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As of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $
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Documents incorporated by reference: Portions of the registrant’s Definitive Proxy Statement for the 2021 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year end) are incorporated by reference in this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
MEDALIST DIVERSIFIED REIT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021
Table of contents
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are included throughout this Annual Report on Form 10-K. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Annual Report on Form 10-K.
The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
| ● | the competitive environment in which we operate; |
| ● | national, international, regional and local economic conditions; |
| ● | capital expenditures; |
| ● | the availability, terms and deployment of capital; |
| ● | financing risks; |
| ● | the general level of interest rates; |
| ● | changes in our business or strategy; |
| ● | fluctuations in interest rates and increased operating costs; |
| ● | our limited operating history; |
| ● | the degree and nature of our competition; |
| ● | our dependence upon our Manager and key personnel; |
| ● | defaults on or non-renewal of leases by tenants; |
| ● | decreased rental rates or increased vacancy rates; |
| ● | our ability to make distributions on shares of our common stock; |
| ● | difficulties in identifying properties to acquire and completing acquisitions; |
| ● | our ability to operate as a public company; |
| ● | potential natural disasters such as hurricanes; |
| ● | COVID-19 pandemic; |
| ● | our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; |
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| ● | potential changes in the law or governmental regulations that affect us and interpretations of those laws and regulations, including changes in real estate and zoning or tax laws, and potential increases in real property tax rates; and |
| ● | related industry developments, including trends affecting our business, financial condition and results of operations. |
The forward-looking statements contained in this Annual Report on Form 10-K are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of the date of this Annual Report on Form 10-K. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
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PART I
ITEM 1.BUSINESS
As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to Medalist Diversified REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Medalist Diversified Holdings, LP, a Delaware limited partnership of which we are the sole general partner, except where it is clear from the context that the term only means Medalist Diversified REIT, Inc.
Overview
Medalist Diversified REIT, Inc. was formed in 2015 as a Maryland corporation, to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial and retail properties, (ii) multi-family residential properties and (iii) hotel properties. We invest primarily in properties across secondary and tertiary markets in the southeastern part of the United States, with a concentration in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. Beginning with our taxable year ended December 31, 2017, we believe that we have operated in a manner qualifying us as a REIT, and we have elected to be taxed as a REIT for federal income tax purposes. We are externally managed and advised by Medalist Fund Manager, Inc., a Virginia corporation, or our Manager. Our Manager makes all investment decisions for us. Our Manager is owned fifty percent each by Mr. Bill Elliott and Mr. Tim Messier, who are co-Presidents thereof.
We operate as an UPREIT, and own our properties through our subsidiary, Medalist Diversified Holdings, L.P., a Delaware limited partnership. We may also pursue other real estate-related investments, including but not limited to equity or other ownership interests in entities that are the direct or indirect owners of real property, or indirect investments in real property, such as those that may be obtained in a joint venture. We anticipate that any such equity or joint venture investments to be in controlling interests in such entities. While we do not intend for these types of investments to be a primary focus, we may make such investments in our Manager’s sole discretion. We refer to our investments in real property and our real estate-related investments, collectively, as Investments.
Our principal objectives include sourcing value-add Investments in markets in which we maintain deep industry relationships and local market knowledge, and the creation of value for stockholders by utilizing our relationships and local knowledge of commercial real estate investment, management and disposition. There is, however, no assurance that any of these objectives will be achieved.
We may make Investments in properties owned by unaffiliated third parties, our Manager, or affiliates of our Manager, as determined by our Manager in its sole discretion.
Management
Our Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. Through their prior experience in the real estate industry, our Manager’s principals and their respective affiliates have developed a strong network of relationships with real estate owners, investors, operators and developers of all sizes and investment formats, across the United States and have a track record of success. We intend to leverage this experience to gain access to and identify suitable Investments, located across secondary and tertiary markets throughout the southeastern part of the United States, primarily in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. We do not anticipate making Investments outside of the United States.
The principal executive offices of the company and our Manager are located at 1051 E. Cary Street, Suite 601, James Center Three, Richmond, Virginia 23219. Our telephone number is (804) 344-4445.
Investment Strategies
Our Manager believes that its focus on value-add and opportunistic commercial real estate provides an attractive balance of risk and returns. Our Manager intends to use some or all of the following strategies to enhance the performance, quality and value of our Investments:
| ● | proprietary investment sourcing; |
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| ● | a rigorous, consistent and replicable process for sourcing and conducting due diligence; |
| ● | appropriate exit strategy; |
| ● | hands-on portfolio management; and |
| ● | focus on opportunistic properties. |
Our investment policies provide our Manager with substantial discretion with respect to the selection, purchase and sale of specific Investments, subject to the limitations in our management agreement. We may revise the investment policies without the approval of our stockholders. We will review the investment policies at least annually to determine whether the policies are in the best interests of our stockholders.
Our Portfolio
Our goal is to acquire and own, through wholly owned subsidiaries of our operating partnership, a portfolio of commercial, retail and hotel properties located primarily in the southeastern United States. We currently own eight Investments comprised of four retail properties, one hotel property and three flex/industrial properties. We own 100% of the interests in our Investments, except for one flex/industrial property of which we own 82% tenant-in-common interest in the property and one retail property of which we own 84% tenant-in-common interest in the property. For further information on properties and our tenant base, see “Item 2—Properties.”
Reporting Segments
We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have Investments. As of December 31, 2021, we had the following reportable segments: retail center properties, flex center properties and hotel properties.
Competition
We are subject to significant competition in seeking real estate investments and tenants. We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. We also face competition from other real estate investment programs, for investments that may be suitable for us. Many of our competitors have substantially greater financial and other resources than we have and may have substantially more operating experience than either us or our Manager. They also may enjoy significant competitive advantages that result from, among other things, a lower cost of capital.
Environmental Matters
As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials (e.g., asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in our buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, it could face fines for such noncompliance. Also, we could be liable to third parties (e.g., occupants of the buildings) for damages related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. In addition, some of our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us, and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations. We are not aware of any material contingent liabilities, regulatory matters or environmental matters that may exist.
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Staffing
We are externally managed by our Manager pursuant to a management agreement. We do not have any employees and our executive officers are employed by our Manager. Our properties are managed by third party property management companies with whom our Manager contracts.
Available Information
We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website at www.sec.gov, or downloaded from our website at www.medalistreit.com, as soon as reasonably practicable after such material has been filed with, or furnished to, the SEC. Access to these filings is free of charge.
ITEM 1A.RISK FACTORS
We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have Investments. As of December 31, 2021, we had the following reportable segments: (i) retail center properties, consisting of the Franklin Square Property, an undivided 84% tenant-in-common interest in the Hanover Square Property, the Ashley Plaza Property and the Lancer Center Property; (ii) flex center properties, consisting of the Brookfield Center Property,
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Greenbrier Business Center Property and an undivided 82% tenant-in-common interest in the Parkway Property and (iii) hotel properties, consisting of the Clemson Best Western Hotel Property.
Name |
| Type |
| Description |
Franklin Square Property |
| Retail |
| 134,239 square foot retail property located at 3940 East Franklin Boulevard in Gastonia, North Carolina 28056, on 10.293 acres, built in 2006 and 2007, that is 81.2% occupied as of December 31, 2021 and anchored by Ashley Furniture and Altitude. |
Hanover Square Property |
| Retail |
| 73,441 square foot retail center located at 7230 Bell Creek Road in Mechanicsville, Virginia 23111, on 9.630 acres, built in 2007, that is 100% occupied as of December 31, 2021 and anchored by a Marshalls store and an Old Navy store. |
Ashley Plaza Property |
| Retail |
| 160,356 square foot retail property located at 201–221 North Berkeley Boulevard in Goldsboro, North Carolina 27534, built in 1977 and fully renovated in 2018, that is 100 percent leased as of December 31, 2021, and is anchored by Hobby Lobby, Harbor Freight, Ashley Home Store and Planet Fitness. |
Clemson Best Western Property |
| Hotel |
| Located at 1310 Tiger Boulevard, Clemson, South Carolina, 29631 The Clemson Best Western Property has 148 rooms, was built in 1982, substantially renovated in 2016 and 2017, is approximately 85,300 square feet and sits on 5.92 acres. |
Brookfield Center Property |
| Flex |
| 64,880 square foot flex-industrial property located at 48 Brookfield Center Drive, Greenville, South Carolina 29607, built in 2007, that is 100 percent leased as of December 31, 2021, and is anchored by Gravitopia Trampoline Park, SME, Inc., and Turning Point Greenville Church. |
Lancer Center Property |
| Retail |
| 178,626 square foot retail center located at 1256 Highway 9 Bypass West, Lancaster, South Carolina, 29270, built in 1987 and substantially renovated in 2013, that is 100 percent leased as of December 31, 2021, and is anchored by Badcock Furniture, KJ’s Market and Big Lots. |
Greenbrier Business Center Property |
| Flex |
| 89,290 square foot flex-industrial property located at 1244 Executive Boulevard, Chesapeake, Virginia, 23320, built in 1987 that is 86.8% leased as of December 31, 2021 and is anchored by Bridge Church and Consolidated Electrical Distributors. |
Parkway Property |
| Flex |
| 64,109 square foot, two building flex-industrial property located at 2697 International Parkway, Virginia Beach, Virginia, 23452, built in 1984 that is 100 percent leased as of December 31, 2021 and is anchored by the City of Virginia Beach and GBRS Group. |
Franklin Square Property
On April 28, 2017, we completed our acquisition of the Franklin Square Property through a wholly owned subsidiary. The purchase price for the Franklin Square Property was $20,500,000 paid through a combination of cash and assumed, secured debt, or the Original Franklin Square Loan. Our total investment, including acquisition and closing costs, escrows and lease reserves was approximately $22,054,071. The Franklin Square Property, built in 2006 and 2007, was 68 percent leased as of the acquisition date, is anchored by Ashley Furniture, Monkey Joe’s, Allen Tate, Inc. and Altitude Trampoline Park, or Altitude, and is located in Gastonia, North Carolina.
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The Original Franklin Square Loan was originally made on February 10, 2016 in the principal amount of $14,275,000 and assumed by us at acquisition. The Original Franklin Square Loan required monthly interest only payments during its term and bore interest at a fixed rate of 4.7%. The original October, 2021 maturity date was extended until November, 2021. On November 8, 2021, we refinanced the Original Franklin Square Loan with a new mortgage loan in the principal amount of $13,250,000 (the Franklin Square Loan) and cash of $2,292,273.
The Franklin Square Loan matures on December 6, 2031 and bears interest at a fixed rate of 3.808%. The Franklin Square Loan requires monthly interest-only payments during the first three years of the term. For the remainder of the term, the Franklin Square Loan requires monthly payments of $61,800, which includes principal on a 30-year amortization schedule, and interest. The Franklin Square Loan may not be prepaid prior to its maturity, but our company has the right initiate a defeasance according to the terms of the loan agreement. Our company has agreed to guarantee all amounts due under the Franklin Square Loan. The loan agreement includes a covenant to maintain a debt service coverage ratio of 1.25 to 1.0 for the property.
The Franklin Square Property is an eight building one-floor retail center totaling approximately 134,239 gross leasable area. The building is concrete slab on grade with spread footings. The exterior walls are a combination of insulation and finish system, metal panel siding, brick veneer and textured concrete masonry units (CMU). Retail storefronts are double-pane glass set in anodized aluminum frames. The roof is flat with fully-adhered, thermoplastic olefin membrane roof system. The parking area comprises 435 spaces.
Tenants occupying 10% or more of the rentable square footage:
|
|
| Percentage |
|
|
| |||||||
Leased | of Rentable | ||||||||||||
Square | Square | 2022 | Lease | Renewal | |||||||||
Tenant | Business | Footage | Footage | Annual Rent | Expiration | Options | |||||||
Ashley Furniture |
| Retail |
| 34,682 |
| 25.84 | % | $ | 277,456 |
| 12/31/2025 |
| 12/31/2030 12/31/2035 |
Altitude Trampoline Park |
| Entertainment |
| 30,000 |
| 22.35 | % |
| 363,750 |
| 7/31/2029 |
| 7/31/2034 7/31/2039 7/31/2044 |
Occupancy data for the five preceding years (as of December 31, unless otherwise noted):
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
Occupancy Rate |
| 81.2 | % | 82.3 | % | 92.4 | % | 92.5 | % | 71.0 | % |
Average effective annual rent per square foot for the five preceding years:
| 2021 | 2020 |
| 2019 |
| 2018 |
| 2017 |
| |||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 11.72 | $ | 12.67 | $ | 13.47 | $ | 11.98 | $ | 9.87 | ||||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements or rent deferrals. |
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Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 | 2031 |
| ||||||||||||
Leases Expiring |
| 2 |
| 1 |
| 4 |
| 5 |
| 2 |
| 3 |
| — |
| 1 |
| — | — | ||||||||||||
Square Footage |
| 3,656 |
| 4,235 |
| 9,564 |
| 47,221 |
| 5,260 |
| 9,061 |
| — |
| 30,000 |
| — | — | ||||||||||||
Annual Rent (1) | $ | 83,420 | $ | 95,965 | $ | 222,927 | $ | 557,071 | $ | 126,544 | $ | 238,647 | $ | — | $ | 300,000 | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 5.2 | % |
| 6.0 | % |
| 14.0 | % |
| 34.9 | % |
| 7.9 | % |
| 14.9 | % |
| — | % |
| 18.8 | % |
| — | % | — | % | ||
| (1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
| (2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total projected 2022 rent. |
Hanover Square Property
On May 8, 2018, we acquired an undivided 84% tenant-in-common interest in the Shops at the Hanover Square Property from COF North, LLC, a Virginia limited liability company. The property is comprised of (i) an approximately 73,441 square foot retail center located on 8.766 acres of land at 7230 Bell Creek Road in Mechanicsville, Virginia 23111 and (ii) a contiguous, undeveloped parcel of land totaling 0.864 acres. We refer to both parcels herein as the Hanover Square Property. The contract purchase price for the Hanover Square Property was $12,173,000. We acquired the Hanover Square Property with $3,291,404 in cash from us, $648,120 in cash from an unaffiliated tenant-in-common, and the assumption of a secured loan of approximately $8,527,315 from Langley Federal Credit Union, which amount was increased by an additional $372,685, or the Hanover Square Property Loan. Our company purchased the Hanover Square Property as a tenant-in-common with PMI Hanover Square, LLC, an unaffiliated party. Our company acquired an 84% interest in the Hanover Square Property, and PMI Hanover Square, LLC owns the remaining 16% interest. The retail center forming a part of the Hanover Square Property was built in 2007 and, as of December 31, 2021, was 100% occupied.
We assumed the Hanover Square Property Loan as of the closing of the acquisition. The Hanover Square Property Loan matures on December 1, 2027. The Hanover Square Property Loan requires monthly payments of principal, on a 25-year amortization schedule, and interest during the term. On May 8, 2020, our company entered into a refinancing transaction with the mortgage lender for the Hanover Square Property which increased the mortgage amount and reduced the interest rate. Under this transaction, the principal amount of the loan was increased to $10,500,000 and the interest rate reduced to a fixed rate of 4.25 percent until January 1, 2023, when the interest rate will adjust to a new fixed rate which will be determined by adding 3.00 percentage points to the daily average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available by the Federal Reserve Board, with a minimum of 4.25 percent. The fixed monthly payment, which includes principal and interest, increased to $56,882.
In connection with our acquisition of the Hanover Square Property, we, through a subsidiary, entered into the Tenants in Common Agreement with PMI Hanover SQ, LLC, or the Hanover Square TIC Agreement. Among other approvals, under the Hanover Square TIC Agreement, the consent of both tenants in common is required to approve (i) any lease, sublease, deed restriction, or grant of easement of/on all or any portion of the Hanover Square Property, (ii) any sale or exchange of the Hanover Square Property, or (iii) any indebtedness or loan, and any negotiation or refinancing thereof, secured by a lien on the Hanover Square Property. In the event the tenants in common are unable to agree on a decision which requires the consent of both tenants in common, a tenant in common may purchase the undivided interest of the other tenant in common subject to certain rights contained in the Hanover Square Property TIC Agreement.
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The property is a three-lot one-floor strip retail shopping center totaling approximately 73,441 square feet of net leasable area. The building is concrete slab with floor coverings consisting of a mixture of vinyl tile and carpeting. The exterior walls are masonry with brick veneer and EIFS at front and painted concrete block sides and rear. Windows are plate glass fixed pane storefront type in aluminum frames. The roof is single-ply, mechanically fastened EPDM over rigid insulation and steel framing in a flat configuration. The parking area comprises approximately 365 spaces.
As of December 31, 2021, tenants occupying 10% or more of the rentable square footage are:
|
|
| Percentage |
|
|
| |||||||
of | |||||||||||||
Leased | Rentable | 2022 | |||||||||||
Square | Square | Annual | Lease | Renewal | |||||||||
Tenant | Business | Footage | Footage | Rent | Expiration | Options | |||||||
Old Navy |
| Retail |
| 15,000 |
| 20.42 | % | $ | 187,900 |
| 4/30/2024 |
| 4/30/2029 |
Marshall’s |
| Retail |
| 28,000 |
| 38.13 | % | $ | 333,667 |
| 2/28/2027 |
| 2/28/2032 |
| 2/28/2037 | ||||||||||||
Occupancy data for the five preceding years (as of December 31):
| 2021 | 2020 |
| 2019 |
| 2018 |
| 2017 |
| ||
Occupancy Rate |
| 100 | % | 100 | % | 100 | % | 97 | % | 92 | % |
Average effective annual rent per square foot for the five preceding years:
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 13.99 | $ | 14.59 | $ | 15.31 | $ | 14.71 | $ | 15.83 | |||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements. For the year ended December 31, 2018, we owned the Hanover Square Property for eight months, the period on which the average annual rent per square foot is based. |
Lease expirations in the next 10 years:
2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 | 2031 |
| |||||||||||||
Leases Expiring |
| 2 |
| 4 |
| 3 |
| — |
| 1 |
| 2 |
| — |
| — |
| — | — | ||||||||||||
Square Footage |
| 7,200 |
| 14,900 |
| 18,140 |
| — |
| 4,000 |
| 29,200 |
| — |
| — |
| — | — | ||||||||||||
Annual Rent (1) | $ | 189,837 | $ | 193,618 | $ | 300,280 | $ | — | $ | 69,276 | $ | 373,091 | $ | — | $ | — | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 17.0 | % |
| 17.3 | % |
| 26.9 | % |
| — | % |
| 6.2 | % |
| 33.4 | % |
| 0 | % |
| 0 | % |
| 0 | % | 0 | % | ||
| (1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
| (2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total projected 2022 rent. |
Ashley Plaza Property
On August 30, 2019, we purchased from RCG-Goldsboro, LLC, a Georgia limited liability company, Ashley Plaza, a 160,356 square foot retail property located at 201–221 North Berkeley Boulevard in Goldsboro, North Carolina 27534, or the Ashley Plaza Property, for $15,200,000. The Ashley Plaza Property was built in 1977, fully renovated in 2018, was 100 percent leased as of December 31, 2021, and is anchored by Hobby Lobby, Harbor Freight, Ashley Home Store and Planet Fitness.
The purchase price and closing costs for the Ashley Plaza Property were financed with $3,281,144 in equity, $1,000,000 in funds from a short term line of credit from Virginia Commonwealth Bank (our company paid $30,000 of loan fees, which were recorded as capitalized issuance costs and are presented as a direct reduction of the associated debt), and net mortgage loan proceeds of
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$11,225,700 from a senior mortgage loan made by Bank of America, N.A., or the Ashley Plaza Lender, in the original principal amount of $11,400,000, or the Ashley Plaza Loan.
The Ashley Plaza Loan will mature on September 1, 2029. The Ashley Plaza Loan required monthly interest only payments during the first 12 months of the term. For the remainder of the term, the Ashley Plaza Loan requires monthly payments of $52,795, which includes principal on a 30-year amortization schedule, and interest. The Ashley Plaza Loan bears interest at 3.75%. The Ashley Plaza Loan may not be prepaid until June 1, 2029, subject to certain conditions and limitations contained in the loan documents. The Ashley Plaza Loan is secured by the Ashley Plaza Property.
The Virginia Commonwealth Bank line of credit had an original term of six months, maturing on February 21, 2020, and bears interest at 2.5% plus the 30 day LIBOR rate. The Virginia Commonwealth Bank line of credit required interest payments every three months. Effective on February 21, 2020, the original maturity date of the line of credit, short term, our company extended the line of credit, short term, for 60 days until April 21, 2020. On March 3, 2020 our company received $550,000 in funding from the line of credit, short term, to fund working capital and dividend payments. On April 21, 2020, our company extended the line of credit, short term, for 40 days until May 31, 2020. On May 31, 2020, our company extended the line of credit, short term, for 90 days until August 31, 2020. On August 12, 2020, our company extended the line of credit, short term, until September 30, 2020. On November 4, 2020, our company made a $225,000 payment to reduce the balance of the line of credit, short term to $325,000, and extended the line of credit, short term, until March 31, 2021. On March 18, 2021 our company extended the line of credit, short term, until April 30, 2021. On April 21, 2021 we repaid the line of credit, short term, in full.
The Ashley Plaza Property consists of a single-story, main retail strip building and two pad sites, all constructed in 1977. Foundations consist of continuous, concrete spread footers. The floor is a reinforced concrete slab-on-grade. The building superstructure utilizes load bearing CMU, interior steel columns supporting steel beams and open web steel joists supporting metal decking. The exterior walls consist of exterior insulation and finishing system, ribbed and painted concrete masonry unit walls. The roof is low-sloped with a portion covered by a single play TPO roof membrane and a portion covered by tar and gravel roofing. Parking is available for five hundred and sixty-seven (567) automobiles on asphalt-paved parking areas.
Tenants occupying 10% or more of the rentable square footage:
|
|
| Percentage |
|
|
| |||||||
of | |||||||||||||
Leased | Rentable | ||||||||||||
Square | Square | 2022 | Lease | Renewal | |||||||||
Tenant | Business | Footage | Footage | Annual Rent | Expiration | Options | |||||||
Ashley Home Store |
| Retail |
| 17,920 |
| 11.2 | % | $ | 161,280 |
| 8/31/2028 |
| 8/31/2033 8/31/2038 8/31/2043 8/31/2048 |
Harbor Freight Tools |
| Retail |
| 21,416 |
| 13.4 | % | $ | 159,840 |
| 2/28/2029 |
| 2/28/2034 2/28/2039 |
Hobby Lobby |
| Retail |
| 50,000 |
| 31.2 | % | $ | 250,000 |
| 3/31/2029 |
| 3/31/2034 3/31/2039 3/31/2044 |
Planet Fitness |
| Fitness |
| 20,131 |
| 12.6 | % | $ | 181,179 |
| 4/30/2030 |
| 4/30/2033 4/30/2038 |
Occupancy data for the five preceding years (as of December 31):
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
Occupancy Rate (1) |
| 100.0 | % | 98.0 | % | 98.0 | % | 52.5 | % | 28.7 | % |
| (1) | Occupancy rates for 2017 and 2018 are from the prior owner. |
10
Average effective annual rent per square foot for the five preceding years:
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 8.11 | $ | 7.98 | $ | 7.74 | $ | 4.60 | $ | 3.32 | |||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements. For the year ended December 31, 2019, we owned Ashley Plaza for four months. The average annual rent per square foot is based on rents from the prior owner for period from January, 2019 through August, 2019 and on rents from our ownership period from September, 2019 through December, 2019. |
Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 | 2031 |
| ||||||||||||
Leases Expiring |
| — |
| 2 |
| 1 |
| 2 |
| 1 |
| 1 |
| 3 |
| 2 |
| 1 | — | ||||||||||||
Square Footage |
| — |
| 18,199 |
| 1,575 |
| 4,000 |
| 3,000 |
| 1,400 |
| 32,565 |
| 71,416 |
| 20,131 | — | ||||||||||||
Annual Rent (1) | $ | — | $ | 104,160 | $ | 29,925 | $ | 57,600 | $ | 120,000 | $ | 40,575 | $ | 334,084 | $ | 438,324 | $ | 181,179 | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| — | % |
| 8.1 | % |
| 2.3 | % |
| 4.5 | % |
| 9.4 | % |
| 3.2 | % |
| 26.1 | % |
| 34.2 | % |
| 14.2 | % | — | % | ||
| (1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
| (2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total projected 2022 rent. |
Clemson Best Western Hotel
On September 27, 2019, we purchased the Clemson Best Western University Inn located at 1310 Tiger Boulevard, Clemson, South Carolina 29631, or the Clemson Best Western Property, from Heri AUM, LLC, a South Carolina limited liability company, for $9,750,000. The Clemson Best Western Property has 148 rooms, was built in 1982, substantially renovated in 2016 and 2017, is approximately 85,300 square feet and sits on 5.92 acres.
