MacKenzie Realty Capital, Inc 10-Q for FY2024 Q1
MacKenzie Realty Capital, Inc. (MKZR)
10-Q
2023-11-13
For: 2023-09-30
View Original
Added on
April 12, 2026
About this 10-Q
MacKenzie Realty Capital, Inc filed this 10-Q on November 13, 2023, covering the quarter ended September 30, 2023 (FY2024 Q1).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.56M
- up 16.0% from $3.07M a year earlier
- Net loss
- $4.21M
- compared with net income of $1.29M a year earlier
- Diluted EPS
- -$0.35
- compared with $0.09 a year earlier
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, 2023
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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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(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: None
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 13, 2023 was 13,304,346.67 .
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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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28 | |
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Item 3.
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40 | |
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Item 4.
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40
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PART II.
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OTHER INFORMATION
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Item 1.
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41
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Item 1A.
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41
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Item 2.
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41
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Item 3.
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41
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Item 4.
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41
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Item 5.
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41
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Item 6.
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42
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43
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MacKenzie Realty Capital, Inc.
(Unaudited)
| September 30, 2023 | June 30, 2023 | |||||||
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Assets
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||||||||
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Real estate assets
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||||||||
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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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|||||||
| Investment acquisition advance |
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Prepaid expenses and other assets
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||||||||
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Total assets
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$
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$ | |||||
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Liabilities
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||||||||
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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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| Stock redemption payable |
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Below-market lease liabilities, net
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| Due to related entities |
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| Contingent liability |
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| Capital pending acceptance |
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Total liabilities
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Equity
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||||||||
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Common stock, $
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Preferred stock, $
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||||||||
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Capital in excess of par value
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|||||||
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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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|||||||
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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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||||||||
| 2023 |
2022 |
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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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||||||||
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Property operating and maintenance
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Interest expense
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||||||||
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Asset management fees to related party (Note 8)
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Professional fees
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||||||||
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General and administrative
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||||||||
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Administrative cost reimbursements to related party (Note 8)
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||||||||
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Directors’ fees
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||||||||
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Transfer agent cost reimbursements to related party (Note 8)
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||||||||
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Total operating expenses
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|||||||
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||||||||
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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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| Net income (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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|||||||
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Net income (loss)
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(
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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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Net income attributable to preferred stockholders
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( |
) | ( |
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| Net income (loss) attributable to common stockholders |
$
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(
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$ | ||||
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Net income (loss) per share attributable to common stockholders
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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
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Preferred Stock
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Total
Stockholders’
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Non-controlling
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|||||||||||||||||||||||||||||||||
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Number of
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Par
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Number of
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Par |
Additional Paid-
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Accumulated
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|||||||||||||||||||||||||||||||
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Three Months Ended September 30, 2023
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Shares
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Value
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Shares
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Value |
in Capital
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Deficit
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Equity
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Interests
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Total Equity
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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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$
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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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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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Dividends to preferred 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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(
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)
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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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)
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(
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)
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||||||||||||||||||||||||
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Operating Partnership Class A conversion to common stock
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*
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(
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)
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|||||||||||||||||||||||||
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Issuance of preferred stock
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-
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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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Issuance of preferred stock through reinvestment of dividends
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-
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-
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*
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Issuance of Operating Partnership Preferred Units through reinvestment of dividends
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-
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-
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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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(
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(
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||||||||||||||||||||||||
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Redemptions of common stock
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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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)
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|
(
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)
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||||||||||||||||||||||
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Balance, September 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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$
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$
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$
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|
|||||||||||||||||||
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|
Common stock
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Preferred stock
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Total
Stockholders’
|
Non-controlling
|
||||||||||||||||||||||||||||||||
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Number of
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Par
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Number of
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Par |
Additional Paid-
|
Accumulated
|
|||||||||||||||||||||||||||||||
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Three Months Ended September 30, 2022
|
Shares
|
Value
|
Shares
|
Value |
in Capital
|
Deficit
|
Equity
|
Interests
|
Total Equity
|
|||||||||||||||||||||||||||
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Balance, June 30, 2022
|
|
$
|
|
|
$
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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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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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|||||||||||||||||||||||||
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Operating Partnership Preferred Units issued
|
-
|
-
|
|
|
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|
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|||||||||||||||||||||||||||
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Dividends to common stockholders
|
-
|
|
-
|
|
|
(
|
)
|
(
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)
|
|
(
|
)
|
||||||||||||||||||||||||
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Dividends to preferred stockholders
|
-
|
|
-
|
|
|
(
|
)
|
(
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)
|
|
(
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)
|
||||||||||||||||||||||||
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Net income
|
-
|
|
-
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
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Operating Partnership Class A conversion to common stock
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|
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*
|
|
|
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(
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)
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|
|||||||||||||||||||||||||
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Issuance of preferred stock
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-
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-
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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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|||||||||||||||||||||||||||
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Issuance of preferred stock through reinvestment of dividends
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-
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-
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*
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||||||||||||||||||||||||||
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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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)
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|
(
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)
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(
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)
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||||||||||||||||||||||||
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Redemptions of common stock
|
(
|
)
|
(
|
)
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|
|
(
|
)
|
|
(
|
)
|
|
(
|
)
|
||||||||||||||||||||||
|
Balance, September 30, 2022
|
|
$
|
|
|
$
|
|
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||
*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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|||||||
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2023
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2022
|
||||||
| Cash flows from operating activities: |
||||||||
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Net income (loss)
|
$
|
(
|
)
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$
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|
|||
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Adjustments to reconcile net income (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 (income) 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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Straight - line rent
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( |
) | ( |
) | ||||
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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
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(
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)
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( |
) | ||||
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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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(
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)
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|||||
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Deferred rent and other liabilities
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(
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)
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Accounts payable and accrued liabilities
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(
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)
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Due to related entities
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(
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)
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(
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)
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Net cash from operating activities
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(
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)
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Cash flows from investing activities:
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Investments in real estate assets
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( |
) | ( |
) | ||||
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Purchase of investments
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( |
) | ( |
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Return of capital distributions
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Proceeds from sale of and sales distribution from investments
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Investment acquisition advance
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(
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)
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Payment on contingent liability
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(
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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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Cash flows from financing activities:
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Proceeds from mortgage notes payable
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Payments on mortgage notes payable
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(
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)
|
(
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)
|
||||
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Payments on notes payable
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(
|
)
|
(
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)
|
||||
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Dividend to stockholders
|
(
|
)
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(
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)
|
||||
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Proceeds from issuance of preferred stock
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|
|
||||||
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Payment of finance lease liabilities
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( |
) | ||||||
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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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)
|
||||
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Distributions to non-controlling interests holders
|
(
|
)
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(
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)
|
||||
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Redemption of common stock, net of stock redemption payable
|
(
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)
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(
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)
|
||||
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Capital pending acceptance
|
(
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)
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|
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Net cash from financing activities
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|
||||||
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Net increase (decrease) in cash, cash equivalents and restricted cash
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(
|
)
|
|
|||||
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Cash, cash equivalents and restricted cash at beginning of the period
|
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|
||||||
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Cash, cash equivalents and restricted cash at end of the period
|
$
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$
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||||
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Cash and cash equivalents at end of the period
|
$
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$
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|
||||
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Restricted cash at end of the period
|
|
|
||||||
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Cash and restricted cash at end of the period classified as assets held for sale
|
|
|
||||||
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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:
|
||||||||
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Issuance of the Operating
Partnership Preferred units for the purchase of First & Main, LP (Note 1)
|
$
|
|
$
|
|
||||
|
Fair value of assets acquired from
consolidation of First & Main, LP
|
$
|
|
$
|
|
||||
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Fair value of liabilities assumed
from consolidation of First & Main, LP
|
$
|
|
$
|
|
||||
|
Issuance of common stock through reinvestment of dividends
|
$
|
|
$
|
|
||||
|
Issuance of preferred stock through reinvestment of dividends
|
$
|
|
$
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|
||||
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Issuance Operating Partnership Preferred Units through reinvestment of dividends
|
$ | $ | ||||||
|
Cash paid for interest
|
$
|
|
$
|
|
||||
The accompanying notes
to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
September 30, 2023
(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.
