The following discussion and analysis is based on, and should be read in
conjunction with, the condensed, consolidated financial statements and the
related notes thereto of
Quarterly Report on Form 10-Q.
As used in this section, unless the context otherwise requires, references to "we," "our," "us," and "our company" refer toMedalist Diversified REIT, Inc. , aMaryland corporation, together with our consolidated subsidiaries, includingMedalist Diversified Holdings, LP , aDelaware limited partnership of which we are the sole general partner, except where it is clear from the context that the term only meansMedalist Diversified REIT, Inc.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements are included throughout this Quarterly Report on Form 10-Q. We have used the words "approximately," "anticipate," "assume," "believe," "budget," "contemplate," "continue," "could," "estimate," "expect," "future," "intend," "may," "outlook," "plan," "potential," "predict," "project," "seek," "should," "target," "will" and similar terms and phrases to identify forward-looking statements in this Quarterly Report on Form 10-Q. The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:
? the competitive environment in which we operate;
? national, international, regional and local economic conditions;
? capital expenditures;
? the availability, terms and deployment of capital;
? financing risks;
? the general level of interest rates;
? changes in our business or strategy;
? fluctuations in interest rates and increased operating costs;
? our limited operating history;
? the degree and nature of our competition;
? our dependence upon our Manager and key personnel;
? defaults on or non-renewal of leases by tenants;
? decreased rental rates or increased vacancy rates;
? our ability to make distributions on shares of our common stock and preferred
stock;
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? difficulties in identifying properties to acquire and completing acquisitions;
? our ability to operate as a public company;
? potential natural disasters such as hurricanes;
? COVID-19 pandemic;
? our ability to maintain our qualification as a REIT for
purposes;
potential changes in the law or governmental regulations that affect us and
? interpretations of those laws and regulations, including changes in real estate
and zoning or tax laws, and potential increases in real property tax rates; and
? related industry developments, including trends affecting our business,
financial condition and results of operations.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on historical performance and management's current plans, estimates and expectations in light of information currently available to us and are subject to uncertainty and changes in circumstances. There can be no assurance that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to the factors, risks and uncertainties described above, changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove to be incorrect, our actual results may vary in material respects from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date of this Quarterly Report on Form 10-Q. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws.
Company Overview
Medalist Diversified REIT Inc. is aMaryland corporation formed onSeptember 28, 2015 . Beginning with our taxable year endedDecember 31, 2017 , we believe that we have operated in a manner qualifying us as a real estate investment trust ("REIT"), and we have elected to be taxed as a REIT for federal income tax purposes. Our company serves as the general partner ofMedalist Diversified Holdings, LP which was formed as aDelaware limited partnership onSeptember 29, 2015 . Our company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial and retail properties, (ii) multi-family residential properties and (iii) limited service hotel properties in secondary and tertiary markets in the southeastern part ofthe United States , with an expected concentration inVirginia ,North Carolina ,South Carolina ,Georgia ,Florida andAlabama . We may also pursue, in an opportunistic manner, other real estate-related investments, including, among other things, equity or other ownership interests in entities that are the direct or indirect owners of real property, and indirect investments in real property, such as those that may be obtained in a joint venture. While these types of investments are not intended to be a primary focus, we may make such investments in our Manager's discretion. Our company is externally managed by the Manager. The Manager makes all investment decisions for our company. The Manager and its affiliated companies specialize in acquiring, developing, owning and managing value-added commercial real estate in the Mid-Atlantic and Southeast regions. The Manager oversees our company's overall business and affairs and has broad discretion to make operating decisions on behalf of our company and to make investment decisions. Our company's stockholders are not involved in its day-to-day affairs. 40
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As ofSeptember 30, 2022 , our company owned and operated eight investment properties, the Shops atFranklin Square (the "Franklin Square Property"), a 134,239 square foot retail property located inGastonia, North Carolina , theHanover North Shopping Center (the "Hanover Square Property"), a 73,440 square foot retail property located inMechanicsville, Virginia , theAshley Plaza Shopping Center (the "Ashley Plaza Property"), a 160,356 square foot retail property located inGoldsboro, North Carolina , Brookfield Center (the "Brookfield Center Property"), a 64,880 square foot mixed-use industrial/office property located inGreenville, South Carolina , the Lancer Center, a 178,626 square foot retail property located inLancaster, South Carolina (the "Lancer Center Property"), theGreenbrier Business Center (the "Greenbrier Business Center Property"), an 89,280 square foot mixed-use industrial/office property located inChesapeake, Virginia , Parkway 3 & 4 (the "Parkway Property"), a 64,109 square foot mixed-use industrial office property located inVirginia Beach, Virginia , and theSalisbury Marketplace Shopping Center , a 79,732 square foot retail property located inSalisbury, North Carolina (the "Salisbury Marketplace Property"). As ofSeptember 30, 2022 , we owned 84 percent of the Hanover Square Property as a tenant in common with a noncontrolling owner which owned the remaining 16 percent interest and 82 percent of the Parkway Property as a tenant in common with a noncontrolling owner which owns the remaining
18 percent interest. Reporting Segments
We establish operating segments at the property level and aggregate individual
properties into reportable segments based on product types in which we have
investments. As of
center properties, flex center properties, and hotel properties.
Recent Trends and Activities
Significant events that have impacted our company are summarized below.
Sale of the Clemson Best Western Property
OnSeptember 29, 2022 , our company sold its interest in the Clemson Best Western Property, a 148 room hotel on 5.92 acres inClemson, South Carolina , to an unrelated purchaser for$10,015,000 . During the three months endedMarch 31, 2021 , our company reclassified the Clemson Best Western Property as assets held for sale. As part of its continuing evaluation of the amounts previously used for the estimated fair value of the Clemson Best Western asset group that had been reclassified as assets held for sale, during the three months endedMarch 31, 2022 , our company recorded an impairment charge of$175,671 associated with this reclassification. As a result of the closing of the sale of theClemson Best Western Property onSeptember 29, 2022 , our company recognized a loss on sale of investment properties of$389,471 for the three and nine months endedSeptember 30, 2022 .
Sale of the
OnAugust 31, 2021 , our company sold its interest in theHampton Inn Property , a 125 room hotel on 2.162 acres inGreensboro, North Carolina , to an unrelated purchaser for$12,900,000 . At the time of the sale, our company owned a 78 percent interest in theHampton Inn Property as a tenant in common with a noncontrolling owner who owned the remaining 22 percent interest. During the year endedDecember 31, 2020 , our company reclassified theHampton Inn Property as assets held for sale and recognized an impairment charge of$3,494,058 associated with this reclassification. As a result of the closing of the sale of theHampton Inn Property onAugust 31, 2021 , our company recognized a gain on sale of investment properties of$124,641 for the year endedDecember 31, 2021 .
2022 Investment Property Acquisitions
Salisbury Marketplace Property
OnJune 13, 2022 , our company completed its acquisition of theSalisbury Marketplace Property, a 79,732 square foot retail property located inSalisbury, North Carolina , through a wholly owned subsidiary.The Salisbury Marketplace Property, built in 1986, was 91.2% leased as ofSeptember 30, 2022 , and is anchored by Food Lion, Citi Trends and Family Dollar. The purchase price for the Salisbury Marketplace Property was$10,025,000 paid through a combination of cash provided by our company and the incurrence of 41
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new mortgage debt. Our company’s total investment was
incurred
added to the tangible assets acquired.
2021 Investment Property Acquisitions
Lancer Center
OnMay 14, 2021 , we completed our acquisition of the Lancer Center Property, a 178,626 square foot retail property located inLancaster, South Carolina , through a wholly owned subsidiary. The Lancer Center Property, built in 1987, was 100 percent leased as ofSeptember 30, 2022 and is anchored by KJ's Market, Big Lots,Badcock Furniture , and Harbor Freight. The purchase price for the Lancer Center Property was$10,100,000 , less a$200,000 credit to our company for major repairs, paid through a combination of cash provided by our company and the incurrence of new mortgage debt. Our company's total investment, including$143,130 of loan issuance costs, was$10,205,385 . We incurred$305,385 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
OnAugust 27, 2021 , we completed our acquisition of the Greenbrier Business Center Property, an 89,290 square foot mixed-use industrial/office property, through a wholly owned subsidiary. The Greenbrier Business Center Property, built in 1987, was 85.0 percent leased as ofSeptember 30, 2022 . Major tenants includeBridge Church , Superior Staffing,Consolidated Electrical Distributors and Mid-Atlantic Office Technologies. The purchase price for theGreenbrier Business Center Property was$7,250,000 , paid through a combination of cash provided by our company and the assumption of mortgage debt. Our total investment, including$13,400 of loan issuance costs, was$7,578,762 . Our company incurred$178,763 of acquisition and closing costs which were capitalized and added to the tangible assets acquired.
Parkway Property
OnNovember 1, 2021 , we completed our acquisition of the Parkway 3 & 4 property, a 64,109 square foot, two building portfolio inVirginia Beach, Virginia (the "Parkway Property") through a wholly owned subsidiary. The Parkway Property, built in 1984, was 100 percent leased as ofSeptember 30, 2022 . Major tenants include theCity of Virginia Beach andGBRS Group . The purchase price for the Parkway Property was$7,300,000 , paid through a combination of$2,138,795 in cash provided by our company,$469,492 in cash provided by an unaffiliated non-controlling interest, and the incurrence of a new mortgage payable of$5,100,000 . Our company's total investment, including the investment of the non-controlling interest and$110,263 of loan issuance costs, was$7,598,024 .
