UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended |
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| OR |
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file no: 001-38719
MEDALIST DIVERSIFIED REIT, INC.
Maryland |
| 47-5201540 |
(State or other jurisdiction of incorporation) |
| (IRS Employer Identification No.) |
1051 E. Cary Street Suite 601
James Center Three
Richmond, VA, 23219
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (804) 344-4435
Securities registered pursuant to section 12(b) of the Act:
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Title of Each Class |
| Trading | Name of each Exchange |
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Common Stock, $0.01 par value per share |
| MDRR | The Nasdaq Capital Market |
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8.0% Series A Cumulative Redeemable Preferred Stock, $0.01 par value per share | | | MDRRP | The Nasdaq Capital Market |
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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ ◻ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ◻ | Accelerated filer | ◻ |
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Non-accelerated filer |
| Smaller reporting company | ☒ |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻☐ ☒ No
The number of shares of Common Stock, $0.01 par value per share, of the registrant outstanding at August 9, 2022May 10, 2023 was 17,439,947.2,219,779.
Medalist Diversified REIT, Inc.
Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2022March 31, 2023
Table of Contents
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I.FINANCIAL INFORMATION
Item 1. Financial Statements
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| | | | | | | | | | | | | | |
|
| | June 30, 2022 | | | December 31, 2021 |
|
| | March 31, 2023 | | | December 31, 2022 |
|
| | (Unaudited) |
| | | | (Unaudited) |
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ASSETS |
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Investment properties, net | | $ | 78,059,345 | | $ | 69,407,915 | | | $ | 76,242,506 | | $ | 76,514,952 | |
Cash | |
| 2,480,925 | |
| 4,370,405 | | |
| 3,048,100 | |
| 3,922,136 | |
Restricted cash | | | 3,297,038 | | | 3,013,572 | | | | 1,937,265 | | | 1,740,717 | |
Rent and other receivables, net of allowance of $18,219 and $13,010, as of June 30, 2022 and December 31, 2021, respectively | |
| 284,056 | |
| 466,141 | | |||||||
Assets held for sale | | | 9,897,045 | | | 9,846,208 | | |||||||
Rent and other receivables, net of allowance of $62,960 and $47,109, as of March 31, 2023 and December 31, 2022, respectively | |
| 290,836 | |
| 402,434 | | |||||||
Unbilled rent | |
| 930,697 | |
| 872,322 | | |
| 1,069,860 | |
| 1,022,153 | |
Intangible assets, net | |
| 4,424,149 | |
| 4,200,392 | | |
| 3,449,600 | |
| 3,748,706 | |
Other assets | |
| 570,038 | |
| 370,133 | | |
| 497,510 | |
| 564,306 | |
Total Assets | | $ | 99,943,293 | | $ | 92,547,088 | | | $ | 86,535,677 | | $ | 87,915,404 | |
| | | | | | | | | | | | | | |
LIABILITIES | |
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| | | |
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Accounts payable and accrued liabilities | | $ | 1,954,385 | | $ | 1,307,257 | | | $ | 1,547,240 | | $ | 1,198,072 | |
Intangible liabilities, net | |
| 2,459,960 | |
| 1,880,612 | | |
| 2,133,752 | |
| 2,234,113 | |
Mortgages payable, net | | | 61,811,192 | | | 54,517,822 | | | | 61,065,672 | | | 61,340,259 | |
Mortgages payable, net, associated with assets held for sale | | | 7,615,368 | | | 7,615,368 | | |||||||
Mandatorily redeemable preferred stock, net | |
| 4,336,667 | |
| 4,227,640 | | |
| 4,509,325 | |
| 4,450,521 | |
Total Liabilities | | $ | 78,177,572 | | $ | 69,548,699 | | | $ | 69,255,989 | | $ | 69,222,965 | |
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EQUITY | |
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Common stock, 17,439,947 and 16,052,617 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | | $ | 174,399 | | $ | 160,526 | | |||||||
Common stock, 17,758,421 and 17,758,421 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively | | $ | 177,584 | | $ | 177,584 | | |||||||
Additional paid-in capital | |
| 51,116,997 | |
| 49,645,426 | | |
| 51,363,812 | |
| 51,363,812 | |
Offering costs | |
| (3,350,946) | |
| (3,350,946) | | |
| (3,350,946) | |
| (3,350,946) | |
Accumulated deficit | |
| (27,650,766) | |
| (24,981,346) | | |
| (32,337,125) | |
| (30,939,020) | |
Total Stockholders' Equity | |
| 20,289,684 | |
| 21,473,660 | | |
| 15,853,325 | |
| 17,251,430 | |
Noncontrolling interests - Hanover Square Property | |
| 137,156 | |
| 146,603 | | |
| 126,185 | |
| 127,426 | |
Noncontrolling interests - Parkway Property | | | 474,854 | | | 500,209 | | | | 462,318 | | | 470,685 | |
Noncontrolling interests - Operating Partnership | |
| 864,027 | |
| 877,917 | | |
| 837,860 | |
| 842,898 | |
Total Equity | | $ | 21,765,721 | | $ | 22,998,389 | | | $ | 17,279,688 | | $ | 18,692,439 | |
Total Liabilities and Equity | | $ | 99,943,293 | | $ | 92,547,088 | | | $ | 86,535,677 | | $ | 87,915,404 | |
See notes to condensed consolidated financial statements
3
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
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| | Three Months Ended | | ||||
| | March 31, | | ||||
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| 2023 |
| 2022 |
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REVENUE |
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Retail center property revenues | | $ | 1,891,679 | | $ | 1,525,085 | |
Flex center property revenues | | | 569,297 | | | 613,390 | |
Hotel property room revenues | |
| — | |
| 762,200 | |
Hotel property other revenues | |
| — | |
| 3,289 | |
Total Revenue | | $ | 2,460,976 | | $ | 2,903,964 | |
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OPERATING EXPENSES | |
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Retail center property operating expenses | | $ | 520,615 | | $ | 450,125 | |
Flex center property operating expenses | | | 176,737 | | | 161,381 | |
Hotel property operating expenses | |
| — | |
| 372,860 | |
Bad debt expense | | | 27,122 | | | 12,783 | |
Share based compensation expenses | |
| — | |
| 233,100 | |
Legal, accounting and other professional fees | |
| 767,078 | |
| 459,869 | |
Corporate general and administrative expenses | |
| 117,049 | |
| 80,706 | |
Loss on impairment | |
| 36,743 | |
| 36,670 | |
Impairment of assets held for sale | | | — | | | 175,671 | |
Depreciation and amortization | |
| 1,156,348 | | | 1,155,197 | |
Total Operating Expenses | |
| 2,801,692 | |
| 3,138,362 | |
Operating loss | |
| (340,716) | |
| (234,398) | |
Interest expense | |
| 864,052 | |
| 841,424 | |
Net Loss from Operations | |
| (1,204,768) | |
| (1,075,822) | |
Other (loss) income | |
| (29,038) | |
| 95,439 | |
Net Loss | |
| (1,233,806) | |
| (980,383) | |
Less: Net loss attributable to Hanover Square Property noncontrolling interests | | | (1,241) | | | (319) | |
Less: Net (loss) income attributable to Parkway Property noncontrolling interests | |
| (8,367) | |
| 10,193 | |
Less: Net loss attributable to Operating Partnership noncontrolling interests | |
| (2,903) | |
| (973) | |
Net Loss Attributable to Medalist Common Shareholders | | $ | (1,221,295) | | $ | (989,284) | |
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Loss per share from operations - basic and diluted | | $ | (0.07) | | $ | (0.06) | |
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Weighted-average number of shares - basic and diluted | |
| 17,758,421 | |
| 16,037,073 | |
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Dividends paid per common share | | $ | 0.01 | | $ | 0.02 | |
See notes to condensed consolidated financial statements
4
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
For the three months ended March 31, 2023 and 2022
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, 2023 | |||||||||||||||||||||||||||
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| Common Stock | | | | | | | | | | | | | | Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | Accumulated | | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | |
| ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2023 | | 17,758,421 | | $ | 177,584 | | $ | 51,363,812 | | $ | (3,350,946) | | $ | (30,939,020) | | $ | 17,251,430 | | $ | 127,426 | | $ | 470,685 | | $ | 842,898 | | $ | 18,692,439 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Net loss |
| — | | $ | — | | $ | — | | $ | — | | $ | (1,221,295) | | $ | (1,221,295) | | $ | (1,241) | | $ | (8,367) | | $ | (2,903) | | $ | (1,233,806) |
Dividends and distributions |
| — | | | — | | | — | | | — | | | (176,810) | | | (176,810) | | | — | | | — | | | (2,135) | | | (178,945) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2023 |
| 17,758,421 |
| $ | 177,584 |
| $ | 51,363,812 |
| $ | (3,350,946) |
| $ | (32,337,125) |
| $ | 15,853,325 |
| $ | 126,185 |
| $ | 462,318 |
| $ | 837,860 |
| $ | 17,279,688 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30, | | June 30, | | ||||||||
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| 2022 |
| 2021 |
| 2022 |
| 2021 |
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REVENUE |
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Retail center property revenues | | $ | 1,623,207 | | $ | 1,361,349 | | $ | 3,148,292 | | $ | 2,554,990 | |
Flex center property revenues | | | 609,843 | | | 183,594 | | | 1,223,233 | | | 366,421 | |
Hotel property room revenues | |
| 356,076 | |
| 1,421,394 | |
| 1,118,276 | |
| 2,708,142 | |
Hotel property other revenues | |
| 6,775 | |
| 11,924 | |
| 10,064 | |
| 20,561 | |
Total Revenue | | $ | 2,595,901 | | $ | 2,978,261 | | $ | 5,499,865 | | $ | 5,650,114 | |
| | | | | | | | | | | | | |
OPERATING EXPENSES | |
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Retail center property operating expenses | | $ | 442,047 | | $ | 353,834 | | $ | 892,172 | | $ | 681,764 | |
Flex center property operating expenses | | | 160,670 | | | 64,716 | | | 322,051 | | | 118,804 | |
Hotel property operating expenses | |
| 339,943 | |
| 975,189 | |
| 712,803 | |
| 1,772,584 | |
Bad debt expense | | | 163 | | | — | | | 12,946 | | | 3,196 | |
Share based compensation expenses | |
| — | |
| — | |
| 233,100 | |
| 149,981 | |
Legal, accounting and other professional fees | |
| 368,546 | |
| 296,040 | |
| 828,415 | |
| 787,895 | |
Corporate general and administrative expenses | |
| 155,509 | |
| 117,040 | |
| 236,215 | |
| 186,177 | |
Loss on impairment | |
| — | |
| — | |
| 36,670 | |
| — | |
Impairment of assets held for sale | | | — | | | — | | | 175,671 | | | — | |
Loss on extinguishment of debt | | | 169,675 | | | — | | | 169,675 | | | — | |
Depreciation and amortization | |
| 1,122,455 | | | 770,377 | |
| 2,277,652 | | | 1,423,610 | |
Total Operating Expenses | |
| 2,759,008 | |
| 2,577,196 | |
| 5,897,370 | |
| 5,124,011 | |
Operating (loss) income | |
| (163,107) | |
| 401,065 | |
| (397,505) | |
| 526,103 | |
Interest expense | |
| 874,156 | |
| 1,224,296 | |
| 1,715,580 | |
| 3,658,428 | |
Net Loss from Operations | |
| (1,037,263) | |
| (823,231) | |
| (2,113,085) | |
| (3,132,325) | |
Other income | |
| 29,324 | |
| 182,407 | |
| 124,763 | |
| 183,759 | |
Net Loss | |
| (1,007,939) | |
| (640,824) | |
| (1,988,322) | |
| (2,948,566) | |
Less: Net income attributable to Hampton Inn Property noncontrolling interests | |
| — | |
| 43,493 | |
| — | |
| 18,255 | |
Less: Net income (loss) attributable to Hanover Square Property noncontrolling interests | | | 7,272 | | | (2,787) | | | 6,953 | | | (9,807) | |
Less: Net income attributable to Parkway Property noncontrolling interests | |
| 4,052 | |
| — | |
| 14,245 | |
| — | |
Less: Net (loss) income attributable to Operating Partnership noncontrolling interests | |
| (4,376) | |
| 1,433 | |
| (5,349) | |
| 3,473 | |
Net Loss Attributable to Medalist Common Shareholders | | $ | (1,014,887) | | $ | (682,963) | | $ | (2,004,171) | | $ | (2,960,487) | |
| | | | | | | | | | | | | |
Loss per share from operations - basic and diluted | | $ | (0.06) | | $ | (0.05) | | $ | (0.12) | | $ | (0.29) | |
| | | | | | | | | | | | | |
Weighted-average number of shares - basic and diluted | |
| 17,439,947 | |
| 14,410,149 | |
| 16,738,510 | |
| 10,133,257 | |
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Dividends paid per common share | | $ | 0.02 | | $ | — | | $ | 0.04 | | $ | — | |
See notes to condensed consolidated financial statements
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| | For the three months ended March 31, 2022 | |||||||||||||||||||||||||||
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| Common Stock | | | | | | | | | | | | | | Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | Accumulated | | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | | | ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2022 | | 16,052,617 | | $ | 160,526 | | $ | 49,645,426 | | $ | (3,350,946) | | $ | (24,981,346) | | $ | 21,473,660 | | $ | 146,603 | | $ | 500,209 | | $ | 877,917 | | $ | 22,998,389 |
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Common stock issuances | | 1,119,668 | | $ | 11,197 | | $ | 1,177,377 | | $ | — | | $ | — | | $ | 1,188,574 | | $ | — | | $ | — | | $ | — | | $ | 1,188,574 |
Common stock repurchases |
| (268,070) | | | (2,681) | | | (283,862) | | | — | | | — | | | (286,543) | | | — | | | — | | | — | | | (286,543) |
Share based compensation |
| 210,000 | | | 2,100 | | | 231,000 | | | — | | | — | | | 233,100 | | | — | | | — | | | — | | | 233,100 |
Net (loss) income |
| — | | | — | | | — | | | — | | | (989,284) | | | (989,284) | | | (319) | | | 10,193 | | | (973) | | | (980,383) |
Dividends and distributions |
| — | | | — | | | — | | | — | | | (316,450) | | | (316,450) | | | (10,000) | | | (10,800) | | | (4,271) | | | (341,521) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2022 |
| 17,114,215 |
| $ | 171,142 |
| $ | 50,769,941 |
| $ | (3,350,946) |
| $ | (26,287,080) |
| $ | 21,303,057 |
| $ | 136,284 |
| $ | 499,602 |
| $ | 872,673 |
| $ | 22,811,616 |
4
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
For the six months ended June 30, 2022 and 2021
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the six months ended June 30, 2022 | |||||||||||||||||||||||||||
|
| Common Stock | | | | | | | | | | | | |
| Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | | Accumulated | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | |
| ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2022 | | 16,052,617 | | $ | 160,526 | | $ | 49,645,426 | | $ | (3,350,946) | | $ | (24,981,346) | | $ | 21,473,660 | | $ | 146,603 | | $ | 500,209 | | $ | 877,917 | | $ | 22,998,389 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Common stock issuances | | 1,445,400 | | $ | 14,454 | | $ | 1,524,433 | | $ | — | | $ | — | | $ | 1,538,887 | | $ | — | | $ | — | | $ | — | | $ | 1,538,887 |
Common stock repurchases |
| (268,070) | | | (2,681) | | | (283,862) | | | — | | | — | | | (286,543) | | | — | | | — | | | — | | | (286,543) |
Conversion of convertible debentures |
| 210,000 | | | 2,100 | | | 231,000 | | | — | | | — | | | 233,100 | | | — | | | — | | | — | | | 233,100 |
Net (loss) income |
| — | | | — | | | — | | | — | | | (2,004,171) | | | (2,004,171) | | | 6,953 | | | 14,245 | | | (5,349) | | | (1,988,322) |
Dividends and distributions |
| — | | | — | | | — | | | — | | | (665,249) | | | (665,249) | | | (16,400) | | | (39,600) | | | (8,541) | | | (729,790) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2022 |
| 17,439,947 |
| $ | 174,399 |
| $ | 51,116,997 |
| $ | (3,350,946) |
| $ | (27,650,766) |
| $ | 20,289,684 |
| $ | 137,156 |
| $ | 474,854 |
| $ | 864,027 |
| $ | 21,765,721 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the six months ended June 30, 2021 | |||||||||||||||||||||||||||
|
| Common Stock | | | | | | | | | | | | |
| Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | | Accumulated | | Shareholders’ | | | Hampton Inn | | | Hanover Square | | | Operating | | | | ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property | | | Property |
| | Partnership |
| | Total Equity | |||
Balance, January 1, 2021 | | 4,803,445 | | $ | 48,034 | | $ | 33,105,097 | | $ | (2,992,357) | | $ | (19,298,987) | | $ | 10,861,787 | | $ | (224,383) | | $ | 189,784 | | $ | 882,555 | | $ | 11,709,743 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Common stock issuances | | 8,000,000 | | $ | 80,000 | | $ | 11,080,000 | | $ | — | | $ | — | | $ | 11,160,000 | | $ | — | | $ | — | | $ | — | | $ | 11,160,000 |
Share based compensation |
| 67,256 | | | 673 | | | 149,308 | | | — | | | — | | | 149,981 | | | — | | | — | | | — | | | 149,981 |
Convertible debenture beneficial conversion feature |
| — | | | — | | | 284,052 | | | — | | | — | | | 284,052 | | | — | | | — | | | — | | | 284,052 |
Conversion of convertible debentures |
| 3,181,916 | | | 31,819 | | | 5,026,969 | | | — | | | — | | | 5,058,788 | | | — | | | — | | | — | | | 5,058,788 |
Offering costs |
| — | | | — | | | — | | | (306,395) | | | — | | | (306,395) | | | — | | | — | | | — | | | (306,395) |
Net (loss) income |
| — | | | — | | | — | | | — | | | (2,960,487) | | | (2,960,487) | | | 18,255 | | | (9,807) | | | 3,473 | | | (2,948,566) |
Dividends and distributions |
| — | | | — | | | — | | | — | | | — | | | — | | | — | | | (12,000) | | | — | | | (12,000) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 |
| 16,052,617 |
| $ | 160,526 |
| $ | 49,645,426 |
| $ | (3,298,752) |
| $ | (22,259,474) |
| $ | 24,247,726 |
| $ | (206,128) |
| $ | 167,977 |
| $ | 886,028 |
| $ | 25,095,603 |
5
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | |||||||||||||||||||||||||||
|
| Common Stock | | | | | | | | | | | | |
| Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | | Accumulated | | Shareholders’ | | | Hanover Square | | | Parkway | | | Operating | | |
| ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property |
| | Property |
| | Partnership |
| | Total Equity | |||
Balance, April 1, 2022 | | 17,114,215 | | $ | 171,142 | | $ | 50,769,941 | | $ | (3,350,946) | | $ | (26,287,080) | | $ | 21,303,057 | | $ | 136,284 | | $ | 499,602 | | $ | 872,673 | | $ | 22,811,616 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Common stock issuances | | 325,732 | | $ | 3,257 | | $ | 347,056 | | $ | — | | $ | — | | $ | 350,313 | | $ | — | | $ | — | | $ | — | | $ | 350,313 |
Net (loss) income |
| — | | | — | | | — | | | — | | | (1,014,887) | | | (1,014,887) | | | 7,272 | | | 4,052 | | | (4,376) | | | (1,007,939) |
Dividends and distributions | | — | | | — | | | — | | | — | | | (348,799) | | | (348,799) | | | (6,400) | | | (28,800) | | | (4,270) | | | (388,269) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2022 |
| 17,439,947 |
| $ | 174,399 |
| $ | 51,116,997 |
| $ | (3,350,946) |
| $ | (27,650,766) |
| $ | 20,289,684 |
| $ | 137,156 |
| $ | 474,854 |
| $ | 864,027 |
| $ | 21,765,721 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended June 30, 2021 | |||||||||||||||||||||||||||
|
| Common Stock | | | | | | | | | | | | |
| Noncontrolling Interests | | | | ||||||||||
| | | | | | | Additional | | | Offering | | | Accumulated | | Shareholders’ | | | Hampton Inn | | | Hanover Square | | | Operating | | |
| ||
| | Shares |
| Par Value |
| Paid in Capital |
|
| Costs |
| Deficit |
| | Equity |
| | Property | | | Property |
| | Partnership |
| | Total Equity | |||
Balance, April 1, 2021 | | 6,945,476 | | $ | 69,455 | | $ | 37,316,977 | | $ | (3,058,559) | | $ | (21,576,511) | | $ | 12,751,362 | | $ | (249,621) | | $ | 170,764 | | $ | 884,595 | | $ | 13,557,100 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Common stock issuances | | 8,000,000 | | $ | 80,000 | | $ | 11,080,000 | | $ | — | | $ | — | | $ | 11,160,000 | | $ | — | | $ | — | | $ | — | | $ | 11,160,000 |
Conversion of convertible debentures |
| 1,107,141 | | | 11,071 | | | 1,248,449 | | | — | | | — | | | 1,259,520 | | | — | | | — | | | — | | | 1,259,520 |
Offering costs |
| — | | | — | | | — | | | (240,193) | | | — | | | (240,193) | | | — | | | — | | | — | | | (240,193) |
Net (loss) income |
| — | | | — | | | — | | | — | | | (682,963) | | | (682,963) | | | 43,493 | | | (2,787) | | | 1,433 | | | (640,824) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 |
| 16,052,617 |
| $ | 160,526 |
| $ | 49,645,426 |
| $ | (3,298,752) |
| $ | (22,259,474) |
| $ | 24,247,726 |
| $ | (206,128) |
| $ | 167,977 |
| $ | 886,028 |
| $ | 25,095,603 |
See notes to condensed consolidated financial statements
65
Medalist Diversified REIT, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| | | | | | | | | | | | |
| | Six months ended June 30, | | Three months ended March 31, | ||||||||
|
| 2022 |
| 2021 |
| 2023 |
| 2022 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | |
| | | | | | | | | | | | |
Net Loss | | $ | (1,988,322) | | $ | (2,948,566) | | $ | (1,233,806) | | $ | (980,383) |
| | | | | | | | | | | | |
Adjustments to reconcile consolidated net loss to net cash flows from operating activities | |
| | |
| | |
| | |
| |
Depreciation | |
| 1,564,144 | |
| 1,003,534 | |
| 911,481 | |
| 771,560 |
Amortization | |
| 713,508 | |
| 420,076 | |
| 244,867 | |
| 383,637 |
Loan cost amortization | |
| 53,617 | |
| 60,588 | |
| 26,990 | |
| 28,118 |
Mandatorily redeemable preferred stock issuance cost and discount amortization | | 109,027 | | | 99,979 | | | 58,804 | | | 53,923 | |
Convertible debenture issuance cost, discount and beneficial conversion feature amortization | | — | | | 1,718,487 | |||||||
Above (below) market lease amortization, net | |
| (64,251) | |
| 3,618 | |
| (73,018) | |
| (26,034) |
Bad debt expense | | 12,946 | | | 3,196 | | | 27,122 | | | 12,783 | |
Note payable forgiveness | | — | | | (176,300) | |||||||
Share-based compensation | | 233,100 | | | 149,981 | | | — | | | 233,100 | |
Impairment of assets held for sale | |
| 175,671 | |
| — | |
| — | |
| 175,671 |
Loss on impairment | | 36,670 | | | — | | | 36,743 | | | 36,670 | |
Loss on extinguishment of debt | | 169,675 | | | — | |||||||
| | | | | | | | | | | | |
Changes in assets and liabilities | |
| | |
| | |
| | |
| |
Rent and other receivables, net | |
| 169,139 | |
| 67,645 | |
| 84,476 | |
| 109,000 |
Unbilled rent | |
| (58,375) | |
| (143,283) | |
| (48,899) | |
| (14,846) |
Other assets | |
| (199,905) | |
| 87,897 | |
| 66,796 | |
| (128,599) |
Accounts payable and accrued liabilities | |
| 647,128 | |
| 647,341 | |
| 349,168 | |
| 38,263 |
Net cash flows from operating activities | |
| 1,573,772 | |
| 994,193 | |
| 450,724 | |
| 692,863 |
| | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Investment property acquisitions | |
| (10,279,714) | |
| (10,205,385) | ||||||
Capital expenditures | | | (492,704) | | | (72,852) | | | (647,690) | | | (366,059) |
Net cash flows from investing activities | |
| (10,772,418) | |
| (10,278,237) | |
| (647,690) | |
| (366,059) |
| | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
| |
|
| |
|
|
| | | | | | | | | | | | |
Dividends and distributions paid | |
| (729,790) | |
| (12,000) | |
| (178,945) | |
| (341,521) |
Repayment of line of credit, short term | | — | | | (325,000) | |||||||
Proceeds from mortgages payable, net | | 18,477,304 | | | 6,421,870 | |||||||
Repayment of mortgages payable | | (11,407,226) | | | (266,270) | | | (301,577) | | | (192,257) | |
Proceeds from sale of convertible debentures, net of capitalized offering costs | |
| — | |
| 1,305,000 | ||||||
Proceeds from sales of common stock, net of capitalized offering costs | | 1,538,887 | | | 10,853,605 | | | — | | | 1,188,574 | |
Repurchases of common stock, including costs and fees | |
| (286,543) | |
| — | |
| — | |
| (286,543) |
Net cash flows from financing activities | |
| 7,592,632 | |
| 17,977,205 | |
| (480,522) | |
| 368,253 |
| | | | | | | | | | | | |
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | |
| (1,606,014) | |
| 8,693,161 | |
| (677,488) | |
| 695,057 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | |
| 7,383,977 | |
| 5,096,928 | |
| 5,662,853 | |
| 7,383,977 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | | $ | 5,777,963 | | $ | 13,790,089 | | $ | 4,985,365 | | $ | 8,079,034 |
| | | | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of period, shown in condensed consolidated balance sheets | | 2,480,925 | | | 10,868,459 | | | 3,048,100 | | | 4,629,945 | |
RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits, end of period, shown in condensed consolidated balance sheets | | | 3,297,038 | | | 2,921,630 | | | 1,937,265 | | | 3,449,089 |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the condensed consolidated statements of cash flows | | $ | 5,777,963 | | $ | 13,790,089 | | $ | 4,985,365 | | $ | 8,079,034 |
| | | | | | | | | | | | |
Supplemental Disclosures and Non-Cash Activities: | |
| | |
| | |
| | |
| |
| | | | | | | | | | | | |
Other cash transactions: | |
|
| |
|
| |
|
| |
|
|
Interest paid | | $ | 1,515,037 | | $ | 1,779,775 | | $ | 796,268 | | $ | 682,456 |
| | | | | | | | | | | | |
Non-cash transactions: | |
|
| |
|
| ||||||
Conversion of convertible debentures and accrued interest to common stock | | $ | — | | $ | 5,058,788 | ||||||
Transfer of investment properties, net to assets held for sale, net | | — | | | 9,683,555 | |||||||
Transfer of mortgages payable, net to mortgages payable associated with assets held for sale, net | | — | | | 7,592,931 |
See notes to condensed consolidated financial statements
76
Medalist Diversified REIT, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation and Consolidation
Medalist Diversified Real Estate Investment Trust, Inc. (the “REIT”) is a Maryland corporation formed on September 28, 2015. Beginning with the taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes. The REIT serves as the general partner of Medalist Diversified Holdings, LP (the “Operating Partnership”) which was formed as a Delaware limited partnership on September 29, 2015. As of June 30, 2022,March 31, 2023, the REIT, through the Operating Partnership, owned and operated nineeight properties, including the Shops at Franklin Square, a 134,239 square foot retail property located in Gastonia, North Carolina (the “Franklin Square Property”), the Shops at Hanover Square North, a 73,440 square foot retail property located in Mechanicsville, Virginia (the “Hanover Square Property”), the Ashley Plaza Shopping Center, a 164,012 square foot retail property located in Goldsboro, North Carolina (the “Ashley Plaza Property”), 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, a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina (the “Brookfield Center Property”), the Lancer Center, a 181,590 square foot retail property located in Lancaster, South Carolina (the “Lancer Center Property”), the Greenbrier Business Center, an 89,280 square foot mixed-use industrial/office property located in Chesapeake, Virginia (the “Greenbrier Business Center Property "), the Parkway Property, a 64,109 square foot mixed-use industrial office property located in Virginia Beach, Virginia (the "Parkway Property") and the Salisbury Marketplace Shopping Center, a 79,732 square foot retail property located in Salisbury, North Carolina (the “Salisbury Marketplace Property”). The Company owns 84 percent84% of the Hanover Square Property as a tenant in common with a noncontrolling owner which owns the remaining 16 percent16% interest and 82 percent82% of the Parkway Property as a tenant in common with a noncontrolling owner which owns the remaining 18 percent18% interest.
