Medalist Diversified REIT(MDRR) - 2023 Q4 - Annual Report

Part I Business Medalist Diversified REIT, Inc. acquires and manages income-producing commercial properties, transitioning to internal management in 2023 and exploring single-tenant net lease assets - The company's primary focus is on acquiring and managing income-producing commercial properties, including flex-industrial, retail, multi-family, and hotel properties in the southeastern U.S.[19] - On July 18, 2023, the company terminated its external management agreement and transitioned to an internally managed structure[22] - The company is exploring a strategy to create and acquire single-tenant net lease assets, with a recent agreement to acquire the Citibank Property announced in February 2024[21] - As of December 31, 2023, the portfolio comprised eight investments: five retail properties and three flex/industrial properties[27] - The company has no employees; its Chief Financial Officer and Controller are employed by Gunston Consulting, LLC under a staffing agreement[31] Risk Factors As a smaller reporting company, the registrant is not required to provide information on risk factors - As a smaller reporting company, the registrant is not required to provide information on risk factors[35] Unresolved Staff Comments The company has no unresolved comments from the SEC staff - None[36] Cybersecurity The company manages cybersecurity risks through internal processes and third-party providers, with no material incidents reported - The company has implemented information security processes to manage cybersecurity risks to its critical systems and data, utilizing both internal controls and third-party service providers[37][38][39] - The Board of Directors oversees cybersecurity risk, with the Chief Financial Officer, Brent Winn, leading the risk assessment and management processes[41] - The company is not aware of any cybersecurity threats or incidents that have had or are reasonably likely to have a material impact on its business, strategy, or financial condition[40] Properties The company's portfolio comprises eight retail and flex-industrial properties across North Carolina, Virginia, and South Carolina, with detailed property descriptions Property Portfolio Overview (as of December 31, 2023) | Name | Type | Location | Square Footage | Occupancy | Anchor Tenants | | :--- | :--- | :--- | :--- | :--- | :--- | | Franklin Square Property | Retail | Gastonia, NC | 134,239 | 98.6% | Ashley Furniture, Altitude | | Hanover Square Property | Retail | Mechanicsville, VA | 73,440 | 96.7% | Marshalls, Old Navy | | Ashley Plaza Property | Retail | Goldsboro, NC | 164,012 | 98.0% | 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 | 85.3% | Food Lion, CitiTrends, Family Dollar | | Brookfield Center Property | Flex | Greenville, SC | 64,880 | 100% | Gravitopia Trampoline Park, S&ME, Inc., Turning Point Greenville Church | | Greenbrier Business Center Property | Flex | Chesapeake, VA | 89,280 | 95.1% | Bridge Church | | Parkway Property | Flex | Virginia Beach, VA | 64,109 | 100% | GBRS Group, First Onsite | - The company owns an 84% tenant-in-common interest in the Hanover Square Property and an 82% tenant-in-common interest in the Parkway Property[44] - On June 13, 2022, the company entered into an $18.6 million mortgage facility with Wells Fargo to acquire the Salisbury Marketplace Property and refinance the Lancer Center and Greenbrier Business Center properties[118] Franklin Square Property This 134,239 sq. ft. retail property in Gastonia, NC, was 98.6% leased as of December 31, 2023 Franklin Square Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Ashley Furniture | Retail | 34,682 | 25.8% | $277,456 | 12/31/2025 | | Altitude Trampoline Park | Entertainment | 30,000 | 22.4% | $270,000 | 7/31/2029 | - Occupancy has improved significantly, rising from 81.2% in 2021 to 98.6% in 2023[51] Hanover Square Property The 73,440 sq. ft. Hanover Square retail property in Mechanicsville, VA, is 96.7% leased, with a sale agreement in place - On December 29, 2023, the company entered into an agreement to sell the Hanover Square Shopping Center for $13 million (later reduced by $75 thousand)[61] Hanover Square Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Old Navy | Retail | 15,000 | 20.4% | $229,650 | 4/30/2029 | | Marshall's | Retail | 28,000 | 38.1% | $336,000 | 2/28/2027 | Ashley Plaza Property This 164,012 sq. ft. retail property in Goldsboro, NC, was 98.0% leased as of December 31, 2023 Ashley Plaza Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Ashley Home Store | Retail | 17,920 | 10.9% | $163,968 | 8/31/2028 | | Harbor Freight Tools | Retail | 21,416 | 13.1% | $159,840 | 2/28/2029 | | Hobby Lobby | Retail | 50,000 | 30.5% | $250,000 | 3/31/2029 | | Planet Fitness | Fitness | 20,131 | 12.3% | $181,179 | 4/30/2030 | Brookfield Center Property This 64,880 sq. ft. flex-industrial