10-K 1 tm205396d1_10k.htm FORM 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

OR

 

¨ 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.)

 

 

11 S. 12th Street, Suite 401

Richmond, Virginia 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:

 

Title of Each Class

  Trading Symbol  

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share   MDRR   The Nasdaq Capital Market
8.0% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value per share
  MDRRP   The Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No x

 

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 x    No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes x    No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting 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. (Check one):

 

Large accelerated filter   ¨   Accelerated filter   ¨
Non-accelerated filter   x   Smaller reporting company   x
        Emerging Growth Company   x

 

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 Act).    Yes ¨    No x

 

As of June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $19,710,420, based on the public offering price of $10.00 per share of common stock in our Regulation A offering which was terminated on June 19, 2018.

 

As of March 24, 2020, the registrant had 4,500,144 shares of common stock outstanding.

 

Documents incorporated by reference: Portions of the registrant’s Definitive Proxy Statement for the 2019 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission no later than 120 days after the end of the registrant’s fiscal year end) are incorporated by reference in this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

 

 

 

 

 

 

MEDALIST DIVERSIFIED REIT, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019

 

Table of contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 1
   
PART I 2
   
ITEM  1.   BUSINESS 2
ITEM 1A.   RISK FACTORS 5
ITEM 1B.   UNRESOLVED STAFF COMMENTS 5
ITEM  2.   PROPERTIES 5
ITEM  3.   LEGAL PROCEEDINGS 14
ITEM  4.   MINE SAFETY DISCLOSURES 14
   
PART II 14
     
ITEM  5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES 14
ITEM  6.   SELECTED FINANCIAL DATA 15
ITEM  7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
ITEM  8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM  9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 29
ITEM 9A.   CONTROLS AND PROCEDURES 29
ITEM 9B.   OTHER INFORMATION 29
   
PART III 29
     
ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 29
ITEM 11.   EXECUTIVE AND DIRECTOR COMPENSATION 29
ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 30
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 30
ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES 30
   
PART IV 30
     
ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 30

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements are included throughout this Annual Report on Form 10-K. We have used the words “approximately,” “anticipate,” “assume,” “believe,” “budget,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will” and similar terms and phrases to identify forward-looking statements in this Annual Report on Form 10-K.

 

The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

  · the competitive environment in which we operate;

  · national, international, regional and local economic conditions;

  · capital expenditures;

  · the availability, terms and deployment of capital;

  · financing risks;

  · the general level of interest rates;
  · changes in our business or strategy;
  · fluctuations in interest rates and increased operating costs;
  · our limited operating history;
  · the degree and nature of our competition;
  · our dependence upon our Manager and key personnel;
  · defaults on or non-renewal of leases by tenants;
  · decreased rental rates or increased vacancy rates;
  · our ability to make distributions on shares of our common stock;
  · difficulties in identifying properties to acquire and completing acquisitions;
  · our ability to operate as a public company;
  · potential natural disasters such as hurricanes;

  · our ability to maintain our qualification as a REIT for U.S. federal income tax purposes;

  · 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.

 

1

 

 

The forward-looking statements contained in this Annual Report on Form 10-K are based on historical performance and management’s current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Annual Report on Form 10-K speaks only as of the date of this Annual Report on Form 10-K. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.

 

2

 

 

PART I

 

ITEM 1. BUSINESS

 

As used in this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “our,” “us,” and “our company” refer to Medalist Diversified REIT, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Medalist Diversified Holdings, LP, a Delaware limited partnership of which we are the sole general partner, except where it is clear from the context that the term only means Medalist Diversified REIT, Inc.

 

Overview

 

Medalist Diversified REIT, Inc. was formed in 2015 as a Maryland corporation, to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial, and retail properties, (ii) multi-family residential properties and (iii) hotel properties. We invest primarily in properties across secondary and tertiary markets in the southeastern part of the United States, with a concentration in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. Beginning with our taxable year ended December 31, 2017, we believe that we have operated in a manner qualifying us as a REIT, and we have elected to be taxed as a REIT for federal income tax purposes. We are externally managed and advised by Medalist Fund Manager, Inc., a Virginia corporation, or our Manager. Our Manager makes all investment decisions for us. Our Manager is owned fifty percent each by Mr. Bill Elliott and Mr. Tim Messier, who are co-Presidents thereof.

 

We operate as an UPREIT, and own our properties through our subsidiary, Medalist Diversified Holdings, L.P., a Delaware limited partnership. We may also pursue other real estate-related investments, including but not limited to equity or other ownership interests in entities that are the direct or indirect owners of real property, or indirect investments in real property, such as those that may be obtained in a joint venture. We anticipate that any such equity or joint venture investments to be in controlling interests in such entities. While we do not intend for these types of investments to be a primary focus, we may make such investments in our Manager’s sole discretion. We refer to our investments in real property and our real estate-related investments, collectively, as Investments.

 

Our principal objectives include sourcing value-add Investments in markets in which we maintain deep industry relationships and local market knowledge, and the creation of value for stockholders by utilizing our relationships and local knowledge of commercial real estate investment, management and disposition. There is, however, no assurance that any of these objectives will be achieved.

 

We may make Investments in properties owned by unaffiliated third parties, our Manager, or affiliates of our Manager, as determined by our Manager in its sole discretion.

 

Management

 

Our Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. Through their prior experience in the real estate industry, our Manager’s principals and their respective affiliates have developed a strong network of relationships with real estate owners, investors, operators and developers of all sizes and investment formats, across the United States and have a track record of success. We intend to leverage this experience to gain access to and identify suitable Investments, located across secondary and tertiary markets throughout the southeastern part of the United States, primarily in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. We do not anticipate making Investments outside of the United States.

 

The principal executive offices of the company and our Manager are located at 11 S. 12th Street, Suite 401, Richmond, Virginia 23219. Our telephone number is (804) 344-4445.

 

3

 

 

Investment Strategies

 

Our Manager believes that its focus on value-add and opportunistic commercial real estate provides an attractive balance of risk and returns. Our Manager intends to use some or all of the following strategies to enhance the performance, quality and value of our Investments:

 

  · proprietary investment sourcing;

  · a rigorous, consistent and replicable process for sourcing and conducting due diligence;

  · appropriate exit strategy;

  · hands-on portfolio management; and

  · focus on opportunistic properties.

 

Our investment policies provide our Manager with substantial discretion with respect to the selection, purchase and sale of specific Investments, subject to the limitations in our management agreement. We may revise the investment policies without the approval of our stockholders. We will review the investment policies at least annually to determine whether the policies are in the best interests of our stockholders.

 

Our Portfolio

 

Our goal is to acquire and own, through wholly owned subsidiaries of our operating partnership, a portfolio of commercial, retail and hotel properties located primarily in the southeastern United States. We currently own six Investments comprised of three retail properties, two hotel properties and one flex/industrial property. We own 100% of the interests in our Investments, except for one hotel property of which we own 75% tenant-in-common interest in the property and one retail property of which we own 84% tenant-in-common interest in the property. For further information on properties and our tenant base, see “Item 2—Properties.”

 

Reporting Segments

 

We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have Investments. As of December 31, 2019, we had the following reportable segments:  retail center properties, flex center properties and hotel properties.

 

Competition

 

We are subject to significant competition in seeking real estate investments and tenants. We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, hedge funds, governmental bodies and other entities. We also face competition from other real estate investment programs, for investments that may be suitable for us. Many of our competitors have substantially greater financial and other resources than we have and may have substantially more operating experience than either us or our Manager. They also may enjoy significant competitive advantages that result from, among other things, a lower cost of capital.

 

Seasonality

 

The hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at our hotels may cause quarterly fluctuations in its revenues. Occupancy rates and hotel revenues for our Hampton Inn Property are highest in April/May and October due to a local event that generates significant demand, and generally greater in the second and third quarters than in the first quarter and in November and December. Occupancy rates and hotel revenues for our Clemson Best Western Property are highest in the spring and fall months, due to sporting events at Clemson University.

 

Environmental Matters

 

As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials (e.g., asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in our buildings. Environmental laws govern the presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, it could face fines for such noncompliance. Also, we could be liable to third parties (e.g., occupants of the buildings) for damages related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. In addition, some of our tenants routinely handle and use hazardous or regulated substances and wastes as part of their operations at our properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us, and changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations. We are not aware of any material contingent liabilities, regulatory matters or environmental matters that may exist.

4

 

 

Staffing

 

We are externally managed by our Manager pursuant to a management agreement. We do not have any employees and our executive officers are employed by our Manager. Our properties are managed by third party property management companies with whom our Manager contracts.

 

Available Information

 

We electronically file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website at www.sec.gov, or downloaded from our website at www.medalistreit.com, as soon as reasonably practicable after such material has been filed with, or furnished to, the SEC. Access to these filings is free of charge.

 

ITEM 1A. RISK FACTORS

 

We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have Investments. As of December 31, 2019, we had the following reportable segments: (i) retail center properties, consisting of the Franklin Square Property, an undivided 84% tenant-in-common interest in Hanover Square North and the Ashley Plaza Property; (ii) flex center properties, consisting of the Brookfield Center Property and (iii) hotel properties, consisting of an undivided 64% tenant-in-common interest in the Greensboro Hampton Inn and the Clemson Best Western Property.

 

Name   Type   Description
Franklin Square Property   Retail   134,239 square foot retail property located at 3940 East Franklin Boulevard in Gastonia, North Carolina 28056, on 10.293 acres, built in 2006 and 2007, that is 92.5% occupied as of December 31, 2019 and anchored by Ashley Furniture, Monkey Joe’s and Altitude.
         
Greensboro Hampton Inn   Hotel   Located at 7803 National Service Road, Greensboro, North Carolina, 27409.  The hotel has 125 rooms, was built in 1996, is approximately 65,400 square feet and sits on 2.162 acres.
         
Hanover Square North   Retail   73,441 square foot retail center located at 7230 Bell Creek Road in Mechanicsville, Virginia 23111, on 9.630 acres, built in 2007, that is 96.7% occupied as of December 31, 2019 and anchored by a Marshalls store and an Old Navy store.  
         
Ashley Plaza Property   Retail   160,356 square foot retail property located at 201–221 North Berkeley Boulevard in Goldsboro, North Carolina 27534, built in 1977, fully renovated in 2018, 98.0 percent leased as of December 31, 2019, and is anchored by Hobby Lobby, Harbor Freight, Ashley Home Store and Planet Fitness.
         
Clemson Best Western Property   Hotel   Located at 1310 Tiger Boulevard, Clemson, South Carolina, 29631 The Clemson Best Western Property has 148 rooms, was built in 1982, substantially renovated in 2016 and 2017, is approximately 85,300 square feet and sits on 5.92 acres.
         
Brookfield Center Property   Flex-industrial   64,880 square foot flex-industrial property located at 48 Brookfield Center Drive, Greenville, South Carolina 29607, built in 2007, 93.8 percent leased as of December 31, 2019, and is anchored by Gravitopia Trampoline Park and Summit Church.  

 

5

 

 

Franklin Square Property

 

On April 28, 2017, we completed our acquisition of the Franklin Square Property through a wholly owned subsidiary. The purchase price for the Franklin Square Property was $20,500,000 paid through a combination of cash and assumed, secured debt, or the Franklin Square Loan. Our total investment, including acquisition and closing costs, escrows and lease reserves was approximately $22,054,071. The Franklin Square Property, built in 2006 and 2007, was 68 percent leased as of the acquisition date, is anchored by Ashley Furniture, Monkey Joe’s, Allen Tate, Inc. and Altitude Trampoline Park, or Altitude, and is located in Gastonia, North Carolina.

 

On May 10, 2018, we entered into a lease with Altitude, a national tenant, for 30,000 square feet of rentable space. Altitude’s occupancy commenced in November, 2018 and rent will commence on August 1, 2019. On October 18, 2018, we entered into a lease with Allen Tate, Inc. for 4,156 square feet. Allen Tate’s occupancy commenced on December 1, 2018, and rent commenced on March 1, 2019. Allen Tate’s and Altitude’s occupancy brought the Franklin Square Property’s occupancy rate to 92.4 percent as of December 31, 2019.

 

The Franklin Square Loan was originally made on February 10, 2016 in the original principal amount of $14,275,000 and assumed by us at acquisition. The Franklin Square Loan will mature in October, 2021. The Franklin Square Loan requires monthly interest only payments during the term. The Franklin Square Loan bears interest at 4.7%. The Franklin Square Loan may be prepaid, subject to certain conditions and limitations contained in the loan documents. The Franklin Square Loan is secured by the Franklin Square Property.

 

The property is an eight building one-floor retail center totaling approximately 134,239 gross leasable area. The building is concrete slab on grade with spread footings. The exterior walls are a combination of insulation and finish system, metal panel siding, brick veneer and textured CMU. Retail storefronts are double-pane glass set in anodized aluminum frames. The roof is flat with fully-adhered, thermoplastic olefin membrane roof system. The parking area comprises 435 spaces.

 

Tenants occupying 10% or more of the rentable square footage:

 

Tenant  Business  Leased
Square
Footage
   Percentage
of Rentable
Square
Footage
   Annual Rent   Lease
Expiration
  Renewal
Options
Ashley Furniture  Retail   34,682    25.84%  $612,327   5/31/2022 

5/31/2027

5/31/2032

5/31/2037

5/31/2042

Altitude Trampoline Park  Entertainment   30,000    22.35%  $270,000   7/31/2029  7/31/2034
7/31/2039
7/31/2044

 

Occupancy data for the five preceding years (as of December 31, unless otherwise noted):

 

   2019   2018   2017   2016   2015   2014 
Occupancy Rate   92.4%   92.5%   71.0%   95.1%   87.7%   90.3%

 

Average effective annual rent per square foot for the five preceding years:

 

   2019   2018   2017   2016   2015   2014 
Average Effective Annual Rent Per Square Foot(1)  $13.47   $11.98   $9.87   $12.86   $14.60   $14.80 

 

  (1)  Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements.  

 

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Lease expirations in the next 10 years:

 

   2020   2021   2022   2023   2024   2025   2026   2027   2028   2029   2030 
Leases Expiring   5    1    3    1    4    3    -    2    -    1    - 
                                                        
Square Footage   12,655    4,260    38,338    4,235    9,564    18,879    -    6,190    -    30,000    - 
                                                        
Annual Rent (1)  $271,152   $89,460   $695,747   $95,965   $223,048   $263,554   $-   $155,273   $-   $300,000   $- 
                                                        
Percentage of Aggregate Annual Rent (2)   15.0%   4.9%   38.5%   5.3%   12.3%   14.6%   0%   8.6%   0%   16.6%   0%

 

  (1) Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months.  
     
  (2) The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total 2019 rent.  

 

Greensboro Hampton Inn

 

On November 3, 2017, we purchased an undivided 64% tenant-in-common interest in the property commonly referred to as the Greensboro Airport Hampton Inn located at 7803 National Service Road in Greensboro, North Carolina, or the Greensboro Hampton Inn. The purchase price for the Greensboro Hampton Inn was $15,100,000. The Greensboro Hampton Inn has 125 rooms, was built in 1996, is approximately 65,400 square feet and sits on 2.162 acres. In the transaction, our operating partnership acquired an undivided sixty-four percent (64%) tenant-in-common interest in the Greensboro Hampton Inn and PMI Greensboro, LLC, or PMI Greensboro, a noncontrolling owner, acquired the remaining undivided thirty-six percent (36%) tenant-in-common interest, each from Medalist Properties 8, LLC, a Delaware limited liability company and affiliate of our company.

 

The purchase price, closing costs and acquisition fee for the Greensboro Hampton Inn was financed with (a) $7,823,312 in equity, comprised of (i) $4,048,281 in cash from our company, (ii) $300,000 in the form of 3,000 shares of our common stock, (iii) $1,175,000 in the form of 125,000 common units of limited partnership interest in our operating partnership, or OP Units, and (iv) $2,300,031 in cash from PMI Greensboro, and (b) net mortgage loan proceeds of $10,181,309 from a senior mortgage loan made by Benefit Street Partners Realty Operating Partnership, L.P., or the Greensboro Lender, in the original principal amount of $10,600,000, or the Greensboro Senior Loan.

