Attached files
| file | filename |
|---|---|
| EX-31.2 - CFO EXHIBIT 31.2 - MacKenzie Realty Capital, Inc. | exhibit31cfo.htm |
| EX-32.2 - CFO EXHIBIT 32.2 - MacKenzie Realty Capital, Inc. | exhibit32cfo.htm |
| EX-32.1 - CEO EXHIBIT 32.1 - MacKenzie Realty Capital, Inc. | exhibit32ceo.htm |
| EX-31.1 - CEO EXHIBIT 31.1 - MacKenzie Realty Capital, Inc. | exhibit31ceo.htm |
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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(Mark one)
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☑
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2018
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☐
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________
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Commission file number 000-55006
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MacKenzie Realty Capital, Inc.
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(Exact name of registrant as specified in its charter)
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Maryland
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45-4355424
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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89 Davis Road, Suite 100, Orinda, CA 94563
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(Address of principal executive offices)
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(925) 631-9100
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(Registrant's telephone number, including area code)
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________________________________________________________________
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes ☐ No ☐
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☐ Emerging growth company ☐
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
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The number of the shares of issuer's Common Stock outstanding as of November 13, 2018 was 9,716,178.66.
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Page
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Consolidated Financial Statements (unaudited)
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Item 2.
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Item 3.
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Item 4.
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PART II.
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OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
MacKenzie Realty Capital, Inc.
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September 30, 2018
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June 30, 2018
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Assets
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(Unaudited) | |||||||
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Investments, at fair value
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Non-controlled/non-affiliated investments (cost of $63,606,316 and $64,558,777, respectively)
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$
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68,937,834
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$
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74,536,671
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Non-controlled/affiliated investment (cost of $6,287 and $6,287, respectively)
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6,613
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6,613
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Controlled investments (cost of $49,901 and $49,901, respectively)
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41,945
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41,222
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Cash and cash equivalents
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26,749,568
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8,442,249
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Accounts receivable
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657,326
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5,878,293
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Other assets
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644,738
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374,634
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Deferred offering costs, net
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336,701
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286,614
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Total assets
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$
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97,374,725
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$
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89,566,296
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Liabilities
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Accounts payable and accrued liabilities
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$
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85,802
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$
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38,170
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Income tax payable
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10,930
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37,153
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Dividend payable
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1,571,551
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1,438,808
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Capital pending acceptance
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835,135
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646,300
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Due to related entities
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2,252,878
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1,807,028
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Deferred tax liability, net
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3,518
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3,518
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Total liabilities
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4,759,814
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3,970,977
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Net assets
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Common stock, $0.0001 par value, 80,000,000 shares authorized; 9,243,584.36 and 8,496,141.57 shares issued and outstanding, respectively
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924
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850
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Capital in excess of par value
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83,932,726
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77,205,361
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Accumulated undistributed net investment income
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1,291,267
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(1,580,433
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)
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Accumulated undistributed net realized gain
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2,066,109
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-
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Accumulated undistributed net unrealized gain
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5,323,885
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9,969,541
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Total net assets
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92,614,911
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85,595,319
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Total liabilities and net assets
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$
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97,374,725
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$
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89,566,296
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Net asset value per share
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$
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10.02
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$
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10.07
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The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
1
MacKenzie Realty Capital, Inc.
September 30, 2018
(Unaudited)
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Name
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Asset Type
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Shares/Units
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Cost Basis
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Total
Fair Value |
% of
Net Assets |
||||||||||||||||
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American Finance Trust Inc., Class A
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(3
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)
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Publicly Traded Company
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10,661.86
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$
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169,494
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$
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162,701
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0.18
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||||||||||||
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Apartment Investment and Management Company
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(3
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)
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Publicly Traded Company
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30,000.00
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1,325,822
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1,323,900
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1.43
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||||||||||||||
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Ashford Hospitality Trust, Inc.
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(3
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)
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Publicly Traded Company
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175,000.00
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1,406,834
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1,118,250
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1.21
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||||||||||||||
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Bluerock Residential Growth REIT, Inc.
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(3
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Publicly Traded Company
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145,000.00
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1,383,080
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1,421,000
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1.53
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||||||||||||||
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Braemar Hotels & Resorts Inc.
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(3
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Publicly Traded Company
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80,000.00
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913,670
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941,600
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1.02
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CBL & Associates Properties, Inc.
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(3
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Publicly Traded Company
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90,000.00
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499,361
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359,100
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0.39
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||||||||||||||
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City Office REIT, Inc.
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(3
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Publicly Traded Company
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64,300.00
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786,127
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811,466
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0.88
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||||||||||||||
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Independence Realty Trust, Inc.
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(3
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)
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Publicly Traded Company
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75,000.00
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775,750
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789,750
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0.85
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||||||||||||||
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Omega Healthcare Investors, Inc.
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(3
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Publicly Traded Company
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52,000.00
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1,632,422
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1,704,040
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1.84
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RLJ Lodging Trust
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(3
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)
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Publicly Traded Company
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42,000.00
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914,814
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925,260
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1.00
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||||||||||||||
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Sabra Health Care REIT, Inc.
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(3
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)
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Publicly Traded Company
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75,000.00
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1,669,232
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1,734,000
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1.87
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||||||||||||||
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VEREIT Inc.
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(3
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Publicly Traded Company
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225,000.00
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1,695,306
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1,633,500
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1.76
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Total Publicly Traded Company
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13,171,912
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12,924,567
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13.96
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American Finance Trust Inc., Class B1
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(4
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Non Traded Company
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14,792.94
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186,008
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221,154
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0.24
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American Finance Trust Inc., Class B2
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(4
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Non Traded Company
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14,792.94
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176,621
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210,060
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0.23
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American Realty Capital Healthcare Trust III, Inc.
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(4)(
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5)
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Non Traded Company
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25,266.41
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40,120
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49,522
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0.05
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||||||||||||||
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American Realty Capital New York City REIT, Inc.
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(4)(
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5)
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Non Traded Company
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194,578.12
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2,476,389
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2,531,461
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2.73
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||||||||||||||
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Benefit Street Partners Realty Trust, Inc.
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(4
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)
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Non Traded Company
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65,833.25
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840,754
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887,432
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0.96
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||||||||||||||
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BRE Select Hotels Corp. - Preferred A
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(4
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)
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Non Traded Company
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508,031.00
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887,011
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883,974
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0.95
|
||||||||||||||
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Carter Validus Mission Critical REIT
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(4
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)
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Non Traded Company
|
51,372.87
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202,001
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225,527
|
0.24
|
||||||||||||||
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Cole Credit Property Trust IV, Inc.
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(4
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)
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Non Traded Company
|
107,330.31
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658,771
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851,129
|
0.92
|
||||||||||||||
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Corporate Property Associates 17 Global Inc.
|
(4
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)
|
Non Traded Company
|
116,154.26
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957,111
|
1,161,543
|
1.25
|
||||||||||||||
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Corporate Property Associates 18 Global A Inc.
|
(4
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)
|
Non Traded Company
|
4,695.14
|
39,627
|
37,749
|
0.04
|
||||||||||||||
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First Capital Real Estate Trust, Inc.
|
(4)(
|
5)
|
Non Traded Company
|
3,792.51
|
15,161
|
21,276
|
0.02
|
||||||||||||||
|
FSP 1441 Main Street
|
(4)(
|
5)
|
Non Traded Company
|
15.73
|
8,559
|
29,568
|
0.03
|
||||||||||||||
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FSP 303 East Wacker Drive Corp. Liquidating Trust
|
(4
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)
|
Non Traded Company
|
3.00
|
30
|
30
|
-
|
||||||||||||||
|
FSP Energy Tower
|
(4)(
|
5)
|
Non Traded Company
|
7.25
|
303,500
|
320,262
|
0.35
|
||||||||||||||
|
FSP Grand Boulevard
|
(4)(
|
5)
|
Non Traded Company
|
7.50
|
42,929
|
15,034
|
0.02
|
||||||||||||||
|
FSP Satellite Place
|
(4)(
|
5)
|
Non Traded Company
|
13.78
|
395,313
|
515,903
|
0.56
|
||||||||||||||
|
Griffin-American Healthcare REIT III, Inc.
|
(4
|
)
|
Non Traded Company
|
686.48
|
4,494
|
5,396
|
0.01
|
||||||||||||||
|
Griffin Capital Essential Asset REIT, Inc.
|
(4
|
)
|
Non Traded Company
|
28,641.60
|
196,636
|
250,614
|
0.27
|
||||||||||||||
|
GTJ REIT, Inc.
|
(4
|
)
|
Non Traded Company
|
1,000.00
|
11,620
|
11,610
|
0.01
|
||||||||||||||
|
Healthcare Trust, Inc.
|
(4
|
)
|
Non Traded Company
|
257,860.50
|
2,950,007
|
3,553,318
|
3.84
|
||||||||||||||
|
Highlands REIT Inc.
|
(4)(
|
5)
|
Non Traded Company
|
14,738,697.90
|
2,908,658
|
2,505,579
|
2.71
|
||||||||||||||
|
InvenTrust Properties Corp.
|
(4
|
)
|
Non Traded Company
|
12,117.65
|
33,719
|
21,206
|
0.02
|
||||||||||||||
|
KBS Legacy Partners Apartment REIT, Inc.
