Medalist Diversified, Inc 10-Q for FY2023 Q1
Medalist Diversified, Inc. (MDRR)
About this 10-Q
Medalist Diversified, Inc filed this 10-Q on May 11, 2023, covering the quarter ended March 31, 2023 (FY2023 Q1).
Headline figures
Quarter ended March 31, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.46M
- down 15.3% from $2.9M a year earlier
- Net loss
- $1.22M
- compared with a net loss of $989.28K a year earlier
- Diluted EPS
- -$0.07
- compared with -$0.06 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the quarterly period ended |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file no:
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(State or other jurisdiction of incorporation) |
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(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (
Securities registered pursuant to section 12(b) of the Act:
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ◻ | Accelerated filer | ◻ |
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☒ | Smaller reporting company | ||
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares of Common Stock, $0.01 par value per share, of the registrant outstanding at May 10, 2023 was
Medalist Diversified REIT, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2023
Table of Contents
2
PART I.FINANCIAL INFORMATION
Item 1. Financial Statements
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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| | March 31, 2023 | | | December 31, 2022 |
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| | (Unaudited) |
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ASSETS |
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Investment properties, net | | $ | | | $ | | |
Cash | |
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Restricted cash | | | | | | | |
Rent and other receivables, net of allowance of $ | |
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Unbilled rent | |
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Intangible assets, net | |
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Other assets | |
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Total Assets | | $ | | | $ | | |
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LIABILITIES | |
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Accounts payable and accrued liabilities | | $ | | | $ | | |
Intangible liabilities, net | |
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Mortgages payable, net | | | | | | | |
Mandatorily redeemable preferred stock, net | |
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Total Liabilities | | $ | | | $ | | |
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EQUITY | |
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Common stock, | | $ | | | $ | | |
Additional paid-in capital | |
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Offering costs | |
| ( | |
| ( | |
Accumulated deficit | |
| ( | |
| ( | |
Total Stockholders' Equity | |
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Noncontrolling interests - Hanover Square Property | |
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Noncontrolling interests - Parkway Property | | | | | | | |
Noncontrolling interests - Operating Partnership | |
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Total Equity | | $ | | | $ | | |
Total Liabilities and Equity | | $ | | | $ | | |
See notes to condensed consolidated financial statements
3
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| | Three Months Ended | | ||||
| | March 31, | | ||||
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| 2023 |
| 2022 |
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REVENUE |
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Retail center property revenues | | $ | | | $ | | |
Flex center property revenues | | | | | | | |
Hotel property room revenues | |
| — | |
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Hotel property other revenues | |
| — | |
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Total Revenue | | $ | | | $ | | |
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OPERATING EXPENSES | |
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Retail center property operating expenses | | $ | | | $ | | |
Flex center property operating expenses | | | | | | | |
Hotel property operating expenses | |
| — | |
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Bad debt expense | | | | | | | |
Share based compensation expenses | |
| — | |
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Legal, accounting and other professional fees | |
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Corporate general and administrative expenses | |
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Loss on impairment | |
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Impairment of assets held for sale | | | — | | | | |
Depreciation and amortization | |
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Total Operating Expenses | |
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Operating loss | |
| ( | |
| ( | |
Interest expense | |
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Net Loss from Operations | |
| ( | |
| ( | |
Other (loss) income | |
| ( | |
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Net Loss | |
| ( | |
| ( | |
Less: Net loss attributable to Hanover Square Property noncontrolling interests | | | ( | | | ( | |
Less: Net (loss) income attributable to Parkway Property noncontrolling interests | |
| ( | |
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Less: Net loss attributable to Operating Partnership noncontrolling interests | |
| ( | |
| ( | |
Net Loss Attributable to Medalist Common Shareholders | | $ | ( | | $ | ( | |
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Loss per share from operations - basic and diluted | | $ | ( | | $ | ( | |
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Weighted-average number of shares - basic and diluted | |
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Dividends paid per common share | | $ | | | $ | | |
See notes to condensed consolidated financial statements
4
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
For the three months ended March 31, 2023 and 2022
(Unaudited)
| | For the three months ended March 31, 2023 | |||||||||||||||||||||||||||
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| Common Stock | | | | | | | | | | | | | | Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | Accumulated | | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | |
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| | Shares |
| Par Value |
| Paid in Capital |
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| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2023 | | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | | | $ | | | $ | | | $ | | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Net loss |
| — | | $ | — | | $ | — | | $ | — | | $ | ( | | $ | ( | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Dividends and distributions |
| — | | | — | | | — | | | — | | | ( | | | ( | | | — | | | — | | | ( | | | ( |
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Balance, March 31, 2023 |
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| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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| | For the three months ended March 31, 2022 | |||||||||||||||||||||||||||
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| Common Stock | | | | | | | | | | | | | | Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | Accumulated | | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | | | ||
| | Shares |
| Par Value |
| Paid in Capital |
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| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2022 | | | | $ | | | $ | | | $ | ( | | $ | ( | | $ | | | $ | | | $ | | | $ | | | $ | |
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Common stock issuances | | | | $ | | | $ | | | $ | — | | $ | — | | $ | | | $ | — | | $ | — | | $ | — | | $ | |
Common stock repurchases |
| ( | | | ( | | | ( | | | — | | | — | | | ( | | | — | | | — | | | — | | | ( |
Share based compensation |
| | | | | | | | | | — | | | — | | | | | | — | | | — | | | — | | | |
Net (loss) income |
| — | | | — | | | — | | | — | | | ( | | | ( | | | ( | | | | | | ( | | | ( |
Dividends and distributions |
| — | | | — | | | — | | | — | | | ( | | | ( | | | ( | | | ( | | | ( | | | ( |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 |
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| $ | |
| $ | |
| $ | ( |
| $ | ( |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
See notes to condensed consolidated financial statements
5
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | Three months ended March 31, | ||||
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| 2023 |
| 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
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Net Loss | | $ | ( | | $ | ( |
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Adjustments to reconcile consolidated net loss to net cash flows from operating activities | |
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Depreciation | |
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Amortization | |
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Loan cost amortization | |
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Mandatorily redeemable preferred stock issuance cost and discount amortization | | | | | | |
Above (below) market lease amortization, net | |
| ( | |
| ( |
Bad debt expense | | | | | | |
Share-based compensation | | | — | | | |
Impairment of assets held for sale | |
| — | |
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Loss on impairment | | | | | | |
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Changes in assets and liabilities | |
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Rent and other receivables, net | |
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Unbilled rent | |
| ( | |
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Other assets | |
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| ( |
Accounts payable and accrued liabilities | |
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Net cash flows from operating activities | |
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CASH FLOWS FROM INVESTING ACTIVITIES | |
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Capital expenditures | | | ( | | | ( |
Net cash flows from investing activities | |
| ( | |
| ( |
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CASH FLOWS FROM FINANCING ACTIVITIES | |
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Dividends and distributions paid | |
| ( | |
| ( |
Repayment of mortgages payable | | | ( | | | ( |
Proceeds from sales of common stock, net of capitalized offering costs | | | — | | | |
Repurchases of common stock, including costs and fees | |
| — | |
| ( |
Net cash flows from financing activities | |
| ( | |
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(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| ( | |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | |
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | | $ | | | $ | |
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CASH AND CASH EQUIVALENTS, end of period, shown in condensed consolidated balance sheets | | | | | | |
RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits, end of period, shown in condensed consolidated balance sheets | | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the condensed consolidated statements of cash flows | | $ | | | $ | |
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Supplemental Disclosures and Non-Cash Activities: | |
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Other cash transactions: | |
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Interest paid | | $ | | | $ | |
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See notes to condensed consolidated financial statements
6
Medalist Diversified REIT, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation and Consolidation
Medalist Diversified Real Estate Investment Trust, Inc. (the “REIT”) is a Maryland corporation formed on September 28, 2015. Beginning with the taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes. The REIT serves as the general partner of Medalist Diversified Holdings, LP (the “Operating Partnership”) which was formed as a Delaware limited partnership on September 29, 2015. As of March 31, 2023, the REIT, through the Operating Partnership, owned and operated eight properties, including the Shops at Franklin Square, a
7
The use of the word “Company” refers to the REIT and its consolidated subsidiaries, except where the context otherwise requires. The Company includes the REIT, the Operating Partnership, wholly owned limited liability companies which own or operate the properties and, for the periods presented prior to September 30, 2022, the taxable REIT subsidiary which formerly operated the Clemson Best Western University Inn, a hotel with
The Company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial, limited-service hotels, and retail properties, and (ii) multi-family residential properties in secondary and tertiary markets in the southeastern part of the United States, with an expected concentration in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. The Company may also pursue, in an opportunistic manner, other real estate-related investments, including, among other things, equity or other ownership interests in entities that are the direct or indirect owners of real property, indirect investments in real property, such as those that may be obtained in a joint venture. While these types of investments are not intended to be a primary focus, the Company may make such investments in the discretion of Medalist Fund Manager, Inc. (the “Manager”).
The Company is externally managed by the Manager. The Manager makes all investment decisions for the Company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees the Company’s overall business and affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment decisions. The Company’s stockholders are not involved in its day-to-day affairs.
2. Summary of Significant Accounting Policies
Investment Properties
The Company has adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. As a result, all of the Company’s acquisitions to date qualified as asset acquisitions and the Company expects future acquisitions of operating properties to qualify as asset acquisitions. Accordingly, third-party transaction costs associated with these acquisitions have been and will be capitalized, while internal acquisition costs will continue to be expensed.
Accounting Standards Codification (“ASC”) 805 mandates that “an acquiring entity shall allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition.” ASC 805 results in an allocation of acquisition costs to both tangible and intangible assets associated with income producing real estate. Tangible assets include land, buildings, site improvements, tenant improvements and furniture, fixtures and equipment, while intangible assets include the value of in-place leases, lease origination costs (leasing commissions and tenant improvements), legal and marketing costs and leasehold assets and liabilities (above or below market leases), among others.
The Company uses independent, third-party consultants to assist management with its ASC 805 evaluations. The Company determines fair value based on accepted valuation methodologies including the cost, market, and income capitalization approaches. The purchase price is allocated to the tangible and intangible assets identified in the evaluation.
8
The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally
Acquisition and closing costs are capitalized as part of each tangible asset on a pro rata basis. Improvements and major repairs and maintenance are capitalized when the repair and maintenance substantially extend the useful life, increases capacity or improves the efficiency of the asset. All other repair and maintenance costs are expensed as incurred.
The Company reviews investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable, but at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. The Company measures any impairment of investment property when the estimated undiscounted cash flows plus its residual value, is less than the carrying value of the property. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as projected future operating income, estimated capitalization rates, or multiples, leasing prospects and local market information. The Company may decide to sell properties that are held for use and the sale prices of these properties may differ from their carrying values.
Other than the tenant-specific losses on impairment and the impairment of assets held for sale described below, the Company did not record any impairment adjustments to its investment properties resulting from events or changes in circumstances during the three months ended March 31, 2023 and 2022, that would result in the projected value being below the carrying value of the Company’s properties.
Assets Held for Sale
The Company may decide to sell properties that are held as investment properties. The accounting treatment for the disposal of long-lived assets is covered by ASC 360. Under this guidance, the Company records the assets associated with these properties, and any associated mortgages payable, as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. Delays in the time required to complete a sale do not preclude a long-lived asset from continuing to be classified as held for sale beyond the initial one-year period if the delay is caused by events or circumstances beyond an entity’s control and there is sufficient evidence that the entity remains committed to a qualifying plan to sell the long-lived asset.
Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell, an impairment charge is recognized. The Company determines fair value based on the three-level valuation hierarchy for fair value measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
During February 2021, the Company committed to a plan for the sale of an asset group associated with the Clemson Best Western Hotel Property that included the land, site improvements, building, building improvements and furniture, fixtures and equipment. As of March 31, 2021, the Company recorded this asset group, and the associated mortgage payable, as held for sale. As of March 31, 2021, the date the Company originally recorded this asset group as held for sale, the Company determined that the fair value of the Clemson Best Western Property exceeded the carrying value of its asset group, and the Company did not record impairment of assets held for sale associated with this asset group.
During subsequent periods since the asset group associated with the Clemson Best Western Property was initially classified as held for sale, the Company continued to follow its disposal plan. Under ASC 360, during subsequent reporting periods after the asset group is classified as held for sale, it is necessary to evaluate the amounts previously used for the estimated fair value of the asset group. Up to and including the reporting periods ending December 31, 2021, the Company reviewed and reassessed the estimated fair value of the asset group and believed that the fair value, less estimated costs to sell, exceeds the Company’s carrying cost in the property.
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Accordingly, the Company did not record impairment of assets held for sale related to the Clemson Best Western Property for the year ended December 31, 2021.
As of March 31, 2022, the Company determined that the carrying value of the asset group associated with the Clemson Best Western Hotel Property exceeded its fair value, less estimated costs to sell, and recorded impairment of assets held for sale of $
On September 29, 2022, the Company closed on the sale of the Clemson Best Western Hotel Property to an unaffiliated purchaser. See Note 3 for additional details.
Intangible Assets and Liabilities, net
The Company determines, through the ASC 805 evaluation, the above and below market lease intangibles upon acquiring a property. Intangible assets (or liabilities) such as above or below-market leases and in-place lease value are recorded at fair value and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the underlying leases. The analysis is conducted on a lease-by-lease basis.
