Medalist Diversified REIT, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; this is an annual report, not a standalone fourth-quarter filing. The company is an externally managed REIT focused on income-producing retail, hotel, and flex-industrial properties in the southeastern United States. At year-end, it owned interests in six properties. The audited financial statements received an unqualified opinion.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $8.27 million | $6.59 million |
| Operating loss | $1.25 million | $1.06 million |
| Net loss | $3.80 million | $2.99 million |
| Net loss attributable to common shareholders | $3.02 million; $0.82 per share | $2.74 million; $1.39 per share |
| Operating cash flow | $0.81 million provided | $0.42 million used |
| Cash and restricted cash at year-end | $2.07 million, including $0.61 million unrestricted | $4.12 million |
| Net mortgages payable | $56.70 million | $33.24 million |
- Revenue increased 25.5%, reflecting a full year of Hanover Square ownership and the 2019 acquisitions of Ashley Plaza, Clemson Best Western, and Brookfield Center. The new properties contributed only part-year revenue.
- Property-level NOI, a non-GAAP measure, rose to $3.92 million from $3.00 million. Hotel NOI declined to $0.74 million from $1.07 million, while retail NOI increased to $3.05 million. Total NOI was approximately 47% of revenue.
- Net loss widened despite revenue growth. Key contributors included a $0.98 million loss on disposal of Hampton Inn furniture, fixtures and equipment (FF&E), higher depreciation and amortization, and increased interest expense. The FF&E disposal related to the hotel’s property improvement plan.
- FFO was negative $29,794 and AFFO was negative $148,096; both are non-GAAP measures. The filing cautions that its AFFO may not be comparable with measures reported by other REITs.
- Cash used in investing was $34.93 million, including $32.79 million for acquisitions and $2.14 million in capital expenditures. Financing provided $32.08 million, including $8.43 million of net common-stock proceeds and $23.44 million of net mortgage proceeds.
- At year-end, total debt principal was $60.32 million, including $57.47 million of mortgage principal, a $2.00 million short-term line of credit, and $0.85 million of related-party notes. Approximate scheduled 2020 principal and maturities totaled $13.72 million; 2021 maturities totaled $14.78 million. Hampton Inn and Franklin Square loans mature in 2020 and 2021, respectively.
Changes, outlook, and risks
- The company acquired Ashley Plaza, Clemson Best Western, and Brookfield Center in 2019, expanding the portfolio and increasing leverage. Year-end occupancy was 98.0% at Ashley Plaza, 93.8% at Brookfield Center, and 100% at Hanover Square. Hampton Inn occupancy fell to 58.6% from 67.6%; Clemson Best Western reported 39.4% for 2019, which includes only the period before the September acquisition.
- Management said COVID-19 was already reducing hotel revenue beginning in March 2020 and anticipated continued hotel and retail impacts, with the magnitude and duration uncertain. Cost reductions were underway, but management could not quantify offsetting savings or confirm government aid. The company warned that cash flow and liquidity could be materially adversely affected.
- The board was expected to reconsider common and preferred dividends in light of COVID-19, including possible elimination, suspension, or significant reduction. The 2019 common dividend was $0.525 per share; a further $0.125 dividend was paid in March 2020. No specific operating or earnings guidance was provided.
- Subsequent events: in January 2020, the company’s Hampton Inn interest increased from 64% to 75% through settlement of advances and issuance of 93,580 OP units. In February 2020, it issued 200,000 8.0% cumulative redeemable preferred shares at $23 per share, receiving $4.10 million net. It repaid the year-end line of credit and related-party notes on February 20, then extended the credit line and drew $550,000 on March 3 for working capital and dividends.
- Risks include hotel and retail demand weakness, concentrated regional exposure, anchor-tenant and lease-renewal risk, interest-rate exposure on variable-rate debt, refinancing needs, limited liquidity, and reliance on the external Manager. The company is externally managed, and acquisition and asset-management fees are payable to the Manager. Management reported no material litigation or known material environmental liabilities.
- Management concluded disclosure controls were effective. The filing includes no auditor attestation of internal control over financial reporting, as permitted for the company’s filer status.
Important facts for investors to verify
- Current hotel performance and rent collections after the COVID-19 disruption, including the Hampton Inn’s occupancy decline and Clemson’s limited ownership-period data.
- Liquidity, covenant compliance, and refinancing or extension plans for the Hampton Inn and Franklin Square loans, as well as the full 2020 debt schedule.
- Whether common and preferred dividends are maintained, reduced, suspended, or eliminated, and the cash available to fund them.
- Lease-renewal exposure, particularly Hanover Square leases representing a substantial share of reported rent expiring in 2022, and major tenant concentration at retail and flex properties.
- Updated terms and use of proceeds for the Series A preferred issuance, subsequent credit-line borrowing, and the company’s ongoing reliance on external capital to fund acquisitions and operations.