Medalist Diversified Reit, Inc. (MDRR) is Blowing a Golden Opportunity
A very promising activist setup has turned into a value-destructive dud
I found MDRR around November 2024 and did a deep dive on it. Their market cap was sub-$15 million and it appeared to be a very interesting setup that was an asymmetric risk/reward proposition.
They owned about 10 properties and their total NAV was substantially higher than what this was trading for. It seemed like a pretty safe 2-3 bagger over time. There was an activist who had recently gotten control from a terrible external manager and it seemed ripe for a great outcome.
I didn’t know exactly how they would close the NAV discount, but my thinking was simply recent activist takeover + deeply discounted real estate = good outcome sometime in the future.
Unfortunately, this activist had other plans and it seems like they are not at all aligned with outside shareholders. Either that, or he is not a good capital allocator. My view is that it is the former as he seems to be an experienced fund manager and there are a lot of questionable related party transactions of late that seem to benefit this activist without providing any value (in fact, it appears value has been destroyed) for shareholders.
Below is my original writeup followed by a couple real-time updates.
Original writeup from November 2024
MDRR is a nano-cap REIT that owns 10 operating properties, and 3 undeveloped land parcels. They had a terrible external manager from inception in 2015 until an activist investor took control in mid-2023, and my view is that there is now a wide gap between price and the underlying value given the market value of their assets and the new management and board in place.
MDRR history through 2022
The company was formed in 2015 and the first year of reports are available in 2018. They are essentially a value-add real estate company, with an external manager, and a horrible incentive structure for said manager.
Medalist Fund Manager was the external manager of MDRR, and the manager is owned 50/50 by Bill Elliott and Tim Messier. These two also collectively owned slightly under 5% of MDRR at this time.
Charlie Munger had the famous quote many of you are likely familiar with, “show me the incentive and I’ll show you the outcome.” That quote is very applicable here as anyone who knows how real estate syndications works can see this management structure is horrible.
Per the management agreement, the manager was to receive:
1. A monthly fee equal to .125% of MDRR’s equity, based on book.
2. An acquisition fee of 2% of a property’s purchase price plus closing costs.
3. A goofy incentive fee that is too long and confusing to type here.
In essence, they were heavily incentivized to grow book value and acquire properties. Anyone who understands real estate knows that book value is generally not the best way to judge the success of a value-add real estate venture as properties are carried at cost, net of depreciation. And depreciation (especially on NNN properties) typically outpaces true capex requirements. So, a good way to grow book is to buy properties.
And acquisition fees that simply pay a manager/sponsor a fee for buying a property is a complete misalignment of interests between investors and the manager/sponsor.
There are also all kinds of related-party transactions between MDRR and entities affiliated with Messiers and/or Elliott and needless to say, a ton of value is destroyed in the years that these guys are managing the company. Here is a very quick summary of some things that happened under their leadership:
In 2019 there are 2 people appointed to the board, and they resign two days later over disagreements about management’s decisions and the financials.
In very early 2020 they sell 200,000 mandatorily redeemable 8% preferreds for $23/share that have a face value of $25 and a mandatory redemption date in 5 years (early 2025 --- more on this later).
In 2021 and 2022 there are board member resignations, some funds disclosing positions in MDRR, and some acquisitions. And throughout this entire time, they were bleeding cash and had to continuously raise money, diluting shareholders. These acquisitions, likely influenced by the acquisition fee in place, were most likely nonsensical as this is when real estate was trading at incredibly low cap rates in a zero-rate environment.
It was a total disaster as the stock chart shows and these managers were either completely incompetent, totally self-interested, fraudulent, or a combination of those things.
2023 activism
On 1/31/23 and 2/13/23, Frank Kavanaugh and Alfred Finley disclose a 9.75% and a 15.1% position, respectively. Here is a timeline of the major events from this point to present:
3/10/23 – MDRR announces they are reviewing strategic alternatives
5/24/23 – MDRR and Kavanaugh enter into a cooperation agreement where he is added to the board, and to the committee tasked with reviewing strategic alternatives (which doesn’t include the managers).