7
The use of the word “Company” refers to the REIT and its condensed consolidated subsidiaries, except where the context otherwise requires. The Company includes the REIT, the Operating Partnership, wholly owned limited liability corporationscompanies which own or operate the properties the taxable REIT subsidiary which operates the Clemson Best Western Property, and, for the periods presented prior to December 31, 2021,September 30, 2022, the taxable REIT subsidiary which formerly operated the HamptonClemson Best Western University Inn, Property.a hotel with 148 rooms on 5.92 acres in Clemson, South Carolina (“the Clemson Best Western Property”), which the Company sold on September 29, 2022. As a REIT, certain tax laws limit
8
the amount of “non-qualifying” income that Company can earn, including income derived directly from the operation of hotels. As a result, the Company leasesleased its condensed consolidated hotel property to a taxable REIT subsidiary (“TRS”) for federal income tax purposes. The Company’s TRS subsidiary iswas subject to income tax and iswas not limited as to the amount of nonqualifying income it cancould generate, but the Company’s TRS subsidiary iswas limited in terms of its value as a percentage of the total value of the Company’s assets. The Company’s TRS subsidiary entersentered into agreementsan agreement with a third party to manage the operations of the hotel. The Company prepared the accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). References to the condensed consolidated financial statements and references to individual financial statements included herein, reference the condensed consolidated financial statements or the respective individual financial statement. All material balances and transactions between the condensed 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 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 discretion of Medalist Fund Manager, Inc. (the “Manager”).
The Company is externally managed by Medalist Fund Manager, Inc. (the “Manager”).the Manager. The Manager makes all investment decisions for the Company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees the Company’s overall business and affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment decisions. The Company’s stockholders are not involved in its day-to-day affairs.
2. Summary of Significant Accounting Policies
Investment Properties
The Company has adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. As a result, all of the Company’s acquisitions to date qualified as asset acquisitions and the Company expects future acquisitions of operating properties to qualify as asset acquisitions. Accordingly, third-party transaction costs associated with these acquisitions have been and will be capitalized, while internal acquisition costs will continue to be expensed.
Accounting Standards Codification (“ASC”) 805 mandates that “an acquiring entity shall allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition.” ASC 805 results in an allocation of acquisition costs to both tangible and intangible assets associated with income producing real estate. Tangible assets include land, buildings, site improvements, tenant improvements and furniture, fixtures and equipment, while intangible assets include the value of in-place leases, lease origination costs (leasing commissions and tenant improvements), legal and marketing costs and leasehold assets and liabilities (above or below market leases), among others.
The Company uses independent, third partythird-party consultants to assist management with its ASC 805 evaluations. The Company determines fair value based on accepted valuation methodologies including the cost, market, and income capitalization approaches. The purchase price is allocated to the tangible and intangible assets identified in the evaluation.
8
The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 54 to 42 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducementsCapitalized leasing commissions and tenant improvements incurred and paid by the Company subsequent to the acquisition of the investment property are amortized utilizing the straight-line method over the term of the related lease. Amounts allocated to buildings are depreciated over the estimated remaining life of the acquired building or related improvements.
9
Acquisition and closing costs are capitalized as part of each tangible asset on a pro rata basis. Improvements and major repairs and maintenance are capitalized when the repair and maintenance substantially extend the useful life, increases capacity or improves the efficiency of the asset. All other repair and maintenance costs are expensed as incurred.
The Company reviews investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable, but at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. The Company measures any impairment of investment property when the estimated undiscounted cash flows plus its residual value, is less than the carrying value of the property. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as projected future operating income, estimated capitalization rates, or multiples, leasing prospects and local market information. The Company may decide to sell properties that are held for use and the sale prices of these properties may differ from their carrying values.
Other than the tenant-specific losses on impairment and the impairment of assets held for sale described below, the Company did not record any impairment adjustments to its investment properties resulting from events or changes in circumstances during the three and six months ended June 30,March 31, 2023 and 2022, or 2021, that would result in the projected value being below the carrying value of the Company’s properties. During the six months ended June 30, 2022, 2 tenants defaulted on their leases and abandoned their premises. The Company determined that the carrying value of certain intangible assets and liabilities associated with these leases that were recorded as part of the purchase of the these properties should be written off. As a result, the Company recorded a loss on impairment of $36,670 for the six months ended June 30, 2022. NaN such tenant-related loss on impairment was recorded during the three months ended June 30, 2022, or during the three and six months ended June 30, 2021.
Assets Held for Sale
The Company may decide to sell properties that are held as investment properties. The accounting treatment for the disposal of long-lived assets is covered by ASC 360. Under this guidance, the Company records the assets associated with these properties, and any associated mortgages payable, as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. Delays in the time required to complete a sale do not preclude a long-lived asset from continuing to be classified as held for sale beyond the initial one yearone-year period if the delay is caused by events or circumstances beyond an entity’s control and there is sufficient evidence that the entity remains committed to a qualifying plan to sell the long-lived asset.
Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell, an impairment charge is recognized. The Company determines fair value based on the three-level valuation hierarchy for fair value measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
During February 2021, the Company committed to a plan for the sale of an asset group associated with the Clemson Best Western Hotel Property that includesincluded the land, site improvements, building, building improvements and furniture, fixtures and equipment. As of March 31, 2021, the Company recorded this asset group, and the associated mortgage payable, as held for sale. As of March 31, 2021, the date the Company originally recorded this asset group as held for sale, the Company determined that the fair value of the Clemson Best Western Property exceeded the carrying value of its asset group, and the Company did not record impairment of assets held for sale associated with this asset group.
During subsequent periods since the asset group associated with the Clemson Best Western Property werewas initially classified as held for sale, the Company has continued to follow its disposal plan. Under ASC 360, during subsequent reporting periods after the asset group is classified as held for sale, it is necessary to evaluate the amounts previously used for the estimated fair value of the asset group. Up to and including the reporting periods ending December 31, 2021, the Company reviewed and reassessed the estimated fair value of the asset group and believed that the fair value, less estimated costs to sell, exceeds the Company’s carrying cost in the property.
9
Accordingly, the Company did not record impairment of assets held for sale related to the Clemson Best Western Property for the year ended December 31, 2021.
As of March 31, 2022, the Company determined that the carrying value of the asset group associated with the Clemson Best Western Hotel Property exceeded its fair value, less estimated costs to sell, and recorded impairment of assets held for sale of $175,671
10
on its condensed consolidated statement of operations for the sixthree months ended June 30,March 31, 2022. NaNNo such impairment of assets held for sale was recorded during the three months ended June 30,March 31, 2023.
On September 29, 2022, or during the three and six months ended June 30, 2021.
The Company originally classifiedclosed on the asset group associated withsale of the Clemson Best Western Hotel Property as held for sale during the three months ended March 31, 2021. Under ASC 360, forto an asset group to qualify as held for sale, the sale of the asset group must be probable and the transfer of the asset group must be expected to qualify for recognition as a completed sale within one year. However, there may be events or circumstances beyond a reporting entity’s control that extend the period required to complete the sale of an asset group that qualify for an exception to the one-year rule under ASC 360-10-4-11. The Company believes that the asset group associated with the Clemson Best Western Hotel Property qualifies for an exception to this one-year rule because the delays in completing the sale have been beyond the Company’s control, and the Company remains committed to its plan to sell the Clemson Best Western Hotel Property. Accordingly, the Company has continued to record the Clemson Best Western Hotel Property as held for sale, as of June 30, 2022.
unaffiliated purchaser. See Note 3 for additional details on impairment of assets held for sale as of June 30, 2022 and 2021.details.
Intangible Assets and Liabilities, net
The Company determines, through the ASC 805 evaluation, the above and below market lease intangibles upon acquiring a property. Intangible assets (or liabilities) such as above or below-market leases and in-place lease value are recorded at fair value and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the underlying leases. The analysis is conducted on a lease-by-lease basis.
The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable, but at least annually. During the sixthree months ended June 30,March 31, 2023, a tenant defaulted on its lease and abandoned its premises. The Company determined that the carrying value of the intangible assets and liabilities, net, associated with this lease of $35,551 that were recorded as part of the purchase of this property should be written off. This amount is included in the loss on impairment reported on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2023. During the three months ended March 31, 2022, 2two tenants defaulted on their leases and abandoned their premises. The Company determined that the bookcarrying value of the intangible assets and liabilities, net, associated with these leases of $36,670 that were recorded as part of the purchase of these properties should be written off. This amount is included in the loss on impairment reported on the Company’s condensed consolidated statement of operations for the six months ended June 30, 2022. NaN such loss on impairment was recorded for the three months ended June 30, 2022 or for the three and six months ended June 30, 2021.March 31, 2022.
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:
| | | | | | | | | | | | | | |
| | | June 30, | | | |
| | | March 31, 2023 | | | |
|
| | | 2022 | | | | |
| (unaudited) |
| December 31, 2022 |
| ||
|
| (unaudited) |
| December 31, 2021 |
| |||||||||
Intangible Assets | | | | | | | | |||||||
Intangible Assets, net | | | | | | | | |||||||
Leasing commissions | | $ | 1,259,267 | | $ | 1,153,736 | | | $ | 1,074,551 | | $ | 1,135,421 | |
Legal and marketing costs | |
| 205,730 | |
| 163,019 | | |
| 150,957 | |
| 169,437 | |
Above market leases | |
| 273,235 | |
| 360,509 | | |
| 175,839 | |
| 209,860 | |
Net leasehold asset | |
| 2,685,917 | |
| 2,523,128 | | |
| 2,048,253 | |
| 2,233,988 | |
| | $ | 4,424,149 | | $ | 4,200,392 | | | $ | 3,449,600 | | $ | 3,748,706 | |
| | | | | | | | | | | | | | |
Intangible Liabilities | |
| | |
| | | |||||||
Intangible Liabilities, net | |
| | |
| | | |||||||
Below market leases | | $ | (2,459,960) | | $ | (1,880,612) | | | $ | (2,133,752) | | $ | (2,234,113) | |
Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases. Adjustments to rental revenue related to the above and below market leases during the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively, were as follows:
1110
| | | | | | | | | | | | | | | | | | | | |
| | For the three months ended |
| For the six months ended |
| | For the three months ended |
| ||||||||||||
| | June 30, | | June 30, | | | March 31, | | ||||||||||||
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | | 2023 | | | 2022 | |
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
| ||||||
Amortization of above market leases | | $ | (55,943) | | $ | (59,984) | | $ | (125,526) | | $ | (113,597) | | | $ | (27,343) | | $ | (69,583) | |
Amortization of below market leases | |
| 94,160 | |
| 59,603 | |
| 189,777 | |
| 109,979 | | |
| 100,361 | |
| 95,617 | |
| | $ | 38,217 | | $ | (381) | | $ | 64,251 | | $ | (3,618) | | | $ | 73,018 | | $ | 26,034 | |
Amortization of lease origination costs, leases in place and legal and marketing costs represent a component of depreciation and amortization expense. Amortization related to these intangible assets during the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | For the three months ended |
| For the six months ended |
| | For the three months ended |
| ||||||||||||
| | June 30, | | June 30, | | | March 31, | | ||||||||||||
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | | | | 2023 | | | 2022 | |
|
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
|
| (unaudited) |
| (unaudited) |
| ||||||
Leasing commissions | | $ | (59,417) | | $ | (48,430) | | $ | (122,449) | | $ | (91,675) | | | $ | (56,618) | | $ | (63,032) | |
Legal and marketing costs | |
| (14,908) | |
| (7,588) | |
| (29,467) | |
| (13,882) | | |
| (16,205) | |
| (14,559) | |
Net leasehold asset | |
| (255,546) | |
| (165,599) | |
| (561,592) | |
| (314,519) | | |
| (172,044) | |
| (306,046) | |
| | $ | (329,871) | | $ | (221,617) | | $ | (713,508) | | $ | (420,076) | | | $ | (244,867) | | $ | (383,637) | |
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’s accumulated amortization of lease origination costs, leases in place and legal and marketing costs totaled $1,990,568$2,148,257 and $2,779,370,$2,198,049, respectively. During the three and six months ended June 30,March 31, 2023 and 2022, the Company wrote off $1,010,414$273,252 and $1,497,199,$486,785, respectively, in accumulated amortization related to fully amortized intangible assets and $0$21,407 and $5,108, respectively, in accumulated amortization related to the write off of intangible assets related to the tenant defaults, discussed above.
Future amortization of above and below market leases, lease origination costs, leases in place, legal and marketing costs and tenant relationships is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | For the | | | | | | | | | | | | | | | | | | |
| | For the | | | | | | | | | | | | | | | | | | |
| | | remaining six | | | | | | | | | | | | | | | | | | | | | remaining nine | | | | | | | | | | | | | | | | | | |
| | | months ending | | | | | | | | | | | | | | | | | | | | | months ending | | | | | | | | | | | | | | | | | | |
| | | December 31, | | | | | | | | | | | | | | | | | | | | | December 31, | | | | | | | | | | | | | | | | | | |
| | 2022 |
| 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027-2041 |
| Total | | 2023 |
| 2024 |
| 2025 |
| 2026 |
| 2027 |
| 2028-2042 |
| Total | ||||||||||||||
Intangible Assets |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Leasing commissions | | $ | 123,846 | | $ | 219,221 | | $ | 173,352 | | $ | 145,550 | | $ | 107,312 | | $ | 489,986 | | $ | 1,259,267 | | $ | 160,102 | | $ | 171,601 | | $ | 145,550 | | $ | 107,312 | | $ | 88,394 | | $ | 401,592 | | $ | 1,074,551 |
Legal and marketing costs | |
| 36,293 | |
| 61,506 | |
| 39,837 | |
| 24,004 | |
| 13,160 | |
| 30,930 | |
| 205,730 | |
| 43,963 | |
| 38,900 | |
| 24,004 | |
| 13,160 | |
| 7,917 | |
| 23,013 | |
| 150,957 |
Above market leases | |
| 63,375 | |
| 97,960 | |
| 45,608 | |
| 21,526 | |
| 15,629 | |
| 29,137 | |
| 273,235 | |
| 66,689 | |
| 42,858 | |
| 21,526 | |
| 15,629 | |
| 14,543 | |
| 14,594 | |
| 175,839 |
Net leasehold asset | |
| 451,927 | |
| 623,930 | |
| 400,511 | |
| 295,851 | |
| 199,466 | |
| 714,232 | |
| 2,685,917 | |
| 443,833 | |
| 394,874 | |
| 295,851 | |
| 199,466 | |
| 153,142 | |
| 561,087 | |
| 2,048,253 |
| | $ | 675,441 | | $ | 1,002,617 | | $ | 659,308 | | $ | 486,931 | | $ | 335,567 | | $ | 1,264,285 | | $ | 4,424,149 | | $ | 714,587 | | $ | 648,233 | | $ | 486,931 | | $ | 335,567 | | $ | 263,996 | | $ | 1,000,286 | | $ | 3,449,600 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible Liabilities | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Below market leases, net | | $ | (225,849) | | $ | (368,802) | | $ | (285,892) | | $ | (213,348) | | $ | (178,776) | | $ | (1,187,293) | | $ | (2,459,960) | | $ | (268,441) | | $ | (285,892) | | $ | (213,348) | | $ | (178,776) | | $ | (161,866) | | $ | (1,025,429) | | $ | (2,133,752) |
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.
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The Company believes that its properties are currently in material compliance with applicable environmental, as well as non-environmental, statutory and regulatory requirements. The Company did not record any conditional asset retirement obligation liabilities during the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively.
11
Cash and Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank operating accounts and money markets. Financial instruments that potentially subject the Company to concentrations of credit risk include its cash and equivalents and its trade accounts receivable.
The Company places its cash and cash equivalents and any restricted cash held by the Company on deposit with financial institutions in the United States which are insured by the Federal Deposit Insurance Company ("FDIC") up to $250,000. The Company's credit loss in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amounts on deposit. Management monitors the financial institutions credit worthiness in conjunction with balances on deposit to minimize risk. As of June 30, 2022,March 31, 2023, the Company held threeone cash accountsaccount at a financial institution with an aggregatea balance that exceeded the FDIC limit by $321,368.$1,404,374. As of December 31, 2021,2022, the Company held fivetwo cash accounts at a single financial institution with an aggregate balancecombined balances that exceeded the FDIC limit by $2,377,633.$2,613,789.
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 June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company reported $264,376$283,646 and $222,265,$267,854, respectively, in security deposits held as restricted cash.
Escrow deposits are restricted cash balances held by lenders for real estate taxes, insurance and other operating reserves. As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company reported $2,127,313$736,865 and $1,523,837,$579,785, respectively, in escrow deposits.
Capital reserves are restricted cash balances held by lenders for capital improvements, leasing commissions furniture, fixtures and equipment, and tenant improvements. As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company reported $905,349$916,754 and $1,267,470,$893,078, respectively, in capital property reserves.
| | | | | | | | |||||||
| | June 30, 2022 | | December 31, | | | | | | | | | ||
|
| (unaudited) | | 2021 |
| | March 31, 2023 | | December 31, | | ||||
Property and Purpose of Reserve | | | | | | | |
| (unaudited) |
| 2022 | | ||
Clemson Best Western Property - improvements | | $ | 50,014 | | $ | 50,012 | | |||||||
Clemson Best Western Property - furniture, fixtures and equipment | |
| 550 | |
| 275,109 | | |||||||
| | | | | | | | |||||||
Franklin Square Property - leasing costs | |
| 740,272 | |
| 700,000 | | | $ | 858,509 | | $ | 845,765 | |
Brookfield Center Property - maintenance reserve | |
| 114,513 | |
| 92,349 | | |||||||
Greenbrier Business Center - capital reserve | |
| — | |
| 150,000 | | |||||||
Brookfield Center Property - maintenance and leasing cost reserve | |
| 58,245 | |
| 47,313 | | |||||||
Total | | $ | 905,349 | | $ | 1,267,470 | | | $ | 916,754 | | $ | 893,078 | |
Share Retirement
ASC 505-30-30-8 provides guidance on accounting for share retirement and establishes two alternative methods for accounting for the repurchase price paid in excess of par value. The Company has elected the method by which the excess between par value and the repurchase price, including costs and fees, is recorded to additional paid in capital on the Company’s condensed consolidated balance sheets. During the sixthree months ended June 30,March 31, 2022, the Company repurchased 268,070 shares of its common stock at a total cost of $278,277 at an average price of $1.038 per common share. The Company incurred fees of $8,266 associated with these transactions. Of the total repurchase price, $2,681 was recorded to common stock and the difference, $283,862, was recorded to additional paid in capital on the Company’s condensed consolidated balance sheet. NaNNo such amounts were recorded during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021.March 31, 2023.
1312
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 condensed consolidated balance sheets. As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company reported $930,697$1,069,860 and $872,322,$1,022,153, respectively, in unbilled rent. During the three months ended March 31, 2023, the Company recorded a loss on impairment of $1,192 related to previously recognized straight-line rent related to a defaulting tenant’s lease. No such loss on impairment related to straight-line rent was recorded during the three months ended March 31, 2022.
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 condensed consolidated statements of operations under the captions "Retail center property revenues” and “Flex center property tenant revenues.” (See Recent Accounting Pronouncements, below.) This significantly reduces the Company’s exposure to increases in costs and operating 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. Since these differences are determined annually under the leases and accrued as of December 31 in the year earned, 0no such revenues were recognized during the three and six months ended June 30, 2022 or 2021.March 31, 2023 and 2022.
The Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets. During the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively, 0no such termination feescosts were recognized.
Hotel Property Revenues
Hotel revenues from the Clemson Best Western Property (and for prior year periods, the Hampton Inn Property) arewere 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 arewere recognized as earned, which is as rooms are occupied or otherwise reserved for use by the University. The Clemson University occupancy agreement ended on May 15, 2022 and the Company sold the Clemson Best Western Property on September 29, 2022.
The Clemson Best Western Property (and for prior year periods, the Hampton Inn Property) iswas 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 Clemson Best Western Property hashad a legal obligation to act as a collection agent. The Clemson Best Western Property doesdid not retain these taxes and fees; therefore, they arewere not included in revenues. The Clemson Best Western Property recordsrecorded a liability when the amounts arewere collected and relievesrelieved the liability when payments arewere made to the applicable taxing authority or other appropriate governmental agency.
Hotel Property Operating Expenses
All personnel of the Clemson Best Western Property (and in prior year periods, the Hampton Inn Property) arewere 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 reimbursereimbursed 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 Clemson Best Western Property,its behalf. The total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the three and six months ended June 30,March 31, 2023 and 2022 were $139,876 and $271,815, respectively, and for the three and six months ended June 30, 2021 were $116,965 and $220,518, respectively. For the Hampton Inn Property, which the Company sold on August 31, 2021, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the three and six months ended June 30, 2022 were $0 and $0, respectively, and for the three and six months ended June 30, 2021 were $207,663 and $372,090,$131,939, respectively.
Rent and other receivables
1413
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 June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company’s allowance for uncollectible rent totaled $18,219$62,960 and $13,010,$47,109, respectively, which are 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 June 30, 2022March 31, 2023 and December 31, 2021,2022, 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 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. If the Company fails to qualify as a REIT, it will be subject to tax at regular corporate rates for the years in which it fails to qualify. If the Company loses its REIT status it could not elect to be taxed as a REIT for five years unless the Company’s failure to qualify was due to reasonable cause and certain other conditions were satisfied.
During the three and six months ended June 30,March 31, 2022, the Company's Clemson Best Western TRS entity generated a taxable loss, so 0 income tax expense was recorded. During the three and six months ended June 30, 2021, the Company's Clemson Best Western TRS entity generated taxable income. However, theThe Company believesbelieved that the net operating loss carry forward from prior years willwould offset the taxable income for the three and six months ended June 30, 2021,March 31, 2022, so 0no income tax expense was recorded. During the three and six months ended June 30, 2021, the Company’s Hampton Inn TRS entity generated a tax loss, so 0 income tax expense was recorded. During the three and six months ended June 30, 2022,March 31, 2023, the Company no longer owned the Hampton InnClemson Best Western Hotel Property.
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 condensed 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 four elements of noncontrolling interests in the capital structure of the Company. The ownership interests not held by the REIT are considered noncontrolling interests. Accordingly,There are three elements of noncontrolling interests in the capital structure of the Company. These noncontrolling interests have been reported in equity on the condensed consolidated balance sheets but separate from the Company’s equity. On the condensed consolidated statements of operations, the subsidiaries are reported at the condensed consolidated amount, including both the amount attributable to the Company and noncontrolling interests. The Company’s condensed 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, which the Company and the noncontrolling owner sold on August 31, 2021. Prior to its sale, the Hampton Inn Property’s net income (loss) was allocated to the noncontrolling ownership interest based on its percent ownership. During the three and six months ended June 30, 2021, 22 percent of the Hampton Inn’s net income of $197,695 and $82,978, respectively, or $43,493 and $18,255, respectively was allocated to the noncontrolling partnership interest. No such allocation was necessary during the three and six months ended June 30, 2022 due to the sale of the property on August 31, 2021.