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.
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, 2023, we own all limited partnership units of the Operating Partnership except for 82,978.43
Class A Limited Partnership units and 474,480 preferred units, which would be entitled to receive, at liquidation of the Operating
Partnership, 82,978.43 common shares of the Company (stated value of $10.25 per share) and $11,862,000 (based on the stated value
of $25 per share for the preferred units) in liquidation preference, respectively. The Parent Company has contributed $73,320,298 in capital to the Operating Partnership since inception; thus the Class A and Series A Preferred Units represent approximately 14.78
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 $50,000,000 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 has not been declared
effective yet as of the date of this filing.
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 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 would be merged with and into FSP Satellite with FSP Satellite as the surviving entity,
but renamed MacKenzie Satellite Place, Inc. (“MacKenzie Satellite”). On June 1, 2022, the merger closed, and MacKenzie Satellite became our wholly owned subsidiary, which 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 (“Management Companies”) and one parcel of entitled land from The Wiseman Company, LLC (“Wiseman”) for $18,333,000 and $3,050,000 ,
respectively. The limited liability companies own the general partnership interests in eight limited partnerships, each of which own a
Class A or B office property in Napa, Fairfield, Suisun, or Woodland, California (the “Wiseman Properties”). Each Management Company is the sole general partner of each of the limited partnerships. The membership interest purchase price is
subject to adjustments and holdbacks as provided in the membership interest purchase agreement. 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. Further details of this acquisition are discussed in Note 5. 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. It was founded in 1979 and
served as the general partner for eight currently active partnerships owning the Wiseman Properties. Concurrently with acquiring the general partnership interests in the Wiseman Properties, the Operating Partnership also negotiated the right to
acquire the limited partnership interest in each Wiseman Property at pre-determined prices over the following two years . Management
believes this transaction is strategically important as it focuses the portfolio on our desired geographic area (Western United States) and creates a captive pipeline of properties which we can acquire when convenient over the next two years . On July 23, 2022, in addition to the general partnership interest in First & Main, LP (“First & Main”), the Operating Partnership
completed the acquisition of 100 % of the limited partnership interest in First & Main for total purchase price of $3,376,322 , of which $2,711,378 was paid
through issuance of 120,505.66 Preferred Units of the Operating Partnership. On October 1, 2022, in addition to the general
partnership interest in 1300 Main, LP (“1300 Main”), the Operating Partnership completed the acquisition of 100 % of the limited
partnership interest in 1300 Main for total purchase price of $6,480,582 . On January 3, 2023, the Operating Partnership completed the
acquisition of 100 % of the limited partnership interest in Woodland Corporate Center Two, LP (“Woodland Corporate Center Two”) for
total purchase price of $5,636,966 , of which $3,242,557 was paid through the issuance of 144,113.63 Preferred Units of the Operating Partnership.
On February 1, 2023, the Operating Partnership completed the acquisition of 100 % of the limited partnership interest in Main Street
West, LP (“Main Street West”) for total purchase price of $8,277,016 . We consolidated the financial statements of First and Main, 1300
Main, Woodland Corporate Center Two and Main Street West after we completed the acquisition of the limited partnership interests in each of these 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 in exchange for the common membership interest. MRC Aurora plans to raise $10 million in preferred capital and
also obtain a construction loan to fund the development of the Aurora Project. As of September 30, 2023, MRC Aurora has not commenced selling the preferred units, making the Operating Partnership the sole equity holder of MRC Aurora. Therefore,
we have consolidated the financial statements of MRC Aurora.
On September 1, 2023, we formed two
operating companies: 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”) with a long-term goal to acquire and develop a parcel of vacant land adjacent to 220 Campus Lane Office Building into a multi-family residential community. The entitlement process for the vacant land has not commenced, and we
are uncertain about the duration and financial resources required to realize our goal. We own 100
We are
externally managed by MacKenzie Capital Management, LP (“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013 (the “Administration Agreement”). MacKenzie manages all of our affairs except for providing
investment advice. MCM Advisers, LP (the “Investment Adviser”) 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”). 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.
As of September 30, 2023, we have raised approximately $119.10
million from our three common stock public offerings and $17.72 million from our Series A preferred stock offering pursuant to the Offering Circular. As of September 30, 2023, we have issued common and Series A preferred shares
with gross proceeds of $14.63 million and $0.12 million, respectively, under our dividend reinvestment plan (“DRIP”). Of the total shares issued by us as of September 30, 2023, approximately $13.80 million and $0.03 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 includes 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.
These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2023, 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, 2023.
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 (“FDIC”) up to certain limits. At times, 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.
Investments Income Receivable
Investment income represent 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. The amounts are generally fully collectible as they are recognized based on completed
transactions. We monitor and adjust our receivables, and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. We have determined that all investments income receivable balances outstanding
as of September 30, 2023 and June 30, 2023, 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, 2023 and June 30, 2023, we recognized an allowance for doubtful accounts of $189,906 and $150,786 , respectively.
Capital Pending Acceptance
We conduct closings for new purchases of our common stock
twice per month and admits 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, 2023 and June 30, 2023, capital pending acceptance was $142,000
and $538,600 , 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, 2022. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2022. Similarly, for the tax year
2023, 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 2023.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on their taxable income at regular statutory
rates. As discussed in Note 1, TRS terminated effective December 31, 2022. As of December 31, 2022, these subsidiaries did not have material taxable income for tax year 2022. Therefore, TRS, and MacKenzie NY 2 did no t record any income tax
provisions during any fiscal period within the tax year 2022. As of September 30, 2023, MacKenzie NY 2 , as a taxable corporate
subsidiary of the Parent Company, did no t have any taxable income. Therefore, we did no t record any tax provisions for tax year 2023. 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, and Campus Lane Residential are limited liability companies. First & Main, 1300 Main, Woodland Corporate Center Two, and Main Street West 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.
