We previously published Part 1 of our Covid-19 Investor Update, focusing on our Pineapple Farm in Panama. In Part 2, we looked at multiple Agricultural investments in Colombia. Part 3 focused on a few of our Multifamily investments in the United States.
This is the final Part 4 update on a boutique hotel investment in Puerto Rico and our Coffee Farm in Colombia. So let’s jump straight in.
In Q2 2019, alongside many of our Alliance members, we invested in a boutique hotel opportunity in Plaza Colon. This Opportunity Zone syndication project consisted of taking a 40,188 square foot property and converting it into a high-end hospitality offering comprising 60 hotel rooms and 4 luxury 2&3 bedroom Hotel Residences. With the additional development of a 3,500 square foot commercial space on the ground floor that will feature a restaurant and retail space to capitalize on foot traffic from the cruise ships docking just four blocks away.
Schematic Plans for the ground floor reception, lobby cafe, and rear restaurant/bar
The building also possesses one of the few 360 degree rooftops whereby we will open up a rooftop bar.
Schematic Plans for the rooftop bar & wet zone with 3600 views
Overall, this is an unparalleled opportunity in Old San Juan which lacks high-end luxury hotels and apartment inventory. The development had a construction timeline of 12-15 months, eventually opening in December this year (2020). Even with some delays during the permitting process, plans had been proceeding to schedule with the demolition phase coming to an end just as Covid-19 arrived.
Puerto Rico's Emergency Declaration regarding Covid-19
On March 15, 2020, Puerto Rico imposed a curfew and ordered most businesses and industries to shut down, including the construction industry. In accordance, all construction crews were stopped from working at Plaza Colon Hotel & Suites, and the site has been closed throughout the mandatory lockdown in Puerto Rico. During this time, the Lifeafar development team along with their various project partners continue to make progress on the branding and interior design of the property, along with other administrative tasks such as legal and management agreements. They also made a few revisions to enhance electrical and engineering drawings and have continued negotiating bids for the various scopes of work remaining to be completed, including drywall, electrical, mechanical and plumbing, and masonry, among others.
Eric and Karen discussing demolition plans
Puerto Rico announced on April 30, that the economy would start to reopen in a phased approach by sectors. Construction and manufacturing was permitted to restart on May 11, with strict health and safety guidelines in place. The lockdown for everyone else on the island will continue through at least May 25 with mandatory curfew from 7pm to 5am. On Friday, May 8, the contractor currently on site at Plaza Colon who is working on the demolition and structural repair, Hambleton Group, submitted their extensive COVID-19 Mitigation Plan to the Department of Labor of Puerto Rico. They expect to have a crew return to the job site this coming Monday, May 18, albeit a much smaller crew than we had on site prior to the shutdown. The project team is dedicated to maintaining a safe and sanitized work environment for the crews and professionals who will be working at the project site.
As a result of the pandemic, the project has to practically push back the planned opening date of the hotel, however Karen and I see some important upsides to that consequence in light of the current environment. The tourism industry has come to a halt worldwide over the past couple of months, but many analysts expect the industry and certain markets to climb back and experience a fairly rapid recovery, and we believe that to be the case as well for certain segments of tourism such as luxury hospitality. Although nobody can predict with any accuracy the exact length of delay, especially with the current level of economic uncertainty. But in the interim, the entire project team will continue to work as diligently as possible on developing all aspects of the project and on working toward a successful launch of the hotel. We believe there are some silver linings for the timing of the project for all of the investors involved in that it would have been much worse to experience the pandemic after opening. In fact, timing is on our side if delaying the opening a few months permit more time for the tourism markets to recover before we launch our grand opening.
Overall, we believe there will be an uneven recovery, with international tourism potentially being the last to come back. But Puerto Rico still offers an amazing Caribbean beach opportunity that many Americans can visit without needing a passport. And if we can deliver a unique luxury hotel experience in one of the most iconic locations in Old San Juan (established in 1509!) with fine dining and a rooftop bar to boot, we will have a paying audience.
View from the hotel rooftop looking towards a docked cruise ship
One of the additional reasons we invested in this project is due to the 500+ cruise ships that arrive in Puerto Rico each year, whether through homeport cruises or daytime cruise tourists spending the day and evenings in Old San Juan. Some of our tourism traffic will be in lock-step with the Cruise ship industry recovery, so we take solace in the fact that bookings are up for 2021 but not quite by as much as the press claims. Either way, many cruises cancelled in 2020 have been rescheduled for 2021 and we are hopeful due to these early data points. At the end of the day, people vote with their wallets and we can expect to see a ton of discounted cruise opportunities on offer to help with the recovery; our project will benefit from that strategy to recover passenger traffic.