The second noncontrolling interest is in the Hanover Square Property in which the Company owns an 84 percent84% tenancy in common interest through its subsidiary and an outside party owns a 16 percent16% tenancy in common interest. The Hanover Square Property’s net income (loss)loss is allocated to the noncontrolling ownership interest based on its 16 percent16% ownership. During the three
15
and six months ended June 30, 2022, 16 percentMarch 31, 2023, 16% of the Hanover Square Property’s net incomeloss of $45,451 and $43,459, respectively,$7,755, or $7,272 and $6,953, respectively $1,241, was allocated to the noncontrolling ownership interest. During the three and six months ended June 30, 2021, 16 percentMarch 31, 2022, 16% of the Hanover Square Property’s net loss of $17,416 and $61,298, respectively,1,992, or $2,787 and $9,807, respectively,$319, was allocated to the noncontrolling ownership interest.
The thirdsecond noncontrolling interest is in the Parkway Property in which the Company owns an 82 percent82% tenancy in common interest through its subsidiary and an outside party owns an 18 percent18% tenancy in common interest. The Parkway Property's net (loss) income is
14
allocated to the noncontrolling ownership interest based on its 18 percent18% ownership. During the three and six months ended June 30, 2022, 18 percentMarch 31, 2023, 18% of the Parkway Property's net incomeloss of $22,513 and $79,137, respectively,$46,482, or $4,052 and $14,245, respectively$8,367, was allocated to the noncontrolling ownership interest. SinceDuring the Company did not ownthree months ended March 31, 2022, 18% of the Parkway Property duringProperty’s net income of $56,624, or $10,193, was allocated to the three and six months ended June 30, 2021, no such noncontrolling interest allocation was made during the three and six months ended June 30, 2021.ownership interest.
The fourththird noncontrolling ownership interest are the units in the Operating Partnership that are not held by the REIT. In 2017, 125,000 Operating Partnership units were issued to members of the selling LLClimited liability company which owned the Hampton Inn Property who elected to participate in a 721 exchange, which allows the exchange of interests in real property for shares in a real estate investment trust. These members of the selling LLClimited liability company invested $1,175,000 in the Operating Partnership in exchange for 125,000 Operating Partnership units. Additionally, as discussed above, effective on January 1, 2020, 93,850 Operating Partnership units were issued in exchange for approximately 3.45 percent3.45% of the noncontrolling owner’s tenant in common interest in the Hampton Inn Property. On August 31, 2020, a unitholder converted 5,319 Operating Partnership units into shares of Common Stock. As of June 30,March 31, 2023 and December 31, 2022, there were 213,531 Operating Partnership units outstanding.
The Operating Partnership units not held by the REIT represent 1.21 percent and 1.31 percent1.19% of the outstanding Operating Partnership units as of June 30, 2022March 31, 2023 and December 31, 2021, respectively.2022. The noncontrolling interest percentage is calculated at any point in time by dividing the number of units not owned by the Company by the total number of units outstanding. The noncontrolling interest ownership percentage will change as additional common or preferred shares are issued by the REIT, or additional Operating Partnerships units are issued or as units are exchanged for the Company’s $0.01 par value per share Common Stock. During periods when the Operating Partnership’s noncontrolling interest changes, the noncontrolling ownership interest is calculated based on the weighted average Operating Partnership noncontrolling ownership interest during that period. The Operating Partnership’s net loss is allocated to the noncontrolling unit holders based on their ownership interest.
During the three and six months ended June 30, 2022,March 31, 2023, a weighted average of 1.21 and 1.22 percent1.19% of the Operating Partnership’s net loss of $361,666 and $437,548, respectively,$243,989, or $4,376 and $5,349, respectively$2,903, was allocated to the noncontrolling unit holders. During the three and six months ended June 30, 2021,March 31, 2022, a weighted average of 1.181.28 and 1.91 percent, respectively,% of the Operating Partnership’s net incomeloss of $120,965 and $181,520, respectively, or $1,433$75,882, or $973, and $3,473, respectively,was allocated to the noncontrolling unit holders.
Recent Accounting Pronouncements
For each of the accounting pronouncements that affect the Company,Since its initial public offering, the Company has elected or plans to elect to follow the rule that allows companies engaging in an initial public offeringbe classified as an Emerging Growth Companyemerging growth company in its periodic reporting to followthe U.S. Securities and Exchange Commission (the “SEC”), and accordingly has followed the private company implementation dates.dates for new accounting pronouncements. Effective for the three months ending March 31, 2023, the Company will no longer be classified as an emerging growth company, but will retain its classification as a smaller reporting company and therefore follow implementation dates applicable to smaller reporting companies with respect to new accounting pronouncements. In addition, the Company has elected to follow scaled disclosure requirements applicable to smaller reporting companies.
Recently Adopted Accounting Pronouncements
Accounting for Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 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, must 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 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
16
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. Following those deferrals, ASU 2016-02 is nowbecame effective for private companies for fiscal years beginning after December 15, 2021, and for
15
interim periods within fiscal years beginning after December 15, 2022. The Company adopted the standard effective on January 1, 2022 using the modified retrospective approach within ASU 2018-11, which allows for the application date to be the beginning of the reporting period in which the entity first applies the new standard. The Company historically has not been and is not currently a “lessee” under any lease agreements, and thus did not have any arrangements requiring the recognition of lease assets or liabilities on its balance sheet.
As a “lessor”, the Company has active lease agreements with over 100 tenants across its portfolio of investment properties. On a prospective and retrospective basis, the accounting for those leases under ASU 2016-02 (ASC No. 842) is substantially unchanged from the previous guidance in ASC No. 840. However, upon the adoption of ASC No. 842, the Company has elected the practical expedient permitting lessors to elect by class of underlying asset to not separate non-lease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC No. 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. The Company assessed the criteria above with respect to our operating leases and determined that they qualify for the non-separation practical expedient. As a result, the Company has accounted for and presented the revenues from these leases, including tenant reimbursements, as a single line item on its condensed consolidated statements of operations for the three and six months ended June 30, 2022. Prior to the adoption of ASC No. 842, the Company separated lease relatedlease-related revenue from its retail center and flex center properties into two components. Fixed rental payments under its leases (recognized on a straight-line basis over the term of the underlying lease) were recorded as retail center property revenues and flex center property revenues. Variable payments made under the leases made by tenants for real estate taxes, insurance and common area maintenance (“CAM”) expenses were recorded as retail center and flex center tenant reimbursements. For comparability,With the adoption of ASC No. 842, the Company determined that its retail center and flex center operating leases qualify for the non-separation practical expedient based on the guidance. As a result, the Company has adjusted its comparative condensed consolidated statement of operationsaccounted for and presented the three and six months ended June 30, 2021, to conform to the 2022 financial statement presentation. The prior period operating lease income presented in retail center property revenues include $206,470 and $389,818 previously classified as retail center propertyfrom these leases, including tenant reimbursements, for the three and six months ended June 30, 2021, respectively, and $43,887 and $87,010 previously classified as flex center property tenant reimbursements for the three and six months ended June 30, 2021, respectively. These reclassifications had no effect on total revenues, net income, total assets, total liabilities or equity.
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 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 havea single line item on its condensed 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 datestatements of January 1, 2023, and does not expect it to have a material impact on its condensed consolidated financial statements.operations.
Effects of Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects ofReference 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
17
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 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 condensed 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, 2023.2022. Early adoption of the guidance is permitted, but no earlier than fiscal years beginning after December 15, 2020. As discussedThe updated guidance in Note 5, below, duringASU 2020-06 was adopted effective January 1, 2023, which did not have a material impact on the periodCompany’s condensed consolidated financial statements.
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 forward-looking information to better calculate credit loss estimates. The guidance applies to most financial assets measured at amortized cost and certain other instruments, such as accounts receivable and loans; however, it does not apply to receivables arising from October 2020 to January 2021,operating leases accounted for in accordance with ASC Topic 842. ASU 2016-13 requires that the Company issued debenturesestimate the lifetime expected credit loss with respect to applicable receivables and record allowances that, were convertible into shareswhen deducted from the balance of its common stock. Whilethe receivables, represent the net amounts expected to be collected. The Company is also 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 debentures werechanges. The Company’s credit losses primarily arise from tenant defaults on amounts due under operating leases. As noted, these losses are not subject to the accounting guidance in ASU 2016-13, and historically have not been significant. The Company adopted the update on the required effective date of January 1, 2023, which did not have a material impact on the Company’s condensed consolidated financial statements.
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Upcoming Accounting Pronouncements
Effects of Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects ofReference 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 convertible financial instruments, they were fully converted into common stock during the period from January to Maynew 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 no longer outstanding.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. Under ASU 2020-04, companies may generally elect to make use of the expedients and exceptions provided therein for any reference rate contract modifications that occur in reporting periods that encompass the timeline from March 12, 2020 to December 31, 2022. The FASB subsequently issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset of Topic 848, to extend that timeline from December 31, 2022 to December 31, 2024. The Company’s 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 evaluatereview the changesguidance in ASU 2020-04 and anticipates that it will use the expedients and exceptions provided therein with respect to the accounting guidance for convertible financial instruments set forthreplacement 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 2020-06 and2020-04 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.have a material impact on its condensed consolidated financial statements.
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 condensed 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 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. The Company’s condensed 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 condensed consolidated financial statements within the parameters set forth in the accounting guidance.
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3. Investment Properties
Investment properties consist of the following:
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | | December 31, |
| | | March 31, 2023 | | | December 31, | |
|
| | (unaudited) |
| | 2021 |
|
| | (unaudited) |
| | 2022 | |
Land | | $ | 16,526,436 | | $ | 14,142,555 | | | $ | 16,526,436 | | $ | 16,526,436 | |
Site improvements | |
| 4,706,876 | |
| 4,431,338 | | |
| 4,731,249 | |
| 4,719,926 | |
Buildings and improvements (1) | |
| 64,485,922 | |
| 57,322,242 | | |
| 65,209,769 | |
| 64,669,498 | |
Investment properties at cost (2) | |
| 85,719,234 | |
| 75,896,135 | | |
| 86,467,454 | |
| 85,915,860 | |
Less accumulated depreciation | |
| 7,659,889 | |
| 6,488,220 | | |
| 10,224,948 | |
| 9,400,908 | |
Investment properties, net | | $ | 78,059,345 | | $ | 69,407,915 | | | $ | 76,242,506 | | $ | 76,514,952 | |
(1) | Includes tenant improvements (both those acquired |
(2) | 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 $792,584 $911,481 and $1,564,144$771,560 for the three and six months ended June 30,March 31, 2023 and 2022, and $548,760 and $1,003,534 for the three and six months ended June 30, 2021, respectively.
Capitalized tenant improvements
The Company carries two categories of capitalized tenant improvements on its condensed consolidated balance sheets, both of which are recorded under investment properties, net, on the Company’s condensed consolidated balance sheets. The first category is the allocation of acquisition costs to tenant improvements that is recorded on the Company’s condensed 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 condensed consolidated balance sheets. Depreciation expense on both categories of tenant improvements is recorded as a component of depreciation expense on the Company’s condensed consolidated statement of operations.
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:
| | | | | | | | | | | | | | |
| | | June 30, | | | |
| | March 31, | | | | | |
| | | 2022 | | | December 31, | | | 2023 | | December 31, | | ||
|
| (unaudited) |
| 2021 |
|
| (unaudited) |
| 2022 | | ||||
Capitalized tenant improvements – acquisition cost allocation, net | | $ | 3,544,912 | | $ | 1,840,612 | | | $ | 2,996,990 | | $ | 3,178,534 | |
Capitalized tenant improvements incurred subsequent to acquisition, net | |
| 275,427 | |
| 257,340 | | |
| 683,836 | |
| 338,836 | |
During the three and six months ended June 30, 2022, the Company recorded $5,802 and $62,083, respectively, in capitalized tenant improvements. During the three and six months ended June 30, 2021, the Company recorded $10,700 and $55,850, respectively, in capitalized tenant improvements.
Depreciation of capitalized tenant improvements incurred subsequent to acquisition was $22,348 and $43,996 for the three and six months ended June 30, 2022, respectively and $15,090 and $26,859 for the three and six months ended June 30, 2021, respectively.
Depreciation of capitalized tenant improvements arising from the acquisition cost allocation was $129,174$172,888 and $256,450$127,276 for the three and six months ended June 30,March 31, 2023 and 2022, respectively. Additionally, the Company wrote off capitalized tenant improvements of $8,656 associated with the tenant that abandoned its premises during the three months ended March 31, 2023. No such write offs were recorded during the three months ended March 31, 2022.
During the three months ended March 31, 2023 and 2022, the Company recorded $377,265 and $56,281, respectively, in capitalized tenant improvements. Depreciation of capitalized tenant improvements incurred subsequent to acquisition was $32,265 and $81,393 and $143,960$21,648 for the three and six months ended June 30, 2021, respectively.March 31, 2023 and 2022, respectively.
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Capitalized leasing commissions
The Company carries two categories of capitalized leasing commissions on its condensed 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 condensed 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 condensed 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:
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | | December 31, |
| | March 31, 2023 | | December 31, | | ||
| | (unaudited) | | 2021 |
| | (unaudited) | | 2022 | | ||||
Capitalized leasing commissions, net |
| $ | 511,653 |
| $ | 356,327 | |
| $ | 614,663 |
| $ | 555,956 | |
During the three and six months ended June 30,March 31, 2023 and 2022, the Company recorded $120,842$90,637 and $199,763, respectively in capitalized leasing commissions. During the three and six months ended June 30, 2021, the Company recorded $24,685 and $24,685,$78,921, respectively, in capitalized leasing commissions. Depreciation of capitalized leasing commissions was $24,646 and $44,437 for the three and six months ended June 30, 2022, respectively. Depreciation on capitalized leasing commissions was $15,616$31,930 and $30,328$19,791 for the three and six months ended June 30, 2021,March 31, 2023 and 2022, respectively.
Assets held for saleSale of investment properties
The Company recordsreports properties as assetsthat have been either previously disposed or that are currently held for sale and any associated mortgages payable, net, as mortgages payable, net, associated with assets held for sale, onin continuing operations in the Company's condensed consolidated balance sheets when management has committed to a plan to sellstatements of operations if the disposition, or anticipated disposition, of the assets actively seeksdoes not represent a buyer forshift in the assets, and the consummationCompany's investment strategy. The Company's sale 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 includesdoes not constitute a change in 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. 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 March 31, 2021.
As discussed in Note 2, above, for an asset groupCompany's investment strategy, which continues to qualify as held for sale, the sale of the asset group must be probable and the transfer of the asset group must be expected to qualify for recognitioninclude limited-service hotels as a completed sale within one year. The Company believes that thetargeted asset group associated withclass.
Operating results of the Clemson Best Western Hotel Property, qualifies for an exception to this one-year rule because the delays in completing the sale have been beyond the Company’s control, and the Company remains committed to its plan to sell the Clemson Best Western Hotel Property. Accordingly, as of June 30, 2022, management believes that its plans to sell the Clemson Best Western Hotel Property continue to meet the criteria for the asset to be recorded an asset held for sale and, as of June 30, 2022, the assets held for salewhich was sold on the Company’s condensed consolidated balance sheets included certain assets associated with the Clemson Best Western Property. As of March 31, 2022, the Company determined that the carrying value of the asset group associated with the Clemson Best Western Hotel Property exceed its fair value, less estimated costs to sell, and recorded impairment of assets held for sale of $175,671 on its condensed consolidated statement of operations for the six months ended June 30, 2022. NaN such impairment of assets held for sale was recorded during the three months ended June 30, 2022 or during the three and six months ended June 30, 2021.
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| | | | | | | |
| | | June 30, 2022 | | | December 31, |
|
| | (unaudited) | | 2021 |
| ||
Investment properties, net |
| $ | 9,897,045 |
| $ | 9,846,208 | |
Total assets held for sale | | $ | 9,897,045 | | $ | 9,846,208 | |
As of June 30,September 29, 2022 and December 31, 2021, assets held for sale and liabilities associated with assets held for sale consisted of the following:which are included in continuing operations, are as follows:
| | | | | | | | | | | | | | |
| | | June 30, 2022 | | | December 31, |
|
| For the three months ended |
| ||||
| | (unaudited) | | 2021 |
| | March 31, | | ||||||
Mortgages payable, net |
| $ | 7,615,368 |
| $ | 7,615,368 | | |||||||
Total liabilities associated with assets held for sale | | $ | 7,615,368 | | $ | 7,615,368 | | |||||||
| | | 2023 | | | 2022 | | |||||||
|
| (unaudited) |
| (unaudited) |
| |||||||||
Hotel property room revenues | | $ | — | | $ | 762,200 | | |||||||
Hotel property other revenues | |
| — | |
| 3,289 | | |||||||
Total Revenue | | | — | | | 765,489 | | |||||||
Hotel property operating expenses | | | — | | | 372,860 | | |||||||
Impairment of assets held for sale | |
| — | |
| 175,671 | | |||||||
Total Operating Expenses | | | — | | | 548,531 | | |||||||
Operating Income | | | — | | | 216,958 | | |||||||
Interest expense | |
| — | |
| 138,917 | | |||||||
Net Income from Operations | | | — | | | 78,041 | | |||||||
Other income | |
| — | |
| 263 | | |||||||
Net Income | | | — | | | 78,304 | | |||||||
Net income attributable to Operating Partnership noncontrolling interests | |
| — | |
| 1,002 | | |||||||
Net Income Attributable to Medalist Common Shareholders | | $ | — | | $ | 77,302 | |
2022 Property Acquisitions
On June 13, 2022, the Company completed its acquisition of the Salisbury Marketplace Property, a 79,732 square foot retail property located in Salisbury, North Carolina, through a wholly owned subsidiary. The Salisbury Marketplace Property, built in 1986, was 89.9%91.2% leased as of June 30, 2022,March 31, 2023, and is anchored by Food Lion, Citi Trends and Family Dollar. The purchase price for the Salisbury Marketplace Property was $10,025,000 paid through a combination of cash provided by the Company and the incurrence of
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new mortgage debt. The Company’s total investment was $10,279,714. The Company incurred $254,714 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
| | | | | | | |
| | | Salisbury | | | | Salisbury |
| | | Marketplace | | | | Marketplace |
|
| | Property |
|
| | Property |
Fair value of assets acquired: | | | | | | | |
Investment property (a) | | $ | 9,963,258 | | | $ | 9,963,258 |
Lease intangibles and other assets (b) | | | 1,045,189 | | | | 1,045,189 |
Above market leases (b) | | | 40,392 | | | | 40,392 |
Below market leases (b) | | | (769,125) | | | | (769,125) |
Fair value of net assets acquired (c) | | $ | 10,279,714 | | | $ | 10,279,714 |
| | | | | | | |
Purchase consideration: | | | | | | | |
Consideration paid with cash (d) | | $ | 3,746,561 | | | $ | 3,746,561 |
Consideration paid with new mortgage debt, net (e) | |
| 6,533,153 | | |
| 6,533,153 |
Total consideration (f) | | $ | 10,279,714 | | | $ | 10,279,714 |
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 the total fair value of assets and liabilities acquired at closing. |
d. | 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. |
e. | Represents allocation of the Wells Fargo Mortgage Facility proceeds used to fund the purchase of the Salisbury Marketplace Property, net of $18,847 in |
2021 Property Acquisitions
On May 14, 2021, the Company completed its 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 June 30, 2022and 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 the Company for major repairs, paid through a combination of
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cash provided by the Company and the incurrence of new mortgage debt. The Company’s total investment, including $143,130 of loan issuance costs, was $10,205,385. The Company incurred $305,385 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
| | | | |
| | | Lancer | |
| | | Center | |
|
| | Property |
|
Fair value of assets acquired: | | | | |
Investment property (a) | | $ | 9,902,876 | |
Lease intangibles and other assets (b) | | | 1,023,753 | |
Above market leases (b) | | | 157,438 | |
Below market leases (b) | | | (878,682) | |
Fair value of net assets acquired (c) | | $ | 10,205,385 | |
| | | | |
Purchase consideration: | | | | |
Consideration paid with cash (d) | | $ | 3,783,515 | |
Consideration paid with new mortgage debt, net (e) | |
| 6,421,870 | |
Total consideration (f) | | $ | 10,205,385 | |
f. | 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 200,000 shares of 8.0% Series A cumulative redeemable 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, and is presented on the Company’s condensed consolidated balance sheets as mandatorily redeemable preferred stock.
The mandatorily redeemable preferred stock has an aggregate liquidation preference of $5 million, plus any accrued and unpaid dividends thereon. The mandatorily redeemable preferred stock is senior to the Company’s common stock and any class or series of capital stock expressly designated as ranking junior to the mandatorily redeemable preferred stock as to distribution rights and rights upon liquidation, dissolution or winding up (“Junior Stock”). The mandatorily redeemable preferred stock is on a parity with any class 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
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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 6six consecutive quarterly periods, the holders of that stock, voting together
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as a single class with the holders of any outstanding Parity Stock having similar voting rights, will be entitled to vote for the election of 2two additional directors to serve on the Company’s Board of Directors (the “Board”) until the Company pays all dividends owed on the mandatorily redeemable preferred stock. The affirmative vote of the holders of at least two-thirds of the outstanding shares of mandatorily redeemable preferred stock, voting together as a single class with the holders of any other class or series of the Company’s preferred stock upon which like voting rights have been conferred and are exercisable, is required for the Company to authorize, create or increase the number of shares of any class or series of capital stock expressly designated as ranking senior to the mandatorily redeemable preferred stock as to distribution rights and rights upon the Company’s liquidation, dissolution or winding up. In addition, the affirmative vote of at least two-thirds of the outstanding shares of mandatorily redeemable preferred stock (voting as a separate class) is required to amend the Company’s charter (including the articles supplementary designating the mandatorily redeemable preferred stock) in a manner that materially and adversely affects the rights of the holders of mandatorily redeemable preferred stock. Among other things, the Company may, without any vote of the holders of mandatorily redeemable preferred stock, issue additional shares of mandatorily redeemable preferred stock and may authorize and issue additional shares of any class or series of any Junior Stock or Parity Stock.
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 condensed 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 8 percent8% per annum, paid quarterly, as follows:
| | | | | | | | | | | | | | |
|
| |
| Amount |
| |
| |
| Amount |
| | ||
Payment Date | | Record Date | | per share | | For the period | | Record Date | | per share | | For the period | ||
April 27, 2020 | | April 24, 2020 | | $ | 0.37 |
| February 19, 2020 - April 27, 2020 | | April 24, 2020 | | $ | 0.37 |
| February 19, 2020 - April 27, 2020 |
July 24, 2020 | | July 22, 2020 | |
| 0.50 |
| April 28, 2020 - July 24, 2020 | | July 22, 2020 | |
| 0.50 |
| April 28, 2020 - July 24, 2020 |
October 26, 2020 | | October 23, 2020 | |
| 0.50 |
| July 25, 2020 - October 26, 2020 | | October 23, 2020 | |
| 0.50 |
| July 25, 2020 - October 26, 2020 |
February 1, 2021 | | January 29, 2021 | |
| 0.50 |
| October 27, 2020 - February 1, 2021 | | January 29, 2021 | |
| 0.50 |
| October 27, 2020 - February 1, 2021 |
April 30, 2021 | | April 26, 2021 | | | 0.50 | | February 2, 2021 – April 30, 2021 | | April 26, 2021 | | | 0.50 | | February 2, 2021 – April 30, 2021 |
July 26, 2021 | | July 12, 2021 | | | 0.50 | | May 1, 2021 - July 26, 2021 | | July 12, 2021 | | | 0.50 | | May 1, 2021 - July 26, 2021 |
October 27, 2021 | | October 25, 2021 | | | 0.50 | | July 27, 2021 – October 26, 2021 | | October 25, 2021 | | | 0.50 | | July 27, 2021 – October 26, 2021 |
January 20, 2022 | | January 13, 2022 | | | 0.50 | | October 27, 2021 – January 19, 2022 | | January 13, 2022 | | | 0.50 | | October 27, 2021 – January 19, 2022 |
April 21, 2022 | | April 18, 2022 | | | 0.50 | | January 20, 2022 - April 20, 2022 | | April 18, 2022 | | | 0.50 | | January 20, 2022 - April 20, 2022 |
July 21, 2022 | | July 18, 2022 | | | 0.50 | | April 21, 2022 - July 20, 2022 | | July 18, 2022 | | | 0.50 | | April 21, 2022 - July 20, 2022 |
October 20, 2022 | | October 17, 2022 | | | 0.50 | | July 21, 2022 - October 19, 2022 | |||||||
January 27, 2023 | | January 24, 2023 | | | 0.50 | | October 20, 2022 - January 19, 2023 | |||||||
April 28, 2023 | | April 25, 2023 | | | 0.50 | | January 20, 2023 - April 20, 2023 |
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, the Company recorded $70,004 and $70,004, respectively, in accrued but unpaid dividends on the mandatorily redeemable preferred stock. This amount is reported in accounts payable and accrued liabilities on the Company’s condensed consolidated balance sheets.
The mandatorily redeemable preferred stock was issued at $23.00 per share, a $2.00 per share discount. The total discount of $400,000 is being amortized over the five-year life of the shares using the effective interest method. Additionally, the Company incurred $739,118 in legal, accounting, other professional fees and underwriting discounts related to this offering. These costs were recorded as deferred financing costs on the accompanying condensed consolidated balance sheets as a direct deduction from the carrying amount of the mandatorily redeemable preferred stock liability and are being amortized using the effective interest method over the term of the agreement.
