Executive Summary / Key Takeaways

• Medalist Diversified REIT (MDRR) is strategically repositioning its portfolio, shifting focus towards the higher-growth Single Tenant Net Lease (STNL) segment and exploring Delaware Statutory Trust (DST) offerings, while managing its legacy retail and flex properties in secondary/tertiary markets.
• First Quarter 2025 results reflect this transition, with STNL revenue surging 156.5% year-over-year due to recent acquisitions, although overall revenue and operating income decreased primarily due to the prior year's Hanover Square property sale and vacancies in the retail segment.
• The company faces competitive pressures from larger, more technologically advanced REITs in overlapping sectors (hotels, multi-family, retail) and lags in scale and technological integration, which impacts efficiency and margins compared to peers.
• Recent financing activities, including the full redemption of preferred stock and termination of a credit line in anticipation of a new facility, highlight efforts to optimize the capital structure, but also underscore ongoing liquidity management needs.
• Key risks include sensitivity to interest rates, geographic and tenant concentration in the legacy portfolio, the relatively small property base, and governance concerns related to related-party transactions, which may affect investor sentiment and access to capital.

Setting the Scene: A REIT in Transition

Medalist Diversified REIT, Inc. (MDRR) operates within the dynamic real estate investment trust landscape, primarily focusing on income-producing properties in secondary and tertiary markets across the Southeast. Formed in 2015, the company has evolved from its initial focus on retail and flex-industrial assets, strategically expanding into the Single Tenant Net Lease (STNL) sector and recently embarking on a program to sponsor Delaware Statutory Trust (DST) investment offerings. This strategic pivot aims to enhance portfolio stability and diversify income streams beyond its legacy holdings.

The competitive environment for MDRR is multifaceted, encompassing larger, more established REITs like Host Hotels & Resorts (HST) in hospitality, Equity Residential (EQR) in multi-family, and Kimco Realty (KIM) in retail, as well as private equity funds and crowdfunding platforms. While MDRR's regional focus and cost-effective approach in its niche markets offer potential advantages, it operates at a significantly smaller scale than these major players. This size disparity contributes to higher operating costs per unit and limits economies of scale compared to larger peers. Furthermore, while competitors like EQR and HST leverage advanced technology for property management, leasing, and guest experience, MDRR does not detail comparable technological differentiators or significant R&D initiatives aimed at creating a technological moat. The competitive analysis suggests MDRR lags in technological integration, potentially impacting efficiency and tenant retention rates compared to rivals with more sophisticated digital platforms. MDRR's competitive positioning is thus characterized by a targeted geographic and asset class strategy in less saturated markets, seeking higher yields (historically targeting 7-9% cap rates in the Southeast), while contending with the scale and technological advantages held by larger, more diversified competitors.

Strategic Evolution and Portfolio Repositioning

MDRR's current strategy is centered on three core pillars: actively managing its existing portfolio of retail and flex-industrial properties, expanding its STNL holdings, and developing a DST sponsorship program. The legacy portfolio, concentrated in Virginia, North Carolina, and South Carolina, continues to generate revenue but faces challenges such as increased vacancies in certain properties like the Lancer Center and Salisbury Marketplace, which impacted recent performance.

The push into the STNL segment represents a strategic effort to acquire properties with predictable, long-term rental income, thereby reducing exposure to tenant turnover and market volatility inherent in multi-tenant retail. This initiative gained traction with recent acquisitions, including the Buffalo Wild Wings Property in Kentucky and the United Rentals (URI) Property in Alabama in Q1 2025. These acquisitions, while involving related parties, were funded through the issuance of Operating Partnership (OP) Units, aligning interests and expanding the portfolio. The sale of the Hanover Square Shopping Center in March 2024, while reducing retail revenue, was framed as not altering the company's overall retail strategy, and the retention and reclassification of the adjacent outparcel as held for sale indicates ongoing portfolio optimization. The planned DST program is another avenue for growth and capital raising, allowing MDRR to leverage its expertise to structure investment opportunities for other investors.

