Medalist Diversified REIT: $5.50 Price Target from Aegis Capital and History of Double-Digit Dividend Yield Since November 2018 IPO
Medalist Diversified REIT, Inc. (NASDAQ: MDRR) IPO’d in November 2018 and has paid its shareholders dividends in every quarter since.
The stock is currently trading for under $4 per share. At this price, the most recent quarterly dividend represents an annual yield of more than 12%, something you won’t find often in today’s market.
Not only can investors buying at these low prices get an extremely healthy double-digit yield, there is also decent upside potential for the share price itself.
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.
We think the share price will ultimately trade much higher as more investors learn of the opportunity with Medalist, and investors wanting to add dividend exposure to their portfolio should act quickly while the shares are still trading well below the estimated NPV.
Medalist Diversified REIT: Strong Dividend Track Record, Targeting Markets in Southeastern US
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.
While Medalist Diversified REIT has only been operating as a public company for a short amount of time, the management team does have extensive experience in acquiring and operating commercial real estate.
Medalist 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 13.3% 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. What does that mean for investors? Even though MDRR is a relatively new company with limited historical performance, this is not management’s first foray into commercial real estate investing.
CEO Breaks Down Value Proposition of Medalist Diversified REIT (NASDAQ: MDRR)
REITs: Best Performing Asset Class Over Last 20 Years
Real Estate Investment Trusts (REITs) were the best performing asset class over the last 20 years, with annualized returns of just under 10%.
Compare this to the S&P 500, which returned just 5.6% annualized over the same period, or bonds, which came in at just 4.5%.
As noted earlier, for investors looking to add REIT exposure to their portfolio, Medalist offers an opportunity for both income and capital appreciation.
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.
Interview with Chairman & CEO
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: a 134,239 sq. ft. retail property in Gastonia, North Carolina, a 73,440 sq. ft. retail property in Mechanicsville, Virginia, a 160,356 sq. ft. retail property in Greensboro, North Carolina, a 125-room hotel in Greensboro, North Carolina, a 148-room hotel in Clemson, South Carolina, and a 66,000 sq. ft. flex-industrial property in Greenville, South Carolina.
Management has brought the occupancy of its Gastonia property up to 92.4% as of June 30, 2019 from an initial 68.0% level when purchased in April 2017.
The company’s Mechanicsville property, acquired in May 2018, had an occupancy rate of 96.7% as of June 30, 2019.
The company’s hotel property in Greensboro, the Greensboro Airport Hampton Inn, was acquired in November 2018. The company is currently completing renovations on the property and expects to see occupancy rates increase as work is finished in the coming quarters.
The remaining properties were purchased in September/October 2019.
The Brookfield Center property in Greenville is 100% occupied and anchored by Gravitopia, the largest developer, operator and franchisor of trampoline parks. The center also includes other national, local and regional tenants.
Greenville is 4th among 15 of the fastest-growing large cities in the U.S. and is home to well-known national and international corporations.
The Clemson Best Western is located less than a mile from Clemson University, with a student enrollment of 24,500 and over 5,000 faculty members. The student population is expected to increase in the coming years, and the athletic programs at Clemson University continue to attract visitors year-round.
Ashley Plaza in Greensboro, purchased in early September 2019, is 98% occupied and anchored by Hobby Lobby, Planet Fitness, Ashley HomeStore, and Harbor Freight Tools, with several other regional and local tenants in the center.
Triple Net Lease Focus
Medalist is a triple net lease (NNN) REIT.
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.
Moreover, the cash available for distribution/dividends should also be fairly predictable.
Medalist paid out three consecutive quarterly dividends of $0.175 each since its IPO in November 2018.
The most recent dividend declared was set at $0.125 per share and is to be paid on March 10, 2020 for shareholders of record as of February 11, 2020.
While the dividend is lower than prior quarters, it still represents an annual yield of more than 12% at current the current stock price of under $4 per share.
Trading at Steep Discount to Net Asset Value
According to an Aegis Capital research report from 2019, based on the initial three properties owned as of the end of the first quarter of 2019, Medalist had a net asset value (NAV) of $6.82 per share.
Since publishing the report, Medalist has acquired an additional three properties.
Recognizing Medalist is a smaller company, Aegis applied a subjective 20% discount to its NAV estimate, reaching a current price target of $5.50 per share in its buy rating, again, prior to the acquisition of the three additional properties.
The latest property acquisitions put Medalist well on its way to full dividend coverage, and an expected near-term capital raise should give the company the funds needed to complete additional acquisitions.