Green Thumb Industries Inc. (GTII) Earnings Call Transcript & Summary

Good afternoon, and welcome to Green Thumb's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, a live audio webcast of the call is available on the Investor Relations section of Green Thumb's website and will be archived for replay. I'd like to remind everyone that today's call is being recorded. I will now turn the call over to Grace Bondy, Corporate Communications. Please go ahead.

Thanks, Matt. Good afternoon, and welcome to Green Thumb's Third Quarter 2021 Earnings Call. I'm here today with Founder and CEO, Ben Kovler; and Chief Financial Officer, Anthony Georgiadis. Today's discussion and responses to questions may include forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. These risks and uncertainties are detailed in our earnings press release issued today, along with the reports filed with the United States Securities and Exchange Commission and Canadian securities regulators, including the annual report on 2020 Form 10-K and the quarterly report filed on Form 10-Q, which we expect to file Friday when the SEC reopens after Veterans Day. This report, along with today's earnings release can be found under the Investors section of our website. Green Thumb assumes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Throughout the discussion Green Thumb will refer to non-GAAP financial measures, including EBITDA and adjusted operating EBITDA. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures is included in our earnings release and SEC and SEDAR filings. Please note, all financial information is provided in U.S. dollars unless otherwise indicated. Thanks, everyone. And now here's Ben.