21
Amortization of the discount and deferred financing costs related to the mandatorily redeemable preferred stock totaling $55,104$58,804 and $109,027$53,923 were included in interest expense for the three and six months ended June 30,March 31, 2023 and 2022, respectively, and $50,530 and $99,979 were included in interest expense for the three and six months ended June 30, 2021, respectively, in the accompanying condensed consolidated statements of operations. Accumulated amortization of the discount and deferred financing costs was $475,785$648,443 and $366,758$589,639 as of June 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
23
5. Loans Payable
Mortgages Payable
The Company’s mortgages payables, net consists of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | June 30, | | | | | | | | | | | | | | March 31, | | | | |
| | Monthly | | Interest | | | | | 2022 | | | December 31, | | | Monthly | | Interest | | | | | 2023 | | | December 31, | | ||
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2021 |
|
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2022 | | ||||||
Franklin Square (a) |
| | Interest only |
| 3.808 | % | December 2031 | | $ | 13,250,000 | | $ | 13,250,000 | |
| | Interest only |
| 3.808 | % | December 2031 | | $ | 13,250,000 | | $ | 13,250,000 | |
Hanover Square (b) |
| $ | 56,882 |
| 4.25 | % | December 2027 | |
| 10,007,632 | |
| 10,134,667 | |
| $ | 78,098 |
| 6.94 | % | December 2027 | |
| 9,813,679 | |
| 9,877,867 | |
Ashley Plaza (c) | | $ | 52,795 |
| 3.75 | % | September 2029 | |
| 11,037,583 | |
| 11,127,111 | | | $ | 52,795 |
| 3.75 | % | September 2029 | |
| 10,856,618 | |
| 10,930,370 | |
Brookfield Center (d) | | $ | 22,876 | | 3.90 | % | November 2029 | | | 4,714,549 | | | 4,758,344 | | | $ | 22,876 | | 3.90 | % | November 2029 | | | 4,639,969 | | | 4,663,206 | |
Parkway Center (e) | | $ | 19,720 | | Variable | | October 2026 | | | 5,033,065 | | | 5,090,210 | | | $ | 28,161 | | Variable | | October 2026 | | | 4,956,301 | | | 4,992,427 | |
Wells Fargo Facility (f) | | $ | 103,438 | | 4.50 | % | June 2027 | | | 18,547,934 | | | — | | | $ | 103,438 | | 4.50 | % | June 2027 | | | 18,247,707 | | | 18,351,981 | |
Lancer Center (g) | | | | | | | | | | — | | | 6,488,034 | | ||||||||||||||
Greenbrier Business Center (h) | | | | | | | | |
| — | |
| 4,495,000 | | ||||||||||||||
Unamortized issuance costs, net | | | | | | | | | | (779,571) | | | (825,544) | | | | | | | | | | | (698,602) | | | (725,592) | |
Total mortgages payable, net | | | |
|
|
|
| | $ | 61,811,192 | | $ | 54,517,822 | | | | |
|
|
|
| | $ | 61,065,672 | | $ | 61,340,259 | |
(a) | The original mortgage loan for the Franklin Square Property in the amount of $14,275,000 matured on October 6, 2021. Effective on October 6, 2021, the 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, the Company closed on a new loan in the principal amount of $13,250,000 with a ten-year term and a maturity date of December 6, 2031. In addition to the funds from the new loan, the Company used $2,242,273 in cash on hand for loan issuance costs (totaling $283,721), to fund escrows and to repay the remaining balance of the original mortgage loan. The Company has guaranteed the payment and performance of the obligations of the new mortgage loan. The new mortgage loan bears interest at a fixed rate of |
(b) | The mortgage loan for the Hanover Square Property |
(c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of |
(d) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of |
22
(e) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of |
24
payment, which varies based on the interest rate in effect each month, includes interest at the variable rate, and principal based on a |
(f) | On June 13, 2022, the Company entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $18,609,500. The proceeds of this mortgage were used to finance the acquisition of the Salisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center |
The Company refinanced the mortgage loan for the Lancer Center Property using proceeds from the Wells Fargo Facility. The Company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $113,282. The original mortgage loan for the Lancer Center Property bore interest at a fixed rate of 4.00%. The monthly payment was $34,667 which included interest at the fixed rate and principal, based on a twenty-five-year amortization schedule. The Company refinanced the mortgage loan for |
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:
| | | | | | | | | | | | | |
| | | | | | | | Balance |
| ||||
| | | | | | | | | June 30, | | | | |
| | Monthly | | Interest | | | | | 2022 | | | December 31, | |
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2021 |
| ||
Clemson Best Western (b) | | Interest only | | Variable | | October 2022 | | | 7,750,000 | | | 7,750,000 | |
Unamortized issuance costs, net |
|
|
|
|
|
|
| | (134,632) |
| | (134,632) | |
Total mortgages payable, net, associated with assets held for sale |
|
| | $ | 7,615,368 | | $ | 7,615,368 | |
25
Wells Fargo Line of Credit
On June 13, 2022, the Company, through its wholly owned subsidiaries, entered into a loan agreement with Wells Fargo Bank for a $1,500,000 line of credit (the “Wells Fargo Line of Credit”). During the three and six months ending June 30, 2022, the Company did not make any draws or repayments on the Wells Fargo Line of Credit. As of June 30, 2022, the Wells Fargo Line of Credit had an outstanding balance of $0. Outstanding balances on the Wells Fargo Line of Credit will bear interest at a floating rate of 2.25 percent above the daily secured overnight financing rate (“SOFR”). The Wells Fargo Line of Credit has a one-year, renewable term, is unconditionally guaranteed by the Company, and any outstanding balances are secured by the Lancer Center Property, the Greenbrier Business Center Property using proceeds from the Wells Fargo Facility. The Company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the Salisbury Marketplace Property. year ended December 31, 2022, recorded a loss on extinguishment of debt of $56,393. The Company assumed the original mortgage loan for the Greenbrier Business Center Property from the seller. The original mortgage loan bore interest at a fixed rate of 4.00% and would have been interest only until August 1, 2022, at which time the monthly payment would have become $23,873, which would have included interest at the fixed rate, and principal, based on a twenty-five-year amortization schedule.
Convertible DebenturesInterest rate protection transaction
On October 27, 2020,28, 2021, the Company entered into a definitivethe Interest Rate Protection Transaction. Under this agreement, the Company’s interest rate exposure is capped at 5.25% if USD 1-Month ICE LIBOR exceeds 3%. USD 1-Month ICE LIBOR was 4.86% and 4.39% as of March 31, 2023 and December 31, 2022, respectively. In accordance with a financing entity to issuethe guidance on derivatives and sell convertible debentureshedging, the Company records all derivatives on the condensed balance sheet at fair value under other assets. The Company determines fair value based on the three-level valuation hierarchy for fair value measurement. Level 1 inputs are quoted prices 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 discountactive 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 principal amount, accrue interest at a rate of 5 percent per annum (payable at conversion or 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 the 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.
| | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Debt |
| | | |
| | | | | Principal | | | | | Issuance | | Net Cash | |||
Tranche | | Closing Date | | Amount | | Discount | | Costs – Cash | | Proceeds | |||||
Tranche 1 | | | October 27, 2020 | | $ | 1,500,000 | | $ | (75,000) | | $ | (155,555) | | $ | 1,269,445 |
Tranche 2 | | | December 22, 2020 | |
| 2,000,000 | | | (100,000) | | | (207,407) | | | 1,692,593 |
Tranche 3 | | | January 5, 2021 | |
| 1,500,000 | |
| (75,000) | |
| (155,555) | | | 1,269,445 |
Total | |
|
| | $ | 5,000,000 | | $ | (250,000) | | $ | (518,517) | | $ | 4,231,483 |
The 5 percent issue discount totaled $250,000 and was amortized over the one-year term of the debentures using the effective interest method. The Company also paid a total of $518,517 in issuance costs, including legal, accounting, other professional fees, and underwriting discounts. In addition to the closing costs paid in cash, the Company paid $123,000 in debt issuance costs in common shares of the Company. These issuance costs were recorded as deferred debt issuance costs on the accompanying condensed consolidated balance sheets as a direct deduction from the carrying amount of the convertible debentures and were amortized over the one-year term of the debentures using the effective interest method.
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 intrinsicfair value of the beneficial conversion feature totaled $946,840 and was recorded as an increase in additional paid-in capital and a corresponding incremental discount on the carryingassets or liabilities. The fair value of the debentures.Interest Rate Protection Transaction is valued by an independent, third-party consultant which uses observable inputs such as yield curves, volatilities and other current market data, all of which are considered Level 2 inputs. As of March 31, 2023 and December 31, 2022, the fair value of the
26
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 $2.47, or (2) a variable conversion price equal to 88 percent of the volume-weighted average price of the Company’s common shares for the 10 consecutive trading days preceding the conversion date, except that the conversion price cannot be lower than $0.6175. Based on securities and stock exchange regulations, the agreement limits the percentage of the Company’s common shares that may be held at any time by the debenture holder, which effectively limits the amount of principal and interest that the debenture holder may convert without disposing of shares received in earlier conversions. The agreement includes customary representations and warranties, as well as provisions for conversion price adjustments that prevent dilution of the holder’s conversion shares in the event the Company issues additional shares of its common stock prior to the maturity or full conversion of the debentures. At its option, the Company may redeem all or any portion of the outstanding principal and accrued interest prior to the maturity date at a 15% premium to the principal amount, provided that the trading price of its common stock at that time is less than the $2.47 fixed conversion price and it provides the holder with 10 business days’ written notice to allow the holder the opportunity to elect conversion of the debentures prior to the redemption.
Between January 6, 2021 and May 11, 2021, the convertible debenture holder completed the full conversion of the total $5,000,000 principal balance of the convertible debentures and $58,788 in accrued interest, to the Company’s common shares, receiving 3,181,916 common shares in a series of 17 conversions at an average conversion price of $1.59 per common share.
Interest expense
Interest expense, including amortization of capitalized issuance costs consists of the following:
| | | | | | | | | | | | |
| | For the three months ended June 30, 2022 | ||||||||||
| | (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
| | Mortgage | | of discounts and | | Other | | | | |||
| | Interest | | capitalized | | interest | | | | |||
| | Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | 127,542 |
| $ | 7,093 |
| $ | — |
| $ | 134,635 |
Hanover Square mortgage | |
| 106,564 |
| | 3,222 |
| | — |
| | 109,786 |
Hampton Inn mortgage | |
| — |
| | — |
| | — |
| | — |
Ashley Plaza mortgage | |
| 104,793 |
| | 4,357 |
| | — |
| | 109,150 |
Clemson Best Western mortgage | |
| 140,071 |
| | — |
| | 180 |
| | 140,251 |
Brookfield Center mortgage | |
| 46,548 |
| | 2,837 |
| | — |
| | 49,385 |
Lancer Center mortgage | | | 51,433 | | | 4,772 | | | — | | | 56,205 |
Greenbrier Business Center mortgage | | | 36,459 | | | 462 | | | — | | | 36,921 |
Parkway Center mortgage | | | 38,092 | | | 2,756 | | | — | | | 40,848 |
Wells Fargo Mortgage Facility | | | 41,871 | | | — | | | — | | | 41,871 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 55,104 | | | 100,000 | | | 155,104 |
Total interest expense | | $ | 693,373 | | $ | 80,603 | | $ | 100,180 | | $ | 874,156 |
2723
| | | | | | | | | | | | |
| | For the three months ended June 30, 2021 | ||||||||||
| | (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
| | Mortgage | | of discounts and | | Other | | | | |||
| | Interest | | capitalized | | interest | | | | |||
| | Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | 169,594 |
| $ | 2,322 |
| $ | — |
| $ | 171,916 |
Hanover Square mortgage | |
| 109,233 |
| | 3,223 |
| | — |
| | 112,456 |
Hampton Inn mortgage | |
| 170,878 |
| | — |
| | 4,511 |
| | 175,389 |
Ashley Plaza mortgage | |
| 106,771 |
| | 4,357 |
| | — |
| | 111,128 |
Clemson Best Western mortgage | |
| 140,071 |
| | — |
| | 3,914 |
| | 143,985 |
Brookfield Center mortgage | |
| 47,396 |
| | 2,838 |
| | — |
| | 50,234 |
Lancer Center mortgage | | | 34,534 | | | 3,658 | | | — | | | 38,192 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 50,530 | | | 100,000 | | | 150,530 |
Amortization and interest on convertible debentures | | | — | | | 263,163 | | | 6,267 | | | 269,430 |
Other interest | |
| — |
| | — |
| | 1,036 |
| | 1,036 |
Total interest expense | | $ | 778,477 | | $ | 330,091 | | $ | 115,728 | | $ | 1,224,296 |
Interest Rate Protection Transaction was $218,411 and $258,279, respectively and is recorded under other assets on the Company’s condensed balance sheets. The Company reports changes in the fair value of the derivative in other (loss) income on its condensed consolidated statements of operations.
| | | | | | | | | | | | |
|
| For the six months ended June 30, 2022 | ||||||||||
|
| (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
|
| Mortgage | | of discounts and | | Other | | | | |||
|
| Interest | | capitalized | | interest | | | | |||
|
| Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | 253,682 |
| $ | 14,186 |
| $ | — |
| $ | 267,868 |
Hanover Square mortgage | |
| 211,418 |
| | 6,445 |
| | — |
| | 217,863 |
Hampton Inn mortgage | |
| — |
| | — |
| | — |
| | — |
Ashley Plaza mortgage | |
| 208,940 |
| | 8,715 |
| | — |
| | 217,655 |
Clemson Best Western mortgage | |
| 278,602 |
| | — |
| | 566 |
| | 279,168 |
Brookfield Center mortgage | |
| 92,802 |
| | 5,675 |
| | — |
| | 98,477 |
Lancer Center mortgage | | | 115,179 | | | 11,928 | | | — | | | 127,107 |
Greenbrier Business Center mortgage | | | 81,409 | | | 1,155 | | | — | | | 82,564 |
Parkway Center mortgage | | | 68,467 | | | 5,513 | | | — | | | 73,980 |
Wells Fargo Mortgage Facility | | | 41,871 | | | — | | | — | | | 41,871 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 109,027 | | | 200,000 | | | 309,027 |
Total interest expense | | $ | 1,352,370 | | $ | 162,644 | | $ | 200,566 | | $ | 1,715,580 |
Wells Fargo Line of Credit
| | | | | | | | | | | | |
|
| For the six months ended June 30, 2021 | ||||||||||
| | (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
|
| Mortgage | | of discounts and | | Other | | | | |||
|
| Interest | | capitalized | | interest | | | | |||
|
| Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | 337,325 |
| $ | 4,644 |
| $ | — |
| $ | 341,969 |
Hanover Square mortgage | |
| 220,065 |
| | 6,457 |
| | — |
| | 226,522 |
Hampton Inn mortgage | |
| 339,878 |
| | 9,000 |
| | 8,889 |
| | 357,767 |
Ashley Plaza mortgage | |
| 212,857 |
| | 8,716 |
| | — |
| | 221,573 |
Clemson Best Western mortgage | |
| 278,602 |
| | 22,437 |
| | 5,490 |
| | 306,529 |
Brookfield Center mortgage | |
| 94,480 |
| | 5,676 |
| | — |
| | 100,156 |
Lancer Center mortgage | | | 34,534 | | | 3,658 | | | — | | | 38,192 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 99,979 | | | 200,000 | | | 299,979 |
Amortization and interest on convertible debentures | | | — | | | 1,718,487 | | | 42,486 | | | 1,760,973 |
Other interest | |
| — |
| | — |
| | 4,768 |
| | 4,768 |
Total interest expense | | $ | 1,517,741 | | $ | 1,879,054 | | $ | 261,633 | | $ | 3,658,428 |
On June 13, 2022, the Company, through its wholly owned subsidiaries, entered into a loan agreement with Wells Fargo Bank for a $1,500,000 line of credit (the “Wells Fargo Line of Credit”). During the three months ended March 31, 2023, the Company did not make any draws or repayments on the Wells Fargo Line of Credit. As of March 31, 2023 and December 31, 2022, respectively, the Wells Fargo Line of Credit had an outstanding balance of $0. Outstanding balances on the Wells Fargo Line of Credit will bear interest at a floating rate of 2.25% above the daily secured overnight financing rate (“SOFR”). As of March 31, 2023 and December 31, 2022, SOFR was 4.87% and 4.30%, respectively. The Wells Fargo Line of Credit has a one-year, renewable term, is unconditionally guaranteed by the Company, and any outstanding balances are secured by the Lancer Center Property, the Greenbrier Business Center Property and the Salisbury Marketplace Property. On May 2, 2023, the Company and Wells Fargo Bank entered into the First Amendment to Revolving Line of Credit Note which extended the maturity date of the Wells Fargo Line of Credit to June 9, 2024.
Interest expense
Interest expense, including amortization of capitalized issuance costs consists of the following:
| | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
| For the three months ended March 31, 2023 (unaudited) | |||||||||||||
|
| | |
| Amortization |
| Interest rate |
| | |
| | | ||
|
| Mortgage | | of discounts and | | protection | | Other | | | | ||||
|
| Interest | | capitalized | | transaction | | interest | | | | ||||
|
| Expense | | issuance costs | | payments | | expense | | Total | |||||
Franklin Square mortgage | | $ | 126,140 |
| $ | 7,093 |
| $ | — |
| $ | — |
| $ | 133,233 |
Hanover Square mortgage | |
| 170,640 |
| | 3,223 |
| | — |
| | — |
| | 173,863 |
Ashley Plaza mortgage | |
| 102,133 |
| | 4,357 |
| | — |
| | — |
| | 106,490 |
Brookfield Center mortgage | |
| 45,391 |
| | 2,838 |
| | — |
| | — |
| | 48,229 |
Parkway Center mortgage | | | 47,257 | | | 2,757 | | | (19,342) | | | — | | | 30,672 |
Wells Fargo Mortgage Facility | | | 206,039 | | | 6,722 | | | — | | | — | | | 212,761 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 58,804 | | | — | | | 100,000 | | | 158,804 |
Total interest expense | | $ | 697,600 | | $ | 85,794 | | $ | (19,342) | | $ | 100,000 | | $ | 864,052 |
| | | | | | | | | | | | |
|
| | | | | | | | | | | |
| | For the three months ended March 31, 2022 (unaudited) | ||||||||||
|
| | |
| Amortization |
| | |
| | | |
|
| Mortgage | | of discounts and | | Other | | | | |||
|
| Interest | | capitalized | | interest | | | | |||
|
| Expense | | issuance costs | | expense | | Total | ||||
Franklin Square mortgage | | $ | 126,140 | | $ | 7,093 | | $ | — | | $ | 133,233 |
Hanover Square mortgage | |
| 104,854 | | | 3,223 | | | — | | | 108,077 |
Ashley Plaza mortgage | |
| 104,147 | | | 4,358 | | | — | | | 108,505 |
Clemson Best Western mortgage | |
| 138,531 | | | — | | | 386 | | | 138,917 |
Brookfield Center mortgage | |
| 46,254 | | | 2,838 | | | — | | | 49,092 |
Lancer Center mortgage | | | 63,746 | | | 7,156 | | | — | | | 70,902 |
Greenbrier Business Center mortgage | | | 44,950 | | | 693 | | | — | | | 45,643 |
Parkway Center mortgage | | | 30,375 | | | 2,757 | | | — | | | 33,132 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | | | — | | | 53,923 | | | 100,000 | | | 153,923 |
Total interest expense | | $ | 658,997 | | $ | 82,041 | | $ | 100,386 | | $ | 841,424 |
2824
Interest accrued and accumulated amortization of capitalized issuance costs consist of the following:
| | | | | | | | | | | | | ||||||||||||
| | As of June 30, 2022 | | | | | | | | | | | | | | | | | | | ||||
| | (unaudited) | | As of December 31, 2021 | | As of March 31, 2023 (unaudited) | | As of December 31, 2022 | ||||||||||||||||
|
| | |
| Accumulated |
| | |
| Accumulated |
| | |
| Accumulated |
| | |
| Accumulated | ||||
| | | | | amortization of | | | | | amortization | | | | | amortization of | | | | | amortization | ||||
| | | | | capitalized | | Accrued | | of capitalized | | Accrued | | capitalized | | Accrued | | of capitalized | |||||||
| | Accrued interest | | issuance costs | | interest | | issuance costs | | interest | | issuance costs | | interest | | issuance costs | ||||||||
Franklin Square mortgage | | $ | 42,046 | | $ | 16,550 | | $ | — | | $ | 2,364 | | $ | 43,448 | | $ | 37,829 | | $ | 43,448 | | $ | 30,736 |
Hanover Square mortgage | |
| 35,443 | |
| 53,435 | |
| 38,287 | |
| 46,990 | |
| 60,539 | |
| 63,103 | |
| 38,792 | |
| 59,880 |
Ashley Plaza mortgage | |
| 34,493 | |
| 49,394 | |
| — | |
| 40,679 | |
| — | |
| 62,466 | |
| 35,296 | |
| 58,109 |
Clemson Best Western mortgage | |
| 46,177 | |
| 134,622 | |
| 47,716 | |
| 134,622 | ||||||||||||
Brookfield Center mortgage | |
| 15,321 | |
| 31,217 | |
| 15,979 | |
| 25,542 | |
| — | |
| 39,731 | |
| — | |
| 36,893 |
Lancer Center mortgage | | | — | | | — | | | 22,042 | | | 17,971 | ||||||||||||
Greenbrier Business Center mortgage | | | — | | | — | | | 15,482 | | | 924 | ||||||||||||
Parkway Center mortgage | | | 13,891 | | | 7,351 | | | 9,966 | | | 1,838 | | | 22,041 | | | 15,621 | | | 26,502 | | | 12,864 |
Amortization and accrued preferred stock dividends (1) on mandatorily redeemable preferred stock | | | 70,004 | | | 475,785 | | | 70,004 | | | 366,758 | ||||||||||||
Wells Fargo Mortgage Facility | | | — | | | 20,166 | | | — | | | 13,444 | ||||||||||||
Amortization and accrued preferred stock dividends on mandatorily redeemable preferred stock (1) | | | 70,004 | | | 648,443 | | | 70,004 | | | 589,639 | ||||||||||||
Total | | $ | 257,375 | | $ | 768,354 | | $ | 219,476 | | $ | 637,688 | | $ | 196,032 | | $ | 887,359 | | $ | 214,042 | | $ | 801,565 |
(1) | Recorded as accrued interest under accounts payable and accrued liabilities on the Company’s condensed consolidated balance sheets as of |
Debt Maturity
The Company’s scheduled principal repayments on indebtedness as of June 30, 2022March 31, 2023 are as follows:
| | | | | | | | | | | | |
| | | | | Mortgages | | | | ||||
| | | | | Payable Associated | | | | ||||
| | Mortgages | | With Assets | | | | |||||
| | Payable | | Held for Sale | | Total | ||||||
For the remaining six months ending December 31, 2022 |
| $ | 530,942 |
| $ | 7,750,000 |
| $ | 8,280,942 | |||
2023 |
| | 1,100,621 | | | — | | | 1,100,621 | |||
For the remaining nine months ending December 31, 2023 |
| $ | 780,584 | |||||||||
2024 |
| | 1,141,026 | | | — | | | 1,141,026 |
| | 1,092,879 |
2025 |
| | 1,428,252 | | | — | | | 1,428,252 |
| | 1,391,025 |
2026 |
| | 1,487,310 | | | — | | | 1,487,310 |
| | 1,460,923 |
2027 |
| | 25,990,390 | |||||||||
Thereafter |
| | 56,902,612 | | | — | | | 56,902,612 |
| | 31,048,473 |
Total principal payments and debt maturities | | | 62,590,763 | | | 7,750,000 | | | 70,340,763 | | | 61,764,274 |
Less unamortized issuance costs | |
| (779,571) | | | (134,632) | | | (914,203) | |
| (698,602) |
Net principal payments and debt maturities | | $ | 61,811,192 | | $ | 7,615,368 | | $ | 69,426,560 | | $ | 61,065,672 |
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 June 30, 2022March 31, 2023 are as follows:
| | | | | | |
For the remaining six months ending December 31, 2022 |
| $ | 3,922,906 | |||
2023 | |
| 7,282,091 | |||
For the remaining nine months ending December 31, 2023 |
| $ | 5,967,624 | |||
2024 | |
| 5,940,401 | |
| 6,702,872 |
2025 | |
| 5,071,176 | |
| 5,814,765 |
2026 | |
| 3,669,717 | |
| 4,048,868 |
2027 | |
| 3,053,369 | |||
Thereafter | |
| 7,993,110 | |
| 7,608,664 |
Total minimum rents | | $ | 33,879,401 | | $ | 33,196,162 |
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7. Equity
The Company has authority to issue 1,000,000,000 shares consisting of 750,000,000 shares of common stock, $0.01 par value per share ("Common Shares"), and 250,000,000 shares of preferred stock, $0.01 par value per share ("Preferred Shares"). Substantially all of the Company’s business is conducted through its Operating Partnership. The REIT is the sole general partner of the Operating Partnership and owned a 98.79% and 98.69%98.81% interest in the Operating Partnership as of June 30, 2022March 31, 2023 and December 31, 2021, respectively.2022. Limited partners in the Operating Partnership who have held their units for one year or longer have the right to redeem their common units for cash or,
25
at the REIT’s option, Common Shares at a ratio of one common unit for one common share. Under the Agreement of Limited Partnership, distributions to unit holders are made at the discretion of the REIT. The REIT intends to make distributions in a manner that will result in limited partners of the Operating Partnership receiving distributions at the same rate per unit as dividends per share are paid to the REIT’s holders of Common Shares.
April 2021 Common Stock Issuance
On April 13, 2021, the 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, the Company filed a shelf registration statement on Form S-3 with the United States Securities and Exchange Commission (“SEC”).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 $150 million. The shelf registration statement was declared effective by the SEC on July 27, 2021. The Company has incurred $84,926 in legal costs, filing fees and other costs associated with this registration which are recorded as offering costs as part of stockholders' equity on the Company’s condensed consolidated balance sheetsheets as of June 30, 2022March 31, 2023 and December 31, 2021 ,2022, respectively.
