Medalist Diversified REIT, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022. The company is an externally managed REIT focused on retail, flex-industrial/office, and limited-service hotel properties in the southeastern United States. At quarter-end it owned eight properties. It acquired Salisbury Marketplace in June and sold the Clemson Best Western hotel on September 29.
Key financial results
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $2.84 million, down 6.5% from $3.04 million | $8.34 million, down 4.0% from $8.69 million |
| Net loss attributable to common shareholders | $1.75 million, versus $0.87 million | $3.76 million, versus $3.83 million |
| Loss per common share, basic and diluted | $0.10, versus $0.05 | $0.22, versus $0.32 |
| Property NOI, non-GAAP | $1.57 million, versus $1.58 million | $5.13 million, versus $4.65 million |
| Cash provided by operating activities | Not provided separately for the quarter | $1.67 million, versus $0.64 million |
| Cash, cash equivalents and restricted cash | Not provided as a quarterly flow | $6.97 million at September 30, versus $11.53 million at September 30, 2021 |
Nine-month FFO, a non-GAAP measure, was $0.77 million versus negative $1.59 million; AFFO, also non-GAAP, was $0.10 million versus negative $0.08 million. These measures and company definitions should be considered alongside GAAP results.
At September 30, total assets were $90.11 million and total equity was $19.63 million. Cash was $4.86 million, with another $2.11 million restricted for reserves, escrows and deposits. Net mortgages payable were $61.55 million; scheduled gross principal payments over the next 12 months were approximately $1.09 million. Mandatorily redeemable preferred stock was reported as a $4.39 million liability.
Material changes and unusual items
- Retail and flex revenue increased with property acquisitions and leasing activity, but hotel revenue fell substantially: the Hampton Inn was sold in 2021, the Clemson University occupancy agreement ended in May 2022, and the Clemson hotel was sold in September.
- The Clemson sale generated $10.015 million in proceeds and a $389,471 loss on sale. The company also recorded a $175,671 impairment of the held-for-sale hotel earlier in 2022.
- In June, the company acquired Salisbury Marketplace for a total investment of $10.28 million. A new Wells Fargo mortgage facility of $18.61 million financed that acquisition and refinanced the Lancer Center and Greenbrier mortgages. The five-year loan bears fixed interest at 4.50%; the company recorded $169,675 in losses on extinguishment of those two refinanced loans.
- Q3 operating expenses were $3.11 million versus $3.09 million. Interest expense was $0.99 million versus $0.95 million. Q3 included $227,164 in attempted refinancing costs related to the Clemson hotel and $219,532 in debt-extinguishment loss related to repaying its mortgage.
- Nine-month net loss improved slightly, despite lower revenue, reflecting lower interest expense—principally because 2021 included convertible-debenture costs and the company no longer owned the Hampton Inn. The 2022 period included higher depreciation and amortization and disposal-related losses.
- Nine-month cash from operations improved to $1.67 million. Investing used $8.92 million, while financing provided $6.84 million; cash and restricted cash declined by $0.41 million during the period.
Outlook, liquidity and risks
Management stated that it believes the company can meet obligations due within one year of issuance and presented the statements on a going-concern basis. It identified unrestricted cash, operating cash flow, potential property dispositions and potential equity issuance under its shelf registration or standby equity purchase agreement as liquidity sources. No quantified earnings or revenue guidance was provided.
- The company reported compliance with its mortgage covenants at September 30. The Wells Fargo facility requires minimum debt-service coverage and debt-yield ratios and at least $1.5 million in liquid assets; the Franklin Square loan separately requires at least $1.0 million in liquid assets.
- The Parkway mortgage has a variable LIBOR-based rate; an interest-rate cap limits exposure to 5.25% under specified conditions. The company noted the expected transition from LIBOR to a replacement reference rate.
- Nasdaq notified the company that its common-stock bid price had been below $1.00 for 30 consecutive business days. The stated compliance deadline was January 9, 2023; the company said it might consider a reverse stock split, with no assurance of regaining compliance.
- Management cited COVID-19 and changing consumer behavior, tenant credit and lease-renewal risk, interest rates and financing availability, and geographic concentration. All annualized base revenue was concentrated in Virginia, North Carolina and South Carolina. COVID-era rent deferrals were being repaid and tenants were current, but permanent rent abatements continue to affect revenue.
- The company has an 8% cumulative preferred-stock obligation, classified as a liability, with mandatory redemption on February 19, 2025 if still outstanding. Common dividends paid were $0.06 per share for the first nine months; a $0.01 common dividend was paid October 20, 2022.
Important facts for investors to verify
- Whether the company regained Nasdaq’s $1.00 minimum bid-price compliance and whether any reverse split or other action followed.
- Current liquidity, covenant compliance and financing needs, including the status and terms of the Wells Fargo mortgage and unused $1.5 million line of credit.
- Post-sale operating performance of the remaining retail and flex portfolio, including occupancy, rent collections, lease expirations and the continuing effect of abatements.
- The sustainability of operating cash flow and distributions given GAAP losses, modest AFFO, debt service and the preferred-stock redemption obligation.
- Exposure to rising rates and the LIBOR transition, plus the company’s ability to refinance or repay debt as maturities approach.