Medalist Diversified REIT, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2023 cover a REIT owning eight retail and flex properties in Virginia, North Carolina and South Carolina. The company sold its Clemson hotel in September 2022, so 2022 comparisons include hotel activity that is absent in 2023. On July 18, 2023, the company ended its external management agreement and moved to board-directed internal management.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $2.589 million | $2.841 million | $7.566 million | $8.341 million |
| Operating loss | $1.067 million | $0.881 million | $1.482 million | $1.279 million |
| Interest expense | $0.900 million | $0.989 million | $2.613 million | $2.705 million |
| Net loss attributable to common shareholders | $1.949 million | $1.754 million | $4.048 million | $3.759 million |
| Loss per common share | $0.88 | $0.80 | $1.82 | $1.77 |
| Company-defined property NOI (non-GAAP) | $1.936 million | $1.570 million | $5.468 million | $5.130 million |
Cash flow and liquidity. For the first nine months, operating cash flow was $416,000, down from $1.673 million. Capital expenditures were $1.144 million; cash, cash equivalents and restricted cash decreased $913,000 to $4.750 million. At September 30, unrestricted cash was $3.016 million and restricted cash was $1.734 million. The $1.5 million Wells Fargo line of credit had $1.0 million drawn, leaving up to $500,000 undrawn, subject to its terms.
Debt and equity. Mortgages had $61.262 million of principal outstanding ($60.617 million net of unamortized issuance costs); the company also had $1.0 million outstanding on its line of credit. The Parkway mortgage was variable-rate at 6.05% at quarter-end and is subject to an interest-rate cap. The Hanover mortgage rate reset to 6.94% in January 2023. Mandatorily redeemable preferred stock was recorded as a $4.631 million liability. Total stockholders’ equity fell to $12.844 million from $17.251 million at year-end 2022.
Material changes versus the prior comparable period
- Q3 revenue declined 9%, and nine-month revenue declined 9%, primarily because the 2022 periods included revenue from the hotel sold on September 29, 2022. Retail revenue increased, supported by Salisbury Marketplace and new leasing; flex revenue was nearly flat year to date.
- Despite higher property NOI, losses attributable to common shareholders widened in both comparisons. Management restructuring expense was $1.453 million in Q3 and $1.846 million year to date, including costs associated with the management termination and strategic-alternatives process.
- Nine-month operating cash flow decreased by $1.258 million. No property acquisitions occurred in 2023, versus the 2022 Salisbury Marketplace acquisition.
- Common dividends were $0.16 per share for the first nine months of 2023 versus $0.48 in 2022; no common dividend was paid in Q3 2023.
Outlook, commentary, risks and unusual items
- Management stated that it was probable the company could meet obligations due within one year of issuance and presented the statements on a going-concern basis. It identified $170,004 of accrued preferred dividends and $268,067 of mortgage principal payments due in the remaining three months of 2023; planned sources included cash, operations and potential dispositions.
- The board temporarily suspended preferred dividends in July 2023 while unpaid dividends continued to accrue. On October 18, the board declared second- and third-quarter 2023 preferred dividends, payable November 1, 2023.
- The company reported no formal earnings or operating guidance. In an October 6, 2023 letter, it said it was evaluating options to create stand-alone single-tenant net-lease assets from its portfolio and to explore acquiring such assets.
- Strategic discussions about a possible sale of interests in four properties ceased in August 2023. The manager termination agreement provided for $1.603 million in settlement payments, including a $1.25 million termination fee and deferred acquisition fees.
- Key risks include regional concentration (all annualized base revenue was from Virginia, North Carolina and South Carolina), tenant defaults or vacancies, anchor-tenant loss, refinancing and interest-rate risk, and dependence on financing access. The company disclosed compliance with stated debt covenants at September 30, 2023. It reported no material litigation or known material environmental contingencies.
- The company completed a 1-for-8 reverse stock split in May 2023 and regained Nasdaq’s minimum bid-price compliance. Its October 2023 repurchase authorization was expanded by 200,000 shares, at a maximum price of $6 per share; repurchases are discretionary.
Important facts for investors to verify
- Confirm the company’s liquidity against near-term payments, the June 2024 line-of-credit maturity, borrowing availability and covenant requirements.
- Review the 2027 mortgage maturities and the impact of higher rates on the Hanover and variable-rate Parkway debt.
- Assess whether leasing and property NOI improvements can offset corporate costs, interest and restructuring expenses.
- Verify preferred-dividend accruals and payment status, and the implications of the preferred stock’s mandatory redemption date of February 19, 2025.
- Reconcile Salisbury Marketplace occupancy: the filing gives 88.4% in one note and 91.2% in MD&A, both as of September 30, 2023.
- Track the company’s stated single-tenant net-lease strategy, any future asset sales or acquisitions, and whether planned capital or equity funding is realized.