Description

Company Overview – Headquartered in Chicago, Verano currently operates in 13 states across the Northeast, Midwest and Sunbelt. Core markets are IL, FL, MD, AZ, NJ, PA, OH, CT and NV. Verano is now vertically integrated in all of these after recent acquisitions and typically has market share in the top 3-5. Developing Markets are MA, MI, WV and AR. In 2021, Verano completed several deals deepening their presence in AZ, PA and Ohio, and also entering the CT market. In Feb 2022 they announced the acquisition of Goodness Growth (GDNS CN) which extends their footprint to 16 states, adding vertically integrated operations/core markets in NY, MN and NM. Note, Mgmt commonly cites Verano’s footprint as being 18 states but this includes minor assets in CA and MO[1]. Excluding these two states, PF footprint covers >135m. 

Verano’s dispensaries operate under the ZenLeaf and MüV store banners. The MüV store brand originates from AltMed and can be found in Florida and Arizona. The ZenLeaf banner is used across the rest of the Company’s markets. Core product brands include Verano, MüV, Avexia (the company’s medical/pain relief-focused product line), and Encore Edibles (confectionary based). 

PF Retail presence (incl pending acquisitions) of ~116 dispensaries, includes 16 from GDNS, with 47 stores in FL, 13 in PA, 10 in IL, 8 in MN, 6 in AZ, 5 in NV, 5 in OH, 4 in NY, 4 in MD, 3 in NJ. Verano operates 15 cultivation and manufacturing facilities with aggregate footprint >1.1m Sqft. They have expansion projects underway in most of their core states. In terms of wholesale penetration, Verano touts ~500 active dispensary partnerships. This is expected to grow once new stores come online in IL and elsewhere. 

Retail is ~75% of revenues and Wholesale was ~25%. Last year BTIG estimated that ~75% of total sales come from VRNO’s top 4 markets (IL, FL, AZ and PA), which are all strong markets with limited licenses. Margins have remained strong (Adj gross margin >60% and EBITDA >40%) despite several obstacles over recent Qs, several of which should not repeat.[2]

Key Highlights

• Verano is a top 5 MSO in terms of Revenue and EBITDA, with one of the best footprints given both presence and depth in the most attractive markets
  • Sequential growth saw a temporary reprieve in Q1 due to an unusual # of headwinds between Omicron, seasonality, inflation, PA vape recall (6 week halt) and impact from a recent cultivation reset in IL. However, even with the recent headwinds from Macro/inflation, Verano should continue to grow Topline/EBITDA as they benefit from recent acquisitions, expansions and Rec conversion in NJ.
    • The launch of adult use sales in NJ is already a big tailwind for Verano, as mgmt noted a 13x jump in sales during the first week of sales, and as they are already wholesaling throughout the state (Verano has a large 120k sqft facility in NJ that is approaching full capacity).
  • Verano is well positioned for further Rec conversions in the Northeast (NY, NJ, PA, MD, CT) and elsewhere (MN, FL, OH).
  • The recent progress on the issuance of new retail licenses in IL represents another potential tailwind for VRNO as they are among the largest wholesalers in Illinois.
  • No formal guidance for Q2, but mgmt. said they expect solid growth and will provide more formal guidance on the Q2 call (~August) once they have more visibility on NJ and other factors
  • Although Mgmt's strategy does not rely on this, potential regulatory reforms on the federal level could benefit the entire sector and cause stocks to rerate higher
    • Recent reports indicate Senate Majority leader Chuck Schumer and other lawmakers have been discussing cannabis options. It remains unclear if capital markets access would be included in any SAFE Act/Banking or other reforms.

• Verano is cheap vs peers despite its footprint and better margins
  • Verano trades well below CURA despite having nearly identical EBITDA projections for 2022. Verano also trades below GTII despite superior margins and arguably better footprint. Note, both CURA and GTII have more exposure to slower growth West Coast markets like CA & CO which have already gone Rec, while Verano has avoided these states. VRNO trades at only modest premium to TRUL despite Verano having a far more robust/diversified footprint[3]
    • Q1’22 Adj Gross margin of 61% vs 58% for TRUL, 51% for GTII, 49% for CURA and 53% for Cresco
    • Q1’22 Adj EBITDA margin of 40% vs 33% for TRUL, 27.5% for GTII, 23.3% for CURA and 24% for Cresco
    • If we exclude California, VRNO’s Footprint covers >135m population vs ~160m for CURA, ~125 for GTII and ~80m for TRUL

• Balance sheet is solid, while FCF gives ability to self fund capex and acquisitions
  • Net debt of ~$244m at end of Q1 (vs Q1 runrate EBITDA of ~$320m and FY22 cons EBITDA of ~$385m) and Real estate unencumbered
    • Under levered vs most of its peers on a debt/EBITDA basis
  • VRNO secured an option to expand its credit facility from $350m to $525m in early March
  • Verano also owns all of its production facilities, and with ~$550m of PPE on its balance sheet as of Q1 providing substantial availability for Sale Leasebacks
  • Verano generated ~$40m of FCF in 2021, and Mgmt plans to pursue more tuck in acquisitions near term to continue to deepen their presence in existing markets.
  • Recent commentary from Verano and peers noted that although public market valuations have come down, acquisitions still attractive given private market assets have also corrected 

• Trading Liquidity has improved since going public but Verano still lags in terms of sell side coverage.
  • Despite going public over a year ago, VRNO still has only 11 analysts covering it vs ~15-+20 for its large MSO peers.

• Significant portion of shares owned by insiders   
  • Founder and CEO George Archos serves as the Chairman, and owns ~20% of shares

Catalyst

• Q2 results/FY22 Guidance
  • Q2 results should be a catalyst as the company provides more formal guidance once it gets clarity on NJ progress and other moving pieces
• Regulatory reform on Federal level causes sector to re-rate higher
  • Safe Banking
  • Removal of 280e Tax penalty
  • Listing on NYSE
• State Lvl reforms and expanded adult use increases total market size
  • Further progress w/Rec legalization in Northeast
  • Other Core States go recreational (FL, MN, OH)
  • Issuance of retail licenses in IL (leads to increased wholesale demand)
• Integrating recent deals and expansions