Thank you, Grace. Good afternoon, everyone, and thank you for joining our third quarter 2021 earnings call. The Green Thumb team delivered strong results this quarter, reflecting solid execution and continued positive momentum in our business. Revenue for the third quarter was $234 million, up 5% sequentially and 49% year-over-year. We posted our fifth consecutive quarter of positive GAAP net income, our seventh quarter of positive cash flow from operations and adjusted EBITDA grew 53% year-over-year to $81 million. That brings year-to-date revenue and adjusted EBITDA through 3 quarters to $650 million and $232 million respectively. We ended the quarter with cash and cash equivalents of $286 million, which gives us flexibility to invest with an eye towards long-term returns for all of our stakeholders. Now I'm going to tell you about some exciting developments inside the business, recent M&A execution and our thinking on brand and the overall industry. Anthony will then discuss the financials, and we will hit Q&A. On September 9 we broke ground on our Warwick New York cultivation and production facility. The irony of building a cannabis campus on the grounds of this former federal prison that locked up people for cannabis is not lost on any of us. When the prison shuttered, hundreds of jobs were eliminated in the community of Warwick. We're planning to reverse the cycle by creating high-paying jobs in the legal cannabis business that will reinvigorate the local economy, something we've done before in our communities in Illinois and Pennsylvania. On October 16 we celebrated the grand reopening of our Rise Mundelein store, which was Green Thumb's first retail store; it opened back in 2015. And in fact yesterday was the sixth year anniversary for Rise Mundelein and the Illinois cannabis program. With the reopening, we believe Rise Mundelein is now the first location east of the Mississippi river to offer onsite purchase and consumption of cannabis. It is also the first store in Illinois to offer roll-through car service for medical patients to pick up their orders. We look forward to continuing to enhance our patient and customer experience and bring these new concepts to other retail locations when regulations permit. We've been busy on other fronts as well. Since the last call, the Green Thumb family has grown. Strategic M&A and strong execution brought new folks onto the team. In July, Virginia became our 13th market with the close of Dharma Pharmaceuticals. We love the investment into Virginia, given their population of 8.5 million people and a path to adult use regulation. We look forward to working with the newly elected Governor Glenn Youngkin and his administration to drive growth and opportunity for the people of Virginia. We currently have 2 stores open, Rise Abingdon and Rise Salem with 4 more in the works. We plan to allocate capital to production in the coming quarters to position us to serve the growing consumer demand for Rhythm, Incredibles and Dogwalkers in the great state of Virginia. In August, we entered Rhode Island, our 14th city, and welcomed Summit Medical Compassion Center to Green Thumb. Summit is one of only 3 dispensaries in the state of Rhode Island. And in September, we partnered with Tom Morey and the great team at GreenStar Herbals, a Massachusetts licensee that operates 2 adult use retail locations, one in Dracut and the other in Maynard with a third expected to open soon in Chelsea, which is less than a mile from Encore Boston Harbor. On September 15 we opened Rise Bloomfield, our third store in New Jersey, bringing our total store count to 65 at the end of the third quarter. And subsequent to the quarter, we closed on the acquisition of Maryland Health and Wellness Center, a single retail site in Hagerstown, bringing our total store count to 4 in Maryland and 66 nationwide. We continue to execute on the pieces of building brands at scale for American consumers who are choosing cannabis for wellbeing. We believe in our brands and their ability to connect to consumers and create loyalty over time. While the industry is still in the first chapter of the brand building book, we are learning from early successes and mistakes in order to optimize our playbook for the future. We see the copycat brands and remind everyone that we are all in this together. We continue to believe in first mover advantage and surfing ahead of the wave. Our growing scale, combined with the information edge we have developed will set us up to make high probability bets and informed decisions to optimize long-term value for all of our stakeholders. In terms of the state of the states, third quarter legal cannabis sales in the United States were $6 billion, which was flat to the second quarter. Illinois and Pennsylvania are each a $1 billion to $2 billion market, and we think both have the power to more than double over time. California continues to be a $3.5 billion to $4 billion market, while Colorado is north of $2 billion. We believe the future for New Jersey, New York, Connecticut and Virginia will align with those experiences, and we like Green Thumb's position in each of those markets ahead of adult use. Based on this setup, we will allocate capital appropriately and prudently. We will continue to build branded products to meet consumers where they are and satisfy the demand. That consumer demand gives us conviction in high-end indoor premium flower and create a simple goal that as Anthony likes to say, [ banks ] at scale, which really means high-quality, consistent flower and available nationally. Our flagship brand in flower is called Rhythm, and we are pleased with the product quality across the country with more room for improvement and growth. Find your rhythm is a universal message that connects with Americans in their daily experiences and special occasions. This is only the beginning. Last quarter we introduced the launch of Good Green across 5 states: Illinois, Maryland, Massachusetts, New Jersey and Pennsylvania, and sales are strong. Quality Popcorn Flower at a value price has a spot in the market, and we think aligning that to a brand that is dedicated to investing in nonprofits fighting the harm created by the failed war on drugs is a good plan. To accomplish this, we made an initial commitment of $1.3 million to fund grants from Good Green sales. And we were excited to have received over 80 applications in the first round from nonprofits that supported one of Good Green's core pillars, education, employment and expungement. Just recently we announced our 3 inaugural winners who received unrestricted grants of $75,000 each. Philadelphia Lawyers for Social Equity that helps eliminate criminal records blocking people from employment; Innovation Works Baltimore, whose mission is to close the racial and wealth divides in neighborhoods; and Why Not Prosper, which helps incarcerated women successfully transition from prison to reentering society in Philadelphia. Our second round of applications is now open. So if you know someone who is involved in a non-profit that has a mission that is aligned with repairing some of the harms created by the war on drugs, please encourage them to apply at www.good.green. We continue to thoughtfully execute the business plan to distribute brands at scale. I'm proud of what we have accomplished to date, but feel we are just getting started. We like the positive cash flow from operations net of the punitive taxes. We sleep well at night knowing that regardless of when the federal government takes action on people's freedom to choose cannabis, we have built Green Thumb to prosper. We plan to stick to our core playbook, which includes tuning out the noise, prudently allocating capital, obsessing over the consumer and focusing on execution. We are having fun and continue to believe it is still day 1 for cannabis in the United States. With that, I'll turn the call over to Anthony for his financial review.