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, 2023 and June 30, 2023, 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 statement 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, 2023 and June 30, 2023:
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
September 30, 2023
|
||||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
|
%
|
$
|
|
||||||
|
Capitol Hill Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|
||||||
|
Citrus Park Hotel Holdings, LLC
|
Limited Liability Company
|
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 |
% | * | |
|||||||
|
One Harbor Center, 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, 2023
|
||||||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
|
%
|
$
|
|
||||||
|
Capitol Hill Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|
||||||
|
Citrus Park Hotel Holdings, LLC
|
Limited Liability Company
|
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 |
% | * | |
|||||||
|
One Harbor Center, LP
|
Limited Partnership |
GP Interest |
% | * | |
|||||||
|
Westside Professional Center I, LP
|
Limited Partnership |
GP Interest |
% | * | |
|||||||
|
Total
|
$
|
|
||||||||||
*The
general partner has a 1 % partnership interest but is also entitled to profit sharing distributions ranging from 25 % to 50 % after certain thresholds
are met.
Unconsolidated Investments (Non-security) at Fair Value
These are equity method investments that do not meet the
consolidation requirements under ASC 810. Under the 1940 Act, these investments are considered “voting securities” as opposed to “investment securities”. Therefore, we listed these equity method investments separately from rest of the equity
method investments at fair value in the consolidated balance sheets. As of September 30, and June 30, 2023, our investments in Green Valley Medical Center, LP, Martin Plaza Associates, LP, One Harbor Center, LP and Westside Professional Center
I, LP are considered to be voting securities under the 1940 Act. Therefore, these investments were shown as unconsolidated investments (non-security), at fair value in the consolidated balance sheets. For GAAP purposes, these investments have
been recorded under the equity method investments, for which we have elected the fair value option as discussed above.
Contingent Consideration in an Asset Acquisition
Contingent consideration recognized is
included in the initial cost of the assets acquired. Subsequent changes in the recorded amount of contingent consideration will generally be recognized as an adjustment to the cost basis of the acquired assets, in accordance with ASC
323-10-35-14a and ASC 360-10-30-1. The subsequent changes will be allocated to the acquired assets based on their relative fair value at the date of acquisition.
Subsequent change in contingent
consideration impacts the cost basis of acquired assets, which may also impact the statements of operations through subsequent accounting for the acquired asset. We are aware of diversity in practice regarding the subsequent treatment of
the statement of operations effect of changes to the cost basis of the acquired assets. We generally believe the depreciation or amortization of these assets should be recognized as a cumulative “catch up” adjustment, as if the additional
amount of consideration that is no longer contingent had been accrued from the outset of the arrangement.
Leases
The three partnerships that we acquired during the
year ended June 30, 2023; 1300 Main, Main Street West and Woodland Corporate Center Two 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 we are reasonably certain to renew. 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 renewed. 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. No
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.
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: |
The following table presents the purchase price
allocation of real estate assets acquired during the three months ended September 30, 2023 based on asset acquisition accounting.
|
Property Name:
|
|
|||
|
Acquisition Date:
|
|
|||
|
Purchase Price Allocation
|
||||
|
Land
|
$
|
|
||
|
Building
|
|
|||
|
Parking Lot
|
|
|||
|
Debt mark-to-market
|
|
|||
|
Total assets acquired
|
$ |
|
||
|
Property Name:
|
|
|||
|
Acquisition Date:
|
|
|||
|
Purchase Price Allocation
|
||||
|
Land
|
$ |
|
||
| Debt mark-to-market |
||||
|
Total assets acquired
|
$
|
|
||
The total
depreciation expense of our operating properties for the three months ended September 30, 2023 and 2022 was $1,129,775 and $706,262 , 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, 2023 and June 30, 2023.
The following table
presents the components of income from real estate operations for the three months ended September 30, 2023 and 2022:
|
Three Months Ended
|
Three Months Ended
|
|||||||
|
September 30, 2023
|
September 30, 2022
|
|||||||
|
Lease Income - Operating leases
|
$
|
|
$
|
|
||||
|
Variable lease income (1)
|
|
|
||||||
|
$
|
|
$
|
|
|||||
| (1) |
|
As of September 30, 2023, the future minimum rental
income from our real estate properties under non-cancelable operating leases are as follows:
|
Year ended June
30, :
|
Rental Income
|
|||
|
2024
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
Lease Intangibles, Above-Market Lease Assets and Below-Market
Lease Liabilities, Net
As of September
30, 2023, our acquired lease intangibles, above-market lease assets, and below-market lease liabilities were as follows:
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average amortization period (years)
|
||||||||||||
As of June 30,
2023, our acquired lease intangibles, above-market lease assets and below-market lease liabilities, were as follows:
|
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, 2023 and 2022, were as follows:
|
Three Months Ended September 30, 2023
|
||||||||||||
|
Lease
Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Amortization
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
|
Three Months Ended September 30, 2022
|
||||||||||||
|
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,
|
||||||||||||||||||||||||
|
2024 (remainder)
|
2025
|
2026
|
2027
|
2028
|
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, 2023 and June 30, 2023:
| Fair Value |
Fair Value |
|||||||
| Asset Type | September 30, 2023 |
June 30, 2023
|
||||||
|
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, 2023 and June 30, 2023.
The following table presents fair value measurements of our investments as of
September 30, 2023, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Non Traded Companies
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
| GP Interests |
||||||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
The following table presents fair value measurements of our investments as of
June 30, 2023, according to the fair value hierarchy that is described in our annual report on Form 10-K:
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
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, 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 change in unrealized losses
included in earnings relating to Level III investments still held at September 30, 2023 was $2,267,248 .
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, 2022:
|
Balance at July 1, 2022
|
$
|
|
||
|
Purchases of investments
|
|
|||
| Transfers to Level I |
( |
) | ||
| Transfer to investment in real estate |
( |
) | ||
|
Proceeds from sales, net
|
(
|
)
|
||
| Return of capital distributions |
( |
) | ||
|
Net realized gains
|
|
|||
|
Net unrealized gains
|
|
|||
|
Ending balance at September 30, 2022
|
$
|
|
The transfer of $30,753 from Level III to Level I category during the three months
ended September 30, 2022 resulted from one of our investments converting from a non-traded REIT to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the period.
For the three months ended September 30, 2022, net change in unrealized gains
included in earnings relating to Level III investments still held at September 30, 2022 was $3,206,722 .
The following table shows quantitative information about significant
unobservable inputs related to the Level III fair value measurements used at September 30, 2023:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable
Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Companies
|
$ |
|
Market Activity
|
Secondary market industry publication
|
||||||||||
|
|
|
|
Share repurchase program
|
|||||||||||
| Estimated Liquidation Value |
Sponsor provided value
|
|||||||||||||
| 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, 2023:
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable Inputs Used
|
Range
|
Weighted
Average
|
|||||||||
|
Non Traded Companies
|
$ |
|
Market Activity
|
Secondary market industry publication
|
||||||||||
|
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 as of September 30, 2023. However, they were material in aggregate as of September 30, 2023.
The aggregated summarized financial information of all equity method investees
as of September 30, 2023 is as follows:
|
All Equity Method Investee
Aggregated
|
||||
|
Total Assets
|
$ | |||
|
Total Liabilities
|
$ | |||
|
Total Equities
|
$ | |||
|
Total Revenues
|
$ | |||
|
Total Expenses
|
$ | |||
|
Total Net Income
|
$ | |||
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%.