Financial Performance: A Snapshot of Transition

The first quarter of 2025 provides a look at MDRR's performance amidst these strategic shifts and ongoing market dynamics. Total revenue for the three months ended March 31, 2025, was $2.32 million, a decrease of $249,999 compared to $2.57 million in the same period of 2024. This decline was primarily driven by a $357,170 decrease in retail center property revenues, largely attributable to the sale of the Hanover Square Shopping Center in Q1 2024 and increased vacancies at Lancer Center and Salisbury Marketplace. Partially offsetting this was a significant 156.5% surge in STNL property revenues, increasing by $90,675 to $148,630, thanks to the Buffalo Wild Wings and United Rentals acquisitions. Flex center property revenues saw a modest increase of $16,496.

Total operating expenses rose by $290,237 to $2.86 million in Q1 2025, compared to $2.57 million in Q1 2024. This increase was mainly due to higher share-based compensation ($397,182 vs. $277,500), a loss on impairment ($61,803 vs. $0), and increased corporate general and administrative expenses ($353,341 vs. $296,794), reflecting higher marketing and compensation costs.

The combination of decreased revenue and increased operating expenses resulted in an operating loss of $552,516 for the three months ended March 31, 2025, a significant decrease from the operating income of $2.76 million reported in the prior-year period. This swing was heavily influenced by the $2.82 million gain on the disposal of the Hanover Square Shopping Center property recognized in Q1 2024.

Interest expense decreased by $303,732 to $573,016 in Q1 2025, down from $876,748 in Q1 2024. This reduction was primarily a result of the repayment of the Hanover Square mortgage and the final redemption of the mandatorily redeemable preferred stock.

Net loss for the quarter was $1.03 million before accounting for noncontrolling interests, compared to net income of $1.93 million in Q1 2024. The net loss attributable to common stockholders was $1.01 million, a decrease of $2.35 million from the $1.36 million net income attributable to common stockholders in the prior-year period, again largely reflecting the absence of the Hanover Square sale gain.

Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO), key non-GAAP metrics for REITs, provide further insight into operational cash flow. FFO for the three months ended March 31, 2025, was $10,247, compared to $178,453 in Q1 2024. AFFO was $217,422 in Q1 2025, down from $229,611 in Q1 2024. While these metrics show a decrease year-over-year, influenced by the factors impacting net income and operating expenses, they represent cash flow generation before certain non-cash items and capital expenditures, which management views as a meaningful measure of property performance.

Liquidity and Capital Structure

MDRR's liquidity is primarily supported by rental receipts, cash on hand, and access to capital markets and debt financing. As of March 31, 2025, the company held $2.74 million in unrestricted cash and $1.49 million in restricted cash (held in lender reserves for items like tenant improvements, taxes, and insurance).

The company's capital structure relies significantly on mortgage debt. As of March 31, 2025, mortgages payable totaled $49.76 million, net of unamortized issuance costs. These mortgages carry varying fixed and variable interest rates and maturity dates, with a notable $17.28 million principal payment due in 2027 related to the Wells Fargo (WFC) Mortgage Facility. The redemption of the mandatorily redeemable preferred stock in January 2025, funded partly by a private placement of common shares, eliminated a liability and is expected to lower future financing costs, a positive step for the capital structure.

A significant subsequent event was the termination of the Expanded Wells Fargo Line of Credit on April 28, 2025. This action was taken in anticipation of establishing a new credit relationship with a different lender, which the company expects to announce in the second quarter of 2025. The successful completion of this new facility is crucial for the company's operational flexibility and ability to fund potential future investments.

To support future growth and liquidity needs, MDRR has also been active in capital markets. In late 2024, it completed private placements of both OP Units and Common Shares. Furthermore, the filing of an S-3 shelf registration statement in April 2025, allowing for the potential issuance of up to $100 million in Common Shares over the next three years, provides a pathway for raising additional capital for acquisitions and other corporate purposes. Management has stated its expectation that current resources, combined with cash generated from operations, will be sufficient to meet anticipated liquidity needs for business operations over the next twelve months and beyond.

Competitive Landscape and Strategic Positioning

MDRR operates in a competitive arena where scale, access to capital, and operational efficiency are critical. Compared to larger competitors like HST, EQR, and KIM, MDRR's smaller scale presents challenges. While MDRR's regional focus allows for potentially higher cap rates (historically 7-9% in the Southeast) than those available in primary markets targeted by larger REITs, its overall profitability margins significantly lag behind peers. For example, MDRR's TTM Net Profit Margin of -24.64% contrasts sharply with peers like HST (12%), EQR (35%), and KIM (20%). This disparity reflects not only differences in asset class mix but also the operational efficiencies and economies of scale enjoyed by larger players.