The purchase price and closing costs for the Clemson Best Western Property were financed with $1,767,528 in equity, $1,000,000 in funds from a short term line of credit from Virginia Commonwealth Bank, and net mortgage loan proceeds of $7,480,746 from a mortgage loan made by Ladder Capital Finance, LLC, or the Clemson Lender, in the original principal amount of $7,750,000, or the Clemson Loan.
The Clemson Loan has an initial 36-month term, maturing on October 6, 2022. The borrower, however, has an extension option, which if exercised, could extend the maturity date of the Clemson Loan for one (1) 12-month period. The Clemson Loan requires monthly interest only payments during the 36-month term. The Clemson Loan bears interest at the greater of (i) 4.9% plus the 30 day LIBOR rate, and (ii) 7.15%. The Clemson Loan may be prepaid, subject to certain conditions and payments. The Clemson Loan is secured by the Clemson Best Western Property.
The Virginia Commonwealth Bank line of credit had an original term of six months, maturing on February 21, 2020, and bears interest at 2.5% plus the 30 day LIBOR rate. The Virginia Commonwealth Bank line of credit required interest payments every three months. Effective on February 21, 2020, the original maturity date of the line of credit, short term, our company extended the line of credit, short term, for 60 days until April 21, 2020. On March 3, 2020 our company received $550,000 in funding from the line of credit, short term, to fund working capital and dividend payments. On April 21, 2020, our company extended the line of credit, short term, for 40 days until May 31, 2020. On May 31, 2020, our company extended the line of credit, short term, for 90 days until August 31, 2020. On August 12, 2020, our company extended the line of credit, short term, until September 30, 2020. On November 4, 2020, our company made a $225,000 payment to reduce the balance of the line of credit, short term to $325,000, and extended the line of credit, short term, until March 31, 2021. On March 18, 2021 our company extended the line of credit, short term, until April 30, 2021. On April 21, 2021 we repaid the line of credit, short term, in full.
11
The Clemson Best Western Property is a four-story building totaling approximately 85,300 square feet, with 148 guestrooms. The building is cast in place concrete upper level flooring supported by a CMU superstructure bearing on continuous perimeter reinforced spread footings and interior isolated spread footings and column pads. The ground level floor is a concrete slab-on-grade. The exterior walls are CMU with faux-stone veneer and EIFS. Common area flooring consists of a combination of carpet, laminate strip, ceramic tile and vinyl tile. Guest room flooring consists of carpet, laminate and ceramic tile. The upper roof consists of standing-seam metal panels and the lower roof consists of single-ply thermoplastic polyolefin (TPO) membrane. The parking area comprises 240 spaces, including 12 ADA accessible stalls. Perimeter sidewalks are concrete. The Clemson Best Western Property is operated by Marshall Hotels and Resorts.
The Clemson Best Western Property average occupancy rate, average daily rate, or ADR and RevPAR for the past five years are as follows:
| Average |
|
| |||||
Occupancy | ||||||||
Period | Rate | ADR | RevPAR | |||||
Year Ended December 31, 2021 |
| 100.0 | % | $ | 49.57 | $ | 49.56 | |
Year Ended December 31, 2020 |
| 47.2 | % | $ | 59.08 | $ | 27.93 | |
Year Ended December 31, 2019 |
| 39.4 | % | $ | 110.16 | $ | 43.40 | |
Year Ended December 31, 2018 |
| 35.1 | % | $ | 110.63 | $ | 38.88 | |
Year Ended December 31, 2017 |
| 24.6 | % | $ | 131.26 | $ | 32.33 | |
Occupancy rates from September 2020 through September 2021 were a result of an agreement by which Clemson University leased the entire Clemson Best Western Property. The initial lease period was from September 14, 2020 through December 15, 2020. In January 2021, this agreement was extended through May 5, 2021. In May 2021, this agreement was extended through May 2022.
Brookfield Center Property
On October 3, 2019, we purchased from Appian-Brookfield South 48, LLC, a South Carolina limited liability company, Brookfield Center, a 64,880 square foot flex-industrial property located at 48 Brookfield Center Drive, Greenville, South Carolina 29607, or the Brookfield Center Property, for $6,700,000. The Brookfield Center Property was built in 2007, was 100 percent leased as of December 31, 2021, and is anchored by the Gravitopia Trampoline Park, SME, Inc., and Turning Point Greenville Church.
The purchase price and closing costs for the Brookfield Center Property were financed with $1,876,138 in equity, $263,000 in funds from a short term, related party note and net mortgage loan proceeds of $4,736,495 from a mortgage loan made by CIBC, Inc., or the Brookfield Center Lender, in the original principal amount of $4,850,000, or the Brookfield Center Loan.
The Brookfield Center Loan will mature on November 1, 2029. The Brookfield Center Loan required monthly interest-only payments during the first 12 months of the term, through October 2020. Beginning in November 2020 and for the remainder of the term, the Brookfield Center Loan requires monthly payments of $22,876, which includes principal on a 30-year amortization schedule, and interest. The Brookfield Center Loan bears interest at 3.90%. The Brookfield Center Loan may not be prepaid until September 1, 2029, subject to certain conditions and limitations contained in the loan documents. The Brookfield Center Loan is secured by the Brookfield Center Property.
We entered into related party notes, short term, with the Manager by which the Manager provided an aggregate of $263,000 to fund a portion of our company’s acquisition of the Brookfield Center Property. The notes are due on demand and bear interest at a rate of 5 percent annually. On February 20, 2020, our company repaid these related party notes payable, short term, as well as additional related party notes, short term, in the principal amount of $852,000 plus accrued interest of $11,710.
The Brookfield Center Property consists of a single-story building on a 7.88 acre parcel of land, and was built in 2007. The foundation consists of a concrete slab-on-grade with continuous perimeter reinforced concrete spread footings and interior isolated spread footings and column pads. The floor is a reinforced concrete slab-on-grade. The building superstructure consists of concrete tilt-up panels with steel columns and steel stud infill walls. The roof is flat and consists of a single ply thermoplastic polyolefin (TPO)
12
membrane. Parking is available for two hundred and seventy-three (273) automobiles on asphalt-paved parking areas, including 12 ADA accessible spaces.
Occupancy data for the five preceding years (as of December 31):
| 2021 | 2020 |
| 2019 |
| 2018 |
| 2017 |
| ||
Occupancy Rate (1) |
| 100.0 | % | 93.8 | % | 93.8 | % | 93.8 | % | 93.8 | % |
| (1) | Occupancy rates for 2017 and 2018 are from the prior owner. |
Average effective annual rent per square foot for the five preceding years:
| 2021 | 2020 |
| 2019 |
| 2018 |
| 2017 | |||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 8.38 | $ | 8.33 | $ | 6.52 | $ | 7.86 | $ | 8.49 | |||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements. |
Tenants occupying 10% or more of the rentable square footage:
|
|
|
|
|
| ||||||||
Percentage | |||||||||||||
Leased | of Rentable | 2022 | |||||||||||
Square | Square | Annual | Lease | Renewal | |||||||||
Tenant | Business | Footage | Footage | Rent | Expiration | Options | |||||||
Turning Point Greenville Church |
| Religious |
| 9,000 |
| 13.9 | % | $ | 99,619 |
| 9/30/2025 |
| None |
SME |
| Engineering |
| 8,582 |
| 13.2 | % | $ | 103,624 |
| 11/30/2023 |
| None |
Gravitopia |
| Entertainment |
| 35,160 |
| 54.2 | % | $ | 278,027 |
| 4/30/2026 |
| 4/30/2031 |
Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 | 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 |
| 2031 |
| ||||||||||||
Leases Expiring |
| 1 |
| 1 |
| 1 |
| 1 |
| 2 |
| — |
| — |
| — |
| — | — | ||||||||||||
Square Footage |
| 4,046 |
| 8,582 |
| 4,046 |
| 9,000 |
| 39,206 |
| — |
| — |
| — |
| — | — | ||||||||||||
Annual Rent (1) | $ | 40,784 | $ | 105,994 | $ | 39,971 | $ | 106,612 | $ | 344,365 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 6.9 | % |
| 18.0 | % |
| 6.8 | % |
| 18.1 | % |
| 58.5 | % |
| 0 | % |
| 0 | % |
| 0 | % |
| 0 | % | 0 | % | ||
(1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
(2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total projected 2022 rent. |
Lancer Center Property
On May 14, 2021, we purchased from BVC Lancer, LLC, a South Carolina limited liability company, Lancer Center, a 178,626 square foot retail property located at 1256 SC-9 By Pass West, Lancaster, South Carolina, 29720, or the Lancer Center Property, for $10,100,000 exclusive of closing costs and a $200,000 credit to our company for major repairs. The Lancer Center Property was built in 1987, was 100 percent leased as of December 31, 2021, and is anchored by Badcock Furniture, KJ’s Market and Big Lots.
The purchase price and closing costs for the Lancer Center Property were financed with $3,783,515 in equity and net mortgage loan proceeds of $6,421,870 from a senior mortgage loan, in the original principal amount of $6,565,000, or the Lancer Center Loan. The Lancer Center Loan will mature on June 1, 2026 and requires monthly payments of $34,663 which includes principal on a 30-year amortization schedule, and interest. The Lancer Center Loan bears interest at 4.00%. The Lancer Center Loan may be prepaid at any time and is secured by the Lancer Center Property.
13
The Lancer Center Property consists of a single-story, main retail strip building constructed in 1987. The building is concrete slab on grade with perimeter and interior footings under load-bearing structures. The building superstructure utilizes concrete masonry unit load bearing walls and a metal deck roof on open web steel trusses. The roof is a combination of (i) a flat, mechanically fastened, single ply thermoplastic membrane system and (ii) a flat, built-up roofing with granular surface modified bitumen cap sheet system. Parking is available for estimated 624 spaces.
Tenants occupying 10% or more of the rentable square footage:
|
|
| Percentage |
|
|
| |||||||
Leased | of Rentable | ||||||||||||
Square | Square | 2022 Annual | Lease | Renewal | |||||||||
Tenant | Business | Footage | Footage | Rent | Expiration | Options | |||||||
Badcock Furniture |
| Retail |
| 32,960 |
| 18.5 | % | $ | 108,000 |
| 6/30/2029 |
| 6/30/2034 |
K.J’s Market |
| Retail |
| 34,100 |
| 19.1 | % | $ | 140,640 |
| 12/31/2025 |
| 12/31/2030 |
| 12/31/2035 | ||||||||||||
| 12/31/2040 | ||||||||||||
| 12/31/2045 | ||||||||||||
| 12/31/2050 | ||||||||||||
Big Lots |
| Retail |
| 28,527 |
| 15.8 | % | $ | 148,349 |
| 2/29/2024 |
| 2/28/2029 |
| 2/28/2034 | ||||||||||||
Occupancy data for the five preceding years (as of December 31):
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
Occupancy Rate (1) |
| 100 | % | 97.2 | % | 99 | % | 90.6 | % | 88.0 | % |
(1) | Occupancy rates for 2017 through 2020 are derived from data from the prior owner. |
Average effective annual rent per square foot for the five preceding years:
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 5.52 | $ | 5.55 | $ | 5.61 | $ | 5.02 | $ | 4.88 | |||||
(1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements or rent deferrals. For the year ended December 31, 2021, we owned Lancer Center for seven months. The average annual rent per square foot is based on rents from the prior owner for period from January, 2021 through May, 2021 and on rents from our ownership period from June, 2021 through December, 2021. Average effective rent per square foot for 2017 through 2020 are based on rents from the prior owner. |
Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 |
| 2031 |
| |||||||||||
Leases Expiring |
| 2 |
| 4 |
| 4 |
| 3 |
| 4 |
| — |
| — |
| 2 |
| — |
| — | |||||||||||
Square Footage |
| 3,100 |
| 14,180 |
| 44,386 |
| 38,700 |
| 26,300 |
| — |
| — |
| 47,960 |
| — |
| — | |||||||||||
Annual Rent (1) | $ | 38,490 | $ | 123,664 | $ | 280,570 | $ | 216,546 | $ | 183,780 | $ | — | $ | — | $ | 213,000 | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 3.96 | % |
| 12.73 | % |
| 28.89 | % |
| 22.30 | % |
| 18.92 | % |
| — | % |
| — | % |
| 21.93 | % |
| — | % |
| — | % | |
(1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
14
(2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the projected 2022 rent. |
The Greenbrier Business Center Property
On August 27, 2021, we purchased from Medalist Fund II-B, LLC, a Virginia limited liability company, which is also managed by the Company’s external manager, the Greenbrier Business Center Property, located at 1244 Executive Boulevard, Chesapeake, Virginia, 23320, for $7,250,000. The Greenbrier Business Center was built in 1987, was 86.8 percent leased as of December 31, 2021 and is anchored by Bridge Church and Consolidated Electrical Distributors.
The purchase price and closing costs were financed with $3,097,162 in equity and the assumption of a secured mortgage loan, net, of $4,481,600, or the Greenbrier Business Center Loan. The Greenbrier Business Center Property, built in 2006 and 2007, was 83.7 percent leased as of the acquisition date, is anchored by Bridge Church and Consolidated Electrical Distributors, and is located in Chesapeake, Virginia.
The Greenbrier Business Center Loan was originally made on June 7, 2021 in the principal amount of $4,495,000 and assumed by us at acquisition. The Greenbrier Business Center Loan bears interest at a fixed rate of 4.0 percent and requires monthly interest only payments during the first 12 months of its term. Beginning in August 2022 and for the remainder of the term, the Greenbrier Business Center Loan requires monthly payments of $23,873, which includes principal on a 30-year amortization schedule, and interest. The Greenbrier Business Center Loan matures on July 1, 2026. The Greenbrier Business Center Loan may be prepaid at any time prior to its maturity with a 1 percent prepayment penalty.
The Greenbrier Business Center Property consists of three (3) one-story flex warehouse buildings totaling approximately 89,290 square feet of rentable area. The buildings are constructed on a deep foundation system consisting of piles or caissons and grade beams. The ground floor consists of reinforced concrete slab. The exterior structural walls are constructed with structural steel framing consisting of columns, beams and open web steel joists. The rooves are flat and consist of PVC roofing membrane. The parking area comprises 171 spaces.
As of December 31, 2021, tenants occupying 10% or more of the rentable square footage:
|
|
| Percentage |
|
|
| |||||||
Leased | of Rentable | ||||||||||||
Square | Square | Lease | Renewal | ||||||||||
Tenant | Business | Footage | Footage | Annual Rent | Expiration | Options | |||||||
Bridge Church (1) |
| Religious |
| 10,913 |
| 12.2 | % | $ | 76,385 |
| 10/31/2022 |
| None |
Consolidated Electrical Distributors (2) |
| Distribution |
| 9,100 |
| 10.2 | % |
| 83,902 |
| 12/31/2021 |
| None |
(1) | On February 28, 2022, Bridge Church renewed its lease for three years through October 31, 2025. |
(2) | Consolidated Electrical Distributors lease expired on December 31, 2021 and the tenant has vacated its space. |
Occupancy data for the five preceding years (as of December 31):
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 |
| |
Occupancy Rate |
| 86.8 | % | 91.4 | % | 82.2 | % | 91.2 | % | 96.8 | % |
Average effective annual rent per square foot for the five preceding years:
| 2021 |
| 2020 |
| 2019 |
| 2018 |
| 2017 | ||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 6.65 | $ | 5.79 | $ | 6.30 | $ | 6.80 | $ | 6.80 | |||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements or rent deferrals. For the year ended December 31, 2021, we owned Greenbrier Business Center for four months. The average annual rent per square foot is based on rents from the prior owner for period from January, 2021 through August, 2021 and on rents from our ownership period from |
15
| September, 2021 through December, 2021. Average effective rent per square foot for 2017 through 2020 are based on rents from the prior owner. |
Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 |
| 2031 |
| |||||||||||
Leases Expiring |
| 6 |
| 2 |
| 4 |
| 2 |
| 2 |
| — |
| — |
| — |
| — |
| — | |||||||||||
Square Footage |
| 31,117 |
| 8,251 |
| 10,857 |
| 11,643 |
| 6,539 |
| — |
| — |
| — |
| — |
| — | |||||||||||
Annual Rent (1) | $ | 260,841 | $ | 71,674 | $ | 104,049 | $ | 111,872 | $ | 68,135 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 48.88 | % |
| 13.43 | % |
| 19.50 | % |
| 20.96 | % |
| 12.77 | % |
| — | % |
| — | % |
| — | % |
| — | % |
| — | % | |
(1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
(2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total 2022 projected rent. |
Parkway Property
On November 1, 2021, we acquired an undivided 82% tenant-in-common interest in the Parkway Property from Continental Parkway, LLC, a Virginia limited liability company and unaffiliated seller. The Parkway Property is comprised of two flex warehouse buildings totaling approximately 64,109 square feet and is located on 4.39 acres of land at 2697 International Parkway, Virginia Beach, Virginia, 23452. The contract purchase price for the Parkway Property was $7,300,000. We acquired the Parkway Property with $2,138,795 in cash from us, $469,492 in cash from an unaffiliated tenant-in-common, and net mortgage loan proceeds of approximately $4,989,737, or the Parkway Property Loan. Our company purchased the Parkway Property as a tenant-in-common with PMI Parkway, LLC, an unaffiliated party. Our company acquired an 82% interest in the Parkway Property, and PMI Parkway, LLC owns the remaining 18% interest. The Parkway Property was built in 1984, was 100% occupied as of December 31, 2021, and is anchored by the City of Virginia Beach and GBRS Group.
The Parkway Property Loan matures on October 31, 2031. The Parkway Property Loan requires monthly payments of principal, on a 30-year amortization schedule, and interest during the term. The Parkway Property Loan bears interest at the greater of (i) 2.25% plus the ICE LIBOR rate, and (ii) 2.25%. The Parkway Property Loan may be prepaid, subject to certain conditions and payments. The Parkway Property Loan is secured by the Parkway Property.
In connection with our acquisition of the Parkway Property, we, through a subsidiary, entered into the Tenants in Common Agreement with PMI Parkway, LLC, or the Parkway TIC Agreement. Among other approvals, under the Parkway TIC Agreement, the consent of both tenants in common is required to approve (i) any lease, sublease, deed restriction, or grant of easement of/on all or any portion of the Parkway Property, (ii) any sale or exchange of the Parkway Property, or (iii) any indebtedness or loan, and any negotiation or refinancing thereof, secured by a lien on the Parkway Property. In the event the tenants in common are unable to agree on a decision which requires the consent of both tenants in common, a tenant in common may purchase the undivided interest of the other tenant in common subject to certain rights contained in the Parkway Property TIC Agreement.
The Parkway Property consists of two buildings totaling approximately 64,109 square feet of leasable area. The buildings are concrete slab-on-grade with continuous perimeter reinforced concrete spread footings and interior isolated spread footings and column pads. The exterior walls are masonry with interior steel beams and framing. The low-slope roof structure is steel frame with corrugated metal panels covered by a single ply EPDM system on one building and a single ply TPO system on the second building. The parking area comprises approximately 207 spaces.
16
As of December 31, 2021, tenants occupying 10% or more of the rentable square footage are:
|
|
| Percentage |
|
|
| |||||||
Leased | of Rentable | ||||||||||||
Square | Square | Lease | Renewal | ||||||||||
Tenant | Business | Footage | Footage | Annual Rent | Expiration | Options | |||||||
City of Virginia Beach (1) |
| Governmental |
| 10,520 |
| 16.4 | % | $ | 170,119 |
| 6/30/2022 |
| None |
GBRS Group |
| Consulting |
| 9,555 |
| 14.9 | % | $ | 90,004 |
| 8/31/2025 |
| 8/31/2030 |
| (1) | The City of Virginia Beach has provided notice that it does not plan to renew its lease and will vacate its space on the lease expiration date. |
Occupancy data for the five preceding years (as of December 31):
| 2021 |
| 2020 |
|
| 2019 |
| 2018 |
| 2017 |
| |
Occupancy Rate | 100 | % | 100 |
| % | 76.6 | % | 62.9 | % | 39.3 | % |
Average effective annual rent per square foot for the five preceding years:
| 2021 |
| 2020 |
| 2019 | 2018 |
| 2017 | |||||||
Average Effective Annual Rent Per Square Foot (1) | $ | 10.12 | $ | 8.22 | $ | 6.80 | $ | 5.19 | $ | 4.35 | |||||
| (1) | Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements or rent deferrals. For the year ended December 31, 2021, we owned the Parkway Property for two months. The average annual rent per square foot is based on rents from the prior owner for period from January, 2021 through October, 2021 and on rents from our ownership period from November, 2021 through December, 2021. Average effective rent per square foot for 2017 through 2020 are based on rents from the prior owner. |
Lease expirations in the next 10 years:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028 |
| 2029 |
| 2030 |
| 2031 |
| |||||||||||
Leases Expiring | 4 | 9 | 7 | 2 | 1 | — | — | — | — | — |
| ||||||||||||||||||||
Square Footage |
| 14,650 |
| 20,123 |
| 14,303 |
| 11,604 |
| 2,617 |
| — |
| — |
| — |
| — |
| — | |||||||||||
Annual Rent (1) | $ | 211,038 | $ | 184,364 | $ | 171,649 | $ | 98,409 | $ | 28,813 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Percentage of Aggregate Annual Rent (2) |
| 37.1 | % |
| 32.4 | % |
| 30.2 | % |
| 17.3 | % |
| 5.1 | % |
| — | % |
| — | % |
| — | % |
| — | % |
| — | % | |
(1) | Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months. |
(2) | The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the projected 2022 rent. |
ITEM 3. LEGAL PROCEEDINGS
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business. We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
17
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock has been listed on the Nasdaq Capital Market under the symbol “MDRR” since November 28, 2018. Prior to that time, there was no public market for our common stock. On March 14, 2022, the closing sale price of our common stock on the Nasdaq Capital Market was $1.06 On December 31, 2021, we had 12,531 holders of record of our common stock. This figure does not represent the actual number of beneficial owners of our common stock because shares of our common stock are frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.
We generally intend to continue to declare quarterly dividends on our common stock, subject to the Board’s discretion and applicable law. The actual amount and timing of dividends, however, will be at the discretion of our board of directors and will depend upon our financial condition in addition to the requirements of the Code, and no assurance can be given as to the amounts or timing of future distributions, if any. From time to time, our board of directors may approve the repurchase of our shares of common stock or Series A Preferred Stock, par value $0.01 per share, through open market purchases or otherwise.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by Item 5 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
Recent Sales of Unregistered Securities
During May 2019, our company issued shares of common stock at $4.80 per share, subject to issuance costs and discounts. The proceeds were used as working capital and general corporate purposes. The warrants were issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.
During January 2020, our company’s operating partnership issued 93,580 OP Units in exchange for tenant in common interests in the Greensboro Hampton Inn. These securities were issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.
During October 2020, our company issued a $1,500,000 convertible debenture. The proceeds were used as working capital and general corporate purposes. The convertible debenture was issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.
During December 2020, our company issued a $2,000,000 convertible debenture. The proceeds were used as working capital and general corporate purposes. The convertible debenture was issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.
During January 2021, our company issued a $1,500,000 convertible debenture. The proceeds were used as working capital and general corporate purposes. The convertible debenture was issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.
Issuer Repurchases of Equity Securities
On December 21, 2021, the Company’s Board of Directors authorized a share repurchase program whereby the Company may repurchase up to 500,000 shares of its common stock. The Company did not repurchase any shares of common stock during the three months ended December 31, 2021.
18
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and the related notes thereto of Medalist Diversified REIT, Inc. for the years ended December 31, 2021 and December 31, 2020.
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements. Our actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors.
Company Overview
Medalist Diversified REIT Inc. is a Maryland corporation formed on September 28, 2015. Beginning with our taxable year ended December 31, 2017, we believe that we have operated in a manner qualifying us as a real estate investment trust (“REIT”), and we have elected to be taxed as a REIT for federal income tax purposes. Our company serves as the general partner of Medalist Diversified Holdings, LP which was formed as a Delaware limited partnership on September 29, 2015.
Our company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial and retail properties, (ii) multi-family residential properties and (iii) limited service hotel 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. We 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, and 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, we may make such investments in our Manager’s discretion.
Our company is externally managed by Medalist Fund Manager, Inc. (the “Manager”). The Manager makes all investment decisions for our 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 our company’s overall business and affairs and has broad discretion to make operating decisions on behalf of our company and to make investment decisions. Our company’s stockholders are not involved in its day-to-day affairs.