We incurred
and added to the tangible assets acquired.
Wells Fargo Mortgage Facility
OnJune 13, 2022 , our company, through its wholly owned subsidiaries, entered into a mortgage loan facility withWells Fargo Bank (the "Wells Fargo Mortgage Facility") in the principal amount of$18,609,500 . The proceeds of the Wells Fargo Mortgage Facility were used to finance the acquisition of theSalisbury Marketplace Property and to refinance the mortgages payable on the Lancer Center Property and the Greenbrier Business Center Property. The Wells Fargo Mortgage Facility bears interest at a fixed rate of 4.50 percent for a five year term. The monthly payment, which includes interest at the fixed rate, and principal, based on a 25 year amortization schedule, is$103,438 . Our company has provided an unconditional guaranty of the payment of and performance under the terms of the Wells Fargo Mortgage Facility. The Wells Fargo Mortgage Facility credit agreement includes covenants to maintain a debt service coverage ratio of not less than 1.50 to 1.00 on an annual basis and a minimum debt yield of 9.5 percent on theSalisbury Marketplace , Lancer Center andGreenbrier Business Center properties, and to maintain liquid assets of not less than$1,500,000 on deposit withWells Fargo Bank . As ofSeptember 30, 2022 , our company believes that it is compliant with these covenants.
Wells Fargo Line of Credit
OnJune 13, 2022 , our company, through its wholly owned subsidiaries, entered into a loan agreement withWells Fargo Bank for a$1,500,000 line of credit (the "Wells Fargo Line of Credit"). As ofSeptember 30, 2022 , the Wells Fargo Line of Credit had an outstanding balance of$0 . Outstanding balances on the Wells Fargo Line of Credit will bear interest at a floating rate of 2.25 percent above the daily secured overnight financing rate ("SOFR"). The Wells Fargo Line of Credit has a one-year, renewable term, is unconditionally guaranteed by our company, and any outstanding balances are secured by the Lancer Center Property, theGreenbrier 42 Table of Contents
Business Center Property and the Salisbury Marketplace Property. We plan to
use the Wells Fargo Line of Credit to help fund future acquisitions.
Equity Issuances
On
offering price of
including the underwriter’s selling commissions and estimated legal and
accounting fees.
Form S-3, Shelf Registration
OnJune 21, 2021 , our company filed a shelf registration statement on Form S-3 with theUnited States Securities and Exchange Commission ("SEC"). The registration statement is intended to provide additional flexibility to finance future business opportunities through timely and cost-effective access to capital markets. Under the shelf registration statement, our company may, from time to time, issue common stock up to an aggregate amount of$150 million . The shelf registration statement was declared effective by theSEC onJuly 27, 2021 .
Standby Equity Purchase Agreement
OnNovember 17, 2021 , our company entered into a Standby Equity Purchase Agreement (the "SEPA") with a financing entity. Under this agreement, our company will be able to sell up to$6,665,299 of its shares of common stock at our company's request any time during the 36 months following the execution of the SEPA. The shares would be purchased at 96.5% of the market price (as defined in the agreement) and would be subject to certain limitations, including that the financing entity could not purchase any shares that would result in it owning more than 4.99% of our company's common stock. As ofSeptember 30, 2022 , our company has generated net proceeds of$1,538,887 from the issuance of 1,445,400 shares at an average price of$1.065 per common share under the SEPA. Issuance Date Shares Issued Price Per Share Total Proceeds March 3, 2022 90,600 $ 1.088 $ 98,574 March 14, 2022 276,190 1.050 290,000 March 17, 2022 278,810 1.076 300,000 March 21, 2022 474,068 1.055 500,000 April 1, 2022 325,732 1.075 350,313 Total 1,445,400 $ 1.065$ 1,538,887
Common Stock Repurchase Plan
InDecember 2021 , our company's board of directors approved a program to purchase up to 500,000 shares of our company's common stock in the open market, up to a maximum price of$4.80 per share. The repurchase program does not obligate our company to acquire any particular amount of shares, and the repurchase program may be suspended or discontinued at any time at our company's discretion. As ofSeptember 30, 2022 , our company has repurchased a total of 268,070 shares of common stock on the open market under the Common Stock Repurchase Plan at an average price of$1.038 per share. Purchase Date Shares Purchased Price Per Share Total Cost January 4, 2022 400 $ 1.060$ 424 January 5, 2022 48,205 1.060 51,093 January 6, 2022 100,000 1.046 104,556 January 7, 2022 30,000 1.050 31,500 January 10, 2022 50,000 1.020 51,000 January 14, 2022 100 1.010 101 January 21, 2022 39,365 1.006 39,603 Total 268,070 $ 1.038$ 278,277 43 Table of Contents
Common stock grants under the 2018 Equity Incentive Plan
OnMarch 16, 2021 , our company's Compensation Committee approved a grant of 40,356 Common Shares to our company's three independent directors, and a grant of 26,900 shares to the chief financial officer of our company. The effective date of the grants wasMarch 16, 2021 . The Common Shares granted vest immediately and are unrestricted. However, the Plan includes other restrictions on the sale of shares issued under the Plan. Because the Common Shares vested immediately, the fair value of the grants, or$149,981 , was recorded to share based compensation expense on our company's condensed consolidated statements of operations on the effective date of the grant. The fair value of the grants was determined by the market price of our company's Common Shares on the effective date of the grant. OnMarch 2, 2022 , our company's Compensation Committee approved a grant of 60,000 Common Shares to two employees of the Manager who also serve as directors of our company, a grant of 90,000 Common Shares to our company's three independent directors, and a grant of 60,000 shares to the chief financial officer of our company. The effective date of the grants wasMarch 2, 2022 . 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$233,100 , was recorded to share based compensation expense on our company's condensed consolidated statements of operations on the effective date of the grant. The fair value of the grants was determined by the market price of our company's Common Shares on the effective date of the grant.
Financing Activities
Mortgages payable
Our company financed its acquisitions of its investment properties through
mortgages, as follows:
Balance
September 30,
Monthly Interest 2022 December 31,
Property Payment Rate Maturity (unaudited) 2021
Franklin Square (a) Interest only 3.808 % December 2031$ 13,250,000 $ 13,250,000 Hanover Square (b)$ 56,882 4.25 % December 2027 9,943,087 10,134,667 Ashley Plaza (c)$ 52,795 3.75 % September 2029 10,966,333 11,127,111 Brookfield Center (d)$ 22,876 3.90 % November 2029 4,685,210 4,758,344 Parkway Center (e)$ 19,720 Variable % October 2026 5,010,286 5,090,210
Wells Fargo Facility (f)$ 103,438 4.50 % June 2027 18,450,515 - Lancer Center (g) - 6,488,034 Greenbrier Business Center (h) - 4,495,000 Total mortgages payable$ 62,305,431 $ 55,343,366
Amounts presented do not reflect unamortized loan issuance costs.
The original mortgage loan for the Franklin Square Property matured on
forbearance agreement with the current lender extending the maturity date for
thirty days with a right to extend the maturity date for an additional thirty
days. On
ten-year term, and matures on
from the new loan, our company used
costs and to repay the remaining balance of the original mortgage loan. Our
(a) company has guaranteed the payment and performance of the obligations of the
new loan. The new mortgage loan bears interest at a fixed rate of 3.808
percent and is interest only until
payment will become
30 year amortization schedule. Our company accounted for this refinancing
transaction in accordance with debt extinguishment accounting in accordance
with ASC 470. The new mortgage includes covenants for our company to
maintain a net worth of
associated with the Franklin Square Property and to maintain liquid assets of
no less than
company believes that we are compliant with these covenants.
The mortgage loan for the Hanover Square Property bears interest at a fixed
(b) rate of 4.25 percent until
adjust to a new fixed rate which will be determined by adding 3.00 percentage
points to the daily average
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yield on United States Treasury securities adjusted to a constant maturity of
five years, as made available by the
4.25 percent. The fixed monthly payment of
the fixed rate, and principal, based on a 25 year amortization schedule. The
mortgage loan agreement for the
(i) maintain a Debt Service Coverage Ratio (“DSCR”) in excess of 1.35 and (ii)
maintain a loan-to-value of real estate ratio of 75 percent. As of
that it is compliant with these covenants.
The mortgage loan for the Ashley Plaza Property bears interest at a fixed
rate of 3.75 percent and was interest only for the first twelve months.
(c) Beginning on October 1, 2020, the monthly payment became
remaining term of the loan, which includes interest at the fixed rate, and
principal, based on a thirty year amortization schedule.
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
(d) on
term of the loan, which includes interest at the fixed rate, and principal,
based on a thirty year amortization schedule.
The mortgage loan for the Parkway Property bears interest at a variable rate
based on LIBOR with a minimum rate of 2.25 percent. The interest rate
payable is the ICE LIBOR rate plus 225 basis points. As of
4.814 percent. The monthly payment, which varies based on the interest rate
(e) in effect each month, includes interest at the variable rate, and principal
based on a 30 year amortization schedule. On
entered into an Interest Rate Protection Transaction to limit the Company’s
exposure to increases in interest rates on the variable rate mortgage loan on
the Parkway Property. Under this agreement, the Company’s interest rate
exposure is capped at 5.25 percent ifUSD 1 -Month ICE LIBOR exceeds 3 percent.