 

The cash portion of the amount contributed by us was financed by (i) a short-term loan made by Virginia Commonwealth Bank in the original principal amount of $1,500,000, or the Virginia Commonwealth Bank Loan, (ii) a short-term loan made by Medalist Fund I, LLC, our affiliate, in the original principal amount of $252,000, or the Fund I Loan, (iii) a short-term loan made by Medalist Fund II, LLC, our affiliate, in the original principal amount of $150,000, or the Fund II Loan, (iv) a short-term loan from Medalist Properties 8, LLC, our affiliate and the seller of the Greensboro Airport Hampton Inn Property, in the original principal amount of $125,238, or the Seller Loan, (v) a short-term loan from K&R Automotive in the original principal amount of $100,000, or the K&R Loan, and (vi) a short-term loan from Medalist Fund I-B, LLC, our affiliate, in the original principal amount of $50,000, or the Fund I-B Loan.

 

The Greensboro Senior Loan has an initial 36-month term, maturing on November 9, 2020. The borrowers, however, have extension options, which if exercised, could extend the maturity date of the Greensboro Senior Loan for two (2) successive 12-month periods. The Greensboro Senior Loan requires monthly interest only payments during the 36-month term. The Greensboro Senior Loan bears interest at the greater of (i) 5.0% plus the Adjusted LIBOR rate (which is calculated by multiplying the LIBOR rate by the resulting reciprocal fraction of 1.0 less the reserve percentage of the Greensboro Lender, and (ii) 6.1%. The Greensboro Senior Loan may be prepaid, subject to certain conditions and payments. The Greensboro Senior Loan is secured by the Greensboro Hampton Inn.

 

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The Virginia Commonwealth Bank Loan carried interest at the rate of 4.223%. The Virginia Commonwealth Bank Loan was repaid in full on January 24, 2018.

 

The Fund I Loan, the Fund II Loan, the Seller Loan, the K&R Loan and the Fund I-B Loan were repaid in full on January 31, 2018. The Fund I Loan, the Fund II Loan, the K&R Loan and the Fund I-B Loan were issued at interest rates of 5%, and the Seller Loan was an interest free loan.

 

In connection with our acquisition of the Greensboro Hampton Inn, we, through a subsidiary, entered into the Tenants in Common Agreement with PMI Greensboro, as amended, or the Greensboro TIC Agreement. Among other approvals, under the Greensboro TIC Agreement, the consent of both tenants in common is required to approve (i) any lease, sublease, deed restriction, or grant of easement of/on all or any portion of the Greensboro Hampton Inn, (ii) any sale or exchange of the Greensboro Hampton Inn, or (iii) any indebtedness or loan, and any negotiation or refinancing thereof, secured by a lien on the Greensboro Hampton Inn. In the event the tenants in common are unable to agree on a decision which requires the consent of both tenants in common, a tenant in common may purchase the undivided interest of the other tenant in common subject to certain rights contained in the Greensboro TIC Agreement.

 

On January 1, 2020, we effected a transaction by which PMI Greensboro exchanged (i) approximately 7.55% of its tenant in common interest in the Greensboro Hampton Inn for the settlement of $867,000 in advances made by our company to the Greensboro Hampton Inn; and (ii) approximately 3.45% of its tenant in common interest in the Greensboro Hampton Inn for 93,580 OP Units. As a result of this transaction, our company’s tenant-in-common interest in the Greensboro Hampton Inn increased from 64% to 75%, and PMI Greensboro’s tenant in common interest decreased from 36% to 25%.

 

The hotel is a five-story building totaling approximately 65,400 square feet, with 125 guestrooms. The building is cast in place reinforced concrete upper level flooring supported by reinforced concrete columns bearing on spread footings and piers. The ground level floor is a concrete slab-on-grade. The exterior walls are frame with brick veneer with synthetic stucco exterior elements. Carpeting covers common area corridor and guestroom flooring with ceramic tiles in restrooms and guest services lobby, business center and breakfast/lounge area. Flat rubber membrane roof covers the building. The parking area comprises 138 spaces, including 6 ADA accessible stalls. Perimeter sidewalks are concrete.

 

The Greensboro Hampton Inn average occupancy rate, average daily rate, or ADR and RevPAR for the past five years are as follows:

 

Period  Average
Occupancy
Rate
   ADR   RevPAR 
Year Ended December 31, 2019   58.60%  $117.31   $68.74 
                
Year Ended December 31, 2018   67.62%  $117.83   $79.71 
                
Year Ended December 31, 2017   70.10%  $115.24   $80.77 
                
Year Ended December 31, 2016   70.08%  $114.80   $80.45 
                
Year Ended December 31, 2015   73.61%  $108.53   $79.89 
                
Year Ended December 31, 2014   79.41%  $103.83   $82.46 

 

Hanover Square North

 

On May 8, 2018, we acquired an undivided 84% tenant-in-common interest in the Shops at Hanover Square North from COF North, LLC, a Virginia limited liability company. The property is comprised of (i) an approximately 73,441 square foot retail center located on 8.766 acres of land at 7230 Bell Creek Road in Mechanicsville, Virginia 23111 and (ii) a contiguous, undeveloped parcel of land totaling 0.864 acres. We refer to both parcels herein as Hanover Square North. The contract purchase price for Hanover Square North was $12,173,000. We acquired Hanover Square North with $3,291,404 in cash from us, $648,120 in cash from an unaffiliated tenant-in-common, and the assumption of a secured loan of approximately $8,527,315 from Langley Federal Credit Union, which amount was increased by an additional $372,685, or the Hanover Square North Loan. In connection with the acquisition, we paid our Manager an acquisition fee of $252,451. Our company purchased Hanover Square North as a tenant-in-common with PMI Hanover Square, LLC, an unaffiliated party. Our company acquired an 84% interest in Hanover Square North, and PMI Hanover Square, LLC owns the remaining 16% interest. The retail center forming a part of Hanover Square North was built in 2007 and, as of December 31, 2019, was 100% occupied.

 

8

 

 

We assumed the Hanover Square North Loan as of the closing of the acquisition. The Hanover Square North Loan matures on December 1, 2027. The Hanover Square North Loan requires monthly payments of principal, on a 25-year amortization schedule, and interest during the term. The Hanover Square North Loan bears interest at 4.90% through January 1, 2023, at which time the interest rate will be adjusted to the daily average yield on US Treasury securities adjusted to a constant maturity of five years, plus 3.10% with an interest rate floor of 4.90%. The Hanover Square North Loan is secured by the developed parcel of Hanover Square North.

 

In connection with our acquisition of Hanover Square North, we, through a subsidiary, entered into the Tenants in Common Agreement with PMI Hanover SQ, LLC, or the Hanover Square TIC Agreement. Among other approvals, under the Hanover Square TIC Agreement, the consent of both tenants in common is required to approve (i) any lease, sublease, deed restriction, or grant of easement of/on all or any portion of Hanover Square North, (ii) any sale or exchange of Hanover Square North, or (iii) any indebtedness or loan, and any negotiation or refinancing thereof, secured by a lien on Hanover Square North. In the event the tenants in common are unable to agree on a decision which requires the consent of both tenants in common, a tenant in common may purchase the undivided interest of the other tenant in common subject to certain rights contained in the Hanover Square North TIC Agreement.

 

The property is a three-lot one-floor strip retail shopping center totaling approximately 73,441 square feet of net leasable area. The building is concrete slab with floor coverings consisting of a mixture of vinyl tile and carpeting. The exterior walls are masonry with brick veneer and EIFS at front and painted concrete block sides and rear. Windows are plate glass fixed pane storefront type in aluminum frames. The roof is single-ply, mechanically fastened EPDM over rigid insulation and steel framing in a flat configuration. The parking area comprises approximately 365 spaces.

 

As of December 31, 2019, tenants occupying 10% or more of the rentable square footage are:

 

Tenant  Business  Leased
Square
Footage
   Percentage
of Rentable
Square
Footage
   Annual Rent   Lease
Expiration
  Renewal
Options
Old Navy  Retail   15,000    20.42%  $208,800   4/30/2022  4/30/2027
Marshall’s  Retail   28,000    38.13%  $322,000   2/28/2022  2/28/2027
                        2/28/2032
                        2/28/2037

 

Occupancy data for the five preceding years (as of December 31):

 

   2019   2018   2017   2016   2015   2014 
Occupancy Rate   100%   97%   92%   96%   95%   95%

 

Average effective annual rent per square foot for the five preceding years:

 

   2019   2018   2017   2016   2015   2014 
Average Effective Annual Rent Per Square Foot(1)  $15.31   $14.71   $15.83   $15.42   $15.31   $15.01 

 

  (1)  Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements. For the year ended December 31, 2018, we owned Hanover Square North for eight months, the period on which the average annual rent per square foot is based.

 

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Lease expirations in the next 10 years:

 

   2020   2021   2022   2023   2024   2025   2026   2027   2028   2029   2030 
Leases Expiring   2    -    6    3    1    -    -    -    -    -    - 
                                                        
Square Footage   5,200    -    57,900    8,401    1,940    -    -    -    -    -    - 
                                                        
Annual Rent (1)  $98,603   $-   $871,258   $74,993   $44,065   $-   $-   $-   $-   $-   $- 
                                                        
Percentage of
Aggregate Annual
Rent (2)
   8.8%   0%   77.5%   6.7%   3.9%   0%   0%   0%   0%   0%   0%

 

(1) Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months.
 
(2) The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total 2019 rent.

 

Ashley Plaza Property

 

On August 30, 2019, we purchased from RCG-Goldsboro, LLC, a Georgia limited liability company, Ashley Plaza, a 160,356 square foot retail property located at 201–221 North Berkeley Boulevard in Goldsboro, North Carolina 27534, or the Ashley Plaza Property, for $15,200,000. The Ashley Plaza Property was built in 1977, fully renovated in 2018, was 98 percent leased as of December 31, 2019, and is anchored by Hobby Lobby, Harbor Freight, Ashley Home Store and Planet Fitness.

 

The purchase price, closing costs and acquisition fee for the Ashley Plaza Property was financed with $3,281,144 in equity, $1,000,000 in funds from a short term line of credit from Virginia Commonwealth Bank (our company paid $30,000 of loan fees, which were recorded as capitalized issuance costs and are presented as a direct reduction of the associated debt), and net mortgage loan proceeds of $11,225,700 from a senior mortgage loan made by Bank of America, N.A., or the Ashley Plaza Lender, in the original principal amount of $11,400,000, or the Ashley Plaza Senior Loan. In connection with the acquisition, we paid our Manager an acquisition fee of $309,080.

 

The Ashley Plaza Senior Loan will mature on September 1, 2029. The Ashley Plaza Senior Loan requires monthly interest only payments during the first 12 months of the term. For the remainder of the term, the Ashley Plaza Senior Loan requires monthly payments of principal on a 30-year amortization schedule, and interest. The Ashley Plaza Senior Loan bears interest at 3.75%. The Ashley Plaza Senior Loan may not be prepaid until June 1, 2029, subject to certain conditions and limitations contained in the loan documents. The Ashley Plaza Senior Loan is secured by the Ashley Plaza Property.

 

The Virginia Commonwealth Bank line of credit has a six month term, maturing on February 21, 2020 and bears interest at 2.5% plus the 30 day LIBOR rate. As of December 31, 2019, the rate in effect was 4.285%. The Virginia Commonwealth Bank line of credit requires interest payments every three months. On February 20, 2020, our company repaid the line of credit, short term in the amount of $2,000,000 plus accrued interest of $21,437. Effective on February 21, 2020, the maturity date of the line of credit, short term, our company extended the line of credit, short term for 60 days. On March 3, 2020, our company received $550,000 in funding from the line of credit, short term to fund working capital and dividend payments.

 

The Ashley Plaza Property consists of a single-story, main retail strip building and two pad sites, all constructed in 1977. Foundations consist of continuous, concrete spread footers. The floor is a reinforced concrete slab-on-grade. The building superstructure utilizes load bearing CMU, interior steel columns supporting steel beams and open web steel joists supporting metal decking. The exterior walls consist of exterior insulation and finishing system, ribbed and painted concrete masonry unit walls. The roof is low-sloped with a portion covered by a single play TPO roof membrane and a portion covered by tar and gravel roofing. Parking is available for five hundred and sixty-seven (567) automobiles on asphalt-paved parking areas.

 

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Tenants occupying 10% or more of the rentable square footage:

 

Tenant  Business  Leased
Square
Footage
   Percentage
of Rentable
Square
Footage
   Annual Rent   Lease
Expiration
  Renewal
Options
Ashley Home
Store
  Retail   17,920    11.2%  $161,280   8/31/2028  8/31/2033
8/31/2038
8/31/2043
8/31/2048
Harbor Freight
Tools
  Retail   21,416    13.4%  $159,840   2/28/2029  2/28/2034
2/28/2039
Hobby Lobby  Retail   50,000    31.2%  $250,000   3/31/2029  3/31/2034
3/31/2039
3/31/2044
Planet Fitness  Fitness   20,131    12.6%  $181,179   4/30/2028  4/30/2033
4/30/2038

 

Occupancy data for the five preceding years (as of December 31):

 

   2019   2018   2017   2016   2015   2014 
Occupancy Rate   98.0%   52.5%   28.7%   94.6%   95.5%   96.5%

 

Average effective annual rent per square foot for the five preceding years:

 

   2019   2018   2017   2016   2015   2014 
Average Effective Annual Rent Per
Square Foot(1)
  $              7.74   $                4.60   $                 3.32   $                 3.44   $3.17   $3.14 

 

  (1)  Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements. For the year ended December 31, 2019, we owned Ashley Plaza for four months.  The average annual rent per square foot is based on rents from the prior owner for period from January, 2019 through August, 2019 and on rents from our ownership period from September, 2019 through December, 2019.  

 

Lease expirations in the next 10 years:

 

   2020   2021   2022   2023   2024   2025   2026   2027   2028   2029   2030 
Leases Expiring   1    1    2    1    1    1    -    1    2    2    - 
                                                        
Square Footage   3,070    3,000    19,880    14,719    1,575    4,000    -    1,400    38,051    71,416    - 
                                                        
Annual Rent (1)  $28,532   $120,000   $188,049   $133,760   $29,925   $42,000   $-   $40,575   $350,523   $438,324   $- 
                                                        
Percentage of
Aggregate Annual
Rent (2)
   2.2%   9.1%   14.3%   10.2%   2.3%   3.2%   0%   3.1%   26.7%   33.4%   0%

 

  (1)  Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months.  
     
(2) The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total 2020 rent.

 

Clemson Best Western Hotel

 

On September 27, 2019, we purchased the Clemson Best Western University Inn located at 1310 Tiger Boulevard, Clemson, South Carolina 29631, or the Clemson Best Western Property, from Heri AUM, LLC, a South Carolina limited liability company, for $9,750,000. The Clemson Best Western Property has 148 rooms, was built in 1982, substantially renovated in 2016 and 2017, is approximately 85,300 square feet and sits on 5.92 acres.

 

The purchase price, closing costs and acquisition fee for the Clemson Best Western Property was financed with $1,767,528 in equity, $1,000,000 in funds from a short term line of credit from Virginia Commonwealth Bank, and net mortgage loan proceeds of $7,480,746 from a senior mortgage loan made by Ladder Capital Finance, LLC, or the Clemson Lender, in the original principal amount of $7,750,000, or the Clemson Senior Loan. In connection with the acquisition, we paid our Manager an acquisition fee of $203,091.

