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 | |
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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(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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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
| 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 | $ | | $ | | |||
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 | $ | | $ | | |||
EQUITY |
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Common stock, | $ | | $ | | |||
Additional paid-in capital |
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Offering costs |
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Accumulated deficit |
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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, | |||||||
| 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 | $ | | $ | | |||
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 |
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Interest expense |
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Net Loss from Operations |
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Other (loss) income |
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Net Loss |
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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 |
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Net Loss Attributable to Medalist Common Shareholders | $ | ( | $ | ( | |||
Loss per share from operations - basic and diluted | $ | ( | $ | ( | |||
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 | |||||||||||||||||||||||||||||
| 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 |
| — | — | — | — | ( | ( | — | — | ( | ( | ||||||||||||||||||
Balance, March 31, 2023 |
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| $ | |
| $ | |
For the three months ended March 31, 2022 | |||||||||||||||||||||||||||||
| 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 |
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| Partnership |
| Total Equity | ||||||||||
Balance, January 1, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | | $ | | ||||||||||
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Common stock issuances | | $ | | $ | | $ | — | $ | — | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Common stock repurchases |
| ( | ( | ( | — | — | ( | — | — | — | ( | ||||||||||||||||||
Share based compensation |
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Net (loss) income |
| — | — | — | — | ( | ( | ( | | ( | ( | ||||||||||||||||||
Dividends and distributions |
| — | — | — | — | ( | ( | ( | ( | ( | ( | ||||||||||||||||||
Balance, March 31, 2022 |
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| $ | ( |
| $ | ( |
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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, | ||||||
| 2023 |
| 2022 | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net Loss | $ | ( | $ | ( | ||
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 |
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Bad debt expense | | | ||||
Share-based compensation | — | | ||||
Impairment of assets held for sale |
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Loss on impairment | | | ||||
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 |
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Repayment of mortgages payable | ( | ( | ||||
Proceeds from sales of common stock, net of capitalized offering costs | — | | ||||
Repurchases of common stock, including costs and fees |
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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 | $ | | $ | | ||
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 | $ | | $ | | ||
Supplemental Disclosures and Non-Cash Activities: |
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Other cash transactions: |
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Interest paid | $ | | $ | | ||
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.
9
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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| 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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$ | | $ | | ||||
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
For the three months ended |
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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:
For the three months ended |
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March 31, | |||||||
2023 | 2022 | ||||||
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Leasing commissions | $ | ( | $ | ( | |||
Legal and marketing costs |
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Net leasehold asset |
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$ | ( | $ | ( | ||||
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:
| For the | ||||||||||||||||||||
remaining nine | |||||||||||||||||||||
months ending | |||||||||||||||||||||
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2023 |
| 2024 |
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| 2026 |
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| 2028-2042 |
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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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$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
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 |
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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