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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

OR

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: 001-38719

MEDALIST DIVERSIFIED REIT, INC.

Maryland

 

47-5201540

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

P. O. Box 8436

Richmond, VA 23226

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (804) 338-7708

Securities registered pursuant to section 12(b) of the Act:

 Title of Each Class

 

 

Trading
Symbol(s)

Name of each Exchange
on Which Registered

Common Stock, $0.01 par value per share

 

 

MDRR

The Nasdaq Capital Market

8.0% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share

MDRRP

The Nasdaq Capital Market

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.   Yes        No

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).   Yes    No  

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

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

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 No

The number of shares of Common Stock, $0.01 par value per share, of the registrant outstanding at May 9, 2024 was 2,236,631.

Medalist Diversified REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2024

Table of Contents

w

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

3

Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023

3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (unaudited)

4

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2024 and 2023 (unaudited)

5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited)

6

Notes to Condensed Consolidated Financial Statements (unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

31

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

46

Item 4.

Controls and Procedures

47

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

48

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

Item 3.

Defaults Upon Senior Securities

48

Item 4.

Mine Safety Disclosures

48

Item 5.

Other Information

48

Item 6.

Exhibits

48

Signatures

49

2

PART I.FINANCIAL INFORMATION

Item 1.   Financial Statements

Medalist Diversified REIT, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

    

March 31, 2024

December 31, 2023

 

(Unaudited)

    

ASSETS

 

  

 

  

Investment properties, net

$

66,305,628

$

64,577,376

Cash

 

3,637,400

 

2,234,603

Restricted cash

1,499,034

1,575,002

Rent and other receivables, net of allowance of $23,694 and $13,413, as of March 31, 2024 and December 31, 2023, respectively

 

233,330

 

292,618

Assets held for sale

9,707,154

Unbilled rent

 

1,017,128

 

1,109,782

Intangible assets, net

 

2,774,934

 

2,716,546

Other assets

 

513,570

 

532,935

Total Assets

$

75,981,024

$

82,746,016

LIABILITIES

 

 

Accounts payable and accrued liabilities

$

1,031,282

$

1,095,049

Intangible liabilities, net

 

1,885,210

 

1,865,310

Line of credit, short term, net

 

 

1,000,000

Mortgages payable, net

50,595,020

50,772,773

Mortgages payable, net, associated with assets held for sale

9,588,888

Mandatorily redeemable preferred stock, net

 

4,757,701

 

4,693,575

Total Liabilities

$

58,269,213

$

69,015,595

EQUITY

 

  

 

  

Common stock, 2,236,631 and 2,218,810 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively

$

22,366

$

22,188

Additional paid-in capital

 

51,601,531

 

51,514,209

Offering costs

 

(3,350,946)

 

(3,350,946)

Accumulated deficit

 

(34,529,636)

 

(35,864,693)

Total Stockholders' Equity

 

13,743,315

 

12,320,758

Noncontrolling interests - Hanover Square Property

 

39,996

 

119,140

Noncontrolling interests - Parkway Property

451,665

453,203

Noncontrolling interests - Operating Partnership

 

3,476,835

 

837,320

Total Equity

$

17,711,811

$

13,730,421

Total Liabilities and Equity

$

75,981,024

$

82,746,016

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, 

    

2024

    

2023

REVENUE

 

  

 

  

Retail center property revenues

$

1,849,617

$

1,835,373

Flex center property revenues

664,067

569,297

Single tenant net lease property revenues

57,955

56,306

Total Revenue

$

2,571,639

$

2,460,976

OPERATING EXPENSES

 

  

 

  

Retail center property operating expenses

$

428,259

$

512,887

Flex center property operating expenses

144,673

176,737

Single tenant net lease property operating expenses

 

7,708

 

7,728

Bad debt expense

14,056

27,122

Share based compensation expenses

 

277,500

 

Legal, accounting and other professional fees

 

393,078

 

525,628

Corporate general and administrative expenses

 

296,794

 

117,049

Management restructuring expenses

241,450

Loss on impairment

 

 

36,743

Depreciation and amortization

 

1,012,476

1,156,348

Total Operating Expenses

 

2,574,544

 

2,801,692

Gain on disposal of investment property

2,819,502

Loss on extinguishment of debt

(51,837)

Operating Income (Loss)

 

2,764,760

 

(340,716)

Interest expense

 

876,748

 

864,052

Net Income (Loss) from Operations

 

