Notes to Condensed
Consolidated Financial Statements
(Unaudited)
1.
|
Organization and Basis of Presentation and Consolidation
|
Medalist
Diversified Real Estate Investment Trust, Inc. (the “REIT”) is a Maryland corporation formed on September 28,
2015. Beginning with the taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment
trust for federal income tax purposes. The REIT serves as the general partner of Medalist Diversified Holdings, LP (the “Operating
Partnership”) which was formed as a Delaware limited partnership on September 29, 2015. As of March 31, 2020, 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 March 31, 2020, the Company owned 75 percent
of the Hampton Inn Property as a tenant in common with a noncontrolling owner which owns the remaining 25 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 condensed consolidated financial statements and references to individual financial
statements included herein, reference the condensed consolidated financial statements or the respective individual financial statement.
All material balances and transactions between the consolidated entities of the Company have been eliminated.
The
Company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial
properties, including flex-industrial, limited service hotels, and retail properties, and (ii) multi-family residential properties
in secondary and tertiary markets in the southeastern part of the United States, with an expected concentration in Virginia, North
Carolina, South Carolina, Georgia, Florida and Alabama. The Company may also pursue, in an opportunistic manner, other real estate-related
investments, including, among other things, equity or other ownership interests in entities that are the direct or indirect owners
of real property, indirect investments in real property, such as those that may be obtained in a joint venture. While these types
of investments are not intended to be a primary focus, the Company may make such investments in its Manager’s discretion.
The Company is externally
managed by Medalist Fund Manager, Inc. (the ‘‘Manager’’). The Manager makes all investment decisions
for the Company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added
commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees the Company’s overall business and
affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment decisions. The Company’s
stockholders are not involved in its day-to-day affairs.
2.
|
Summary of Significant Accounting Policies
|
Investment
Properties
The
Company has adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), which clarifies
the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised
framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the
definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions
of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions.
As a result, 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. The Company
did not record any impairment adjustments to its investment properties during the three months ended March 31, 2020 or 2019, respectively.
Intangible
Assets and Liabilities, net
The
Company determines, through the ASC 805 evaluation, the above and below market lease intangibles upon acquiring a property. Intangible
assets (or liabilities) such as above or below-market leases and in-place lease value are recorded at fair value and are amortized
as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases.
The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over
the remaining life of the underlying leases. The analysis is conducted on a lease-by-lease basis.
The
Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value
of its intangible assets may not be recoverable, but at least annually. During the three months ending March 31, 2020 and 2019,
respectively, the Company did not record any impairment adjustments to its intangible assets.
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:
|
|
March 31, 2020
(unaudited)
|
|
|
December 31, 2019
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
Leasing commissions
|
|
$
|
1,099,468
|
|
|
$
|
1,145,948
|
|
Legal and marketing costs
|
|
|
114,239
|
|
|
|
122,582
|
|
Above market leases
|
|
|
563,738
|
|
|
|
624,285
|
|
Net leasehold asset
|
|
|
2,378,635
|
|
|
|
2,565,256
|
|
|
|
$
|
4,156,080
|
|
|
$
|
4,458,071
|
|
|
|
|
|
|
|
|
|
|
Intangible Liabilities
|
|
|
|
|
|
|
|
|
Below market leases, net
|
|
$
|
(1,220,506
|
)
|
|
$
|
(1,277,960
|
)
|
Capitalized
above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized
below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases. Adjustments
to rental revenue related to the above and below market leases during the three months ending March 31, 2020 and 2019, respectively,
were as follows:
|
|
For the three months ending March 31,
|
|
|
|
2020
(unaudited)
|
|
|
2019
(unaudited)
|
|
Amortization of above market leases
|
|
$
|
(60,547
|
)
|
|
$
|
(54,934
|
)
|
Amortization of below market leases
|
|
|
57,454
|
|
|
|
23,512
|
|
|
|
$
|
(3,093
|
)
|
|
$
|
(31,422
|
)
|
Amortization
of lease origination costs, leases in place and legal and marketing costs represent a component of depreciation and amortization
expense. Amortization related to these intangible assets during the three months ending March 31, 2020 and 2019, respectively,
were as follows:
|
|
For the three months ending March 31,
|
|
|
|
2020
(unaudited)
|
|
|
2019
(unaudited)
|
|
Leasing commissions
|
|
$
|
(46,480
|
)
|
|
$
|
(23,237
|
)
|
Legal and marketing costs
|
|
|
(8,343
|
)
|
|
|
(8,510
|
)
|
Net leasehold asset
|
|
|
(186,621
|
)
|
|
|
(131,086
|
)
|
|
|
$
|
(241,444
|
)
|
|
$
|
(162,833
|
)
|
As
of March 31, 2020 and December 31, 2019, the Company’s accumulated amortization of lease origination costs, leases in place
and legal and marketing costs totaled $1,760,216 and $1,518,772, 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:
|
|
For the remaining nine months ending December 31, 2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025-2039
|
|
|
Total
|
|
Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasing commissions
|
|
$
|
134,500
|
|
|
$
|
171,570
|
|
|
$
|
137,213
|
|
|
$
|
109,615
|
|
|
$
|
91,762
|
|
|
$
|
454,808
|
|
|
$
|
1,099,468
|
|
Legal and marketing costs
|
|
|
21,872
|
|
|
|
24,949
|
|
|
|
20,085
|
|
|
|
15,160
|
|
|
|
10,094
|
|
|
|
22,079
|
|
|
|
114,239
|
|
Above market leases
|
|
|
160,843
|
|
|
|
214,452
|
|
|
|
121,137
|
|
|
|
33,311
|
|
|
|
7,692
|
|
|
|
26,303
|
|
|
|
563,738
|
|
Net leasehold asset
|
|
|
500,778
|
|
|
|
582,861
|
|
|
|
354,284
|
|
|
|
207,919
|
|
|
|
156,036
|
|
|
|
576,757
|
|
|
|
2,378,635
|
|
|
|
$
|
817,993
|
|
|
$
|
993,832
|
|
|
$
|
632,719
|
|
|
$
|
366,005
|
|
|
$
|
265,584
|
|
|
$
|
1,079,947
|
|
|
$
|
4,156,080
|
|
Intangible Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below market leases, net
|
|
$
|
(162,260
|
)
|
|
$
|
(207,700
|
)
|
|
$
|
(185,252
|
)
|
|
$
|
(138,780
|
)
|
|
$
|
(96,971
|
)
|
|
$
|
(429,543
|
)
|
|
$
|
(1,220,506
|
)
|
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 three months ending March 31, 2020 and 2019, 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, (iii) capital reserves held by lenders for investment property capital
improvements and (iv) an escrow for the first year of dividends on the Company’s mandatorily redeemable preferred stock (see
Note 4, below).
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 March 31, 2020, the Company held two cash accounts with a total balance that exceeded the FDIC limit by $171,701. As
of December 31, 2019, the Company had no cash accounts with balances that exceeded the FDIC limit.
