MKZR 10-Q
MacKenzie Realty Capital, Inc. (MKZR)
10-Q
2024-11-14
For: 2024-09-30
View Original
Added on
April 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2024
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________
Commission file number 000-55006
(Exact name of registrant as specified in its charter)
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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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(Address of principal executive offices)
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(
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(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Trading symbol (s)
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Name of exchange on which registered
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Indicate by check mark whether the registrant (1) has 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 ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 ☐
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 ☐
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Accelerated filer ☐
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Smaller reporting company
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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 ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of the shares of issuer’s Common Stock outstanding as of November 14, 2024 was 13,435,762.80 .
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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
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1
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2
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3
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4
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5
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Item 2.
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33
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Item 3.
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48
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Item 4.
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48
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PART II.
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OTHER INFORMATION
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Item 1.
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49
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Item 1A.
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49
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Item 2.
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49
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Item 3.
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49
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Item 4.
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49
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Item 5.
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49
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Item 6.
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50
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MacKenzie Realty Capital, Inc.
(Unaudited)
| September 30, 2024 | June 30, 2024 | |||||||
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Assets
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Real estate assets
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Land
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$
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$ | |||||
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Building, fixtures and improvements
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Intangible lease assets
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Less: accumulated depreciation and amortization
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(
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)
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( |
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Total real estate assets, net
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Cash and cash equivalents
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Restricted cash
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Investments, at fair value
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| Unconsolidated investment (non-security), at fair value |
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| Investments income, rents and other receivables |
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| Deferred offering costs, net |
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Prepaid expenses and other assets
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| Assets held for sale, net |
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Total assets
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$
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$ | |||||
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Liabilities
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Mortgage notes payable, net
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$
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$ | |||||
| Notes payable |
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Deferred rent and other liabilities
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| Finance lease liabilities |
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| Dividend payable |
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| Accounts payable and accrued liabilities |
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Below-market lease liabilities, net
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| Due to related entities |
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| Capital pending acceptance |
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| Liabilities held for sale |
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Total liabilities
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Equity
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Common stock, $
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Preferred stock, $
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Series A Preferred stock,
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||||||||
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Series B Preferred stock,
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||||||||
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Capital in excess of par value
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Accumulated deficit
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(
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)
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( |
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Total stockholders’ equity
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Non-controlling interests
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Total equity
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Total liabilities and equity
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$
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$ | |||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
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Three Months Ended September 30,
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||||||||
| 2024 |
2023 |
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Revenue
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||||||||
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Rental and reimbursements
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$
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$ | |||||
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Expenses
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Depreciation and amortization
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Interest expense
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Property operating and maintenance
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Asset management fees to related party (Note 8)
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General and administrative
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Professional fees
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Administrative cost reimbursements to related party (Note 8)
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Directors’ fees
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Transfer agent cost reimbursements to related party (Note 8)
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Impairment loss
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Total operating expenses
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Operating loss
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(
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)
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( |
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Other income (loss)
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||||||||
| Dividend and distribution income from equity securities at fair value |
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|||||||
| Net unrealized loss on equity securities at fair value |
(
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)
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( |
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| Net loss from equity method investments at fair value |
(
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( |
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Net realized gain from investments
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|||||||
| Net loss |
(
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( |
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Net income attributable to non-controlling interests
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(
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)
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( |
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Net income attributable to preferred stockholders Series A and B
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( |
) | ( |
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| Net loss attributable to common stockholders |
$
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(
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)
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$ | ( |
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Net loss per share attributable to common stockholders
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$
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(
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)
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$ | ( |
) | ||
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Weighted average common shares outstanding
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The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
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Common Stock |
Series A Preferred Stock |
Series B Preferred Stock | Additional Paid-
in Capital
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Accumulated
Deficit
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Total
Stockholders’
Equity
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Non-controlling
Interests
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Total Equity
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||||||||||||||||||||||||||||||||||||
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Number of
Shares
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Par
Value
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Number of
Shares
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Par
Value
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Number of
Shares
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Par
Value
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|||||||||||||||||||||||||||||||||||||||
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Three Months Ended September 30, 2024
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Balance, June 30, 2024
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$
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$ | $ |
$
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$
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(
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)
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$
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$ | $ | ||||||||||||||||||||||||||||||
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Contributions by non-controlling interest holders
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- | - | - | |||||||||||||||||||||||||||||||||||||||||
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Distributions to non-controlling interest holders
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-
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- | - |
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( |
) | ( |
) | |||||||||||||||||||||||||||||||||
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Dividends to common stockholders
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-
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- | - |
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(
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)
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(
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)
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( |
) | |||||||||||||||||||||||||||||||||
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Dividends to Series A preferred stockholders
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- | - | - | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
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Dividends to Series B preferred stockholders
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- | - | - | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Net income (loss) |
-
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- | - |
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(
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)
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(
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)
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( |
) | |||||||||||||||||||||||||||||||||
| Operating Partnership Class A conversion to common stock |
* | ( |
) | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||||||||||||||||||||||||||
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Issuance of Series A preferred stock through reinvestment of dividends
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- | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of Series B preferred stock through reinvestment of dividends | - | - | - | * | ||||||||||||||||||||||||||||||||||||||||
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Issuance of Series A preferred stock
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- | * | - | - | ||||||||||||||||||||||||||||||||||||||||
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Issuance of Series B preferred stock
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- | - | - | |||||||||||||||||||||||||||||||||||||||||
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Increase in liquidation preference - Series B preferred stock
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- | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Operating Partnership Series A Preferred Units issued | - | - | - | |||||||||||||||||||||||||||||||||||||||||
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Issuance Operating Partnership Series A Preferred
Units through reinvestment of dividends
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- | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Increase liquidation preference of Operating Partnership Series B Preferred Units | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
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Payment of selling commissions and fees
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-
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|
- | - |
(
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)
|
|
( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
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Balance, September 30, 2024
|
|
$
|
|
$ | $ |
$
|
|
$
|
(
|
)
|
$ | $ | $ | |||||||||||||||||||||||||||||||
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|
Common Stock
|
Series A Preferred Stock
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Additional Paid-
in Capital
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Accumulated
Deficit
|
Total
Stockholders’
Equity
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Non-controlling
Interests
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Total Equity
|
|||||||||||||||||||||||||||||
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|
Number of
Shares
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Par
Value
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Number of
Shares
|
Par
Value
|
||||||||||||||||||||||||||||||||
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Three Months Ended September 30, 2023
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||||||||||||||||||||||||||||||||||||
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||||||||||||||||||||||||||||||||||||
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Balance, June 30, 2023
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|
$
|
|
|
$
|
|
$
|
|
$
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(
|
)
|
$
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|
$
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$
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|
|||||||||||||||||||
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Distributions to non-controlling interest holders
|
-
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-
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(
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)
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(
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)
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|||||||||||||||||||||||||
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Dividends to common stockholders
|
-
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|
-
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|
|
(
|
)
|
(
|
)
|
|
(
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)
|
||||||||||||||||||||||||
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Dividends to Series A preferred stockholders
|
-
|
|
-
|
|
|
(
|
)
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||||
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Net income (loss)
|
-
|
|
-
|
|
|
(
|
)
|
(
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)
|
|
(
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)
|
||||||||||||||||||||||||
| Operating Partnership Class A conversion to common stock |
* |
( |
) | |||||||||||||||||||||||||||||||||
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Issuance of Series A preferred stock
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- | |||||||||||||||||||||||||||||||||||
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Issuance of common stock through reinvestment of dividends
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|
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-
|
-
|
|
|
|
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|
|||||||||||||||||||||||||||
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Issuance of Series A preferred stock through reinvestment of dividends
|
- | * |
||||||||||||||||||||||||||||||||||
| Issuance of Operating Partnership Series A Preferred Units through reinvestment of dividends | - | - | ||||||||||||||||||||||||||||||||||
|
Payment of selling commissions and fees
|
-
|
|
-
|
|
(
|
)
|
|
(
|
)
|
|
(
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)
|
||||||||||||||||||||||||
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Redemptions of common stock
|
(
|
)
|
(
|
)
|
|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Balance, September 30, 2023
|
|
$
|
|
|
$
|
|
$
|
|
$
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(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||
*Amount is less than $1.
The accompanying
notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
|
Three Months Ended
September 30,
|
|||||||
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2024
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2023
|
||||||
| Cash flows from operating activities: |
||||||||
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Net loss
|
$
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(
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)
|
$
|
(
|
)
|
||
|
Adjustments to reconcile net loss to net cash from operating activities:
|
||||||||
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Net unrealized loss on equity securities at fair value
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|
|
||||||
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Net loss from equity method investments at fair value
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|
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||||||
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Net realized gain on investments
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(
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)
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|
|||||
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Impairment loss
|
||||||||
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Straight-line rent
|
( |
) | ||||||
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Depreciation and amortization
|
|
|
||||||
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Amortization of deferred financing costs and debt mark-to-market
|
|
|
||||||
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Accretion of above (below) market lease, net
|
(
|
)
|
( |
) | ||||
|
Changes in assets and liabilities:
|
||||||||
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Investments income, rents and other receivables
|
(
|
)
|
|
|||||
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Prepaid expenses and other assets
|
|
|
||||||
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Deferred rent and other liabilities
|
|
(
|
)
|
|||||
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Accounts payable and accrued liabilities
|
|
|
||||||
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Due to related entities
|
(
|
)
|
(
|
)
|
||||
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Net cash from operating activities
|
|
|
||||||
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|
||||||||
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Cash flows from investing activities:
|
||||||||
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Proceeds from sale of investments
|
||||||||
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Investments in real estate assets
|
( |
) | ( |
) | ||||
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Purchase of investments
|
( |
) | ( |
) | ||||
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Return of capital distributions
|
|
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||||||
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Net cash from investing activities
|
(
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)
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(
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)
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||||
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Cash flows from financing activities:
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||||||||
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Proceeds from mortgage notes payable
|
||||||||
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Payments on mortgage notes payable
|
(
|
)
|
(
|
)
|
||||
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Payments on notes payable
|
(
|
)
|
(
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)
|
||||
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Dividend to common stockholders
|
(
|
)
|
(
|
)
|
||||
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Dividend to Series A preferred stockholders
|
( |
) | ||||||
|
Dividend to Series B preferred stockholders
|
( |
) | ||||||
|
Proceeds from issuance of Series A preferred stock
|
|
|
||||||
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Proceeds from issuance of Series B preferred stock
|
||||||||
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Payment on finance lease liabilities
|
( |
) | ( |
) | ||||
|
Payment of selling commissions and fees
|
(
|
)
|
(
|
)
|
||||
|
Contributions by non-controlling interests holders
|
|
|
||||||
|
Distributions to non-controlling interests holders
|
( |
) | ( |
) | ||||
|
Redemption of common stock, net of stock redemption payable
|
|
(
|
)
|
|||||
|
Capital pending acceptance
|
(
|
)
|
(
|
)
|
||||
|
Net cash from financing activities
|
|
|
||||||
|
|
||||||||
|
Net decrease in cash, cash equivalents and restricted cash
|
(
|
)
|
(
|
)
|
||||
|
Cash, cash equivalents and restricted cash at beginning of the period
|
|
|
||||||
|
Cash, cash equivalents and restricted cash at end of the period
|
$
|
|
$
|
|
||||
|
|
||||||||
|
Cash and cash equivalents at end of the period
|
$
|
|
$
|
|
||||
|
Restricted cash at end of the period
|
|
|
||||||
|
Cash and restricted cash at end of the period classified as assets held for sale
|
|
|
||||||
|
Total cash, cash equivalents, restricted cash and cash classified as held for sale at end of the
period
|
$
|
|
$
|
|
||||
|
|
||||||||
|
Supplemental disclosure of non-cash financing activities and other cash flow information:
|
||||||||
| Issuance of Series A preferred stock through reinvestment of dividends | $ | $ | ||||||
| Issuance of Series B preferred stock through reinvestment of dividends |
$ | $ | ||||||
|
Increase in liquidation preference of Series B preferred stock
|
$
|
|
$
|
|
||||
|
Issuance Operating Partnership Preferred Units - Series A through reinvestment of dividends
|
$
|
|
$
|
|
||||
|
Cash paid for interest
|
$
|
|
$
|
|
||||
| Increase in liquidation preference of Operating Partnership Preferred Units - Series B | $ | $ | ||||||
|
Issuance of the Operating Partnership Preferred Units for the purchase of Green Valley Medical Center, LP (Note 1)
|
$ | $ | ||||||
|
Fair value of assets acquired from consolidation of Green Valley Medical Center, LP
|
$
|
|
$
|
|
||||
|
Fair value of liabilities assumed from consolidation of Green Valley Medical Center, LP
|
$ | $ | ||||||
|
Stock-based compensation
|
$ | $ | ||||||
|
Operating Partnership Class A conversion to common stock
|
$ | $ | ||||||
|
Capitalized construction in progress outstanding as accounts payable
|
$ | $ | ||||||
|
Issuance of common stock through reinvestment of dividends
|
$ | $ | ||||||
The accompanying notes
to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
September 30, 2024
(Unaudited)
NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION
MacKenzie Realty Capital, Inc. (the “Parent Company” together with its
subsidiaries as discussed below, collectively, the “Company,” “we,” “us,” or “our”) was incorporated under the general corporation laws of the State of Maryland on January 27, 2012. We have 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”). We are 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. We commenced our operations on February 28, 2013, and our fiscal year-end is June 30.
We filed our initial registration statement in June 2012 with the Securities and Exchange Commission (“SEC”) to register
the initial public offering of 5,000,000 shares of our common stock. The initial public offering commenced in January 2014 and
concluded in October 2016. We filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000
shares of our common stock. The second offering commenced in December 2016 and concluded on October 28, 2019. We filed a third registration statement with the SEC to register a public offering of 15,000,000 shares of our common stock that was declared effective by the SEC on October 31, 2019. The third offering commenced shortly thereafter and expired on October 31,
2020. On April 29, 2024, our common stock became eligible for trading on the OTCQX Best Market under the ticker symbol of MKZR. In addition, on November 6, 2024, Nasdaq approved the listing of the
Company’s common stock, and trading commenced on November 11, 2024.
We are externally managed by MacKenzie Capital Management, LP (“MacKenzie”) under a turnkey administration agreement dated and effective as of January 1, 2021
(the “Administration Agreement”). MCM Advisers, LP (the “Investment Adviser”), an affiliate of MacKenzie, advises us in our assessment, acquisition, and divestiture of securities under the advisory agreement amended and restated effective
January 1, 2021 (the “Amended and Restated Investment Advisory Agreement”). Another affiliate of Mackenzie, MacKenzie Real Estate Advisers, LP (the “Real Estate Adviser”; together, the “Investment Adviser” and the “Real Estate Adviser” may be
referred to as “Adviser” or “Advisers” as appropriate) advises us in our assessment, acquisition, and divestiture of real estate assets. We pursue a strategy focused on investing primarily in real estate assets, and to a lesser extent (intended
to be less than 20 % of our portfolio) 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.
Our wholly owned subsidiary, MRC TRS, Inc., (“TRS”) was incorporated under the general corporation laws of the State of California on February 22, 2016, and operated as a taxable REIT
subsidiary. MacKenzie NY Real Estate 2 Corp., (“MacKenzie NY 2”), a wholly owned subsidiary of TRS, was formed for the purpose of making certain limited investments in New York companies. We terminated TRS effective December 31, 2022, after
the sale of its sole investment and transferred the ownership of MacKenzie NY 2, to the Parent Company. The financial statements of TRS (through its termination date) and MacKenzie NY 2 have been consolidated with the Parent Company.
Effective tax year 2023, MacKenzie NY 2 has elected to be treated as a taxable REIT subsidiary.
On May 20, 2020, we formed an operating partnership, MacKenzie Realty Operating Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and
operating real estate assets. As of September 30, 2024, we own all limited partnership units of the Operating Partnership except for 82,148.28
Class A Limited Partnership units, 1,060,150.83 Series A preferred units and 43,212.86 Series B preferred units. Upon liquidation of the Operating Partnership, (i) the 82,148.28
Class A Limited Partnership units are convertible into the Company’s common shares on a 1:1 conversion ratio; (ii) the 1,060,150.83 Series A preferred units are entitled to a liquidation preference of $26,503,771 (based on the stated value of $25 per share for the Series A
preferred units); and (iii) the 43,212.86 Series B preferred units are entitled to a liquidation preference of $1,080,322
(based on the stated value of $25 per share for the Series B preferred units). The Parent Company has contributed $82,093,593 in capital to the Operating Partnership since inception; thus, the Class A, Series A and Series B Preferred Units represent
approximately 25.72
In March 2021, we, together with our joint venture partners, formed two operating companies: Madison-PVT Partners LLC (“Madison”) and PVT-Madison Partners LLC (“PVT”), to acquire and operate two residential apartment buildings located in Oakland, California. We own 98.45 % and 98.75 % of equity units of Madison and PVT,
respectively. The joint venture partners own the remaining 1.55 % and 1.25 % equity units of Madison and PVT, respectively, and also hold a carried interest in both companies. We are the controlling majority owner of both companies; therefore,
effective March 31, 2021, we have consolidated the financial statements of these companies.
