Item 2.
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Statements by MacKenzie Realty Capital, Inc., together with its subsidiaries as discussed in Note 1 of the financial statements included in this report (collectively, the “Company,” “we,” or “us”) contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, stockholders can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” “could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. An economic downturn could impair our ability to continue to operate, which could lead to the loss of some or all of our investments, a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities, and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in our Annual Report on Form 10-K.
Further, we may experience fluctuations in our operating results due to a number of factors, including the effect of the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Overview
Historically, we were an externally managed non-diversified closed-end management investment company that elected to be treated as a BDC under the 1940 Act, but we withdrew our election to be treated as a BDC on December 31, 2020. Our objective remains to generate both current income and capital appreciation through real estate-related investments. We have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding any net capital gain) to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. Our wholly owned subsidiary, MacKenzie NY Real Estate 2 Corp. (“MacKenzie NY 2”), Inc. is subject to corporate federal and state income tax on its taxable income at regular statutory rates.
We are managed by the Advisers, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Investment Plan
We generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up to 20% of our total assets in investment securities of real estate companies. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate. We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. When purchasing securities, we generally favor purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate related investments.
Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our independent directors review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings.
We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate securities at significant discounts to their net asset value.
We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as necessary to extract unrealized value.
We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of the Advisers’ investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from what the Advisers estimate to be the actual or potential value of the real estate.
We intend to continue our historical activities related to launching tender offers to purchase shares of non-traded REITs in order to boost our short-term cash flow and to support our distributions, subject to the constraint that such securities will not exceed 20% of our portfolio. We believe this niche strategy will allow us to pay distributions that are supported by cash flow rather than paying back investors’ capital, although there can be no assurance that some portion of any distribution is not a return of capital.
Rental and Reimbursement
We generate rental revenue by leasing office space and apartment units to a building’s tenants. These tenant leases fall under the scope of Accounting Standards Codification (“ASC”) Topic 842, and are classified as operating leases. Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements.
Investment Income
We generate revenues in the form of operating income, capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees are generated in connection with our investments and recognized as earned.
Expenses
Our primary operating expenses include the payment of: (i) advisory fees to our Advisers; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement; and (iii) other 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; |
| • | 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 March 31, 2024, we owned various real estate limited partnerships and REITs that are listed in the “Investments, at fair value” in the table below. We also owned various investments in entities that own real estate which gave us enough control such that the investments are not securities for 1940 Act purposes, but not enough to consolidate the financial statements of such entities with our own; these are listed below as “Unconsolidated investments (non-securities), at fair value”. The following table summarizes the composition of our investments at fair value as of March 31, 2024, and June 30, 2023:
| | Fair Value | | | Fair Value | |
| Investments, at fair value | | March 31, 2024 | | | June 30, 2023 | |
5210 Fountaingate, LP | | $
| 6,820 | | | $
| 6,820 | |
Blackstone Real Estate Income Trust, Inc. - Class S | | | 330,828 | | | | - | |
Capitol Hill Partners, LLC | | | - | | | | 1,107,795 | |
Citrus Park Hotel Holdings, LLC | | | - | | | | 4,100,000 | |
Healthcare Trust, Inc. | | | 1,080,640 | | | | 1,554,693 | |
Highlands REIT, Inc. | | | 1,692 | | | | 2,794,926 | |
Lakemont Partners, LLC | | | 797,720 | | | | 829,381 | |
Moody National REIT II, Inc. | | | 18,644 | | | | 13,853 | |
SmartStop Self Storage REIT, Inc. - Class A | | | 1,130,003 | | | | 1,878,092 | |
Starwood Real Estate Income Trust, Inc. - Class S | | | 23,541 | | | | - | |
Strategic Realty Trust, Inc. | | | - | | | | 216,068 | |
Summit Healthcare REIT, Inc. | | | 647,549 | | | | 930,852 | |
| Total | | $ | 4,037,437 | | | $ | 13,432,480 | |
| | | Fair Value | | | Fair Value | |
| Unconsolidated investments (non-securities), at fair value | | March 31, 2024 | | | June 30, 2023 | |
Green Valley Medical Center, LP | | $
| 2,097,738 | | | $
| 2,363,000 | |
Martin Plaza Associates, LP | | | 541,070 | | | | 493,000 | |
One Harbor Center, LP | | | 3,505,384 | | | | 4,076,500 | |
Westside Professional Center I, LP | | | 1,485,766 | | | | 1,784,000 | |
| Total | | $ | 7,629,958 | | | $ | 8,716,500 | |
Properties
In addition to our investment securities, we currently own and manage seven 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, 220 Campus Lane and Green Valley Executive Center 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.