As of December 31, 2021, our company owned and operated eight investment properties, the Shops at Franklin Square (the “Franklin Square Property”), a 134,239 square foot retail property located in Gastonia, North Carolina, the Hanover North Shopping Center (the “Hanover Square Property”), a 73,440 square foot retail property located in Mechanicsville, Virginia, the Ashley Plaza Shopping Center (the “Ashley Plaza Property”), a 160,356 square foot retail property located in Goldsboro, North Carolina, the Clemson Best Western University Inn (the “Clemson Best Western Property”), a hotel with 148 rooms on 5.92 acres in Clemson, South Carolina, Brookfield Center (the “Brookfield Center Property”), a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina, the Lancer Center, a 178,626 square foot retail property located in Lancaster, South Carolina (the “Lancer Center Property”), the Greenbrier Business Center (the “Greenbrier Business Center Property”), an 89,290 square foot mixed-use industrial/office property located in Chesapeake, Virginia and Parkway 3 4 (the “Parkway Property”), a 64,109 square foot mixed-use industrial office property located in Virginia Beach, Virginia. As of December 31, 2021, we owned 84 percent of the Hanover Square Property as a tenant in common with a noncontrolling owner which owned the remaining 16 percent interest and 82 percent of the Parkway Property as a tenant in common with a noncontrolling owner which owns the remaining 18 percent interest
Reporting Segments
We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have investments. As of December 31, 2021, our reportable segments were retail center properties, flex center properties, and hotel properties.
19
Recent Trends and Activities
Significant events that have impacted our company are summarized below.
Sale of the Hampton Inn Property
On August 31, 2021, our company sold its interest in the Hampton Inn Property, a 125 room hotel on 2.162 acres in Greensboro, North Carolina, to an unrelated purchaser for $12,900,000. At the time of the sale, our company owned a 78 percent interest in the Hampton Inn Property as a tenant in common with a noncontrolling owner who owned the remaining 22 percent interest. During the year ended December 31, 2020, our company reclassified the Hampton Inn Property as assets held for sale and recognized an impairment charge of $3,494,058 associated with this reclassification. As a result of the closing of the sale of the Hampton Inn Property on August 31, 2021, our company recognized a gain on sale of investment properties of $124,641 for the year ended December 31, 2021.
2021 Investment Property Acquisitions
Lancer Center
On May 14, 2021, we completed our acquisition of the Lancer Center Property, a 178,626 square foot retail property located in Lancaster, South Carolina, through a wholly owned subsidiary. The Lancer Center Property, built in 1987, was 100 percent leased as of December 31, 2021 and is anchored by KJ’s Market, Big Lots, Badcock Furniture, and Harbor Freight. The purchase price for the Lancer Center Property was $10,100,000, less a $200,000 credit to our company for major repairs, paid through a combination of cash provided by our company and the incurrence of new mortgage debt. Our company’s total investment, including $143,130 of loan issuance costs, was $10,205,385. We incurred $305,385 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
Greenbrier Business Center
On August 27, 2021, we completed our acquisition of the Greenbrier Business Center Property, an 89,290 square foot mixed-use industrial/office property, through a wholly owned subsidiary. The Greenbrier Business Center Property, built in 1987, was 86.8 percent leased as of December 31, 2021. Major tenants include Bridge Church, Superior Staffing, Consolidated Electrical Distributors and Mid-Atlantic Office Technologies. The purchase price for the Greenbrier Business Center Property was $7,250,000, paid through a combination of cash provided by our company and the assumption of mortgage debt. Our total investment, including $13,400 of loan issuance costs, was $7,578,762. Our company incurred $178,763 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
Parkway Property
On November 1, 2021, we completed our acquisition of the Parkway 3 4 property, a 64,109 square foot, two building portfolio in Virginia Beach, Virginia (the “Parkway Property”) through a wholly owned subsidiary. The Parkway Property, built in 1984, was 100 percent leased as of December 31, 2021. Major tenants include the City of Virginia Beach and GBRS Group. The purchase price for the Parkway Property was $7,300,000, paid through a combination of $2,138,795 in cash provided by our company, $469,492 in cash provided by an unaffiliated non-controlling interest, and the incurrence of a new mortgage payable of $5,100,000. Our company’s total investment, including the investment of the non-controlling interest and $110,263 of loan issuance costs, was $7,598,024. We incurred $298,024 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
Equity Issuances
On April 13, 2021, our company issued and sold 8,000,000 Common Shares at an offering price of $1.50 per share. Net proceeds from the issuance totaled $10,886,337, which includes the impact of discounts and offering costs, including the underwriter’s selling commissions and estimated legal and accounting fees.
Form S-3, Shelf Registration
On June 21, 2021, our company filed a shelf registration statement on Form S-3 with the United States Securities and Exchange Commission (“SEC”). The registration statement is intended to provide additional flexibility to finance future business opportunities
20
through timely and cost-effective access to capital markets. Under the shelf registration statement, our company may, from time to time, issue common stock up to an aggregate amount of $150 million. The shelf registration statement relating to these securities has been filed with the SEC and became effective on July 27, 2021.
Standby Equity Purchase Agreement
On November 17, 2021, our company entered into a Standby Equity Purchase Agreement (the “SEPA”) with a financing entity. Under this agreement, our company will be able to sell up to $6,665,299 of its shares of common stock at our company’s request any time during the 36 months following the execution of the SEPA. The shares would be purchased at 96.5% of the market price (as defined in the agreement) and would be subject to certain limitations, including that the financing entity could not purchase any shares that would result in it owning more than 4.99% of our company’s common stock. As of December 31, 2021, our company has not sold any shares under this agreement.
Common Stock Repurchase Plan
In December 2021, our company’s board of directors approved a program to purchase up to 500,000 shares of our company’s common stock in the open market, up to a maximum price of $4.80 per share. The repurchase program does not obligate our company to acquire any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at our company’s discretion. As of December 31, 2021, our company had not repurchased any of its common shares under this plan. Subsequent to the December 31, 2021 effective date of the consolidated financial statements, through the date of this Annual Report on Form 10-K, the Company has repurchased a total of 268,070 shares of common stock on the open market under the Common Stock Repurchase Plan at an average price of $1.04 per share.
Common stock grants under the 2018 Equity Incentive Plan
On March 11, 2020, our company’s Compensation Committee approved a grant of 156,522 shares of Common Shares to two employees of the Manager who also serve as directors of our company, a grant of 65,215 Common Shares to our company’s five independent directors, and a grant of 26,087 shares to the chief financial officer of our company. The effective date of the grants was March 11, 2020. The Common Shares granted vested immediately and were unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the Common Shares vested immediately, the fair value of the grants, or $569,995, was recorded to share based compensation expense on the effective date of the grant. The fair value of the grants was determined by the market price of our company’s Common Shares on the effective date of the grant.
On March 16, 2021, our company’s Compensation Committee approved a grant of 40,356 Common Shares to our company’s three independent directors, and a grant of 26,900 shares to the chief financial officer of our company. The effective date of the grants was March 16, 2021. The Common Shares granted vest immediately and are unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the Common Shares vested immediately, the fair value of the grants, or $149,981, was recorded to share based compensation expense on our company’s condensed consolidated statements of operations on the effective date of the grant. The fair value of the grants was determined by the market price of our company’s Common Shares on the effective date of the grant.
Mandatorily redeemable preferred stock issuance
On February 19, 2020, our company issued and sold 200,000 shares of 8.0% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) at $23.00 per share, resulting in gross proceeds of $4,600,000. Net proceeds from the issuance were $3,860,882, which includes the impact of the underwriter’s discounts, selling commissions and legal, accounting and other professional fees. Our company has classified the Series A Preferred Stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the accompanying consolidated statements of operations.
21
Financing Activities
Mortgages payable
Our company financed its acquisitions of its investment properties through mortgages, as follows:
Monthly | Interest | December 31, | ||||||||||||
Property |
| Payment |
| Rate |
| Maturity |
| 2021 |
| 2020 | ||||
Franklin Square (a) |
| Interest only |
| 3.808 | % | December 2031 | $ | 13,250,000 | $ | 14,275,000 | ||||
Hanover Square (b) | $ | 56,882 |
| 4.25 | % | December 2027 |
| 10,134,667 |
| 10,380,791 | ||||
Ashley Plaza (c) | $ | 52,795 |
| 3.75 | % | September 2029 |
| 11,127,111 |
| 11,349,518 | ||||
Clemson Best Western (d) | Interest only |
| Variable |
| October 2022 |
| — |
| 7,750,000 | |||||
Brookfield Center (e) | $ | 22,876 |
| 3.90 | % | November 2029 |
| 4,758,344 |
| 4,842,887 | ||||
Lancer Center (f) | $ | 34,667 | 4.00 | % | March 2026 | 6,488,034 | — | |||||||
Greenbrier Business Center (g) | Interest only | 4.00 | % | July 2026 | 4,495,000 | — | ||||||||
Parkway Center (h) | Variable | Variable | % | October 2026 | 5,090,210 | — | ||||||||
Total mortgages payable |
|
| $ | 55,343,366 | $ | 48,598,196 | ||||||||
Amounts presented do not reflect unamortized loan issuance costs.
| (a) | The original mortgage loan for the Franklin Square Property matured on October 6, 2021. Effective on October 6, 2021, our company entered into a forbearance agreement with the current lender extending the maturity date for thirty days with a right to extend the maturity date for an additional thirty days. On November 8, 2021, we closed on a new loan in the principal amount of $13,250,000 which bears interest at a fixed rate of 3.808 percent, has a ten-year term, and matures on December 6, 2031. In addition to the funds from the new loan, our company used $2,242,273 in cash on hand for closing costs and to repay the remaining balance of the original mortgage loan. Our company has guaranteed the payment and performance of the obligations of the new loan. The new mortgage loan bears interest at a fixed rate of 3.808 percent and is interest only until January 6, 2025, at which time the monthly payment will become $61,800, which includes interest and principal based on a 30 year amortization schedule. Our company accounted for this refinancing transaction in accordance with debt extinguishment accounting in accordance with ASC 470. The new mortgage includes covenants for our company to maintain a net worth of $13,250,000, excluding the assets and liabilities associated with the Franklin Square Property and to maintain liquid assets of no less than $1,000,000. As of December 31, 2021, we believe that we are compliant with these covenants. |
| (b) | On May 8, 2020, we entered into a refinancing transaction with the mortgage lender for the Hanover Square Property which increased the mortgage amount and reduced the interest rate. Under this transaction, the principal amount of the loan was increased to $10,500,000 and the interest rate reduced to a fixed rate of 4.25 percent until January 1, 2023, when the interest rate will adjust to a new fixed rate which will be determined by adding 3.00 percentage points to the daily average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available by the Federal Reserve Board, with a minimum of 4.25 percent. The fixed monthly payment, which includes principal and interest, increased to $56,882. Our company accounted for this transaction as a loan modification in accordance with ASC 470. |
The mortgage loan agreement for the Hanover Square property includes covenants to (i) maintain a Debt Service Coverage Ratio (“DSCR”) in excess of 1.35 to 1.00 and (ii) maintain a loan-to-value of real estate ratio of 75 percent. As of December 31, 2021 and 2020, respectively, our company believes that it is compliant with these covenants.
| (c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of 3.75 percent and was interest only for the first twelve months. Beginning on October 1, 2020, the monthly payment became $52,795 for the remaining term of the loan, which includes interest at the fixed rate, and principal, based on a thirty year amortization schedule. |
| (d) | As of March 31, 2021, our company reclassified the mortgage loan for the Clemson Best Western Property to mortgages payable, net, associated with assets held for sale (see below). |
22
| (e) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of 3.90 percent and is interest only for the first twelve months. Beginning on November 1, 2020, the monthly payment became $22,876 for the remaining term of the loan, which includes interest at the fixed rate, and principal, based on a thirty year amortization schedule. |
| (f) | The mortgage loan for the Lancer Center Property bears interest at a fixed rate of 4.00 percent. The monthly payment is $34,667 which includes interest at the fixed rate and principal, based on a twenty-five year amortization schedule. Our company has provided a guaranty of the payment of and performance under the terms of the Lancer Center Property mortgage. |
| (g) | Our company assumed the mortgage loan for the Greenbrier Business Center Property from the seller. The mortgage loan bears interest at a fixed rate of 4.00 percent and is interest only until August 1, 2022, at which time the monthly payment will become $23,873, which includes interest at the fixed rate, and principal, based on a twenty-five year amortization schedule. The Greenbrier Business Center Property mortgage includes covenants to maintain a debt service coverage ratio above 1.35 to 1.00 and maintain an occupancy rate of at least 80 percent. As of December 31, 2021, our company believes that it is compliant with these covenants. |
| (h) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of 2.25 percent. The interest rate payable is the ICE LIBOR rate plus 225 basis points. As of December 31, 2021, the rate in effect for the Parkway Property mortgage was 2.3493 percent. The monthly payment, which varies based on the interest rate in effect each month, includes interest at the variable rate, and principal based on a 30 year amortization schedule. |
Our company financed its acquisitions of its assets held for sale through mortgages, which as of December 31, 2021 are recorded as mortgages payable, net, associated with assets held for sale, on our consolidated balance sheets, as follows:
Balance | ||||||||||||
December 31, | ||||||||||||
Monthly | Interest | 2021 | December 31, | |||||||||
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2020 | ||
Hampton Inn (a) |
| Interest only |
| Variable |
| May 2022 | $ | — | $ | 10,400,000 | ||
Clemson Best Western (b) | Interest only | Variable | October 2022 | 7,750,000 | — | |||||||
Total mortgages payable associated with assets held for sale | $ | 7,750,000 | $ | 10,400,000 | ||||||||
Amounts presented do not reflect unamortized loan issuance costs.
| (a) | As of December 31, 2020, our company reclassified the mortgage loan for the Hampton Inn Property to mortgages payable, net, associated with assets held for sale. On August 31, 2021, we repaid the loan as part of the sale of the Hampton Inn Property. |
The mortgage loan for the Hampton Inn Property bore interest at a variable rate based on LIBOR with a minimum rate of 6.50 percent. The interest rate payable is the USD LIBOR one-month rate plus 6.25 percent. As of August 31, 2021 (the date of the mortgage loan repayment) and December 31, 2020, the rate in effect for the Hampton Inn Property mortgage was 6.50 percent and 6.50 percent, respectively.
| (b) | As of March 31, 2021, our company reclassified the mortgage loan for the Clemson Best Western Property to mortgages payable, net, associated with assets held for sale. The mortgage loan for the Clemson Best Western Property bears interest at a variable rate based on LIBOR with a minimum rate of 7.15 percent. The interest rate payable is the USD LIBOR one-month rate plus 4.9 percent. As of December 31, 2021 and 2020, respectively, the rate in effect for the Clemson Best Western Property mortgage was 7.15 percent. The mortgage payable on our Clemson Best Western Property matures on October 6, 2022. We have an option to extend the term of the mortgage by one year, until October 6, 2023, under certain conditions. If we have not been successful in our efforts to sell the Clemson Best Western Property by loan maturity date, we plan to exercise the option to extend the term of the mortgage. |
23
Convertible debenture issuance
On October 27, 2020, our company entered into a definitive agreement with a financing entity to issue and sell convertible debentures in an aggregate principal amount of up to $5 million pursuant to a private offering exempt from registration under the Securities Act of 1933, as amended. The debentures were issued at a 5 percent discount to the principal amount, accrue interest at a rate of 5 percent per annum (payable at maturity), and were closed in three separate tranches as follows: (i) convertible debenture of $1.5 million issued and sold on October 27, 2020 upon the signing of the definitive agreement, (ii) convertible debenture of $2.0 million issued and sold on December 22, 2020 upon the filing of a registration statement with the U.S. Securities and Exchange Commission (“SEC”) relating to the shares of common stock that may be issued upon the conversion of the convertible debentures, and (iii) convertible debenture of $1.5 million issued and sold on January 5, 2021, the date the registration statement was declared effective by the SEC. The second and third closings of the convertible debentures were subject to our company successfully obtaining approval from its common stockholders for the issuance of shares of common stock that may be issued upon the conversion of the convertible debentures. Net proceeds from the issuance and sale of the convertible debentures totaled $4,231,483.
As of December 31, 2021, the convertible debenture holder has elected to fully convert the total $5,000,000 in principal balance of the convertible debentures and $58,788 in accrued interest to our company’s common shares, receiving 3,181,916 common shares at an average conversion price of $1.59, as set forth in the table below.
| Accrued and |
|
|
|
| |||||||||
Principal | Unpaid | Total | Common | |||||||||||
Amount | Interest | Conversion | Conversion | Shares | ||||||||||
Conversion Date | Converted | Converted | Amount | Price | Issued | |||||||||
January 6, 2021 | $ | 100,000 | $ | 411 | $ | 100,411 | $ | 1.9079 |
| 52,629 | ||||
January 14, 2021 |
| 200,000 |
| 1,534 |
| 201,534 |
| 1.9079 |
| 105,631 | ||||
January 15, 2021 |
| 300,000 |
| 164 |
| 300,164 |
| 1.9079 |
| 157,327 | ||||
January 21, 2021 |
| 300,000 |
| 740 |
| 300,740 |
| 2.0060 |
| 149,920 | ||||
January 26, 2021 |
| 500,000 |
| 411 |
| 500,411 |
| 2.0060 |
| 249,457 | ||||
February 9, 2021 |
| 100,000 |
| 192 |
| 100,192 |
| 2.0078 |
| 49,901 | ||||
February 9, 2021 |
| 400,000 |
| 13,699 |
| 413,699 |
| 2.0078 |
| 206,046 | ||||
February 10, 2021 |
| 500,000 |
| 219 |
| 500,219 |
| 2.0078 |
| 249,138 | ||||
February 17, 2021 |
| 200,000 |
| 1,055 |
| 201,055 |
| 2.0193 |
| 99,567 | ||||
March 10, 2021 |
| 400,000 |
| 2,589 |
| 402,589 |
| 1.5637 |
| 257,459 | ||||
March 11, 2021 |
| 250,000 |
| 69 |
| 250,069 |
| 1.5637 |
| 159,921 | ||||
March 12, 2021 |
| 250,000 |
| 34 |
| 250,034 |
| 1.5637 |
| 159,899 | ||||
March 12, 2021 |
| 250,000 |
| 28,151 |
| 278,151 |
| 1.5637 |
| 177,880 | ||||
April 28, 2021 |
| 250,000 |
| 8,048 |
| 258,048 |
| 1.1007 |
| 234,440 | ||||
May 3, 2021 |
| 250,000 |
| 685 |
| 250,685 |
| 1.1007 |
| 227,750 | ||||
May 10, 2021 |
| 250,000 |
| 719 |
| 250,719 |
| 1.1641 |
| 215,376 | ||||
May 11, 2021 |
| 500,000 |
| 68 |
| 500,068 |
| 1.1641 |
| 429,575 | ||||
Total Conversions | $ | 5,000,000 | $ | 58,788 | $ | 5,058,788 |
| 3,181,916 | ||||||
The principal amount outstanding of the convertible debentures as of December 31, 2021 and December 31, 2020 was $0 and $3,500,000, respectively. As of December 31, 2021, and December 31, 2020, the carrying amount of the convertible debentures, net, was $0 and $2,260,565, respectively.
Notes payable
As of December 31, 2021 and 2020, our company had a note payable outstanding in the principal amount of $0 and $176,300, respectively, under the Small Business Administration’s Paycheck Protection Program (the “SBA PPP Loan Program”). This note was issued on April 30, 2020, on behalf of a subsidiary, MDR PMI Greensboro TRS, LLC, the entity that operates the Hampton Inn Property. Our company used these funds pursuant to the limitations established by the SBA PPP Loan Program for payroll and other eligible expenses for the Hampton Inn Property. Under the terms of the loan, all, a portion or none of the loan may be forgiven, based on criteria established by the SBA PPP Loan Program. On June 14, 2021, our company received confirmation that the note payable had been
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forgiven, in full, including $1,978 of accrued interest. The forgiven principal and interest were recognized as a gain upon debt extinguishment and are recorded on our company’s consolidated statement of operations as other income.
COVID-19 Impact
The following discussion is intended to provide certain information regarding the impacts of the COVID-19 pandemic on our company’s business and management’s efforts to respond to those impacts. Unless otherwise specified, the statistical and other information regarding our company’s portfolio are estimates based on information available to our company as of the date of this Annual Report on Form 10-K. As a result of the rapid development, fluidity and uncertainty surrounding this situation, our company expects that such statistical and other information will change, potentially significantly, going forward and may not be indicative of the actual impact of the COVID-19 pandemic on our company’s business, operations, cash flows and financial condition for future periods.
Since March 2020, our company’s investment properties have been significantly impacted by (i) measures taken by local, state and federal authorities to mitigate the impact of COVID-19, such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and (ii) significant changes in consumer behavior and business and leisure travel patterns. While most of the measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from the continued spread of COVID-19 and its new variants and the possibility of the re-imposition of mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders by some governmental authorities, and the possibility that changes in consumer behavior and business and leisure travel patters will continue, the negative impact on room demand for our hotel properties and consumer demand for the goods and services of our retail tenants within our portfolio could continue to be significant in the coming months.
Retail Center and Flex Center Properties
As of the date of this Annual Report on Form 10-K, all of the tenants in our company’s retail properties and flex properties are open.
As is the case with retail landlords across the U.S., our company received a number of rent relief requests from tenants which were impacted by mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and significant changes in consumer behavior. Our company evaluated each of these requests on a case-by-case basis. As of the date of this Annual Report on Form 10-K, our company has granted lease concessions in the form of (i) rent deferrals or (ii) rent abatements. In addition, during the year ended December 31, 2020, a tenant in the Franklin Square Property defaulted on its lease and abandoned its premises, resulting in the recognition of the loss on impairment recorded during the year ended December 31, 2020. A second tenant in the Hanover Square Property which was operating under bankruptcy protection, did not renew its lease upon its expiration. However, this space has been re-leased.
The deferral and abatement agreements, and the lease abandonment, have reduced the rent revenues our company has recognized during the year ended December 31, 2021, and will reduce the rent revenues our company expects to receive in future periods, as discussed below.
Under the rent deferral agreements, the tenants have agreed to repay deferred and unpaid rent over a specified time period or before a certain date. Under these rent deferral agreements reached during the year ended December 31, 2020 (our company did not enter into any such deferral agreements during the year ended December 31, 2021), our company agreed to defer $81,773 and $228,345 in base rent payments during the years ended December 31, 2021 and 2020, respectively. Deferred rent is recognized as retail center property revenues or flex center property revenues on our company’s condensed consolidated statement of operations and as rent and other receivables on our company’s condensed consolidated balance sheets.
Under the rent abatement agreements reached during the year ended December 31, 2020 (our company did not enter into any such abatement agreements during the year ended December 31, 2021), we agreed to permanently abate rent in exchange for lease extensions of between one and three years, depending on the amount of the abatement. In one case, our company agreed to abate a portion of a tenant’s base rent in exchange for future rent payments based on the tenant’s monthly sales. For the years ended December 31, 2021 and 2020, the Company abated rents of $439,271 and $346,897, respectively. For the year ending December 31, 2022 the Company has agreed to abate rent of $174,330.
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In addition to the deferrals and abatements, two tenants in our retail property centers declared bankruptcy and a third tenant defaulted on its lease during the year ended December 31, 2020. While under bankruptcy protection, the first tenant’s term expired on June 30, 2020 and our company was unable to collect rent totaling $18,750. This rent was recognized and then written off and is recorded as bad debt expense on our company’s consolidated statement of operations for the year ended December 31, 2020. No such amounts related to this lease were recorded during the year ended December 31, 2021. A second tenant declared bankruptcy and then emerged from bankruptcy protection during the year ended December 31, 2020. As part of the bankruptcy proceeding, the tenant’s lease was restructured, resulting in rent abatements of $53,760 and $77,653 for the years ended December 31, 2021 and 2020, respectively. Additionally, our company agreed to abate base rent of $22,760 for the year ended December 31, 2022 and $7,300 for the year ended December 31, 2023. Under the restructured lease, the Tenant’s lease term, which originally expired in 2023, was extended for one five-year period.
A third tenant defaulted on its lease and abandoned its premises. During the year ended December 31, 2020, we wrote off a total of $34,556 in rent and CAM. Of this amount, $16,842 was initially recorded as retail center property revenues, $8,817 was initially recorded as retail property tenant reimbursements on our company’s consolidated statement of operations for the year ended December 31, 2020 and $8,897 was initially recorded as retail center property revenues and retail property tenant reimbursements on our company’s consolidated statement of operations for the year ended December 31, 2019. These amounts were then recorded as bad debt expense on our company’s consolidated statement of operations for the year ended December 31, 2020. No such amounts related to this tenant were recorded to bad debt expense for the year ended December 31, 2021.
In return for (i) granting abatements and (ii) restructuring the lease of the tenant under bankruptcy protection, our company received lease extension agreements of between one and five years, resulting in additional future rents payable under these leases as follows. These amounts are included in future minimum rents in Note 6 of the accompanying notes to the condensed consolidated financial statements.
