Going back more than 20 years, Kyle Kazan has syndicated private equity real estate and launched 23 funds. He knows his way around property management and real estate analysis, which are vital tools for the California cannabis entrepreneur.
He took an interest in advocating for cannabis reform over those earlier years and then, seeing an opportunity, leapt into the nascent California cannabis market. Kazan started four funds that consolidated into California Cannabis Enterprises in 2016; the company’s portfolio includes Glass House Farms, Glass House Brands, Roam Escapes, The Pottery and Bud & Bloom.
On July 9, CCE announced the appointment of Derrek Higgins as its CFO. Higgins previously worked as the CFO of FLRish Inc., the parent company of Harborside. While there, he closed a $19.65-million capital raise prior to Harborside’s public listing on the Canadian Securities Exchange.
With that big hire on the books, we took a moment to ask Kazan how the market is evolving in California (answer: rapidly) and what it takes to build a team around an internal culture.
Cannabis Business Times: What’s the impact of Derrek’s background on the company—and specifically on the CFO role?
Kyle Kazan: From 30,000 feet, what makes CCE special are the people. Graham [Farrar] is the president of Glass House [Farms], which is a wholly owned subsidiary of CCE, and he does an amazing job. We’ve got some great assets, and we’ve got some great people. And now, as we're rolling all these private equity funds and all these assets into one—and we've been in contemplating the public markets now for over a year—we decided now it's time to build a C-suite with the best talent. I interviewed—and when I say ‘interviewed,’ I spent over three hours with—13 different people, and I'm absolutely determined that we have a culture fit and we have talent. And I kept calling the CFO position the ‘unicorn,’ and Derrek's the unicorn. That's somebody who has solid accounting experience, M&A experience and then public market experience. The unicorn was cannabis, too.
Not only does he fit our culture, he’s a hard worker, he’s humble, he just gets in there and gets after it. He has extensive market knowledge in cannabis, so that he can help us on all the M&A because he understands what the different markers are. He's very good at saying, ‘Look, this is how we structure the deals, and this is how they'll be looked favorably by institutional investors.’
CBT: When you're in those lengthy interview settings, and you're talking to these folks, how have you gone about identifying the culture of CCE and then looking for those fits, especially in the C-suite?
KK: One thing that I learned pretty quickly was: Find the right people and put them in the right seats. And for me, as the CEO of the company, it's: Make sure that that our interests are aligned financially, but also that we see the world the same way. When you're building a company, there's friction, there's pressure, there's problems. So, the method of my madness that I've come up with running companies for over 20 years is every single CFO candidate met me at my house on a weekend or maybe a Friday morning, and I would take them on a hike. When I say hike, it was a three-hour hike—ups and downs—and from my law enforcement background I'm pretty good at asking the same question four different ways over the course of a hike.
Over the course of a long hike, you're getting a little bit tired, you don't know where the hike ends, you just start answering questions, and then you get a real feel for somebody. And I encourage them to ask me questions. And also feel free to meet Graham [Farrar, CEO of Glass House Farms], go visit our properties, do an audit on us—because I can't afford to get the CFO position wrong. I can't afford to get the COO position wrong. Graham and I started working together in 2016, so we've gotten into our own cadence, and we work really well together. And I didn't want to screw that up. And so, to that end, every two months we get together, we have a four-hour meeting, and the spouses go to a spa, so that they can do some team-building too. You know what it's like in this industry: We're working in dog years right now. So, there has to be a buy-in, this has to become a family. And this needs to be a team.
CBT: Once you’ve got the team, how do you maintain that culture?
KK: We pay probably lower than almost every other cannabis company when it comes to salary. I basically put a cap at $250,000, including me. We just got valued at $380 million, conservative value. So, $380-million company, C-suite, a guy with Derrek's role, I said, ‘Look, the whole reason we're here is to build equity—not just for the investors, but for us.’ We align ourselves with the investors, we're here to make millions. We're not here to make it in salary, because that is not aligning our interest with investors.
CBT: How does your real estate background figure into the company’s goals?