1,888,012

 

(1,204,768)

Other income

 

44,889

 

10,830

Other expense

 

 

39,868

Net Income (Loss)

 

1,932,901

 

(1,233,806)

Less: Net income (loss) attributable to Hanover Square Property noncontrolling interests

457,184

(1,241)

Less: Net income (loss) attributable to Parkway Property noncontrolling interests

 

6,562

 

(8,367)

Less: Net income (loss) attributable to Operating Partnership noncontrolling interests

 

111,757

 

(2,903)

Net Income (Loss) Attributable to Medalist Common Shareholders

$

1,357,398

$

(1,221,295)

Earnings per common share - basic

$

0.61

$

Weighted-average number of shares - basic

2,233,182

Earnings per common share - diluted

$

0.60

$

Weighted-average number of shares - diluted

2,248,142

Loss per common share - basic and diluted

$

$

(0.55)

Weighted-average number of shares - basic and diluted

2,219,803

Dividends paid per common share

$

0.01

$

0.08

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, 2024 and 2023

(Unaudited)

For the three months ended March 31, 2024

    

Common Stock

Noncontrolling Interests  

Additional

Offering

Accumulated

Shareholders’

Hanover Square

Parkway

Operating

 

Shares

    

Par Value

    

Paid in Capital

    

 

Costs

    

Deficit

    

Equity

    

Property

    

Property

    

Partnership

    

Total Equity 

Balance, January 1, 2024

2,218,810

$

22,188

$

51,514,209

$

(3,350,946)

$

(35,864,693)

$

12,320,758

$

119,140

$

453,203

$

837,320

$

13,730,421

 

Share based compensation

17,821

$

178

$

87,322

$

$

$

87,500

$

$

$

190,000

$

277,500

Redemption of operating partnership units

 

(61,589)

(61,589)

Net income

 

1,357,398

1,357,398

457,184

6,562

111,757

1,932,901

Dividends and distributions

 

(22,341)

(22,341)

(479,856)

(8,100)

(653)

(510,950)

Noncontrolling Interests

 

(56,472)

2,400,000

2,343,528

Balance, March 31, 2024

 

2,236,631

 

$

22,366

 

$

51,601,531

 

$

(3,350,946)

 

$

(34,529,636)

 

$

13,743,315

 

$

39,996

 

$

451,665

 

$

3,476,835

 

$

17,711,811

For the three months ended March 31, 2023

    

Common Stock

Noncontrolling Interests  

Additional

Offering

Accumulated

Shareholders’

Hanover Square

Parkway

Operating

Shares

    

Par Value

    

Paid in Capital

    

 

Costs

    

Deficit

    

Equity

    

Property

    

Property

    

Partnership

    

Total Equity 

Balance, January 1, 2023

2,219,803

$

22,198

$

51,519,198

$

(3,350,946)

$

(30,939,020)

$

17,251,430

$

127,426

$

470,685

$

842,898

$

18,692,439

 

Net loss

$

$

$

$

(1,221,295)

$

(1,221,295)

$

(1,241)

$

(8,367)

$

(2,903)

$

(1,233,806)

Dividends and distributions

 

(176,810)

(176,810)

(2,135)

(178,945)

Balance, March 31, 2023

 

2,219,803

 

$

22,198

 

$

51,519,198

 

$

(3,350,946)

 

$

(32,337,125)

 

$

15,853,325

 

$

126,185

 

$

462,318

 

$

837,860

 

$

17,279,688

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, 

    

2024

    

2023

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

$

1,932,901

$

(1,233,806)

Adjustments to reconcile consolidated net loss to net cash flows from operating activities

 

 

Depreciation

 

840,461

 

911,481

Amortization

 

172,015

 

244,867

Loan cost amortization

 

23,767

 

26,990

Mandatorily redeemable preferred stock issuance cost and discount amortization

64,126

58,804

Amortization of lease incentives

741

 

Above (below) market lease amortization, net

 

(64,422)

 

(73,018)

Bad debt expense

14,056

 

27,122

Share-based compensation

277,500

 

Loss on impairment

 

36,743

Loss on extinguishment of debt

51,837

 

Gain on disposal of investment property

 

(2,819,502)

 

Changes in assets and liabilities

 

Rent and other receivables, net

 

45,232

 

84,476

Unbilled rent

 

(1,869)

 

(48,899)

Other assets

 

19,365

 

66,796

Accounts payable and accrued liabilities

 