Additional Rent Under Term Extensions (1) | ||||||||||||||||||
For the year ended December 31, | ||||||||||||||||||
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total | |||||||
Franklin Square | $ | 161,849 | $ | 277,456 | $ | 333,039 | $ | 360,830 | $ | 111,165 | $ | 1,244,339 | ||||||
Hanover Square |
| 242,069 |
| 259,306 |
| 76,550 |
| — |
| — |
| 577,925 | ||||||
Ashley Plaza |
| — |
| 124,993 |
| 125,000 |
| 128,333 |
| 744,858 |
| 1,123,184 | ||||||
Total | $ | 403,918 | $ | 661,755 | $ | 534,589 | $ | 489,163 | $ | 856,023 | $ | 2,945,448 | ||||||
(1) Excludes future rent payments based on tenant’s monthly sales revenues.
There is no assurance that our company will receive these future rent payments.
While rent collections from our retail and flex center properties have stabilized, the extent of the continued impact of COVID-19 and its new variants, including the delta variant, on revenues from our company’s retail and flex center properties and tenants remains uncertain and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, and potential mutations of COVID-19 and the response thereto.
Revenues will continue to be impacted by the deferral and abatement agreements (discussed above) that our company has granted to various tenants and could continue to be negatively impacted until consumer demand for the goods and services of our company’s retail and flex center tenants returns to levels prior to the virus outbreak. Additionally, the direct and indirect economic effects of the pandemic and containment measures and the potential for changes in consumer behavior and business and leisure travel patterns could continue to have a significant negative impact on consumer demand for the goods and services of our company’s retail tenants within its portfolio in the coming months.
Hotel Properties
Beginning in March 2020, COVID-19 caused widespread cancellations of both business and leisure travel throughout the United States, resulting in significant decreases in our company’s hotel property (the Hampton Inn Property and the Clemson Best Western Property), revenues and the hospitality industry as a whole. With the overall uncertainty of the longevity of COVID-19 in the U.S. and the resulting economic decline, it is difficult to project the duration of revenue declines for the industry and our company.
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However, our company currently expects the decline in revenue and operating results as compared to 2019 to continue throughout 2021 and potentially into future years.
Operating statistics for the year ended December 31, 2021, and the years ended December 31, 2020 and 2019, for the Hampton Inn Property were as follows:
Occupancy | Average Daily Rate | ||||||||||||||
Hampton Inn Property |
| 2021 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2019 | |||
January |
| 47.8 | % | 41.6 | % | 43.9 | % | $ | 72.85 | $ | 100.41 | $ | 94.57 | ||
February |
| 68.3 | % | 72.0 | % | 51.9 | % |
| 81.74 |
| 102.73 |
| 105.15 | ||
March |
| 51.8 | % | 33.3 | % | 64.1 | % |
| 94.10 |
| 106.98 |
| 109.11 | ||
April |
| 56.3 | % | 25.7 | % | 62.3 | % |
| 93.46 |
| 65.15 |
| 149.33 | ||
May |
| 66.1 | % | 41.5 | % | 55.8 | % |
| 102.11 |
| 67.87 |
| 111.37 | ||
June |
| 70.4 | % | 49.6 | % | 72.1 | % |
| 126.38 |
| 73.40 |
| 103.89 | ||
July |
| 80.5 | % | 65.1 | % | 60.8 | % |
| 104.80 |
| 71.34 |
| 110.57 | ||
August |
| 69.5 | % | 50.3 | % | 75.7 | % |
| 101.92 |
| 77.73 |
| 107.29 | ||
September (1) |
| N/A | % | 59.8 | % | 65.0 | % |
| N/A |
| 80.27 |
| 105.22 | ||
October |
| N/A | % | 41.8 | % | 75.0 | % |
| N/A |
| 99.43 |
| 160.01 | ||
November |
| N/A | % | 28.8 | % | 66.6 | % |
| N/A |
| 83.02 |
| 106.43 | ||
December |
| N/A | % | 24.4 | % | 48.7 | % |
| N/A |
| 75.67 |
| 99.43 | ||
Full Year |
| N/A | % | 44.4 | % | 60.6 | % | N/A | $ | 84.10 | $ | 113.41 | |||
(1) Our company sold the Hampton Inn Property on August 31, 2021. Accordingly, no statistical data is presented for periods after the date of the sale.
During the period of the year ended December 31, 2020 that was impacted by COVID-19 (March through December 2020) significant portions of the Hampton Inn’s occupancy was generated by non-traditional sources, including an agreement with the City of Greensboro to house homeless families. During this period, this agreement resulted in 5,704 room nights of occupancy, or approximately 28 percent of the total occupied rooms during the year ended December 31, 2020 and 39 percent of the occupied rooms during the nine months of 2020 that were impacted by COVID-19 (March through December 2020). This agreement continued in January and ended in February 2021, resulting in 2,064 room nights of occupancy, or approximately 33 percent of the total occupied rooms during the year ended March 31, 2021 and 49 percent of the rooms occupied during January and February 2021. While these non-traditional sources of occupancy generated room nights, the average daily rate was significantly lower than prior periods and resulted in significantly reduced hotel property revenues.
Operating statistics for the year ended December 31, 2021, and the years ended December 31, 2020 and 2019, for the Clemson Best Western Property were as follows:
Occupancy | Average Daily Rate | ||||||||||||||
Clemson Best Western Property |
| 2021 |
| 2020 |
| 2019 (1) |
| 2021 |
| 2020 |
| 2019 (1) | |||
January |
| 100.0 | % | 24.8 | % | 27.4 | % | $ | 55.13 | $ | 77.04 | $ | 98.10 | ||
February |
| 100.0 | % | 31.9 | % | 34.8 | % |
| 58.83 |
| 94.07 |
| 92.03 | ||
March |
| 100.0 | % | 26.7 | % | 67.3 | % |
| 59.05 |
| 90.58 |
| 92.61 | ||
April |
| 100.0 | % | 24.5 | % | 47.4 | % |
| 59.00 |
| 68.97 |
| 103.92 | ||
May |
| 100.0 | % | 19.9 | % | 37.5 | % |
| 42.23 |
| 61.54 |
| 109.69 | ||
June |
| 100.0 | % | 24.0 | % | 38.4 | % |
| 39.00 |
| 61.24 |
| 93.80 | ||
July |
| 100.0 | % | 22.7 | % | 31.6 | % |
| 39.00 |
| 56.13 |
| 85.34 | ||
August |
| 100.0 | % | 27.0 | % | 47.2 | % |
| 48.03 |
| 64.35 |
| 111.60 | ||
September |
| 100.0 | % | 65.0 | % | 38.5 | % |
| 59.00 |
| 67.59 |
| 161.11 | ||
October |
| 100.0 | % | 100.0 | % | 38.3 | % |
| 59.00 |
| 58.99 |
| 143.35 | ||
November |
| 100.0 | % | 100.0 | % | 39.3 | % |
| 59.00 |
| 58.48 |
| 121.87 | ||
December |
| 100.0 | % | 99.7 | % | 28.4 | % |
| 19.00 |
| 26.94 |
| 83.12 | ||
Full Year |
| 100.0 | % | 47.2 | % | 34.9 | % | 49.57 | $ | 59.08 | $ | 118.64 | |||
(1) January through August 2019 data for the Clemson Best Western Property is from the prior owner. September 2019 data is from the September 2019 STR report for the Clemson Best Western Property.
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Occupancy rates from September 2020 through December 2021 were a result of an occupancy agreement with Clemson University under which the University occupied the entire hotel from September 14, 2020 through December 15, 2020. In January 2021, this agreement was extended through May 5, 2021. In May 2021, this agreement was extended through May 2022.
While intense efforts to reduce operating costs have resulted in expense reductions in the period during which our company’s hotel operations have been impacted by COVID-19, our company cannot be certain as to what level of savings can continue to be achieved overall to mitigate the material decline in hotel revenues it may continue to experience. The federal government has provided assistance to the industries negatively affected by the virus, including the hospitality industry, and our two hotel properties have received loans under one of these programs (see Note 5), but the aid has not mitigated the material reduction in revenue resulting from COVID-19 travel impacts. Our company was not eligible to participate in the second round of the Payroll Protection Program loans announced in December 2020.
Due to the depressed outlook for leisure and business travel, on which both of our company’s hotel properties significantly relied, our company sold the Hampton Inn Property on August 31, 2021 and has committed to a plan to sell the Clemson Best Western Property as discussed above. There is no assurance that our company will be able to complete the sale of the Clemson Best Western Property. Despite our company’s decision to sell its hotel properties, we have not removed hotel properties from our company’s investment policy and will consider future opportunistic acquisitions of hotel properties in the future.
Until such time as the virus is contained or eradicated and room demand for our company’s hotel properties and consumer demand for the goods and services of our company’s retail and flex center tenants returns to more customary levels, our company may continue to experience material reductions in its operating revenue. The anticipated negative impact on revenues, discussed above, from our company’s retail, flex center and hotel properties has also, and will continue, to impact our company’s liquidity, resulting in reduced cash flow to meet our company’s obligations and to fund dividend distribution payments.
Discussion of Potential Future Impact
While most of the containment measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from new variants of COVID-19 and the possibilities of the re-imposition of mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders by some governmental authorities, the negative impact on room demand for our hotel properties and consumer demand for the goods and services of our retail tenants within our portfolio could continue to be significant in the coming months.
Our company derives revenues primarily from rents and reimbursement payments received from tenants under leases at our company’s properties. Our company’s operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic impacts the businesses of our company’s tenants, and our company’s operations and financial condition, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and such containment measures, among others. While the extent of the outbreak and its impact on our company, its tenants and the U.S. retail market is uncertain, a prolonged crisis could result in continued disruptions in the credit and financial markets, a continued rise in unemployment rates, decreases in consumer confidence and consumer spending levels and an overall worsening of global and U.S. economic conditions. The factors described above, as well as additional factors that our company may not currently be aware of, could materially negatively impact our company’s ability to collect rent and could lead to termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at our company’s properties, difficulties in accessing capital, impairment of our company’s long-lived assets and other impacts that could materially and adversely affect our company’s business, results of operations, financial condition and ability to pay distributions to stockholders.
Off-Balance Sheet Arrangements
As of December 31, 2021 and 2020, we have no off-balance sheet arrangements.
Summary of Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or
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different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Significant Accounting Policies,” of our Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Revenue Recognition
Principal components of our total revenues for our retail center properties and flex center properties include base rents and tenant reimbursements. We accrue minimum (base) rent on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. Certain lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent) which we recognize when the tenants achieve the specified targets as defined in their lease agreements. We periodically review the valuation of the asset/liability resulting from the straight-line accounting treatment of our leases in light of any changes in lease terms, financial condition or other factors concerning our tenants.
For our hotel property, revenues are recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues from our company’s occupancy agreement with Clemson University are recognized as earned, which is as rooms are occupied by the University.
Our company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective on January 1, 2019. This adoption did not have a material impact on our company’s recognition of revenues from either its retail center properties, flex center properties or hotel properties.
Rents and Other Tenant Receivables
For our retail center and flex center properties, we record a tenant receivable for amounts due from tenants such as base rents, tenant reimbursements and other charges allowed under the lease terms. We periodically review tenant receivables for collectability and determine the need for an allowance for the uncollectible portion of accrued rents and other accounts receivable based upon customer creditworthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. We consider a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other actions per the lease.
Acquisition of Investments in Real Estate
The adoption of ASU 2017-01, as discussed in Note 2, “Summary of Significant Accounting Policies” of the condensed consolidated financial statements included in this report, has impacted our accounting framework for the acquisition of investment properties. Upon acquisition of investment properties, our company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, above- and below-market leases, tenant relationships and assumed debt based on evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparable market data and other information which is subjective in nature, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.
Impairment of Long-Lived Assets
We periodically review investment properties for impairment on a property-by-property basis to identify any events or changes in circumstances that indicate that the carrying value of investment properties may not be recoverable. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. If any such events or changes in circumstances are identified, we perform a formal impairment analysis. We measure any impairment of investment property when the estimated undiscounted operating income before depreciation and amortization, is less than the carrying value of the property. To the extent impairment has occurred, we charge to income the excess of carrying value of the property over its estimated fair value. We estimate fair value using data such as operating income, estimated capitalization rates or multiples, leasing prospects and local market
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information. Our 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.
REIT Status
We are a Maryland corporation that has elected to be treated, for U.S. federal income tax purposes, as a REIT. We elected to be taxed as a REIT under the Code For the year ended December 31, 2017 and have not revoked such election. A REIT is a corporate entity which holds real estate interests and must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90 percent of its adjusted taxable income to stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on our taxable income if we annually distribute 100 percent of our taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to regular federal and state corporate income taxes and may not be able to elect to qualify as a REIT for four subsequent taxable years. Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.
Evaluation of our company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, our company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of our company’s condensed consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. Our company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In applying applicable accounting guidance, management considered our company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our company’s obligations due over the next twelve months, as well as our company’s recurring business operating expenses.
Our company concludes that it is probable that it will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance. For additional information regarding our company’s liquidity, see Note 5 – Loans Payable and Note 8 – Commitments and Contingencies in the notes to our company’s condensed consolidated financial statements.
Liquidity and Capital Resources
Our business model is intended to drive growth through acquisitions. Access to the capital markets is an important factor for our continued success. We expect to continue to issue equity in our company, with proceeds being used to acquire additional investment properties.
Our primary liquidity needs are funding for (1) operations, including operating expenses, corporate and administrative costs, payment of principal of, and interest on, outstanding indebtedness, and escrow and reserve payments associated with long-term debt financing for our properties; (2) investing needs, including property acquisitions and recurring capital expenditures; and (3) financing needs, including cash dividends and debt repayments.
Internal liquidity to fund operating needs will be provided primarily by the rental receipts from our retail properties and flex center property, and revenues from our hotel property. During the year ended December 31, 2021, the COVID-19 pandemic continued to impact our financial and operational results that provide the liquidity for operating needs. While our company recognized only $39,024 in bad debt expense for our retail and flex center properties during the year ended December 31, 2021 which were due to adjustments made to CAM expense reimbursements for current and prior periods, and were not related to COVID-19 business disruptions, our company’s retail property and flex property rent revenues continued to be impacted by (i) rent abatement agreements that resulted in rent abatements of $439,271 and $346,897, respectively, for the years ended December 31, 2021 and 2020, respectively, and (ii) a restructured lease agreement (under a tenant’s bankruptcy proceedings) that resulted in a rent abatement of $53,760 and $77,653 for the years ended December 31, 2021 and 2020, respectively.
For our Hampton Inn Property and Clemson Best Western Property, occupancy and revenues were significantly impacted by COVID-19 during 2020 and early 2021.
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However, during the year ended December 31, 2021, our Clemson Best Western Property saw increased revenues resulting from the occupancy agreement with Clemson University. Room revenues for the year ended December 31, 2021 were approximately 177 and 123 percent, respectively, of the room revenues for the years ended December 31, 2020 and 2019, respectively. However, this trend is unlikely to continue when the Clemson University occupancy agreement ends in May 2022.
The full extent of the impact will be dictated by, among other things, its nature, duration and scope, the success of efforts to contain the spread of COVID-19 and the impact of actions taken in response to the pandemic including travel bans and restrictions, quarantines, shelter in place orders, the promotion of social distancing and limitations on business activity, including business closures. New variants of COVID-19, including the delta variant, and continued resistance to vaccination could result in the re-imposition of limitations on business activity, travel and other restrictions that could increase the extent of the impact on our investment properties. Possible future declines in rental rates and expectations of future rental concessions, including granting free rent to induce tenants to renew their leases early, to retain tenants who are up for renewal, or to attract new tenants, or requests from tenants for rent abatements during periods when they are severely impacted by COVID-19, may result in decreases in our cash flows from our retail and flex properties. The past and potential for future travel bans and stay at home orders have and could continue to materially affect our hotel revenues. At this point, the extent to which the COVID-19 pandemic may impact the economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business, results of operations and internal liquidity.
Cash Flows
At December 31, 2021, our consolidated cash and restricted cash on hand totaled $7,383,977 compared to consolidated cash on hand of $5,096,928 at December 31, 2020. Cash from operating activities, investing activities and financing activities for the year ended December 31, 2021 are as follows:
Operating Activities
During the year ended December 31, 2021 our cash provided by operating activities was $832,613 compared to cash used by operating activities of $1,684,934 for the year ended December 31, 2020, an increase of cash provided by operating activities of $2,517,547.
Cash flows from operating activities has two components. The first component consists of net operating loss adjusted for non-cash operating activities. During the year ended December 31, 2021, operating activities adjusted for non-cash items resulted in net cash provided by operating activities of $1,040,512. During the year ended December 31, 2020, operating activities adjusted for non-cash items resulted in net cash used in operating activities of $435,537. The increase of $1,476,049 in cash flows from operating activities for the year ended December 31, 2021 was a result of improved operating performance across all property types. The improved property operations were offset by increased legal, accounting and other professional fees and corporate general and administrative expenses during the year ended December 31, 2021.
The second component consists of changes in assets and liabilities. Increases in assets and decreases in liabilities result in cash used in operations. Decreases in assets and increases in liabilities result in cash provided by operations. During the year ended December 31, 2021, net changes in asset and liability accounts resulted in $207,899 in cash used in operations. During the year ended December 31, 2020, net changes in asset and liability accounts resulted in $1,249,397 in cash used in operations. This decrease of $1,041,498 in changes in assets and liabilities is a result of a decreased change in rent and other receivables, net, of $694,100, accounts payable and accrued liabilities of $344,440, and unbilled rent of $14,246, offset by a decreased change in other assets of $11,288.
The net of (i) the $1,476,049 increase in cash provided by operations from the first category and (ii) the $1,041,498 increase in cash provided by operations from the second category results in a total increase of cash provided in operations of $2,517,547 for the year ended December 31, 2021.
Investing Activities
During the year ended December 31, 2021, our cash used in investing activities was $19,142,727, compared to cash used in investing activities of $414,361 during the year ended December 31, 2020, an increase in cash used in investing activities of $18,728,366. During the year ended December 31, 2021, cash used in investing activities consisted of $20,750,571 used for the acquisition of the Lancer Center Property, Greenbrier Business Center Property and the Parkway Property, $536,685 in capitalized expenditures, including
31
$230,403 in building improvements, $62,504 in capitalized leasing commissions, $78,400 in site improvements, $132,379 in tenant improvements, and $32,999 in furniture, fixtures and equipment for our Clemson Best Western Hotel Property. Cash used in investing activities was offset by cash received from the disposal of investment properties of $2,144,529.
During the year ended December 31, 2020, our cash used in investing activities was $414,361, compared to cash used in investing activities of $34,930,405 during the year ended December 31, 2019, a decrease in cash used in investing activities of $34,516,044. During the year ended December 31, 2020, cash used in investing activities consisted of $414,361 in capital expenditures, including $103,194 in site improvements for our Hanover Square Property, $56,746 in leasing commissions for our retail center properties, $60,000 in tenant improvements for our Ashley Plaza Property, $64,818 in furniture, fixtures and equipment, $39,423 in interior construction and $22,664 in site improvements related to the Property Improvement Plan for the Hampton Inn Property and $38,016 in building improvements and $29,500 in site improvements for the Clemson Best Western Property.
The non-cash investing activity for the year ended December 31, 2021, that did not affect our cash provided by investing activities, was the transfer of investment properties, net, to assets held for sale, net of $9,683,555.
Financing Activities
During the year ended December 31, 2021, our cash provided by financing activities was $20,597,163 compared to cash provided by financing activities of $5,124,033 during the year ended December 31, 2020, an increase in cash provided by financing activities of $15,473,130. During the year ended December 31, 2021, financing activities generated $10,801,411 in net proceeds, after issuance costs, from a common stock issuance, net proceeds, after loan issuance costs, from new mortgages payable associated with the Lancer Center and Parkway acquisitions and the Franklin Square Property mortgage refinancing of $24,377,886, and net proceeds, after issuance costs, from the closing of the third tranche of our convertible debentures of $1,305,000. In addition, we generated $504,000 from the investment of noncontrolling interests associated with the acquisition of the Parkway Property. During the year ended December 31, 2021, cash used in financing activities included repayment of a line of credit, short term, of $325,000, repayment of mortgages payable, net of $14,914,830, consisting of regular, monthly mortgage debt principal payments of $639,830 and repayment of the original Franklin Square Property mortgage of $14,275,000, and dividends and distributions of $1,151,304.
During the year ended December 31, 2020, our cash provided by financing activities was $5,124,033 compared to cash provided by financing activities of $32,076,110 during the year ended December 31, 2019, a decrease in cash provided by financing activities of $26,952,077. During the year ended December 31, 2020, we generated net proceeds, after offering costs, from our preferred stock issuance of $3,860,882, net proceeds, after issuance costs, from the closings on the first and second tranches of our convertible debentures of $2,926,483, net funds of $1,938,697, after loan issuance costs, from the refinancing of the Hanover Square North mortgage payable ($1,992,697) and extension of the Hampton Inn Property mortgage (capitalized issuance costs of $54,000), funds from a line of credit, short term, net, in the amount of $550,000 and funds from notes payable of $305,900. Additionally, our company used funds to repay a line of credit, short term, in the amount of $2,225,000, related party notes payable, short term, in the amount of $852,000, and mortgage debt principal associated with the Hanover Square Property, Ashley Square Property and Brookfield Center Property of $263,196, and $200,000 in principal reduction payments associated with the extension of the Hampton Inn Property mortgage. Our company paid dividends and distributions of $917,733 during the year ended December 31, 2020.
Non-cash financing activities for the year ended December 31, 2021, that did not affect our cash provided by financing activities were the conversion of convertible debentures and accrued interest totaling $5,058,788 into common stock, the transfer of the mortgage payable, net, of $7,592,931, for the Clemson Best Western Property from mortgages payable, net, to mortgages payable, net, associated with assets held for sale on our condensed consolidated balance sheets, the assumption of the $4,481,600 mortgage payable, net, from the seller of the Greenbrier Business Center Property, and the $176,300 forgiveness of the Hampton Inn Property’s note payable under the SBA PPP loan program.
Non-cash financing activities for the year ended December 31, 2020, that did not affect our cash provided by financing activities were the exchanges of operating partnership units for portions of the noncontrolling owner’s interest in the Hampton Inn Property, the settlement of advances made by our company for additional portions of the noncontrolling owner’s interest in the Hampton Inn Property, the $129,600 forgiveness of the Clemson Best Western Hotel Property’s note payable under the SBA PPP loan program and the conversion of operating partnership common units for common shares in our company. For the year ended December 31, 2019, there were no non-cash financing activities.
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Future Liquidity Needs
Liquidity for general operating needs and our company’s investment properties is generally provided by the rental receipts from our retail properties and flex center property, and revenues from our hotel properties. Liquidity for growth (acquisition of new investment properties) will be provided by raising additional investment capital. In addition, our company continually reviews and evaluates its outstanding mortgages payable for refinancing opportunities. While some of our mortgages payable are not pre-payable, some mortgages payable may present opportunities for refinancing.
The primary, non-operating liquidity need of our company, is $325,323 to pay the dividends and distributions that were declared on December 22, 2021, payable on January 20, 2022 to common shareholders and operating partnership unit holders of record on January 13, 2022. In addition, our company has approximately $872,925 in principal payments due on its mortgages payable during the year ending December 31, 2022. In addition to liquidity required to fund these principal payments, we may also incur some level of capital expenditures for our existing properties that cannot be passed on to our tenants. Our company plans to pay these obligations through a combination of cash on hand, potential dispositions and operating cash.
The mortgage payable on our Clemson Best Western Property matures on October 6, 2022. We have an option to extend the term of the mortgage by one year, until October 6, 2023, under certain conditions. If we have not been successful in our efforts to sell the Clemson Best Western Property by the loan maturity date, we plan to exercise the option to extend the term of the mortgage.
As discussed above, the continuing COVID-19 pandemic outbreak has adversely impacted states and cities where our company’s tenants operate their businesses and where our company’s properties are located. The COVID-19 pandemic could have a material adverse effect on our company’s financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of our company’s tenants’ businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to our company in full. Closures of stores operated by our company’s tenants could reduce our company’s cash flows.
To meet these future liquidity needs, we have the following resources:
| ● | $4,370,405 in unrestricted cash as of December 31, 2021 |
| ● | $3,013,572 held in lender reserves for the purposes of tenant improvements, leasing commissions, real estate taxes and insurance premiums |
| ● | cash generated from operations during the year ended December 31, 2022, if any |
| ● | Potential proceeds from issuances of common stock under our shelf registration or under the Standby Equity Purchase Agreement (see note 7 of the notes to the consolidated financial statements), although there is no guarantee that any such issuances will be successful in raising additional funds. |
Our success in refinancing the debt, and executing on our strategy will dictate our liquidity needs going forward. If we are unable to execute in these areas, our ability to grow and to continue to pay dividends may be limited without additional capital.