On
amount of
the acquisition of the Salisbury Marketplace Property and to refinance the
mortgages payable on the Lancer Center Property and the Greenbrier Business
Center Property (see notes (g) and (h), below). The Wells Fargo Mortgage
Facility bears interest at a fixed rate of 4.50 percent for a five year term.
The monthly payment, which includes interest at the fixed rate, and
(f) principal, based on a 25 year amortization schedule, is
company has provided an unconditional guaranty of the payment of and
performance under the terms of the Wells Fargo Mortgage Facility. The Wells
Fargo Mortgage Facility credit agreement includes covenants to maintain a
debt service coverage ratio of not less than 1.50 to 1.00 on an annual basis
and a minimum debt yield of 9.5 percent on the
Center and
assets of not less than
believes that it is compliant with these covenants.
On
Center Property, using proceeds from the Wells Fargo Facility discussed
above. Our company accounted for this refinancing transaction under debt
extinguishment accounting in accordance with ASC 470, and for the three and
nine months ended
(g) debt of
bore interest at a fixed rate of 4.00 percent. The monthly payment was
twenty-five year amortization schedule. Our company has provided a guaranty
of the payment of and performance under the terms of the Lancer Center
Property mortgage.
On
Business Center Property, using proceeds from the Wells Fargo Facility
discussed above. Our company accounted for this refinancing transaction under
debt extinguishment accounting in accordance with ASC 470, and for the three
and nine months ended
(h) of debt of
Greenbrier Business Center Property from the seller. The original mortgage
loan bore interest at a fixed rate of 4.00 percent and would have been
interest only until
have become
and principal, based on a twenty-five year amortization schedule.
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Our company financed its acquisitions of its assets held for sale through
mortgages which, as of September 30, 2022 , are recorded as mortgages payable,
net, associated with assets held for sale, on our condensed consolidated balance
sheets, as follows:
Balance
September 30,
Monthly Interest 2022 December 31,
Property Payment Rate Maturity (unaudited) 2021
Clemson Best Western (a) Interest only Variable October 2022 - 7,750,000
Amounts presented do not reflect unamortized loan issuance costs.
As of
Clemson Best Western Property to mortgages payable, net, associated with
assets held for sale. The mortgage loan for the Clemson Best Western
Property bore interest at a variable rate based on LIBOR with a minimum rate
of 7.15 percent. The interest rate payable was the USD LIBOR one-month rate
plus 4.9 percent. As of
(a) in effect for the Clemson Best Western Property mortgage was 7.15 percent. On
repaid the Clemson Best Western Property mortgage payable. Our company
accounted for the repayment of the mortgage payable under debt extinguishment
accounting in accordance with ASC 470. During the three months ended
Our Company incurred$227,164 in expenses related to our efforts to refinance of the Clemson Best Western Property mortgage payable in anticipation of itsOctober 6, 2022 maturity, had we not successfully closed on the sale of the Clemson Best Western Property onSeptember 29, 2022 . These expenses for lender fees and other third-party costs are recorded as other expenses on our company's condensed consolidated statement of operations for the three and nine months endedSeptember 30, 2022 . No such expenses were recorded during the three and nine months endedSeptember 30, 2021 .
Convertible debenture issuance
OnOctober 27, 2020 , our company entered into a definitive agreement with a financing entity to issue and sell convertible debentures in an aggregate principal amount of up to$5 million pursuant to a private offering exempt from registration under the Securities Act of 1933, as amended. The debentures were issued at a 5 percent discount to the principal amount, accrue interest at a rate of 5 percent per annum (payable at maturity), and were closed in three separate tranches as follows: (i) convertible debenture of$1.5 million issued and sold onOctober 27, 2020 upon the signing of the definitive agreement, (ii) convertible debenture of$2.0 million issued and sold onDecember 22, 2020 upon the filing of a registration statement with theU.S. Securities and Exchange Commission ("SEC") relating to the shares of common stock that may be issued upon the conversion of the convertible debentures, and (iii) convertible debenture of$1.5 million issued and sold onJanuary 5, 2021 , the date the registration statement was declared effective by theSEC . The second and third closings of the convertible debentures were subject to our company successfully obtaining approval from its common stockholders for the issuance of shares of common stock that may be issued upon the conversion of the convertible debentures. Net proceeds from the issuance and sale of the convertible debentures totaled$4,231,483 . BetweenJanuary 6, 2021 andMay 11, 2021 , the convertible debenture holder completed the full conversion of the total$5,000,000 principal balance of the convertible debentures and$58,788 in accrued interest, to our company's common shares, receiving 3,181,916 common shares in a series of 17 conversions at an average conversion price of$1.59 per common share.
COVID-19 Impact
The following discussion is intended to provide certain information regarding the impacts of the COVID-19 pandemic on our company's business and management's efforts to respond to those impacts. SinceMarch 2020 , our company's investment properties have been significantly impacted by (i) measures taken by local, state and federal authorities to mitigate the impact of COVID-19, such as mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders and (ii) significant changes in consumer behavior and business and leisure travel patterns. While most of the measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from the continued mutation of COVID-19 into new variants and the possibility of the re-imposition of mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders by some governmental authorities, and the possibility that changes 46
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in consumer behavior and business and leisure travel patters will continue, the negative impact on room demand for our hotel properties and consumer demand for the goods and services of our retail tenants within our portfolio could continue to be significant in future periods.
As of the date of this Quarterly Report on Form 10-Q, all of the tenants in our
company’s retail properties and flex properties are open.
As is the case with retail landlords across theU.S. , our company received a number of rent relief requests from tenants which were impacted by mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders and significant changes in consumer behavior. Our company evaluated each of these requests on a case-by-case basis. During the period following the onset of the COVID-19 pandemic, fromMarch 2020 throughDecember 2020 , our company granted lease concessions in the form of (i) rent deferrals or (ii) rent abatements. The deferral and abatement agreements have reduced the rent revenues our company has recognized in all subsequent periods, including during the nine months endedSeptember 30, 2022 and 2021, and will reduce the rent revenues our company expects to receive in future periods. Under the rent deferral agreements, all of which were reached during the year endedDecember 31, 2020 , our company granted rent deferrals to various tenants in return for an agreement by the tenants to repay deferred and unpaid rent over a specified time period or before a certain date. Deferred rent is recognized as retail center property revenues or flex center property revenues on our company's condensed consolidated statement of operations and as rent and other receivables on our company's condensed consolidated balance sheets. As ofSeptember 30, 2022 , all rent deferral periods have ended and, in all cases, tenants have commenced repayment of the deferred rent amounts. As of the date of this Quarterly Report on Form 10-Q, all tenants are current on their deferred rent repayment. Under the rent abatement agreements, all of which were reached during the year endedDecember 31, 2020 , our company agreed to permanently abate rent in exchange for lease extensions of between one and three years, depending on the amount of the abatement. In one case, our company agreed to abate a portion of a tenant's base rent in exchange for future rent payments based on the tenant's monthly sales. While our company's rent collections from its retail and flex center properties have stabilized, the extent of the continued impact of COVID-19 and its new variants on revenues from our company's retail and flex center properties and tenants remains uncertain and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the continued efficacy of vaccines against new variants, development and deployment of treatments, and potential mutations of COVID-19 and the response thereto. Revenues will continue to be impacted by the abatement agreements that our company has granted to various tenants and could continue to be negatively impacted until consumer demand for the goods and services of our company's retail and flex center tenants returns to levels prior to the virus outbreak. Additionally, the direct and indirect economic effects of the pandemic and containment measures and the potential for changes in consumer behavior and business and leisure travel patterns could continue to have a significant negative impact on consumer demand for the goods and services of our company's retail tenants within its portfolio in the coming months.
Hotel Properties
Beginning inMarch 2020 , COVID-19 caused widespread cancellations of both business and leisure travel throughoutthe United States , resulting in significant decreases in our company's revenues from theHampton Inn Property (which our company sold onAugust 31, 2021 ) and the Clemson Best Western Property (which our company sold onSeptember 29, 2022 ), and the hospitality industry as a whole. During our company's ownership of these properties, both were specifically subject to significant decreases in occupancy and revenues due to the impact of COVID-19 on business and leisure travel and generally subject to seasonal variations in occupancy and revenues. Despite our company's decision to sell its hotel properties, we have not removed hotel properties from our investment policy and will consider future opportunistic acquisitions of hotel properties in the future. Accordingly, should we make future investments in hotel properties, these investments could be subject to material impacts on occupancy and revenues from possible future outbreaks of COVID-19 and seasonality fluctuations in occupancy and revenues. 47
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Discussion of Potential Future Impact
While most of the containment measures have been relaxed by the respective governmental authorities, with the uncertainty resulting from new variants of COVID-19 and the possibilities of the re-imposition of mandatory business closures, quarantines, restrictions on travel and "shelter-in-place" or "stay-at-home" orders by some governmental authorities, the negative impact on consumer demand for the goods and services of our retail and flex tenants within our portfolio could continue to be significant in the coming months. Our company derives revenues primarily from rents and reimbursement payments received from tenants under leases at our company's properties. Our company's operating results therefore depend materially on the ability of its tenants to make required rental payments. The extent to which the COVID-19 pandemic impacts the businesses of our company's tenants, and our company's operations and financial condition, will depend on future developments which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and such containment measures, among others. While the extent of the outbreak and its impact on our company, its tenants and theU.S. retail market is uncertain, a prolonged crisis could result in continued disruptions in the credit and financial markets, a continued rise in unemployment rates, decreases in consumer confidence and consumer spending levels and an overall worsening of global andU.S. economic conditions. The factors described above, as well as additional factors that our company may not currently be aware of, could materially negatively impact our company's ability to collect rent and could lead to termination of leases by tenants, tenant bankruptcies, decreases in demand for retail space at our company's properties, difficulties in accessing capital, impairment of our company's long-lived assets and other impacts that could materially and adversely affect our company's business, results of operations, financial condition and ability to pay distributions to stockholders.