 

11

 

 

The Clemson Senior Loan has an initial 36-month term, maturing on October 6, 2022. The borrower, however, has an extension option, which if exercised, could extend the maturity date of the Clemson Senior Loan for one (1) 12-month period. The Clemson Senior Loan requires monthly interest only payments during the 36-month term. The Clemson Senior Loan bears interest at the greater of (i) 4.9% plus the 30 day LIBOR rate, and (ii) 7.15%. The Clemson Senior Loan may be prepaid, subject to certain conditions and payments. The Clemson Senior Loan is secured by the Clemson Best Western Property.

 

The Virginia Commonwealth Bank line of credit has a six month term, maturing on February 21, 2020 and bears interest at 2.5% plus the 30 day LIBOR rate. As of December 31, 2019, the rate in effect was 4.285%. The Virginia Commonwealth Bank line of credit requires interest payments every three months. On February 20, 2020, our company repaid the line of credit, short term in the amount of $2,000,000 plus accrued interest of $21,437. Effective on February 21, 2020, the maturity date of the line of credit, short term, our company extended the line of credit, short term for 60 days. On March 3, 2020, our company received $550,000 in funding from the line of credit, short term to fund working capital and dividend payments.

 

The Clemson Best Western Property is a four-story building totaling approximately 85,300 square feet, with 148 guestrooms. The building is cast in place concrete upper level flooring supported by a concrete masonry unit (CMU) superstructure bearing on continuous perimeter reinforced spread footings and interior isolated spread footings and column pads. The ground level floor is a concrete slab-on-grade. The exterior walls are CMU with faux-stone veneer and EIFS. Common area flooring consists of a combination of carpet, laminate strip, ceramic tile and vinyl tile. Guest room flooring consists of carpet, laminate and ceramic tile. The upper roof consists of standing-seam metal panels and the lower roof consists of single-ply thermoplastic polyolefin (TPO) membrane.

 

The parking area comprises 240 spaces, including 12 ADA accessible stalls. Perimeter sidewalks are concrete. The hotel is considered to be overall good and well-maintained condition.

 

The Clemson Best Western Property is operated by Marshall Hotels and Resorts.

 

The Clemson Best Western Property average occupancy rate, average daily rate, or ADR and RevPAR for the past five years are as follows:

 

Period  Average
Occupancy
Rate
   ADR   RevPAR 
Year Ended December 31, 2019   39.4%  $110.16   $43.40 
                
Year Ended December 31, 2018   35.1%  $110.63   $38.88 
                
Year Ended December 31, 2017   24.6%  $131.26   $32.33 
                
Year Ended December 31, 2016   13.7%  $120.93   $16.58 
                
Year Ended December 31, 2015   14.5%  $50.14   $7.27 

 

Brookfield Center Property

 

On October 3, 2019, we purchased from Appian-Brookfield South 48, LLC, a South Carolina limited liability company, Brookfield Center, a 64,880 square foot flex-industrial property located at 48 Brookfield Center Drive, Greenville, South Carolina 29607, or the Brookfield Center Property, for $6,700,000. The Brookfield Center Property was built in 2007, was 93.8 percent leased as of December 31, 2019, and is anchored by the Gravitopia Trampoline Park and Summit Church.

 

12

 

 

The purchase price, closing costs and acquisition fee for the Brookfield Center Property was financed with $1,876,138 in equity, $263,000 in funds from a short term, related party note and net mortgage loan proceeds of $4,736,495 from a senior mortgage loan made by CIBC, Inc., or the Brookfield Center Lender, in the original principal amount of $4,850,000, or the Brookfield Center Senior Loan. In connection with the acquisition, we paid our Manager an acquisition fee of $137,000.

 

The Brookfield Center Senior Loan will mature on November 1, 2029. The Brookfield Center Senior Loan requires monthly interest only payments during the first 12 months of the term. For the remainder of the term, the Brookfield Center Senior Loan requires monthly payments of principal on a 30-year amortization schedule, and interest. The Brookfield Center Senior Loan bears interest at 3.90%. The Brookfield Center Senior Loan may not be prepaid until September 1, 2029, subject to certain conditions and limitations contained in the loan documents. The Brookfield Center Senior Loan is secured by the Brookfield Center Property.

 

We entered into related party notes, short term, with the Manager by which the Manager provided an aggregate of $263,000 to fund a portion of the Company’s acquisition of the Brookfield Center Property. The notes are due on demand and bear interest at a rate of 5 percent annually. On February 20, 2020, the Company repaid these related party notes payable, short term, as well as additional related party notes, short term, in the principal amount of $852,000 plus accrued interest of $11,710.

 

The Brookfield Center Property consists of a single-story building on a 7.88 acre parcel of land, and was built in 2007. The foundation consists of a concrete slab-on-grade with continuous perimeter reinforced concrete spread footings and interior isolated spread footings and column pads. The floor is a reinforced concrete slab-on-grade. The building superstructure consists of concrete tilt-up panels with steel columns and steel stud infill walls. The roof is flat and consists of a single ply thermoplastic polyolefin (TPO) membrane. Parking is available for two hundred and seventy-three (273) automobiles on asphalt-paved parking areas, including 12 ADA accessible spaces.

 

The property is considered to be in good overall condition and appears to have been proactively maintained.

 

Occupancy data for the five preceding years (as of December 31):

 

   2019   2018   2017   2016   2015   2014 
Occupancy Rate   93.8%   93.8%   93.8%   100.0%   86.8%   80.5%

 

Tenants occupying 10% or more of the rentable square footage:

 

Tenant   Business   Leased
Square
Footage
    Percentage
of Rentable
Square
Footage
    Annual Rent     Lease
Expiration
  Renewal
Options
Summit Church   Religious     9,000       13.9 %   $ 101,366     9/30/2020   (1)
S&ME   Engineering     8,582       13.2 %   $ 96,225     8/31/2024   N/A
Gravitopia   Entertainment     35,160       54.2 %   $ 263,715     4/30/2026   4/30/2031

 

  (1)  Summit Church’s lease will terminate on September 30, 2020.  Our company has entered into a new lease with a replacement tenant, Turning Point Church, for the 9,000 square foot space.  The Turning Point Lease has a term of five years and expires on September 19, 2025.  

 

Average effective annual rent per square foot for the five preceding years:

 

   2019   2018   2017   2016   2015   2014 
Average Effective Annual Rent Per Square Foot (1)  $6.52   $7.86   $8.49   $6.62   $5.75   $5.48 

 

  (1)  Average effective rent per square foot represents the average annual rent for all occupied space for the respective periods after accounting for rent abatements and concessions but before accounting for tenant reimbursements.

 

13

 

 

Lease expirations in the next 10 years:

 

   2020   2021   2022   2023   2024   2025   2026   2027   2028   2029   2030 
Leases Expiring   1    -    1    1    1    -    1    -    -    -    - 
                                                        
Square Footage   9,000    -    4,046    8,582    4,046    -    35,160    -    -    -    - 
                                                        
Annual Rent (1)  $101,366   $-   $40,784   $105,994   $39,971   $-   $296,986   $-   $-   $-   $- 
                                                        
Percentage of
Aggregate Annual Rent (2)
   19.6%   0%   7.9%   20.5%   7.7%   0%   57.3%   0%   0%   0%   0%

 

  (1)  Annual rent is determined by multiplying the monthly rent in effect at the time of the lease expiration by 12 months.  
     
  (2) The percentage of aggregate annual rent is determined by dividing (i) the annual rent (see note 1) related to expiring leases by (ii) the total 2020 rent. 

 

ITEM 3. LEGAL PROCEEDINGS

 

We and our subsidiaries are, from time to time, parties to litigation arising from the ordinary course of their business. We are not presently subject to any material litigation nor, to our knowledge, is any other litigation threatened against us, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock has been listed on the Nasdaq Capital Market under the symbol “MDRR” since November 28, 2018. Prior to that time, there was no public market for our common stock. On March 23, 2020, the closing sale price of our common stock on the Nasdaq Capital Market was $1.60. On December 31, 2019, we had 1,470 holders of record of our common stock. This figure does not represent the actual number of beneficial owners of our common stock because shares of our common stock are frequently held in “street name” by securities dealers and others for the benefit of beneficial owners who may vote the shares.

 

We intend to continue to declare quarterly distributions on our common stock. The actual amount and timing of distributions, however, will be at the discretion of our board of directors and will depend upon our financial condition in addition to the requirements of the Internal Revenue Code of 1986, as amended, and no assurance can be given as to the amounts or timing of future distributions. As a result of the potential impact of the novel coronavirus (COVID-19) on our business, we expect that the board of directors will reconsider our current dividend policy and may take further action with respect to dividends for both our common and preferred stock, and may consider eliminating, suspending, or significantly reducing the dividends until more information regarding the effect of the virus and its duration is available.

  

Recent Sales of Unregistered Securities

 

During January and February 2018, our company issued 839,080 shares of common stock at $10.00 per share, subject to issuance costs and discounts. The net proceeds were used to (i) retire the short-term notes payable used to finance the purchase of the Greensboro Hampton Inn and (ii) fund our acquisition of Hanover Square North, which closed in May 2018. These shares were issued pursuant to an exemption from registration pursuant to Section 3(b)(2) of the Securities Act.

 

During June 2018, our company issued 8,500 shares of common stock at $10.00 per share, subject to issuance costs and discounts. The net proceeds were used for working capital and general corporate purposes. These shares were issued pursuant to an exemption from registration pursuant to Section 3(b)(2) of the Securities Act.

 

14

 

 

During September 2018, our company issued warrants to purchase 49,890 shares of our common stock at a price of $0.001 per warrant. The proceeds were used for working capital and general corporate purposes. The warrants are exercisable from September 12, 2019 through July 8, 2021 at a price of $12.50. The warrants were issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.

 

During May 2019, our company issued shares of common stock at $4.80 per share, subject to issuance costs and discounts. The proceeds were used as working capital and general corporate purposes. The warrants were issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.

 

During January 2020, our company’s operating partnership issued 93,580 OP Units in exchange for tenant in common interests in the Greensboro Hampton Inn. These securities were issued pursuant to an exemption from registration pursuant to Section 4(a)(2) the Securities Act.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and the related notes thereto of Medalist Diversified REIT, Inc. for the years ended December 31, 2019 and December 31, 2018.

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions associated with those statements. Our actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors.

 

Company Overview

 

Medalist Diversified REIT Inc. is a Maryland corporation formed on September 28, 2015. Beginning with our taxable year ended December 31, 2017, we believe that we have operated in a manner qualifying us as a real estate investment trust (“REIT”), and we have elected to be taxed as a REIT for federal income tax purposes. Our company serves as the general partner of Medalist Diversified Holdings, LP which was formed as a Delaware limited partnership on September 29, 2015.

 

Our company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial, limited service hotels, and retail properties, (ii) multi-family residential properties and (iii) 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, indirect investments in real property, such as those that may be obtained in a joint venture. While these types of investments are not intended to be a primary focus, we may make such investments in our Manager’s discretion.

 

Our company is externally managed by Medalist Fund Manager, Inc. (the “Manager”). The Manager makes all investment decisions for our company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees our company’s overall business and affairs and has broad discretion to make operating decisions on behalf of our company and to make investment decisions. Our company’s stockholders are not involved in its day-to-day affairs.

 

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As of December 31, 2019, our company owned and operated six investment properties, the Shops at Franklin Square (the “Franklin Square Property”), a 134,239 square foot retail property located in Gastonia, North Carolina, the Greensboro Hampton Inn (the “Hampton Inn Property”) a hotel with 125 rooms on 2.162 acres in Greensboro, North Carolina, the Hanover North Shopping Center (the “Hanover Square Property”), a 73,440 square foot retail property located in Mechanicsville, Virginia, the Ashley Plaza Shopping Center (the “Ashley Plaza Property”), a 160,356 square foot retail property located in Goldsboro, North Carolina, the Clemson Best Western University Inn (the “Clemson Best Western Property”), a hotel with 148 rooms on 5.92 acres in Clemson, South Carolina and Brookfield Center (the “Brookfield Center Property”), a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina. As of December 31, 2019, we owned 64 percent of the Hampton Inn Property as a tenant in common with a noncontrolling owner which owned the remaining 36 percent interest. The tenants in common lease the Hampton Inn Property to a taxable REIT subsidiary that is also owned 64 percent by us and 36 percent by the noncontrolling owner. As of December 31, 2019, we owned 84 percent of the Hanover Square Property as a tenant in common with a noncontrolling owner which owned the remaining 16 percent interest.

 

Reporting Segments

 

We establish operating segments at the property level and aggregate individual properties into reportable segments based on product types in which we have Investments. As of December 31, 2019, we had the following reportable segments:  retail center properties, flex center properties and hotel properties.

 

Recent Trends and Activities

 

There have been several significant events during 2017, 2018 and 2019 that have impacted our company. These events are summarized below.

 

Equity Issuances

 

Between January and June 2018, our company issued and sold 847,580 shares of common stock at an offering price of $10.00 per share. Net proceeds from the issuances totaled $7,749,992, which includes the impact of discounts and offering costs, including the underwriters' selling commissions and legal, accounting and other professional fees. The net funds after issuance costs were used to (i) retire the short-term notes payable used to finance the purchase of the Hampton Inn Property and (ii) fund our company’s acquisition of the Hanover Square Property, which closed on May 8, 2018.

 

On November 30, 2018, we completed our initial registered public offering, or our IPO, pursuant to which we issued an aggregate of 240,000 shares of our common stock at an offering price of $10.00 per share and received approximately $1,838,727 in net proceeds.

 

On May 8, 2019, our company issued and sold 1,666,667 shares of common stock at an offering price of $4.80 per share. Net proceeds from the issuance totaled $7,222,501, which includes the impact of discounts and offering costs, including the underwriter’s selling commissions and reimbursable legal fees and other expenses. On May 21, 2019, our company issued and sold 227,062 shares of common stock at an offering price of $4.80 per share, pursuant to its underwriter’s over-allotment option related to the May 8, 2019 offering. Net proceeds from the issuance totaled $991,807, which includes the impact of discounts and offering costs, including the underwriter’s selling commissions. On May 31, 2019, our company issued and sold 270,833 shares of common stock pursuant to a private placement at an offering price of $4.80 per share. Net proceeds from the issuance totaled $1,183,998, which includes the impact of discounts and offering costs, including the underwriter’s selling commissions and reimbursable legal fees. During the year ended December 31, 2019, our company also incurred $970,667 respectively, in offering costs, including legal, accounting, advisory and other professional fees.

 

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On August 31, 2018, our company’s Board of Directors approved a grant of 80,000 shares of our common stock to two employees of the Manager who also serve as directors of our company and a grant of 6,000 shares of our common stock to our company’s three independent directors. The shares were granted under our company’s 2018 Equity Incentive Plan (the “Plan”). The effective date of the grants was December 4, 2018, the date on which the registration of the Plan shares was effective. The shares vested immediately, but, pursuant to lock-up agreements executed in connection with our November 30, 2018 IPO, May 8, 2019 common stock issuance and February 19, 2020 Series A Preferred Stock issuance (see below), the holders of these shares have been and are restricted from selling any of their shares of our common stock. Specifically, the sale of any shares held by our directors was restricted for 180 days following the effective date of each of the registration statements. The effective date of our Series A Preferred Stock registration statement was February 13, 2020, so the sale of the shares will be restricted for 180 days from this date, or until August 11, 2020. In addition, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the shares vested immediately, the fair value of the grants, or $790,340, was recorded to expense on the effective date of the grant. The fair value of the grants was determined by the market price of our company’s common stock on the effective date of the grant.

 

On July 18, 2019, our company’s Board of Directors approved a grant of 14,000 shares of our common stock to our company’s five independent directors. The effective date of the grants was July 18, 2019. The shares granted vest immediately and are unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the shares vest immediately, the fair value of the grants, or $61,600, was recorded to expense on the effective date of the grant. The fair value of the grants was determined by the market price of our company’s common stock on the effective date of the grant.

