In this edition of "Rising High," The Fly conducted exclusive interviews with Catherine Hastings, chief financial officer of Innovative Industrial Properties (IIPR), a U.S.-based real estate investment trust for the cannabis space, and Nick Kovacevich, chief executive officer of KushCo Holdings (KSHB), a U.S.-based company that provides packaging for the cannabis industry. In the interviews, Hastings and Kovacevich discussed the companies, competition, legalization, and more. Here are some of the highlights:
CANNABIS REAL ESTATE PIONEER: Hastings described Innovative Industrial Properties as the pioneering real estate investment trust for the medical-use cannabis industry. “As the first and only publicly traded company on the New York Stock Exchange focused on the regulated cannabis industry, we focus on the long-term ownership of specialized real estate that is leased on a long-term basis to state-licensed, medical-use cannabis operators,” she said. “We offer creative structuring of each of our transactions to meet the individual operator’s capital needs and growth plans, through sale-leaseback transactions, funding improvements to existing facilities and ground-up construction.” As of November 26, 2018, the company’s portfolio consisted of ten properties in eight states, each of which was 100% leased to state-licensed medical-use cannabis operators.
CANNABIS PACKAGING, BRANDING: Kovacevich described KushCo Holdings as the publicly-traded parent company to a diverse group of business units leading transformation across several industries. “KushCo Holdings’ subsidiaries and brands provide exceptional customer service, product quality, compliancy knowledge and a local presence in serving its diverse customer base,” he said. “Our business units include the premier ancillary distributor of packaging, supplies, vape hardware and accessories to the cannabis and CBD industry.” The company also includes Kush Energy, which provides ultra-pure hydrocarbon gases and solvents, The Hybrid Creative, a creative design agency for clients in several industries, and Koleto Packaging Solutions, the research and development arm driving intellectual property development and acquisitions. The CEO added while the company does not touch the plant, it has warehouse and hazmat facilities in all the key cannabis markets.
COMPETITION: When asked about competition, Hastings said Innovative Industrial Properties is seeing a handful of players looking to enter the space, but few that are “executing on a meaningful scale.” She said, “Ultimately, at this juncture, we are primarily competing with the operators who continue to own their properties, and in that case seek out temporary high-rate debt financing or further dilute their ownership through the issuance of additional equity to fund their expansion initiatives.” Meanwhile, Kovacevich said KushCo was well prepared for rising competition in Canada establishing an office in Toronto, led by vice president Gordon Wooley and regional sales director Mark Door, well before the October 17 legalization date. “Kush Supply Co. services licensed producers in Canada with careful attention paid to the unique needs and regulatory framework of the market,” he said. “Both Mr. Wooley and Mr. Door have considerable experience in the Canadian market and have positioned the team to capitalize on the industry’s dramatic growth in the wake of Canada’s adult-use legalization.”
LEGALIZATION: Hastings said that while a number of countries have legalized medical cannabis use federally, those programs tend to be highly restrictive with limited access for patients. “Numerous bi-partisan bills have been introduced in the U.S. Congress, similar to the past several years, that seek to ease various restrictions and operational challenges in the cannabis industry on a federal level. However, traction in the Congressional process for these bills remains highly uncertain,” she said. “Similarly, in many European countries, the focus on the federal level has been legalization of cannabis for medical-use purposes through highly restrictive programs, so we do not necessarily see a quick path to general cannabis legalization on a federal level for any of these countries either.” The CFO added there has been significant momentum in the U.S. for voter approval of cannabis programs. “We fully expect a number of additional states to adopt both medical-use and adult-use cannabis programs as voters and legislators in these states recognize the benefits of providing safe, reliable access to medical-use cannabis as alternative treatment for patients suffering from a wide range of health conditions.” When asked about legalization, Kovacevich said KushCo is keeping the advancements of other nations in the company’s discussion points. He noted the Mexico has overturned its ban on recreational cannabis through its Supreme Court and South Korea recently became the first Asian country to enable medical use. “Our primary focus is to continue to capture organic market share in the U.S. and Canada, allowing the other country opportunities to play out accordingly to their federal rules and regulations,” he said. “When the opportunities appear to be on the horizon, our team can quickly plan, scale and execute to meet those needs.” In regard to the U.S., the CEO said KushCo sees “a strong and positive momentum” towards legalization of adult recreational use in additional states. “As 2020 approaches and another round of elections will take place, we are confident the residents of other states, such as New Jersey or New York could be next. The east coast is certainly a major market and we have had our East coast facility up and running in preparation for this in Worchester, Massachusetts.”
EXPANSION: While Innovative Industrial Properties is also following the global expansion of the cannabis industry closely, the company’s focus remains on U.S. opportunities, Hastings said. “We believe that for the foreseeable future, the cannabis industry in the United States will be driven by domestic, individual state-licensed operators,” she said. “We will continue to seek out opportunities with these best-in-class, state-licensed operators to provide the growth capital they need within their state, as well as for expansion into additional states.” Kovacevich, who noted KushCo has offices throughout the country and Canada as well as an office in China, said while the company does not handle anything plant touching, there are businesses conducting that operation that need suppliers. “We intend to be that key global supplier with the most efficient and robust supply chain with the highest quality of packaging and supplies an importer/exporter would need to facilitate this operation,” he said.
OPPORTUNITIES: While Canada’s federal legalization of cannabis has been a “very positive development” for the industry, Hastings said the company believes opportunity is in the U.S. She cited cannabis market research company ArcView, which estimates that California alone will have $7.6B in regulated cannabis sales in 2022, accounting for roughly one-quarter of legal global cannabis sales, while Canada is estimated to have $4.9B in sales. “We continue to believe the United States represents a far larger opportunity and we are focused on opportunities in states that have established robust regulatory frameworks for cannabis operators,” she said. Kovacevich said he sees opportunities for KushCo around the opening of new markets and the shift of brands desiring to have custom branded solutions for retail display, which the company offers through Hybrid Creative and Koleto. “The other opportunities lie in the maturation of the California market, the opening of the eastern seaboard of states and our products supplying that growth,” he said.
GOING FORWARD: Hastings said that as the industry progresses over the years, it will “undoubtedly change” in many ways. “We believe our business model is a durable one that is, and will remain, a highly attractive alternative to operators looking to effectively and efficiently expand their businesses,” she said. “We will remain focused on our execution of this model, underwriting management teams with a proven track record of success, including success in adapting their companies to meet changing industry needs.” Meanwhile, Kovacevich said KushCo is in an “advantageous position” as the company’s biggest challenges are internal. We are in an advantageous position in the fact our biggest challenges are internal. “They are to get our internal process controls in place, continue to optimize our warehouse management, keep the level of quality and service our client base expects and we will continue to grow our market share,” he said.
OTHER CANNABIS STOCKS: Other publicly traded companies in the space include Aurora Cannabis (ACB), Aphria (APHA), CV Sciences (CVSI), CannTrust Holdings (CNTTF), Canopy Growth (CGC), Cronos Group (CRON), General Cannabis (CANN), India Globalization Capital (IGC), Tilray (TLRY), ICC International Cannabis (KNHBF), MedMen Enterprises (MMNFF), Biome Grow (ORTFD), MediPharm Labs (MLCPF), Indiva (NDVAF) and OrganiGram (OGRMF).
“Rising High" is The Fly's recurring series focused on cannabis stock news.