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 March 31, 2020 and December 31, 2019, the Company reported $109,003 and $101,503, 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 March
31, 2020 and December 31, 2019, the Company reported $1,055,852 and $882,265, 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 March 31, 2020 and December 31, 2019, the Company reported $585,005 and $474,747, respectively,
in capital property reserves. These funds are being held in reserve, as follows:
Property and Purpose of Reserve
|
|
March 31, 2020
(unaudited)
|
|
|
December 31, 2019
|
|
Hampton Inn Property – improvements
|
|
$
|
82,693
|
|
|
$
|
82,693
|
|
Hampton Inn Property – furniture, fixtures and equipment
|
|
|
36,811
|
|
|
|
-
|
|
Clemson Best Western Property - improvements
|
|
|
50,004
|
|
|
|
50,002
|
|
Clemson Best Western Property - furniture, fixtures and equipment
|
|
|
68,068
|
|
|
|
27,226
|
|
Franklin Square Property - leasing costs
|
|
|
332,653
|
|
|
|
307,438
|
|
Brookfield Center Property – maintenance reserve
|
|
|
14,776
|
|
|
|
7,388
|
|
Total
|
|
$
|
585,005
|
|
|
$
|
474,747
|
|
The
escrow for mandatorily redeemable preferred stock dividends is held by a financial institution under an escrow agreement by which
the funds are restricted for payment of dividends on the Company’s mandatorily redeemable preferred stock for the first 12
months. As of March 31, 2020 and December 31, 2019, the Company reported $371,414 and $0, respectively, in escrow reserves. (See
Note 4 for further discussion of the Company’s mandatorily redeemable preferred stock).
Revenue
Recognition
The
Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) effective on January 1, 2019.
This adoption did not have a material impact on 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 condensed consolidated balance sheet. As of March 31, 2020 and December 31, 2019,
the Company reported $504,722 and $460,888, 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 condensed 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.
The
Company recognizes differences between previously estimated recoveries and the final billed amounts in the year in which the amounts
become final. Since these differences are determined annually under the leases and accrued as of December 31 in the year earned,
no such revenues were recognized during the three months ended March 31, 2020 and 2019.
The
Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured.
Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets. During the three
months ending March 31, 2020 and 2019, 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 three months ended March 31, 2020 and 2019 were $144,383 and $166,604,
respectively. For the Clemson Best Western Property, total amounts incurred for payroll salaries and wages, payroll taxes and other
employee benefits for the three months ended March 31, 2020 and 2019 were $150,178 and $0, respectively. The amounts were included
in hotel property operating expenses in the accompanying condensed 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. (Rent and other receivables do
not include receivables attributable to recording rents on a straight-line basis, which are included in unbilled rent, discussed
above.) The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer
credit worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels,
and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease.
A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As
of March 31, 2020 and December 31, 2019, the Company’s allowance for uncollectible rent totaled $14,618 and $8,615, 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 March 31, 2020 and December
31, 2019, respectively.
In
addition to the allowance for uncollectible rent, the Company has established an allowance for uncollectible receivables related
to revenues previously accrued by the Clemson Best Western Property of $6,506 and $0 as of March 31, 2020 and December 31, 2019,
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.
During the three months
ended March 31, 2020 and 2019, respectively, the Company’s Hampton Inn TRS and Clemson Best Western entities generated a
tax loss, so no income tax expense was recorded. 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.
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 condensed
consolidated balance sheets but separate from the Company’s equity. On the condensed consolidated statements of operations,
the subsidiaries are reported at the consolidated amount, including both the amount attributable to the Company and noncontrolling
interests. Condensed 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 2017, the noncontrolling owner of the Hampton Inn Property provided
$2.3 million as part of the acquisition of the Hampton Inn Property for a 36 percent tenancy in common ownership interest. The
Company acquired a 64 percent tenancy in common interest through its subsidiaries. Effective on January 1, 2020, the Company
entered into a transaction with the noncontrolling owner of the Hampton Inn Property by which the noncontrolling owner exchanged
(i) approximately 7.55 percent of its tenant in common interest in the Hampton Inn Property for the settlement of $867,000
in advances made by the Company to the Hampton Inn Property; and (ii) approximately 3.45 percent of its tenant in common interest
in the Hampton Inn Property for 93,850 units of the Operating Partnership. As a result of this transaction, effective on January
1, 2020, the Company’s tenant-in-common interest in the Hampton Inn Property increased from 64 percent to 75 percent, and
the noncontrolling owner’s tenant-in-common interest decreased from 36 percent to 25 percent. This transaction did not have
any impact on the Company’s total assets, liabilities or shareholder’s equity or total equity as of March 31, 2020
or for the three months ended March 31, 2020, respectively.
The
Hampton Inn Property’s net loss is allocated to the noncontrolling ownership interest based on its percent ownership. During
the three months ended March 31, 2020, 25 percent of the Hampton Inn’s net loss of $339,836, or $84,960, was allocated to
the noncontrolling partnership interest. During the three months ending March 31, 2019, 36 percent of the Hampton Inn’s net
loss of $369,109, or $132,879, 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 three months ended March
31, 2020, 16 percent of the Hanover Square Property’s net income of $31,037 or $4,966, was allocated to the noncontrolling
ownership interest. During the three months ended March 31, 2019, 16 percent of the Hanover Square Property’s net loss
of $29,409, or $4,705, was allocated to the noncontrolling ownership interest.
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.
Additionally, as discussed above, effective on January 1, 2020, 93,850 Operating Partnership units were issued in exchange for
approximately 3.45 percent of the noncontrolling owner’s tenant in common interest in the Hampton Inn Property.
The
Operating Partnership units not held by the REIT represent 4.41 percent and 2.70 percent of the outstanding Operating Partnership
units as of March 31, 2020 and December 31, 2019, 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 three months ended March
31, 2020, a weighted average of 4.58 percent of the Operating Partnership’s net loss of $630,176, or $28,893 was allocated
to the noncontrolling unit holders. During the three months ended March 31, 2019, a weighted average of 5.11 percent of the Operating
Partnership’s net loss of $318,258, or $16,263 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.
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. 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.
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
adopted ASU 2018-13 effective January 1, 2020. The changes did not have a material impact on the Company’s condensed
consolidated financial statements.
Effects of
Reference Rate Reform
In March 2020, the
FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting. The London Interbank Offered Rate (LIBOR), which is widely used as a reference interest rate in debt agreements
and other contracts, is scheduled to be discontinued by the end of calendar year 2021. Financial market regulators in certain jurisdictions
throughout the world have undertaken reference rate reform initiatives to guide the transition and modification of debt agreements
and other contracts that are currently based on LIBOR to the successor reference rate that will replace it. ASU 2020-04 was issued
to provide companies that will be impacted by these changes with the opportunity to elect certain expedients and exceptions that
are intended to ease the potential burden of accounting for or recognizing the effects of reference rate reform on financial reporting.
Companies may generally elect to make use of the expedients and exceptions provided by ASU 2020-04 for any reference rate contract
modifications that occur in reporting periods that encompass the timeline from March 12, 2020 to December 31, 2022. The Company
currently has two outstanding mortgage loans with corresponding interest rate protection agreement and the line of credit, short
term, which use USD LIBOR as the reference interest rate (see Note 5). The Hampton Inn Property mortgage loan matures in November
2020, but may be extended for two successive twelve-month terms. The Clemson Best Western Property mortgage loan matures in October
2022. The line of credit, short term, expired on April 21, 2020. The Company is currently evaluating the guidance in ASU 2020-04
and has not made any determination at this time on whether it will use the expedients and exceptions provided therein with respect
to the replacement of USD LIBOR as the reference rate in these agreements.