The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable, but at least annually. During the three months ended March 31, 2023, a tenant defaulted on its lease and abandoned its premises. The Company determined that the carrying value of the intangible assets and liabilities, net, associated with this lease of $
Details of the deferred costs, net of amortization, arising from the Company’s purchases of its retail center properties and flex center properties are as follows:
| | | March 31, 2023 | | | |
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| (unaudited) |
| December 31, 2022 |
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Intangible Assets, net | | | | | | | |
Leasing commissions | | $ | | | $ | | |
Legal and marketing costs | |
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Above market leases | |
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Net leasehold asset | |
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| | $ | | | $ | | |
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Intangible Liabilities, net | |
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Below market leases | | $ | ( | | $ | ( | |
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases. Adjustments to rental revenue related to the above and below market leases during the three months ended March 31, 2023 and 2022, respectively, were as follows:
10
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| | For the three months ended |
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| | March 31, | | ||||
| | | 2023 | | | 2022 | |
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| (unaudited) |
| (unaudited) |
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Amortization of above market leases | | $ | ( | | $ | ( | |
Amortization of below market leases | |
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| | $ | | | $ | | |
Amortization of lease origination costs, leases in place and legal and marketing costs represent a component of depreciation and amortization expense. Amortization related to these intangible assets during the three months ended March 31, 2023 and 2022, respectively, were as follows:
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| | For the three months ended |
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| | March 31, | | ||||
| | | 2023 | | | 2022 | |
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| (unaudited) |
| (unaudited) |
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Leasing commissions | | $ | ( | | $ | ( | |
Legal and marketing costs | |
| ( | |
| ( | |
Net leasehold asset | |
| ( | |
| ( | |
| | $ | ( | | $ | ( | |
As of March 31, 2023 and December 31, 2022, the Company’s accumulated amortization of lease origination costs, leases in place and legal and marketing costs totaled $
Future amortization of above and below market leases, lease origination costs, leases in place, legal and marketing costs and tenant relationships is as follows:
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| | For the | | | | | | | | | | | | | | | | | | |
| | | remaining nine | | | | | | | | | | | | | | | | | | |
| | | months ending | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | | | | | | | | | | | | | | | |
| | 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028-2042 |
| Total | |||||||
Intangible Assets |
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Leasing commissions | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
Legal and marketing costs | |
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Above market leases | |
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Net leasehold asset | |
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| | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
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Intangible Liabilities | |
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Below market leases, net | | $ | ( | | $ | ( | | $ | ( | | $ | ( | | $ | ( | | $ | ( | | $ | ( |
Conditional Asset Retirement Obligation
A conditional asset retirement obligation represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement depends on a future event that may or may not be within the Company’s control. Currently, the Company does not have any conditional asset retirement obligations. However, any such obligations identified in the future would result in the Company recording a liability if the fair value of the obligation can be reasonably estimated. Environmental studies conducted at the time the Company acquired its properties did not reveal any material environmental liabilities, and the Company is unaware of any subsequent environmental matters that would have created a material liability.
The Company believes that its properties are currently in material compliance with applicable environmental, as well as non-environmental, statutory and regulatory requirements. The Company did not record any conditional asset retirement obligation liabilities during the three months ended March 31, 2023 and 2022, respectively.
11
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank operating accounts and money markets. Financial instruments that potentially subject the Company to concentrations of credit risk include its cash and equivalents and its trade accounts receivable.
The Company places its cash and cash equivalents and any restricted cash held by the Company on deposit with financial institutions in the United States which are insured by the Federal Deposit Insurance Company ("FDIC") up to $
Restricted cash represents (i) amounts held by the Company for tenant security deposits, (ii) escrow deposits held by lenders for real estate tax, insurance, and operating reserves, (iii) an escrow for the first year of dividends on the Company’s mandatorily redeemable preferred stock, and (iv) capital reserves held by lenders for investment property capital improvements.
Tenant security deposits are restricted cash balances held by the Company to offset potential damages, unpaid rent or other unmet conditions of its tenant leases. As of March 31, 2023 and December 31, 2022, the Company reported $
Escrow deposits are restricted cash balances held by lenders for real estate taxes, insurance and other operating reserves. As of March 31, 2023 and December 31, 2022, the Company reported $
Capital reserves are restricted cash balances held by lenders for capital improvements, leasing commissions furniture, fixtures and equipment, and tenant improvements. As of March 31, 2023 and December 31, 2022, the Company reported $
| | | | | | | |
| | March 31, 2023 | | December 31, | | ||
Property and Purpose of Reserve |
| (unaudited) |
| 2022 | | ||
| | | | | | | |
Franklin Square Property - leasing costs | | $ | | | $ | | |
Brookfield Center Property - maintenance and leasing cost reserve | |
| | |
| | |
Total | | $ | | | $ | | |
Share Retirement
ASC 505-30-30-8 provides guidance on accounting for share retirement and establishes two alternative methods for accounting for the repurchase price paid in excess of par value. The Company has elected the method by which the excess between par value and the repurchase price, including costs and fees, is recorded to additional paid in capital on the Company’s condensed consolidated balance sheets. During the three months ended March 31, 2022, the Company repurchased
12
Revenue Recognition
Retail and Flex Center Property Revenues
The Company recognizes minimum rents from its retail center properties and flex center properties on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset being recorded on the condensed consolidated balance sheets. As of March 31, 2023 and December 31, 2022, the Company reported $
The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). The Company includes these reimbursements, along with other revenue derived from late fees and seasonal events, on the condensed consolidated statements of operations under the captions "Retail center property revenues” and “Flex center property revenues.” (See Recent Accounting Pronouncements, below.) This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. The Company accrues reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. The Company calculates the tenant’s share of operating costs by multiplying the total amount of the operating costs by a fraction, the numerator of which is the total number of square feet being leased by the tenant, and the denominator of which is the average total square footage of all leasable buildings at the property. The Company also receives payments for these reimbursements from substantially all its tenants on a monthly basis throughout the year.
The Company recognizes differences between previously estimated recoveries and the final billed amounts in the year in which the amounts become final. Since these differences are determined annually under the leases and accrued as of December 31 in the year earned, no such revenues were recognized during the three months ended March 31, 2023 and 2022.
The Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets. During the three months ended March 31, 2023 and 2022, respectively, no such termination costs were recognized.
Hotel Property Revenues
Hotel revenues from the Clemson Best Western Property were recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues from the Company’s occupancy agreement with Clemson University were recognized as earned, which is as rooms are occupied or otherwise reserved for use by the University. The Clemson University occupancy agreement ended on May 15, 2022 and the Company sold the Clemson Best Western Property on September 29, 2022.
The Clemson Best Western Property was required to collect certain taxes and fees from customers on behalf of government agencies and remit them back to the applicable governmental agencies on a periodic basis. The Clemson Best Western Property had a legal obligation to act as a collection agent. The Clemson Best Western Property did not retain these taxes and fees; therefore, they were not included in revenues. The Clemson Best Western Property recorded a liability when the amounts were collected and relieved the liability when payments were made to the applicable taxing authority or other appropriate governmental agency.
Hotel Property Operating Expenses
All personnel of the Clemson Best Western Property were directly or indirectly employees of Marshall Hotels and Resorts, Inc. (“Marshall”), the Company’s hotel management firm. In addition to fees and services discussed above, the Clemson Best Western Property reimbursed Marshall for all employee related service costs, including payroll salaries and wages, payroll taxes and other employee benefits paid by Marshall on its behalf. The total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the three months ended March 31, 2023 and 2022 were $
13
Rent and other receivables
Rent and other receivables include tenant receivables related to base rents and tenant reimbursements. Rent and other receivables do not include receivables attributable to recording rents on a straight-line basis, which are included in unbilled rent, discussed above. The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of March 31, 2023 and December 31, 2022, the Company’s allowance for uncollectible rent totaled $
Income Taxes
Beginning with the Company’s taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least
During the three months ended March 31, 2022, the Company's Clemson Best Western TRS entity generated taxable income. The Company believed that the net operating loss carry forward from prior years would offset the taxable income for the three months ended March 31, 2022, so
Management has evaluated the effect of the guidance provided by GAAP on Accounting for Uncertainty of Income Taxes and has determined that the Company had no uncertain income tax positions.
Use of Estimates
The Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and revenues and expenses during the reported period. The Company’s actual results could differ from these estimates.
Noncontrolling Interests
The ownership interests not held by the REIT are considered noncontrolling interests. There are three elements of noncontrolling interests in the capital structure of the Company. These noncontrolling interests have been reported in equity on the condensed consolidated balance sheets but separate from the Company’s equity. On the condensed consolidated statements of operations, the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. The Company’s condensed consolidated statements of changes in stockholders’ equity includes beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
The first noncontrolling interest is in the Hanover Square Property in which the Company owns an
The second noncontrolling interest is in the Parkway Property in which the Company owns an
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allocated to the noncontrolling ownership interest based on its
The third noncontrolling ownership interest are the units in the Operating Partnership that are not held by the REIT. In 2017,
The Operating Partnership units not held by the REIT represent
During the three months ended March 31, 2023, a weighted average of
Recent Accounting Pronouncements
Since its initial public offering, the Company has elected to be classified as an emerging growth company in its periodic reporting to the U.S. Securities and Exchange Commission (the “SEC”), and accordingly has followed the private company implementation dates for new accounting pronouncements. Effective for the three months ending March 31, 2023, the Company will no longer be classified as an emerging growth company, but will retain its classification as a smaller reporting company and therefore follow implementation dates applicable to smaller reporting companies with respect to new accounting pronouncements. In addition, the Company has elected to follow scaled disclosure requirements applicable to smaller reporting companies.
Recently Adopted Accounting Pronouncements
Accounting for Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases. Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, must be recognized as assets and liabilities, respectively, on the balance sheets. Other significant provisions of this standard include (i) defining the “lease term” to include the non-cancelable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease; (ii) defining the initial lease liability to be recorded on the balance sheets to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components. The lease standard was effective for public companies for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years) and for private companies, fiscal years beginning after December 15, 2019, with early adoption permitted. The FASB subsequently deferred the effective date of ASU 2016-02 for private companies by one year, to fiscal years beginning after December 15, 2020, to provide those companies with additional time to address various implementation challenges and complexities. In June 2020, the FASB further deferred the effective date due to the effects on private companies from business and capital market disruptions caused by the novel coronavirus (“COVID-19”) pandemic. Following those deferrals, ASU 2016-02 became effective for private companies for fiscal years beginning after December 15, 2021, and for
15
interim periods within fiscal years beginning after December 15, 2022. The Company adopted the standard effective on January 1, 2022 using the modified retrospective approach within ASU 2018-11, which allows for the application date to be the beginning of the reporting period in which the entity first applies the new standard. The Company historically has not been and is not currently a “lessee” under any lease agreements, and thus did not have any arrangements requiring the recognition of lease assets or liabilities on its balance sheet.
As a “lessor”, the Company has active lease agreements with over 100 tenants across its portfolio of investment properties. On a prospective and retrospective basis, the accounting for those leases under ASU 2016-02 (ASC No. 842) is substantially unchanged from the previous guidance in ASC No. 840. However, upon the adoption of ASC No. 842, the Company has elected the practical expedient permitting lessors to elect by class of underlying asset to not separate non-lease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC No. 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. Prior to the adoption of ASC No. 842, the Company separated lease-related revenue from its retail center and flex center properties into two components. Fixed rental payments under its leases (recognized on a straight-line basis over the term of the underlying lease) were recorded as retail center property revenues and flex center property revenues. Variable payments under the leases made by tenants for real estate taxes, insurance and common area maintenance (“CAM”) expenses were recorded as retail center and flex center tenant reimbursements. With the adoption of ASC No. 842, the Company determined that its retail center and flex center operating leases qualify for the non-separation practical expedient based on the guidance. As a result, the Company has accounted for and presented the revenues from these leases, including tenant reimbursements, as a single line item on its condensed consolidated statements of operations.
Debt With Conversion Options
In August 2020, the FASB issued ASU 2020-06, Debt - Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The objective of ASU 2020-06 is to reduce the current complexity involved in accounting for convertible financial instruments by reducing the number of accounting models applicable to those instruments in the existing guidance. Following the adoption of ASU 2020-06, companies are expected to encounter fewer instances in which a convertible financial instrument must be separated into a debt or equity component and a derivative component for accounting purposes due to the embedded conversion feature. As a result of these revisions, debt instruments issued with a beneficial conversion feature will no longer require separation and thus will be accounted for as a single debt instrument under the updated guidance. In addition to those changes, ASU 2020-06 adds several incremental financial statement disclosures with respect to a company’s convertible financial instruments and makes certain refinements with respect to calculating the effect of those instruments on a company’s diluted earnings per share. ASU 2020-06 is effective for public companies for fiscal years beginning after December 15, 2021 (including interim periods within those fiscal years), and for private companies, fiscal years beginning after December 15, 2022. Early adoption of the guidance is permitted, but no earlier than fiscal years beginning after December 15, 2020. The updated guidance in ASU 2020-06 was adopted effective January 1, 2023, which did not have a material impact on the Company’s condensed consolidated financial statements.
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update enhances the methodology of measuring expected credit losses to include the use of forward-looking information to better calculate credit loss estimates. The guidance applies to most financial assets measured at amortized cost and certain other instruments, such as accounts receivable and loans; however, it does not apply to receivables arising from operating leases accounted for in accordance with ASC Topic 842. ASU 2016-13 requires that the Company estimate the lifetime expected credit loss with respect to applicable receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. The Company is also required to disclose information about how it developed the allowances, including changes in the factors that influenced the Company’s estimate of expected credit losses and the reasons for those changes. The Company’s credit losses primarily arise from tenant defaults on amounts due under operating leases. As noted, these losses are not subject to the guidance in ASU 2016-13, and historically have not been significant. The Company adopted the update on the required effective date of January 1, 2023, which did not have a material impact on the Company’s condensed consolidated financial statements.
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Upcoming Accounting Pronouncements
Effects of Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The London Interbank Offered Rate (LIBOR), which is widely used as a reference interest rate in debt agreements and other contracts, was effectively discontinued for new contracts as of December 31, 2021, and its publication for existing contracts is scheduled to be discontinued by June 30, 2023. Financial market regulators in certain jurisdictions throughout the world undertook reference rate reform initiatives to guide the transition and modification of debt agreements and other contracts that are based on LIBOR to the successor reference rate that will replace it. ASU 2020-04 was issued to provide companies that are impacted by these changes with the opportunity to elect certain expedients and exceptions that are intended to ease the potential burden of accounting for or recognizing the effects of reference rate reform on financial reporting. Under ASU 2020-04, companies may generally elect to make use of the expedients and exceptions provided therein for any reference rate contract modifications that occur in reporting periods that encompass the timeline from March 12, 2020 to December 31, 2022. The FASB subsequently issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset of Topic 848, to extend that timeline from December 31, 2022 to December 31, 2024. The Company’s Parkway Property is financed by a mortgage loan with a corresponding interest rate protection agreement which both use USD LIBOR as the reference interest rate (see Note 5, below). The mortgage loan matures on November 1, 2031, and the interest rate protection agreement expires on December 1, 2026. The Company is continuing to review the guidance in ASU 2020-04 and anticipates that it will use the expedients and exceptions provided therein with respect to the replacement of USD LIBOR as the reference rate in the Parkway Property mortgage loan and corresponding interest rate protection agreement. However, the Company does not expect that any changes under ASU 2020-04 will have a material impact on its condensed consolidated financial statements.
Evaluation of the Company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the condensed consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of the Company’s condensed consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. The Company’s condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In applying applicable accounting guidance, management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company’s obligations due over the next twelve months as well as the Company’s recurring business operating expenses.