 

On February 19, 2020, our Company issued and sold 200,000 shares of 8.0% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) at $23.00 per share. Net proceeds from the issuance were $4,103,500, which includes the impact of the underwriter’s discounts, selling commissions and legal, accounting and other professional fees. Our company created an escrow for $371,111 for the first year of dividends, which will be reported as restricted cash on our Company’s consolidated balance sheet. Our company also incurred $212,896 in other offering costs, including legal, accounting and other fees associated with this offering. As part of this offering, our company granted the underwriters a 45-day option to purchase up to 23,000 additional Series A Preferred Stock at the public offering price, less the underwriting discount and commissions, to cover over-allotments, if any.

 

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2018 Acquisition

 

Hanover North Shopping Center

 

On May 8, 2018, we completed our acquisition of an undivided 84 percent tenant-in-common interest in the Hanover Square Property through a wholly owned subsidiary. The contract purchase price for the Hanover Square Property was $12,173,000. We acquired the Hanover Square Property with $3,291,404 in cash, $648,120 in cash from an unaffiliated tenant-in-common noncontrolling owner, and the assumption of a secured loan of approximately $8,527,315 from Langley Federal Credit Union, which amount was increased by an additional $372,685. The Hanover Square Property is located in Mechanicsville, Virginia and consists of approximately 73,440 square feet of improvements located on an 8.766 acre parcel of land and a contiguous, undeveloped parcel of land totaling 0.864 acres. As of December 31, 2019, the Hanover Square Property was 100 percent leased.

 

2019 Acquisitions

 

The Ashley Plaza Property

 

On August 30, 2019, our company completed its acquisition of the Ashley Plaza Property, a 160,356 square foot retail property located in Goldsboro, North Carolina, through a wholly owned subsidiary. The Ashley Plaza Property, built in 1977 and fully renovated in 2018, was 98 percent leased as of December 31, 2019 and is anchored by Hobby Lobby, Harbor Freight and Ashley Home Store. The purchase price for the Ashley Plaza Property was $15,200,000 paid through a combination of cash provided by our company, the incurrence of new mortgage debt and funds from a line of credit, short term. Our company’s total investment, including acquisition and closing costs, escrows and lease reserves was $15,885,444, including $204,300 of loan issuance costs. Our company paid $357,823 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.

 

The Clemson Best Western Property

 

On September 27, 2019, our company completed its acquisition of the Clemson Best Western Property, a 148 room hotel on 5.92 acres located in Clemson, South Carolina, through a wholly owned subsidiary. The Clemson Best Western Property was built in 1982 and substantially renovated in 2016 and 2017. The purchase price for the Clemson Best Western Property was $9,750,000 paid through a combination of cash provided by our company, the incurrence of new mortgage debt and funds from a line of credit, short term. Our total investment, including acquisition and closing costs, escrows and lease reserves was $10,786,782, including $269,254 of loan issuance costs. Our company paid $578,953 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.

 

The Brookfield Center Property

 

On October 3, 2019, our company completed its acquisition of the Brookfield Center Property, a 64,880 square foot flex-industrial property located in Greenville, South Carolina, through a wholly owned subsidiary. The Brookfield Center Property, built in 2007, was 93.8 percent leased as of December 31, 2019. Major tenants include Gravitopia Trampoline Park and Summit Church. The purchase price for the Brookfield Center Property was $6,700,000 paid through a combination of cash provided by our company, the incurrence of new mortgage debt and funds from related party notes payable, short term. Our company’s total investment, including $113,505 of loan issuance costs, was $7,102,643. Our company paid $207,957 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.

 

Financing Activities

 

Our company financed its acquisitions of its investment properties through mortgages, as follows:

 

               Balance 
   Monthly  Interest      Balance – December 31, 
Property  Payment  Rate   Maturity  2019   2018 
Franklin Square    Interest only   4.70%  October 2021  $14,275,000   $14,275,000 
Hampton Inn (a)    Interest only   Variable   November 2020   10,600,000    10,600,000 
Hanover Square (b)  $ 51,993   4.90%  December 2027   8,642,520    8,592,195 
Ashley Plaza (c)    Interest only   3.75%  September 2029   11,400,000    - 
Clemson Best Western (d)    Interest only   Variable   October 2022   7,750,000    - 
Brookfield Center (e)    Interest only   3.9%  November 2029   4,850,000    - 

 

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  (a)  The mortgage loan for the Hampton Inn Property bears interest at a variable rate based on LIBOR with a minimum rate of 6.1 percent. The interest rate payable is the USD LIBOR one-month rate plus 5 percent.  As of December 31, 2019 and 2018, respectively, the rates in effect for the Hampton Inn Property mortgage loan were 6.75 percent and 7.50 percent.  The mortgage loan for the Hampton Inn property matures on November 9, 2020.  However, our company has options to extend the term of the mortgage loan for two successive 12 month terms.  

 

  (b) As part of its acquisition of the Hanover Square Property, our company assumed a secured loan of $8,527,315 and incurred additional mortgage debt from the same lender of $372,685. The mortgage loan for the Hanover Square Property matures on December 1, 2027 and requires monthly payments of principal, on a 25-year amortization schedule, and interest during the term. The mortgage loan for the Hanover Square Property will bear interest at 4.90 percent through January 1, 2023, at which time the interest rate will be adjusted to the daily average yield on US Treasury securities adjusted to a constant maturity of five years, plus 3.10 percent with an interest rate floor of 4.90 percent. The fixed monthly payment includes principal and interest.  

 

  (c) The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of 3.75 percent and is interest only for the first twelve months.  Beginning on October 1, 2020, the monthly payment will be $52,795 for the remaining term of the loan, which will include interest at the fixed rate, and principal, based on a thirty year amortization schedule.  

 

  (d) The mortgage loan for the Clemson Best Western Property bears interest at a variable rate based on LIBOR with a minimum rate of 7.15 percent. The interest rate payable is the USD LIBOR one-month rate plus 4.9 percent.  As of December 31, 2019, the rate in effect for the Clemson Best Western Property mortgage was 7.15 percent.  

 

  (e) The mortgage loan for the Brookfield Property bears interest at a fixed rate of 3.90 percent and is interest only for the first twelve months.  Beginning on November 1, 2020, the monthly payment will be $22,876 for the remaining term of the loan, which will include interest at the fixed rate, and principal, based on a thirty year amortization schedule.

 

As of December 31, 2019, our company had a line of credit, short term outstanding in the principal amount of $2,000,000. The line of credit, short term was established on August 21, 2019 to provide short term funding for our company’s acquisition of the Ashley Plaza Property and the Clemson Best Western Property. On August 29, 2019, our company received $1,000,000 in funding from the line of credit, short term, to fund a portion of its acquisition of the Ashley Plaza Property. On September 26, 2019, our company received an additional $1,000,000 to fund a portion of its acquisition of the Clemson Best Western Property. Our company paid $30,000 of loan fees, which were recorded as capitalized issuance costs and are presented as a direct reduction of the associated debt.

 

The line of credit, short term, bears interest at a variable rate calculated at 250 basis points over USD 1-Month LIBOR as published in the Wall Street Journal. The rate adjusts on the first day of each month during which the loan is outstanding. As of December 31, 2019, the rate in effect for the line of credit, short term, was 4.285 percent. Interest expense includes amortization of the capitalized issuance costs using the straight-line method, which approximates to the effective interest method, over the six-month term of the loan.

 

As of December 31, 2019 and 2018, our company had related party notes payable, short term, outstanding in the principal amount of $852,000 and $0, respectively. These notes were issued on September 30, 2019 in the principal amount of $183,000 and on October 2, 2019 in the principal amount of $80,000, both to fund a portion of our company’s acquisition of the Brookfield Center Property, which closed on October 3, 2019. In addition, our company issued a related party note payable in the principal amount of $589,000 on November 29, 2019 to pay dividends and fund working capital requirements. The related party notes payable are due on demand and bear interest at a rate of 5 percent annually. On February 20, 2020, the Company repaid the related party notes payable, short term, in the principal amount of $852,000 plus accrued interest of $11,710.

 

In addition, during the year ended December 31, 2019 and 2018, our company repaid related party notes payable, short term, totaling $0 and $677,538 respectively. These short term notes to five related parties were issued on November 3, 2017 to fund a portion of the purchase price of the Hampton Inn Property.

 

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On February 20, 2020, our company repaid the line of credit, short term in the amount of $2,000,000 plus accrued interest of $21,437. Effective on February 21, 2020, the maturity date of the line of credit, short term, our company extended the line of credit, short term for 60 days. On March 3, 2020, our company received $550,000 in funding from the line of credit, short term to fund working capital and dividend payments. In addition, on February 20, 2020, our company repaid the related party notes payable, short term, in the principal amount of $852,000 plus accrued interest of $11,710.

 

COVID-19 Impact

 

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 stemming from the novel coronavirus (COVID-19) may be significant. We have experienced declines in hotel revenue that began in March and expect this to continue as the novel coronavirus (COVID-19) continues to spread across the country.  While intense efforts to reduce operating costs are underway, we cannot be certain as to what level of savings can be achieved overall to mitigate the material decline in hotel revenues we may experience. The impact on revenue from our retail properties and tenants remains uncertain, but we anticipate that revenue may be decreased until consumer demand for the goods and services of our retail tenants returns to levels prior to the virus outbreak. The federal government has announced its intention to provide various forms of aid to the industries negatively affected by the virus, including the hospitality industry, but we cannot be certain that such aid will be rendered or that any amount will help mitigate the material reduction in revenue we may experience.  Until such time as the virus is contained or eradicated and room demand for our hotel properties and consumer demand for the goods and services of our retail tenants returns to more customary levels, we may experience material reductions in our operating revenue. 

 

Off-Balance Sheet Arrangements

 

As of December 31, 2019 and 2018, we have no off-balance sheet arrangements.

 

Summary of Critical Accounting Policies

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, “Summary of Significant Accounting Policies,” of our Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.

 

Revenue Recognition

 

Principal components of our total revenues for our retail center properties and flex center properties include base rents and tenant reimbursements. We accrue minimum (base) rent on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. Certain lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent) which we recognize when the tenants achieve the specified targets as defined in their lease agreements. We periodically review the valuation of the asset/liability resulting from the straight-line accounting treatment of our leases in light of any changes in lease terms, financial condition or other factors concerning our tenants.

 

For our hotel property, revenues are recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services.

 

Our company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective on January 1, 2019 (see Recent Accounting Pronouncements in Note 2, “Summary of Significant Accounting Polices,” of our Consolidated Financial Statements). This adoption did not have a material impact on our company’s recognition of revenues from either its retail center properties, flex center property or hotel properties.

 

Rents and Other Tenant Receivables

 

For our retail center and flex center properties, we record a tenant receivable for amounts due from tenants such as base rents, tenant reimbursements and other charges allowed under the lease terms. We periodically review tenant receivables for collectability and determine the need for an allowance for the uncollectible portion of accrued rents and other accounts receivable based upon customer creditworthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. We consider a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other actions per the lease.

 

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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 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 percent of its adjusted taxable income to stockholders. As a REIT, we generally will not be subject to corporate level federal income tax on our taxable income if we annually distribute 100 percent of our taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to regular federal and state corporate income taxes and may not be able to elect to qualify as a REIT for four subsequent taxable years. Our qualification as a REIT requires management to exercise significant judgment and consideration with respect to operational matters and accounting treatment. Therefore, we believe our REIT status is a critical accounting estimate.

 

Liquidity and Capital Resources

 

Our business model is intended to drive growth through acquisitions. Access to the capital markets is an important factor for our continued success. We expect to continue to issue equity in our company, with proceeds being used to acquire additional investment properties.

 

Our liquidity needs are primarily to fund (i) operating expenses and cash dividends; (ii) property acquisitions; (iii) deposits and fees associated with long-term debt financing for our properties; (iv) recurring capital expenditures; (v) debt repayments; (vi) payment of principal of, and interest on, outstanding indebtedness; and (vii) corporate and administrative costs.

 

Internal liquidity will be provided solely by the rental receipts from our real properties. The only external liquidity source we have currently identified is our ongoing efforts to raise capital by the issuance of shares of common or preferred stock.

 

Our cash flow and liquidity may be materially adversely impacted by the novel coronavirus (COVID-19) pandemic.  We have implemented a number of cost-cutting measures to reduce the impact of the reduction in revenue we may experience.  We may have to take additional measures to fund continuing operations.

 

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Cash Flows

 

At December 31, 2019, our consolidated cash and restricted cash on hand totaled $2,072,190 compared to consolidated cash on hand of $4,120,796 at December 31, 2018. Cash from operating activities, investing activities and financing activities for the year ended December 31, 2019 and 2018 are as follows:

 

Operating Activities

 

During the year ended December 31, 2019, our financial results include the impact of owning the Franklin Square Property, the Hampton Inn Property and the Hanover Square Property for the full year, Ashley Plaza for approximately four months, the Clemson Best Western Property for approximately three months and the Brookfield Center Property for approximately three months. During the year ended December 31, 2018, our company owned and operated the Franklin Square Property and the Hampton Inn Property for the full year and the Hanover Square Property for eight months.

 

During the year ended December 31, 2019 our cash provided by operating activities was $805,689 compared to cash used in operating activities of $420,676 for the year ended December 31, 2018, an increase of cash provided by operating activities of $1,226,365. For the year ended December 31, 2019, this increase in cash provided by operating activities was largely driven by changes in working capital accounts, most significantly by a $1,162,764 increase to the change in accounts payable and accrued liabilities.

 

Investing Activities

 

During the year ended December 31, 2019, our cash used in investing activities was $34,930,405 compared to cash used in investing activities of $5,422,426 during the year ended December 31, 2018, an increase in cash used in investing activities of $29,507,979. During the year ended December 31, 2019, cash used in investing activities included $32,794,733 used for investment property acquisitions (the Ashley Plaza Property, the Clemson Best Western Property and the Brookfield Center Property, including tangible and intangible assets recorded as part of the Ashley Plaza Property and Brookfield Center Property acquisitions) and $2,135,672 in capital expenditures, consisting of $1,995,892 in interior and exterior construction costs and furniture, fixtures and equipment for the Property Improvement Plan for the Hampton Inn Property, $83,520 in tenant improvements, leasing commissions and building improvements for the Franklin Square Property, $2,598 in leasing commissions for the Hanover Square Property, $18,736 in leasing commissions for the Ashley Plaza Property, $30,066 in leasing commissions for the Brookfield Center property and $4,860 in equipment for the Clemson Best Western Property.

 

During the year ended December 31, 2018, cash used in investing activities included $4,012,209 for the acquisition of the Hanover Square Property, $986,470 in capital expenditures, which included payment of leasing commissions for the Franklin Square Property and initial expenditures for the Hampton Inn Property’s Property Improvement Plan and $423,747 in advance deposits for the Hampton Inn Property’s Property Improvement Plan.

 

Non-cash investing activities for the year ended December 31, 2019 that did not affect our cash used in investing activities were $423,747, representing advance deposits made for Hanover Square Property furniture, fixtures and equipment that was expended during the year ended December 31, 2018 and transferred to investment properties during the year ended December 31, 2019. Non-cash investing activities for the year ended December 31, 2018 that did not affect our cash used in investing activities were $137,714 in capital expenditures that were recorded but not yet paid as of December 31, 2018.

 

Financing Activities

 

During the year ended December 31, 2019, our cash provided by financing activities was $32,076,110 compared to cash provided by financing activities of $6,669,051 during the year ended December 31, 2018, an increase in cash provided by financing activities of $25,407,059. During the year ended December 31, 2019, we generated net proceeds, after offering costs, from our stock issuances of $8,427,639. Additionally, we incurred new mortgage debt (in connection with our acquisition of the Ashley Plaza Property, Clemson Best Western Property and the Brookfield Center Property) of $23,442,941 (net of capitalized loan issuance costs), we generated funds from a line of credit, short term, net, in the amount of $1,970,000 (net of capitalized loan issuance costs) and we issued related party notes payable, short term in the total amount of $852,000. We also paid dividends and distributions of $2,436,103 and repaid mortgage debt principal associated with the Hanover Square Property of $180,367.