property in Greenville, SC, was 100% leased as of December 31, 2023 Brookfield Center Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Turning Point Greenville Church | Religious | 9,000 | 13.9% | $102,109 | 9/30/2025 | | S&ME | Engineering | 8,582 | 13.2% | $97,161 | 10/31/2027 | | Gravitopia | Entertainment | 35,160 | 54.2% | $283,588 | 4/30/2026 | Lancer Center Property This 181,590 sq. ft. retail property in Lancaster, SC, was 100% leased as of December 31, 2023 Lancer Center Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Badcock Furniture | Retail | 35,876 | 19.8% | $108,000 | 6/30/2029 | | K.J.'s Market | Retail | 34,100 | 18.8% | $140,640 | 12/31/2025 | | Big Lots | Retail | 28,527 | 15.6% | $148,349 | 2/28/2034 | The Greenbrier Business Center Property This 89,280 sq. ft. flex-industrial property in Chesapeake, VA, was 95.1% leased as of December 31, 2023 - Occupancy rate increased from 79.9% in 2022 to 95.1% in 2023[95] Parkway Property This 64,109 sq. ft. flex-industrial property in Virginia Beach, VA, was 100% leased with a variable-rate loan - The variable interest rate on the mortgage loan was 7.05% as of Dec 31, 2023, up from 4.3117% as of Dec 31, 2022[101] - an Interest Rate Protection Transaction caps the company's interest rate exposure at 5.25% if the reference rate (now SOFR) exceeds 3%[102] Salisbury Marketplace Property This 79,732 sq. ft. retail property in Salisbury, NC, was 85.3% leased as of December 31, 2023 Salisbury Marketplace Property - Major Tenants (as of Dec 31, 2023) | Tenant | Business | Leased Square Footage | % of Rentable Square Footage | 2023 Annual Rent | Lease Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | | Food Lion | Retail | 31,762 | 39.8% | $324,096 | 12/31/2032 | | CitiTrends | Retail | 12,500 | 15.7% | $113,850 | 9/30/2027 | | Family Dollar | Retail | 8,470 | 10.6% | $87,115 | 12/31/2033 | Legal Proceedings The company is not subject to any material litigation or threatened legal actions - The company is not presently subject to any material litigation, nor is any threatened, other than routine actions not expected to have a material adverse effect[119] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[120] 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, with a repurchase program authorized but no repurchases in Q4 2023 - The company's common stock is listed on the Nasdaq Capital Market under the symbol 'MDRR'[123] - As of December 31, 2023, there were approximately 7,583 holders of record[123] - A share repurchase program was expanded in October 2023, authorizing the repurchase of an additional 200,000 common shares, with no shares repurchased in the fourth quarter of 2023[126] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance and condition, highlighting key events, revenue changes, and liquidity Recent Trends and Activities The company underwent a reverse stock split and management internalization, actively managing its property portfolio and financing - Completed a 1-for-8 reverse stock split on May 3, 2023, to regain compliance with Nasdaq's minimum bid price requirement[135] - Internalized management on July 18, 2023, by terminating the external Management Agreement, resulting in management restructuring expenses of $2.1 million[139][183] - Sold the Clemson Best Western Property on September 29, 2022, for $10.015 million, recognizing a loss on sale of $421,096[140] - Entered into an agreement to sell the Hanover Square Shopping Center for $13 million on December 29, 2023[142] - Entered into an agreement on February 15, 2024, to acquire a single-tenant net lease asset (Citibank Property) from a related party[143] Liquidity and Capital Resources Cash and restricted cash decreased to $3.8 million, with future liquidity needs including preferred stock redemption and debt repayment Cash Flow Summary | (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $104 | $1,195 | | Net cash used in investing activities | ($1,483) | ($9,319) | | Net cash (used in) provided by financing activities | ($474) | $6,403 | - The decrease in cash from operations in 2023 was primarily due to $2.1 million in management restructuring expenses[183] - Primary future liquidity needs include retiring $5.0 million of mandatorily redeemable preferred stock in February 2025 and repaying a $1.0 million line of credit[192] - Resources to meet future needs include $2.2 million in unrestricted cash, $1.6 million in lender reserves, a $1.5 million line of credit (with a $1.0 million balance), and projected proceeds of approximately $2.6 million from the sale of the Hanover Square Shopping Center[194][199] Results of Operations Total revenues decreased to $10.3 million due to a hotel property sale, while net loss improved to $4.6 million Revenue by Segment (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Retail center properties | $7,768 | $7,054 | $714 | | Hotel property | $0 | $1,508 | ($1,508) | | Flex center properties | $2,505 | $2,530 | ($25) | | Total Revenues | $10,273 | $11,091 | ($818) | Key Operating Expenses (2023 vs. 2022) | (In thousands) | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Investment Property Operating Expenses | $2,664 | $3,980 | ($1,316) | | Legal, accounting and other professional fees | $1,391 | $1,628 | ($237) | | Management restructuring expenses | $2,067 | $0 | $2,067 | | Depreciation and amortization | $4,574 | $4,707 | ($133) | | Total Operating Expenses | $11,270 | $11,695 | ($425) | - Net loss attributable to common shareholders was $4.6 million in 2023, compared to $4.8 million in 2022, an improvement of $197,962[219][220] Funds from Operations (FFO) and Adjusted FFO (AFFO) FFO significantly decreased to $91 thousand in 2023, and AFFO became negative due to higher capital expenditures FFO Reconciliation | (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net loss | ($4,573) | ($4,732) | | Depreciation & Amortization | $4,574 | $4,707 | | Loss on disposal of investment property | $0 | $421 | | Loss on impairment / Impairment of assets held for sale | $90 | $212 | | Loss on extinguishment of debt | $0 | $389 | | Funds from operations (FFO) | $91 | $997 | AFFO Reconciliation | (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Funds from operations (FFO) | $91 | $997 | | Capital expenditures | ($1,483) | ($1,019) | | Straight line rent | ($100) | ($150) | | Amortization of above/below market leases | ($275) | ($227) | | Other adjustments | $498 | $640 | | Adjusted funds from operations (AFFO) | ($1,269) | $241 | Summary of Critical Accounting Policies Critical accounting policies include revenue recognition, asset acquisitions, impairment reviews, and maintaining REIT status - Acquisitions of investment properties are accounted for as asset acquisitions, with transaction costs capitalized[173] - Long-lived assets are reviewed for impairment whenever events indicate the carrying value may not be recoverable[174] - Maintaining REIT status is a critical accounting estimate, requiring distribution of at least 90% of adjusted taxable income and meeting other operational tests[175] - Management has concluded that it is probable the company will be able to meet its obligations and continue as a going concern for at least one year from the financial statement issuance date[179] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, the registrant is not required to provide market risk disclosures - As a smaller reporting company, the registrant is not required to provide quantitative and qualitative disclosures about market risk[229] Financial Statements and Supplementary Data Consolidated financial statements and supplementary data are included in Item 15 of this report - The consolidated financial statements and supplementary data are included in Item 15 of this report and are incorporated by reference[230] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes or disagreements with its accountants on financial disclosure - None[232] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective - The CEO concluded that disclosure controls and procedures were effective as of December 31, 2023[234] - Management concluded that internal control over financial reporting was effective as of December 31, 2022[235] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[237] Other Information No directors or officers adopted, terminated, or modified Rule 10b5-1 trading arrangements in Q4 2023 - No directors or officers adopted, terminated, or modified a Rule 10b5-1 trading arrangement during the three months ended December 31, 2023[238] Part III Directors, Executive Officers and Corporate Governance This section details executive officers, directors, board committees, governance policies, and discloses untimely SEC filings Executive Officers and Directors | Name | Age | Position | | :--- | :--- | :--- | | Francis P. Kavanaugh | 63 | Director, President, CEO, Secretary and Treasurer | | Timothy O'Brien | 55 | Chairman of the Board | | Neil P. Farmer | 67 | Independent Director | | David Lunin | 43 | Independent Director | | Emanuel D. Neuman | 44 | Independent Director | | Charles S. Pearson, Jr. | 66 | Independent Director | | C. Brent Winn, Jr. | 62 | Chief Financial Officer | - The Board has four standing committees: Audit, Compensation, Nominating and Corporate Governance, and Acquisition[253] - Charles S. Pearson, Jr. serves as the chairman of the audit committee and qualifies as an 'audit committee financial expert'[255][256] - The company reported delinquent Section 16(a) filings for directors Francis P. Kavanaugh and Emanuel D. Neuman, who filed untimely Form 3s, with Mr. Kavanaugh also having three untimely Form 4 filings due to administrative errors[250] Executive and Director Compensation CEO received no compensation in 2023, CFO received $250,000 salary, and