|
(4)(
|
5)
|
Non Traded Company
|
79,630.53
|
15,926
|
15,926
|
0.02
|
||||||||||||||
|
KBS Real Estate Investment Trust II, Inc.
|
(4
|
)
|
Non Traded Company
|
1,611,656.52
|
5,886,576
|
6,559,442
|
7.08
|
||||||||||||||
|
KBS Real Estate Investment Trust III, Inc.
|
(4
|
)
|
Non Traded Company
|
46,397.55
|
369,236
|
392,059
|
0.42
|
||||||||||||||
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NorthStar Healthcare Income, Inc.
|
(4
|
)
|
Non Traded Company
|
800.00
|
5,608
|
5,112
|
0.01
|
||||||||||||||
|
Phillips Edison & Company, Inc
|
(4
|
)
|
Non Traded Company
|
152,725.85
|
1,105,937
|
1,427,987
|
1.54
|
||||||||||||||
|
Phillips Edison Grocery Center REIT II, Inc.
|
(4
|
)
|
Non Traded Company
|
34,851.10
|
521,858
|
650,670
|
0.70
|
||||||||||||||
|
Steadfast Apartment REIT
|
(4
|
)
|
Non Traded Company
|
570.25
|
5,552
|
7,008
|
0.01
|
||||||||||||||
|
Steadfast Income REIT
|
(4
|
)
|
Non Traded Company
|
49,904.48
|
377,718
|
407,720
|
0.44
|
||||||||||||||
|
Strategic Realty Trust, Inc.
|
(4
|
)
|
Non Traded Company
|
148,104.91
|
581,147
|
676,839
|
0.73
|
||||||||||||||
|
Summit Healthcare REIT, Inc.
|
(4)(
|
5)
|
Non Traded Company
|
1,360,694.88
|
1,846,468
|
2,285,967
|
2.47
|
||||||||||||||
|
The Parking REIT Inc.
|
(4)(
|
5)
|
Non Traded Company
|
17,989.90
|
230,880
|
204,545
|
0.22
|
||||||||||||||
|
Total Non Traded Company (1)
|
|
24,281,945
|
26,942,622
|
29.09
|
|||||||||||||||||
|
|
|
||||||||||||||||||||
|
3100 Airport Way South LP
|
(4
|
)
|
LP Interest
|
1.00
|
355,000
|
380,226
|
0.40
|
||||||||||||||
|
5210 Fountaingate
|
(4
|
)
|
LP Interest
|
9.89
|
500,000
|
570,206
|
0.62
|
||||||||||||||
|
Addison NC, LLC
|
(4)(
|
5)
|
LP Interest
|
200,000.00
|
2,000,000
|
3,150,000
|
3.40
|
||||||||||||||
|
Arrowpoint Burlington LLC
|
(4
|
)
|
LP Interest
|
7.50
|
750,000
|
858,024
|
0.93
|
||||||||||||||
|
BR Cabrillo LLC
|
(4)(
|
5)
|
LP Interest
|
346,723.32
|
104,942
|
83,214
|
0.09
|
||||||||||||||
|
BR Jefferson Place Investment Co, LLC
|
(4
|
)
|
LP Interest
|
2,766,697.28
|
2,766,697
|
2,766,697
|
2.99
|
||||||||||||||
|
Britannia Preferred Members, LLC -Class 1
|
(4)(
|
5)
|
LP Interest
|
103.88
|
2,597,000
|
2,597,000
|
2.80
|
||||||||||||||
|
Britannia Preferred Members, LLC -Class 2
|
(4)(
|
5)
|
LP Interest
|
150,000.00
|
1,500,000
|
2,524,500
|
2.73
|
||||||||||||||
|
Capitol Hill Partners, LLC
|
(4
|
)
|
LP Interest
|
190,000.00
|
1,900,000
|
1,936,100
|
2.09
|
||||||||||||||
|
CRP I Roll Up, LLC
|
(4
|
)
|
LP Interest
|
4,500,000.00
|
4,500,000
|
4,770,000
|
5.15
|
||||||||||||||
|
CRP III Roll Up, LLC
|
(4
|
)
|
LP Interest
|
6,000,000.00
|
6,000,000
|
6,240,000
|
6.74
|
||||||||||||||
|
MPF Pacific Gateway - Class B
|
(2)(
|
4)(5)
|
LP Interest
|
23.20
|
6,287
|
6,613
|
0.01
|
||||||||||||||
|
Redwood Mortgage Investors VIII
|
(4
|
)
|
LP Interest
|
56,300.04
|
29,700
|
37,158
|
0.04
|
||||||||||||||
|
Satellite Investment Holdings, LLC - Class A
|
(4
|
)
|
LP Interest
|
22.00
|
2,200,000
|
2,200,000
|
2.38
|
||||||||||||||
|
Secured Income, LP
|
(4)(
|
5)
|
LP Interest
|
64,670.00
|
316,890
|
325,290
|
0.35
|
||||||||||||||
|
The Weatherly Building, LLC
|
(4)(
|
5)
|
LP Interest
|
17.50
|
118,721
|
118,721
|
0.13
|
||||||||||||||
|
The Weatherly, LTD
|
(4)(
|
5)
|
LP Interest
|
60.00
|
184,761
|
184,761
|
0.20
|
||||||||||||||
|
Uniprop Manufactured Housing Income Fund II, LP
|
(4
|
)
|
LP Interest
|
155,070.00
|
328,748
|
328,748
|
0.35
|
||||||||||||||
|
Total LP Interest
|
|
26,158,746
|
29,077,258
|
31.40
|
|||||||||||||||||
|
|
|
||||||||||||||||||||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
(2)(
|
4)(5)
|
Investment Trust
|
72,320.00
|
49,901
|
41,945
|
0.05
|
||||||||||||||
|
Total Investment Trust
|
|
49,901
|
41,945
|
0.05
|
|||||||||||||||||
|
|
|
||||||||||||||||||||
|
Total Investments
|
|
$
|
63,662,504
|
$
|
68,986,392
|
74.50
|
|||||||||||||||
|
(1) Investments primarily in non-traded public REITs or their successors.
|
|
(2) Investment in affiliated companies. See additional disclosures in Note 5.
|
|
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of September 30, 2018, the total percentage of non-qualifying assets is 13.27%, and, as a business development company, non-qualifying assets may not exceed 30% of our total assets.
|
|
(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of September 30, 2018, 57.57% of the Company's total assets are in illiquid securities.
|
|
(5) Investments in non-income producing securities. As of September 30, 2018, 18.00% of the Company's total assets are in non-income producing securities.
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
2
MacKenzie Realty Capital, Inc.
June 30, 2018
|
(1) Investments primarily in non-traded public REITs or their successors.
|
|
(2) Investments in affiliated companies. See additional disclosures in note 5.
|
|
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of June 30, 2018, the total percentage of non-qualifying assets is 7.44%, and as a business development company non-qualifying assets may not exceed 30% of our total assets.
|
|
(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of June 30, 2018, 75.84 % of the Company's total assets are in illiquid securities.
|
|
(5) Investments in non-income producing securities. As of June 30, 2018, 21.96% of the Company's total assets are in non-income producing securities.
|
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
3
MacKenzie Realty Capital, Inc.
(Unaudited)
|
|
||||||||
|
|
Three Months Ended
September 30, |
|||||||
|
|
2018
|
2017
|
||||||
|
Investment income
|
||||||||
|
Non-controlled/non-affiliated investments:
|
||||||||
|
Dividend and operational/sales distributions
|
$
|
5,437,141
|
$
|
603,019
|
||||
|
Interest and other income
|
143,878
|
28,853
|
||||||
|
Non-controlled/affiliated investments:
|
||||||||
|
Dividend and operational/sales distributions
|
-
|
789
|
||||||
|
Total investment income
|
5,581,019
|
632,661
|
||||||
|
|
||||||||
|
Operating expenses
|
||||||||
|
Base management fee (note 5)
|
512,179
|
388,917
|
||||||
|
Portfolio structuring fee (note 5)
|
211,692
|
201,902
|
||||||
|
Subordinated incentive fee (note 5)
|
1,565,729
|
-
|
||||||
|
Administrative cost reimbursements (note 5)
|
156,000
|
108,000
|
||||||
|
Amortization of deferred offering costs
|
105,179
|
122,702
|
||||||
|
Professional fees
|
86,075
|
110,997
|
||||||
|
Directors' fees
|
15,500
|
18,500
|
||||||
|
Printing and mailing
|
30,091
|
14,717
|
||||||
|
Other general and administrative
|
26,874
|
27,062
|
||||||
|
Total operating expenses
|
2,709,319
|
992,797
|
||||||
|
|
||||||||
|
Net investment income before taxes
|
2,871,700
|
(360,136
|
)
|
|||||
|
Income tax provision (benefit) - (note 2)
|
-
|
13,210
|
||||||
|
Net investment income (loss)
|
2,871,700
|
(373,346
|
)
|
|||||
|
|
||||||||
|
Realized and unrealized gain (loss) on investments
|
||||||||
|
Net realized gain (loss)
|
||||||||
|
Non-controlled/non-affiliated investments
|
3,637,660
|
848,583
|
||||||
|
Total net realized gain
|
3,637,660
|
848,583
|
||||||
|
Net unrealized gain (loss)
|
||||||||
|
Non-controlled/non-affiliated investments
|
(4,646,379
|
)
|
649,246
|
|||||
|
Non-controlled/affiliated investments
|
-
|
(696
|
)
|
|||||
|
Controlled investments
|
723
|
313,223
|
||||||
|
Total net unrealized gain (loss)
|
(4,645,656
|
)
|
961,773
|
|||||
|
|
||||||||
|
Total net realized and unrealized gain on investments
|
(1,007,996
|
)
|
1,810,356
|
|||||
|
|
||||||||
|
Net increase in net assets resulting from operations
|
$
|
1,863,704
|
$
|
1,437,010
|
||||
|
|
||||||||
|
Net increase in net assets resulting from operations per share
|
$
|
0.21
|
$
|
0.22
|
||||
|
|
||||||||
|
Weighted average common shares outstanding
|
9,004,403
|
6,577,208
|
||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
4
MacKenzie Realty Capital, Inc.