 

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During the year ended December 31, 2018, our company generated net proceeds, after offering costs, from its common stock issuances, of $9,289,095. Additionally, we repaid short term notes payable of $2,177,538, paid dividends of $1,213,840, incurred new mortgage debt associated with the Hanover Square Property of $250,652 (net of capitalized loan issuance costs), in addition to the assumed mortgage debt of $8,527,315 (non-cash transaction), and repaid mortgage debt principal associated with the Hanover Square Property of $127,438. We also generated $648,120 from the investment of noncontrolling interests associated with the acquisition of the Hanover Square Property.

 

Non-cash financing activities that did not affect our cash provided by financing activities were $0 for the year ended December 31, 2019. For the year ended December 31, 2018, non-cash financing activities were $8,527,315, representing a mortgage payable assumed for the acquisition of the Hanover Square Property and $49,890 for warrants issued.

 

Future Liquidity Needs

 

Liquidity for general operating needs and our company’s investment properties is provided solely by the rental receipts from those properties. Liquidity for growth (acquisition of new investment properties) will be provided by additional equity issuances, net of issuance costs.

 

Results of Operations

 

Revenues

 

Total revenue was $8,268,768 for the year ended December 31, 2019, consisting of $4,186,745 in revenues from retail center properties, $3,898,254 from hotel properties and $183,769 from the flex center property. Total revenues for the year ended December 31, 2019 increased by $1,678,817 over the year ended December 31, 2018.

 

Revenues from retail center properties were $4,186,745 for the year ended December 31, 2019, an increase of $1,272,963 over retail center property revenues for the year ended December 31, 2018 due to new tenant revenues from the Franklin Square Property, ownership of the Hanover Square Property for the full 12 months ended December 31, 2019, and the acquisition of the Ashley Plaza Property.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Retail Center Properties               
Franklin Square Property  $2,303,713   $2,049,580   $254,133 
Hanover Square Property   1,329,695    864,202    465,493 
Ashley Plaza Property   553,337    -    553,337 
   $4,186,745   $2,913,782   $1,272,963 

 

Revenues from hotel properties were $3,898,254 for the year ended December 31, 2019, an increase of $222,085 over revenues from hotel properties for the year ended December 31, 2018. Revenues of $675,123 from the Clemson Best Western Property, which was acquired on September 27, 2019, offset a decline in revenues from the Hampton Inn Property of $453,038, resulting from increased competition in the market and the impact of construction at the hotel related to the Property Improvement Plan.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Hotel Properties               
Hampton Inn Property  $3,223,131   $3,676,169   $(453,038)
Clemson Best Western Property   675,123    -    675,123 
   $3,898,254   $3,676,169   $222,085 

 

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Revenues from the flex center property were $183,769 for the year ended December 31, 2019 resulting from the acquisition of the Brookfield Center Property on October 3, 2019.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Brookfield Center Property  $183,769   $-   $183,769 

 

Operating Expenses

 

Total operating expenses were $9,517,088 for the year ended December 31, 2019, consisting of $1,134,718 in expenses from retail center properties, $3,156,664 in expenses from hotel properties, $55,266 in expenses from the flex center property, $61,600 in share based compensation expenses, $1,089,246 in legal, accounting and other professional fees, $261,934 in corporate general and administrative expenses, a $983,855 loss on disposition of furniture, fixtures and equipment, and $2,773,805 in depreciation and amortization.

 

Operating expenses for retail center properties were $1,134,718 for the year ended December 31, 2019, an increase of $158,250 over retail center property operating expenses for the year ended December 31, 2018. A decline in operating expenses for the Franklin Square property resulting from reduced legal fees, utility costs and repairs was offset by the impact of increased expenses from owning the Hanover Square Property for the full 12 months of 2019 and the acquisition of the Ashley Plaza Property.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Retail Center Properties               
Franklin Square Property  $709,984   $758,232   $(48,248)
Hanover Square Property   311,759    218,236    93,523 
Ashley Plaza Property   112,975    -    112,975 
   $1,134,718   $976,468   $158,250 

 

Operating expenses for hotel properties were $3,156,664 for the year ended December 31, 2019, an increase of $547,839 over operating expenses from hotel properties for the year ended December 31, 2018. Operating expenses of $561,522 for the Clemson Best Western Property, which was acquired on September 27, 2019, offset a slight decline in operating expenses from the Hampton Inn Property of $13,713.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Hotel Properties               
Hampton Inn Property  $2,595,112   $2,608,825   $(13,713)
Clemson Best Western Property   561,552    -    561,552 
   $3,156,664   $2,608,825   $547,839 

 

Operating expenses from the flex center property were $55,266 for the year ended December 31, 2019 resulting from the acquisition of the Brookfield Center Property on October 3, 2019.

 

   For the year ended December 31,   Increase / 
   2019   2018   (Decrease) 
Brookfield Center Property  $55,266   $-   $55,266 

 

24

 

 

Loss on Disposition of FF&E

 

Our company allocated and recorded a portion of the acquisition cost of the Hampton Inn Property to furniture, fixtures and equipment (“FF&E”), a component of investment properties on the consolidated balance sheet, when it acquired the Hampton Inn Property in November 2017. As part of a property improvement plan for the Hampton Inn Property, we have replaced a significant portion of the FF&E we acquired. During the year ended December 31, 2019, our company recorded a loss on disposition of FF&E of $983,855, which represented the net book value of the assets that were disposed. No such losses were recorded during the year ended December 31, 2018.

 

Operating Loss

 

Operating loss for the year ended December 31, 2019 was $1,248,320, an increase of $183,407 over the operating loss of $1,064,913 for the year ended December 31, 2018. Increased operating income from (i) the retail center properties of $1,114,713 resulting from new tenant revenues at the Franklin Square Property, owning the Hanover Square Property for the full year ended December 31, 2019 and the acquisition of the Ashley Plaza Property, (ii) the flex center property of $128,503 and (iii) the Clemson Best Western Property of $113,751, were offset by (i) decreased operating income of $439,325 from the Hampton Inn Property due to the impact of construction at the hotel from the Property Improvement Plan, (ii) increased depreciation and amortization expense resulting from the 2019 property acquisitions, (iii) the loss on the disposition of furniture, fixtures and equipment, and (iv) increased corporate general and administrative expenses.

 

Interest Expense

 

Interest expense for the year ended December 31, 2019 was as follows:

 

   For the year ended December 31, 2019 
   Mortgage Interest
Expense
  

Amortization

of capitalized
issuance costs

   Interest
rate
protection
transaction
payments
   Other
interest
expense
   Total 
Franklin Square  $680,241   $18,552   $-   $-   $698,793 
Hanover Square   426,635    12,732    -    -    439,367 
Hampton Inn   783,517    139,560    (39,161)   11,289    895,205 
Ashley Plaza   147,251    5,812    -    -    153,063 
Clemson Best Western   155,463    22,437    -    2,048    179,948 
Brookfield Center   47,814    2,838    -    -    50,652 
Line of credit, short term   -    20,000    -    26,916    46,916 
Related party notes payable, short term   -    -    -    5,875    5,875 
Other interest   -    -    -    2,809    2,809 
Total interest expense  $2,240,921   $221,931   $(39,161)  $48,937   $2,472,628 

 

Total interest expense for the year ended December 31, 2019 increased by $555,445 over the year ended December 31, 2018. This increase was a result of owning the Hanover Square Property for the full 12 months of the year ended December 31, 2019, and new interest expense from the Ashley Plaza Property, Clemson Best Western Property and Brookfield Center Property.

 

Net Loss

 

Total net loss was $3,804,494 for the year ended December 31, 2019, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was $3,015,718. Total net loss was $2,991,153 for the year ended December 31, 2018, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was $2,743,323.

 

25

 

 

Total net loss for the year ended December 31, 2019 increased by $813,341 over the year ended December 31, 2018, before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, total net loss for the year ended December 31, 2019 increased by $272,395 over the year ended December 31, 2018.

 

The increase in net loss was a result of (i) the loss on disposition of $983,855 recognized during the year ended December 31, 2019, (ii) increased depreciation and amortization of $730,482 for the year ended December 31, 2019 resulting from the acquisition of the Ashley Plaza Property, Clemson Best Western Property and the Brookfield Center Property, and owning the Hanover Square Property for the full year ended December 31, 2019, and (iii) increased interest expense of $555,445 resulting from owning the Hanover Square Property for the full 12 months of the year ended December 31, 2019, and new interest expense from the acquisitions of the Ashley Plaza Property, Clemson Best Western Property and Brookfield Center Property during the year ended December 31, 2019.  These increased expenses were offset by decreased share based compensation expenses of $728,740 for the year ended December 31, 2019 and increased revenues of $1,678,817 for the year ended December 31, 2019 resulting from owning the Hanover Square Property for the full year ended December 31, 2019, and new interest expense from the Ashley Plaza Property, Clemson Best Western Property and Brookfield Center Property.

 

Funds from Operations

 

We use Funds from operations (“FFO”), a non-GAAP measure, as an alternative measure of our operating performance, specifically as it relates to results of operations and liquidity. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in its March 1995 White Paper (as amended in November 1999, April 2002 and December 2018). As defined by NAREIT, FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of loan origination costs and above and below market leases) and after adjustments for unconsolidated partnerships and joint ventures. Most industry analysts and equity REITs, including us, consider FFO to be an appropriate supplemental measure of operating performance because, by excluding gains or losses on dispositions and excluding depreciation, FFO is a helpful tool that can assist in the comparison of the operating performance of a company’s real estate between periods, or as compared to different companies. Management uses FFO as a supplemental measure to conduct and evaluate our business because there are certain limitations associated with using GAAP net income alone as the primary measure of our operating performance. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time, while historically real estate values have risen or fallen with market conditions. Accordingly, we believe FFO provides a valuable alternative measurement tool to GAAP when presenting our operating results.

 

NAREIT’s December 2018 White Paper states, “FFO of a REIT includes the FFO of all consolidated properties, including consolidated, partially owned affiliates”. Additionally, since the adjustments to GAAP net income, such as depreciation and amortization, used in the reconciliation of net income (loss) to determine FFO are not allocated between shareholders and noncontrolling interests (i.e. 100 percent of depreciation and amortization are “added back” without reduction to reflect the noncontrolling owners’ interest in such items), our company believes that the appropriate starting point for the calculation is the net income (loss) before allocation to noncontrolling interests.  This allows our company to use FFO as a tool to measure the overall performance of its investment properties, as a whole, not just the portion of the investment properties controlled by Company shareholders.

 

26

 

 

Below is our company’s FFO, which is a non-GAAP measurement, for the year ended December 31, 2019:

 

Net income (loss)  $(3,804,494)
Depreciation of tangible real property assets (1)   1,715,274 
Depreciation of tenant improvements (2)   270,203 
Amortization of leasing commissions (3)   40,067 
Amortization of tenant inducements (4)   17,040 
Amortization of intangible assets (5)   748,261 
Loss on disposition of furniture, fixtures and equipment (6)   983,855 
Funds from operations  $(29,794)

 

  (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 Franklin Square Property and Hanover Square Property and (ii) those constructed by our company subsequent to the acquisition of the properties.  

 

  (3)  Amortization of leasing commissions paid for the Franklin Square Property, Hanover Square Property, Ashley Plaza Property and Brookfield Center Property subsequent to the acquisition of the properties.   

 

  (4)  Amortization of tenant inducements paid for the Franklin Square Property during the year ended December 31, 2019.  

 

  (5)  Amortization of intangible assets acquired as part of the purchase of the Franklin Square Property, the Hanover Square Property, the Ashley Plaza Property and the Brookfield Center Property, including leasing commissions, leases in place and legal and marketing costs during the year ended December 31, 2019.

 

  (6)  Adjustment to FFO for the non-cash loss recognized as a result of the disposition of FF&E at the Hampton Inn Property during the year ended December 31, 2019.  NAREIT’s December 2018 White Paper provides guidance for the treatment of material non-cash revenues and expenses affecting their results, stating “NAREIT encourages those reporting FFO to make supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period.”

 

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 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.

 

27

 

 

Total AFFO for the year ended December 31, 2019 was as follows:

 

Funds from operations  $(29,794)
Amortization of above market leases (1)   226,251 
Amortization of below market leases (2)   (140,481)
Straight line rent (3)   (195,374)
Capital expenditures (4)   (428,787)
Increase (Decrease) in fair value of interest rate cap (5)   136,558 
Amortization of loan issuance costs (6)   221,931 
Share-based compensation (7)   61,600 
Adjusted funds from operations (AFFO)  $(148,096)

 

  (1)  Adjustment to FFO resulting from non-cash amortization of intangible assets recorded as part of the purchase of the Franklin Square Property, the Hanover Square Property, the Ashley Plaza Property and the Brookfield Center Property during the year ended December 31, 2019.  

 

  (2)  Adjustment to FFO resulting from non-cash amortization of intangible liabilities recorded as part of the Franklin Square Property, the Hanover Square Property, the Ashley Plaza Property and the Brookfield Center Property during the year ended December 31, 2019.  

 

  (3)  Adjustment to FFO resulting from non-cash revenues recognized as a result of applying straight line revenue recognition for the Franklin Square Property, the Hanover Square Property, the Ashley Plaza Property and the Brookfield Center Property during the year ended December 31, 2019.  

 

  (4)  Adjustment to FFO for capital expenditures, including capitalized leasing commissions, tenant improvements, building and site improvements and purchases of furniture, fixtures and equipment for the Franklin Square Property, the Hanover Square Property, Hampton Inn Property and Brookfield Center Property that will not be reimbursed by property escrow accounts.  During the year ended December 31, 2019, our company paid $2,135,672 in costs for leasing commissions, tenant improvements and building improvements at the Franklin Square Property, leasing commissions at the Hanover Square Property, Ashley Plaza Property and Brookfield Center Property, and interior and exterior renovations and advance deposits for furniture and fixtures at the Hampton Inn Property.  During the year ended December 31, 2019, our company received $1,706,885 in funds from property capital reserves held by the Hampton Inn Property and Franklin Square Property mortgage holders.  

 

  (5)  Adjustment to FFO resulting from non-cash expenses recognized as a result of decreases in the fair value of the interest rate caps for the Hampton Inn Property and the Clemson Best Western Property during the year ended December 31, 2019.  

 

  (6)  Adjustment to FFO for amortization of non-cash expenses recognized as a result of amortizing loan issuance costs over the terms of the respective mortgages during the year ended December 31, 2019.  

 

  (7)  Adjustment to FFO resulting from non-cash expenses recorded for share based compensation.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements and supplementary data required by this Item 8 are included as a separate section of this Annual Report on Form 10-K, see “Item 15. Exhibits and Financial Statement Schedules,” and are incorporated herein by reference.

 

28

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer, regarding the effectiveness of our disclosure controls and procedures as of December 31, 2019, the end of the period covered by this Annual Report. Based on the foregoing, our Chief Executive Officer has concluded, as of December 31, 2019, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate to allow for timely decisions regarding required disclosure.

 

Management’s Report on Internal Control Over Financial Reporting

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by Item 10 is incorporated by reference to our definitive Proxy Statement for our 2020 annual stockholders’ meeting.

 

ITEM 11. EXECUTIVE AND DIRECTOR COMPENSATION

 

The information required by Item 11 is incorporated by reference to our definitive Proxy Statement for our 2020 annual stockholders’ meeting.

 

29

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The information required by Item 12 is incorporated by reference to our definitive Proxy Statement for our 2020 annual stockholders’ meeting.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by Item 13 is incorporated by reference to our definitive Proxy Statement for our 2020 annual stockholders’ meeting.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Fees Paid to Independent Registered Public Accounting Firm

 

The information required by Item 14 is incorporated by reference to our definitive Proxy Statement for our 2020 annual stockholders’ meeting.