Thanks, Ben, and good afternoon, everyone. Thank you for listening. As you just heard, our momentum continued during the third quarter, with the business generating record revenue, EBITDA and our fifth consecutive quarter of positive EPS. At a high level, in Q3, the company posted $234 million of top line net revenue and $81 million of adjusted operating EBITDA. Total net revenue increased 5% over Q2, with gross CPG revenue growing 3% and gross retail revenue growing 7%. Prior to accounting for intercompany revenue, this left our gross CPG to retail revenue breakdown at 43% and 57% respectively, about flat with last quarter. Please note that 100% of our CPG revenue consists of branded products sold to retail stores as the company does not currently wholesale any bulk biomass to other operators. Consistent with previous periods and despite the overall industry being flat quarter-over-quarter, we attribute our revenue growth to successful execution, high-quality differentiated product and strong consumer demand across our market base. On the profitability front, the company's gross margin percentage performance equals Q2 at 55.4%. And just to reiterate something I've said in the past, our goal remains to keep this very important metric at or above 50%. As time evolves, we anticipate our scale and diversified market base will help support us in continuing to achieve this goal. On the SG&A side, excluding depreciation, amortization and stock-based comp, normalized operating costs approximated $52 million, a $5 million increase over $47 million incurred in Q2. Consistent with the growth experienced from Q1 and Q2, most of this increase was payroll related. Said differently, we're executing on our previously stated goal of accelerating our investments in our team and infrastructure. Our boat now has approximately 3,400 onboard, and the journey continues. In the coming quarters, the company will continue to closely watch SG&A spend relative to its top line growth. Other income for the quarter approximated $800,000, which primarily reflects noncash gains associated with our investment portfolio as well as interest expense from our senior debt facility. Net of these expenses, the company generated $20.2 million in net income. In addition, the company generated over $81 million in adjusted operating EBITDA, close to 35% of revenue. Moving on to our balance sheet and cash flows, we ended the quarter with approximately $286 million in cash. During the quarter, the company made healthy tax payments to Uncle Sam and invested over $85 million in gross CapEx when including the spend associated with our sale leasebacks. On our last call I communicated our plan to increase our bets in a number of key markets that we believe will help drive the next phase of growth for Green Thumb. Subsequent to quarter end, we raised the remaining $33 million of capacity we had under our $250 million debt facility. Consistent with our initial raise, this was a nonbrokered offering led by long-term investors. We remain bullish on our uses of capital and the cash-on-cash returns we can generate in this next phase of Prohibition 2.0. As we head into late Q4 in 2022, we want to give thanks to our team, our investors and other members of the extended Green Thumb family. Without their trust and dedication, none of our accomplishments thus far would be possible. In addition, in advance of Veterans Day, we must recognize all those who served and the sacrifices they have made to protect our freedom. In closing, I'll leave everyone with this. As the world around us continues to evolve, our strategy largely remains the same with a few unique but simple things: number one, be the consumer, people's connection to cannabis are personal and real. We continue to believe that our success is directly correlated with our ability to think and act like a consumer every step of the way. Two, quality matters. As the competitive spirit in each market evolve, we are confident that our ability to cultivate and produce premium flower and other cannabis products at scale with the consumer pocket book in mind will set us apart from others. Last, no matter what challenges present themselves, we can't forget that our opportunity is built on years of sacrifice by many before us. We have an obligation to try to right some of the wrongs created by the war on drugs. We hope everyone joins the upcoming holiday season with their loved ones and look forward to speaking with you all in the New Year. Back to you, Ben.

