10-Q 1 tm2111666d1_10q.htm FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2021

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

For the transition period from ________ to ________

Commission file no: 001-38719

MEDALIST DIVERSIFIED REIT, INC.

Maryland

47-5201540

(State or other jurisdiction

of incorporation)

(IRS Employer

Identification No.)

1051 E. Cary Street Suite 601

James Center Three

Richmond, VA, 23219

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (804) 344-4435

Title of Each Class

Name of each Exchange

on Which Registered

Trading

Symbol(s)

Common Stock, $0.01 par value per share

The Nasdaq Capital Market

MDRR

8.0% Series A Cumulative Redeemable Preferred Stock,
$0.01 par value per share

The Nasdaq Capital Market

MDRRP

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No  x

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at May 14, 2021 was 16,052,617.

Medalist Diversified REIT, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended March 31, 2021

Table of Contents

PART I. FINANCIAL INFORMATION		3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020	4

	Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	56

PART II. OTHER INFORMATION		57

Item 1.	Legal Proceedings	57

Item 1A.	Risk Factors	57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3.	Defaults Upon Senior Securities	57

Item 4.	Mine Safety Disclosures	57

Item 5.	Other Information	57

Item 6.	Exhibits	57

Signatures

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Medalist Diversified REIT, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	March 31, 2021			Dec. 31, 2020
	(Unaudited)
ASSETS
Investment properties, net	$	46,962,683		$	57,055,862
Cash		3,681,292			2,862,994
Restricted cash		2,669,952			2,233,934
Rent and other receivables, net of allowance of $0 and $4,693, as of March 31, 2021 and December 31, 2020, respectively		347,957			458,752
Assets held for sale		22,093,805			12,410,250
Unbilled rent		761,820			673,728
Intangible assets, net		3,004,290			3,256,362
Other assets		608,414			319,890
Total Assets	$	80,130,213		$	79,271,772

LIABILITIES
Accounts payable and accrued liabilities	$	1,683,755		$	1,308,056
Intangible liabilities, net		972,121			1,022,497
Line of credit, short term, net		325,000			325,000
Notes payable		176,300			176,300
Convertible debentures, net		986,837			2,260,565
Mortgages payable, net		40,380,026			48,094,354
Mortgages payable, net, associated with assets held for sale		17,976,368			10,352,000
Mandatorily redeemable preferred stock, net		4,072,706			4,023,257
Total Liabilities	$	66,573,113		$	67,562,029

EQUITY
Common stock, 6,945,476 and 4,803,287 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively		69,453			48,032
Additional paid-in capital		37,316,979			33,105,099
Offering costs		(3,058,559	)		(2,992,357	)
Accumulated deficit		(21,576,511	)		(19,298,987	)
Total Stockholders’ Equity		12,751,362			10,861,787
Noncontrolling interests - Hampton Inn Property		(249,621	)		(224,383	)
Noncontrolling interests - Hanover Square Property		170,764			189,784
Noncontrolling interests - Operating Partnership		884,595			882,555
Total Equity	$	13,557,100		$	11,709,743
Total Liabilities and Equity	$	80,130,213		$	79,271,772

See notes to condensed consolidated financial statements

Medalist Diversified REIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended March 31,
	2021			2020
REVENUE
Retail center property revenues	$	1,010,293		$	1,130,503
Retail center property tenant reimbursements		183,348			245,787
Flex center property revenues		139,704			139,989
Flex center property tenant reimbursements		43,123			55,163
Hotel property room revenues		1,286,748			888,550
Hotel property other revenues		8,637			68,318
Total Revenue	$	2,671,853		$	2,528,310

