Medalist Diversified REIT (MDRR) Risk Analysis

The Maryland General Corporation Law (the "MGCL") provides protection for Maryland corporations against unsolicited takeovers by limiting, among other things, the duties of the directors in unsolicited takeover situations. The duties of directors of Maryland corporations do not require them to: - accept, recommend or respond to any proposal by a person seeking to acquire control of the corporation;- authorize the corporation to redeem any rights under, or modify or render inapplicable, any stockholder rights plan;- make a determination under the Maryland Business Combination Act; or - act or fail to act solely because of the effect the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under the MGCL, the act of a director of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. The MGCL also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under the MGCL. The MGCL also provides that unless exempted, certain Maryland corporations may not engage in business combinations, including mergers, dispositions of 10% or more of its assets, certain issuances of shares of stock and other specified transactions, with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10% or more of the voting power of the outstanding stock of the Maryland corporation, unless the stock had been obtained in a transaction approved by its board of directors. These and other provisions of the MGCL could have the effect of delaying, deferring or preventing a proxy contest, tender offer, merger or other change in control, which may have a material adverse effect on our business, financial condition and results of operations.

As of the date of this Annual Report on Form 10-K, we are the sole general partner of our Operating Partnership and own, directly or through subsidiaries, approximately 63.8% of the outstanding OP Units. We may, in connection with our acquisition of properties or otherwise, cause our operating partnership to issue additional OP Units to third parties. Such issuances would reduce our ownership percentage in our Operating Partnership and affect the amount of distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our stockholders. Because our stockholders will not directly own any interest in our Operating Partnership, our stockholders will not have any voting rights with respect to any such issuances or other partnership level activities of our Operating Partnership.

Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to our company under Maryland law in connection with their management of our company. At the same time, we, as the general partner of Operating Partnership, have fiduciary duties and obligations to our operating partnership and its limited partners under Delaware law and the partnership agreement of our Operating Partnership in connection with the management of our Operating Partnership. Our fiduciary duties and obligations as the general partner of our Operating Partnership may come into conflict with the duties of our directors and officers to our company. The partnership agreement provides that, in the event of a conflict between the interests of our Operating Partnership or any partner, on the one hand, and the separate interests of our company or our stockholders, on the other hand, we, in our capacity as the general partner of our Operating Partnership, are under no obligation not to give priority to the separate interests of our company or our stockholders, and that any action or failure to act on our part or on the part of our directors that gives priority to the separate interests of our company or our stockholders that does not result in a violation of the contract rights of the limited partners of our Operating Partnership under its partnership agreement does not violate the duty of loyalty that we, in our capacity as the general partner of our Operating Partnership, owe to the Operating Partnership and its partners. Additionally, the partnership agreement provides that we will not be liable to our Operating Partnership or any partner for monetary damages for losses sustained, liabilities incurred or benefits not derived by our Operating Partnership or any limited partner, if we acted in good faith.

We record an asset for the future tax benefits from unused U.S. federal and state net operating losses ("NOLs") and net capital losses ("NCLs"). Federal and state taxing bodies often place limitations on NOL and NCL carryforward benefits. As a result, we may not be able to utilize our NOLs or NCLs. In general, under Sections 382 and 383 of the Code, a corporation that undergoes an ownership change is subject to limitations on its ability to utilize its pre-change NOLs and NCLs to offset future taxable income and net capital gain income. An "ownership change" occurs if 5% shareholders increase their collective ownership of the aggregate amount of the outstanding shares of our company by more than 50 percentage points looking back over the relevant testing period. The determination of whether an ownership change has occurred or will occur is complicated and depends on changes in percentage stock ownership among shareholders. Based on our knowledge of our stock ownership, we do not believe that an ownership change has occurred since our losses were generated. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. As a result, no assurance can be provided as to whether an ownership change has occurred or will occur in the future. In addition, there is also a risk that a future statutory or regulatory changes could limit our ability to offset future income tax liabilities with NOLs or NCLs. For these reasons, we may not be able to utilize a material portion of our NOLs and NCLs, which could potentially result in increased future tax liabilities to us and could adversely affect our results of operations.

During our strategic transition, we may hold significant amounts of cash, cash equivalents, or short-term investments while evaluating strategic opportunities. While this approach is intended to preserve flexibility and maintain balance sheet strength, it may reduce our overall returns if suitable acquisition or investment opportunities are not identified or executed in a timely manner. Holding substantial liquid assets may result in lower yields compared to alternative investments, particularly in periods of declining interest rates. In addition, a conservative capital posture may create opportunity costs if market conditions present attractive investment opportunities that we are unable or unwilling to pursue. If we are unable to deploy capital in a manner that generates returns exceeding our cost of capital and operating expenses, our financial performance and stockholder returns may be adversely affected.

Our new strategy includes holding investments in marketable securities. These investments could consist of U.S. treasuries and other equity and debt instruments. We currently do not use derivative financial instruments to adjust our investment portfolio risk or income profile. These investments, as well as any cash deposited in bank accounts, are subject to general credit, liquidity, market and interest rate risks, which may be exacerbated by unusual events, such as the COVID-19 pandemic and the U.S. debt ceiling crisis, which affected various sectors of the financial markets and led to global credit and liquidity issues. If the global credit market experiences volatility or deteriorates, our investment portfolio may be impacted and some or all of our investments may experience other-than-temporary impairment, which could adversely impact our operating results and position.