Results of Operations
Year ended December 31, 2021
Revenues
Total revenue was $11,472,549 for the year ended December 31, 2021, consisting of $5,634,396 in revenues from retail center properties, $4,635,331 from hotel properties and $1,202,822 from flex center properties. Total revenues for the year ended December 31, 2021 increased by $2,196,389 over the year ended December 31, 2020, resulting primarily from increased hotel property revenues, but also from new revenues from our retail center and flex center property acquisitions.
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For the year ended | |||||||||
December 31, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Revenues |
|
|
|
|
|
| |||
Retail center properties | $ | 5,634,396 | $ | 5,152,150 | $ | 482,246 | |||
Hotel properties |
| 4,635,331 |
| 3,337,176 |
| 1,298,155 | |||
Flex center properties |
| 1,202,822 |
| 786,834 |
| 415,988 | |||
Total Revenues | $ | 11,472,549 | $ | 9,276,160 | $ | 2,196,389 | |||
Revenues from retail center properties were $5,634,396 for the year ended December 31, 2021, an increase of $482,246 over retail center property revenues for the year ended December 31, 2020. New revenues from the Lancer Center Property of $769,164 and increased revenues from the Ashley Plaza Property of $1,003 were offset by decreased revenues from the Franklin Square Property of $255,905 due to COVID lease concessions and $32,016 from the Hanover Square Property due to reduced common area maintenance reimbursement revenues.
For the year ended | |||||||||
December 31, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Retail Center Properties |
|
|
|
|
|
| |||
Franklin Square Property | $ | 1,874,797 | $ | 2,130,702 | $ | (255,905) | |||
Hanover Square Property |
| 1,316,148 |
| 1,348,164 |
| (32,016) | |||
Ashley Plaza Property |
| 1,674,287 |
| 1,673,284 |
| 1,003 | |||
Lancer Center Property | 769,164 | — | 769,164 | ||||||
$ | 5,634,396 | $ | 5,152,150 | $ | 482,246 | ||||
Revenues from hotel properties were $4,635,331 for the year ended December 31, 2021, an increase of $1,298,155 over revenues from hotel properties for the year ended December 31, 2020, despite the sale of the Hampton Inn property on August 31, 2021. Revenues from the Hampton Inn Property for the eight-month ownership period from January 1, 2021 through August 31, 2021, increased by $182,401 over the revenues for the full, 12 month of ownership during the year ended December 31, 2020, due to improved occupancy levels. Revenues from the Clemson Best Western Property increased by $1,115,754 due to the occupancy agreement for the entire hotel during the year ended December 31, 2021.
For the year ended | |||||||||
December 31, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Hotel Properties |
|
|
|
|
|
| |||
Hampton Inn Property | $ | 1,941,083 | $ | 1,758,682 | $ | 182,401 | |||
Clemson Best Western Property |
| 2,694,248 |
| 1,578,494 |
| 1,115,754 | |||
$ | 4,635,331 | $ | 3,337,176 | $ | 1,298,155 | ||||
Revenues from the flex center properties were $1,202,822 for the year ended December 31, 2021, an increase of $415,988 over revenues from flex center properties for the year ended December 31, 2020. New revenues from the Greenbrier Business Center of $299,129 and Parkway of $148,117 were offset by decreased revenues from the Brookfield Center Property of $31,258 due to reduced common area maintenance reimbursement revenues.
For the year ended | |||||||||
December 31, | Increase / | ||||||||
Flex Center Properties |
| 2021 |
| 2020 |
| (Decrease) | |||
Brookfield Center Property | $ | 755,576 | $ | 786,834 | $ | (31,258) | |||
Greenbrier Business Center Property | 299,129 | — | 299,129 | ||||||
Parkway Center Property | 148,117 | — | 148,117 | ||||||
$ | 1,202,822 | $ | 786,834 | $ | 415,988 | ||||
Operating Expenses
Total operating expenses were $10,782,686 for the year ended December 31, 2021, consisting of $1,557,319 in expenses from retail center properties, $3,102,951 in expenses from hotel properties, $344,395 in expenses from the flex center properties, $149,981
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in share-based compensation expenses, $1,465,199 in legal, accounting and other professional fees, $654,137 in corporate general and administrative expenses, and $3,508,704 in depreciation and amortization.
For the year ended | |||||||||
December 31, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Operating Expenses |
|
|
|
|
|
| |||
Retail center properties (1) | $ | 1,557,319 | $ | 1,793,675 | $ | (236,356) | |||
Hotel properties |
| 3,102,951 |
| 3,164,646 |
| (61,695) | |||
Flex center property (2) |
| 344,395 |
| 231,209 |
| 113,186 | |||
Total Investment Property Operating Expenses |
| 5,004,665 |
| 5,189,530 |
| (184,865) | |||
Share based compensation expenses |
| 149,981 |
| 569,995 |
| (420,014) | |||
Legal, accounting and other professional fees |
| 1,465,199 |
| 1,258,863 |
| 206,336 | |||
Corporate general and administrative expenses |
| 654,137 |
| 300,641 |
| 353,496 | |||
Loss on impairment |
| — |
| 223,097 |
| (223,097) | |||
Impairment of assets held for sale |
| — |
| 3,494,058 |
| (3,494,058) | |||
Depreciation and amortization |
| 3,508,704 |
| 3,981,874 |
| (473,170) | |||
Total Operating Expenses | $ | 10,782,686 | $ | 15,018,058 | $ | (4,235,372) | |||
| (1) | Includes $38,346 and $431,143 of bad debt expense for the year ended December 31, 2021 and 2020, respectively. |
| (2) | Includes $678 and $0 of bad debt expense for the year ended December 31, 2021 and 2020, respectively. |
Operating expenses for retail center properties were $1,557,319 for the year ended December 31, 2021, a decrease of $236,356 from retail center property operating expenses for the year ended December 31, 2020. Decreased bad debt expense of $392,797 at our Franklin Square, Hanover Square and Ashley Plaza properties were the primary contributor to this reduction, but this decrease was partially offset by increased operating expenses from the acquisition of the Lancer Center Property.
For the year ended | |||||||||
December 30, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Retail Center Properties | |||||||||
Franklin Square Property (1) | $ | 668,812 | $ | 901,739 | $ | (232,927) | |||
Hanover Square Property (2) | 331,248 | 451,593 | (120,345) | ||||||
Ashley Plaza Property (3) | 329,124 | 440,343 | (111,219) | ||||||
Lancer Center Property (4) | 228,135 | — | 228,135 | ||||||
Total | $ | 1,557,319 | $ | 1,793,675 | $ | (236,356) | |||
(1) | Includes bad debt expense of $7,526 and $220,700 for the years ending December 31, 2021 and 2020, respectively. |
(2) | Includes bad debt expense of $13,267 and $95,271 for the years ending December 31, 2021 and 2020, respectively. |
(3) | Includes bad debt expense of $12,069 and $115,172 for the years ending December 31, 2021 and 2020, respectively. |
(4) | Includes bad debt expense of $5,484 and $0 for the years ending December 31, 2021 and 2020, respectively. |
Operating expenses for hotel properties were $3,102,951 for the year ended December 31, 2021, a decrease of $61,695 over operating expenses from hotel properties for the year ended December 31, 2020. Operating expenses at the Hampton Inn Property decreased due to its sale on August 31, 2021.
For the year ended | |||||||||
December 30, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Hotel Properties | |||||||||
Hampton Inn Property |
| $ | 1,701,451 |
| $ | 1,755,684 |
| $ | (54,233) |
Clemson Best Western Property |
| 1,401,500 |
| 1,408,962 |
| (7,462) | |||
$ | 3,102,951 | $ | 3,164,646 | $ | (61,695) | ||||
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Operating expenses from the flex center properties were $344,395 for the year ended December 31, 2021 an increase of $113,186 over flex center property operating expenses for the year ended December 31, 2020 due to new operating expenses from the Greenbrier Business Center and Parkway Property acquisitions and slightly increased operating expenses from the Brookfield Center Property.
For the year ended | |||||||||
December 30, | Increase / | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Flex Center Properties | |||||||||
Brookfield Center Property (1) | $ | 242,194 | $ | 231,209 | $ | 10,985 | |||
Greenbrier Business Center Property | 75,279 | — | 75,279 | ||||||
Parkway Center Property | 26,922 | — | 26,922 | ||||||
$ | 344,395 | $ | 231,209 | $ | 113,186 | ||||
(1) Includes $678 and $0 of bad debt expense for the year ended December 31, 2021 and 2020, respectively.
Operating Income (Loss)
Operating income for the year ended December 31, 2021 was $814,504 an increase of $6,556,402 over the operating loss of $5,741,898 for the year ended December 31, 2020. This increase was a result of (i) increased operating income from our retail center properties of $718,602 consisting of increases in operating income of $541,029 from the acquisition of the Lancer Center Property, $88,329 from the Hanover Square Property and $112,222 from the Ashley Plaza Property, offset by a decrease of $22,978 from the Franklin Square Property, (ii) increased operating income from our hotel properties of $1,359,850, consisting of an increase in operating income from the Hampton Inn Property of $236,634 and an increase in operating income from the Clemson Best Western Hotel Property of $1,123,216 and (iii) increased operating income of $302,802 from our flex center properties, consisting of new operating income of $223,850 from the acquisition of the Greenbrier Business Center Property and $121,195 from the acquisition of the Parkway Property offset by decreased net operating income from the Brookfield Center Property of $42,243, (iv) decreased depreciation and amortization expense of $473,170 resulting from the reclassification of the two hotel properties to assets held for sale, which results in the cessation of the recordation of depreciation and amortization expenses, (v) increased legal, accounting and other professional fees of $206,336, (vi) increased corporate general and administrative expenses of $353,496, (vii) decreased share based compensation expenses of $420,014, (viii) decreased loss on impairment of $223,097, (ix) decreased impairment of assets held for sale of $3,494,058, and (x) increased gain on sale of investment properties of $124,641.
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Interest Expense
Interest expense was $5,534,255 and $3,960,626 for the year ended December 31, 2021 and 2020, respectively, as follows:
For the year ended | |||||||||
December 30, | Increase/ | ||||||||
| 2021 |
| 2020 |
| (Decrease) | ||||
Franklin Square | $ | 729,328 | $ | 698,342 | $ | 30,986 | |||
Hanover Square |
| 451,833 |
| 445,875 |
| 5,958 | |||
Hampton Inn |
| 475,844 |
| 811,214 |
| (335,370) | |||
Ashley Plaza |
| 444,711 |
| 451,741 |
| (7,030) | |||
Clemson Best Western |
| 590,946 |
| 662,276 |
| (71,330) | |||
Brookfield Center |
| 201,037 |
| 203,633 |
| (2,596) | |||
Lancer Center | 183,997 | — | 183,997 | ||||||
Greenbrier Business Center | 64,353 | — | 64,353 | ||||||
Parkway Center | 21,733 | — | 21,733 | ||||||
Amortization and preferred stock dividends on mandatorily redeemable preferred stock |
| 604,383 |
| 506,819 |
| 97,564 | |||
Amortization and interest on convertible debentures |
| 1,760,973 |
| 136,171 |
| 1,624,802 | |||
Line of credit, short term |
| 3,118 |
| 36,699 |
| (33,581) | |||
Related party notes payable, short term |
| — |
| 5,835 |
| (5,835) | |||
Other interest |
| 1,999 |
| 2,021 |
| (22) | |||
Total interest expense | $ | 5,534,255 | $ | 3,960,626 | $ | 1,573,629 | |||
Total interest expense for the year ended December 31, 2021 increased by $1,573,629 over the year ended December 31, 2020. This increase was a result of (i) the write-off of unamortized discount, issuance costs and beneficial conversion feature resulting from the conversion of convertible debentures to common stock (which is recorded on our condensed consolidated statement of operations as a component of interest expense), (ii) increased interest expense on the mandatorily redeemable preferred stock, (iii) new interest expense from the acquisition of the Lancer Center Property, Greenbrier Business Center Property and Parkway Property, offset by (iv) reduced interest expense from the Hampton Inn Property mortgage as a result of its sale, (v) reduced loan issuance amortization expense for the Hampton Inn Property mortgage and the Clemson Best Western Hotel mortgage resulting from the reclassification to mortgages payable associated with assets held for sale, and (vi) reduced interest expense related to the line of credit, short term and related party notes payable, short term. Interest expense above includes non-cash amortization of discounts and capitalized issuance costs related to the mandatorily redeemable preferred stock and the convertible debentures. See Note 5 of the accompanying notes to the Consolidated Financial Statements.
Other Income
During the year ended December 31, 2021, other income was $361,469, consisting of $200,000 in lease termination fee income, $176,300 loan forgiveness of the Hampton Inn Property PPP loan, and $10,472 of interest income, offset by other expenses of $27,281 related to the fair value change of the interest rate caps. Other income of $361,469 for the year ended December 31, 2021 represented an increase of $240,487 over other income for the year ended December 31, 2020.
Net Loss
Net loss was $4,358,282 for the year ended December 31, 2021, before adjustments for net income (loss) attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was $4,364,264. Net loss was $9,581,542 for the year ended December 31, 2020, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was $8,180,609 for the year ended December 31, 2020.
Net loss for the year ended December 31, 2021 decreased by $5,223,260 over the year ended December 31, 2020, before adjustments for net loss attributable to noncontrolling interests. This decrease was due to increased investment property operating income of $2,381,524, increased other income of $240,487, increased gain on disposal of investment properties of $124,641, decreased loss on impairment of $223,097 and decreased impairment of assets held for sale of $3,494,058, offset by increased interest expense of $1,573,629.
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After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the year ended December 31, 2021 decreased by $3,816,345 over the year ended December 31, 2020.
Funds from Operations
We use Funds from operations (“FFO”), a non-GAAP measure, as an alternative measure of our operating performance, specifically as it relates to results of operations and liquidity. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in its March 1995 White Paper (as amended in November 1999, April 2002 and December 2018). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs and above and below market leases) and after adjustments for unconsolidated partnerships and joint ventures. Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions and excluding depreciation, FFO is a helpful tool that can assist in the comparison of the operating performance of a company’s real estate between periods, or as compared to different companies. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, while historically real estate values have risen or fallen with market conditions. Accordingly, we believe FFO provides a valuable alternative measurement tool to GAAP when presenting our operating results.
NAREIT’s December 2018 White Paper states, “FFO of a REIT includes the FFO of all consolidated properties, including consolidated, partially owned affiliates”. Additionally, since the adjustments to GAAP net income, such as depreciation and amortization, used in the reconciliation of net income (loss) to determine FFO are not allocated between shareholders and noncontrolling interests (i.e. 100 percent of depreciation and amortization are “added back” without reduction to reflect the noncontrolling owners’ interest in such items), our company believes that the appropriate starting point for the calculation is the net income (loss) before allocation to noncontrolling interests. This allows our company to use FFO as a tool to measure the overall performance of its investment properties, as a whole, not just the portion of the investment properties controlled by our company’s shareholders.
Below is our company’s FFO, which is a non-GAAP measurement, for the year ended December 31, 2021:
Net income (loss) |
| $ | (4,358,282) |
Depreciation of tangible real property assets (1) |
| 1,912,353 | |
Depreciation of tenant improvements (2) |
| 437,372 | |
Amortization of leasing commissions (3) |
| 65,414 | |
Amortization of intangible assets (4) |
| 1,093,565 | |
Gain on sale of investment properties (5) |
| (124,641) | |
Funds from operations | $ | (974,219) |
| (1) | Depreciation expense for buildings, site improvements and furniture and fixtures. |
| (2) | Depreciation of tenant improvements, including those (i) acquired as part of the purchase of the retail center and flex center properties and (ii) those constructed by our company for the retail center properties and flex center property subsequent to their acquisition. |
| (3) | Amortization of leasing commissions paid for the retail center properties and flex center property subsequent to the acquisition of the properties. |
| (4) | Amortization of (i) intangible assets acquired as part of the purchase of the retail center properties and flex center property, including leasing commissions, leases in place and legal and marketing costs during the year ended December 31, 2021. |
| (5) | NAREIT’s December 2018 White Paper states “Gains and losses from the sale of depreciable real estate and land when connected to the main business of a REIT are excluded from the computation of FFO.” |
NAREIT’s December 2018 White Paper encourages companies reporting FFO to “make supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period.” We believe that the computation of FFO in accordance with
38
NAREIT’s definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include non-cash items such as amortization of loans and above and below market leases, unbilled rent arising from applying straight line rent revenue recognition and share-based compensation expenses. Additionally, the impact of capital expenditures, including tenant improvement and leasing commissions, net of reimbursements of such expenditures by property escrow funds, is included in our calculation of AFFO. Therefore, in addition to FFO, management uses Adjusted FFO (“AFFO”), which we define to exclude such items. Management believes that these adjustments are appropriate in determining AFFO as their exclusion is not indicative of the operating performance of our assets. In addition, we believe that AFFO is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that AFFO presented by us is comparable to the adjusted or modified FFO of other REITs.
Total AFFO for the year ended December 31, 2021 was as follows:
Funds from operations |
| $ | (974,219) |
Amortization of above market leases (1) |
| 250,504 | |
Amortization of below market leases (2) |
| (274,528) | |
Straight line rent (3) |
| (198,594) | |
Capital expenditures (4) |
| (536,685) | |
Decrease in fair value of interest rate cap (5) |
| 27,281 | |
Amortization of loan issuance costs (6) |
| 103,180 | |
Amortization of preferred stock discount and offering costs (7) |
| 204,383 | |
Amortization of convertible debenture discount, offering costs, beneficial conversion feature (8) |
| 1,718,487 | |
Share-based compensation (9) |
| 149,981 | |
Bad debt expense (10) |
| 39,024 | |
Debt forgiveness (10) |
| (176,300) | |
Adjusted funds from operations (AFFO) | $ | 332,514 |
(1) | Adjustment to FFO resulting from non-cash amortization of intangible assets for the year ended December 31, 2021. |
(2) | Adjustment to FFO resulting from non-cash amortization of intangible liabilities for the year ended December 31, 2021. |
(3) | Adjustment to FFO resulting from non-cash revenues recognized as a result of applying straight line revenue recognition for the retail center properties and flex center property during the year ended December 31, 2021. |
(4) | Adjustment to FFO for capital expenditures, including capitalized leasing commissions, tenant improvements, building and site improvements and purchases of furniture, fixtures and equipment that have not been reimbursed by property escrow accounts. See Investing Activities, above, for detail of capital expenditures during the year ended December 31, 2021. |
(5) | Adjustment to FFO resulting from non-cash expenses recognized as a result of decreases in the fair value of the interest rate caps for the Hampton Inn Property and the Clemson Best Western Property during the year ended December 31, 2021. |
(6) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing loan issuance costs over the terms of the respective mortgages during the year ended December 31, 2021. |
(7) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing the preferred stock discount over its five year term during the year ended December 31, 2021. |
(8) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing the preferred stock offering costs over its five year term during the year ended December 31, 2021. |
(9) | Adjustment to FFO resulting from non-cash expenses recorded for share-based compensation. |
(10) | NAREIT’s December 2018 White Paper provides guidance on non-cash revenues and expenses, stating, “To provide an opportunity for consistent analysis of operating results among REITs, NAREIT encourages those reporting FFO to make |
39
supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period. Our company has elected to include non-cash revenues (debt forgiveness) and non-cash expenses (bad debt expense) in its calculation of AFFO.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data required by this Item 8 are included as a separate section of this Annual Report on Form 10-K, see “Item 15. Exhibits and Financial Statement Schedules,” and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer, regarding the effectiveness of our disclosure controls and procedures as of December 31, 2021, the end of the period covered by this Annual Report. Based on the foregoing, our Chief Executive Officer has concluded, as of December 31, 2021, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow for timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Our management, including our Chief Executive Officer, evaluated, as of December 31, 2021, the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on that evaluation, our Chief Executive Officer concluded that our internal control over financial reporting, as of December 31, 2021, were effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
40
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION
The information required by Item 11 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Paid to Independent Registered Public Accounting Firm
The information required by Item 14 is incorporated by reference to our definitive Proxy Statement for our 2022 annual stockholders’ meeting.