The Company concludes that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these condensed consolidated financial statements within the parameters set forth in the accounting guidance.
17
3. Investment Properties
Investment properties consist of the following:
| | | | | | | |
| | | March 31, 2023 | | | December 31, | |
|
| | (unaudited) |
| | 2022 | |
Land | | $ | | | $ | | |
Site improvements | |
| | |
| | |
Buildings and improvements (1) | |
| | |
| | |
Investment properties at cost (2) | |
| | |
| | |
Less accumulated depreciation | |
| | |
| | |
Investment properties, net | | $ | | | $ | | |
| (1) | Includes tenant improvements (both those acquired as part of the acquisition of the properties and those constructed after the properties’ acquisition), capitalized leasing commissions and other capital costs incurred post-acquisition. |
| (2) | Excludes intangible assets and liabilities (see Note 2, above, for a discussion of the Company's accounting treatment of intangible assets), escrow deposits and property reserves. |
The Company’s depreciation expense on investment properties was $
Capitalized tenant improvements
The Company carries two categories of capitalized tenant improvements on its condensed consolidated balance sheets, both of which are recorded under investment properties, net, on the Company’s condensed consolidated balance sheets. The first category is the allocation of acquisition costs to tenant improvements that is recorded on the Company’s condensed consolidated balance sheet as of the date of the Company’s acquisition of the investment property. The second category are tenant improvement costs incurred and paid by the Company subsequent to the acquisition of the investment property. Both are recorded as a component of investment properties on the Company’s condensed consolidated balance sheets. Depreciation expense on both categories of tenant improvements is recorded as a component of depreciation expense on the Company’s condensed consolidated statement of operations.
The Company generally records depreciation of capitalized tenant improvements on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation are as follows:
| | | | | | | |
| | March 31, | | | | | |
| | 2023 | | December 31, | | ||
|
| (unaudited) |
| 2022 | | ||
Capitalized tenant improvements – acquisition cost allocation, net | | $ | | | $ | | |
Capitalized tenant improvements incurred subsequent to acquisition, net | |
| | |
| | |
Depreciation of capitalized tenant improvements arising from the acquisition cost allocation was $
During the three months ended March 31, 2023 and 2022, the Company recorded $
18
Capitalized leasing commissions
The Company carries two categories of capitalized leasing commissions on its condensed consolidated balance sheets. The first category is the allocation of acquisition costs to leasing commissions that is recorded as an intangible asset (see Note 2, above, for a discussion of the Company’s accounting treatment for intangible assets) on the Company’s condensed consolidated balance sheet as of the date of the Company’s acquisition of the investment property. The second category is leasing commissions incurred and paid by the Company subsequent to the acquisition of the investment property. These costs are carried on the Company’s condensed consolidated balance sheets under investment properties.
The Company generally records depreciation of capitalized leasing commissions on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation are as follows:
| | | | | | | |
| | March 31, 2023 | | December 31, | | ||
| | (unaudited) | | 2022 | | ||
Capitalized leasing commissions, net |
| $ | |
| $ | | |
During the three months ended March 31, 2023 and 2022, the Company recorded $
Sale of investment properties
The Company reports properties that have been either previously disposed or that are currently held for sale in continuing operations in the Company's condensed consolidated statements of operations if the disposition, or anticipated disposition, of the assets does not represent a shift in the Company's investment strategy. The Company's sale of the Clemson Best Western Hotel Property does not constitute a change in the Company's investment strategy, which continues to include limited-service hotels as a targeted asset class.
Operating results of the Clemson Best Western Hotel Property, which was sold on September 29, 2022 and which are included in continuing operations, are as follows:
|
| For the three months ended |
| ||||
| | March 31, | | ||||
| | | 2023 | | | 2022 | |
|
| (unaudited) |
| (unaudited) |
| ||
Hotel property room revenues | | $ | — | | $ | | |
Hotel property other revenues | |
| — | |
| | |
Total Revenue | | | — | | | | |
Hotel property operating expenses | | | — | | | | |
Impairment of assets held for sale | |
| — | |
| | |
Total Operating Expenses | | | — | | | | |
Operating Income | | | — | | | | |
Interest expense | |
| — | |
| | |
Net Income from Operations | | | — | | | | |
Other income | |
| — | |
| | |
Net Income | | | — | | | | |
Net income attributable to Operating Partnership noncontrolling interests | |
| — | |
| | |
Net Income Attributable to Medalist Common Shareholders | | $ | — | | $ | | |
2022 Property Acquisitions
On June 13, 2022, the Company completed its acquisition of the Salisbury Marketplace Property, a
19
new mortgage debt. The Company’s total investment was $
| | | |
| | | Salisbury |
| | | Marketplace |
|
| | Property |
Fair value of assets acquired: | | | |
Investment property (a) | | $ | |
Lease intangibles and other assets (b) | | | |
Above market leases (b) | | | |
Below market leases (b) | | | ( |
Fair value of net assets acquired (c) | | $ | |
| | | |
Purchase consideration: | | | |
Consideration paid with cash (d) | | $ | |
Consideration paid with new mortgage debt, net (e) | |
| |
Total consideration (f) | | $ | |
| a. | Represents the fair value of the investment property acquired which includes land, buildings, site improvements, tenant improvements and furniture, fixtures and equipment. The fair value was determined using the market approach, the cost approach, the income approach or a combination thereof. Closing and acquisition costs were allocated and added to the fair value of the tangible assets acquired. |
| b. | Represents the fair value of lease intangibles and other assets. Lease intangibles include leasing commissions, leases in place, above market leases, below market leases and legal and marketing costs associated with replacing existing leases. |
| c. | Represents the total fair value of assets and liabilities acquired at closing. |
| d. | Represents cash paid at closing and cash paid for acquisition (including intangible assets), and closing costs paid at closing or directly by the Company outside of closing. |
| e. | Represents allocation of the Wells Fargo Mortgage Facility proceeds used to fund the purchase of the Salisbury Marketplace Property, net of $ |
| f. | Represents the consideration paid for the fair value of the assets and liabilities acquired. |
4. Mandatorily Redeemable Preferred Stock
On February 19, 2020, the Company issued and sold
The mandatorily redeemable preferred stock has an aggregate liquidation preference of $
If outstanding on February 19, 2025, the mandatorily redeemable preferred stock must be redeemed by the Company on that date, the fifth anniversary of the date of issuance. Beginning on February 19, 2022, the second anniversary of the issuance, the Company may redeem the outstanding mandatorily redeemable preferred stock for an amount equal to its aggregate liquidation preference, plus any accrued but unpaid dividends. The holders of the mandatorily redeemable preferred stock may also require the Company to redeem
20
the stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference plus any accrued and unpaid dividends thereon.
Holders of the mandatorily redeemable preferred stock generally have no voting rights. However, if the Company does not pay dividends on the mandatorily redeemable preferred stock for
The Company has classified the mandatorily redeemable preferred stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the accompanying condensed consolidated statements of operations (see Note 5, below, for a discussion of interest expense associated with the mandatorily redeemable preferred stock).
For all periods the mandatorily redeemable preferred stock has been outstanding, the Company has paid a cash dividend on the stock equal to
|
| |
| Amount |
| | |
Payment Date | | Record Date | | per share | | For the period | |
April 27, 2020 | | April 24, 2020 | | $ | |
| February 19, 2020 - April 27, 2020 |
July 24, 2020 | | July 22, 2020 | |
| |
| April 28, 2020 - July 24, 2020 |
October 26, 2020 | | October 23, 2020 | |
| |
| July 25, 2020 - October 26, 2020 |
February 1, 2021 | | January 29, 2021 | |
| |
| October 27, 2020 - February 1, 2021 |
April 30, 2021 | | April 26, 2021 | | | | | February 2, 2021 – April 30, 2021 |
July 26, 2021 | | July 12, 2021 | | | | | May 1, 2021 - July 26, 2021 |
October 27, 2021 | | October 25, 2021 | | | | | July 27, 2021 – October 26, 2021 |
January 20, 2022 | | January 13, 2022 | | | | | October 27, 2021 – January 19, 2022 |
April 21, 2022 | | April 18, 2022 | | | | | January 20, 2022 - April 20, 2022 |
July 21, 2022 | | July 18, 2022 | | | | | April 21, 2022 - July 20, 2022 |
October 20, 2022 | | October 17, 2022 | | | | | July 21, 2022 - October 19, 2022 |
January 27, 2023 | | January 24, 2023 | | | | | October 20, 2022 - January 19, 2023 |
April 28, 2023 | | April 25, 2023 | | | | | January 20, 2023 - April 20, 2023 |
As of March 31, 2023 and December 31, 2022, the Company recorded $
The mandatorily redeemable preferred stock was issued at $
21
Amortization of the discount and deferred financing costs related to the mandatorily redeemable preferred stock totaling $
5. Loans Payable
Mortgages Payable
The Company’s mortgages payables, net consists of the following:
| | | | | | | | | | March 31, | | | | |
| | Monthly | | Interest | | | | | 2023 | | | December 31, | | |
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2022 | | |||
Franklin Square (a) |
| |
| | % | | $ | | | $ | | | ||
Hanover Square (b) |
| $ | |
| | % | |
| | |
| | | |
Ashley Plaza (c) | | $ | |
| | % | |
| | |
| | | |
Brookfield Center (d) | | $ | | | | % | | | | | | | | |
Parkway Center (e) | | $ | | | Variable | | | | | | | | | |
Wells Fargo Facility (f) | | $ | | | % | | | | | | | | ||
Unamortized issuance costs, net | | | | | | | | | | ( | | | ( | |
Total mortgages payable, net | | | |
|
|
|
| | $ | | | $ | | |
| (a) | The original mortgage loan for the Franklin Square Property in the amount of $ |
| (b) | The mortgage loan for the Hanover Square Property bore interest at a fixed rate of |
| (c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of |
| (d) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of |
22
| (e) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of |
| (f) | On June 13, 2022, the Company entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $ |
The Company refinanced the mortgage loan for the Lancer Center Property using proceeds from the Wells Fargo Facility. The Company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $
The Company refinanced the mortgage loan for the Greenbrier Business Center Property using proceeds from the Wells Fargo Facility. The Company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $
Interest rate protection transaction
On October 28, 2021, the Company entered into the Interest Rate Protection Transaction. Under this agreement, the Company’s interest rate exposure is
23
Interest Rate Protection Transaction was $
Wells Fargo Line of Credit
On June 13, 2022, the Company, through its wholly owned subsidiaries, entered into a loan agreement with Wells Fargo Bank for a $
Interest expense
Interest expense, including amortization of capitalized issuance costs consists of the following:
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
| For the three months ended March 31, 2023 (unaudited) | |||||||||||||
|
| | |
| Amortization |
| Interest rate |
| | |
| | | ||
|
| Mortgage | | of discounts and | | protection | | Other | | | | ||||
|
| Interest | | capitalized | | transaction | | interest | | | | ||||
|
| Expense | | issuance costs | | payments | | expense | | Total | |||||
Franklin Square mortgage | | $ | |
| $ | |
| $ | — |
| $ | — |
| $ | |
Hanover Square mortgage | |
| |
| | |
| | — |
| | — |
| | |
Ashley Plaza mortgage | |
| |
| | |
| | — |
| | — |
| | |
Brookfield Center mortgage | |
| |
| | |
| | — |
| | — |
| | |
Parkway Center mortgage | | | | | | | | | ( | | | — | | | |
Wells Fargo Mortgage Facility | | | | | | | | | — | | | — | | | |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | | | | — | | | | | | |
Total interest expense | | $ | | | $ | | | $ | ( | | $ | | | $ | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | For the three months ended March 31, 2022 (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
|
| Mortgage | | of discounts and | | Other | | | | |||
|
| Interest | | capitalized | | interest | | | | |||
|
| Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | | | $ | | | $ | — | | $ | |
Hanover Square mortgage | |
| | | | | | | — | | | |
Ashley Plaza mortgage | |
| | | | | | | — | | | |
Clemson Best Western mortgage | |
| | | | — | | | | | | |
Brookfield Center mortgage | |
| | | | | | | — | | | |
Lancer Center mortgage | | | | | | | | | — | | | |
Greenbrier Business Center mortgage | | | | | | | | | — | | | |
Parkway Center mortgage | | | | | | | | | — | | | |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | | | | | | | |
Total interest expense | | $ | | | $ | | | $ | | | $ | |
24
Interest accrued and accumulated amortization of capitalized issuance costs consist of the following:
| | As of March 31, 2023 (unaudited) | | As of December 31, 2022 | ||||||||
|
| | |
| Accumulated |
| | |
| Accumulated | ||
| | | | | amortization of | | | | | amortization | ||
| | Accrued | | capitalized | | Accrued | | of capitalized | ||||
| | interest | | issuance costs | | interest | | issuance costs | ||||
Franklin Square mortgage | | $ | | | $ | | | $ | | | $ | |
Hanover Square mortgage | |
| | |
| | |
| | |
| |
Ashley Plaza mortgage | |
| — | |
| | |
| | |
| |
Brookfield Center mortgage | |
| — | |
| | |
| — | |
| |
Parkway Center mortgage | | | | | | | | | | | | |
Wells Fargo Mortgage Facility | | | — | | | | | | — | | | |
Amortization and accrued preferred stock dividends on mandatorily redeemable preferred stock (1) | | | | | | | | | | | | |
Total | | $ | | | $ | | | $ | | | $ | |
(1) | Recorded as accrued interest under accounts payable and accrued liabilities on the Company’s condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively. |
Debt Maturity
The Company’s scheduled principal repayments on indebtedness as of March 31, 2023 are as follows:
| | | |
For the remaining nine months ending December 31, 2023 |
| $ | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
2027 |
| | |
Thereafter |
| | |
Total principal payments and debt maturities | | | |
Less unamortized issuance costs | |
| ( |
Net principal payments and debt maturities | | $ | |
6. Rentals under Operating Leases
Future minimum rents (based on recognizing future rents on the straight-line basis) to be received under noncancelable tenant operating leases for each of the next five years and thereafter, excluding common area maintenance and other expense pass-throughs, as of March 31, 2023 are as follows:
For the remaining nine months ending December 31, 2023 |
| $ | |
2024 | |
| |
2025 | |
| |
2026 | |
| |
2027 | |
| |
Thereafter | |
| |
Total minimum rents | | $ | |
7. Equity
The Company has authority to issue
25
at the REIT’s option, Common Shares at a ratio of
Shelf Registration
On June 21, 2021, the Company filed a shelf registration statement on Form S-3 with the SEC. The registration statement is intended to provide the Company additional flexibility to finance future business opportunities through timely and cost-effective access to capital markets. Under the shelf registration statement, the Company may, from time to time, issue common stock up to an aggregate amount of $
Standby Equity Purchase Agreement
On November 17, 2021, the Company entered into a Standby Equity Purchase Agreement (the “SEPA”) with a financing entity. Under this agreement, the Company will be able to sell up to $
Issuance Date |
| Shares Issued |
| Price Per Share |
| Total Proceeds | ||
March 3, 2022 | | | | $ | | | $ | |
March 14, 2022 |
| |
| | |
| | |
March 17, 2022 |
| |
| | |
| | |
March 21, 2022 |
| |
| | |
| | |
April 1, 2022 |
| |
| | |
| | |
Total |
| | | $ | | | $ | |
Common Stock Repurchase Plan
In December 2021, the Board approved a program to purchase up to
Purchase (Trade) Date |
| Shares Purchased |
| Price Per Share |
| Total Cost (1) | ||
January 4, 2022 | | | | $ | | | $ | |
January 5, 2022 |
| |
| | |
| | |
January 6, 2022 |
| |
| | |
| | |
January 7, 2022 |
| |
| | |
| | |
January 10, 2022 |
| |
| | |
| | |
January 14, 2022 |
| |
| | |
| | |
January 21, 2022 |
| |
| | |
| | |
Total |
| | | $ | | | $ | |
(1) | Total cost before transaction fees. |
26
