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Below is a brief excerpt from a complimentary research note written by our Cannabis analyst Howard Penney. We are pleased to announce our new Sector Pro Product Consumables Pro. Click HERE to learn more. |
Ayr Strategies is a Hedgeye Cannabis Best Idea LONG.
Ayr Strategies, a leading vertically integrated cannabis multi-state operator, announced its expansion into Florida and New Jersey, bringing its retail footprint to seven states. In Florida, Ayr has entered into an agreement to acquire Liberty Health Sciences (LHSIF), a vertically integrated operator, in a stock-for-stock transaction valued at $290 million.
Additionally, Ayr announced the proposed acquisition of the membership interests in GSD NJ LLC (“GSD”), a licensed operator in New Jersey, for upfront consideration totaling $101 million.
With these and other pending transactions, Ayr will have operations in seven states covering 73 million people, which includes four adult-use markets and three medical markets. With the completed acquisitions, Ayr will be posited as a top 5 MSO by 2022 expected Adjusted EBITDA. Management commented that they have a presence in seven of the 10-12 states which fit their market criteria.
Florida: Acquisition of Liberty Health Sciences
The assets being acquired from Liberty includes a 387-acre cultivation campus in Gainesville, FL with over 300,000 sq. ft. of current production facilities in operation; 28 open retail dispensaries, seven completed and ready-to-open dispensaries, and seven dispensaries currently under construction.
Liberty currently employs 335 people, all of whom are expected to be retained by Ayr.
Liberty Health Sciences has been a chronic underperformer in Florida’s robust medical marijuana market. The most recent data from the Florida Office of Medical Marijuana Use (OMMU) shows Liberty’s declining market share across all categories. On a four-week moving average, Liberty has a 9.3% share of approved retail units, but only has 5.2% share of THC in mgs sold, 2.2% share of CBD in mgs sold, and 3.2% share of flower in oz. sold.
While a medical marijuana dispensary in Florida can pull anywhere from $4 - $10 million in monthly revenues, Liberty has averaged a $2 million. Management commented that the cultivation and production of dried flower was low enough that Liberty would sell out of flower within four days every week across its entire retail footprint. Lastly, Liberty has yet to produce edibles or oil concentrate products, leaving entire product categories untapped.
Management emphasized Liberty’s underperformance as an exceptional opportunity for upside. Ayr CEO John Sandelman framed the timing of the acquisition as a land grab. As these nascent markets continue developing and maturing, municipalities are likely to limit the number of operators.
Sandelman noted an urgency in penetrating these markets at the ground floor to avoid being locked out. Management expressed an optimism in significantly rehauling the Liberty’s operations to improve productivity, increase cultivation yield, and create a consumer-centric business. Ayr anticipates $15 million of CapEx over 2021 for cultivation and retail expansion. Liberty has 14 stores slated to open in 2021, and the company plans to add a least one store every month.
Total consideration paid of $290 million represents a forward multiple of approximately 4.8x 2022 estimated adjusted EBITDA. If Ayr can turn around this massively underperforming asset, then they’ll have gained one of the best retail footprints in Florida with already built out cultivation facilities ahead of potential adult-use legalization.
The acquisition is expected to close towards the end of Q1 2021.
New Jersey: Acquisition of Garden State Dispensary
In New Jersey, Ayr has signed a binding agreement to acquire licensed operator GSD, one of the 12 existing vertical license holders in the state one of the state’s original six alternative treatment centers (ATCs).
GSD already has three open medical dispensaries, the largest footprint of any operator. GSD has 30,000 sq. ft. of cultivation and production facilities in operation with an additional 75,000 sq. ft. currently under construction.
Total up-front consideration of $101 million includes $41 million in cash, $30 million in stock and $30 million in the form of a promissory note. Earn-outs based on exceeding revenue target thresholds in 2022 will be capped at a maximum of $97 million and payable in a combination of cash, promissory notes and exchangeable shares.
Including the maximum earn-out consideration, the Company estimates this represents a forward multiple of approximately 4x 2022 adjusted EBITDA.
The acquisition is expected to close towards the end of Q2 2021.