|
|
Three Months Ended
|
Year Ended June 30,
|
||||||
|
|
September 30, 2018
|
June 30, 2018
|
||||||
|
|
(Unaudited)
|
|||||||
|
Operations
|
||||||||
|
Net investment income
|
$
|
2,871,700
|
$
|
2,227,199
|
||||
|
Net realized gain
|
3,637,660
|
2,691,773
|
||||||
|
Net unrealized gain (loss)
|
(4,645,656
|
)
|
5,846,839
|
|||||
|
Net increase in net assets resulting from operations
|
1,863,704
|
10,765,811
|
||||||
|
|
||||||||
|
Dividends
|
||||||||
|
Dividends to stockholders
|
(1,571,551
|
)
|
(6,759,484
|
)
|
||||
|
|
||||||||
|
Capital share transactions
|
||||||||
|
Issuance of common stock
|
7,039,757
|
23,007,310
|
||||||
|
Issuance of common stock through reinvestment of dividends
|
655,801
|
2,340,042
|
||||||
|
Redemption of common stock
|
(284,131
|
)
|
(1,454,120
|
)
|
||||
|
Selling commissions and fees
|
(683,988
|
)
|
(2,293,765
|
)
|
||||
|
Net increase in net assets resulting from capital share transactions
|
6,727,439
|
21,599,467
|
||||||
|
|
||||||||
|
Total increase in net assets
|
7,019,592
|
25,605,794
|
||||||
|
|
||||||||
|
Net assets at beginning of the period
|
85,595,319
|
59,989,525
|
||||||
|
|
||||||||
|
Net assets at end of the period
|
$
|
92,614,911
|
$
|
85,595,319
|
||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
5
MacKenzie Realty Capital, Inc.
(Unaudited)
|
|
||||||||
|
|
Three Months Ended
September 30, |
|||||||
|
|
2018
|
2017
|
||||||
|
|
||||||||
|
Cash flows from operating activities:
|
||||||||
|
Net increase in net assets resulting from operations
|
$
|
1,863,704
|
$
|
1,437,010
|
||||
|
Adjustments to reconcile net increase in net assets resulting from
|
||||||||
|
operations to net cash from operating activities:
|
||||||||
|
Proceeds from sale of investments, net
|
20,026,294
|
15,372,752
|
||||||
|
Return of capital
|
7,220,964
|
96,702
|
||||||
|
Purchase of investments
|
(22,657,140
|
)
|
(23,867,620
|
)
|
||||
|
Net realized gain on investments
|
(3,637,660
|
)
|
(848,583
|
)
|
||||
|
Net unrealized (gain) loss on investments
|
4,645,656
|
(961,773
|
)
|
|||||
|
Amortization of deferred offering costs
|
105,179
|
122,702
|
||||||
|
Changes in assets and liabilities:
|
||||||||
|
Accounts receivable
|
5,220,967
|
1,849,897
|
||||||
|
Other assets
|
(262,453
|
)
|
(792,622
|
)
|
||||
|
Payment of deferred offering costs
|
(155,266
|
)
|
(27,544
|
)
|
||||
|
Accounts payable and accrued liabilities
|
62,581
|
454,561
|
||||||
|
Income tax payable
|
(26,223
|
)
|
26,209
|
|||||
|
Due to related entities
|
445,850
|
(198,027
|
)
|
|||||
|
Deferred tax liability
|
-
|
(14,599
|
)
|
|||||
|
Net cash from operating activities
|
12,852,453
|
(7,350,935
|
)
|
|||||
|
|
||||||||
|
Cash flows from financing activities:
|
||||||||
|
Proceeds from issuance of common stock
|
7,039,757
|
6,730,057
|
||||||
|
Redemption of common stock
|
(284,131
|
)
|
(357,002
|
)
|
||||
|
Dividends to stockholders
|
(783,007
|
)
|
(599,811
|
)
|
||||
|
Payment of selling commissions and fees
|
(706,588
|
)
|
(592,653
|
)
|
||||
|
Change in capital pending acceptance
|
188,835
|
(994,890
|
)
|
|||||
|
Net cash from financing activities
|
5,454,866
|
4,185,701
|
||||||
|
|
||||||||
|
Net increase (decrease) in cash and cash equivalents
|
18,307,319
|
(3,165,234
|
)
|
|||||
|
|
||||||||
|
Cash and cash equivalents at beginning of the period
|
8,442,249
|
11,849,712
|
||||||
|
|
||||||||
|
Cash and cash equivalents at end of the period
|
$
|
26,749,568
|
$
|
8,684,478
|
||||
|
|
||||||||
|
Non-cash financing activities:
|
||||||||
|
Issuance of common stock through reinvestment of dividends
|
$
|
655,801
|
$
|
434,005
|
||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
6
MacKenzie Realty Capital, Inc.
September 30, 2018
(Unaudited)
NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION
MacKenzie Realty Capital, Inc. (the "Parent Company" together with its subsidiary as discussed below, the "Company") was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. It is a non-diversified, closed-end investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). The Parent Company has elected to be treated as a real estate investment trust ("REIT") as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The Parent Company is authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as Common Stock, with a $0.0001 par value per share; and (ii) 20,000,000 are designated as Preferred Stock, with a $0.0001 par value per share. The Parent Company commenced its operations on February 28, 2013, and its fiscal year-end is June 30.
The Parent Company filed its initial registration statement in June 2012 with the Securities and Exchange Commission ("SEC") to register the initial public offering ("IPO") of 5,000,000 shares of its common stock. The IPO commenced in January 2014 and concluded in October 2016. The Parent Company filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock that was declared effective by the SEC on December 20, 2016, and the offering commenced shortly thereafter.
The Parent Company's wholly owned subsidiary, MRC TRS, Inc., ("TRS") was incorporated under the general corporation laws of the State of California on February 22, 2016, and operates as a taxable REIT subsidiary. TRS started its operation on January 1, 2017, and the financial statements of TRS have been consolidated with the Parent Company beginning with the year ended June 30, 2017. On December 20, 2017, a wholly owned subsidiary of TRS, MacKenzie NY Real Estate 2 Corp., ("MacKenzie NY 2"), was formed for the purpose of making certain limited investments in New York companies. The financial statements of MacKenzie NY 2 have been consolidated with the Company beginning with the quarter ended March 31, 2018.
The Company is externally managed by MacKenzie Capital Management, LP ("MacKenzie") under the administration agreement dated and effective as of February 28, 2013 (the "Administration Agreement"). Pursuant to the Administration Agreement, MacKenzie manages all of the Company's affairs except for providing investment advice. The Company is advised by MCM Advisers, LP (the "Adviser") under the advisory agreement amended and restated effective October 1, 2017, and subsequently amended October 23, 2018 (the "Amended and Restated Investment Advisory Agreement"). The Company pursues a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate. These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships and limited liability companies.
As of September 30, 2018, the Company has raised approximately $89.1 million from the public offerings, including proceeds from the Company's dividend reinvestment plan ("DRIP") of approximately $5.9 million. Of the shares issued by the Company in exchange for the total capital raised as of September 30, 2018, approximately $4.2 million worth of shares have been repurchased under the Company's share repurchase program.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation Policy
The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company's wholly owned consolidated subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Under the 1940 Act rules, regulations pursuant to Article 6 of Regulation S-X and Topic 946 of the Accounting Standards Codification, as amended (the "ASC"), of the Financial Accounting Standards Board ("FASB"), Financial Services-Investment Companies, the Company is precluded from consolidating portfolio company investments, including those in which the Company has a controlling interest, unless the portfolio company is an investment company or a controlled operating company which provides substantially all of its services to benefit the Company, such as an investment adviser or transfer agent. None of the Company's investments qualifies for these exceptions. Therefore, the Company's portfolio company investments, including those in which the Company has a controlling interest, are carried on the consolidated statements of assets and liabilities at fair value with changes to fair value recognized as net unrealized gain (loss) on the consolidated statements of operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeds the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, the Company will include required financial information for such subsidiary in the notes or as an attachment to its consolidated financial statements.
The unaudited consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.
These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2018, included in the Company's annual report on Form 10-K filed with the SEC.
There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2018, other than those expanded upon and described below.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to certain limits. At times the cash balances held in financial institutions by the Company may exceed these insured limits. Cash and cash equivalents are carried at cost which approximates fair value. There were no cash equivalents held as of September 30, 2018, and June 30, 2018.
