Medalist Diversified REIT, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The company is an externally managed REIT focused on retail, flex-industrial and limited-service hotel properties in the southeastern United States. At year-end it owned six properties: three retail centers, one flex center and two hotels. The financial statements received an unmodified audit opinion; the auditor highlighted COVID-19’s adverse effect on operations.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $9.28 million | $8.28 million |
| Operating loss | $5.74 million | $1.25 million |
| Net loss | $9.58 million | $3.80 million |
| Net loss attributable to common shareholders | $8.18 million | $3.02 million |
| Basic and diluted loss per share | $1.74 | $0.82 |
| Net operating income (non-GAAP) | $4.09 million | $3.92 million |
| Net cash from operating activities | $(1.68) million | $0.81 million |
| Capital expenditures | $0.41 million | $2.14 million |
| Net cash from financing activities | $5.12 million | $32.08 million |
- Revenue rose 12% as 2019 acquisitions contributed a full year of operations, partly offset by COVID-related weakness, particularly at the Hampton Inn.
- Hotel revenue fell to $3.34 million from $3.90 million; retail revenue rose to $5.15 million from $4.20 million; flex-center revenue rose to $0.79 million from $0.18 million.
- Operating expenses were $15.02 million, including $3.49 million impairment of assets held for sale, $0.43 million bad-debt expense, and $3.98 million depreciation and amortization. Interest expense increased to $3.96 million from $2.47 million.
- FFO was a loss of $1.88 million and adjusted FFO was a loss of $0.98 million; both are non-GAAP measures.
- Year-end cash was $2.86 million, plus $2.23 million restricted cash. Operating cash flow was negative, and financing supplied most of the year’s cash increase.
- Total assets were $79.27 million; total liabilities were $67.56 million; total equity was $11.71 million. Mortgages, convertible debentures, the short-term credit line and PPP debt had approximately $63.0 million of gross principal outstanding at year-end.
Material changes and operating developments
- Hotel demand deteriorated sharply. Hampton Inn occupancy declined to 44.4% from 60.6%, and its average daily rate fell to $84.10 from $113.41. Clemson Best Western reported 47.2% occupancy and a $59.08 average daily rate in 2020; its 2019 comparison includes prior-owner data.
- Retail and flex tenants received $310,118 in rent deferrals and $960,498 in rent abatements, including future-period concessions. The company recorded $431,143 of bad-debt expense. One Franklin Square tenant defaulted and abandoned its space; two retail tenants filed for bankruptcy.
- Franklin Square occupancy fell to 82.3% from 92.4%. Hanover Square was 100% occupied and Ashley Plaza 98% leased; Brookfield Center was 93.8% leased.
- Management recorded a $3.49 million impairment on the Hampton Inn after classifying it as held for sale, and a $223,097 impairment tied to a Franklin Square tenant default.
- The company issued $4.6 million of 8% Series A preferred stock, classified as a liability, and issued $3.5 million principal of convertible debentures in 2020. It also refinanced Hanover Square, increasing principal to $10.5 million and setting a 4.25% fixed rate through January 2023.
Liquidity, outlook and risks
- Management said it believed the company could meet obligations for the year following issuance and presented the financial statements on a going-concern basis. However, 2020 operating cash flow was negative and COVID-related revenue, collection and financing uncertainty remains significant.
- Major scheduled 2021 obligations included the $14.275 million Franklin Square mortgage maturity in October, a $325,000 credit-line balance due March 31, and convertible debentures. The filing’s maturity schedule lists $3.5 million of debentures due in 2021; after $3.0 million principal was converted by March 10, 2021, management identified $2.0 million remaining, reflecting the subsequent $1.5 million tranche issuance. The company also disclosed approximately $530,000 of scheduled mortgage principal payments for 2021.
- Management planned to refinance or extend maturing debt and cited cash, lender reserves, post-year-end debenture proceeds, possible property sales and operating cash as liquidity sources. The company had $2.86 million unrestricted cash and $2.23 million in lender reserves at year-end; restricted cash is not generally available for unrestricted corporate needs.
- The company contracted in February 2021 to sell Hampton Inn for $12.65 million and committed to a plan to sell Clemson Best Western. Completion and proceeds are not assured. Hampton Inn’s year-end asset carrying amount was $12.41 million, with $10.35 million net associated mortgage debt.
- After the $3.0 million debenture conversion, 1,577,075 common shares had been issued by March 10, 2021, creating dilution. A proposed Lancer Center acquisition was contingent on obtaining a firm loan commitment.
- The board suspended common dividends after the fourth-quarter 2019 declaration; the related $562,357 was paid in March 2020. It paid $344,444 in preferred dividends during 2020. The 8% preferred stock has a $5 million liquidation preference and is mandatorily redeemable in February 2025.
- Other material risks include tenant defaults and vacancies, concentrated exposure to Virginia, North Carolina and South Carolina, hotel seasonality, interest-rate and LIBOR transition risk, REIT qualification, environmental liabilities, and dependence on the external manager. Management reported compliance with Hanover Square loan covenants at year-end.
Key facts investors should verify
- Whether Franklin Square’s $14.275 million mortgage was refinanced or extended on acceptable terms, and how subsequent debt conversions affect the remaining 2021 maturity.
- Whether the Hampton Inn and Clemson Best Western sales closed, at what prices, and the net cash available after debt and transaction costs.
- Current hotel and retail operating trends, rent collections, tenant concessions, vacancies, defaults and recoveries of deferred rent.
- Unrestricted liquidity and cash burn, including availability restrictions on lender reserves and the status of the Hampton Inn PPP forgiveness application.
- Further dilution from convertible debentures, future capital raises, and the company’s ability to meet preferred dividends and the 2025 redemption obligation.