Common shares and operating partnership units outstanding
As of March 31, 2023 and December 31, 2022, there were
2018 Equity Incentive Plan
The Company’s 2018 Equity Incentive Plan (the “Equity Incentive Plan”) was adopted by the Board on July 27, 2018 and approved by the Company’s shareholders on August 23, 2018. The Equity Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance units, incentive awards and other equity-based awards (including LTIP units of the Company’s Operating Partnership) to its employees or an affiliate (as defined in the Equity Incentive Plan) of the Company and for up to the greater of (i)
On March 2, 2022, the Compensation Committee of the Board (the “Compensation Committee”) approved a grant of
On November 22, 2022, the Compensation Committee approved a grant of
On each January 1 during the term of the Equity Incentive Plan, the maximum number of shares of common stock that may be issued under the Equity Incentive Plan will increase by eight percent (
Earnings per share
Basic earnings per share for the Company’s Common Shares is calculated by dividing income (loss) from continuing operations, excluding the net income (loss) attributable to noncontrolling interests, by the Company’s weighted-average number of Common Shares outstanding during the period. Diluted earnings per share is computed by dividing the net income attributable to common shareholders, excluding the net loss attributable to noncontrolling interests, by the weighted average number of Common Shares, including any dilutive shares. As of March 31, 2023 and 2022,
27
The Company's loss per common share is determined as follows:
|
| Three months ended March 31, |
| ||||
|
| 2023 |
| 2022 |
| ||
| | (unaudited) |
| (unaudited) | | ||
Basic and diluted shares outstanding | | | | | | | |
Weighted average Common Shares – basic | | | |
| | | |
Effect of conversion of operating partnership units | | | |
| | | |
Weighted average Common Shares – diluted | | | |
| | | |
| | | | | | | |
Calculation of earnings per share – basic and diluted | | | |
| | | |
Net loss attributable to common shareholders | | $ | ( | | $ | ( | |
Weighted average Common Shares – basic and diluted | |
| | |
| | |
Loss per share – basic and diluted | | ( | | ( | | ||
Dividends and Distributions
During the three months ended March 31, 2023, dividends in the amount of $
|
| Three months ended March 31, | ||||
|
| 2023 |
| 2022 | ||
| | (unaudited) |
| (unaudited) | ||
Common shareholders (dividends) | | $ | | | $ | |
Hanover Square Property noncontrolling interest (distributions) | |
| — | |
| |
Parkway Property noncontrolling interest (distributions) | |
| — | |
| |
Operating Partnership unit holders (distributions) | |
| | |
| |
Total dividends and distributions | | $ | | | $ | |
Nasdaq Compliance
On July 11, 2022, the Company received a deficiency letter (the “Deficiency Letter”) from the Nasdaq Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market LLC notifying the Company that, for the last thirty (30) consecutive business days, the closing bid price for the Company’s common stock had been below the minimum $1.00 per share required for continued listing on the Nasdaq Capital Market (“Nasdaq”) pursuant to Nasdaq Listing Rule 5550 (a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was given one hundred and eighty (180) calendar days, or until January 9, 2023, to regain compliance with the Minimum Bid Price Requirement.
On January 10, 2023, the Company received a letter (the “Second Notification”) from the Nasdaq Stock Market LLC notifying the Company that, while the Company had not regained compliance with the Minimum Bid Price Requirement, the Staff determined that the Company is eligible for an additional 180 calendar day period, or until July 10, 2023 (the “Second Compliance Period”), to regain compliance. The Staff’s determination was based on (i) the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on Nasdaq, with the exception of the Minimum Bid Price Requirement, and (ii) the Company’s written notice to the Nasdaq Stock Market LLC of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
If at any time during the Second Compliance Period, the closing bid price of the Company’s common stock is at least $1.00 per share for a minimum of 10 consecutive business days, the Staff will provide the Company with written confirmation of compliance. If compliance with the Minimum Bid Price Requirement cannot be demonstrated by July 10, 2023, the Staff will provide written notification that the Company’s common stock will be delisted. At that time, the Company may appeal the Staff’s determination to a Hearings Panel.
Neither the Deficiency Letter or the Second Notification had any effect on the listing of the Company’s common stock, and its common stock continues to trade on Nasdaq under the symbol “MDRR”.
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Reverse Stock Split
See Note 11, Subsequent Events, for a discussion of the reverse stock split that was completed on May 3, 2023.
8. Commitments and Contingencies
Insurance
The Company carries comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in its portfolio, in addition to other coverages that may be appropriate for certain of its properties. Additionally, the Company carries a directors and officers liability insurance policy that covers such claims made against the Company and its directors and officers. The Company believes the policy specifications and insured limits are appropriate and adequate for its properties given the relative risk of loss, the cost of the coverage and industry practice; however, its insurance coverage may not be sufficient to fully cover its losses.
Concentration of Credit Risk
The Company is subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of tenants, competition for tenants and customers, changes in tax laws, interest rates, the availability of financing and potential liability under environmental and other laws. The Company’s portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in the Mid-Atlantic, specifically in South Carolina, North Carolina and Virginia, which represented
Interest Rate Risk
The value of the Company’s real estate is subject to fluctuations based on changes in interest rates, which may affect the Company’s ability to refinance property-level mortgage debt when balloon payments are scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the value of the Company’s assets to decrease. Increases in interest rates may also have an impact on the credit profile of certain tenants.
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. To limit this exposure, the Company attempts to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, the Company may obtain variable-rate mortgage loans and, as a result, may enter into interest rate cap agreements that limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. These interest rate caps are derivative instruments designated as cash flow hedges on the forecasted interest payments on the debt obligation. Our objective in using interest rate caps is to limit our exposure to interest rate movements.
As of March 31, 2023 and December 31, 2022, all of the Company’s long-term debt either bore interest at fixed rates or was capped to a fixed rate. The Company’s debt obligations are more fully described in Note 5, Loans Payable, above.
Other Risks and Uncertainties
Since March 2020, the Company’s investment properties have been significantly impacted by (i) measures taken by local, state and federal authorities to mitigate the impact of COVID-19, such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and (ii) significant changes in consumer behavior and business and leisure travel patterns. While most, if not all, of the initial measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from the continued mutation of COVID-19 into new variants, and the possibility that changes in consumer behavior and business and
29
leisure travel patterns will continue, the negative impact on consumer behavior, including demand for the goods and services of our retail tenants within our portfolio could continue to be significant in future periods.
Regulatory and Environmental
As the owner of the buildings on its properties, the Company could face liability for the presence of hazardous materials (e.g., asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in its buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if the Company does not comply with such laws, it could face fines for such noncompliance. Also, the Company could be liable to third parties (e.g., occupants of the buildings) for damages related to exposure to hazardous materials or adverse conditions in its buildings, and the Company could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in its buildings. In addition, some of the Company’s tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at the Company’s properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject the Company or its tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to the Company, and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect the Company’s operations. The Company is not aware of any material contingent liabilities, regulatory matters or environmental matters that may exist.
Litigation
The Company is not currently involved in any litigation or legal proceedings.
9. Related Party Transactions
Medalist Fund Manager, Inc.
The Company is externally managed by the Manager, which makes all investment decisions for the Company. The Manager oversees the Company’s overall business and affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment decisions.
The Company pays the Manager a monthly asset management fee equal to
The Manager also receives an acquisition fee of
30
On March 19, 2021, pursuant to a Letter Agreement, dated March 19, 2021, by and among the Company, the Operating Partnership and the Manager (the “2021 Manager Letter Agreement”), which amended that certain Management Agreement, dated as of March 15, 2016, among the Company, the Operating Partnership and the Manager (the “Management Agreement”), the Manager agreed to defer payment of one-half of any acquisition fee payable to the Manager from that date until the earlier of: (i) the date that the public trading price of our common stock, as reported on the Nasdaq Capital Market, reaches a closing trading price of at least $
On March 10, 2023, the Company announced that the Board established a Special Committee of the Board (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. In light of the exploration of potential strategic alternatives by the Special Committee, the Company entered into a Letter Agreement, dated as of March 10, 2023, by and among the Company, the Operating Partnership and the Manager (the “2023 Manager Letter Agreement”).
Pursuant to the terms of the 2023 Manager Letter Agreement, the Company further amended the Management Agreement, which provides for the deferral of the acquisition fee payable to the Manager in certain circumstances, to clarify that the Deferred Acquisition Fee Amount (as defined in the 2021 Manager Letter Agreement) will be deferred until the earlier of (i) the date that the public trading price of the Company’s common stock, as reported on the Nasdaq Capital Market, reaches a closing trading price of at least $5.00 per share (as the same may be proportionately adjusted to reflect a stock split or reverse stock split); (ii) the effective date of the termination of the Management Agreement as the result of an election by the Company to terminate the Management Agreement (other than on account of any of the events specified in clauses (i) through (vi) of Section 11(a) of the Management Agreement); and (iii) a Change in Control.
For the year ended December 31, 2022, the Company incurred $
The Manager will be entitled to an incentive fee, payable quarterly, equal to an amount, not less than zero, equal to the difference between (1) the product of (x) 20% and (y) the difference between (i) Adjusted Funds from Operations (AFFO) (as further defined below) for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price of equity securities issued in this offering and in future offerings and transactions, multiplied by the weighted average number of all shares of common stock outstanding on a fully-diluted basis (including any restricted stock units, any restricted shares of common stock and OP Units) in the previous 12-month period, exclusive of equity securities issued prior to this offering, and (B) 7%, and (2) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of such previous 12-month period. For purposes of calculating the incentive fee during the first years after completion of this offering, adjusted funds from operations (“AFFO”) will be determined by annualizing the applicable period following completion of this offering. AFFO is calculated by removing the effect of items that do not reflect ongoing property operations. The Company further adjusts funds from operations (“FFO”) for certain items that are not added to net income in the National Association of Real Estate Investment Trusts’ (NAREIT) definition of FFO, such as acquisition expenses, equity based compensation expenses, and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of the Company’s properties, and subtract recurring capital expenditures (and, when calculating the incentive fee only, we further adjust FFO to include any realized gains or losses on real estate investments).
31
Colin Elliott
Effective as of March 1, 2020, the Company entered into a consulting agreement (the “Consulting Agreement”), with Gunston Consulting, LLC (the “Consultant”), pursuant to which the Consultant agreed to provide certain financial and accounting consulting services to the Company, and the Company agreed to pay the Consultant an annual fee and annual stock grants awarded by the Compensation Committee and agreed to reimburse the Consultant for certain expenses to be authorized by the Company. Pursuant to the terms of the Consulting Agreement, the Company authorized the Consultant to retain the services of Mr. C. Elliott as vice president of the Company and authorized the Consultant to incur certain costs related to Mr. C. Elliott’s employment as vice president and agreed to reimburse the Consultant for such costs, including Mr. C. Elliott’s $
In addition, on March 10, 2023, the Company entered into a change in control agreement with the Consultant and Mr. C. Elliott (the “Change in Control Agreement”), in order to authorize the Consultant to pay Mr. C. Elliott, our Vice President, and to reimburse the Consultant for, the payment of the Elliott Retention Amount (as defined below), in the event that (i) a Change in Control (as defined therein) occurs at a time when Mr. C. Elliott remains employed by the Consultant and no Cause Event (as defined therein) has then occurred and the Consultant thereafter terminates, at the request of the Company (or any successor), the employment of Mr. C. Elliott (other than on account of a Cause Event) within twelve (12) months after the date of the Change in Control; (ii) a Change in Control occurs at a time when Mr. C. Elliott remains employed by the Consultant and no Cause Event has then occurred and within twelve (12) months after the date of the Change in Control Mr. C. Elliott elects to terminate his engagement with the Consultant to provide services to the Company (or any successor) because either (a) the Company (or any successor) requires Mr. C. Elliott to relocate his primary work location by more than fifty (50) miles from the location as of the effective date of the Change in Control Agreement; (b) the Company (or any successor) directs the Consultant to reduce the annual compensation ($150,000) of Mr. C. Elliott; (c) the Company (or any successor) directs the Consultant to materially diminish Mr. C. Elliott’s position, authority, duties or responsibilities with respect to services to the Company (or any successor); or (d) the Company (or any successor) commits a material breach of the Consulting Agreement and fails to cure such material breach within thirty (30) days after receiving written notice of such material breach; or (iii) the Consultant terminates, at the Company’s (or any successor’s) request, Mr. C. Elliott’s employment (other than on account of a Cause Event) ninety (90) or fewer days prior to the Change in Control. In each such case, a “Triggering Event” shall be deemed to have occurred, and pursuant to the Change in Control Agreement, the Company authorizes the Consultant to pay, and agrees to reimburse the Consultant for, and the Consultant agrees to pay to Mr. C. Elliott, within thirty-seven (37) days after such Triggering Event, an amount equal to the sum of (i) Mr. C. Elliott’s current annual compensation (i.e., $150,000) payable by the Consultant to Mr. C. Elliott and reimbursable by the Company, plus (ii) the amount of Mr. C. Elliott’s last annual bonus (i.e., $50,000) payable by the Consultant to Mr. C. Elliott and reimbursable by the Company, plus (iii) a cash payment equivalent to the value of the last stock grant from the Company to Mr. C. Elliott (i.e., $30,000) (collectively, the “Elliott Retention Amount”).
