Medalist Diversified REIT, Inc. — Q1 2020 Form 10-Q
Business context and period. The filing reports the three months ended March 31, 2020. The externally managed REIT owned six properties across retail, hotel and flex-industrial/office segments, compared with three properties in the year-earlier quarter. Results include acquisitions completed in 2019: Ashley Plaza, Clemson Best Western and Brookfield Center.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparator |
|---|---|---|
| Total revenue | $2.52 million | $1.54 million; up $983,825 (about 64%) |
| Operating loss | $914,130 | $288,383 loss |
| Interest expense | $918,132 | $506,074 |
| Net loss | $1.83 million | $840,486 |
| Net loss attributable to common shareholders | $1.72 million | $686,639 |
| Loss per common share | $0.38 | $0.30 |
| Operating cash flow | $16,784 provided | $84,822 provided |
| Investing cash flow | $163,246 used | $778,600 used |
| Financing cash flow | $897,265 provided | $187,235 used |
Property-level NOI, a non-GAAP measure, was $1.15 million versus $687,232; NOI margin was approximately 45.6% versus 44.7%. The hotel segment reported a $5,828 NOI loss, while retail NOI was $1.01 million and flex NOI was $142,593. Adjusted FFO was a loss of $341,598; the filing cautions that FFO and AFFO are non-GAAP measures.
At March 31, total assets were $83.08 million, total liabilities $64.10 million and total equity $18.98 million. Cash was $701,719 and restricted cash $2.12 million. Mortgage principal was $57.42 million ($56.72 million net of unamortized costs); the short-term line of credit had $550,000 outstanding. The balance sheet also included $3.88 million of mandatorily redeemable preferred stock classified as a liability. Common dividends paid were $0.125 per share.
Changes and notable items
- Revenue growth primarily reflected the three acquired properties; hotel revenue also included $376,918 from Clemson Best Western. Hampton Inn revenue fell $64,538 year over year, which management attributed to lower occupancy associated with COVID-19.
- Operating expenses rose $1.61 million, including $569,995 of immediately vested share-based compensation, higher depreciation and amortization, and expenses from the additional properties. Interest expense increased $412,058, largely with the acquisitions and preferred-stock financing.
- On February 19, the company issued 200,000 Series A preferred shares at $23 each, generating $4.60 million gross and $3.86 million net. The 8% preferred instrument is mandatorily redeemable in 2025; dividends are treated as interest expense under the filing’s accounting.
- The company increased its Hampton Inn ownership from 64% to 75% through an exchange of the prior owner’s interests for settlement of advances and Operating Partnership units.
- No investment-property or intangible-asset impairment was recorded in the quarter. No litigation or material environmental contingencies were identified.
Outlook, liquidity and risks
Management provided no numerical earnings or revenue guidance. It warned that COVID-19 could materially reduce rent collections, hotel revenue, cash flow and liquidity, and said the duration and extent of the effects were uncertain. As of the filing date, about 66% of retail tenants by leased area had temporarily closed; the company had collected about 58% of April retail base rent and reimbursements and 49% for Brookfield Center. It had not modified tenant leases at that time. Hotel occupancy dropped sharply: Hampton Inn occupancy was 33.32% in March and 25.36% in April 2020, versus 64.13% and 62.29% in 2019; Clemson Best Western was 26.96% and 24.86%, versus 67.30% and 47.37% in 2019.
Management said it was reducing hotel staffing and services and might consider suspending common dividends to preserve liquidity. The company had $701,719 in unrestricted cash at quarter-end and warned that reduced revenue could impair its ability to meet obligations. Risks include regional concentration in Virginia, North Carolina and South Carolina, tenant credit and lease risks, hotel travel exposure, interest-rate and refinancing risks, and dependence on external management.
Subsequent events: the short-term credit line was extended to May 31, 2020; the company obtained $129,600 and $176,300 in SBA PPP loans for its hotel operating subsidiaries, subject to potential forgiveness; and a May 8 Hanover Square refinancing increased principal to $10.5 million, reduced the initial fixed rate to 4.25%, and generated approximately $1.57 million of net proceeds for the company after specified distributions and closing payments. The Hampton Inn mortgage matures in November 2020, with two extension options; scheduled mortgage principal and maturities were $10.82 million for the remaining nine months of 2020.
Investor verification points
- Track actual tenant rent collections, deferrals, defaults and occupancy recoveries after the April figures disclosed in the filing.
- Confirm the short-term credit line’s status after its May 31, 2020 extension and the company’s capacity to fund obligations and distributions.
- Verify use of Hanover Square refinancing proceeds, PPP loan forgiveness or repayment, and the Hampton Inn mortgage extension or refinancing.
- Assess whether the 8% preferred dividend and common dividends remain sustainable given operating losses and limited unrestricted cash.
- Reconcile recurring property performance with reported losses, including the effects of acquisitions, $569,995 share compensation and increased interest and depreciation costs.