NOTE 5 – ACQUISITIONS
As discussed in Note 1, in September 2023, 220 Campus Lane and Campus Lane Residential acquired a vacant office building and the adjacent vacant parcel
of land for a total purchase price of $4,473,756 , of which $3,300,000 was funded through seller-financed non-recourse loans.
Contingent Consideration
As discussed in Note 1 and in our June 30, 2023 consolidated financial statements, pursuant to the membership interest purchase agreement for the Wiseman
partnerships, the purchase price paid at closing for the general partnership interests was reduced by 20 % as of the closing date for the
property companies that had not received fully executed and in force leases, the annualized scheduled rents of which are equal to or greater than the target scheduled rent as stated in the membership interest purchase agreement. This 20 % holdback will be paid upon a property company reaching the stabilization threshold, reduced by stabilization costs, as defined in the membership
interest purchase agreement. Management believes that it is probable that the stabilization thresholds will be reached for each of the property companies that did not meet this threshold at the acquisition date. Hence, the 20 % holdback in the amount of $2,715,000
was recorded as a contingent liability as of the acquisition date. As of September 30, 2023 and June 30, 2023, contingent liability amounted to $1,503,000
Debt Guaranty
The Wiseman partnerships have mortgage loans with various banks and the loans are guaranteed by Wiseman and its owner, Doyle Wiseman and his trust. 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 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. 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, 2023.
NOTE 6 –LEASES
Lessee Arrangements
As discussed in Note 2, we acquired three 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 7.08 to 7.50 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, 2023
|
June 30, 2023 | |||||||
|
Right-of-use assets:
|
|||||||||
|
Finance leases
|
|
$
|
|
$ |
|||||
|
Lease liabilities:
|
|||||||||
|
Finance leases
|
Finance lease liabilities
|
$
|
|
$ |
|||||
We have included these leases in as follows:
|
September 30, 2023
|
June 30, 2023 | |||||||
|
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, 2023:
|
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
|
|||
|
2024 (remainder)
|
$
|
|
||
|
2025
|
|
|||
|
2026
|
|
|||
|
2027
|
|
|||
|
2028
|
|
|||
|
Thereafter
|
|
|||
|
Total undiscounted lease payments
|
|
|||
|
Less: Imputed interest
|
(
|
)
|
||
|
Net lease liabilities
|
$
|
|
||
Supplemental Lease Information
|
September 30, 2023
|
June 30, 2023 | |||||||
|
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 it is the primary beneficiary of a VIE on an ongoing basis based on current facts and circumstances.
Nonconsolidated VIEs
As of September 30, 2023 and June 30, 2023, four
The table below presents a summary of the nonconsolidated VIEs in which we hold
variable interests:
|
Total Nonconsolidated VIEs
|
As of September 30, 2023
|
As of June 30, 2023 | ||||||
|
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, 2023 and 2022, we incurred asset
management fees of $787,077 and $716,267 ,
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 %
|
|
|
|
|
|
|
Total Invested
Capital
|
|||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2023
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2022
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
During the three months ended September 30, 2023 and 2022, 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 the acquisition date, WCM has been providing property management and leasing services to the eight property limited partnerships in accordance with the pre-existing agreements. There have been no changes to any of the management services agreements terms with the
property limited partnerships since the acquisition of the property management service rights.
During the three months ended September 30, 2023 and 2022, the eight limited partnerships paid total property management fees of $125,750 and $117,225 , respectively, and leasing commissions of $64,908
and $202,886 , respectively, to WCM. In addition, during the three months ended September 30, 2023 and 2022, the eight partnerships also paid $399,771
and $836,803 , respectively, 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 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. In such case, the broker savings were available to be paid by us for marketing expenses or other non-cash compensation. As of
September 30, 2023, we incurred $1,257,098 of offering costs, of which $1,128,570 relates to offering cost paid by Mackenzie on behalf of us in connection with the preferred stock offering. As of June 30, 2023, we incurred $1,099,189 of offering costs, of which $1,000,667
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, 2023 were in excess of the total offering cost reimbursement threshold including
the broker savings by $149,649 . The total offering cost incurred as of June 30, 2023 were below the offering cost reimbursement
threshold including the broker savings. The cumulative offering costs in excess of the reimbursable threshold as of September 30, 2023 will be reimbursed by the Adviser during the quarter ending December 31, 2023. The excess amounts
reimbursable from the Adviser as of September 30, 2023 were netted against due to related entities in the consolidated balance sheets.
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.
Effective November 1, 2018, transfer agent services are also provided by MacKenzie and the costs incurred by MacKenzie in providing the services
are reimbursed by us. No fee (only cost reimbursement) is being paid by us to MacKenzie for this service.
The administrative cost reimbursements for the three months ended September 30, 2023 and 2022 were $189,183 and $181,500 , respectively. The transfer agent
services cost reimbursement for the three months ended September 30, 2023 and 2022 were $16,567 and $23,000 , respectively.
The table below outlines the related party expenses incurred for the three months ended September 30, 2023 and 2022, and unpaid as of
September 30, 2023, and June 30, 2023.
|
Three Months Ended
|
Unpaid as of
|
|||||||||||||||
|
Types and Recipient
|
September 30, 2023
|
September 30, 2022
|
September 30, 2023
|
June 30, 2023
|
||||||||||||
|
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, 2023 and June 30, 2023, 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, the
outstanding loan balances as of September 30, 2023 and June 30, 2023, were $6,737,500 8,387,500
PT Hillview Mortgage
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 can 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 balance as of September 30, 2023 and June 30, 2023 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, 2023, 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.
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, 2023 and June 30, 2023, 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, 2023 and June 30, 2023, was $11,208,046 and $11,288,012 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
The following table provides the projected principal and interest payments on the loan for the next three years:
|
Fiscal Year Ending June 30, :
|
Principal
|
Interest
|
||||||
|
2024 (remainder)
|
$
|
|
$
|
|
||||
|
2025
|
|
|
||||||
|
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 a maturity date of December 31, 2023 and
include no prepayment penalty for early retirement. 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.
First & Main Other Notes Payables:
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 in December 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, 2023 and June 30, 2023, the outstanding balance of the loan amounted to $177,717 and $182,393 , 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 as discussed in Note 5. The outstanding balance of the loan as of
September 30, 2023 and June 30, 2023 was $8,335,579 and $8,393,068 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
In accordance
with the 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, net of accumulated amortization as of September 30, 2023 and June 30, 2023 amounted to $124,526 and $177,895 , respectively, and was netted against the total debt balance in the consolidated balance sheets.
The following table provides the projected principal and interest payments on the loan for the next five years:
|
Fiscal Year Ending June 30, :
|
Principal
|
Interest
|
||||||
|
2024 (remainder)
|
$
|
|
$
|
|
||||
|
2025
|
|
|
||||||
|
2026
|
|
|
||||||
|
2027
|
|
|
||||||
| 2028 |
||||||||
| Thereafter |
||||||||
|
Total
|
$
|
|
$
|
|
||||
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 in July 2023. Monthly payments will be $731 . The loan is disclosed as a part of the 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 Two Office Building. The loan matures on October 7, 2024 and is secured by Woodland
Corporate Center Two 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, 2023 and June 30, 2023 was $6,778,757 and $6,827,930 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
The following table provides the projected principal and interest payments on the loan for the next two
years:
|
Fiscal Year Ending June 30,
|
Principal
|
Interest
|
||||||
|
2024 (remainder)
|
$
|
|
$
|
|
||||
|
2025
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
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 was obtained to refinance the prior loan secured by the real property when it matured. 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, 2023 and June 30, 2023 was $15,228,807 and $15,337,106 , respectively, which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets.