6/9/23 – Kavanaugh is granted a waiver to the above mentioned agreement allowing him to own up to 10.02% of their common stock, which he promptly builds his position to.
7/18/23 – MDRR and the external manager enter into a termination agreement, and Messier and Elliott resign from all positions within the company. MDRR simultaneously internalizes management and Frank Kavanaugh is appointed as interim CEO and President.
8/23/23 – Kavanaugh issues a statement outlining the current status of the company and his vision moving forward. He also highlighted a few things that stand out to me; 1) $61mm of their outstanding debt at this time is assumable, which is pretty much all of it. They sold Hanover Square in late Q1 ’24 which leaves them with their current debt stack around $51mm, indicating this entire amount is assumable. This is very nice given the low rates and long maturities of these mortgages and how this might appeal to potential buyers. 2) On 7/12/23 the company announced a 6-month suspension of dividends, and during this same period Frank Kavanaugh foregoes all compensation as a director and executive of the company. This demonstrates his desire to show he is aligned with shareholders, in my opinion. 3) Management and directors purchased a combined $564k of their common and preferred stock during this month of August as well, which is a good signal that they believe the stock was cheap at the time (~$11 at this time, split-adjusted).
10/18/23 – Kavanaugh becomes permanent CEO.
12/29/23 – They invoked the MGCL unsolicited takeovers act rule and create 3 separate classes of directors.
3/28/24 – MDRR buys Citibank property from a Kavanaugh-affiliated entity for $2.4mm, paid mainly using OP units (more on these) at a split-adjusted price of $11.50/share, which was 8.5% higher than the closing price on the day the contract was agreed on. This is not a big acquisition, I am only highlighting it because it shows the shareholder-oriented mindset of Kavanaugh, in my opinion. Not only did he use OP units valued above market (which helped MDRR realize a lower purchase price, ultimately), but the sale price appears to be slightly under market, as well. This is an absolute-NNN property leased to Citibank and if we apply a 6-cap to their NOI, we arrive at a value of $2,512,850. My gut tells me it is likely worth more like a 5.75 or 5.5-cap, but even a 6-cap is higher than the purchase price. Again, not a huge financial impact to the company, but just shows the mindset of Kavanaugh and how he is likely shareholder-oriented in nature.
6/25/24 – Alfred Finley is appointed to the board, a couple holdovers from the original board resign (including the chairman) and Kavanaugh becomes chairman.
MDRR’s valuation
Before getting into MDRR’s valuation, I want to address the mandatorily redeemable preferred shares as these are due for redemption by 2/19/25. As I briefly went over earlier, the external manager was terrible and destroyed a ton of value. Part of this was done by issuing these preferred shares in early 2020 prior to Covid (they tried blaming Covid for a lot of the problems in a news article when they resigned, but the problems began long before Covid solely at their hands).
Per their recent 10-Q, MDRR planned to redeem 140,000 shares on 11/25/24, and is exploring options on how to redeem the remaining 60,000 shares. To raise the ~$3.5mm to redeem these, they planned to use $1.5mm cash and the remaining amount will come from the sale of 160,000 OP units to Kavanaugh and an unnamed board member (I’d assume Finley) for $2mm. Below is a visual of their organization and I have highlighted the OP that owns all of the properties, and positions in properties.
It appears there are 1,350,905 OP units outstanding, and after selling 160,000 of them, MDRR would own 70.82% of the OP.
My opinion is that there won’t be any further OP units sold to raise cash to redeem the remaining 60,000 shares as they likely would have done this as a single transaction. It is more likely that they use a combination of debt/cash to come up with the ~$1.5mm needed to redeem the remaining shares by 2/19/25. If they sell 60,000 additional OP units at the same $12.50/unit price to raise $750,000, which is half of the amount needed, MDRR would own 66.37%.
Not ideal, but not a ton of dilution and their capital structure would be considered fixed at this point. I’m going to assume 70.82% ownership of the OP in my analysis below as this is what I believe it’ll end up at. If you feel otherwise, use a lower percentage.
