Medalist Diversified REIT, Inc. — Q2 2020 Form 10-Q
Business and period. This unaudited report covers the quarter and six months ended June 30, 2020. The externally managed REIT owned six properties in Virginia, North Carolina, and South Carolina: three retail centers, one flex/industrial-office property, and two hotels.
Financial performance and position
| Metric | Q2 2020 | Six months 2020 | Comparable 2019 |
|---|---|---|---|
| Revenue | $1.74 million | $4.26 million | Q2: $1.71 million; six months: $3.25 million |
| Operating loss | $767,329 | $1.68 million | Q2: $973,490; six months: $1.26 million |
| Net loss | $1.74 million | $3.57 million | Q2: $1.52 million; six months: $2.36 million |
| Net loss attributable to common shareholders | $1.57 million; $0.33/share | $3.30 million; $0.71/share | Q2: $1.06 million; $0.31/share. Six months: $1.75 million; $0.61/share |
| Operating cash flow | Not presented by quarter | $(898,009) | Six months: $290,817 provided |
| Cash and restricted cash | At June 30: $3.73 million total, including $1.81 million unrestricted | — | At June 30, 2019: $10.67 million total |
Q2 revenue rose about 2% year over year, while six-month revenue increased about 31%, primarily reflecting acquisitions completed in 2019. Q2 hotel revenue fell $311,018, including a $509,826 decline at the Hampton Inn, partly offset by new properties. Six-month retail revenue increased $653,443 and flex revenue was $358,418, while hotel revenue was approximately flat. Management-reported property NOI was $794,644 in Q2 (versus $846,053) and $1.95 million for six months (versus $1.53 million); NOI is a non-GAAP measure.
At June 30, total assets were $82.89 million, total liabilities $66.01 million, and total equity $16.88 million. Net investment properties were $74.30 million. Mortgages had $59.35 million of principal outstanding before unamortized issuance costs; the company also had $550,000 drawn on its short-term line, $305,900 of PPP loans, and $3.93 million of mandatorily redeemable preferred stock recorded as a liability. Total interest expense was $970,631 for Q2 and $1.89 million for six months. Cash used in investing was $217,910 for six months; financing provided $2.78 million. No common dividend was paid in Q2; $0.125 per common share was paid in Q1.
Material changes and unusual items
- Three properties acquired in 2019 expanded the portfolio and contributed revenue and expenses not present in the 2019 comparison.
- Operating cash flow shifted from positive to negative, with management citing COVID-related rent delinquencies and weaker hotel performance. The allowance for uncollectible rent rose to $296,992 from $8,615 at year-end; six-month bad-debt expense was $282,374.
- A Franklin Square tenant abandoned its premises and defaulted. The company recorded a $223,097 impairment and wrote off $31,162 of unbilled rent.
- Six-month results included $569,995 of share-based compensation. Prior-year results included a $983,855 loss on disposal of hotel furniture, fixtures, and equipment.
- Hanover Square mortgage refinancing increased principal to $10.5 million and reduced the rate to 4.25% through January 2023; the company reported $1.57 million of net proceeds after specified distributions and closing payments.
- The company issued 200,000 Series A preferred shares for $4.6 million gross proceeds. They carry an 8% cumulative dividend and a $5 million liquidation preference, are mandatorily redeemable in February 2025, and are classified as a liability.
Outlook, risks, and contingencies
Management gave no quantified earnings or revenue guidance. It said COVID-19 effects could continue to materially reduce tenant collections, hotel demand, cash flow, and liquidity, and that the duration and extent of the impact remain uncertain. Rent and CAM collections were 66.6% in April, 71.8% in May, and 77.4% in June. The company deferred $87,263 of rent due in Q2 and agreed to abate $118,507 of Q2 rent; additional deferrals and abatements were also scheduled for the second half of 2020. Management stated the board may consider temporarily suspending common dividends to preserve liquidity.
Hotel occupancy remained weak: Hampton Inn occupancy was 25.36% in April, 41.45% in May, and 49.04% in June, versus 2019 levels of 62.29%, 55.82%, and 55.01%. Clemson Best Western occupancy was 24.86%, 19.12%, and 24.05%, respectively. Management expects subdued travel demand to continue while business and leisure travel remain below pre-pandemic levels.
Near-term financing is a key risk. The Hampton Inn mortgage of $10.6 million matures in November 2020, with two conditional 12-month extension options; the Franklin Square mortgage of $14.3 million matures in March 2021. The $550,000 short-term line was extended to September 30, 2020 after quarter-end. Management said it intends to seek extensions or refinancing but cannot assure favorable terms or completion before maturity. Hanover Square mortgage covenants were reported in compliance. Two hotel subsidiaries received PPP loans totaling $305,900; forgiveness was not yet established. The company also disclosed regional concentration, tenant bankruptcy/default risks, variable-rate LIBOR-linked debt, and potential REIT qualification requirements. It reported no current litigation believed material and no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and terms of the Hampton Inn and Franklin Square mortgage extensions or refinancing, and repayment or refinancing of the short-term line.
- Subsequent rent collections, tenant credit quality, and the recoverability of deferred rent and receivables, including the allowance for doubtful accounts.
- Actual hotel occupancy, room rates, and property cash flows as pandemic-related conditions evolve.
- Whether PPP loans qualify for forgiveness and whether preferred and common dividend payments remain sustainable.
- Debt service capacity, compliance with all loan covenants, and the effect of variable-rate debt and LIBOR transition.