The competitive analysis highlights that MDRR trails peers in technological integration, which can impact areas like property management efficiency, tenant acquisition, and retention rates. While MDRR's cost-effective approach in renovations and management is noted, the lack of detailed information on its own technological capabilities suggests this is an area where larger competitors, particularly EQR with its technology-driven multi-family management, hold a distinct advantage.

MDRR's strategic positioning relies on identifying and acquiring undervalued properties in its target markets and implementing its repositioning and management strategies. The expansion into STNL and DST offerings is a move to diversify and potentially improve the overall portfolio's risk-adjusted returns and cash flow stability, addressing some of the vulnerabilities associated with its legacy multi-tenant retail assets. However, the company's relatively small property base (12 developed assets as of the recent news) makes it more susceptible to the impact of tenant attrition or performance issues at individual properties compared to REITs with vast portfolios.

Risks and Challenges

Several factors could impact MDRR's performance and the realization of its strategic objectives. The current elevated interest rate environment poses a significant risk, increasing the cost of borrowing for new acquisitions and potentially impacting property valuations (leading to higher capitalization rates). While a portion of MDRR's debt is fixed-rate or capped, refinancing existing debt in a high-rate environment could lead to increased interest expenses, pressuring profitability and cash flow.

The company's geographic concentration in the Mid-Atlantic region and dependence on regional/local economic conditions make it vulnerable to adverse developments in those specific markets. Furthermore, the retail shopping center properties are dependent on anchor tenants, and the loss of a major tenant could significantly impact revenue and property value.

Governance concerns related to related-party transactions, such as the recent STNL acquisitions from entities controlled by the CEO, while approved by the Audit Committee, could potentially deter institutional investors and impact the company's access to capital. The company's history of reporting net losses and operating expenses outpacing revenues also raises questions about its ability to achieve consistent profitability and scale efficiently.

Changes in international trade policies and the imposition of tariffs could adversely affect the operations and financial health of MDRR's retail tenants who source goods internationally, potentially leading to reduced sales, compressed margins, and increased risk of store closures or bankruptcies, which would directly impact MDRR's rental income and occupancy rates.

Outlook and Future Strategy

MDRR's outlook is tied to the successful execution of its strategic repositioning. The growth in the STNL segment is a positive indicator of this shift, contributing significantly to recent revenue and Adjusted NOI growth. The company's plan to seek a new credit facility following the termination of the Wells Fargo line is critical for maintaining liquidity and funding future investments. The S-3 shelf registration provides a mechanism for raising equity capital, which will be necessary for significant portfolio expansion.

Management's historical commentary (from the Q4 2019 call, noting the context of that time) indicated plans to add properties and a focus on accretive acquisitions in the Southeast targeting specific property types and cap rates. While the market environment and specific targets may have evolved since then, the recent STNL acquisitions suggest a continued focus on portfolio growth through acquisition. The DST sponsorship program represents a new strategic avenue that could generate fee income and potentially provide a pipeline for future property acquisitions.

Ultimately, the company's ability to improve its financial performance and achieve consistent profitability will depend on successfully integrating new, higher-yielding assets, managing vacancies and operating expenses in its legacy portfolio, optimizing its capital structure in the current interest rate environment, and effectively navigating the competitive landscape and macroeconomic risks.

Conclusion

Medalist Diversified REIT is in a period of strategic transition, actively reshaping its portfolio with a greater emphasis on the STNL sector and exploring new ventures like DST sponsorship. While recent financial results reflect the impact of portfolio changes and operational challenges in legacy assets, the significant growth in the STNL segment demonstrates the potential of the new strategic direction. The company is taking steps to manage its capital structure, including preferred stock redemption and seeking new credit facilities, and has positioned itself for future capital raising through its shelf registration.

However, MDRR faces notable hurdles, including intense competition from larger, more technologically advanced peers, a relatively small asset base that increases property-specific risk, and the ongoing sensitivity to interest rate fluctuations and macroeconomic conditions. Investors should weigh the potential for growth and improved portfolio stability through the STNL and DST strategies against the challenges posed by scale disadvantages, competitive pressures, and execution risks associated with portfolio repositioning and securing favorable financing in the current environment. The success of the planned new credit relationship and the ability to consistently acquire accretive assets will be key factors to monitor as MDRR seeks to enhance its financial performance and build long-term value.