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

MEDALIST DIVERSIFIED REIT, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2019

 

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

 

    Page
   
Report of Independent Registered Public Accounting Firm   31
   
Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018   32
   
Consolidated Statements of Operations for the Years Ended December 31, 2019 and December 31, 2018   33
   
Consolidated Changes in Stockholders’ Equity for the Years December 31, 2019 and December 31, 2018   34
   
Consolidated Statements of Cash Flows for the Years December 31, 2019 and December 31, 2018   35
   
Notes to Consolidated Financial Statements   36
   
Schedule III – Real Estate Properties and Accumulated Depreciation   61

 

30

 

 

Report of Independent Registered Public Accounting Firm 

 

To the Board of Directors and Stockholders

Medalist Diversified REIT, Inc. and Subsidiaries

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Medalist Diversified REIT, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Cherry Bekaert LLP

 

We have served as the Company’s auditor since 2017.

 

Richmond, VA

 

March 24, 2020

 

31

 

 

Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and 2018
         
    2019    2018 
ASSETS          
Investment properties, net  $75,791,825   $45,323,497 
Cash   613,675    1,327,424 
Restricted cash   1,458,515    2,793,372 
Rent and other receivables, net of allowance of $8,615 and $15,194, as of December 31, 2019 and 2018,
respectively
   149,382    108,478 
Unbilled rent   460,888    259,216 
Advance deposits   -    423,747 
Intangible assets, net   4,458,071    2,585,834 
Other assets   306,886    285,484 
Total Assets  $83,239,242   $53,107,052 
           
LIABILITIES          
Accounts payable and accrued liabilities  $1,565,145   $826,336 
Intangible liabilities, net   1,277,960    439,726 
Line of credit, short term, net   1,990,000    - 
Related party notes payable, short term   852,000    - 
Mortgages payable, net   56,700,902    33,236,397 
Total Liabilities  $62,386,007   $34,502,459 
           
EQUITY          
Preferred stock, $.01 par value, 250,000,000 shares authorized, none issued and outstanding  $-   $- 
Common stock, $.01 par value, 750,000,000 shares authorized, 4,500,144 and 2,321,582 shares issued and outstanding at December 31, 2019 and 2018, respectively   45,001    23,216 
Additional paid-in capital   31,702,347    22,077,827 
Offering costs   (2,992,357)   (1,835,291)
Accumulated deficit   (10,555,841)   (5,229,760)
Total Stockholders' Equity   18,199,150    15,035,992 
Noncontrolling interests - Hampton Inn Property   1,282,782    2,009,031 
Noncontrolling interests - Hanover Square Property   540,791    608,943 
Noncontrolling interests - Operating Partnership   830,512    950,627 
Total Equity  $20,853,235   $18,604,593 
Total Liabilities and Equity  $83,239,242   $53,107,052 

 

See notes to consolidated financial statements

 

32

 

 

Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Statements of Operations
For the years ended December 31, 2019 and 2018
         
    2019    2018 
REVENUE          
Retail center property revenues  $3,495,396   $2,372,666 
Retail center property tenant reimbursements   691,349    541,116 
Flex center property revenues   138,607    - 
Flex center property tenant reimbursements   45,162    - 
Hotel property room revenues   3,723,173    3,636,485 
Hotel property other revenues   175,081    39,684 
Total Revenue  $8,268,768   $6,589,951 
           
OPERATING EXPENSES          
Retail center property operating expenses  $1,134,718   $976,468 
Flex center property operating expenses   55,266    - 
Hotel property operating expenses   3,156,664    2,608,825 
Share based compensation expenses   61,600    790,340 
Legal, accounting and other professional fees   1,089,246    924,651 
Corporate general and administrative expenses   261,934    119,679 
Loss on impairment   -    191,578 
Loss on disposition of furniture, fixtures and equipment   983,855    - 
Depreciation and amortization   2,773,805    2,043,323 
Total Operating Expenses   9,517,088    7,654,864 
Operating Loss   (1,248,320)   (1,064,913)
Interest expense   2,472,628    1,917,183 
Net Loss from Operations   (3,720,948)   (2,982,096)
Other (loss) income   (83,546)   44,094 
Net Loss before Income Taxes   (3,804,494)   (2,938,002)
Income tax expense   -    53,151 
Net Loss   (3,804,494)   (2,991,153)
Less: Net loss attributable to Hampton Inn Property noncontrolling interests   (726,249)   (166,314)
Less: Net loss attributable to Hanover Square Property noncontrolling interests   (8,037)   (15,177)
Less: Net loss attributable to Operating Partnership noncontrolling interests   (54,490)   (66,339)
Net Loss Attributable to Medalist Common Shareholders  $(3,015,718)  $(2,743,323)
           
Net loss per Medalist common share - basic and diluted  $(0.82)  $(1.39)
           
Weighted-average number of shares - basic and diluted   3,683,171    1,967,980 
           
Dividends paid per common share  $0.525   $0.525 

 

See notes to consolidated financial statements

 

33

 

 

Medalist Diversified REIT, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For the years ended December 31, 2019 and 2018

  

 
   Common Stock                   Noncontrolling Interests     
   Shares   Par Value   Additional
Paid in
Capital
   Offering
Costs
   Accumulated
Deficit
   Total
Shareholders'
Equity
   Hampton Inn
Property
   Hanover
Square
Property
   Operating
Partnership
   Total
Equity
 
Balance, December 31, 2017  1,148,002   $ 11,480   $ 11,086,897   $ (912,060)  $ (1,398,222)  $ 8,788,095   $ 2,211,345   $ -   $ 1,082,591   $ 12,082,031 
                                         
Common stock issuances   1,087,580    10,876    10,151,560    -    -    10,162,436    -    -    -    10,162,436 
Share based compensation   86,000    860    789,480    -    -    790,340    -    -    -    790,340 
Offering costs   -    -    -    (873,341)   -    (873,341)   -    -    -    (873,341)
Warrants issued   -    -    49,890    (49,890)   -    -    -    -    -    - 
Net loss   -    -    -    -    (2,743,323)   (2,743,323)   (166,314)   (15,177)   (66,339)   (2,991,153)
Dividends and distributions   -    -    -    -    (1,088,215)   (1,088,215)   (36,000)   (24,000)   (65,625)   (1,213,840)
Non-controlling interests   -    -    -    -    -    -    -    648,120    -    648,120 
                                                   
Balance, December 31, 2018   2,321,582   $23,216   $22,077,827   $(1,835,291)  $(5,229,760)  $15,035,992   $2,009,031   $608,943   $950,627   $18,604,593 
                                                   
Common stock issuances   2,164,562    21,645    9,563,060    -    -    9,584,705    -    -    -    9,584,705 
Share based compensation   14,000    140    61,460    -    -    61,600    -    -    -    61,600 
Offering costs   -    -    -    (1,157,066)   -    (1,157,066)   -    -    -    (1,157,066)
Net loss   -    -    -    -    (3,015,718)   (3,015,718)   (726,249)   (8,037)   (54,490)   (3,804,494)
Dividends and distributions   -    -    -    -    (2,310,363)   (2,310,363)   -    (60,115)   (65,625)   (2,436,103)
                                                   
Balance, December 31, 2019   4,500,144   $45,001   $31,702,347   $(2,992,357)  $(10,555,841)  $18,199,150   $1,282,782   $540,791   $830,512   $20,853,235 
                                                   
See notes to consolidated financial statements  

 

34

 

 

Medalist Diversified REIT, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31, 2019 and 2018

 

   2019    2018 
CASH FLOWS FROM OPERATING ACTIVITIES           
            
Net Loss  $(3,804,494 )  $(2,991,153)
            
Adjustments to reconcile consolidated net loss to           
net cash provided by (used in) operating activities           
Depreciation   2,025,544     1,461,630 
Amortization   748,261     581,693 
Loan cost amortization   221,931     166,600 
Amortization of tenant inducements   17,040     11,360 
Above (below) market lease amortization, net   85,770     136,370 
Loss on disposition of FF&E   983,855     - 
Share-based compensation   61,600     790,340 
Loss on impairment   -     191,578 
            
Changes in assets and liabilities, net of acquisitions           
Rent and other receivables, net   (40,904 )   13,539 
Unbilled rent   (201,672 )   (207,432)
Other assets   (30,051 )   (151,246)
Accounts payable and accrued liabilities   738,809     (423,955)
Net cash provided by (used in) operating activities   805,689     (420,676)
            
CASH FLOWS FROM INVESTING ACTIVITIES           
            
Investment property acquisitions   (32,794,733 )   (4,012,209)
Capital expenditures   (2,135,672 )   (986,470)
Advance deposits   -     (423,747)
Net cash used in investing activities   (34,930,405 )   (5,422,426)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
           
Dividends and distributions paid   (2,436,103 )   (1,213,840)
Investment of noncontrolling interests   -     648,120 
Proceeds from line of credit, short term   2,000,000     - 
Proceeds from issuance of related party notes payable, short term   852,000     - 
Repayment of notes payable and related party notes payable   -     (2,177,538)
Loan issuance costs from line of credit, short term   (30,000 )   - 
Proceeds from mortgages payable, net   23,442,941     250,652 
Repayment of mortgages payable   (180,367 )   (127,438)
Proceeds from sales of common stock, net of offering costs   8,427,639     9,289,095 
Net cash provided by investing activities   32,076,110     6,669,051 
            
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   (2,048,606 )   825,949 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period   4,120,796     3,294,847 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period   2,072,190     4,120,796 
           
CASH AND CASH EQUIVALENTS, end of period shown in consolidated balance sheets   613,675     1,327,424 
RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits   1,458,515     2,793,372 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the statement of cash flows  $2,072,190    $4,120,796 
          
Supplemental Disclosures and Non-Cash Activities:           
            
Other cash transactions:           
Interest paid, net of interest rate cap offsetting receipts  $2,090,886    $1,850,615 
            
Non-cash transactions:           
Transfer advance deposits to investment properties  $423,747    $- 
Mortgage payable assumed for acquisition of Hanover Square Property   -     8,527,315 
Warrants issued   -     49,890 
Capital expeditures recorded by not yet paid   -     137,174 
            
See notes to consolidated financial statements 

 

35

 

 

Medalist Diversified REIT, Inc. and Subsidiaries 

Notes to Consolidated Financial Statements

 

1. Organization and Basis of Presentation and Consolidation

 

Medalist Diversified Real Estate Investment Trust, Inc. (the “REIT”) is a Maryland corporation formed on September 28, 2015. Beginning with the taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes. The REIT serves as the general partner of Medalist Diversified Holdings, LP (the “Operating Partnership”) which was formed as a Delaware limited partnership on September 29, 2015. As of December 31, 2019, the REIT, through the Operating Partnership, owned and operated six properties, the Shops at Franklin Square, a 134,239 square foot retail property located in Gastonia, North Carolina (the “Franklin Square Property”), the Greensboro Airport Hampton Inn, a hotel with 125 rooms on 2.162 acres in Greensboro, North Carolina (the “Hampton Inn Property”), the Shops at Hanover Square North (the “Hanover Square Property”), a 73,440 square foot retail property located in Mechanicsville, Virginia, the Ashley Plaza Shopping Center (the “Ashley Plaza Property”), a 160,356 square foot retail property located in Goldsboro, North Carolina, the Clemson Best Western University Inn (the “Clemson Best Western Property”), a hotel with 148 rooms on 5.92 acres in Clemson, South Carolina and Brookfield Center, a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina (the “Brookfield Center Property”). As of December 31, 2019, the Company owned 64 percent of the Hampton Inn Property as a tenant in common with a noncontrolling owner which owns the remaining 36 percent interest. The Company owns 84 percent of the Hanover Square Property as a tenant in common with a noncontrolling owner which owns the remaining 16 percent interest.

 

The use of the word “Company” refers to the REIT and its consolidated subsidiaries, except where the context otherwise requires. The Company includes the REIT, the Operating Partnership, wholly owned limited liability corporations which own or operate the properties, and the taxable REIT subsidiaries which operate the Hampton Inn Property and the Clemson Best Western Property. As a REIT, certain tax laws limit the amount of “non-qualifying” income that Company can earn, including income derived directly from the operation of hotels. As a result, the Company and, in the case of the Hampton Inn Property, the tenant in common (“TIC”) noncontrolling owner, leases its consolidated hotel properties to taxable REIT subsidiaries (“TRS”) for federal income tax purposes. The TRS subsidiaries are subject to income tax and are not limited as to the amount of nonqualifying income they can generate, but they are limited in terms of their value as a percentage of the total value of the Company’s assets. The TRS subsidiaries enter into agreements with a third party to manage the operations of the hotel. The Company prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). References to the consolidated financial statements and references to individual financial statements included herein, reference the consolidated financial statements or the respective individual financial statement. All material balances and transactions between the consolidated entities of the Company have been eliminated.

 

36

 

 

 

 

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.

 

37

 

 

The Company is externally managed by Medalist Fund Manager, Inc. (the ‘‘Manager’’). The Manager makes all investment decisions for the Company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees the Company’s overall business and affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment decisions. The Company’s stockholders are not involved in its day-to-day affairs.

 

2. Summary of Significant Accounting Policies

 

Investment Properties

 

As of January 1, 2017, the Company 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, the 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 the 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 party consultants to assist management with its ASC 805 evaluations. The Company determines fair value based on accepted valuation methodologies including the cost, market, and income capitalization approaches. The purchase price is allocated to the tangible and intangible assets identified in the evaluation.

 

The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 5 to 40 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducements and tenant improvements 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.

 

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.

 

38

 

 

The Company did not record any impairment adjustments to its investment properties during the year ended December 31, 2019 other than the loss on disposition of furniture, fixtures and equipment. During 2018, a tenant in the Company’s Franklin Square Property was evicted. The Company determined that the carrying value of the tenant improvements associated with this lease that were recorded as part of the purchase of the Franklin Square Property should be written off. As a result, the Company recorded a loss on impairment of $50,405 for the year ended December 31, 2018.

 

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 vents or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable, but at least annually. During the year ended December 31, 2019, the Company did not record any impairment adjustments to its intangible assets. During the year ended December 31, 2018, a tenant in the Company’s Franklin Square Property was evicted. The Company determined that the book value of the intangible assets associated with this lease that were recorded as part of the purchase of the Franklin Square Property should be written off. As a result, the Company recorded a loss on impairment of intangible assets of $141,173 for the year ended December 31, 2018.

 

Details of these deferred costs, net of amortization, arising from the Company’s purchases of the Franklin Square Property, Hanover Square Property, Ashley Plaza Property and Brookfield Center Property are as follows:

 

   December 31, 
   2019   2018 
Intangible Assets        
Leasing commissions  $1,145,948   $305,646 
Legal and marketing costs   122,582    95,950 
Above market leases   624,285    648,409 
Net leasehold asset   2,565,256    1,535,829 
   $4,458,071   $2,585,834 
           
Intangible Liabilities          
Below market leases, net  $(1,277,960)  $(439,726)

 

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 years ended December 31, 2019 and 2018, respectively, were as follows:

 

   For the years ended December 31, 
   2019   2018 
Amortization of above market leases  $(226,251)  $(214,415)
Amortization of below market leases   140,481    78,045 
   $(85,770)  $(136,370)

 

39

 

 

Amortization of lease origination costs, leases in place and legal and marketing costs represent a component of depreciation and amortization expense. Amortization related to these intangible assets during the years ended December 31, 2019 and 2018, respectively, were as follows:

 

   For the years ended December 31, 
   2019   2018 
Leasing commissions  $(121,150)  $(82,306)
Legal and marketing costs   (32,944)   (31,660)
Net leasehold asset   (585,518)   (467,727)
   $(739,612)  $(581,693)

 

As of December 31, 2019 and 2018, the Company’s accumulated amortization of lease origination costs, leases in place and legal and marketing costs totaled $1,518,772 and $821,014, respectively.