OPERATING EXPENSES
Retail center property operating expenses	$	327,930		$	355,597
Flex center property operating expenses		54,088			52,559
Hotel property operating expenses		797,395			962,696
Bad debt expense		3,196			6,003
Share based compensation expenses		149,981			569,995
Legal, accounting and other professional fees		498,612			402,795
Corporate general and administrative expenses		62,380			75,388
Depreciation and amortization		653,233			1,017,407
Total Operating Expenses		2,546,815			3,442,440
Operating income (loss)		125,038			(914,130	)
Interest expense		2,434,132			918,132
Net Loss from Operations		(2,309,094	)		(1,832,262	)
Other income (loss)		1,352			(918	)
Net Loss		(2,307,742	)		(1,833,180	)
Less: Net loss attributable to Hampton Inn Property noncontrolling interests		(25,238	)		(84,960	)
Less: Net (loss) income attributable to Hanover Square Property noncontrolling interests		(7,020	)		4,966
Less: Net income (loss) attributable to Operating Partnership noncontrolling interests		2,040			(28,893	)
Net Loss Attributable to Medalist Common Shareholders	$	(2,277,524	)	$	(1,724,293	)

Loss per share from operations - basic and diluted	$	(0.39	)	$	(0.38	)

Weighted-average number of shares - basic and diluted		5,856,365			4,553,440

Dividends paid per common share	$	-		$	0.125

See notes to condensed consolidated financial statements

Medalist Diversified REIT, Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

For the three months ended March 31, 2021 and 2020

(Unaudited)

	Common Stock															Noncontrolling Interests
	Shares		Par Value		Additional Paid in Capital		Offering Costs			Accumulated Deficit			Total Shareholders’ Equity			Hampton Inn Property			Hanover Square Property			Operating Partnership			Total Equity
Balance, January 1, 2021		4,803,287	$	48,032	$	33,105,099	$	(2,992,357	)	$	(19,298,987	)	$	10,861,787		$	(224,383	)	$	189,784		$	882,555		$	11,709,743

Common stock issuances		2,074,933	$	20,748	$	3,778,520	$	-		$	-		$	3,799,268		$	-		$	-		$	-		$	3,799,268
Share based compensation		67,256		673		149,308		-			-			149,981			-			-			-			149,981
Convertible debenture beneficial conversion feature		-		-		284,052		-			-			284,052			-			-			-			284,052
Offering costs		-		-		-		(66,202	)		-			(66,202	)		-			-			-			(66,202	)
Net (loss) income		-		-		-		-			(2,277,524	)		(2,277,524	)		(25,238	)		(7,020	)		2,040			(2,307,742	)
Dividends and distributions		-		-		-		-			-			-			-			(12,000	)		-			(12,000	)
Balance, March 31, 2021		6,945,476	$	69,453	$	37,316,979	$	(3,058,559	)	$	(21,576,511	)	$	12,751,362		$	(249,621	)	$	170,764		$	884,595		$	13,557,100

Balance January 1, 2020		4,500,144	$	45,001	$	31,702,347	$	(2,992,357	)	$	(10,555,841	)	$	18,199,150		$	1,282,782		$	540,791		$	830,512		$	20,853,235

Share based compensation		247,824	$	2,478	$	567,517	$	-		$	-		$	569,995		$	-		$	-		$	-		$	569,995
Offering costs		-		-		-		-			-			-			-			-			-			-
Net (loss) income		-		-		-		-			(1,724,293	)		(1,724,293	)		(84,960	)		4,966			(28,893	)		(1,833,180	)
Dividends and distributions		-		-		-		-			(562,537	)		(562,537	)		-			(20,800	)		(27,356	)		(610,693	)
Non-controlling interests		-		-		-		-			-			-			(375,400	)		-			375,400			-

Balance, March 31, 2020		4,747,968	$	47,479	$	32,269,864	$	(2,992,357	)	$	(12,842,671	)	$	16,482,315		$	822,422		$	524,957		$	1,149,663		$	18,979,357

See notes to condensed consolidated financial statements

Medalist Diversified REIT, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES

Net Loss	$	(2,307,742	)	$	(1,833,180	)

Adjustments to reconcile consolidated net loss to net cash flows from operating activities
Depreciation		454,774			767,314
Amortization		198,459			250,093
Loan cost amortization		44,190			82,345
Mandatorily redeemable preferred stock issuance cost and discount amortization		49,449			7,128
Convertible debenture issuance cost, discount and beneficial conversion feature amortization		1,455,324			13,171
Amortization of tenant inducements		-			4,260
Above (below) market lease amortization, net		3,237			3,093
Bad debt expense		3,196			6,003
Share-based compensation		149,981			569,995