On April 13, 2021, we filed a preliminary offering circular (the “Offering Circular”) pursuant to Regulation A with the SEC to sell up to $50 million of shares of our Series A preferred stock at an initial offering price of $25.00 per share. We filed a post-effective amendment to the Offering Circular on October
14, 2022, and increased the offering to sell up to $75 million of shares of our Series A preferred stock. The post-effective
amendment to this Offering Circular was declared effective on November 13, 2022. We filed a second post-effective amendment to the Offering Circular on November 1, 2023, which amended the offering to sell an aggregate of up to $75 million of shares of either our Series A preferred stock or our Series B preferred stock. This post-effective amendment to the Offering Circular
was qualified by the SEC on November 14, 2023.
On October 4, 2021, through the Operating Partnership, we acquired a 90 % economic interest in Hollywood Hillview Owner, LLC (“Hollywood Hillview”), a Delaware limited liability company, to acquire and operate a multifamily building (“Hollywood Apartments”) located in Los Angeles, California. The
remaining 10 % economic interest in Hollywood Hillview is owned by an unaffiliated third party, True USA, LLC. Hollywood Hillview owns
100 % of the membership interests in PT Hillview GP, LLC (the “PT Hillview”). We are the controlling majority owner of Hollywood
Hillview; therefore, effective December 31, 2021, we have consolidated the financial statements of Hollywood Hillview.
On January 25, 2022, through the Operating Partnership, we acquired a 98 % limited liability company interest in MacKenzie BAA IG Shoreline LLC (“MacKenzie Shoreline”), formed to acquire, renovate, and own the 84-unit
multifamily building located at 1841 Laguna Street, Concord, CA. The joint venture partners own the remaining 2 % of the limited
liability company interest as well as a carried interest. We are the controlling majority owner of the MacKenzie Shoreline; therefore, effective June 30, 2022, we have consolidated the financial statements of MacKenzie Shoreline.
On April 1, 2022, we, and our newly formed, wholly owned subsidiary, FSP Merger
Sub, Inc. (“Merger Sub”) entered into a reverse triangular merger agreement with FSP Satellite Place Corp. (“FSP Satellite”), pursuant to which the Merger Sub merged with and into FSP Satellite with FSP Satellite as the surviving entity, but
renamed MacKenzie Satellite Place Corp. (“MacKenzie Satellite”), effective June 1, 2022, at which time MacKenzie Satellite became our wholly owned subsidiary. MacKenzie Satellite owns the Satellite Place Office Building, a six-story Class “A”
suburban office building containing approximately 134,785 rentable square feet of space located on approximately 10 acres of land in Duluth, GA. The former shareholders of FSP Satellite received cash or shares of the Company, based upon their election. All former
shareholders of FSP Satellite holders elected to be paid in cash with the exception of two shareholders who elected to receive common
and preferred stocks in the amount of $27,503 and $13,752 , respectively. Subsequent to the completion of the merger, we have consolidated the financial statements of MacKenzie Satellite effective June 30, 2022.
On May 6, 2022, the Operating Partnership purchased 100 % of the membership interests in eight
limited liability companies (each a “Management Company”) and one parcel of entitled land from The Wiseman Company, LLC (“Wiseman”)
for $18,333,000 and $3,050,000 ,
respectively. Each Management Company is the sole general partner and owns all general partnership interest in a limited partnership (each a “Wiseman Partnership”) that owns a Class A or B office property in Napa, Fairfield, Suisun, or Woodland,
California (the “Wiseman Properties”). As part of the purchase agreement, $4,650,000 of the purchase price was paid through the
issuance of 206,666.67 Preferred Units of the Operating Partnership and $750,000 of the land purchase price was paid through the issuance of 77,881.62
Class A units of the Operating Partnership. We have consolidated the financial statements of the eight limited liability companies,
which hold the general partnership interests in the limited partnerships, effective June 30, 2022.
Wiseman is a full-service real estate syndicator,
developer, broker, and property manager founded in 1979. Concurrently with acquiring the Management Companies and land from Wiseman, the Operating Partnership also negotiated the right to acquire the limited partnership interests in each
Wiseman Partnership at pre-determined prices over a two-year period that expired in May 2024. Management believed this transaction
was strategically important as it focuses the portfolio on our desired geographic area (Western United States) and created a captive pipeline of properties. We completed the acquisition of all of the limited partnership interests in five of the eight partnerships prior
to the expiration of the two-year window, and one shortly thereafter via a separate agreement. We may acquire the remaining limited partnership interests via separate agreements in the future, but there is no agreement or obligation to do so. We acquired
all the limited partnership interests in, and therefore all the equity in, the following partnership on the following dates: First & Main, LP (“First and Main”) in July 2022, 1300 Main, LP (“1300 Main”) in October 2022, Woodland Corporate
Center Two, LP (“Woodland Corporate Center Two”) in January 2023, Main Street West, LP (“Main Street West”) in February 2023, One Harbor Center, LP (“One Harbor Center”) in May 2024 and Green Valley Medical Center, LP (“Green Valley Medical
Center”) in August 2024. Some of these acquisitions were paid in all cash, and some were purchased through issuance of 459,620.35
and 43,212.86 of the Operating Partnership’s Series A and Series B preferred units, respectively. We consolidated the financial
statements of these six limited partnerships after we completed the acquisition of the limited partnership interests in each of
these Wiseman Partnerships.
On February 6, 2023, we formed a new entity, MRC Aurora, LLC (the “MRC Aurora”) for the purpose of owning, developing, renovating, leasing, managing, renting, and potentially selling certain real
property and building and improvements located at 5000 Wiseman Way, Fairfield, California (the “Aurora Project”). The Parent Company is the manager and the Operating Partnership is the sole common member of MRC Aurora. The Operating Partnership
contributed the entitled land located at 5000 Wiseman Way, Fairfield, California to MRC Aurora in exchange for the common membership interest in MRC Aurora. MRC Aurora commenced selling its preferred units in February 2024 with the goal of
raising $10 million in preferred capital and closed on a construction loan of $17.15 million on February 21, 2024, to fund the development of the Aurora Project. Since the Operating Partnership has 100 % of the voting rights and we, as the manager, have the managing and operating rights of MRC Aurora, we have consolidated the financial statements of MRC Aurora.
On September 1, 2023, we formed 220 Campus Lane, LLC (“220 Campus Lane”) to
acquire, lease and operate a vacant office building located at 220 Campus Lane, Fairfield, CA (“220 Campus Lane Office Building”) and Campus Lane Residential, LLC (“Campus Lane Residential”) to acquire and develop a parcel of vacant land
adjacent to 220 Campus Lane Office Building into a multi-family residential community. 220 Campus Lane acquired the 220 Campus Lane Office Building, and Campus Lane Residential acquired the vacant land in September 2023. The entitlement
process for the vacant land is currently underway, but our goal of commencing construction in late 2025 will be dependent upon the City’s approval of our development application that was submitted in April 2024 and securing the necessary
financial resources. We own 100
On January 1, 2024, the Operating
Partnership acquired 100 % membership interest in GV Executive Center, LLC (“GVEC”), which owns an office building located in
Fairfield, California known as “Green Valley Executive Center” from an affiliate of our Advisers, for a net purchase price of $8,703,127 ,
which was paid through issuance of 386,805.64 Series A Preferred Units of the Operating Partnership. The net acquisition price
was determined based on the price paid for the building by the affiliate in August 2022 adjusted for the company’s other current assets and liabilities as of the acquisition date. The acquisition of GVEC was approved by our Independent
Directors.
On August 26, 2024, the Company entered into a letter agreement with Maxim Group LLC
(“Maxim”) to provide general financial advisory and investment banking services to the Company in connection with, among other things, strategic planning, potential uplisting to a U.S. exchange (Nasdaq, New York Stock Exchange), and
potential rights offering, equity issuance or other mechanisms to enhance corporate and shareholder value. In connection with the agreement, the Company has issued in a private placement an aggregate amount of 133,000 shares of common stock to Maxim’s affiliate, approximately 1 % of the Company’s outstanding stock. The common stock does not have any conversion rights.
As of September 30, 2024, we have raised approximately $119.10
million from our three common stock public offerings, $18.56 million from our Series A preferred stock offering and $1.65 million
from our Series B preferred stock offering pursuant to the Offering Circular. As of September 30, 2024, we have issued common and Series A and Series B preferred shares with gross proceeds of $15.56 million and $0.30 million, respectively, under our
DRIP. Of the total shares issued by us as of September 30, 2024, approximately $14.28 million and $0.11 million, respectively, worth of common and Series A preferred stock shares have been repurchased under our 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 Regulation S-X. We follow the accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of our wholly owned consolidated subsidiaries
and majority-owned controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of
management, necessary for the fair presentation of our results for the interim periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
The assets and liabilities of each of the consolidated subsidiaries are
separate from those of the Parent Company and the Operating Partnership. Consequently, the assets of the consolidated subsidiaries are not available to settle the obligations of the Parent Company or the Operating Partnership, and the
obligations of the subsidiaries does not constitute obligations of the Parent Company or the Operating Partnership.
These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2024, included in our 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, 2024.
Certain prior
period information has been reclassified to conform to the current year end presentation. The reclassification has no effect on our consolidated balance sheet or the consolidated statement of operations as previously reported.
Use of Estimates
The preparation of consolidated financial statements
requires management to make estimates and assumptions that affect reported asset values, liabilities, revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to
change, and actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Our cash and cash
equivalents represent current bank accounts and other bank deposits free of encumbrances and having maturity dates of three months or less from the respective dates of deposit. We limit cash investments to financial institutions with high credit
standing; therefore, we believe our cash investments are not exposed to any significant credit risk. The restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, and debt service
and leasing costs held by lenders. These balances are insured by the Federal Deposit Insurance Corporation up to certain limits. Often, the cash balances held in financial institutions by us may exceed these insured limits.
Restricted cash is
subject to legal or contractual restrictions as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used.
Investment Income Receivable
Investment income receivable represents dividends,
distributions, and sales proceeds recognized in accordance with our revenue recognition policy but not yet received as of the date of the consolidated financial statements. We monitor and adjust our receivables, and those deemed to be
uncollectible are written-off only after all reasonable collection efforts are exhausted. We believe, based on the credit worthiness of the obligors, that all investments income receivable balances outstanding as of September 30, 2024 and June
30, 2024, are collectible and do not require recording any uncollectible allowance.
Rents and Other Receivables
We will
periodically evaluate the collectability of amounts due from tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. We exercise
judgment in establishing these allowances and consider payment history and current credit status of tenants in developing these estimates. As of September 30, 2024 and June 30, 2024, we recognized an allowance for doubtful accounts of $182,218 and $213,797 , respectively.
Capital Pending Acceptance
We conduct closings for new issuance of our stocks twice
per month and admit new stockholders effective beginning the first of each month. Subscriptions are effective only upon our 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 balance sheets. As of September 30, 2024 and June 30, 2024, capital pending acceptance was $96,700
and $297,000 , 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, is not subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it generally distributes at least 90 % of its REIT taxable income (determined without regard to the dividends paid deduction and excluding any net capital gain) to the stockholders and meets certain other
conditions. To the extent it satisfies the annual distribution requirement but distributes less than 100 % of its REIT taxable
income, it will be subject to U.S. federal corporate income tax on its undistributed taxable income. In addition, it will be subject to a 4 %
nondeductible excise tax if the actual amount that it pays to its stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
The Parent Company satisfied the annual dividend payment
and other REIT requirements for the tax year ended December 31, 2023. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2023. In addition, for the tax year
2024, we intend to pay the requisite amounts of dividends during the year and meet other REIT requirements such that the Parent Company will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during
any fiscal periods within the tax year 2024.
MacKenzie NY 2 is subject to corporate federal and
state income tax on its taxable income at regular statutory rates. As of September 30, 2024, it did no no no
The Operating Partnership is a limited partnership. Hollywood
Hillview, MacKenzie Shoreline, Madison, PVT, 220 Campus Lane, Campus Lane Residential and GVEC are limited liability companies. First & Main, 1300 Main, Woodland Corporate Center Two, Main Street West, One Harbor Center, and Green
Valley Medical Center are limited partnerships. Accordingly, all income tax liabilities of these entities flow through to their partners, which, subject to the minority exceptions described in this document, ultimately is the Company.
Therefore, no income tax provisions are recorded for these entities.
We 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 liabilities attributable to
the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, we consider 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 recognizing, measuring, presenting, and disclosing uncertain tax positions in the financial statements. As
of September 30, 2024 and June 30, 2024, there were no
Subsequent Events
Subsequent events are events or transactions that occur
after the date of the consolidated balance sheets but before the date the consolidated financial statements are issued. Subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance
sheets are considered in the preparation of the consolidated financial statements presented herein. Subsequent events that occur after the date of the consolidated balance sheets that do not provide evidence about the conditions that existed as
of the date of the consolidated statements of changes in equity are considered for disclosure based upon their significance in relation to our consolidated financial statements taken as a whole.
Fair Value of
Financial Instruments
Fair value
estimates are made at discrete points in time based on relevant information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. We
believe that the carrying amounts of our financial instruments, consisting of cash, restricted cash, investments income, rent and other receivables, prepaid expenses and other assets, mortgage notes payable, accounts payable and accrued
liabilities, below-market lease liabilities, net, deferred rent and other liabilities and due to related entities, approximate the fair values of such items based on their nature, terms, and interest rates.
Equity Securities
We have minority and non-controlling equity investments
in various limited partnerships and non-traded entities, which do not have readily determinable fair values. We do not have controlling interests in these entities. Thus, these investments have been recorded as investments in equity securities
in accordance with ASC Topic 321, Investments – Equity Securities, and measured at fair value. The changes in the fair value of these investments are recorded in the consolidated statements of
operations.
Equity Method Investments with Fair Value Option Election
We elected the fair value option of accounting for the investments listed below that would have otherwise been recorded under the equity method of
accounting. The primary purpose of electing the fair value option was to enhance the transparency of our financial condition. Changes in the fair value of these investments, which are inclusive of equity in income, are recorded in the
consolidated statements of operations during the period such changes occur.
The below list of investments would have been accounted for under the equity method if the fair value method had not been elected and have been included in
investments in the consolidated balance sheets as of September 30, 2024 and June 30, 2024:
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
September 30, 2024
|
|||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
|
%
|
$
|
|
|||||
|
Lakemont Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
||||||
|
Martin Plaza Associates, LP
|
Limited Partnership |
GP Interest |
% | * |
|||||||
|
Westside Professional Center I, LP
|
Limited Partnership |
GP Interest |
% | * |
|||||||
|
Total
|
$
|
|
|||||||||
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
June 30, 2024
|
|||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
% | $ | |||||||
|
Lakemont Partners, LLC
|
Limited Liability Company
|
LP Interest
|
% | ||||||||
|
Green Valley Medical Center, LP
|
Limited Partnership |
GP Interest |
% | * | |||||||
|
Martin Plaza Associates, LP
|
Limited Partnership |
GP Interest |
% | * | |||||||
|
Westside Professional Center I, LP
|
Limited Partnership |
GP Interest |
% | * | |||||||
|
Total
|
$
|
|
|||||||||
*The
general partner has a 1 25 50
Unconsolidated Investments (Non-security) at Fair Value
Certain of our investments are equity method investments that do not meet the
consolidation requirements under ASC 810 and, pursuant to GAAP, are shown as unconsolidated investments (non-security) at fair value in the consolidated balance sheets. Under the 1940 Act, these investments are considered “voting securities” as
opposed to “investment securities”. Therefore, we listed the following equity method investments separately from the rest of the equity method investments at fair value in the consolidated balance sheets: (i) as of September 30, 2024, our
voting securities in Martin Plaza Associates, LP and Westside Professional Center I, LP (“Westside Professional Center”); and (ii) as of June 30, 2024, our voting securities in Green Valley Medical Center, Martin Plaza Associates, LP and
Westside Professional Center.