Mr. C. Elliott is the son of Mr. William R. Elliott, Vice Chairman of the Board and President and Chief Operating Officer of the Company. During the three months ended March 31, 2023 and 2022, the Company paid the Consultant $
Other related parties
The Company pays Shockoe Properties, LLC, a subsidiary of Dodson Properties, an entity in which one of the owners of the Manager holds a
10. Segment Information
The Company establishes operating segments at the property level and aggregates individual properties into reportable segments based on product types in which the Company has investments. For the three months ended March 31, 2023, the Company had the following reportable segments: retail center properties and flex center properties. For the three months ended March 31, 2022, the Company had the following reportable segments: retail center properties, flex center properties and hotel properties. During the periods presented, there have been no material intersegment transactions.
32
Although the Company’s flex center property has tenants that are similar to tenants in its retail center properties, the Company considers its flex center properties as a separate reportable segment. Flex properties are considered by the real estate industry as a distinct subset of the industrial market segment. Flex properties contain a mix of industrial/warehouse and office spaces. Warehouse space that is not air conditioned can be used flexibly by building office or showroom space that is air conditioned, depending on tenants’ needs.
Net operating income (“NOI”) is a non-GAAP financial measure and is not considered a measure of operating results or cash flows from operations under GAAP. NOI is the primary performance measure reviewed by management to assess operating performance of properties and is calculated by deducting operating expenses from operating revenues. Operating revenues include rental income, tenant reimbursements, hotel income, and other property income; and operating expenses include retail center property and hotel operating costs. The NOI performance metric consists of only revenues and expenses directly related to real estate rental operations. NOI reflects property acquisitions and dispositions, occupancy levels, rental rate increases or decreases, and the recoverability of operating expenses. NOI, as the Company calculates it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs.
Asset information and capital expenditures by segment are not reported because the Company does not use these measures to assess performance. Depreciation and amortization expense, along with other expense and income items, are not allocated among segments.
The following table presents property operating revenues, expenses and NOI by product type:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | ||||||||||||||||||||||
| | Hotel properties |
| Retail center properties |
| | Flex center property | | Total | |||||||||||||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
|
| (unaudited) |
| (unaudited) | | (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||||||
Revenues | | $ | — | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
Operating expenses | |
| — | |
| | |
| | |
| | | | | | | | |
| | |
| |
Bad debt expense | | | — | | | — | | | | | | | | | | | | | | | | | | |
Net operating income | | $ | — | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | | | $ | |
11. Subsequent Events
As of May 11, 2023, the following events have occurred subsequent to the March 31, 2023 effective date of the condensed consolidated financial statements:
Common Stock Dividend
On April 28, 2023, a dividend in the amount of $
Mandatorily Redeemable Preferred Stock Dividend
On April 28, 2023, a dividend in the amount of $
Completion of 1-for-8 Reverse Stock Split
On May 3, 2023, the Company completed the previously announced reverse stock split of its Common Shares, and a corresponding adjustment to the outstanding common units of the Operating Partnership, at a ratio of -for-8 (the “Reverse Stock Split”). The Reverse Stock Split took effect at 5:00 p.m. Eastern Time on May 3, 2023 (the “Effective Time”) and automatically converted every Common Shares outstanding at that time into one Common Share.
The Reverse Stock Split affected all common stockholders uniformly and did not affect any common stockholder’s percentage ownership interest in the Company, except for de minimis changes as a result of the elimination of fractional shares, as described below. As a result of the Reverse Stock Split, the number of Common Shares outstanding was reduced from
33
At the Effective Time, the aggregate number of shares of Common Stock available for awards under the Company’s 2018 Equity Incentive Plan and the terms of outstanding awards were ratably adjusted to reflect the Reverse Stock Split.
Trading of the Common Shares on Nasdaq commenced on a split-adjusted basis on May 4, 2023 under the existing trading symbol “MDRR.” The new CUSIP number for the Common Shares following the Reverse Stock Split is 58403P303.
The Reverse Stock Split is intended to help the Company regain compliance with the Minimum Bid Price Requirement. If at any time before July 10, 2023, the closing bid price of the Common Stock is at least $
Charter Amendments
In connection with the Reverse Stock Split, on April 19, 2023, the Company filed two Articles of Amendment to its charter with the State Department of Assessments and Taxation of Maryland that provided for:
(i)a Reverse Stock Split of the Common Stock, effective at 5:00 p.m. Eastern Time on May 3, 2023 (the “First Amendment”); and
(ii)the par value of the Common Stock to be decreased from $
The foregoing descriptions of the First Amendment and the Second Amendment do not purport to be complete and are qualified in their entirety by reference to each amendment, copies of which are filed as Exhibit 3.3 and Exhibit 3.4, respectively, to this Quarterly Report on Form 10-Q (this “Quarterly Report”) and are incorporated herein by reference.
Wells Fargo Line of Credit
On May 2, 2023, the Company and Wells Fargo Bank entered into the First Amendment to Revolving Line of Credit Note which extended the maturity date of the Wells Fargo Line of Credit to June 9, 2024 (see Note 5, above).
Update on Special Committee and Exploration of Strategic Alternatives
On March 10, 2023, the Board announced that it established a Special Committee (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. The Special Committee is comprised solely of independent directors and is charged with exploring potential strategic alternatives including, without limitation, a business combination involving our company, a sale of all or part of our company’s assets, joint venture arrangements and/or restructurings, and determining whether a strategic transaction is in the best interest of our company.
On April 18, 2023, the Company provided an update on the Special Committee’s efforts. Specifically, the Company announced that the Special Committee is in active discussions with potential parties in pursuit of those alternatives and the Company will provide further disclosures as appropriate or required by law or regulation. While the review is underway, the Company remains fully focused on its operations and on the continued execution of its strategies to create stockholder value. There is no assurance that the review will result in any transaction, including a sale of the Company, its assets, or entry into a business combination, among other alternatives being reviewed.
34
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on, and should be read in conjunction with, the condensed consolidated financial statements and the related notes thereto of Medalist Diversified REIT, Inc. contained in this Quarterly Report.
This following discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements. Our actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Quarterly Report.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
| ● | the competitive environment in which we operate; |
| ● | failure of our recently announced exploration of strategic alternatives to maximize stockholder value or to result in a transaction that yields value to our stockholders, and the potential that our exploration of strategic alternatives could adversely impact us; |
| ● | local, regional, national and international economic conditions; |
| ● | capital expenditures; |
| ● | the availability, terms and deployment of capital; |
| ● | financing risks; |
| ● | inflation; |
| ● | the general level of interest rates; |
| ● | changes in our business or strategy; |
| ● | fluctuations in interest rates and increased operating costs; |
| ● | our limited operating history; |
| ● | the degree and nature of our competition; |
| ● | our dependence upon our Manager and key personnel; |
| ● | defaults on or non-renewal of leases by tenants; |
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| ● | decreased rental rates or increased vacancy rates; |
| ● | our ability to make distributions on shares of our common stock; |
| ● | difficulties in identifying properties to acquire and completing acquisitions; |
| ● | our ability to operate as a public company; |
| ● | potential natural disasters such as hurricanes; |
| ● | the impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as COVID-19 and its variants); |
| ● | our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; |
| ● | our ability to maintain an active trading market for our common stock on The Nasdaq Capital Market (“Nasdaq”) and maintain continued listing on Nasdaq and the likelihood that a delisting of our common stock from Nasdaq could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our common stock; |
| ● | the reverse stock split may decrease the liquidity of the shares of our common stock and could lead to a decrease in our overall market capitalization; |
| ● | potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates; and |
| ● | related industry developments, including trends affecting our business, financial condition and results of operations. |
The forward-looking statements contained in this Quarterly Report are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report speaks only as of the date of this Quarterly Report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
Company Overview
Medalist Diversified REIT Inc. is a Maryland corporation formed on September 28, 2015. Beginning with our taxable year ended December 31, 2017, we believe that we have operated in a manner qualifying us as a real estate investment trust (“REIT”), and we have elected to be taxed as a REIT for federal income tax purposes. Our company serves as the general partner of Medalist Diversified Holdings, LP which was formed as a Delaware limited partnership on September 29, 2015.
Our company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial and retail properties, (ii) multi-family residential properties and (iii) limited-service hotel properties in secondary and tertiary markets in the southeastern part of the United States, with an expected concentration in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. We may also pursue, in an opportunistic manner, other real estate-related investments, including, among other things, equity or other ownership interests in entities that are the direct or indirect owners of real property, and indirect investments in real property, such as those that may be obtained in a joint venture. While these types of investments are not intended to be a primary focus, we may make such investments in our Manager’s discretion.
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Our company is externally managed by the Manager. The Manager makes all investment decisions for our company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees our company’s overall business and affairs and has broad discretion to make operating decisions on behalf of our company and to make investment decisions. Our company’s stockholders are not involved in its day-to-day affairs.
As of March 31, 2023, our company owned and operated eight investment properties, the Shops at Franklin Square (the “Franklin Square Property”), a 134,239 square foot retail property located in Gastonia, North Carolina, the Hanover North Shopping Center (the “Hanover Square Property”), a 73,440 square foot retail property located in Mechanicsville, Virginia, the Ashley Plaza Shopping Center (the “Ashley Plaza Property”), a 164,012 square foot retail property located in Goldsboro, North Carolina, Brookfield Center (the “Brookfield Center Property”), a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina, the Lancer Center, a 181,590 square foot retail property located in Lancaster, South Carolina (the “Lancer Center Property”), the Greenbrier Business Center (the “Greenbrier Business Center Property”), an 89,280 square foot mixed-use industrial/office property located in Chesapeake, Virginia, Parkway 3 & 4 (the “Parkway Property”), a 64,109 square foot mixed-use industrial office property located in Virginia Beach, Virginia, and the Salisbury Marketplace Shopping Center, a 79,732 square foot retail property located in Salisbury, North Carolina (the “Salisbury Marketplace Property”). As of March 31, 2023, we owned 84% of the Hanover Square Property as a tenant in common with a noncontrolling owner which owned the remaining 16% interest and 82% of the Parkway Property as a tenant in common with a noncontrolling owner which owns the remaining 18% interest.
Reporting Segments
We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have investments. For the three months ended March 31, 2023, our reportable segments were retail center properties and flex center properties. Although we sold our interest in the Clemson Best Western Hotel Property on September 29, 2022, we include hotel properties as a third reportable segment for the three months ended March 31, 2022.
Recent Trends and Activities
1:8 Reverse Stock Split
On May 3, 2023, our company completed a reverse stock split of its Common Shares, and a corresponding adjustment to the outstanding common units of the Operating Partnership, at a ratio of 1-for-8 (the “Reverse Stock Split”). The Reverse Stock Split took effect at 5:00 p.m. Eastern Time on May 3, 2023 (the “Effective Time”) and automatically converted every eight Common Shares outstanding at that time into one Common Share. The Reverse Stock Split is intended to help our company regain compliance with Nasdaq’s Minimum Bid Price Requirement. If at any time before July 10, 2023, the closing bid price of the Common Stock is at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide our company with written confirmation of compliance. If compliance with the Minimum Bid Price Requirement cannot be demonstrated by July 10, 2023, the Staff will provide written notification that the Common Stock will be delisted. At that time, our company may appeal the Staff’s determination to a Hearings Panel. Accordingly, there can be no assurance that our company will be able to regain compliance with the Minimum Bid Price Requirement or maintain its listing on Nasdaq.
Establishment of a Special Committee of the Board and Exploration of Strategic Alternatives
On March 10, 2023, the Board announced that it established a Special Committee (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. The Special Committee is comprised solely of independent directors and is charged with exploring potential strategic alternatives including, without limitation, a business combination involving our company, a sale of all or part of our company’s assets, joint venture arrangements and/or restructurings, and determining whether a strategic transaction is in the best interest of our company.
On April 18, 2023, the Company provided an update on the Special Committee’s efforts. Specifically, the Company announced that the Special Committee is in active discussions with potential parties in pursuit of those alternatives and the Company will provide further disclosures as appropriate or required by law or regulation. While the review is underway, the Company remains fully focused on its operations and on the continued execution of its strategies to create stockholder value. There is no assurance that the review will result in any transaction, including a sale of the Company, its assets, or entry into a business combination, among other alternatives being reviewed.
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Sale of the Clemson Best Western Property
On September 29, 2022, our company sold its interest in the Clemson Best Western Property, a 148 room hotel on 5.92 acres in Clemson, South Carolina, to an unrelated purchaser for $10,015,000. During the three months ended March 31, 2021, our company reclassified the Clemson Best Western Property as assets held for sale. As part of our continuing evaluation of the amounts previously used for the estimated fair value of the Clemson Best Western asset group that had been reclassified as assets held for sale, during the three months ended March 31, 2022, our company recorded an impairment charge of $175,671 associated with this reclassification. As a result of the closing of the sale of the Clemson Best Western Property on September 29, 2022, our company recognized a loss on sale of investment properties of $421,096 for the year ended December 31, 2022.
Salisbury Marketplace Property Acquisition
On June 13, 2022, we completed our acquisition of the Salisbury Marketplace Property, a 79,732 square foot retail property located in Salisbury, North Carolina, through a wholly owned subsidiary. The Salisbury Marketplace Property, built in 1986, was 91.2% leased as of March 31, 2023, and is anchored by Food Lion, Citi Trends and Family Dollar. The purchase price for the Salisbury Marketplace Property was $10,025,000 paid through a combination of cash provided by our company and the incurrence of new mortgage debt. Our company’s total investment was $10,279,714 and we incurred $254,714 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
Wells Fargo Mortgage Facility
On June 13, 2022, our company, through its wholly owned subsidiaries, entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $18,609,500. The proceeds of the Wells Fargo Mortgage Facility were used to finance the acquisition of the Salisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center Property. The Wells Fargo Mortgage Facility bears interest at a fixed rate of 4.50% for a five-year term. The monthly payment, which includes interest at the fixed rate, and principal, based on a 25-year amortization schedule, is $103,438. Our company has provided an unconditional guaranty of the payment of and performance under the terms of the Wells Fargo Mortgage Facility. The Wells Fargo Mortgage Facility credit agreement includes covenants to maintain a debt service coverage ratio of not less than 1.50 to 1.00 on an annual basis and a minimum debt yield of 9.5% on the Salisbury Marketplace, Lancer Center and Greenbrier Business Center properties, and to maintain liquid assets of not less than $1,500,000 on deposit with Wells Fargo Bank. As of March 31, 2023, our company believes that it is compliant with these covenants.