Thank you, Anthony. In closing, the headline for this quarter and the remainder of 2021 is that we are laying tracks for growth in 2022, 2023 and beyond. In the third quarter, our gross capital expenditures, which include sale-leaseback transactions, exceeded $85 million, which brings year-to-date gross CapEx to over $150 million. And as we all know, it's not how much you invest, it's what the investment will ultimately return. That is something we never lose sight of and it dominates our capital allocation discussions. I'm proud that we have earned the reputation for thoughtfully allocating capital, for focusing on strong execution and for doing what we say we're going to do. It's what we live by each and every day and knowing that none of this will be possible without your support and our amazing Green Thumb team. Special shout out and thank you to all of our team members across the country. We appreciate everything you do for our patients and our customers every day. As I've said many times before, we are still in the early innings in this great American cannabis growth story. We do not believe the U.S. market will look like Canada given the current regulatory environment. The U.S. legal cannabis market is already a $24 billion industry. And as new states, new products and new consumers come into the market, we believe the market will triple over the next decade. That means at least $50 billion more of legal sales to come. What kind of market capital will that create? Who will that do for the American consumer experience? And how can we position Green Thumb to take advantage of that for our stakeholders? Finally, tomorrow is Veterans Day and to honor the men and women in uniform who sacrifice so much to protect our freedoms, Green Thumb has partnered with Happy for veterans' mental health. This worthy organization is dedicated to connecting vets with mental health support as well as overcoming harmful stigmas around treatment for those who need it. Suicide is a massive problem in the veteran community with numbers approaching 7,000 per year or 20 per day. We applaud the House VA Committee support of research into medical cannabis as a viable treatment option for veterans. COVID-19 has amplified mental health issues in the United States broadly, especially in the veteran community. Our team is proud to partner with Happy to support this much-needed endeavor to provide adequate resources to our vets. So on this Veterans Day, let's all remember just how much we owe those who answered the call of duty. And with that, I'll turn the call to the operator, and we welcome your questions.

[Operator Instructions] Our first question will come from Camilo Lyon with BTIG.

Really nice job on the consistency, especially in light of a fairly competitive environment. I wanted to dig into the CapEx spend, that acceleration in CapEx. You've got a lot of opportunity. There's definitely more that you're spending on. I'm curious to know, specifically what were the projects, 1 or 2 projects that really took a bulk of that incremental CapEx? I'm guessing it's the New York facility since you broke ground on that. And if it is, how are the -- what are the plans and timelines for when that will go live, particularly now that the state allows the sale of whole flower?

Yes. It's Ben. Appreciate the question. The -- and I think we used the analogy last quarter. We have conviction where cannabis demand and the size of the market at $24 billion going to $80 billion is going. And we really put the chips on the table in the markets where we see a lot of growth coming. So high level, the new CapEx is focused on New York, New Jersey, Connecticut, Virginia, for markets where adult-use is coming. When the cash leaves the balance sheet is always a little different. You use the golf cart, you hit on gas, sometimes it jerks a little later. So where New York has broken ground, it's not a huge piece of the capital from a cash flow standpoint. We're obviously committed to that. We have the capital, we're ready to go. But when the cash leaves the balance sheet, it's sometimes not totally aligned. But I would say at high level, those 4 markets continue to dominate our conviction on where cannabis growth is going to come.

Our next question will come from Pablo Zuanic with Cantor.

Ben, just in general, I mean, when you talk about -- when we've seen this supposedly pressure in New York and New Jersey since decriminalization, can you talk about whether that's something you are seeing in your business and whether that's in any way impacting overall profitability of the business? Clearly, gross margins were stable quarter-on-quarter. But just talk about if there's been a negative effect from a decriminalization in terms of sales for you in New Jersey and New York?

Pablo, it's Ben. Can you repeat the beginning of your question? What factors...

Sorry, there was something wrong with the line. No. So other companies have talked about that since decriminalization started in New York and New Jersey, that, that has boosted the illicit trade and affected sales of legal stores, right? And I'm just wondering, you got pretty good retail sales growth, 7% sequentially. So I'm just wondering if you saw a decline in York and New Jersey sequentially that you can highlight like other [ people ].

Got it. Yes. I didn't hear you on the illegal market. Sorry. Totally understand the question, no, didn't majorly impact our business. As you know, those are small for us in the scheme of things. But I think it's a good point. And I think how states figure out enforcement and regulation of turning on adult use and not enforcing illegal stores 5, 6 years ago, I don't think that existed in some markets. It's now the beginnings of existing. There's products, there's other things, lack of testing, potential consumer dangers and things like that. But it has not impacted our P&L. There's a huge amount of demand in New York. It's going to find its way. It already is. There's a massive market there. We're excited to bring the products and the brands that we know how to do and deliver to those markets.