Assets and Liabilities Held for Sale
We classify long-lived assets or disposal groups to be sold as held for sale in the period in which all of the following criteria are met:
|
•
|
Management, having the authority to approve the action, commits to a plan to sell the asset (disposal group);
|
|
•
|
The asset (disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such
assets (disposal groups);
|
|
•
|
An active program to locate a buyer and other actions required to complete the plan to sell the asset (disposal group) have been initiated;
|
|
•
|
The sale of the asset (disposal group) is probable, and transfer of the asset (disposal group) is expected to qualify for recognition as a completed sale
within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year;
|
|
•
|
The asset (disposal group) is being actively marketed for sale at a price that is reasonable in relation to its current fair value. The price at which a
long-lived asset (disposal group) is being marketed is indicative of whether the entity currently has the intent and ability to sell the asset (disposal group). A market price that is reasonable in relation to fair value
indicates that the asset (disposal group) is available for immediate sale, whereas a market price in excess of fair value indicates that the asset (disposal group) is not available for immediate sale; and
|
|
•
|
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
|
On the day that these criteria are met, we suspend depreciation on the investment properties held for sale, including depreciation for tenant improvements and additions, as well as on the amortization of acquired
in-place leases. The investment properties and liabilities associated with those investment properties that are held for sale are classified separately on the consolidated balance sheets for the most recent reporting period and recorded
at the lesser of the carrying value or fair value less costs to sell. The prior period investment properties and liabilities associated with those investment properties that are classified as held for sale have been classified
separately as assets and liabilities held for sale on the consolidated balance sheet as of June 30, 2024 for comparative purposes. Refer to Note 5.
Leases
Six of our properties, 1300 Main, Main Street West,
Woodland Corporate Center, Green Valley Executive Center, One Harbor Center and Green Valley Medical Center had solar equipment leases in place at the time of our acquisition. Therefore, these existing solar leases were reassessed at the
acquisition date and were recorded as finance leases in accordance with ASC 842. We record leases on the consolidated balance sheets in the form of a lease liability for the present value of future minimum payments under the lease terms and
a right-of-use asset equal to the lease liability adjusted for items such as deferred or prepaid rent, lease incentives, and any impairment of the right-of-use asset. The discount rate used in determining the lease liability is based upon
incremental borrowing rates that we could obtain for similar loans as of the date of commencement or renewal. We do not record leases on the consolidated balance sheets that are classified as short term (less than one year).
At lease inception, we determine the lease term by considering the
minimum lease term and all optional renewal periods that are reasonably certain to be exercised. The lease term is also used to calculate straight-line rent expense. The depreciable life of leasehold improvements is limited by the
estimated lease term, including renewals if they are reasonably certain to be exercised. Our leases do not contain residual value guarantees or material variable lease payments that will impact our ability to pay dividends or cause us to
incur additional expenses.
The amortization of the right-of-use asset arising
from finance leases is expensed through depreciation and amortization expense and the interest on the related lease liability is expensed through interest expense on our consolidated statements of operations.
Impairment of Real Estate Assets
We continually monitor events and changes in circumstances
that could indicate that the carrying value of our real estate and related intangible assets may not be recoverable. When indicators of potential impairment emerge, we assess whether we will recover the carrying value of the asset through its
undiscounted future cash flows and its eventual disposition. Based on this assessment, if we do not believe that we will recover the carrying value of the real estate and related intangible assets, we will record an impairment loss to the
extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets.
During the quarter ended September 30, 2024, due to an early
lease termination by the anchor tenant at our Main Street West Office Building, we recorded an impairment loss of $4,406,249 .
We utilized a third-party appraisal to estimate the fair value of the property and determine the impairment amount. We consider these inputs as Level 3 measurements within the fair value hierarchy.
Stock-based Compensation
ASC 718, Stock-based Compensation, requires
generally that all equity awards granted to employees and consultants be accounted for at fair value. This fair value is measured at grant date for stock settled awards, and at subsequent exercise or settlement for cash-settled awards. Under this
method, we recorded the 133,000 shares of common stock issued to Maxim discussed in Note 1 at fair value as a deferred offering cost.
The fair value is computed based on the trading price of the common stock on the OTCQX capital market at the grant date of August 26, 2024.
Reportable Segments
ASC 280, Segment
Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have one
reportable segment, income-producing real estate properties, which consists of activities related to investing in real estate. The real estate properties are geographically diversified throughout the United States, and we evaluate operating
performance on an overall portfolio level.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting – Improvements to Reportable Segments Disclosures, to enhance reportable segment disclosure requirements, primarily through increased disclosures about significant segment expenses. The amendment is effective
for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and should be applied retrospectively to all periods presented. Early adoption is permitted. We are currently
evaluating the impact of these amendments on our consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes – Improvements to Income Tax, to enhance the transparency and decision usefulness of income tax disclosures, primarily related to rate reconciliation and income taxes paid information. The amendment is effective
for annual periods beginning after December 15, 2024, and should be applied on a prospective basis, with the option to apply retrospectively. Early adoption is permitted for annual financial statements that have not yet been issued or made
available for issuance. We are currently evaluating the impact of adopting these amendments on our consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, Disaggregation of Income Statement Expenses. The ASU’s purpose is to improve the disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of
expenses (including purchases of inventory, employee compensation, depreciation, amortization, and depletion) in commonly presented expense captions (such as cost of sales, SG&A, and research and development). This ASU is effective for the
Company’s annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated
financial statements.
NOTE 3 – INVESTMENTS IN REAL ESTATE
The following
tables provide summary information regarding our operating properties, which are owned through our subsidiaries. The ownership interest shown below is the percentage of the property owned by the subsidiary, not the percentage of the subsidiary
owned by the Parent Company or the Operating Partnership.
Consolidated
Operating Properties
|
Property Name:
|
|
|
|
|
||||
|
Property Owner:
|
|
|
|
|
||||
|
Location:
|
|
|
|
|
||||
|
Number of Tenants:
|
|
|
|
|||||
|
Year Built:
|
|
|
|
|||||
|
Ownership Interest:
|
|
|
|
|
||||
|
Property Name:
|
|
|
|
|||||
|
Property Owner:
|
|
|
|
|||||
|
Location:
|
|
|
|
|||||
|
Number of Tenants:
|
|
|
|
|||||
|
Year Built:
|
|
|
|
|||||
|
Ownership Interest:
|
|
|
|
|||||
| Property Name: |
||||||||
| Property Owner: |
||||||||
| Location: |
||||||||
| Number of Tenants: |
||||||||
| Year Built: |
||||||||
| Ownership Interest: |
||||||||
| Property Name: | ||||||||
| Property Owner: | ||||||||
| Location: | ||||||||
| Number of Tenants: | ||||||||
| Year Built: | ||||||||
| Ownership Interest: |
The following table presents the purchase price
allocation of real estate asset acquired during the three months ended September 30, 2024 based on asset acquisition accounting.
|
Property Name:
|
||||
|
Acquisition Date:
|
||||
|
Purchase Price Allocation
|
||||
|
Land
|
$
|
|
||
| Building |
||||
| Site Improvements | ||||
| Tenant Improvements | ||||
|
Lease In Place
|
||||
| Leasing Commissions | ||||
| Legal & Marketing Lease Up Costs |
||||
| Solar Finance Lease | ||||
| Total assets acquired |
||||
| Net leasehold liability |
(
|
)
|
||
| Total assets acquired, net | $ | |||
The total
depreciation expense of our operating properties for the three months ended September 30, 2024 and 2023 were $1,581,524 and $1,129,775 , respectively.
Operating Leases:
Our real estate
assets are leased to tenants under operating leases that contain varying terms and expirations. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and
conditions as negotiated. We retain substantially all the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, we do not require a security deposit from tenants on our commercial
real estate properties, depending upon the terms of the respective leases and the creditworthiness of the tenants. Even when required, security deposits generally are not significant amounts. Therefore, exposure to credit risk exists to the
extent that a receivable from a tenant exceeds the amount of the security deposit. Security deposits received in cash related to tenant leases are included in other accrued liabilities in the accompanying consolidated balance sheets and were
immaterial as of September 30, 2024 and June 30, 2024.
The following table
presents the components of income from real estate operations for the three months ended September 30, 2024 and 2023:
|
Three Months Ended
|
Three Months Ended
|
|||||||
|
September 30, 2024
|
September 30, 2023
|
|||||||
|
Lease income - Operating leases
|
$
|
|
$
|
|
||||
|
Variable lease income (1)
|
|
|
||||||
|
$
|
|
$
|
|
|||||
| (1) |
|
As of September 30, 2024, the future minimum rental
income from our real estate properties under non-cancelable operating leases are as follows:
|
Year ended June
30, :
|
Rental Income
|
|||
|
2025
|
$
|
|
||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
2029
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
Lease Intangibles, Above-Market Lease Assets and Below-Market
Lease Liabilities, Net
As of September
30, 2024 and June 30, 2024, our acquired lease intangibles, above-market lease assets, and below-market lease liabilities were as follows:
|
As of September 30, 2024
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average amortization period (years)
|
||||||||||||
| As of June 30, 2024 |
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average amortization period (years)
|
||||||||||||
Our amortization of lease intangibles, above-market lease assets and below-market lease liabilities for the three months ended September 30, 2024 and
2023, were as follows:
|
Three Months Ended September 30, 2024
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Amortization
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Three Months Ended September 30, 2023
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Amortization
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
The following table
provides the projected amortization expense and adjustments to revenue from tenants for intangible assets and liabilities for the next five years:
|
Year Ended June 30,
|
||||||||||||||||||||||||
|
2025 (remainder)
|
2026
|
2027
|
2028
|
2029
|
Thereafter |
|||||||||||||||||||
|
In-place leases, to be included in amortization
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||
|
Above-market lease intangibles
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||||||||||
|
Below-market lease liabilities
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
( |
) | ||||||||||||
|
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$ | ( |
) | ||||||
NOTE 4 – INVESTMENTS
The following table summarizes the composition of our equity method investments
with fair value option election and other equity securities at fair value as of September 30, 2024 and June 30, 2024:
| Fair Value |
Fair Value |
|||||||
| Asset Type | September 30, 2024 |
June 30, 2024
|
||||||
|
Non Traded Companies
|
$ |
|
$ |
|||||
|
GP Interests (Equity method investment with fair value
option election)
|
|
|||||||
|
LP Interests (Equity method investment with fair value
option election)
|
|
|||||||
|
Total
|
$
|
|
$ |
|||||
Our above total investments at fair value are disclosed in two separate lines as investments and unconsolidated investments (non-securities) in the consolidated
balance sheets as of September 30, 2024 and June 30, 2024.
During the three months ended September 30, 2024, we realized a total net gain of $151,370 from two investment liquidations and disposals (Blackstone Real Estate Income Trust, Inc. and Highlands REIT, Inc.). During the three months ended September 30, 2023, no realized gain or loss on investments was recognized.
The following table presents fair value measurements of our investments as of
September 30, 2024 and June 30, 2024, according to the fair value hierarchy that is described in our annual report on Form 10-K:
| As of September 30, 2024 |
||||||||||||||||
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Non Traded Companies
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
| GP Interests |
||||||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
| As of June 30, 2024 | ||||||||||||||||
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Non Traded Companies
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
| GP Interests |
||||||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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, 2024:
|
Balance at July 1, 2024
|
$
|
|
||
|
Purchases of investments
|
|
|||
| Transfer to Investments in Real Estate |
( |
) | ||
| Proceeds from sales, net |
( |
) | ||
| Net realized gain |
||||
|
Net unrealized gain
|
|
|||
|
Ending balance at September 30, 2024
|
$
|
|
For the three months ended September 30, 2024, net included in earnings relating to Level III investments still held at September 30, 2024 was $146,930 .
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, 2023:
|
Balance at July 1, 2023
|
$
|
|
||
|
Purchases of investments
|
|
|||
| Return of capital distributions | ( |
) | ||
|
Net unrealized loss
|
(
|
)
|
||
|
Ending balance at September 30, 2023
|
$
|
|
There
were no transfers of investments from Level III to Level I category during the three months ended September 30, 2023.
For the three months ended September 30, 2023, net included in earnings relating to Level III investments still held at September 30, 2023 was $2,267,248 .
The following table shows quantitative information about significant
unobservable inputs related to the Level III fair value measurements used at September 30, 2024:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable
Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Companies
|
$ |
|
Market Activity
|
Secondary market industry publication
|
||||||||||
|
Acquisition cost
|
||||||||||||||
| GP Interests |
Direct Capitalization Method
|
Capitalization rate
|
||||||||||||
|
Discount rate
|
|
|||||||||||||
|
LP Interests
|
|
Discounted Cash Flow
|
Discount rate
|
|
|
|||||||||
|
LP Interests
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
|||||||||||
|
$
|
|
|||||||||||||
The following table shows quantitative information about significant
unobservable inputs related to the Level III fair value measurements used at June 30, 2024:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Companies
|
$ |
|
Market Activity
|
Secondary market industry publication
|
||||||||||
| Acquisition cost | ||||||||||||||
|
GP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|||||||||
|
Discount rate
|
|
|||||||||||||
|
LP Interests
|
|
Discounted Cash Flow
|
Discount rate
|
|
||||||||||
|
LP Interests
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
|||||||||||
|
$
|
|
|||||||||||||
Summarized Financial Statements for Equity Method Investments
(Fair Value Option)
Our investments in securities are generally in small and mid-sized
companies in a variety of industries. In accordance with the Rule 8-03(b)(3) of Regulation S-X applicable for smaller reporting companies, we must determine which of our equity method investments measured at fair value under the Fair Value
Option are considered “significant”, if any. Regulation S-X mandates the use of three different tests to determine if any of our investments are considered significant investments: the investment test, the asset test, and the income test. The
rule requires summarized financial statements for any significant equity method investments in an annual and interim report if any of the three tests exceed 20%.
In addition to the SEC rules, ASC 323-10-50-3(c) requires summarized financial
statements of our equity method investments, including those reported under the fair value option, if they are material individually or in aggregate.
None of our equity method investments accounted under the fair value option were
determined to be individually significant under any of the tests and are not material in aggregate as of September 30, 2024.
Unconsolidated
Significant Subsidiaries
In accordance with SEC Rules 3-09 and 4-08(g) of Regulation S-X, we must
determine which of our investments in securities are considered “significant subsidiaries”, if any. Regulation S-X mandates the use of three different tests to determine if any of our controlled investments are significant subsidiaries: the
investment test, the asset test, and the income test. Rule 3-09 of Regulation S-X requires separate audited financial statements for any unconsolidated majority-owned subsidiary in an annual report if any of the three tests exceed 20%. Rule
4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%.
As of September 30, 2024 and June 30, 2024, none of our investments in securities were considered unconsolidated significant subsidiaries under the SEC
rules described above.
NOTE 5 – REAL ESTATE ACQUISITIONS AND HELD FOR SALE
As discussed in Note 1, on August 1, 2024, the Operating Partnership completed the acquisition of 100 %
limited partnership interest in Green Valley Medical Center for a total purchase price of $3,004,194 , of which $2,712,194 was paid through the issuance of 120,541.96
Series A Preferred Units of the Operating Partnership.
Assets and Liabilities Held for Sale
In August 2024, the
Company decided to list Hollywood Apartments for sale and met the criteria to be classified as held for sale, which requires us to present the related assets and liabilities as separate line items in our consolidated balance sheets. We recorded
these assets and liabilities at the lesser of the carrying value or fair value less costs to sell. As of September 30, 2024, we did not record any impairment loss allowance on assets held for sale.
