The Royalty Investing Model is Heating Up in The Cannabis Industry

marc lustig cannaroyalty

Marc Lustig CEO of CannaRoyalty joins the show today. While other industries have benefited from royal investments this is something new to the cannabis space. Listen in as Marc details the benefits of royalty investments for both investors and entrepreneurs.

Learn more at
http://cannaroyalty.com/

Key Takeaways:
[1:16] – What is CannaRoyalty
[2:05] – Marc’s background
[4:07] – Royalty investing and how CannaRoyaly fits in the investing landscape
[7:08] – Marc talks about the timing of CannaRoyalty
[8:52] – Timing on big investments in the cannabis space
[10:16] – What do entrepreneurs get from a royalty operation
[11:59] – Marc talks about his investments
[15:29] – Marc discusses managing investor expectations
[18:35] – Do current policies make investors nervous
[20:54] – Marc talks about how much capital they deploy
[24:59] – Marc talks about characteristics of a strong brand
[26:02] – Marc answers some personal development questions
[31:54] – Contact details for CannaRoyalty

Important Update: What are the five trends that will disrupt the cannabis market in the next five years?Find out with your free guide at https://www.cannainsider.com/trends

Read Full Transcript

Matthew: Hi. I’m Matthew Kind. Every Monday look for a fresh new episode where I will take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at www(dot)cannainsider(dot)com. That’s www(dot)cannainsider(dot)com. Now here’s your program.

Cannabis is getting sophisticated in borrowing the playbook from other industries such as mining and oil to create licensing revenue streams for investors. Here to tell us about it is Marc Lustig of CannaRoyalty. Marc, welcome to CannaInsider.

Marc: Thanks for having me Matt.

Matthew: Give us a sense of geography. Where are you in the world today?

Marc: I’m in Vancouver today. That’s where my home is, but it’s also convenient given all the assets that we as CannaRoyalty own, that are either in Canada along the west coach or in the pacific west coast of the United States.

Matthew: Yeah it’s a good thing to be up there. If you’re down there, down in the states, you’re a semi outlaw. You don’t know what’s going to happen. It’s a roll of the dice to be in the cannabis business still. So I think you’ve picked a safe harbor.

Marc: True enough.

Matthew: So what is CannaRoyalty, for people who are unfamiliar with this type of investing vehicle?

Marc: CannaRoyalty is a company focused on aggregating strategic assets in the cannabis sector, which looks to create royalty structured returns for its shareholders. A royalty is like a hybrid of equity and debt where the royalty holder is paid a percentage of the sales or income of the investee company.

Matthew: Okay. So, I’m familiar with royalty, just not in the royalties, just not in the cannabis space. I’m a big fan and believer of some of the precious metals royalty companies like Franco Nevada and Silver Wheaton and been following them for a while. So, this is kind of taking playbook from another industry and applying it to the cannabis business so I’m anxious to unpack that, but before we do, can you give us a little bit of a background on yourself, both personally and professionally, and how you got into this business?

Marc: Sure. So I have graduate degrees in business and science, both from McGill University. I spent the first part of my career in the pharmaceutical industry at Merck. The next 12 years I worked in capital markets in North America and Europe. I was always focused in some way on healthcare and life science companies. In 2014, with the passing of federal medical cannabis legislation in Canada, I founded a private company called Cannabis Royalties and Holdings Corp, because I saw an opportunity to create something different than the standard Canadian license producer model that a lot of your subscribers would be familiar with.

So my thesis was that cannabis is a healthier alternative as a recreational product than alcohol or tobacco. So it can compete head-to-head with those types of products in that market, but the real upside to me and over and over that, which is already very attractive, is the unlimited upside that I see that can come from cannabis as the plant, which has never really had a chance to be researched or have had a chance to have modern, technological research applied to it. So when you start talking about the therapeutic advances of cannabis what’s where to me you see a lot more upsides. So the combined opportunity was really what drove me to found Cannabis Royalties and Holdings Corp.

Matthew: So before I mentioned how the precious metals industry and even the oil industry does some royalty operations. Can you explain and give some context on royalty investing in terms of how they do it and then talk a little bit in terms of how exactly CannaRoyalty is in the royalty space? Kind of compare the two but also get a context and a background.

Marc: Absolutely, and I think it’s the right context to provide, and by the way CannaRoyalty previously the private company being Cannabis Royalties and Holdings Corp was very much structured off of Franco Nevada. And so it works the same way in the mining or energy sector as it’s been working in the cannabis sector, although there are some differences obviously. For the company receiving the financing as a royalty it’s non-dilutive equity, and usually doesn’t have the same encumbrance that a debt would. For that same mining company or energy company, which is producing, let’s say, an ounce of gold or a barrel of oil, part of the sale of that product in the future is paid out to the investor in the form of a royalty.