Our next question will come from Vivien Azer with Cowen.

Anthony, I have a question for you. You guys don't offer guidance and I think that's absolutely appropriate. But you have posted 2 quarters of sequential contraction of 100 basis points in your adjusted EBITDA. And well-explained in terms of the headcount, there is certainly going to be ebbs and flows as you expand into new markets. But if you could just maybe help us think about is headcount the major driver? Is that what we should be tracking in terms of forecasting your adjusted EBITDA levels or any other helpful kind of color without offering guidance that you could provide would be very helpful.

Yes. It's a great question, Vivien. So you're right. In my prepared remarks I mentioned that payroll was the biggest driver of, call it, the $5 million SG&A or normalized SG&A increase. We anticipate that continues to be the case. I mean, obviously what we're doing is we're closely watching the top line. And as we head into 2022, we'll kind of throttle up and down the SG&A spend accordingly based off the demands of the business. But that's really where we're seeing the biggest kind of growth. Obviously we had some marketing expense. And as the top line grows, we'll have to continue to kind of feed as well. But looking ahead, I would say the payroll will continue to be a hefty portion of any of the SG&A expense increase that we incur.

Our next question will come from Matt McGinley with Needham.

The net wholesale business grew only about 1% in the third quarter, but the acquired assets you had in the quarter would have likely been additive to that segment. Is there anything to note here in terms of market weakness by state? And was the CPG growth primarily volume growth? Or did you see any declines in realized pricing?

That's a good question. So in terms of the CPG growth. So the facility that we acquired in Massachusetts, we have some work to do there in terms of the flower production. So it really didn't show up on the P&L as of yet. That's certainly kind of one of the reasons why we didn't see greater CPG growth. But overall, we didn't have any additional facilities really turning on. So as you know, the way our CPG kind of revenue works, it's very stair-step function in terms of as we bring on new capacity. So if we don't bring on new capacity, and that facility is already operating at max capacity, the numbers can't really get any higher. But it's certainly something that the team is working on. And as we look ahead, we're focused on improving.

Yes. I could just jump in Matt. Just in those states, a teeny bit of color, Rhode Island has really no net outside sales and [ neither is ] Virginia. So seeing the CPG from that M&A, I understand your question, you're right. But when you look at it, there's not a lot of wholesale distribution of product yet in those states, particularly Virginia versus where we think it will be in 24 or 36 months.

Our next question will come from Eric Des Lauriers with Craig-Hallum Capital.

Congrats on very solid results here. So pricing obviously, a popular topic in the industry now and sure it will be for a long time here. Can you talk about some of the pricing trends that you guys are seeing from a product category perspective? Is it similar across the board? Are you seeing any categories faring better or worse than others? And then how should we think about how that all fits in with your brand portfolio here?

Yes. Great question, Eric. So look, I think what we're seeing -- when we talk about it internally is more price settling than compression because really when you peel back the onion, gone are the days when call it in a market like Pennsylvania where every eighth of flowers sells for $55 to $60 an eighth. Now the product needs to stand on its own two feet. So obviously the majority of our brands sit on the premium side of the equation. We think that bodes well for us. But really, what we're seeing is that, at least in flower kind of premium seems to be holding price. And as you work down to different kind of other value levels, that's really where you're seeing some of the erosion. But obviously, something we're watching very closely. And just as a business, we're very focused on just maintaining.

Our next question will come from Owen Bennett with Jefferies.

This is actually [ Derek ] calling in for Owen. Congrats on the quarter. Quick question, excited to hear about the consumption site in the [indiscernible] facility. Can you just dig deeper into the different objectives you have within your consumption site strategy and maybe different states you're targeting for that? And also maybe some additional color on potential alternative monetization opportunities as that strategy kind of comes to fruition?