The following table
presents information related to the major classes of assets and liabilities that were classified as held for sale in our consolidation balance sheets:
|
|
September 30, 2024
|
June 30, 2024
|
||||||
|
Assets
|
||||||||
|
Real estate assets
|
||||||||
|
Land
|
$
|
|
$
|
|
||||
|
Building, fixtures and improvements
|
|
|
||||||
|
Intangible lease assets
|
|
|
||||||
|
Less: accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
accumulated amortization
|
(
|
)
|
(
|
)
|
||||
|
Total real estate assets, net
|
|
|
||||||
|
Cash and cash equivalents
|
|
|
||||||
|
Restricted cash
|
|
|
||||||
|
Investment income, rent and other receivable
|
|
|
||||||
|
Prepaid expenses and other assets
|
|
|
||||||
|
Total assets
|
$
|
|
$
|
|
||||
|
|
||||||||
|
Liabilities
|
||||||||
|
Deferred rent and other liabilities
|
$ |
|
$ |
|
||||
|
Accounts payable and accrued liabilities
|
|
|
||||||
|
Due to related entities
|
|
|
||||||
|
Total liabilities
|
$
|
|
$
|
|
||||
NOTE 6 –LEASES
Lessee Arrangements
As discussed in Note 2, we acquired six partnerships which had solar equipment leases
in place. We reassessed the leases as of the acquisition date and recorded them as finance leases in accordance with ASC 842. Our leases have remaining terms of 3.92 to 8.50 years. Right-of-use assets and lease liabilities by lease type, and the associated balance sheet
classifications, are as follows:
| Balance Sheet Classification |
September 30, 2024
|
June 30, 2024 | |||||||
|
Right-of-use assets:
|
|||||||||
|
Finance leases
|
|
$
|
|
$ |
|||||
|
Lease liabilities:
|
|||||||||
|
Finance leases
|
Finance lease liabilities
|
$
|
|
$ |
|||||
We have included these leases in as follows:
|
September 30, 2024
|
June 30, 2024 | |||||||
|
Building, fixtures and improvements
|
$
|
|
$ |
|||||
|
Accumulated depreciation
|
(
|
)
|
( |
) | ||||
| Real estate assets, net |
$
|
|
$ |
|||||
Lease Expense
The components of total lease cost were as follows for the three months ended September 30, 2024 and 2023:
|
September 30, 2024
|
September 30, 2023 |
|||||||
|
Finance lease cost
|
||||||||
|
Right-of-use asset amortization
|
$
|
|
$ |
|||||
|
Interest expense
|
|
|||||||
|
Total lease cost
|
$
|
|
$ |
|||||
Lease Obligations
Future undiscounted lease payments for finance leases with initial terms of one year or more are as follows:
|
Fiscal Year Ending June 30, :
|
Finance Leases
|
|||
|
2025 (remainder)
|
$
|
|
||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
2029
|
|
|||
|
Thereafter
|
|
|||
|
Total undiscounted lease payments
|
|
|||
|
Less: Imputed interest
|
(
|
)
|
||
|
Net lease liabilities
|
$
|
|
||
Supplemental Lease Information
|
September 30, 2024
|
June 30, 2024 | |||||||
|
Finance lease weighted average remaining lease term (years)
|
|
|||||||
|
Finance lease weighted average discount rate
|
|
|
||||||
|
Cash paid for amounts included in the measurement of lease liabilities
|
||||||||
|
Financing cash flows from finance leases
|
$
|
|
$ |
|||||
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
$
|
|
$ |
|||||
NOTE 7 – VARIABLE INTEREST ENTITIES
A variable interest in a variable interest entity (VIE) is an investment or other interest that will absorb portions of the VIE’s expected losses
and/or receive portions of the VIE’s expected residual returns. Our variable interests in VIEs include limited partnership interests. VIEs sometimes finance the purchase of assets by issuing limited partnership interests that are either
collateralized by or indexed to the assets held by the VIE.
The enterprise with a controlling financial interest in a VIE is known as the primary beneficiary and consolidates the VIE. We determine whether we
are the primary beneficiary of a VIE by performing an analysis that principally considers: (a) which variable interest holder has the power to direct activities of the VIE that most significantly impact the VIE’s economic performance; (b) which
variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; (c) the VIE’s purpose and design, including the risks the VIE was designed to create and
pass through to its variable interest holders; (d) the VIE’s capital structure; (e) the terms between the VIE and its variable interest holders and other parties involved with the VIE; and (f) related-party relationships. We reassess our
evaluation of whether an entity is a VIE when certain reconsideration events occur. We reassess our determination of whether we are the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.
Nonconsolidated VIEs
As of September 30, 2024 and June 30, 2024, two
The table below presents a summary of the nonconsolidated VIEs in which we hold
variable interests:
|
Total Nonconsolidated VIEs
|
As of September 30, 2024
|
As of June 30, 2024 | ||||||
|
Fair value of investments in VIEs
|
$
|
|
$ | |||||
|
Carrying value of variable interests - assets
|
$
|
|
$ | |||||
|
Maximum Exposure to Loss:
|
||||||||
|
Limited Partnership Interest
|
$
|
|
$ | |||||
Our exposure to the obligations of VIEs is generally limited to the carrying
value of the limited partnership interests in these entities.
NOTE 8 – RELATED PARTY TRANSACTIONS
Advisory Agreements Effective January 1,
2021:
As discussed in Note 1, on January 26, 2021, our Board of Directors approved,
effective January 1, 2021, two advisory agreements, an Advisory Management Agreement with the Real Estate Adviser and the Amended
and Restated Investment Advisory Agreement with the Investment Adviser.
The terms of the Advisory Management Agreement with the Real Estate Adviser
provide that we will continue to pay an Asset Management Fee on essentially the same terms as we were paying the Investment Adviser prior to 2021, namely based upon a percentage of Invested Capital (3 % of the first $20 million, 2 % of the next $80 million, and 1.5 % over $100 million). Invested
Capital is equal to the amount calculated by multiplying the total number of outstanding shares, preferred shares, and the partnership units (units in our operating partnership issued by us and held by persons other than us) issued by us by the price paid for each or the value ascribed to each in
connection with their issuance. The Advisory Management Agreement also provides for a 2.5 % Acquisition Fee on new (non-security)
purchases, subject to certain limitations designed to eliminate incentives to “churn” our assets. The new Advisory Management Agreement also provides for an incentive management fee that is equal to 15 % of all distributions once shareholders have received cumulative distributions equal to 6 % from the effective date of the Agreement.
The Investment Adviser will receive an annual fee equal to $100 for providing the investment advice to us as to our securities portfolio under the Amended and Restated Investment Advisory Agreement.
During the three months ended September 30, 2024 and 2023, we incurred asset
management fees of $848,458 and $787,077 ,
respectively.
The asset management fees mentioned above were based on the following quarter
ended Invested Capital segregated in three columns based on the annual fee rate:
|
Asset Management Fee Annual %
|
3.0%
|
|
2.0%
|
|
1.5%
|
|
Total Invested
Capital
|
|||||||||
|
Quarter
ended:
|
||||||||||||||||
|
September 30, 2024
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Quarter
ended:
|
||||||||||||||||
|
September 30, 2023
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the three months ended September 30, 2024 and 2023, we did no
Property Management and Leasing Services:
On May 6, 2022, the Real Estate Adviser’s newly formed wholly owned subsidiary, Wiseman Company Management, LLC (“WCM”), purchased the property
management and leasing services rights from Wiseman. Therefore, effective as of the acquisition date, WCM has been providing property management and leasing services to the limited partnerships acquired from WCM affiliates in accordance with
the pre-existing agreements. There have been no changes to any of the management services agreements terms with these limited partnerships since the acquisition of the property management service rights. In addition, WCM also provides the
property management and leasing services to 220 Campus Lane under a similar term as the eight -property partnership.
During the three months ended September 30, 2024, these WCM managed limited partnerships paid total property management fees of $167,077 and total leasing commissions of $310,573
to WCM. In addition, during the three months ended September 30, 2024, the ten partnerships also paid $497,663 to WCM for direct operating costs and construction of tenant improvements.
During the three months ended September 30, 2023, the WCM managed limited partnerships paid total property management fees of $125,750 and leasing commissions of $64,908
to WCM. In addition, during the three months ended September 30, 2023, the WCM managed limited partnerships also paid $399,771 to WCM
for direct operating costs and construction of tenant improvements.
Organization and Offering Costs Reimbursement:
As detailed in the Offering Circular, offering costs incurred and paid by us in excess of $825,000 (excluding legal fees) in connection with the offering of preferred stock will be reimbursed by the Advisers except to the
extent that 10 % in broker fees are not incurred during the issuance of the preferred shares. In
such case, the broker fees savings are available to us for paying marketing expenses or other non-cash compensation and therefore the broker fees savings increases the offering cost reimbursement threshold from the Advisers. As of September
30, 2024, we incurred $1,430,452 (excluding legal fees) of offering costs, of which
$1,408,217 relates to offering cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. As of June
30, 2024, we incurred $1,385,342 (excluding legal fees) of offering costs, of which $1,363,107 relates to offering cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. The total offering cost incurred as of September 30, 2024 and June 30, 2024 were in excess of the total offering cost reimbursement threshold including the broker savings by $299,326 , and $259,575 , respectively. The cumulative offering costs in
excess of the reimbursable threshold have been reimbursed by the Advisor during the year ended June 30, 2024 and the quarter ended September 30, 2024.
Administration Agreement:
Under the Administration Agreement, we reimburse MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its
obligations under the Administration Agreement, including furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with other administrative services,
subject to the independent directors’ approval. In addition, we reimburse MacKenzie for the fees and expenses associated with performing compliance functions, and its allocable portion of the compensation of our Chief Financial Officer, Chief
Compliance Officer, Director of Accounting and Financial Reporting, and any administrative support staff.
Since November 1, 2018, MacKenzie has provided transfer agent services, with
the out-of-pocket costs incurred by MacKenzie being reimbursed by us. No fee (only cost reimbursement) is paid to MacKenzie for this service. Effective March 5, 2024, to comply with Nasdaq listing requirements, we hired Securities Transfer
Corporation, a third-party transfer agent, to provide these services for our common and Series B preferred stocks. However, effective September 30, 2024, Computershare Limited, another third-party transfer agent, took over as transfer agent for
our common stocks.
The administrative cost reimbursements for the three months ended September 30, 2024 and 2023 were $167,464 and $189,183 , respectively. The transfer agent
services cost reimbursement for the three months ended September 30, 2024 and 2023 were $1,536 and $16,567 , respectively.
The table below outlines the related party expenses incurred for the three months ended September 30, 2024 and 2023, and unpaid as of
September 30, 2024, and June 30, 2024.
|
Three Months Ended
|
Unpaid as of
|
|||||||||||||||
|
Types and Recipient
|
September 30, 2024
|
September 30, 2023
|
September 30, 2024
|
June 30, 2024
|
||||||||||||
|
Asset management fees- the Real Estate Adviser
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Administrative cost reimbursements- MacKenzie
|
||||||||||||||||
|
Asset acquisition fees- the Real Estate Adviser (1)
|
|
|
|
|
||||||||||||
|
Transfer agent cost reimbursements - MacKenzie
|
|
|
|
|
||||||||||||
|
Organization & Offering Cost (2) - MacKenzie
|
|
|
|
|||||||||||||
|
Other expenses (3)- MacKenzie and Subsidiary’s GPs
|
||||||||||||||||
|
Due to related entities
|
$
|
|
$
|
|
||||||||||||
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
NOTE 9 – MARGIN LOANS
We have a brokerage account through which
we buy and sell publicly traded securities. The provisions of the account allow us to borrow on certain securities held in the account and to purchase additional securities based on the account equity (including cash). 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
are used as collateral. As of September 30, 2024 and June 30, 2024, we had no no
NOTE 10 – MORTGAGE
NOTES PAYABLE, NOTES PAYABLE AND DEBT GUARANTY
Madison and PVT Notes
Payable
On
February 26, 2021, Madison and PVT obtained mortgage loans from First Republic Bank in the amounts of $6,737,500 and $8,387,500 , respectively, both at a fixed interest rate of 3.0 one year 2.75 April 1, 2031 360 months of
amortization period. The remaining unpaid principal balance is due at maturity date. Accordingly, as of September 30, 2024 and June 30, 2024, the outstanding loan balances for both years were $6,737,500 8,387,500
PT Hillview Notes
Payable
On October 4, 2021,
PT Hillview entered into a loan agreement with Ladder Capital Finance in the amount of $17,500,000 . The annual interest rate was equal
to the greater of (i) a floating rate of interest equal to 5.5 % plus LIBOR, and (ii) 5.75 %. The loan was obtained to finance the acquisition of Hollywood Apartments. The loan is secured by Hollywood Apartments and has an initial maturity date of October 6, 2023 , which could be extended for two
successive 12 -month terms (the “Maturity Date”). On August 14, 2023, PT Hillview exercised the first extension option to extend the
term of the loan to October 6, 2024 . The loan requires interest-only monthly payments with the principal balance due at maturity date.
Interest is due based on a 360 -day amortization period. The outstanding balances as of September 30, 2024 and June 30, 2024 was $17,500,000
Pursuant to Section
2.4.5 of the loan agreement, the lender determined that a substitute benchmark rate transition event occurred. Accordingly, the loan agreement was amended on March 15, 2023 to update the interest rate on the loan. Pursuant to the amendment,
effective April 6, 2023, the annual interest rate shall be equal to the greater of (i) a floating rate of interest equal to 5.61148 %
plus the secured overnight financing rate (SOFR) published by Federal Reserve Bank of New York, and (ii) 5.75 %.
We (along with three
other principals of True USA) guaranteed: (1) the “Recourse Obligations” as defined in the loan agreement, which are triggered only if the borrower of the loan engages in “Bad Boy Acts” (such as fraud, intentional misrepresentation, willful
misconduct, waste, conversion, intentional failure to pay taxes or maintain insurance, filing for bankruptcy, ADA noncompliance, and environmental contamination, etc.), (2) a “Debt Service and Carry Guaranty” under the loan, which guarantees the
payment of interest on the loan and other “Basic Carrying Costs”, and (3) a “Guaranty of Completion” guaranteeing that the redevelopment work contracted to be performed will be completed as agreed. As of September 30, 2024, we have not recorded any guaranty obligations since we have not engaged in any bad boy acts,
substantial cash reserves are maintained to cover the basic carrying costs and the redevelopment construction work was completed as agreed.
In August 2024, the underlying property was
listed for sale. Subsequently, on October 3, 2024, the loan agreement was amended to update the extension option. Pursuant to the amended loan agreement, PT Hillview has the option to extend the term of the loan beyond the current maturity date
for three periods from October 6, 2024 to November 6, 2024 with a principal paydown of $515,000 , the first extension option, from November 6, 2024 to December 6, 2024
with a principal paydown of $410,000 , the second extension option, and from December 6, 2024 to February 6, 2025 with a principal
paydown of $410,000 , which is the final extension option.
MacKenzie Shoreline Mortgage Notes Payable
On May 6, 2021, MacKenzie Shoreline entered into a loan agreement with Pacific Premier Bank, in the amount of $17,650,000 . The annual interest rate under the agreement is 3.65 % for the first 60 months, and a variable interest rate based on a 6-month CME Term Secured Overnight Financing Rate plus a margin of 3.00 percentage points, for months thereafter until maturity. The loan was obtained to finance the acquisition of Shoreline Apartments. The loan matures on June 1, 2032 , and is secured by Shoreline Apartments. The loan requires interest only monthly payments through June 30, 2027, and beginning July 1, 2027, monthly payments
of principal and interests are due based on 360 months of amortization period. Accordingly, the outstanding loan balance as of September 30, 2024 and June 30, 2024, was $17,650,000
First & Main Mortgage Notes Payable
On January 4, 2021, First & Main entered into a loan agreement with Exchange
Bank, in the amount of $12,000,000 at a fixed annual interest rate of 3.75 %. The loan was obtained to finance the acquisition of First & Main Office Building. The loan matures on February 1, 2026 , and is secured by First & Main Office Building. The loan requires monthly payments of principal and interest based on a 25 -year amortization period with the remaining principal balance due at maturity. The loan is guaranteed by Wiseman, but Wiseman was
subsequently indemnified by the Operating Partnership on July 1, 2022, as discussed in Note 5. The outstanding balance of the loan as of September 30,
2024 and June 30, 2024, was $10,880,252 and $10,963,355 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
The following table provides the projected principal payments on the
loan for the next two years:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
2026
|
|
|||
|
Total
|
$
|
|
||
First & Main Other Note Payables:
Junior Debt
In 2018, First & Main voted to issue $1,000,000
in interest-only junior promissory notes. The notes were issued in 2018 and 2019 with an original maturity date of December 31, 2023
and included no prepayment penalty for early retirement. Of the total promissory notes, notes with a total principal balance of $350,000 were paid off as of December 31, 2023. The maturity dates of the remaining promissory notes were extended to: December 31, 2025 for notes with a principal balance of $100,000 , December 31, 2026 , for notes with a principal balance of $100,000 , and December 31, 2028 for the remaining notes with a principal
balance of $450,000 . Interest on the notes is payable on the first day of each month at 7 % per annum. The promissory notes are disclosed as a part of the notes payable in the consolidated balance sheets.
In March 2024, the partnership obtained a new loan with the principal amount
of $200,000 in an interest-only junior promissory note. The note was issued on March 8, 2024 with a maturity date of March 31, 2025 . Interest on the note is payable on the first day of each month at 8.5 % per annum.
Small Business Administration (“SBA”) Loan
In June 2020, First & Main borrowed $151,000
from the SBA, under the Economic Injury Disaster Loan program. The loan will be paid back over 30 years at an annual interest rate
of 3.75 % starting on December 20, 2022. Monthly payments will be $731 . The loan is disclosed as a part of the notes payable in the consolidated balance sheets.
Solar System Loan (First & Main)
In August 2020, First & Main borrowed $220,000
from The Wiseman Family Trust to fund the installation of the solar power system at First & Main Office Building. The loan will be paid back over a period of 10 years at an annual interest rate of 5 %. Monthly payments of principal
and interest will be $1,486 . As of September 30, 2024 and June 30, 2024, the outstanding balance of the loan amounted to $158,495 and $163,362 , respectively, and is disclosed as a part of the
notes payable in the consolidated balance sheets.
