Ayr Wellness (CSE: AYR.A, OTCQX: AYRWF) CEO Jon Sandelman had many reasons to be excited as he settled into a recent interview with CBE, which profiled him in 2018. To name but a few, he’s back out on the road visiting cannabis businesses throughout the country; he’s doing podcasts and interviews (like this one) talking about the Ayr Way; and he remains in aggressive acquisition mode, picking up cannabis assets at a seemingly record pace in an increasing number of targeted states, including Arizona, Massachusetts, Pennsylvania, Nevada, and Florida, where Ayr arguably has its largest footprint. The company also recently announced plans to enter the Illinois market with its agreement to acquire Herbal Remedies Dispensaries’ two licensed retail locations by the end of 2021, and a similar deal was inked in March with New Jersey-based Garden State Dispensary that encompasses retail, cultivation, and production assets. Ayr, which is in the middle of moving its official HQ from New York to new offices in Miami, celebrated the opening of its 50th store in April, and since then has opened at least four more dispensaries.
Ohio also can be added to Ayr’s ledger with the March acquisition of Ohio Medical Solutions, an Akron-based producer of cannabis-based products, along with the simultaneous acquisition of a provisional cultivation license and plans to develop 25,000 square feet of indoor canopy. It is all part and parcel of Sandelman’s strategy for systemic growth in an industry primed to explode but in need of the necessary catalysts to do so. Identifying those catalysts and being prepared to take advantage of them is the name of his game.
“When I invest, I think about catalysts,” explained Sandelman. “Okay, it’s cheap now, but what causes it to get to full value, and I think about what those catalysts have to be. Think about this: we’re slowly getting a lot of catalysts. The Schumer bill is not perfect, it’s probably not going to get done, but think about two years ago when there was no proposal out of the Senate. So, I look at it as super positive. I know it’s not going to pass, but I’m glad the Senate is talking about it.”
As far as any momentum that may result from those talks, Sandelman appeared all too ready to wait it out. “Did [people] think it was going to happen quickly? It’s politics,” he said. “We’re talking about descheduling marijuana, which has been irrationally scheduled with heroin for too long. But we are talking about it, and we’re also talking about getting rid of 280E. I like that, and it’s also a kind of catalyst.
“So, what’s the exit?” he asked rhetorically, pivoting into the role of an interested investor. “‘Jon, I’m going to invest. I’m making this investment because I think at some point something’s going to happen that will bring these assets to full value.’” He paused to let the coming answer sink in. “CPG. When I did my original math, I saw that in the states where cannabis was legal and beer was legal, beer was trending down, cannabis is going up, so I understood that at some point [big] beverage, tobacco, and alcohol are all going to be forced in. Why do I say forced in? Because while most CEOs still think [cannabis is] drugs – half the country has maybe tried it, while the other half thinks it’s not so good even though states keep legalizing it – a beer guy is not going to be so comfortable because in his mind it’s still drugs. So, why will he be forced in, and we’ve seen this repeatedly – when beer got forced into buying up all the craft beers because they were eating their lunch. Remember, they lose a few percentage points, it’s devastating for them. They are going to be forced in by their boards, by activists, as they see the erosion in their businesses and the steepness of the returns and the growth rates in this business. This is what my theory was four years ago, that it’s not going to be their choice, they’re going to be forced in.
“So, how do we position Ayr? How does Ayr function?” he added, taking his point to the next level. “We think we have the best operational technology in the business. When we acquire an asset, the day we close, that company is already in our system. All the accounting, all the operations, we can see everything. We take over everything on day one. I’ve said for 30 years, you can’t build tall buildings on weak foundations. It’s all about risk mitigation and risk control. We, like everyone, are moving to GAP accounting for that day when we’re going to get listed. What we learned today from our CFO is that 50 percent of the reasons why companies fail their Sarbanes-Oxley audit is because they don’t have the right talent. They don’t have enough people in the control position.
“We know that,” he added with emphasis, “so, catalyst/exit/CPG will be forced in, and who are they likely to want to do business with? The people with maximum control, excellent operational skills, and the right culture that mirrors their culture. I never really talk about this much, but I was president of Bank of America’s security business, so I got to understand their mentality, and it’s going to be worth something understanding that culture. When I invest, I reverse engineer and say, okay, something’s going to be happening in five years, and I think these are the catalysts. When that event happens, who is the obvious person for that group of people to buy? The people whose culture and systems and risk controls and accounting and finance and operational SOPs mirror theirs, because they’re going to make a big leap of faith going into what they think is drugs. And what I’ve seen happen is that when they buy, they’re not necessarily going to be comfortable with the subject, so the management team is what they focus on, and because of our management team’s resumes and track record of success and discipline, I think it will put us in a super unique position when that day comes.”