Changes in assets and liabilities
Rent and other receivables, net		107,599			(5,056	)
Unbilled rent		(88,092	)		(43,834	)
Other assets		(288,524	)		34,178
Accounts payable and accrued liabilities		424,967			161,274
Net cash flows from operating activities		206,818			16,784

CASH FLOWS FROM INVESTING ACTIVITIES

Capital expenditures		(45,150	)		(163,246	)
Net cash flows from investing activities		(45,150	)		(163,246	)

CASH FLOWS FROM FINANCING ACTIVITIES

Dividends and distributions paid		(12,000	)		(610,693	)
Proceeds from line of credit, short term, net		-			550,000
Repayment of line of credit, short term		-			(2,000,000	)
Repayment of related party notes payable, short term		-			(852,000	)
Repayment of mortgages payable		(134,150	)		(50,924	)
Proceeds from sale of mandatorily preferred stock, net of capitalized offering costs		-			3,860,882
Proceeds from sale of convertible debentures, net of capitalized offering costs		1,305,000			-
Offering costs paid related to common stock offering		(66,202	)		-
Net cash flows from investing activities		1,092,648			897,265

INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		1,254,316			750,803
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period		5,096,928			2,072,190
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period	$	6,351,244		$	2,822,993

CASH AND CASH EQUIVALENTS, end of period, shown in condensed consolidated balance sheets		3,681,292			701,719
RESTRICTED CASH including assets restricted for capital and operating reserves and tenant deposits, end of period, shown in condensed consolidated balance sheets		2,669,952			2,121,274
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period shown in the condensed consolidated statements of cash flows	$	6,351,244		$	2,822,993
		-
Supplemental Disclosures and Non-Cash Activities:

Other cash transactions:
Interest paid	$	897,369		$	733,113

Non-cash transactions:
Conversion of convertible debentures and accrued interest to common stock	$	3,799,268		$	-
Transfer of investment properties, net to assets held for sale, net		9,683,555			-
Transfer of mortgages payable, net to mortgages payable associated with assets held for sale, net		7,592,931			-
Exchange for 7.55 percent of the noncontrolling interest in the Hampton Inn Property		-			867,000
Issuance of operating partnership interests in exchange for 3.45 percent of the noncontrolling interest in the Hampton Inn Property		-			375,400

See notes to condensed consolidated financial statements

Medalist Diversified REIT, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

1.	Organization and Basis of Presentation and Consolidation

Medalist Diversified Real Estate Investment Trust, Inc. (the “REIT”) is a Maryland corporation formed on September 28, 2015. Beginning with the taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes. The REIT serves as the general partner of Medalist Diversified Holdings, LP (the “Operating Partnership”) which was formed as a Delaware limited partnership on September 29, 2015. As of March 31, 2021, the REIT, through the Operating Partnership, owned and operated six properties, the Shops at Franklin Square, a 134,239 square foot retail property located in Gastonia, North Carolina (the “Franklin Square Property”), the Greensboro Airport Hampton Inn, a hotel with 125 rooms on 2.162 acres in Greensboro, North Carolina (the “Hampton Inn Property”), the Shops at Hanover Square North (the “Hanover Square Property”), a 73,440 square foot retail property located in Mechanicsville, Virginia, the Ashley Plaza Shopping Center (the “Ashley Plaza Property”), a 160,356 square foot retail property located in Goldsboro, North Carolina, the Clemson Best Western University Inn (the “Clemson Best Western Property”), a hotel with 148 rooms on 5.92 acres in Clemson, South Carolina and Brookfield Center, a 64,880 square foot mixed-use industrial/office property located in Greenville, South Carolina (the “Brookfield Center Property”). As of March 31, 2021, the Company owned 78 percent of the Hampton Inn Property as a tenant in common with a noncontrolling owner which owns the remaining 22 percent interest. The Company owns 84 percent of the Hanover Square Property as a tenant in common with a noncontrolling owner which owns the remaining 16 percent interest.