**Update 12/12/24 – they released an 8-K on 12/10/24 indicating they are redeeming the remaining 60,000 shares on 1/10/25 and from here these shares will no longer exist. Again, I will assume there will be dilution in connection with this purchase because they have not indicated there will be.**
MDRR’s properties
MDRR has 4 property segments: Flex Industrial, Retail, STNL (single tenant net lease) and Undeveloped. I’ve excluded their 3 undeveloped parcels and have applied no value to them, although I believe there is value in these as they are potential pad sites that can be ground leased on a long term. I just don’t know their plans and have chosen to be conservative and exclude them.
Also, their Parkway property has an 18% minority owner, and I have netted out their portion of the asset value and debt obligation below. All other properties are owned 100% by the OP. The blue is prior to netting out the OP limited partners, green is net to owners of MDRR.
My implied lease rate calculation is based on run rate actuals from their Q3 2024 financials where I took the top line rental income (which includes NNN reimbursements where applicable) and then subtracted the property-related expenses. This should give us the NOI/base lease rate for each property.
While I believe cap rates 6% and north seem conservative for the STNL properties, I’m least concerned with this segment as these add only a small amount of value overall, and there isn’t a ton of info since they recently added this segment (T-Mobile and East Coast Wings are near Ashley Plaza and until recently were consolidated with that one, and Citibank was acquired in March 2024). I’ll highlight the other 2 segments (retail and flex) below and all lease/occupancy info is from their 2023 10-K as this isn’t broken down on their 10-Q’s.
Retail
For the 4 retail properties, I dug into them and feel the most confident about Ashley and Salisbury.
Ashley has very little lease roll (less than 10% ABR annually) until 2028 when 22% expires. I feel very confident in this one as it appears to be in a good area with tenant demand. No spaces are listed for lease as of writing this, which is a good sign rents are competitive, if not low.
Salisbury’s occupancy rate of 86% is misleading as this is one of their better properties based on leases, in my opinion. Their anchor tenant is Food Lion, who takes about 40% of their sq footage and their lease doesn’t expire until 2032. Their total annual lease rolls based on ABR (from 12/31/23) for 2024-2030 are 5%, 2.8%, 15.3%, 14.7%, 0%, 4.9%, 0%. And their only 10% or greater (per rented sf) tenant with a lease roll during that time is CitiTrends in late 2027. Based on their most recent 10-Q it doesn’t appear they have filled the vacancy, so if they can do that this will boost income and NAV since I was using as-is financials based on Q3 of 2024. There is a total of 14,050 sf listed online for lease, but again --- a lot of this is already vacant and leasing it up would only improve my numbers. And one thing to note is that Family Dollar, who is their third largest tenant after Food Lion and CitiTrends signed a 10-year lease renewal in 2023, which indicates this is a desirable area for tenants.
Franklin Square appears to be 100% occupied based on an October listing brochure, with no space available. Appears they were just being proactive to potentially build a wait list of tenants. This is a positive sign as 100% occupancy on a multi-tenant property generally means you’re under market rents. Their tenant roster based on this brochure indicates it is a decent area that has a well-diversified range of tenants that are suitable for this property. The bad news is that about 34% of ABR expires in 2025, including 1 of their 2 anchors, Ashley Furniture. It doesn’t appear they will have a problem renewing this and I found no indication that Ashley is leaving, but the mystery box is their TI money given. Even with this large expiration I feel solid about this one given the diverse array of businesses here, indicating this is a desirable area and a decent property:
Lancer appears to be the worst of the retail bunch; it seems to be in a seedier area, has some deferred maintenance, and would likely be throwing good money after bad if you put big capex dollars into it. Their average lease rates say it all with them being in the low $5 range. They also have a marketing brochure indicating Big Lots (who filed bankruptcy in September) and Badcock Furniture (quite the name!) are available at some point and I’m assuming they’ll vacate earlier than their expirations in 2029 and 2034, respectively. These 2 tenants represent about 35% of their sq footage, and their second largest tenant, KJ’s Market expires 12/31/25. They’re only advertising 6,300 sq ft for lease though, so maybe I’m overblowing this. I just don’t get too thrilled seeing one anchor in bankruptcy, another anchor that appears to be leaving (Badcock) and the third anchor with a lease expiring in 2025. The fact that only 6,300 sf is listed for lease is positive, however. And this is what occupancy has looked like from 2019 through 2023: 99%, 97.2%, 100%, 100%, 100%. That is a good factor that likely indicates leases are under market currently. This is why I have applied a 7% cap rate to this one’s current NOI, as opposed to higher.
