Planet 13 Gets Massive Cultivation Deal
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On June 4th, I shared Planet 13’s comments that the company was seeking more cultivation assets. Planet 13 (PLNHF) currently has only 15,000 square feet and its owned brands are taking off—not just at the Planet 13 superstore but at other dispensaries throughout Nevada.
Co-CEO Larry Scheffler said on the company’s earnings call that Planet 13 was looking for 25,000 to 50,000 square feet and that he was looking to pay “pennies on the dollar.”
On Friday, Planet 13 announced that it got what it was looking for. It is acquiring the Las Vegas assets of W Vapes, which was originally going to be sold to Indus Holdings (INDXF), but the deal never fully closed. Planet 13 is paying $1.656 million in cash $2.5 million worth of shares to acquire the operating assets, licenses, inventory, and equipment.
In a parallel deal, Planet 13’s Co-CEOs will be buying the real estate and leasing it to Planet 13 at a price “well below the rate set by cannabis REITS." When the deal closes (see below), Planet 13 will own an additional 25,000 square feet of cultivation with an ability to expand to a total of 45,000 square feet. Fully expanded, the new facility will quadruple Planet 13’s ability to grow cannabis and make products from it. So Scheffler is getting all the cultivation capacity he wanted in a single transaction.
About $7.5 million for a Las Vegas facility of that size and expansion ability may not be “pennies on the dollar,” but it’s a good price for Planet 13. The low price reflects that simply owning cultivation assets, even producing assets, is not a sufficient path to making a lot of money in a maturing cannabis market. Those assets must have brands attached to them and a good distribution strategy to create value. The property Planet 13 is acquiring did not have that – it is primarily selling wholesale cannabis. This theme will reverberate from state to state as markets mature.
The value of the transaction as of this writing is higher than was announced because much of the consideration is in Planet 13 stock. That stock has been on a run lately, contrary to my prediction 10 days ago. I remain cautious on Planet 13 because of worsening COVID19 conditions in Nevada but I will say that this transaction solves a lot of long-term challenges for the company in one deal.
The real estate
Next is the real estate deal. As I wrote previously, shareholders should be skeptical of transactions with affiliates, particularly new transactions. In this case, Co-CEO’s Larry Scheffler and Robert Groesbeck have compiled an admirable record of building trust, so it’s reasonable to assume that they structured the transaction the way they did for the reason they gave—to preserve cash for Planet 13. But still, when the company makes its regulatory filing about the deal, shareholders should double-check. It’s important to keep that discipline.
The other interesting thing about the real estate portion of the transaction is that Groesbeck and Scheffler said that they are leasing the facility to Planet 13 at a rate cheaper than was available from cannabis REITs like Innovative Industrial Properties (IIPR). We can take two pieces of information from that. First, cannabis REITs get a full and fair price when they buy assets and lease them to the operators. Second, the next available source of real estate capital after a cannabis REIT is even more expensive. Otherwise, Planet 13’s Co-CEOs would have chosen a third-party alternative. Not many cannabis CEO’s have several million dollars in cash to buy facilities, so this deal is not an overall threat to companies like Innovative Industrial. Instead, it is an endorsement of the value cannabis REIT’s bring to the industry while still making a good return for themselves.
How this deal closes and the long trip the facility has been on to get to this point are also instructive to cannabis investors. The cash portion of the deal closed on Friday. But the shares went into an escrow and will not be released until the transfer of the licenses. The real estate deal is also delayed until the license transfers are approved.
As I’ve noted before, there is a moratorium on cannabis license transfers in Nevada. No one has a good handle on when the moratorium will be lifted and on how long after that it will take the Nevada Cannabis Control Board to work through a large backlog of transfers, so it could be a while before this deal finally closes. In the meantime, Planet 13 has a management agreement to operate the facility.
This facility has been on a journey. It is owned by a private company called W Vapes and by CBDMD (YCBD) CEO Scott Coffman. In May of 2019 Indus Holdings, the California cannabis company agreed to acquire the facility but the license never transferred and Indus abandoned the attempt concurrently with this deal. It does appear to own the real estate which is going to the Planet 13 co-CEOs.
For its part, Indus says it wants to stick to its home market of California, where it has four greenhouses totaling 225,000 square feet of cultivation facility in Salinas and its recent public statements reflect that desire. It’s probably a sensible strategy since Indus did not have the resources to build brands or retail distribution in Nevada which would add value to the cultivation assets. Planet 13 has the biggest dispensary in Vegas and several enviable brands of its own.
At any rate, the deal Indus announced was originally for $20 million. That price included assets in Oregon, but the Oregon assets appear to have been a minor part of the transaction. The deal was also renegotiated and the total price appears to have come down to $12 million, with Indus having purchased the Nevada facility prior to the license transfer. The history of this facility confirms that Planet 13 got a good price. It does not have to pay a premium to acquire brands it does not need and it will be able to get to work producing its own Medzin brand at the facility.
Overall, this is a good transaction for Planet 13 despite the time it will take to fully close. Companies that already have a substantial Nevada presence can show patience which other cannabis companies cannot. The deal does shine a light on those regulatory delays and the negative effect it is having on asset values in Nevada. It also features what is probably a “good” affiliated transaction and it reminds cannabis investors that REITs are getting high returns on the facilities they purchase.