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

The Company was formed to acquire, reposition, renovate, lease and manage income-producing properties, with a primary focus on (i) commercial properties, including flex-industrial, limited-service hotels, and retail properties, and (ii) multi-family residential properties in secondary and tertiary markets in the southeastern part of the United States, with an expected concentration in Virginia, North Carolina, South Carolina, Georgia, Florida and Alabama. The Company may also pursue, in an opportunistic manner, other real estate-related investments, including, among other things, equity or other ownership interests in entities that are the direct or indirect owners of real property, indirect investments in real property, such as those that may be obtained in a joint venture. While these types of investments are not intended to be a primary focus, the Company may make such investments in its Manager’s discretion.

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

2.	Summary of Significant Accounting Policies

Investment Properties

The Company has adopted Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805), which clarifies the framework for determining whether an integrated set of assets and activities meets the definition of a business. The revised framework establishes a screen for determining whether an integrated set of assets and activities is a business and narrows the definition of a business, which is expected to result in fewer transactions being accounted for as business combinations. Acquisitions of integrated sets of assets and activities that do not meet the definition of a business are accounted for as asset acquisitions. As a result, all of the Company’s acquisitions to date qualified as asset acquisitions and the Company expects future acquisitions of operating properties to qualify as asset acquisitions. Accordingly, third-party transaction costs associated with these acquisitions have been and will be capitalized, while internal acquisition costs will continue to be expensed.

Accounting Standards Codification (“ASC”) 805 mandates that “an acquiring entity shall allocate the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at date of acquisition.” ASC 805 results in an allocation of acquisition costs to both tangible and intangible assets associated with income producing real estate. Tangible assets include land, buildings, site improvements, tenant improvements and furniture, fixtures and equipment, while intangible assets include the value of in-place leases, lease origination costs (leasing commissions and tenant improvements), legal and marketing costs and leasehold assets and liabilities (above or below market leases), among others.

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

The Company records depreciation on buildings and improvements utilizing the straight-line method over the estimated useful life of the asset, generally 5 to 40 years. The Company reviews depreciable lives of investment properties periodically and makes adjustments to reflect a shorter economic life, when necessary. Tenant allowances, tenant inducements and tenant improvements are amortized utilizing the straight-line method over the term of the related lease. Amounts allocated to buildings are depreciated over the estimated remaining life of the acquired building or related improvements.

Acquisition and closing costs are capitalized as part of each tangible asset on a pro rata basis. Improvements and major repairs and maintenance are capitalized when the repair and maintenance substantially extend the useful life, increases capacity or improves the efficiency of the asset. All other repair and maintenance costs are expensed as incurred.

The Company reviews investment properties for impairment on a property-by-property basis whenever events or changes in circumstances indicate that the carrying value of investment properties may not be recoverable, but at least annually. These circumstances include, but are not limited to, declines in the property’s cash flows, occupancy and fair market value. The Company measures any impairment of investment property when the estimated undiscounted cash flows plus its residual value, is less than the carrying value of the property. To the extent impairment has occurred, the Company charges to income the excess of the carrying value of the property over its estimated fair value. The Company estimates fair value using unobservable data such as projected future operating income, estimated capitalization rates, or multiples, leasing prospects and local market information. The Company may decide to sell properties that are held for use and the sale prices of these properties may differ from their carrying values.

The Company did not record any impairment adjustments to its investment properties resulting from events or changes in circumstances during the three months ended March 31, 2021 or 2020, respectively.