Wells Fargo Line of Credit
On June 13, 2022, our company, through its wholly owned subsidiaries, entered into a loan agreement with Wells Fargo Bank for a $1,500,000 line of credit (the “Wells Fargo Line of Credit”). As of March 31, 2023, the Wells Fargo Line of Credit had an outstanding balance of $0. Outstanding balances on the Wells Fargo Line of Credit will bear interest at a floating rate of 2.25% above the daily secured overnight financing rate (“SOFR”). The Wells Fargo Line of Credit has a one-year, renewable term, is unconditionally guaranteed by our company, and any outstanding balances are secured by the Lancer Center Property, the Greenbrier Business Center Property and the Salisbury Marketplace Property. On May 2, 2023, our company and Wells Fargo Bank entered into the First Amendment to Revolving Line of Credit Note which extended the maturity date of the Wells Fargo Line of Credit to June 9, 2024. We plan to use the Wells Fargo Line of Credit to help fund future acquisitions.
Shelf Registration
On June 21, 2021, our company filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement is intended to provide additional flexibility to finance future business opportunities through timely and cost-effective access to capital markets. Under the shelf registration statement, our company may, from time to time, issue common stock up to an aggregate amount of $150 million. The shelf registration statement was declared effective by the SEC on July 27, 2021.
Standby Equity Purchase Agreement
On November 17, 2021, our company entered into a Standby Equity Purchase Agreement (the “SEPA”) with a financing entity. Under the SEPA, our company may sell up to $6,665,299 of our shares of common stock at our request any time during the 36 months
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following the execution of the SEPA. Any shares purchased pursuant to the SEPA would be purchased at 96.5% of the market price (as defined in the SEPA), subject to certain limitations, including that the financing entity could not purchase any shares that would result in it owning more than 4.99% of our company’s outstanding common stock. As of March 31, 2023, our company has generated net proceeds of $1,538,887 from the issuance of 1,445,400 shares of our common stock at an average price of $1.065 per share under the SEPA.
Issuance Date |
| Shares Issued |
| Price Per Share |
| Total Proceeds | ||
March 3, 2022 | | 90,600 | | $ | 1.088 | | $ | 98,574 |
March 14, 2022 |
| 276,190 |
| | 1.050 |
| | 290,000 |
March 17, 2022 |
| 278,810 |
| | 1.076 |
| | 300,000 |
March 21, 2022 |
| 474,068 |
| | 1.055 |
| | 500,000 |
April 1, 2022 |
| 325,732 |
| | 1.075 |
| | 350,313 |
Total |
| 1,445,400 | | $ | 1.065 | | $ | 1,538,887 |
Common Stock Repurchase Plan
In December 2021, the Board approved a program to purchase up to 500,000 shares of our common stock in the open market, up to a maximum price of $4.80 per share (the “Common Stock Repurchase Plan”). The Common Stock Repurchase Plan does not obligate our company to acquire any particular amount of shares, and the Common Stock Repurchase Plan may be suspended or discontinued at any time at our discretion. As of March 31, 2023, we have repurchased a total of 268,070 shares of our common stock on the open market under the Common Stock Repurchase Plan at an average price of $1.038 per share.
Purchase Date |
| Shares Purchased |
| Price Per Share |
| Total Cost | ||
January 4, 2022 | | 400 | | $ | 1.060 | | $ | 424 |
January 5, 2022 |
| 48,205 |
| | 1.060 |
| | 51,093 |
January 6, 2022 |
| 100,000 |
| | 1.046 |
| | 104,556 |
January 7, 2022 |
| 30,000 |
| | 1.050 |
| | 31,500 |
January 10, 2022 |
| 50,000 |
| | 1.020 |
| | 51,000 |
January 14, 2022 |
| 100 |
| | 1.010 |
| | 101 |
January 21, 2022 |
| 39,365 |
| | 1.006 |
| | 39,603 |
Total |
| 268,070 | | $ | 1.038 | | $ | 278,277 |
Common stock grants under the 2018 Equity Incentive Plan
On March 2, 2022, the Compensation Committee approved a grant of 60,000 Common Shares to two employees of our Manager who also serve as directors of our company, a grant of 90,000 Common Shares to our company’s three independent directors, and a grant of 60,000 Common Shares to the chief financial officer of our company under the Equity Incentive Plan. The effective date of the grants was March 2, 2022. The Common Shares granted vested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $233,100, was recorded to share based compensation expense on our condensed consolidated statements of operations on the effective date of the grant. The fair value of the grants was determined by the market price of our Common Shares on the effective date of the grant.
On November 22, 2022, the Compensation Committee approved a grant of 76,434 Common Shares to two employees of our Manager who also serve as directors of our company, a grant of 114,651 Common Shares to our company’s three independent directors, a grant of 76,433 Common Shares to the chief financial officer of our company, and a grant of 50,956 Common Shares to the vice president and senior accountant of our company under the Equity Incentive Plan. The effective date of the grants was November 22, 2022. The Common Shares granted vested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $250,000, was recorded to share based compensation expense on our condensed consolidated statements of operations on the effective date of the grant. The fair value of the grants was determined by the market price of our Common Shares on the effective date of the grant.
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Financing Activities
Mortgages payable
Our company financed its acquisitions of its investment properties through mortgages, as follows:
| | | | | | | | Balance | | ||||||
| | | | | | | | March 31, | | | | | |||
| | Monthly | | Interest | | | | 2023 | | | December 31, | | |||
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2022 | | ||||
Franklin Square (a) |
| | Interest only |
| | 3.808 | % | December 2031 | | $ | 13,250,000 | | $ | 13,250,000 | |
Hanover Square (b) | | $ | 78,098 |
| | 6.94 | % | December 2027 | |
| 9,813,679 | |
| 9,877,867 | |
Ashley Plaza (c) | | $ | 52,795 |
| | 3.75 | % | September 2029 | |
| 10,856,618 | |
| 10,930,370 | |
Brookfield Center (d) | | $ | 22,876 |
| | 3.90 | % | November 2029 | |
| 4,639,969 | |
| 4,663,206 | |
Parkway Center (e) | | $ | 28,161 | | | Variable | | October 2026 | | | 4,956,301 | | | 4,992,427 | |
Wells Fargo Facility (f) | | $ | 103,438 | | | 4.50 | % | June 2027 | | | 18,247,707 | | | 18,351,981 | |
Total mortgages payable | | | | | | | | | | $ | 61,764,274 | | $ | 62,065,851 | |
Amounts presented do not reflect unamortized loan issuance costs.
(a) | The original mortgage loan for the Franklin Square Property matured on October 6, 2021. Effective on October 6, 2021, our company entered into a forbearance agreement with the current lender extending the maturity date for thirty days with a right to extend the maturity date for an additional thirty days. On November 8, 2021, we closed on a new loan in the principal amount of $13,250,000 which bears interest at a fixed rate of 3.808%, has a ten-year term, and matures on December 6, 2031. In addition to the funds from the new loan, our company used $2,242,273 in cash on hand for closing costs and to repay the remaining balance of the original mortgage loan. Our company has guaranteed the payment and performance of the obligations of the new loan. The new mortgage loan bears interest at a fixed rate of 3.808% and is interest only until January 6, 2025, at which time the monthly payment will become $61,800, which includes interest and principal based on a thirty-year amortization schedule. Our company accounted for this refinancing transaction in accordance with debt extinguishment accounting in accordance with ASC 470. The new mortgage includes covenants for our company to maintain a net worth of $13,250,000, excluding the assets and liabilities associated with the Franklin Square Property and to maintain liquid assets of no less than $1,000,000. As of March 31, 2023 and December 31, 2022, respectively, our company believes that we are compliant with these covenants. |
(b) | The mortgage loan for the Hanover Square Property bore interest at a fixed rate of 4.25% until January 1, 2023, when the interest rate adjusted to a fixed rate of 6.94%, which was determined by adding 3.00% to the daily average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available by the Federal Reserve Board, with a minimum of 4.25%. As a result of the interest rate change, as of February 1, 2023, the fixed monthly payment of $56,882 increased to $78,098 which includes interest at the fixed rate, and principal, based on a twenty-five -year amortization schedule. The mortgage loan agreement for the Hanover Square property includes covenants to (i) maintain a Debt Service Coverage Ratio (“DSCR”) in excess of 1.35 and (ii) maintain a loan-to-value of real estate ratio of 75%. As of March 31, 2023 and December 31, 2022, respectively, our company believes that we are compliant with these covenants. |
(c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of 3.75% and was interest only for the first twelve months. Beginning on October 1, 2020, the monthly payment became $52,795 for the remaining term of the loan, which includes interest at the fixed rate, and principal, based on a thirty-year amortization schedule. |
(d) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of 3.90% and is interest only for the first twelve months. Beginning on November 1, 2020, the monthly payment became $22,876 for the remaining term of the loan, which includes interest at the fixed rate, and principal, based on a thirty-year amortization schedule. |
(e) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of 2.25%. The interest rate payable is the ICE LIBOR rate plus 225 basis points. Under the terms of the mortgage, the interest rate payable each month shall not change by greater than 1% during any six-month period and 2% during any 12-month period. As of March 31, 2023 and December 31, 2022, the rate in effect for the Parkway Property mortgage was 4.4806% and 4.3117%, respectively. The monthly payment, which varies based on the interest rate in effect each month, includes interest at the variable |
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rate, and principal based on a thirty-year amortization schedule. On October 28, 2021, our company entered into the Interest Rate Protection Transaction to limit our exposure to increases in interest rates on the variable rate mortgage loan on the Parkway Property. Under this agreement, our interest rate exposure is capped at 5.25% if USD 1-Month ICE LIBOR exceeds 3%. For the period from September 1, 2022 through March 31, 2023, LIBOR exceeded the 3%, and payments from the Interest Rate Protection Transaction reduced our company’s net interest expense. Payments to our company from the Interest Rate Protection Transaction are recorded as an offset to interest expense on our company’s condensed consolidated statements of operations for the three months ended March 31, 2023. No such payments were received during the three months ended March 31, 2022 because the LIBOR rate in effect did not exceed the LIBOR cap. The mortgage loan for the Parkway Property includes a covenant to maintain a debt service coverage ratio of not less than 1.60 to 1.00 on an annual basis. As of March 31, 2023 and December 31, 2022, respectively, our company believes that it is compliant with this covenant.
(f) | On June 13, 2022, our company entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $18,609,500. The proceeds of this mortgage were used to finance the acquisition of the Salisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center Property (see notes (g) and (h), below). The Wells Fargo Mortgage Facility bears interest at a fixed rate of 4.50% for a five-year term. The monthly payment, which includes interest at the fixed rate, and principal, based on a twenty-five -year amortization schedule, is $103,438. Our company has provided an unconditional guaranty of the payment of and performance under the terms of the Wells Fargo Mortgage Facility. The Wells Fargo Mortgage Facility credit agreement includes covenants to maintain a debt service coverage ratio of not less than 1.50 to 1.00 on an annual basis and a minimum debt yield of 9.5% on the Salisbury Marketplace, Lancer Center and Greenbrier Business Center properties, and to maintain liquid assets of not less than $1,500,000. As of March 31, 2023 and December 31, 2022, our company believes that we are compliant with these covenants. |
Our company refinanced the mortgage loan for the Lancer Center Property using proceeds from the Wells Fargo Mortgage Facility discussed above. Our company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $113,282. The original mortgage loan for the Lancer Center Property bore interest at a fixed rate of 4.00%. The monthly payment was $34,667 which includes interest at the fixed rate and principal, based on a twenty-five-year amortization schedule.
Our company refinanced the mortgage loan for the Greenbrier Business Center Property, using proceeds from the Wells Fargo Mortgage Facility discussed above. Our company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $56,393. Our company assumed the original mortgage loan for the Greenbrier Business Center Property from the seller. The original mortgage loan bore interest at a fixed rate of 4.00% and would have been interest only until August 1, 2022, at which time the monthly payment would have become $23,873, which would have included interest at the fixed rate, and principal, based on a twenty-five-year amortization schedule.
COVID-19 Impact
Since March 2020, our company’s investment properties have been significantly impacted by (i) measures taken by local, state and federal authorities to mitigate the impact of COVID-19, such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and (ii) significant changes in consumer behavior and business and leisure travel patterns. While most of the measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from the continued mutation of COVID-19 into new variants and the possibility of the re-imposition of mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders by some governmental authorities, and the possibility that changes in consumer behavior will continue and consumer demand for the goods and services of our retail tenants within our portfolio could continue to be significant in future periods. These factors, as well as additional factors that our company may not currently be aware of, could materially negatively impact our company’s ability to collect rent and could lead to termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at our company’s properties, difficulties in accessing capital, impairment of our company’s long-lived assets and other impacts that could materially and adversely affect our company’s business, results of operations, financial condition, and ability to pay distributions to stockholders.
Off-Balance Sheet Arrangements
As of March 31, 2023 and December 31, 2022, we have no off-balance sheet arrangements.
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Summary of Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Significant Accounting Policies,” of our Condensed Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Revenue Recognition
Principal components of our total revenues for our retail center properties and flex center properties include base rents and tenant reimbursements. We accrue minimum (base) rent on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. Certain lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent) which we recognize when the tenants achieve the specified targets as defined in their lease agreements. We periodically review the valuation of the asset/liability resulting from the straight-line accounting treatment of our leases in light of any changes in lease terms, financial condition or other factors concerning our tenants.
For the periods during which our company owned its hotel properties, revenues were recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues from our company’s occupancy agreement with Clemson University were recognized as earned, which is as rooms were occupied by the University.
Rents and Other Tenant Receivables
For our retail center and flex center properties, we record a tenant receivable for amounts due from tenants such as base rents, tenant reimbursements and other charges allowed under the lease terms. We periodically review tenant receivables for collectability and determine the need for an allowance for the uncollectible portion of accrued rents and other accounts receivable based upon customer creditworthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. We consider a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other actions per the lease.
Accounting for Leases
Our company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) on January 1, 2022 using the modified retrospective approach within ASU 2018-11, which allows for the application date to be the beginning of the reporting period in which the entity first applies the new standard. Our company historically has not been and is not currently a “lessee” under any lease agreements, and thus did not have any arrangements requiring the recognition of lease assets or liabilities on its balance sheet. As a “lessor”, our company has active lease agreements with over 100 tenants across our portfolio of investment properties.