Sure. Thanks for the question. I would say in terms of state regulatory environment, I think we really only have clarity on one additional state, which is Nevada, which is crystallizing what those means with a few people who have talked about those. We plan to bring a lounge there. There's obviously a massive amount of tourists coming, special events, special occasion, huge opportunity to continue to grow that business. We think the Nevada total size of market can be so much bigger. There's particularly unique regulatory structures there around tourism and the casinos that prevents a lot of that. So it's only a matter of time. And there's not another state that feels ripe on the radar. But again, putting our best foot forward, and sort of leading by example of how this sort of subsector or new thing can be regulated, done safely, continuing to just lead with education and sort of self-rules that we think are based on experience of being pretty conservative, help set it up to win. Our North Star continues to be the consumer. The consumer is consuming the product. Enough said. So why are we not offering an environment that's [indiscernible] half of the alcohol is on-prem, roughly pre-COVID. So that makes a lot of sense to us. From a P&L and monetization standpoint, too early, not a factor. We're willing to invest and learn, but it's not a material impact either way on expenses or revenue uptick.

Our next question will come from Aaron Grey with Alliance Global Partners.

So I was curious if you could provide some color in terms of maybe some of the contribution that you received from the acquisitions on the retail side. You gave some nice color there on the CPG side. And then more specifically on the comparable sales sequentially 1%. Could you provide some detail whether or not that was more driven by transactions or basket size? I know year-over-year it was more transactions in the PR. But that would be very helpful.

Sure. Good question. I would say on the second one first, is transactions versus basket size driving it. We're seeing more people buy more often and a bigger audience versus incrementally growing the basket where if you zoom out on the basket you saw big change with COVID, you've had 18 months or almost 2 years now coming back to where we were. And on the first question, we're not going to comment on any specific store performance.

Our next question will come from Scott Fortune with ROTH Capital.

You've been very active in kind of more M&A on side of things. Without going into certain detail in the markets you're seeing more favorable value -- are you seeing more favorable valuations in looking at operators or brands and potentially kind of valuations from a private side to continue your M&A activity going forward here? How do you view the market [ in all ]?

Sure, I can take that. Scott, thanks for the question. Not a lot of new for me on that. Like everything is on the table if it makes sense. We're really thinking about how to drive long-term shareholder value. The business plan of Enter, Open, Scale helps us think about that landscape, how pricing is affected in the private market versus the public market, things are mark-to-market every day and really susceptible to the capital market flows and supply and demand, whereas private company valuations aren't moving like that. But the capital markets are thin, and we're watching. It's an unbelievable opportunity to invest inside our business, like I mentioned, New York, New Jersey, Connecticut, Virginia. It's hard to find kind of better opportunities than a raw dollar there into the production given the demand coming and the regulatory setup. So it's a very high bar. And at the same time, as you saw, a few what we consider very high value, very strategic M&A makes sense. So we continue to look. I would continue to say that we don't think we're in the business of a transformative transaction within the industry in the U.S. at the moment. But everything is on the table. We'd like to answer the phone. We also like to say no. So we're here.

Our next question will come from Glenn Mattson with Ladenburg.

Congrats on the quarter. So part of the story with GTI has been like finding the best markets and then kind of executing the heck out of them. And so that's been the driver of a solid margin throughout. But I'm just wondering, as you think about the business and the national footprint and building brands on a national scale, not every market is going to be as good as Illinois or Pennsylvania. And you have a runway still of a number of good markets yet to come. But long term, would you be willing to -- what's more important, would you sacrifice margin to build brand presence in some other markets? Or would you just skip those, generally speaking, and then just try to execute on the best markets possible?