Until then, Ayr is acquiring assets as quickly as possible, deciding to buy and move on to other acquisitions rather than buying and immediately rebranding. That said, its retail strategy is built on a philosophy Sandelman took great pains to describe. “Let’s think about retail, what makes retail click, and why at Ayr we find having that retail experience, that connection to our patient, is so important,” he said. “It’s so funny you asked this question, because now that COVID is over I’ve been able to do what I love to do best, and what I’ve always done in my prior careers, which is to get back on the road. I have an excellent management team, and what Ayr is about is the people, the quality of the talent, and the culture. That’s just the Ayr way. We think the most hidden asset on our balance sheet is our culture, and what I said to my team, and what my personal goal was to have is that culture permeate the entire organization so that not only the people at the top but all 1500 [employees] are singing from the same hymnal and believe the same messaging, because in the world I come from you win with the biggest, best talent. You have to be a great culture, you have to be a great company, where the talent wants to come to work.”
Sandelman obviously likes to engage one-on-one, and said he is eager for feedback for very tangible reasons. “It’s why I was so excited yesterday to be on the road again,” he said. “I get to hear the unedited version of what our consumers are looking for, what they are responding to. But also, what our teammates are thinking, because they talk to consumers, too, and in the world I come from, I’m a terrible guesser but an excellent problem solver. If I maintain that relationship – delivering a consistent, excellent consumer experience – I don’t have to guess what makes my customers happy; they will tell me. And because the culture is linked to that information flow, because we attract the best talent, and because they love working here, happy people, helpful budtenders come back with great data, because they also want to make their customers happy. So, retail gives us that ability to build the best brands, because we know what the consumer wants.
“We’ve said from the beginning that it’s all about understanding the demographics of the consumer,” continued Sedelman. “Who are we selling to and in what form factors do they want to ingest their THC? Young people like concentrates, moms like substitutes for Chardonnay – I never knew that – so they like to micro-dose with vape pens or gummy bears. I don’t know this firsthand, but it’s what the budtenders tell me. Middle-aged folks like to ingest it another way, and people who are older use it for anxiety or they use it for sleeplessness and want to ingest it in a different form factor. So, the retail experience delivers Ayr’s goal, which is to be the largest scaled producer of high-quality flower in the United States. We never say we’ll be the only one! There will be boutique people, and businesses that produce beautiful products, but we feel our competitive edge, the thing that differentiates our brand, is that we want to do it at scale, and we want to do it consistently. And so, the retail experience is so important to us, and delivering the best quality products consistently in our stores is our strategy going forward.”
Sandelman likes to question himself, not critically but to constantly test assumptions and keep the company pointed north. “We talked about it this morning,” he said. “One of the people on our management team said, ‘How do you verify, Jon, that your vision, your strategy is what we’re actually doing?’ Great question, right? How do we know that the consumer is responding to our mission? So, recently in Pennsylvania – a new state for us last month in the wholesale business, our first flower, our first cultivation; we have a bunch of stores there and have been selling third party flower, but [this was] our first flower on the market – and we tested our theory [that] if we can enter a new market with the best quality flower, the consumer will respond and we will take market share, not by price cutting but by offering quality.”
At the right price point, I asked. “That’s my theory,” replied Sandelman. “A lot of people who first got in the business wanted to be like Barney’s or some fancy place. I wanted to be Target. I want to offer the best quality product consistently and affordably. Affordable luxury. That’s Ayr.
“But how do you find out if your business plan works, because I’m the kind of guy who, every day I wake up, I have a new idea,” he continued. “So, we entered Pennsylvania with our first flower, our first harvest, under the names Revel and Seven Hills, and it sells out instantaneously, and even the reddit reviews – if you understand how to read it, I’m too old to figure it out – are blowing up. Nothing makes a team happier than that they formulate a strategy [and] they execute on that strategy. We delivered great flower and the customer responded, so while it’s a limited data point, it worked amazingly and we know it works, because while Pennsylvania is new to Ayr, Massachusetts, where we have one of the largest wholesale businesses, is not. In Nevada, we do the same thing, and we have the largest retail business in the state, and we had a record month in wholesale in Nevada and Massachusetts, so the consumer does know the difference.
