Medalist Diversified, Inc. quarterly report, Q1 FY2024

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Medalist Diversified REIT, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. The company owns and operates retail, flex-industrial and single-tenant net lease properties and reports as a REIT. Financial statements are unaudited.

Financial performance and position

  • Revenue: $2.572 million, up $111,000 (4.5%) year over year. Retail revenue was $1.850 million; flex-center revenue was $664,000; single-tenant net lease revenue was $58,000.
  • Property NOI: $1.977 million, versus $1.737 million; reported NOI margin was approximately 76.9% of revenue. NOI is a company-defined non-GAAP measure.
  • Profit: Net income was $1.933 million, compared with a $1.234 million net loss. Net income attributable to common shareholders was $1.357 million, or $0.61 per basic share and $0.60 diluted. Results included a $2.820 million gain on the Hanover Square shopping-center sale.
  • Funds from operations: FFO was $178,000 versus negative $41,000; adjusted FFO was $230,000 versus negative $658,000. Both are non-GAAP measures.
  • Cash flow: Operating cash flow was $492,000, compared with $451,000. Investing activities provided $2.738 million, principally from the Hanover Square sale; financing activities used $1.904 million. Cash and restricted cash totaled $5.136 million at quarter-end, including $3.637 million unrestricted cash.
  • Debt and liquidity: Mortgages payable were $51.138 million gross principal ($50.595 million net of issuance costs). The balance sheet reports no line-of-credit balance at March 31. The $4.758 million net carrying value of mandatorily redeemable preferred stock is also classified as a liability; $5.0 million is due for redemption on February 19, 2025. Total liabilities were $58.269 million and total assets $75.981 million.
  • Dividends: Common dividends paid were $0.01 per share in Q1 2024, versus $0.08 in Q1 2023. A $0.02 common dividend was paid April 25, 2024. The 8% preferred stock dividend is $0.50 per share per quarter.

Material changes versus Q1 2023

  • Revenue increased 4.5%, with flex-center growth of $95,000, partly offset by lower revenue at certain retail properties and the Hanover Square sale.
  • Property operating expenses fell by $130,000. Overall operating expenses declined $227,000, despite $278,000 of share-based compensation and $180,000 higher corporate general and administrative expense.
  • Common-shareholder results improved by $2.579 million, substantially reflecting the Hanover Square gain and the absence of prior-year restructuring and impairment charges. Excluding the sale gain, reported net income would be materially lower.
  • The company sold the Hanover Square shopping center on March 13 for $13.0 million less $85,000 of repair credits, repaid its mortgage and recorded the $2.820 million gain. It retained the outparcel and acquired its partner’s 16% interest in that land.
  • On March 28, the company acquired the 100%-leased Citibank property for $2.4 million, paid through issuance of $2.4 million of operating partnership units. The seller was controlled by the company’s CEO, making this a related-party transaction.

Outlook, risks and unusual items

  • Management concluded that the company is likely to meet obligations arising within one year of filing and presented the statements on a going-concern basis. However, it needs additional liquidity for the $5.0 million preferred-stock redemption in February 2025. Management cited cash, operating cash flow and capital-expenditure management as potential sources, and also identified possible new preferred stock, debt or equity financing; it cautioned that sufficient funding is not assured.
  • The $1.5 million Wells Fargo line of credit matured June 9, 2024. The filing says the company was discussing an extension, with no assurance of success. The line is secured by three properties.
  • Most debt is fixed-rate, but the Parkway mortgage is variable-rate (7.05% at quarter-end) and partly hedged by an interest-rate cap. Refinancing risk remains, including a $17.3 million scheduled principal payment in 2027.
  • Approximately 99% of annualized base revenue was concentrated in Virginia, North Carolina and South Carolina. Risks include regional economic conditions, tenant defaults or vacancies, interest rates, refinancing, property costs and REIT qualification.
  • Management reported effective disclosure controls and internal control over financial reporting, no material litigation, and no covenant breaches identified; it stated it believed the applicable mortgage covenants were met.
  • No quantified earnings or revenue guidance was provided.

Key facts investors should verify

  1. Line-of-credit inconsistency: The balance sheet and cash-flow statement indicate the $1.0 million balance was repaid in Q1 and was zero at March 31, while the MD&A’s Recent Trends section says $1.0 million was outstanding at March 31. Confirm the actual balance, repayment timing and subsequent extension or refinancing.
  2. Preferred redemption funding: Verify the plan and committed sources for the $5.0 million February 2025 redemption, including any financing, asset sales or cash-flow assumptions.
  3. Earnings quality: Assess recurring operating performance and cash generation apart from the $2.820 million property-sale gain and non-GAAP FFO/AFFO adjustments.
  4. Related-party acquisition: Review the Citibank purchase terms, valuation and approval process for the transaction with an entity controlled by the CEO.
  5. Portfolio and debt exposure: Monitor leasing, occupancy, tenant credit, regional concentration, variable-rate debt and upcoming maturities.