(63,767)

 

349,168

Net cash flows from operating activities

 

492,441

 

450,724

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

Investment property acquisitions

 

(145,345)

 

Capital expenditures

(226,662)

(647,690)

Cash received from disposal of investment properties, net

 

3,110,149

 

Net cash flows from investing activities

 

2,738,142

 

(647,690)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Dividends and distributions paid

 

(510,950)

 

(178,945)

Repayment of line of credit, short term

(1,000,000)

 

Operating partnership unit redemption

 

(61,589)

 

Repayment of mortgages payable

(331,215)

 

(301,577)

Net cash flows from financing activities

 

(1,903,754)

 

(480,522)

DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

1,326,829

 

(677,488)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period

 

3,809,605

 

5,662,853

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period

$

5,136,434

$

4,985,365

CASH AND CASH EQUIVALENTS, end of period, shown in condensed consolidated balance sheets

3,637,400

3,048,100

RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits, end of period, shown in condensed consolidated balance sheets

1,499,034

1,937,265

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the condensed consolidated statements of cash flows

$

5,136,434

$

4,985,365

Supplemental Disclosures and Non-Cash Activities:

 

 

Other cash transactions:

 

  

 

  

Interest paid

$

865,664

$

796,268

Non-cash transactions:

Issuance of operating partnership units for Citibank Acquisition

$

2,400,000

$

See notes to condensed consolidated financial statements

6

Medalist Diversified REIT, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

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, 2024, the REIT, through the Operating Partnership, owned and operated 10 developed properties consisting of four retail center properties, three flex center properties, and three single tenant net lease (“STNL”) properties, and three undeveloped parcels.  

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 and wholly-owned limited liability companies which own or operate the properties.

Graphic

The Company owns four retail center properties consisting of (i) the Shops at Franklin Square, a 134,239 square foot retail property located in Gastonia, North Carolina (the “Franklin Square Property”), (ii) the Ashley Plaza Shopping Center, a 156,012 square foot retail property located in Goldsboro, North Carolina (the “Ashley Plaza Property”), (iii) the Lancer Center, a 181,590 square foot retail property located in Lancaster, South Carolina (the “Lancer Center Property”), and (iv) the Salisbury Marketplace Shopping Center, a 79,732 square foot retail property located in Salisbury, North Carolina (the “Salisbury Marketplace Property”).  

On March 13, 2024, the Company, and its tenant in common partner, sold the Shops at Hanover Square North, a 73,440 square foot retail property located in Mechanicsville, Virginia (the “Hanover Square Shopping Center Property”). The Company and its tenant in common partner retained ownership of the 0.864 acre outparcel (the “Hanover Square Outparcel” and together with the Hanover Square Shopping Century Property, the “Hanover Square Property”).  The Company owned 84% of the Hanover Square Shopping Center Property and the Hanover Square Outparcel as a tenant in common with a noncontrolling owner which owned the remaining 16% interest.  On March 25, 2024, the Company purchased its tenant in common partner’s 16% interest in the Hanover Square Outparcel (see Note 3, below).  Collectively, the sale of the Hanover Square Shopping Center and the acquisition of the tenant in common partner’s 16% interest in the Hanover Square Outparcel are referenced herein as the “Hanover Square Transactions”.

The Company owns three flex center properties consisting of (i) Brookfield Center, a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina (the “Brookfield Center Property”), (ii) the Greenbrier Business Center,

7

an 89,280 square foot mixed-use industrial/office property located in Chesapeake, Virginia (the “Greenbrier Business Center Property”), and (iii) the Parkway Property, a 64,109 square foot mixed-use industrial office property located in Virginia Beach, Virginia (the "Parkway Property”), in which the Company owns an 82% tenant in common interest with a noncontrolling owner which owns the remaining 18% interest.

The Company owns three STNL properties consisting of (i) the Citibank Property, a 4,350 square foot single tenant building on 0.45 acres located in Chicago, Illinois, (ii) the East Coast Wings building, a 5,000 square foot single tenant building on approximately 0.89 acres located in Goldsboro, North Carolina (the “East Coast Wings Property”), and (iii) the T-Mobile building, a 3,000 square foot single tenant building on approximately 0.78 acres located in Goldsboro, North Carolina (the “T-Mobile Property”).  The East Coast Wings Property and the T-Mobile Property are both located on outparcels adjacent to the Ashley Plaza Property.  Prior to January 1, 2024, the Company included the East Coast Wings Property and the T-Mobile Property as part of the Ashley Plaza Property.  

