Medalist Diversified REIT, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The REIT owned six properties across retail, flex/industrial-office, and hotel segments in the southeastern United States and was externally managed by Medalist Fund Manager, Inc.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Total revenue | $2.672 million | $2.528 million; up 5.7% |
| Operating income (loss) | $125,038 | $(914,130) |
| Net loss | $(2.308) million | $(1.833) million |
| Net loss attributable to common shareholders | $(2.278) million; $(0.39) per share | $(1.724) million; $(0.38) per share |
| Property NOI, non-GAAP | $1.489 million | $1.151 million |
| Net cash from operating activities | $206,818 | $16,784 |
| Cash and restricted cash at quarter-end | $6.351 million, including $3.681 million unrestricted | $2.823 million at March 31, 2020 |
| Total assets / total liabilities | $80.130 million / $66.573 million | Assets were $79.272 million at December 31, 2020 |
Revenue increased as hotel revenue rose $338,517, largely from the Clemson Best Western property’s university lease. Retail revenue fell $182,649, primarily due to COVID-related rent abatements, while flex revenue declined $12,325. Total operating expenses decreased $895,625, including lower hotel costs, share-based compensation and depreciation and amortization. Interest expense rose $1.516 million to $2.434 million, principally from amortization and write-offs of convertible-debenture discounts, issuance costs and beneficial conversion features. The company reported no common dividend for Q1 2021, versus $0.125 per share in Q1 2020.
Debt included $40.380 million of mortgages, net, $17.976 million of mortgage debt associated with assets held for sale, $986,837 of convertible debentures, a $325,000 line of credit and a $176,300 PPP note. The company had $21.013 million of future minimum tenant rents under noncancelable leases. Restricted cash is not generally available for unrestricted operating needs.
Material changes and unusual items
- The Hampton Inn and Clemson Best Western properties were classified as held for sale. Their related assets totaled $22.094 million and associated mortgage liabilities totaled $17.976 million at March 31. Hampton Inn had a previously recorded $3.494 million impairment in 2020; no additional impairment was recorded in Q1 2021.
- The Hampton Inn sale contract, at $12.65 million, was terminated on April 19, 2021 after the buyer’s due-diligence period. The company disclosed no assurance that either hotel sale would be completed.
- During Q1, $3.75 million principal and $49,268 accrued interest on convertible debentures converted into 2,074,775 common shares. The remaining $1.25 million principal converted after quarter-end; as of May 14, no debenture principal remained outstanding.
- On April 13, the company issued 8 million common shares at $1.50 per share for estimated net proceeds of $10.919 million. On May 14, it completed the $10.1 million Lancer Center Shopping Center acquisition, exclusive of closing costs and subject to a $200,000 repair credit.
- The $325,000 line of credit was repaid on April 21. The company’s $176,300 PPP loan forgiveness application remained pending; forgiveness was not assured.
Outlook, liquidity and risks
Management said hotel operating results compared with 2019 were expected to remain depressed through 2021 and potentially beyond. It warned that COVID-19, travel patterns, tenant demand and possible restrictions could continue to affect hotel and retail/flex revenue, collections, cash flow and distributions. Hampton Inn occupancy and rates remained affected by the pandemic; Clemson’s unusually high Q1 occupancy reflected its university lease, which was scheduled to end May 5, 2021.
The Franklin Square mortgage, with $14.275 million principal, was due in October 2021. Management planned to seek refinancing but cautioned that success was not guaranteed. The company also cited remaining 2021 mortgage principal payments, potential capital spending and the PPP loan if not forgiven. It expected to address liquidity through refinancing, capital raises, possible dispositions and operating cash. Management concluded that it was probable the company could meet obligations over the year following issuance, and the statements were prepared on a going-concern basis. The board had not declared a common dividend since the dividend paid in March 2020 and said it would continue to evaluate distributions.
Most important facts for investors to verify
- Whether the Franklin Square mortgage was refinanced or otherwise addressed before its October 2021 maturity, and on what terms.
- Whether the hotel dispositions proceeded after the Hampton Inn contract termination, and the final sale proceeds and debt repayment effects.
- How the $10.919 million equity proceeds and Lancer Center acquisition affected liquidity, leverage and future operating cash flow.
- Whether tenant rent deferrals and abatements were collected or resulted in further concessions, defaults or vacancies; the filing reports $109,818 of Q1 2021 rent abatements.
- Whether the PPP loan was forgiven and whether the company could resume common dividends while meeting preferred-stock and debt obligations.