Investment properties
consist of the following:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Land
|
|
$
|
13,242,593
|
|
|
$
|
13,242,593
|
|
Site improvements
|
|
|
4,058,394
|
|
|
|
4,058,394
|
|
Buildings and improvements (a)
|
|
|
59,996,337
|
|
|
|
59,879,175
|
|
Furniture, fixtures and equipment
|
|
|
2,168,401
|
|
|
|
2,122,317
|
|
Investment properties at cost (b)
|
|
|
79,465,725
|
|
|
|
79,302,479
|
|
Less accumulated depreciation
|
|
|
4,282,228
|
|
|
|
3,510,654
|
|
Investment properties, net
|
|
$
|
75,183,497
|
|
|
$
|
75,791,825
|
|
|
(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)
|
Excludes intangible assets and liabilities (see note, below), escrow deposits and property reserves.
|
The
Company’s depreciation expense on investment properties was $767,314 and $403,330 for the three months ended March 31, 2020
and 2019, 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:
|
|
March 31, 2020
(unaudited)
|
|
|
December 31, 2019
|
|
Capitalized tenant improvements, net
|
|
$
|
215,226
|
|
|
$
|
165,762
|
|
Capitalized leasing commissions, net
|
|
|
345,939
|
|
|
|
339,269
|
|
During
the three months ended March 31, 2020 and 2019, the Company recorded $60,000 and $31,224, respectively, in capitalized tenant improvements.
Depreciation on capitalized tenant improvements was $10,536 and $9,494 for the three months ended March 31, 2020 and 2019, respectively.
During
the three months ended March 31, 2020 and 2019, the Company recorded $17,739 and $1,346, respectively in capitalized leasing commissions.
Amortization of capitalized leasing commissions was $11,069 and $9,678 for the three months ended March 31, 2020 and 2019, respectively.
During 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:
|
|
March 31, 2020
(unaudited)
|
|
|
December 31, 2019
|
|
Capitalized tenant inducements, net
|
|
$
|
92,340
|
|
|
$
|
96,600
|
|
Amortization
of the tenant inducement was $4,260 and $4,260 for the three months ended March 31, 2020 and 2019, 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 March 31, 2020 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 March 31, 2020. 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.
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 5, below.
|
g.
|
Represents funds
received from related party notes payable, short term. See Note 5, below.
|
h.
|
Issuance of new
mortgage debt to fund the purchase of the properties. See Note 5, below.
|
i.
|
Represents the consideration paid for the fair value of the assets and liabilities acquired.
|
4.
|
Mandatorily Redeemable Preferred Stock
|
On
February 19, 2020, the Company issued and sold 200,000 shares of 8.0% Series A cumulative redeemable preferred stock
at $23.00 per share, resulting in gross proceeds of $4,600,000. Net proceeds from the issuance were $3,860,882, which includes
the impact of the underwriter’s discounts, selling commissions and legal, accounting and other professional fees, and is
presented on the Company’s condensed consolidated balance sheet as mandatorily redeemable preferred stock. The Company created
an escrow for $371,111 for the first year of dividends, which is reported as restricted cash on the Company’s condensed consolidated
balance sheet. As part of this offering, the Company granted the underwriters a 45-day option to purchase up to 23,000 additional
shares of mandatorily redeemable preferred stock at the public offering price, less the underwriting discount and commissions,
to cover over-allotments, if any. This 45-day period terminated on April 4, 2020, and the underwriters did not exercise any portion
of this option.
The mandatorily redeemable
preferred stock has an aggregate liquidation preference of $5 million, plus any accrued and unpaid dividends thereon. The mandatorily
redeemable preferred stock is senior to the Company’s common stock and any class or series of capital stock expressly designated
as ranking junior to the mandatorily redeemable preferred stock as to distribution rights and rights upon liquidation, dissolution
or winding up (“Junior Stock”). The mandatorily redeemable preferred stock is on a parity with any class or series
of the Company’s capital stock expressly designated as ranking on a parity with the mandatorily redeemable preferred stock
as to distribution rights and rights upon liquidation, dissolution or winding up (“Parity Stock”).
The mandatorily redeemable
preferred stock is mandatorily redeemable by the Company on February 19, 2025, the fifth anniversary of the date of issuance. Beginning
on February 19, 2022, the second anniversary of the issuance of the mandatorily redeemable preferred stock, the Company may redeem
the outstanding mandatorily redeemable preferred stock for an amount equal to its aggregate liquidation preference, plus any accrued
but unpaid dividends. The holders of the mandatorily redeemable preferred stock may also require the Company to redeem the mandatorily
redeemable preferred stock upon a change of control of the Company for an amount equal to its aggregate liquidation preference
plus any accrued and unpaid dividends thereon.
Holders of the mandatorily
redeemable preferred stock generally have no voting rights. However, if the Company does not pay dividends on the mandatorily redeemable
preferred stock for six consecutive quarterly periods, the holders of mandatorily redeemable preferred stock, voting together as
a single class with the holders of any outstanding Parity Stock having similar voting rights, will be entitled to vote for the
election of two additional directors to serve on the Company’s Board of Directors until the Company pays all dividends owed
on the mandatorily redeemable preferred stock. The affirmative vote of the holders of at least two-thirds of the outstanding shares
of mandatorily redeemable preferred stock, voting together as a single class with the holders of any other class or series of the
Company’s preferred stock upon which like voting rights have been conferred and are exercisable, is required for the Company
to authorize, create or increase the number of shares of any class or series of capital stock expressly designated as ranking senior
to the mandatorily redeemable preferred stock as to distribution rights and rights upon the Company’s liquidation, dissolution
or winding up. In addition, the affirmative vote of at least two-thirds of the outstanding shares of mandatorily redeemable preferred
stock (voting as a separate class) is required to amend the Company’s charter (including the articles supplementary designating
the mandatorily redeemable preferred stock) in a manner that materially and adversely affects the rights of the holders of mandatorily
redeemable preferred stock. Among other things, the Company may, without any vote of the holders of mandatorily redeemable preferred
stock, issue additional shares of mandatorily redeemable preferred stock and may authorize and issue additional shares of any class
or series of any Junior Stock or Parity Stock.
The Company has classified
the mandatorily redeemable preferred stock as a liability in accordance with ASC Topic No. 480, “Distinguishing Liabilities
from Equity,” which states that mandatorily redeemable financial instruments should be classified as liabilities and
therefore the related dividend payments are treated as a component of interest expense in the accompanying condensed consolidated
statements of operations (see Note 5, below).
For
all periods the mandatorily redeemable preferred stock has been outstanding, we have paid a cash dividend on the mandatorily redeemable
preferred stock equal to 8 percent per annum, payable quarterly. On April 27, 2020, a dividend in the amount of $0.3722 was paid
to mandatorily redeemable preferred stock shareholders of record on April 24, 2020 for the stub period from February 19, 2020,
the date of issuance, through April 27, 2020. As of March 31, 2020 and December 31, 2019, the Company reported $44,444 and $0,
respectively, in accrued but unpaid dividends on the mandatorily redeemable preferred stock. This amount is reported in accounts
payable and accrued liabilities on the Company’s condensed consolidated balance sheets.