Assets Held for Sale

The Company may decide to sell properties that are held as investment properties. The Company records these properties, and any associated liabilities, as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probable and is expected within one year. Properties classified as held for sale are reported at the lower of their carrying value or their fair value, less estimated costs to sell. When the carrying value exceeds the fair value, less estimated costs to sell, an impairment charge is recognized. The Company determines fair value based on the three-level valuation hierarchy for fair value measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in markets that are not active; and inputs other than quoted prices. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As of December 31, 2020, the Company had committed to a plan to sell the Hampton Inn Property. The Company’s plan includes the sale of an asset group that includes the land, site improvements, building, building improvements and furniture, fixtures and equipment associated with the Hampton Inn Property. As a result, the Company determined that as of December 31, 2020, the carrying value of the Hampton Inn Property exceeded its fair value, less estimated costs to sell, and recorded impairment of assets held for sale of $3,494,058 on its condensed consolidated statements of operations during the year ended December 31, 2020. There was no such impairment recorded during the three months ended March 31, 2021 and 2020, respectively. The impairment of assets held for sale represents the difference between the carrying value of the Hampton Inn Property and its estimated fair value, less estimated closing costs. The Company based its estimate of the fair value of the Hampton Inn Property on the actual contract sale price, less estimated closing costs, a level 2 input. The fair value measurement date is as of December 31, 2020. As of March 31, 2021, the Company does not believe that the estimated fair value of the Hampton Inn Property has changed, and the Company has not recorded any further impairment of assets held for sale related to the Hampton Inn Property.

During February 2021, the Company committed to a plan to sell the Clemson Best Western Hotel Property. The Company’s plan includes the sale of an asset group that includes the land, site improvements, building, building improvements and furniture, fixtures and equipment associated with the Clemson Best Western Property. The Company believes that the fair value, less estimated costs to sell, exceeds the Company’s carrying cost, so the Company has not recorded any impairment of assets held for sale related to the Clemson Best Western Property for the three months ended March 31, 2021.

See Note 3 for additional details on impairment of assets held for sale as of March 31, 2021 and December 31, 2020.

Intangible Assets and Liabilities, net

The Company determines, through the ASC 805 evaluation, the above and below market lease intangibles upon acquiring a property. Intangible assets (or liabilities) such as above or below-market leases and in-place lease value are recorded at fair value and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. The Company amortizes amounts allocated to tenant improvements, in-place lease assets and other lease-related intangibles over the remaining life of the underlying leases. The analysis is conducted on a lease-by-lease basis.

The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of its intangible assets may not be recoverable, but at least annually. The Company did not record any impairment adjustments to its intangible assets during the three months ended March 31, 2021 or 2020, respectively.

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

	March 31, 2021 (unaudited)			December 31, 2020
Intangible Assets
Leasing commissions	$	905,182		$	948,427
Legal and marketing costs		80,492			86,786
Above market leases		349,282			402,895
Net leasehold asset		1,669,334			1,818,254
	$	3,004,290		$	3,256,362
Intangible Liabilities
Below market leases, net	$	(972,121	)	$	(1,022,497	)

Capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases. Capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases. Adjustments to rental revenue related to the above and below market leases during the three months ended March 31, 2021 and 2020, respectively, were as follows:

	For the three months ending March 31,
	2021 (unaudited)			2020 (unaudited)
Amortization of above market leases	$	(53,613	)	$	(60,547	)
Amortization of below market leases		50,376			57,454
	$	(3,237	)	$	(3,093	)

Amortization of lease origination costs, leases in place and legal and marketing costs represent a component of depreciation and amortization expense. Amortization related to these intangible assets during the three months ended March 31, 2021 and 2020, respectively, were as follows:

	For the three months ending March 31,
	2021 (unaudited)			2020 (unaudited)
Leasing commissions	$	(43,245	)	$	(46,480	)
Legal and marketing costs		(6,294	)		(8,343	)
Net leasehold asset		(148,920	)		(186,621	)
	$	(198,459	)	$	(241,444	)

As of March 31, 2021 and December 31, 2020, the Company’s accumulated amortization of lease origination costs, leases in place and legal and marketing costs totaled $2,551,562 and $2,353,103, respectively.

