good-news-for-ayr-strategies-podcast

[rkbabang]

Ayr Strategies Enters into Agreements to Expand Operations to Fourth State with Strategic Acquisitions in Ohio; Deepens Pennsylvania Presence

https://ir.ayrstrategies.com/news-events/press-releases/detail/45/ayr-strategies-enters-into-agreements-to-expand-operations

[Gregmal]

The deal mix is interesting. If nothing else, I would have expected them to be using more stock to fund these deals. But with cash flow ramping and the deals accretive, I am glad they dont seem to find that necessary.

[Gregmal]

Word on the street is NJ and IL are the two states with current deals. Huge markets with very strict regulation.

[spartansaver]

I'm guessing that management are anticipating warrants to be forced to early exercise, resulting in large cash inflow. We are on day 7 out of 20 (within a 30 day trading window) of share price above CAD18/share where warrants would get early exercise. That's a lot of cash coming in the door that eliminate ant balance sheet risk.

[Gregmal]

I am being lazy here, but I vaguely recall a warrant exercise already taking place last summer, no?

[spartansaver]

There are about 16mn warrants outstanding as of June 30th. The excerpt below is from the annual filings (March 2019). The way I am reading it is that all warrants are forced to exercise. Please let me know if you think I'm misunderstanding it.

 

All Warrants will become exercisable only commencing 65 days after the completion of our Qualifying Transaction.

Each Warrant is exercisable to purchase one Class A Restricted Voting Share (which, following the closing of the

Qualifying Transaction, will become one Class B Share) at a price of $11.50 per share, subject to the following

adjustments. The Warrant Agreement will provide that the exercise price and number of Class B Shares issuable on

exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend,

Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. The Warrants will not, however,

be adjusted for issuances of Class B Shares at a price below their exercise price. Once the Warrants become

exercisable, the Corporation may accelerate the expiry date of the outstanding Warrants (excluding the Founders’

Warrants but only to the extent still held by the Sponsor at the date of public announcement of such acceleration and

not transferred prior to the accelerated expiry date, due to the anticipated knowledge by the Sponsor of material

undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share

price of the Class B Shares equals or exceeds $18.00 per Class B Share (as adjusted for stock splits or combinations,

stock dividends, Extraordinary Dividends, reorganizations and recapitalizations and the like) for any 20 trading days

within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on

which such notice if provided.

[Gregmal]

Yea you are correct. I remembered them talking about exercising last year but will have to check when I get a change. There are still some outstanding but I thought they had redeemed a portion earlier.

 

EDIT: https://ir.ayrstrategies.com/news-events/press-releases/detail/13/ayr-strategies-updates-its-plans-regarding-the-early-expiry

 

Thats what I was thinking of. Nevermind lol

[rkbabang]

Arizona

https://ir.ayrstrategies.com/news-events/press-releases/detail/47/ayr-strategies-agrees-to-expand-operations-to-fifth-state

 

[Gregmal]

Great news. NJ also passed legalization, which green lights AYRs operations there as well.

[villainx]

Arizona seem heavier with paid with stock portion.  With potentially another 2 mil share owe for cultivation target?

 

Big transaction though.

 

[rkbabang]

This sounds like good news. Expanding recreational "adult use" into greater Boston.

 

"received three host community approvals to meaningfully expand its existing medical footprint, as well as begin the final preparations for adult-use sales in Boston, Somerville and Watertown, Massachusetts. The approvals for Host Community Agreements (“HCAs”) mark a significant first step toward the Company’s entry into the adult-use market in the Greater Boston area, with a population of 4.9 million."

 

https://ir.ayrstrategies.com/news-events/press-releases/detail/48/ayr-strategies-receives-three-host-community-agreement

 

[Gregmal]

Result out

 

https://ir.ayrstrategies.com/news-events/press-releases/detail/49/ayr-strategies-reports-third-quarter-2020-results-updates

[spartansaver]

All these guys do is report good news.

 

I sold the other day. I'm horrible at holding when a stock goes up a lot. Wish I still owned it after reading the results.

[rkbabang]

All these guys do is report good news.

 

I sold the other day. I'm horrible at holding when a stock goes up a lot. Wish I still owned it after reading the results.

 

I'm usually horrible at this myself.  The stocks I sold too early are legion: NFLX, TSLA, SAM, ... I could go on, but I'd start to cry.  I was trading in and out of AYR last year and earlier this year, I'm glad I bought back in to stay at about $6.30.  I'm going to try to hold this one I think.

[Gregmal]

I am also impressed with these fellows. Recently, I took a chunk of original investment off the table. The rest, which is ~5% position will ride for a while. Lot of runway and its crazy to think they are more or less hitting guidance issued pre pandemic even with big time shutdowns and further, should absolutely crush things next year as well. I dont think a $60-$75 price target is unreasonable.

[RichardGibbons]

Yeah, it seems to be rolling.

 

The challenge for me is that I'm not convinced they have a long-term competitive advantage unless states limit licenses in perpetuity (and cannabis licenses basically become taxi medallions). That seems to me to be the lower probability scenario, so my ongoing game is trying to identify the moment when the economics of being a commodity business starts to bite them.

 

But hopefully I'm just wrong and can hold AYR for a while.

[rkbabang]

Yeah, it seems to be rolling.

 

The challenge for me is that I'm not convinced they have a long-term competitive advantage unless states limit licenses in perpetuity (and cannabis licenses basically become taxi medallions). That seems to me to be the lower probability scenario, so my ongoing game is trying to identify the moment when the economics of being a commodity business starts to bite them.

 

But hopefully I'm just wrong and can hold AYR for a while.

 

The challenge for them will to develop a brand.  After all there are a lot of great companies that do well in commodity businesses  KO, SBUX, SAM, ... 

Right now though and for many years to come they have a long runway just being the best in class operators in a highly regulated fast growing industry.

[JRM]

How are you guys thinking about valuation on this?  It looks like they're at about 4x sales, and sales grew ~40% yoy.

 

I'm having time not trimming some here, but I have regretted selling winners too early in the past.

[Gregmal]

Ive removed some in the past few months but still have about a 5% position. I am ball parking something in the neighborhood of $160M Adj EBITDA for NTM which I think is fairly conservative. I think they have the formula down and if they are able to continue with the value adds, such as expansion permits or continued store openings, this could really get out of hand in a good way. Roughly speaking they've done $200M or so of acquisitions at a slightly lower than 3x Adj EBITDA rate. Organic growth was north of 40% and at run rate $77M you could pretty easily see $160-$200M if execution remains on point as it has been.

 

I am also still waiting to hear news about IL and NJ. Both places where they are hiring and have applied for permits. I'd be ok with $55 a share as a 12M target.

[JRM]

I was also thinking shares could roughly double in 2021 if all goes well.  I think it's an execution story at this point, and I like the management decisions so far.

[rkbabang]

What does the price/sales at the current price look like if they grow another 40% this year and another 40% the year after (which isn't an unreasonable assumption)?.  They are only in a handful of states right now and most of their competition is fairly amateurish.  The market is huge and the runway is long if they execute.