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 $6,665,299 of its shares of common stock at the 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 the Company’s common stock. As of June 30, 2022,March 31, 2023, the Company has generated net proceeds of $1,538,887 from the issuance of 1,445,400 shares at an average price of $1.065 per common share under the SEPA.
| | | | | | | | | | | | | | | | |
Issuance Date |
| Shares Issued |
| Price Per Share |
| Total Proceeds |
| Shares Issued |
| Price Per Share |
| Total Proceeds | ||||
March 3, 2022 | | 90,600 | | $ | 1.088 | | $ | 98,574 | | 90,600 | | $ | 1.088 | | $ | 98,574 |
March 14, 2022 |
| 276,190 |
| | 1.050 |
| | 290,000 |
| 276,190 |
| | 1.050 |
| | 290,000 |
March 17, 2022 |
| 278,810 |
| | 1.076 |
| | 300,000 |
| 278,810 |
| | 1.076 |
| | 300,000 |
March 21, 2022 |
| 474,068 |
| | 1.0547 |
| | 500,000 |
| 474,068 |
| | 1.055 |
| | 500,000 |
April 1, 2022 |
| 325,732 |
| | 1.0745 |
| | 350,313 |
| 325,732 |
| | 1.075 |
| | 350,313 |
Total |
| 1,445,400 | | $ | 1.065 | | $ | 1,538,887 |
| 1,445,400 | | $ | 1.065 | | $ | 1,538,887 |
Common Stock Repurchase Plan
In December 2021, the Company’s board of directorsBoard approved a program to purchase up to 500,000 shares of the Company’s common stock in the open market, up to a maximum price of $4.80 per share. The repurchase program does not obligate the Company to acquire any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion. As of June 30, 2022,March 31, 2023, the Company had repurchased 268,070 shares of its common stock at a total cost of $278,277 at an
30
average price of $1.038 per common share. The Company incurred fees of $8,266 associated with these transactions. All repurchased shares were retired in accordance with Maryland law.
| | | | | | | | |
Purchase (Trade) Date |
| Shares Purchased |
| Price Per Share |
| Total Cost (1) | ||
January 4, 2022 | | 400 | | $ | 1.060 | | $ | 424 |
January 5, 2022 |
| 48,205 |
| | 1.060 |
| | 51,093 |
January 6, 2022 |
| 100,000 |
| | 1.046 |
| | 104,556 |
January 7, 2022 |
| 30,000 |
| | 1.050 |
| | 31,500 |
January 10, 2022 |
| 50,000 |
| | 1.020 |
| | 51,000 |
January 14, 2022 |
| 100 |
| | 1.010 |
| | 101 |
January 21, 2022 |
| 39,365 |
| | 1.006 |
| | 39,603 |
Total |
| 268,070 | | $ | 1.038 | | $ | 278,277 |
(1) | Total cost before transaction fees. |
26
Common shares and operating partnership units outstanding
As of June 30, 2022March 31, 2023 and December 31, 2021, respectively,2022, there were 17,653,478 and 16,266,14817,971,952 common units of the Operating Partnership outstanding with the REIT owning 17,439,947 and 16,052,617, respectively,17,758,421 of these common units. The remaining 213,531 common units are held by noncontrolling, limited partners. As of June 30,March 31, 2023 and December 31, 2022, and Decemer 31, 2021, respectively, there were 17,439,947 and 16,052,61717,758,421 Common Shares of the REIT outstanding. As of June 30, 2022March 31, 2023 and December 31, 2021, respectively,2022, there were 213,531 and 213,531 common units of the Operating Partnership held by noncontrolling, limited partners that were eligible for conversion to the Company’s Common Shares.
2018 Equity Incentive Plan
The Company’s 2018 Equity Incentive Plan (the “Plan”“Equity Incentive 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 Equity Incentive 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 Equity Incentive Plan) of the Company and for up to the greater of (i) 240,000 shares of common stockCommon Shares and (ii) eight percent (8)% of the number of fully diluted shares of the Company’s Common Shares (taking into account interests in the Operating Partnership that may become convertible into Common Shares).
On March 16, 2021, the Company’s Compensation Committee approved a grant of 40,356 Common Shares to the Company’s 3 independent directors, and a grant of 26,900 shares to the chief financial officer of the 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 the 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 the Company’s Common Shares on the effective date of the grant.
On March 2, 2022, the Company’s Compensation Committee of the Board (the “Compensation Committee”) approved a grant of 60,000 Common Shares to 2two employees of the Manager who also serve as directors of the Company, a grant of 90,000 Common Shares to the Company’s 3three independent directors, and a grant of 60,000 sharesCommon Shares to the chief financial officer of the Company.Company, under the Equity Incentive Plan. The effective date of the grants was March 2, 2022. The Common Shares granted vestvested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $233,100, was recorded to share based compensation expense on the 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 the Company’s Common Shares on the effective date of the grant.
On November 22, 2022, the Compensation Committee approved a grant of 76,434 Common Shares to two employees of the Manager who also serve as directors of the Company, a grant of 114,651 Common Shares to the Company’s three independent directors, a grant of 76,433 Common Shares to the chief financial officer of the Company, and a grant of 50,956 Common Shares to two consultants of the Company, under the Equity Incentive Plan. The effective date of the grants was November 22, 2022. The Common Shares granted vested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $250,000, was recorded to share based compensation expense on the 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 the Company’s Common Shares on the effective date of the grant.
On each January 1 during the term of the Equity Incentive Plan, the maximum number of shares of common stock that may be issued under the Equity Incentive Plan will increase by eight percent (8)%(8%) of any additional shares of common stock or interests in the Operating Partnership issued (i) after the completion date the Company’s initial registered public offering of common stock, in the case of the January 1, 2019 adjustment, or (ii) in the preceding calendar year, in the case of any adjustment subsequent to January 1, 2020. As of January 1, 2022,2023, the shares available for issuance under the planEquity Incentive Plan was adjusted to 904,146491,304 shares.
31
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 Shares, including any dilutive shares. As of June 30,March 31, 2023 and 2022, and 2021, respectively, 213,531 and 213,531 of the Operating Partnership’s 213,531 common units held by noncontrolling, limited partners were eligible to be converted, on a one-to-one basis, into Common Shares. The Operating Partnership’s common units and the equivalent common shares attributable to the convertible debentures have been excluded from the Company’s diluted earnings per share calculation because their inclusion would be antidilutive.
27
The Company's loss per common share is determined as follows:
| | | | | | | ||||||||||||||
| | | | | | | | | | | | | |
| Three months ended March 31, |
| ||||
| | Three months ended June 30, |
| Six months ended June 30, |
|
| 2023 |
| 2022 |
| ||||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| | (unaudited) |
| (unaudited) | | ||||||
Basic and diluted shares outstanding |
| |
|
| |
| | |
|
| |
| | | | | | | | |
Weighted average Common Shares – basic |
| | 17,439,947 |
| | 14,410,149 | | | 16,738,510 |
| | 10,133,257 | | | 17,758,421 |
| | 16,037,073 | | |
Effect of conversion of operating partnership units |
| | 213,531 |
| | 213,531 | | | 213,531 |
| | 213,531 | | | | 213,531 |
| | 213,531 | |
Weighted average Common Shares – diluted |
| | 17,653,478 |
| | 14,623,680 | | | 16,952,041 |
| | 10,346,788 | | | 17,971,952 |
| | 16,250,604 | | |
| | | | | | | | | | | | | | | | | | | | |
Calculation of earnings per share – basic and diluted |
| | |
| | | | | |
| | | | | |
| | | | |
Net loss attributable to common shareholders | | $ | (1,014,887) | | $ | (682,963) | | $ | (2,004,171) | | $ | (2,960,487) | | | $ | (1,221,295) | | $ | (989,284) | |
Weighted average Common Shares – basic and diluted | |
| 17,439,947 | |
| 14,410,149 | |
| 16,738,510 | |
| 10,133,257 | | |
| 17,758,421 | |
| 16,037,073 | |
Loss per share – basic and diluted | | $ | (0.06) | | $ | (0.05) | | $ | (0.12) | | $ | (0.29) | | | $ | (0.07) | | $ | (0.06) | |
Dividends and Distributions
During the three months and sixended March 31, 2023, dividends in the amount of $0.01 per share were paid on January 27, 2023, to stockholders of record on January 24, 2023. During the three months ended June 30,March 31, 2022, dividends in the amount of $0.02 and $0.04, respectively, per share were paid on January 20, 2022, to shareholdersstockholders of record on January 13, 2022 and on April 21, 2022 to shareholders of record on April 18, 2022. During the three months and six months ended June 30, 2021, 0 dividends were paid. Total dividends and distributions to noncontrolling interests paid during the three and six months ended June 30,March 31, 2023 and 2022, and 2021, respectively, are as follows:
| | | | | | | ||||||||||||
| | | | | | | | | | | |
| Three months ended March 31, | |||||
|
| Three months ended June 30, |
| Six months ended June 30, |
| 2023 |
| 2022 | ||||||||||
| | 2022 | | 2021 |
| 2022 | | 2021 | | (unaudited) |
| (unaudited) | ||||||
Common shareholders (dividends) | | $ | 348,799 | | $ | — | | $ | 665,249 | | $ | — | | $ | 176,810 | | $ | 316,450 |
Hanover Square Property noncontrolling interest (distributions) | |
| 6,400 | |
| — | |
| 16,400 | |
| 12,000 | |
| — | |
| 10,000 |
Parkway Property noncontrolling interest (distributions) | |
| 28,800 | |
| — | |
| 39,600 | |
| — | |
| — | |
| 10,800 |
Operating Partnership unit holders (distributions) | |
| 4,270 | |
| — | |
| 8,541 | |
| — | |
| 2,135 | |
| 4,271 |
Total dividends and distributions | | $ | 388,269 | | $ | — | | $ | 729,790 | | $ | 12,000 | | $ | 178,945 | | $ | 341,521 |
Nasdaq Compliance
On July 11, 2022, the Company received a deficiency letter (the “Deficiency Letter”) from the Nasdaq Listing Qualifications Department (the “Staff”) of Thethe Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the last thirty (30) consecutive business days, the closing bid price for the Company’s common stock hashad been below the minimum $1.00 per share required for continued listing on Thethe Nasdaq Capital Market (“Nasdaq”) pursuant to Nasdaq Listing Rule 5550 (a)(2) (the “Minimum Bid Price Requirement”). The Deficiency Letter has no immediate effect on the listing of the Company’s common stock, and its common stock will continue to trade on The Nasdaq Capital Market under the symbol “MDRR” at this time.
In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has beenwas given one hundred and eighty (180) calendar days, or until January 9, 2023, to regain compliance with the Minimum Bid Price Requirement.
On January 10, 2023, the Company received a letter (the “Second Notification”) from the Nasdaq Stock Market LLC notifying the Company that, while the Company had not regained compliance with the Minimum Bid Price Requirement, the Staff determined that the Company is eligible for an additional 180 calendar day period, or until July 10, 2023 (the “Second Compliance Period”), to regain compliance. The Staff’s determination was based on (i) the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on Nasdaq, with the exception of the Minimum Bid Price Requirement, and (ii) the Company’s written notice to the Nasdaq Stock Market LLC of its intention to cure the deficiency during the second compliance period by effecting a reverse stock split, if necessary.
If at any time before January 9, 2023,during the Second Compliance Period, the closing bid price of the Company’s common stock closesis at least $1.00 per share or more for a minimum of ten (10)10 consecutive business days, the Staff will provide the Company with written confirmation that the Company has achievedof compliance.
If the Company does not regain compliance with the Minimum Bid Price Requirement cannot be demonstrated by January 9,July 10, 2023, the Staff will provide written notification that the Company’s common stock will be delisted. At that time, the Company may be affordedappeal the Staff’s determination to a second one hundredHearings Panel.
Neither the Deficiency Letter or the Second Notification had any effect on the listing of the Company’s common stock, and eighty (180) calendar day periodits common stock continues to regain compliance.trade on Nasdaq under the symbol “MDRR”.
3228
The Company intends to monitorReverse Stock Split
See Note 11, Subsequent Events, for a discussion of the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance with the Minimum Bid Price Requirement, including initiating a reverse stock split. However, there can be no assurancesplit that the Company will be able to regain compliance with the Minimum Bid Price Requirement or will otherwise be in compliance with other Nasdaq Listing Rules.was completed on May 3, 2023.
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 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 100 percent100% of the total annualized base revenues of the properties in its portfolio as of June 30, 2022.March 31, 2023. The Company’s geographic concentration may cause it to be more susceptible to adverse developments in those markets than if it owned a more geographically diverse portfolio. Additionally, the Company’s retail shopping center properties depend on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one or more of these tenants.
Interest Rate Risk
The value of the Company’s real estate is subject to fluctuations based on changes in interest rates, which may affect the Company’s ability to refinance property-level mortgage debt when balloon payments are scheduled. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions, and other factors beyond our control. An increase in interest rates would likely cause the value of the Company’s assets to decrease. Increases in interest rates may also have an impact on the credit profile of certain tenants.
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. To limit this exposure, the Company attempts to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, the Company may obtain variable-rate mortgage loans and, as a result, may enter into interest rate cap agreements that limit the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. These interest rate caps are derivative instruments designated as cash flow hedges on the forecasted interest payments on the debt obligation. Our objective in using interest rate caps is to limit our exposure to interest rate movements.
As of March 31, 2023 and December 31, 2022, all of the Company’s long-term debt either bore interest at fixed rates or was capped to a fixed rate. The Company’s debt obligations are more fully described in Note 5, Loans Payable, above.
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 mutation of COVID-19 into new variants, and the possibility that changes in consumer behavior and business and
29
leisure travel patterns will continue, the negative impact on consumer behavior, including demand for the goods and services of our retail tenants within our portfolio and room demand for our hotel properties, could continue to be significant in future periods.
Retail Center and Flex Center Properties
As of the date of this Quarterly Report on Form 10-Q, 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. During the period following the onset of the COVID-19 pandemic, from March 2020 through December 2020, the Company granted lease concessions in the form of (i) rent deferrals or (ii) rent abatements. The deferral and abatement agreements have reduced the rent revenues the Company has recognized in all subsequent periods, including during the three and six months ended June 30, 2022 and 2021, and will reduce the rent revenues the Company expects to receive in future periods.
Under the rent deferral agreements, all of which were reached during the year ended December 31, 2020, the Company granted rent deferrals to various tenants in return for an agreement by the tenants to repay deferred and unpaid rent over a specified time period or before a certain date. Deferred rent is recognized as retail center property revenues or flex center property revenues on the Company’s
33
condensed consolidated statement of operations and as rent and other receivables on the Company’s condensed consolidated balance sheets. As of June 30, 2022, all rent deferral periods have ended and, in all cases, tenants have commenced repayment of the deferred rent amounts. As of the date of this Quarterly Report on Form 10-Q, all tenants are current on their deferred rent repayment.
Under the rent abatement agreements, all of which were reached during the year ended December 31, 2020, the Company 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, the 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. Abated rent is excluded from future minimum rents in Note 6, above.
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 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.
Due to the risk and uncertainty associated with continued ownership of the Company’s hotel properties, the Company sold its Hampton Inn Property on August 31, 2021. While the Company’s occupancy agreement with Clemson University for the Clemson Best Western Property has resulted in 100 percent occupancy rates from September 2020 through May 15, 2022, due to the continued risk and uncertainties associated with hotels, the Company has committed to a plan to sell its Clemson Best Western Hotel Property. See Note 3, above. 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
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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.
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 0.125% of stockholders’ equity, payable in arrears in cash. For purposes of calculating the asset management fee, the Company’s stockholders’ equity means: (a) the sum of (1) the net proceeds from (or equity value assigned to) all issuances of the Company’s equity and equity equivalent securities (including common stock, common stock equivalents, preferred stock and OP Units issued by the Company’s operating partnership) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (2) the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less (b) any amount that the Company has paid to repurchase its common stock issued in this or any subsequent offering. Stockholders’ equity also excludes (1) any unrealized gains and losses and other non-cash items (including depreciation and amortization) that have impacted stockholders’ equity as reported in the Company’s condensed consolidated financial statements prepared in accordance with GAAP, and (2) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between the Company’s Manager and its independent director(s) and approval by a majority of its independent directors. For the three and six months ended June 30,March 31, 2023 and 2022, the Company incurred $222,255$224,380 and $432,403,$210,148, in asset management fees, respectively. ForAsset management fees are recorded on the Company’s condensed consolidated statements of operations as (i) retail center property operating expenses ($84,282 and $70,257 for the three and six months ended June 30, 2021,March 31, 2023 and 2022, respectively), (ii) hotel property operating expenses ($0 and $6,825 for the Company incurred $211,253three months ended March 31, 2023 and $386,293, in asset management2022, respectively), (iii) flex center property operating expenses ($27,675 and $26,075 for the three months ended March 31, 2023 and 2022, respectively) and (iv) legal, accounting and other professional fees respectively.($112,423 and $106,991 for the three months ended March 31, 2023 and 2022, respectively).
The Manager also receives an acquisition fee of 2.0% of the purchase price plus transaction costs, for each property acquired or investment made on the Company’s behalf at the closing of the acquisition of such property or investment, in consideration for the Manager’s assistance in effectuating such acquisition. Acquisition fees are allocated and added to the fair value of the tangible assets acquired and recorded as part of investment properties, net, on the Company’s condensed consolidated balance sheets.
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On March 16,19, 2021, pursuant to a Letter Agreement, dated March 19, 2021, by and among the Company, the Operating Partnership and the Manager (the “2021 Manager Letter Agreement”), which amended that certain Management Agreement, dated as of March 15, 2016, among the Company, the Operating Partnership and the Manager (the “Management Agreement”), the Manager agreed to defer payment of one-half of allany acquisition feesfee payable to the Manager from that date until the Company’searlier of: (i) the date that the public trading price of our common stock, as reported on the Nasdaq Capital Market, reaches a closing trading price reachesof at least $5.00 per share.share (as the same may be proportionately adjusted to reflect a stock split or reverse stock split); (ii) the effective date of the termination of the Management Agreement as the result of an election by the Company to terminate the Management Agreement (other than on account of any of the events specified in clauses (i) through (vi) of Section 11(a) of the Management Agreement); and (iii) a Change in Control (the “Deferral Agreement”).
On March 10, 2023, the Company announced that the Board established a Special Committee of the Board (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. In light of the exploration of potential strategic alternatives by the Special Committee, the Company entered into a Letter Agreement, dated as of March 10, 2023, by and among the Company, the Operating Partnership and the Manager (the “2023 Manager Letter Agreement”).
Pursuant to the terms of the 2023 Manager Letter Agreement, the Company further amended the Management Agreement, which provides for the deferral of the acquisition fee payable to the Manager in certain circumstances, to clarify that the Deferred Acquisition Fee Amount (as defined in the 2021 Manager Letter Agreement) will be deferred until the earlier of (i) the date that the public trading price of the Company’s common stock, as reported on the Nasdaq Capital Market, reaches a closing trading price of at least $5.00 per share (as the same may be proportionately adjusted to reflect a stock split or reverse stock split); (ii) the effective date of the termination of the Management Agreement as the result of an election by the Company to terminate the Management Agreement (other than on account of any of the events specified in clauses (i) through (vi) of Section 11(a) of the Management Agreement); and (iii) a Change in Control.
For the three and six monthsyear ended June 30,December 31, 2022, the Company incurred $201,524 in acquisition fees associated with the Salisbury Marketplace Property acquisition, which were allocated and added to the fair value of the Salisbury Marketplace Property tangible assets. One half of the acquisition fee, or $100,762 was paid in cash and one half of the acquisition fee was accrued until such time that in connection with the Company’s stock price reaches $5.00 per share.Deferral Agreement. For the three and six monthsyear ended June 30,December 31, 2021, the Company incurred $206,052$503,910 in acquisition fees associated with the Lancer Center Property, acquisition,Greenbrier Business Center Property and Parkway Property, which were allocated and added to the fair value of the Lancer Center Property, Greenbrier Business Center Property and Parkway Property tangible assets. One half of the acquisition fee,fees, or $103,026$251,955 was paid in cash and one half of the acquisition fees was accrued in connection with the Deferral Agreement. The accrued portion of the acquisition fee was accrued until such time that the Company’s stock price reaches $5.00 per share. As of June 30, 2022 and December 31, 2021, the Company had accrued a total of $352,717 and $251,955, respectively, in acquisition fees resulting from the Company’s 2021
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acquisitions. These accrued acquisition fees areis recorded under accounts payable and accrued liabilities on the Company’s condensed consolidated balance sheetsheets as of June 30, 2022March 31, 2023 and December 31, 2021.2022. As of March 31, 2023 and December 31, 2022, the Company had accrued a total of $352,717 in acquisition fees in connection with the Deferral Agreement.
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) 20% and (y) the difference between (i) Adjusted Funds from Operations (AFFO) (as further defined below) for the previous 12-month period, and (ii) the product of (A) the weighted average of the issue price of equity securities issued in this offering and in future offerings and transactions, multiplied by the weighted average number of all shares of common stock outstanding on a fully-diluted basis (including any restricted stock units, any restricted shares of common stock and OP Units) in the previous 12-month period, exclusive of equity securities issued prior to this offering, and (B) 7%, and (2) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of such previous 12-month period. For purposes of calculating the incentive fee during the first years after completion of this offering, adjusted funds from operations (“AFFO”) will be determined by annualizing the applicable period following completion of this offering. AFFO is calculated by removing the effect of items that do not reflect ongoing property operations. The Company further adjusts funds from operations (“FFO”) for certain items that are not added to net income in the National Association of Real Estate Investment Trusts’ (NAREIT) definition of FFO, such as acquisition expenses, equity based compensation expenses, and any other non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of the Company’s properties, and subtract recurring capital expenditures (and, when calculating the incentive fee only, we further adjust FFO to include any realized gains or losses on real estate investments). NaNNo incentive fees were earned or paid during the three and six months ended June 30,March 31, 2023 or 2022.
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Colin Elliott
Effective as of March 1, 2020, the Company entered into a consulting agreement (the “Consulting Agreement”), with Gunston Consulting, LLC (the “Consultant”), pursuant to which the Consultant agreed to provide certain financial and accounting consulting services to the Company, and the Company agreed to pay the Consultant an annual fee and annual stock grants awarded by the Compensation Committee and agreed to reimburse the Consultant for certain expenses to be authorized by the Company. Pursuant to the terms of the Consulting Agreement, the Company authorized the Consultant to retain the services of Mr. C. Elliott as vice president of the Company and authorized the Consultant to incur certain costs related to Mr. C. Elliott’s employment as vice president and agreed to reimburse the Consultant for such costs, including Mr. C. Elliott’s $150,000 annual salary, payroll taxes and certain benefits, and an annual bonus to be determined in consultation with the Company.
In addition, on March 10, 2023, the Company entered into a change in control agreement with the Consultant and Mr. C. Elliott (the “Change in Control Agreement”), in order to authorize the Consultant to pay Mr. C. Elliott, our Vice President, and to reimburse the Consultant for, the payment of the Elliott Retention Amount (as defined below), in the event that (i) a Change in Control (as defined therein) occurs at a time when Mr. C. Elliott remains employed by the Consultant and no Cause Event (as defined therein) has then occurred and the Consultant thereafter terminates, at the request of the Company (or any successor), the employment of Mr. C. Elliott (other than on account of a Cause Event) within twelve (12) months after the date of the Change in Control; (ii) a Change in Control occurs at a time when Mr. C. Elliott remains employed by the Consultant and no Cause Event has then occurred and within twelve (12) months after the date of the Change in Control Mr. C. Elliott elects to terminate his engagement with the Consultant to provide services to the Company (or any successor) because either (a) the Company (or any successor) requires Mr. C. Elliott to relocate his primary work location by more than fifty (50) miles from the location as of the effective date of the Change in Control Agreement; (b) the Company (or any successor) directs the Consultant to reduce the annual compensation ($150,000) of Mr. C. Elliott; (c) the Company (or any successor) directs the Consultant to materially diminish Mr. C. Elliott’s position, authority, duties or responsibilities with respect to services to the Company (or any successor); or (d) the Company (or any successor) commits a material breach of the Consulting Agreement and fails to cure such material breach within thirty (30) days after receiving written notice of such material breach; or (iii) the Consultant terminates, at the Company’s (or any successor’s) request, Mr. C. Elliott’s employment (other than on account of a Cause Event) ninety (90) or fewer days prior to the Change in Control. In each such case, a “Triggering Event” shall be deemed to have occurred, and pursuant to the Change in Control Agreement, the Company authorizes the Consultant to pay, and agrees to reimburse the Consultant for, and the Consultant agrees to pay to Mr. C. Elliott, within thirty-seven (37) days after such Triggering Event, an amount equal to the sum of (i) Mr. C. Elliott’s current annual compensation (i.e., $150,000) payable by the Consultant to Mr. C. Elliott and reimbursable by the Company, plus (ii) the amount of Mr. C. Elliott’s last annual bonus (i.e., $50,000) payable by the Consultant to Mr. C. Elliott and reimbursable by the Company, plus (iii) a cash payment equivalent to the value of the last stock grant from the Company to Mr. C. Elliott (i.e., $30,000) (collectively, the “Elliott Retention Amount”).
Mr. C. Elliott is the son of Mr. William R. Elliott, Vice Chairman of the Board and President and Chief Operating Officer of the Company. During the three months ended March 31, 2023 and 2022, or 2021.the Company paid the Consultant $44,872 and $0, respectively, for services provided by Mr. C. Elliott under the Consulting Agreement.
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 6.32 percent6.32% interest, an annual property management fee of up to 3 percent3% of the monthly gross revenues of the Franklin Square, Hanover Square, Ashley Plaza, Brookfield, Lancer Center, Greenbrier Business Center, Parkway and Salisbury properties. These fees are paid in arrears on a monthly basis. During the three and six months ended June 30,March 31, 2023 and 2022, the Company paid Shockoe Properties, LLC property management fees of $66,318$70,519 and $128,390, respectively. During the three and six months ended June 30, 2021, the Company paid Shockoe Properties, LLC property management fees of $42,839 and $83,405,$62,072, respectively.
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 June 30,For the three months ended March 31, 2023, the Company had the following reportable segments: retail center properties and flex center properties. For the three months ended March 31, 2022, 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.
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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"(“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.