Overall, their retail segment seems to be leased below market rents and I feel fairly confident about it. They don’t appear to be terrific properties in outstanding areas, but I like their growth prospects over the next few years. Especially with competent management overseeing them.
Flex industrial
I like their flex properties and believe my estimated values for these are on the conservative end, given their opportunity over the next few years to bring the leases up to market rents. The reason I didn’t get more aggressive with the cap rates, which I believe there is an argument for, is because of the older vintage and how the value might get dragged down a bit by the fact that these are more flex office/industrial as opposed to some of the newer retail/industrial flex we are seeing.
Brookfield has no more lease rolls in 2024, and virtually everything rolls from 2025-2027. They are 100% occupied with no space available that I can find, which is a good sign that they shouldn’t have a problem with re-leasing. Their occupancy levels from 2019 through 2023 were 93.8%, 93.8%, 100%, 100%, 100% with effective rent only increasing during this period YOY. This leads me to believe that rents are under market and that these lease renewals give them an opportunity to mark everything to market.
Greenbrier has almost all of their leases roll from 2024-2026, but they are only advertising 4,100 sf right now which is a good sign that they aren’t having problems with re-leasing. This one’s occupancy dipped to about 80% in 2022 but is now at 95% at the end of 2023. If leases are under market, which is likely based on the small amount they are advertising and the fact that 42% of leases roll in 2025, they have a great opportunity to bring these up to market.
Parkway had 10 leases equaling 19,790 sf expiring in 2024 and has 4 leases for 22,146 sf expiring in 2025. It appears they aren’t having issues re-leasing as only 3,700 sf is available for lease currently based on what I can find. This property appears to be their worst based on appearance and the fact that it is the only one that is a gross lease (net electric and janitorial only) whereas all the others are NNN. With the exception of 2019, occupancy has been 100% from 2020-2023, which indicates rents are likely on the low end though. Rents seemed to have troughed from their peak over the past 5 years in 2021 as they are now above 2023 levels, which is a good sign. But I still think this is at the bottom of their 3 flex properties in terms of quality.
If you look at their contractual rents due for the next several years, it might scare you a bit as it did me. But upon further digging I actually feel like a lot of these lease rolls are an opportunity to push rents, although none of that is factored into my numbers above.
I should also note that as of 12/31/23 (again, they don’t go over occupancy in their Q’s) the occupancy rates for each property was:
Parkway – 100%
Brookfield – 100%
Greenbrier – 95.1%
Franklin – 98.6%
Ashley – 98%
Lancer – 100%
Salisbury – 85.3%
And all of them either have occupancy rates that have increased since 2019, or that have troughed and come back after Covid. This also applies to their average effective rents charged since 2019. Salisbury is the only exception for occupancy, although the occupancy rate is misleading as they should be able to fill that vacancy given the demand, and of the remaining leases there aren’t many rolling over the next couple years.
Overall, they have decent properties and I believe they will be able to push rents on most of them as they roll. Blended, I believe the leases are below market and the fact that they have such high occupancy and very little advertising for tenants online that I can find would imply this. And if they can monetize the undeveloped pad sites, that is icing on the cake.
If we look at this from another standpoint and dig into their ability to generate cash as a business, here is what this looks like on a run-rate basis based on their Q3 financials and assuming the preferreds are gone:
$ 9,347,700 - Top line rental income
$ (2,180,016) - Property expenses
$ 7,167,684 - NOI
$ (1,999,436) - Corporate expenses
$ 5,168,248 - EBITDA
$ (3,228,848) - Annual debt service
$ 1,939,400 - Free cash flow before capex
That is $1.23/share after minority interests. If we use $750k as a normalized amount annually for capex, which I believe should be on the conservative side with a much shrewder and shareholder-aligned CEO (it averaged about $1mm annually from 2021-2023), we end up with $.75/share. Factoring in principal paydown on their mortgages ($.70/share currently), we get $1.46/share after minority interests (70.82% of OP owned).