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

	For the remaining nine months ending December 31, 2021			2022			2023			2024			2025			2026-2039			Total
Intangible Assets
Leasing commissions	$	124,785		$	133,682		$	106,075		$	88,222		$	79,830		$	372,588		$	905,182
Legal and marketing costs		17,455			18,879			13,960			8,894			5,366			15,938			80,492
Above market leases		160,839			121,137			33,311			7,692			7,692			18,611			349,282
Net leasehold asset		421,162			341,480			195,139			143,256			122,282			446,015			1,669,334
	$	724,241		$	615,178		$	348,485		$	248,064		$	215,170		$	853,152		$	3,004,290

Intangible Liabilities
Below market leases, net	$	(149,668	)	$	(177,581	)	$	(131,112	)	$	(89,303	)	$	(63,039	)	$	(361,418	)	$	(972,121	)

Conditional Asset Retirement Obligation

A conditional asset retirement obligation represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement depends on a future event that may or may not be with the Company’s control. Currently, the Company does not have any conditional asset retirement obligations. However, any such obligations identified in the future would result in the Company recording a liability if the fair value of the obligation can be reasonably estimated. Environmental studies conducted at the time the Company acquired its properties did not reveal any material environmental liabilities, and the Company is unaware of any subsequent environmental matters that would have created a material liability.

The Company believes that its properties are currently in material compliance with applicable environmental, as well as non-environmental, statutory and regulatory requirements. The Company did not record any conditional asset retirement obligation liabilities during the three months ended March 31, 2021 and 2020, respectively.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash and cash equivalents. Cash equivalents are carried at cost, which approximates fair value. Cash equivalents consist primarily of bank operating accounts and money markets. Financial instruments that potentially subject the Company to concentrations of credit risk include its cash and equivalents and its trade accounts receivable.

The Company places its cash and cash equivalents and any restricted cash held by the Company on deposit with financial institutions in the United States which are insured by the Federal Deposit Insurance Company ("FDIC") up to $250,000. The Company's credit loss in the event of failure of these financial institutions is represented by the difference between the FDIC limit and the total amounts on deposit. Management monitors the financial institutions credit worthiness in conjunction with balances on deposit to minimize risk. As of March 31, 2021, the Company held one cash account with a balance that exceeded the FDIC limit by $2,181,325. As of December 31, 2020, the Company held two cash accounts with balances that exceeded the FDIC limit by an aggregate amount of $1,719,233.

Restricted cash represents (i) amounts held by the Company for tenant security deposits, (ii) escrow deposits held by lenders for real estate tax, insurance, and operating reserves, (iii) capital reserves held by lenders for investment property capital improvements and (iv) an escrow for the first year of dividends on the Company’s mandatorily redeemable preferred stock (see Note 4, below).

Tenant security deposits are restricted cash balances held by the Company to offset potential damages, unpaid rent or other unmet conditions of its tenant leases. As of March 31, 2021 and December 31, 2020, the Company reported $109,059 and $109,059, respectively, in security deposits held as restricted cash.

Escrow deposits are restricted cash balances held by lenders for real estate taxes, insurance and other operating reserves. As of March 31, 2021 and December 31, 2020, the Company reported $1,847,252 and $1,352,723, respectively, in escrow deposits.

Capital reserves are restricted cash balances held by lenders for capital improvements, leasing commissions furniture, fixtures and equipment, and tenant improvements. As of March 31, 2021 and December 31, 2020, the Company reported $713,641 and $674,520, respectively, in capital property reserves. These funds are being held in reserve, as follows:

Property and Purpose of Reserve	March 31, 2021 (unaudited)		December 31, 2020
Hampton Inn Property – furniture, fixtures and equipment	$	18,460	$	18,460
Clemson Best Western Property - improvements		50,010		50,009
Clemson Best Western Property - furniture, fixtures and equipment		152,578		149,752
Franklin Square Property - leasing costs		433,490		408,278
Brookfield Center Property – maintenance reserve		59,103		48,021
Total	$	713,641	$	674,520

Revenue Recognition

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

Retail and Flex Center Property Revenues

The Company recognizes minimum rents from its retail center properties (the Franklin Square, Hanover Square and Ashley Plaza properties) and flex center property (Brookfield Center) on a straight-line basis over the terms of the respective leases which results in an unbilled rent asset being recorded on the condensed consolidated balance sheets. As of March 31, 2021 and December 31, 2020, the Company reported $761,820 and $673,728, respectively, in unbilled rent.