We own our properties through our subsidiaries, which are listed in the table below.
| Property: | Property Owners | |
| Commodore Apartments | Madison-PVT Partners LLC | |
| The Park View (fka as Pon De Leo Apartments) | PVT-Madison Partners LLC | |
| Hollywood Apartments | PT Hillview GP, LLC | |
| Shoreline Apartments | MacKenzie BAA IG Shoreline LLC | |
| Satellite Place Office Building | MacKenzie Satellite Place Corp. | |
| First & Main Office Building | First & Main, LP | |
| 1300 Main Office Building | 1300 Main, LP | |
| Woodland Corporate Center 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 | |
Green Valley Executive Center
| GV Executive Center, 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 March 31, 2024, the property is 95% occupied by 7 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants Business | Business | | Square Ft. Occupied | | | Annual Base Rent | | Lease Expiration | Renewal
options |
Wilson Daniels | Wine Wholesaler | | | 6,712 | | | $ | 429,510 | | 3/15/25 | 1, 5 years |
Norcal Gold | Real Estate | | | 2,896 | | | $ | 176,016 | | 3/31/26 | No |
Bao Ling Li | Restaurant | | | 3,212 | | | $ | 158,960 | | 11/30/30 | No |
| Whole Health | Medical | | | 2,186 | | | $ | 136,103 | | 7/31/25 | No |
The following information pertains to lease expirations at 1300 Main Office Building:
| Year | | Number of Leases Expiring | | | Total Area | | | Annual Base Rent | | | Percentage of Gross Rent | |
| 2025 | | | 2 | | | | 8,898 | | | $ | 565,613 | | | | 51% |
|
| 2026 | | | 1 | | | | 2,896 | | | $ | 176,016 | | | | 16% |
|
| 2029 | | | 1 | | | | 1,059 | | | $ | 67,104 | | | | 6% |
|
| Thereafter | | | 3 | | | | 6,204 | | | $ | 292,667 | | | | 27% |
|
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 March 31, 2024, the property is 100% occupied by 9 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants Business | Business | | Square Ft.
Occupied | | | Annual Base Rent | | Lease
Expiration | Renewal options |
GVM Law | Legal Services | | | 9,470 | | | $ | 497,521 | | 9/20/26 | 2, 5 years |
Brotlemarkle | Accounting Services | | | 4,366 | | | $ | 241,051 | | 7/31/30 | 2, 5 years |
Napa Palisades | Restaurant | | | 3,462 | | | $ | 191,038 | | 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 | | | $ | 71,280 | | | | 5% |
|
| 2025 | | | 2 | | | | 5,648 | | | $ | 308,569 | | | | 21% |
|
| 2026 | | | 1 | | | | 9,470 | | | $ | 497,521 | | | | 33% |
|
| Thereafter | | | 5 | | | | 11,122 | | | $ | 609,076 | | | | 41% |
|
Main Street West Office Building contains 38,153 square feet, of which approximately 32,700 square feet is office space and the remainder is designated as retail space. As of March 31, 2024, the property is 89% occupied by 8 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants
Business | Business | | Square Ft.
Occupied | | | Annual Base Rent | | Lease
Expiration | Renewal
options |
AUL Corporation | Insurance | | | 13,806 | | | $ | 814,461 | | 2/3/26 | No |
State of California | Medical | | | 4,697 | | | $ | 259,721 | | 4/30/28 | No |
Strategies To Empower | Medical | | | 4,875 | | | $ | 218,310 | | 12/31/27 | No |
Azzurro Pizzeria | Restaurant | | | 2,935 | | | $ | 145,236 | | 3/31/29 | 1, 5 years |
The following information pertains to lease expirations at Main Street West Office Building:
| Year | | Number of Leases Expiring | | | Total Area | | | Annual Base Rent | | | Percentage of Gross Rent | |
| 2024 | | | 2 | | | | 3,678 | | | $ | 171,080 | | | | 9% |
|
| 2026 | | | 1 | | | | 13,806 | | | $ | 814,461 | | | | 44% |
|
| 2027 | | | 2 | | | | 7,010 | | | $ | 339,912 | | | | 19% |
|
| Thereafter | | | 3 | | | | 9,573 | | | $ | 513,905 | | | | 28% |
|
Satellite Place Office Building contains 134,785 square feet, all of which is office space. As of March 31, 2024, the property is approximately 71% occupied by 4 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants
Business | Business | | Square Ft.