41
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
MEDALIST DIVERSIFIED REIT, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2021
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Medalist Diversified REIT, Inc. and Subsidiaries
Richmond, Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Medalist Diversified REIT, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2021 and the related notes and schedule III (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ |
We have served as the Company’s auditor since 2017. |
March 15, 2022 |
43
Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Balance Sheets
| December 31, | |||||
2021 |
| 2020 | ||||
ASSETS |
|
|
|
| ||
Investment properties, net | $ | | $ | | ||
Cash |
| |
| | ||
Restricted cash | | | ||||
Rent and other receivables, net of allowance of $ |
| |
| | ||
Assets held for sale | | | ||||
Unbilled rent |
| |
| | ||
Intangible assets, net |
| |
| | ||
Other assets |
| |
| | ||
Total Assets | $ | | $ | | ||
LIABILITIES |
|
| ||||
Accounts payable and accrued liabilities | $ | | $ | | ||
Intangible liabilities, net |
| |
| | ||
Line of credit, short term, net |
| — |
| | ||
Notes payable | — | | ||||
Convertible debentures, net | — | | ||||
Mortgages payable, net | | | ||||
Mortgages payable, net, associated with assets held for sale | | | ||||
Mandatorily redeemable preferred stock, net |
| |
| | ||
Total Liabilities | $ | | $ | | ||
EQUITY |
|
|
|
| ||
Common stock, | $ | |
| | ||
Additional paid-in capital |
| |
| | ||
Offering costs |
| ( |
| ( | ||
Accumulated deficit |
| ( |
| ( | ||
Total Stockholders' Equity |
| |
| | ||
Noncontrolling interests - Hampton Inn Property |
| — |
| ( | ||
Noncontrolling interests - Hanover Square Property |
| |
| | ||
Noncontrolling interests - Parkway Property | | | ||||
Noncontrolling interests - Operating Partnership |
| |
| | ||
Total Equity | $ | | $ | | ||
Total Liabilities and Equity | $ | | $ | | ||
See notes to consolidated financial statements
44
Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ending December 31, | ||||||
| 2021 |
| 2020 | |||
REVENUE |
|
|
|
| ||
Retail center property revenues | $ | | $ | | ||
Retail center property tenant reimbursements |
| |
| | ||
Flex center property revenues | | | ||||
Flex center property tenant reimbursements | | | ||||
Hotel property room revenues |
| |
| | ||
Hotel property other revenues |
| |
| | ||
Total Revenue | $ | | $ | | ||
OPERATING EXPENSES |
|
|
|
| ||
Retail center property operating expenses | $ | | $ | | ||
Flex center property operating expenses | | | ||||
Hotel property operating expenses |
| |
| | ||
Bad debt expense | | | ||||
Share based compensation expenses |
| |
| | ||
Legal, accounting and other professional fees |
| |
| | ||
Corporate general and administrative expenses |
| |
| | ||
Loss on impairment |
| — |
| | ||
Impairment of assets held for sale | — | | ||||
Depreciation and amortization | | | ||||
Total Operating Expenses |
| |
| | ||
Gain on disposal of investment properties | | | ||||
Operating income (loss) |
| |
| ( | ||
Interest expense |
| |
| | ||
Net Loss from Operations |
| ( |
| ( | ||
Other income |
| |
| | ||
Net Loss |
| ( |
| ( | ||
Less: Net income (loss) attributable to Hampton Inn Property noncontrolling interests |
| |
| ( | ||
Less: Net loss attributable to Hanover Square Property noncontrolling interests | ( | ( | ||||
Less: Net loss attributable to Parkway Property noncontrolling interests |
| ( |
| | ||
Less: Net income (loss) attributable to Operating Partnership noncontrolling interests |
| |
| ( | ||
Net Loss Attributable to Medalist Common Shareholders | $ | ( | $ | ( | ||
Loss per share from operations - basic and diluted | ( | ( | ||||
Weighted-average number of shares - basic and diluted |
| |
| | ||
Dividends paid per common share | $ | | $ | | ||
See notes to consolidated financial statements
45
Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For the years ended December 31, 2021 and 2020
Noncontrolling Interests | ||||||||||||||||||||||||||||||||
| Common Stock |
|
|
|
| Total |
|
| Hanover |
|
| |||||||||||||||||||||
Additional | Offering | Accumulated | Shareholders' | Hampton Inn | Square | Parkway | Operating | |||||||||||||||||||||||||
Shares | Par Value | Paid in Capital | Costs | Deficit | Equity | Property | Property | Property | Partnership | Total Equity | ||||||||||||||||||||||
Balance, December 31, 2019 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | — | $ | | $ | | ||||||||||
Common stock issuances |
| | $ | | $ | | $ | — | $ | — | $ | | $ | — | $ | — | $ | — | $ | — | $ | | ||||||||||
Share based compensation |
| | | | — | — | | — | — | — | - | | ||||||||||||||||||||
Operating partnership unit conversion |
| |
| |
| |
| — |
| — |
| |
| — |
| — | — |
| ( |
| — | |||||||||||
Convertible debenture beneficial conversion feature |
| — | — | | — | — | | — | — | — | — | | ||||||||||||||||||||
Net loss | — | — | — | — | ( | ( | ( | ( | — | ( | ( | |||||||||||||||||||||
Dividends and distributions |
| — |
| — |
| — |
| — |
| ( |
| ( |
| — |
| ( | — |
| ( |
| ( | |||||||||||
Non-controlling interests |
| — |
| — |
| — |
| — |
| — |
| — |
| ( |
| — | — |
| |
| — | |||||||||||
Balance, December 31, 2020 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | ( | $ | | $ | — | $ | | $ | | ||||||||||
Common stock issuances | | $ | | $ | | $ | — | $ | — | $ | | $ | — | $ | — | $ | — | $ | — | $ | | |||||||||||
Share based compensation |
| |
| |
| |
| — |
| — |
| |
| — |
| — | — |
| — |
| | |||||||||||
Convertible debenture beneficial conversion feature | — | — | | — | — | | — | — | — | — | | |||||||||||||||||||||
Conversion of convertible debentures | | | | — | — | | — | — | — | — | | |||||||||||||||||||||
Offering costs |
| — |
| — |
| — |
| ( |
| — |
| ( |
| — |
| — | — |
| — |
| ( | |||||||||||
Net (loss) income |
| — |
| — |
| — |
| — |
| ( |
| ( |
| |
| ( | ( |
| |
| ( | |||||||||||
Dividends and distributions |
| — |
| — |
| — |
| — |
| ( |
| ( |
| ( |
| ( | — |
| ( |
| ( | |||||||||||
Non-controlling interests |
| — |
| — |
| — |
| — |
| ( |
| ( |
| |
| — | |
| — |
| | |||||||||||
Balance, December 31, 2021 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | — | $ | | $ | | $ | | $ | | ||||||||||
See notes to consolidated financial statements
46
Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31, | ||||||
| 2021 |
| 2020 | |||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net Loss | $ | ( | $ | ( | ||
Adjustments to reconcile consolidated net loss to net cash flows from operating activities |
|
| ||||
Depreciation |
| |
| | ||
Amortization |
| |
| | ||
Loan cost amortization |
| |
| | ||
Mandatorily redeemable preferred stock issuance cost and discount amortization | | | ||||
Convertible debenture issuance cost, discount and beneficial conversion feature amortization | | | ||||
Amortization of tenant inducements |
| — |
| | ||
Above (below) market lease amortization, net |
| ( |
| | ||
Bad debt expense | | | ||||
Note payable forgiveness | ( | ( | ||||
Share-based compensation | | | ||||
Impairment of assets held for sale |
| — |
| | ||
Loss on impairment | — | | ||||
Gain on sale of investment property |
| ( |
| — | ||
Changes in assets and liabilities |
|
| ||||
Rent and other receivables, net |
| ( |
| ( | ||
Unbilled rent |
| ( |
| ( | ||
Other assets |
| ( |
| ( | ||
Accounts payable and accrued liabilities |
|
| ( | |||
Net cash flows from operating activities |
| |
| ( | ||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
| ||||
Investment property acquisitions, net of cash acquired and assumed debt |
| ( |
| — | ||
Capital expenditures | ( | ( | ||||
Cash received from disposal of investment properties |
| |
| — | ||
Net cash flows from investing activities |
| ( |
| ( | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
| ||
Dividends and distributions paid |
| ( |
| ( | ||
Investment of noncontrolling interests | | — | ||||
Proceeds from line of credit, short term, net | — | | ||||
Repayment of line of credit, short term |
| ( |
| ( | ||
Repayment of related party notes payable, short term |
| — |
| ( | ||
Proceeds from notes payable | — | | ||||
Proceeds from mortgages payable, net |
| |
| | ||
Repayment of mortgages payable |
| ( |
| ( | ||
Proceeds from sale of mandatorily preferred stock, net of capitalized offering costs | — | | ||||
Proceeds from sale of convertible debentures, net of capitalized offering costs | | | ||||
Proceeds from sales of common stock, net of capitalized offering costs |
| |
| — | ||
Net cash flows from financing activities |
| |
| | ||
INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
| |
| | ||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period |
| |
| | ||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | | $ | | ||
CASH AND CASH EQUIVALENTS, end of period, shown in consolidated balance sheets | | | ||||
RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits, end of period, shown in consolidated balance sheets | | | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the consolidated statements of cash flows | $ | | $ | | ||
Supplemental Disclosures and Non-Cash Activities: |
|
| ||||
Other cash transactions: |
|
|
|
| ||
Interest paid | $ | | $ | | ||
Non-cash transactions: |
|
|
|
| ||
Conversion of convertible debentures and accrued interest to common stock | $ | | $ | — | ||
Transfer of investment properties, net to assets held for sale, net | | — | ||||
Transfer of mortgages payable, net to mortgages payable associated with assets held for sale, net | | — | ||||
Assumption of mortgage debt, net | | — | ||||
Forgiveness of note payable |
| |
| | ||
Exchange for | — | | ||||
Exchange for | — | | ||||
Issuance of operating partnership interests in exchange for | ||||||
interest in the Hampton Inn Property |
| — |
| | ||
Conversion of operating partnership units to common shares |
| — |
| | ||
See notes to consolidated financial statements
47
Medalist Diversified REIT, Inc. and Subsidiaries
Notes to 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 December 31, 2021, the REIT, through the Operating Partnership, owned and operated eight properties, the Shops at Franklin Square, a
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 corporations which own or operate the properties, and the taxable REIT subsidiaries which operate the Clemson Best Western Property and formerly operated the Hampton Inn Property. As a REIT, certain tax laws limit the amount of “non-qualifying” income that Company can earn, including income derived directly from the operation of hotels. As a result, the Company leases its consolidated hotel properties to taxable REIT subsidiaries (“TRS”) for federal income tax purposes. The TRS subsidiaries are subject to income tax and are not limited as to the amount of nonqualifying income they can generate, but they are limited in terms of their value as a percentage of the total value of the Company’s assets. The TRS subsidiaries enter into agreements with a third party to manage the operations of the hotel. The Company prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). References to the consolidated financial statements and references to individual financial statements included herein, reference the 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 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
48
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 its Manager’s discretion.
The Company is externally managed by Medalist Fund Manager, Inc. (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.
49
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
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.
The Company did not record any impairment adjustments to its investment properties resulting from events or changes in circumstances during the year ended December 31, 2021. Other than the tenant-specific loss on impairment described below, the Company did not record any impairment adjustments to its investment properties resulting from events or changes in circumstances during the year ended December 31, 2020, that would result in the projected value being below the carrying value of the Company’s properties. During June 2020 a tenant in the Company’s Franklin Square Property notified the Company that it was abandoning its leased premises and defaulting on its lease. The Company determined that the carrying value of certain tangible and intangible assets and liabilities associated with this lease that (i) were recorded as part of the purchase of the Franklin Square Property and (ii) were related to this lease and which were recorded during the Company’s ownership of the Franklin Square Property, should be written off. As a result, the Company recorded a loss on impairment of $
Loss on impairment – capitalized tenant inducements |
| $ | |
Loss on impairment – capitalized tenant improvements arising from acquisition cost allocation |
| | |
Loss on impairment – intangible assets – leasing commissions |
| | |
Loss on impairment – intangible assets – legal and marketing costs |
| | |
Loss on impairment – intangible assets – leases in place |
| | |
Gain on impairment – intangible liabilities – below market leases |
| ( | |
Loss on impairment, net | $ | |
No such tenant-related loss on impairment was recorded during the year ended December 31, 2021.
Assets Held for Sale
The Company may decide to sell properties that are held as investment properties. The Company records 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. 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.
50
As of December 31, 2020, the Company had committed to a plan to sell the Hampton Inn Property. The Company’s plan was for the sale of an asset group that included the land, site improvements, building, building improvements and furniture, fixtures and equipment associated with the Hampton Inn Property. As of December 31, 2020, the Company determined that the carrying value of the Hampton Inn Property exceeded its fair value, less estimated costs to sell, and recorded impairment of assets held for sale of $
During February 2021, the Company committed to a plan to sell the Clemson Best Western Hotel Property. The Company’s plan is for the sale of an asset group that includes the land, site improvements, building, building improvements and furniture, fixtures and equipment associated with the Clemson Best Western Property. The Company believes that the fair value, less estimated costs to sell, exceeds the Company’s carrying cost in the property, so the Company has not recorded any impairment of assets held for sale related to the Clemson Best Western Property for the year ended December 31, 2021.
See Note 3 for additional details on impairment of assets held for sale as of December 31, 2021 and 2020, respectively.
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. The Company did not record any impairment adjustments to its intangible assets during the year ended December 31, 2021. During June 2020, a tenant in the Company’s Franklin Square Property notified the Company that it was abandoning its leased premises and defaulting on its lease. The Company determined that the book 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:
December 31, | ||||||
| 2021 |
| 2020 | |||
Intangible Assets | ||||||
Leasing commissions | $ | | $ | | ||
Legal and marketing costs |
| |
| | ||
Above market leases |
| |
| | ||
Net leasehold asset |
| |
| | ||
$ | | $ | | |||
Intangible Liabilities |
|
| ||||
Below market leases, net | $ | ( | $ | ( | ||
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
51
leases. Adjustments to rental revenue related to the above and below market leases during the years ended December 31, 2021 and 2020, respectively, were as follows:
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Amortization of above market leases | $ | ( | $ | ( | ||
Amortization of below market leases |
| |
| | ||
$ | | $ | ( | |||
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 years ended December 31, 2021 and 2020, respectively, were as follows:
For the year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Leasing commissions | $ | ( | $ | ( | ||
Legal and marketing costs |
| ( |
| ( | ||
Net leasehold asset |
| ( |
| ( | ||
$ | ( | $ | ( | |||
As of December 31, 2021 and 2020, 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:
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027-2040 |
| Total | ||||||||
Intangible Assets | |||||||||||||||||||||
Leasing commissions | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
Legal and marketing costs |
| |
| |
| |
| |
| |
| |
| | |||||||
Above market leases |
| |
| |
| |
| |
| |
| |
| | |||||||
Net leasehold asset |
| |
| |
| |
| |
| |
| |
| | |||||||
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Intangible Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
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 years ended December 31, 2021 and 2020, 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
52
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 December 31, 2021 and 2020, the Company reported $
Escrow deposits are restricted cash balances held by lenders for real estate taxes, insurance and other operating reserves. As of December 31, 2021 and 2020, the Company reported $
An escrow of $
Capital reserves are restricted cash balances held by lenders for capital improvements, leasing commissions furniture, fixtures and equipment, and tenant improvements. As of December 31, 2021 and 2020, the Company reported $
December 31, | ||||||
Property and Purpose of Reserve |
| 2021 | 2020 | |||
Hampton Inn Property - furniture, fixtures and equipment | $ | — | $ | | ||
Clemson Best Western Property - improvements | | | ||||
Clemson Best Western Property - furniture, fixtures and equipment |
| |
| | ||
Franklin Square Property - leasing costs |
| |
| | ||
Brookfield Center Property - maintenance reserve |
| |
| | ||
Greenbrier Business Center - capital reserve |
| |
| — | ||
Total | $ | | $ | | ||
Revenue Recognition
Retail and Flex Center Property Revenues
The Company recognizes minimum rents from its retail center properties and flex center properties on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset being recorded on the consolidated balance sheets. As of December 31, 2021 and 2020, the Company reported $
The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). The Company includes these reimbursements, along with other revenue derived from late fees and seasonal events, on the consolidated statements of operations under the captions “Retail center property tenant reimbursements” and “Flex center property tenant reimbursements.” This significantly reduces the Company’s exposure to increases in costs and operating
53
expenses resulting from inflation or other outside factors. The Company accrues reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. The Company calculates the tenant’s share of operating costs by multiplying the total amount of the operating costs by a fraction, the numerator of which is the total number of square feet being leased by the tenant, and the denominator of which is the average total square footage of all leasable buildings at the property. The Company also receives payments for these reimbursements from substantially all its tenants on a monthly basis throughout the year.
The Company recognizes differences between previously estimated recoveries and the final billed amounts in the year in which the amounts become final. During the years ended December 31, 2021 and 2020, respectively, the Company recognized $
The Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. During the year ended December 31, 2021, the Company received a $
Hotel Property Revenues
Hotel revenues (from the Hampton Inn Property and Clemson Best Western Property) are recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Revenues from the Company’s occupancy agreement with Clemson University are recognized as earned, which is as rooms are occupied or otherwise reserved for use by the University.
The Hampton Inn Property and Clemson Best Western Property are required to collect certain taxes and fees from customers on behalf of government agencies and remit them back to the applicable governmental agencies on a periodic basis. The Hampton Inn Property and Clemson Best Western Property have a legal obligation to act as a collection agent. The Hampton Inn Property and Clemson Best Western Property do not retain these taxes and fees; therefore, they are not included in revenues. The Hampton Inn Property and Clemson Best Western Property record a liability when the amounts are collected and relieves the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.
Hotel Property Operating Expenses
All personnel of the Hampton Inn Property and Clemson Best Western Property are directly or indirectly employees of Marshall Hotels and Resorts, Inc. (“Marshall”), the Company’s hotel management firm. In addition to fees and services discussed above, the Hampton Inn Property and Clemson Best Western Property reimburse Marshall for all employee related service costs, including payroll salaries and wages, payroll taxes and other employee benefits paid by Marshall on behalf of the respective property. For the Hampton Inn Property, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the years ended December 31, 2021 (the Company sold the Hampton Inn Property on August 31, 2021) and December 31, 2020, were $
Rent and other receivables
Rent and other receivables include tenant receivables related to base rents and tenant reimbursements. Rent and other receivables do not include receivables attributable to recording rents on a straight-line basis, which are included in unbilled rent, discussed above. The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of December 31, 2021 and 2020, the Company’s allowance for uncollectible rent totaled $
54
comprised of amounts specifically identified based on management’s review of individual tenants’ outstanding receivables. Management determined that no additional general reserve is considered necessary as of December 31, 2021 and 2020, respectively.
Income Taxes
Beginning with the Company’s taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least
During the years ended December 31, 2021 and 2020, respectively, the Company’s Hampton Inn TRS entity generated a tax loss, so
Management has evaluated the effect of the guidance provided by GAAP on Accounting for Uncertainty of Income Taxes and has determined that the Company had no uncertain income tax positions.
Use of Estimates
The Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the reported period. The Company’s actual results could differ from these estimates.
Noncontrolling Interests
There are three elements of noncontrolling interests in the capital structure of the Company. The ownership interests not held by the REIT are considered noncontrolling interests. Accordingly, noncontrolling interests have been reported in equity on the consolidated balance sheets but separate from the Company’s equity. On the consolidated statements of operations, the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. The Company’s consolidated statements of changes in stockholders’ equity includes beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
The first noncontrolling interest is in the Hampton Inn Property. In 2017, the noncontrolling owner of the Hampton Inn Property provided $
55
The Hampton Inn Property’s net income (loss) is allocated to the noncontrolling ownership interest based on its percent ownership. During the year ended December 31, 2021,
The second noncontrolling interest is in the Hanover Square Property in which the Company owns an
The third noncontrolling interest is in the Parkway Property in which the Company owns an
The fourth noncontrolling ownership interest are the units in the Operating Partnership that are not held by the REIT. In 2017,
The Operating Partnership units not held by the REIT represent
During the year ended December 31, 2021, a weighted average of
Recent Accounting Pronouncements
For each of the accounting pronouncements that affect the Company, the Company has elected or plans to elect to follow the rule that allows companies engaging in an initial public offering as an Emerging Growth Company to follow the private company implementation dates.
Accounting for Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases. Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheets. Other significant provisions of this standard include (i) defining the “lease term” to include the non-cancelable period together with periods for which there is a significant economic incentive for the lessee to extend or not terminate the lease; (ii) defining the initial lease liability
56
to be recorded on the balance sheets to contemplate only those variable lease payments that depend on an index or that are in substance “fixed,” (iii) a dual approach for determining whether lease expense is recognized on a straight-line or accelerated basis, depending on whether the lessee is expected to consume more than an insignificant portion of the leased asset’s economic benefits and (iv) a requirement to bifurcate certain lease and non-lease components. The lease standard was effective for public companies for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years) and for private companies, fiscal years beginning after December 15, 2019, with early adoption permitted. The FASB subsequently deferred the effective date of ASU 2016-02 for private companies by one year, to fiscal years beginning after December 15, 2020, to provide those companies with additional time to address various implementation challenges and complexities. In June 2020, the FASB further deferred the effective date due to the effects on private companies from business and capital market disruptions caused by the novel coronavirus (“COVID-19”) pandemic. ASU 2016-02 is now effective for private companies for fiscal years beginning after December 15, 2021, and for interim periods within fiscal years beginning after December 15, 2022. The Company is adopting the standard effective on January 1, 2022. The accounting for leases under which the Company is the lessor remains largely unchanged and the Company is not currently a “lessee” under any lease agreements. Management does not believe that the adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial statements.
Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, lessors may provide rent deferrals and other lease concessions to lessees. In April 2020, the FASB staff issued a question and answer document (the “Lease Modification QA”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under the existing lease guidance in either ASC 840 or ASC 842 prior to the issuance of the Lease Modification QA, the Company would have been required to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification QA allowed the Company, based on certain criteria, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company elected the practical expedient and elected not to apply lease modification accounting on a lease-by-lease basis where applicable. As a result, $
In addition to the deferred rent agreements granted by the Company, the Company has abated rent payments totaling $
Years ended December 31, | ||||||
2021 | 2020 | |||||
Rent abated |
| $ | |
| $ | |
Through December 31, | ||||||
2021 | 2020 | |||||
Cumulative rent abated |
| $ | |
| $ | |
Rent abatements granted prospectively (those granted in advance of the due date of the abated rental payments), are recorded as a reduction to retail center property revenues on the Company’s consolidated statement of operations for the periods in which the abatement was granted. Rent abatements granted retroactively (those granted for past due, unpaid rent that has already been recognized as rent revenue on the Company’s consolidated statement of operations), are recorded as a bad debt expense on the Company’s consolidated statement of operations during the period in which the abatement was retroactively granted. For the year ended December 31, 2021, bad debt expense was $
Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This update enhances the methodology of measuring expected credit losses to include the use of
57
forward-looking information to better calculate credit loss estimates. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, such as accounts receivable and loans. The guidance will require that the Company estimate the lifetime expected credit loss with respect to these receivables and record allowances that, when deducted from the balance of the receivables, represent the net amounts expected to be collected. The Company will also be required to disclose information about how it developed the allowances, including changes in the factors that influenced the Company’s estimate of expected credit losses and the reasons for those changes. The Company is continuing to evaluate the impact the adoption of the guidance will have on its consolidated financial statements. Credit losses primarily arise from tenant defaults and historically have not been significant. The Company will adopt the update on the required effective date of January 1, 2023, and does not expect it to have a material impact on its consolidated financial statements.
Effects of Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The London Interbank Offered Rate (LIBOR), which is widely used as a reference interest rate in debt agreements and other contracts, was effectively discontinued for new contracts as of December 31, 2021, and its publication for existing contracts is scheduled to be discontinued by June 30, 2023. Financial market regulators in certain jurisdictions throughout the world undertook reference rate reform initiatives to guide the transition and modification of debt agreements and other contracts that are based on LIBOR to the successor reference rate that will replace it. ASU 2020-04 was issued to provide companies that are impacted by these changes with the opportunity to elect certain expedients and exceptions that are intended to ease the potential burden of accounting for or recognizing the effects of reference rate reform on financial reporting. Companies may generally elect to make use of the expedients and exceptions provided by ASU 2020-04 for any reference rate contract modifications that occur in reporting periods that encompass the timeline from March 12, 2020 to December 31, 2022. The Company’s Clemson Best Western Property mortgage loan and its corresponding interest rate protection agreement use USD LIBOR as the reference interest rate (see Note 5, below). However, that loan matures in October 2022, which is prior to the date that publication of the applicable USD LIBOR rate is discontinued, therefore no transition to a replacement reference rate is currently expected. The Company’s newly-acquired Parkway Property is financed by a mortgage loan with a corresponding interest rate protection agreement which both use USD LIBOR as the reference interest rate (see Note 5, below). The mortgage loan matures on November 1, 2031, and the interest rate protection agreement expires on December 1, 2026. The Company is continuing to review the guidance in ASU 2020-04 and anticipates that it will use the expedients and exceptions provided therein with respect to the replacement of USD LIBOR as the reference rate in the Parkway Property mortgage loan and corresponding interest rate protection agreement. However, the Company does not expect that any changes under ASU 2020-04 will have a material impact on its consolidated financial statements.
Debt With Conversion Options
In August 2020, the FASB issued ASU 2020-06, Debt - Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The objective of ASU 2020-06 is to reduce the current complexity involved in accounting for convertible financial instruments by reducing the number of accounting models applicable to those instruments in the existing guidance. Following the adoption of ASU 2020-06, companies are expected to encounter fewer instances in which a convertible financial instrument must be separated into a debt or equity component and a derivative component for accounting purposes due to the embedded conversion feature. As a result of these revisions, debt instruments issued with a beneficial conversion feature will no longer require separation and thus will be accounted for as a single debt instrument under the updated guidance. In addition to those changes, ASU 2020-06 adds several incremental financial statement disclosures with respect to a company’s convertible financial instruments and makes certain refinements with respect to calculating the effect of those instruments on a company’s diluted earnings per share. ASU 2020-06 is effective for public companies for fiscal years beginning after December 15, 2021 (including interim periods within those fiscal years), and for private companies, fiscal years beginning after December 15, 2023. Early adoption of the guidance is permitted, but no earlier than fiscal years beginning after December 15, 2020. As discussed in Note 5, below, during the period from October 2020 to January 2021, the Company issued debentures that were convertible into shares of its common stock. While those debentures were subject to the accounting guidance for convertible financial instruments, they were fully converted into common stock during the period from January to May 2021 and are no longer outstanding. The Company is continuing to evaluate the changes to the accounting guidance for convertible financial instruments set forth under ASU 2020-06 and will adopt the updated guidance as of January 1, 2024, with application to any convertible instruments that may be outstanding at or issued after that date.
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Evaluation of the Company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, the Company is required to evaluate, on a quarterly basis, whether or not the entity’s current financial condition, including its sources of liquidity at the date that the consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of the Company’s consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. The Company’s consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
In applying applicable accounting guidance, management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows, the Company’s obligations due over the next twelve months as well as the Company’s recurring business operating expenses.
The Company concludes that it is probable that the Company will be able to meet its obligations arising within one year of the date of issuance of these consolidated financial statements within the parameters set forth in the accounting guidance.
3. Investment Properties
Investment properties consist of the following:
December 31, | ||||||
| 2021 |
| 2020 (1) | |||
Land | $ | | $ | | ||
Site improvements |
| |
| | ||
Buildings and improvements (2) |
| |
| | ||
Furniture, fixtures and equipment |
| — |
| | ||
Investment properties at cost (3) |
| |
| | ||
Less accumulated depreciation |
| |
| | ||
Investment properties, net | $ | | $ | | ||
| (1) | As of December 31, 2020, the Clemson Best Western Property is recorded as an investment property. As of December 31, 2021, the Clemson Best Western Property is recorded as an asset held for sale. Please see the note on “assets held for sale”, below. |
| (2) | Includes tenant improvements (both those acquired at the acquisition and those constructed after the acquisition), tenant inducements, capitalized leasing commissions and other capital costs incurred post-acquisition. |
| (3) | Excludes intangible assets and liabilities (see Note 2, above, for a discussion of the Company’s accounting treatment of intangible assets), escrow deposits and property reserves. |
The Company’s depreciation expense on investment properties was $
Capitalized tenant improvements
The Company carries two categories of capitalized tenant improvements on its consolidated balance sheets, both of which are recorded under investment properties, net on the Company’s consolidated balance sheets. The first category is the allocation of acquisition costs to tenant improvements that is recorded on the Company’s consolidated balance sheet as of the date of the Company’s acquisition of the investment property. The second category are tenant improvement costs incurred and paid by the Company subsequent to the acquisition of the investment property. Both are recorded as a component of investment properties on the Company’s consolidated balance sheets. Depreciation expense on both categories of tenant improvements is recorded as a component of depreciation expense on the Company’s consolidated statement of operations.
