OVERVIEW
Ayr Strategies (AYR.A: CN) is a vertically integrated U.S. multi-state operator with most of its operations in Massachusetts and Nevada. The Company cultivates and manufactures branded cannabis products for wholesale and its retail stores. Ayr Strategies began in December 2017 by raising C$130M of equity in Canada through a SPAC offering and acquiring U.S. cannabis operators in Massachusetts and Nevada. The Company raised capital when there was a big gap between public and private valuations. Management's business plan focuses on individual limited license states with large populations where it can be vertically integrated.
Earlier this month, Ayr announced the acquisition of cultivation and processing facilities in Ohio. The Company also announced the purchase of a grower-processor in Pennsylvania. In Ohio, AYR has agreements to acquire an operational processing facility and non-binding management rights over a level 1 cultivation license. The cultivation facility under construction is 58,000 square feet, and the 9,000 square feet processing facility is fully operational. In August, AYR announced the acquisition of rights to develop six retail dispensaries in Pennsylvania and a cultivation and production campus.
Following the closings of the announced acquisitions in Ohio and Pennsylvania, Ayr will have access to a population of approximately 35 million people across four states. In total, the Company will have seven operating dispensaries, nine additional dispensary licenses, and about 160,000 ft of cultivation and processing space, with the ability to expand to over 460,000 ft.
MANY REASONS TO BE LONG AYR
MASSACHUSETTS IS UNDER EARNING
Ayr Strategies will see an organic step function growth in 2021, without recent acquisitions in Ohio and Pennsylvania. We believe the company's multiple will expand as it enters new markets and executes its organic growth plans in Nevada and Massachusetts's existing markets. Currently, AYR is operating two of its three licensed dispensaries in the State. Notably, the two open are serving as medical only, awaiting licensing to open for recreational sales. Expectations are for the approval process to happen sometime in 2021. Currently, average unit volumes in Massachusetts are close to $10 million and are set to go significantly higher. As the Company gets approval for recreational sales in Massachusetts, the average unit volumes could double or triple, but getting local municipalities to approve that license can be a significant hurdle. Besides, the Company currently has two approved sites for its third dispensary, which can do more than $40 million in recreational sales. These incremental sales in the Massachusetts market will have significant implications for the potential for margin expansion in 2021.
SECULAR GROWTH
With its recent acquisition announcements, AYR is currently operating in 4 states, with a significant opportunity to expand that to seven more states. The Company currently operates in MA, NV, PA, and O.H. There are further opportunities to expand into MI, IL, NY, NJ, FL, and AZ. The growth in the number of the potential market has the potential to increase by year-end. States with a legalization measure officially on the November ballot:
- New Jersey: adult-use, (Population: 8.9M)
- Arizona: adult-use, (Population: 7.3M)
- Mississippi: medical-use, (Population: 3.0M)
- Montana: adult-use, (Population: 1.1M)
- South Dakota: adult-use and medical-use
(Population: 0.9M)
STRONG MARGINS & FREE CASH FLOW
The Company reported 2Q20 (A) EBITDA of $9.1 million, representing an 8% increase from 1Q20 and an EBITDA margin of over 32%. Gross margin improvement (before fair value adjustments) drove the increase in (A) EBITDA, which improved to 60.4% compared to 54.5% in 1Q19. The Company indicated that gross margins continue to improve in 3Q20. The continuous improvement in gross margins is due to completed cultivation expansions in 2Q20 in both Nevada and Massachusetts, resulting in more own branded sales at retail in Nevada. The Company also held G&A costs steady and expected revenues to grow faster than expenses for the balance of 2020. The capital spending in Massachusetts and Nevada's core markets is estimated to be $5-$6 million, with $1-$2 million in maintenance capital spending. In Pennsylvania, the build-out over the next three quarters is projected to be between $15-$20 million over the next two to three quarters. This compares to estimated operating cash flow of $32 million in 2020.
VALUATION DISCOUNT
Before the SPAC craze of 2020, AYR started as a SPAC, which is likely contributing to some uncertainty in the market. Some could also argue that AYR is a cannabis "roll-up," which can also leave some people uneasy. AYR trades at 1.7x 2021 EV/Sales versus 4.6x for GTBIF, 3.5x for TCNNF, and 3.8x for CRLBF.
STRONG WHOLESALE BUSINESS & STRONG UNIT ECONOMICS
The pace of approvals from the Cannabis Control Commission has picked up in MA, which means the State has more recreational dispensaries coming online every month. AYR's newly expanded cultivation facility produces some of the best flower in the State and can be seen in the market share it captures at the wholesale level. As of 2Q20, the Company reported wholesale revenues that have ramped to over $3.4 million as of July, up 30% since the beginning of the year. AYR operates several stores with highly attractive unit economics. Most stores are run out of modest square footage; many of the stores are highly productive and earn significant margins and are set to accelerate meaningfully. Since operators are limited to three dispensaries, having a strong wholesale business with brands and low costs is vital to participate in the state's future growth.
CULTIVATION
The Company currently operates two cultivation facilities in MA, totaling 50,000 sq ft; 32,000 ft of the canopy. Significantly, as AYR's business expands into the recreational side, the Company can expand its cultivation to 100,000 ft. In PA, Ayr Strategies is acquiring is 143,000 square feet, with the initial Phase, I construction of 45,000 square feet nearly completed. The remaining 98,000 square feet of the facility is primed for further build-out as demand requires. Following the closings of the recently announced acquisitions in Ohio and Pennsylvania, the Company will have seven operating dispensaries, nine additional dispensary licenses, and approximately 160,000 ft of cultivation and processing space, with the ability to expand to over 460,000 ft.
SUMMARY
There are several visible drivers of organic and acquisition-driven revenue growth over the next few years. The associated margins and cash flow should lead to years of compounding growth as the Company grows in new markets. Ayr Strategies is one of the most compelling organic and acquisitive growth strategies in our covered universe.
More details to come in our upcoming Black Book!