Off-Balance Sheet Arrangements
As of
arrangements.
Summary of Critical Accounting Policies
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that different accounting policies would have been applied, resulting in different financial results or a different presentation of our financial statements. Below is a discussion of the accounting policies that we consider critical to an understanding of our financial condition and operating results that may require complex or significant judgment in their application or require estimates about matters which are inherently uncertain. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, "Summary of Significant Accounting Policies," of our Condensed Consolidated Financial Statements. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.
Revenue Recognition
Principal components of our total revenues for our retail center properties and flex center properties include base rents and tenant reimbursements. We accrue minimum (base) rent on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset or deferred rent liability being recorded on the balance sheet. Certain lease agreements contain provisions that grant additional rents based on tenants' sales volumes (contingent or percentage rent) which we recognize when the tenants achieve the specified targets as defined in their lease agreements. We periodically review the valuation of the asset/liability resulting from the straight-line accounting treatment of our leases in light of any changes in lease terms, financial condition or other factors concerning our tenants. For the periods during which our company owned its hotel properties, revenues were recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel's services. Revenues from our company's occupancy agreement withClemson University were recognized as earned, which is as rooms were occupied by the University. 48
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Rents and Other Tenant Receivables
For our retail center and flex center properties, we record a tenant receivable for amounts due from tenants such as base rents, tenant reimbursements and other charges allowed under the lease terms. We periodically review tenant receivables for collectability and determine the need for an allowance for the uncollectible portion of accrued rents and other accounts receivable based upon customer creditworthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels and current economic trends. We consider a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other actions per the lease.
Accounting for Leases
Our company adopted Accounting Standards Update ("ASU") 2016-02, Leases (Topic
842) on January 1, 2022 using the modified retrospective approach within ASU
2018-11, which allows for the application date to be the beginning of the
reporting period in which the entity first applies the new standard. Our company
historically has not been and is not currently a "lessee" under any lease
agreements, and thus did not have any arrangements requiring the recognition of
lease assets or liabilities on its balance sheet. As a "lessor", our company
has active lease agreements with over 100 tenants across its portfolio of
investment properties.
Upon the adoption of ASC No. 842, our company has elected the practical
expedient permitting lessors to elect by class of underlying asset to not
separate non-lease components (for example, maintenance services, including
common area maintenance) from associated lease components (the "non-separation
practical expedient") if both of the following criteria are met: (1) the timing
and pattern of transfer of the lease and non-lease component(s) are the same and
(2) the lease component would be classified as an operating lease if it were
accounted for separately. If both criteria are met, the combined component is
accounted for in accordance with ASC No. 842 if the lease component is the
predominant component of the combined component; otherwise, the combined
component is accounted for in accordance with the revenue recognition standard.
Our company assessed the criteria above with respect to our operating leases and
determined that they qualify for the non-separation practical expedient. As a
result, we have accounted for and presented the revenues from these leases,
including tenant reimbursements, as a single line item on our condensed
consolidated statements of operations for the nine months ended
September 30, 2022 . For comparability, we have adjusted our comparative
condensed consolidated statement of operations for the nine months ended
September 30, 2021 , to conform to the 2022 financial statement presentation.
Acquisition of Investments in Real Estate
The adoption of ASU 2017-01, as discussed in Note 2, "Summary of Significant Accounting Policies" of the condensed consolidated financial statements included in this report, has impacted our accounting framework for the acquisition of investment properties. Upon acquisition of investment properties, our company estimates the fair value of acquired tangible assets (consisting of land, buildings and improvements, and furniture, fixtures and equipment) and identified intangible assets and liabilities, including in-place leases, above- and below-market leases, tenant relationships and assumed debt based on evaluation of information and estimates available at that date. Fair values for these assets are not directly observable and estimates are based on comparable market data and other information which is subjective in nature, including estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information.
Impairment of Long-Lived Assets
We periodically review investment properties for impairment on a
property-by-property basis to identify any events or changes in circumstances
that indicate that the carrying value of investment properties may not be
recoverable. These circumstances include, but are not limited to, declines in
the property's cash flows, occupancy and fair market value. If any such events
or changes in circumstances are identified, we perform a formal impairment
analysis. We measure any impairment of investment property when the estimated
undiscounted operating income before depreciation and amortization, is less than
the carrying value of the property. To the extent impairment has occurred, we
charge to income the excess of carrying value of the property over its estimated
fair value. We estimate fair value using data such as operating income,
estimated capitalization rates or multiples, leasing prospects and local market
information. Our company also reviews its intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying value of
its intangible assets may not be recoverable, but at least annually.
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REIT Status
We are a Maryland corporation that has elected to be treated, for U.S. federal
income tax purposes, as a REIT. We elected to be taxed as a REIT under the Code
for the year ended December 31, 2017 and have not revoked such election. A REIT
is a corporate entity which holds real estate interests and must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 90 percent of its adjusted taxable income to
stockholders. As a REIT, we generally will not be subject to corporate level
federal income tax on our taxable income if we annually distribute 100 percent
of our taxable income to our stockholders. If we fail to qualify as a REIT in
any taxable year, we will be subject to regular federal and state corporate
income taxes and may not be able to elect to qualify as a REIT for four
subsequent taxable years. Our qualification as a REIT requires management to
exercise significant judgment and consideration with respect to operational
matters and accounting treatment. Therefore, we believe our REIT status is a
critical accounting estimate.
Evaluation of our company’s Ability to Continue as a Going Concern
Under the accounting guidance related to the presentation of financial statements, our company is required to evaluate, on a quarterly basis, whether or not the entity's current financial condition, including its sources of liquidity at the date that the condensed consolidated financial statements are issued, will enable the entity to meet its obligations as they come due arising within one year of the date of the issuance of our company's condensed consolidated financial statements and to make a determination as to whether or not it is probable, under the application of this accounting guidance, that the entity will be able to continue as a going concern. Our company's condensed consolidated financial statements have been presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. In applying applicable accounting guidance, management considered our company's current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our company's obligations due over the next twelve months, as well as our company's recurring business operating expenses. Our company concludes that it is probable that it will be able to meet its obligations arising within one year of the date of issuance of these condensed consolidated financial statements within the parameters set forth in the accounting guidance. For additional information regarding our company's liquidity, see Note 5 - Loans Payable and Note 8 - Commitments and Contingencies in the notes to our company's condensed consolidated financial statements.
Liquidity and Capital Resources
Our business model is intended to drive growth through acquisitions. Access to the capital markets is an important factor for our continued success. We expect to continue to issue equity in our company, with proceeds being used to acquire additional investment properties. Our primary liquidity needs are funding for (1) operations, including operating expenses, corporate and administrative costs, payment of principal of, and interest on, outstanding indebtedness, and escrow and reserve payments associated with long-term debt financing for our properties; (2) investing needs, including property acquisitions and recurring capital expenditures; and (3) financing needs, including cash dividends and debt repayments. Internal liquidity to fund operating needs will be provided primarily by the rental receipts from our retail properties and flex center property. During the three and nine months endedSeptember 30, 2022 , the COVID-19 pandemic continued to impact our financial and operational results that provide the liquidity for operating needs. Our company's retail property and flex property rent revenues continued to be impacted by rent abatement agreements and other concessions. However, our Clemson Best Western Property saw increased revenues resulting from the occupancy agreement withClemson University , which ended onMay 15, 2022 . During the transitional period between the end of this occupancy agreement and the reopening of normal hotel operations onJune 24, 2022 , the Clemson Best Western Property's revenues were significantly impacted while marketing and sales efforts resulted in increased demand and revenues and hotel operations returned to normal. Our company sold the Clemson Best Western Property onSeptember 29, 2022 . See above. The full extent of the impact of COVID-19 on our company's liquidity will be dictated by, among other things, its nature, duration and scope, the success of efforts to contain the spread of COVID-19 and the impact of actions taken in response to the pandemic including travel bans and restrictions, quarantines, shelter in place orders, the promotion of social distancing and limitations on business activity, including business closures. New variants of COVID-19, including the omicron variant and sub-variants, and continued 50
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resistance to vaccination could result in the re-imposition of limitations on business activity, travel and other restrictions that could increase the extent of the impact on our investment properties. Possible future declines in rental rates and expectations of future rental concessions, including granting free rent to induce tenants to renew their leases early, to retain tenants who are up for renewal, or to attract new tenants, or requests from tenants for rent abatements during periods when they are severely impacted by COVID-19, may result in decreases in our cash flows from our retail and flex properties. At this point, the extent to which the COVID-19 pandemic may continue to impact the economy and our business is uncertain, but pandemics or other significant public health events could have a material adverse effect on our business, results of operations and internal liquidity in the future.