The Company also owns three undeveloped parcels which are currently being marketed for use as STNL properties including (i) an outparcel at its Lancer Center Property consisting of approximately 1.80 acres (the “Lancer Outparcel”), (ii) an outparcel at its Salisbury Marketplace Property consisting of approximately 1.20 acres (the “Salisbury Outparcel”) (the exact size of the Lancer Outparcel and Salisbury Outparcel will not be determined until a user is identified), and (iii) the Hanover Square Outparcel consisting of approximately 0.86 acres located adjacent to the Hanover Square Shopping Center Property, which the Company sold on March 13, 2024.  

The Company prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). References to the condensed consolidated financial statements and references to individual financial statements included herein, reference the condensed consolidated financial statements or the respective individual financial statement. All material balances and transactions between the consolidated entities of the Company have been eliminated.

The Company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus, as of March 31, 2024, on commercial properties, including retail properties and flex-industrial 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, and STNL assets with an expected national focus. 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 at the discretion of the Company’s Board of Directors (the “Board”).  

For all periods prior to July 18, 2023, the Company was externally managed by Medalist Fund Manager, Inc. (the “Manager”).  On July 18, 2023, the Company and the Manager entered into an agreement (the “Termination Agreement”) terminating that certain Management Agreement, dated as of March 15, 2016, among the Company, the Operating Partnership and the Manager, as amended (the “Management Agreement”).  Until the termination of the Management Agreement, the Manager made all investment decisions for the Company, which were approved by the Board’s Acquisition Committee.  In addition, until the termination of the Management Agreement, the Manager oversaw the Company’s overall business and affairs and had broad discretion to make operating decisions on behalf of the Company.  Since the termination of the Management Agreement, the Company has been managed internally as directed by the Board.  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

8

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.

The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 4 to 42 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Capitalized leasing commissions and tenant improvements incurred and paid by the Company subsequent to the acquisition of the investment property are amortized utilizing the straight-line method over the term of the related lease. Amounts allocated to buildings are depreciated over the estimated remaining life of the acquired building or related improvements.

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.

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 November 2023, the Company committed to a plan to sell an asset group associated with the Hanover Square Shopping Center Property that included the land, site improvements, building, building improvements and tenant improvements. As a result, as of December 1, 2023, the Company reclassified these assets, and the related mortgage payable, net, for the Hanover Square Shopping Center Property as assets held for sale and liabilities associated with assets held for sale, respectively. Under ASC 360, depreciation of assets held for sale is discontinued, so no further depreciation or amortization was recorded subsequent to December 1, 2023.  The Company believed that the fair value, less estimated costs to sell, exceeded the Company’s carrying cost, so the Company did not record any impairment of assets held for sale related to the Hanover Square Shopping Center Property for any periods, including the three months ended March 31, 2024 and the year ended December 31, 2023, the periods during which the Hanover Square Shopping Center Property was classified as assets held for sale.  The Company sold the Hanover Square Shopping Center on March 13, 2024.  

9

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.

Details of the deferred costs, net of amortization, arising from the Company’s purchases of its retail center properties, flex center properties and STNL properties are as follows:

March 31, 2024

 

    

(unaudited)

    

December 31, 2023

 

Intangible Assets, net

Leasing commissions

$

932,217

$

912,040

Legal and marketing costs

 

97,889

 

104,791

Above market leases

 

91,472

 

106,907

Net leasehold asset

 

1,653,356

 

1,592,808

$

2,774,934

$

2,716,546

Intangible Liabilities, net

 

 

Below market leases

$

(1,885,210)

$

(1,865,310)

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, 2024 and 2023, respectively, were as follows:

For the three months ended

 

March 31, 

2024

2023

    

(unaudited)

    

(unaudited)

 

Amortization of above market leases

$

(15,434)

$

(27,343)

Amortization of below market leases

 

79,856

 

100,361

$

64,422

$

73,018

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, 2024 and 2023, respectively, were as follows:

For the three months ended

 

March 31, 

2024

2023

    

(unaudited)

    

(unaudited)

 

Leasing commissions

$

(46,507)

$

(56,618)

Legal and marketing costs

 

(11,846)

 

(16,205)

Net leasehold asset

 

(113,662)

 

(172,044)

$

(172,015)

$

(244,867)

As of March 31, 2024 and December 31, 2023, the Company’s accumulated amortization of lease origination costs, leases in place and legal and marketing costs totaled $2,254,058 and $2,204,404, respectively. During the three months ended March 31, 2024 and 2023, the Company wrote off $122,360 and $273,252, respectively, in accumulated amortization related to fully amortized intangible assets, and $0 and $21,407, respectively, in accumulated amortization related to the write off of intangible assets related to the early terminated leases, discussed above.