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The Company generally records depreciation of capitalized tenant improvements on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation are as follows:
December 31, | ||||||
| 2021 |
| 2020 | |||
Capitalized tenant improvements – acquisition cost allocation, net | $ | | $ | | ||
Capitalized tenant improvements incurred subsequent to acquisition, net |
| |
| | ||
During the years ended December 31, 2021 and 2020, the Company recorded $
Depreciation of capitalized tenant improvements incurred subsequent to acquisition was $
Depreciation of capitalized tenant improvements arising from the acquisition cost allocation was $
Capitalized leasing commissions
The Company carries two categories of capitalized leasing commissions on its consolidated balance sheets. The first category is the allocation of acquisition costs to leasing commissions that is recorded as an intangible asset (see Note 2, above, for a discussion of the Company’s accounting treatment for intangible assets) on the Company’s consolidated balance sheet as of the date of the Company’s acquisition of the investment property. The second category is leasing commissions incurred and paid by the Company subsequent to the acquisition of the investment property. These costs are carried on the Company’s consolidated balance sheets under investment properties.
The Company generally records depreciation of capitalized leasing commissions on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation are as follows:
December 31, | ||||||
2021 | 2020 | |||||
Capitalized leasing commissions, net |
| $ | |
| $ | |
During the years ended December 31, 2021 and 2020, the Company recorded $
Assets held for sale
The Company records properties as assets held for sale, and any associated mortgages payable, net, as mortgages payable, net, associated with assets held for sale, on the Company’s consolidated balance sheets 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.
During February 2021, the Company committed to a plan to sell an asset group associated with the Clemson Best Western Hotel Property that includes the land, site improvements, building, building improvements and furniture, fixtures and equipment. As a result, as of March 31, 2021, the Company reclassified these assets, and the related mortgage payable, net, for the Clemson Best Western Property as assets held for sale and liabilities associated with assets held for sale, respectively. The Company expects that it will retain cash and restricted cash and will be responsible for the extinguishment of any accounts payable and other liabilities associated with the Clemson Best Western Property. As of December 31, 2021, management believes that its plans to sell the Clemson Best Western Hotel
60
Property continue to meet the criteria for the asset to be recorded an asset held for sale and, as of December 31, 2021, the assets held for sale on the Company’s consolidated balance sheets included certain assets associated with the Clemson Best Western Property. The Company believes that the fair value, less estimated costs to sell, exceeds the Company’s carrying cost, so the Company has not recorded any impairment of assets held for sale related to the Clemson Best Western Property for the year ended December 31, 2021 or 2020.
As of December 31, 2020, the Company committed to a plan to sell an asset group associated with the Hampton Inn Property that includes the land, site improvements, building, building improvements and furniture, fixtures and equipment. As a result, as of December 31, 2020, the Company reclassified these assets, and the related mortgage payable, net, for the Hampton Inn Property as assets held for sale and liabilities associated with assets held for sale, respectively. The Company expected that it would retain cash and restricted cash and would be responsible for the extinguishment of any accounts payable and other liabilities associated with the Hampton Inn Property. Accordingly, these amounts were excluded from the assets and related liabilities that had been reclassified as assets held for sale and liabilities associated with assets held for sale as of December 31, 2020. For the year ended December 31, 2020, the Company recorded an impairment charge of $
As of December 31, 2021 and 2020, assets held for sale and liabilities associated with assets held for sale consisted of the following:
December 31, | ||||||
2021 | 2020 | |||||
Investment properties, net |
| $ | |
| $ | |
Total assets held for sale | $ | | $ | | ||
December 31, | ||||||
2021 | 2020 | |||||
Mortgages payable, net |
| $ | |
| $ | |
Total liabilities associated with assets held for sale | $ | | $ | | ||
Sale of investment property
On August 31, 2021, the Company sold the Hampton Inn Property to an unrelated third party for a sale price of $
The Company reports properties that are either previously disposed of or currently held for sale in continuing operations in the Company’s consolidated statements of operations if the disposition, or anticipated disposition, of the assets does not represent a shift in the Company’s investment strategy. The Company’s sale of the Hampton Inn Property and plan to sell the asset group associated with the Clemson Best Western Hotel Property do not constitute a change in the Company’s investment strategy, which continues to include limited service hotels as a targeted asset class.
Operating results of the Hampton Inn Property, which are included in continuing operations, are as follows:
Year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Hotel property room revenues |
| $ | |
| $ | |
Hotel property other revenues |
| |
| | ||
Total Revenue |
| |
| | ||
Hotel property operating expenses |
| |
| | ||
Depreciation and amortization |
| — |
| | ||
Total Operating Expenses |
| |
| | ||
Gain on disposal of investment properties |
| |
| — | ||
Operating Income (Loss) |
| |
| ( | ||
Interest expense |
| |
| | ||
Net Loss from Operations |
| ( |
| ( | ||
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Other income (loss) |
| |
| ( | ||
Net Income (Loss) |
| |
| ( | ||
Net income (loss) attributable to Hampton Inn Property noncontrolling interests |
| |
| ( | ||
Net Income (Loss) Attributable to Medalist Common Shareholders | $ | | $ | ( |
2021 Property Acquisitions
The Lancer Center Property
On May 14, 2021, the Company completed its acquisition of the Lancer Center Property, a
The Greenbrier Business Center Property
On August 27, 2021, the Company completed its acquisition of the Greenbrier Business Center Property, an
The Parkway Property
On November 1, 2021, the Company completed its acquisition of an undivided tenant-in-common interest in the Parkway Property, a
62
Lancer |
| Greenbrier |
|
| ||||||||
Center | Business Center | Parkway | ||||||||||
| Property | Property | Property | Total | ||||||||
Fair value of assets acquired |
|
|
|
|
|
| ||||||
Investment property (a) | $ | | $ | | $ | | $ | | ||||
Lease intangibles and other assets (b) | |
| |
| |
| | |||||
Restricted cash acquired (c) | — |
| |
| — |
| | |||||
Above market leases (b) | |
| |
| |
| | |||||
Below market leases (b) | ( |
| ( |
| ( |
| ( | |||||
Preliminary fair value of net assets acquired (d) | $ | | $ | | $ | | $ | | ||||
Purchase consideration |
|
|
|
|
|
| ||||||
Consideration paid with cash (e) | $ | | $ | | $ | | $ | | ||||
Consideration paid by noncontrolling owner (f) | — |
| — |
| |
| | |||||
Consideration paid with new mortgage debt, net (g) | |
| — |
| |
| | |||||
Consideration paid with assumed mortgage debt, net (h) | — |
| |
| — |
| | |||||
Preliminary total consideration (i) | $ | | $ | | $ | | $ | | ||||
| a. | Represents the fair value of the investment property acquired which includes land, buildings, site improvements, tenant improvements and furniture, fixtures and equipment. The fair value was determined using the market approach, the cost approach, the income approach or a combination thereof. Closing and acquisition costs were allocated and added to the fair value of the tangible assets acquired. |
| b. | Represents the fair value of lease intangibles and other assets. Lease intangibles include leasing commissions, leases in place, above market leases, below market leases and legal and marketing costs associated with replacing existing leases. |
| c. | Represents an operating reserve funded by the Company at closing. |
| d. | Represents the total fair value of assets and liabilities acquired at closing. |
| e. | Represents cash paid at closing and cash paid for acquisition (including intangible assets), and closing costs paid at closing or directly by the Company outside of closing. |
| f. | Represents cash paid at closing by the noncontrolling owner. In addition to cash paid at closing, the noncontrolling owner provided $ |
| g. | Issuance of new mortgage debt to fund the purchase of the Lancer Center Property , net of capitalized loan issuance costs. See Note 5, below. |
| h. | Assumption of mortgage debt related to the purchase of the Greenbrier Business Center Property. See Note 5, below. |
| i. | Represents the consideration paid for the fair value of the assets and liabilities acquired. |
4. Mandatorily Redeemable Preferred Stock
On February 19, 2020, the Company issued and sold
The mandatorily redeemable preferred stock has an aggregate liquidation preference of $
63
or series of the Company’s capital stock expressly designated as ranking on a parity with the mandatorily redeemable preferred stock as to distribution rights and rights upon liquidation, dissolution or winding up (“Parity Stock”).
If outstanding on February 19, 2025, the mandatorily redeemable preferred stock must be redeemed by the Company on that date, the fifth anniversary of the date of issuance. Beginning on February 19, 2022, the second anniversary of the issuance, the Company may redeem the outstanding mandatorily redeemable preferred stock for an amount equal to its aggregate liquidation preference, plus any accrued but unpaid dividends. The holders of the mandatorily redeemable preferred stock may also require the Company to redeem the stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference plus any accrued and unpaid dividends thereon.
Holders of the mandatorily redeemable preferred stock generally have no voting rights. However, if the Company does not pay dividends on the mandatorily redeemable preferred stock for
The Company has classified the mandatorily redeemable preferred stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and therefore the related dividend payments are treated as a component of interest expense in the accompanying consolidated statements of operations (see Note 5, below, for a discussion of interest expense associated with the mandatorily redeemable preferred stock).
For all periods the mandatorily redeemable preferred stock has been outstanding, the Company has paid a cash dividend on the stock equal to
|
| Amount |
| ||||
Payment Date | Record Date | per share | For the period | ||||
April 27, 2020 | April 24, 2020 | $ | |
| February 19, 2020 - April 27, 2020 | ||
July 24, 2020 | July 22, 2020 |
| |
| April 28, 2020 - July 24, 2020 | ||
October 26, 2020 | October 23, 2020 |
| |
| July 25, 2020 - October 26, 2020 | ||
February 1, 2021 | January 29, 2021 |
| |
| October 27, 2020 - February 1, 2021 | ||
April 30, 2021 | April 26, 2021 | | February 2, 2021 – April 30, 2021 | ||||
July 26, 2021 | July 12, 2021 | | May 1, 2021 - July 26, 2021 | ||||
October 27, 2021 | October 25, 2021 | | July 27, 2021 – October 26, 2021 | ||||
January 20, 2022 | January 13, 2022 | | October 27, 2021 – January 19, 2022 | ||||
As of December 31, 2021 and 2020, the Company recorded $
The mandatorily redeemable preferred stock was issued at $
64
Amortization of the discount and deferred financing costs related to the mandatorily redeemable preferred stock totaling $
5. Loans Payable
Mortgages Payable
The Company’s mortgages payables, net consists of the following:
Monthly | Interest | December 31, | |||||||||||
Property |
| Payment |
| Rate |
| Maturity |
| 2021 |
| 2020 | |||
Franklin Square (a) |
|
| | % | $ | | $ | | |||||
Hanover Square (b) |
| $ | |
| | % |
| |
| | |||
Ashley Plaza (c) | $ | |
| | % |
| |
| | ||||
Clemson Best Western (d) | — | | |||||||||||
Brookfield Center (e) | $ | | | % | | | |||||||
Lancer Center (f) | $ | | | % | | — | |||||||
Greenbrier Business Center (g) |
| | % |
| |
| — | ||||||
Parkway Center (h) | | — | |||||||||||
Unamortized issuance costs, net | ( | ( | |||||||||||
Total mortgages payable, net |
|
|
|
| $ | | $ | | |||||
| (a) | The original mortgage loan for the Franklin Square Property in the amount of $ |
| (b) | On May 8, 2020, the Company entered into a refinancing transaction with the mortgage lender for the Hanover Square Property which increased the mortgage amount and reduced the interest rate. Under this transaction, the principal amount of the loan was increased to $ |
The mortgage loan agreement for the Hanover Square property includes covenants to (i) maintain a Debt Service Coverage Ratio (“DSCR”) in
| (c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of |
65
| (d) | As of March 31, 2021, the Company reclassified the mortgage loan for the Clemson Best Western Property to mortgages payable, net, associated with assets held for sale (see below). |
| (e) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of |
| (f) | The mortgage loan for the Lancer Center Property bears interest at a fixed rate of |
| (g) | The Company assumed the mortgage loan for the Greenbrier Business Center Property from the seller. The mortgage loan bears interest at a fixed rate of |
| (h) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of |
Mortgages payable, net, associated with assets held for sale
The Company’s mortgages payables, net, associated with assets held for sale, consists of the following:
Monthly | Interest | December 31, | ||||||||||
Property |
| Payment |
| Rate |
| Maturity |
| 2021 |
| 2020 | ||
Hampton Inn (a) |
|
|
|
| $ | — |
| $ | | |||
Clemson Best Western (b) | | — | ||||||||||
Unamortized issuance costs, net |
|
|
|
|
|
|
| ( |
| ( | ||
Total mortgages payable, net, associated with assets held for sale |
|
| $ | | $ | | ||||||
| (a) | As of December 31, 2020, the Company reclassified the mortgage loan for the Hampton Inn Property to mortgages payable, net, associated with assets held for sale. On August 31, 2021, the Company repaid the loan as part of the sale of the Hampton Inn Property. |
The mortgage loan for the Hampton Inn Property bore interest at a variable rate based on
(b) | As of March 31, 2021, the Company reclassified the mortgage loan for the Clemson Best Western Property to mortgages payable, net, associated with assets held for sale. The mortgage loan for the Clemson Best Western Property bears interest at a variable rate based on |
Convertible Debentures
On October 27, 2020, the Company entered into a definitive agreement with a financing entity to issue and sell convertible debentures in an aggregate principal amount of up to $
66
Securities Act of 1933, as amended. The debentures were issued at a
|
|
|
| Debt |
| ||||||||||
Principal | Issuance | Net Cash | |||||||||||||
Tranche | Closing Date | Amount | Discount | Costs – Cash | Proceeds | ||||||||||
Tranche 1 | October 27, 2020 | $ | |
| $ | ( |
| $ | ( |
| $ | | |||
Tranche 2 | December 22, 2020 |
| |
|
| ( |
|
| ( |
|
| | |||
Tranche 3 | January 5, 2021 |
| |
| ( |
| ( |
|
| | |||||
Total |
|
| $ | | $ | | $ | | $ | | |||||
The
Based on the terms and relevant conversion details, the debt component and embedded conversion option of the debentures are not bifurcated for accounting purposes under ASC 815, Derivative Instruments and Hedging Activities. Because the variable conversion price of the debentures was lower than the market price of the Company’s common stock at the commitment date, the debentures have a beneficial conversion feature as outlined in ASC 470, Debt. The intrinsic value of the beneficial conversion feature totaled $
Each tranche of the convertible debentures had a maturity date one year from its closing date. At its option, the holder at any time may elect to convert any portion of the principal and accrued interest into shares of the Company’s common stock. Conversions into common stock occur at the lower of (1) a fixed conversion price of $
67
As of December 31, 2021, the convertible debenture holder has elected to fully convert the total $
| Accrued and |
|
|
|
| |||||||||
Principal | Unpaid | Total | Common | |||||||||||
Amount | Interest | Conversion | Conversion | Shares | ||||||||||
Conversion Date | Converted | Converted | Amount | Price | Issued | |||||||||
January 6, 2021 | $ | | $ | | $ | | $ | |
| | ||||
January 14, 2021 |
| |
| |
| |
| |
| | ||||
January 15, 2021 |
| |
| |
| |
| |
| | ||||
January 21, 2021 |
| |
| |
| |
| |
| | ||||
January 26, 2021 |
| |
| |
| |
| |
| | ||||
February 9, 2021 |
| |
| |
| |
| |
| | ||||
February 9, 2021 |
| |
| |
| |
| |
| | ||||
February 10, 2021 |
| |
| |
| |
| |
| | ||||
February 17, 2021 |
| |
| |
| |
| |
| | ||||
March 10, 2021 |
| |
| |
| |
| |
| | ||||
March 11, 2021 |
| |
| |
| |
| |
| | ||||
March 12, 2021 |
| |
| |
| |
| |
| | ||||
March 12, 2021 |
| |
| |
| |
| |
| | ||||
April 28, 2021 |
| |
| |
| |
| |
| | ||||
May 3, 2021 |
| |
| |
| |
| |
| | ||||
May 10, 2021 |
| |
| |
| |
| |
| | ||||
May 11, 2021 |
| |
| |
| |
| |
| | ||||
Total Conversions | $ | | $ | | $ | |
| | ||||||
The principal amount outstanding of the convertible debentures as of December 31, 2021 and December 31, 2020 was $
Notes payable
As of December 31, 2021 and 2020, the Company had a note payable outstanding in the principal amount of $
68
Interest expense
Interest expense, including amortization of capitalized issuance costs consists of the following:
For the year ended December 31, 2021 | ||||||||||||
Amortization | ||||||||||||
Mortgage | of discounts | Other | ||||||||||
Interest | and capitalized | interest | ||||||||||
| Expense |
| issuance costs |
| expense |
| Total | |||||
Franklin Square |
| $ | |
| $ | |
| $ | — |
| $ | |
Hanover Square |
| |
| |
| — |
| | ||||
Hampton Inn |
| |
| |
| |
| | ||||
Ashley Plaza |
| |
| |
| — |
| | ||||
Clemson Best Western |
| |
| |
| |
| | ||||
Brookfield Center |
| |
| |
| — |
| | ||||
Lancer Center | | | — | | ||||||||
Greenbrier Business Center | | | — | | ||||||||
Parkway Center | | | — | | ||||||||
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | — | | | | ||||||||
Amortization and interest on convertible debentures |
| — |
| |
| |
| | ||||
Line of credit, short term |
| — |
| — |
| |
| | ||||
Other interest |
| — |
| — |
| |
| | ||||
Total interest expense | $ | | $ | | $ | | $ | | ||||
For the year ended December 31, 2020 | ||||||||||||
|
| Amortization |
|
| ||||||||
Mortgage | of discounts and | Other | ||||||||||
Interest | capitalized | interest | ||||||||||
| Expense |
| issuance costs |
| expense |
| Total | |||||
Franklin Square | $ | |
| $ | |
| $ | — |
| $ | | |
Hanover Square |
| |
| |
| — |
| | ||||
Hampton Inn |
| |
| |
| |
| | ||||
Ashley Plaza |
| |
| |
| — |
| | ||||
Clemson Best Western |
| |
| |
| |
| | ||||
Brookfield Center |
| |
| |
| — |
| | ||||
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | — | | | | ||||||||
Amortization and interest on convertible debentures | — | | | | ||||||||
Line of credit, short term |
| — |
| |
| |
| | ||||
Related party notes payable, short term |
| — |
| — |
| |
| | ||||
Other interest |
| — |
| — |
| |
| | ||||
Total interest expense | $ | | $ | | $ | | $ | | ||||
69
Interest accrued and accumulated amortization of capitalized issuance costs consist of the following:
As of December 31, 2021 | As of December 31, 2020 | |||||||||||
|
| Accumulated |
|
| Accumulated | |||||||
amortization of | amortization | |||||||||||
capitalized | Accrued | of capitalized | ||||||||||
Accrued interest | issuance costs | interest | issuance costs | |||||||||
Franklin Square | $ | — | $ | | $ | | $ | | ||||
Hanover Square |
| |
| |
| |
| | ||||
Hampton Inn |
| — |
| — |
| |
| | ||||
Ashley Plaza |
| — |
| |
| |
| | ||||
Clemson Best Western |
| |
| |
| |
| | ||||
Brookfield Center |
| |
| |
| |
| | ||||
Lancer Center | | | — | — | ||||||||
Greenbrier Business Center | | | — | — | ||||||||
Parkway Center | | | — | — | ||||||||
Amortization and accrued preferred stock dividends (1) on mandatorily redeemable preferred stock | | | | | ||||||||
Amortization and interest on convertible debentures |
| — |
| — |
| |
| | ||||
Line of credit, short term |
| — |
| — |
| |
| — | ||||
Total | $ | | $ | | $ | | $ | | ||||
| (1) | Recorded as accrued interest under accounts payable and accrued liabilities on the Company’s consolidated balance sheets as of December 31, 2021 and 2020, respectively. |
Debt Maturity
The Company’s scheduled principal repayments on indebtedness as of December 31, 2021 are as follows:
Mortgages | |||||||||
Payable Associated | |||||||||
Mortgages | With Assets | ||||||||
Payable | Held for Sale | Total | |||||||
2022 |
| $ | |
| $ | |
| $ | |
2023 |
| | — | | |||||
2024 |
| | — | | |||||
2025 |
| | — | | |||||
2026 |
| | — | | |||||
Thereafter |
| | — | | |||||
Total principal payments and debt maturities | | | | ||||||
Less unamortized issuance costs |
| ( | ( | ( | |||||
Net principal payments and debt maturities | $ | | $ | | $ | | |||
70
6. Rentals under Operating Leases
Future minimum rents (based on recognizing future rents on the straight-line basis) to be received under noncancelable tenant operating leases for each of the next five years and thereafter, excluding common area maintenance and other expense pass-throughs, as of December 31, 2021 are as follows:
2022 |
| $ | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total minimum rents | $ | |
7. Equity
The Company has authority to issue
April 2021 Common Stock Issuance
On April 13, 2021, the Company issued and sold
Form S- Shelf Registration
On June 21, 2021, the Company filed a shelf registration statement on Form S-3 with the United States Securities and Exchange Commission (“SEC”). The registration statement is intended to provide the Company additional flexibility to finance future business opportunities through timely and cost-effective access to capital markets. Under the shelf registration statement, the Company may, from time to time, issue common stock up to an aggregate amount of $
Standby Equity Purchase Agreement
On November 17, 2021, the Company entered into a Standby Equity Purchase Agreement (the “SEPA”) with a financing entity. Under this agreement, the Company will be able to sell up to $
71
Common Stock Repurchase Plan
In December 2021, the Company’s board of directors approved a program to purchase up to
Common shares and operating partnership units outstanding
As of December 31, 2021 and 2020, respectively, there were
2018 Equity Incentive Plan
The Company’s 2018 Equity Incentive Plan (the “Plan”) was adopted by the Company’s Board of Directors on July 27, 2018 and approved by the Company’s shareholders on August 23, 2018. The Plan permits the grant of stock options, stock appreciation rights, stock awards, performance units, incentive awards and other equity-based awards (including LTIP units of the Company’s Operating Partnership) to its employees or an affiliate (as defined in the Plan) of the Company and for up to the greater of (i)
On March 11, 2020, the Company’s Compensation Committee approved a grant of
On March 16, 2021, the Company’s Compensation Committee approved a grant of
On each January 1 during the term of the Plan, the maximum number of shares of common stock that may be issued under the Plan will increase by eight percent (
Earnings per share
Basic earnings per share for the Company’s Common Shares is calculated by dividing income (loss) from continuing operations, excluding the net income (loss) attributable to noncontrolling interests, by the Company’s weighted-average number of Common Shares outstanding during the period. Diluted earnings per share is computed by dividing the net income attributable to common shareholders, excluding the net loss attributable to noncontrolling interests, by the weighted average number of Common
72
Shares, including any dilutive shares. As of December 31, 2021 and 2020, respectively,
The Company’s loss per common share is determined as follows:
Year ended December 31, | ||||||
| 2021 |
| 2020 | |||
Basic and diluted shares outstanding |
|
|
|
| ||
Weighted average Common Shares – basic |
| |
| | ||
Effect of conversion of operating partnership units |
| |
| | ||
Effect of conversion of convertible debentures (1) | — | | ||||
Weighted average Common Shares – diluted |
| |
| | ||
Calculation of earnings per share – basic and diluted |
|
| ||||
Net loss attributable to common shareholders | $ | ( | $ | ( | ||
Weighted average Common Shares – basic and diluted |
| |
| | ||
Loss per share – basic and diluted | ( | ( | ||||
| (1) | Represents the number of shares that would be issued if all outstanding convertible debentures and accrued interest were converted into CommonShares on December 31, 2020 at a price equal to |
Dividends and Distributions
During the year ended December 31, 2021, dividends in the amount of $
| Year ended December 31, | |||||
2021 | 2020 | |||||
Common shareholders (dividends) | $ | | $ | | ||
Hampton Inn Property noncontrolling interest (distribution) | | — | ||||
Hanover Square Property noncontrolling interest (distributions) |
| |
| | ||
Operating Partnership unit holders (distributions) |
| |
| | ||
Total dividends and distributions | $ | | $ | | ||
8. Commitments and Contingencies
Insurance
The Company carries comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties in its portfolio, in addition to other coverages that may be appropriate for certain of its properties. Additionally, the Company carries a directors and officers liability insurance policy that covers such claims made against the Company and its directors and officers. The Company believes the policy specifications and insured limits are appropriate and adequate for its properties given the relative risk of loss, the cost of the coverage and industry practice; however, its insurance coverage may not be sufficient to fully cover its losses.