1300 Main Mortgage Notes Payable
On April 12, 2019, 1300 Main entered into a loan agreement with Suncrest Bank, in the amount of $9,160,000 at a fixed annual interest rate of 4.55 % for
the first 60 payments. Beginning May 25, 2024, the interest rate will be calculated on the unpaid principal balance at an
interest rate based on the Prime Rate as published in the Western Edition Wall Street Journal, plus a margin of 1 %. The loan was
obtained to consolidate the construction loans obtained during the development and construction of the building. The loan matures on April 25, 2029 , and is secured by 1300 Main Office Building. The loan requires monthly payments of principal and interest of $51,610
for 60 consecutive payments followed by 59 monthly payments of principal and interest of $60,674 with the remaining principal balance
due at maturity. The loan is guaranteed by Wiseman, but Wiseman was subsequently indemnified by the Operating Partnership on July 1, 2022. The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $8,125,372 and $8,168,350 , respectively, which is disclosed as a part of the mortgage notes
payable in the consolidated balance sheets.
Consistent
with asset acquisition accounting, the debt assumed from the acquisition of 1300 Main was measured at fair value. The interest rate on the debt was below the current market rates, as a result, $338,000 of the acquisition cost was allocated to debt mark-to-market. The debt mark-to-market value is amortized over the remaining loan term. The debt mark-to-market
value was fully amortized as of June 30, 2024.
The following table provides the projected principal payments on the loan for the next five years:
|
Fiscal Year Ending June 30, :
|
|
Principal
|
|
|
|
2025 (remainder)
|
|
$
|
|
|
|
|
|
|
|
|
|
2026
|
|
|
|
|
|
|
|
|
|
|
|
2027
|
|
|
|
|
|
|
|
|
|
|
|
2028
|
|
|
|
|
|
|
|
|
|
|
|
2029
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
Subsequently, on November 4, 2024, 1300 Main entered into a loan agreement with Valley Strong Credit Union, in
the amount of $8,000,000 at a fixed annual interest rate of 6.85 %. The loan was obtained to refinance the prior $9,160,000 loan from Suncrest Bank which was scheduled to mature on April 25, 2029 .
The loan matures on November 15, 2029 , and is secured by a real property and the assignment of all its rental revenue. The loan
requires monthly payments of principal and interest of $52,534 through maturity. The remaining unpaid principal balance is due at
maturity. The note is guaranteed by the Parent Company. This mortgage note payable was not included in our consolidated balance sheet as of September 30, 2024.
1300 Main Other Notes Payable:
SBA Loan
On January 13, 2021, 1300 Main borrowed $150,000
from the SBA, under the Economic Injury Disaster Loan program. The loan will be paid back over 30 years at an annual interest rate
of 3.75 % starting on July 11, 2023. Monthly payments will be $731 . The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $160,118 and $160,111 , respectively, which is disclosed as a part of the
mortgage notes payable in the consolidated balance sheets.
Woodland Corporate Center Two Mortgage Notes Payable
On October 2, 2019, Woodland Corporate Center Two entered into a loan agreement with Western Alliance
Bank, in the amount of $7,500,000 at a fixed annual interest rate of 4.15 %. The loan was obtained to finance the acquisition of Woodland Corporate Center Office Building. The loan matures on October 7, 2027 and is secured by Woodland Corporate Center Office Building. The loan requires monthly payments of principal and interest based on a 25-year amortization period with the remaining principal balance due at maturity. The loan is guaranteed by Wiseman, but Wiseman was
subsequently indemnified by the Operating Partnership on July 1, 2022 as discussed in Note 5. The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $6,575,236 and
$6,626,543 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
Subsequently, on October 4, 2024, Woodland Corporate Center Two entered into a loan agreement with Summit Bank, in the amount of $6,000,000
at a fixed annual interest rate of 6.5 %. The loan was obtained to refinance the prior $7,500,000 loan from Western Alliance Bank which matured on October 7, 2024. The loan matures on October 5, 2027 ,
and is secured by the real property and the assignment of all its rental revenue. The Parent Company has guaranteed the loan. The loan requires monthly payments of principal and interest of $40,873 through October 5, 2027. The remaining unpaid principal balance is due at maturity. This mortgage note payable was not included in our consolidated balance
sheet as of September 30, 2024.
Main Street West Mortgage Notes Payable
On October 22, 2019, Main Street West entered into a loan agreement with First Northern Bank of Dixon,
in the amount of $16,600,000 at a fixed annual interest rate of 4 %. The loan matures on November 1, 2024, and is secured by Main Street West Office Building. The loan requires monthly payments of principal and interest based on a 25-year amortization period with the remaining principal balance due at maturity. The loan is guaranteed by Wiseman, but Wiseman was
subsequently indemnified by the Operating Partnership on July 1, 2022 as discussed in Note 5. The outstanding balance of the loan as of September 30, 2024, and June 30, 2024 was $14,781,015
and $14,893,842 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
Subsequently, on November 1, 2024, the loan matured, and we were unable to agree with the bank on extension terms. As a result, the Company is
currently in default under the note terms. The bank ordered appraisal was recently completed and concluded an “as-is” value of $20.5
million and “as if stabilized” value of $21.8 million. The Bank has also requested a broker’s opinion of value, which is
currently in process. We are actively in negotiations with the bank to extend the maturity date.
Consistent with asset acquisition
accounting, the debt assumed from the acquisition of Main Street West was measured at fair value. The interest rate on the debt was below the current market rates, as a result, $717,000 of the acquisition cost was allocated to debt mark-to-market. The debt mark-to-market value is amortized over the remaining loan term. The debt mark-to-market
value, net of accumulated amortization as of September 30, 2024 and June
30, 2024 amounted to $65,182 and $162,955 ,
respectively, and was netted against the total debt balance in the consolidated balance sheets.
Main Street West Other Notes Payable:
SBA Loan
On April 7, 2021, Main Street West borrowed $150,000 from the SBA, under the Economic Injury Disaster Loan program. The loan will be paid back over 30 years at an annual interest rate of 3.75 % starting in September 4,
2023. Monthly payments will be $731 . The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $161,300
220 Campus Lane Mortgage Notes Payable
On September 8, 2023, 220 Campus Lane borrowed $2,145,000 from Northern California Laborers Pension Fund at a fixed annual interest rate of 5 %. The loan was obtained to finance the acquisition of 220 Campus Lane Office Building and the underlying parcel of land. The loan matures on September 30, 2028 , and is secured by the vacant office building and the underlying parcel of land. The loan requires interest only monthly
payments of $8,938 through September 30, 2028. The remaining unpaid principal balance is due at maturity date. Accordingly, the
outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $2,145,000
Consistent with asset acquisition accounting, this debt was measured at fair value. The interest rate
on the debt was below the current market rates, as a result, $223,000 of the acquisition cost was allocated to debt
mark-to-market. The debt mark-to-market value is amortized over the remaining loan term. The debt mark-to-market value, net of accumulated amortization as of September 30, 2024 and June 30, 2024 amounted to $176,046
and $187,196 , respectively, and was netted against the total debt balance in the consolidated balance sheets.
Campus Lane Residential Mortgage Notes Payable
On September 8, 2023, Campus Residential borrowed $1,155,000 from Northern California Laborers Pension Fund at a fixed annual interest rate of 5 %. The loan was obtained to finance the acquisition of a vacant parcel of land. The loan matures on September 30, 2028 , and is secured by the vacant parcel of land. The loan requires interest only monthly payments of $4,813 through September 30, 2028. The remaining unpaid principal balance is due at maturity date. The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $1,155,000
Consistent with asset acquisition accounting, the debt acquired from the acquisition of Campus Lane
Residential Land was measured at fair value. The interest rate on the debt was below the current market rates, as a result, $120,000
of the acquisition cost was allocated to debt mark-to-market. The debt mark-to-market value is amortized over the remaining loan term. The debt mark-to-market value, net of accumulated amortization as of September 30, 2024 and June 30,
2024, amounted to $94,372 and $100,732 ,
respectively, and was netted against the total debt balance in the consolidated balance sheets.
Green Valley Executive Center Mortgage Notes Payable
On August 16, 2022, the predecessor owner, GVEC entered into a $14,000,000 fixed-rate loan agreement with Columbia State Bank. The initial interest rate is 4.25 % until October 1, 2027, increasing to 5.46 %
thereafter. The loan matures on September 1, 2032 and is secured by the Green Valley Executive Center. The loan requires
monthly payments of principal and interest based on a 30-year amortization period with the remaining principal balance due
at maturity. The loan was assumed by GVEC on January 1, 2024 from the predecessor owner. The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $13,538,284 and $13,599,329 , respectively, which is
disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
Consistent with asset acquisition accounting, the debt assumed
from the acquisition of Green Valley Executive Center was measured at fair value. The interest rate on the debt was below the current market rates, as a result, $993,000 of the acquisition cost was allocated to debt mark-to-market. The debt mark-to-market value is amortized over the remaining loan term. The debt
mark-to-market value, net of accumulated amortization as of September 30, 2024 and June 30, 2024 amounted to $918,525 and $943,350 , respectively, and was netted against the total debt balance in the consolidated balance sheets.
The following table provides the projected principal payments on the loan for the next five years:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
|
||||
|
2026
|
|
|||
|
|
||||
|
2027
|
|
|||
|
|
||||
|
2028
|
|
|||
|
|
||||
|
2029
|
|
|||
|
|
||||
|
Thereafter
|
|
|||
|
|
||||
|
Total
|
$
|
|
||
One Harbor Center Mortgage Notes
Payable
On April 20, 2020, under the predecessor ownership, One Harbor Center, LP borrowed $8,378,825 from Travis Credit
Union at a fixed annual interest rate of 4.96 %. The loan matures on June 1, 2028 , and is secured by a real property and the assignment of all its rental revenue. The loan requires monthly payments of principal and interest of $46,092 through June 1, 2028. The remaining unpaid principal balance is due at maturity date. The outstanding balance of the loan as of
September 30, 2024 and June 30, 2024 was $7,812,060 and $7,846,182 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
Consistent with asset acquisition accounting, the debt assumed from the acquisition of One Harbor Center was measured at fair value. The interest rate on the debt was below the current market rates, as a result, $334,000 of the acquisition cost was allocated to debt mark-to-market. The debt mark-to-market value is amortized over the remaining loan
term. The debt mark-to-market value, net of accumulated amortization as of September 30, 2024 and June 30, 2024 amounted to $300,865
and $320,746 , respectively, and was netted against the total debt balance in the consolidated balance sheets.
The following table provides the projected
principal payments on the loan for the next four years:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
|
||||
|
2026
|
|
|||
|
|
||||
|
2027
|
|
|||
|
|
||||
|
2028
|
|
|||
|
|
||||
|
Total
|
$
|
|
||
One Harbor Center Other Notes
Payable:
SBA Loan
In August 2020, One Harbor
Center borrowed $150,000 from the SBA, under the Economic Injury Disaster Loan program. The loan will be paid back over 30 years at an annual interest rate of 3.75 %
starting on February 10, 2023. The outstanding balance of the loan as of September 30, 2024 and June 30, 2024 was $150,000
MRC Aurora Construction Loan
As discussed in Note 1, in order
to fund the development of the Aurora Project (known as Aurora at Green Valley), we closed on a construction loan of $17.15
million with Valley Strong Credit Union, headquartered in Bakersfield, CA, on February 21, 2024. Interest rate on the loan will be the current index (Prime) plus a spread of 0.25 %. As of September 30, 2024, we have not drawn any amount on the line. Per the loan agreement, MRC Aurora will first use its cash equity of $12.5 million, less any out-of-pocket costs already spent on the project, for the construction before drawing on the line.
MacKenzie Satellite Mortgage Notes
Payable
On August 21, 2024, MacKenzie
Satellite entered into a loan agreement with Summit Bank, in the amount of $6,000,000 at a fixed annual interest rate of 6.50 %. The loan matures on August 21, 2027 ,
and is secured by a real property and the assignment of all its rental revenue. The Parent Company has guaranteed the loan. The loan requires monthly payments of principal and interest of $40,867 through August 21, 2027. The remaining unpaid principal balance is due at maturity date. The outstanding balance of the loan as of September 30, 2024 was $5,984,050 , which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
The following table provides the projected
principal payments on the loan for the next four years:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
|
||||
|
2026
|
|
|||
|
|
||||
|
2027
|
|
|||
|
|
||||
|
2028
|
|
|||
|
|
||||
|
Total
|
$
|
|
||
Green Valley Medical Center
Mortgage Notes Payable
On July 15, 2024, Green Valley Medical Center entered into a loan agreement with Valley Strong Credit Union, in the amount of $7,800,000
at a fixed annual interest rate of 7.12 %. The loan matures on August 1, 2029 , and is secured by the real property and the assignment of all its rental revenue. The Parent Company provided a guaranty of the Note. The loan requires monthly payments of
principal and interest of $52,628 through December 1, 2028. The remaining unpaid principal balance is due at maturity
date. The outstanding balance of the loan as of September 30, 2024 was $7,800,000 , which is disclosed as a part of the
mortgage notes payable in the consolidated balance sheets. We consolidated Green Valley Medical Center with our consolidated financial statements during the quarter ended September 30, 2024; accordingly, this mortgage note payable
was not included in our consolidated balance sheet as of June 30, 2024.
The following table provides the
projected principal payments on the loan for the next five years:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
|
||||
|
2026
|
|
|||
|
|
||||
|
2027
|
|
|||
|
|
||||
|
2028
|
|
|||
|
|
||||
|
2029
|
|
|||
|
|
||||
|
Thereafter
|
|
|||
|
|
||||
|
Total
|
$
|
|
||
Green Valley Medical Center Other
Notes Payable:
SBA Loan
In March of 2021, Green Valley
Medical Center borrowed $150,000 from the SBA, under the Economic Injury Disaster Loan program. Related loan documents call
for the loan to be amortized and repaid over 30 years at an annual interest rate of 3.75 %. We have been making interest payments, but the Federal Government has not yet commenced amortization of the principal. The
outstanding balance of the loan as of September 30, 2024 was $150,000 , which is disclosed as a part of the mortgage notes
payable in the consolidated balance sheets.
The table below presents the total loan outstanding at the underlying
companies as of September 30, 2024, and the fiscal years those loans mature:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
|
||
|
|
||||
|
2026
|
|
|||
|
|
||||
|
2027
|
|
|||
|
|
||||
|
2028
|
|
|||
|
|
||||
|
2029
|
|
|||
|
|
||||
|
Thereafter
|
|
|||
|
|
||||
|
Total
|
$
|
|
||
Debt Guaranty
The Wiseman partnerships have
mortgage loans and solar leases with various banks, all of which were guaranteed by Wiseman and its owner, Doyle Wiseman and his trust, as of May 6, 2022, the date the Operating Partnership acquired the management companies. The
mortgage loans of 1300 Main, LP, One Harbor Center, LP, Martin Plaza Associates, LP, and Main Street West, LP are also guaranteed by the partnerships’ general partner as the co-guarantor.
On July 1, 2022, subsequent to
the Operating Partnership’s acquisition of the management companies, Wiseman’s owner, Doyle Wiseman and the Operating Partnership entered into an indemnity agreement whereby the Operating Partnership will indemnify Doyle Wiseman for any
losses suffered by him through the default of a limited partnership on the mortgage secured by the property owned by the limited partnership, or default on any solar lease obligations. Historically, none of the limited partnerships has
had any defaults on any mortgages and Doyle Wiseman has not had to satisfy any mortgage default through a guaranty. Furthermore, each of the limited partnerships is adequately capitalized, has sufficient cash flow from operations to
service the mortgage notes and has not required Doyle Wiseman to provide any subordinated financial support to the limited partnerships. Therefore, we have no t recorded any liability related to the guaranty on the mortgage loans as of September 30, 2024.
As of September 30, 2024,
refinancings have resulted in removal of Wiseman as guarantor at Westside Professional Center and Green Valley Medical Center and subsequent to September 30, 2024 at Woodland Corporate Center Two and 1300 Main. The Parent Company now
guarantees the mortgage note at each of these properties, with the exception of Westside Professional Center which is guaranteed by its sole limited partner.
As discussed above, as of
November 1, 2024, Main Street West is in default under its note terms. We are actively negotiating with the bank to extend the maturity date and if negotiations fail, the Company may be required to repay the outstanding balance.
However, we have determined that the Company does not need to record any liability under the loan guaranty as of September 30, 2024, since the underlying property’s appraised value substantially exceeds the outstanding debt balance.