Occupied | | | Annual Base Rent | | Lease Expiration | Renewal options |
| OS National, LLC | Title Services | | | 71,085 | | | $ | 1,381,892 | | 12/31/29 | 2, 5 years |
| Polytron | Title Services | | | 10,737 | | | $ | 209,427 | | 4/30/31 | 2, 5 years |
| Ampirical | Engineering Consulting | | | 9,790 | | | $ | 201,152 | | 9/30/30 | 2, 5 years |
| Sun Taiyang | Consumer Products | | | 4,383 | | | $ | 94,344 | | 11/30/29 | 1, 5 years |
The following information pertains to lease expirations at Satellite Place Office Building:
| Year | | Number of Leases Expiring | | | Total Area | | | Annual Base Rent | | | Percentage of Gross Rent | |
| 2029 | | | 2 | | | | 75,468 | | | $ | 1,476,237 | | | | 78% |
|
| 2030 | | | 1 | | | | 9,790 | | | $ | 201,152 | | | | 11% |
|
| 2031 | | | 1 | | | | 10,737 | | | $ | 209,427 | | | | 11% |
|
Woodland Corporate Center Office Building contains 37,034 square feet, of which 7,797 square feet are laboratories and the rest is office space. All of the laboratories space is occupied by Agtech Innovation. As of March 31, 2024, the property is 100% occupied by 14 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants Business | Business | | Square Ft.
Occupied | | | Annual Base Rent | | Lease Expiration | Renewal options |
Agtech Innovation | Research and Development | | | 12,940 | | | $ | 423,144 | | 8/31/32 | No |
Children’s Home Society | Non-Profit Education | | | 4,042 | | | $ | 147,240 | | 6/30/28 | No |
Johnston, Martin & Montgomery | Accounting | | | 3,388 | | | $ | 133,668 | | 11/2/24 | 2, 5 years |
Burger Rehab | Physical Therapy | | | 4,013 | | | $ | 119,247 | | 9/22/28 | 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 | | | 4 | | | | 6,596 | | | $ | 246,798 | | | | 18% |
|
| 2025 | | | 3 | | | | 4,106 | | | $ | 131,318 | | | | 11% |
|
| 2027 | | | 1 | | | | 1,456 | | | $ | 52,118 | | | | 4% |
|
| 2028 | | | 3 | | | | 10,161 | | | $ | 320,075 | | | | 27% |
|
| Thereafter | | | 3 | | | | 14,715 | | | $ | 437,652 | | | | 40% |
|
Green Valley Executive Center Office Building contains 46,101 square feet, of which approximately 41,600 square feet is office space and the remainder is designated as retail space. As of March 31, 2024, the property is 100% occupied by 16 tenants. The following table shows the largest tenants and square footage occupied:
Largest Tenants Business | Business | | Square Ft. Occupied | | | Annual Base Rent | | Lease Expiration | Renewal options |
Community Housing Opportunities | Real Estate | | | 8,510 | | | $ | 341,096 | | 8/31/26 | No |
Arkshire Financial, LLC | Financial Services | | | 7,016 | | | $ | 301,092 | | 2/28/27 | No |
Sticky Rice | Restaurant | | | 4,511 | | | $ | 205,848 | | 8/17/24 | No |
Larsen & Toubro Limited, Inc. | Multinational Conglomerate | | | 3,312 | | | $ | 176,922 | | 2/13/25 | 2, 5 years |
The following information pertains to lease expirations at Green Valley Executive Center Office Building:
| Year | | Number of Leases Expiring | | | Total Area | | | Annual Base Rent | | | Percentage of Gross Rent | |
| 2024 | | | 2 | | | | 6,145 | | | $ | 271,092 | | | | 13% |
|
| 2025 | | | 5 | | | | 7,455 | | | $ | 378,867 | | | | 19% |
|
| 2026 | | | 3 | | | | 13,567 | | | $ | 556,650 | | | | 27% |
|
| Thereafter | | | 6 | | | | 18,934 | | | $ | 822,472 | | | | 41% |
|
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of March 31, 2024, Commodore Apartment building is approximately 93.8% occupied. The Park View is also a mid-rise apartment building built in 1929 and has 39 units. As of March 31, 2024, The Park View building is approximately 94.9% occupied. Hollywood Hillview Apartments (“Hollywood Property”), located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has 54 units. The property contains approximately 37,000 square feet of net rentable apartment area and 8,560 square feet of retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 88.9% occupied as of March 31, 2024. Shoreline Apartments is a mid-rise apartment building built in 1967 and renovated in 2015 which has 84 units. As of March 31, 2024, Shoreline Apartments building is approximately 90.5% occupied.
The following table provides information regarding each of the residential properties:
| Property Name | Sector | Location | | Square Feet | | | Units | | | Percentage Leased | | | Annual Base Rent | | | Monthly Base Rent/Occupied Unit | |
The Park View | Multi-Family Residential | Oakland, CA | | | 36,654 | | | | 39 | | | | 94.9 | % | | $ | 1,074,013 | | | $ | 2,419 | |
Commodore | Multi-Family Residential | Oakland, CA | | | 31,156 | | | | 48 | | | | 93.8 | % | | $ | 857,795 | | | $ | 1,589 | |
| Hollywood Property | Multi-Family Residential | Los Angeles, CA | | | 36,991 | | | | 54 | | | | 88.9 | % | | $ | 1,305,208 | | | $ | 2,266 | |
Shoreline Apartments | Multi-Family Residential | Concord, CA | | | 67,925 | | | | 84 | | | | 90.5 | % | | $ | 1,927,496 | | | $ | 2,113 | |
| 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 | % | | $ | 333,356 | | | $ | 27,780 | |
Our 220 Campus Lane Office building was purchased in September 2023. The office building was vacant at the time of our purchase. Currently we are in the process of renovating the building and marketing it for lease. As of March 31, 2024, the building had no tenants. One tenant is scheduled to occupy 7,166 square feet beginning in June 2024.
