Medalist Diversified REIT, Inc. — Q2 2022 Form 10-Q
Business context and period. Unaudited results cover the three and six months ended June 30, 2022, compared with the same 2021 periods. The externally managed REIT owned nine properties across retail, flex-industrial/office and hotel segments. It acquired Salisbury Marketplace in June 2022; its portfolio remained concentrated in Virginia, North Carolina and South Carolina.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $2.60 million | $2.98 million | $5.50 million | $5.65 million |
| Operating income (loss) | ($0.16 million) | $0.40 million | ($0.40 million) | $0.53 million |
| Net loss attributable to common shareholders | ($1.01 million) | ($0.68 million) | ($2.00 million) | ($2.96 million) |
| Loss per common share | ($0.06) | ($0.05) | ($0.12) | ($0.29) |
| Operating cash flow | Not provided by quarter | $1.57 million | $0.99 million |
- Q2 revenue declined 12.8%, principally because the Hampton Inn had been sold and Clemson University’s occupancy agreement at the Clemson hotel ended May 15, 2022. Six-month revenue fell 2.7%; higher retail and flex revenues from acquisitions partly offset lower hotel revenue.
- Property-level NOI, a non-GAAP measure, was $1.65 million in Q2 (versus $1.58 million) and $3.56 million for six months (versus $3.07 million). Consolidated operating margins were approximately -6.3% and -7.2%, respectively, compared with 13.5% and 9.3% in 2021.
- Six-month net loss improved by $0.96 million, mainly as 2021 included substantial noncash convertible-debenture amortization. Q2 net loss worsened by $0.37 million. Depreciation and amortization, impairments and debt-extinguishment costs weighed on 2022 operating results.
- Six-month investing cash outflow was $10.77 million, including the Salisbury acquisition; financing provided $7.59 million. Cash, cash equivalents and restricted cash totaled $5.78 million at June 30, including $2.48 million unrestricted and $3.30 million restricted. A $1.5 million revolving line of credit was undrawn.
- Total assets were $99.94 million, total liabilities $78.18 million and total equity $21.77 million. Mortgages payable, net, were $61.81 million, plus $7.62 million associated with assets held for sale. Scheduled principal and maturities totaled $70.34 million, including the $7.75 million Clemson hotel mortgage due October 6, 2022.
Material changes, outlook and risks
- The June Salisbury acquisition cost $10.03 million before capitalized acquisition costs. A new $18.61 million Wells Fargo mortgage facility financed that purchase and refinanced the Lancer Center and Greenbrier loans. It carries a fixed 4.50% rate, five-year term and financial covenants; management reported compliance at quarter-end.
- The Clemson Best Western property remained held for sale. In March, the company recorded a $175,671 impairment; a further $36,670 impairment related to intangible lease balances after two tenants defaulted and abandoned their premises. The hotel mortgage carries a 7.15% variable rate. Management said it might refinance if a sale was not completed, but could not assure refinancing success.
- After quarter-end, on July 26, 2022, the Clemson property’s contract purchaser terminated the purchase agreement. The filing states management remained committed to selling the property. Management concluded it was probable the company could meet obligations for one year from issuance, while identifying liquidity needs and refinancing as key considerations.
- The Clemson University occupancy agreement ended May 15; normal hotel operations reopened June 24. Management cautioned that revenues could remain affected as demand and marketing recover. COVID-19-related tenant concessions continued to affect rents, although tenants were current on deferred-rent repayments as of the filing date.
- On July 11, Nasdaq notified the company that its common-stock bid price had been below $1 for 30 consecutive business days. The initial compliance deadline was January 9, 2023; a reverse split was among options management might consider. There was no assurance of regaining compliance.
- Common dividends paid were $0.02 per share in Q2 and $0.04 for six months; the 8% Series A preferred stock is mandatorily redeemable and classified as a liability. The company repurchased 268,070 common shares for $278,277 and issued 1,445,400 shares under its standby equity purchase agreement for net proceeds of $1.54 million.
- Risks include dependence on tenant rent collections, hotel recovery, interest-rate exposure, debt maturities and refinancing, possible COVID-19 effects, and geographic concentration: all annualized base revenue was from Virginia, North Carolina and South Carolina. Management reported no current litigation, effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Clemson hotel is sold or refinanced and how the October 2022 mortgage maturity was addressed after the buyer terminated its contract.
- Unrestricted cash, access to financing and compliance with debt covenants, particularly the Wells Fargo facility’s liquidity requirement and the other mortgage covenants.
- Post-agreement hotel occupancy and revenue recovery, and trends in retail and flex rent collections, tenant defaults and concessions.
- Nasdaq bid-price compliance progress and any resulting capital actions, including a possible reverse stock split or further equity issuance.
- The effect of the preferred-stock redemption obligation, dividends and any additional common-share issuance on liquidity and per-share results.