Investors on the rooftop, the future home of a bar with 3600 views
Suffice to say, we remain optimistic about our investment in this project and will keep everyone in the loop on future developments and progress at Plaza Colon Hotel & Suites in Old San Juan.
Another agriculture syndication investment we made a year ago with our Alliance members was to help fund the purchase of three existing coffee farms in the Salgar region of Colombia, resulting in a 610-acre coffee farm with over a million coffee trees. Given Colombia is the #2 producer of Arabica coffee globally (after Brazil), the goal is to create a premium coffee brand for export to specialty roasters worldwide. In the second half of 2019, the Green Coffee Company (GCC) team raised additional capital for the project and acquired another 8 coffee farms with a total of 1,766 acres of farmland to bring our GCC to 2,385 acres and eventually 4.8 million trees!
Even though it is a tumultuous time due to Covid-19, our Colombian coffee farm hasn’t suffered compared to most other industries in Colombia. This is due to the fact that agriculture is an essential activity in Colombia, and business practices have not been halted during the course of this global pandemic by the government. And given GCC is currently in a period of project development, especially following the acquisition of the new farmland, most of the planned procedures and initiatives related to farm development have proceeded uninterrupted.
On a macroeconomic level, coffee consumption preferences will likely continue to change and evolve, but unlike other commodities, we expect the demand for the base product to remain relatively stable in the coming year – people love drinking coffee, no matter the economic situation!
At the beginning of this year, GCC had already started to adjust their sales model away from small to mid-sized roasters, as moving sufficient product through that channel was proving to be difficult. For that reason, these macroeconomic changes have simply accelerated the focus away from the smaller clients to the larger US importers and large-scale roasters. They recently hired Gabriel Chait to help GCC make this switch. Gabriel has sourced and sold coffee from all over the world to importers, distributors and large roasters, and has a wealth of experience in the industry. Prior to creating his own coffee sourcing and sustainability consulting company, Gabriel worked as the Director of Sustainability and Sourcing at Stumptown Coffee Roasters, an iconic specialty coffee brand found all over the U.S. We look forward to Gabriel helping navigate this environment to ensure the focus is on the correct sales channels to get our coffee into the cups of the end consumer.
For this upcoming year, GCC’s sales focus will be on two primary channels. First, GCC will be selling coffee at healthy margins to international exporters when pricing makes sense. In addition to the coffee produced on our farms, any coffee purchased from local farmers to augment production will be covered with local futures contracts. However, GCC continues to recognize that higher margins are found via overseas sales and this sales channel remains their priority. GCC expects to strengthen their existing partnerships and capitalize on the new connections Gabriel brings to the table during the remainder of this year with the goal of creating higher volume opportunities in the future. Especially as the combined farms will be producing significantly larger harvests in the years to come.
On a national level, the governing body that represents the coffee sector via the FNC, has worked hard to limit the extent to which COVID-19 has affected the sector in a variety of ways. While there has been a national quarantine for the last two months on the majority of industries operating within the Colombian economy, the coffee sector has always been one of the exceptions to the rule, and as such GCC has continued operating as normally as possible during this difficult period. This is not to say there haven’t been challenges. The national supply chain, particularly as it relates to getting supplies into the Salgar region, has been negatively affected and ports are facing significant delays. Labor shortages are also a threat, as municipalities are implementing more stringent measures to limit the spread of the virus. Additionally, the warmer and dryer conditions experienced in January have diminished the productivity of the 2020 half-harvest throughout Antioquia.
GCC has tried to operate as nimbly as possible in response to these conditions; whether it be working closely with the Salgar government to comply with the new restrictions including establishing safety protocols to protect the workers and their families before, during and after their work days are complete. Some of the GCC workers were actually on the local news discussing new biosecurity measures in the time of COVID-19; this demonstrates leadership from the farm’s management team. GCC has also been able to manage many of the supply delays others farms have faced in part thanks to a new partnership with Yara International. Including the ability to custom design the fertilizer to fit the needs of the soil on every farm, making the trees more resilient to the adverse weather conditions we’ve recently experienced. All said, the half harvest is currently underway (it will continue until June), and GCC has been able to operate successfully during the time of collection. Speaking to GCC’s quality control team, they are projecting half harvest production in the realm of 92,000 kg of parchment, a huge increase compared to last year 15,000 kg in the same timeframe. The team needs to remain nimble and responsive throughout the remainder of 2020 as we all fully expect the main harvest will present additional unique challenges to both labor and supplies.