“Here’s one last point,” he concluded. “People talk about branding in this business, and I believe in branding. I come from a family whose business was advertising and sales promotion. Of course, I believe. But what I don’t believe in is that you can fool the consumer. You cannot underestimate the consumer, particularly in a business that in the last few years you could sell anything you wanted, and it sold. But the business is getting more competitive, the consumer is getting more educated, and it’s not solely the box [that counts]. At Ayr, it’s the contents of the box, what’s in the box, that the consumers will react to. Will they buy a pretty box once? Sure. If they walk across the street to our stores, they get a pretty box with excellent, consistent quality, because we aspire to do that at large scale. Frankly, no one else is saying the stuff I’m saying. They have a different business plan. There’s never one way to be successful. This is the Ayr way. This is our culture. This is our vision of where the business is going to go.”
To that end, Ayr recently announced an agreement to acquire Nevada-based cultivator Tahoe Hydro in a $17 million deal that the company, in a statement, said would “add significant cultivation talent to Ayr’s already robust cultivation team, including 75 employees, which the company plans to deploy both within Nevada and nationally.”
Regarding the popularity of cannabis as a product, Sandelman said he had only seen one other similar product. “One of the things I loved about this [business] is that as an investor this industry has the broadest diversity of consumers I have ever seen other than with one other product; sugar. Kids like sugar, moms like sugar, middle aged guys like me like sugar, old people, everyone loves sugar in some form or another. I never met anyone [who didn’t]. They might say, ‘Oh, I’m on a diet,’ but it’s only because they’ve been eating too much sugar. So, I looked at [cannabis], and I said, who friggin’ hates this? What age group? What ethnic group? What sexual group doesn’t like this product? And honestly, I couldn’t come up with one, so I said, I have to figure this out.
“And the truth is, most of us in the industry are left with no inventory at the end of the month,” he added. “The demand is enormous. And remember, if we haven’t told you, Ayr believes it should be at the cross section of wellness and wonder. We have to be there. I was talking to a scientist recently, and maybe there is just medical at the end of the day. I thought it was two different group of people, but for those people who are getting high all day long, maybe it’s not recreational, maybe it’s because they have anxiety. I never thought about the science, and that’s why I’m bringing this university in, to help really understand why these products work, and eventually be able to make not false claims but real claims based in science.” Ayr announced recently it has partnered with Lake Erie College of Osteopathic Medicine-Erie on double-blind, placebo-controlled research into medical cannabis treatments for various problems. Lake Erie is one of eight medical schools in Pennsylvania that have been approved to do the research.
But Sandelman was not finished making his point about the cannabis consumer. “Let me ask you a question” he said. “I want to get to it, because I’ve been talking about it a lot lately on my management calls, because I’m back on the road asking tons of question. So, I asked budtenders in other people’s stores and in our stores – because I’m on the M&A trail and I’m an aggressive buyer in this industry, I am fortunate to get exposure to our own businesses and a lot of other businesses – I’m in a store that I’m looking at, and I was there with a bunch of my team, and I’m locked and loaded, I’ve got some questions in my head. And the budtender is super knowledgeable, super nice, and I asked, ‘Do consumers walk in and ask for any one of these brands in the case?’ And everyone’s brand is there. ‘Not really.’ ‘What do they ask for?’ “Which one has the highest THC?’
“I know that will be unsustainable,” added Sandelman. “I love wine. I don’t drink grain alcohol, do you? So, there’s probably a place for getting fucked up, but I think most people will come to understand that the balance between cannabinoids and terpenes is a much better experience. Our releases in Pennsylvania were not the highest levels we produce, it was our first harvest, but the consumer reacted to 21 percent THC, not 30 to 35 percent, and over 3 percent terpenes. They got it, and I just think it’s going to take time for people to figure out what they like.”
I mentioned that I love wine, too, but Wall Street still assumes that THC is equivalent to alcohol content, or at least Jim Cramer does, so how does a new CPG industry deal with it? “Here’s what I think,” said Sandelman. “We know from talking to people and from my conversations with the scientists of a company we’re buying – and the head person of this institution, which incubates tech and biotech out of the university, a credible person and an advisor to one of the big CPG companies – told me that they are getting up to speed, but they’re not ready yet. I also hear this from bankers, and now I hear it from this scientist. They know. Now, this I don’t normally share on interviews; this is my innermost secret. My investing style typically is that I do a tremendous amount of work. I’m a mathematician, a relative value guy, and I do a lot of work, more than most. I just work it to death. Seven days a week, you have a question, call me, I’m on it. But when I invest, I think, ‘Okay, what is my investment horizon? I think this seems cheap; it seems like a great opportunity. What is the catalyst to make it full value? When I first start buying in the U.S., it was dirt cheap because everyone was buying in Canada. Remember, I did the first SPAC, I did the first company that was rolling up the U.S. A bit of a visionary back then even though my hedge fund friends thought I was going through a midlife crisis. Now they’re all in.”
