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Medalist Diversified REIT(MDRR) - 2022 Q4 - Annual Report

Part I Business Medalist Diversified REIT, Inc. is an externally managed REIT focused on acquiring and managing income-producing commercial properties in the southeastern U.S. As of December 31, 2022, its portfolio included eight properties, and in March 2023, the Board began exploring strategic alternatives - The company, a Maryland corporation, elected REIT taxation in 2017 and is externally managed by Medalist Fund Manager, Inc.18 - The investment strategy targets commercial, multi-family, and hotel properties in secondary and tertiary markets across the southeastern U.S.18 - As of year-end 2022, the portfolio consisted of eight investments: five retail and three flex/industrial properties, with most properties 100% owned27 - On March 10, 2023, the Board formed a special committee to explore strategic alternatives to maximize stockholder value22 - The company is externally managed with no employees; executive officers are employed by the Manager or third-party firms, with financial services from Gunston Consulting, LLC33 Risk Factors As a smaller reporting company, Medalist Diversified REIT, Inc. has omitted the discussion of risk factors as permitted by regulations - The company omitted risk factor discussion due to its qualification as a smaller reporting company35 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments36 Properties As of December 31, 2022, the company's portfolio comprised eight properties across retail and flex segments, with a hotel segment maintained for historical reporting despite asset sale. A significant $18,609,500 mortgage facility was secured in June 2022 Property Portfolio Overview As of December 31, 2022, the portfolio included five retail and three flex/industrial properties, with the hotel segment maintained for reporting despite its sale Property Portfolio as of December 31, 2022 | Name | Type | Location | Size (sq. ft.) | Occupancy | Anchor Tenants | | :--- | :--- | :--- | :--- | :--- | :--- | | Franklin Square Property | Retail | Gastonia, NC | 134,239 | 93.2% | Ashley Furniture, Altitude | | Hanover Square Property | Retail | Mechanicsville, VA | 73,441 | 100% | Marshalls, Old Navy | | Ashley Plaza Property | Retail | Goldsboro, NC | 164,012 | 100% | Hobby Lobby, Harbor Freight, Ashley Home Store, Planet Fitness | | Lancer Center Property | Retail | Lancaster, SC | 181,590 | 100% | Badcock Furniture, KJ's Market, Big Lots | | Salisbury Marketplace Property | Retail | Salisbury, NC | 79,732 | 91.2% | Food Lion, CitiTrends, Family Dollar | | Brookfield Center Property | Flex | Greenville, SC | 64,880 | 100% | Gravitopia Trampoline Park, S&ME, Inc. | | Greenbrier Business Center Property | Flex | Chesapeake, VA | 89,290 | 79.9% | Bridge Church | | Parkway Property | Flex | Virginia Beach, VA | 64,109 | 100% | GBRS Group, First Onsite | Retail Properties The retail portfolio comprises five properties totaling over 633,000 square feet, with strong occupancy and national/regional anchor tenants, indicating manageable lease rollover risk - The Salisbury Marketplace Property was acquired on June 13, 2022, for $10,025,000, a 79,732 sq. ft. retail property 91.2% leased at year-end100 - The Lancer Center Property was acquired on May 14, 2021, for $10,100,000, a 181,590 sq. ft. retail property that was 100% leased at year-end76 Flex Properties The flex/industrial portfolio includes three properties totaling approximately 218,000 square feet, with two properties 100% leased and one at 79.9% occupancy at year-end 2022 - The Parkway Property was acquired on November 1, 2021, as an 82% tenant-in-common interest, a 64,109 sq. ft. property 100% leased and financed with a variable-rate loan9193 - The Greenbrier Business Center Property was acquired on August 27, 2021, for $7,250,000, an 89,290 sq. ft. property 79.9% leased as of December 31, 202282 Financing On June 13, 2022, the company secured an $18,609,500 mortgage facility with Wells Fargo to acquire a new property and refinance existing ones, featuring a 5-year term at a 4.50% fixed rate and specific covenants - The company entered into an $18,609,500 mortgage facility with Wells Fargo on June 13, 2022105 - Proceeds were utilized to acquire the Salisbury Marketplace Property and refinance the Lancer Center and Greenbrier Business Center properties105 - The loan features a 5-year term, a 4.50% fixed rate, and covenants requiring a debt service coverage ratio of at least 1.50x, a