Cash Flows
AtSeptember 30, 2022 , our consolidated cash and restricted cash on hand totaled$6,973,084 compared to consolidated cash on hand of$11,527,622 atSeptember 30, 2021 . Cash from operating activities, investing activities and financing activities for the nine months endedSeptember 30, 2022 are as follows:
Operating Activities
During the nine months endedSeptember 30, 2022 our cash provided by operating activities was$1,673,481 compared to cash provided by operating activities of$642,501 for the nine months endedSeptember 30, 2021 , an increase of cash provided by operating activities of$1,030,980 . Cash flows from operating activities has two components. The first component consists of net operating loss adjusted for non-cash operating activities. During the nine months endedSeptember 30, 2022 , operating activities adjusted for non-cash items resulted in net cash provided by operating activities of$1,113,651 . During the nine months endedSeptember 30, 2021 , operating activities adjusted for non-cash items resulted in net cash provided in operating activities of$360,700 . The increase of$752,951 in cash flows from operating activities for the nine months endedSeptember 30, 2022 was a result of improved operating performance across all property types, as well as cash flows from our company's acquisition of the Lancer Center Property, which was acquired onMay 14, 2021 , and the Greenbrier Business Center Property, which was acquired onAugust 27, 2021 , and the Parkway Property, which we did not own during the nine months endedSeptember 30, 2021 . The second component consists of changes in assets and liabilities. Increases in assets and decreases in liabilities result in cash used in operations. Decreases in assets and increases in liabilities result in cash provided by operations. During the nine months endedSeptember 30, 2022 , net changes in asset and liability accounts resulted in$559,830 in cash provided by operations. During the nine months endedSeptember 30, 2021 , net changes in asset and liability accounts resulted in$281,801 in cash provided by operations. This increase of$278,029 in changes in assets and liabilities is a result of increased changes in accounts payable and accrued liabilities of$122,964 , decreased changes in unbilled rent of$52,210 , and increased changes in rent and other receivables, net, of$158,136 , and decreased changes in other assets of$55,281 . The net of (i) the$752,951 increase in cash provided by operations from the first category and (ii) the$278,029 decrease in cash provided by operations from the second category results in a total increase of cash provided in operations of$1,030,980 for the nine months endedSeptember 30, 2022 .
Investing Activities
During the nine months endedSeptember 30, 2022 , our cash used in investing activities was$8,919,905 , compared to cash used in investing activities of$11,291,036 during the nine months endedSeptember 30, 2021 , a decrease in cash used in investing activities of$2,371,131 . During the nine months endedSeptember 30, 2022 , cash used in investing activities consisted of$651,653 in capitalized expenditures, including$270,062 in building improvements,$219,541 in capitalized leasing commissions,$95,167 in furniture, fixtures and equipment for theClemson Best Western Hotel property, and$66,883 in capitalized tenant improvements, offset by$2,011,462 in cash received from the disposal of investment properties. During the nine months endedSeptember 30, 2021 , cash used in investing activities consisted of$13,152,547 used for the acquisition of the Lancer Center Property and Greenbrier Business Center Property,$283,018 in capitalized expenditures, including$21,817 in building improvements,$37,686 in capitalized leasing commissions,$78,400 in site improvements and$132,379 in tenant improvements for our retail center properties,$7,736 in capitalized leasing commissions for our Brookfield Center Property and$5,000 in furniture, fixtures and equipment for ourClemson Best Western Hotel Property . Cash used in investing activities was offset by cash received from the disposal of investment properties of$2,144,529 . 51 Table of Contents The non-cash investing activities during the nine months endedSeptember 30, 2022 were$1,455,777 in restricted cash that was released upon the repayment of the Clemson Best Western Property mortgage payable and$269,246 in capital expenditures which were incurred during the nine months endedSeptember 30, 2022 , but which were accrued and unpaid as ofSeptember 30, 2022 . The non-cash investing activity for the nine months endedSeptember 30, 2021 , that did not affect our cash provided by investing activities, was the transfer of investment properties, net, to assets held for sale, net of$9,683,555 and the transfer of other assets to investment properties, net, of$384,882 .
Financing Activities
During the nine months endedSeptember 30, 2022 , our cash provided by financing activities was$6,835,531 compared to cash provided by financing activities of$17,079,229 during the nine months endedSeptember 30, 2021 , a decrease in cash provided by financing activities of$10,243,698 . During the nine months endedSeptember 30, 2022 , financing activities generated$18,477,304 in net proceeds from mortgages payable and$1,538,887 in net proceeds, after issuance costs, from common stock issuances under our SEPA (see above), offset by cash used in financing activities, including dividends and distributions of$1,116,660 , mortgage debt principal payments of$11,692,557 (including$10,962,483 of cash used to refinance the Lancer Center andGreenbrier Business Center properties and$730,074 in normal, monthly principal payments for our company's other mortgages), repurchases of our company's common stock of$286,543 , including costs and fees and$84,900 in lender fees associated with the repayment of the Clemson Best Western Property mortgage payable at the closing of its sale onSeptember 29, 2022 . During the nine months endedSeptember 30, 2021 , financing activities generated$10,826,920 in net proceeds, after issuance costs, from a common stock issuance, net proceeds, after loan issuance costs, from a new mortgage payable associated with the Lancer Center acquisition of$6,421,870 , and net proceeds, after issuance costs, from the closing of the third tranche of our convertible debentures of$1,305,000 . Cash used in financing activities included repayment of a line of credit, short term, of$325,000 , funds for mortgage debt principal payments associated with the Hanover Square Property, Ashley Square Property, Brookfield Center Property and Lancer Center Property of$437,662 , and dividends and distributions of$711,899 during the nine months endedSeptember 30, 2021 . There were no non-cash financing activities during the nine months endedSeptember 30, 2022 . Non-cash financing activities for the nine months endedSeptember 30, 2021 , that did not affect our cash provided by financing activities were the conversion of convertible debentures and accrued interest totaling$5,058,788 into common stock, the transfer of the mortgage payable, net, of$7,592,931 , for the Clemson Best Western Property from mortgages payable, net, to mortgages payable, net, associated with assets held for sale on our condensed consolidated balance sheets, the assumption of the mortgage payable, net, from the seller of the Greenbrier Business Center Property, and the$176,300 forgiveness of theHampton Inn Property's note payable under the SBA PPP loan program. Future Liquidity Needs Liquidity for general operating needs and our company's investment properties is generally provided by the rental receipts from our retail properties and flex center property, and revenues from our hotel properties. Liquidity for growth (acquisition of new investment properties) will be provided by raising additional investment capital. In addition, our company continually reviews and evaluates its outstanding mortgages payable for refinancing opportunities. While some of our mortgages payable are not pre-payable, some mortgages payable may present opportunities for refinancing. The primary, non-operating liquidity need of our company is$176,535 to pay the dividends and distributions to common shareholders and operating partnership unit holders, and$100,000 to pay the dividends to holders of our mandatorily redeemable preferred stock that were declared onOctober 4, 2022 and payableOctober 20, 2022 to holders of record onOctober 17, 2022 , and$1,090,492 in principal payments due on its mortgages payable during the 12 month period fromOctober 1, 2022 throughSeptember 30, 2023 . In addition to liquidity required to fund these principal payments, we may also incur some level of capital expenditures for our existing properties that cannot be passed on to our tenants. Our company plans to pay these obligations through a combination of cash on hand, potential dispositions and operating cash. As discussed above, the continuing COVID-19 pandemic outbreak has adversely impacted states and cities where our company's tenants operate their businesses and where our company's properties are located. The COVID-19 pandemic could have a material adverse effect on our company's financial condition, results of operations and cash flows as the reduced economic activity severely impacts certain of our company's tenants' businesses, financial condition and liquidity and may cause certain tenants to be unable to meet their obligations to our company in full. Closures of stores operated by our company's tenants could reduce our company's cash flows. 52
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To meet these future liquidity needs, we have the following resources:
?
?
leasing commissions, real estate taxes and insurance premiums
? cash generated from operations during the remaining three months ending
Potential proceeds from issuances of common stock under our shelf registration
? or under the Standby Equity Purchase Agreement (see note 7 of the notes to the
condensed consolidated financial statements), although there is no guarantee
that any such issuances will be successful in raising additional funds.