In accordance with the 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, 2023 and June 30, 2023
amounted to $456,273 and $554,045 ,
respectively, and was netted against the total debt balance in the consolidated balance sheets.
The following table provides the projected principal and interest payments on the loan for the next two years:
|
Fiscal Year Ending June 30,
|
Principal
|
Interest
|
||||||
|
2024 (remainder)
|
$
|
|
$
|
|
||||
|
2025
|
|
|
||||||
|
Total
|
$
|
|
$
|
|
||||
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, 2022. Monthly payments will be $731 . The loan is disclosed as a part of the notes payable in the consolidated
balance sheets.
220 Campus Lane Mortgage Notes Payable
On September 8, 2023, 220 Campus Lane borrowed $2,145,000 from the Northern California Laborers Pension Fund (the seller) 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 loan balance as of September 30, 2023 was $2,145,000 , which is disclosed as a part of the mortgage notes payable in
the consolidated balance sheets.
In accordance with the 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 as disclosed in Note 3. 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, 2023 amounted to $220,646 , 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 the Northern California Laborers Pension Fund (the seller) 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. Accordingly, the outstanding loan balance as of September 30, 2023 was
$1,155,000 , which is disclosed as a part of the mortgage notes payable in the consolidated balance sheets
In accordance with the 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 as disclosed in Note 3. 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,
2023 amounted to $118,733 , and was netted against the total debt balance in the consolidated balance sheets.
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, 2023 and 2022:
| Three Months Ended | Three Months Ended | |||||||
| September 30, 2023 |
September 30, 2022 |
|||||||
|
Net income (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
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. Additionally, 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.
During the
three months ended September 30, 2022, we issued 41,884.51 common shares with total gross proceeds of $386,385 under the DRIP. In September 2022, we issued 169.97 common shares at $10.25 per share, to the Class A unit holders
of the Operating Partnership as discussed in Note 1.
NOTE 13 – SHARE REPURCHASE PLAN
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 stocks |
||||||||||||
|
September 1, 2023 through September 30, 2023
|
|
$
|
|
$
|
|
|||||||
During
the three months ended September 30, 2022, we repurchased our own shares 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, 2022
|
||||||||||||
| Common stocks |
||||||||||||
|
September 1, 2022 through September 30, 2022
|
|
$
|
|
$
|
|
|||||||
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, 2023:
|
Dividends
|
||||||||||||||||
|
Common Stock
|
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 October 2023.
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 preferred dividends of $242,173 ,
of which $39,858 have been reinvested under our DRIP.
On September 18, 2023, 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, 2023, November 30, 2023, and December 31, 2023. The preferred stock dividend declared on September 18, 2023, will be paid in January 2024. Similarly, on November 9, 2023, we also declared the common stock
quarterly dividend of $0.125 per share for the quarter ended December 31, 2023 which will be paid in January 2024.
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
|
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 preferred distributions of $177,589 , of which $20,454 have been reinvested under our DRIP.
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, 2022:
|
Dividends
|
|||||||||||||||
|
Common stock
|
Preferred stock
|
||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
|||||||||||
|
|
$
|
|
$ |
|
$
|
|
$
|
|
|||||||
The above common and preferred dividends declared during the
quarter ended September 30, 2022 were paid in October 2022.
During the three months ended September 30, 2022, we paid common
dividends of $1,323,888 , of which $386,385
have been reinvested under our DRIP. During the three months ended September 30, 2022, we paid preferred dividends of $37,980 , of
which $4,829 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, 2022:
|
Distributions
|
|||||||||||||||
|
Class A Units
|
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 2022.
During the three months ended September 30, 2022, the Operating Partnership paid Class A and preferred distributions of $6,299 and
$51,667 , 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 estimates 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 operating expenses 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, 2023, 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, 2023, and June 30, 2023:
|
Fair Value
|
||||||||
|
Investments, at fair value
|
September 30, 2023
|
June 30, 2023
|
||||||
|
5210 Fountaingate, LP
|
$
|
6,820
|
$
|
6,820
|
||||
|
Blackstone Real Estate Income Trust, Inc. - Class S
|
24,994
|
-
|
||||||
|
Capitol Hill Partners, LLC
|
-
|
1,107,795
|
||||||
|
Citrus Park Hotel Holdings, LLC
|
4,100,000
|
4,100,000
|
||||||
|
Healthcare Trust, Inc.
|
1,331,571
|
1,554,693
|
||||||
|
Highlands REIT, Inc.
|
3,053,533
|
2,794,926
|
||||||
|
Lakemont Partners, LLC
|
827,220
|
829,381
|
||||||
|
Moody National REIT II, Inc.
|
20,991
|
13,853
|
||||||
|
SmartStop Self Storage REIT, Inc. - Class A
|
1,719,853
|
1,878,092
|
||||||
|
Starwood Real Estate Income Trust, Inc. - Class S
|
24,748
|
-
|
||||||
|
Strategic Realty Trust, Inc.
|
212,794
|
216,068
|
||||||
|
Summit Healthcare REIT, Inc.
|
663,738
|
930,852
|
||||||
|
Total
|
$
|
11,986,262
|
$
|
13,432,480
|
||||
|
Fair Value
|
||||||||
|
Unconsolidated investments (non-security), at fair value
|
September 30, 2023
|
June 30, 2023
|
||||||
|
Green Valley Medical Center, LP
|
$
|
2,108,500
|
$
|
2,363,000
|
||||
|
Martin Plaza Associates, LP
|
516,000
|
493,000
|
||||||
|
One Harbor Center, LP
|
4,034,500
|
4,076,500
|
||||||
|
Westside Professional Center I, LP
|
1,609,000
|
1,784,000
|
||||||
|
Total
|
$
|
8,268,000
|
$
|
8,716,500
|
||||
Properties
In addition to our investment securities, we currently own and manage six commercial real estate properties: Satellite Place located in Duluth, GA, 1300 Main, First & Main and Main Street West
located in Napa, CA, Woodland Corporate Center Two located in Woodland, CA, and 220 Campus Lane located in Fairfield, CA and four residential apartments: Commodore Apartments and The Park View (f/k/a as Pon De Leo Apartments), located in Oakland,
CA, Hollywood Apartments located in Los Angeles, CA and the Shoreline Apartments located in Concord, CA. 1300 Main, First & Main, Main Street West, Woodland Corporate Center and 220 Campus Lane office buildings, and the Hollywood Apartments are
owned through our subsidiary, the Operating Partnership as noted below. The Commodore Apartments are owned through our subsidiary Madison; The Park View are owned through our subsidiary PVT; and the Shoreline Apartments are owned through our
subsidiary BAA-Shoreline.