So instead of that underlying company paying a dividend to its equity holders or paying an interest rate to its debt holders. The form or payback to the royalty investor is a slice of the sales or net income of the underlying company. The key variables are the same for all of these examples, which is what is the underlying health and reliability of the underlying business? What is the royalty rate itself? What is the term? So for how long is this royalty transaction going to play out? It can be a very short term or it can be in perpetuity. And what is the security that underpins the actual royalty should things not go as planned?

So from all of those perspectives, it’s identical investing in the cannabis sector as it would be investing in metals or energy-based royalties. The key difference would be really just a function of the period of time that we’re in. Mining and energy businesses are very well-known and have been being invested in for hundreds of years. Cannabis, not so much. So the fact that people are still reluctant to invest in cannabis for a variety of the different stigmas that we’re all aware of or because of the fragmented legal paradigms that exist between even Canada or the United States or other jurisdictions, there’s not a usual flow of capital that you would typically see from investors into the underlying companies, and that’s actually where CannaRoyalty has benefitted and played, I think, a very important role.

Matthew: And why is now the right time? I don’t recall coming across any other cannabis royalty firms or investment vehicles. Why did you feel now was the time to take the plunge?

Marc: Well, I mean, it’s really been two years. So it was first started in late 2014, but it’s still the same point, which is that to me it’s absolutely ideal. The timing is perfect because on one hand you have all of this growth and innovation of completely new products and new markets, but on the other hand, as I was sort of mentioning earlier, that access to capital has been constrained by the realities of the cannabis sector, whether that’s legally or because of stigmas that exist. So you have a thirst on behalf of entrepreneurs to access capital, but you have an unusual situation where that capital, either because banks won’t lend to the sector or because unless maybe you’re a Canadian licensed producer and you’re public, in which case you can’t access capital, the rest of the companies that are really just starting out or that are new or may just not have the experience in terms of raising capital are finding it difficult and that’s the gap that CannaRoyalty is looking to fill.

Matthew: Marc, is now the time to make really big investments in the cannabis space before the dust settles? I think there’s a lot of investors or potential investors listening that are thinking hey, I want to kind of wait until there’s more public companies where I can get more competitive analysis and real good information. All the ducks have to be in a row for some investors, but there is a certain amount of opportunity in an opaque market. Would you agree with that?

Marc: I mean, I believe it’s absolutely ideal. You know it’s the classic risk reward paradigm. But I believe because of the growth and progress in this sector has really just started, that you’re able to reduce that risk at the moment without commensurately reducing the return profile. So actually the opacity of the market is also helping a company like CannaRoyalty. I like to think that we give investors access to deals that they wouldn’t have a chance to gain access to on their own. And so from the perspective that these opportunities exist and they need capital yesterday and we’re there to provide what I think is an elegant structure in a non-diluted way to the end entrepreneur, it really gives our investors that exposure to a diversity of assets in a structure that I think is smart and also provides a lot of upside.

Matthew: And so for the entrepreneurs out there listening, what is the benefit to them in a royalty model? Why would they be interested in working with CannaRoyalty or another royalty operation? What do they get?

Marc: I think it’s a couple things. First of all, at a very basic level a royalty is non-dilutive to equity. And so if you’re really starting a business and you need capital badly, a lot people who are entrepreneurs end up regretting that they sold off so much of their company at such a low valuation only to see it flourish and them not own nearly enough of it as they would have like to. There’s also the aspect that debt carries with it, especially bank owned debt, would carry with it a lot of conveyance and a lot of restrictions that could limit their business.

So a royalty I think sits as a very nice alternative to both of those aspects. Over and above that, now I will talk sort of specifically about CannaRoyalty. I think that our model and our effort to be a partner with our investee company has played out very well. So not only are we providing a royalty financing but I think we’re providing a lot of other strategic advantages to our investee companies. We have every interest in making sure that our partners succeed. And to the extent that our platform gets bigger, we’re able to provide our partners with access to new markets or to other professional services perhaps where they wouldn’t have had access to those without us. So I think that the royalty model, especially from CannaRoyalty, provides an entrepreneur with a lot of flexibility and a lot of support.

Matthew: Can you tell us a little bit about some of the investments you’ve made today?