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 (known as Aurora at Green Valley)
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 approved our development project last September 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 in addition obtain a construction loan. Accordingly, we commenced selling the preferred units in February 2024 and in addition closed on a construction loan of $17.15 million on February 21, 2024. We commenced the construction preparation and grading work on April 1, 2024.
There are no present plans for any major renovation or development of any property except for our 220 Campus Lane Office Building, Aurora at Green Valley and Campus Lane Land as discussed above. Each property is being held for income production and increased occupancy and/or rental rates. We have property and liability insurance policies on all properties which we believe are adequate.
Current Market and Economic Conditions
The markets in which our properties (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, 220 Campus Lane, and Green Valley Executive Center are all Class A suburban office properties and are located in Napa, Woodland and Fairfield, California and Duluth, Georgia. All properties must compete with every other office property in the market, as well as facing the uncertainty of workers returning to the office after COVID-19.
Our unconsolidated investment in a hotel property held through a holding company, Citrus Park Hotel, LLC, is a Courtyard by Marriott located in the Tampa/St. Petersburg market that competes for business and leisure travel. In March 2024, Citrus Park Hotel sold the hotel property and liquidated the company.
Recently, the broader economy began experiencing increased levels of inflation, higher interest rates and tightening monetary and fiscal policies. The Federal Reserve increased the federal funds rate multiple times in 2022 and 2023. We currently have fixed and variable interest rates for our loans. The rise in overall interest rates has caused an increase in our variable rate borrowing costs resulting in an increase in interest expense. The higher interest rates imposed by the Federal Reserve to address inflation may also adversely impact real estate asset values. In addition, a prolonged period of high and persistent inflation could cause an increase in our expenses. The current market and economic conditions could have a material impact on our business, cash flow and results of operations. It could also impact our ability to find suitable acquisitions, sell properties, and raise equity and debt capital.
Results of Operations
Three Months Ended March 31, 2024 and 2023
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the three months ended March 31, 2024, we generated $4.08 million in rental and reimbursements revenues, of which $2.60 million was generated from our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building, Woodland Corporate Center Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building), and $1.48 million was generated from our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments and Shoreline Apartments). During the three months ended March 31, 2023, we generated $4.47 million in rental and reimbursements revenues, of which $2.87 million was generated from our six commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building and Woodland Corporate Center Office Building) and $1.60 million from our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The total decrease of $0.39 million in rental revenues during the three months ended March 31, 2024 was mainly due to the sale of Addison Corporate Center building in June 2023 partly offset by acquisition of two commercial properties: 220 Campus Lane and Green Valley Executive Center since March 2023.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the three months ended March 31, 2024 and 2023 was $0.22 million and $10.23 million, respectively. During the three months ended March 31, 2024, we received $0.08 million of distributions from operations, sales, and liquidations as compared to $10.15 million during the three months ended March 31, 2023. The decrease was mainly because during the three months ended March 31, 2023, we had received the proceeds from liquidation of Dimension 28, LP. During the three months ended March 31, 2024, we received dividends, interest, and other investment income of $0.14 million as compared to $0.08 million received during the three months ended March 31, 2023. This increase was mainly due to increase in interest income from our cash deposits in money market funds during the three months ended March 31, 2024.
Expenses:
Our asset management and incentive management fees are based on the advisory agreements that were effective January 1, 2021.
Asset management fee:
The asset management fees for the three months ended March 31, 2024 and 2023 were $0.81 million and $0.77 million, respectively. The slight increase was due to total increase of $14.09 million in total invested capital from $160.15 million as of March 31, 2023 to $174.24 million as of March 31, 2024.
Incentive management fee:
Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. We did not incur any incentive management fee for the three months ended March 31, 2024 and 2023.
Administrative cost and transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended March 31, 2024 were $0.19 million as compared to $0.18 million for the three months ended March 31, 2023. The slight increase was due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to March 31, 2023, as a result of the increase in number of properties since March 2023.
Transfer agent cost reimbursements paid to MacKenzie for the three months ended March 31, 2024 and 2023 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 March 31, 2024, we incurred operating and maintenance expenses of $1.81 million, of which $1.09 million were incurred in the operation of our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $0.72 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 March 31, 2023, we incurred operating and maintenance expenses of $2.54 million, of which $1.87 million were incurred in the operation of our six commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building and Main Street West Office Building) and $0.67 million from 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 two new office buildings (220 Campus Lane Office Building and Green Valley Executive Center Office Building) since March 31, 2023.
