Medalist Diversified REIT, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; financial statements are unaudited. The company owned three properties: two retail centers and a 125-room Hampton Inn. It is externally managed and elected REIT tax treatment.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.713 million | $1.810 million | $3.252 million | $3.010 million |
| Property NOI | $846,053 | $820,473 | $1.533 million | $1.265 million |
| Net loss | $1.523 million | $509,377 | $2.363 million | $1.021 million |
| Net loss attributable to common shareholders | $1.059 million | $500,087 | $1.746 million | $950,962 |
| Loss per share, basic and diluted | $0.31 | $0.25 | $0.61 | $0.52 |
| Operating cash flow | Not separately presented | Not separately presented | $290,817 | $(273,454) |
- Q2 revenue declined 5.4% year over year; six-month revenue rose 8.0%. Retail revenue improved, while Hampton Inn revenue fell amid renovation work and increased competition.
- Property NOI margin was approximately 49% in Q2 2019 versus 45% in Q2 2018, and approximately 47% for the first half versus 42% a year earlier. NOI is a non-GAAP measure defined by the company.
- Operating expenses were $1.703 million in Q2 and $3.530 million for the first half. Interest expense was $511,000 and $1.017 million, respectively.
- First-half FFO was a loss of $1.226 million and AFFO was a loss of $569,000; Q2 FFO and AFFO were losses of $956,000 and $126,000, respectively. These are non-GAAP measures.
- At June 30, total assets were $58.973 million, liabilities were $34.892 million, and total equity was $24.081 million. Cash was $9.106 million and restricted cash was $1.564 million. The filing does not provide a conventional current ratio.
- Mortgages payable, net, were $33.243 million. The Hampton Inn’s $10.6 million mortgage is variable-rate (7.50% at June 30, subject to an interest-rate cap); Franklin Square’s $14.275 million loan is interest-only and matures in October 2021. Hanover Square’s $8.693 million loan has a 4.9% rate through January 2023, then resets subject to a 4.9% floor.
- Cash dividends declared were $0.175 per common share in both Q2 2019 and Q2 2018. The company reported 4,486,144 common shares outstanding at June 30.
Changes, outlook and notable items
- The $983,855 loss on Hampton Inn furniture, fixtures and equipment (FF&E) replaced during the property improvement plan was the principal unusual charge and contributed to the higher reported losses. No comparable charge was recorded in 2018.
- Six-month operating cash flow improved from use of $273,454 to generation of $290,817, with management citing a $429,981 increase in accounts payable and accrued liabilities. Investing used $1.502 million, including property-improvement spending; financing provided $7.761 million, principally from stock issuance.
- In May 2019, the company sold common shares at $4.80 per share, including an over-allotment and private placement, generating $8.627 million in net proceeds for the six-month period. The share count increased from 2,321,582 at year-end 2018 to 4,486,144 at June 30.
- The Hampton Inn property improvement plan had estimated total costs of $2.717 million in the financial-statement note. At June 30, estimated remaining costs were $524,284, expected to be covered by the remaining lender-held reserve of $525,096.
- Subsequent to quarter-end, the company reinstated its agreement to acquire the Clemson hotel for $9.75 million, and signed agreements to acquire a North Carolina retail center for $15.2 million and a South Carolina flex property for $6.7 million. Closings remained subject to conditions; completion was not assured. No formal earnings or operating guidance is provided.
- Management cited risks including reliance on equity markets and property rental receipts, refinancing and interest-rate exposure, regional concentration, tenant defaults or vacancies, hotel seasonality and competition, acquisition execution, and maintaining REIT qualification. The portfolio’s annualized base revenue was entirely concentrated in the Mid-Atlantic as reported.
- Management stated disclosure controls were effective as of June 30, 2019; no material changes to internal control over financial reporting were reported. The company reported no current litigation it believed would materially affect operations and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Hampton Inn renovations were completed on schedule and within the remaining reserve, and whether construction affected hotel occupancy and revenue as expected.
- The cause, accounting treatment and cash-flow implications of the $983,855 FF&E write-off, and the effect of ongoing capital spending on AFFO and distributions.
- Refinancing plans for the interest-only Franklin Square and Hampton Inn loans, including the 2020–2021 maturities and exposure to variable rates.
- Whether the three announced acquisitions closed, their financing and purchase terms, and their expected contribution to cash flow.
- The sustainability of the $0.175-per-share dividend given reported losses, negative AFFO and dependence on external equity for growth liquidity.
- The filing gives differing Hampton Inn improvement-plan total cost estimates: $2.717 million in the commitments note and $2.649 million in MD&A. Investors should verify the applicable budget and remaining obligations.
- Cash balances exceeded FDIC insurance limits by an aggregate $7.155 million at June 30, 2019; investors may wish to verify the company’s cash concentration and mitigation practices.