The Company’s leases generally require the tenant to reimburse the Company for a substantial portion of its expenses incurred in operating, maintaining, repairing, insuring and managing the shopping center and common areas (collectively defined as Common Area Maintenance or “CAM” expenses). The Company includes these reimbursements, along with other revenue derived from late fees and seasonal events, on the condensed consolidated statements of operations under the captions "Retail center property tenant reimbursements” and “Flex center property tenant reimbursements." This significantly reduces the Company’s exposure to increases in costs and operating expenses resulting from inflation or other outside factors. The Company accrues reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. The Company calculates the tenant’s share of operating costs by multiplying the total amount of the operating costs by a fraction, the numerator of which is the total number of square feet being leased by the tenant, and the denominator of which is the average total square footage of all leasable buildings at the property. The Company also receives payments for these reimbursements from substantially all its tenants on a monthly basis throughout the year.

The Company recognizes differences between previously estimated recoveries and the final billed amounts in the year in which the amounts become final. Since these differences are determined annually under the leases and accrued as of December 31 in the year earned, no such revenues were recognized during the three months ended March 31, 2021 and 2020.

The Company recognizes lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, the Company provides for losses related to unrecovered intangibles and other assets. During the three months ended March 31, 2021 and 2020, respectively, no such termination costs were recognized.

Hotel Property Revenues

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

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

Hotel Property Operating Expenses

All personnel of the Hampton Inn Property and Clemson Best Western Property are directly or indirectly employees of Marshall Hotels and Resorts, Inc. (“Marshall”), the Company’s hotel management firm. In addition to fees and services discussed above, the Hampton Inn Property and Clemson Best Western Property reimburse Marshall for all employee related service costs, including payroll salaries and wages, payroll taxes and other employee benefits paid by Marshall on behalf of the respective property. For the Hampton Inn Property, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the three months ended March 31, 2021 and 2020 were $164,427 and $144,383, respectively. For the Clemson Best Western Property, total amounts incurred for payroll salaries and wages, payroll taxes and other employee benefits for the three months ended March 31, 2021 and 2020 were $103,553 and $150,178, respectively. The amounts are included in hotel property operating expenses in the accompanying condensed consolidated statements of operations.

Rent and other receivables

Rent and other receivables include tenant receivables related to base rents and tenant reimbursements. (Rent and other receivables do not include receivables attributable to recording rents on a straight-line basis, which are included in unbilled rent, discussed above.) The Company determines an allowance for the uncollectible portion of accrued rents and accounts receivable based upon customer credit worthiness (including expected recovery of a claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. The Company considers a receivable past due once it becomes delinquent per the terms of the lease. A past due receivable triggers certain events such as notices, fees and other allowable and required actions per the lease. As of March 31, 2021 and December 31, 2020, the Company’s allowance for uncollectible rent totaled $0 and $4,693, respectively, which are comprised of amounts specifically identified based on management’s review of individual tenants’ outstanding receivables. Management determined that no additional general reserve is considered necessary as of March 31, 2021 and December 31, 2020, respectively.

Income Taxes

Beginning with the Company’s taxable year ended December 31, 2017, the REIT has elected to be taxed as a real estate investment trust for federal income tax purposes under Sections 856 through 860 of the Internal Revenue Code and applicable Treasury regulations relating to REIT qualification. In order to maintain this REIT status, the regulations require the Company to distribute at least 90% of its taxable income to shareholders and meet certain other asset and income tests, as well as other requirements. If the Company fails to qualify as a REIT, it will be subject to tax at regular corporate rates for the years in which it fails to qualify. If the Company loses its REIT status it could not elect to be taxed as a REIT for five years unless the Company’s failure to qualify was due to reasonable cause and certain other conditions were satisfied.

During the three months ended March 31, 2021 and 2020, respectively, the Company’s Hampton Inn TRS entity generated a tax loss, so no income tax expense was recorded. During the three months ended March 31, 2021 and 2020, respectively, the Company’s Clemson Best Western TRS entity generated taxable income, but the Company believes that its net operating loss carryforwards from prior periods will offset this taxable income, so no income tax expense was recorded.

Management has evaluated the effect of the guidance provided by GAAP on Accounting for Uncertainty of Income Taxes

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

SEC Form 10-Q filed by Medalist Diversified REIT, Inc.