Yes, good question. Little hard to answer it, simply because making decisions on capital allocation, we have a pretty good North Star on what we're trying to do. And as a trade-off in those 2 kinds of things that you're suggesting of different sorts of spend. Like I said, it's the early innings of the brand building game and what brands have essentially meant in cannabis probably in the last 10 years being available, being there, eventually getting consistent. And then it's the beginning of what is Chapter 2 on its way to many more chapters. So overall, we'll put more dollars into it for sure. We're watching the $24 billion go to $80 billion, we're allocating capital where we need to be, weighing the things like first mover, brand equity, competition and differentiation. It's really about the relationship with the consumer. That can lead to the aspirational pricing power that gives the brand something. We look towards the most simple commodity sold products. We don't think cannabis is, but water is and why is pricing power there? How does that work? Pretty good rhyme for us. And we're just sort of conscious of where we are in the cycle of the decade of growth and not wanting to get too far over our skis. But we have a lot of cash, we're willing to spend. So it's like we sleep really well, and we're watching it evolve. I think it's a very exciting next 3 to 5 years for brand building in cannabis, unbelievably exciting, actually.

Our next question will come from Andrew Partheniou with Stifel.

And congrats on the results here. Maybe just thinking about big picture, Ben, you talked about how the U.S. is not Canada. There's definitely a lot of focus on price right now. Could you walk us through what makes you so confident in that assessment? What about the regulatory structure is different, where we won't see that result? And how do you see yourselves and your brands being positioned and advantageous in that situation?

Sure. I think that's a great question. And there's a couple of sort of key things I would reiterate, in sort of an unlimited competitive market in the U.S. in any consumer products, there are brands that exist. There is differentiation. People pay pricing power for whatever reason across brands. So we think the concept of a brand exists because we see it every day. Two, the regulatory structure in Canada is so fundamentally different from where we sit with unlimited amount of license or essentially that, lack of quality product on the market, although that maybe is changing. And a regulatory environment where -- and maybe the people on the phone know more than I would, but the government is heavily involved in some of the supply chain distribution channels. Branding is quite limited. Product sets are quite limited. And you really can't compete with things that are going on that the consumers want, quality flower and form factor. So that core setup, which is the legal cannabis market in the United States is often producing some of the best, most innovative forward-thinking branded product, form factors and different things. Second, with legality in Canada, the amount of capital, the fall in price of capital is the dynamics of the Canadian capital market set up unlimited capital flowing into the space to build Taj Mahal of cannabis. And we can see where that lands. The case is not the same here, and I think that rational capital allocators with higher cost of capital in a federally illegal business that we see continuing unlikely to massively overspend to then tip over. It just seems a little less likely though the capital markets are ruthless and [ move ] and people get greedy and they swing. So we're watching it. You can see it in micro markets. But we think overall, if an industry is going to go from $25 billion to $80 billion, and I said it like 4 times on this call because that's our core thesis. And we get that if you look at Colorado, and regardless of the pricing if you look at California and even other more mature-ish markets, Oregon and Washington, give us a real conviction in a high amount of demand and product that will move through the legal channel in the U.S. So that investment has been the same thesis really since 2014 when we started, and we continue to check our map pretty regularly. And so far, so good. And just look, the money is where our mouth is, look at the cash flow moving into the CapEx, into the states because I just believe New York is going to be a multibillion-dollar market. I'm very sure Virginia is going to be a multibillion-dollar market, New Jersey, the list goes on. And that's what we think we can do in the best interest of all stakeholders.

Our next question will come from Andrew Semple with Echelon Capital Markets.

My question here is on the $85 million [ growth ] CapEx spend within the quarter. I'm sure you guys were excited to publish that number because we all know what tends to follow. I'm just wondering on the allocation between that CapEx between your new markets, Virginia, Rhode Island and the additional assets in Massachusetts compared to your existing business? And also on the CapEx, how many quarters ahead do you think we're going to be at this more elevated spend rate?