Depreciation and amortization:
During the three months ended March 31, 2024, we recorded depreciation and amortization of $1.91 million, of which $1.37 million was attributable to the depreciation and amortization of real estate and intangible assets of our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $0.54 million was attributable to our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). During the three months ended March 31, 2023, we recorded depreciation and amortization of $1.66 million, of which $1.09 million was attributable to the depreciation and amortization of real estate and intangible assets of our five commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building and Main Street West Office Building) and $0.57 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 $0.25 million during the three months ended March 31, 2024 was due to the acquisitions of two new office buildings (220 Campus Lane Office Building and Green Valley Executive Center Office Building) since March 31, 2023. The sale of Addison Corporate Center in June 2023, which was previously held for sale and not depreciated, did not contribute to the overall increase.
Interest expense:
Interest expense for the three months ended March 31, 2024 was $1.60 million, of which $0.80 million was incurred on the mortgage notes payable associated with our six commercial properties (First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $0.80 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 March 31, 2023 was $1.91 million, of which $1.23 million was incurred on the notes payable associated with our five commercial properties (Addison Corporate Center, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building and Main Street West Office Building) and $0.68 million was incurred on the mortgage notes payable associated with our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The total decrease of $0.31 million in interest expense during the three months ended March 31, 2024, was primarily due to the settlement of the Addison Property Owner debt after the sale of Addison Corporate Center in June 2023.
Other operating expenses:
Other operating expenses include professional fees, directors’ fees, printing and mailing expense, and other general and administrative expenses. Other operating expenses for the three months ended March 31, 2024 and 2023, were $0.42 million and $0.42 million, respectively.
Net realized gain (loss) on sale of investments:
During the three months ended March 31, 2024, we recorded a net realized loss on investments of $0.26 million. During the three months ended March 31, 2023, we had no realized gain (loss) on sale of investments. The total net realized loss for the three months ended March 31, 2024, was realized from sales of three non-traded REIT securities.
Net unrealized gain (loss) on investments:
During the three months ended March 31, 2024, we recorded a net unrealized loss of $0.22 million, which was net of $0.13 million of unrealized losses reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized losses excluding the reclassification adjustment for the three months ended March 31, 2024 were $0.35 million, which resulted from fair value depreciations of $.01 million from limited partnership interests, $0.14 million from general partnership interests and $0.20 million from non-traded REIT securities.
During the three months ended March 31, 2023, we recorded net unrealized loss of $11.23 million, which was net of $7.76 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 loss excluding the reclassification adjustment for the three months ended March 31, 2023 was $3.47 million, which resulted from fair value depreciations $3.11 million from limited partnership interests, $0.20 million from general partnership interests, and $0.16 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, The Parent Company paid the requisite amounts of dividends during the year and met 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.
MacKenzie NY 2 is subject to corporate federal and state income tax on its taxable income at regular statutory rates. As of March 31, 2024, it did not have any taxable income for tax year 2024. Therefore, we did not record any tax provisions during any fiscal periods within the tax year 2024. MacKenzie Satellite is a qualified REIT subsidiary of the Parent Company. Therefore, it does not file a separate tax return.
The Operating Partnership is a limited partnership. Hollywood Hillview, MacKenzie Shoreline, Madison, PVT, 220 Campus Lane, Campus Lane Residential and Green Valley Executive Center 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.
Nine Months Ended March 31, 2024 and 2023
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from our commercial and residential real estate properties. During the nine months ended March 31, 2024, we generated $11.22 million in rental and reimbursements revenues, of which $6.77 million was generated from our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building, Woodland Corporate Center Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building), and $4.45 million from our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments and Shoreline Apartments). During the nine months ended March 31, 2023, we generated $11.21 million in rental and reimbursements revenues, of which $6.78 million was generated from our six commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building and Woodland Corporate Center Two), and $4.43 million from our four residential apartments (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The total increase of $0.01 million in rental revenues during the nine months ended March 31, 2024 was mainly due to the acquisition of two office buildings since March 2023 partly offset by the disposal of Addison Corporate Center in June 2023.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the nine months ended March 31, 2024 and 2023 was $0.80 million and $10.99 million, respectively. During the nine months ended March 31, 2024, we received $0.28 million of distributions from operations, sales, and liquidations as compared to $10.71 million during the nine months ended March 31, 2023. The decrease was mainly due to liquidation of Dimension 28, LP in December 2022. During the nine months ended March 31, 2024, we received dividends, interest, and other investment income of $0.52 million as compared to $0.28 million received during the nine months ended March 31, 2023. This increase was mainly due to increase in interest income from our cash deposits in money market funds during the nine months ended March 31, 2024.
Expenses:
The Company’s asset management and incentive management fees are based on the advisory agreement that was effective January 1, 2021.