Results of Operations
Three months ended
Revenues
Total revenue was$2,841,073 for the three months endedSeptember 30, 2022 , consisting of$1,850,797 in revenues from retail center properties,$379,309 from hotel properties and$610,967 from flex center properties. Total revenues for the three months endedSeptember 30, 2022 decreased by$197,070 over the three months endedSeptember 30, 2021 , resulting from decreased hotel property revenues from (i) the sale of our company'sHampton Inn Property inAugust 2021 and (ii) the termination of theClemson University occupancy agreement for our Clemson Best Western Property, offset by increased retail center and flex center revenues from our company's acquisition of the Parkway andSalisbury Marketplace properties, which were not owned during the three months endedSeptember 30, 2021 . For the three months ended September 30, Increase / 2022 2021 (Decrease) Revenues Retail center properties$ 1,850,797 $ 1,494,219 $ 356,578 Hotel properties 379,309 1,280,338 (901,029) Flex center properties 610,967 263,586 347,381 Total Revenues$ 2,841,073 $ 3,038,143 $ (197,070)
Revenues from retail center properties were$1,850,797 for the three months endedSeptember 30, 2022 , an increase of$356,578 over retail center property revenues for the three months endedSeptember 30, 2021 . This was a result of increased revenues of$241,977 from the acquisition of theSalisbury Marketplace Property, and increased revenues as a result of new leasing activity and annual rent increases from the Franklin Square Property of$69,768 , theAshley Plaza Property of$29,710 , the Lancer Center Property of$13,919 , and theHanover
Square Property of$1,204 . For the three months ended September 30, Increase / 2022 2021 (Decrease)Retail Center Properties Franklin Square Property$ 544,135 $ 474,367 $ 69,768 Hanover Square Property 324,045 322,841 1,204 Ashley Plaza Property 440,807 411,097 29,710 Lancer Center Property 299,833 285,914 13,919 Salisbury Property 241,977 - 241,977$ 1,850,797 $ 1,494,219 $ 356,578 Revenues from hotel properties were$379,309 for the three months endedSeptember 30, 2022 , a decrease of$901,029 from revenues from hotel properties for the three months endedSeptember 30, 2021 , due to the sale of the Hampton Inn property on August 53 Table of Contents
31, 2021 and a decrease of
Property due to the end of the
For the three months ended
September 30, Increase /
2022 2021 (Decrease)
Hotel Properties
Hampton Inn Property $ - $ 613,130 $ (613,130)
Clemson Best Western Property 379,309 667,208 (287,899)
$ 379,309 $ 1,280,338 $ (901,029)
Revenues from the flex center properties were$610,967 for the three months endedSeptember 30, 2022 , an increase of$347,381 over revenues from flex center properties for the three months endedSeptember 30, 2021 due to new revenues from the acquisition of the Parkway Property of$203,845 , increased revenues from theGreenbrier Business Center of$128,343 resulting from owning the property for the full three months endingSeptember 30, 2022 , and increased revenues from the Brookfield Center Property of$15,193 . For the three months ended September 30, Increase / 2022 2021 (Decrease)Flex Center Properties Brookfield Center Property$ 198,787 $ 183,594 $ 15,193
Greenbrier Business Center Property 208,335 79,992
128,343
Parkway Center Property 203,845 - 203,845
$ 610,967 $ 263,586 $ 347,381
Operating Expenses
Total operating expenses were $3,113,383 for the three months ended
September 30, 2022 , consisting of $491,889 in expenses from retail center
properties, $589,311 in expenses from hotel properties, $189,720 in expenses
from the flex center properties, $284,463 in legal, accounting and other
professional fees, $99,323 in corporate general and administrative expenses,
$227,164 in costs related to our efforts to refinance of the Clemson Best
Western Property mortgage payable in anticipation of its October 6, 2022
maturity, had we not successfully closed on the sale of the Clemson Best Western
Property on September 29, 2022 , and $1,231,513 in depreciation and amortization.
For the three months ended
September 30, Increase /
2022 2021 (Decrease)
Operating Expenses
Retail center properties (1) $ 491,889 $ 419,390 $ 72,499
Hotel properties 589,311 960,994 (371,683)
Flex center properties (2) 189,720 78,723 110,997
Total Investment Property Operating Expenses 1,270,920 1,459,107 (188,187) Legal, accounting and other professional fees 284,463 311,986 (27,523) Corporate general and administrative expenses 99,323
382,302 (282,979) Other expenses 227,164 - 227,164 Depreciation and amortization 1,231,513 937,604 293,909 Total Operating Expenses$ 3,113,383 $ 3,090,999 $ 22,384
(1) Includes
(2) Includes
Operating expenses for retail center properties were
months ended
property operating expenses for the three months ended
Increased operating expenses
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from the acquisition of the Salisbury Property of $47,353 , the Lancer Center
Property of $19,054 , and the Franklin Square Property of $24,594 , were offset by
decreases in operating expenses of $15,455 from the Hanover Square Property and
$3,047 from the Ashley Plaza Property.
For the three months ended
September 30, Increase /
2022 2021 (Decrease)
Retail Center Properties
Franklin Square Property (1) $ 179,897 $ 155,303 $ 24,594
Hanover Square Property 77,058 92,513 (15,455)
Ashley Plaza Property 85,912 88,959 (3,047)
Lancer Center Property 101,669 82,615 19,054
Salisbury Property 47,353 - 47,353
Total $ 491,889 $ 419,390 $ 72,499
(1) Includes bad debt expense of
Operating expenses for hotel properties were$589,311 for the three months endedSeptember 30, 2022 , a decrease of$371,683 from operating expenses from hotel properties for the three months endedSeptember 30, 2021 . This decrease was due to the sale of the Hampton Inn, which reduced hotel property operating expenses by$612,395 , but were offset by increased expenses for the Clemson Best Western Property of$240,712 related to costs associated with re-opening the hotel after the termination of theClemson University occupancy agreement. For the three months ended September 30, Increase / 2022 2021 (Decrease) Hotel Properties Hampton Inn Property $ -$ 612,395 $ (612,395) Clemson Best Western Property 589,311 348,599 240,712$ 589,311 $ 960,994 $ (371,683) Operating expenses from the flex center properties were$189,720 for the three months endedSeptember 30, 2022 , an increase of$110,997 over flex center property operating expenses for the three months endedSeptember 30, 2021 due to new operating expenses from the acquisition of the Parkway Property of$72,114 , the Greenbrier Property of$33,689 , and the Brookfield Property of$5,194 .
For the three months ended
September 30, Increase /
2022 2021 (Decrease)
Flex Center Properties
Brookfield Center Property (1)$ 66,693 $ 61,499 $ 5,194 Greenbrier Business Center Property 50,913 17,224
33,689
Parkway Center Property 72,114 - 72,114
$ 189,720 $ 78,723 $ 110,997
(1) Includes bad debt expense of
Operating (Loss) Income
Operating loss for the three months endedSeptember 30, 2022 was$881,313 , a decrease of$953,098 from the operating income of$71,785 for the three months endedSeptember 30, 2021 . This decrease was a result of (i) increased loss on disposal of investment properties of$514,112 , (ii) increased depreciation and amortization expenses from the addition of the four properties (Lancer Center, Parkway,Greenbrier Business Center andSalisbury Marketplace ) of$293,909 , (iii) increased loss on extinguishment of debt of$219,532 related to the sale of the Clemson Best Western Property, (iv) increased other expenses of$227,164 , and (v) decreased operating income from our investment properties of$8,883 , offset by (i) decreased corporate general and administrative expenses of$282,979 , and (ii) decreased legal, accounting and other professional fees
of$27,523 . 55 Table of Contents Interest Expense
Interest expense was
For the three months ended
September 30, Increase/
2022 2021 (Decrease)
Franklin Square $ 136,036 $ 173,775 $ (37,739)
Hanover Square 111,445 111,794 (349)
Hampton Inn - 118,077 (118,077)
Ashley Plaza 109,795 111,817 (2,022)
Clemson Best Western 147,589 141,966 5,623
Brookfield Center 49,682 50,546 (864)
Lancer Center - 73,115 (73,115)
Greenbrier Business Center - 17,711 (17,711)
Parkway Center 58,780 - 58,780
Wells Fargo Mortgage Facility 219,617 - 219,617
Amortization and preferred stock dividends on
mandatorily redeemable preferred stock 156,311 151,637 4,674
Amortization and interest on convertible debentures - - -
Other interest - 332 (332)
Total interest expense $ 989,255
Total interest expense for the three months endedSeptember 30, 2022 decreased by$38,485 over the three months endedSeptember 30, 2021 . This decrease was a result of (i) decreased interest expense of$37,739 from theFranklin Square mortgage due to its refinancing inNovember 2021 at a lower interest rate and principal amount, (ii) decreased interest expense of$118,077 resulting from the sale of theHampton Inn Property , (iii) decreased other interest of$332 , and (iv) slight decreases in interest expense for theHanover Square mortgage of$349 , theAshley Plaza mortgage of$2,022 , and the Brookfield Center mortgage of$864 , offset by increased interest expense from the Wells Fargo Mortgage Facility, which refinanced the Lancer Center andGreenbrier Business Center mortgages payable, and financed the acquisition of theSalisbury Marketplace Property acquisition of the Lancer Center Property, Parkway Property,Greenbrier Business Center Property and the Salisbury Marketplace Property (total increase in interest expense of$128,791 for the four properties, combined). Interest expense above includes non-cash amortization of discounts and capitalized issuance costs related to the mandatorily redeemable preferred stock and the convertible debentures. See Note 5 of the accompanying notes to the condensed consolidated financial statements.
Other Income
During the three months endedSeptember 30, 2022 , other income was$126,434 , an increase of$122,915 over other income of$3,519 for the three months endedSeptember 30, 2021 . Other income for the three months endedSeptember 30, 2022 consisted of$126,127 in income related to the fair value change of the interest rate caps and interest income of$307 . Other income of$3,519 for the three months endedSeptember 30, 2021 consisted of$3,720 in interest income offset by and$201 in expense related to the fair value change of the interest rate caps.