Good question. This is Ben, I can start and Anthony can fill in if I miss anything. Again, the timing of the cash, when the market is coming on and how we make the decisions, you've heard us talk for a long time on Illinois and PA, and the dialogue is beginning to change to New Jersey, New York, Connecticut and Virginia, just kind of going to say the same thing. Which dollar went where doesn't matter so much. We have a very fortunate relationship on the sale-leaseback with IIP. We like the cost of capital, we like the setup. And we're comfortable allocating sort of bottom-up and top-down and sideways, the way we're doing the capital allocation to make the decisions. But you don't make a decision just to sort of set the table up, okay, we're going to spend $100 million in New York and build a cannabis campus. Okay, $100 million leaves the cash flow of the balance sheet next quarter, and then it's built. So the decision is made, the zoning happens, the earthwork, the cash begins to leave over a period, it's a curve. Team has done a great job, not a good job, a great job at managing the cash flow, and we're basically on time, on budget and do better with the cash flow management. At the same time, the flower hits the market when we want. Our global supply chain, we're not immune to various pieces there. But that's how we're managing it. And we're confident. I can't tell you what next quarter or anything is going to be, but we think 2022 is going to be a similarish year to 2021 from a spend standpoint, not back to 2018 levels.

[Operator Instructions] Our next question will come from Matt Bottomley with Canaccord Genuity.

Just wondering if we can maybe drill down a bit, not into the particulars of anything at the granular level with GTI, but maybe at a higher level with some segment disclosures. I know that that's something that investors are looking more and more for given that there's more and more states coming online and everything kind of gets consolidated up and even results when they're positive, it's kind of hard to parse it out. So I'm just wondering if we could speak maybe more holistically to maybe Illinois and Pennsylvania, which are 2 key markets and what you're seeing there at a very high level without getting into too many specifics, if you can't, with the state's continuing to regulate and allow for more capacity, retail store openings, if you think there's risks of headwinds in those markets, which are arguably 2 of the strongest markets in the U.S. and I know are very important to certainly your near-term growth prospects. So just wondering if you can comment on those 2 markets specifically or anything else that might be more segment-related on a state-by-state basis.

Yes, sure. Matt, it's Ben. Illinois and PA, pretty simple story. I think you're right on it. Holistically, we think, as I said in the prepared remarks, both our run rate and actual between $1 billion and $2 billion now, we think both easily double over time. Why is that not happening more quickly? And if you look at the curve, it is not that hard to see them flattening, [indiscernible] has only 110 stores. It's incredibly frustrating that the new licenses can't get out. I've been vocal about it. A lot of people have. We're still stuck in the courts. And we have not heard from the governor's office or anybody to try to accelerate that. It's frustrating. 110 stores should at least double, the market will go up. New folks can enter the industry and new wealth can be created because $1.5 billion is going to 2-point something, and then it's going to 3-point something. We said the same thing now for a few years. And in the meantime, the market is going to [ muddle ] along, the stores will grow, but it's not going to inflect the way it should to meet the demand. PA, a little bit of a different story. If you look at that from -- over time, quickly accelerated. We're into a 4% to 5% patient penetration rate or run rating we think $1.3 billion to $1.5 billion total size, easily going to go $3 billion to $4 billion, same size as Illinois. And it's a medical market. So it's open on the medical, but we have not gotten rec. There's a lot of discussions. There is positivity coming from the legislature. Governor Wolf has been banging the table for adult use. And just to remind everybody, states that have legalized adult-use are generating more tax revenue from cannabis than they are from alcohol. This is a major revenue growth driver, a major job creator, and we're seeing governors across the country embrace that; Republican and/or Democrat, it really doesn't matter. This is a movement, and consumers are demanding it, and it's becoming hard to quantify any sort of material costs of other things except relief from the courts and other things. So PA rec, you'll see a big step-up. Illinois, when the stores get out, you'll see step-up. And in the meantime, things continue positively. Keep in mind, in PA, no edibles, so if you look across the segment, across the industry, there's mid-teens part of the basket depending a little bit on the market is edibles, that's not allowed. There are no pre-rolls. We cannot sell Dogwalkers in PA due to the rules. So those regulatory constraints are temporary. And eventually, we think the consumer demand materializes, and we're very bullish on both of those markets.

This concludes our question-and-answer session. I would like to turn the conference back over to Ben Kovler for any closing remarks.

Well, thanks, everybody, for joining us. We look forward to giving you a year-end update sometime in the first quarter. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.