Coffee Sector: Big Picture
Commodity pricing, while volatile, has risen both locally and internationally due to coffee prices spiking and countries hoarding due to the pandemic. Based on a recent update from the FNC, this price is expected to hold throughout the summer. This is in line with our farm’s experience as our sales team recently locked in a 15,000kg position with a local buyer for delivery at the end of June at pricing about 20% higher than this time last year. On the supply side, this price increase is largely due to current results of many coffee-producing countries which have lowered their production estimates and global supply chains struggling to weather the crisis (the FNC has not lowered Colombia’s production estimates yet). Brazil, the world’s largest coffee producer, has been severely affected by the pandemic, and is suffering port delays.
On the demand side, the sector benefits from the fact that demand for coffee is relatively inelastic, although we’ve never experienced this kind of pandemic. Whether it is at home or in a café, consumers will continue to purchase the product. That isn’t to say that buying patterns are not shifting dramatically before our eyes. Boutique roasters in the specialty coffee sector are struggling, forced to adapt to daily changes in the U.S. market. As seen on US news, cafes across the US are sitting practically empty as of the date of this blog post, and we fully expect that fewer people will want to pay $5 for a cup of coffee during these challenging times. However, global demand is offset by a surge in online and grocery store purchases for consumption at home.
We believe that it is still too early to tell exactly how demand for specialty coffee will change in the long-term as developing countries exit their lockdowns, but small roasters and cafes, especially those serving specialty coffee, will need to be proactive in getting consumers back once safety measures are lifted and we expect the environment to be challenging. From our own experience, talking to friends and family as some states start to open up, there will be a pent-up demand to resume ‘normal life’ again – the coffee shop has created a special role for remote workers (which is obviously going to climb post pandemic).
All of the existing investors in this deal understand the farm development undertaken the last 18 months after purchasing the initial farms and the time it has taken to plant new trees and bring the coffee up to the “specialty” quality level. To that end, with the new farms quadrupling the landholdings of the GCC, there is still a lot of work to be done to bring these additional 8 coffee farms up to the same standard.
The next few years are going to be focused on increasing productivity of standard and premium coffees on these new acquisition farms. GCC also recently hired a new head agronomist, Marino Restrepo, who has run coffee cooperatives and was Agronomy Director for Starbucks’ operations in Colombia. Marino was also heavily involved in the Starbucks Coffee and Farmer Equity (C.A.F.E.) Practices program in Colombia. Under Marino’s guidance at GCC, the new tree plantings, and land development will enable the farms to hit peak productivity in 2022, with the quality of the coffee continuing to improve after that. With regards to the wet mills, GCC will be contracting JM Estrada, a reputable construction company that recently built the two largest facilities in Colombia. Construction will take place during the off-harvest periods so as not to interrupt our ongoing operations, and is expected to take around two years to be fully operational. The goal here is to align the processing capacity with the timeline expected to reach maximum productivity across the farmland holdings.
A summary of our current GCC farm sustainability practices
The final thing to say about this syndication investment is that for the early investors, we all expected the first distribution this year. But as is sometimes the case, business plans change and the asset manager took advantage of the declining value of the Colombian Peso and the lower global commodity price to raise additional capital to expand the farm through acquisitions. This is great opportunity to gain strength through expanding the coffee production volume of our farm and even though we've now experienced delayed investor returns, we are happy to support this strategy as we are in this investment for the long-term.
Overall, these two investments are still very much in their major development phase and we look forward to these businesses hitting their stride in the coming years.
At that stage, we expect to add these syndication investments to our portfolio of asset-backed cash-producing assets that provide us a mix of diversified income, no matter the economic environment. If you'd like to learn how to invest in Real Estate and Agriculture so you can retain your wealth outside of the volatile stock market, please click here to schedule a call
All that remains is to wish everyone stays safe and fingers crossed for a quick economic recovery!
Peter & Karen