The mandatorily redeemable
preferred stock was issued at $23.00 per share, a $2.00 per share discount. The total discount of $400,000 will be amortized over
the five-year life of the shares using the effective interest method. Additionally, the Company incurred $739,118 in legal, accounting,
other professional fees and underwriting discounts related to this offering. These costs were recorded as deferred financing costs
on the accompanying condensed consolidated balance sheets (unaudited) as a direct deduction from the carrying amount of the mandatorily
redeemable preferred stock liability and are being amortized using the effective interest method over the term of the agreement.
Amortization of the discount and deferred financing costs totaling $20,299 and $0 (see Note 5, below) was included in interest
expense for the three months ended March 31, 2020 and 2019, respectively, in the accompanying condensed consolidated statements
of operations (unaudited). Accumulated amortization of the discount and deferred financing costs was $20,299 and $0 as of March
31, 2020 and December 31, 2019, respectively.
Mortgages
Payable
The
Company’s mortgages payables, net, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Property
|
|
Monthly
Payment
|
|
Interest
Rate
|
|
|
|
Maturity
|
|
|
March 31,
2020
(unaudited)
|
|
|
December 31,
2019
|
|
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
|
|
|
|
8,541,271
|
|
|
|
8,592,195
|
|
Ashley Plaza (d)
|
|
Interest only
|
|
|
3.75
|
%
|
|
|
September 2029
|
|
|
|
11,400,000
|
|
|
|
11,400,000
|
|
Clemson Best Western (e)
|
|
Interest only
|
|
|
Variable
|
|
|
|
October 2022
|
|
|
|
7,750,000
|
|
|
|
7,750,000
|
|
Brookfield Center (f)
|
|
Interest only
|
|
|
3.90
|
%
|
|
|
November 2029
|
|
|
|
4,850,000
|
|
|
|
4,850,000
|
|
Unamortized issuance costs, net
|
|
|
|
|
|
|
|
|
|
|
|
|
(693,948
|
)
|
|
|
(766,293
|
)
|
Total mortgages payable, net
|
|
|
|
|
|
|
|
|
|
|
|
$
|
56,722,323
|
|
|
$
|
56,700,902
|
|
|
(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 March 31, 2020, 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 March 31, 2020 and December 31, 2019, the rate in effect for the Hampton Inn Property
mortgage was 6.10 percent and 6.75 percent, respectively. The mortgage loan for the Hampton Inn property matures
on November 9, 2020. However, the Company has options and intends 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 March 31, 2020 and December 31, 2019,
respectively, the Company believes that it is compliant with these covenants. On May 8, 2020, the Company entered into a
refinancing transaction with the mortgage lender for the Hanover Square Property which increased the mortgage
amount and reduced the interest rate. (See Note 11, below.)
|
|
(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 March 31, 2020 and December 31, 2019, respectively, 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 March 31, 2020
and December 31, 2019, the Company had a line of credit, short term, outstanding in the principal amount of $550,000 and $2,000,000,
respectively. 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 February 20,
2020, the 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 original maturity date of the line of credit, short term, the Company extended the line of credit,
short term, for 60 days until April 21, 2020. On March 3, 2020 the Company received $550,000 in funding from the line of credit,
short term, to fund working capital and dividend payments. On April 21, 2020, the Company extended the line of credit, short term,
for 40 days until May 31, 2020. (See Note 11, below.)
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 March 31,
2020 and December 31, 2019, the rate in effect for the line of credit, short term, was 4.015 percent and 4.285 percent, respectively.
Interest expense for the three months ended March 31, 2020, includes amortization of the capitalized issuance costs using the straight-line
method, which approximates to the effective interest method, over the initial, six-month term of the loan.
Related
party notes payable, short term
As
of March 31, 2020, and December 31, 2019, the Company had related party notes payable, short term, outstanding in the principal
amount of $0 and $852,000, respectively (see related party transactions, below). These notes, which were due on demand, 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 bore interest at a fixed 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.
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 three months ended March 31, 2020
|
|
|
|
(unaudited)
|
|
|
|
Mortgage
Interest
Expense
|
|
|
Amortization
of discounts and capitalized
issuance costs
|
|
|
Interest
rate
protection transaction
payments
|
|
|
Other
interest
expense
|
|
|
Total
|
|
Franklin Square
|
|
$
|
169,595
|
|
|
$
|
4,638
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
174,233
|
|
Hanover Square
|
|
|
103,684
|
|
|
|
3,183
|
|
|
|
-
|
|
|
|
-
|
|
|
|
106,867
|
|
Hampton Inn
|
|
|
174,929
|
|
|
|
34,890
|
|
|
|
-
|
|
|
|
3,987
|
|
|
|
213,806
|
|
Ashley Plaza
|
|
|
108,064
|
|
|
|
4,359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
112,423
|
|
Clemson Best Western
|
|
|
140,070
|
|
|
|
22,437
|
|
|
|
-
|
|
|
|
1,991
|
|
|
|
164,498
|
|
Brookfield Center
|
|
|
47,813
|
|
|
|
2,838
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,651
|
|
Amortization and preferred stock dividends on mandatorily redeemable preferred stock
|
|
|
-
|
|
|
|
20,299
|
|
|
|
-
|
|
|
|
44,444
|
|
|
|
64,743
|
|
Line of credit, short term
|
|
|
-
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
13,572
|
|
|
|
23,572
|
|
Related party notes payable, short term
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,835
|
|
|
|
5,835
|
|
Other interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,504
|
|
|
|
1,504
|
|
Total interest expense
|
|
$
|
744,155
|
|
|
$
|
102,644
|
|
|
$
|
-
|
|
|
$
|
71,333
|
|
|
$
|
918,132
|
|
|
|
For the three months ended March 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
Mortgage
Interest
Expense
|
|
|
Amortization
of capitalized
issuance
costs
|
|
|
Interest
rate
protection
transaction
payments
|
|
|
Other
interest
expense
|
|
|
Total
|
|
Franklin Square
|
|
$
|
167,731
|
|
|
$
|
4,638
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
172,369
|
|
Hanover Square
|
|
|
107,265
|
|
|
|
3,183
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110,448
|
|
Hampton Inn
|
|
|
199,891
|
|
|
|
34,890
|
|
|
|
(14,391
|
)
|
|
|
1,694
|
|
|
|
222,084
|
|
Ashley Plaza
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Clemson Best Western
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Brookfield Center
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Amortization and preferred stock dividends on mandatorily redeemable preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Line of credit, short term
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Related party notes payable, short term
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,173
|
|
|
|
1,173
|
|
Total interest expense
|
|
$
|
474,887
|
|
|
$
|
42,711
|
|
|
$
|
(14,391
|
)
|
|
$
|
2,867
|
|
|
$
|
506,074
|
|
Interest
accrued and accumulated amortization of capitalized issuance costs consist of the following:
