An Introduction To Verano: A Top-Shelf MSO

Verano is a leading US cannabis company differentiated by top-shelf offerings and industry-leading margins. Headquartered in Chicago, their footprint spans 15 states, 93 retail locations, and over 12 production facilities comprising over one-million square feet of cultivation. Through this structure, they are reaching an addressable population of over 150 million, plus distributing to over 500 active wholesale dispensary accounts.

History

Verano was founded in 2014 as an Illinois medical-cannabis growing operation by George Archos. A restaurateur before getting into the cannabis business, Archos establishments include four Wildberry Pancakes and Cafe locations in Chicago area.

Verano operated as a private company for seven years and went public at $10/share on February 17, 2021 through a reverse takeover (RTO) of Majesta Minerals. At the time of the IPO, they merged with Alternative Medical Enterprise, LLC (AltMed). AltMed offered Verano valuable retail assets in Arizona and Florida under their MUV dispensaries banner.  Today, the stock trades on the Canadian Stock Exchange (CSE) under the ticker VRNO, and VRNOF on the US OTC Exchange.

Leadership

When analyzing investments, I always study the management team to understand where they will perform best. Experienced professional investors like Abner Kurtin from Ascend are experts in sourcing capital and allocating to the most attractive assets. This is perfectly suited for creative financing and investing in the most attractive assets.

George Archos, CEO of Verano, comes from the restaurant business. Restaurants live with razor thin margins and must have impeccable financial discipline to survive. Hence, the adage that 90% of restaurants fail within the first two years of operation. George has taken what he learned successfully operating several restaurants and applied this to Verano. While the firm is not cheap, they are disciplined with their spending.

Verano excels at creating beautiful stores with informed budtenders. In the cannabis world, the budtender is analagous to a waiter in the restaurant industry. Verano prides themselves on being more a knowledgable team and taking a consultative sales approach, rather than just pushing the special of the day. Again, these service principles are carryovers from George's restaurant roots.

I listened  to several interviews in preparation for this piece, and George's knowledge and humility are exemplary. The biggest mistakes in business are made when too much leverage meets excess ego. I have neither of these concerns with Verano.

Footprint

Verano’s footprint is characterized by prime assets in highly populated, limited-license states.The firm got their start in Illinois and currently operates 10 dispensaries and almost 200,000 square feet of cultivation. Illinois is a limited-license state that recently expanded from medical-only to adult use.  

In October, I wrote Why Limited License Matter, showing how constraining capacity makes each license much more valuable. Limited-license environments, especially when flipping from medical to recreational, are the cannabis-investing sweet spot.

Verano, largely due to their acquisition of AltMed, has key assets in Florida and Arizona. Florida is fascinating: the population is 22 million (and climbing), with 2.5% of residents in their medical cannabis program. Broadly, about 18% of Americans use cannabis, meaning the move from medical to recreational has potential for a 7x increase in consumers.

Plus, Florida gets 130 million annual tourists. Only residents can get a medical card, but with adult use anyone over 21 can purchase cannabis. It's already a massive market, but with adult use and tourism, Florida is poised to take off.

Speculation is adult-use will be on the 2024 Florida ballot, will pass, and take effect in 2025. Verano has 41 dispensaries across the state, plus 220,000 square feet of indoor cultivation and manufacturing in Apollo Beach.

The other exciting aspect of Verano’s footprint are expanding east-coast markets. New Jersey has a population of almost nine million and has historically been a small medical program, with a massive illicit market fed by California. The state has approved adult use and hopefully recreational sales begin in Q2 2022.

This will be huge for New Jersey residents, but will be enhanced by traffic from neighboring states like New York and Pennsylvania that are not, yet, offering recreational dispensaries. Verano operates three stores, plus a 120,000 square-foot indoor cultivation and manufacturing facility in New Jersey.

Retail Presence

Verano has an expanding retail presence through their Zen Leaf and MUV dispensaries. Zen Leaf is Verano’s attempt to capture the high-end, adult-use consumer. These are beautiful, custom-designed stores that will remind you more of an Apple store than a traditional cannabis dispensary. Clean displays, bright lights and educated bud tenders are hallmarks of a Zen Leaf dispensary.

Below is a picture of Zen Leaf in Waldorf, Maryland.

Originally from the AltMed acquisition, MUV are Verano’s medical dispensaries. There are 41 locations in Florida and one in Arizona. MUV stores have a lower-key look, are diversified across product lines, but with a greater emphasis on tinctures, topical, capsules and patches that will appeal to people with chronic pain and other ailments.

Products

While Verano strives to create brands to fit every lifestyle, they are all premium quality. Premium products have higher margins and often lead to bigger retail basket sizes. However, they are also harder to grow, and this has been where Verano has been excelling.

