VIRIDIAN INSIGHTS

• The Curaleaf vs. New Jersey regulators drama of the last week demonstrates the capricious nature of state regulation and the sensitivity of even the largest MSO to the performance of a single market. On April 13,  the New Jersey Cannabis Regulatory Commission’s voted to deny the renewal of Curaleafs adult-use licenses. The decision potentially affected two cultivation facilities and two stores, including the Bellmayr dispensary, one of the country’s most profitable stores with estimated annual sales of over $80M. The commission objected to Curaleaf’s decision to close a cultivation facility in Bellmayr and was bothered by allegations that the company interfered with attempts to unionize the facility. Curaleaf’s stock dropped approximately 10% in the two days following the decision, erasing $185M of market value. To put the potential loss in perspective, the Bellmayr dispensary accounts for over 6% of Curaleaf’s total 2022 revenue. Only 19 public cannabis companies have as much total revenue as that store. Luckily for Curaleaf, skillful persuasion, no doubt emphasizing the lost tax revenue and employment that the state would experience, saved the day, and the commission reversed the decision. Curaleaf’s stock bounced back by 7%. A kick-save and a good one! But a painful lesson was learned:  regulators do not always act in the rational economic interest of the state. I guess New York should have taught us that one!

• The 10-year minus 3-month yield spread at -1.61 points continues to be more inverted than it’s been for 20 years, yet we still believe that the Fed will continue raising rates. The Fed has aspirations beyond taming the inflation rate. Its fundamental goal is to tame the all-asset price bubble produced by a decade of zero interest rates. To achieve that goal, the Fed is not only not afraid of a recession but practically requires one. Its problem is that its political cover of taming inflation is likely to give out before achieving its goal. Things will become interesting when that happens, particularly in an election year.

• Hopefully, we are nearing an inflection point where analyst estimates of year-ahead EBITDA begin to bottom out. We do not believe a substantial stock resurgence will occur until expectations stabilize. The graph below shows the reduction in consensus 2023 revenue and EBITDA estimates for the top 15 MSOs over the last twelve months. 2023 EBITDA estimates are about 55% of what they were a year ago. The widening gap between the revenue and EBITDA lines shows the negative margin impact of wholesale price pressures matched with inflationary cost increases.