Medalist Diversified REIT, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The REIT owned six retail, hotel, and flex/industrial properties in North Carolina, South Carolina, and Virginia; three properties were acquired in 2019 and contributed to the year-over-year comparisons.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $2.28 million | $1.91 million | $6.54 million | $5.16 million |
| Operating loss | $426,000 | $138,000 | $2.11 million | $1.40 million |
| Interest expense | $977,000 | $573,000 | $2.87 million | $1.59 million |
| Net loss attributable to common shareholders | $1.29 million | $606,000 | $4.58 million | $2.35 million |
| Loss per common share | $0.27 | $0.13 | $0.98 | $0.69 |
- Revenue increased about 20% in Q3 and 27% year to date, primarily reflecting the additional properties. Hotel revenue was nearly flat year over year in both periods as growth from the newly acquired Clemson hotel offset weaker Hampton Inn results.
- Q3 property NOI, a non-GAAP measure, was $1.01 million versus $903,000; nine-month NOI was $2.96 million versus $2.44 million. Hotel properties reported negative NOI of $8,000 for Q3 and $61,000 for the first nine months of 2020.
- Operating expenses rose to $2.71 million in Q3 and $8.65 million year to date. Nine-month expenses included $570,000 of share-based compensation, a $223,000 impairment charge tied to a defaulting retail tenant, and higher depreciation and amortization from acquisitions.
- For the nine months, operating cash flow was negative $1.51 million, investing cash flow was negative $285,000, and financing cash flow was positive $2.78 million. Cash and restricted cash totaled $3.05 million at September 30, including $966,000 of unrestricted cash and $2.09 million of restricted cash.
- At September 30, total assets were $81.58 million, total liabilities $66.04 million, and total equity $15.53 million. Net mortgages were $58.75 million; mortgage principal before unamortized issuance costs was $59.30 million. The company also had a $550,000 line of credit, $306,000 of SBA PPP loans, and $3.97 million of mandatorily redeemable preferred stock classified as a liability.
- Common dividends were suspended for Q3; $0.125 per share was paid during the first nine months of 2020, compared with $0.35 in the comparable 2019 period. The 8% Series A preferred stock continued to receive quarterly dividends.
- Management reported nine-month FFO of negative $1.73 million and AFFO of negative $1.18 million; Q3 FFO was negative $413,000 and AFFO negative $454,000. These are non-GAAP measures and are not substitutes for operating cash flow.
Material changes and management commentary
- COVID-19 disrupted hotel travel and retail tenant activity. Q3 rent and common-area-maintenance collections were about 85% of contractual amounts in each month from July through September. Retail tenants received deferrals and abatements; deferred rents were generally to be repaid by December 2022.
- Hotel occupancy and room rates weakened materially, particularly at Clemson. Management expected depressed travel and consumer demand to continue, with uncertain duration and effects on collections, cash flow, asset values, and distributions.
- A Franklin Square tenant abandoned its premises and defaulted; the company wrote off related assets and recorded the impairment. One Ashley Plaza tenant remained in bankruptcy protection, with an amended lease not yet signed as of the report date. The filing also describes a separate bankruptcy-related lease restructuring and abatements.
- Management stated it was probable the company could meet obligations falling due within one year of the financial statement issuance date and presented the statements on a going-concern basis. No formal earnings or acquisition guidance was provided. The board said it would continue to evaluate the common dividend and could temporarily suspend distributions.
- Subsequent to quarter-end, the Hampton Inn mortgage was extended to May 2022 after a $200,000 principal paydown and $250,000 reserve deposit; its minimum rate increased from 6.10% to 6.50%, and its LIBOR spread rose from 5.00% to 6.25%. The short-term line of credit was reduced to $325,000 and extended to March 2021.
- The company agreed to issue up to $5 million of convertible debentures at 5% interest, maturing one year after issuance. It received $1.27 million net from the initial $1.5 million tranche. Conversion pricing is subject to a market-price formula, creating potential dilution; later tranches were conditional on registration and shareholder approval.
- Management stated it believed the SBA PPP funds had been used in accordance with forgiveness criteria; forgiveness was not confirmed in the filing. The Franklin Square mortgage, $14.28 million, remained due October 2021, and management said refinancing efforts were planned but not guaranteed.
Key investor verification points
- Track rent collections, receivable allowances, tenant deferrals and abatements, and the status of the defaulted or restructured retail leases.
- Assess hotel recovery using occupancy, average daily rates, and property-level NOI, especially at Clemson and Hampton Inn.
- Confirm cash availability after restrictions and reserves, ongoing operating cash burn, and the company’s ability to fund debt service and property needs.
- Verify completion and terms of the convertible-debenture tranches, conversion-related dilution, and subsequent common-share count.
- Monitor the refinancing or repayment plan for the Franklin Square mortgage and compliance with mortgage covenants; confirm PPP loan forgiveness outcomes.
- Review the sustainability of preferred dividends and any reinstatement or further suspension of common dividends.