Medalist Diversified REIT: Buying Opportunity Trading at Less than 50% of Book Value

Medalist Diversified REIT (NASDAQ: MDRR) currently trades for under $2 per share yet has a book value of nearly $4 per share.

Analysts at Aegis Capital gave Medalist a buy recommendation and $5.50 price target on their initial report in 2019, and since then, Medalist has gone on to acquire an additional three properties, doubling its portfolio.

Compelling Competitive Advantages

Medalist targets assets in secondary and tertiary markets, predominantly in the Southeastern US, where management has market experience and extensive industry contacts. These contacts, combined with industry knowledge provide a unique competitive advantage, facilitating acquisition opportunities where competition is much lower than in primary markets, which attract large pools of potential buyers.

The Medalist Team has extensive experience in acquiring and operating commercial real estate. Medalist began buying commercial real estate as a private equity company in 2003.They launched a private fund (Fund I) in 2013 that acquired three properties and paid 8.0% annualized cash distributions. After 4.5 years, Medalist sold out of Fund I, realizing an internal rate of return (IRR) of 13.1% for its investors.

Medalist launched its second fund (Fund II) in 2015 following a $6 million capital raise. Fund II is still outstanding, and it generates 7.5% annualized cash distributions, paid quarterly.

MDRR follows the same investment strategy and philosophy as Funds I and II. The primary difference is that MDRR is a publicly traded, permanent capital vehicle.

Strong Management Team

Thomas (Tim) Messier joined Medalist in 2003 and currently serves as Chairman and CEO. Tim has extensive experience across commercial real estate acquisition, financing, asset management and investor relations. Prior to joining Medalist, Messier was in the capital markets business, where he focused on structured fixed income products, including commercial mortgage backed securities. Tim was formerly a Director of Global Capital Markets at Wells Fargo Bank and prior to that he was a Senior Vice President of Capital Markets at Bank of America.

William (Bill) Elliott founded Medalist in 2002 and currently serves as the company’s Vice Chairman, President and COO. Mr. Elliott has been responsible for investment strategy, acquisitions and management decisions since the firm’s inception, and he has been involved in the commercial real estate industry since 1983. Prior to Medalist, Bill held the roles of Managing Partner of Prudential Commercial Real Estate, President of Virginia Realty and Development Company and President of the Central Virginia Region at Goodman, Segar, Hogan, Hoffler.

Targeting Opportunities in Southeastern US

The Southeast has been benefitting from outsized population growth in recent years, a trend that is likely to continue for some time.

According to Deutsche Bank, baby boomers are retiring at a pace of 10,000 people per day right now. Attracted to the warmer climates of the region, boomers have been a big driver of the Southeast’s population growth. And with the youngest baby boomers being only 55 today, there are still quite a few years for this trend to continue.

The Southeast also offers appeal to younger generations.

With Gen Y and Z saddled with unprecedented levels of student debt, they are getting priced out of major primary markets where the cost of living is prohibitively high. As the economic cycle continues to lengthen, these younger generations might be enticed by the lower cost of living and lower tax states in the Southeast.

Current Investment Portfolio

Medalist currently owns six properties in the Southeast. Assets in the portfolio total $83mm and consist of 3 neighborhood retail centers, 1 flex/industrial property and 2 two limited service hotels. The properties are located in Virginia, North Carolina and South Carolina.

Triple Net Lease Focus

Most of the Medalist properties have triple net leases.

A triple net lease means the tenant is responsible for paying most property level operating expenses; specifically, the real estate taxes, insurance and common area maintenance charges.

Since Medalist does not shoulder increases in operating costs, the net operating income (NOI) generated from the property should be stable and predictable over time.

While some of its retailers were obviously impacted by the COVID-19 pandemic, management has reported that over 90% of its retail stores have reopened as of May 18th. The Flex property is fully reopened and the hotels have remained open through the pandemic.

Attractive Discount to Book Value

Trading under $2 per share as of mid-May with a book value of nearly $4, Medalist represents a highly compelling opportunity right now.

The company reported revenue of $2.5 million in the first quarter ended March 31, up from just $1.5 million in the same period last year.

Medalist is also in a strong financial position right now, further strengthened by a $300,000 loan from the US Government under the Paycheck Protection Program (PPP). If Medalist meets the necessary PPP requirements, this loan will eventually be turned into a grant that does not have to be paid back.

As the economy moves forward with reopening throughout the regions where Medalist owns properties, it is unlikely its shares will remain at this discounted price for long.