February 23, 2020

Marijuana in Florida: This Bud's for Us

Headed by Wall Streeters and MBAs and backed by deep-pocketed investor funds, more than 20 companies are fighting for dominance in the era of Big Pot ushered in by voters.

Mike Vogel | 9/25/2019

For the moment at least, Columbia Care is playing Shasta in the medical marijuana market.

Vita, who spent time as a youth on Sanibel Island on the Gulf, says he never smoked marijuana but began to consider the industry as a business opportunity in 2011. Hearing about the potential, he gave cannabis cream to his mother, who has rheumatoid arthritis. She felt better enough to resume hobbies and pastimes. He called it his “aha moment.”

Columbia Care was late to Florida, buying its way into the state by purchasing Sun Bulb, a nursery that wasn’t among the initial five licensees but got a license in 2017. (Sun Bulb, in business since 1956, grows orchids in Arcadia for Home Depot and Lowe’s.)

Columbia Care opened its first store in Florida in July and had opened only one other store as of Sept. 1. The company hopes to open 20 stores — at a cost of about $1 million apiece — by year-end. (Columbia Care has just four in New York, its next largest state.)

Two to five stores is typical for an operator in much of the country, but in Florida it makes Columbia Care the second smallest. Unusual in states that have legalized marijuana in some form, Florida’s industry is dominated by a few very large players — a legacy of the regulatory scheme that created the original five license winners, a group that Gov. Ron DeSantis and other state leaders have called “the cartel.”

The dominant player is Trulieve, a Tallahassee-based, publicly held company that’s one of the most profitable operators in the world. Trulieve, one of the original five, has a majority of the Florida market for sales of smokable marijuana and other marijuana products containing THC, the psychoactive, “get high” compound marijuana users seek. Trulieve has 31 stores in Florida. It and the rest of the “cartel” accounted for 116 of the 157 stores open in Florida at the end of August.

Even as the number of licensees has grown, the value of a marijuana license in Florida has remained high. Florida voters in 2016 may have envisioned creating a way to bring good quality marijuana to the ill, but in doing so they “created an extremely valuable limited licensing system that has enriched a large number of publicly traded companies traded on the Canadian Securities Exchange,” says Livingston, the law firm economist.

Compare Florida and its 22 license-holders with Oklahoma, which has given out 7,300. Livingston evaluated the Florida market with an index tool commonly used by economists to judge market concentration and found Florida’s medical marijuana market more concentrated than the nation’s breakfast cereal business, which is dominated by just Kellogg, General Mills and Post.

The relatively small number of licenses in Florida has inflated their value — and enabled many license holders to flip their licenses.

Columbia Care paid $11 million for Sun Bulb in 2018, but other sale prices for flipped licenses have been considerably higher. Spring Oaks Greenhouses, which won a license in April, flipped it for $54 million to Canada’s Green Growth Brands. A New York-based publicly traded company called Acreage Holdings acquired license holder Nature’s Way Nursery, which hadn’t even begun to sell marijuana, for $67 million in January. Publicly held, Chicago-based Cresco has agreed to acquire Jacksonville-based VidaCann, which already has significant operations, for $120 million.

The limited supply of licenses also accounts for the litigation that’s followed license denials. “When you’re looking at a license in a state like Florida that’s worth $50 million, it makes sense to spend $5 million on a lawsuit,” Livingston says.

The state charges $65,000 to apply for a license and requires winning applicants to post a $5-million bond. For the time being, those who get licenses must maintain their own cultivation facilities. “It makes the license very expensive to operate,” says Sally Peebles, a Vicente Sederberg partner who runs the cannabis law firm’s Florida office in Jacksonville.

And so as it opens retail stores, Columbia Care also is investing millions in Florida for cultivation and processing facilities. Company-wide, it can have up to 760,000 square feet of cultivation space to grow pot for its stores. The company operates in 15 jurisdictions from California to New York and the European Union. In Florida, it has 180,000 square feet in Arcadia and another 40,000 square feet in Lakeland. The company reported that its revenue doubled in its second quarter. Its average Florida customer purchase was $56.

Margins remain attractive to investors. Trulieve reported a gross margin of 65% in a recent quarter, though that was down from 74% in the year earlier. By comparison, gross margins in the alcohol, tobacco and pharma industries are 48%, 59% and 69%, respectively.

Given the youth of many companies, same-store evaluations aren’t relevant at present. Most players have small revenue and large losses as they expand, along with outsized market caps. Those market caps reflect bets by traders that growth will boom — and that pharmaceutical firms, tobacco and liquor companies or other buyers will vie to acquire the firms if the marijuana stigma dissipates.

Muddying the investment picture in Florida is the unsettled regulatory and legislative landscape. In July, the 1st District Court of Appeal tossed out as unconstitutional the state’s requirement that all marijuana operators be vertically integrated — “seed to sale.” The state Supreme Court will have to settle the issue. The “ambiguity needs to be cleared up,” says attorney Colin Roopnarine, a partner at Berger Singerman. “We’re at something of a standstill.”

In some states, the market for operators collapsed when more competition came. But Florida licenses still will be valuable, predicts Peebles. She says 22 operators is too few for Florida. “We’re not going to see the prices go down until we have more competition,” she says.

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