10

Future amortization of above and below market leases, lease origination costs, leases in place, legal and marketing costs and tenant relationships is as follows:

    

For the

remaining nine

months ending

December 31, 

2024

    

2025

    

2026

    

2027

    

2028

    

2029-2041

    

Total

Intangible Assets

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Leasing commissions

$

129,836

$

154,496

$

116,510

$

97,592

$

76,167

$

357,616

$

932,217

Legal and marketing costs

 

25,593

 

24,456

 

13,842

 

8,599

 

5,886

 

19,513

 

97,889

Above market leases

 

25,416

 

21,292

 

15,629

 

14,543

 

10,114

 

4,478

 

91,472

Net leasehold asset

 

288,837

 

318,667

 

223,495

 

177,171

 

128,963

 

516,223

 

1,653,356

$

469,682

$

518,911

$

369,476

$

297,905

$

221,130

$

897,830

$

2,774,934

Intangible Liabilities

 

 

 

 

 

 

 

Below market leases, net

$

(216,355)

$

(227,108)

$

(192,535)

$

(175,625)

$

(153,615)

$

(919,972)

$

(1,885,210)

Impairment

During the three months ended March 31, 2024 and 2023, the Company recorded a loss on impairment of $0 and $36,743, respectively, resulting from the events described below.  

Investment Properties

The Company reviews its 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 an 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. 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, 2024 and 2023, that would result in the projected value of the Company’s investment properties being below their carrying value.  

However, during the three months ended March 31, 2023, one tenant defaulted on its lease.  The Company determined that the carrying value of capitalized tenant improvements associated with this lease which were recorded as a component of investment properties on the Company’s condensed consolidated balance sheets should be written off, and the Company recorded a loss on impairment of $8,655 for the three months ended March 31, 2023.  This amount is included in the loss on impairment reported on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2023. No such loss on impairment was recorded for the three months ended March 31, 2024.  

Intangible Assets

The 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.  During the three months ended March 31, 2023, the Company determined that the carrying value of certain intangible assets associated with the lease on which the tenant defaulted should

11

be written off and recorded a loss on impairment of $26,896.  This amount is included in the loss on impairment reported on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2023.  No such amounts were recorded during the three months ended March 31, 2024.  

Unbilled Rent

The Company also reviews the unbilled rent asset recorded on the Company’s condensed consolidated balance sheets for impairment to determine if any amounts may not be recoverable.  During the three months ended March 31, 2023, the Company recorded a loss on impairment of $1,192 related to previously recognized straight-line rent related to the defaulting tenant.  This amount is included in the loss on impairment reported on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2023.  No such amounts were recorded during the three months ended March 31, 2024.  

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, 2024 and 2023, respectively.

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 $250,000. The Company’s credit loss in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amounts on deposit. Management monitors the financial institutions’ credit worthiness in conjunction with balances on deposit to minimize risk. As of March 31, 2024, the Company held two cash accounts at a single financial institution with combined balances that exceeded the FDIC limit by $2,592,582.  As of December 31, 2023, the Company held two cash accounts at a single financial institution with combined balances that exceeded the FDIC limit by $1,366,872.

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, 2024 and December 31, 2023, the Company reported $247,983 and $260,898, respectively, in security deposits held as restricted cash.

Escrow deposits are restricted cash balances held by lenders for real estate taxes and insurance premiums. As of March 31, 2024 and December 31, 2023, the Company reported $217,000 and $191,139, respectively, in escrow deposits.

Capital reserves are restricted cash balances held by lenders for capital improvements, leasing commissions and tenant improvements. As of March 31, 2024 and December 31, 2023, the Company reported $1,034,051 and $1,122,965, respectively, in capital property reserves.

12

March 31, 2024

December 31, 

Property and Purpose of Reserve

    

(unaudited)

    

2023

Ashley Plaza Property - maintenance and leasing cost reserve

459,914

439,404

Brookfield Center Property – maintenance and leasing cost reserve

102,573

91,491

Franklin Square Property – leasing costs

 

471,564