MacKenzie Realty Capital, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - SECTION 302 CERTIFICATION/DIXON - MacKenzie Realty Capital, Inc.	exhibit311_110413.htm
EX-32.1 - SECTION 1350 CERTIFICATION/DIXON - MacKenzie Realty Capital, Inc.	exhibit321_110413.htm
EX-31.2 - SECTION 302 CERTIFICATION/KOSLOSKY - MacKenzie Realty Capital, Inc.	exhibit312_110413.htm
EX-32.2 - SECTION 1350 CERTIFICATION/KOSLOSKY - MacKenzie Realty Capital, Inc.	exhibit322_110413.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

Form 10-Q

(Mark one)
R	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

£	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-55006

MacKenzie Realty Capital, Inc.
(Exact name of registrant as specified in its charter)

Maryland		45-4355424
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	1640 School Street, Moraga, California 94556
	(Address of principal executive offices)

	(925) 631-9100
	(Registrant’s telephone number, including area code)




	(Former name, former address and former fiscal year, if changed since last report)

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Statements of Assets and Liabilities as of September 30, 2013 (Unaudited) and June 30, 2013	1
	Schedule of Investments as of September 30, 2013 (Unaudited)	2
	Schedule of Investments as of June 30, 2013	3
	Statements of Operations for the three months ended September 30, 2013 and 2012 (Unaudited)	4
	Statements of Changes in Net Assets for the three months ended September 30, 2013 (Unaudited), and the year ended June 30, 2013	5
	Statements of Cash Flows for the three months ended September 30, 2013 and 2012 (Unaudited)	6
	Notes to Financial Statements	7-14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 - 18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	20

Item 4.	Mine Safety Disclosures	20

Item 5.	Other Information	20

Item 6.	Exhibits	21

SIGNATURES		22 - 27

Part I. FINANCIAL INFORMATION

Item 1.

Financial Statements

MacKenzie Realty Capital, Inc.

Statements of Assets and Liabilities

September 30, 2013 and June 30, 2013

	September 30, 2013		June 30, 2013
	(Unaudited)
Assets
Investments, at fair value (cost of $6,718,348 and $6,735,644, respectively)	$	6,922,487	$	6,855,708
Cash and cash equivalents		148,530		262,806
Accounts receivable		7,710		9,219
Due from related entities		48,952		-
Other assets		64,672		41,040
Deferred offering costs (net of accumulated amortization of $70,804 and 0, respectively)		354,021		424,825
Total assets	$	7,546,372	$	7,593,598

Liabilities
Accounts payable and accrued liabilities	$	347,117	$	264,273
Due to related entities		-		35,393
Total liabilities		347,117		299,666

Net assets
Common stock, $0.0001 par value, 80,000,000 shares authorized; 728,217 and 728,217 shares issued and outstanding respectively
		73		73
Capital in excess of par value		7,282,097		7,282,097
Retained earnings (deficit)		(82,915)		11,762
Total net assets	$	7,199,255	$	7,293,932

Net asset value per share of common stock	$	9.89	$	10.02

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Schedule of Investments

September 30, 2013

(Unaudited)

Name		Asset Type	Shares/Units		Cost Basis		Total Fair Value		% of Net Assets
Agree Realty Corporation		Public REIT		4,200.00	$	117,894	$	126,756		1.76
Apartment Investment and Management Company		Public REIT		3,888.00		115,163		108,631		1.51
Ashford Hospitality Trust, Inc.		Public REIT		19,000.00		223,630		234,460		3.26
Associated Estates Realty Corporation		Public REIT		4,000.00		69,920		59,640		0.83
CommonWealth REIT		Public REIT		16,900.00		426,725		370,279		5.14
FelCor Lodging Trust Incorporated		Public REIT		9,900.00		52,642		60,984		0.85
Rouse Properties Inc		Public REIT		3,077.00		56,753		63,325		0.88
Total Public REIT						1,062,727		1,024,075		14.23

Apple REIT Seven, Inc.		Non-traded REIT		1,000.00		5,325		5,500		0.08
BellaVista Capital, Inc.		Non-traded REIT		123,987.00		74,392		59,514		0.83
Hines Real Estate Investment Trust, Inc.		Non-traded REIT		2,692.31		13,569		11,900		0.17
USA Real Estate Investment Trust		Non-traded REIT		6.57		330		223		-
Total Non-traded REIT						93,616		77,137		1.08