|
|
As
of March 31, 2020
(unaudited)
|
|
|
As of December 31, 2019
|
|
|
|
Accrued
interest
|
|
|
Accumulated
amortization of
capitalized
issuance costs
|
|
|
Accrued
interest
|
|
|
Accumulated
amortization
of capitalized
issuance costs
|
|
Franklin Square
|
|
$
|
57,774
|
|
|
$
|
54,111
|
|
|
$
|
57,774
|
|
|
$
|
49,473
|
|
Hanover Square
|
|
|
33,714
|
|
|
|
24,403
|
|
|
|
35,085
|
|
|
|
21,220
|
|
Hampton Inn
|
|
|
55,679
|
|
|
|
337,271
|
|
|
|
61,613
|
|
|
|
302,381
|
|
Ashley Plaza
|
|
|
36,813
|
|
|
|
10,171
|
|
|
|
-
|
|
|
|
5,812
|
|
Clemson Best Western
|
|
|
47,716
|
|
|
|
44,874
|
|
|
|
47,716
|
|
|
|
22,437
|
|
Brookfield Center
|
|
|
16,288
|
|
|
|
5,676
|
|
|
|
-
|
|
|
|
2,838
|
|
Amortization and preferred stock dividends on mandatorily redeemable preferred stock
|
|
|
44,444
|
|
|
|
20,299
|
|
|
|
-
|
|
|
|
-
|
|
Line of credit, short term
|
|
|
1,657
|
|
|
|
-
|
|
|
|
9,522
|
|
|
|
20,000
|
|
Related party notes payable, short term
|
|
|
-
|
|
|
|
-
|
|
|
|
5,875
|
|
|
|
-
|
|
Total
|
|
$
|
294,085
|
|
|
$
|
496,805
|
|
|
$
|
217,585
|
|
|
$
|
424,161
|
|
Debt Maturity
The
Company’s scheduled principal repayments on mortgages payable indebtedness as of March 31, 2020 (unaudited) are as follows:
|
|
Mortgages
Payable
|
For the remaining nine months ending December 31, 2020
|
$
|
10,816,123
|
2021
|
|
14,777,382
|
2022
|
|
8,274,526
|
2023
|
|
547,663
|
2024
|
|
569,094
|
Thereafter
|
|
22,431,483
|
Total Maturities
|
|
57,416,271
|
Less unamortized issuance costs
|
|
(693,948)
|
Total principal payments and debt maturities
|
$
|
56,722,323
|
6.
|
Rentals under Operating Leases
|
Future
minimum rentals (based on recognizing future rents on the straight-line basis) to be received under noncancelable tenant operating
leases for each of the next five years and thereafter, excluding common area maintenance and other expense pass-throughs, as of
March 31, 2020 (unaudited) are as follows:
For the remaining nine months ending December 31, 2020
|
|
$
|
3,716,407
|
|
2021
|
|
|
4,729,085
|
|
2022
|
|
|
3,686,198
|
|
2023
|
|
|
2,837,776
|
|
2024
|
|
|
2,220,199
|
|
Thereafter
|
|
|
5,680,079
|
|
Total minimum rents
|
|
$
|
22,869,744
|
|
The
Company has authority to issue 1,000,000,000 shares consisting of 750,000,000 shares of common stock, $0.01 par value per share
("Common Shares"), and 250,000,000 shares of preferred stock, $0.01 par value per share ("Preferred Shares").
Substantially all of the Company’s business is conducted through its Operating Partnership. The REIT is the sole general
partner of the Operating Partnership and owned a 95.59% and 97.30% interest in the Operating Partnership as of March 31, 2020 and
December 31, 2019, respectively. Limited partners in the Operating Partnership who have held their units for one year or longer
have the right to redeem their common units for cash or, at the REIT’s option, Common Shares at a ratio of one common unit
for one common share. Under the Agreement of Limited Partnership, distributions to unit holders are made at the discretion of the
REIT. The REIT intends to make distributions in a manner that will result in limited partners of the Operating Partnership receiving
distributions at the same rate per unit as dividends per share are paid to the REIT’s holders of Common Shares.
2019 Issuances
On
May 8, 2019, the Company issued and sold 1,666,667 Common Shares 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 legal fees. On May 21, 2019, the company issued and sold 227,062 Common Shares 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, the Company issued and sold 270,833 shares 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 legal fees. During the year ended December 31, 2019, the Company
incurred $970,667 in offering costs, including legal, accounting, advisory and other professional fees.
Common shares
and operating partnership units outstanding
As
of March 31, 2020 and December 31, 2019, respectively, there were 4,966,818 and 4,625,144 common units of the Operating Partnership
outstanding with the REIT owning 4,747,968 and 4,500,144, respectively, of these common units. As of March 31, 2020 and December
31, 2019, respectively, there were 4,747,968 and 4,500,144 Common Shares of the REIT outstanding. As of March 31, 2020 and December
31, 2019, respectively, there were 125,000 common units of the Operating Partnership that were eligible for conversion to the Company’s
Common Shares.
Warrants
to purchase shares of common stock
On
October 4, 2018, the Company issued a warrant to Moloney Securities Co. Inc. (the “Holder”), the lead underwriter
of the issuances of the Company’s Common Shares in 2017 and the first six months of 2018, which grants the Holder the right
to purchase 49,890 shares of the Company’s Common Shares, in whole or in part, at an exercise price of $12.50 per share,
subject to certain conditions. The warrant was valued at $49,890 in the condensed consolidated financial statements, its fair value
as of the date of issuance using the Black-Scholes Model.
2018 Equity Incentive Plan
The
Company’s 2018 Equity Incentive Plan (the “Plan”) was adopted by the Company’s Board of Directors on July 27,
2018 and approved by the Company’s shareholders on August 23, 2018. The Plan permits the grant of stock options, stock
appreciation rights, stock awards, performance units, incentive awards and other equity-based awards (including LTIP units of the
Company’s Operating Partnership) to its employees or an affiliate (as defined in the Plan) of the Company and for up to the
greater of (i) 240,000 shares of common stock and (ii) eight percent (8%) of the number of fully diluted shares of the
Company’s Common Shares (taking into account interests in the Operating Partnership that may become convertible into Common
Shares).
On
August 31, 2018, the Company’s Board of Directors approved a grant of 80,000 shares of Common Shares to two employees
of the Manager who also serve as directors of the Company and a grant of 6,000 Common Shares to the Company’s three independent
directors. The effective date of the grants was December 4, 2018, the date on which the registration of the Plan shares was
effective. The Common Shares granted vested immediately, but were restricted for 180 days by a lock-up agreement associated with
the Company’s November 30, 2018 initial public offering and a second 180-day lock-up agreement associated with the Company’s
issuance of Common Shares on May 8, 2019. In addition, the Plan includes other restrictions on the sale of shares issued under
the Plan. Because the Common Shares vested immediately, the fair value of the grants, or $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 the Company’s Common Shares
on the effective date of the grant.
On
July 18, 2019, the Company’s Board of Directors approved a grant of 14,000 Common Shares to the Company’s five
independent directors. The effective date of the grants was July 18, 2019. The Common Shares granted vest immediately and
are unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the Common
Shares 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 the Company’s Common Shares on the effective date of the
grant.