|
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 Office Building
|
Woodland Corporate Center Two, LP
|
|
Main Street West Office Building
|
Main Street West, LP
|
|
220 Campus Lane Office Building
|
220 Campus Lane, LLC
|
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, 2023, the property
is 100% 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
|
||||||
|
Wilson Daniels
|
Wine Wholesaler
|
6,712
|
$
|
423,795
|
3/15/25
|
1, 5 years
|
|||||
|
Hal Yamashita
|
Restaurant
|
3,212
|
$
|
192,276
|
7/31/26
|
No
|
|||||
|
Norcal Gold
|
Real Estate
|
2,896
|
$
|
173,453
|
3/31/26
|
1, 5 years
|
|||||
|
Shackford’s Kitchen
|
Retail
|
2,409
|
$
|
134,160
|
6/30/32
|
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
|
||||||||||
|
2024
|
1
|
1,088
|
$
|
74,232
|
6%
|
|
||||||||
|
2025
|
2
|
8,898
|
$
|
558,225
|
45%
|
|
||||||||
|
2026
|
2
|
6,108
|
$
|
365,729
|
30%
|
|
||||||||
|
Thereafter
|
3
|
4,051
|
$
|
233,851
|
19%
|
|
||||||||
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, 2023, the
property is 98% 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
|
||||||
|
GVM Law
|
Legal Services
|
9,470
|
$
|
488,292
|
9/20/26
|
2, 5 years
|
|||||
|
Brotlemarkle
|
Accounting Services
|
4,366
|
$
|
237,683
|
7/31/30
|
2, 5 years
|
|||||
|
Napa Palisades
|
Restaurant
|
3,462
|
$
|
188,221
|
8/31/40
|
No
|
|||||
|
Moss Adams
|
Accounting Services
|
3,428
|
$
|
164,544
|
6/30/25
|
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
|
||||||||
|
2024
|
1
|
1,135
|
$
|
70,473
|
5%
|
|||||||
|
2025
|
2
|
5,648
|
$
|
306,460
|
21%
|
|||||||
|
2026
|
1
|
9,470
|
$
|
488,292
|
34%
|
|||||||
|
Thereafter
|
4
|
10,550
|
$
|
569,956
|
40%
|
|||||||
Main Street West Office Building contains 38,136 square feet, of which approximately 32,500 square feet is office space and the remainder is designated as retail space. As of September 30, 2023, the
property is 84% 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
|
||||||
|
AUL Corporation
|
Insurance
|
13,806
|
$
|
806,125
|
2/3/26
|
No
|
|||||
|
State of California
|
Medical
|
4,697
|
$
|
259,296
|
4/30/28
|
No
|
|||||
|
Strategies To Empower
|
Medical
|
4,875
|
$
|
214,503
|
12/31/27
|
No
|
|||||
|
Azzurro Pizzeria
|
Restaurant
|
2,935
|
$
|
202,380
|
7/31/24
|
No
|
|||||
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
|
3
|
6,613
|
$
|
371,792
|
21%
|
|||||||
|
2026
|
1
|
13,806
|
$
|
806,125
|
45%
|
|||||||
|
2027
|
2
|
7,010
|
$
|
333,258
|
19%
|
|||||||
|
Thereafter
|
1
|
4,697
|
$
|
259,296
|
15%
|
|||||||
Satellite Place Office Building contains 143,785 square feet, all of which is office space. As of September 30, 2023, the property is approximately 64% occupied by 3 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
|
$
|
1,365,010
|
12/31/29
|
2, 5 years
|
|||||
|
Polytron
|
Title Services
|
10,737
|
$
|
206,370
|
4/16/31
|
2, 5 years
|
|||||
|
Sun Taiyang
|
Consumer Products
|
4,373
|
$
|
92,963
|
11/30/29
|
No
|
|||||
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
|
$
|
1,457,973
|
88%
|
|||||||
|
2031
|
1
|
10,737
|
$
|
206,370
|
12%
|
|||||||
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 laboratories space is occupied by Agtech
Innovation. As of September 30, 2023, the property is 97% 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
|
$
|
416,693
|
8/31/32
|
No
|
|||||
|
Burger Rehab
|
Physical Therapy
|
4,013
|
$
|
117,485
|
9/22/28
|
No
|
|||||
|
Johnston, Martin & Montgomery
|
Accounting
|
3,388
|
$
|
129,362
|
11/2/24
|
2, 5 years
|
|||||
|
Children’s Home Society
|
Non-Profit Education
|
4,013
|
$
|
145,080
|
6/30/28
|
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
|
5
|
7,303
|
$
|
266,525
|
22%
|
|||||||
|
2025
|
3
|
4,106
|
$
|
130,480
|
11%
|
|||||||
|
2027
|
2
|
3,178
|
$
|
103,385
|
9%
|
|||||||
|
2028
|
3
|
8,439
|
$
|
277,073
|
23%
|
|||||||
|
Thereafter
|
1
|
12,940
|
$
|
416,693
|
35%
|
|||||||
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of September 30, 2023, Commodore Apartment building is approximately 100% occupied. The Park View is also a
mid-rise apartment building built in 1929 and has 39 units. As of September 30, 2023, The Park View building is approximately 92.3% occupied. Hollywood Hillview Apartments (“Hollywood Property”), located in Los Angeles, CA, is a mid-rise apartment
building built in 1917 and has 53 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 66% occupied as of September 30, 2023. Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015 which has 84 units. As of September 30, 2023, Shoreline Apartments building is approximately 92.9%
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
|
92.3%
|
$
|
1,031,944
|
$
|
2,389
|
||||||||||
|
Commodore
|
Multi-Family Residential
|
Oakland, CA
|
31,156
|
48
|
100%
|
$
|
908,863
|
$
|
1,578
|
||||||||||
|
Hollywood Property
|
Multi-Family Residential
|
Los Angeles, CA
|
36,991
|
53
|
66%
|
$
|
1,006,727
|
$
|
2,397
|
||||||||||
|
Shoreline Apartments
|
Multi-Family Residential
|
Concord, CA
|
67,925
|
84
|
92.9%
|
$
|
1,965,600
|
$
|
2,100
|
||||||||||
|
Property Name
|
Sector
|
Location
|
Square Feet
|
Units
|
Percentage Leased
|
Annual Base Rent
|
Monthly Base Rent/Occupied Unit
|
||||||||||||
|
Hollywood Property
|
Retail
|
Los Angeles, CA
|
8,610
|
1
|
100%
|
|
$
|
323,647
|
$
|
26,971
|
|||||||||
Our 220 Campus Lane Office building was purchased in September 2023. The office building was vacant at the time of our purchase. We are currently in the process of renovating the building and
marketing it for lease.
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 has not commenced, and we are uncertain about the duration and financial resources required to realize our goal. 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
We plan to build a multi-family residential community on this land which will include 72 units and a club house. The city’s planning commission has approved our development project and the building
department is currently reviewing our building permit submittals. In order to fund the construction of the project, we plan to raise $10 million in preferred capital and also obtain a construction loan. We hope to obtain the construction loan
during the first two months of 2024 and commence the construction in early Spring 2024.
