Business Context and Reporting Period
Company: Medalist Diversified REIT, Inc. (MDRR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Business Overview: An externally managed Real Estate Investment Trust (REIT) focused on acquiring, repositioning, and managing value-add commercial properties (retail, flex-industrial, and hotels) in secondary and tertiary markets in the southeastern United States. The company operates as an UPREIT structure.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Revenue | $6,589,951 | $1,724,657 |
| Net Loss (GAAP) | $(2,991,153) | $(968,548) |
| Net Loss Attributable to Common Shareholders | $(2,743,323) | $(847,919) |
| Funds from Operations (FFO) | $(744,892) | Not explicitly stated |
| Adjusted Funds from Operations (AFFO) | $(780,532) | Not explicitly stated |
| Cash and Cash Equivalents (End of Period) | $1,327,424 | $263,002 |
| Total Mortgages Payable (Net) | $33,236,397 | $24,419,268 |
| Dividends Declared per Common Share | $0.525 | $0.350 |
Material Changes vs. Prior Period
- Portfolio Expansion: Acquired an 84% tenant-in-common interest in Hanover Square North (retail) in May 2018 for a total investment of approximately $12.96 million. This added a third property to the portfolio alongside Franklin Square (retail) and Greensboro Hampton Inn (hotel).
- Revenue Growth: Total revenue increased by $4.87 million (282%) year-over-year, driven by full-year operations of 2017 acquisitions and the partial-year contribution from Hanover Square North.
- Increased Net Loss: Net loss widened by $2.02 million to $2.99 million. This was primarily due to increased depreciation and amortization ($1.3 million increase), share-based compensation expenses ($790,340), and a loss on impairment ($191,578) related to a tenant eviction at Franklin Square.
- Debt Structure: Repaid all short-term bridge loans ($2.18 million) used to finance the Greensboro Hampton Inn acquisition in early 2018. Assumed and increased mortgage debt for Hanover Square North.
- Equity Issuances: Raised approximately $9.29 million in net proceeds from common stock issuances in 2018, including an IPO in November 2018.
Guidance, Outlook, and Risks
- Outlook: Management intends to continue issuing equity to fund property acquisitions and working capital. A new S-11 registration statement was filed in January 2019 to sell up to 1,000,000 additional shares.
- Capital Expenditures: Significant renovations are ongoing at the Greensboro Hampton Inn (Property Improvement Plan) with estimated remaining costs of $1.57 million, largely funded by escrow reserves.
- Key Risks:
- Concentration Risk: 100% of annualized base revenues are derived from the Mid-Atlantic region.
- Tenant Concentration: Reliance on anchor tenants (e.g., Ashley Furniture, Marshalls, Old Navy) and the Hampton Inn TRS.
- Interest Rate Risk: The Greensboro Hampton Inn mortgage has a variable rate (LIBOR + 5%), though capped at 7% via an interest rate protection transaction.
- REIT Qualification: Failure to maintain REIT status would subject the company to corporate income taxes.
Investor Verification Checklist
- Occupancy Rates: Verify current occupancy levels for Franklin Square (92.5% as of 12/31/18) and Hanover Square North (96.7% as of 12/31/18) to ensure stability post-acquisition.
- Hampton Inn Renovations: Confirm the status and funding of the Property Improvement Plan (PIP) and whether escrow reserves are sufficient to cover the remaining $1.57 million in costs.
- Debt Covenants: Review compliance with Debt Service Coverage Ratio (DSCR) and Loan-to-Value (LTV) covenants, particularly for the Hanover Square North loan.
- Share-Based Compensation: Assess the impact of the $790,340 non-cash expense recorded for director and manager grants on future earnings.
- Dividend Sustainability: Evaluate the ability to maintain quarterly distributions given the negative AFFO of $(780,532) for the year.