Upon the adoption of ASC No. 842, our company has elected the practical expedient permitting lessors to elect by class of underlying asset to not separate non-lease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC No. 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. Our company assessed the criteria above with respect to our operating leases and determined that they qualify for the non-separation practical expedient. As a result, we have accounted for and presented the revenues from these leases, including tenant reimbursements, as a single line item on our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022.
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Acquisition of Investments in Real Estate
The adoption of ASU 2017-01, as discussed in Note 2, “Summary of Significant Accounting Policies” of the condensed consolidated financial statements included in this report, has impacted our accounting framework for the acquisition of investment properties. Upon acquisition of investment properties, our company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, above- and below-market leases, tenant relationships and assumed debt based on evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparable market data and other information which is subjective in nature, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.
Impairment of Long-Lived Assets
We periodically review investment properties for impairment on a property-by-property basis to identify any events or changes in circumstances that indicate that the carrying value of investment properties may not be recoverable. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. If any such events or changes in circumstances are identified, we perform a formal impairment analysis. We measure any impairment of investment property when the estimated undiscounted operating income before depreciation and amortization, is less than the carrying value of the property. To the extent impairment has occurred, we charge to income the excess of carrying value of the property over its estimated fair value. We estimate fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects and local market information. Our company also reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable, but at least annually.
REIT Status
We are a Maryland corporation that has elected to be treated, for U.S. federal income tax purposes, as a REIT. We elected to be taxed as a REIT under the Code for the year ended December 31, 2017 and have not revoked such election. A REIT is a corporate entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted taxable income to stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on our taxable income if we annually distribute 100% of our taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to regular federal and state corporate income taxes and may not be able to elect to qualify as a REIT for four subsequent taxable years. Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.
Evaluation of our company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, our company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the condensed consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of our company’s condensed consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. Our company’s condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In applying applicable accounting guidance, management considered our company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our company’s obligations due over the next twelve months, as well as our company’s recurring business operating expenses.
We have concluded that it is probable that we will be able to meet our obligations arising within one year of the date of issuance of these condensed consolidated financial statements within the parameters set forth in the accounting guidance. For additional information regarding our company’s liquidity, see Note 5 – Loans Payable and Note 8 – Commitments and Contingencies in the notes to our company’s condensed consolidated financial statements.
43
Liquidity and Capital Resources
Our business model is intended to drive growth through acquisitions. Access to the capital markets is an important factor for our continued growth and success. Our primary liquidity needs are funding for (1) operations, including operating expenses, corporate and administrative costs, payment of principal of, and interest on, outstanding indebtedness, and escrow and reserve payments associated with long-term debt financing for our properties; (2) investing needs, including property acquisitions and recurring capital expenditures; and (3) financing needs, including cash dividends and debt repayments.
Internal liquidity to fund operating needs are expected to be provided primarily by the rental receipts from our retail and flex center properties.
Cash Flows
At March 31, 2023, our consolidated cash and restricted cash on hand totaled $4,985,365 compared to consolidated cash on hand of $8,079,034 at March 31, 2022. Cash from operating activities, investing activities and financing activities for the three months ended March 31, 2023 are as follows:
Operating Activities
During the three months ended March 31, 2023 our cash provided by operating activities was $450,724 compared to cash provided by operating activities of $692,863 for the three months ended March 31, 2022, a decrease in cash provided by operating activities of $242,139.
Cash flows from operating activities has two components. The first component consists of net operating loss adjusted for non-cash operating activities. During the three months ended March 31, 2023, operating activities adjusted for non-cash items resulted in net cash used by operating activities of $817. During the three months ended March 31, 2022, operating activities adjusted for non-cash items resulted in net cash provided in operating activities of $689,045. The decrease of $689,862 in cash flows from operating activities for the three months ended March 31, 2023 was primarily a result of increased legal, accounting and other professional fees resulting from the exploration of strategic alternatives announced by our Board of Directors on March 10, 2023, of $307,209, and a decrease in operating income of $392,629 resulting from the sale of the Clemson Best Western Hotel on September 29, 2022. For the three months ended March 31, 2022, the Clemson Best Western Hotel generated $392,629 in operating income. Since our company sold the Clemson Best Western Hotel on September 29, 2022, no operating income was generated during the three months ended March 31, 2023.
The second component consists of changes in assets and liabilities. Increases in assets and decreases in liabilities result in cash used in operations. Decreases in assets and increases in liabilities result in cash provided by operations. During the three months ended March 31, 2023, net changes in asset and liability accounts resulted in $451,541 in cash provided by operations. During the three months ended March 31, 2022, net changes in asset and liability accounts resulted in $3,818 in cash provided by operations. This increase of $447,723 in cash provided by operations resulting from changes in assets and liabilities is a result of increased changes in accounts payable and accrued liabilities of $310,905, and increased changes in other assets of $195,395, offset by decreased changes in unbilled rent of $34,053, and other receivables, net, of $24,524.
The net of (i) the $689,862 decrease in cash provided by operations from the first category and (ii) the $447,723 increase in cash provided by operations from the second category results in a total decrease in cash provided in operations of $242,139 for the three months ended March 31, 2023.
Investing Activities
During the three months ended March 31, 2023, our cash used in investing activities was $647,690, compared to cash used in investing activities of $366,059 during the three months ended March 31, 2022, an increase in cash used in investing activities of $281,631. During the three months ended March 31, 2023, cash used in investing activities consisted of $647,690 in capitalized expenditures, including $168,464 in building improvements, $11,323 in site improvements, $90,638 in capitalized leasing commissions, and $377,265 in capitalized tenant improvements. During the three months ended March 31, 2022, cash used in investing activities consisted of $366,059 in capitalized expenditures, including $230,857 in building improvements, $78,921 in capitalized leasing commissions, and $56,281 in capitalized tenant improvements.
44
Financing Activities
During the three months ended March 31, 2023, our cash used in financing activities was $480,522 compared to cash provided by financing activities of $368,253 during the three months ended March 31, 2022, an increase in cash used in financing activities of $848,775. During the three months ended March 31, 2023, cash used in financing activities consisted of $301,577 for mortgage debt principal payments and $178,945 for dividends and distributions. During the three months ended March 31, 2022, financing activities generated $1,188,574 in net proceeds, after issuance costs, from common stock issuances under our SEPA, offset by cash used in financing activities, including dividends and distributions of $341,521, mortgage debt principal payments of $192,257 and repurchases of our company’s common stock of $286,543, including costs and fees.
Future Liquidity Needs
Liquidity for general operating needs and our company’s investment properties is generally provided by the rental receipts from our retail properties and flex center property, and revenues from our hotel properties, if any. We expect to provide any liquidity for growth (acquisition of new investment properties) by raising additional investment capital. In addition, our company continually reviews and evaluates its outstanding mortgages payable for refinancing opportunities. While some of our mortgages payable are not pre-payable, some mortgages payable may present opportunities for refinancing.
The primary, non-operating liquidity need of our company is $179,719 to pay the dividends and distributions to common shareholders and operating partnership unit holders, and $100,000 to pay the dividends to holders of our mandatorily redeemable preferred stock that were declared on April 12, 2023 and payable April 28, 2023 to holders of record on April 25, 2023, and $780,584 in principal payments due on its mortgages payable during the remaining nine months ending December 31, 2023. In addition to liquidity required to fund these principal payments, we may also incur some level of capital expenditures for our existing properties that cannot be passed on to our tenants. Our company plans to pay these obligations through a combination of cash on hand, potential dispositions and operating cash.
As discussed above, the continuing COVID-19 pandemic outbreak has adversely impacted states and cities where our company’s tenants operate their businesses and where our company’s properties are located. The COVID-19 pandemic could have a material adverse effect on our company’s financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of our company’s tenants’ businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to our company in full. Closures of stores operated by our company’s tenants could reduce our company’s cash flows.
To meet these future liquidity needs, we have the following resources:
· | $3,048,100 in unrestricted cash as of March 31, 2023; |
· | $1,937,265 held in lender reserves for the purposes of tenant improvements, leasing commissions, real estate taxes and insurance premiums; |
· | Our $1,500,000 line of credit with Wells Fargo Bank, which, as of March 31, 2023, had a $0 balance; |
| ● | Cash generated from operations during the nine months ending December 31, 2023, if any; and |
· | Potential proceeds from issuances of common stock under our shelf registration or under the Standby Equity Purchase Agreement (see note 7 of the notes to the condensed consolidated financial statements), although there is no guarantee that any such issuances will be successful in raising additional funds. |
45
Results of Operations
Three months ended March 31, 2023
Revenues
Total revenue was $2,460,976 for the three months ended March 31, 2023, consisting of $1,891,679 in revenues from retail center properties, and $569,297 from flex center properties. Total revenues for the three months ended March 31, 2023 decreased by $442,988 over the three months ended March 31, 2022, resulting from decreased hotel property revenues from the sale of our company’s Clemson Best Western Hotel Property on September 29, 2022, decreased flex center revenues from tenant turnovers in our Parkway Center and Greenbrier Business Center properties, offset by increased retail center revenues from new leasing activity at our Franklin Square property, and our company’s acquisition of the Salisbury Marketplace Property.
| | For the three months ended | | | | | ||||
| | March 31, | | | | |||||
| | 2023 |
| 2022 | | Increase / | | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) |
| |||
Revenues |
| |
|
| |
|
| |
|
|
Retail center properties | | $ | 1,891,679 | | $ | 1,525,085 | | $ | 366,594 | |
Hotel property | |
| — | |
| 765,489 | |
| (765,489) | |
Flex center properties | |
| 569,297 | |
| 613,390 | |
| (44,093) | |
Total Revenues | | $ | 2,460,976 | | $ | 2,903,964 | | $ | (442,988) | |
Revenues from retail center properties were $1,891,679 for the three months ended March 31, 2023, an increase of $366,594 over retail center property revenues for the three months ended March 31, 2022. Increased revenues of $239,734 from the acquisition of the Salisbury Marketplace Property, $127,669 from new leasing activity at our Franklin Square Property, and $8,078 from the Hanover Square Property, were offset by slightly decreased revenues of $5,016 from the Lancer Center Property and $3,871 from the Ashley Plaza Property.
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property | | $ | 583,874 | | $ | 456,205 | | $ | 127,669 |
Hanover Square Property | |
| 331,437 | |
| 323,359 | |
| 8,078 |
Ashley Plaza Property | |
| 431,849 | |
| 435,720 | |
| (3,871) |
Lancer Center Property | | | 304,785 | | | 309,801 | | | (5,016) |
Salisbury Property | | | 239,734 | | | — | | | 239,734 |
| | $ | 1,891,679 | | $ | 1,525,085 | | $ | 366,594 |
Revenues from hotel properties were $0 for the three months ended March 31, 2023, a decrease of $765,489 from revenues from hotel properties for the three months ended March 31, 2022, due to the sale of Clemson Best Western Property on September 29, 2022.
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Hotel Property |
| |
|
| |
|
| |
|
Clemson Best Western Property | | $ | — | | $ | 765,489 | | $ | (765,489) |
| | $ | — | | $ | 765,489 | | $ | (765,489) |
Revenues from the flex center properties were $569,297 for the three months ended March 31, 2023, a decrease of $44,093 over revenues from flex center properties for three months ended March 31, 2022 due to decreased revenues from the Greenbrier Business Center Property of $19,255 and the Parkway Property of $33,972, resulting from tenant turnovers in both properties, offset by increased revenues from the Brookfield Center Property of $9,134.
46
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 207,111 | | $ | 197,977 | | $ | 9,134 |
Greenbrier Business Center Property | | | 180,246 | | | 199,501 | | | (19,255) |
Parkway Center Property | | | 181,940 | | | 215,912 | | | (33,972) |
| | $ | 569,297 | | $ | 613,390 | | $ | (44,093) |
Operating Expenses
Total operating expenses were $2,801,692 for the three months ended March 31, 2023, consisting of $520,740 in expenses from retail center properties, $203,734 in expenses from the flex center properties, $767,078 in legal, accounting and other professional fees, $117,049 in corporate general and administrative expenses, a loss on impairment of $36,743, and $1,156,348 in depreciation and amortization.
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Operating Expenses |
| |
|
| |
|
| |
|
Retail center properties (1) | | $ | 520,740 | | $ | 457,916 | | $ | 62,824 |
Hotel property | |
| — | |
| 372,860 | |
| (372,860) |
Flex center properties (2) | |
| 203,734 | |
| 166,373 | |
| 37,361 |
Total Investment Property Operating Expenses | |
| 724,474 | |
| 997,149 | |
| (272,675) |
Share based compensation expenses | |
| — | |
| 233,100 | |
| (233,100) |
Legal, accounting and other professional fees (3) | |
| 767,078 | |
| 459,869 | |
| 307,209 |
Corporate general and administrative expenses | |
| 117,049 | |
| 80,706 | |
| 36,343 |
Loss on impairment | |
| 36,743 | |
| 36,670 | |
| 73 |
Impairment of assets held for sale | |
| — | |
| 175,671 | |
| (175,671) |
Depreciation and amortization | |
| 1,156,348 | |
| 1,155,197 | |
| 1,151 |
Total Operating Expenses | | $ | 2,801,692 | | $ | 3,138,362 | | $ | (336,670) |
(1) | Includes $125 and $7,791 of bad debt expense for the three months ended March 31, 2023 and 2022, respectively. |
(2) | Includes $26,997 and $4,992 of bad debt expense for the three months ended March 31, 2023 and 2022, respectively. |
(3) | Includes $144,734 and $99,531 in expenses paid to the Consultant pursuant to the Consulting Agreement for the three months ended March 31, 2023 and 2022, respectively. |
Operating expenses for retail center properties were $520,740 for the three months ended March 31, 2023, an increase of $62,824 over retail center property operating expenses for the three months ended March 31, 2022. Increased operating expenses from the acquisition of the Salisbury Marketplace Property of $60,893, and from three of our existing properties, the Franklin Square Property, which increased by $3,440, the Ashley Plaza Property, which increased by $3,696, and the Hanover Square Property, which increased by $8,669, were offset by decreased operating expenses from the Lancer Center Property of $13,874.
