Business context and reporting period
Medalist Diversified REIT, Inc. is an externally managed REIT focused on retail, flex-industrial/office and limited-service hotel properties in the southeastern United States. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. The company reported seven properties at quarter-end; it sold the Hampton Inn on August 31 and classified its Clemson hotel as held for sale.
Financial performance and position
- Revenue: Third-quarter revenue was $3.04 million, up 29% from $2.36 million. Nine-month revenue was $8.69 million, up 26% from $6.88 million. Growth reflected hotel recovery and new properties, partly offset by weaker retail and flex reimbursements.
- Profit and margins: Third-quarter net loss attributable to common shareholders was $872,000, or $0.05 per share, versus a loss of $1.29 million, or $0.27 per share. Nine-month common-shareholder loss was $3.83 million, or $0.32 per share, versus $4.58 million, or $0.98 per share. Operating income improved to $72,000 for the quarter and $598,000 for nine months, from operating losses in the comparable periods. Property NOI, a company-defined non-GAAP measure, was $1.58 million for the quarter and $4.65 million for nine months, versus $1.01 million and $2.96 million, respectively.
- Cash flow: Nine-month operating cash flow was positive $643,000, compared with cash used of $1.51 million in 2020. Investing activities used $11.29 million, primarily for acquisitions, partly offset by $2.14 million in property-sale proceeds. Financing activities provided $17.08 million, principally from common-stock proceeds and mortgage financing.
- Liquidity: September 30 cash was $8.53 million, with another $3.00 million restricted for reserves, escrows and deposits. Management concluded it was probable the company could meet obligations over the following year. The company reported $23.49 million of total equity and $89.82 million of total assets.
- Debt and preferred stock: Mortgage debt was $51.02 million net on properties held for use and $7.62 million net associated with assets held for sale. Total net mortgage debt was therefore $58.63 million. The 8% Series A preferred stock is classified as a liability; its net carrying amount was $4.17 million, with a $5 million liquidation preference and mandatory redemption in February 2025. Nine-month interest expense rose to $4.61 million from $2.87 million, largely due to non-cash convertible-debenture discount and issuance-cost charges.
- Capital and distributions: An April common-stock offering of 8 million shares at $1.50 per share raised $10.89 million net. The $5 million convertible debentures and $58,788 accrued interest were converted into 3,181,916 common shares. The company paid a $0.02-per-share common dividend during the nine-month period.
Material changes versus the prior comparable period
- Revenue and property NOI increased, supported by recovery in hotel activity and the acquisitions of Lancer Center and Greenbrier Business Center. The new properties contributed revenue beginning in 2021.
- The Hampton Inn sale for $12.9 million generated a reported gain of $124,641; its mortgage was repaid at closing. The company recorded no impairment in 2021, compared with a $223,097 tenant-related impairment in the first nine months of 2020.
- The company’s common-share count increased substantially following the 8-million-share offering and conversion of debentures. This affects comparability of per-share results.
- Nine-month operating cash flow improved to positive territory. However, net loss remained significant and interest expense increased, principally due to convertible-debt accounting charges.
Outlook, commentary and risks
- No quantified earnings or revenue guidance was provided. Management said retail and flex rent collections had stabilized, but COVID-19, variants, tenant demand and travel patterns could continue to affect revenue, liquidity and distributions. Hotel results were expected to remain below 2019 levels through 2021 and potentially longer.
- The Clemson Best Western was leased to Clemson University through May 2022, supporting reported occupancy and revenue; management cautioned that this performance may not continue after the lease ends. The company planned to sell the property, but gave no assurance that a sale would be completed.
- Retail tenants received rent deferrals and abatements. Cumulative abatements were $676,350 through September 30, 2021; deferred rent and tenant creditworthiness remain collection risks. The company’s properties are concentrated in Virginia, North Carolina and South Carolina, representing all portfolio annualized base revenue.
- Franklin Square’s mortgage matured in October 2021. After a short forbearance period, the company refinanced it on November 8, 2021 with a $13.25 million, fixed-rate 3.808% loan maturing in 2031, using $2.24 million of cash for closing costs and repayment of the prior loan balance.
- Other subsequent events included the November 1 acquisition of the Parkway Property for $7.3 million and payment of a $0.02 common dividend and a $0.50 preferred dividend on October 27, 2021.
- Management stated the financial statements were prepared on a going-concern basis and concluded the company could meet obligations for the next year. Hanover Square mortgage covenants were reported as compliant. The filing reported no current litigation considered material, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether the Clemson hotel sale is completed, on what terms, and what operating results follow the Clemson University lease’s May 2022 expiration.
- Actual rent collections, tenant concessions, occupancy and leasing trends, particularly given COVID-related abatements and regional concentration.
- Liquidity after the Parkway acquisition and Franklin Square refinancing, including use of cash and upcoming debt principal requirements.
- The sustainability of operating cash flow and the ability to fund common and preferred dividends while reporting recurring losses and negative FFO/AFFO; nine-month FFO was negative $1.59 million and AFFO negative $77,000.
- The impact of share issuance and potential future equity raises on dilution, per-share performance and capital availability; the effective shelf registration permits up to $150 million of common-stock issuance.
- Preferred-stock obligations, including the 8% cumulative dividend, change-of-control redemption rights and February 2025 mandatory redemption date.