Concentration of Credit Risk
The Company is subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others, the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness
73
of tenants, competition for tenants and customers, changes in tax laws, interest rates, the availability of financing and potential liability under environmental and other laws. The Company’s portfolio of properties is dependent upon regional and local economic conditions and is geographically concentrated in the Mid-Atlantic, specifically in South Carolina, North Carolina and Virginia, which represented
Other Risks and Uncertainties
Since March 2020, the Company’s investment properties have been significantly impacted by (i) measures taken by local, state and federal authorities to mitigate the impact of COVID-19, such as mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and (ii) significant changes in consumer behavior and business and leisure travel patterns. While most, if not all, of the initial measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from the continued spread of COVID-19 and its new variants, and the possibility that changes in consumer behavior and business and leisure travel patterns will continue, the negative impact on room demand for our hotel properties and consumer demand for the goods and services of our retail tenants within our portfolio could continue to be significant in future periods.
Retail Center and Flex Center Properties
As of the date of this Annual Report on Form 10-K, all of the tenants in the Company’s retail properties and flex properties are open.
As is the case with retail landlords across the U.S., the Company received a number of rent relief requests from tenants which were impacted by mandatory business closures, quarantines, restrictions on travel and “shelter-in-place” or “stay-at-home” orders and significant changes in consumer behavior. The Company evaluated each of these requests on a case-by-case basis. As of the date of this Annual Report on Form 10-K, the Company has granted lease concessions in the form of (i) rent deferrals or (ii) rent abatements. In addition, during the year ended December 31, 2020, a tenant in the Franklin Square Property defaulted on its lease and abandoned its premises, resulting in the recognition of the loss on impairment recorded during the year ended December 31, 2020. During the year ended December 31, 2020, a second tenant in the Hanover Square Property which was operating under bankruptcy protection, did not renew its lease upon its expiration. However, this space has been re-leased.
The deferral and abatement agreements, and the lease abandonment, have reduced the rent revenues the Company has recognized during the year ended December 31, 2021, and will reduce the rent revenues the Company expects to receive in future periods, as discussed below.
Under the rent deferral agreements, the tenants have agreed to repay deferred and unpaid rent over a specified time period or before a certain date. Under these rent deferral agreements reached during the year ended December 31, 2020 (the Company did not enter into any such deferral agreements during the year ended December 31, 2021), the Company agreed to defer $
Rent Deferrals | Rent Deferral Repayments | ||||||||||||||||||||||
Year ended | Year ended | ||||||||||||||||||||||
Number | December 31, | December 31, | |||||||||||||||||||||
of | Total | Total | |||||||||||||||||||||
Tenants | 2020 | 2021 | Deferrals | 2021 | 2022 | 2023 | Repayments | ||||||||||||||||
Franklin Square |
| |
| $ | |
| $ | — |
| $ | — |
| $ | — |
| $ | |
| $ | |
| $ | |
Hanover Square |
| |
| |
| — |
| — |
| |
| — |
| — |
| | |||||||
Ashley Plaza |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Brookfield Center |
| |
| |
| |
| |
| — |
| |
| — |
| | |||||||
Total |
| | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
74
Under the rent abatement agreements reached during the year ended December 31, 2020 (the Company did not enter into any such abatement agreements during the year ended December 31, 2021), the Company agreed to permanently abate rent in exchange for lease extensions of between and
Rent Abatements | ||||||||||||||
For the year ended December 31, | ||||||||||||||
| Number of |
|
|
|
| Total Rent | ||||||||
Tenants | 2020 | 2021 | 2022 | Abated | ||||||||||
Franklin Square |
| | $ | | $ | | $ | | $ | | ||||
Hanover Square |
| |
| |
| |
| |
| | ||||
Ashley Plaza |
| |
| |
| — |
| — |
| | ||||
Brookfield Center |
| — |
| — |
| — |
| — |
| — | ||||
Total |
| | $ | | $ | | $ | | $ | | ||||
In addition to the deferrals and abatements,
A third tenant defaulted on its lease and abandoned its premises. During the year ended December 31, 2020, the Company wrote off a total of $
Rent Losses and Reductions Due to Bankruptcies, | |||||||||||||||||||||||
Bankruptcy Restructuring and Tenant Default | |||||||||||||||||||||||
Number | Year ended December 31, | Total Rent | |||||||||||||||||||||
| of Tenants | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
| Reductions | ||||||||||||||
Franklin Square |
| |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Hanover Square |
| |
| |
| — |
| — |
| — |
| — |
| — |
| | |||||||
Ashley Plaza |
| |
| |
| |
| |
| |
| — |
| — |
| | |||||||
Brookfield Center |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — | |||||||
Total |
| | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||
75
In return for (i) granting abatements and (ii) restructuring the lease of the tenant under bankruptcy protection, the Company received lease extension agreements of between one and five years, resulting in additional future rents payable under these leases as follows. These amounts are included in future minimum rents in Note 6, above, and summarized in the following table.
Additional Rent Under Term Extensions (1) | ||||||||||||||||||
For the year ended December 31, | ||||||||||||||||||
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total | |||||||
Franklin Square | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Hanover Square |
| |
| |
| |
| — |
| — |
| | ||||||
Ashley Plaza |
| — |
| |
| |
| |
| |
| | ||||||
Total | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
(1) | Excludes future rent payments based on tenant’s monthly sales revenues. |
There is no assurance that the Company will receive these future rent payments.
While the Company’s rent collections from its retail and flex center properties have stabilized, the extent of the continued impact of COVID-19 and its new variants on revenues from the Company’s retail and flex center properties and tenants remains uncertain and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the continued efficacy of vaccines against new variants, development and deployment of of treatments, and potential mutations of COVID-19 and the response thereto.
Revenues will continue to be impacted by the deferral and abatement agreements (discussed above) that the Company has granted to various tenants and could continue to be negatively impacted until consumer demand for the goods and services of the Company’s retail and flex center tenants returns to levels prior to the virus outbreak. Additionally, the direct and indirect economic effects of the pandemic and containment measures and the potential for changes in consumer behavior and business and leisure travel patterns could continue to have a significant negative impact on consumer demand for the goods and services of the Company’s retail tenants within its portfolio in the coming months.
Hotel Properties
Beginning in March 2020, COVID-19 caused widespread cancellations of both business and leisure travel throughout the United States, resulting in significant decreases in the Company’s revenues from the Hampton Inn Property (which the Company sold on August 31, 2021) and the Clemson Best Western Property, and the hospitality industry as a whole. With the overall uncertainty of the longevity of COVID-19 in the U.S. and the resulting economic decline, it is difficult to project the duration of revenue declines for the industry and the Company.
76
Operating statistics for the years ended December 31, 2021, 2020 and 2019, for the Hampton Inn Property were as follows:
Occupancy | Average Daily Rate | ||||||||||||||
Hampton Inn Property |
| 2021 | 2020 |
| 2019 |
| 2021 | 2020 |
| 2019 | |||||
January |
| % | | % | | % | $ | | $ | | $ | | |||
February |
| % | | % | | % | |
| |
| | ||||
March |
| % | | % | | % | |
| |
| | ||||
April |
| % | | % | | % | |
| |
| | ||||
May |
| % | | % | | % | |
| |
| | ||||
June |
| % | | % | | % | |
| |
| | ||||
July |
| % | | % | | % | |
| |
| | ||||
August |
| % | | % | | % | |
| |
| | ||||
September (1) |
| N/A | % | | % | | % | N/A |
| |
| | |||
October |
| N/A | % | | % | | % | N/A |
| |
| | |||
November |
| N/A | % | | % | | % | N/A |
| |
| | |||
December |
| N/A | % | | % | | % | N/A |
| |
| | |||
Full Year |
| N/A | % | | % | | % | N/A | $ | | $ | | |||
| (1) | The Company sold the Hampton Inn Property on August 31, 2021. Accordingly, no statistical data is presented for periods after the sale or for the full year ending December 31, 2021. |
During the period of the year ended December 31, 2020 that was impacted by COVID-19 (March through December 2020) significant portions of the Hampton Inn’s occupancy was generated by non-traditional sources, including an agreement with the City of Greensboro to house homeless families. During this period, this agreement resulted in
Operating statistics for the years ended December 31, 2021, 2020 and 2019, for the Clemson Best Western Hotel Property were as follows:
Occupancy | Average Daily Rate | ||||||||||||||
Clemson Best Western Property | 2021 | 2020 | 2019 (1) | 2021 | 2020 | 2019 (1) | |||||||||
January |
| | % | | % | | % | $ | $ | |
| $ | | ||
February |
| | % | | % | | % |
|
| |
| | |||
March |
| | % | | % | | % |
|
| |
| | |||
April |
| | % | | % | | % |
|
| |
| | |||
May |
| | % | | % | | % |
|
| |
| | |||
June |
| | % | | % | | % |
|
| |
| | |||
July |
| | % | | % | | % |
|
| |
| | |||
August |
| | % | | % | | % |
|
| |
| | |||
September |
| | % | | % | | % |
|
| |
| | |||
October |
| | % | | % | | % |
|
| |
| | |||
November |
| | % | | % | | % |
|
| |
| | |||
December |
| | % | | % | | % |
|
| |
| | |||
Full Year |
| | % | | % | | % | $ | | $ | | ||||
| (1) | January through August 2019 data for the Clemson Best Western Property is from the prior owner. September 2019 data is from the September 2019 STR report for the Clemson Best Western Property. |
Occupancy rates from September 2020 through December 2021 were a result of an agreement by which the Company leased the entire Clemson Best Western Property to Clemson University from September 14, 2020 through December 15, 2020. In January 2021, this agreement was extended through May 5, 2021. In May 2021, this agreement was extended through May 2022.
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While intense efforts to reduce operating costs have resulted in expense reductions in the period during which the Company’s hotel operations have been impacted by COVID-19, the Company cannot be certain as to what level of savings can continue to be achieved overall to mitigate the material decline in hotel revenues it may continue to experience. The federal government has provided assistance to the industries negatively affected by the virus, including the hospitality industry, and our two hotel properties have received loans under one of these programs (see Note 5), but the aid has not mitigated the material reduction in revenue resulting from COVID-19 travel impacts. The Company was not eligible to participate in the second round of the Payroll Protection Program loans announced in December 2020.
Due to the depressed outlook for leisure and business travel, on which both of the Company’s hotel properties significantly relied, the Company sold its Hampton Inn Property and has committed to a plan to sell the Clemson Best Western Property as discussed above. The Company closed on the sale of the Hampton Inn Property on August 31, 2021, but there is no assurance that the Company will be able to complete the sale of the Clemson Best Western Property. Despite the Company’s decision to sell its hotel properties, the Company has not removed hotel properties from its investment policy and will consider future opportunistic acquisitions of hotel properties in the future.
Until such time as the virus is contained or eradicated and room demand for the Company’s hotel property and consumer demand for the goods and services of the Company’s retail and flex center tenants returns to more customary levels, the Company may continue to experience material reductions in its operating revenue. The anticipated negative impact on revenues, discussed above, from the Company’s retail, flex center and hotel property has also, and will continue, to impact the Company’s liquidity, resulting in reduced cash flow to meet the Company’s obligations and to fund dividend distribution payments.
Regulatory and Environmental
As the owner of the buildings on its properties, the Company could face liability for the presence of hazardous materials (e.g., asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in its buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if the Company does not comply with such laws, it could face fines for such noncompliance. Also, the Company could be liable to third parties (e.g., occupants of the buildings) for damages related to exposure to hazardous materials or adverse conditions in its buildings, and the Company could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in its buildings. In addition, some of the Company’s tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at the Company’s properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject the Company or its tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to the Company, and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect the Company’s operations. The Company is not aware of any material contingent liabilities, regulatory matters or environmental matters that may exist.
Seasonality
The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause quarterly fluctuations in its revenues. Historically, occupancy rates and hotel revenues for the Company’s Clemson Best Western Property are highest in the spring and fall months, due to sporting events at Clemson University. However, throughout most of 2020 and all of 2021, the Clemson Best Western Property was fully occupied by Clemson University. To the extent that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand or available financing sources to meet cash requirements.
Litigation
The Company is not currently involved in any litigation or legal proceedings.
78
9. Related Party Transactions
Medalist Fund Manager, Inc. (the “Manager”)
The Company is externally managed by the Manager, which makes all investment decisions for the Company. 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 pays the Manager a monthly asset management fee equal to
The Manager also receives an acquisition fee of
The Manager will be entitled to an incentive fee, payable quarterly, equal to an amount, not less than zero, equal to the difference between (1) the product of (x)
Other related parties
The Company pays Shockoe Properties, LLC, a subsidiary of Dodson Properties, an entity in which one of the owners of the Manager holds a
79
fees are paid in arrears on a monthly basis. During the years ended December 31, 2021 and 2020, the Company paid Shockoe Properties, LLC property management fees of $
10. Segment Information
The Company establishes operating segments at the property level and aggregates individual properties into reportable segments based on product types in which the Company has investments. As of December 31, 2021, the Company had the following reportable segments: retail center properties, flex center properties and hotel properties. During the periods presented, there have been no material intersegment transactions.
Although the Company’s flex center property has tenants that are similar to tenants in its retail center properties, the Company considers its flex center properties as a separate reportable segment. Flex properties are considered by the real estate industry as a distinct subset of the industrial market segment. Flex properties contain a mix of industrial/warehouse and office spaces. Warehouse space that is not air conditioned can be used flexibly by building office or showroom space that is air conditioned, depending on tenants’ needs.
Net operating income (“NOI”) is a non-GAAP financial measure and is not considered a measure of operating results or cash flows from operations under GAAP. NOI is the primary performance measure reviewed by management to assess operating performance of properties and is calculated by deducting operating expenses from operating revenues. Operating revenues include rental income, tenant reimbursements, hotel income, and other property income; and operating expenses include retail center property and hotel operating costs. The NOI performance metric consists of only revenues and expenses directly related to real estate rental operations. NOI reflects property acquisitions and dispositions, occupancy levels, rental rate increases or decreases, and the recoverability of operating expenses. NOI, as the Company calculates it, may not be directly comparable to similarly titled, but differently calculated, measures for other REITs.
Asset information and capital expenditures by segment are not reported because the Company does not use these measures to assess performance. Depreciation and amortization expense, along with other expense and income items, are not allocated among segments.
The following table presents property operating revenues, expenses and NOI by product type:
For the year ended December 31, | ||||||||||||||||||||||||
Hotel properties |
| Retail center properties |
| Flex center property | Total | |||||||||||||||||||
| 2021 |
| 2020 | 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||||||||
Revenues | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
Operating expenses |
| |
| |
| |
| | | |
| |
| | ||||||||||
Bad debt expense | — | — | | | | | | | ||||||||||||||||
Net operating income | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||
11. Subsequent Events
As of March 15, 2022, the following events have occurred subsequent to the December 31, 2021 effective date of the consolidated financial statements:
Common Stock Dividend
On January 20, 2022, a dividend in the amount of $
Common Stock Issuances Under Standby Equity Purchase Agreement
80
As of March 15, 2022, the date of this Annual Report on Form 10-K, the Company has issued
Common Stock Grants Under 2018 Equity Incentive Plan
On March 2, 2022, the Company's Compensation Committee approved a grant of
Mandatorily Redeemable Preferred Stock Dividend
On January 20, 2022, a dividend in the amount of $
Common Stock Repurchases
Subsequent to the December 31, 2021 effective date of the consolidated financial statements, through the date of this Annual Report on Form 10-K, the Company has repurchased a total of
81
Medalist Diversified REIT, Inc. and Subsidiaries
Schedule III - Real Estate Properties and Accumulated Depreciation
December 31, 2021
Initial Cost to Company | Gross Amount at Which Carried at Close of Period | |||||||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Buildings, | Costs Written | Life on Which | ||||||||||||||||||||||||||||||||||
Improvements | Costs | Off Due to | Depreciation | |||||||||||||||||||||||||||||||||
and Furniture, | Capitalized | Impairment | Fully | Buildings | in Latest | |||||||||||||||||||||||||||||||
Encum- | Fixtures | Subsequent to | and Loss on | Amortized | and | Accumulated | Date of | Date | Income Statements | |||||||||||||||||||||||||||
Description | brances | Land | Equipment | Acquisition | Disposition | Improvements | Land | Improvements | Total | Depreciation | Construction | Acquired | is Computed | |||||||||||||||||||||||
Retail properties |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
The Shops at Franklin Square | $ | | $ | | $ | | (1) | $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | |
| 2006 | April 28, 2017 |
| Building - | ||||||||||
Gastonia, North Carolina |
|
|
|
|
|
|
|
|
|
| Site Improvements - | |||||||||||||||||||||||||
Hanover North Shopping Center |
| |
| |
| | (1) |
| |
| — |
| ( |
| | |
| |
| |
| 2007 | May 8, 2018 |
| Building - | |||||||||||
Mechanicsville, Virginia |
|
|
|
|
|
|
|
|
|
| Site Improvements - | |||||||||||||||||||||||||
Ashley Plaza Shopping Center | | | | (1) | | — | ( | | | | | 1977 | August 30, 2019 | Building - | ||||||||||||||||||||||
Goldsboro, North Carolina | Site Improvements - | |||||||||||||||||||||||||||||||||||
Lancer Center Shopping Center | | | | (1) | | — | — | | | | | 1978 | May 14, 2021 | Building - | ||||||||||||||||||||||
Lancaster, South Carolina | Site Improvements - | |||||||||||||||||||||||||||||||||||
Total retail properties |
| |
| |
| |
| |
| ( |
| ( |
| | |
| |
| |
|
|
|
|
| ||||||||||||
Hotel property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Clemson Best Western Inn (2) | | | | | — | — | | | | | 1982 | September 27, 2019 | Building - | |||||||||||||||||||||||
Clemson, South Carolina | Site Improvements - | |||||||||||||||||||||||||||||||||||
Total hotel properties | | | | | — | — | | | | | ||||||||||||||||||||||||||
Flex property | ||||||||||||||||||||||||||||||||||||
Brookfield Center | | | | (1) | | — | — | | | | | 2007 | October 3, 2019 | Building - | ||||||||||||||||||||||
Greenville, South Carolina | Site Improvements - | |||||||||||||||||||||||||||||||||||
Greenbrier Business Center | | | | (1) | | — | — | | | | | 1987 | August 27, 2021 | Building - | ||||||||||||||||||||||
Chesapeake, Virginia | Site Improvements - | |||||||||||||||||||||||||||||||||||
Parkway Center | | | | (1) | | — | — | | | | | 1984 | November 1, 2021 | Building - | ||||||||||||||||||||||
Virginia Beach, Virginia | Site Improvements - | |||||||||||||||||||||||||||||||||||
Total flex properties | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | | $ | | $ | | $ | | ||||||||||||||||
Total investment properties | $ | | $ | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | $ | |
|
|
|
|
| |||||||||||
| (1) | Excludes intangible assets |
| (2) | Recorded as an asset held for sale on the Company’s consolidated balance sheet as of December 31, 2021. |
82
| Greenbrier | |||||||||||||||||||||||||||||
Franklin |
| Hanover |
| Hampton |
| Ashley | Clemson | Brookfield | Lancer | Business | ||||||||||||||||||||
Square | Square | Inn | Plaza | Best Western (1) | Center | Center | Center | Parkway | Total | |||||||||||||||||||||
Investments in real estate - 2021 |
|
|
|
|
|
| ||||||||||||||||||||||||
Balance at beginning of period - January 1, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Additions during period: |
|
|
|
| ||||||||||||||||||||||||||
Acquisitions |
| — |
| — |
| — | — | — | — | | | |
| | ||||||||||||||||
Capitalized leasing commissions |
| |
| |
| — | | — | | | | |
| | ||||||||||||||||
Capitalized tenant improvements |
| |
| — |
| — | — | — | — | | — | — |
| | ||||||||||||||||
Capitalized tenant inducements |
| — |
| — |
| — | — | — | — | — | — | — |
| - | ||||||||||||||||
Building and site improvements |
| |
| |
| — | — | | — | | — | — |
| | ||||||||||||||||
Impairment write-offs |
| — |
| — |
| — | — | — | — | — | — | — |
| - | ||||||||||||||||
Fully amortized tenant improvements | ( | ( | — | ( | — | — | — | — | — | ( | ||||||||||||||||||||
Furniture, Fixtures and Equipment | — | — | — | — | | — | — | — | — | | ||||||||||||||||||||
Dispositions of investment properties | — | — | ( | — | — | — | — | — | — | ( | ||||||||||||||||||||
Balance at end of period - December 31, 2021 | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Accumulated depreciation - 2021 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Balance at beginning of period | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Additions charged to costs and expenses |
| |
| |
| — | | — | | | | |
| | ||||||||||||||||
Write off depreciation of property disposed |
| — |
| — |
| ( | — | — | — | — | — | — |
| ( | ||||||||||||||||
Balance at end of period | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Net investments in real estate - December 31, 2021 | $ | | $ | | $ | — | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||
Investments in real estate - 2020 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Balance at beginning of period - January 1, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Additions during period: |
|
|
|
|
|
|
| |||||||||||||||||||||||
Capitalized leasing commissions |
| |
| — |
| — | | — | — | — | — | — |
| | ||||||||||||||||
Capitalized tenant improvements |
| — |
| |
| — | | — | — | — | — | — |
| | ||||||||||||||||
Capitalized tenant inducements |
| — |
| — |
| — | — | — | — | — | — | — |
| - | ||||||||||||||||
Building and site improvements | — | | | — | | — | — | — | — | | ||||||||||||||||||||
Impairment write-offs | ( |
| — |
| ( | — | — | — | — | — | — |
| ( | |||||||||||||||||
Fully amortized tenant improvements | — |
| — |
| — | — | — | — | — | — | — |
| - | |||||||||||||||||
Furniture, Fixtures and Equipment | — | — | | — | | — | — | — | — | | ||||||||||||||||||||
Balance at end of period - December 31, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Accumulated depreciation - 2020 |
|
|
|
|
|
| ||||||||||||||||||||||||
Balance at beginning of period | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Additions charged to costs and expenses | |
| |
| | | | | — | — | — |
| | |||||||||||||||||
Impairment write-offs | ( |
| — |
| — | — | — | — | — | — | — |
| ( | |||||||||||||||||
Balance at end of period | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
Net investments in real estate - December 31, 2020 | $ | | $ | | $ | | $ | | $ | | $ | | $ | — | $ | — | $ | — | $ | | ||||||||||
| (1) | Recorded as an asset held for sale on the Company’s consolidated balance sheet as of December 31, 2021. |
83
EXHIBIT INDEX
Exhibit |
| Description | |
3.1 |
| Articles of Incorporation of Medalist Diversified REIT, Inc.* | |
3.2 |
| ||
3.3 |
| ||
4.1 |
| ||
4.2 |
| ||
10.1 |
| Management Agreement by and among Medalist Diversified REIT, Inc. * | |
10.2 |
| ||
10.3 |
| ||
10.4 |
| ||
10.5 |
| ||
10.6 |
| ||
10.7 |
| ||
10.8 |
| Medalist Diversified REIT, Inc. 2018 Equity Incentive Plan * | |
10.9 |
| Agreement of Limited Partnership of Medalist Diversified Holdings, L.P. * | |
10.10 |
| ||
10.11 |
| ||
10.12 | |||
10.13 | |||
10.14 | |||
10.15 | |||
10.16 | |||
10.17 | |||
10.18 | |||
10.19 | |||
10.20 | |||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
21.1 |
| |
23.1 | ||
31.1 | Certification by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002 † | |
31.2 | Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. † | |
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL † | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document † | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document † | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document † | |
101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document † | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document † | |
104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) † |
†Filed herewith.
* Previously filed with the Amendment to the Registrant’s Registration Statement on Form S-11 filed by the Registrant with the Securities and Exchange Commission on October 5, 2018.
** Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDALIST DIVERSIFIED REIT, INC. | ||
Date: March 15, 2022 | By: | /s/ Thomas E. Messier |
Thomas E. Messier | ||
Chief Executive Officer and Chairman of the Board | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name |
| Title |
| Date |
|
|
|
|
|
/s/ Thomas E. Messier |
| Chief Executive Officer and Chairman of the Board |
| March 15, 2022 |
Thomas E. Messier |
| (principal executive officer) |
|
|
|
|
|
|
|
/s/ Brent Winn, Jr. |
| Chief Financial Officer |
| March 15, 2022 |
Brent Winn, Jr. |
| (principal accounting officer and principal financial officer) |
|
|
|
|
|
|
|
/s/ William R. Elliott |
| President, Chief Operating Officer and |
| March 15, 2022 |
William R. Elliott |
| Vice Chairman of the Board |
|
|
|
|
|
|
|
/s/ Neil P. Farmer |
| Director |
| March 15, 2022 |
Neil P. Farmer |
|
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|
|
/s/ Charles S. Pearson, Jr. |
| Director |
| March 15, 2022 |
Charles S. Pearson, Jr. |
|
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|
|
|
|
|
|
/s/ Timothy O’Brien |
| Director |
| March 15, 2022 |
Timothy O’Brien |
|
|
|
|
86