This doesn’t seem tremendous, but this assumes no property sales and is also based on current leases without any increase in lease rates, which has been happening and appears will continue. It also doesn’t include corporate expenses being reduced.
They also have great debt that is all assumable, with their first loan maturing in mid-2027, and the rest not starting to mature until late 2029:
*The Franklin Square mortgage is i/o until early 1/6/2025 and then is fully-amortized over 30 years at the same interest rate moving forward. I’ve used this fully amortized payment in my numbers. Ashley, Brookfield, and Parkway are all 30-year am schedules as well. The Wells mortgage is cross-collateralized across Salisbury, Lancer, Greenbrier and Citibank and the am-schedule is 25 years. The Parkway mortgage is variable at a rate of 30-day SOFR + 236.44 bps, however it appears they have a cap they purchased that limits their exposure to 5.25% if SOFR is higher than 3%.*
If my pro rata NAV based on 70.82% OP ownership is accurate at $33.03, then this is trading at about 37% of that prior to corporate expense drag, which I don’t know what to use as I’m not sure if normalized corporate expenses will come down further or not. Their legal/accounting line item has steadily decreased quarter over quarter starting in 2024, but G&A has not, and it seems too early to decide based solely on the numbers. G&A is almost entirely made up of Kavanaugh’s $750k salary, so not much wiggle room there unless he cuts this.
If we assume they’ll eventually get this to a normalized $1.4mm from the $2mm it currently is at, and we capitalize this by applying a 6x multiple on it (I am using a lower multiple than I’d normally use because this is an activist situation where the incentive structure for management is now aligned with shareholders, this should be viewed differently than a lot of REITs that have rent-a-manager types of oversight with little ownership) then we end up with a drag of $5.33 on the price after netting out minority OP owners. Even if you use $6-7/share the NAV after corporate drag is around $26-27/share against a current price in the low-$12’s. And a lot of times I’ve found with REITs that I believe are undervalued, this value gap is predicated on management not making any stupid decisions moving forward (which is why I like liquidation scenarios such as CPPTL, NLOP, EQR…where management’s potential for stupidity is eliminated). With this one, I don’t have those same concerns as that was the exact reason Kavanaugh and co. took over this one, and they are now heavily incentivized to unlock the value in this one. This $26-27/share NAV after corporate drag is also based on zero rent growth and/or filling vacancy at Salisbury. If their rental keeps growing as it has been, this would be gravy.
Current management and unlocking value
Assuming run rate figures from Q3 2024, and assuming $750k in annual capex, that leaves $1.46/share in free cash flow before principal payments. The debt is also great with no looming maturities and only about a 50% ratio to their total estimated asset values.
Management is brand-new and while not much is available about Frank Kavanaugh online, I can’t find anything bad and there is no doubt his interests are now very much aligned with shareholders. His website (fortashfordfunds.com) would indicate he has experience here, but I’ll take with a grain of salt since it is his.
While Kavanaugh’s rhetoric implies they’d like to continue to grow the asset base of this REIT, it is possible that there is a full or partial liquidation. I don’t think a full liquidation of assets is likely, but we’ve already seen them sell off a property in Q1 2024 (Hanover Square). We’ve also seen them acquire a property around the same time (Citibank) and this is why I don’t think it is likely to see a full liquidation any time soon or else they likely wouldn’t have made that acquisition.
Hanover Square had debt on it with an interest rate close to 7%, so this likely influenced their decision to sell. None of their current properties have rates even close to this, with their weighted average around 4% and no looming maturities. So, maybe they don’t decide to sell anything and just raise rents to market and grow organically, which should allow them to increase the dividend over time and the price/value gap should narrow, albeit slowly.
To me, that seems unlikely given the nature of Kavanaugh and how he took control of MDRR. Logically, it makes sense to me that Kavanaugh would do everything he could to close the gap between NAV and the current share price much quicker. He’s financially incentivized to do so, and based on his website his focus is on mismanaged assets where he can unlock value in some way through corporate action.
