Passing of the Torch
Last November, our monthly letter to investors was titled “Winter is Coming” with an eye toward the darkness that would likely precede the light of spring. Several marquee multistate operators had just listed–Acreage Holdings, Harvest Health and Cresco Labs among them–and the cannabis complex lost 55% of its market value into year-end before bouncing in kind.
The chart above illustrates the percentage changes in the MSOs from November through the most recent month-end. As we enter the execution and consolidation phases of industry growth, relative value has begun to emerge within the context of the broader valuation disparity compared with Canadian LPs.
The Wall Street-ification of cannabis continued apace as the industry took strides toward becoming a legitimate asset class, one that we believe will become a staple across portfolios. In April alone, Bank of America initiated coverage of Canadian LPs, three new cannabis-specific ETFs announced their launch, and Canopy Growth bid for Acreage Holdings in what would become the first cross-border consolidation.
While we continue to believe that banking reform will serve as the catalyst that turns the current ‘denial’ into the eventual ‘migration’ of institutional investors into U.S. operators, there are near-term risks to that thesis. Among them is the transfer of ownership from the private equity investors that bankrolled these companies to investors in publicly traded securities.
To illustrate this point, witness these lock-up expirations of several U.S. multi-state operators:
Cresco Labs (85% of pre-OH float) — 234 million subordinate voting shares entered into lock-up agreements for a period of 180 days from December 3, 2018 to June 3, 2019
Harvest Health & Recreation (74% of float) — 217 million shares become freely tradeable on May 13, 2019
Curaleaf Holdings — 371 million shares, or 81% of the total float, lock-up extended until Oct 29, 2019
Trulieve Cannabis Corp — 75.5 million subordinate voting shares, representing 68.6% of the subordinate voting shares of the company, will be freely tradable on or before July 25, 2019
Acreage Holdings — 28.3 million shares will become free-trading starting in May 2019
Once this transfer of ownership takes place, the liquidity profile of these companies should meaningfully improve, which will allow for broader investor adoption. The rub, of course, will be in how the market digests the supply given the complex regulatory landscape and the current inability of most U.S. institutions to custody these assets.
While we remain bullish on U.S. cannabis, we’ve reduced exposure in select MSOs to allow for the insider supply to settle, which will explain the reduction in several of our top holdings.
As always, please let us know if you have any questions or would like further clarity on the strategy.
Chief Investment Officer
CB1 Capital Management