Flying Dutchman launched its cannabis operations in March out of a 13,600-square-foot greenhouse in Coachillin’ Business Park in Desert Hot Springs at the outset of the coronavirus pandemic.
The timing meant that much of the company’s leadership team couldn’t come over from the Netherlands as planned due to overseas travel restrictions.
But founder Bob de Groot, who moved to California about three years ago, didn’t let the circumstances stop the business from forging ahead, and completing a successful first harvest.
“I’m from an industry where a lot of things can be a little bit stressful, so I just consider it as part of the job,” de Groot said. “Every day has its challenges, we deal with them as they come.”
Cannabis is an essential business, meaning operations can continue during shelter-in-place orders when many other business operations are shut down.
But the pandemic has damped overall activity: Industrywide, investment activity is stunted compared to last year. Viridian Capital Advisors reports a total of $2.5 billion was raised in 165 cannabis transactions through June 26 this year, compared to $7.4 billion in 338 transactions through the same time last year.
Still, many legal operators — accustomed to the uncertainty that comes with being in a newly regulated industry and the risk that comes with navigating unchartered waters — are making moves in the desert.
Royal Pharmaceuticals announced in May it was creating a research space at the former Kmart building in Desert Hot Springs. Kings Garden in Palm Springs entered into a new lease in July as part of a $17.5 million sale-leaseback deal with a publicly traded real estate company.
de Groot said cannabis is like the wine industry. There will always be a demand to fill.
“It all has to do with your planning and your execution,” de Groot said. “We always plan for the worst, and we hope to get the best.”
Paula Turner with Desert Pacific Properties, who handles a host of cannabis real estate listings in the desert including at Coachillin Business Park, said she gets about five calls a day from cannabis companies interested in expand here.
“It’s gotten to the next phase, and they’re very knowledgeable,” Turner said. “They’ve been established in Los Angeles, and now they’re getting established growing out here.”
In a single day last week, two companies signed leases for yet-to-be-constructed facilities Morongo Industrial Park, Turner said.Located on Little Morongo Road, the park has several other lots under development for committed companies. Buildings there are selling for around $200 a square foot, which is less than some other industrial listings in other municipalities.
A newly constructed cannabis facility in the Morongo Industrial Park on Little Morongo Road in Desert Hot Springs seen on July 24, 2020.
But the interested companies tend to be pre-existing businesses looking to expand, and have at least seven figures to show as part of their proof of finance.
“If you only have $250,000 or $500,000, I say ‘You need to go back and find an investor,'” Turner said. “You’re not going to make it.”
The pandemic hit as the cannabis industry was experiencing growing pains. After a rush of initial public offerings for companies with high valuations, many public cannabis companies that trade on a Canadian exchange saw their stock prices plummet in late 2019, which wound up making some companies and investors more cautious after a flood of initial public offerings.
Akerna, a compliance technology provider in the cannabis industry, said in a mid-year report public cannabis companies lost an average of 75% to 90%.
The cannabis industry has been volatile, with top brands from a few years ago disappearing and new ones coming in. And while the legal market “has never been doing better,” there’s potential for prices to drop in the future, said Kyle Kazan, a longtime real estate investor and CEO of cannabis company Glass House Group.
“There will be commoditization in this industry, like there is in every industry,” Kazen said.
He said that the indoor cultivation that’s become popular in the desert might not fare well in long-term as consumers seek sustainable products, and as companies eye the overhead that comes with a building.
“I wouldn’t own any indoor grow today, I wouldn’t add to my portfolio,” he said. “Would I do more greenhouse? Yes. Would I do more outdoor? Yes. Because that’s where the majority of the market is going to come from, in my opinion.”
Building brand-new indoor facilities can come with the risk that they won’t get finished on time.
In Cathedral City, Sunniva’s sprawling 489,000-square-foot cultivation facility along Ramon Road near Date Palm Drive was initially supposed to be partly completed by December 2018. But progress has been stalled while the company ran into legal disputes. In April, Sunniva announced it was laying off employees, with chief executive officer Anthony Holler saying the company was “in survival mode.”
Since then, the company succeeded in its bid to sell off property in British Columbia for $6.8 million, a deal with at will get it about $3.2 million in net cash proceeds at closing.Kings Garden, one of the oldest legal operators in the Coachella Valley, this month continued its commitment to the desert with a recent $17.5 million deal for a 70,000-square-foot, two-story indoor cultivation facility located north of Interstate 10.
Wilson Meade Commercial Real Estate represented both buyer and seller in the triple-net investment sale. The deal involved selling the building to Innovative Industrial Properties Inc., a publicly traded real estate company on the New York Stock Exchange that focuses on the cannabis industry. That company will lease the property back to Kings Garden.
Michael King, the co-founder of Kings Garden, said part of the reason they’ve been able to sustain their operations while other similarly sized companies have downsized is that they have a “Costco model”: they focus on producing a high-quality, affordable product at scale.
They produce roughly 750 pounds of hand-trimmed cannabis on a weekly basis from eight cultivation facilities, and also have three manufacturing facilities to use the byproduct of the flower to make concentrates.
“We don’t need to have 30 SKUs,” or individual products, King said. “We have 12, and they all do very well.”
King’s Garden has opted to stay private, despite considering an IPO at one time. And unlike some public competitors, King said their company hasn’t laid off any of its 180 workers during the pandemic-induced downturn.
“The game plan we had from Day 1 didn’t change,” even within the circumstances of the pandemic, King said. “It was one step at a time. We don’t need to look anywhere except at what we’re doing here in our company. Profitability, as well as producing high-quality product consistently and at large scale, is the most important part of our business”.
Michael Meade, the co-founder of Wilson Meade, said he divested from the Kings Garden facility because he wanted to diversify some of his holdings outside of cannabis.
He said he believes only established operators will be able to weather the economic recession and follow through on their plans — pointing to Kings Garden as an example of the kind of businesses that remain active and successful.
“They did it right and proper, and so the investors saw they knew what they were doing,” Meade said.
While Meade has about 200,000 square feet of pre-leased space in Coachella that’s slated to be developed into cannabis facilities this fall, he still has another 800,000 square feet available. He said he’s holding off on building until he has committed leases from established operators.
“It’s a great industry if you know what you’re doing, but you have to have access to capital and be willing to take that risk,” he said.