minimum debt yield of 9.5%, and at least $1.5 million in liquid assets105 Legal Proceedings The company and its subsidiaries are not currently party to any material litigation or threatened material litigation, excluding routine matters - The company is not subject to any material litigation, aside from routine actions covered by liability insurance106 Mine Safety Disclosures This section is not applicable to the company's operations - Not Applicable107 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under MDRR, facing a $1.00 minimum bid deficiency with a July 2023 compliance deadline. As of year-end 2022, 268,070 shares were repurchased under its program - The company's common stock (MDRR) and Series A Preferred Stock (MDRRP) are listed on the Nasdaq Capital Market3110 - On July 11, 2022, Nasdaq issued a deficiency notice for the common stock's bid price falling below $1.00, with an extension until July 10, 2023, to regain compliance112113 - A share repurchase program authorized up to 500,000 shares in December 2021, with 268,070 shares repurchased for $278,277 as of December 31, 2022121 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, total revenue decreased to $11.1 million due to hotel sales, offset by retail/flex acquisitions, while net loss attributable to common shareholders increased to $4.8 million; FFO improved to $1.0 million from a negative $1.0 million in 2021 Recent Trends and Activities In 2022, the company sold its last hotel property for $10.0 million and acquired Salisbury Marketplace for $10.0 million, securing an $18.6 million mortgage facility and raising $1.5 million via SEPA, while repurchasing 268,070 shares - The Clemson Best Western Property was sold on September 29, 2022, for $10,015,000, resulting in a loss on sale of $421,096130 - The Salisbury Marketplace Property was acquired on June 13, 2022, for $10,025,000132 - An $18.6 million mortgage facility and a $1.5 million line of credit were secured with Wells Fargo on June 13, 2022137138 - As of December 31, 2022, $1,538,887 was raised from issuing 1,445,400 shares under the Standby Equity Purchase Agreement (SEPA)142143 - 268,070 shares of common stock were repurchased for $278,277 under the Common Stock Repurchase Plan as of December 31, 2022144145 Liquidity and Capital Resources The company's primary liquidity sources are rental receipts and capital markets access. As of December 31, 2022, cash and restricted cash totaled $5,662,853, down from $7,383,977 in 2021. Cash from operations increased to $1,194,626 in 2022 from $832,613 in 2021, while investing activities used $9,319,181 and financing provided $6,403,431. Future liquidity needs include $1.1 million in mortgage principal payments due in 2023 Cash and Restricted Cash Position | Date | Amount | | :--- | :--- | | December 31, 2022 | $5,662,853 | | December 31, 2021 | $7,383,977 | Cash Flow Summary (Year Ended Dec 31) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $1,194,626 | $832,613 | | Cash used in Investing Activities | ($9,319,181) | ($19,142,727) | | Cash from Financing Activities | $6,403,431 | $20,597,163 | - Future liquidity needs include $1.1 million in mortgage principal payments due in 2023 and declared dividends of $176,810 for common shareholders and $100,000 for preferred stockholders payable in January 2023203 Results of Operations For 2022, total revenues decreased by $381,224 to $11,091,325, driven by a $3,127,682 decline in hotel revenues offset by increases in retail and flex revenues. Total operating expenses rose to $11,694,648 from $10,782,686, while interest expense decreased to $3,600,000 from $5,500,000. The net loss attributable to common shareholders widened to ($4,769,241) ($0.28 per share) from ($4,364,264) ($0.33 per share) in 2021 Revenue by Segment (Year Ended Dec 31) | Segment | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Retail center properties | $7,053,757 | $5,634,396 | $1,419,361 | | Hotel properties | $1,507,649 | $4,635,331 | ($3,127,682) | | Flex center properties | $2,529,919 | $1,202,822 | $1,327,097 | | Total Revenues | $11,091,325 | $11,472,549 | ($381,224) | Operating Expenses Summary (Year Ended Dec 31) | Expense Category | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total Investment Property Operating Expenses | $3,979,686 | $5,004,665 | ($1,024,979) | | Share based compensation | $483,100 | $149,981 | $333,119 | | Depreciation and amortization | $4,706,823 | $3,508,704 | $1,198,119 | | Total Operating Expenses | $11,694,648 | $10,782,686 | $911,962 | Net Loss Summary (Year Ended Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Loss | ($4,732,214) | ($4,358,282) | | Net Loss Attributable to Common Shareholders | ($4,769,241) | ($4,364,264) | | Loss per share (basic and diluted) | ($0.28) | ($0.33) | Funds from Operations (FFO) and Adjusted FFO (AFFO) The company uses non-GAAP measures FFO and AFFO to evaluate performance. For 2022, FFO was $997,253, a significant turnaround from a loss of ($974,219) in 2021. AFFO was $241,024 in 2022, compared to $332,514 in 2021 FFO and AFFO Reconciliation (Year Ended Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income (loss) | ($4,732,214) | ($4,358,282) | | Depreciation & Amortization | $4,389,993 | $3,508,704 | | Loss (gain) on sale of investment properties | $421,096 | ($124,641) | | Impairment & Debt Extinguishment Losses | $601,548 | $0 | | Funds from operations (FFO) | $997,253 | ($974,219) | | Adjustments for AFFO | ($756,229) | $1,306,733 | | Adjusted funds from operations (AFFO) | $241,024 | $332,514 | Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2022, with no material changes during the quarter - The Chief Executive Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022246 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework248 - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter250 Other Information On March 10, 2023, the Board established a Special Committee to explore strategic alternatives, amending the Management Agreement and CFO/VP Consulting Agreements to clarify termination and retention payments upon a Change in Control - On March 10, 2023, the Board established a Special Committee to explore strategic alternatives to maximize stockholder value251 - The Management Agreement was amended to clarify that deferred acquisition fees become payable upon a Change in Control or certain termination events252 - The CFO's Consulting Agreement was amended to establish a "Retention Amount" payable upon termination without cause within 12 months of a Change in Control257 - A Change in Control Agreement was established for the Vice President, Mr. C. Elliott, providing for a similar retention payment upon a triggering event related to a Change in Control262 Part III Directors, Executive Officers and Corporate Governance This section provides biographical information for executive officers and directors, noting untimely Form 4 filings in 2022. The company has adopted a code of ethics and operates with four standing board committees: Audit, Compensation, Nominating and Corporate Governance, and Acquisition, with independent directors chairing key committees Executive Officers and Directors | Name | Position | | :--- | :--- | | Thomas E. Messier | Chairman of the Board, CEO, Secretary and Treasurer | | William R. Elliott | Vice Chairman of the Board, President and COO | | Neil P. Farmer | Independent Director | | Charles S. Pearson, Jr. | Independent Director | | Timothy O'Brien | Independent Director | - Five directors and the CFO filed untimely Form 4 reports during 2022 related to stock grants and a stock purchase274 - The Board operates with four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Acquisition277 - Charles S. Pearson, Jr. chairs the audit committee and qualifies as an "audit committee financial expert"279280 Executive and Director Compensation Top executives receive no direct cash compensation from the company, while the CFO and VP are compensated via a consulting agreement. In 2022, CFO C. Brent Winn, Jr.'s total compensation was $426,600. The 2018 Equity Incentive Plan provides for accelerated vesting upon a change in control, and consulting agreements include specific severance payments. Independent directors received $63,300 each in stock awards 2022 Summary Compensation | Name | Position | Salary ($) | Bonus ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Thomas E. Messier | CEO | — | — | 63,300 | 63,300 | | William R. Elliott | COO & President | — | — | 63,300 | 63,300 | | C. Brent Winn, Jr. | CFO | 250,000 | 50,000 | 126,600 | 426,600 | | Colin M. Elliott | Vice President | 64,516 | 50,000 | 30,000 | 144,516 | - Upon a change in control, all outstanding awards under the 2018 Equity Incentive Plan will automatically vest295 - The Consulting Agreement provides for a "Retention Amount" payment to the CFO's firm upon termination without cause within 12 months of a Change in Control299 2022 Director Compensation | Name | Fees Earned ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | Neil P. Farmer | — | 63,300 | 63,300 | | Charles S. Pearson, Jr. | — | 63,300 | 63,300 | | Timothy O'Brien | — | 63,300 | 63,300 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 10, 2023, three beneficial owners held over 5% of common stock, with all named executive officers and directors as a group owning 6.98%. The 2018 Equity Incentive Plan had 375,672 shares available for future issuance as of December 31, 2022 Beneficial Ownership as of March 10, 2023 | Owner | Shares Beneficially Owned | Percentage of Shares | | :--- | :--- | :--- | | Alfred Lee Finley | 2,625,000 | 14.78% | | Francis P. Kavanaugh | 1,700,000 | 9.57% | | Wells Fargo & Co. | 1,042,594 | 5.87% | | All Named Executive Officers and Directors as a Group | 1,239,664 | 6.98% | - Ownership percentages are based on 17,758,421 shares of common stock outstanding as of March 10, 2023307 - As of December 31, 2022, 375,672 securities remained available for future issuance under the company's equity compensation plans310 Certain Relationships and Related Transactions, and Director Independence The company is externally managed, paying asset management fees ($876,049 in 2022) and acquisition fees ($201,524 in 2022) to its Manager, with a significant termination fee provision. Related parties receive property management and consulting fees, and three of the five board directors are independent - The company pays its external Manager a monthly asset management fee of 0.125% of stockholders' equity, totaling $876,049 in 2022312 - The Manager receives a 2.0% acquisition fee on property purchases, totaling $201,524 in 2022 (half deferred), with accrued deferred fees of $352,717 at year-end 2022315316 - Termination of the Management Agreement without cause would trigger a termination fee equal to three times the prior 12 months' asset management and incentive fees, amounting to $2,628,147 as of December 31, 2022322324 - Colin M. Elliott, son of executive William R. Elliott, serves as Vice President via a Consulting Agreement with Gunston Consulting, LLC, with $114,516 reimbursed for his services in 2022325327 - The Board comprises five directors, with three (Messrs. Farmer, Pearson, and O'Brien) considered independent331 Principal Accountant Fees and Services Fees paid to independent registered public accounting firm Cherry Bekaert LLP totaled $306,105 in 2022, a significant decrease from $536,440 in 2021, primarily due to lower audit fees Fees Paid to Cherry Bekaert LLP | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $228,283 | $426,565 | | Tax Fees | $77,822 | $108,952 | | All Other Fees | — | $923 | | Total | $306,105 | $536,440 | Part IV Exhibits and Financial Statement Schedules This section includes the company's consolidated financial statements for 2022 and 2021, the independent auditor's report, Schedule III detailing real estate properties, and a comprehensive index of all exhibits filed with the 10-K Financial Statements The audited consolidated financial statements present the company's financial position, results of operations, and cash flows. As of year-end 2022, total assets were $87,915,404, total liabilities $69,222,965, and a net loss of ($4,732,214) was reported for 2022 Consolidated Balance Sheet Highlights (As of Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Assets | $87,915,404 | $92,547,088 | | Total Liabilities | $69,222,965 | $69,548,699 | | Total Equity | $18,692,439 | $22,998,389 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Account | 2022 | 2021 | | :--- | :--- | :--- | | Total Revenue | $11,091,325 | $11,472,549 | | Total Operating Expenses | $11,694,648 | $10,782,686 | | Net Loss | ($4,732,214) | ($4,358,282) | | Net Loss Attributable to Common Shareholders | ($4,769,241) | ($4,364,264) | - The company adopted ASC 842 on January 1, 2022, primarily combining lease revenue and tenant reimbursements into a single line item for lessors418419 - The Clemson Best Western Hotel Property was sold on September 29, 2022, for $10,015,000, resulting in a loss on sale of $421,096438 Schedule III – Real Estate Properties and Accumulated Depreciation This schedule details the company's real estate assets as of December 31, 2022, showing a gross carrying amount of $85,915,860 for investment properties, with accumulated depreciation of $9,400,908, resulting in a net book value of $76,514,952 Real Estate Portfolio Summary (as of Dec 31, 2022) | Metric | Amount | | :--- | :--- | | Gross Amount of Investment Properties | $85,915,860 | | Accumulated Depreciation | $9,400,908 | | Net Investment Properties | $76,514,952 |