 

Future amortization of above and below market leases, lease origination costs, leases in place, legal and marketing costs and tenant relationships is as follows:

 

   2020   2021   2022   2023   2024   2025-2039   Total 
Intangible Assets                                   
Leasing commissions  $180,980   $171,570   $137,213   $109,615   $91,762   $454,808   $1,145,948 
Legal and marketing costs   30,215    24,949    20,085    15,160    10,094    22,079    122,582 
Above market leases   221,390    214,452    121,137    33,311    7,692    26,303    624,285 
Net leasehold asset   687,399    582,861    354,284    207,919    156,036    576,757    2,565,256 
   $1,119,984   $993,832   $632,719   $366,005   $265,584   $1,079,947   $4,458,071 
                                    
Intangible Liabilities                                   
Below market leases, net  $(219,714)  $(207,700)  $(185,252)  $(138,780)  $(96,971)  $(429,543)  $(1,277,960)

 

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 with the Company’s control. Currently, the Company does not have any conditional asset retirement obligations. However, any such obligations identified in the future would result in the Company recording a liability if the fair value of the obligation can be reasonably estimated. Environmental studies conducted at the time the Company acquired its properties did not reveal any material environmental liabilities, and the Company is unaware of any subsequent environmental matters that would have created a material liability.

 

The Company believes that its properties are currently in material compliance with applicable environmental, as well as non-environmental, statutory and regulatory requirements. The Company did not record any conditional asset retirement obligation liabilities during the years ended December 31, 2019 and 2018, respectively.

 

Cash and Cash Equivalents and Restricted Cash

 

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank 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.

 

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 and (iii) capital reserves held by lenders for investment property capital improvements.

 

40

 

 

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 December 31, 2019, the Company had no cash accounts with balances that exceeded the FDIC limit. As of December 31, 2018, the Company held one cash account with a balance that exceeded the FDIC limit by $650,699.

 

Tenant security deposits are restricted cash balances held by the Company to offset potential damages, unpaid rent or other unmet conditions of its tenant leases. As of December 31, 2019 and 2018, the Company reported $101,503 and $71,022, 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 December 31, 2019 and 2018, the Company reported $882,265 and $719,588, 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 December 31, 2019 and 2018, the Company reported $474,747 and $2,002,762, respectively, in capital property reserves. These funds are being held in reserve, as follows:

 

   December 31, 
Property and Purpose of Reserve  2019   2018 
Hampton Inn Property - improvements  $82,693   $1,601,809 
Clemson Best Western Property - improvements   50,002    - 
Clemson Best Western Property - furniture, fixtures and equipment   27,226    - 
Franklin Square Property - leasing costs   307,438    400,953 
Brookfield Center Property - maintenance reserve   7,388    - 

 

Revenue Recognition

 

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective on January 1, 2019 (see Recent Accounting Pronouncements, below). This adoption did not have a material impact on the Company’s recognition of revenues from either its retail, flex or hotel properties.

 

Retail and Flex Center Property Revenues

 

The Company recognizes minimum rents from its retail center properties (the Franklin Square, Hanover Square and Ashley Plaza properties) and flex center property (Brookfield Center) on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset being recorded on the consolidated balance sheet. As of December 31, 2019 and 2018, the Company reported $460,888 and $259,216, respectively, in unbilled rent.

 

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, under the consolidated statements of operations captions "Retail center property tenant reimbursements” and “Flex center property tenant reimbursements." This significantly reduces the Company’s exposure to increases in costs and operating 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.

 

41

 

 

The Company recognizes differences between previously estimated recoveries and the final billed amounts in the year in which the amounts become final. During the years ended December 31, 2019 and 2018, respectively, the Company recognized $50,498 and $120,124, respectively, in CAM reimbursement revenues.

 

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 years ended December 31, 2019 and 2018, respectively, no such termination costs were recognized.

 

Hotel Property Revenues

 

Hotel revenues (from the Hampton Inn Property and Clemson Best Western Property) are recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services.

 

The Hampton Inn Property and Clemson Best Western Property are required to collect certain taxes and fees from customers on behalf of government agencies and remit them back to the applicable governmental agencies on a periodic basis. The Hampton Inn Property and Clemson Best Western Property have a legal obligation to act as a collection agent. The Hampton Inn Property and Clemson Best Western Property do not retain these taxes and fees; therefore, they are not included in revenues. The Hampton Inn Property and Clemson Best Western Property record a liability when the amounts are collected and relieves the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.

 

Hotel Property Operating Expenses

 

All personnel of the Hampton Inn Property and Clemson Best Western Property are directly or indirectly employees of Marshall, the hotel manager. In addition to fees and services discussed above, the Hampton Inn Property and Clemson Best Western Property reimburses Marshall for all employee related service costs, including payroll salaries and wages, payroll taxes and other employee benefits paid by Marshall on behalf of the respective property. For the Hampton Inn Property, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the year ended December 31, 2019 and 2018 were $897,421 and $845,010, respectively. For the Clemson Best Western Property, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the year ended December 31, 2019 and 2018 were $213,998 and $0, respectively. The amounts were included in hotel property operating expenses in the accompanying consolidated statements of operations.

 

Rent and other receivables and unbilled rent

 

Rent and other receivables include tenant receivables related to base rents and tenant reimbursements. Unbilled rent includes receivables attributable to recording rents on a straight-line basis. The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of December 31, 2019 and 2018, the Company’s allowance for uncollectible accounts totaled $8,615 and $15,194, 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 December 31, 2019 and 2018, 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.

 

42

 

 

During the year ended December 31, 2019, the REIT’s Hampton Inn TRS and Clemson Best Western Property entities generated a tax loss, so no accrual was recorded. During the year ended December 31, 2018, the REIT’s Hampton Inn TRS entity generated taxable income and an expense and accrual of $53,151 was recorded for federal and state income taxes. 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.

 

Management has evaluated the effect of the guidance provided by GAAP on Accounting for Uncertainty of Income Taxes and has determined that the Company had no uncertain income tax positions.

 

Use of Estimates

 

The Company has made estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the reported period. The Company’s actual results could differ from these estimates.

 

Loss on Disposition of Furniture, Fixtures and Equipment

 

The Company allocated and recorded a portion of the acquisition cost of the Hampton Inn Property to furniture, fixtures and equipment, a component of investment properties on the consolidated balance sheet, when it acquired the Hampton Inn Property in November 2017. As part of a property improvement plan for the Hampton Inn Property, the Company replaced a significant portion of the furniture, fixtures and equipment it acquired. As a result, during the year ended December 31, 2019, the Company recorded a loss on disposition of furniture, fixtures and equipment of $983,855, which represented the net book value of the assets that were disposed. No such losses were recorded during the year ended December 31, 2018.

 

Noncontrolling Interests

 

There are three elements of noncontrolling interests in the capital structure of the Company. The ownership interests not held by the REIT are considered noncontrolling interests. Accordingly, noncontrolling interests have been reported in equity on the consolidated balance sheets but separate from the Company’s equity. On the consolidated statements of operations, the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling interests. Consolidated statements of changes in stockholders’ equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.

 

The first noncontrolling interest is in the Hampton Inn Property in which the Company owns a 64 percent tenancy in common interest through its subsidiaries and an outside party owns a 36 percent tenancy in common interest, as of December 31, 2019. In 2017, the noncontrolling owner of the Hampton Inn Property provided $2.3 million as part of the acquisition of the Hampton Inn Property. The Hampton Inn Property’s net loss is allocated to the noncontrolling ownership interest based on its 36 percent ownership. During the years ended December 31, 2019, 36 percent of the Hampton Inn’s net loss of $2,017,362, or $726,249, was allocated to the noncontrolling partnership interest. During the year ended December 31, 2018, 36 percent of the Hampton Inn’s net loss of $461,982, or $166,314, was allocated to the noncontrolling ownership interest.

 

The second noncontrolling interest is in the Hanover Square Property in which the Company owns an 84 percent tenancy in common interest through its subsidiary and an outside party owns a 16 percent tenancy in common interest. The Hanover Square Property’s net loss is allocated to the noncontrolling ownership interest based on its 16 percent ownership. During the year ended December 31, 2019, 16 percent of the Hanover Square Property’s net loss of $50,240 or $8,037, was allocated to the noncontrolling ownership interest. During the year ended December 31, 2018, 16 percent of the Hanover Square Property’s net loss of $94,858, or $15,177, was allocated to the noncontrolling ownership interest.

 

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The third 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 LLC 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 LLC invested $1,175,000 in the Operating Partnership in exchange for 125,000 Operating Partnership units. The Operating Partnership units not held by the REIT represent 2.70 percent and 5.11 percent of the outstanding Operating Partnership units as of December 31, 2019 and 2018, respectively. 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 year ended December 31, 2019, a weighted average of 3.23 percent of the Operating Partnership’s net loss of $1,685,001, or $54,490 was allocated to the noncontrolling unit holders. During the year ended December 31, 2018, a weighted average of 5.98 percent of the Operating Partnership’s net loss of $1,108,614, or $66,339 was allocated to the noncontrolling unit holders.

 

Recent Accounting Pronouncements

 

For each of the accounting pronouncements that affect the Company, the Company has elected or plans to elect to follow the rule that allows companies engaging in an initial public offering as an Emerging Growth Company to follow the private company implementation dates.

 

Revenue Recognition

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements of ASC Topic 605, Revenue Recognition and most industry-specific guidance on revenue recognition throughout the ASC. The new standard is principles based and provides a five step model to determine when and how revenue is recognized. The core principle of the new standard is that revenue should be recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also requires disclosure of qualitative and quantitative information surrounding the amount, nature, timing and uncertainty of revenues and cash flows arising from contracts with customers. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations. In June 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which relates to assessing collectability, presentation of sales taxes, noncash consideration and completed contracts and contract modifications in transition. In December 2016, the FASB issued 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which clarifies or corrects unintended application of the standard. Adoption is required for private companies for fiscal years beginning after December 15, 2018. In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The Company adopted Topic 606 effective on January 1, 2019.

 

A majority of the Company’s tenant-related revenue from its Franklin Square, Hanover Square, Ashley Plaza and Brookfield Center Properties is recognized pursuant to lease agreements and will be governed by the leasing guidance discussed below.  The Company evaluated its hotel revenues and concluded that the adoption of this standard did not impact the amount or timing of revenue recognition in its consolidated financial statements. As previously discussed, the Company completed its assessment of ASU No. 2014-09 and concluded that the guidance does not have a material impact on the Company’s method of revenue recognition or on the consolidated financial statements.

 

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Accounting for Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842).  The amendments in this update govern a number of areas including, but not limited to, accounting for leases, replacing the existing guidance in ASC No. 840, Leases.  Under this standard, among other changes in practice, a lessee’s rights and obligations under most leases, including existing and new arrangements, would be recognized as assets and liabilities, respectively, on the balance sheet.  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 sheet 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 is effective for public companies for fiscal years beginning after December 15, 2018 (including interim periods within those fiscal years) and for private companies, fiscal years beginning after December 15, 2020, with early adoption permitted.  The Company plans to adopt the standard effective on January 1, 2021. The accounting for leases under which the Company is the lessor remains largely unchanged and the Company is not currently a “lessee” under any lease agreements. Management does not believe the adoption will have a material impact on the Company’s 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 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. For public companies, the guidance is effective for interim and annual reporting periods beginning after December 15, 2019, or December 15, 2020 if they qualify as a smaller reporting company. For private companies, the guidance will be effective for periods beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of the guidance will have on its consolidated financial statements and has not yet determined if it will adopt the update effective on the required effective date of January 1, 2023, or whether it will elect earlier adoption.

 

Cash Flows

 

In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and Cash Payments." This ASU amends guidance to either add or clarify the classification of certain cash receipts and payments in the statement of cash flows. Eight specific issues were identified for further clarification and include: debt prepayment or extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of company-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and the classification of cash flows that have aspects of more than one class of cash flows. The provisions of ASU No. 2016-15 were effective for the Company as of January 1, 2018. The Company adopted the standard using the modified retrospective approach, and the adoption did not have any impact to the consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). The ASU provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows in an effort to reduce diversity in practice. The standard requires a reconciliation of total cash, cash equivalents and restricted cash, such as escrows and operating property reserves and property capital reserves, in the cash flow statement or in the notes to the financial statements. This ASU was effective for public companies for annual and interim reporting periods beginning after December 15, 2017, and for private companies for periods beginning after December 15, 2018. The new standard is to be applied retrospectively for all periods presented. The Company adopted the standard as of January 1, 2019. For the year ended December 31, 2018, the retrospective application resulted in a reduction of $30,090 in net cash used in operating activities and an increase of $268,563 in net cash used in investing activities on the consolidated statements of cash flows.

 

In addition, for presentation purposes, the Company combined certain items included on its consolidated balance sheets as of December 31, 2018, to one restricted cash line item. Specifically, security deposits ($71,022 as of December 31, 2018), escrows and operating property reserves ($719,588 as of December 31, 2018) and property capital reserves ($2,002,762 as of December 31, 2018), all of which were previously presented separately on the Company’s December 31, 2018 consolidated balance sheets, have been combined and presented as restricted cash.

 

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Fair Value Disclosures

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This update eliminates or modifies certain existing disclosure requirements for fair value measurements for all companies and also adds certain new disclosures for public companies. It is effective for all companies for fiscal years beginning after December 15, 2019 (including interim periods within those fiscal years). The Company will adopt ASU 2018-13 effective January 1, 2020. The changes will not have a material impact on the Company’s consolidated financial statements.

 

3. Investment Properties

 

Investment properties consist of the following:

 

   December 31, 2019  December 31, 2018 
Land  $13,242,593  $7,462,946 
Site improvements   4,058,394   2,341,547 
Buildings and improvements (a)   59,879,175   35,753,467 
Furniture, fixtures and equipment (b)   2,122,317   1,733,273 
Investment properties at cost (c)   79,302,479   47,291,233 
Less accumulated depreciation   3,510,654   1,967,736 
Investment properties, net  $75,791,825  $45,323,497 

 

  (a) Includes tenant improvements (both those acquired at the acquisition and those constructed after the acquisition), tenant inducements, capitalized leasing commissions and other capital costs incurred post-acquisition.

 

  (b) As of December 31, 2019 and 2018, excludes $0 and $423,747, respectively, in pre-payments recorded as advance deposits for furniture and fixtures not yet received as part of the renovations of the Hampton Inn Property.  The Company reclassifies the amounts recorded as advance deposits to a furniture and fixtures account when the assets are received or placed in service.

 

  (c) Excludes intangible assets and liabilities (see note, below), escrow deposits and property reserves.

 

The Company’s depreciation expense on investment properties was $2,025,544 and $1,461,630 for the years ended December 31, 2019 and 2018, respectively.

 

The Company generally records depreciation of capitalized tenant improvements and amortization of capitalized leasing commissions on a straight-line basis over the terms of the related leases. Details of these deferred costs, net of depreciation and amortization are as follows:

 

   December 31, 2019  December 31, 2018 
Capitalized tenant improvements, net  $165,762  $175,580 
Capitalized leasing commissions, net   339,269   322,861 

 

During the year ended December 31, 2019 and 2018, the Company recorded $31,284 and $62,340, respectively, in capitalized tenant improvements. Depreciation on capitalized tenant improvements was $41,102 and $22,850 for the year ended December 31, 2019 and 2018, respectively.

 

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During the year ended December 31, 2019 and 2018, the Company recorded $56,475 and $305,648, respectively in capitalized leasing commissions. Amortization of capitalized leasing commissions was $40,067 and $25,075 for the year ended December 31, 2019 and 2018, respectively.

 

In May 2018, the Company paid $125,000 to induce a tenant in the Franklin Square Property to release a restriction in its lease that prohibited the Company from leasing space to a similar user. Capitalized tenant inducements are amortized as a reduction of rental income over the term of the respective lease. Details of these deferred costs, net of depreciation and amortization, are as follows:

 

   December 31, 2019   December 31, 2018 
Capitalized tenant inducements, net  $96,600   $113,640 

 

Amortization of the tenant inducement was $17,040 and $11,360 for the year ended December 31, 2019 and 2018, respectively.

