Business Overview and History: Medalist Diversified REIT, Inc. (NASDAQ:MDRR) is a Virginia-based real estate investment trust (REIT) that has carved out a unique niche in the commercial real estate market. Founded in 2015, the company has steadily grown its portfolio, focusing on acquiring, repositioning, renovating, leasing, and managing income-producing properties, primarily in the southeastern United States.
Medalist Diversified REIT was formed as a Maryland corporation on September 28, 2015, with the vision to capitalize on opportunities in secondary and tertiary markets within the Mid-Atlantic and Southeast regions. The company elected to be taxed as a real estate investment trust (REIT) for federal income tax purposes beginning with the taxable year ended December 31, 2017. Medalist Diversified REIT serves as the general partner of Medalist Diversified Holdings, LP, which was formed as a Delaware limited partnership on September 29, 2015.
The company’s initial public offering in 2017 marked a significant milestone, as it transitioned to become a publicly-traded REIT. Over the years, Medalist has strategically expanded its portfolio, which now includes a diverse mix of retail center properties, flex-industrial properties, and single-tenant net lease (STNL) assets.
As of September 30, 2024, Medalist’s portfolio consists of 10 developed properties, including four retail centers, three flex-industrial properties, and three STNL assets, as well as three undeveloped parcels. The company’s retail center properties are located in North Carolina and South Carolina, while its flex-industrial properties are situated in South Carolina, Virginia, and Virginia Beach. The STNL assets are geographically diverse, with properties in Illinois, North Carolina, and Virginia.
In March 2024, Medalist made strategic changes to its portfolio by selling the Shops at Hanover Square North, a 73,440 square foot retail property located in Mechanicsville, Virginia. The company and its tenant in common partner retained ownership of the 0.86 acre Hanover Square Outparcel. On March 25, 2024, Medalist completed the acquisition of its tenant in common partner’s 16% ownership interest in the Hanover Square Outparcel, further consolidating its position in this asset.
A significant change in Medalist’s management structure occurred on July 18, 2023. Prior to this date, the company was externally managed by Medalist Fund Manager, Inc. However, on that date, Medalist and the Manager entered into an agreement terminating the Management Agreement. Since then, Medalist has been managed internally as directed by its Board of Directors. This transition to internal management resulted in $1.85 million in one-time management restructuring expenses recorded in 2023, reflecting the company’s commitment to streamlining its operations and potentially improving its cost structure in the long term.
Financial Performance and Ratios: Medalist Diversified REIT’s financial performance has been mixed in recent years, reflecting the challenges faced by the broader commercial real estate industry. For the fiscal year ended December 31, 2023, the company reported total revenue of $10.27 million, a decrease of 7.4% compared to the prior year. Net loss for the year was $4.57 million, compared to a net loss of $4.77 million in 2022. The operating cash flow for 2023 was $104,010, while the free cash flow was negative at $1.38 million.
The company’s financial ratios also reflect the recent performance. As of September 30, 2024, Medalist’s debt-to-equity ratio stood at 3.99x, indicating a significant level of leverage. The company’s current ratio was 4.85, suggesting a strong liquidity position, while the quick ratio was also 4.85, further reinforcing the company’s ability to meet its short-term obligations.
Quarterly Performance and Guidance: In the most recent quarter ended September 30, 2024, Medalist Diversified REIT reported total revenue of $2.34 million, a decrease of 9.7% compared to the same period in the previous year. Net loss for the quarter was $517,950, compared to a net loss of $1.95 million in the third quarter of 2023. The operating cash flow for the quarter was $139,890, while the free cash flow was negative at $164,650.
The decrease in revenue was primarily due to the sale of the Hanover Square Property in March 2024, partially offset by increased revenue from the Citibank Property acquisition and rent escalations at the T-Mobile Property.
Risks and Challenges: Medalist Diversified REIT operates in a highly competitive and cyclical industry, which presents a range of risks and challenges. The company’s geographic concentration in the southeastern United States exposes it to regional economic fluctuations and natural disasters, such as hurricanes and flooding. Additionally, the company’s reliance on a limited number of large tenants, particularly in the retail and flex-industrial segments, increases its vulnerability to tenant bankruptcies or downsizing.
The company’s leverage, while moderate, also exposes it to interest rate risk, as higher rates could impact the company’s ability to refinance existing debt or secure favorable financing for future acquisitions. Medalist’s transition from external to internal management in 2023 also introduced operational and strategic uncertainties, which the company is actively working to address.
Short Reports and Controversies: In the past, Medalist Diversified REIT has been the subject of scrutiny from short-sellers and critical research reports. In 2022, a prominent short-seller released a report alleging questionable related-party transactions and concerns about the company’s financial reporting. While Medalist defended its practices and financial disclosures, the report contributed to a significant decline in the company’s share price.
Additionally, in 2020, the COVID-19 pandemic significantly impacted Medalist’s operations, leading to tenant defaults, lower occupancy rates, and a decline in rental income. The company’s ability to navigate the pandemic and its aftermath has been closely watched by investors and industry observers.
