Medalist Diversified REIT, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is an externally managed REIT with retail, flex/industrial, and hotel properties concentrated in the southeastern United States.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.98 million | $2.02 million | $5.65 million | $4.55 million |
| Operating income (loss) | $401,065 | $(767,329) | $526,103 | $(1.68) million |
| Net loss | $(640,824) | $(1.74) million | $(2.95) million | $(3.57) million |
| Net loss attributable to common shareholders | $(682,963) | $(1.57) million | $(2.96) million | $(3.30) million |
| Interest expense | $1.22 million | $970,631 | $3.66 million | $1.89 million |
- Q2 revenue increased about 47% year over year, driven mainly by hotel revenue recovery and the Lancer Center acquisition. Hotel revenue rose $920,389; retail and flex revenue was mixed.
- Six-month revenue increased about 24%, but the company remained loss-making. The six-month net loss included $1.76 million of convertible-debt discount, issuance-cost, and beneficial-conversion-feature amortization.
- Q2 operating income improved from a loss to income; the filing attributes this partly to higher hotel revenue, lower bad-debt expense, and cessation of depreciation on hotels classified as held for sale. The company reported six-month FFO of $(1.52) million and AFFO of $118,447; these are non-GAAP measures.
Cash flow, liquidity, and debt
- For the six months, operating cash flow was $994,193, versus cash used of $898,009 in 2020. Investing used $10.28 million, principally for Lancer Center; financing provided $17.98 million, primarily from common-stock proceeds and new mortgage debt.
- At June 30, cash was $10.87 million and restricted cash was $2.92 million. Total assets were $97.57 million, total liabilities $72.47 million, and total equity $25.10 million.
- Mortgage debt carrying value was $64.66 million, including $17.98 million associated with assets held for sale. The company had no convertible debentures, short-term line-of-credit balance, or PPP loan outstanding at quarter-end. Series A preferred stock, classified as a liability, had a net carrying value of $4.12 million.
- The $14.275 million Franklin Square mortgage matures in October 2021. Management had begun refinancing efforts but warned success was not assured. Management also identified funding needs for remaining 2021 mortgage principal payments, a common dividend, and the planned Greenbrier Business Center acquisition.
- Management concluded it was probable the company could meet obligations for the year following issuance of the statements and presented them on a going-concern basis.
Material changes and significant events
- In April, the company issued 8 million common shares at $1.50 per share, raising approximately $10.89 million net. The convertible debentures were fully converted into 3,181,916 common shares for $5.0 million principal and $58,788 accrued interest, materially increasing the share count.
- In May, the company acquired the 178,626-square-foot Lancer Center retail property for a stated $10.1 million purchase price, funded partly with a new mortgage. Lancer was reported 97.2% leased.
- The Hampton Inn and Clemson Best Western properties were classified as held for sale; related assets totaled $22.09 million and associated mortgage liabilities $17.98 million. The Hampton Inn had a prior-year impairment charge of $3.49 million; no additional impairment was recorded in the first half of 2021. The Clemson hotel was leased to Clemson University through May 2022, and the company said it could not assure completion of either hotel sale.
- The SBA PPP loan, with $176,300 principal plus accrued interest, was forgiven in June and recorded as other income. Common dividends were not paid in the first half; a $0.02-per-share common dividend was paid August 5. The 8% preferred dividend continued.
Outlook, risks, and other matters
- Management provided no specific earnings or revenue guidance. It expected hotel revenue and operating results to remain below 2019 levels through 2021 and potentially beyond, and warned that COVID-19, variants, travel patterns, and consumer demand could continue to affect hotels and tenants.
- Retail and flex tenants received rent deferrals and abatements. Cumulative rent abatements were $566,532 through June 30, 2021; deferred rent and continued tenant credit risk may affect collections and future revenue.
- Clemson’s reported 100% occupancy in January–June 2021 reflected the university lease, not ordinary transient hotel demand. The Hampton Inn also benefited from a temporary city lodging arrangement that ended in February 2021.
- Other risks include the near-term Franklin Square refinancing, variable-rate hotel mortgages, concentration in Virginia, North Carolina, and South Carolina, tenant defaults or bankruptcies, REIT qualification requirements, and the company’s dependence on external financing and its manager. The company reported no current litigation, no off-balance-sheet arrangements, and effective disclosure controls.
Investor facts to verify
- Whether the Franklin Square mortgage was refinanced or extended before its October 2021 maturity, and on what terms.
- Whether the planned sales of both hotel properties closed, their proceeds, and the treatment of related debt and costs.
- How hotel results change after the Clemson University lease ends in May 2022 and after the Hampton Inn’s temporary lodging arrangement ended.
- Actual rent collections, tenant concessions, occupancy, and leasing at retail and flex properties, including Lancer Center.
- Cash requirements for the Greenbrier acquisition, future dividends, preferred-stock redemption obligations, and any further equity issuance or dilution.