On
March 11, 2020, the Company’s Board of Directors approved a grant of 156,522 shares of Common Shares to two employees of
the Manager who also serve as directors of the Company, a grant of 65,215 Common Shares to the Company’s five independent
directors, and a grant of 26,087 shares to an Affiliate of the Company (as defined by the Plan) who provides contract financial
and accounting services to the Company. The effective date of the grants was March 11, 2020. The Common Shares granted vest immediately
and are unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the Common
Shares vested immediately, the fair value of the grants, or $569,995, was recorded to share based compensation expense on the effective
date of the grant. The fair value of the grants was determined by the market price of the Company’s Common Shares on the
effective date of the grant.
On
each January 1 during the term of the Plan, the maximum number of shares of common stock that may be issued under the Plan
will increase by eight percent (8%) of any additional shares of common stock or interests in the Operating Partnership issued (i) after
the completion date the Company’s initial registered public offering of common stock, in the case of the January 1,
2019 adjustment, or (ii) in the preceding calendar year, in the case of the January 1, 2020 adjustment and any subsequent
adjustment. No adjustment to shares available for issuance under the Plan was made as of January 1, 2019. As of January 1,
2020, the shares available for issuance under the plan was adjusted to 313,165 shares. As of March 31, 2020, there are 65,341 shares
available for issuance under the Plan.
Earnings
per share
Basic
earnings per share for the Company’s Common Shares is calculated by dividing income (loss) from continuing operations, excluding
the net income (loss) attributable to noncontrolling interests, by the Company’s weighted-average number of Common Shares
outstanding during the period. Diluted earnings per share is computed by dividing the net income attributable to common shareholders,
excluding the net loss attributable to noncontrolling interests, by the weighted average number of Common Shares, including any
dilutive shares. As of March 31, 2020 and December 31, 2019, 125,000 of the Operating Partnership’s 218,850 common units
outstanding were eligible to be converted, on a one-to-one basis, into Common Shares. The Operating Partnership’s common
units have been excluded from the Company’s diluted earnings per share calculation because their inclusion would be antidilutive.
The Company's loss
per common share is determined as follows:
|
|
Three months ending March 31,
|
|
|
|
2020
(unaudited)
|
|
|
2019
(unaudited)
|
|
Basic and diluted shares outstanding
|
|
|
|
|
|
|
|
|
Weighted average Common Shares – basic
|
|
|
4,553,440
|
|
|
|
2,321,582
|
|
Effect of conversion of operating partnership units
|
|
|
125,000
|
|
|
|
125,000
|
|
Weighted average common shares – diluted
|
|
|
4,678,440
|
|
|
|
2,446,582
|
|
|
|
|
|
|
|
|
|
|
Calculation of earnings per share – basic and diluted
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(1,724,293
|
)
|
|
$
|
(686,639
|
)
|
Weighted average Common Shares – basic and diluted
|
|
|
4,553,440
|
|
|
|
2,321,582
|
|
Loss per share – basic and diluted
|
|
$
|
(0.38
|
)
|
|
$
|
(0.30
|
)
|
Dividends and Distributions
During
the three months ended March 31, 2020, a dividend in the amount of $0.125 was paid on March 10, 2020 to shareholders of record
on February 11, 2020. No dividends were paid during the three months ended March 31, 2019.
Total
dividends and distributions to noncontrolling interests paid during the three months ending March 31, 2020 and 2019, respectively,
are as follows:
|
|
Three months ended March 31,
|
|
|
|
2020
(unaudited)
|
|
|
2019
(unaudited)
|
|
Common shareholders (dividends)
|
|
$
|
562,537
|
|
|
$
|
-
|
|
Hanover Square Property noncontrolling interest (distributions)
|
|
|
20,800
|
|
|
|
-
|
|
Hampton Inn Property noncontrolling interest (distributions)
|
|
|
-
|
|
|
|
16,000
|
|
Operating Partnership unit holders (distributions)
|
|
|
27,356
|
|
|
|
-
|
|
Total dividends and distributions
|
|
$
|
610,693
|
|
|
$
|
16,000
|
|
8.
|
Commitments and Contingencies
|
Insurance
The
Company carries comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all
of the properties in its portfolio, in addition to other coverages that may be appropriate for certain of its properties. Additionally,
the Company carries a directors and officers liability insurance policy that covers such claims made against the Company and its
directors and officers. The Company believes the policy specifications and insured limits are appropriate and adequate for its
properties given the relative risk of loss, the cost of the coverage and industry practice; however, its insurance coverage may
not be sufficient to fully cover its losses.
Concentration
of Credit Risk
The
Company is subject to risks incidental to the ownership and operation of commercial real estate. These risks include, among others,
the risks normally associated with changes in the general economic climate, trends in the retail industry, creditworthiness of
tenants, competition for tenants and customers, changes in tax laws, interest rates, the availability of financing and potential
liability under environmental and other laws. The Company’s portfolio of properties is dependent upon regional and local
economic conditions and is geographically concentrated in the Mid-Atlantic, specifically in South Carolina, North Carolina and
Virginia, which represented 100 percent of the total annualized base revenues of the properties in its portfolio as of March 31,
2020. The Company’s geographic concentration may cause it to be more susceptible to adverse developments in those markets
than if it owned a more geographically diverse portfolio. Additionally, the Company’s retail shopping center properties depend
on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of, or a store closure by, one
or more of these tenants.
Other Risks
and Uncertainties
The
Company’s investment properties have been significantly impacted by measures taken by local, state and federal authorities
to mitigate the impact of the novel coronavirus (COVID-19), such as mandatory business closures, quarantines, restrictions on travel
and “shelter-in-place” or “stay-at-home” orders. 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)
could continue to be significant in the coming months.
As
of the date of this Quarterly Report on Form 10-Q, approximately 66 percent of the tenants (based on gross leasable square
footage) in the Company’s retail properties (the Franklin Square Property, Hanover Square Property and Ashley Plaza
Property) have notified the Company that they are temporarily closed and approximately 34 percent of the tenants are open and
operating, some with reduced operating hours. As of the date of this Quarterly Report on Form 10-Q, the Company has received
approximately 58% of contractual base rent and common area reimbursables billed for the month of April. As is believed to be
the case with retail landlords across the U.S., the Company has received a number of rent relief requests from tenants, most
often in the form of rent deferral requests, which the Company is evaluating on a case-by-case basis. As of the date of this
Quarterly Report on Form 10-Q, the Company has not made any modifications to any of its tenants’ lease agreements.
As
of the date of this Quarterly Report on Form 10-Q, one tenant consisting of approximately 58 percent of the gross leasable square
footage in the Company’s flex center property (the Brookfield Center Property) has notified the Company that it is temporarily
closed. The remaining tenants, consisting of approximately 42 percent of the gross leasable area, are operating. As of the date
of this Quarterly Report on Form 10-Q, the Company has received approximately 49 percent of contractual base rent and common area
reimbursables billed for the month of April. As of the date of this Quarterly Report on Form 10-Q, the Company has not made any
modifications to any of its flex center property’s tenants’ lease agreements.