There are no present plans for any major renovation or development of any property except for our 220 Campus Lane Office Building, Aurora Land 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 (those consolidated and those that are not yet consolidated) operate are highly competitive, and each property faces unique competitive challenges based upon local
economic, political, and legal factors. Our West coast multi-family properties are generally restricted from raising rents significantly by local rent control laws. Two of our unconsolidated investments in apartment properties, Lakemont Partners
and Capitol Hill, are also subject to rent control. 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, First and Main, Main Street West, Satellite Place, Woodland Corporate Center Two, and 220 Campus Lane are all Class A suburban office properties and are
located in Napa, California, Napa, California, Napa, California, Duluth, Georgia, Woodland, California, and Fairfield, California, respectively. 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.
Our unconsolidated investment in a hotel property, Citrus Park Hotel, is a Courtyard by Marriott located in the Tampa/St. Petersburg market that competes for business and leisure travel.
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies. The Federal Reserve has increased its targeted range
for the federal funds rate, leading to increased interest rates and it foresees further interest rate increases. 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, 2023 and 2022
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, 2023, we generated $3.56 million in rental and
reimbursements revenues, of which $2.06 million was generated from our five commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building and Woodland Corporate
Center Office Building), and $1.50 million was generated from our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments and Shoreline Apartments). During the three months ended September 30, 2022, we generated $3.07
million in rental and reimbursements revenues, of which $1.70 million was generated from three commercial properties (Addison Corporate Center, Satellite Place Office Building and First & Main Office Building) and $1.37 million from our four
residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The total increase of $0.49 million in rental revenues during the three months ended June 30, 2023 was mainly due to the acquisition of
three commercial properties since September 2022.
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, 2023 and 2022 was $0.32 million and $0.45 million, respectively. During the three months ended September 30, 2023 we received $0.09 million of distributions from operations, sales, and liquidations as compared to $0.33
million during the three months ended September 30, 2022. The decrease was mainly due to liquidation of Dimension 28, LP in December 2022. During the three months ended September 30, 2023, we received dividends, interest, and other investment
income of $0.23 million as compared to $0.12 million received during the three months ended September 30, 2022. This increase was mainly due to increase in interest income from our cash deposits in money market funds during the three months ended
September 30, 2023.
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, 2023 and 2022 were $0.79 million and $0.72 million, respectively. The slight increase was due to total increase of $15.59 in total
invested capital from $148.64 million as of September 30, 2022 to $164.23 million as of September 30, 2023.
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, 2023 and 2022.
Administrative cost and transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended September 30, 2023 were $0.19 million as compared to $0.18 million for the three months ended September 30, 2022. The slight increase was due
to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to September 30, 2022, as a result of the increase in number of properties since September 2022.
Transfer agent cost reimbursements paid to MacKenzie for the three months ended September 30, 2023 and 2022 were $0.02 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, 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 (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building and 220 Campus Lane Office Building) and $0.7 million were
incurred in the operation of our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). During the three months ended September 30, 2022, we incurred operating and maintenance expenses of
$1.83 million, of which $1.20 million were incurred in the operation of our three commercial properties (Addison Corporate Center, Satellite Place Office Building and First & Main Office Building) and $0.63 million were incurred in the
operation of our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The decrease in the operating expenses was mainly due to the sale of Addison Property in June 2023 partly offset by
the acquisitions of three new office buildings (1300 Main, Main Street West and Woodland Corporate Center) since September 30, 2022.
Depreciation and amortization:
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 (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building and 220 Campus
Lane Office Building) and $0.55 million was attributable to our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). During the three months ended September 30, 2022, we recorded
depreciation and amortization of $0.91 million, of which $0.36 million was attributable to the depreciation and amortization of real estate and intangible assets of our two commercial properties (Satellite Place Office Building and First & Main
Office Building) and $0.55 million was attributable to our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments and Shoreline Apartments). The increase in total depreciation and amortization of $0.65 million during
the three months ended September 30, 2023 was due to the acquisitions of three new office buildings (1300 Main, Main Street West and Woodland Corporate Center) since September 30, 2022.
Interest expense:
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
(First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building and 220 Campus Lane Building) and $0.7 million was incurred on the mortgage notes payable associated with
our five residential properties (Commodore Apartments, The Park View, Hollywood Apartments, Shoreline Apartments and Campus Lane Residential). Interest expense for the three months ended September 30, 2022 was $1.59 million, of which $0.66
million was incurred on the notes payable associated with our two commercial properties (Addison Corporate Center and First & Main Office Building), $0.93 million was incurred on the mortgage notes payable associated with our four residential
properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments) and $0.02 million was incurred on short sale fees.
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, 2023 and 2022, were $0.55 million and $0.33 million, respectively. The increase in other operating expenses was mainly due to the acquisition of three commercial properties (1300 Main, Main Street West and Woodland Corporate Center)
since September 30, 2022 resulting in higher amount of general and administrative operating expenses during the three months ended September 30, 2023.
Net realized gain on sale of investments:
During the three months ended September 30, 2023, no realized gain was recorded as compared to $0.52 million during the three months ended September 30, 2022. Total realized gains for the three months
ended September 30, 2022, were realized from sale of a publicly traded REIT securities with realized gain of $0.01 million, four non-traded REIT securities with total realized gain of $0.18 million, and a limited partnership interest with realized
gains of $0.33 million.
Net unrealized gain (loss) on investments:
During the three months ended September 30, 2023, we recorded net unrealized losses on investments of $2.27 million, which resulted from fair value depreciations of $1.11 million from limited
partnership interests, $0.43 million from general partnership interests and $0.73 million from non-traded REIT securities.
During the three months ended September 30, 2022, we recorded net unrealized gains of $2.84 million, which were net of $0.49 million of unrealized gains 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 gains excluding the reclassification adjustment for the three
months ended September 30, 2022 were $3.33 million, which resulted from fair value appreciations of $2.99 million from limited partnership interests, $0.65 million from general partnership interests, and $0.03 million from investment trust and
fair value depreciations of $0.34 million from non-traded REIT securities.
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, 2022. Therefore, it did not incur any tax expense or excise tax on its income
from operations during the quarterly periods within the tax year 2022. Similarly, for the tax year 2023, we intend to pay the requisite amounts of dividends during the year and meet other REIT requirements such that it 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 2023.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on their taxable income at regular statutory rates. However, these subsidiaries did not have material taxable income for
tax year 2022. In addition, as discussed in Note 1, TRS was terminated effective December 31, 2022. Therefore, TRS, and MacKenzie NY 2 did not record any income tax provisions during any fiscal periods within the tax year 2022. As of September 30,
2023, MacKenzie NY 2, as a taxable corporate subsidiary of the Parent Company, did not have any taxable income. Therefore, we did not record any tax provisions for tax year 2023. 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, and Campus Lane Residential are limited liability companies. First &
Main, 1300 Main, Woodland Corporate Center Two, and Main Street West 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 $14.63 million from the issuance of common shares under the DRIP as
of September 30, 2023. Out of the total proceeds from DRIP, we have utilized a total of $13.80 million to repurchase common stocks 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 has not been declared effective yet as of the date of this filing. We had raised $17.72 million through the sale of our Series A preferred stock pursuant to the Offering Circular as of September 30, 2023. In
addition, we have raised $0.12 million from the issuance of Series A 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. 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. In addition, from time to time, we may draw on the Company’s margin line of credit on
a temporary basis to bridge our investment purchases and sales or capital raising. For additional information concerning our margin borrowing activity,
please see Note 9 - Margin Loans in the financial statements included in this report.
