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%.

20-year annualized returns by asset class (1998 – 2017) by J.P. Morgan

For investors looking to add REIT exposure to their portfolio, we’ve identified a unique under-the-radar opportunity trading on the NASDAQ. This lack of awareness creates an extremely compelling opportunity for investors to accumulate shares before it is discovered by a wider audience.

Medalist Diversified REIT, Inc. (NASDAQ: MDRR) began trading with an IPO in November 2018.

Volume in the stock was extremely light in its first months until the company completed a follow-on offering in May 2019. Since that time, while still light by most comparisons, volume has begun to pick up, and it now trades an average of just under 10,000 shares per day.

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.

Marshalls one of MDRR 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.

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.

Thomas and William at the nasdaq

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.

map of mdrr southeastern target areas

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.

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 Goldsboro, 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.

Franklin Square Shopping Center

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 2017. The company completed renovations on the property in July 2019 and expects to see occupancy rates increase going forward.

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.

Hampton hotel building

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.

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.

Moreover, the cash available for distribution/dividends should also be fairly predictable.

Medalist has paid out three consecutive quarterly dividends of $0.175 each since its IPO in November 2018.

While there is no guarantee Medalist will continue to pay dividends at this rate moving forward, with the latest three acquisitions, the company is getting closer to achieving dividend coverage.

According to an Aegis Capital research report from earlier this year, 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.

As of early in the fourth quarter, the shares were trading for just over $4 per share.

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.

This projection also factors in a more conservative dividend forecast of just $0.15 per quarter, despite Medalist announcing and paying out $0.175 in its most recent quarterly dividend distribution.

None of these estimates factor in the three new properties Medalist acquired over the last 45 days.