The mortgage loan of GVEC is guaranteed by Patterson Real Estate Services LP, an affiliate of the Adviser, and its owner, Berniece A. Patterson and her trust. As part of the GVEC
contribution agreement, the Operating Partnership indemnified Berneice Patterson and her trust for any losses suffered by her through the default by GVEC on the mortgage loan. The mortgage loans for MacKenzie Satellite, obtained in August 2024 and the construction loan for MRC Aurora, LLC are also guaranteed by the Parent Company.
NOTE 11 – EARNINGS
PER SHARE
Basic
earnings per share is computed using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to
potentially diluted securities. The
following table sets forth the computation of basic and diluted earnings per share for three months ended September 30, 2024 and 2023:
| Three Months Ended | Three Months Ended | |||||||
| September 30, 2024 |
September 30, 2023 |
|||||||
|
Net loss attributable to common stockholders
|
$
|
(
|
)
|
$ | ( |
) | ||
|
Basic and diluted weighted average common shares outstanding
|
|
|||||||
|
Basic and diluted earnings per share
|
$
|
(
|
)
|
$ | ( |
) | ||
NOTE 12 – SHARE
OFFERINGS AND FEES
As discussed in Note 1, on August 26, 2024, in connection with our agreement with Maxim, the Company has issued through a private placement
agreement an aggregate amount of 133,000 shares of common stock to Maxim’s affiliate, approximately 1 % of the Company’s outstanding stock.
During the three
months ended September 30, 2024, no common shares were issued under the DRIP. Additionally, in September 2024, we issued 83.80 common shares at $10.25 per
share, to the Class A unit holders of the Operating Partnership who exercised their option to convert their Class A units to our common shares.
During the three
months ended September 30, 2024, we issued 2,000.00 Series A preferred shares with total gross proceeds of $50,000 and 14,260.00 Series B
preferred shares with total gross proceeds of $356,499 under the Offering Circular and incurred syndication costs of $46,011 in relation to preferred shares offering. For the three months ended September 30, 2024, we issued 2,059.14 Series A preferred shares with total gross proceeds of $46,333 under the DRIP and 84.96 Series B preferred shares with total gross proceeds of $1,912 under the DRIP.
During the
three months ended September 30, 2023, we issued 60,063.66 common shares with total gross proceeds of $443,271 under the DRIP. In addition, in July 2023, we issued 2,265 common shares at $10.25 per share, to the Class A unit holders of the Operating
Partnership who exercised their option to convert their Class A units to our common shares.
During the
three months ended September 30, 2023, we issued 54,394.20 Series A preferred shares with total gross proceeds of $1,359,350 under the Offering Circular and incurred syndication costs of $143,695 in relation to preferred shares offering. For the three months ended September 30, 2023, we issued 1,771.45 Series A preferred shares with total gross proceeds of $39,858
under the DRIP.
NOTE 13 – SHARE REPURCHASE PLAN
On March 4, 2024, the Board of Directors suspended the common stock share repurchase program and DRIP in connection with its pursuit of the
listing of its common stock on a securities exchange. During the three months ended September 30, 2024, we did no t repurchase any
shares.
During
the three months ended September 30, 2023, we repurchased our own shares through our Share Repurchase Program and through third-party auctions as noted in the below table:
|
Period
|
Total Number
of Shares Repurchased
|
Average Repurchase
Price
Per Share
|
Total Repurchase
Consideration
|
|||||||||
|
During the three months ended September 30, 2023
|
||||||||||||
| Common stock | ||||||||||||
|
September 1, 2023 through September 30, 2023
|
|
$
|
|
$
|
|
|||||||
NOTE 14 – STOCKHOLDER DIVIDENDS
The following table reflects the dividends per share that we have declared on our common stock and preferred stock
during the three months ended September 30, 2024:
|
|
Dividends
|
|||||||||||||||||||||||
|
|
Common Stock
|
Series A Preferred Stock
|
Series B Preferred Stock
|
|||||||||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
* |
|||||||||||
* Of the total dividends declared for Series
B during the three months ended September 30, 2024, $34,037 was an increase in liquidation preference and $11,341 was the cash dividend.
The above
common and preferred dividends declared were recorded as dividends payable in the consolidated balance sheets as of September 30, 2024, and were subsequently paid in .
On October 7, 2024 , we declared the Series A
Preferred stock quarterly dividend of $0.375 per share payable at the rate of $0.125 per month for holders of record as of October 31, 2024 ,
November 30, 2024 , and December 31, 2024 . The Series A preferred stock dividend declared on October 7, 2024 , will be paid in .
On October 7, 2024 , we also declared the Series
B Preferred stock quarterly 3 % dividend of $0.1875 per share payable at the rate of $0.0625 per month for holders of
record as of October 31, 2024 , November 30, 2024 , and December 31, 2024 . The Series B preferred stock dividend declared on October 7, 2024 , will be paid in .
In addition, the Series B
Preferred Stock will accrue dividends at the rate of 9 % per annum on the stated value as an increase in liquidation preference.
On October 7, 2024 , we also declared the common
stock quarterly dividend of $0.125 per share which will be paid in .
The following table reflects the distributions declared by the Operating Partnership for the Class A and Preferred
unit holders during the three months ended September 30, 2024:
|
|
Distributions
|
|||||||||||||||||||||||
|
|
Class A Units
|
Series A Preferred Units
|
Series B Preferred Units
|
|||||||||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
* |
|||||||||||
* Of the total distributions declared for Series B during the three months ended September 30, 2024, $24,307 was an increase in liquidation preference and $8,103 was the cash dividend.
During the three months ended September 30, 2024, the
Operating Partnership paid Series A preferred distributions of $342,654 , of which $23,514 have been reinvested under our DRIP. Preferred (Series A and B), and common distributions declared during the three months ended September 30, 2024 were paid in .
The following table reflects the dividends per share that we
have declared on our common stock and preferred stock during the three months ended September 30, 2023:
|
Dividends
|
||||||||||||||||
|
Common Stock
|
Series A Preferred Stock
|
|||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The above common and preferred quarterly dividends declared
during the quarter were paid in .
During the three months ended September 30, 2023, we paid
common dividends of $1,586,864 , of which $443,271 have been reinvested under our DRIP. Similarly, during the three months ended September 30, 2023, we paid Series A preferred dividends of $242,173 , of which $39,858 have been reinvested under our
DRIP.
The following table reflects the distributions declared by the
Operating Partnership for the Class A and Preferred unit holders during the three months ended September 30, 2023:
|
Distributions
|
||||||||||||||||
|
Class A Units
|
Series A Preferred Units
|
|||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The above common and preferred
distributions declared during the quarter were paid in October 2023.
During
the three months ended September 30, 2023, the Operating Partnership paid Class A distributions of $10,229 . Similarly, during the
three months ended September 30, 2023, the Operating Partnership paid Series A preferred distributions of $177,589 , of which $20,454 have been reinvested under our DRIP.
NOTE 15 – COMMITMENTS
We commenced the Aurora Project construction in September 2024 and currently the building
is being framed. As of September 30, 2024, MRC Aurora has entered into several contracts with third parties for the construction of the Aurora Project. These contracts represent MRC Aurora’s commitment to incur future expenditures for the
development of the project. The total commitments as of September 30, 2024 and June 30, 2024, amounted to $18.16 million and $19.56 million, respectively.
| Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Statements by MacKenzie Realty Capital, Inc., together with its subsidiaries as discussed in Note 1 of the financial statements included in this report (collectively, 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,
stockholders 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. An economic downturn could impair our ability to continue to operate,
which could lead to the loss of some or all of our investments, 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.
Further, we may experience fluctuations in our operating results due to a number of factors, including the effect of 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
Historically, we were an externally managed non-diversified closed-end management investment company that elected to be treated as a BDC under the 1940 Act, but we withdrew our election to be treated
as a BDC on December 31, 2020. Our objective remains 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 generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding any
net capital gain) 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 REIT taxable income, we will be subject to U.S. federal corporate income
tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax
laws. Our wholly owned subsidiary, MacKenzie NY Real Estate 2 Corp. (“MacKenzie NY 2”), Inc. is subject to corporate federal and state income tax on its taxable income at regular statutory rates.
We are managed by the Advisers, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Investment Plan
We generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up to 20% of our total assets in
investment securities of real estate companies. A real estate company is one that (i) derives at least 50% 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% of its assets invested in such real estate. We will 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. When purchasing securities, we generally favor 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.
Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our independent
directors review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of
Directors meetings.
We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities
at significant discounts to their net asset value.
We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as
necessary to extract unrealized value.
We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience
of the Advisers’ investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from what the
Advisers estimate to be the actual or potential value of the real estate.
We intend to continue our historical activities related to launching tender offers to purchase shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions,
subject to the constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us to pay distributions that are supported by cash flow rather than paying back investors’ capital, although there can be
no assurance that some portion of any distribution is not a return of capital.
Rental and Reimbursement
We generate rental revenue by leasing office space and apartment units to a building’s tenants. These tenant leases fall under the scope of Accounting Standards Codification (“ASC”) Topic 842 and are
classified as operating leases. Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements.
Investment Income
We generate revenues in the form of operating income, 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) advisory fees to our Advisers; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations
under the Administration Agreement; and (iii) other real estate properties operating expenses, including interest expenses on debt obtained to finance our property acquisitions, as detailed below. Our investment advisory fees compensate our
Investment Adviser and Real Estate Adviser for their 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 operating and maintaining real estate properties;
|
| • |
the cost of calculating our net asset value, including the cost of any third-party valuation services;
|
| • |
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, any stock exchange listing fees in the future;
|
| • |
federal, state and local taxes;
|
| • |
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 and sub-administration, including printing, mailing, long distance telephone 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 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 are 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 and our chief financial officer and any administrative support staff.
|
Portfolio Investment Composition
As of September 30, 2024, we owned various real estate limited partnerships and REITs that are listed in the “Investments, at fair value” in the table below. We also owned various investments in
entities that own real estate which gave us enough control such that the investments are not securities for 1940 Act purposes, but not enough to consolidate the financial statements of such entities with our own; these are listed below as
“Unconsolidated investments (non-securities), at fair value.” The following table summarizes the composition of our investments at fair value as of September 30, 2024, and June 30, 2024:
|
Fair Value
|
||||||||
|
Investments, at fair value
|
September 30, 2024
|
June 30, 2024
|
||||||
|
5210 Fountaingate, LP
|
$
|
4,950
|
$
|
4,950
|
||||
|
Blackstone Real Estate Income Trust, Inc. - Class S
|
-
|
330,828
|
||||||
|
Highlands REIT, Inc.
|
74,735
|
69,322
|
||||||
|
Lakemont Partners, LLC
|
768,052
|
791,990
|
||||||
|
Moody National REIT II, Inc.
|
16,373
|
18,759
|
||||||
|
National Healthcare Properties, Inc.
|
833,850
|
856,285
|
||||||
|
SmartStop Self Storage REIT, Inc. - Class A
|
40,948
|
41,149
|
||||||
|
Starwood Real Estate Income Trust, Inc. - Class S
|
24,410
|
24,821
|
||||||
|
Total
|
$
|
1,763,318
|
$
|
2,138,104
|
||||
|
Fair Value
|
||||||||
|
Unconsolidated investments (non-security), at fair value
|
September 30, 2024
|
June 30, 2024
|
||||||
|
Green Valley Medical Center, LP
|
$
|
-
|
$
|
2,005,102
|
||||
|
Martin Plaza Associates, LP
|
474,539
|
465,053
|
||||||
|
Westside Professional Center I, LP
|
1,309,931
|
1,436,171
|
||||||
|
Total
|
$
|
1,784,470
|
$
|
3,906,326
|
||||
Properties
In addition to our investment securities, we currently own and manage nine commercial real estate properties: Satellite Place Office Building located in Duluth, GA, 1300 Main Office Building, First
& Main Office Building and Main Street West Office Building located in Napa, CA, Woodland Corporate Center located in Woodland, CA, 220 Campus Lane Office Building, Green Valley Medical Center and Green Valley Executive Center located in
Fairfield, CA and One Harbor Center located in Suisun, CA and four residential apartments: Commodore Apartments and The Park (f/k/a as Pon De Leo Apartments), located in Oakland, CA, Hollywood Apartments located in Los Angeles, CA, and the
Shoreline Apartments in Concord, CA. 1300 Main Office Building, First & Main Office Building, Main Street West Office Building, Woodland Corporate Center, Hollywood Apartments, and Green Valley Medical Center are owned through our subsidiary,
the Operating Partnership; the Commodore Apartments are owned through our subsidiary Madison; The Park View (f/k/a as Pon De Leo Apartments) is owned through our subsidiary PVT; and the Shoreline Apartments are owned through our subsidiary
BAA-Shoreline. In August 2024, we have listed Hollywood Apartments for sale.
We own our properties through our subsidiaries, which are listed in the table below.
|
Property:
|
Property Owners
|
|
Commodore Apartments
|
Madison-PVT Partners LLC
|
|
The Park View (fka as Pon De Leo Apartments)
|
PVT-Madison Partners LLC
|
|
Hollywood Apartments
|
PT Hillview GP, LLC
|
|
Shoreline Apartments
|
MacKenzie BAA IG Shoreline LLC
|
|
Satellite Place Office Building
|
MacKenzie Satellite Place Corp.
|
|
First & Main Office Building
|
First & Main, LP
|
|
1300 Main Office Building
|
1300 Main, LP
|
|
Woodland Corporate Center
|
Woodland Corporate Center Two, LP
|
|
Main Street West Office Building
|
Main Street West, LP
|
|
220 Campus Lane Office Building
|
220 Campus Lane, LLC
|
|
Green Valley Executive Center
|
GV Executive Center, LLC
|
|
One Harbor Center
|
One Harbor Center, LP
|
|
Green Valley Medical Center
|
Green Valley Medical Center, LP
|
1300 Main Office Building contains 20,145 square feet, of which approximately 13,900 square feet is office space and the remainder is designated as retail space. As of September 30, 2024, the property
is 95% occupied by 7 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
Wilson Daniels
|
Wine Wholesaler
|
6,712
|
$
|
398,292
|
06/15/2031
|
1, 5 years
|
||||
|
Norcal Gold
|
Real Estate
|
2,896
|
$
|
178,656
|
03/31/2026
|
No
|
||||
|
Bao Ling Li
|
Restaurant
|
3,212
|
$
|
170,960
|
11/30/2030
|
No
|
||||
|
Whole Health
|
Medical
|
2,186
|
$
|
137,219
|
07/31/2025
|
No
|
||||
The following information pertains to lease expirations at 1300 Main Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2025
|
1
|
2,186
|
$
|
137,219
|
13%
|
||||||||
|
2026
|
1
|
2,896
|
$
|
178,656
|
16%
|
||||||||
|
2029
|
1
|
1,059
|
$
|
68,194
|
6%
|
||||||||
|
Thereafter
|
4
|
12,916
|
$
|
705,820
|
65%
|
||||||||
First and Main Office Building contains 27,396 square feet, of which approximately 19,000 square feet is office space and the remainder is designated as retail space. As of September 30, 2024, the
property is 100% occupied by 9 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
GVM Law
|
Legal Services
|
9,470
|
$
|
508,362
|
09/20/2026
|
2, 5 years
|
||||
|
Brotlemarkle
|
Accounting Services
|
4,366
|
$
|
244,454
|
07/31/2030
|
2, 5 years
|
||||
|
Napa Palisades
|
Restaurant
|
3,462
|
$
|
193,868
|
08/31/2040
|
No
|
||||
|
Moss Adams
|
Accounting Services
|
3,428
|
$
|
169,480
|
06/30/2025
|
No
|
||||
The following information pertains to lease expirations at First & Main Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2025
|
2
|
5,648
|
$
|
315,999
|
21%
|
||||||||
|
2026
|
1
|
9,470
|
$
|
508,362
|
34%
|
||||||||
|
2027
|
1
|
1,135
|
$
|
73,181
|
5%
|
||||||||
|
Thereafter
|
5
|
11,122
|
$
|
616,314
|
40%
|
||||||||
Main Street West Office Building contains 38,156 square feet, of which approximately 32,700 square feet is office space and the remainder is designated as retail space. As of September 30, 2024, the
property is 89% occupied by 8 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business |
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
AUL Corporation
|
Insurance
|
13,806
|
$
|
822,692
|
02/03/2025
|
No
|
||||
|
State of California
|
Health Care
|
4,697
|
$
|
259,721
|
04/30/2028
|
No
|
||||
|
Strategies To Empower People
|
Health Care
|
4,875
|
$
|
221,568
|
12/31/2027
|
No
|
||||
|
Azzurro Pizzeria
|
Restaurant
|
2,735
|
$
|
144,000
|
07/31/2029
|
1, 5 years
|
||||
The following information pertains to lease expirations at Main Street West Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2024
|
2
|
3,678
|
$
|
171,080
|
9%
|
||||||||
|
2025
|
1
|
13,806
|
$
|
822,692
|
44%
|
||||||||
|
2027
|
2
|
7,010
|
$
|
344,039
|
19%
|
||||||||
|
Thereafter
|
3
|
9,373
|
$
|
512,669
|
28%
|
||||||||
Satellite Place Office Building contains 134,785 square feet, all of which is office space. As of September 30, 2024, the property is approximately 71% occupied by 4 tenants. The following table shows
the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease Expiration
|
Renewal
options
|
|||||
|
OS National, LLC
|
Title Services
|
71,085
|
$
|
1,398,953
|
12/31/2029
|
2, 5 years
|
||||
|
Polytron
|
Title Services
|
10,737
|
$
|
212,512
|
04/30/2031
|
2, 5 years
|
||||
|
Ampirical
|
Engineering Consulting
|
9,790
|
$
|
203,893
|
09/30/2030
|
2, 5 years
|
||||
|
Sun Taiyang
|
Consumer Products
|
4,383
|
$
|
95,754
|
11/30/2029
|
1, 5 years
|
||||
The following information pertains to lease expirations at Satellite Place Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2029
|
2
|
75,468
|
$
|
1,494,707
|
78%
|
|
|||||||
|
2030
|
1
|
9,790
|
$
|
203,893
|
11%
|
|
|||||||
|
2031
|
1
|
10,737
|
$
|
212,512
|
11%
|
|
|||||||
Woodland Corporate Center Office Building contains 37,034 square feet, of which 7,797 square feet are laboratories and the rest is office space. All of the laboratory space is occupied by Agtech
Innovation. As of September 30, 2024, the property is 100% occupied by 14 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
Agtech Innovation
|
Research and Development
|
12,940
|
$
|
341,680
|
08/31/2032
|
No
|
||||
|
Children’s Home
Society
|
Non-Profit Education
|
4,042
|
$
|
149,432
|
06/30/2028
|
No
|
||||
|
Johnston, Martin
& Montgomery
|
Accounting
|
3,388
|
$
|
133,668
|
11/02/2024
|
2, 5 years
|
||||
|
Burger Rehab
|
Physical Therapy
|
4,013
|
$
|
121,011
|
09/22/2028
|
No
|
||||
The following information pertains to lease expirations at Woodland Corporate Center Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2024
|
2
|
4,459
|
$
|
171,756
|
15%
|
||||||||
|
2025
|
4
|
5,539
|
$
|
179,202
|
15%
|
||||||||
|
2027
|
2
|
2,160
|
$
|
83,391
|
7%
|
||||||||
|
2028
|
3
|
9,777
|
$
|
325,581
|
28%
|
||||||||
|
Thereafter
|
3
|
15,099
|
$
|
416,296
|
35%
|
||||||||
Green Valley Executive Center Office Building contains 46,101 square feet, of which approximately 41,600 square feet is office space and the remainder is designated as retail space. As of September
30, 2024, the property is 100% occupied by 17 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
Community Housing
Opportunities
|
Real Estate
|
8,510
|
$
|
349,819
|
08/31/2026
|
No
|
||||
|
Arkshire Financial, LLC
|
Insurance
|
7,016
|
$
|
308,400
|
02/28/2027
|
No
|
||||
|
Sticky Rice
|
Restaurant
|
4,511
|
$
|
184,853
|
08/17/2034
|
No
|
||||
|
Larsen & Toubro Limited, Inc.