The downside case I see is one where rents slowly drift upwards as new leases are signed, G&A costs remain steady and the yield increases over time, along with their dividend. Price should follow as more people see new management making sensible moves, although this likely happens over time. After a deep dive on their properties, debt, etc it is tough for me to see a likely situation where things could go terribly south. They have low fixed-rate debt with no maturities approaching, diverse multi-tenant properties with rents that appear below market and management that is now greatly aligned with shareholders in terms of incentives. Apart from some black swan event, I think the downside is fairly limited here.
The upside case(s) I see that are more probable to me, is where they aggressively raise rents over the next few years and control expenses well, which are the only value drivers they can directly control. If they can then strategically sell assets and return cash to shareholders, that is a great way to unlock value without having to wait for the market to agree with them. Even if they don’t sell assets, if they can raise rents at a fast pace and trim corporate expenses at the same time, their dividend should increase and this should screen much better.
I don’t want to speculate too much, but it doesn’t seem out of the question for a takeover to occur either. Kavanaugh appears to focus on the real estate space and I would assume he has a decent rolodex. This could lead to a situation where MDRR is purchased by a larger REIT or private buyer.
He could also decide to take the company private by issuing a tender offer. This would immediately reduce the costs of being public and if a price could be offered in the mid to high $20 range that would probably work for both sides.
Bottom line
Overall, I think this situation presents limited downside and a good bit of upside. If you look at the charts below, it shows the price and volume from Nov 2022 – Aug 2023 for their common (top) and preferred (bottom).
1. This is late 2022/early 2023 when Kavanaugh and Finley began building their positions and I’d guess their average cost basis to be somewhere around $12-14.
2. This is around May 2023 when Kavanaugh is added to the board and this is probably when the departing managers and investors start selling their common, and Kavanaugh and co. buy more for an average price around $10.50-12 I would guess.
3. Per Frank Kavanaugh’s letter on 8/23/23 it sounds like management bought $564k of common and preferreds around this time and that seems to match the charts below.
Kavanaugh and Finley appear to own their positions at a cost basis around or maybe slightly above or below the current share price of $12.20. With them owning over 50% through the common and OP units, there’s a large incentive in place to narrow the gap between price and value. Getting in around the same price as them gives me confidence that the downside is limited and that there will likely be a good outcome at some point in the future.
Update 12/19/24
On 12/17 MDRR released an 8-K that announced how they went under contract on 2 properties that are affiliated with Frank Kavanaugh. One is a United Rentals in Huntsville, AL, and the other is a Buffalo Wild Wings in Bowling Green, KY. The United Rentals purchase is for $3.145mm and the BWW is $2.62mm. The prices aren’t terrible and these are great absolute-NNN single-tenant net-leased properties.
The issue was that they are issuing common units in the operating partnership at $12.50/unit (total of 381,200 common units), and 40,000 5% preferred units in the OP valued at $25 ($27.5 liquidation preference).
The preferred units don’t bother me a ton, but the common units issued were incredibly dilutive, based on my math of how many OP units in total there were, etc. I reached out to management for clarity on this on 12/18 and their CFO, Brent Winn Jr., called me shortly after.
He was a super nice guy and was very forthcoming with as much information as he was allowed to share. Long story short --- they are not looking to flip the portfolio to a bigger buyer or take it private. They are looking to grow. And he talked about how it is expensive to be a public company and they want to grow in order to spread their corporate costs out. Makes complete sense.
So, I asked him to provide color on why they would issue OP units at a price well below their NAV and he acknowledged this was the case but that they didn’t have any better options to raise money and fuel growth. That was a terrible answer in my opinion, and I decided to sell my entire position.
If you look above in my writeup, I had figured the REIT owned about 70% of the OP after accounting for selling OP units to raise cash to redeem the preferreds. I actually realized from speaking with their CFO that the REIT owned 74% of the OP, so it turned out to be better than my original estimate…….and then this happened.
Assuming these 2 property purchases go through, which they should since Frank Kavanaugh controls them, the REIT will own 59% of the OP. Which means they gave away 15% of the OP to buy 2 properties that add around 5-6% to their total asset value. It’s even worse than this when considering the preferred shares they issued on top of this though, which I’m not even calculating here. Prior to corporate drag I had estimated about $33/share to be their NAV before this was announced. Now I have it estimated at $30/share assuming all of this unfolds as expected.