Accounts Receivable
Accounts receivable represent dividends, distributions and sales proceeds recognized in accordance with our revenue recognition policy but not yet received as of the date of the financial statements. The amounts are generally fully collectible as they are recognized based on completed transactions. The Company monitors and adjusts its receivables and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. The Company has determined that all account receivable balances outstanding as of September 30, 2018, are collectible and do not require recording any uncollectible allowance.
Capital Pending Acceptance
The Company conducts closings for new purchases of the Company's common stock twice per month and admits new stockholders effective beginning the first of each month. Subscriptions are effective only upon the Company's acceptance. Any gross proceeds received from subscriptions which are not accepted as of the period-end are classified as capital pending acceptance in the consolidated statements of assets and liabilities. As of September 30, 2018, and June 30, 2018, capital pending acceptance was $835,135 and $646,300, respectively.
Organization and Deferred Offering Costs
Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the IPO and the initial statement of assets and liabilities. These costs are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statements and pre- and post-effective amendments. Offering costs are capitalized as deferred offering costs as incurred by the Company and subsequently amortized to expense over a twelve-month period. Any deferred offering costs that have not been amortized upon the expiration or earlier termination of an offering will be accelerated and expensed upon such expiration or termination.
The offering costs incurred in connection with the current public offering through September 30, 2018, were $1,130,821. These offering costs are deferred and expensed over a twelve-month period beginning from the date the registration was declared effective by the SEC. The offering costs incurred and paid by the Company in excess of $1,650,000 on this public offering will be reimbursed by the Adviser as discussed in Note 5. Amortization of these deferred costs for the three months ended September 30, 2018 and 2017 were $105,179 and $122,702, respectively. Accumulated amortization of these deferred costs as of September 30, 2018, and June 30, 2018, were $794,120 and $688,941, respectively.
Income Taxes and Deferred Tax Liability
The Parent Company has elected to be treated as a REIT for tax purposes under the Code and as a REIT, it is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meets certain other conditions. To the extent that it satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year.
The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax years ended December 31, 2017. Therefore, it did not incur any tax expense or excise tax during the quarterly periods within the tax year 2017. Similarly, for the tax year 2018, the Parent Company plans to pay the requisite amounts of dividends to stockholders during the year such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during the quarterly periods within the tax year 2018.
The Parent Company is subject to tax on built-in gains it realizes during the first five years following REIT election. Prior to the REIT effective date, the Parent Company recorded an estimated built-in gains liability on the entire unrealized built-in gains as deferred tax liabilities. Therefore, in each subsequent period it only records the difference between the actual and the previously recorded estimated tax liability on the built-in gains it realizes during the period as built-in gain tax adjustment. For the three months ended September 30, 2018, the Parent Company did not realize any built-in gains. Therefore, there was no built-in gain tax adjustment. The built-in gain tax adjustment for the three months ended September 30, 2017, was $13,210 and it was recorded as an income tax provision on the consolidated statements of operations.
The remaining net unrealized built-in gains, which are subject to tax, as of September 30, 2018 and June 30, 2018 were $8,025. The deferred tax liabilities relating to those net unrealized built-in gains as of September 30, 2018 and June 30, 2018, were $3,518.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2018, they did not have any taxable income for tax year 2018. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during the quarterly periods within the tax year 2018.
The Company and its subsidiaries follow ASC 740, Income Taxes, ("ASC 740") to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, the Company considers all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment. In addition, ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. As of September 30, 2018, and June 30, 2018, there were no uncertain tax positions. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014‑09, Revenue from Contracts with Customers (Topic 606). ASU 2014‑09 supersedes the revenue recognition requirements under ASC 605, Revenue Recognition, and most industry‑specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All of the Company's income is not within the scope of ASU 2014-09. As a result, the Company's timing of its revenue recognition remains the same and the adoption of the standard did not have any impact on the Company's consolidated financial statements.
In August 2018, the FASB issued guidance which changes the fair value disclosure requirements. The new guidance includes new, eliminated and modified fair value disclosures. Among other requirements, the guidance requires disclosure of the range and weighted average of the significant unobservable inputs for Level 3 fair value measurements and the way it is calculated. The guidance also eliminated the following disclosures: (1) amount and reason for transfers between Level I and Level II, (2) policy for timing of transfers between levels of the fair value hierarchy and (3) valuation processes for Level 3 fair value measurement. The guidance is effective for all entities for interim and annual periods beginning after December 15, 2019. Early adoption is permitted upon issuance of the guidance. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
NOTE 3 –INVESTMENTS
The following table summarizes the composition of the Company's investments at cost and fair value as of September 30, 2018, and June 30, 2018:
|
|
September 30, 2018
|
June 30, 2018
|
||||||||||||||
|
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
|
Publicly Traded Companies
|
$
|
13,171,912
|
$
|
12,924,567
|
$
|
6,652,816
|
$
|
6,661,083
|
||||||||
|
Non Traded Companies
|
24,281,945
|
26,942,622
|
30,234,571
|
33,097,115
|
||||||||||||
|
LP Interests
|
26,158,746
|
29,077,258
|
26,577,677
|
33,685,086
|
||||||||||||
|
Investment Trusts
|
49,901
|
41,945
|
49,901
|
41,222
|
||||||||||||
|
Note
|
-
|
-
|
1,100,000
|
1,100,000
|
||||||||||||
|
Total
|
$
|
63,662,504
|
$
|
68,986,392
|
$
|
64,614,965
|
$
|
74,584,506
|
||||||||
The following table presents fair value measurements of the Company's investments as of September 30, 2018, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Publicly Traded Companies
|
$
|
12,924,567
|
$
|
12,924,567
|
$
|
-
|
$
|
-
|
||||||||
|
Non Traded Companies
|
26,942,622
|
-
|
431,214
|
26,511,408
|
||||||||||||
|
LP Interests
|
29,077,258
|
-
|
-
|
29,077,258
|
||||||||||||
|
Investment Trusts
|
41,945
|
-
|
-
|
41,945
|
||||||||||||
|
Total
|
$
|
68,986,392
|
$
|
12,924,567
|
$
|
431,214
|
$
|
55,630,611
|
||||||||
The following table presents fair value measurements of the Company's investments as of June 30, 2018, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Publicly Traded Companies
|
$
|
6,661,083
|
$
|
6,661,083
|
$
|
-
|
$
|
-
|
||||||||
|
Non Traded Companies
|
33,097,115
|
-
|
-
|
33,097,115
|
||||||||||||
|
LP Interests
|
33,685,086
|
-
|
-
|
33,685,086
|
||||||||||||
|
Investment Trusts
|
41,222
|
-
|
-
|
41,222
|
||||||||||||
|
Notes
|
1,100,000
|
-
|
-
|
1,100,000
|
||||||||||||
|
Total
|
$
|
74,584,506
|
$
|
6,661,083
|
$
|
-
|
$
|
67,923,423
|
||||||||
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2018:
|
Balance at July 1, 2018
|
$
|
67,923,423
|
||
|
Purchases of investments
|
12,201,495
|
|||
|
Transfers to Level I and II
|
(396,760
|
)
|
||
|
Proceeds from sales, net
|
(15,365,903
|
)
|
||
|
Return of capital
|
(7,220,962
|
)
|
||
|
Net realized gains
|
2,947,946
|
|||
|
Net unrealized gains
|
(4,458,628
|
)
|
||
|
Ending balance at September 30, 2018
|
$
|
55,630,611
|
The transfers of $396,760 from Level III to Level I and II categories during the three months ended September 30, 2018 results from one of the Company's investments converting from a private REIT to publicly traded REIT.
For the three months ended September 30, 2018, changes in unrealized loss included in earnings relating to Level III investments still held at September 30, 2018, were $3,128,451.
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2017:
|
Balance at July 1, 2017
|
$
|
31,023,069
|
||
|
Purchases of investments
|
11,664,924
|
|||
|
Proceeds from sales, net
|
(3,294,495
|
)
|
||
|
Return of capital
|
(96,702
|
)
|
||
|
Net realized gains
|
1,273,402
|
|||
|
Net unrealized gains
|
774,001
|
|||
|
Ending balance at September 30, 2017
|
$
|
41,344,199
|
For the three months ended September 30, 2017, changes in unrealized gains included in earnings relating to Level III investments still held at September 30, 2017 were $1,598,718.