|
Multinational Conglomerate
|
3,312
|
$
|
178,896
|
02/13/2025
|
2, 5 years
|
||||
The following information pertains to lease expirations at Green Valley Executive Center Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2025
|
4
|
7,455
|
$
|
358,074
|
18%
|
|
|||||||
|
2026
|
3
|
13,567
|
$
|
567,951
|
28%
|
||||||||
|
2027
|
3
|
9,147
|
$
|
414,464
|
20%
|
||||||||
|
Thereafter
|
7
|
15,932
|
$
|
701,403
|
34%
|
||||||||
One Harbor Center Office Building contains 49,569 square feet, all of which is office space. As of September 30, 2024, the property is 93% occupied by 13 tenants. The following table shows the largest
tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease
Expiration
|
Renewal
options
|
|||||
|
Shimmick Construction Company, Inc.
|
Construction
|
10,221
|
$
|
340,380
|
05/15/2027
|
No
|
||||
|
Richmond American Homes
|
Home Builder
|
7,993
|
$
|
256,860
|
12/31/2024
|
No
|
||||
|
Equiventure
|
Health Care
|
6,446
|
$
|
212,724
|
11/16/2033
|
4, 5 years
|
||||
|
Wiseman Company Mgt.
|
Real Estate
|
4,883
|
$
|
167,064
|
05/31/2026
|
No
|
||||
The following information pertains to lease expirations at One Harbor Center Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2024
|
1
|
7,993
|
$
|
256,860
|
16%
|
|
|||||||
|
2025
|
5
|
9,220
|
$
|
346,868
|
22%
|
||||||||
|
2026
|
5
|
12,085
|
$
|
429,940
|
27%
|
||||||||
|
Thereafter
|
2
|
16,667
|
$
|
553,104
|
35%
|
||||||||
Green Valley Medical Center Office Building contains 31,590 square feet of which approximately 19,000 square feet is office space, approximately 8,300 square feet
is health care space, and the remainder is designated as retail space. As of September 30, 2024, the property is 91% occupied by 13 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft. Occupied
|
Annual Base Rent
|
Lease Expiration
|
Renewal
options
|
|||||
|
Cal OES
|
State Emergency Services
|
7,605
|
$
|
293,160
|
08/31/2031
|
No
|
||||
|
Reliant
|
Property Management
|
3,341
|
$
|
147,216
|
11/06/2024
|
No
|
||||
|
eDEA Care
|
Health Care
|
3,409
|
$
|
145,971
|
11/18/2024
|
No
|
||||
|
Green Valley Oral Surgery
|
Health Care
|
2,179
|
$
|
99,253
|
05/07/2029
|
2, 10 years
|
||||
The following information pertains to lease expirations at Green Valley Medical Center Office Building:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Base Rent
|
Percentage of Gross Rent
|
|||||||||
|
2024
|
2
|
6,750
|
$
|
293,187
|
25%
|
|
|||||||
|
2026
|
1
|
889
|
$
|
32,076
|
3%
|
||||||||
|
2027
|
1
|
1,332
|
$
|
66,561
|
6%
|
||||||||
|
Thereafter
|
9
|
19,660
|
$
|
764,330
|
66%
|
||||||||
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of September 30, 2024, Commodore Apartment building is approximately 91.7% occupied. The Park View is also a
mid-rise apartment building built in 1929 and has 39 units. As of September 30, 2024, The Park View building is approximately 97.4% occupied. Hollywood Apartments, located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has
54 units. The property contains approximately 37,000 square feet of net rentable apartment area and 8,610 square feet of retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 96.3%
occupied as of September 30, 2024. Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015 which has 84 units. As of September 30, 2024, Shoreline Apartments building is approximately 84.5% occupied.
The following table provides information regarding each of the residential properties:
|
Property Name
|
Sector
|
Location
|
Square
Feet
|
Units
|
Percentage Leased
|
Annual
Base Rent
|
Monthly Base Rent/Occupied Unit
|
||||||||||||
|
The Park View
|
Multi-Family Residential
|
Oakland, CA
|
36,654
|
39
|
97.4%
|
|
$
|
1,107,628
|
$
|
2,429
|
|||||||||
|
Commodore
|
Multi-Family Residential
|
Oakland, CA
|
31,156
|
48
|
91.7%
|
$
|
836,659
|
$
|
1,585
|
||||||||||
|
Hollywood Apartments
|
Multi-Family Residential
|
Los Angeles, CA
|
36,991
|
54
|
96.3%
|
$
|
1,399,214
|
$
|
2,242
|
||||||||||
|
Shoreline Apartments
|
Multi-Family Residential
|
Concord, CA
|
67,925
|
84
|
84.5%
|
$
|
1,794,126
|
$
|
2,106
|
||||||||||
|
Property Name
|
Sector
|
Location
|
Square
Feet
|
Units
|
Percentage
Leased
|
Annual
Base Rent
|
Monthly Base
Rent/Occupied
Unit
|
||||||||||||
|
Hollywood Apartments
|
Retail
|
Los Angeles, CA
|
8,610
|
1
|
100.0%
|
|
$
|
333,356
|
$
|
27,780
|
|||||||||
Our 220 Campus Lane Office building was purchased in September 2023. The office building was vacant at the time of our purchase. Currently we are in the process of renovating the building and
marketing it for lease. As of September 30, 2024, four tenants are leasing space totaling 11,986 square feet or 27.7% of the building. The annualized base rent for these tenants is $371,640.
In addition to our commercial and residential real estate properties, we also own two parcels of land: a vacant parcel adjacent to our 220 Campus Lane Office Building in Fairfield, California (“Campus
Lane Land”), and a vacant parcel located at 5000 Wiseman Way, Fairfield, California (“Aurora Land”). We acquired the Campus Lane Land in September 2023 with the long-term objective of developing it into a multi-family residential community. The
entitlement process for the vacant land is currently underway, but the financial resources to realize our goal of commencing construction in late 2025 have not been secured and will be dependent upon the City’s approval process. The development of
Aurora Land is discussed below. Both parcels of land are owned by the Operating Partnership through its subsidiaries: Campus Lane Residential, LLC, and MRC Aurora, LLC.
Aurora Land Development (known as Aurora at Green Valley)
We are actively constructing a multi-family residential community on this land which will include 72 units in three buildings, and a club house. The city’s planning commission approved our development
project in September 2023, and we obtained all necessary building permits in August 2024 and the building construction phase commenced in September 2024. Construction is progressing on schedule and on budget. In February 2024, we commenced selling
preferred units in MRC Aurora with the goal of raising $10 million in preferred capital and closed on a construction loan of $17.15 million. We have raised $3.17 million in preferred capital from outside investors as of the date of this report.
There are no present plans for any major renovation or development of any property except for our 220 Campus Lane Office Building, Aurora at Green Valley and Campus Lane Land, as discussed above. Each property is
being held for income production and increased occupancy and/or rental rates. We have property and liability insurance policies on all properties which we believe are adequate.
Current Market and Economic Conditions
The markets in which our properties operate are highly competitive, and each property faces unique competitive challenges based upon local economic, political, and legal factors. Our West coast
multi-family residential properties are generally restricted from raising rents significantly by local rent control laws. Rent control can result in average rents that are significantly below market, and this provides some buffer against declining
rents in a recession. However, in order to encourage development, rent control usually does not apply to newer properties. Since older properties may be unable to raise rents as needed, they may be unable to make improvements that could allow them
to compete with newer properties.
Our consolidated office properties, 1300 Main Office Building, First and Main Office Building, Main Street West Office Building, One Harbor Center, Satellite Place Office Building, Woodland Corporate
Center, 220 Campus Lane Office Building, and Green Valley Executive Center are all Class A suburban office properties and are located in Napa, Woodland, Suisun City and Fairfield, California and Duluth, Georgia. All properties must compete with
every other office property in the market, as well as facing the uncertainty of workers returning to the office after COVID-19.
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies, although inflation has now moderated and interest
rates have begun to come back down some. The Federal Reserve increased the federal funds rate multiple times in 2022 and 2023. We currently have fixed and variable interest rates for our loans. The rise in overall interest rates has caused an
increase in our variable rate borrowing costs resulting in an increase in interest expense. The higher interest rates imposed by the Federal Reserve to address inflation may also adversely impact real estate asset values. In addition, a prolonged
period of high and persistent inflation could cause an increase in our expenses. The current market and economic conditions could have a material impact on our business, cash flow and results of operations. It could also impact our ability to find
suitable acquisitions, sell properties, and raise equity and debt capital.
Results of Operations
Three Months Ended September 30, 2024 and 2023. The commercial and residential properties owned by us during the three months ended September2024 and 2023 are as follows:
|
Three Months Ended September 30, 2024
|
Three Months Ended September 30, 2023
|
|
|
|
|
Commercial properties
|
Commercial properties
|
|
Satellite Place Office Building
|
Satellite Place Office Building
|
|
First & Main Office Building
|
First & Main Office Building
|
|
1300 Main Office Building
|
1300 Main Office Building
|
|
Main Street West Office Building
|
Main Street West Office Building
|
|
Woodland Corporate Center
|
Woodland Corporate Center
|
|
220 Campus Lane Office Building
|
220 Campus Lane Office Building
|
|
Green Valley Executive Center
|
|
|
One Harbor Center
|
|
|
Green Valley Medical Center (Acquired in August 2024)
|
|
|
|
|
|
Residential properties
|
Residential properties
|
|
Commodore Apartments
|
Commodore Apartments
|
|
The Park View
|
The Park View
|
|
Hollywood Apartments
|
Hollywood Apartments
|
|
Shoreline Apartments
|
Shoreline Apartments
|
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the three months ended September 30, 2024, we generated $4.95 million in rental and
reimbursements revenues, of which $3.47 million was generated from our nine commercial properties and $1.48 million was generated from our four residential properties. During the three months ended September 30, 2023, we generated $3.56 million in
rental and reimbursements revenues, of which $2.06 million was generated from our five commercial properties, which excludes 220 Campus Lane Office Building, as it had not yet commenced operations during the three months ended September 30, 2023
and $1.50 million was generated from our four residential properties. The total increase in rental revenues was mainly due to the acquisition of three office buildings (Green Valley Executive Center, One Harbor Center and Green Valley Medical
Center) since September 2023.
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, 2024 and 2023 was $0.02 million and $0.32 million, respectively. During the three months ended September 30, 2024 we received minimal distributions from operations, sales, and liquidations as compared to $0.09 million
during the three months ended September 30, 2023. The decrease was mainly due to the decrease in distributions received from investments. During the three months ended September 30, 2024, we received dividends, interest, and other investment income
of $0.02 million as compared to $0.23 million received during the three months ended September 30, 2023. This decrease was mainly due to decrease in interest income from our cash deposits in money market funds during the three months ended
September 30, 2024.
Expenses:
Our asset management and incentive management fees are based on the advisory agreements that were effective January 1, 2021.
Asset management fee:
The asset management fees for the three months ended September 30, 2024 and 2023 were $0.85 million and $0.79 million, respectively. The slight increase was due to total increase of $17.70 million in total invested capital from $164.23 million as of September 30, 2023 to $181.93 million as of September 30, 2024.
Incentive management fee:
Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the
effective date of the Agreement. We did not incur any incentive management fee for the three months ended September 30, 2024 and 2023.
Administrative cost and transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended September 30, 2024 were $0.17 million as compared to $0.19 million for the three months ended September 30, 2023. The slight decrease was due
to a decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to September 30, 2023, mainly due to hiring of a third party transfer service agent since September 30, 2023.
Transfer agent cost reimbursements paid to MacKenzie for the three months ended September 30, 2024 and 2023 were $0.00 million and $0.02 million, respectively.
Property operating and maintenance expenses:
Operating and maintenance expenses mainly consist of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other
administrative expenses incurred in the operation of our commercial and residential real estate assets. During the three months ended September 30, 2024, we incurred operating and maintenance expenses of $1.88 million, of which $1.19 million were
incurred in the operation of our nine commercial properties and $0.69 million were incurred in the operation of our four residential properties. During the three months ended September 30, 2023, we incurred operating and maintenance expenses of
$1.39 million, of which $0.69 million were incurred in the operation of our six commercial properties and $0.7 million from our four residential properties. The increase in the operating expenses was mainly due to the acquisitions of three new
office buildings (Green Valley Executive Center, One Harbor Center, and Green Valley Medical Center) since September 30, 2023.
Depreciation and amortization:
During the three months ended September 30, 2024, we recorded depreciation and amortization of $2.28 million, of which $1.79 million was attributable to the depreciation and amortization of real
estate and intangible assets of our nine commercial properties and $0.49 million was attributable to our four residential properties. During the three months ended September 30, 2023, we recorded depreciation and amortization of $1.56 million, of
which $1.01 million was attributable to the depreciation and amortization of real estate and intangible assets of our six commercial properties and $0.55 million was attributable to our four residential properties. The increase in total
depreciation and amortization of $0.72 million during the three months ended September 30, 2024 was due to the acquisitions of three new office buildings (Green Valley Executive Center, One Harbor Center, and Green Valley Medical Center) since
September 30, 2023.