Marc: Sure, I mean, in a short interview it’s tough to sort of pick a few. I would summarize it by saying that we own parts of companies doing medical research in Canada such as (12.12 unclear), which is focused on the treatment of concussions using cannabis therapy. We own a part of a company in Canada called Anandia [ph], which is a leader in the area of genetics lab and testing expertise. We own real estate and infrastructure in Washington. We have a royalty on a processing and extraction facility in Oregon. We own a big cartridge company in California that’s doing exceptionally well. We currently have five of our own fully owned cannabis brands in the area of edibles, skin care line, animal health and various vaporization formulations that are our own proprietary brands.

We’re also in the process of closing a large investment into a leading distribution company in the state of California what we’re very excited by. I mean, in summary, we have 24 separate and unique investments. I would actually see this growing to more than 30 by the end of the year. In total we dot the map of Canada, the United States, Puerto Rico and I see us doing deals in Europe and Australia as well in addition to other states, particularly in the northeast like Massachusetts and Maryland are the areas that I see us adding deals to.

Matthew: Okay. And what’s the typical or average size of the investments?

Marc: The minimum investment that we’ve made of that 24 would be somewhere in the order of a half a million dollars. The largest would be about $5 million, exactly $5 million to date. The size of the investment is growing as we’ve grown. There are opportunities that we’re looking at now that are in the double digit million dollar investment range. And so I would say that the investment size is growing. There’s not a particular number that won’t work. Obviously it can’t be too small anymore because it won’t really have the impact that I think the platform now needs to keep growing, but generally let’s call it between a million and $5 million.

Matthew: Okay. And so, you mentioned the U.S. and Canada. Are they equally divided in terms of investments or are you a little bit heavier in Canada at the moment?

Marc: No. We’re probably heavier in the United States, at least by a number of assets. We are in the process of adding a fairly significant Canadian asset to that mix. Like I said, we’re also looking in some new states to add some U.S. assets, and in addition to that, I would expect by yearend to have other deals done, certainly one in particular in western Europe.

Matthew: Now let’s switch gears a little bit to investor expectations. How do you manage the expectations of investors in terms of the returns they can expect and anything else that they might expect?

Marc: Well I think a big part of it is first of all pointing out that we’re a public company. So in Canada we’re listed on the CSC under the ticker of CRZ. In the U.S. we’re listed on the OTC market under the ticker CNNRF. With being a public company we obviously have a number of disclosure obligations. And so financial reporting and compliance is a major part of that. In addition to that, I mean, our website I think is an excellent source of information for our investors specifically. Our business plan is dynamic in the sense that if we currently have 24 deals and we’re moving up to 30 deals, that can generate a fair amount of opportunity to communicate with our investors as to how those deals are doing or obviously the closing of any new transactions.

I think as a result of that, people either have or are going to start to get a pretty good feel for first of all, how we’re generating results or revenues or income. And then in addition, how they can think about what the return profile may look like from various of our investments or developments in our underlying assets.

Matthew: Now how does that work when you make an investment in a company that is in a state that’s not that friendly to out of staters like a Washington comes to mind?

Marc: That’s a good question. I mean I would point out first and foremost, the very highest criteria priority, from a criteria perspective, is compliance. So if there’s a state that we can’t invest in because of what you’re talking about, residency for example, then we don’t. Clearly that’s the end of that discussion. In Washington, the way that we structured our royalty transaction is that we actually finance the acquisition of property and equipment for a tenant who is the license holder, who is a Washington resident. And then in that sense our royalty structure looks and feels very much like a rate, as a way to work within the Washington legislation.

As you’re well aware, different states have different paradigms and so I think one of the advantages of CannaRoyalty has been to figure out in which states we can invest and then within that, which structures we can invest in compliantly.

Matthew: What does the current federal policy do to the risk in your business? I’m thinking particular in the United States. I mean, are you getting questions around Jeff Sessions being the Attorney General in the U.S. and does that make investors jittery at all? What’s your sense there?

Marc: Well absolutely current U.S. federal policy or whatever that is going to look like could present a risk to some of our U.S. assets. There’s no other way to say that. I mean, to be clear, we’re only invested in businesses today where state legislation supports the cannabis sector. We go a step further than that, which is that we don’t directly grow or distribute cannabis ourselves, so we don’t own any licenses directly.

We’re providing elegant financing solutions to companies that have IP or brands or different solutions for the cannabis sector. So we, as I said, focus on the compliance within the state and within the structure. Our hope is that either because of significant job growth or the obvious tax revenues or the economic stimulation that the cannabis sector is providing , in addition to the strong public support that you see across the United States, that there will be positive unification of federal policy with the state policy. I mean, even Jeff Sessions, a lot of the things that we think that he’s pointing out as being concerns, we share those concerns, whether it has to do with the transportation of cannabis across borders or whether it has to be getting higher restrictions around the young people who shouldn’t be taking cannabis, restricting the access to young people having access to cannabis.