Asset management fee:
The asset management fees for the nine months ended March 31, 2024 and 2023 were $2.39 million and $2.23 million, respectively. The slight increase was due to total increase of $14.09 in total invested capital from $160.15 million as of March 31, 2023 to $174.24 million as of March 31, 2024.
Incentive management fee:
Under the Advisory Management Agreement, we pay an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions equal to 6% from the effective date of the Agreement. We did not incur any incentive management fee for the nine months ended March 31, 2024 and 2023.
Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the nine months ended March 31, 2024, were $0.57 million as compared to $0.54 million for the nine months ended March 31, 2024. The slight increase was due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to March 31, 2023, as a result of the increase in the number of real estate assets owned by us since March 2023.
Transfer agent cost reimbursements paid to MacKenzie for the nine months ended March 31, 2024 and 2023 were $0.05 million and $0.07 million, respectively.
Property operating and maintenance expenses:
Operating and maintenance expenses mainly consists 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 nine months ended March 31, 2024, we incurred operating and maintenance expenses of $4.70 million, of which $2.63 million mainly were incurred in the operation of our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $2.07 million from our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). During the nine months ended March 31, 2023, we incurred operating and maintenance expenses of $6.66 million, of which $4.75 million mainly were incurred in the operation of our six commercial properties (Addison Corporate Center, Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Main Street West and Woodland Corporate Center Two office buildings) and $1.91 million from 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 two new office buildings (220 Campus Lane Office Building and Green Valley Executive Center Office Building) since March 31, 2023.
Depreciation and amortization:
During the nine months ended March 31, 2024, we recorded depreciation and amortization of $5.03 million, of which $3.40 million was attributable to the depreciation and amortization of real estate and intangible assets of our seven commercial properties (Satellite Place Office Building, First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $1.63 million was attributable to our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). During the nine months ended March 31, 2023, we recorded depreciation and amortization of $3.74 million, of which $2.02 million was attributable to the depreciation and amortization of real estate and intangible assets of 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 $1.72 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 $1.29 million during the nine months ended March 31, 2024 was due to the acquisitions of two new office buildings (220 Campus Lane Office Building and Green Valley Executive Center Office Building) since March 31, 2023. The sale of Addison Corporate Center in June 2023, which was previously held for sale and not depreciated, did not contribute to the overall increase.
Interest expense:
Interest expense for the nine months ended March 31, 2024 was $4.38 million, of which $2.06 million was incurred on the notes payable associated with our six commercial properties (First & Main Office Building, 1300 Main Office Building, Woodland Corporate Center Office Building, Main Street West Office Building, 220 Campus Lane Office Building and Green Valley Executive Center Office Building) and $2.32 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 nine months ended March 31, 2023 was $5.17 million, of which $2.90 million was incurred on the notes payable associated with our five commercial properties (Addison Corporate Center, First & Main Office Building, 1300 Main Office Building, Main Street West Office Building and Woodland Corporate Center Office Building) and $2.27 million was incurred on the mortgage notes payable associated our four residential properties (Commodore Apartments, The Park View, Hollywood Apartments, and Shoreline Apartments). The total decrease of $0.79 million in interest expense during the nine months ended March 31, 2024, was primarily due to the settlement of the Addison Property Owner debt after the sale of Addison Corporate Center in June 2023.
Other operating expenses:
Other operating expenses include professional fees, directors’ fees, printing and mailing expenses, and other general and administrative expenses. Other operating expenses for the nine months ended March 31, 2024 and 2023, were $1.40 million and $1.13 million, respectively. The increase in other operating expenses was mainly due to the acquisition of two commercial properties (220 Campus Lane Office Building and Green Valley Executive Center Office Building ) since March 31, 2023 resulting in a higher amount of general and administrative operating expenses during the nine months ended March 31, 2024.
Net realized gain (loss) on sale of investments:
During the nine months ended March 31, 2024, we recorded a net realized loss on investments of $1.55 million as compared to $0.83 million net realized gain during the nine months ended March 31, 2023. Total net realized loss for the nine months ended March 31, 2024, was realized from a limited partnership interest write-off (BP 3 affiliates) with a realized loss of $1.67 million offset by the sale of three non-traded REIT securities with a realized gain of $0.12 million. The total net realized gain for the nine months ended March 31, 2023, was realized from sale of a publicly traded REIT security with realized gain of $0.01 million, six non-traded REIT securities with a total realized gain of $0.44 million, a limited partnership interest with realized gains of $0.33 million and an investment trust of $0.05 million.
Net unrealized gain (loss) on investments:
During the nine months ended March 31, 2024, we recorded a net unrealized loss of $0.66 million, which was net of a $2.44 million unrealized loss reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of the prior period that are realized during the current period. Accordingly, the net unrealized loss excluding the reclassification adjustment for the nine months ended March 31, 2024 was $3.10 million, which resulted from fair value depreciations of $0.65 million from general partnership interests, $1.31 million from non-traded REIT securities and $1.14 million from limited partnership interests.