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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 three months ended June 30, | ||||||||||||||||||||||
| | Hotel properties |
| Retail center properties |
| | Flex center property | | Total | |||||||||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Revenues | | $ | 362,851 | | $ | 1,433,318 | | $ | 1,623,207 | | $ | 1,361,349 | | $ | 609,843 | | $ | 183,594 | | $ | 2,595,901 | | $ | 2,978,261 |
Operating expenses | |
| 339,943 | |
| 975,189 | |
| 442,047 | |
| 353,834 | | | 160,670 | | | 64,716 | |
| 942,660 | |
| 1,393,739 |
Bad debt expense | | | — | | | — | | | 163 | | | — | | | — | | | — | | | 163 | | | — |
Net operating income | | $ | 22,908 | | $ | 458,129 | | $ | 1,180,997 | | $ | 1,007,515 | | $ | 449,173 | | $ | 118,878 | | $ | 1,653,078 | | $ | 1,584,522 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the six months ended June 30, | ||||||||||||||||||||||
| | Hotel properties |
| Retail center properties |
| | Flex center property | | Total | |||||||||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 |
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||||
Revenues | | $ | 1,128,340 | | $ | 2,728,703 | | $ | 3,148,292 | | $ | 2,554,990 | | $ | 1,223,233 | | $ | 366,421 | | $ | 5,499,865 | | $ | 5,650,114 |
Operating expenses | |
| 712,803 | |
| 1,772,584 | |
| 892,172 | |
| 681,764 | | | 322,051 | | | 118,804 | |
| 1,927,026 | |
| 2,573,152 |
Bad debt expense | | | — | | | — | | | 7,954 | | | 3,196 | | | 4,992 | | | — | | | 12,946 | | | 3,196 |
Net operating income | | $ | 415,537 | | $ | 956,119 | | $ | 2,248,166 | | $ | 1,870,030 | | $ | 896,190 | | $ | 247,617 | | $ | 3,559,893 | | $ | 3,073,766 |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended March 31, | ||||||||||||||||||||||
| | Hotel properties |
| Retail center properties |
| | Flex center property | | Total | |||||||||||||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 |
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||||||
|
| (unaudited) |
| (unaudited) | | (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) |
| (unaudited) | ||||||||
Revenues | | $ | — | | $ | 765,489 | | $ | 1,891,679 | | $ | 1,525,085 | | $ | 569,297 | | $ | 613,390 | | $ | 2,460,976 | | $ | 2,903,964 |
Operating expenses | |
| — | |
| 372,860 | |
| 520,615 | |
| 450,125 | | | 176,737 | | | 161,381 | |
| 697,352 | |
| 984,366 |
Bad debt expense | | | — | | | — | | | 125 | | | 7,791 | | | 26,997 | | | 4,992 | | | 27,122 | | | 12,783 |
Net operating income | | $ | — | | $ | 392,629 | | $ | 1,370,939 | | $ | 1,067,169 | | $ | 365,563 | | $ | 447,017 | | $ | 1,736,502 | | $ | 1,906,815 |
11. Subsequent Events
As of August 9, 2022,May 11, 2023, the following events have occurred subsequent to the June 30, 2022March 31, 2023 effective date of the condensed consolidated financial statements:
Common Stock Dividend
On July 21, 2022,April 28, 2023, a dividend in the amount of $0.02$0.01 per share was paid to common stock shareholdersstockholders and operating partnership unit holders of record on July 18, 2022.April 25, 2023.
Mandatorily Redeemable Preferred Stock Dividend
On July 21, 2022,April 28, 2023, a dividend in the amount of $0.50 per share was paid to mandatorily redeemable preferred stock shareholdersstockholders of record on July 18, 2022April 25, 2023 for the period from January 20, 2023 through April 21, 2022 through July 20, 2022.2023.
TerminationCompletion of the Contract to Sell the Clemson Best Western Property1-for-8 Reverse Stock Split
On July 26, 2022, the contract purchaser for the Clemson Best Western Property terminated its contract to purchase the Clemson Best Western Property.
On May 3, 2023, the Company completed the previously announced reverse stock split of its Common Shares, and a corresponding adjustment to the outstanding common units of the Operating Partnership, at a ratio of 1-for-8 (the “Reverse Stock Split”). The Reverse Stock Split took effect at 5:00 p.m. Eastern Time on May 3, 2023 (the “Effective Time”) and automatically converted every eight Common Shares outstanding at that time into one Common Share.
The Reverse Stock Split affected all common stockholders uniformly and did not affect any common stockholder’s percentage ownership interest in the Company, except for de minimis changes as a result of the elimination of fractional shares, as described below. As a result of the Reverse Stock Split, the number of Common Shares outstanding was reduced from 17,758,421 to 2,219,779 shares as of the Effective Time.
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No fractional shares were issued in connection with the Reverse Stock Split. Instead, each stockholder that otherwise would have received fractional shares received, in lieu of such fractional shares, cash in an amount equal to the applicable fraction multiplied by the closing price of the Common Shares on Nasdaq on May 3, 2023 (as adjusted for the Reverse Stock Split).
At the Effective Time, the aggregate number of shares of Common Stock available for awards under the Company’s 2018 Equity Incentive Plan and the terms of outstanding awards were ratably adjusted to reflect the Reverse Stock Split.
Trading of the Common Shares on Nasdaq commenced on a split-adjusted basis on May 4, 2023 under the existing trading symbol “MDRR.” The new CUSIP number for the Common Shares following the Reverse Stock Split is 58403P303.
The Reverse Stock Split is intended to help the Company regain compliance with the Minimum Bid Price Requirement. If at any time before July 10, 2023, the closing bid price of the Common Stock is at least $1.00 per share for a minimum of 10 consecutive business days, the Staff will provide the Company with written confirmation of compliance. If compliance with the Minimum Bid Price Requirement cannot be demonstrated by July 10, 2023, the Staff will provide written notification that the Common Stock will be delisted. At that time, the Company may appeal the Staff’s determination to a Hearings Panel. Accordingly, there can be no assurance that the Company will be able to regain compliance with the Minimum Bid Price Requirement or maintain its listing on Nasdaq.
Charter Amendments
In connection with the Reverse Stock Split, on April 19, 2023, the Company filed two Articles of Amendment to its charter with the State Department of Assessments and Taxation of Maryland that provided for:
(i)a 1-for-8 Reverse Stock Split of the Common Stock, effective at 5:00 p.m. Eastern Time on May 3, 2023 (the “First Amendment”); and
(ii)the par value of the Common Stock to be decreased from $0.08 per share (as a result of the 1-for-8 Reverse Stock Split) back to $0.01 per share, effective at 5:01 p.m. Eastern Time on May 3, 2023 (the “Second Amendment”).
The foregoing descriptions of the First Amendment and the Second Amendment do not purport to be complete and are qualified in their entirety by reference to each amendment, copies of which are filed as Exhibit 3.3 and Exhibit 3.4, respectively, to this Quarterly Report on Form 10-Q (this “Quarterly Report”) and are incorporated herein by reference.
Wells Fargo Line of Credit
On May 2, 2023, the Company and Wells Fargo Bank entered into the First Amendment to Revolving Line of Credit Note which extended the maturity date of the Wells Fargo Line of Credit to June 9, 2024 (see Note 5, above).
Update on Special Committee and Exploration of Strategic Alternatives
On March 10, 2023, the Board announced that it established a Special Committee (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. The Special Committee is comprised solely of independent directors and is charged with exploring potential strategic alternatives including, without limitation, a business combination involving our company, a sale of all or part of our company’s assets, joint venture arrangements and/or restructurings, and determining whether a strategic transaction is in the best interest of our company.
On April 18, 2023, the Company provided an update on the Special Committee’s efforts. Specifically, the Company announced that the Special Committee is in active discussions with potential parties in pursuit of those alternatives and the Company will provide further disclosures as appropriate or required by law or regulation. While the review is underway, the Company remains fully focused on its operations and on the continued execution of its strategies to create stockholder value. There is no assurance that the review will result in any transaction, including a sale of the Company, its assets, or entry into a business combination, among other alternatives being reviewed.
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ItemITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’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 condensed consolidated financial statements and the related notes thereto of Medalist Diversified REIT, Inc. contained in this Quarterly Report on Form 10-Q.Report.
As used in this section, unless the context otherwise requires, references to “we,” “our,” “us,”This following discussion 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 partnershipanalysis of which we are the sole general partner, except where it is clear from the contextfinancial condition and results of operations contains forward-looking statements that the term only means Medalist Diversified REIT, Inc.
Cautionaryinvolve risks, uncertainties and assumptions. See “Cautionary Statement Regarding Forward-Looking StatementsStatements” 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. These forward-looking statements are included throughout this Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q.Report.
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; |
● | failure of our recently announced exploration of strategic alternatives to maximize stockholder value or to result in a transaction that yields value to our stockholders, and the potential that our exploration of strategic alternatives could adversely impact us; |
● | local, regional, national |
● | capital expenditures; |
● | the availability, terms and deployment of capital; |
● | financing risks; |
● | inflation; |
● | 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; |
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● | decreased rental rates or increased vacancy rates; |
● | our ability to make distributions on shares of our common |
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● | difficulties in identifying properties to acquire and completing acquisitions; |
● | our ability to operate as a public company; |
● | potential natural disasters such as hurricanes; |
● | the impact of epidemics, pandemics, or other outbreaks of illness, disease or virus (such as COVID-19 |
● | our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; |
● | our ability to maintain an active trading market for our common stock on The Nasdaq Capital Market (“Nasdaq”) and maintain continued listing on Nasdaq and the likelihood that a delisting of our common stock from Nasdaq could result in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our common stock; |
● | the reverse stock split may decrease the liquidity of the shares of our common stock and could lead to a decrease in our overall market capitalization; |
● | 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q speaks only as of the date of this Quarterly Report on Form 10-Q.Report. 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.
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 servicelimited-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.
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Our company is externally managed by Medalist Fund Manager, Inc. (the “Manager”).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.
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As of June 30, 2022,March 31, 2023, our company owned and operated nineeight 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 160,356164,012 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 178,626181,590 square foot retail property located in Lancaster, South Carolina (the “Lancer Center Property”), the Greenbrier Business Center (the “Greenbrier Business Center Property”), an 89,280 square foot mixed-use industrial/office property located in Chesapeake, Virginia, Parkway 3 & 4 (the “Parkway Property”), a 64,109 square foot mixed-use industrial office property located in Virginia Beach, Virginia, and the Salisbury Marketplace Shopping Center, a 79,732 square foot retail property located in Salisbury, North Carolina (the “Salisbury Marketplace Property”). As of June 30, 2022,March 31, 2023, we owned 84 percent84% of the Hanover Square Property as a tenant in common with a noncontrolling owner which owned the remaining 16 percent16% interest and 82 percent82% of the Parkway Property as a tenant in common with a noncontrolling owner which owns the remaining 18 percent18% 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 June 30, 2022,For the three months ended March 31, 2023, our reportable segments were retail center properties and flex center properties. Although we sold our interest in the Clemson Best Western Hotel Property on September 29, 2022, we include hotel properties and hotel properties.as a third reportable segment for the three months ended March 31, 2022.
Recent Trends and Activities
Significant events that have impacted1:8 Reverse Stock Split
On May 3, 2023, our company are summarized below.completed a reverse stock split of its Common Shares, and a corresponding adjustment to the outstanding common units of the Operating Partnership, at a ratio of 1-for-8 (the “Reverse Stock Split”). The Reverse Stock Split took effect at 5:00 p.m. Eastern Time on May 3, 2023 (the “Effective Time”) and automatically converted every eight Common Shares outstanding at that time into one Common Share. The Reverse Stock Split is intended to help our company regain compliance with Nasdaq’s Minimum Bid Price Requirement. If at any time before July 10, 2023, the closing bid price of the Common Stock is at least $1.00 per share for a minimum of 10 consecutive business days, Nasdaq will provide our company with written confirmation of compliance. If compliance with the Minimum Bid Price Requirement cannot be demonstrated by July 10, 2023, the Staff will provide written notification that the Common Stock will be delisted. At that time, our company may appeal the Staff’s determination to a Hearings Panel. Accordingly, there can be no assurance that our company will be able to regain compliance with the Minimum Bid Price Requirement or maintain its listing on Nasdaq.
Establishment of a Special Committee of the Board and Exploration of Strategic Alternatives
On March 10, 2023, the Board announced that it established a Special Committee (the “Special Committee”) to explore potential strategic alternatives focusing on maximizing stockholder value. The Special Committee is comprised solely of independent directors and is charged with exploring potential strategic alternatives including, without limitation, a business combination involving our company, a sale of all or part of our company’s assets, joint venture arrangements and/or restructurings, and determining whether a strategic transaction is in the best interest of our company.
On April 18, 2023, the Company provided an update on the Special Committee’s efforts. Specifically, the Company announced that the Special Committee is in active discussions with potential parties in pursuit of those alternatives and the Company will provide further disclosures as appropriate or required by law or regulation. While the review is underway, the Company remains fully focused on its operations and on the continued execution of its strategies to create stockholder value. There is no assurance that the review will result in any transaction, including a sale of the Company, its assets, or entry into a business combination, among other alternatives being reviewed.
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Sale of the Hampton InnClemson Best Western Property
On August 31, 2021,September 29, 2022, our company sold its interest in the Hampton InnClemson Best Western Property, a 125148 room hotel on 2.1625.92 acres in Greensboro, NorthClemson, South 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.$10,015,000. During the yearthree months ended DecemberMarch 31, 2020,2021, our company reclassified the Hampton InnClemson Best Western Property as assets held for sale. As part of our continuing evaluation of the amounts previously used for the estimated fair value of the Clemson Best Western asset group that had been reclassified as assets held for sale, and recognizedduring the three months ended March 31, 2022, our company recorded an impairment charge of $3,494,058$175,671 associated with this reclassification. As a result of the closing of the sale of the Hampton InnClemson Best Western Property on August 31, 2021,September 29, 2022, our company recognized a gainloss on sale of investment properties of $124,641$421,096 for the year ended December 31, 2021.2022.
2022 Investment Property Acquisitions
Salisbury Marketplace Property Acquisition
On June 13, 2022, our companywe completed itsour acquisition of the Salisbury Marketplace Property, a 79,732 square foot retail property located in Salisbury, North Carolina, through a wholly owned subsidiary. The Salisbury Marketplace Property, built in 1986, was 89.9%91.2% leased as of June 30, 2022,March 31, 2023, and is anchored by Food Lion, Citi Trends and Family Dollar. The purchase price for the Salisbury Marketplace Property was $10,025,000 paid through a combination of cash provided by our company and the incurrence of new mortgage debt. Our company’s total investment was $10,279,714 and we incurred $254,714 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
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.
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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.
Wells Fargo Mortgage Facility
On June 13, 2022, our company, through its wholly owned subsidiaries, entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $18,609,500. The proceeds of the Wells Fargo Mortgage Facility were used to finance the acquisition of the Salisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center Property. The Wells Fargo Mortgage Facility bears interest at a fixed rate of 4.50 percent4.50% for a five yearfive-year term. The monthly payment, which includes interest at the fixed rate, and principal, based on a 25 year25-year amortization schedule, is $103,438. Our company has provided an unconditional guaranty of the payment of and performance under the terms of the Wells Fargo Mortgage Facility. The Wells Fargo Mortgage Facility credit agreement includes covenants to maintain a debt service coverage ratio of not less than 1.50 to 1.00 on an annual basis and a minimum debt yield of 9.5 percent9.5% on the Salisbury Marketplace, Lancer Center and Greenbrier Business Center properties, and to maintain liquid assets of not less than $1,500,000 on deposit with Wells Fargo Bank. As of June 30, 2022,March 31, 2023, our company believes that it is compliant with these covenants.
Wells Fargo Line of Credit
On June 13, 2022, our company, through its wholly owned subsidiaries, entered into a loan agreement with Wells Fargo Bank for a $1,500,000 line of credit (the “Wells Fargo Line of Credit”). As of June 30, 2022,March 31, 2023, the Wells Fargo Line of Credit had an outstanding balance of $0. Outstanding balances on the Wells Fargo Line of Credit will bear interest at a floating rate of 2.25 percent2.25% above the daily secured overnight financing rate (“SOFR”). The Wells Fargo Line of Credit has a one-year, renewable term, is unconditionally guaranteed by our company, and any outstanding balances are secured by the Lancer Center Property, the Greenbrier Business Center Property and the Salisbury Marketplace Property. On May 2, 2023, our company and Wells Fargo Bank entered into the First Amendment to Revolving Line of Credit Note which extended the maturity date of the Wells Fargo Line of Credit to June 9, 2024. We plan to use the Wells Fargo Line of Credit to help fund future acquisitions.
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”).SEC. The shelf registration statement is intended to provide additional flexibility to finance future business opportunities 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 was declared effective by the SEC on July 27, 2021.
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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,the SEPA, our company will be able tomay sell up to $6,665,299 of itsour shares of common stock at our company’s request any time during the 36 months
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following the execution of the SEPA. TheAny shares purchased pursuant to the SEPA would be purchased at 96.5% of the market price (as defined in the agreement) and would beSEPA), 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 outstanding common stock. As of June 30, 2022,March 31, 2023, our company has generated net proceeds of $1,538,887 from the issuance of 1,445,400 shares of our common stock at an average price of $1.065 per common share under the SEPA.
| | | | | | | | |
Issuance Date |
| Shares Issued |
| Price Per Share |
| Total Proceeds | ||
March 3, 2022 | | 90,600 | | $ | 1.088 | | $ | 98,574 |
March 14, 2022 |
| 276,190 |
| | 1.050 |
| | 290,000 |
March 17, 2022 |
| 278,810 |
| | 1.076 |
| | 300,000 |
March 21, 2022 |
| 474,068 |
| | 1.055 |
| | 500,000 |
April 1, 2022 |
| 325,732 |
| | 1.075 |
| | 350,313 |
Total |
| 1,445,400 | | $ | 1.065 | | $ | 1,538,887 |
Common Stock Repurchase Plan
In December 2021, our company’s board of directorsthe Board 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.share (the “Common Stock Repurchase Plan”). The repurchase programCommon Stock Repurchase Plan does not obligate our company to acquire any particular amount of shares, and the repurchase programCommon Stock Repurchase Plan may be suspended or discontinued at any time at our company’s discretion. As of June 30, 2022, our company hasMarch 31, 2023, we have repurchased a total of 268,070 shares of our common stock on the open market under the Common Stock Repurchase Plan at an average price of $1.038 per share.
| | | | | | | | |
Purchase Date |
| Shares Purchased |
| Price Per Share |
| Total Cost | ||
January 4, 2022 | | 400 | | $ | 1.060 | | $ | 424 |
January 5, 2022 |
| 48,205 |
| | 1.060 |
| | 51,093 |
January 6, 2022 |
| 100,000 |
| | 1.046 |
| | 104,556 |
January 7, 2022 |
| 30,000 |
| | 1.050 |
| | 31,500 |
January 10, 2022 |
| 50,000 |
| | 1.020 |
| | 51,000 |
January 14, 2022 |
| 100 |
| | 1.010 |
| | 101 |
January 21, 2022 |
| 39,365 |
| | 1.006 |
| | 39,603 |
Total |
| 268,070 | | $ | 1.038 | | $ | 278,277 |
Common stock grants under the 2018 Equity Incentive Plan
On March 16, 2021, our company’s2, 2022, the Compensation Committee approved a grant of 40,35660,000 Common Shares to two employees of our Manager who also serve as directors of our company, a grant of 90,000 Common Shares to our company’s three independent directors, and a grant of 26,900 shares60,000 Common Shares to the chief financial officer of our company.company under the Equity Incentive Plan. The effective date of the grants was March 16, 2021.2, 2022. The Common Shares granted vestvested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $149,981,$233,100, 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.
On March 2,November 22, 2022, our company’sthe Compensation Committee approved a grant of 60,00076,434 Common Shares to two employees of theour Manager who also serve as directors of our company, a grant of 90,000114,651 Common Shares to our company’s three independent directors, and a grant of 60,000 shares76,433 Common Shares to the chief financial officer of our company.company, and a grant of 50,956 Common Shares to the vice president and senior accountant of our company under the Equity Incentive Plan. The effective date of the grants was March 2,November 22, 2022. The Common Shares granted vestvested immediately and are unrestricted. However, the Equity Incentive Plan includes other restrictions on the sale of shares issued under the Equity Incentive Plan. Because the Common Shares vested immediately, the fair value of the grants, or $233,100,$250,000, 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.
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Financing Activities
Mortgages payable
Our company financed its acquisitions of its investment properties through mortgages, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Balance |
| | | | | | | | Balance | | ||||||||||||
| | | | | | | | June 30, | | | | | | | | | | | | March 31, | | | | | ||||||
| | Monthly | | Interest | | | | 2022 | | | December 31, |
| | Monthly | | Interest | | | | 2023 | | | December 31, | | ||||||
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2021 |
|
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2022 | | ||||||||
Franklin Square (a) |
| | Interest only |
| | 3.808 | % | December 2031 | | $ | 13,250,000 | | $ | 13,250,000 | |
| | Interest only |
| | 3.808 | % | December 2031 | | $ | 13,250,000 | | $ | 13,250,000 | |
Hanover Square (b) | | $ | 56,882 |
| | 4.25 | % | December 2027 | |
| 10,007,632 | |
| 10,134,667 | | | $ | 78,098 |
| | 6.94 | % | December 2027 | |
| 9,813,679 | |
| 9,877,867 | |
Ashley Plaza (c) | | $ | 52,795 |
| | 3.75 | % | September 2029 | |
| 11,037,583 | |
| 11,127,111 | | | $ | 52,795 |
| | 3.75 | % | September 2029 | |
| 10,856,618 | |
| 10,930,370 | |
Brookfield Center (d) | | $ | 22,876 |
| | 3.90 | % | November 2029 | |
| 4,714,549 | |
| 4,758,344 | | | $ | 22,876 |
| | 3.90 | % | November 2029 | |
| 4,639,969 | |
| 4,663,206 | |
Parkway Center (e) | | $ | 19,720 | | | Variable | % | October 2026 | | | 5,033,065 | | | 5,090,210 | | | $ | 28,161 | | | Variable | | October 2026 | | | 4,956,301 | | | 4,992,427 | |
Wells Fargo Facility (f) | | $ | 103,438 | | | 4.50 | % | June 2027 | | | 18,547,934 | | | — | | | $ | 103,438 | | | 4.50 | % | June 2027 | | | 18,247,707 | | | 18,351,981 | |
Lancer Center (g) | | | | | | | | | | | — | | | 6,488,034 | | |||||||||||||||
Greenbrier Business Center (h) | | | | | | | | | | | — | | | 4,495,000 | | |||||||||||||||
Total mortgages payable | | | | | | | | | | $ | 62,590,763 | | $ | 55,343,366 | | | | | | | | | | | $ | 61,764,274 | | $ | 62,065,851 | |
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 |
(b) | The mortgage loan for the Hanover Square Property |
(c) | The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of |
(d) | The mortgage loan for the Brookfield Property bears interest at a fixed rate of |
(e) | The mortgage loan for the Parkway Property bears interest at a variable rate based on LIBOR with a minimum rate of |
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rate, and principal based on a thirty-year amortization schedule. On October 28, 2021, our company entered into the Interest Rate Protection Transaction to limit our exposure to increases in interest rates on the variable rate mortgage loan on the Parkway Property. Under this agreement, our interest rate exposure is capped at 5.25% if USD 1-Month ICE LIBOR exceeds 3%. For the period from September 1, 2022 through March 31, 2023, LIBOR exceeded the 3%, and payments from the Interest Rate Protection Transaction reduced our company’s net interest expense. Payments to our company from the Interest Rate Protection Transaction are recorded as an offset to interest expense on our company’s condensed consolidated statements of operations for the three months ended March 31, 2023. No such payments were received during the three months ended March 31, 2022 because the LIBOR rate in effect did not exceed the LIBOR cap. The mortgage loan for the Parkway Property includes a covenant to maintain a debt service coverage ratio of not less than 1.60 to 1.00 on an annual basis. As of March 31, 2023 and December 31, 2022, respectively, our company believes that it is compliant with this covenant.
(f) | On June 13, 2022, our company entered into a mortgage loan facility with Wells Fargo Bank (the “Wells Fargo Mortgage Facility”) in the principal amount of $18,609,500. The proceeds of this mortgage were used to finance the acquisition of the Salisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center Property (see notes (g) and (h), below). The Wells Fargo Mortgage Facility bears interest at a fixed rate of |
Our company refinanced the mortgage loan for the Lancer Center Property using proceeds from the Wells Fargo Mortgage Facility discussed above. Our company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and for the year ended December 31, 2022, recorded a loss on extinguishment of debt of $113,282. The original mortgage loan for the Lancer Center Property bore |
Our company financed its acquisitions of its assets held for sale through mortgages which, as of June 30, 2022, are recorded as mortgages payable, net, associated with assets held for sale, on our condensed consolidated balance sheets, as follows:
| | | | | | | | | | | | |
| | | | | | | | Balance | ||||
| | | | | | | | June 30, | | | | |
| | Monthly | | Interest | | | | 2022 | | December 31, | ||
Property |
| Payment |
| Rate |
| Maturity |
| (unaudited) |
| 2021 | ||
Clemson Best Western (a) | | Interest only | | Variable | | October 2022 | | | 7,750,000 | | | 7,750,000 |
Amounts presented do not reflect unamortized loan issuance costs.
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 fixed rate of 5 percent per annum (payable4.00%. The monthly payment was $34,667 which includes interest at maturity),the fixed rate and were closed in three separate tranches as follows: (i) convertible debenture of $1.5 million issued and soldprincipal, based on October 27, 2020 upona twenty-five-year amortization schedule.
Our company refinanced the signing of the definitive agreement, (ii) convertible debenture of $2.0 million
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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 stockholdersmortgage loan for the issuance of shares of common stock that may be issued upon the conversion of the convertible debentures. NetGreenbrier Business Center Property, using proceeds from the issuanceWells Fargo Mortgage Facility discussed above. Our company accounted for this refinancing transaction under debt extinguishment accounting in accordance with ASC 470, and salefor the year ended December 31, 2022, recorded a loss on extinguishment of debt of $56,393. Our company assumed the convertible debentures totaled $4,231,483.original mortgage loan for the Greenbrier Business Center Property from the seller. The original mortgage loan bore interest at a fixed rate of 4.00% and would have been interest only until August 1, 2022, at which time the monthly payment would have become $23,873, which would have included interest at the fixed rate, and principal, based on a twenty-five-year amortization schedule.
