Medalist Diversified REIT, Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2023, compared with Q1 2022. The externally managed REIT owned eight retail and flex properties in Virginia, North Carolina, and South Carolina. The Clemson hotel sale closed in September 2022, so the company had no hotel revenue in Q1 2023. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $2.461 million | $2.904 million |
| Operating loss | $341,000 | $234,000 |
| Net loss | $1.234 million | $980,000 |
| Net loss attributable to common shareholders | $1.221 million; $0.07 per share | $989,000; $0.06 per share |
| Net operating income (NOI, non-GAAP) | $1.737 million | $1.907 million |
| Funds from operations (FFO, non-GAAP) | $(41,000) | $387,000 |
| Adjusted FFO (AFFO, non-GAAP) | $(658,000) | $217,000 |
| Cash from operating activities | $451,000 | $693,000 |
| Capital expenditures | $648,000 | $366,000 |
| Cash, including restricted cash, at quarter-end | $4.985 million | $8.079 million |
Revenue fell about 15%; operating and net losses widened. Operating margin was approximately negative 13.8%, versus negative 8.1% in the prior-year quarter. Operating cash flow less capital expenditures was approximately negative $197,000 in Q1 2023. The common dividend paid was $0.01 per share, compared with $0.02 in Q1 2022.
At March 31, 2023, total assets were $86.5 million, total liabilities $69.3 million, and total equity $17.3 million. Mortgages payable, net, were $61.1 million; gross scheduled principal was $61.8 million. Unrestricted cash was $3.048 million, with $1.937 million of restricted cash. A $1.5 million Wells Fargo line of credit had no balance outstanding. Approximately $26.0 million of principal payments were scheduled for 2027, the largest stated maturity year.
Material changes versus Q1 2022
- Total revenue decreased $443,000, principally because the sold Clemson hotel contributed $765,000 in Q1 2022 and nothing in Q1 2023. Retail revenue increased $367,000, including contributions from Salisbury Marketplace and new leasing at Franklin Square; flex revenue declined $44,000, reflecting tenant turnover.
- Investment-property NOI decreased about $170,000, mainly due to the hotel sale and weaker flex results. Total operating expenses declined $337,000, partly because Q1 2022 included hotel expenses, share-based compensation, and a $176,000 held-for-sale impairment.
- Legal, accounting, and other professional fees increased $307,000 to $767,000. Management attributed much of the increase to work on the strategic-alternatives review.
- Interest expense increased $23,000 to $864,000. The higher rate on the Hanover Square mortgage, effective January 2023, contributed; the Parkway rate cap partially reduced interest expense.
- Operating cash flow declined $242,000. Investing outflows rose to $648,000, while financing activities used $481,000, including $302,000 of mortgage principal payments and $179,000 of dividends and distributions.
Outlook, risks, and unusual items
- Strategic review: An independent-director Special Committee is exploring alternatives including a business combination, asset sale, joint venture, or restructuring. The company reported active discussions with potential parties as of April 18, 2023, but gave no transaction assurance or financial guidance.
- Nasdaq listing: The stock had not regained the $1 minimum bid-price requirement and received an extension through July 10, 2023. A 1-for-8 reverse split was completed May 3, 2023; the filing says there was no assurance of continued Nasdaq listing if compliance was not achieved.
- Liquidity and debt: Management concluded it was probable the company could meet obligations due within one year. Liquidity sources cited include cash, operating receipts, a fully undrawn $1.5 million line, and possible asset sales or equity issuance. The Wells Fargo line maturity was extended after quarter-end to June 9, 2024. The filing reports management believed debt covenants were met.
- Property and financing risks: All property base revenue was concentrated in Virginia, North Carolina, and South Carolina. Risks include tenant defaults or vacancies, anchor-tenant loss, local economic conditions, refinancing and interest rates, and potential lingering effects of COVID-19. Most long-term debt was fixed-rate or rate-capped; Parkway’s mortgage was variable-rate and referenced LIBOR, with a transition to a replacement benchmark under review.
- Other items: A tenant default and abandonment led to a $36,743 impairment loss, including write-offs of lease-related intangibles. No material litigation or environmental contingencies were reported. The filing states disclosure controls and internal control over financial reporting were effective, with no material quarterly change in internal controls.
Important facts for investors to verify
- Progress and outcome of the Special Committee review, including any transaction terms, costs, or effect on operations.
- Post-split Nasdaq bid-price compliance and the status of the July 10, 2023 deadline.
- Cash generation, capital spending, tenant collections and leasing, particularly flex-property vacancies and the defaulting tenant.
- Compliance with mortgage covenants, the 2027 maturity concentration, and refinancing options and costs.
- Capacity to fund dividends, scheduled debt service, and property improvements without relying on uncertain asset sales or equity issuance.
- Whether the company’s reported non-GAAP NOI, FFO, and AFFO reconciliations and definitions are comparable with other REITs.