The following table shows quantitative information about significant unobservable inputs related to the Level II and III fair value measurements used at September 30, 2018:
|
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
|||||
|
Level II
|
||||||||||
|
Non Traded Companies
|
$ 431,214
|
Market Activity
|
Publicly traded price of convertable security
|
|||||||
|
$ 431,214
|
||||||||||
|
Level III
|
||||||||||
|
Non Traded Companies
|
$ 24,214,773
|
Market Activity
|
Acquisition Cost
|
|||||||
|
Secondary market industry publication
|
||||||||||
|
Non Traded Companies
|
2,296,635
|
Net Asset Value (1)
|
Capitalization rate
|
5.5% - 8.9%
|
7.9%
|
|||||
|
Liquidity discount
|
5.0% - 65.0%
|
28.4%
|
||||||||
|
Sponsor provided value
|
||||||||||
|
LP Interests
|
5,363,698
|
Market Activity
|
Acquisition Cost
|
|||||||
|
LP Interests
|
15,734,500
|
Discounted Cash Flow
|
Underlying note discount rate
|
15.0% - 20.0%
|
15.9%
|
|||||
|
Discount term (months)
|
22.0 - 27.0
|
26.1
|
||||||||
|
LP Interests
|
7,979,060
|
Net Asset Value (1)
|
Capitalization rate
|
5.4% - 7.5%
|
5.5%
|
|||||
|
Discount rate
|
30.0%
|
|||||||||
|
Discount term (months)
|
10.0
|
|||||||||
|
Liquidity discount
|
5.0% - 50.0%
|
18.9%
|
||||||||
|
Sponsor provided value
|
||||||||||
|
Contracted sale price of underlying property
|
||||||||||
|
Investment Trust
|
41,945
|
Net Asset Value (1)
|
Capitalization rate
|
6.0%
|
||||||
|
Liquidity discount
|
25.0%
|
|||||||||
|
$ 55,630,611
|
||||||||||
Valuation Technique Terms:
|
(1)
|
The net asset value of the issuer's shares was calculated by the Company.
|
The following table shows quantitative information about significant unobservable inputs related to the Level II and Level III fair value measurements used at June 30, 2018:
|
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
|||||
|
Non Traded Companies
|
$ 28,675,305
|
Market Activity
|
Acquisition Cost
|
|||||||
|
Secondary market industry publication
|
||||||||||
|
Contracted sale price of security
|
||||||||||
|
Non Traded Companies
|
4,421,810
|
Net Asset Value (1)
|
Capitalization rate
|
8.0% - 8.9%
|
8.6%
|
|||||
|
Liquidity discount
|
10.0% - 64.0%
|
25.4%
|
||||||||
|
Sponsor provided value
|
||||||||||
|
LP Interests
|
4,703,633
|
Market Activity
|
Acquisition Cost
|
|||||||
|
LP Interests
|
12,973,750
|
Discounted Cash Flow
|
Underlying note discount rate
|
15%
|
||||||
|
Discount term (months)
|
30.0
|
|||||||||
|
LP Interests
|
16,007,703
|
Net Asset Value (1)
|
Capitalization rate
|
5.4% - 8.0%
|
5.6%
|
|||||
|
Discount rate
|
20.0% - 30.0%
|
25.4%
|
||||||||
|
Liquidity discount
|
6.0% - 50.0%
|
11.9%
|
||||||||
|
Discount term (months)
|
4.0 - 13.0
|
8.9
|
||||||||
|
Sponsor provided value
|
||||||||||
|
Contracted sale price of underlying property
|
||||||||||
|
Investment Trust
|
41,222
|
Net Asset Value (1)
|
Capitalization rate
|
6.00%
|
||||||
|
Liquidity discount
|
25.0%
|
|||||||||
|
Note
|
1,100,000
|
Discounted Cash Flow
|
Discount rate
|
24.0%
|
||||||
|
Discount term (months)
|
2.0
|
|||||||||
|
$ 67,923,423
|
||||||||||
Valuation Technique Terms:
|
(1)
|
The net asset value of the issuer's shares was calculated by the Company.
|
NOTE 4—MARGIN LOANS
The Company has a brokerage account through which it buys and sells publicly traded securities. The provisions of the account allow the Company to borrow on certain securities held in the account. Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account. As of September 30, 2018, the Company had $8,225,945 of margin credit available for cash withdrawal or the ability to purchase up to $16,451,890 in additional shares. As of June 30, 2018, the Company had $10,946,343 of margin credit available for cash withdrawal or the ability to purchase up to $22,198,676 in additional shares. As of September 30, 2018, and June 30, 2018, the Company had not drawn any amount or purchased any shares under this short-term credit line.
NOTE 5 –RELATED PARTY TRANSACTIONS
Amended and Restated Investment Advisory Agreement:
Under the Amended and Restated Investment Advisory Agreement, the Company will pay the Adviser a fee for its services consisting of three components — a portfolio structuring fee, a base management fee, and a subordinated incentive fee.
The portfolio structuring fee is for the Adviser's initial work performed in identifying, evaluating and structuring the acquisition of assets. The fee equals 3.0% of the gross invested capital ("Gross Invested Capital"), which equals the number of shares issued, multiplied by the offering price of the shares sold ($10.00, regardless of whether or not shares were issued with volume or commission discounts), plus any borrowed funds. These services are performed on an ongoing basis in anticipation of deploying new capital, generally within 15 days of the receipt of capital. Therefore, this fee is expensed in the period the capital is accepted.
The base management fee is calculated based on the Company's Gross Invested Capital plus any borrowing for investment purposes. The base management fees range from 1.5% to 3.0%, depending on the level of Gross Invested Capital.
The subordinated incentive fee has two parts—income and capital gains. The incentive fee components (other than during liquidation) are designed so that neither the income incentive fee nor the capital gains incentive fee is payable to the Adviser unless our stockholders have first received dividends at a rate of at least 7.0% per annum for the relevant measurement period (a fiscal quarter, for the income incentive fee; a fiscal year, for the capital gains incentive fee).
The income incentive fee ("Income Fee") is calculated and payable quarterly in arrears as follows: (i) the sum of preliminary net investment income for each fiscal quarter since the effective date of the Amended and Restated Investment Advisory Agreement (October 1, 2017) exceeding 7% of the "Contributed Capital" (which equals the number of shares issued multiplied by the maximum public offering price at the time such shares were sold, regardless of whether or not shares were issued with volume or commission discounts or through the DRIP, as such amount is computed from time to time) on an annualized basis up to 8.75% of Contributed Capital; and (ii) 20.0% of our preliminary net investment income for each fiscal quarter after the effective date exceeding 8.75% of Contributed Capital at an annualized rate; minus (iii) the sum of all previously paid income incentive fees since the effective date, plus (iv) any incremental income incentive fee payable resulting from the reanalysis after calculation of the capital gains incentive fee.
The capital gains incentive fee ("Capital Gains Fee") is calculated and payable in arrears as of the end of each fiscal year as follows: (i) the sum of all "capital gains" (calculated as net realized capital gains less unrealized capital depreciation) for each fiscal year after the effective date exceeding 7% of Contributed Capital on an annualized basis up to 8.75% of Contributed Capital, which thresholds are reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income); and (ii) 20.0% of all capital gains for each fiscal quarter after the effective date exceeding 8.75% of Contributed Capital at an annualized rate, which threshold is reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income); minus (iii) the sum of all previously paid income incentive fees since the effective date and prior to the end of such fiscal year; less (iv) the aggregate amount of all capital gains incentive fees paid in prior fiscal years ending after the effective date. To the extent that such calculation would result in a capital gains incentive fee that exceeds 20% of all realized capital gains for the measurement period, the capital gains incentive fee shall be capped so that under no circumstance does it exceed 20% of the realized capital gains for the measurement period.
The portfolio structuring fees for the three months ended September 30, 2018 and 2017, were $211,692 and $201,902, respectively.
The base management fees for the three months ended September 30, 2018 and 2017, were $512,179 and $388,917, respectively. These base management fees were based on the following quarter ended Gross Invested Capital segregated in two columns based on the annual fee rate:
|
Base Management Fee Annual %
|
3.0%
|
2.0%
|
Total Gross Invested Capital
|
|
|
Quarter ended:
|
||||
|
September 30, 2018
|
$ 20,000,000
|
$ 72,435,844
|
$ 92,435,844
|
|
|
Quarter ended:
|
||||
|
September 30, 2017
|
$ 20,000,000
|
$ 47,783,337
|
$ 67,783,337
|
Organization and Offering Costs Reimbursement:
As provided in the Amended and Restated Investment Advisory Agreement, offering costs incurred and paid by the Company in excess of $1,650,000 on the second public offering will be reimbursed by the Adviser. The offering costs incurred in connection with this public offering as of September 30, and June 30, 2018 were $1,130,821 and $975,555, respectively, both of which were below the reimbursement threshold. Accordingly, there were no amounts reimbursable from the Adviser as of September 30, and June 30, 2018. Of the total offering costs incurred by the Company as of September 30, 2018 and June 30, 2018, MacKenzie had paid $125,252 and $237,149 on behalf of the Company. Therefore, these amounts were recorded as payable to MacKenzie and included as a part of due to related entities in the statements of assets and liabilities as of September 30 and June 30, 2018.
Administration Agreement:
Under the Administration Agreement, the Company reimburses MacKenzie for the Company's allocable portion of overhead and other expenses that MacKenzie incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services, performing compliance functions, providing the services of the Chief Financial Officer, Chief Compliance Officer, Director of Financial Reporting, and any administrative support staff, as well as providing the Company with other administrative services, subject to the Independent Directors' approval. The administrative cost reimbursements for the three months ended September 30, 2018 and 2017, were $156,000 and $108,000, respectively.