Between January 6, 2021 and May 11, 2021, the convertible debenture holder completed the full conversion of the total $5,000,000 principal balance of the convertible debentures and $58,788 in accrued interest, to our company’s common shares, receiving 3,181,916 common shares in a series of 17 conversions at an average conversion price of $1.59 per common share.
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.
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 mutation of COVID-19 into 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 future periods.
Retail Center and Flex Center Properties
As of the date of this Quarterly Report on Form 10-Q, 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. During the period following the onset of the COVID-19 pandemic, from March 2020 through December 2020, our company granted lease concessions in the form of (i) rent deferrals or (ii) rent abatements. The deferral and abatement agreements have reduced the rent revenues our company has recognized in all subsequent periods, including during the six months ended June 30, 2022 and 2021, and will reduce the rent revenues our company expects to receive in future periods.
Under the rent deferral agreements, all of which were reached during the year ended December 31, 2020, our company granted rent deferrals to various tenants in return for an agreement by the tenants to repay deferred and unpaid rent over a specified time period or before a certain date. 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. As of June 30, 2022, all rent deferral periods have ended and, in all cases, tenants have commenced repayment of the deferred rent amounts. As of the date of this Quarterly Report on Form 10-Q, all tenants are current on their deferred rent repayment.
Under the rent abatement agreements, all of which were reached during the year ended December 31, 2020, our company 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.
While our 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 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
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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 abatement agreements 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 revenues from the Hampton Inn Property (which our 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 our company.
Due to the risk and uncertainty associated with continued ownership of our company’s hotel properties, our company sold its Hampton Inn Property on August 31, 2021. While our company’s occupancy agreement with Clemson University for the Clemson Best Western Property has resulted in 100 percent occupancy rates from September 2020 through May 15, 2022, due to the continued risk and uncertainties associated with hotels, our company has committed to a plan to sell its Clemson Best Western Hotel Property. 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, our 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 our company’s hotel property 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 property 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 These 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 March 31, 2023 and December 31, 2022, we have no off-balance sheet arrangements.
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Off-Balance Sheet Arrangements
As of June 30, 2022 and December 31, 2021, we have no off-balance sheet arrangements.
Summary of Critical Accounting Policies
The preparation of condensed 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 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 Condensed 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 the periods during which our company owned its hotel property,properties, revenues arewere 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 arewere recognized as earned, which is as rooms arewere occupied by the University.
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.
Accounting for Leases
Our company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) on January 1, 2022 using the modified retrospective approach within ASU 2018-11, which allows for the application date to be the beginning of the reporting period in which the entity first applies the new standard. Our company historically has not been and is not currently a “lessee” under any lease agreements, and thus did not have any arrangements requiring the recognition of lease assets or liabilities on its balance sheet. As a “lessor”, our company has active lease agreements with over 100 tenants across itsour portfolio of investment properties.
Upon the adoption of ASC No. 842, our company has elected the practical expedient permitting lessors to elect by class of underlying asset to not separate non-lease components (for example, maintenance services, including common area maintenance) from associated lease components (the “non-separation practical expedient”) if both of the following criteria are met: (1) the timing and pattern of transfer of the lease and non-lease component(s) are the same and (2) the lease component would be classified as an operating lease if it were accounted for separately. If both criteria are met, the combined component is accounted for in accordance with ASC No. 842 if the lease component is the predominant component of the combined component; otherwise, the combined component is accounted for in accordance with the revenue recognition standard. Our company assessed the criteria above with respect to our operating leases
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and determined that they qualify for the non-separation practical expedient. As a result, we have accounted for and presented the revenues from these leases, including tenant reimbursements, as a single line item on our condensed consolidated statements of operations for the sixthree months ended June 30,March 31, 2023 and 2022. For comparability, we have adjusted our comparative condensed consolidated statement
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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 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 percent90% 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 percent100% 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 condensed 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 condensed 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 concludesWe have concluded that it is probable that itwe will be able to meet itsour obligations arising within one year of the date of issuance of these condensed consolidated financial statements within the parameters set forth in the accounting guidance. For additional
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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.
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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 growth and 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 willare expected to be provided primarily by the rental receipts from our retail properties and flex center property, and revenues from our hotel property. During the three and six months ended June 30, 2022, the COVID-19 pandemic continued to impact our financial and operational results that provide the liquidity for operating needs. Our company’s retail property and flex property rent revenues continued to be impacted by rent abatement agreements and other concessions. However, our Clemson Best Western Property saw increased revenues resulting from the occupancy agreement with Clemson University, which ended on May 15, 2022. During the transitional period between the end of this occupancy agreement and the reopening of normal hotel operations on June 24, 2022, the Clemson Best Western Hotel Property’s revenues were significantly impacted, and will continue to be significantly impacted while hotel operations return to normal and marketing and sales efforts result in increased demand and revenues. properties.
The full extent of the impact of COVID-19 on our company’s liquidity 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 omicron variant and sub-variants, 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 continue to 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 in the future.
Cash Flows
At June 30, 2022,March 31, 2023, our consolidated cash and restricted cash on hand totaled $5,777,963$4,985,365 compared to consolidated cash on hand of $13,790,089$8,079,034 at June 30, 2021.March 31, 2022. Cash from operating activities, investing activities and financing activities for the sixthree months ended June 30, 2022March 31, 2023 are as follows:
Operating Activities
During the sixthree months ended June 30, 2022March 31, 2023 our cash provided by operating activities was $1,573,772$450,724 compared to cash provided by operating activities of $994,193$692,863 for the sixthree months ended June 30, 2021, an increase ofMarch 31, 2022, a decrease in cash provided by operating activities of $579,579.$242,139.
Cash flows from operating activities has two components. The first component consists of net operating loss adjusted for non-cash operating activities. During the sixthree months ended June 30, 2022,March 31, 2023, operating activities adjusted for non-cash items resulted in net cash providedused by operating activities of $1,015,785.$817. During the sixthree months ended June 30, 2021,March 31, 2022, operating activities adjusted for non-cash items resulted in net cash provided in operating activities of $334,593.$689,045. The increasedecrease of $681,192$689,862 in cash flows from operating activities for the sixthree months ended June 30, 2022March 31, 2023 was primarily a result of improvedincreased legal, accounting and other professional fees resulting from the exploration of strategic alternatives announced by our Board of Directors on March 10, 2023, of $307,209, and a decrease in operating performance across all property types, as well as cash flowsincome of $392,629 resulting from our company’s acquisitionthe sale of the Lancer Center, whichClemson Best Western Hotel on September 29, 2022. For the three months ended March 31, 2022, the Clemson Best Western Hotel generated $392,629 in operating income. Since our company sold the Clemson Best Western Hotel on September 29, 2022, no operating income was acquired on May 14, 2021, and the Parkway and Greenbrier Business Center properties, neither of which we ownedgenerated during the sixthree months ended June 30, 2021.March 31, 2023.
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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 sixthree months ended June 30,March 31, 2023, net changes in asset and liability accounts resulted in $451,541 in cash provided by operations. During the three months ended March 31, 2022, net changes in asset and liability accounts resulted in $557,987 in cash provided by operations. During the six months ended June 30, 2021, net changes in asset and liability accounts resulted in $659,600$3,818 in cash provided by operations. This decreaseincrease of $101,613$447,723 in cash provided by operations resulting from changes in assets and liabilities is a result of decreasedincreased changes in accounts payable and accrued liabilities of $213$310,905, and increased changes in other assets of $287,802,$195,395, offset by increaseddecreased changes in unbilled rent of $34,053, and other receivables, net, of $101,494 unbilled rent of $84,908.$24,524.
The net of (i) the $681,192 increase$689,862 decrease in cash provided by operations from the first category and (ii) the $101,613 decrease$447,723 increase in cash provided by operations from the second category results in a total increase ofdecrease in cash provided in operations of $579,579$242,139 for the sixthree months ended June 30, 2022.March 31, 2023.
Investing Activities
During the sixthree months ended June 30, 2022,March 31, 2023, our cash used in investing activities was $10,772,418,$647,690, compared to cash used in investing activities of $10,278,237$366,059 during the sixthree months ended June 30, 2021,March 31, 2022, an increase in cash used in investing activities of $494,181.$281,631. During the sixthree months ended June 30,March 31, 2023, cash used in investing activities consisted of $647,690 in capitalized expenditures, including $168,464 in building improvements, $11,323 in site improvements, $90,638 in capitalized leasing commissions, and $377,265 in capitalized tenant improvements. During the three months ended March 31, 2022, cash used in investing activities consisted of $492,704$366,059 in capitalized expenditures, including $230,857 in building improvements, $199,764$78,921 in capitalized leasing commissions, and $62,083$56,281 in capitalized tenant improvements. During the six months ended June 30, 2021, cash used in investing activities consisted of $10,205,385 used for the acquisition of the Lancer Center Property and $72,852 in capitalized expenditures, including $45,150 for tenant improvements, $11,885 for leasing commissions and related to a new tenant in the Franklin Square Property, $15,817 for building improvements.
There were no non-cash investing activities during the six months ended June 30, 2022. The non-cash investing activity for the six months ended June 30, 2021, that did not affect our cash provided by investing activities, was the transfer44
Financing Activities
During the sixthree months ended June 30, 2022,March 31, 2023, our cash provided byused in financing activities was $7,592,632$480,522 compared to cash provided by financing activities of $17,977,205$368,253 during the sixthree months ended June 30, 2021, a decreaseMarch 31, 2022, an increase in cash provided byused in financing activities of $10,384,573.$848,775. During the sixthree months ended June 30,March 31, 2023, cash used in financing activities consisted of $301,577 for mortgage debt principal payments and $178,945 for dividends and distributions. During the three months ended March 31, 2022, financing activities generated $18,477,304 in net proceeds from mortgages payable and $1,538,887$1,188,574 in net proceeds, after issuance costs, from common stock issuances under our SEPA, (see above), offset by cash used in financing activities, including dividends and distributions of $729,790,$341,521, mortgage debt principal payments of $11,407,226 (including $10,962,484 of cash used to refinance the Lancer Center and Greenbrier Business Center properties and $444,742 in normal, monthly principal payments for our company’s other mortgages)$192,257 and repurchases of our company’s common stock of $286,543, including costs and fees.
During the six months ended June 30, 2021, financing activities generated $10,853,605 in net proceeds, after issuance costs,
from a common stock issuance, net proceeds, after loan issuance costs, from a new mortgage payable associated with the Lancer Center acquisition of $6,421,870, and net proceeds, after issuance costs, from the closing of the third tranche of our convertible debentures of $1,305,000. Cash used in financing activities included repayment of a line of credit, short term, of $325,000, funds for mortgage debt principal payments associated with the Hanover Square Property, Ashley Square Property and Brookfield Center Property of $266,270, and distributions to noncontrolling interests of $12,000 during the six months ended June 30, 2021.
There were no non-cash financing activities during the six months ended June 30, 2022. Non-cash financing activities for the six months ended June 30, 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, and the $176,300 forgiveness of the Hampton Inn Property’s note payable under the SBA PPP loan program.
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. Liquidityproperties, if any. We expect to provide any liquidity for growth (acquisition of new investment properties) will be provided by raising additional investment capital. In addition, our company continually reviews and
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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 $7,750,000 for the maturity of the Clemson Best Western Mortgage on October 6, 2022, $353,070$179,719 to pay the dividends and distributions to common shareholders and operating partnership unit holders, and $100,000 to pay the dividends to holders of our mandatorily redeemable preferred stock that were declared on June 23, 2022April 12, 2023 and payable July 21, 2022April 28, 2023 to holders of record on July 18, 2022,April 25, 2023, and $530,942$780,584 in principal payments due on its mortgages payable during the remaining sixnine months ending December 31, 2022.2023. 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.
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:
· | $ |
· | $ |
· | Our $1,500,000 line of credit with Wells Fargo Bank, which, as of March 31, 2023, had a $0 balance; |
● |
· | 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 condensed consolidated financial statements), although there is no guarantee that any such issuances will be successful in raising additional funds. |
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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.Table of Contents
Results of Operations
Three months ended June 30, 2022March 31, 2023
Revenues
Total revenue was $2,595,901$2,460,976 for the three months ended June 30, 2022,March 31, 2023, consisting of $1,623,207$1,891,679 in revenues from retail center properties, $362,851 from hotel properties and $609,843$569,297 from flex center properties. Total revenues for the three months ended June 30, 2022March 31, 2023 decreased by $382,360$442,988 over the three months ended June 30, 2021,March 31, 2022, resulting from decreased hotel property revenues from the sale of our company’s Hampton InnClemson Best Western Hotel Property on September 29, 2022, decreased flex center revenues from tenant turnovers in August 2021,our Parkway Center and Greenbrier Business Center properties, offset by increased retail center and flex center revenues from new leasing activity at our Franklin Square property, and our company’s
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acquisition of the Lancer Center on May 14, 2021, the Parkway, Greenbrier Business Center and Salisbury Marketplace properties, which were not owned during the three months ending June 30, 2021. Property.
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| | | | | | | | | | | For the three months ended | | | | | ||||
| | For the three months ended | | | | | March 31, | | | | |||||||||
| | June 30, | | Increase / | | 2023 |
| 2022 | | Increase / | | ||||||||
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| 2022 |
| 2021 |
| (Decrease) |
| (unaudited) |
| (unaudited) |
| (Decrease) |
| ||||||
Revenues |
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| |
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| |
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| |
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| |
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Retail center properties | | $ | 1,623,207 | | $ | 1,361,349 | | $ | 261,858 | | $ | 1,891,679 | | $ | 1,525,085 | | $ | 366,594 | |
Hotel properties | |
| 362,851 | |
| 1,433,318 | |
| (1,070,467) | ||||||||||
Hotel property | |
| — | |
| 765,489 | |
| (765,489) | | |||||||||
Flex center properties | |
| 609,843 | |
| 183,594 | |
| 426,249 | |
| 569,297 | |
| 613,390 | |
| (44,093) | |
Total Revenues | | $ | 2,595,901 | | $ | 2,978,261 | | $ | (382,360) | | $ | 2,460,976 | | $ | 2,903,964 | | $ | (442,988) | |
Revenues from retail center properties were $1,623,207$1,891,679 for the three months ended June 30, 2022,March 31, 2023, an increase of $261,858$366,594 over retail center property revenues for the three months ended June 30, 2021. This was a result of increasedMarch 31, 2022. Increased revenues of $147,346 from the acquisition of Lancer Center Property and $47,914$239,734 from the acquisition of the Salisbury Marketplace Property, and increased revenes as a result of$127,669 from new leasing activity and annual rent increases from theat our Franklin Square Property, of $40,251, the Ashley Plaza Property of $20,958, and $8,078 from the Hanover Square Property, were offset by slightly decreased revenues of $5,389.$5,016 from the Lancer Center Property and $3,871 from the Ashley Plaza Property.
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| | For the three months ended | | | | ||||
| | June 30, | | Increase / | |||||
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| 2022 |
| 2021 |
| (Decrease) | |||
Retail Center Properties | | | | | | | | | |
Franklin Square Property | | $ | 512,335 | | $ | 472,084 | | $ | 40,251 |
Hanover Square Property | |
| 322,393 | |
| 317,004 | |
| 5,389 |
Ashley Plaza Property | |
| 438,389 | |
| 417,431 | |
| 20,958 |
Lancer Center Property | | | 302,176 | | | 154,830 | | | 147,346 |
Salisbury Property | | | 47,914 | | | — | | | 47,914 |
| | $ | 1,623,207 | | $ | 1,361,349 | | $ | 261,858 |
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| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property | | $ | 583,874 | | $ | 456,205 | | $ | 127,669 |
Hanover Square Property | |
| 331,437 | |
| 323,359 | |
| 8,078 |
Ashley Plaza Property | |
| 431,849 | |
| 435,720 | |
| (3,871) |
Lancer Center Property | | | 304,785 | | | 309,801 | | | (5,016) |
Salisbury Property | | | 239,734 | | | — | | | 239,734 |
| | $ | 1,891,679 | | $ | 1,525,085 | | $ | 366,594 |
Revenues from hotel properties were $362,851$0 for the three months ended June 30, 2022,March 31, 2023, a decrease of $1,070,467$765,489 from revenues from hotel properties for the three months ended June 30, 2021,March 31, 2022, due to the sale of the Hampton Inn property on August 31, 2021 and a decrease of $268,314 in revenues from the Clemson Best Western Property due to the end of the Clemson University occupancy agreement.on September 29, 2022.
| | | | | | | | | | | | | | | | | | |
| | For the three months ended | | | | | For the three months ended | | | | ||||||||
| | June 30, | | Increase / | | March 31, | | | ||||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | 2023 |
| 2022 | | Increase / | ||||||
Hotel Properties |
| |
|
| |
|
| |
| |||||||||
Hampton Inn Property | | $ | — | | $ | 802,153 | | $ | (802,153) | |||||||||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | ||||||||||||
Hotel Property |
| |
|
| |
|
| |
| |||||||||
Clemson Best Western Property | |
| 362,851 | |
| 631,165 | |
| (268,314) | | $ | — | | $ | 765,489 | | $ | (765,489) |
| | $ | 362,851 | | $ | 1,433,318 | | $ | (1,070,467) | | $ | — | | $ | 765,489 | | $ | (765,489) |
Revenues from the flex center properties were $609,843$569,297 for the three months ended June 30, 2022, an increaseMarch 31, 2023, a decrease of $426,249$44,093 over revenues from flex center properties for the three months ended June 30, 2021March 31, 2022 due to newdecreased revenues from the acquisition of the Greenbrier Business Center Property of $197,895$19,255 and the Parkway Property of $213,970, and$33,972, resulting from tenant turnovers in both properties, offset by increased revenues from the Brookfield Center Property of $14,384.$9,134.
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 197,978 | | $ | 183,594 | | $ | 14,384 |
Greenbrier Business Center Property | | | 197,895 | | | — | | | 197,895 |
Parkway Center Property | | | 213,970 | | | — | | | 213,970 |
| | $ | 609,843 | | $ | 183,594 | | $ | 426,249 |
5246
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 207,111 | | $ | 197,977 | | $ | 9,134 |
Greenbrier Business Center Property | | | 180,246 | | | 199,501 | | | (19,255) |
Parkway Center Property | | | 181,940 | | | 215,912 | | | (33,972) |
| | $ | 569,297 | | $ | 613,390 | | $ | (44,093) |
Operating Expenses
Total operating expenses were $2,759,008$2,801,692 for the three months ended June 30, 2022,March 31, 2023, consisting of $442,210$520,740 in expenses from retail center properties, $339,943 in expenses from hotel properties, $160,670$203,734 in expenses from the flex center properties, $368,546$767,078 in legal, accounting and other professional fees, $155,509$117,049 in corporate general and administrative expenses, $169,675 ina loss on extinguishmentimpairment of debt,$36,743, and $1,122,455$1,156,348 in depreciation and amortization.
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Operating Expenses |
| |
|
| |
|
| |
|
Retail center properties (1) | | $ | 442,210 | | $ | 353,834 | | $ | 88,376 |
Hotel properties | |
| 339,943 | |
| 975,189 | |
| (635,246) |
Flex center properties | |
| 160,670 | |
| 64,716 | |
| 95,954 |
Total Investment Property Operating Expenses | |
| 942,823 | |
| 1,393,739 | |
| (450,916) |
Legal, accounting and other professional fees | |
| 368,546 | |
| 296,040 | |
| 72,506 |
Corporate general and administrative expenses | |
| 155,509 | |
| 117,040 | |
| 38,469 |
Loss on extinguishment of debt | | | 169,675 | | | — | | | 169,675 |
Depreciation and amortization | |
| 1,122,455 | |
| 770,377 | |
| 352,078 |
Total Operating Expenses | | $ | 2,759,008 | | $ | 2,577,196 | | $ | 181,812 |
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Operating Expenses |
| |
|
| |
|
| |
|
Retail center properties (1) | | $ | 520,740 | | $ | 457,916 | | $ | 62,824 |
Hotel property | |
| — | |
| 372,860 | |
| (372,860) |
Flex center properties (2) | |
| 203,734 | |
| 166,373 | |
| 37,361 |
Total Investment Property Operating Expenses | |
| 724,474 | |
| 997,149 | |
| (272,675) |
Share based compensation expenses | |
| — | |
| 233,100 | |
| (233,100) |
Legal, accounting and other professional fees (3) | |
| 767,078 | |
| 459,869 | |
| 307,209 |
Corporate general and administrative expenses | |
| 117,049 | |
| 80,706 | |
| 36,343 |
Loss on impairment | |
| 36,743 | |
| 36,670 | |
| 73 |
Impairment of assets held for sale | |
| — | |
| 175,671 | |
| (175,671) |
Depreciation and amortization | |
| 1,156,348 | |
| 1,155,197 | |
| 1,151 |
Total Operating Expenses | | $ | 2,801,692 | | $ | 3,138,362 | | $ | (336,670) |
(1) | Includes |
(2) | Includes $26,997 and $4,992 of bad debt expense for the three months ended March 31, 2023 and 2022, respectively. |
(3) | Includes $144,734 and $99,531 in expenses paid to the Consultant pursuant to the Consulting Agreement for the three months ended March 31, 2023 and 2022, respectively. |
Operating expenses for retail center properties were $442,210$520,740 for the three months ended June 30, 2022,March 31, 2023, an increase of $88,376$62,824 over retail center property operating expenses for the three months ended June 30, 2021.March 31, 2022. Increased operating expenses from the acquisition of the Salisbury Marketplace Property of $60,893, and from three of our existing properties, the Franklin Square Property, which increased by $3,440, the Ashley Plaza Property, which increased by $3,696, and the Hanover Square Property, which increased by $8,669, were offset by decreased operating expenses from the Lancer Center Property of $52,173 and Salisbury Property of $8,947 were the primary contributors to the increase, but our existing properties also experienced slight operating expense increases, including $21,383 from the Franklin Square Property, $1,122 from the Hanover Square Property, and $4,751 from the Ashley Plaza Property.$13,874.
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property (1) | | $ | 186,631 | | $ | 165,248 | | $ | 21,383 |
Hanover Square Property | |
| 76,962 | |
| 75,840 | |
| 1,122 |
Ashley Plaza Property | | | 81,427 | | | 76,676 | | | 4,751 |
Lancer Center Property (2) | |
| 88,243 | |
| 36,070 | |
| 52,173 |
Salisbury Property | |
| 8,947 | |
| — | |
| 8,947 |
Total | | $ | 442,210 | | $ | 353,834 | | $ | 88,376 |
5347
| | | | | | | | | |
| | For the three months ended | | | | ||||
| | March 31, | | | |||||
| | 2023 |
| 2022 | | Increase / | |||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property | | $ | 178,492 | | $ | 175,052 | | $ | 3,440 |
Hanover Square Property | |
| 89,153 | |
| 80,484 | |
| 8,669 |
Ashley Plaza Property | | | 87,938 | | | 84,242 | | | 3,696 |
Lancer Center Property (1) | |
| 104,264 | |
| 118,138 | |
| (13,874) |
Salisbury Property | |
| 60,893 | |
| — | |
| 60,893 |
| | $ | 520,740 | | $ | 457,916 | | $ | 62,824 |
(1) | Includes bad debt expense of $125 and $7,791 for the March 31, 2023 and 2022, respectively. |
Operating expenses for hotel properties were $339,943$0 for the three months ended June 30, 2022,March 31, 2023, a decrease of $635,246$372,860 from operating expenses from hotel properties for the three months ended June 30, 2021. This decrease was primarily due toMarch 31, 2022 resulting from the sale of the Hampton Inn, which reduced hotel property operating expenses by $607,308. In addition, operating expenses from the Clemson Best Western Property decreased by $27,938.on September 29, 2022.
| | | | | | | | | | | | | | | | | | |
| | For the three months ended | | | | | For the three months ended | | | | ||||||||
| | June 30, | | Increase / | | March 31, | | | ||||||||||
|
| 2022 |
| 2021 |
| (Decrease) | | 2023 |
| 2022 | | Increase / | ||||||
Hotel Properties |
| |
|
| |
|
| |
| |||||||||
Hampton Inn Property | | $ | — | | $ | 607,308 | | $ | (607,308) | |||||||||
|
| (unaudited) |
| (unaudited) |
| (Decrease) | ||||||||||||
Hotel Property |
| |
|
| |
|
| |
| |||||||||
Clemson Best Western Property | |
| 339,943 | |
| 367,881 | |
| (27,938) | | $ | — | | $ | 372,860 | | $ | (372,860) |
| | $ | 339,943 | | $ | 975,189 | | $ | (635,246) | | $ | — | | $ | 372,860 | | $ | (372,860) |
Operating expenses from the flex center properties were $160,670$203,734 for the three months ended June 30, 2022,March 31, 2023, an increase of $95,954$37,361 over flex center property operating expenses for the three months ended June 30, 2021March 31, 2022 due to newincreased operating expenses from the acquisitions of the Greenbrier Business Center of $41,416 and the Brookfield Center Property of $49,447 and$1,038, offset by decreased operating expenses from the Parkway Property of $47,906, offset by slightly decreased operating expenses of $1,399 from the Brookfield Center Property.$5,093.
| | | | | | | | | | |||||||||
| | | | | | | | | | | For the three months ended | | | | ||||
| | For the three months ended | | | | | March 31, | | | |||||||||
| | June 30, | | Increase / | | 2023 |
| 2022 | | Increase / | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) |
| (unaudited) |
| (unaudited) |
| (Decrease) | ||||||
Flex Center Properties | | | | | | | | | | | | | | | | | | |
Brookfield Center Property | | $ | 63,317 | | $ | 64,716 | | $ | (1,399) | | $ | 60,851 | | $ | 59,813 | | $ | 1,038 |
Greenbrier Business Center Property | | | 49,447 | | | — | | | 49,447 | |||||||||
Parkway Center Property | | | 47,906 | | | — | | | 47,906 | |||||||||
Greenbrier Business Center Property (1) | | | 85,192 | | | 43,776 | | | 41,416 | |||||||||
Parkway Center Property (2) | | | 57,691 | | | 62,784 | | | (5,093) | |||||||||
| | $ | 160,670 | | $ | 64,716 | | $ | 95,954 | | $ | 203,734 | | $ | 166,373 | | $ | 37,361 |
(1) | Includes $24,463 and $0 of bad debt expense for the March 31, 2023 and 2022, respectively. |
(2) | Includes $2,534 and $4,992 of bad debt expense for the March 31, 2023 and 2022, respectively. |
Operating (Loss) Income
Operating loss for the three months ended June 30, 2022March 31, 2023 was $163,107, a decrease$340,716, an increase of $564,172$106,318 over the operating incomeloss of $401,065$234,398 for the three months ended June 30, 2021.March 31, 2022. This decrease was a result of (i) increaseddecreased investment property operating income of $170,313 primarily resulting from the sale of the Clemson Best Western Hotel on September 29, 2022, (ii) a slight increase in depreciation and amortization expenses from the addition of the four properties (Lancer Center, Parkway, Greenbrier Business Center and Salisbury Marketplace) acquired in 2021 of $352,078,$1,151, (ii) slightly increased loss on extinguishmentimpairment of debt of $169,675,$73, (iii) increased corporate general and administrative expenses of $38,469, (iv) increased legal, accounting and other professional fees of $72,506, offset by$307,209, and (iv) increased operating income from our investment propertiescorporate general and administrative expenses of $68,556. $36,343.