The
Company’s hotel properties (the Hampton Inn Property and the Clemson Best Western Property) depend on leisure and
business travel, and have experienced significant declines in occupancy rates and revenues that began in March, have
continued in April and May, and which the Company expects to continue while the governmental restrictions on travel and
stay-at-home orders remain in place. Occupancy rates for the months of March and April, 2020 and 2019, respectively,
were:
|
|
2020
|
|
|
2019
|
|
|
|
March
|
|
|
April
|
|
|
March
|
|
|
April
|
|
Hampton Inn Property
|
|
|
33.32
|
%
|
|
|
25.36
|
%
|
|
|
64.13
|
%
|
|
|
62.29
|
%
|
Clemson Best Western Property (1)
|
|
|
26.96
|
%
|
|
|
24.86
|
%
|
|
|
67.30
|
%
|
|
|
47.37
|
%
|
|
(1)
|
2019 data for the Clemson Best Western Property is from the prior owner.
|
While
intense efforts to reduce operating costs are underway, the Company 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 federal government has provided assistance to
the industries negatively affected by the virus, including the hospitality industry, and our two hotel properties have received
loans under one of these programs (see Note 11), but the Company cannot be certain that such aid will mitigate the material reduction
in revenue resulting from COVID-19 travel impacts.
The impact on revenue
from the Company’s retail and flex center properties and tenants remains uncertain, but management anticipates that revenue
may be decreased until consumer demand for the goods and services of the Company’s retail and flex center tenants returns
to levels prior to the virus outbreak. There is uncertainty as to (i) the time, date and extent to which restrictions will be relaxed
or lifted, (ii) when tenants that have closed, either voluntarily or by mandate, will reopen, and (iii) when customers will re-engage
with tenants as they have in the past. Until such time as the virus is contained or eradicated and room demand for the Company’s
hotel properties and consumer demand for the goods and services of the Company’s retail and flex center tenants returns to
more customary levels, the Company may experience material reductions in our operating revenue.
The anticipated negative
impact on revenues, discussed above, from the Company’s retail, flex center and hotel properties has also, and will continue,
to impact the Company’s liquidity, resulting in reduced cash flow to meet the Company’s obligations. However, the Company’s
refinancing of its Hanover Square Property mortgage (see Note 11, below) will provide net cash proceeds to provide an alternative
source of liquidity for the Company to meet its obligations in the coming months.
Regulatory
and Environmental
As
the owner of the buildings on its properties, the Company could face liability for the presence of hazardous materials (e.g.,
asbestos or lead) or other adverse conditions (e.g., poor indoor air quality) in its buildings. Environmental laws govern the
presence, maintenance, and removal of hazardous materials in buildings, and if the Company does not comply with such laws, it
could face fines for such noncompliance. Also, the Company could be liable to third parties (e.g., occupants of the
buildings) for damages related to exposure to hazardous materials or adverse conditions in its buildings, and the Company
could incur material expenses with respect to abatement or remediation of hazardous materials or other adverse conditions in
its buildings. In addition, some of the Company’s tenants routinely handle and use hazardous or regulated substances
and wastes as part of their operations at the Company’s properties, which are subject to regulation. Such environmental
and health and safety laws and regulations could subject the Company or its tenants to liability resulting from these
activities. Environmental liabilities could affect a tenant’s ability to make rental payments to the Company, and
changes in laws could increase the potential liability for noncompliance. This may result in significant unanticipated
expenditures or may otherwise materially and adversely affect the Company’s operations. The Company is not aware of any
material contingent liabilities, regulatory matters or environmental matters that may exist.
Seasonality
The
hotel industry historically has been seasonal in nature. Seasonal variations in occupancy at the Company’s hotels may cause
quarterly fluctuations in its revenues. Occupancy rates and hotel revenues for the Company’s 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 the Company’s
Clemson Best Western Property are highest in the spring and fall months, due to sporting events at Clemson University. To the extent
that cash flow from operations is insufficient during any quarter due to temporary or seasonal fluctuations in revenue, the Company
expects to utilize cash on hand or available financing sources to meet cash requirements.
Litigation
The
Company is not currently involved in any litigation or legal proceedings.
9.
|
Related Party Transactions
|
Medalist
Fund Manager, Inc. (the “Manager”)
The
Company is externally managed by the Manager, which makes all investment decisions for the Company. The Manager oversees the Company’s
overall business and affairs and has broad discretion to make operating decisions on behalf of the Company and to make investment
decisions.
The
Company pays the Manager a monthly asset management fee equal to 0.125% of stockholders’ equity, payable in arrears in cash.
For purposes of calculating the asset management fee, the Company’s stockholders’ equity means: (a) the sum of
(1) the net proceeds from (or equity value assigned to) all issuances of the Company’s equity and equity equivalent
securities (including common stock, common stock equivalents, preferred stock and OP Units issued by the Company’s operating
partnership) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance),
plus (2) the Company’s retained earnings at the end of the most recently completed calendar quarter (without taking
into account any non-cash equity compensation expense incurred in current or prior periods), less (b) any amount that the
Company has paid to repurchase its common stock issued in this or any subsequent offering. Stockholders’ equity also excludes
(1) any unrealized gains and losses and other non-cash items (including depreciation and amortization) that have impacted
stockholders’ equity as reported in the Company’s condensed consolidated financial statements prepared in accordance
with GAAP, and (2) one-time events pursuant to changes in GAAP, and certain non-cash items not otherwise described above,
in each case after discussions between the Company’s Manager and its independent director(s) and approval by a majority
of its independent directors.
For
the three months ended March 31, 2020 and 2019, the Company incurred $144,862 and $93,925, in asset management fees, respectively.
Asset management fees are recorded on the Company’s condensed consolidated statements of operations as either (i) retail
center property operating expenses, (ii) hotel property operating expenses or (iii) legal, accounting and other professional
fees, depending on the basis on which the asset management fee is determined. As of March 31, 2020 and December 31, 2019, respectively,
the Company had $26,088 and $0 in accrued and unpaid asset management fees that were due to the Manager.
The
Manager also receives an acquisition fee of 2.0% of the purchase price plus transaction costs, for each property acquired or investment
made on the Company’s behalf at the closing of the acquisition of such property or investment, in consideration for the Manager’s
assistance in effectuating such acquisition. Acquisition fees are allocated and added to the fair value of the tangible assets
acquired. No acquisition fees were earned or paid during the three months ending March 31, 2020 or 2019.
The
Manager will be entitled to an incentive fee, payable quarterly, equal to an amount, not less than zero, equal to the
difference between (1) the product of (x) 20% and (y) the difference between (i) Adjusted Funds from
Operations (AFFO) (as further defined below) for the previous 12-month period, and (ii) the product of (A) the
weighted average of the issue price of equity securities issued in this offering and in future offerings and transactions,
multiplied by the weighted average number of all shares of common stock outstanding on a fully-diluted basis (including any
restricted stock units, any restricted shares of common stock and OP Units) in the previous 12-month period, exclusive of
equity securities issued prior to this offering, and (B) 7%, and (2) the sum of any incentive fee paid to the
Manager with respect to the first three calendar quarters of such previous 12-month period. For purposes of calculating the
incentive fee during the first years after completion of this offering, adjusted funds from operations (“AFFO”)
will be determined by annualizing the applicable period following completion of this offering. AFFO is calculated by removing
the effect of items that do not reflect ongoing property operations. The Company further adjusts funds from operations
(“FFO”) for certain items that are not added to net income in the National Association of Real Estate Investment
Trusts’ (NAREIT) definition of FFO, such as acquisition expenses, equity based compensation expenses, and any other
non-recurring or non-cash expenses, which are costs that do not relate to the operating performance of the Company’s
properties, and subtract recurring capital expenditures (and, when calculating the incentive fee only, we further adjust FFO
to include any realized gains or losses on real estate investments). No incentive fees were earned or paid during the three
months ending March 31, 2020 or 2019.