I mean a lot of those things make very good sense. So our hope is that the federal policy aligns with the state policy and preserves the right of the state legislation to conduct its cannabis policy. I mean, clearly in other jurisdiction, such as Canada or Europe, where we’re particularly seeing a lot of opportunity, the federal policy supports the cannabis sector. So the risk there is minimal.

Matthew: And how much capital are you going to deploy? In other words, when do you stop investing? I mean as more capital comes in, do you find new opportunities, or how do you think about that?

Marc: I mean, we’re seeing more opportunities today than ever in the two and a half years that we’ve been CannaRoyalty. The opportunities today are more exceptional than we’ve seen. We have a number of different sources of capital to be able to provide bigger and bigger deals, whether that’s either internal funding or external. I mean, to date we’ve invested approximately $30 million. We’ve raised approximately $45 million to date. So we have ample capital to go and execute a number of new deals, which is obviously what we’ll be doing.

I mean it would be easy to stop investing and sit back and collect all the various streams of return from the investments that we’ve made to date and wind things up, except our view is that we’re taking advantage of a unique period of time in the sector right now where the growth and innovation is rampant. And we have a model that I think supplies the capital in a way that gives our investors exceptional return potential at a time, as I mentioned earlier in this discussion, other investors, whether they’re equity investors or debt investors just haven’t gotten around yet to being there. So we look at it very much like a land grab, if you will, where we can put these assets together still at very good valuations and eventually that will end. The market will become more competitive, certainly when federal legislation does change and you do see pharmaceutical companies or tobacco companies or alcohol and spirits companies coming into this sector. It will make the competition for the assets that we’re currently aggregating much higher.

It will make the asset values a lot more expensive, and that may be the time where we would be in a position to debate whether we should continue or not, but for the time being we see this as a really open field with a great model, and again being able to provide our investors with a lot of exposure to deals that they just wouldn’t be able to get access to on their own.

Matthew: Do you think as more competition comes in and the spirits companies, tobacco companies, pharmaceutical companies come into the picture and they have obviously access to capital, do you think you would find yourself becoming less generalist and more focused maybe on a couple different verticals within the cannabis space, instead of being across such a broad spectrum?

Marc: Absolutely. I mean, at that time I think our company would create a very nice solution for any of those larger companies. Having said that, our focus is very disciplined. I mean if you were to really synthesize down the types of investments that we have in our portfolio today, it would really come down to research, IP, intellectual property brands and delivery devices would be the areas that we’re most focused on. So we don’t and have not yet invested in any broad based cultivation play. We’ve stayed away from some of the more general aspects of the cannabis sector that we think are at risk of commoditization. And I think our focus will only continue to get refined in the areas of brands and devices and things that can sustain and increase their value as more product development and innovation happens within the sector.

Matthew: You mentioned brands there. What do you think the characteristics are of a strong brand that has enduring brand equity?

Marc: Well first of all, I think that it’s protection in the sense that it can’t be copied or made easily by anybody else is probably the highest end of that spectrum. Beyond that it really has to do with the impact at the customer level or patient level, whatever the case may be. And all of our products, we’re most focused on quality and effectiveness. And so to the extent that we’re able to provide that for our customers or the patients, we think that that’s the most enduring quality behind brand equity.

Matthew: Yeah, building the protective moat, as Warren Buffet likes to say.

Marc: Exactly right.

Matthew: Okay. So Marc this is a time when I like to transition to some personal development questions to give listeners a sense of who you are. With that, is there a book that has had a big impact on your life or your way of thinking that you would like to share?

Marc: Sure, I mean, I’m very big into climbing, mountain climbing. I’ve climbed some of the bigger mountains in the world, whether it’s in Africa or Asia. Later this year I’ll be climbing in South America. So particularly books about climbing, especially Everest, which I have not climbed and probably won’t get around to in this lifetime, but particularly books around Everest and probably the significant thing The Assent on Everest by John Hunt, have been the greatest diversions for me from a very busy business and personal life, but also very strong inspirations for one of the things I really like to do.

Matthew: Is there a tool, web-based or otherwise, that you consider vital to your day-to-day productivity?