Interest expense:
Interest expense for the three months ended September 30, 2024 was $1.89 million, of which $1.14 million was incurred on the mortgage notes payable associated with our nine commercial properties and
$0.75 million was incurred on the mortgage notes payable associated with our four residential properties and the debt on Campus Lane Residential. Interest expense for the three months ended September 30, 2023 was $1.32 million, of which $0.62
million was incurred on the mortgage notes payable associated with our five commercial properties, which exclude Satellite Place Office Building since there was no debt on the property during the three months ended September 30, 2023, and $0.7
million was incurred on the mortgage notes payable associated with our four residential properties and the debt on Campus Lane Residential. The total increase of $0.57 million in interest expense during the three months ended September 30, 2024,
was primarily due to the additional mortgage notes payable of four office buildings (Satellite Place Office Building, Green Valley Executive Center, One Harbor Center, and Green Valley Medical Center) since September 30, 2023.
Other operating expenses:
Other operating expenses include professional fees, directors’ fees, printing and mailing expense, and other general and administrative expenses. Other operating expenses for the three months ended
September 30, 2024 and 2023, were $0.92 million and $0.55 million, respectively. The increase in other operating expenses was mainly due to the acquisition of three commercial properties (Green Valley Executive Center, One Harbor Center, and Green
Valley Medical Center) since September 30, 2023 resulting in a higher amount of general and administrative operating expenses during the three months ended September 30, 2024.
Net realized gain on sale of investments:
During the three months ended September 30, 2024, we recorded a realized gain of $0.15 million as compared to no realized gain during the three months ended September 30, 2023. Total realized gain for
three months ended September 30, 2024 was realized from the sale of two non-traded REIT securities.
Net unrealized gain (loss) on investments:
During the three months ended September 30, 2024, we recorded a net unrealized loss of $0.14 million, which was net of $0.10 million of unrealized gain reclassification adjustment. The
reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized losses excluding the reclassification adjustment for the three
months ended September 30, 2024 were $0.04 million, which resulted from fair value depreciations of $0.12 million from general partnership interests, $0.02 million from limited partnership interests and fair value appreciations of $0.10 million
from non-traded REIT securities.
During the three months ended September 30, 2023, we recorded net unrealized losses on investments of $2.27 million, which resulted from fair value depreciation in the amounts of $1.11 million from
limited partnership interests, $0.73 million from non-traded REIT securities and $0.43 million from general partnership interests.
Income tax provision (benefit):
The Parent Company has elected to be treated as a REIT for tax purposes under the Code and, as a REIT, is not subject to federal income taxes on amounts that it distributes to the stockholders,
provided that, on an annual basis, it generally distributes at least 90% of its REIT taxable income (determined without regard to the dividends paid deduction and excluding any capital gain) 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 REIT taxable income, it will be subject to U.S. federal corporate income tax on its undistributed taxable income. In addition, it will be
subject to a 4% excise tax if the actual amount that it pays to its stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2023. Therefore, it did not incur any tax expense or excise tax on its income
from operations during the quarterly periods within the tax year 2023. In addition, for the tax year 2024, we intend to pay the requisite amounts of dividends during the year and meet other REIT requirements such that the Parent Company will not
owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal periods within the tax year 2024.MacKenzie NY 2 is subject to corporate federal and state income tax on its taxable income at regular
statutory rates. As of September 30, 2024, it did not have any taxable income for tax year 2023 and 2024. Therefore, we did not record any tax provisions during any fiscal periods within the tax year 2023 and 2024. MacKenzie Satellite is a
qualified REIT subsidiary of the Parent Company. Therefore, it does not file a separate tax return.
The Operating Partnership is a limited partnership. Hollywood Hillview, MacKenzie Shoreline, Madison, PVT, 220 Campus Lane, Campus Lane Residential, Green Valley Executive Center, One Harbor Center
and Green Valley West are limited liability companies. First & Main, 1300 Main, Woodland Corporate Center Two, Main Street West, and Green Valley Medical Center are limited partnerships. Accordingly, all income tax liabilities of these entities
flow through to their partners, which ultimately is the Company. Therefore, no income tax provisions are recorded for these entities.
Liquidity and Capital Resources
Capital Resources:
We offered to sell up to 5 million shares of common stock in our first public offering and up to 15 million shares of common stock in each of our second and third public offerings. We have raised
total gross proceeds of $119.10 million from the issuance of common stock under the three public offerings, $42.46 million from our first public offering, which concluded in October 2016, $67.99 million from the second public offering, which
concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $15.56 million from the issuance of common shares under the DRIP as of September 30, 2024. Out of the total
proceeds from DRIP, we have utilized a total of $14.28 million to repurchase common shares under the Share Repurchase Program. In November 2021, the SEC qualified our Offering Circular pursuant to Regulation A to sell up to $50,000,000 of shares of
our Series A preferred stock at an initial offering price of $25.00 per share. On October 14, 2022, we amended our Offering Circular and increased the offering to sell up to $75 million of shares of our Series A preferred stock. On November 1,
2023, we further amended our Offering Circular to sell an aggregate of up to $75 million of shares of either our Series A preferred stock or our Series B preferred stock. This post-effective amendment to the Offering Circular was declared effective
on November 14, 2023. We had raised $18.56 million through the sale of our Series A preferred stock and $1.65 million Series B preferred stock pursuant to the Offering Circular as of September 30, 2024. In addition, we have raised $0.30 million
from the issuance of Series A and Series B preferred shares under the DRIP.
We plan to fund future investments with the net proceeds raised from our preferred equity 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. However, we have not raised as much from our preferred equity offering as we did when it was first offered,
at least in part due to rising interest rates making the preferred return less attractive. Thus, there is no guarantee that we can raise sufficient funds to meet our goals in terms of growth, strategic or necessary loan rebalancings, and additional
investments. We also may fund a portion of our investments through borrowings from banks and issuances of senior securities. We also may borrow money within the underlying companies in which we have majority ownership.
We intend to utilize leverage to enhance the total returns of our portfolio. Historically, we were only able to access leverage at attractive costs through a credit facility, but the termination of
our BDC status effective December 31, 2020 has provided us with greater flexibility in choosing among different alternatives for raising debt capital going forward.
We also have greater flexibility in issuing securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as preferred) in
order to facilitate capital formation now that we are no longer subject to the restrictions of the 1940 Act.
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.
We used the funds raised from our public offerings to invest in portfolio companies and to pay operating expenses.
We finished the three months ended September 30, 2024, with cash and cash equivalents, and restricted cash of approximately $11.97 million. Our principal demands for cash are to fund operating and
administrative expenses, debt service obligations, and dividends on our common and preferred Series A and B stocks. In addition, we may also use cash to purchase additional properties. We expect to fund our material cash requirements over the next
year through a combination of cash on hand, net cash provided by our property operations, new capital raised from our preferred series A and B stocks, and new borrowings at the underlying companies and at the Parent Company level under a new line
of credit.
Cash Flows:
Three months ended September 30, 2024:
For the three months ended September 30, 2024, we experienced a net decrease in cash of $1.11 million. During this period, we generated cash of $1.32 million in our operating activities, used cash of
$6.00 million in our investing activities and generated cash of $3.57 million in our financing activities.
The net cash inflow of $1.32 million from operating activities resulted from $4.62 million of rental revenues and $0.03 million of investment income offset by cash outflow of $3.33 million used in
operating expenses.
The net cash outflow of $6.00 million from investing activities resulted from $6.50 million of real estate acquisitions through our subsidiaries, $0.17 million purchases of equity investments, offset
by cash inflow of $0.67 million from sale of investments.
The net cash inflow of $3.57 million from financing activities resulted from $5.89 million additional mortgage borrowings, $0.36 million capital contributions by non-controlling interests holders,
$0.36 million issuance of Series B preferred stock and $0.05 million issuance of Series A preferred stock, offset by $1.66 million payment of dividends to common stockholders, $0.41 million payment on existing mortgage notes payables, $0.34 million
capital distributions to non-controlling interests holders, $0.24 million payment of dividends to Series A preferred stockholders, $0.20 million change in capital pending acceptance, $0.17 million payment of selling commissions and fees, $0.06
million repayment of finance lease liabilities and $0.01 million payment of dividends to Series B preferred stockholders.
Three months ended September 30, 2023:
For the three months ended September 30, 2023, we experienced a net decrease in cash of $3.46 million. During this period, we generated cash of $0.52 million in our operating activities, used cash of
$5.43 million in our investing activities and generated cash of $1.45 million in our financing activities and.
The net cash inflow of $0.52 million from operating activities resulted from $3.76 million of rental revenues and $0.32 million of investment income, offset by cash outflows of $3.56 million used in
operating expenses.
The net cash outflow of $5.43 million from investing activities resulted from $5.06 million of real estate acquisitions through our subsidiaries and $0.39 million in purchases of equity investments,
offset by cash inflows of $0.02 million from distributions received from our investments that are considered return of capital.
The net cash inflow of $1.45 million from financing activities resulted from $2.95 million proceeds from additional mortgage borrowings and $1.36 million proceeds from the issuance of Series A
preferred stock, offset by $1.36 million payment of dividends to common stockholders, $0.45 million redemption of common stocks, $0.18 million payment of selling commissions and fees, $0.17 million capital distributions to non-controlling interests
holders, $0.01 million repayment of finance lease liabilities, $0.40 million change in capital pending acceptance and $0.29 million payment on existing mortgage notes payable.
Material Cash Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Management Agreement and the Amended and Restated Investment Advisory Agreement, under which the
Advisers serves as our advisers, 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 Advisory Management Agreement in future periods will be (i) a percentage of the value of our Invested Capital; (ii) Acquisition Fees, and (iii) incentive fees based on
our performance above specified hurdles. 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. For additional information concerning the terms of these agreements and related fees paid, see Note 8 – Related Party Transactions in the consolidated financial statements included in this report.
Borrowings
In August 2024, we have applied for a new line of credit at the Parent Company level. We anticipate utilizing this credit facility on a short-term basis to bridge the gap between our asset acquisition
expenditures and the inflow of funds from our planned capital raise. The bank is currently reviewing our application. We 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. We also borrow money within the underlying companies in which we have majority ownership.
The below table presents the total loans outstanding at the underlying companies as of September 30, 2024 and the fiscal years those loans mature:
|
Fiscal Year Ending June 30, :
|
Principal
|
|||
|
2025 (remainder)
|
$
|
39,880,419
|
||
|
|
||||
|
2026
|
11,725,538
|
|||
|
|
||||
|
2027
|
1,152,985
|
|||
|
|
||||
|
2028
|
13,874,433
|
|||
|
|
||||
|
2029
|
10,924,135
|
|||
|
|
||||
|
Thereafter
|
53,294,672
|
|||
|
|
||||
|
Total
|
$
|
130,852,182
|
||
Three of our underlying companies: Hollywood Hillview, Woodland Corporate Center Two, and Main Street West’s debts mature during the fiscal year ending June 30, 2025. The $17.5 million note payable on
Hollywood Hillview matured in October 2024; however, prior to the maturity date, the loan agreement was amended with the options to extend the current maturity date for three periods from October 6, 2024 to November 6, 2024 with a principal paydown
of $515,000, from November 6, 2024 to December 6, 2024 with a principal paydown of $410,000, and from December 6, 2024 to February 6, 2025 with a principal paydown of $410,000, as discussed in Note 10 in the financial statements included in this
report. We also listed the underlying property for sale in August 2024. The $7.5 million note payable on Woodland Corporate Center Two also matured in October 2024, and was refinanced through a new loan that closed on October 4, 2024. The $14.89
million note payable on Main Street West matured on November 1, 2024; however, we were unable to agree with the bank on the principal paydown amount to extend the maturity date. As a result, the Company is currently in default under the note terms.
We are actively negotiating with the bank to extend the maturity date.
Distributions to Stockholders
We pay quarterly distributions to stockholders to the extent that we have income from operations available. Our quarterly distributions, if any, will be determined by our Board of Directors after a
review and distributed pro-rata to holders of our shares; we declare distributions on a monthly basis, but pay each quarter. Any distributions to our stockholders will be declared out of assets legally available for distribution. In no event are we
permitted to borrow money to make distributions if the amount of such distributions would exceed our annual accrued and received revenues, less operating costs. Distributions in kind are not permitted, except as provided in our Charter.
We have elected to be treated as a REIT under the Code. 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
generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding any net capital gain) 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 REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise
tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
We have a DRIP that provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the
DRIP is permitted by the state in which the stockholders reside. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions. On March 4, 2024, the Board of Directors suspended the common stock
share repurchase program and DRIP in connection with trading of its common stock on the OTCQX Best Market. When our common stock became eligible for trading on OTC Markets in April 2024, the share repurchase program automatically terminated, and
the Board of Directors will decide whether, and when, to reinstate the DRIP.
During the three months ended September 30, 2024, the Board approved the following quarterly dividends:
|
|
Dividends
|
|||||||||||||||||||||||
|
|
Common Stock
|
Series A Preferred Stock
|
Series B Preferred Stock
|
|||||||||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||||||||
|
September 30, 2024
|
$
|
0.125
|
$
|
1,679,460
|
$
|
0.375
|
$
|
287,036
|
$
|
0.750
|
$
|
45,378
|
*
|
|||||||||||
* Of the total dividends declared for Series B during the three months ended September 30, 2024, $34,037 was an increase in liquidation preference and $11,341 was
the cash dividend.
| Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our portfolio primarily consists of equity and debt investments in smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our
investments are considered speculative in nature. 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, 2024, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 10% of our total assets as
of that date. As discussed in Note 4 – Investments, to our consolidated financial statements, 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 portfolio sometimes also includes shares of publicly traded REITs, which are valued at recently quoted trading prices. Our investment strategy represents a high degree of business and financial
risk due primarily to the general illiquidity of our investments. 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.
In addition, we are exposed to interest rate risk with respect to our variable-rate indebtedness, generally an increase in interest rates would directly result in higher interest expense. We seek to
manage our exposure to interest rate risk by utilizing a mix of fixed and floating rate financing, and through interest rate hedging agreements to fix or cap our variable rate debt. As of September 30, 2024, the outstanding principal balance of our
variable rate indebtedness was $17.5 million, which is the mortgage debt on Hollywood Apartments. The debt is indexed to Secured Overnight Financing Rate (“SOFR”). In order to mitigate the raising interest rate risk, we have executed an interest
rate cap. For the year ended September 30, 2024, a 10% increase in SOFR would have resulted in no change in interest expense, net of the impact of our interest rate cap.
| Item 4. |
CONTROLS AND PROCEDURES
|
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 as of such date 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, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. |
LEGAL PROCEEDINGS
|
None.
| Item 1A. |
RISK FACTORS
|
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, 2024.
| Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
During the three months ended September 30, 2024, we issued 83.80 common shares to the Class A unit holders of the Operating Partnership who exercised their option to convert their Class A units to
our common shares on a 1:1 conversion ratio.
During the three months ended September 30, 2024, we issued 2,000.00 of Series A preferred shares with total gross proceeds of $50,000, 14,260.00 of Series B preferred shares with total gross
proceeds of $356,499. We also issued 2,059.14 Series A preferred shares with total gross proceeds of $46,333 under the DRIP related to the Series A preferred and 84.96 Series B preferred shares with total gross proceeds of $1,912 under the DRIP
related to the Series B preferred. All such issuances were pursuant to our Regulation A Series A and Series B preferred stock offering.
These private placements of our common and preferred shares were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 3(b)(2) and
Regulation A thereunder (in the case of our Regulation A offering of preferred shares) or Section 4(a)(2) and Regulation D thereunder (in the case of Operating Partnership unit conversions).
On August 26, 2024, in connection with our agreement with Maxim, the Company has issued in a private placement an aggregate amount of 133,000 shares of common stock to Maxim’s affiliate,
approximately 1% of the Company’s outstanding stock. The private placement is exempt from registration under the Section 4(a)(2) of the Securities Act, and Regulation D thereunder. The Company is relying, in part, upon representations of the
Maxim that it is an accredited investor as defined in Regulation D under the Securities Act. The common stock does not have any conversion rights.
Issuer Purchases of Equity Securities
None.
| Item 3. |
DEFAULTS UPON SENIOR SECURITIES
|
None.
| Item 4. |
MINE SAFETY DISCLOSURES
|
Not applicable.
| Item 5. |
OTHER INFORMATION
|
During the quarterly period September 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted terminated
| Item 6. |
EXHIBITS
|
|
Exhibit
|
Description
|
|
Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
|
|
|
Section 302 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
|
|
|
Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
|
|
|
Section 1350 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
|
|
|
101.INS
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Documents.
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document.
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained Exhibit 101).
|
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.
|
MACKENZIE REALTY CAPITAL, INC.
|
||||
|
Date: November 14, 2024
|
By:
|
/s/ Robert Dixon | ||
|
President and Chief Executive Officer
|
||||
|
Date: November 14, 2024
|
By:
|
/s/ Angche Sherpa | ||
|
Treasurer and Chief Financial Officer
|
||||
51