 

A significant portion of the Company’s land, buildings and improvements serve as collateral for its mortgage loans payable portfolio. Accordingly, restrictions exist as to each property’s transferability, use and other common rights typically associated with property ownership.

 

Property Acquisitions

 

2019 Acquisitions

 

The Ashley Plaza Property

 

On August 30, 2019, the Company completed its acquisition of the Ashley Plaza Property, a 160,356 square foot retail property located in Goldsboro, North Carolina, through a wholly owned subsidiary. The Ashley Plaza Property, built in 1977 and fully renovated in 2018, was 98 percent leased as of December 31, 2019 and is anchored by Hobby Lobby, Harbor Freight and Ashley Home Store. The purchase price for the Ashley Plaza Property was $15,200,000 paid through a combination of cash provided by the Company, the incurrence of new mortgage debt and funds from a line of credit, short term. The Company’s total investment, including $204,300 of loan issuance costs, was $15,885,444. The Company paid $357,823 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.

 

The Clemson Best Western Property

 

On September 27, 2019, the Company completed its acquisition of the Clemson Best Western Property, a 148 room hotel on 5.92 acres located in Clemson, South Carolina, through a wholly owned subsidiary. The Clemson Best Western Property was built in 1982 and substantially renovated in 2016 and 2017. The purchase price for the Clemson Best Western Property was $9,750,000 paid through a combination of cash provided by the Company, the incurrence of new mortgage debt and funds from a line of credit, short term. The Company’s total investment, including $269,254 of loan issuance costs, was $10,786,782. The Company paid $578,953 of acquisition, closing costs and lease buy-out fees, which were capitalized and added to the tangible assets acquired.

 

The Brookfield Center Property

 

On October 3, 2019, the Company completed its acquisition of the Brookfield Center Property, a 64,880 square foot flex-industrial property located in Greenville, South Carolina, through a wholly owned subsidiary. The Brookfield Center Property, built in 2007, was 93.8 percent leased as of December 31, 2019. Major tenants include Gravitopia Trampoline Park and Summit Church. The purchase price for the Brookfield Center Property was $6,700,000 paid through a combination of cash provided by the Company, the incurrence of new mortgage debt and funds from related party notes payable, short term. The Company’s total investment, including $113,505 of loan issuance costs, was $7,102,643. The Company paid $207,957 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.

 

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The following summarizes the consideration paid and the fair values of the assets acquired and liabilities created or assumed in conjunction with the acquisitions described above, along with a description of the methods used to determine fair value. Asset values presented include allocated acquisition and closing costs.

 

   Brookfield
Center
Property
   Clemson
Best
Western
Property
   Ashley Plaza Property   Total 
Fair value of assets acquired                    
Investment property (a)  $6,407,367   $10,328,953   $14,199,028   $30,935,348 
Lease intangibles and other assets (b)   493,849    -    2,142,124    2,635,973 
Restricted cash created (c)   81,181    188,575    123,321    393,077 
Above market leases (b)   6,741    -    195,386    202,127 
Below market leases (b)   -    -    (978,715)   (978,715)
Fair value of net assets acquired (d)  $6,989,138   $10,517,528   $15,681,144   $33,187,810 
                     
Purchase consideration                    
Consideration paid with cash (e)  $1,876,138   $1,767,528   $3,281,144   $6,924,810 
Consideration paid with new line of credit, short term (f)   -    1,000,000    1,000,000    2,000,000 
Consideration paid with new related party note payable, short term (g)   263,000    -    -    263,000 
Consideration paid with new mortgage debt (h)   4,850,000    7,750,000    11,400,000    24,000,000 
Total consideration (i)  $6,989,138   $10,517,528   $15,681,144   $33,187,810 

 

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 of $207,957 for the Brookfield Center Property, $578,953 for the Clemson Best Western Property and $357,823 for the Ashley Plaza Property 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 deposits paid by the Company at closing for real estate tax escrows and operating and capital reserves.

 

d.

Represents the total fair value of assets and liabilities acquired at closing.

 

e.

Represents cash paid at closing and cash paid for acquisition (including intangible assets), escrows, lease buy-out fees, and closing costs paid outside of closing or directly by the Company.

 

f.

Represents funds received from a line of credit, short term. See Note 4, below.

 

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g.

Represents funds received from related party notes payable, short term. See Note 4, below.

 

h.

Issuance of new mortgage debt to fund the purchase of the properties. See Note 4, below.

 

i.

Represents the consideration paid for the fair value of the assets and liabilities acquired.

 

2018 Acquisition

 

The Hanover Square Property

 

On May 8, 2018, the Company completed its acquisition of an 84 percent interest in the Hanover Square Property through a wholly owned subsidiary. The Hanover Square Property, built in 2007, was 100 percent leased as of December 31, 2019 and is anchored by Marshalls and an Old Navy store. The purchase price for the Hanover Square Property was $12,173,000 paid through a combination of cash provided by the Company, assumed secured debt which amount was increased by additional debt and cash provided by the 16 percent noncontrolling investor. The Company’s total investment, including acquisition and closing costs, escrows and lease reserves was $12,961,557, including $122,033 of loan issuance costs and $648,120 in cash provided by a non-controlling investor.

 

The following summarizes the consideration paid and the fair values of assets acquired and liabilities assumed in conjunction with the acquisition described above, along with a description of the methods used to determine fair value. Asset values presented include allocated acquisition and closing costs.

 

   Hanover
Square
 
Fair value of assets acquired     
Investment property (a)  $11,493,360 
Lease intangibles and other assets (b)   1,093,057 
Escrows and property reserves created or acquired (c)   300,000 
Above market leases (b)   170,154 
Below market leases (b)   (217,047)
Fair value of net assets acquired (d)  $12,839,524 
      
Purchase consideration     
Consideration paid with cash (e)  $3,291,404 
Consideration paid with assumed mortgage debt (f)   8,527,315 
Consideration paid with new mortgage debt (g)   372,685 
Consideration paid by noncontrolling interest (h)   648,120 
Total consideration (i)  $12,839,524 

 

  (a) Represents the fair value of the investment property acquired which includes land, buildings, site improvements, tenant improvements and furniture and fixtures. 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) Escrow deposits are restricted cash balances held by lenders for real estate taxes, insurance and reserves for capital improvements. These are generally created at closing. For the Hanover Square Property, $200,000 in existing reserves were purchased at closing from the Seller as part of the loan assumption (see (f) below) and the Company funded $100,000 in additional escrows at closing.

 

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  (d) Represents the total fair value of assets and liabilities acquired at closing.

 

  (e) Represents cash paid at closing and cash paid for acquisition (including intangible assets), escrows and closing costs paid outside of closing or directly by the Company.

 

  (f) Assumption of mortgage debt related to the purchase of the Hanover Square Property.

 

  (g) Issuance of new mortgage debt (an increase in the amount of the assumed mortgage) to fund the purchase of the Hanover Square Property. See mortgages payable.

 

  (h) Represents investment of noncontrolling interest paid at closing for the Hanover Square Property.

 

  (i) Represents the consideration paid for the fair value of the assets and liabilities acquired.

 

4. Loans Payable

 

Mortgages Payable

 

The Company’s mortgages payables, net, consists of the following:

 

                Balance 
Property  Monthly
Payment
   Interest
Rate
    Maturity   December 31,
2019
   December 31,
2018
 
Franklin Square   Interest only    4.70%   October 2021   $14,275,000   $14,275,000 
Hampton Inn (a)   Interest only    Variable(b)   November 2020    10,600,000    10,600,000 
Hanover Square (c)  $51,993    4.90%   December 2027    8,592,195    8,772,562 
Ashley Plaza (d)   Interest only    3.75%   September 2029    11,400,000    - 
Clemson Best Western (e)   Interest only    Variable    October 2022    7,750,000    - 
Brookfield Center (f)   Interest only    3.90%   November 2029    4,850,000    - 
Unamortized issuance costs, net                  (766,293)   (411,165)
Total mortgages payable, net                 $56,700,902   $33,236,397 

 

  (a) Certain of the Company’s obligation under the mortgage loan for the Hampton Inn Property to complete a property improvement plan (PIP) are guaranteed by individual members of the Manager and by an individual member of the noncontrolling owner. This guarantee is irrevocable and unconditional and requires the PIP work to be completed on schedule and free of all liens.  As of December 31, 2019, the PIP was substantially complete.  

 

  (b) The mortgage loan for the Hampton Inn Property bears interest at a variable rate based on LIBOR with a minimum rate of 6.1 percent. The interest rate payable is the USD LIBOR one-month rate plus 5 percent.  As of December 31, 2019 and 2018, the rate in effect for the Hampton Inn Property mortgage was 6.75 percent and 7.50 percent, respectively.  The mortgage loan for the Hampton Inn property matures on November 9, 2020.  However, the Company has options to extend the term of the mortgage loan for two successive 12 month terms.  

 

  (c) The mortgage loan for the Hanover Square Property bears interest at a fixed rate of 4.9 percent until January 2023, when the interest rate adjusts to a new fixed rate which will be determined by adding 3.10 percentage points to the daily average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available by the Federal Reserve Board, with a minimum of 4.9 percent. The fixed monthly payment includes principal and interest. The mortgage loan agreement for the Hanover Square property includes covenants to (i) maintain a Debt Service Coverage Ratio (“DSCR”) in excess of 1.35 to 1.00 and (ii) maintain a loan-to-value of real estate ratio of 75 percent. As of December 31, 2019 and 2018, respectively, the Company believes that it is complaint with these covenants.

 

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  (d) The mortgage loan for the Ashley Plaza Property bears interest at a fixed rate of 3.75 percent and is interest only for the first twelve months.  Beginning on October 1, 2020, the monthly payment will be $52,795 for the remaining term of the loan, which will include interest at the fixed rate, and principal, based on a thirty year amortization schedule.  

 

  (e) The mortgage loan for the Clemson Best Western Property bears interest at a variable rate based on LIBOR with a minimum rate of 7.15 percent. The interest rate payable is the USD LIBOR one-month rate plus 4.9 percent.  As of December 31, 2019, the rate in effect for the Clemson Best Western Property mortgage was 7.15 percent.  

 

  (f) The mortgage loan for the Brookfield Property bears interest at a fixed rate of 3.90 percent and is interest only for the first twelve months.  Beginning on November 1, 2020, the monthly payment will be $22,876 for the remaining term of the loan, which will include interest at the fixed rate, and principal, based on a thirty year amortization schedule.

 

Line of credit, short term and note payable, short term

 

As of December 31, 2019, the Company had a line of credit, short term outstanding in the principal amount of $2,000,000. The line of credit, short term, was established on August 21, 2019 to provide short term funding for the Company’s acquisition of the Ashley Plaza Property and the Clemson Best Western Property (see note on 2019 acquisitions, above). On August 29, 2019, the Company received $1,000,000 in funding from the line of credit, short term, to fund a portion of its acquisition of the Ashley Plaza Property. On September 26, 2019, the Company received an additional $1,000,000 to fund a portion of its acquisition of the Clemson Best Western Property. The Company paid $30,000 of loan fees, which were recorded as capitalized issuance costs, which are presented as a direct reduction of the associated debt. The line of credit, short term, has a six month term and matures on February 21, 2020.

 

The line of credit, short term, bears interest at a variable rate calculated at 250 basis points over USD 1-Month LIBOR as published in the Wall Street Journal. The rate adjusts on the first day of each month during which the loan is outstanding. As of December 31, 2019, the rate in effect for the line of credit, short term, was 4.285 percent. Interest expense includes amortization of the capitalized issuance costs using the straight-line method, which approximates to the effective interest method, over the six-month term of the loan.

 

As of December 31, 2018, the Company had no line of credit, short term outstanding.

 

During the year ended December 31, 2018, the Company repaid a note payable, short term in the principal amount of $1,500,000. In addition, the Company accrued and paid $27,485 in interest and fees related to the note payable, short term, all of which was recorded as interest, during the year ended December 31, 2018.

 

Related party notes payable, short term

 

As of December 31, 2019, the Company had related party notes payable, short term, outstanding in the principal amount of $852,000 (see related party transactions, below). These notes were issued on September 30, 2019 in the principal amount of $183,000 and on October 2, 2019 in the principal amount of $80,000, both to fund a portion of the Company’s acquisition of the Brookfield Center Property, which closed on October 3, 2019. In addition, the Company issued a related party note payable in the principal amount of $589,000 on November 29, 2019 to fund dividends and working capital requirements. The related party notes payable are due on demand and bear interest at a rate of 5 percent annually.

 

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As of December 31, 2018, the Company had no related party notes payable, short term, outstanding. During the year ended December 31, 2018, the Company repaid related party notes payable, short term, to five related parties totaling $677,538. In addition, the Company accrued and paid $9,200 in interest related to the related party notes payable, short term during the year ended December 31, 2018.

 

Interest expense – loans payable

 

Interest expense, including amortization of capitalized issuance costs and payments received from the Company’s interest rate protection transactions for the Hampton Inn Property, consists of the following:

 

   For the year ended December 31, 2019 
   Mortgage
Interest
Expense
   Amortization
of capitalized
issuance costs
   Interest
rate
protection transaction
payments
   Other
interest
expense
   Total 
Franklin Square  $680,241   $18,552   $-   $-   $698,793 
Hanover Square   426,635    12,732    -    -    439,367 
Hampton Inn   783,517    139,560    (39,161)   11,289    895,205 
Ashley Plaza   147,251    5,812    -    -    153,063 
Clemson Best Western   155,463    22,437    -    2,048    179,948 
Brookfield Center   47,814    2,838    -    -    50,652 
Line of credit, short term   -    20,000    -    26,916    46,916 
Related party notes payable, short term   -    -    -    5,875    5,875 
Other interest   -    -    -    2,809    2,809 
Total interest expense  $2,240,921   $221,931   $(39,161)  $48,937   $2,472,628 

 

   For the year ended December 31, 2018 
   Mortgage
Interest
Expense
   Amortization
of capitalized
issuance
costs
   Interest
rate
protection
transaction
payments
   Other
interest
expense
   Total 
Franklin Square  $680,242   $18,552   $-   $-   $698,794 
Hanover Square   280,377    8,488    -    -    288,865 
Hampton Inn   761,544    139,560    (12,330)   2,609    891,383 
Ashley Plaza   -    -    -    -    - 
Clemson Best Western   -    -    -    -    - 
Brookfield Center   -    -    -    -    - 
Notes payable, short term   -    -    -    27,485    27,485 
Related party notes payable, short term   -    -    -    9,200    9,200 
Other interest   -    -    -    1,456    1,456 
Total interest expense  $1,722,163   $166,600   $(12,330)  $40,750   $1,917,183 

 

52

 

 

Interest accrued and accumulated amortization of capitalized issuance costs consist of the following:

 

   As of December 31, 2019   As of December 31, 2018 
   Accrued
interest
   Accumulated
amortization of
capitalized
issuance costs
   Accrued
interest
   Accumulated
amortization
of capitalized
issuance costs
 
Franklin Square  $57,774   $49,473   $57,774   $30,921 
Hanover Square   35,085    21,220    -    8,488 
Hampton Inn   61,613    302,381    -    162,821 
Ashley Plaza   -    5,812    -    - 
Clemson Best Western   47,716    22,437    -    - 
Brookfield Center   -    2,838    -    - 
Line of credit, short term   9,522    20,000    -    - 
Related party notes payable, short term   5,875    -    -    - 
Total  $217,585   $424,161   $57,774   $202,230 

 

Debt Maturity

 

The Company’s scheduled principal repayments on indebtedness as of December 31, 2019 are as follows:

 

   Mortgages
Payable
   Line of
Credit,
Short Term
   Related
Party Notes
Payable,
Short Term
   Total 
2020  $10,863,420   $2,000,000   $852,000   $13,715,420 
2021   14,777,198    -    -    14,777,198 
2022   8,274,334    -    -    8,274,334 
2023   547,460    -    -    547,460 
2024   568,879    -    -    568,879 
Thereafter   22,435,904    -