Medalist Diversified REIT, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company is an externally managed REIT focused on income-producing commercial real estate in the Southeast. At quarter-end it owned five properties: three retail centers and two hotels. It acquired a sixth property, a flex-industrial center in Greenville, South Carolina, on October 3, 2019.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1.91 million | $1.71 million | $5.16 million | $4.72 million |
| Operating income (loss) | $(138,000) | $55,000 | $(1.40) million | $(182,000) |
| Net loss | $(706,000) | $(438,000) | $(3.07) million | $(1.46) million |
| Net loss attributable to common shareholders | $(606,000) | $(374,000) | $(2.35) million | $(1.32) million |
| Loss per common share, basic and diluted | $(0.13) | $(0.19) | $(0.69) | $(0.67) |
| Property NOI, non-GAAP | $903,000 | $849,000 | $2.44 million | $2.11 million |
Q3 revenue rose about 11%, but operating results moved from income to loss as expenses grew. For the first nine months, revenue increased about 9%, while net loss widened. Management-reported FFO was a loss of $1.30 million and AFFO a loss of $590,000 for the nine months; Q3 FFO was a loss of $75,000 and AFFO a loss of $22,000. FFO and AFFO are non-GAAP measures.
Financial position, cash flow and distributions
- At September 30, total assets were $79.3 million, including net investment properties of $70.0 million. Total liabilities were $56.8 million and total equity was $22.5 million.
- Cash was $2.57 million and restricted cash was $1.63 million. Restricted cash includes lender reserves and tenant deposits and is not all freely available.
- Net mortgage debt was $51.94 million, with $2.00 million principal outstanding under a short-term line of credit (reported net of issuance costs at $1.98 million) and a $183,000 related-party note due on demand. Total scheduled debt principal, including the line, was $54.67 million.
- Cash used in operating activities was $86,000 for the first nine months, compared with $15,000 in the prior-year period. Cash used in investing was $27.45 million, primarily for the Ashley Plaza and Clemson hotel acquisitions. Financing provided $27.62 million, including $8.51 million net stock proceeds and $18.69 million net mortgage proceeds. Cash, cash equivalents and restricted cash increased $87,000.
- Common dividends declared were $0.175 per share in Q3 and $0.35 per share year to date, unchanged from comparable 2018 periods. Cash dividends and distributions paid totaled $1.61 million year to date.
Material changes and management commentary
- The company acquired Ashley Plaza, a 160,356-square-foot retail center, on August 30 for a stated purchase price of $15.2 million; it was 98% leased. It acquired the 148-room Clemson Best Western on September 27 for $9.75 million. The acquisitions contributed to higher revenue and substantially increased debt and depreciation.
- Retail property NOI increased year over year, while hotel NOI fell: management attributed the Hampton Inn decline to renovation-related disruption under its property improvement plan and increased competition. The plan was substantially complete at quarter-end; management estimated $120,000 of remaining costs, with $83,000 of lender escrow available.
- Nine-month results included a $984,000 noncash loss on disposal of Hampton Inn furniture, fixtures and equipment replaced during renovations. Interest expense increased by $192,000 year over year for the nine-month period, reflecting additional properties, higher variable-rate Hampton Inn borrowing costs and the Hanover property being owned for the full comparative period.
- Common shares outstanding increased from 2.32 million at December 31, 2018 to 4.50 million at September 30, 2019, following 2019 equity issuances at $4.80 per share. Management says acquisitions and growth are expected to rely on additional equity issuance; it provides no specific earnings or acquisition guidance.
- The new $2.0 million line of credit matures February 21, 2020 and bore a variable rate of 4.724% at quarter-end. The Hampton Inn and Clemson mortgages are variable-rate debt; the company reported interest-rate caps on both. Scheduled principal maturities include $12.85 million in 2020, including the line of credit, and $14.69 million in 2021.
Outlook, risks and contingencies
Management identifies access to capital, property acquisitions, rental receipts and additional equity issuance as central to liquidity and growth. There is no specific forward-looking financial guidance in the filing. Risks include refinancing and interest-rate exposure, dependence on tenant rent and hotel demand, renovation costs, competition, regional economic conditions, anchor-tenant concentration, natural disasters, and maintaining REIT qualification. The portfolio’s annualized base revenue was entirely concentrated in the Mid-Atlantic, according to the filing. Hotel revenue is seasonal, and management expects to use cash or available financing if seasonal operating cash flow is insufficient.
The filing reports no current litigation, no material known environmental or regulatory contingencies, and no off-balance-sheet arrangements. Management stated disclosure controls were effective at September 30, 2019, with no material change in internal control over financial reporting during the quarter. The company is externally managed and incurred $345,000 of asset management fees and $512,000 of acquisition fees in the first nine months; it also borrowed $183,000 from the Manager, due on demand at 5% interest.
Important facts for investors to verify
- Confirm the Clemson Best Western mortgage maturity: the notes state October 2022, while the MD&A financing table states October 2029.
- Review the timing and funding plan for the $12.85 million scheduled 2020 principal maturities, including repayment of the February 2020 line of credit.
- Assess hotel operating performance after the Hampton Inn improvement plan and the Clemson acquisition, including occupancy, renovation costs and variable-rate interest exposure.
- Compare the $0.35 year-to-date common dividend with negative year-to-date AFFO and operating cash flow, and assess the company’s capacity to sustain distributions.
- Evaluate dilution from the 2019 share issuance and the reliance on further equity financing to fund growth.
- Confirm the Brookfield Center acquisition’s final funding, terms and contribution to results; it closed after quarter-end for a $6.7 million purchase price, before closing costs.