Green Thumb Industries (GTBIF 1.58%) made major investments in new infrastructure to grow, process, and sell cannabis in 2021. But in Q1 of 2022, the vertically integrated cannabis operator started spending less on such capital expenditures, signaling that its expenditures in some East Coast states are beginning to ramp down. With its entry into some adult-use markets delayed while those states draft regulations , Green Thumb will likely keep spending less on property, plant, and equipment in 2022, freeing up cash for anticipated expansions in 2023 in states just opening up to legal cannabis.
Spend money to make money
Green Thumb did a great job in 2021 predicting the adult-use tea leaves. New Jersey and New York are both a go, with New Jersey already starting sales and New York's regulations blossoming.
In 2021, GTI spent a total of $225.3 million on large infrastructure investments in adult-use cannabis states like New Jersey and New York. The company opened new Rise dispensaries in Paramus , NJ, and Bloomfield, NJ, in 2021, giving it three dispensaries and a manufacturing facility in the state's expected $2 billion market.
In New York, which is projected to have a $2.5 billion market, GTI invested in a $150 million, 40-acre campus outside of Warwick. It includes a cultivation and manufacturing facility forecasted to grow tens of thousands of pounds of cannabis and produce products like edibles and vape cartridges.
GTI also expanded into medical cannabis in Virginia, Rhode Island, and Minnesota in 2021 in preparation for those states developing adult-use markets.
Nuts and bolts
Looking on the cash flow statement, you can see that capital expenditures rose throughout 2021 to make these large investments.
Source: Company filings.
In a reversal, capital expenditures dropped by 19.6% from the previous quarter in Q1 2022 -- though the company still spent more than in the prior-year quarter -- as New Jersey's dispensary projects neared completion. These lower capital expenditures will likely increase Green Thumb's free cash flow, a top priority for the company and a key indicator of its ability to grow.
Investments paying off
Q1 2022 marked Green Thumb's ninth consecutive quarter of positive operating cash flow -- $55 million, up nearly 40% year over year. Though capital expenditures have eaten up all that cash and more in five of those quarters, including the most recent 12 months, the company expects its access to cash will pay off as the federal government continues to deny cannabis businesses access to banking , and Green Thumb continues to expand. Keeping cash at the forefront of its business model looks like a good strategy, considering the unique challenges of legally distributing a Schedule I narcotic.
Look for capital expenditures to level out in 2022 as Green Thumb completes its New York campus. As it generates more and more operating cash flow, that spending slowdown could give Green Thumb the chance to restock its cash in the bank without taking on new debt, as the company did to raise cash in 2021.
Later this year and in early 2023, as Rhode Island and Connecticut regulators begin to share what adult-use systems will look like in their states, GTI's capital expenditures will likely increase as the company expands further. But GTI's 2021 investments in medical cannabis states on the road to adult use, combined with positive gross profit, its steady growth in operating cash flow, and New Jersey adult-use sales growing by the day, put the company in a strong position to meet those increased financial demands.
Although Minnesota is years away from adult use, a new law allowing medical cannabis patients to consume flower (bud) does make room for growth there. In its recent earnings call, the company branded Virginia, Connecticut and Rhode Island the states to watch for adult-use legalization news, as they've all passed adult-use cannabis laws awaiting regulations.
Once those regulations become public, watch Green Thumb's capital expenditures to see whether it begins building out in those developing markets – and keep an eye on its free cash flow to measure how much its investments in New York and New Jersey have begun to bear fruit.
