Business Context and Reporting Period
Company: Medalist Diversified REIT, Inc. (MDRR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2019
Business Overview: An externally managed REIT focused on acquiring and operating commercial properties (retail and limited-service hotels) in secondary and tertiary markets in the Southeastern U.S. As of the reporting date, the portfolio consisted of three properties: the Shops at Franklin Square (NC), the Greensboro Airport Hampton Inn (NC), and the Shops at Hanover Square (VA). The company is classified as a smaller reporting company and an emerging growth company.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Revenue | $1,538,482 | $1,202,850 |
| Net Operating Income (NOI) | $687,232 | $447,115 |
| Operating Loss | $(288,383) | $(161,333) |
| Net Loss | $(840,486) | $(511,325) |
| Net Loss Attributable to Common Shareholders | $(686,639) | $(450,875) |
| Loss Per Share (Basic & Diluted) | $(0.30) | $(0.27) |
| Cash from Operating Activities | $84,822 | $(222,931) |
| Cash from Investing Activities | $(778,600) | $(46,568) |
| Cash from Financing Activities | $(187,235) | $5,412,818 |
| Total Assets | $52,397,239 | $53,107,052 |
| Total Liabilities | $34,787,959 | $34,502,459 |
| Mortgages Payable, Net | $33,246,700 | $33,236,397 |
| Cash and Restricted Cash | $3,239,783 | $8,438,166 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased by $335,632 (28%) compared to Q1 2018. This was driven by the addition of the Hanover Square Property (acquired May 2018) contributing $326,433 in revenue and increased occupancy/leases at Franklin Square. Hotel revenue declined by $101,491 due to ongoing renovations and competition.
- Expense Increases: Total operating expenses rose by $462,682. Increases were attributed to the inclusion of Hanover Square expenses and higher legal/accounting fees associated with public company compliance. Depreciation and amortization increased by $172,199 due to the new property and capitalized improvements.
- Net Loss Expansion: Net loss attributable to common shareholders increased by $235,764. While NOI improved, the increase in interest expense (due to Hanover Square debt) and non-cash charges (depreciation, fair value adjustments) widened the GAAP loss.
- Cash Flow Shift: Operating cash flow turned positive ($84,822) from negative in the prior year, largely due to an increase in accounts payable. Investing cash outflows increased significantly ($778,600) due to capital expenditures and advance deposits for the Hampton Inn Property Improvement Plan.
Guidance, Outlook, and Risks
- Capital Raising: The company relies on equity issuances for growth. Subsequent to the reporting period (May 13, 2019), the company issued 1,666,667 shares at $4.80 per share, estimating net proceeds of $6.755 million.
- Dividends: No dividends were declared for Q1 2019. However, on May 14, 2019, a quarterly dividend of $0.175 per share was declared.
- Property Improvement Plan (PIP): The Hampton Inn Property is undergoing a mandatory renovation plan estimated at $2.65 million. As of March 31, 2019, approximately $903,746 in costs remained, funded by escrow balances.
- Interest Rate Risk: The Hampton Inn mortgage has a variable rate (LIBOR + 5%). The company holds an interest rate cap (capped at 7%) which generated a $14,391 payment in Q1 2019, reducing interest expense. The fair value of this cap decreased by $50,403 during the quarter.
- Risks: Key risks include geographic concentration (100% in Mid-Atlantic), dependence on anchor tenants, REIT qualification requirements, and the ability to raise capital in volatile markets.
Investor Verification Checklist
- Equity Issuance Pricing: Verify the impact of the May 2019 equity offering priced at $4.80 per share, which is significantly lower than the $10.00 offering price in 2018, on shareholder dilution and future capital raising.
- Dividend Sustainability: Confirm the company's ability to maintain the newly declared $0.175 quarterly dividend given the current GAAP net loss and negative Adjusted Funds From Operations (AFFO) of $(442,270) for the quarter.
- Hampton Inn Renovation Costs: Monitor the completion of the Property Improvement Plan and ensure escrow funds are sufficient to cover the remaining $903,746 in costs without requiring additional equity dilution.
- Occupancy Trends: Track occupancy rates at the Hampton Inn Property post-renovation to determine if revenue declines are temporary or indicative of long-term market headwinds.
- Debt Covenants: Verify continued compliance with the Debt Service Coverage Ratio (DSCR) and Loan-to-Value covenants on the Hanover Square mortgage, particularly as interest rates may adjust in 2023.