As part of our strategic repositioning, we may allocate a portion of our capital to U.S. Treasury securities, short-duration fixed-income instruments, and other investment-grade securities in order to preserve liquidity and generate income. These investments are subject to market risks, including interest rate risk, reinvestment risk, and market value fluctuations. Although short-duration securities are generally less sensitive to interest rate changes than longer-term instruments, increases in interest rates may reduce the market value of our fixed-income holdings. Conversely, if interest rates decline, the income generated from maturing securities may be reinvested at lower yields, which could reduce future interest income. In addition, credit spread movements and changes in overall market conditions may affect the market value and liquidity of investment-grade securities. Fluctuations in the fair value of our investment portfolio could impact our reported financial results, particularly if such investments are classified as available-for-sale or otherwise marked to market. While we intend to manage our investment portfolio conservatively, there can be no assurance that our treasury strategy will achieve its intended objectives or protect us from market volatility.

We may later reacquire DST Properties through our Operating Partnership's exercise of a contractual right to acquire a DST Property from the DST at its fair market value (the "FMV Option"). In such cases, the investors who elect to receive units in our Operating Partnership (such units, the "OP Units") pursuant to the FMV Option and become limited partners inour Operating Partnership will generally still be tied to the applicable DST Property in terms of basis and built-in-gain. As a result, if a DST Property is subsequently sold, unless we effectuate a like-kind exchange under Section 1031 of the Code, then tax will be triggered on the investors' built-in-gain. Any replacement property acquired in connection with a 1031 exchange will similarly be tied to such investors with similar considerations if such replacement property ever is sold. We also may enter into tax protection agreements with investors who elect to receive OP Units in connection with the exercise of a FMV Option pursuant to which we will agree to indemnify such investors from their tax liabilities generated from a taxable disposition of a DST Property during a protected period of time.  As a result of these factors, placing real properties into the DST Program may limit our ability to access liquidity from such real properties or replacement properties through sale without triggering taxes due to the built-in-gain tied to investors in the DST Program. Such reduced liquidity could impair our ability to utilize cash proceeds from sales for other purposes such as paying down debt, paying distributions, funding repurchases or making additional investments.

As a result of the use of leverage, a decrease in revenues of a leveraged real estate investment may materially and adversely affect that real estate investment's cash flow and, in turn, our ability to make distributions. No assurance can be given that future cash flow of a particular real estate investment will be sufficient to make the debt service payments on any borrowed funds for that real estate investment and also cover operating expenses. If the real estate investment's revenues are insufficient to pay debt service and operating expenses, we would be required to use net income from other real estate investments, working capital or reserves, or seek additional funds. There can be no assurance that additional funds will be available, if needed, or, if such funds are available, that they will be available on terms acceptable to us.

Our property-level mortgage loans may contain provisions requiring our Company to maintain minimum financial thresholds, and failure to satisfy these requirements may constitute a "Trigger Event" under the applicable loan documents. Upon the occurrence of a Trigger Event, the lender may require the establishment of a cash management account into which all rents and other property revenues are deposited and subject to lender control until the Trigger Event is cured, which could restrict our access to cash flow from the property, reduce our operating flexibility, and adversely affect our liquidity. If the underlying condition is not timely remedied, the lender may exercise additional rights and remedies, including the potential declaration of an event of default, which could result in foreclosure or other adverse consequences that could materially affect our financial condition and results of operations.

Our transition from an equity REIT to a DST Program and capital allocation–focused public company represents a significant shift in our business model and investment profile. Investors may have difficulty evaluating our company during this transition period, particularly as we monetize legacy real estate assets, deploy capital into treasury and other short-duration investments, develop fee-based businesses such as our DST platform, and evaluate potential strategic transactions. Our financial results during this period may be less predictable and may not be comparable to our historical operating results as a REIT. In addition, certain investors that focus on REITs or income-oriented investments may choose to reduce or eliminate their holdings following our revocation of REIT status. Changes in our stockholder base, uncertainty regarding the timing and execution of our strategic initiatives, or differing views regarding our long-term capital allocation strategy could result in increased volatility in the trading price of our common stock. If the market does not perceive our strategic transition as value-enhancing, our stock price and access to capital could be adversely affected.

The success of our acquisition strategy that contemplates the potential acquisition of operating businesses or other assets depends on our ability to identify suitable targets, negotiate favorable terms, complete transactions efficiently, and integrate acquired operations effectively. We may be unable to identify attractive acquisition opportunities, particularly in competitive markets. If we do pursue acquisitions, we may face risks of overpaying for assets, misjudging growth prospects, underestimating liabilities, or failing to realize anticipated synergies or returns. Acquisitions may also require the issuance of equity or the use of cash resources, which could dilute existing stockholders or reduce our liquidity. In addition, we may seek to enter industries or business lines outside of our historical real estate operating experience. Expansion into new sectors may expose us to unfamiliar regulatory environments, operational risks, competitive dynamics, and market cycles. We may lack the expertise necessary to manage such businesses effectively, which could result in underperformance or losses. Integration of acquired businesses may require substantial management attention and may involve the consolidation of systems, controls, personnel, and corporate cultures. If we are unable to successfully integrate acquired operations or if anticipated benefits do not materialize, our business, financial condition, and results of operations could be adversely affected.

We intend to remain a publicly traded company following our strategic transition, which requires us to continue to incur substantial general and administrative expenses, including costs associated with SEC reporting, internal controls, audit and legal fees, NASDAQ listing requirements, director and officer insurance, and other governance-related expenses. As we monetize real estate assets and reposition our business, our recurring rental revenues may decline before new income streams from treasury investments, fee-based businesses, or strategic transactions are fully developed. During this transition period, our fixed public company costs may represent a higher percentage of revenue, which could result in operating losses or reduced profitability. If we are unable to align our cost structure with our evolving revenue base, our financial condition and results of operations could be adversely affected.