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, 2023, with cash and cash equivalents, restricted cash, and receivables of approximately $15.58 million and $4.49 million of current liabilities.
Because of our strong liquidity and the liquidity preservation measures taken by the board, we are currently capable of meeting all of our obligations and continuing our operations for the foreseeable future. We intend to continue to qualify as a
REIT and to meet the associated testing requirements, including paying out at least 90% of our taxable income.
Cash Flows:
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 used cash of $5.43
million in our investing activities and generated $1.45 million in our financing activities and $0.52 million in our operating activities.
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 real estate acquisitions through our subsidiaries of $5.06 million
and purchases of equity investments of $0.39 million, 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 mortgage notes payable and $1.36 million proceeds from the issuance of preferred
stock, offset by payment of dividends of $1.36 million, $0.45 million redemption of common stocks, payments of selling commissions and fees amounting to $0.18 million, capital distributions to non-controlling interests holders amounting to $0.17 million, $0.01 million repayment of finance lease liabilities, $0.40 million change in capital pending acceptance and $0.29 million payment of mortgage payables.
Three months ended September 30, 2022:
For the three months ended September 30, 2022, we experienced a net increase in cash of $2.91 million. During this period, we generated cash of
$3.21 million from our financing activities, $0.55 million from our investing activities and used $0.85 million in our operating activities.
The net cash outflow of $0.85 million from operating activities resulted from $4.33 million of rental revenues and $0.45 million of investment income offset by $5.63 million of cash used in operating
expenses.
The net cash inflow of $0.55 million from investing activities resulted from real estate acquisitions through our subsidiaries of $1.22 million,
investment acquisition deposit of $0.37 million, payment of contingent liability of $0.86 million and purchases of equity investments of $0.11 million offset by cash inflows of $2.08 million from sale of investments, and $1.03 million from
distributions received from our investments that are considered return of capital.
The net cash inflow of $3.21 million from financing activities resulted from payment of dividends of $0.97 million, $0.35 million redemption of common stocks, payments of syndication
cost amounting to $0.54 million, capital distributions to non-controlling interests holders amounting to $0.06 million and $0.05 million payment of mortgage payables offset by $5.03 million proceeds from the
issuance of preferred stock and $0.15 million from capital pending acceptance.
Material Cash Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Management Agreement, under which the Real Estate Adviser serves as our adviser, and (ii) the
Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon
proper notice. Payments under the 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
We do not have any current plans to borrow money at the Parent Company level. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our
operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional
debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates. While we do not have any plans to borrow money at the Parent Company level, we 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, 2023 and the fiscal years those loans mature:
|
Fiscal Year Ending June 30, :
|
Debt Maturing
|
|||
|
2024 (remainder)
|
$
|
943,436
|
||
|
2025
|
22,237,498
|
|||
|
2026
|
11,024,219
|
|||
|
Thereafter
|
62,570,297
|
|||
|
Total
|
$
|
96,775,450
|
||
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.
During the three months ended September 30, 2023, the Board approved the following quarterly dividends:
|
|
Dividends
|
|||||||||||||||
|
|
Common Stock
|
Preferred Stock
|
||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||
|
September 30, 2023
|
$
|
0.125
|
$
|
1,652,688
|
$
|
0.375
|
$
|
268,383
|
||||||||
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, 2023,
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, 2023, the outstanding principal balance of our
variable rate indebtedness was $17.5 million, which is the mortgage debt on Hollywood Property. 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, 2023, a 10% increase in SOFR would have resulted in no change in interest expense, net of the impact of our interest rate cap.
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, 2023, 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, 2023.
| Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
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 of Series A preferred shares with total gross proceeds of $1,359,350, as well as 1,771.45 Series A preferred shares with total
gross proceeds of $39,858 under the DRIP related to the Series A preferred, pursuant to our Regulation A Series A preferred stock offering.
These private placements of our common and preferred shares were exempt from registration under Section 4(a)(2) and Section 3(b) of the Securities Act of 1933, as amended (the “Securities Act”), and
Regulation D and A thereunder.
Issuer Purchases of Equity Securities
The following table presents information with respect to our purchases of our common stock during the period covered by this report:
|
Execution Date
|
Total Number of
Shares Purchased
|
Average Price Paid
Per Share
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
|
Maximum Dollar
Value of Shares That
May Yet Be
Purchased Under
Publicly Announced
Plans
|
||||||||||||
|
During the quarter ended September 30, 2023
|
||||||||||||||||
|
Common stocks
|
||||||||||||||||
|
September 1, 2023 through September 30, 2023
|
64,092.00
|
$
|
7.38
|
64,092.00
|
-
|
|||||||||||
| Item 3. |
DEFAULTS UPON SENIOR SECURITIES
|
None.
| Item 4. |
MINE SAFETY DISCLOSURES
|
Not applicable.
| Item 5. |
OTHER INFORMATION
|
None.
|
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 13, 2023
|
By:
|
/s/ Robert Dixon
|
|
|
President and Chief Executive Officer
|
|||
|
Date: November 13, 2023
|
By:
|
/s/ Angche Sherpa
|
|
|
Treasurer and Chief Financial Officer
|
|||
43
EXHIBIT 31.1
Section 302 Certification
of Robert Dixon (President and Chief Executive Officer)
CERTIFICATION
I, Robert Dixon, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of MacKenzie Realty Capital, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
|
| a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
Date: November 13, 2023
|
By:
|
/s/ Robert Dixon
|
|
|
Robert Dixon
|
|||
|
President and Chief Executive Officer
|
EXHIBIT 31.2
Section 302 Certification
of Angche Sherpa (Treasurer and Chief Financial Officer)
CERTIFICATION
I, Angche Sherpa, certify that:
| 1. |
I have reviewed this quarterly report on Form 10-Q of MacKenzie Realty Capital, Inc.;
|
| 2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
|
| 3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
|
| 4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
| a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
| b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
|
| c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
|
| d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
|
| 5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
|
| a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
|
| b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
|
|
Date: November 13, 2023
|
By:
|
/s/ Angche Sherpa
|
|
|
Angche Sherpa
|
|||
|
Treasurer and Chief Financial Officer
|
EXHIBIT 32.1
Section 1350 Certification
of Robert Dixon (President and Chief Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MacKenzie Realty Capital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the United States Securities and
Exchange Commission on the date hereof (the “Report”), I, Robert Dixon, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: November 13, 2023
|
By:
|
/s/ Robert Dixon
|
|
|
Robert Dixon
|
|||
|
President and Chief Executive Officer
|
EXHIBIT 32.2
Section 1350 Certification
of Angche Sherpa (Treasurer and Chief Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MacKenzie Realty Capital, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2023, as filed with the United States Securities and
Exchange Commission on the date hereof (the “Report”), I, Angche Sherpa, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
Date: November 13, 2023
|
By:
|
/s/ Angche Sherpa
|
|
|
Angche Sherpa
|
|||
|
Treasurer and Chief Financial Officer
|