Net Loss
Net loss was$1,744,134 for the three months endedSeptember 30, 2022 , before adjustments for net (loss) income attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was$1,754,458 . Net loss was$875,466 for the three months endedSeptember 30, 2021 , before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was$872,015 , for the three months endedSeptember 30, 2021 . Net loss for the three months endedSeptember 30, 2022 decreased by$868,668 over the three months endedSeptember 30, 2021 , before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the three months endedSeptember 30, 2022 decreased by$882,443 over the three months endedSeptember 30, 2021 . 56
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Nine months ended
Revenues
Total revenue was$8,340,938 for the nine months endedSeptember 30, 2022 , consisting of$4,999,089 in revenues from retail center properties,$1,507,649 from hotel properties and$1,834,200 from flex center properties. Total revenues for the nine months endedSeptember 30, 2022 decreased by$347,319 over the nine months endedSeptember 30, 2021 , resulting from decreased hotel property revenues from (i) the sale of our company'sHampton Inn Property inAugust 2021 and (ii) the termination of theClemson University occupancy agreement for our Clemson Best Western Property, offset by increased revenues from our company's acquisition of the Lancer Center, Parkway,Greenbrier Business Center andSalisbury Marketplace properties. For the nine months ended September 30, Increase / 2022 2021 (Decrease) Revenues Retail center properties$ 4,999,089 $ 4,049,209 $ 949,880 Hotel properties 1,507,649 4,009,041 (2,501,392) Flex center properties 1,834,200 630,007 1,204,193 Total Revenues$ 8,340,938 $ 8,688,257 $ (347,319)
Revenues from retail center properties were$4,999,089 for the nine months endedSeptember 30, 2022 , an increase of$949,880 over retail center property revenues for the nine months endedSeptember 30, 2021 . All of our company's existing retail properties experienced increased revenues, including$66,054 from the Ashley Plaza Property,$25,467 from the Hanover Square Property, and$97,402 from the Franklin Square Property. In addition, our company experienced increased revenues of$471,066 resulting from owning the Lancer Center Property for the full nine months endedSeptember 30, 2022 , and$289,891 from the acquisition of the Salisbury Marketplace Property. For the nine months ended September 30, Increase / 2022 2021 (Decrease)Retail Center Properties Franklin Square Property$ 1,512,675 $ 1,415,273 $ 97,402 Hanover Square Property 969,797 944,330 25,467 Ashley Plaza Property 1,314,916 1,248,862 66,054 Lancer Center Property 911,810 440,744 471,066 Salisbury Property 289,891 - 289,891$ 4,999,089 $ 4,049,209 $ 949,880 Revenues from hotel properties were$1,507,649 for the nine months endedSeptember 30, 2022 , a decrease of$2,501,392 from revenues from hotel properties for the nine months endedSeptember 30, 2021 , due to the sale of the Hampton Inn property onAugust 31, 2021 and a decrease of$560,309 in revenues from the Clemson Best Western Property due to the end of theClemson University occupancy agreement. For the nine months ended September 30, Increase / 2022 2021 (Decrease) Hotel Properties Hampton Inn Property $ -$ 1,941,083 $ (1,941,083) Clemson Best Western Property 1,507,649 2,067,958 (560,309)$ 1,507,649 $ 4,009,041 $ (2,501,392)
Revenues from the flex center properties were
ended
center properties for the nine months ended
revenues from the
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Greenbrier Business Center Property of $525,739 and the Parkway Property of
$633,727 , and increased revenues from the Brookfield Center Property of $44,727 .
For the nine months ended
September 30, Increase /
2022 2021 (Decrease)
Flex Center Properties
Brookfield Center Property $ 594,742 $ 550,015 $ 44,727
Greenbrier Business Center Property 605,731 79,992
525,739
Parkway Center Property 633,727 - 633,727
$ 1,834,200 $ 630,007 $ 1,204,193
Operating Expenses
Total operating expenses were $8,841,078 for the nine months ended
September 30, 2022 , consisting of $1,392,015 in expenses from retail center
properties, $1,302,114 in expenses from hotel properties, $516,763 in expenses
from the flex center properties, $233,100 in share-based compensation expenses,
$1,112,878 in legal, accounting and other professional fees, $335,538 in
corporate general and administrative expenses, a $36,670 loss on impairment,
$175,671 in impairment of assets held for sale, $227,164 in expenses related to
our efforts to refinance of the Clemson Best Western Property mortgage payable
in anticipation of its October 6, 2022 maturity, had we not successfully closed
on the sale of the Clemson Best Western Property on September 29, 2022 , and
$3,509,165 in depreciation and amortization.
For the nine months ended
September 30, Increase /
2022 2021 (Decrease)
Operating Expenses
Retail center properties (1) $ 1,392,015 $ 1,104,350 $ 287,665
Hotel properties 1,302,114 2,733,578 (1,431,464)
Flex center properties (2) 516,763 197,527 319,236
Total Investment Property Operating Expenses 3,210,892 4,035,455 (824,563) Share based compensation expenses 233,100 149,981 83,119 Legal, accounting and other professional fees 1,112,878 1,099,881 12,997 Corporate general and administrative expenses 335,538 568,479 (232,941) Loss on impairment 36,670 - 36,670 Impairment of assets held for sale 175,671 - 175,671 Other expenses 227,164 - 227,164 Depreciation and amortization 3,509,165
2,361,214 1,147,951 Total Operating Expenses$ 8,841,078 $ 8,215,010 $ 626,068
(1) Includes
(2) Includes
Operating expenses for retail center properties were
months ended
property operating expenses for the nine months ended
Increased operating expenses from the acquisition of the Lancer Center Property of$189,365 and the Salisbury Marketplace Property of$56,300 , and from two of our existing properties,Franklin Square , which increased by$63,143 , andAshley Plaza which increased by$1,117 , were offset by reduced expenses from the Hanover Square Property of$22,260 . 58 Table of Contents For the nine months ended September 30, Increase / 2022 2021 (Decrease)Retail Center Properties Franklin Square Property (1)$ 541,580 $ 478,437 $ 63,143 Hanover Square Property (2) 234,504 256,764 (22,260) Ashley Plaza Property (3) 251,581 250,464 1,117 Lancer Center Property (4) 308,050 118,685 189,365 Salisbury Property 56,300 - 56,300$ 1,392,015 $ 1,104,350 $ 287,665
(1) Includes bad debt expense of
(2) Includes bad debt expense of
(3) Includes bad debt expense of
(4) Includes bad debt expense of
Operating expenses for hotel properties were$1,302,114 for the nine months endedSeptember 30, 2022 , a decrease of$1,431,464 from operating expenses from hotel properties for the nine months endedSeptember 30, 2021 . Decreased hotel operating expenses of$1,677,844 resulting from the sale of theHampton Inn Property were offset by increased operating expenses of$246,380 from the Clemson Best Western Property. For the nine months ended September 30, Increase / 2022 2021 (Decrease) Hotel Properties Hampton Inn Property $ -$ 1,677,844 $ (1,677,844) Clemson Best Western Property 1,302,114 1,055,734 246,380$ 1,302,114 $ 2,733,578 $ (1,431,464) Operating expenses from the flex center properties were$516,763 for the nine months endedSeptember 30, 2022 , an increase of$319,236 over flex center property operating expenses for the nine months endedSeptember 30, 2021 due to new operating expenses from theGreenbrier Business Center and Parkway Property acquisitions and slightly increased operating expenses from the Brookfield
Center Property.
For the nine months ended
September 30, Increase /
2022 2021 (Decrease)
Flex Center Properties
Brookfield Center Property (1)$ 189,823 $ 180,303 $
9,520
Greenbrier Business Center Property 144,136 17,224
126,912
Parkway Center Property (2) 182,804 - 182,804
$ 516,763 $ 197,527 $ 319,236
(1) Includes
(2) Includes
Operating (Loss) Income
Operating loss for the nine months endedSeptember 30, 2022 was$1,278,818 , a decrease of$1,876,706 over the operating income of$597,888 for the nine months endedSeptember 30, 2021 . This decrease was a result of (i) increased depreciation and amortization expenses from the addition of four properties (Lancer Center, Parkway,Greenbrier Business Center andSalisbury Marketplace ) of$1,147,951 , (ii) increased impairment of assets held for sale of$175,671 related to the Clemson Best Western Property, 59
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(iii) increased loss on impairment of$36,670 , (iv) increased loss on extinguishment of debt of$389,207 , (vi) increased share based compensation expenses of$83,119 , (vii) increased legal, accounting and other professional fees of$12,997 , (viii) increased loss on disposition of investment properties of$514,112 and (ix) increased other expenses of$227,164 , offset by increased investment property operating income of$477,244 and decreased corporate general and administrative expenses of$232,941 .
Interest Expense
Interest expense was
For the nine months ended
September 30, Increase/
2022 2021 (Decrease)
Franklin Square $ 403,904 $ 515,744 $ (111,840)
Hanover Square 329,308 338,316 (9,008)
Hampton Inn - 475,844 (475,844)
Ashley Plaza 327,450 333,390 (5,940)
Clemson Best Western 426,757 448,495 (21,738)
Brookfield Center 148,159 150,702 (2,543)
Lancer Center 127,107 111,307 15,800
Greenbrier Business Center 82,564 17,711 64,853
Parkway Center 132,760 - 132,760
Wells Fargo Mortgage Facility 261,488 - 261,488
Amortization and preferred stock dividends on
mandatorily redeemable preferred stock 465,338 451,616 13,722
Amortization and interest on convertible debentures - 1,760,973 (1,760,973)
Other interest - 5,100 (5,100)
Total interest expense $ 2,704,835 $
4,609,198
Total interest expense for the nine months endedSeptember 30, 2022 decreased by$1,904,363 over the nine months endedSeptember 30, 2021 . This decrease was a result of (i) decreased interest expense of$111,840 from theFranklin Square mortgage due to its refinancing inNovember 2021 at a lower interest rate and principal amount, (ii) decreased interest expense of$475,844 resulting from the sale of theHampton Inn Property , (iii) decreased amortization and interest on convertible debentures of$1,760,973 , decreased other interest of$5,100 , and (iv) slight decreases in interest expense for theHanover Square mortgage of$9,008 , theAshley Plaza mortgage of$5,940 the Clemson Best Western mortgage of$21,738 and the Brookfield Center mortgage of$2,543 , offset by increased interest expense from the Wells Fargo Mortgage Facility, which refinanced the Lancer Center andGreenbrier Business Center mortgages payable, and financed the acquisition of the Salisbury Marketplace Property acquisition of the Lancer Center Property, Parkway Property, Greenbrier Business Center Property and the Salisbury Marketplace Property (total increase in interest expense of$342,141 for the four properties, combined). Interest expense above includes non-cash amortization of discounts and capitalized issuance costs related to the mandatorily redeemable preferred stock and the convertible debentures. See Note 5 of the accompanying notes to the condensed consolidated financial statements.