5448
Interest Expense
Interest expense was $874,156$864,052 and $1,224,296$841,424 for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, as follows:
| | | | | | | | | | |||||||||
| | | | | | | | | | | For the three months ended | | | | ||||
| | For the three months ended | | | | | March 31, | | | |||||||||
| | June 30, | | Increase/ | | 2023 |
| 2022 | | Increase / | ||||||||
|
| 2022 |
| 2021 |
| (Decrease) |
| (unaudited) |
| (unaudited) |
| (Decrease) | ||||||
Franklin Square | | $ | 134,635 | | $ | 171,916 | | $ | (37,281) | | $ | 133,233 | | $ | 133,233 | | $ | — |
Hanover Square | |
| 109,786 | |
| 112,456 | |
| (2,670) | |
| 173,863 | |
| 108,077 | |
| 65,786 |
Hampton Inn | |
| — | |
| 175,389 | |
| (175,389) | |||||||||
Ashley Plaza | |
| 109,150 | |
| 111,128 | |
| (1,978) | |
| 106,490 | |
| 108,505 | |
| (2,015) |
Clemson Best Western | |
| 140,251 | |
| 143,985 | |
| (3,734) | |
| — | |
| 138,917 | |
| (138,917) |
Brookfield Center | |
| 49,385 | |
| 50,234 | |
| (849) | |
| 48,229 | |
| 49,092 | |
| (863) |
Lancer Center | | | 56,205 | | | 38,192 | | | 18,013 | | | — | | | 70,902 | | | (70,902) |
Greenbrier Business Center | | | 36,921 | | | — | | | 36,921 | | | — | | | 45,643 | | | (45,643) |
Parkway Center | | | 40,848 | | | — | | | 40,848 | | | 30,672 | | | 33,132 | | | (2,460) |
Wells Fargo Mortgage Facility | | | 41,871 | | | — | | | 41,871 | | | 212,761 | | | — | | | 212,761 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | |
| 155,104 | |
| 150,530 | |
| 4,574 | |
| 158,804 | |
| 153,923 | |
| 4,881 |
Amortization and interest on convertible debentures | |
| — | |
| 269,430 | |
| (269,430) | |||||||||
Other interest | |
| — | |
| 1,036 | |
| (1,036) | |||||||||
Total interest expense | | $ | 874,156 | | $ | 1,224,296 | | $ | (350,140) | | $ | 864,052 | | $ | 841,424 | | $ | 22,628 |
Total interest expense for the three months ended June 30, 2022 decreasedMarch 31, 2023 increased by $350,140$22,628 over the three months ended June 30, 2021.March 31, 2022. This decrease was a result of (i) increased interest expense from the Wells Fargo Mortgage Facility, which refinanced the Lancer Center and Greenbrier Business Center mortgages payable, and financed the acquisition of the Salisbury Marketplace Property (net increase in interest expense of $96,216 for the four properties, combined), and (ii) increased amortization of preferred stock issuance costs of $4,881, offset by (i) decreased interest expense of $37,281 from the Franklin Square mortgage due to its refinancing in November 2021 at a lower interest rate and principal amount, (ii) decreased interest expense of $175,389 resulting$138,917 from the sale of the Hampton InnClemson Best Western Property, (iii) decreased amortization and interest on convertible debentures of $269,430, decreased other interest of $1,036, and (iv)(ii) slight decreases in interest expense for the Hanover Square mortgage ($2,670), the Ashley Plaza mortgage ($1,978) the Clemson Best Western mortgage ($3,734)of $2,015, and the Brookfield Center mortgage ($849), offset by increased interest expense from the acquisition of the Lancer Center Property, Parkway Property, Greenbrier Business Center Property and the Salisbury Marketplace Property (total increase in interest expense of $137,653 for the four properties, combined). 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 condensed consolidated financial statements.$863.
Other (Loss) Income
During the three months ended June 30, 2022,March 31, 2023, other incomeloss was $29,324,$29,038, a decrease of $153,083 over$124,477 from other income of $182,407$95,439 for the three months ended June 30, 2021.March 31, 2022. Other incomeloss for the three months ended June 30, 2022March 31, 2023 consisted of $28,894$39,868 in incomeloss related to the fair value change of the interest rate caps, andoffset by interest income of $430.$10,830. Other income of $182,407$95,439 for the three months ended June 30, 2021March 31, 2022 consisted of $178,278 from the forgiveness of a Small Business Adminstration Payroll Protection Program loan and $149 in other expense$91,042 related to the fair value change of the interest rate caps.cap, $3,913 of miscellaneous income and $484 of interest income.
Net Loss
Net loss was $1,007,939$1,233,806 for the three months ended June 30, 2022,March 31, 2023, before adjustments for net income (loss) income attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was $1,014,887.$1,221,295. Net loss was $640,824$980,383 for the three months ended June 30, 2021,March 31, 2022, before adjustments for net lossincome (loss) attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was $682,963,$989,284, for the three months ended June 30, 2021.March 31, 2022.
Net loss for the three months ended June 30, 2022 decreasedMarch 31, 2023 increased by $367,115$253,423 over the three months ended June 30, 2021,March 31, 2022, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the three months ended June 30, 2022 decreasedMarch 31, 2023 increased by $331,924$232,011 over the three months ended June 30, 2021.
55
Six months ended June 30, 2022
Revenues
Total revenue was $5,499,865 for the six months ended June 30, 2022, consisting of $3,148,292 in revenues from retail center properties, $1,128,340 from hotel properties and $1,223,233 from flex center properties. Total revenues for the six months ended June 30, 2022 decreased by $150,249 over the six months ended June 30, 2021, resulting primarily from decreased hotel property revenues from sale of the Hampton Inn Property, offset by increased revenues from our company’s acquisition of the Lancer Center, Parkway, Greenbrier Business Center and Salisbury Marketplace properties.
| | | | | | | | | | |
| | For the six months ended | | | | | ||||
| | June 30, | | Increase / | | |||||
|
| 2022 |
| 2021 |
| (Decrease) |
| |||
Revenues |
| |
|
| |
|
| |
|
|
Retail center properties | | $ | 3,148,292 | | $ | 2,554,990 | | $ | 593,302 | |
Hotel properties | |
| 1,128,340 | |
| 2,728,703 | |
| (1,600,363) | |
Flex center properties | |
| 1,223,233 | |
| 366,421 | |
| 856,812 | |
Total Revenues | | $ | 5,499,865 | | $ | 5,650,114 | | $ | (150,249) | |
Revenues from retail center properties were $3,148,292 for the six months ended June 30, 2022, an increase of $593,302 over retail center property revenues for the six months ended June 30, 2021. All of our company’s existing retail properties experienced increased revenues, including $36,344 from the Ashley Plaza Property, $24,263 from the Hanover Square Property, and $27,634 from the Franklin Square Property. In addition, our company experienced increased revenues of $457,147 resulting from the acquisition of the Lancer Center Property, and $47,914 from the acquisition of the Salisbury Marketplace Property.
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property | | $ | 968,540 | | $ | 940,906 | | $ | 27,634 |
Hanover Square Property | |
| 645,752 | |
| 621,489 | |
| 24,263 |
Ashley Plaza Property | |
| 874,109 | |
| 837,765 | |
| 36,344 |
Lancer Center Property | | | 611,977 | | | 154,830 | | | 457,147 |
Salisbury Property | | | 47,914 | | | — | | | 47,914 |
| | $ | 3,148,292 | | $ | 2,554,990 | | $ | 593,302 |
Revenues from hotel properties were $1,128,340 for the six months ended June 30, 2022, a decrease of $1,600,363 from revenues from hotel properties for the six months ended June 30, 2021, due to the sale of the Hampton Inn property on AugustMarch 31, 2021 and a slight decrease of $272,410 in revenues from the Clemson Best Western Property due to the end of the Clemson University occupancy agreement.
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Hotel Properties |
| |
|
| |
|
| |
|
Hampton Inn Property | | $ | — | | $ | 1,327,953 | | $ | (1,327,953) |
Clemson Best Western Property | |
| 1,128,340 | |
| 1,400,750 | |
| (272,410) |
| | $ | 1,128,340 | | $ | 2,728,703 | | $ | (1,600,363) |
Revenues from the flex center properties were $1,223,233 for the six months ended June 30, 2022, an increase of $856,812 over revenues from flex center properties for the six months ended June 30, 2021 due to new revenues from the Greenbrier Business
56
Center Property of $397,396 and the Parkway Property of $429,882, and increased revenues from the Brookfield Center Property of $29,534.
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 395,955 | | $ | 366,421 | | $ | 29,534 |
Greenbrier Business Center Property | | | 397,396 | | | — | | | 397,396 |
Parkway Center Property | | | 429,882 | | | — | | | 429,882 |
| | $ | 1,223,233 | | $ | 366,421 | | $ | 856,812 |
Operating Expenses
Total operating expenses were $5,897,370 for the six months ended June 30, 2022, consisting of $900,126 in expenses from retail center properties, $712,803 in expenses from hotel properties, $327,043 in expenses from the flex center properties, $233,100 in share-based compensation expenses, $828,415 in legal, accounting and other professional fees, $236,215 in corporate general and administrative expenses, $36,670 in loss on impairment, $175,671 in impairment of assets held for sale, $169,675 in loss on extinguishment of debt, and $2,277,652 in depreciation and amortization.
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Operating Expenses |
| |
|
| |
|
| |
|
Retail center properties (1) | | $ | 900,126 | | $ | 684,960 | | $ | 215,166 |
Hotel properties | |
| 712,803 | |
| 1,772,584 | |
| (1,059,781) |
Flex center properties (2) | |
| 327,043 | |
| 118,804 | |
| 208,239 |
Total Investment Property Operating Expenses | |
| 1,939,972 | |
| 2,576,348 | |
| (636,376) |
Share based compensation expenses | |
| 233,100 | |
| 149,981 | |
| 83,119 |
Legal, accounting and other professional fees | |
| 828,415 | |
| 787,895 | |
| 40,520 |
Corporate general and administrative expenses | |
| 236,215 | |
| 186,177 | |
| 50,038 |
Loss on impairment | |
| 36,670 | |
| — | |
| 36,670 |
Impairment of assets held for sale | |
| 175,671 | |
| — | |
| 175,671 |
Loss on extinguishment of debt | |
| 169,675 | |
| — | |
| 169,675 |
Depreciation and amortization | |
| 2,277,652 | |
| 1,423,610 | |
| 854,042 |
Total Operating Expenses | | $ | 5,897,370 | | $ | 5,124,011 | | $ | 773,359 |
Operating expenses for retail center properties were $900,126 for the six months ended June 30, 2022, an increase of $215,166 over retail center property operating expenses for the six months ended June 30, 2021. Increased operating expenses from the acquisition of the Lancer Center Property of $170,311 and the Salisbury Marketplace Property of $8,947, and from two of our existing properties, Franklin Square, which increased by $38,549, and Ashley Plaza which increased by $4,164, were offset by slightly reduced expenses from the Hanover Square Property of $6,805.2022.
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| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Retail Center Properties |
| |
|
| |
|
| |
|
Franklin Square Property (1) | | $ | 361,683 | | $ | 323,134 | | $ | 38,549 |
Hanover Square Property | |
| 157,446 | |
| 164,251 | |
| (6,805) |
Ashley Plaza Property (2) | | | 165,669 | | | 161,505 | | | 4,164 |
Lancer Center Property (3) | |
| 206,381 | |
| 36,070 | |
| 170,311 |
Salisbury Property | |
| 8,947 | |
| — | |
| 8,947 |
| | $ | 900,126 | | $ | 684,960 | | $ | 215,166 |
Operating expenses for hotel properties were $712,803 for the six months ended June 30, 2022, a decrease of $1,059,781 from operating expenses from hotel properties for the six months ended June 30, 2021. Decreased hotel operating expenses of $1,065,449 resulting from the sale of the Hampton Inn Property were slightly offset by increased operating expenses of $5,668 from the Clemson Best Western Property.
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Hotel Properties |
| |
|
| |
|
| |
|
Hampton Inn Property | | $ | — | | $ | 1,065,449 | | $ | (1,065,449) |
Clemson Best Western Property | |
| 712,803 | |
| 707,135 | |
| 5,668 |
| | $ | 712,803 | | $ | 1,772,584 | | $ | (1,059,781) |
Operating expenses from the flex center properties were $327,043 for the six months ended June 30, 2022, an increase of $208,239 over flex center property operating expenses for the six months ended June 30, 2021 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 six months ended | | | | ||||
| | June 30, | | Increase / | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Flex Center Properties | | | | | | | | | |
Brookfield Center Property | | $ | 123,130 | | $ | 118,804 | | $ | 4,326 |
Greenbrier Business Center Property (1) | | | 93,223 | | | — | | | 93,223 |
Parkway Center Property | | | 110,690 | | | — | | | 110,690 |
| | $ | 327,043 | | $ | 118,804 | | $ | 208,239 |
Operating (Loss) Income
Operating loss for the six months ended June 30, 2022 was $397,505, a decrease of $923,608 over the operating income of $526,103 for the six months ended June 30, 2021. This increase was a result of (i) increased depreciation and amortization expenses from the addition of four properties (Lancer Center, Parkway, Greenbrier Business Center and Salisbury Marketplace) of $854,042, (ii) increased impairment of assets held for sale of $175,671 related to the Clemson Best Western Property, (iii) increased loss on impairment of $36,670, (iv) increased loss on extinguishment of debt of $169,675, (v) increased corporate general and administrative expenses of
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$50,038, (vi) increased share based compensation expenses of $83,119, (vii) increased legal, accounting and other professional fees of $40,520, offset by increased investment property operating income of $486,127
Interest Expense
Interest expense was $1,715,580 and $3,658,428 for the six months ended June 30, 2022 and 2021, respectively, as follows:
| | | | | | | | | |
| | For the six months ended | | | | ||||
| | June 30, | | Increase/ | |||||
|
| 2022 |
| 2021 |
| (Decrease) | |||
Franklin Square | | $ | 267,868 | | $ | 341,969 | | $ | (74,101) |
Hanover Square | |
| 217,863 | |
| 226,522 | |
| (8,659) |
Hampton Inn | |
| — | |
| 357,767 | |
| (357,767) |
Ashley Plaza | |
| 217,655 | |
| 221,573 | |
| (3,918) |
Clemson Best Western | |
| 279,168 | |
| 306,529 | |
| (27,361) |
Brookfield Center | |
| 98,477 | |
| 100,156 | |
| (1,679) |
Lancer Center | | | 127,107 | | | 38,192 | | | 88,915 |
Greenbrier Business Center | | | 82,564 | | | — | | | 82,564 |
Parkway Center | | | 73,980 | | | — | | | 73,980 |
Wells Fargo Mortgage Facility | | | 41,871 | | | — | | | 41,871 |
Amortization and preferred stock dividends on mandatorily redeemable preferred stock | |
| 309,027 | |
| 299,979 | |
| 9,048 |
Amortization and interest on convertible debentures | |
| — | |
| 1,760,973 | |
| (1,760,973) |
Other interest | |
| — | |
| 4,768 | |
| (4,768) |
Total interest expense | | $ | 1,715,580 | | $ | 3,658,428 | | $ | (1,942,848) |
Total interest expense for the six months ended June 30, 2022 decreased by $1,942,848 over the six months ended June 30, 2021. This decrease was a result of (i) decreased interest expense of $74,101 from the Franklin Square mortgage due to its refinancing in November 2021 at a lower interest rate and principal amount, (ii) decreased interest expense of $357,767 resulting from the sale of the Hampton Inn Property, (iii) decreased amortization and interest on convertible debentures of $1,760,973, decreased other interest of $4,768, and (iv) slight decreases in interest expense for the Hanover Square mortgage of $8,659, the Ashley Plaza mortgage of $3,918 the Clemson Best Western mortgage of $27,361 and the Brookfield Center mortgage of $1,679, offset by increased interest expense from the acquisition of the Lancer Center Property, Parkway Property, Greenbrier Business Center Property and the Salisbury Marketplace Property (total increase in interest expense of $287,330 for the four properties, combined). 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 condensed consolidated financial statements.
Other Income
During the six months ended June 30, 2022, other income was $124,763, a decrease of $58,996 over other income of $183,759 for the six months ended June 30, 2021. Other income for the six months ended June 30, 2022 consisted of $119,936 in income related to the fair value change of the interest rate caps, interest income of $914 and miscellaneous income of $3,913. Other income of $183,759 for the six months ended June 30, 2021 consisted of $178,278 from the forgiveness of a Small Business Adminstration Payroll Protection Program loan, interest income of $5,470, and $11 resulting from an increase in the fair value of the interest rate caps.
Net Loss
Net loss was $1,988,322 for the six months ended June 30, 2022, before adjustments for net (loss) income attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was $2,004,171. Net loss was $2,948,566 for the six months ended June 30, 2021, before adjustments for net loss attributable to
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noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was $2,960,487, for the six months ended June 30, 2021.
Net loss for the six months ended June 30, 2022 decreased by $960,244 over the six months ended June 30, 2021, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the six months ended June 30, 2022 decreased by $956,316 over the six months ended June 30, 2021.
Funds from Operations
We use Fundsfunds 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.
49
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 percent100% 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 sixthree months ended June 30,March 31, 2023 and 2022:
| | | | | | | | | |
Net income (loss) |
| $ | (1,988,322) | ||||||
| | For the three months ended | |||||||
| | March 31, | |||||||
|
| 2023 |
| 2022 | |||||
Net loss | | $ | (1,233,806) | | (980,383) | ||||
Depreciation of tangible real property assets (1) | |
| 1,219,261 | |
| 674,398 | | 602,845 | |
Depreciation of tenant improvements (2) | |
| 300,446 | |
| 205,153 | | 148,924 | |
Amortization of leasing commissions (3) | |
| 44,437 | |
| 31,930 | | 19,791 | |
Amortization of intangible assets (4) | |
| 713,508 | |
| 244,867 | | 383,637 | |
Loss on impairment (5) | |
| 36,670 | |
| 36,743 | | 36,670 | |
Impairment of assets held for sale (5) | |
| 175,671 | |
| — | | | 175,671 |
Loss on extinguishment of debt (6) | | | 169,675 | ||||||
Funds from operations | | $ | 671,346 | | $ | (40,715) | | $ | 387,155 |
(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 |
60
(5) | NAREIT’s December 2018 White Paper provides guidance for the treatment of impairment write-downs. Specifically, “To the extent there is an impairment write-down of depreciable real estate … related to a REIT’s main business, the write-down is excluded from FFO (i.e., adjusted from net income in calculating FFO).” Additionally, NAREIT’s December 2018 White Paper provides guidance on gains or losses on the sale of assets, stating “the REIT has the option to include or exclude such gains and losses in the calculation 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 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
50
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 sixthree months ended June 30,March 31, 2023 and 2022 was as follows:
| | | |
Funds from operations |
| $ | 671,346 |
Amortization of above market leases (1) | |
| 125,526 |
Amortization of below market leases (2) | |
| (189,777) |
Straight line rent (3) | |
| (58,450) |
Capital expenditures (4) | |
| (492,703) |
Increase in fair value of interest rate cap (5) | |
| (119,936) |
Amortization of loan issuance costs (6) | |
| 53,617 |
Amortization of preferred stock discount and offering costs (7) | |
| 109,027 |
Share-based compensation (8) | |
| 233,100 |
Bad debt expense (9) | |
| 12,946 |
Adjusted funds from operations (AFFO) | | $ | 344,696 |
| | | | | | |
| | For the three months ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
Funds from operations | | $ | (40,715) | | $ | 387,155 |
Amortization of above market leases (1) | |
| 27,343 | |
| 69,583 |
Amortization of below market leases (2) | |
| (100,361) | |
| (95,617) |
Straight line rent (3) | |
| (48,899) | |
| (14,921) |
Capital expenditures (4) | |
| (647,690) | |
| (366,059) |
(Increase) decrease in fair value of interest rate cap (5) | |
| 39,868 | |
| (91,042) |
Amortization of loan issuance costs (6) | |
| 26,990 | |
| 28,118 |
Amortization of preferred stock discount and offering costs (7) | |
| 58,804 | |
| 53,923 |
Share-based compensation (8) | |
| — | |
| 233,100 |
Bad debt expense (9) | |
| 27,122 | |
| 12,783 |
Adjusted funds from operations (AFFO) | | $ | (657,538) | | $ | 217,023 |
(1) | Adjustment to FFO resulting from non-cash amortization of intangible |
(2) | Adjustment to FFO resulting from non-cash amortization of intangible |
(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 |
(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 |
(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 Parkway Property and Clemson Best Western |
(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 |
(7) | Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing the preferred stock discount over its |
(8) | Adjustment to FFO |
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(9) | 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 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. |
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ItemITEM 3. Quantitative and Qualitative Disclosures about Market RiskQUANTITATIVE 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.
ItemITEM 4. Controls and ProceduresCONTROLS 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 principal executive officer and principal financial officer, regarding the effectiveness of our disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Quarterly Report. Based on the most recent evaluation, the Company’sforegoing, our principal executive officer and principal financial officer have determinedconcluded, as of March 31, 2023, that the Company’sour disclosure controls and procedures (as definedwere effective in Rules 13a-15(e) and 15d-15(e)ensuring that information required to be disclosed by us in reports filed or submitted under the Securities and Exchange Act of 1934,(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 amended) were effective as of June 30, 2022.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 principal executive officer and principal financial officer, evaluated, as of March 31, 2023, 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 principal executive officer and principal financial officer concluded that our internal control over financial reporting, as of March 31, 2023, were effective.
This Quarterly 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 Quarterly Report.
Changes in Internal Control over Financial Reporting
There have beenwas no changes tochange in our internal control over financial reporting that occurred during the period covered by this reportour most recent fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ItemITEM 1. Legal ProceedingsLEGAL PROCEEDINGS
We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business. Our management doesWe are not believe thatpresently subject to any suchmaterial litigation will materially affectnor, 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 position or operations.condition.
52
ItemITEM 1A. Risk FactorsRISK FACTORS
We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.
ItemITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsUNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Repurchases of Equity Securities
On December 21, 2021, the Company’s Board of Directors authorized a share repurchase program whereby the Companywe may repurchase up to 500,000 shares
of itsour common stock.
Share repurchase activity understock for a maximum price of $4.80 per share. As of December 31, 2022, the Company had repurchased 268,070 shares of our share repurchase plan, oncommon stock at a trade date basis, fortotal cost of $278,277 and an average price of $1.038 per share. During the sixthree months ended June 30, 2021, was as follows:
| | | | | | | | |
Purchase Date |
| Shares Purchased |
| Price Per Share |
| Total Cost | ||
January 4, 2022 | | 400 | | $ | 1.060 | | $ | 424 |
January 5, 2022 |
| 48,205 |
| | 1.060 |
| | 51,093 |
January 6, 2022 |
| 100,000 |
| | 1.046 |
| | 104,556 |
January 7, 2022 |
| 30,000 |
| | 1.050 |
| | 31,500 |
January 10, 2022 |
| 50,000 |
| | 1.020 |
| | 51,000 |
January 14, 2022 |
| 100 |
| | 1.010 |
| | 101 |
January 21, 2022 |
| 39,365 |
| | 1.006 |
| | 39,603 |
Total |
| 268,070 | | $ | 1.038 | | $ | 278,277 |
March 31, 2023, the Company did not make any share repurchases.
62
Item 3. Defaults Upon Senior Securities
None.
ItemITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. Mine Safety DisclosuresMINE SAFETY DISCLOSURES
Not applicable.Applicable.
ITEM 5. OTHER INFORMATION
None.
Item 5. Other Information
None.EXHIBIT INDEX
63
Item 6. Exhibits
Exhibit |
| Description | |||
3.1 | Articles of Incorporation of Medalist Diversified REIT, Inc.* | ||||
3.2 | |||||
3.3 | | ||||
3.4 | | ||||
3.5 | |||||
4.1 | |||||
4.2 | | ||||
| | ||||
10.1 | | ||||
10.2 | |
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10.3 | | |
10.4 | | |
| | |
|
| |
|
| |
|
|
|
|
| |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | Inline XBRL Instance |
101.SCH | | Inline XBRL Schema Document. |
101.CAL | | Inline XBRL Calculation Linkbase Document. |
|
| |
|
| |
101.DEF | | Inline XBRL Definition Linkbase Document. |
| | Inline XBRL Labels Linkbase Document. |
101.PRE | | Inline XBRL Presentation Linkbase Document. |
104 | |
|
| †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.
Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to Condensed Consolidated Financial Statements.
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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.
ay | | |
Date: | | |
| | |
By: | /s/ Thomas E. Messier | |
Thomas E. Messier | ||
Chief Executive Officer and Chairman of the Board | ||
(principal executive officer) | ||
| | |
| By: | /s/ C. Brent Winn |
|
| C. Brent Winn |
|
| |
|
| Chief Financial Officer |
|
| (principal accounting officer and principal financial officer) |
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