During the nine months ended March 31, 2023, we recorded a net unrealized loss of $9.22 million, which was net of a $8.44 million of unrealized gains reclassification adjustment. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of the prior period that are realized during the current period. Accordingly, the net unrealized gains excluding the reclassification adjustment for the nine months ended March 31, 2023, were $0.78 million, which resulted from fair value appreciations of $0.42 million from general partnership interests and fair value depreciations of $0.90 million from non-traded REIT securities and $0.30 million from limited partnership interests.
Income tax provision (benefit):
Income tax provision for nine months ended March 31, 2024, and 2023 are discussed above under the three months ended section.
Liquidity and Capital Resources
Capital Resources:
We offered to sell up to 5 million shares of common stock in our first public offering and up to 15 million shares of common stock in each of our second and third public offerings. We have raised total gross proceeds of $119.10 million from the issuance of common stock under the three public offerings: $42.46 million from our first public offering, which concluded in October 2016, $67.99 million from the second public offering, which concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $15.56 million from the issuance of common shares under the DRIP as of March 31, 2024. Out of the total proceeds from DRIP, we have utilized a total of $14.28 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 $3 million of shares of either our Series A preferred stock or our Series B preferred stock. This post-effective amendment to the Offering Circular was declared effective on November 14, 2023. We had raised $18.37 million through the sale of our Series A preferred stock and $0.41 million Series B preferred stock pursuant to the Offering Circular as of March 31, 2024. In addition, we have raised $0.21 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 March 31, 2024, with cash and cash equivalents, restricted cash, and receivables of approximately $18.05 million and $4.59 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:
Nine months ended March 31, 2024:
For the nine months ended March 31, 2024, we experienced a net decrease in cash of $1.99 million. During this period, we used cash of $2.90 million in our financing activities and generated $0.75 million in our investing activities and $0.16 million in our operating activities.
The net cash inflow of $0.16 million from operating activities resulted from $11.55 million of rental revenues and $0.80 million of investment income offset by cash outflows of $12.19 million used in operating expenses.
The net cash inflow of $0.75 million from investing activities resulted from $8.80 million sale of investments and $0.43 million distributions received from our investments that are considered return of capital offset by real estate acquisitions through our subsidiaries of $6.72 million, $0.97 million purchases of equity investments and $0.79 million payment of contingent liability.
The net cash outflow of $2.90 million from financing activities resulted from payment of dividends to common stockholders of $3.53 million, redemption of common stocks of $1.39 million, payment of mortgage payables of $0.97 million, payment of loan extension fee of $0.88 million, payments of selling commissions and fees of $0.71 million, payment of dividends to Series A preferred stockholders of $0.66 million, distributions to non-controlling interests holders of $0.52 million, payment on notes payables of $0.36 million, acquisition of below market debt of $0.34 million, payments on finance lease liabilities of $0.06 million and redemption of Series A preferred stock of $0.05 million. The cash outflows were partly offset by cash inflows of $3.49 million proceeds from mortgage notes payable, $1.74 million proceeds from the issuance of Series A preferred stock, $0.94 million of capital contributions from non-controlling interests holders and $0.40 million proceeds from the issuance of Series B preferred stock.
Nine months ended March 31, 2023:
For the nine months ended March 31, 2023, we experienced a net increase in cash of $10.02 million. During this period, we generated cash of $8.83 million from our financing activities and $6.10 million from our investing activities and used $4.91 million in our operating activities.
The net cash outflow of $4.91 million from operating activities resulted from $18.5 million of cash used in operating expenses offset by cash inflows of $11.99 million of rental revenues and $1.60 million of investment income.
The net cash inflow of $6.10 million from investing activities resulted from $13.22 million from sale of and sales distribution from investments and $12.28 million from distributions received from our investments that are considered return of capital, offset by real estate acquisitions through our subsidiaries of $17.95 million, payment of $1.15 million on the contingent liability and purchases of equity investments of $0.30 million.
The net cash inflow of $8.83 million from financing activities resulted from proceeds from the issuance of Series A preferred stock of $11.45 million, $3.03 million proceeds from mortgage payables, $0.46 million from capital pending acceptance and $0.01 million proceeds from notes payables. The cash inflows were offset by cash outflows of $3.20 million payment of dividends, $1.15 million redemption of common stocks, $1.01 million payments of selling commissions and fees, $0.45 million payment of mortgage payables, $0.28 million capital distributions to non-controlling interests holders, $0.02 million repayment of finance lease liabilities and $0.01 million payment of notes payables.