The table below outlines the related party expenses incurred for the three months ended September 30, 2018, and 2017 and unpaid as of September 30, 2018, and June 30, 2018.
|
|
Three Months Ended
|
Unpaid as of
|
||||||||||||||
|
Types and Recipient
|
September 30, 2018
|
September 30, 2017
|
September 30, 2018
|
June 30, 2018
|
||||||||||||
|
|
||||||||||||||||
|
Portfolio Structuring fee- the Adviser
|
$
|
211,692
|
$
|
201,902
|
$
|
-
|
$
|
-
|
||||||||
|
Base Management fees- the Adviser
|
512,179
|
388,917
|
512,179
|
474,807
|
||||||||||||
|
Subordinated Incentive fee - the Adviser
|
1,565,729
|
-
|
1,565,729
|
1,092,351
|
||||||||||||
|
Administrative Cost Reimbursements- MacKenzie
|
156,000
|
108,000
|
48,000
|
-
|
||||||||||||
|
Organization & Offering Cost (2) - MacKenzie
|
125,252
|
237,149
|
||||||||||||||
|
Other expenses (1)- MacKenzie
|
1,718
|
2,721
|
||||||||||||||
|
|
||||||||||||||||
|
Due to related entities
|
$
|
2,252,878
|
$
|
1,807,028
|
||||||||||||
(2) Offering costs paid by MacKenzie- discussed in Note 5 under organization and offering costs reimbursements. These are amortized over twelve-month period as discussed in Note 2.
Investments in Affiliated Companies:
|
September 30, 2018
|
||||||||||||||||||||||||
|
Name of issuer and title of issue
|
Fair Value at
|
Gross Reductions (1)
|
Net Realized Gains (losses)
|
Net Change in Unrealized Gains/(Losses)
|
Fair Value at
|
Interest/Dividend/Other income
Year Ended |
||||||||||||||||||
|
|
June 30, 2018
|
September 30, 2018
|
September 30, 2018
|
|||||||||||||||||||||
|
Non-Controlled/Affiliate Investment:
|
||||||||||||||||||||||||
|
MPF Pacific Gateway - Class B
|
$
|
6,613
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,613
|
$
|
-
|
||||||||||||
|
|
||||||||||||||||||||||||
|
|
$
|
6,613
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,613
|
$
|
-
|
||||||||||||
|
Controlled Investments:
|
||||||||||||||||||||||||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
$
|
41,222
|
$
|
-
|
$
|
-
|
$
|
723
|
$
|
41,945
|
$
|
-
|
||||||||||||
|
|
||||||||||||||||||||||||
|
|
$
|
41,222
|
$
|
-
|
$
|
-
|
$
|
723
|
$
|
41,945
|
$
|
-
|
||||||||||||
|
|
||||||||||||||||||||||||
|
June 30, 2018
|
||||||||||||||||||||||||
|
Name of issuer and title of issue
|
Fair Value at
|
Gross Reductions (1)
|
Net Realized Gains (losses)
|
Net Change in Unrealized Gains/(Losses)
|
Fair Value at
|
Interest/Dividend/Other income
Year Ended |
||||||||||||||||||
|
|
June 30, 2017
|
June 30, 2018
|
June 30, 2018
|
|||||||||||||||||||||
|
Non-Controlled/Affiliate Investment:
|
||||||||||||||||||||||||
|
MPF Pacific Gateway - Class B
|
$
|
7,309
|
$
|
-
|
$
|
-
|
$
|
(696
|
)
|
$
|
6,613
|
$
|
789
|
|||||||||||
|
|
||||||||||||||||||||||||
|
|
$
|
7,309
|
$
|
-
|
$
|
-
|
$
|
(696
|
)
|
$
|
6,613
|
$
|
789
|
|||||||||||
|
Controlled Investments:
|
||||||||||||||||||||||||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
$
|
30,374
|
$
|
-
|
$
|
-
|
$
|
10,848
|
$
|
41,222
|
$
|
-
|
||||||||||||
|
Coastal Realty Business Trust, Series H2- A
|
3,783
|
(7,705
|
)
|
(54,413
|
)
|
58,335
|
-
|
-
|
||||||||||||||||
|
MC 15 Preferred Equity, LLC
|
3,250,000
|
(2,501,557
|
)
|
1,557
|
(750,000
|
)
|
-
|
1,690,000
|
||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
$
|
3,284,157
|
$
|
(2,509,262
|
)
|
$
|
(52,856
|
)
|
$
|
(680,817
|
)
|
$
|
41,222
|
$
|
1,690,000
|
|||||||||
Coastal Realty Business Trust ("CRBT"):
CRBT is a Nevada business trust whose trustee is MacKenzie. Each series of the trust has its own beneficiaries and own assets. The Company owns two series of CRBT and is the only beneficiary of such series. Under the terms of the agreement, there are no redemption rights to any of the series participants. The Company and TRS are the sole beneficiaries of the following series as of September 30, 2018, and June 30, 2018:
| · |
CRBT, REEP, Inc.-A, which has an ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland.
|
| · |
CRBT, Series H2-A, which invests in shares of a REIT that owns a real estate portfolio totaling 105 properties within asset classes of ski and mountain lifestyle, senior housing, attractions, marinas and other lifestyle properties located in the United States and Canada. During the quarter ended December 31, 2017, the underlying REIT made a liquidating distributions of $7,705 and dissolved. The Company had a cost basis of $62,118 at the time of the final liquidation.
|
MC 15 Preferred Equity, LLC:
MC 15 Preferred Equity, LLC is a holding company that owns preferred equity of a company that owns a commercial real estate property in Austin, Texas. The Company is a co-manager of MC 15 Preferred Equity, LLC and owns 55.8% ownership interest in the company. During the year ended June 30, 2018, MC 15 Preferred Equity, LLC dissolved after it received the preferred equity distributions from the underlying real estate company and distributed the proceeds to its members in accordance with the operating agreement.
MPF Pacific Gateway:
MPF Pacific Gateway, which is managed by MacKenzie, is a holding company that owns an investment in a REIT Liquidating Trust. As of September 30, 2018, and June 30, 2018, the Company had a 15.82% of ownership interest in MPF Pacific Gateway.
NOTE 6 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights of the Company for the three months ended September 30, 2018, and the year ended June 30, 2018.
|
|
For The Three Months Ended
|
For The Year Ended
|
||||||
|
|
September 30, 2018
|
June 30, 2018
|
||||||
|
Per Share Data:
|
(Unaudited)
|
|||||||
|
|
||||||||
|
Beginning net asset value ("NAV")
|
$
|
10.07
|
$
|
9.84
|
||||
|
|
||||||||
|
Net investment income (loss) (1)
|
0.32
|
0.30
|
||||||
|
Net realized gain (1)
|
0.40
|
0.36
|
||||||
|
Net unrealized gain (loss) (1)
|
(0.51
|
)
|
0.79
|
|||||
|
Net increase in net assets resulting from operations
|
0.21
|
1.45
|
||||||
|
|
||||||||
|
Issuance of common stock above (below) NAV (1) (4)
|
(0.09
|
)
|
(0.32
|
)
|
||||
|
Redemption of common stock below NAV (1) (6)
|
-
|
0.01
|
||||||
|
Dividends to stockholders (1) (5)
|
(0.17
|
)
|
(0.91
|
)
|
||||
|
Ending NAV
|
$
|
10.02
|
$
|
10.07
|
||||
|
|
||||||||
|
Weighted average common Shares outstanding
|
9,004,403
|
7,440,841
|
||||||
|
Shares outstanding at the end of period
|
9,243,584
|
8,496,142
|
||||||
|
Net assets at the end of period
|
$
|
92,614,911
|
$
|
85,595,319
|
||||
|
Average net assets (2)
|
$
|
89,105,115
|
$
|
72,792,422
|
||||
|
|
||||||||
|
Ratios to average net assets
|
||||||||
|
Total expenses (7)
|
3.04
|
%
|
6.52
|
%
|
||||
|
Net investment income (7)
|
3.22
|
%
|
3.06
|
%
|
||||
|
Total rate of return (2) (3) (7)
|
2.09
|
%
|
14.79
|
%
|
||||
|
(1) Based on weighted average number of shares of common stock outstanding for the period.
|
|
||||
|
(2) Average net assets were derived from the beginning and ending period-end net assets.
|
|
|
|||
|
(3) Total rate of return is based on net increases (decreases) in net assets resulting from operations. An individual stockholder's return may vary from this return based on the time of capital transactions.
|
|||||
|
(4) Net of sales commissions and dealer manager fees of $1.00 per share.
|
|
|
|
|
|
|
(5) Dividends are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP.
|
|||||
|
(6) Amounts based on differences between the actual redemption price and the NAVs preceding the redemptions.
|
|||||
|
(7) Not annualized for interim reporting periods.
|
|
|
|
|
|
NOTE 7 – SHARE OFFERINGS AND FEES
During the three months ended September 30, 2018, the Company issued 706,146 shares with gross proceeds of $7,039,757 and 72,866.83 shares pursuant to the DRIP at $9 per share with gross proceeds of $655,801. For the three months ended September 30, 2018, the Company incurred selling commissions and fees of $683,988.
During the three months ended September 30, 2017, the Company issued 673,005 shares with gross proceeds of $6,730,057 and 48,223 shares pursuant to the DRIP at $9 per share with gross proceeds of $434,005. For the three months ended September 30, 2017, the Company incurred selling commissions and fees of $668,039.
NOTE 8 – SHARE REPURCHASE PLAN
Pursuant to the Company's share repurchase program, during the three months ended September 30, 2018, the Company made a tender offer to purchase its own shares at $9 per share. The Company repurchased 31,570.04 shares for a total of $284,131. Similarly, during the three months ended September 30, 2017, the Company submitted a tender offer and repurchased a total of 39,666.90 shares for a total of $357,002.