directors received no compensation Summary Compensation Table (2023 & 2022) | Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Francis P. Kavanaugh, CEO and President | 2023 | — | — | — | — | | C. Brent Winn, Jr., Chief Financial Officer | 2023 | 250,000 | — | — | 250,000 | | C. Brent Winn, Jr., Chief Financial Officer | 2022 | 250,000 | 50,000 | 126,600 | 426,600 | - No compensation was paid to directors during the fiscal year 2023[277] - Under the 2018 Equity Incentive Plan, a change in control results in the automatic vesting of outstanding equity awards[272] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Alfred Lee Finley is the only 5% stockholder, and management beneficially owns 16.17% of common stock Beneficial Ownership (as of March 6, 2024) | Name of Beneficial Owner | Percentage of all Shares (1) | | :--- | :--- | | 5% Stockholders | | | Alfred Lee Finley | 14.67% | | Named Executive Officers and Directors | | | Francis P. Kavanaugh | 9.94% | | All Named Executive Officers and Directors as a Group (7 individuals) | 16.17% | - As of December 31, 2023, there were 61,413 securities remaining available for future issuance under the company's equity compensation plans[285] Certain Relationships and Related Transactions, and Director Independence The company has a staffing agreement with the CFO's entity and a policy for reviewing related party transactions - The company has a Staffing Agreement with Gunston Consulting, LLC, an entity owned by CFO C. Brent Winn, Jr., to employ staff on the company's behalf, reimbursing costs without markup[286] - The Board has a written policy requiring the audit committee to review and approve related person transactions exceeding $120 thousand[287] - A majority of the board members are independent, with CEO Francis P. Kavanaugh being the only non-independent director[289] Principal Accountant Fees and Services Cherry Bekaert LLP billed approximately $303 thousand in 2023 for audit and tax services, all pre-approved Accountant Fees (Billed by Cherry Bekaert LLP) | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $212,012 | $228,283 | | Tax Fees | $90,826 | $77,822 | | Total Fees | $302,838 | $306,105 | Part IV Exhibits and Financial Statement Schedules This section includes audited consolidated financial statements, the auditor's report, notes, and supplementary schedules - This part includes the Report of Independent Registered Public Accounting Firm, Consolidated Financial Statements, Notes to Consolidated Financial Statements, and Schedule III – Real Estate Properties and Accumulated Depreciation[295] Report of Independent Registered Public Accounting Firm Cherry Bekaert LLP issued an unqualified opinion, identifying investment property impairment as a critical audit matter - The auditor, Cherry Bekaert LLP, expressed an unqualified opinion, stating the financial statements present fairly, in all material respects, the financial position of the company[298] - A Critical Audit Matter was identified concerning the 'Evaluation of Investment Properties for Impairment' due to the subjective judgments and significant assumptions involved in the assessment[303][306] Consolidated Financial Statements Total assets decreased to $82.7 million, with a net loss of $4.6 million in 2023 Consolidated Balance Sheet Summary | (In millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $82.7 | $87.9 | | Total Liabilities | $69.0 | $69.2 | | Total Equity | $13.7 | $18.7 | Consolidated Statement of Operations Summary | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenue | $10.3 | $11.1 | | Total Operating Expenses | $11.3 | $11.7 | | Operating loss | ($1.0) | ($1.4) | | Net Loss | ($4.6) | ($4.7) | | Net Loss Attributable to Common Shareholders | ($4.6) | ($4.8) | Notes to Consolidated Financial Statements Notes detail management internalization, asset reclassification, preferred stock, mortgage debt, and related party transactions - The company transitioned from external to internal management on July 18, 2023, terminating its agreement with Medalist Fund Manager, Inc.[326] - The Hanover Square Shopping Center was reclassified to 'assets held for sale' as of December 1, 2023, with a carrying value of $9.7 million[335] - The company has $5.0 million in 8.0% Series A mandatorily redeemable preferred stock that must be redeemed on February 19, 2025[416][421] - As of Dec 31, 2023, the company had total mortgage debt principal of $61.0 million, with maturities extending to 2041[444] - In connection with terminating the management agreement, the company paid a $1.25 million termination fee and a $353 thousand Deferred Acquisition Fee, which were part of $2.1 million in total management restructuring expenses for 2023[366] - Subsequent to year-end, the company agreed to acquire the Citibank Property from a related party and redeem 11,731.25 Operating Partnership Units from a limited partner[510][512]