Marc: I’m pretty old school. I can imagine that a lot of the people that you interview would have a really sexy app on their phone or computer or something. I hand write a list every morning of all the different ideas and action items that I need to follow through on every day. What doesn’t get done on one day starts the list for the next day. I’ve become sort of paranoid about leaving things undone on that list. So unless I get them crossed off, it’s a good way for me to start a new day to make sure that things get followed through on. So I would say that’s probably my greatest tool for my own personal productivity, but again it’s in the dark ages, but I’m comfortable with it.

Matthew: You know, there’s something to be said for the tactile sensation of a physical list where you don’t have to turn on the glowing blue screen to get the answer. So I can understand that, and there’s satisfaction in crossing it off.

Marc: Yeah, that’s right.

Matthew: One last question. You being a Canadian, do you find the only difference between Americans and Canadians is that Canadians are just a little bit friendlier? Remember we’ve got a lot of potential investors listening.

Marc: That has not been my experience. I think that North Americans generally are very friendly. I just spent a week in Europe where I can’t really say that was the case where I was in Europe. I happened to be in Germany, and I just think North Americans generally are very friendly. I lived in Europe for four years, in London, where certainly the European perspective is that there’s a significant difference between Canadians and Americans, but myself being Canadian, but having a lot to do and basically spending half of my time, if not more, in the United States.

I’ve got so many friends and so many people that I really enjoy and like who are American that I’ve sort of seen through any of those perceptions that there is a difference. I look at it as one large convent, and generally I’ve been lucky because I think everyone’s been quite friendly on both sides of the border.

Matthew: That’s good. That was a great answer. We should put that in a political case study for how you conflated those two together to appeal to your investors.

Marc: And if we’re speaking offline, I know a lot of assholes in Canada. So I don’t really see it the same way.

Matthew: One thing, my cousin fishes with a lot of Canadians, and back when cannabis was illegal, he did comment that he said, it’s cheap for us to buy beer, but in Canada it’s cheaper for them to buy pot and it’s expensive for them to buy beer. I though oh, that’s kind of interesting.

Marc: BC Bud, which I’m sure you’re well aware of, has been as prevalent here in Canada as (30.19 unclear), which are the two large beer companies, like Canadian fixtures. But BC Bud, if it weren’t for the fact it was illegal, it would have been just as prominent as either of those two brands.

Matthew: Now, one last question before we close. Do you know what the national sport of Canada is?

Marc: Since you ask and because of how you asked it, I’m going to guess that it’s not the normal ice hockey, which would be the easy answer. I’m going to guess it’s Lacrosse.

Matthew: Oh, he’s right. That was good. I was hoping to trick you there. I thought you might go for that… what’s that game where you push the large thing across ice. What’s that called, where they roll the huge thing and then they have a little duster in front of it and it’s going on the ice.

Marc: Curling.

Matthew: Curling, I thought you might say curling, but you got it right. It’s lacrosse.

Marc: Our roots are based in native as anywhere else. Really it’s all about native settlers and lacrosse was the game of choice. It’s not that much of a stretch. I don’t even know, as a separate topic, whether you call curling a game. If someone does, I would like to understand how they justify that sport I should say, but anyways, glad I got that one.

Matthew: Yeah. Good. Well, as we close, can you tell listeners the best way to learn more about CannaRoyalty?

Marc: Absolutely. As I’ve mentioned, I think our website is extremely informative and dynamic, and being updated regularly, especially for a company that’s generating as many different new developments as we are. So that website is www.cannaroyalty.com. There is a way for anyone who visits that website to be added to our corporate investor relations distribution list, which I would say would probably be the starting point for anyone who is looking for more information about CannaRoyalty. Once you’re on that list, like I said, you can expect as a shareholder to get fairly consistent updates. I mean we generate a lot of developments that I think keep the investor or prospective investor or even interested cannabis enthusiasts in the loop on different things that we’re working on.

Matthew: Great. Well Marc, thanks so much for coming on the show and introducing us to this topic of royalty investing. It’s really something of interest to me, and I think this sector is only going to grow as the whole industry grows. So good luck to you.

Marc: My pleasure Matt. Thanks a lot of having me and congratulations on your show. I can tell you I get a lot of cannabis related media or reporting for different types of services, and I think yours is at the top of the list.

Matthew: Alright, can’t hear that enough. Thanks Marc.

  • DTPyeahUCME

    Thank you for the information on royalty investing I am going to look into that for myself. I have been wondering if you have any information about tracking our canna stocks? I use seeking alpha, yahoo finance, bloomberg, morningstar, and marketwatch to get my financial news. None of them mutter a thing when AERO loses 1/3 of their value over the course of a month. I undestand the election bump, but there are times when holding a canna stock that the stock either rises or falls and I can not find any news to explain the situation. I would love some insight,

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