I asked about inflation and whether large market forces at play will impact his plans if, or when, the current bull market hits the skids. I ask in the context of Ayr’s relatively strong price point compared with other cannabis stocks, and its current role as a darling of the analyst class. “So, think about this,” said Sandelman. “In March, when the market cracked, cannabis cracked, too. But I explained to my teammates that our business is counter-cyclical. The more furloughs, the more anxiety, the more layoffs there are, the more people are going to reach for our product. When we think about a portfolio manager, you want to have businesses that are that are counter cyclical, and this is a counter-cyclical business. When times get tough, what we’ve learned through COVID is sales go up. I like that. Number two is, Ayr is one of the best performing operators in the industry by any metrics, and yet – and that’s why I love our stock, because when you think about it, the market does correct – you want to be in the cheapest stocks. And yet we trade at roughly 60 percent of the average multiple. We’re not a rich stock. We’re the cheapest stock in the industry among the top performers. So, if I’m thinking, well, maybe the market’s getting toppy, maybe the Fed chair is saying that inflation is the highest in the last 30 years, and there may be a move to start raising rates, I’d rather be in one of the best operators in a kind of cyclical business that trades point six of the market multiple. That’s where my family’s money is because we are one of the largest shareholders, but if I was creating a portfolio now, if I was still managing other people’s money, that’s how it’d be positioning, selling certain high flyers, moving to the counter cyclicals, and moving to the cheapest stocks in those industries.”
I asked if he thinks Wall Street analysts truly understand the dynamics at play in a business like his and know which metrics to use in evaluating it, because I am not sure they do. “I agree with you, and let me explain why,” he replied. “For a while I was very focused on the operations and M&A, but when Rob [Vanisko, VP of Corporate Communications] joined us, I said I needed to be back talking on podcasts and to guys like you in interviews, to make sure the world knows how well we’re operating, how deep the management team is here, what risk functions we focus on here that others are less focused on, and the quality of the products that we aspire to grow at large scale. And I’m not sure at point six of forward earnings of the market multiple that the message has resonated or been as articulated as well as I think it should be. That’s why I do this, because it’s my vision, my strategy. I love our team. I love our culture. We’re a different company.”
Our interview coming to an end, I noted how frustrating it can be to interview the head of a company whose facilities and products are in other states, unavailable to me, and that it reinforces for me the local nature of the cannabis experience, as well as the eternal question for cannabis retailers: Why am I coming back to your shop instead of going to another one selling most of the same products? “Let me give you my theory on that,” said Sandelman. “You’re coming to Ayr for the reasons we talked about. My strategy was not to just plant my flag in every state, but to build a portfolio of states that were contiguous, so, as the consumer travels through Massachusetts, New Jersey, Pennsylvania, all the way down to Florida, they will see Ayr stores. And what does Ayr stand for? Ayr stands for being the largest scale producer of high-quality flower at fair prices. You’ll go, ‘I know the Ayr experience is excellent, and that’s why I come here.’ The other reason, and this is very important to me, is that I love having the resources of a large MSO, but like you, many people want to shop with the local company. They don’t want to go into the big guys, they don’t want to go into Starbucks, they want to go into the smaller coffee company.
“So, again, I’m giving you my aspirations, and we work on this every day,” he continued. “I want the resource, the access to capital, the systems, the ability to grow and scale, which takes a lot of capital and a lot of talent. But I told my team, I want to be local in every market. And how do I feel local? How do I create that contact with my communities and my customers? You know, the reason why I picked the name Ayr is because it’s the only thing that should separate us from our patient – the air we breathe. Most people call it a-y-r, so that didn’t work out, but that was the theory.
“So how do I do it,” he repeated. “I create – and I’ve done it – training programs so that everyone in society gets an opportunity to participate in this once-in-a-lifetime opportunity, and it’s not concentrated in the hands of a few people. So, we have an accelerated program where we train people to be cultivators and retailers and manufacturers, and they can either stay with Ayr or graduate and go into their own businesses, and we help them do that. So, how does that make me feel local in my market? If you are training your community, and you are hiring people from the community, so that as a consumer when I walk into an Ayr store, I see my father, my mother, my uncle, my aunt, my cousin, all people I know being offered the chance to participate in this amazing opportunity, where do you think my loyalty is? Doesn’t it feel local when it’s populated with people from your community who you know and respect and trust, so that when they give you advice, you take it? That’s the secret sauce here.”