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 March 31, 2024 and the fiscal years those loans mature:
| Fiscal Year Ending June 30, : | | Debt Maturing | |
2024 (remainder) | | $ | 388,036 | |
| | | | |
2025 | | | 40,290,062 | |
| | | | |
2026 | | | 11,387,884 | |
| | | | |
Thereafter | | | 57,604,378 | |
| | | | |
| Total | | $ | 109,670,360 | |
Distributions to Stockholders
We pay quarterly distributions to stockholders to the extent that we have income from operations available. Our quarterly distributions, if any, will be determined by our Board of Directors after a review and distributed pro-rata to holders of our shares; we declare distributions on a monthly basis, but pay each quarter. Any distributions to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make distributions if the amount of such distributions would exceed our annual accrued and received revenues, less operating costs. Distributions in kind are not permitted, except as provided in our Charter.
We have elected to be treated as a REIT under the Code. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding any net capital gain) to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
We have a DRIP that provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the DRIP is permitted by the state in which the stockholders reside. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions. On March 4, 2024, the board of directors suspended the common stock DRIP in connection with the pursuit of a listing of its common stock on a securities exchange.
During the nine months ended March 31, 2024, the Board approved the following quarterly dividends:
| | Dividends | |
| | | Common Stock | | | Series A Preferred Stock | | | Series B Preferred Stock | |
| During the Quarter Ended | | Per Share | | | Amount | | | Per Share | | | Amount | | | Per Share | | | Amount | |
September 30, 2023 | | $ | 0.125 | | | $ | 1,652,688 | | | $ | 0.375 | | | $ | 268,383 | | | $ | - | | | $ | - | |
December 31, 2023 | | | 0.125 | | | | 1,652,367 | | | | 0.375 | | | | 276,600 | | | | 0.500 | | | | 2,222 | |
March 31, 2024 | | | 0.125 | | | | 1,660,225 | | | | 0.375 | | | | 281,770 | | | | 0.486 | | | | 8,078 | |
| | $ | 0.375 | | | $ | 4,965,280 | | | $ | 1.125 | | | $ | 826,753 | | | $ | 0.986 | | | $ | 10,300 | |
Of the total dividend declared for Series B as of March 31, 2024, $7,725 was an increase in liquidation preference and $2,575 was the cash dividend.
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
Our portfolio primarily consists of equity and debt investments in smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments are considered speculative in nature. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital.
At March 31, 2024, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 10% of our total assets as of that date. As discussed in Note 4 – Investments, to our consolidated financial statements, these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment portfolio sometimes also includes shares of publicly traded REITs, which are valued at recently quoted trading prices. Our investment strategy represents a high degree of business and financial risk due primarily to the general illiquidity of our investments. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.
In addition, we are exposed to interest rate risk with respect to our variable-rate indebtedness, generally an increase in interest rates would directly result in higher interest expense. We seek to manage our exposure to interest rate risk by utilizing a mix of fixed and floating rate financing, and through interest rate hedging agreements to fix or cap our variable rate debt. As of March 31, 2024, 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 March 31, 2024, a 10% increase in SOFR would have resulted in no change in interest expense, net of the impact of our interest rate cap.
| Item 4. | CONTROLS AND PROCEDURES |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
None.
There have been no material changes to our risk factors discussed in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended June 30, 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 nine months ended March 31, 2024, we issued 80,280.31 of Series A preferred shares with total gross proceeds of $2,005,751, 16,612.44 of Series B preferred shares with total gross proceeds of $404,200, and 5,719.07 Series A preferred shares with total gross proceeds of $128,679 under the DRIP related to the Series A preferred, pursuant to our Regulation A Series A and Series B preferred stock offering.
These private placements of our common and preferred shares were exempt from registration under 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 December 31, 2023 | | | | | | | | | | | | |
| Common stocks | | | | | | | | | | | | |
September 1, 2023 through September 30, 2023 | | | 64,092.00 | | | $ | 7.38 | | | | 64,092.00 | | | | - | |
December 1, 2023 through December 31, 2023 | | | 64,497.00 | | | | 7.38 | | | | 64,497.00 | | | | - | |
March 1, 2024 through March 31, 2024 | | | - | | | | - | | | | - | | | | - | |
| | | 128,589.00 | | | | | | | | 128,589.00 | | | | - | |
| | | | | | | | | | | | | | | | |
| Series A Preferred stocks | | | | | | | | | | | | | | | | |
December 1, 2023 through December 31, 2023 | | | 400.00 | | | $ | 22.75 | | | | 400.00 | | | | - | |
March 1, 2024 through March 31, 2024 | | | 2,000.00 | | | | 22.00 | | | | 2,000.00 | | | | - | |
| | | 2,400.00 | | | | | | | | 2,400.00 | | | | - | |
| Item3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MACKENZIE REALTY CAPITAL, INC. |
| | | |
| Date: May 15, 2024 | | By: /s/ Robert Dixon | |
| | | President and Chief Executive Officer |
| | | |
| Date: May 15, 2024 | | By: /s/ Angche Sherpa | |
| | | Treasurer and Chief Financial Officer |
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