The
Company entered into a series of related party notes payable, short term with the Manager by which the Manager advanced funds for
acquisitions, dividends and working capital. On September 30, 2019 and October 2, 2019, the Manager advanced $183,000
and $80,000 respectively, to fund a portion of the Company’s acquisition of the Brookfield Center Property which closed on
October 3, 2019. On November 29, 2019, the Manager advanced $589,000 to the Company to fund dividends and working capital
requirements. The notes bore 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.
Other related
parties
The
Company pays Shockoe Properties, LLC, a subsidiary of Dodson Properties, an entity in which one of the owners of the Manager holds
a 6.32 percent interest, an annual property management fee of up to 3 percent of the monthly gross revenues of the Franklin Square,
Hanover Square, Ashley Plaza and Brookfield properties. These fees are paid in arrears on a monthly basis. During the three months
ended March 31, 2020 and 2019, the Company paid Shockoe Properties, LLC property management fees of $45,325 and $27,134, respectively.
The
Company establishes operating segments at the property level and aggregates individual properties into reportable segments based
on product types in which the Company has investments. As of March 31, 2020, the Company had the following reportable segments:
retail center properties, flex center properties and hotel properties. During the periods presented, there have been no material
intersegment transactions.
Although
the Company’s flex center property has tenants that are similar to tenants in its retail center properties, the Company considers
its flex center properties as a separate reportable segment. Flex properties are considered by the real estate industry as a distinct
subset of the industrial market segment. Flex properties contain a mix of industrial/warehouse and office spaces. Warehouse space
that is not air conditioned can be used flexibly by building office or showroom space that is air conditioned, depending on tenants’
needs.
Net
operating income ("NOI") is a non-GAAP financial measure and is not considered a measure of operating results or cash
flows from operations under GAAP. NOI is the primary performance measure reviewed by management to assess operating performance
of properties and is calculated by deducting operating expenses from operating revenues. Operating revenues include rental income,
tenant reimbursements, hotel income, and other property income; and operating expenses include retail center property and hotel
operating costs. The NOI performance metric consists of only revenues and expenses directly related to real estate rental operations.
NOI reflects property acquisitions and dispositions, occupancy levels, rental rate increases or decreases, and the recoverability
of operating expenses. NOI, as the Company calculates it, may not be directly comparable to similarly titled, but differently calculated,
measures for other REITs.
Asset
information and capital expenditures by segment are not reported because the Company does not use these measures
to assess performance. Depreciation and amortization expense, along with other expense and income items, are not allocated
among segments.
The
following table presents property operating revenues, expenses and NOI by product type:
|
|
For the three months ended March 31,
|
|
|
|
Hotel properties
|
|
|
Retail center properties
|
|
|
Flex center property
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
956,868
|
|
|
$
|
644,488
|
|
|
$
|
1,370,287
|
|
|
$
|
893,994
|
|
|
$
|
195,152
|
|
|
$
|
-
|
|
|
$
|
2,522,307
|
|
|
$
|
1,538,482
|
|
Operating expenses
|
|
|
962,696
|
|
|
|
581,975
|
|
|
|
355,597
|
|
|
|
269,275
|
|
|
|
52,559
|
|
|
|
-
|
|
|
|
1,370,852
|
|
|
|
851,250
|
|
Net operating (loss) income
|
|
$
|
(5,828
|
)
|
|
$
|
62,513
|
|
|
$
|
1,014,690
|
|
|
$
|
624,719
|
|
|
$
|
142,593
|
|
|
$
|
-
|
|
|
$
|
1,151,455
|
|
|
$
|
687,232
|
|
As
of May 14, 2020, the following events have occurred subsequent to the March 31, 2020 effective date of the condensed
consolidated financial statements:
Extension
of Line of Credit, Short Term
The 60 day extension
of the line of credit, short term, expired on April 21, 2020. On April 21, 2020, the Company entered into a second extension for
the line of credit, short term, for a 40 day period until May 31, 2020.
Mandatorily
Redeemable Preferred Stock Dividend
On
April 27, 2020, a preferred dividend in the amount of $0.3722 was paid to the Company’s mandatorily redeemable preferred
stock shareholders of record as of April 24, 2020 for the stub period from February 19, 2020 through April 27, 2020.
Small Business
Administration Paycheck Protection Program Loans
On
April 30, 2020, the Company entered into a loan agreement for $129,600 under the Small Business Administration Paycheck Protection
Program (the “SBA PPP Loan Program”) on behalf of a wholly owned subsidiary, MDR Clemson TRS, LLC, the entity that
operates the Clemson Best Western Property. The Company plans to use these funds pursuant to the limitations established by the
SBA PPP Loan Program for payroll and other eligible expenses for the Clemson Best Western Property. Under the terms of the loan,
all, a portion or none of the loan may be forgiven, based on criteria established by the SBA PPP Loan Program. Any portion of the
loan that is not forgiven will bear interest at a fixed rate of 1 percent per annum and be repaid in 18 monthly installments of
principal and interest of $7,295 beginning on November 1, 2020.
On
April 30, 2020, the Company entered into a loan agreement for $176,300 under the SBA PPP Loan Program on behalf of a subsidiary,
MDR PMI Greensboro TRS, LLC, the entity that operates the Hampton Inn Property. The Company plans to use these funds pursuant to
the limitations established by the SBA PPP Loan Program for payroll and other eligible expenses for the Hampton Inn Property. Under
the terms of the loan, all, a portion or none of the loan may be forgiven, based on criteria established by the SBA PPP Loan Program.
Any portion of the loan that is not forgiven will bear interest at a fixed rate of 1 percent per annum and be repaid in 18 monthly
installments of principal and interest of $9,923 beginning on November 1, 2020.
Hanover
Square Property Refinancing
On May 8, 2020, the Company entered into
a refinancing transaction with the mortgage lender for the Hanover Square Property. Under this transaction, the principal
amount of the loan was increased to $10,500,000 and the interest rate reduced to a fixed rate of 4.25 percent until January 1,
2023, when the interest rate will adjust to a new fixed rate which will be determined by adding 3.00 percentage points to the daily
average yield on United States Treasury securities adjusted to a constant maturity of five years, as made available by the Federal
Reserve Board, with a minimum of 4.25 percent. The fixed monthly payment, which includes principal and interest, increased to $56,882.
Proceeds, net of capitalized loan issuance costs of $42,352, were $1,951,845. The noncontrolling owner of the Hanover Square
Property received 16% of the net proceeds. The remaining proceeds of approximately $1,570,000, after the pre-payment of real
estate taxes and interest at closing, will be used by the Company for working capital and property acquisitions.