NOTE 9 –STOCKHOLDER DIVIDENDS AND INCOME TAXES
The following table reflects the dividends the Company declared on its common stock:
|
|
Dividends
|
|||||||
|
For The Three Months Ended
|
Per Share
|
Amount
|
||||||
|
September 30, 2018
|
$
|
0.175
|
$
|
1,571,551
|
||||
|
|
||||||||
|
|
$
|
0.175
|
$
|
1,571,551
|
||||
During the three months ended September 30, 2018, the Company paid dividends of $1,438,808, which were declared as of June 30, 2018. Of this total, $655,801 were reinvested in the DRIP.
The following table reflects the dividends the Company paid on its common stock:
|
|
Dividends
|
|||||||
|
For The Three Months Ended
|
Per Share
|
Amount
|
||||||
|
September 30, 2017
|
$
|
0.175
|
$
|
1,033,816
|
||||
|
|
||||||||
|
|
$
|
0.175
|
$
|
1,033,816
|
||||
On October 23, 2018, the Company's Board of Directors approved a monthly dividend of $0.05833 per share to the holders of record on each October 31, 2018, November 30, 2018, and December 31, 2018, for a total of $0.175 for the quarter, which does not include any dividend the Board may declare on or before December 31, 2018 to meet REIT distribution requirements for 2018.
Income Taxes
While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is December 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.
For income tax purposes, dividends paid to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. The tax character of dividends paid to stockholders for the tax years ended December 31, 2017, (the most recent tax year end completed and filed) were as follows:
|
December 31, 2017
|
||||
|
Capital gain
|
$
|
3,798,189
|
||
|
Ordinary income
|
1,046,997
|
|||
|
Total dividends
|
$
|
4,845,186
|
||
Because of the difference between our fiscal and tax year ends, the final determination of the tax character of dividends will not be made until we file our tax return for the tax year ended December 31, 2017.
The components of undistributed earnings on a tax basis as of December 31, 2017 (the most recent tax year end completed and filed) were as follows:
|
December 31, 2017
|
||||
|
Undistributed long term capital gain
|
$
|
114,401
|
||
|
Unrealized fair value appreciation
|
4,939,463
|
|||
|
$
|
5,053,864
|
|||
The following table presents the aggregate gross unrealized appreciation, depreciation, and cost basis of investments for income tax purposes as of:
|
September 30, 2018
|
June 30, 2018
|
|||||||
|
Aggregate gross unrealized appreciation
|
$
|
7,101,162
|
$
|
11,257,709
|
||||
|
Aggregate gross unrealized depreciation
|
(1,527,252
|
)
|
(840,942
|
)
|
||||
|
Net unrealized appreciation
|
$
|
5,573,910
|
$
|
10,416,767
|
||||
|
Aggregate cost (tax basis)
|
$
|
63,412,482
|
$
|
64,167,738
|
||||
Statements by MacKenzie Realty Capital, Inc. and its wholly owned subsidiary MRC TRS, Inc. (the "Company," "we," or "us") contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements, including an economic downturn could impair our portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading "Risk Factors" in our Annual Report on Form 10-K.
We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Overview
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our objective is to generate both current income and capital appreciation through real estate-related investments. We have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our taxable income, we will be subject to an excise tax on our undistributed taxable income. Our wholly owned subsidiary, MRC TRS, Inc., is subject to corporate federal and state income tax on its taxable income at regular statutory rates.
We are managed by the Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Investment Plan
Our investments are generally expected to range in size from $10,000 to $3 million. However, we may make smaller or larger investments from time to time on an opportunistic basis. We focus primarily on real estate-related securities. We purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers. We invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.
We generally seek to invest in interests of real estate-related limited partnerships and REITs. Under normal market conditions, we invest at least 80.0% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. A real estate company is one that (i) derives at least 50.0% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50.0% of its assets invested in such real estate. We do not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. We generally consider purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate-related investments.
We may also acquire (i) individual mortgages secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages secured by income producing real property, and (iii) using no more than 20.0% of our available capital, securities of issuers that own assets other than real estate.
Investment income
We generate revenues in the form of capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection with our investments and recognized as earned.
Expenses
Our primary operating expenses include the payment of: (i) investment advisory fees to our Adviser; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including:
| · |
the cost of calculating our NAV;
|
| · |
the cost of effecting sales and repurchases of our shares and other securities;
|
| · |
interest payable on debt, if any, to finance our investments;
|
| · |
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;
|
| · |
transfer agent and safekeeping fees;
|
| · |
fees and expenses associated with marketing efforts;
|
| · |
federal and state registration fees, and any stock exchange listing fees in the future;
|
| · |
federal, state, and local taxes, if any;
|
| · |
Independent Directors' fees and expenses;
|
| · |
brokerage commissions;
|
| · |
fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums;
|
| · |
direct costs and expenses of administration, including printing, mailing, and staff;
|
| · |
fees and expenses associated with independent audits and outside legal costs;
|
| · |
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act, and applicable federal and state securities laws; and
|
| · |
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, our Chief Financial Officer, Director of Accounting and Financial Reporting, General Counsel, and any administrative support staff.
|
In addition, we will bear organization and offering expenses in connection with our current public offering up to $1,650,000. Any additional organization and offering expenses will be paid by our Adviser.
Portfolio Investment Composition
The following table summarizes the composition of our investments at cost and fair value as of September 30, 2018, and June 30, 2018:
|
|
September 30, 2018
|
June 30, 2018
|
||||||||||||||
|
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
|
Publicly Traded Companies
|
$
|
13,171,912
|
$
|
12,924,567
|
$
|
6,652,816
|
$
|
6,661,083
|
||||||||
|
Non Traded Companies
|
24,281,945
|
26,942,622
|
30,234,571
|
33,097,115
|
||||||||||||
|
LP Interests
|
26,158,746
|
29,077,258
|
26,577,677
|
33,685,086
|
||||||||||||
|
Investment Trusts
|
49,901
|
41,945
|
49,901
|
41,222
|
||||||||||||
|
Note
|
-
|
-
|
1,100,000
|
1,100,000
|
||||||||||||
|
Total
|
$
|
63,662,504
|
$
|
68,986,392
|
$
|
64,614,965
|
$
|
74,584,506
|
||||||||
Net Asset Value
September 30, 2018 vs. June 30, 2018:
Our NAV as of September 30, 2018, was $10.02 per share compared to $10.07 per share as of June 30, 2018, a $0.05 per share decrease of approximately 0.50%. The net decrease during the three months was due to decreases resulting from (i) a dividend to stockholders of $0.17 per share (on a weighted average basis) (ii) net unrealized loss of $0.51 per share and (iii) issuance of shares (net of selling commissions and dealer manager fees) below NAV per share resulting in a decrease of a $0.09 per share. The decreases were offset by increases resulting from (i) net investment income of $0.32 per share and (ii) net realized gain on sale of investments of $0.40 per share.
Results of Operations
Three Months Ended September 30, 2018, and 2017:
Investment Income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the three months ended September 30, 2018, and 2017, was $5.58 million and $0.63 million, respectively. The increase of $4.95 million or 785.7%, was primarily due to an increase of $4.36 million in our distribution income from sales or capital transactions during 2018. During the three months ended September 30, 2018, the Company received total sales or capital distributions of $4.38 million from four securities as compared to only $0.02 million from two securities during the three months ended September 30, 2017. The remaining increase of $0.59 million was attributed to the increase in our overall investment portfolio since September 30, 2017. The Company had an investment portfolio with a total cost basis of $53.01 million as of September 30, 2017, which increased to $63.66 million as of September 30, 2018.
Operating Expenses:
Base management fee: The base management fee for the three months ended September 30, 2018 was $0.51 million as compared to $0.39 million for the three months ended September 30, 2017. This increase of $0.12 million, or 30.8% was due to an increase in the Gross Invested Capital by $24.66 million from $67.78 million as of September 30, 2017, to $92.44 million as of September 30, 2018.
Portfolio structuring fee: The portfolio structuring fees for the three months ended September 30, 2018, and 2017 were $0.21 million and $0.20 million, respectively. The fees were comparable as the Gross Invested Capital from the issuance of new shares during the three months periods of 2017 and 2018 also were comparable. During the three months ended September 30, 2018, the Company raised $7.04 million of new capital through issuance of new shares excluding the DRIP, which was comparable to the $6.73 million of new capital raised during September 30, 2017.
Administrative cost reimbursements: Costs reimbursed to MacKenzie for the three months ended September 30, 2018, was $0.16 million as compared to $0.11 million for the three months ended September 30, 2017. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie since September 30, 2017, as a result of the increase in the Company's operating activities.
Subordinated incentive fee: The subordinated incentive fee has two components; Capital Gains Fee and Income Fee. Capital Gains Fee is based on realized gains (including the distributions received from sales/capital transactions) and the Income Fee is based on net investment income.
There was no Income Fee for the three months ended September 30, 2018. Capital Gains Fee was $1.57 million for the three months ended September 30, 2018. Capital Gains Fee was accrued as of September 30, 2018 because the cumulative net realized gains exceeded the threshold of 7% of the Contributed Capital. The Company records the Capital Gains Fee accrual on the consolidated statements of operations and statements of assets and liabilities when net realized capital gains less unrealized capital depreciation on its investments exceed the incentive fee threshold of 7% of Contributed Capital. However, the actual incentive fee payable to the Adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year. There was neither Income Fee nor Capital Gains Fee for the three months ended September 30, 2017. This was because the cumulative net investment income and net realized gains were below the threshold of 7% of Contributed Capital.