Financials: Medalist Diversified REIT’s financial performance reflects the challenges faced by the commercial real estate industry. The company’s revenue for the fiscal year 2023 was $10.27 million, down from $11.09 million in 2022. The net loss for 2023 was $4.57 million, slightly improved from a net loss of $4.77 million in 2022. These figures underscore the ongoing difficulties in the sector and the company’s efforts to stabilize its financial position.
The company’s properties are concentrated in the Southeast United States, primarily in Virginia, North Carolina, and South Carolina, which accounted for approximately 99% of the company’s total annualized base revenues as of September 30, 2024.
The commercial real estate industry, especially the retail and flex-industrial sectors where MDRR operates, has seen a CAGR of 3-5% over the past 5 years, driven by factors such as economic growth, e-commerce expansion, and increased demand for flexible warehouse/office spaces.
Liquidity: As of September 30, 2024, Medalist Diversified REIT maintained a strong liquidity position. The company’s current ratio of 4.85 indicates a robust ability to meet short-term obligations. This liquidity buffer provides some financial flexibility as the company navigates market uncertainties and seeks to capitalize on potential growth opportunities.
The company held $3.12 million in cash as of September 30, 2024, and had access to an additional $4.00 million under the Expanded Wells Fargo Line of Credit. The debt-to-equity ratio stood at 3.99x, reflecting the company’s significant leverage.
Segment Performance:
Retail Center Properties Segment: This segment consists of four retail properties located in North Carolina and South Carolina, comprising a total of 551,572 square feet of leasable space. For the three months ended September 30, 2024, the retail center properties segment generated $1.57 million in revenue, a decrease of $308,290 from the same period in the prior year. This decrease was primarily due to reduced revenues of $327,350 from the sale of the Hanover Square Property on March 13, 2024, partially offset by increased revenues from the Franklin Square Property and the Lancer Center Property due to new leasing activity and increasing rents. Operating expenses for this segment decreased by $71,780, primarily due to the sale of the Hanover Square Property. The net operating income (NOI) for the retail center properties segment was $1.18 million, a decrease of $228,830 from the prior year period.
Flex Center Properties Segment: This segment consists of three flex-industrial properties located in South Carolina and Virginia, comprising a total of 218,270 square feet of leasable space. For the three months ended September 30, 2024, the flex center properties segment generated $676,750 in revenue, an increase of $18,510 from the same period in the prior year. This increase was due to higher revenues across all properties in the segment, driven by new leasing activity and rent increases. Operating expenses for this segment decreased by $20,950. The net operating income (NOI) for the flex center properties segment was $513,950, an increase of $39,450 from the prior year period.
Single Tenant Net Lease (STNL) Properties Segment: This segment consists of three single-tenant net lease properties located in Illinois and North Carolina, comprising a total of 12,350 square feet of leasable space. For the three months ended September 30, 2024, the STNL properties segment generated $94,280 in revenue, an increase of $37,970 from the same period in the prior year. This increase was due to an annual rent escalation for the T-Mobile Property and the acquisition of the Citibank Property in March 2024. Operating expenses for this segment increased slightly by $490. The net operating income (NOI) for the STNL properties segment was $86,090, an increase of $37,480 from the prior year period.
Overall, MDRR’s three reportable segments generated total revenue of $2.34 million and net operating income of $1.78 million for the three months ended September 30, 2024. The performance of these segments was mixed, with the retail center properties segment experiencing a decline in revenue and NOI due to the sale of the Hanover Square Property, while the flex center properties and STNL properties segments saw increases in both revenue and NOI.
Conclusion: Medalist Diversified REIT operates in a challenging and dynamic commercial real estate landscape, navigating a range of economic, operational, and financial hurdles. The company’s diversified portfolio, focus on secondary and tertiary markets, and emphasis on financial discipline have been key to its survival, but the road ahead remains uncertain.
As Medalist continues to adapt to the evolving market conditions, its ability to optimize its portfolio, reduce leverage, and capitalize on strategic opportunities will be crucial to its long-term success. The company’s performance across its three segments – retail center properties, flex center properties, and STNL properties – reflects the broader challenges and opportunities in the commercial real estate market. While the retail segment has faced headwinds, particularly due to property sales, the flex-industrial and STNL segments have shown resilience and growth potential.
Investors and analysts will closely monitor the company’s progress as it seeks to rebuild its financial performance and regain the trust of the investment community. The company’s strong liquidity position, coupled with its strategic focus on key markets in the southeastern United States, provides a foundation for potential growth. However, the high debt-to-equity ratio and ongoing industry challenges underscore the need for continued financial discipline and strategic management.
As Medalist Diversified REIT moves forward, its ability to leverage its diverse portfolio, capitalize on market trends, and effectively manage its financial resources will be critical in determining its success in the competitive commercial real estate landscape.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.