They just destroyed about 10% of the NAV with a tiny acquisition of 2 properties. That was an asinine decision in my opinion and I lost all confidence in management. They could have easily used a combination of cash, debt and preferreds to do this and these would be fine purchases. Issuing deeply discounted common units is not a winning formula, but it seems like this is their strategy moving forward.
In speaking with Brent he said they are focused on these single tenant net-lease properties and can offer owners a tax-deferred option when they issue OP units instead of cash. This allows them to be competitive versus groups that can only offer cash.
There are 2 case studies I know of that are similar….PSTL and FCPT. FCPT is a REIT that buys single tenant net leases properties as well, and they raise money by having an ATM program in place in addition to conservative leverage. Not sure if they offer sellers the option to receive comp in the form of stock/op units, but my point is that they are constantly selling shares ATM to raise cash. If you look at their price over the last 10 years it is basically flat, especially when accounting for inflation. They’ve paid some dividends, but nowhere close to what would allow them to keep pace with the market during this period. Admittedly, I haven’t done a deep dive on this one but I heard the CEO on a podcast and the strategy made little sense to me.
PSTL is one I did a deeper dive on as I liked their strategy before figuring out the dilution issue. They only buy post offices that are net-leased to the US Postal Service. Very interesting play, but since ownership in this space is fragmented with lots of older mom/pop owners, they offer OP units as a way for sellers to defer taxes and their intrinsic value per share has remained flat because of this. They pay a decent 7.4% dividend at today’s prices, but again they are flat/down since going public in 2019 and I just don’t see this as winning formula.
Assuming the price remains discounted to NAV, this strategy will be very dilutive and value-destructive for MDRR shareholders if they continue it, which is their plan. This makes no sense to me.
Update 6/25/25
Turns out that Medalist is now following the Postal Realty model with little deviation. Their website looks like it's trying really hard to appeal to the bingo-and-early-bird-special crowd, somewhere between a retirement home and a financial planner.
Their strategy is now to target aging property owners looking to cash in their chips without incurring a large capital gain. It isn’t uncommon for these owners to have properties that are fully depreciated, which means a big tax bill is due when the property is sold.
By doing a 721 exchange, the seller is able to trade their property for OP units (essentially the same thing as shares) in the REIT. This is a great proposition for the seller, but is a horrible proposition for Medalist, given the current discount this is trading for.
Again, in the form of dilution through OP units being issued, Medalist is giving away a piece of every property they already own. Since their shares are deeply discounted, this is incredibly value-destructive. When I originally analyzed this, it appeared this was trading at about 1/3 of NAV. This effectively means that when they issued OP units to buy the properties they purchased recently, they “fire sold” a piece of their existing assets for 33 cents on the dollar to buy a new asset at 100 cents on the dollar.
My view is that they should only issue shares when the opposite scenario occurs and they have the ability to issue OP units that are trading at a premium to acquire a property that is slightly discounted. This strategy will likely accrete value over time, the one described previously will destroy it.
As I write this, Medalist is down almost 20% in the previous 6 months since they publicly began touting this strategy as the way forward. I don’t see any possible outcome other than value destruction if they continue issuing deeply discounted OP units.
I was very optimistic about this, seeing significant potential for value creation. Unfortunately, it seems Frank Kavanaugh's interests don't align with those of the outside shareholders. He has plans to grow this at the expense of current shareholders, who are being diluted in a serious way with every OP unit issued.
It is also a questionable practice for him to sell properties he owns (through affiliated entities) at full market price where he is issued OP units as consideration. This is the definition of “having your cake and eating it too.” He is getting full price for these properties, and is getting very undervalued securities as consideration. Meanwhile, the existing shareholders are the ones left footing the bill here in the form of serious dilution.
On their website, it says, “The smartest owners never sell.” Meanwhile, they are “selling” a piece of every property they own at an extreme discount when they complete these questionable acquisitions. The irony!
Important: This information is for general purposes only and is not financial advice. Always seek professional guidance for investment decisions.