KK: I look for capital dislocations. I always try and buy during a financial crisis; I cut my teeth during the RTC fiasco with all the S&Ls blowing up in the late ‘80s and early ‘90s. As an investor, that's how I got out of a police car [and left a career in law enforcement], was by investing my own account. For many years, I had to analyze deals, and mainly these are apartment or commercial properties.
The people that came to me and said, ‘Hey, would you invest [in cannabis]?’ Back in 2011 and 2012 in Los Angeles? I said, ‘No. Hell no.’ But as I stayed in the battle to help these folks by trying to speak out about legalization, to try and help turn public opinion and do my share, all of a sudden I started looking at this going, ‘Oh my god, there's a massive capital dislocation. There's going to be a massive industry here. There's the biggest capital dislocation I have ever seen.’
CBT: How is 2019 stacking up, as opposed to 2018? What are some of the questions guiding you now that might be different from one year ago?
KK: It's a much better day in that far less people are being arrested for cannabis. And I can't tell you how much of a big deal that is to me. In California, there's a good new day for a lot of people. I'm super excited about that. On the business end, I would have told you in 2016 that by 2019 we would see major compression in the pricing of the ag segment—Glass House—of our business. You know, I've invested in in some big pecan farms just south of Macon, Ga., for a number of years. So, I know what it's like to be in a mature ag business and how difficult that is. We've been preparing to get ahead by taking our COGS down and making sure we have no debt, so that when the compression comes not only will we be a survivor, but we will thrive. To the contrary: Marijuana in California is the highest regulated ag product in any state. Because we are well capitalized and came into this with the idea that we are going to make as high quality as we could with the lowest COGS, using technology and our scale, we've been in a great position where we have good product consistency. And we pass tests. So, we’ve had no issues. For others, each time [the state adds] in heavy metals [to the testing regulations], testing wipes out a bunch of people. And licensing is difficult around the state; it's hard to get new businesses up. So, because of that, we've raised our prices three times this year, and we have a line out the door for trim.
CBT: How does brand-building fit into this?
KK: Our COO was the CFO of Nissin Foods. Nissin Foods is Cup Noodles. Before that, he worked at Nestle. What he basically said was, ‘Kyle, you're going from silos to horizontal.’ Just like Nestle. You care about all your COGS—going from the genetics to the consumer. For our measurables, we're going to be pushing those brands, because that's where we're going to get our margin—through the brands. That's why our manufacturing facility—which will be finished in the fourth quarter this year—it's in a zero-tax area. If I'm selling all that through my retail, I can stack a lot of the cost in the zero-tax, and tax is a big deal here. I’m in ‘Taxifornia.’ Every penny is going to count; we take it seriously now. You can get away with being sloppy now, because of the margins, but you will not be able to do that at some point in the future.
We have a board, an internal board that shows demographics by age and what the product does. We look at: This one has flower, this one's a vape pen, this one is an edible. We are looking to make sure that our suite of brands doesn't hit the same exact consumer; we're targeting for different people. Our hope is at the end of the day, when we go up to Hall of Flowers in September, we will likely have the largest suite of brands of anybody in California.
CBT: That’s an interesting point of distinction between other acquisition strategies that are more focused on just getting feet on the ground in as many states as possible.
KK: We've been offered a Florida license that we could buy for $60 million. We've been offered—no cash, just stock—dispensaries in other states. And I've considered them. And I'm not saying that I wouldn't consider, you know, Vegas. But, number one, my advantage right now with California is that, as the walls come down and when we can start delivering out of state, my COGS are going to be the cheapest in this state—and I think in the country. I’ve got the California reputation and the appellation. The other thing is that I only have to know my state's laws. I don't have to know Ohio's. At the end of the day, if we get retail right here and we branded it correctly, then we can always manage, we can always franchise and we can always figure that out. But to me, I'm good just focusing in California. And we're already talking to some of the MSOs about licensing our brands; I can get my brands out there. And my goal, quite frankly, is by this time next year we’ll be all over Florida. And if New York ever gets its act together we will be in New York.
I feel very, very comfortable that the road we're taking with the team we have and the assets that we purchased and how they're structured—we're going to be very, very hard to compete with.
Editor’s Note: The interview has been edited for length and clarity.