Other operating expenses: Other operating expenses include amortization of deferred offering costs, professional fees, directors' fees printing and mailing, and other general and administrative expenses. Other operating expenses for the three months ended September 30, 2018, were $0.28 million as compared to $0.29 million for the three months ended September 30, 2017. The decrease of $0.01 million or 3.4% was mainly due to a decrease in amortization of the deferred offering costs on the second public offering during the three months ended September 30, 2018.
Net realized gain on investments:
Total net realized gains for three months ended September 30, 2018 and 2017, were $3.64 million and $0.85 million, respectively. Total realized gains for the three months ended September 30, 2018, was realized from sales of one publicly traded security with realized gains of $0.69 million and four non-traded REIT securities with realized gains of $2.95 million. Total realized gains for the three months ended September 30, 2017, were realized from liquidations of four non-traded REIT securities with total realized gains of $0.76 million and a liquidation of a limited partnership interest with realized gains of $0.51 million offset by a total net realized loss of $0.42 million from the disposal of fourteen publicly traded securities.
Net unrealized gain/loss on investments:
During the three months ended September 30, 2018, we recorded net unrealized losses of $4.65 million, which were net of $1.24 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gains as of June 30, 2018, that were realized during the three months ended September 30, 2018. Accordingly, the net unrealized losses excluding the reclassification adjustment for the three months ended September 30, 2018, were $3.41 million, which resulted from fair value depreciation of $4.19 million from limited partnership interests and $0.19 million from publicly traded REIT securities offset by fair value appreciation of $0.97 million from non-traded REIT securities. The large fair value depreciation in limited partnership interests resulted from distributions of sales proceeds by three partnerships (The Weatherly, LTD, The Weatherly Building, LLC and Uniprop Manufactured Housing Income Fund II) following the sales of underlying properties. The Company recorded $4.25 million of distribution income, which is a part of the investment income discussed above, from these three partnerships during the three months ended September 30, 2018.
During the three months ended September 30, 2017, we recorded net unrealized gains of $0.96 million, which was net of $0.86 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2017, that was realized during the quarter. Accordingly, the net unrealized gains excluding the reclassification adjustment for the three months ended September 30, 2017, was $1.82 million, which resulted from fair value appreciation of (i) limited partnership interests by $1.00 million, (ii) non-traded REIT shares by $0.58 million and (iii) publicly traded REIT shares by $0.23 million.
Income tax provision (benefit):
The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax years ended December 31, 2017. Therefore, it did not incur any tax expense or excise tax during the quarterly periods within the tax year 2017. Similarly, for the tax year 2018, the Parent Company plans to pay the requisite amounts of dividends to stockholders during the year such that the Parent Company will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during the quarterly periods within the tax year 2018.
The Parent Company is subject to tax on built-in gains it realizes during the first five years following REIT election. Prior to the REIT effective date, the Parent Company recorded an estimated built-in gains liability on the entire unrealized built-in gains as deferred tax liabilities. Therefore, in each subsequent period it only records the difference between the actual and the previously recorded estimated tax liability on the built-in gains it realizes during the period as built-in gain tax adjustment. For the three months ended September 30, 2018, the Parent Company did not realize any built-in gains. Therefore, there was no built-in gain tax adjustment. The built-in gain tax adjustment for the three months ended September 30, 2017, was $13,210 and it was recorded as an income tax provision on the consolidated statements of operations.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2018, they did not have any taxable income for tax year 2018. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during the quarterly periods within the tax year 2018.
Liquidity and Capital Resources
Capital Resources
We are offering to sell shares under the offering with a total gross proceeds of $150 million, although the Company believes it is improbable that all such shares will be sold prior to the end of the offering. As of September 30, 2018, we sold 4,073,637 shares with gross proceeds of $40.71 million, issued 434,088.51 shares in our DRIP with gross proceeds of $3.91 million, and repurchased 276,924.50 shares in our share repurchase program at an aggregate price of $2.49 million. We do not have any plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised from our second offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities. We currently do not have any plans to borrow money on a long-term basis or issue debt securities; however, from time to time we may draw on the margin line of credit on a temporary basis to bridge our investment purchases and sales or capital raising. As of September 30, 2018, we were selling our shares on a continuous basis at a price of $10 which may be below NAV per share from time to time, as approved by our stockholders.
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The maximum amount of such borrowing is limited by the 1940 Act.
Our primary uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (primarily from investment income and realized capital gains), and the payment of operating expenses. If all the shares registered under our second registration statement in the second public offering are sold, we would receive investable cash totaling approximately $130.5 million, of which approximately $39.35 million has been received as of September 30, 2018.
Cash Flows:
Three months ended September 30, 2018:
For the three months ended September 30, 2018, we experienced a net increase in cash of $18.31 million. During this period, we generated cash of $5.46 million from our financing activities and $12.85 million from our operating activities.
The net cash inflow of $12.85 million from operating activities resulted from $25.46 million from sales of investments, $7.22 million from distributions received from our investments that are considered return of capital and $2.81 million from investment income, net of operating expenses, offset by cash outflow of $22.64 million from purchases of investments.
The net cash inflow of $5.46 million from financing activities resulted from the sale of shares under our current public offering with gross proceeds of $7.23 million (adjusted for $0.19 million of increase in capital pending acceptance) offset by cash outflows of $0.28 million from share redemptions, $0.78 million from payments of cash dividends, and $0.71 million from payments of selling commissions and fees.
Three months ended September 30, 2017:
For the three months ended September 30, 2017, we experienced a net decrease in cash of $3.17 million. During this period, we generated cash of $4.18 million from our financing activities and used $7.35 million in operating activities.
The net cash outflow of $7.35 million from operating activities resulted from $23.87 million used for purchases of investments and $0.12 million used for operating expenses, net of investment income. The cash outflows were offset by cash inflows of $16.54 million from sales of investments and $0.10 million from distributions received from our investments that were considered return of capital.
The net cash inflow of $4.19 million from financing activities resulted from the sale of shares under our public offering with gross proceeds of $5.74 million (adjusted for the $0.99 million of decrease in capital pending acceptance), offset by cash outflows of $0.36 million from share redemptions, $0.60 million from dividend payments, and $0.59 million from selling commissions and fees payments.
Contractual Obligations
We have entered into two contracts under which we have material future commitments: (i) the Amended and Restated Investment Advisory Agreement, under which the Adviser serves as our investment adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Amended and Restated Investment Advisory Agreement in future periods (after the up-front payment of the portfolio structuring fee during the public offering) will be (i) a percentage of the value of our Gross Invested Capital; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation). Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Borrowings
We do not have any current plans to borrow money or issue preferred securities. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates.
Critical Accounting Policies
The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2018, included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2018.
Dividends to Stockholders
We intend to pay quarterly dividends to our stockholders to the extent that we have income from operations available. Our quarterly dividends, if any, will be determined by our Board of Directors near the beginning of each quarter based on the estimated quarterly income and will be paid pro-rata to holders of our shares. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to pay dividends (or make distributions) if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.
We qualified and elected to be taxed as a REIT beginning with the tax year ended December 31, 2014. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. Our current intention is to make any dividends in additional shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state securities regulator. If one holds shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.
Our current investment portfolio, as well as our future investments, primarily consists of equity and debt securities issued by smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments in these securities are considered speculative in nature. Our investments often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital.
At September 30, 2018, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 93% of our total assets as of that date. As discussed in Note 3 to our financial statements ("Investments"), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy exposes us to a high degree of business and financial risk because portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
There have been no material changes to our risk factors discussed in "Risk Factors" in our annual report on Form 10-K for the fiscal year ended June 30, 2018 except for the below addition.
We may be subject to adverse legislative or regulatory tax changes that could reduce the value of our common stock.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation. In addition, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The 2018 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2018 Tax Legislation that could affect us and our stockholders include, among others:
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temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
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permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;
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permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
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reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
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limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (determined without regard to the dividends paid reduction);
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generally limiting the deduction for net business interest expense in excess of 30% of a business's "adjusted taxable income," except for taxpayers that engage in certain real estate businesses (including most equity REITs) and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods); and
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eliminating the corporate alternative minimum tax.
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Many of these changes that are applicable to us are effective beginning with our 2018 taxable year, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the IRS and the U.S. Department of the Treasury, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the 2018 Tax Legislation as a whole will have on us.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Issuer Purchases of Equity Securities
The following table presents information with respect to the Company's purchases of its common stock during the period covered by this report:
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Period
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Total Number of
Shares Purchased
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Average Price
Paid Per Share
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Total Number of
Shares Purchased as Part of
Publicly Announced Plans
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Maximum Dollar Value
of Shares That May
Yet Be Purchased Under
Publicly Announced Plans
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August 17, 2018 through September 17, 2018
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31,570.04
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$ 9.00
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31,570.04
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-
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Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Not applicable.
None.
Item 6. EXHIBITS
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Exhibit
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Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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MACKENZIE REALTY CAPITAL, INC.
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Date: November 13, 2018
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By: /s/ Robert Dixon__________________
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President and Chief Executive Officer
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Date: November 13, 2018
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By: /s/ Paul Koslosky_________________
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Treasurer and Chief Financial Officer
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