Other Income
During the nine months endedSeptember 30, 2022 , other income was$251,197 , an increase of$63,919 over other income of$187,278 for the nine months endedSeptember 30, 2021 . Other income for the nine months endedSeptember 30, 2022 consisted of$246,063 in income related to the fair value change of the interest rate caps, interest income of$1,221 and miscellaneous income of$3,913 . Other income of$187,278 for the nine months endedSeptember 30, 2021 consisted of$178,278 from the forgiveness of a Small Business Administration Payroll Protection Program loan and interest income of$9,190 , offset by$190 in expense related to the fair value change of the interest rate cap.
Net Loss
Net loss was$3,732,456 for the nine months endedSeptember 30, 2022 , before adjustments for net (loss) income attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to our common shareholders was$3,758,629 . Net loss was$3,824,032 for the nine months endedSeptember 30, 2021 , before adjustments for net loss attributable to 60
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noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders was$3,832,502 , for the nine months endedSeptember 30, 2021 . Net loss for the nine months endedSeptember 30, 2022 decreased by$91,576 over the nine months endedSeptember 30, 2021 , before adjustments for net loss attributable to noncontrolling interests. After adjusting for noncontrolling interests, the net loss attributable to Medalist common shareholders for the nine months endedSeptember 30, 2022 decreased by$73,873 over the nine months endedSeptember 30, 2021 . Funds from Operations
We use Funds from operations ("FFO"), a non-GAAP measure, as an alternative
measure of our operating performance, specifically as it relates to results of
operations and liquidity. We compute FFO in accordance with standards
established by the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") in its March 1995 White Paper (as amended in
November 1999 , April 2002 and December 2018 ). As defined by NAREIT, FFO
represents net income (computed in accordance with GAAP), excluding gains (or
losses) from sales of property, plus real estate related depreciation and
amortization (excluding amortization of loan origination costs and above and
below market leases) and after adjustments for unconsolidated partnerships and
joint ventures. Most industry analysts and equity REITs, including us, consider
FFO to be an appropriate supplemental measure of operating performance because,
by excluding gains or losses on dispositions and excluding depreciation, FFO is
a helpful tool that can assist in the comparison of the operating performance of
a company's real estate between periods, or as compared to different companies.
Management uses FFO as a supplemental measure to conduct and evaluate our
business because there are certain limitations associated with using GAAP net
income alone as the primary measure of our operating performance. Historical
cost accounting for real estate assets in accordance with GAAP implicitly
assumes that the value of real estate assets diminishes predictably over time,
while historically real estate values have risen or fallen with market
conditions. Accordingly, we believe FFO provides a valuable alternative
measurement tool to GAAP when presenting our operating results.
NAREIT's December 2018 White Paper states, "FFO of a REIT includes the FFO of
all consolidated properties, including consolidated, partially owned
affiliates". Additionally, since the adjustments to GAAP net income, such as
depreciation and amortization, used in the reconciliation of net income (loss)
to determine FFO are not allocated between shareholders and noncontrolling
interests (i.e. 100 percent of depreciation and amortization are "added back"
without reduction to reflect the noncontrolling owners' interest in such items),
our company believes that the appropriate starting point for the calculation is
the net income (loss) before allocation to noncontrolling interests. This
allows our company to use FFO as a tool to measure the overall performance of
its investment properties, as a whole, not just the portion of the investment
properties controlled by our company's shareholders.
Below is our company’s FFO, which is a non-GAAP measurement, for the nine months
ended
For the nine months ended
September 30,
2022 2021
Net income (loss) $ (3,732,456) (3,824,032)
Depreciation of tangible real property assets (1) 1,890,428 1,325,228
Depreciation of tenant improvements (2)
509,558
292,635
Amortization of leasing commissions (3) 71,379
47,340
Amortization of intangible assets (4) 1,037,800
696,011
Loss (gain) on sale of investment properties (5) 389,471
(124,641)
Loss on impairment (6) 36,670
–
Impairment of assets held for sale (6) 175,671
–
Loss on extinguishment of debt (7) 389,207
- Funds from operations$ 767,728 $ (1,587,459)
(1) Depreciation expense for buildings, site improvements and furniture and
fixtures.
Depreciation of tenant improvements, including those (i) acquired as part of
(2) the purchase of the retail center and flex center properties and (ii) those
constructed by our company for the retail center properties and flex center
property subsequent to their acquisition.
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(3) Amortization of leasing commissions paid for the retail center properties and
flex center property subsequent to the acquisition of the properties.
Amortization of (i) intangible assets acquired as part of the purchase of the
(4) retail center properties and flex center property, including leasing
commissions, leases in place and legal and marketing costs.
NAREIT’s
(5) depreciable real estate and land when connected to the main business of a
REIT are excluded from the computation of FFO.”
NAREIT’s
impairment write-downs. Specifically, “To the extent there is an impairment
write-down of depreciable real estate … related to a REIT’s main business,
(6) the write-down is excluded from FFO (i.e., adjusted from net income in
calculating FFO).” Additionally, NAREIT’s
guidance on gains or losses on the sale of assets, stating “the REIT has the
option to include or exclude such gains and losses in the calculation of
FFO.”
(7) Consistent with the treatment of impairment write-downs, our company includes
an adjustment for its loss on extinguishment of debt.
NAREIT'sDecember 2018 White Paper encourages companies reporting FFO to "make supplemental disclosure of all material non-cash revenues and expenses affecting their results for each period." We believe that the computation of FFO in accordance with NAREIT's definition includes certain items that are not indicative of the results provided by our operating portfolio and affect the comparability of our period-over-period performance. These items include non-cash items such as amortization of loans and above and below market leases, unbilled rent arising from applying straight line rent revenue recognition and share-based compensation expenses. Additionally, the impact of capital expenditures, including tenant improvement and leasing commissions, net of reimbursements of such expenditures by property escrow funds, is included in our calculation of AFFO. Therefore, in addition to FFO, management uses Adjusted FFO ("AFFO"), which we define to exclude such items. Management believes that these adjustments are appropriate in determining AFFO as their exclusion is not indicative of the operating performance of our assets. In addition, we believe that AFFO is a useful supplemental measure for the investing community to use in comparing us to other REITs as many REITs provide some form of adjusted or modified FFO. However, there can be no assurance that AFFO presented by us is comparable to the adjusted or modified FFO of other REITs. Total AFFO for the nine months endedSeptember 30, 2022 and 2021 was as follows: For the nine months ended September 30, 2022 2021 Funds from operations$ 767,728 $ (1,587,459)
Amortization of above market leases (1) 159,388
180,803
Amortization of below market leases (2) (305,456)
(173,319) Straight line rent (3) (112,842) (164,977) Capital expenditures (4) (651,653) (283,018)
(Increase) decrease in fair value of interest rate cap (5) (246,063)
190 Amortization of loan issuance costs (6) 80,607
80,711
Amortization of preferred stock discount and offering costs (7) 165,338
151,616
Amortization of convertible debenture discount, offering
costs and beneficial conversion feature (8)
1,718,487 Share-based compensation (9) 233,100 149,981 Bad debt expense (10) 12,946 26,014 Debt forgiveness (10) - (176,300)
Adjusted funds from operations (AFFO)$ 103,093
(1) Adjustment to FFO resulting from non-cash amortization of intangible assets.
(2) Adjustment to FFO resulting from non-cash amortization of intangible
liabilities.
Adjustment to FFO resulting from non-cash revenues recognized as a result of
(3) applying straight line revenue recognition for the retail center properties
and flex center properties.
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Adjustment to FFO for capital expenditures, including capitalized leasing
commissions, tenant improvements, building and site improvements and
(4) purchases of furniture, fixtures and equipment that have not been reimbursed
by property escrow accounts. See Investing Activities, above, for detail of
capital expenditures.
Adjustment to FFO resulting from non-cash expenses recognized as a result of
(5) decreases in the fair value of the interest rate caps for the Parkway
Property and Clemson Best Western Property.
Adjustment to FFO for amortization of non-cash expenses recognized as a
(6) result of amortizing loan issuance costs over the terms of the respective
mortgages.
(7) Adjustment to FFO for amortization of non-cash expenses recognized as a
result of amortizing the preferred stock discount over its five year term.
Adjustment to FFO for amortization of non-cash expenses recognized as a
(8) result of amortizing the preferred stock offering costs over its five year
term.
(9) Adjustment to FFO resulting from non-cash expenses recorded for share-based
compensation.
NAREIT’s
and expenses, stating, “To provide an opportunity for consistent analysis of
operating results among REITs, NAREIT encourages those reporting FFO to make
(10) supplemental disclosure of all material non-cash revenues and expenses
affecting their results for each period. Our company has elected to include
non-cash revenues (debt forgiveness) and non-cash expenses (bad debt
expense) in its calculation of AFFO.
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