47
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property | | $ | 178,492 | | $ | 175,052 | | $ | 3,440 |
Hanover Square Property | |
| 89,153 | |
| 80,484 | |
| 8,669 |
Ashley Plaza Property | | | 87,938 | | | 84,242 | | | 3,696 |
Lancer Center Property (1) | |
| 104,264 | |
| 118,138 | |
| (13,874) |
Salisbury Property | |
| 60,893 | |
| — | |
| 60,893 |
| | $ | 520,740 | | $ | 457,916 | | $ | 62,824 |
(1) | Includes bad debt expense of $125 and $7,791 for the March 31, 2023 and 2022, respectively. |
Operating expenses for hotel properties were $0 for the three months ended March 31, 2023, a decrease of $372,860 from operating expenses from hotel properties for the three months ended March 31, 2022 resulting from the sale of the Clemson Best Western Property on September 29, 2022.
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Hotel Property |
| |
|
| |
|
| |
|
Clemson Best Western Property | | $ | — | | $ | 372,860 | | $ | (372,860) |
| | $ | — | | $ | 372,860 | | $ | (372,860) |
Operating expenses from the flex center properties were $203,734 for the three months ended March 31, 2023, an increase of $37,361 over flex center property operating expenses for the three months ended March 31, 2022 due to increased operating expenses from the Greenbrier Business Center of $41,416 and the Brookfield Center Property of $1,038, offset by decreased operating expenses from the Parkway Property of $5,093.
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 60,851 | | $ | 59,813 | | $ | 1,038 |
Greenbrier Business Center Property (1) | | | 85,192 | | | 43,776 | | | 41,416 |
Parkway Center Property (2) | | | 57,691 | | | 62,784 | | | (5,093) |
| | $ | 203,734 | | $ | 166,373 | | $ | 37,361 |
(1) | Includes $24,463 and $0 of bad debt expense for the March 31, 2023 and 2022, respectively. |
(2) | Includes $2,534 and $4,992 of bad debt expense for the March 31, 2023 and 2022, respectively. |
Operating (Loss) Income
Operating loss for the three months ended March 31, 2023 was $340,716, an increase of $106,318 over the operating loss of $234,398 for the three months ended March 31, 2022. This decrease was a result of (i) decreased investment property operating income of $170,313 primarily resulting from the sale of the Clemson Best Western Hotel on September 29, 2022, (ii) a slight increase in depreciation and amortization expenses of $1,151, (ii) slightly increased loss on impairment of $73, (iii) increased legal, accounting and other professional fees of $307,209, and (iv) increased corporate general and administrative expenses of $36,343.
48
Interest Expense
Interest expense was $864,052 and $841,424 for the March 31, 2023 and 2022, respectively, as follows:
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Franklin Square | | $ | 133,233 | | $ | 133,233 | | $ | — |
Hanover Square | |
| 173,863 | |
| 108,077 | |
| 65,786 |
Ashley Plaza | |
| 106,490 | |
| 108,505 | |
| (2,015) |
Clemson Best Western | |
| — | |
| 138,917 | |
| (138,917) |
Brookfield Center | |
| 48,229 | |
| 49,092 | |
| (863) |
Lancer Center | | | — | | | 70,902 | | | (70,902) |
Greenbrier Business Center | | | — | | | 45,643 | | | (45,643) |
Parkway Center | | | 30,672 | | | 33,132 | | | (2,460) |
Wells Fargo Mortgage Facility | | | 212,761 | | | — | | | 212,761 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | |
| 158,804 | |
| 153,923 | |
| 4,881 |
Total interest expense | | $ | 864,052 | | $ | 841,424 | | $ | 22,628 |
Total interest expense for the three months ended March 31, 2023 increased by $22,628 over the three months ended March 31, 2022. This decrease was a result of (i) increased interest expense from the Wells Fargo Mortgage Facility, which refinanced the Lancer Center and Greenbrier Business Center mortgages payable, and financed the acquisition of the Salisbury Marketplace Property (net increase in interest expense of $96,216 for the four properties, combined), and (ii) increased amortization of preferred stock issuance costs of $4,881, offset by (i) decreased interest expense of $138,917 from the sale of the Clemson Best Western Property, (ii) slight decreases in interest expense for the Ashley Plaza mortgage of $2,015, and the Brookfield Center mortgage of $863.
Other (Loss) Income
During the three months ended March 31, 2023, other loss was $29,038, a decrease of $124,477 from other income of $95,439 for the three months ended March 31, 2022. Other loss for the three months ended March 31, 2023 consisted of $39,868 in loss related to the fair value change of the interest rate caps, offset by interest income of $10,830. Other income of $95,439 for the three months ended March 31, 2022 consisted of $91,042 related to the fair value change of the interest rate cap, $3,913 of miscellaneous income and $484 of interest income.
Net Loss
Net loss was $1,233,806 for the three months ended March 31, 2023, before adjustments for net income (loss) attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was $1,221,295. Net loss was $980,383 for the three months ended March 31, 2022, before adjustments for net income (loss) attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was $989,284, for the three months ended March 31, 2022.
Net loss for the three months ended March 31, 2023 increased by $253,423 over the three months ended March 31, 2022, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the three months ended March 31, 2023 increased by $232,011 over the three months ended March 31, 2022.
Funds from Operations
We use funds from operations (“FFO”), a non-GAAP measure, as an alternative measure of our operating performance, specifically as it relates to results of operations and liquidity. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in its March 1995 White Paper (as amended in November 1999, April 2002 and December 2018). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs and above and below market leases) and after adjustments for unconsolidated partnerships and joint ventures.
49
Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions and excluding depreciation, FFO is a helpful tool that can assist in the comparison of the operating performance of a company’s real estate between periods, or as compared to different companies. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, while historically real estate values have risen or fallen with market conditions. Accordingly, we believe FFO provides a valuable alternative measurement tool to GAAP when presenting our operating results.
NAREIT’s December 2018 White Paper states, “FFO of a REIT includes the FFO of all consolidated properties, including consolidated, partially owned affiliates”. Additionally, since the adjustments to GAAP net income, such as depreciation and amortization, used in the reconciliation of net income (loss) to determine FFO are not allocated between shareholders and noncontrolling interests (i.e. 100% of depreciation and amortization are “added back” without reduction to reflect the noncontrolling owners’ interest in such items), our company believes that the appropriate starting point for the calculation is the net income (loss) before allocation to noncontrolling interests. This allows our company to use FFO as a tool to measure the overall performance of its investment properties, as a whole, not just the portion of the investment properties controlled by our company’s shareholders.
Below is our company’s FFO, which is a non-GAAP measurement, for the three months ended March 31, 2023 and 2022:
| | For the three months ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Net loss | | $ | (1,233,806) | | | (980,383) |
Depreciation of tangible real property assets (1) | |
| 674,398 | | | 602,845 |
Depreciation of tenant improvements (2) | |
| 205,153 | | | 148,924 |
Amortization of leasing commissions (3) | |
| 31,930 | | | 19,791 |
Amortization of intangible assets (4) | |
| 244,867 | | | 383,637 |
Loss on impairment (5) | |
| 36,743 | | | 36,670 |
Impairment of assets held for sale (5) | |
| — | | | 175,671 |
Funds from operations | | $ | (40,715) | | $ | 387,155 |
(1) | Depreciation expense for buildings, site improvements and furniture and fixtures. |
(2) | Depreciation of tenant improvements, including those (i) acquired as part of the purchase of the retail center and flex center properties and (ii) those constructed by our company for the retail center properties and flex center property subsequent to their acquisition. |
(3) | Amortization of leasing commissions paid for the retail center properties and flex center property subsequent to the acquisition of the properties. |
(4) | Amortization of (i) intangible assets acquired as part of the purchase of the retail center properties and flex center property, including leasing commissions, leases in place and legal and marketing costs. |
(5) | NAREIT’s December 2018 White Paper provides guidance for the treatment of impairment write-downs. Specifically, “To the extent there is an impairment write-down of depreciable real estate … related to a REIT’s main business, the write-down is excluded from FFO (i.e., adjusted from net income in calculating FFO).” Additionally, NAREIT’s December 2018 White Paper provides guidance on gains or losses on the sale of assets, stating “the REIT has the option to include or exclude such gains and losses in the calculation of FFO.” |
NAREIT’s December 2018 White Paper encourages companies reporting FFO to “make supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period.” We believe that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include non-cash items such as amortization of loans and above and below market leases, unbilled rent arising from applying straight line rent revenue recognition and share-based compensation expenses. Additionally, the impact of capital expenditures, including tenant improvement and leasing commissions, net of reimbursements of such expenditures by property escrow funds, is included in our calculation of AFFO. Therefore, in addition to FFO, management uses
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Adjusted FFO (“AFFO”), which we define to exclude such items. Management believes that these adjustments are appropriate in determining AFFO as their exclusion is not indicative of the operating performance of our assets. In addition, we believe that AFFO is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that AFFO presented by us is comparable to the adjusted or modified FFO of other REITs.
Total AFFO for the three months ended March 31, 2023 and 2022 was as follows:
| | For the three months ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Funds from operations | | $ | (40,715) | | $ | 387,155 |
Amortization of above market leases (1) | |
| 27,343 | |
| 69,583 |
Amortization of below market leases (2) | |
| (100,361) | |
| (95,617) |
Straight line rent (3) | |
| (48,899) | |
| (14,921) |
Capital expenditures (4) | |
| (647,690) | |
| (366,059) |
(Increase) decrease in fair value of interest rate cap (5) | |
| 39,868 | |
| (91,042) |
Amortization of loan issuance costs (6) | |
| 26,990 | |
| 28,118 |
Amortization of preferred stock discount and offering costs (7) | |
| 58,804 | |
| 53,923 |
Share-based compensation (8) | |
| — | |
| 233,100 |
Bad debt expense (9) | |
| 27,122 | |
| 12,783 |
Adjusted funds from operations (AFFO) | | $ | (657,538) | | $ | 217,023 |
(1) | Adjustment to FFO resulting from non-cash amortization of intangible assets. |
(2) | Adjustment to FFO resulting from non-cash amortization of intangible liabilities. |
(3) | Adjustment to FFO resulting from non-cash revenues recognized as a result of applying straight line revenue recognition for the retail center properties and flex center properties. |
(4) | Adjustment to FFO for capital expenditures, including capitalized leasing commissions, tenant improvements, building and site improvements and purchases of furniture, fixtures and equipment that have not been reimbursed by property escrow accounts. See Investing Activities, above, for detail of capital expenditures. |
(5) | Adjustment to FFO resulting from non-cash expenses recognized as a result of decreases in the fair value of the interest rate caps for the Parkway Property and Clemson Best Western Property. |
(6) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing loan issuance costs over the terms of the respective mortgages. |
(7) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing the preferred stock discount over its five-year term. |
(8) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing the preferred stock offering costs over its five-year term. |
(9) | NAREIT’s December 2018 White Paper provides guidance on non-cash revenues and expenses, stating, “To provide an opportunity for consistent analysis of operating results among REITs, NAREIT encourages those reporting FFO to make supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period. Our company has elected to include non-cash revenues (debt forgiveness) and non-cash expenses (bad debt expense) in its calculation of AFFO. |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We have carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Quarterly Report. Based on the foregoing, our principal executive officer and principal financial officer have concluded, as of March 31, 2023, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our principal executive officer and principal financial officer, evaluated, as of March 31, 2023, the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on that evaluation, our principal executive officer and principal financial officer concluded that our internal control over financial reporting, as of March 31, 2023, were effective.
This Quarterly Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Quarterly Report.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business. We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
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ITEM 1A.RISK FACTORS
We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Repurchases of Equity Securities
On December 21, 2021, the Board authorized a share repurchase program whereby we may repurchase up to 500,000 shares
of our common stock for a maximum price of $4.80 per share. As of December 31, 2022, the Company had repurchased 268,070 shares of our common stock at a total cost of $278,277 and an average price of $1.038 per share. During the three months ended March 31, 2023, the Company did not make any share repurchases.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
None.
EXHIBIT INDEX
Exhibit |
| Description | |
3.1 |
| Articles of Incorporation of Medalist Diversified REIT, Inc.* | |
3.2 |
| ||
3.3 | | ||
3.4 | | ||
3.5 |
| ||
4.1 |
| ||
4.2 | | ||
4.3 | | ||
10.1 | | ||
10.2 | | ||
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10.3 | | |
10.4 | | |
31.1 | | Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. † |
31.2 | | Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. † |
32.1 | | |
32.2 | | |
101.INS | | Inline XBRL Instance Document. |
101.SCH | | Inline XBRL Schema Document. |
101.CAL | | Inline XBRL Calculation Linkbase Document. |
101.DEF | | Inline XBRL Definition Linkbase Document. |
101.LAB | | Inline XBRL Labels Linkbase Document. |
101.PRE | | Inline XBRL Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit 101). |
†Filed herewith.
* Previously filed with the Amendment to the Registrant’s Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on October 5, 2018.
Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDALIST DIVERSIFIED REIT, INC.
Date: May 11, 2023 | | |
| | |
By: | /s/ Thomas E. Messier | |
Thomas E. Messier | ||
Chief Executive Officer and Chairman of the Board | ||
(principal executive officer) | ||
| | |
| By: | /s/ C. Brent Winn |
|
| C. Brent Winn |
|
| |
|
| Chief Financial Officer |
|
| (principal accounting officer and principal financial officer) |
55
Exhibit 31.1
Certification
I, Thomas E. Messier, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Medalist Diversified REIT, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
May 11, 2023 | /s/ Thomas E. Messier |
Date | Thomas E. Messier |
| Chief Executive Officer and Chairman of the Board |
| (principal executive officer) |
Exhibit 31.2
Certification
I, C. Brent Winn, Jr., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Medalist Diversified REIT, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
May 11, 2023 | /s/ C. Brent Winn, Jr. |
Date | C. Brent Winn, Jr. |
| Chief Financial Officer |
| (principal accounting officer and principal financial officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Medalist Diversified REIT, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas E. Messier, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 11, 2023 | /s/ Thomas E. Messier |
Date | Thomas E. Messier |
| Chief Executive Officer and Chairman of the Board |
| (principal executive officer) |
This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to Medalist Diversified REIT, Inc. and will be retained by Medalist Diversified REIT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this Quarterly Report on Form 10-Q for the period ended March 31, 2023 of Medalist Diversified REIT, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, C. Brent Winn, Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
May 11, 2023 | /s/ C. Brent Winn, Jr. |
Date | C. Brent Winn, Jr. |
| Chief Financial Officer |
| (principal accounting officer and principal financial officer) |
This written report is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of this written statement required by Section 906 has been provided to Medalist Diversified REIT, Inc. and will be retained by Medalist Diversified REIT, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.