Verano is the flagship brand and spans flower, pre rolls, concentrates and vape cartridges. While some MSOs, like Curaleaf, strive to grow compelling flower, but really lean into their formulated products, Verano is a flower-first operation.

Almost everything is grown indoors, as opposed to more affordable outdoor and mixed-light environments. Indoor cannabis has greater bag appeal and is often more potent. The tradeoff is the higher cost of creating and operating climate-controlled environments, which makes indoor meaningfully more expensive to produce. This works if the flower is fire and can command top-shelf dollars at the dispensary. I ran a dispensary, and can confidently say the hardest thing to sell is mediocre indoor.

While we don’t get Verano flower in California, friends in other states, and the reviews on Leafly, Weedmaps and Reddit say it's excellent. The firm also has a leading breeding program and offers a wide range of proprietary genetics.

Here is a beautiful of picture of Wedding Cake from their Reserve Line.

In addition to the Verano line, they offer Encore edibles in several forms: mints, gummies, chocolates and caramels. Edibles are popular with newer consumers, those favoring a discreet solution and are great for seniors revisiting cannabis later in life. On the medical side, MUV line has flower, concentrates, tinctures, vapes and lotions for Florida and Arizona patients, and the Avexia line of medical serums, soaks, balms and tablets are perfect for pain relief.

Vertical Integration

Along with premium products, vertical integration is the other key to Verano's higher margins.  In the cannabis industry, vertical integration occurs when you have licenses for cultivation and retail (some also add manufacturing). This way, the same company grows the flower, creates the products, and sells them directly to consumers, which is a lower-cost approach than buying from distributors. Vertical integration also gives you greater control of the supply chain. Verano is vertically integrated in 10 of 12 active markets.

Mergers and Acquisitions

Verano has historically been active in M&A, completing 13 acquisitions since going public in February 2021. Their strategy is similar to other MSO 2.0’s: focus on densely populated, limited-license states where medical is moving to adult use.

Within these fast-growing markets, Verano looks for top-performing stores that will get an additional boost when adult-use arrives and teams that are willing to stick around and help build the business. Valuation is always important, and Verano strives to transact at mid-single digit EBITDA multiples. The firm ended Q3 2021 with $57 million in cash, so they are perfectly positioned to feast on struggling lower-tier operators in the coming quarters.

Below is an overview of their M&A activity in Florida and Arizona.

Financials

Verano has been profitable since inception and has industry-leading margins. Whereas other major MSO’s, like Curaleaf (which we covered last week), are relying on debt deals to fund their acquisition plans, Verano is self funding. This is once again reflective of their CEO's more conservative midwestern values.

This slide illustrates Verano’s EBITDA profile, compared with other top-tier competitors.

While Verano stands out for 54% margins, their whole financial picture is healthy. Q3 2021 revenue was up 106% versus one-year ago, profits increased 93% and adjusted-EBITDA jumped 99%. With strong growth stories, it is easy to get intoxicated by the top-line growth and justify weaker or negative earnings. Verano does not require this compromise.

Below is perspective on their valuation when compared with other top-tier MSOs,

One of the reasons the share price is so low, and valuation is so compelling, is the recent share unlock. On November 17, 2021, Verano relased the remaining 35% of the shares issued in its reverse takover transaction in February, 2021. These shares were supposed to be subject to a 400-day lockup.

George Archos stated, “Given the increased investor demand, we are taking proactive measures to facilitate additional liquidity in the stock and eliminate the remaining trading restrictions."

Essentially, they opted to take all the pain at once, rather than spread out the additional shares hitting the market over a longer period. The stock sold off sharply for the first few weeks, but more recently the market has digested the extra liquidity and Verano has been outperforming peers.

Moving Forward

Verano is worthy of consideration for any cannabis portfolio. They have a broad footprint that touches over 150 million Americans through 93, and expanding, retail locations. The products are top shelf, and this starts with their committment to premium, indoor-grown flower. Especially when combined with vertical integration, premium products have higher margins than lower-priced alternatives.

This comes with world-class leadership and compelling valuations. Over the trailing-12 months, revenue grew by 106% and adjusted EBITDA increased by 99%. Meanwhile, the stock trades at at 8.4x 2022 EV/EBITDA and a mind-numbing 6.9x 2023 numbers.

Finally, the business is self funding. Whereas as almost all other top-tier MSOs are borrowing money, or diluting investors, to expand, Verano is generating free-cash flow ($35 million last quarter) and is unencumbered by sale leasebacks or other financial trickery. As interest rates rise, the ability to fund capex without adding burdensome interest expenses is increasingly important.

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Disclosure: Verano is a member of the Green Giants portfolio.