60 East 42nd St. Associates L.L.C		LP Interest		0.38		56,700		107,431		1.49
250 West 57th St. Associates L.L.C.		LP Interest		0.67		66,670		95,093		1.32
Brown Palace Hotel Associates, LP		LP Interest		0.25		35,750		35,628		0.49
Civic Center, LP		LP Interest		2.00		163,994		160,186		2.23
CRI Hotel Income Partners, LP		LP Interest		15,961.00		64,642		123,857		1.72
Del Taco Income Properties IV		LP Interest		2,296.00		59,696		65,459		0.91
Del Taco Restaurant Properties I		LP Interest		287.00		207,358		222,385		3.09
Del Taco Restaurant Properties II		LP Interest		273.00		60,459		62,315		0.87
Del Taco Restaurant Properties III		LP Interest		628.00		125,983		140,886		1.96
Divall Insured Income Properties 2, LP		LP Interest		830.33		211,926		228,339		3.17
DRV Holding Company, LLC		LP Interest		500.00		500,000		500,000		6.95
El Conquistador Limited Partnership		LP Interest		2.00		80,976		100,524		1.40
Empire State Building Associates L.L.C.		LP Interest		2.50		449,150		562,500		7.81
Hotel Durant, LLC		LP Interest		7.10		577,299		529,512		7.36
Inland Land Appreciation Fund, L.P.		LP Interest		149.30		18,166		19,600		0.27
Inland Land Appreciation Fund II, L.P.		LP Interest		211.00		19,177		21,100		0.29
Madison Place Associates, LLC		LP Interest		6.80		77,943		105,530		1.47
MPF Pacific Gateway - Class B	*	LP Interest		23.20		6,287		6,960		0.10
National Property Investors 6		LP Interest		7.00		145		129		-
NCP-Seven Liquidating Trust		LP Interest		79.00		1,694		1,691		0.02
Post Street Renaissance Partners Class A		LP Interest		9.10		177,844		163,094		2.27
Post Street Renaissance Partners Class D		LP Interest		11.60		542,115		481,488		6.69
Rancon Realty Fund IV		LP Interest		975.00		173,706		220,565		3.06
Rancon Realty Fund V		LP Interest		935.00		165,691		165,093		2.29
Secured Income, LP		LP Interest		25,600.00		223,232		224,512		3.12
Uniprop Manufactured Housing Income Fund II, LP		LP Interest		12,156.00		54,475		59,929		0.83
Total LP Interest						4,121,078		4,403,806		61.18

Coastal Realty Business Trust, REEP, Inc.	*	Investment Trust		72,320.00		72,320		73,043		1.01
Coastal Realty Business Trust, Secured Income	*	Investment Trust		37,577.00		327,671		329,550		4.58
Coastal Realty Business Trust, Series F2	*	Investment Trust		10,000.00		58,800		59,900		0.83
Coastal Realty Business Trust, Series H2	*	Investment Trust		47,284.16		246,351		274,248		3.81
Coastal Realty Business Trust, Series L2	*	Investment Trust		7,950.00		18,444		15,741		0.22
Coastal Realty Business Trust, Series Q	*	Investment Trust		10.00		467,341		414,987		5.76
Total Investment Trust						1,190,927		1,167,469		16.21

TTLC Note		Note				250,000		250,000		3.47
Total Note						250,000		250,000		3.47

Total Investments					$	6,718,348	$	6,922,487		96.17

* Investments in related parties.

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Schedule of Investments

June 30, 2013

Name		Asset Type	Shares/Units		Cost Basis		Total Fair Value		% of Net Assets
Agree Realty Corporation		Public REIT		4,200.00	$	117,894	$	123,983		1.70
Apartment Investment and Management Company		Public REIT		3,888.00		115,163		116,796		1.60
Ashford Hospitality Trust, Inc.		Public REIT		19,000.00		223,630		217,550		2.98
Associated Estates Realty Corporation		Public REIT		4,000.00		69,920		64,320		0.88
CommonWealth REIT		Public REIT		16,900.00		426,725		390,728		5.36
FelCor Lodging Trust Incorporated		Public REIT		9,900.00		52,642		58,509		0.80
Rouse Properties Inc		Public REIT		3,077.00		56,753		60,371		0.83
Total Public REIT						1,062,727		1,032,257		14.15

BellaVista Capital, Inc.		Non-traded REIT		123,987.00		74,392		59,514		0.82
Hines Real Estate Investment Trust, Inc.		Non-traded REIT		2,692.31		13,569		11,900		0.16
USA Real Estate Investment Trust		Non-traded REIT		6.57		330		223		0.01
Total Non-traded REIT						88,291		71,637		0.99

60 East 42nd St. Associates L.L.C		LP Interest		0.38		56,700		107,431		1.47
250 West 57th St. Associates L.L.C.		LP Interest		0.67		66,670		95,087		1.30
AEI Net Lease Income & Growth Fund XX Limited Partnership		LP Interest		16.00		11,432		11,100		0.15
Brown Palace Hotel Associates, LP		LP Interest		0.25		35,750		35,628		0.49
Civic Center, LP		LP Interest		2.00		163,994		160,186		2.20
CRI Hotel Income Partners, LP		LP Interest		15,961.00		64,642		55,864		0.77
Del Taco Restaurant Properties I		LP Interest		287.00		207,358		222,385		3.05
Del Taco Restaurant Properties II		LP Interest		273.00		60,459		62,315		0.85
Del Taco Restaurant Properties III		LP Interest		628.00		125,983		139,303		1.91
Del Taco Income Properties IV		LP Interest		2,296.00		59,696		65,459		0.90
Divall Insured Income Properties 2, LP		LP Interest		830.33		211,926		222,220		3.05
DRV Holding Company, LLC		LP Interest		500.00		500,000		500,000		6.86
El Conquistador Limited Partnership		LP Interest		2.00		80,976		88,761		1.22
Empire State Building Associates L.L.C.		LP Interest		2.50		449,150		562,500		7.71
Hotel Durant, LLC		LP Interest		7.10		577,299		529,512		7.26
Inland Land Appreciation Fund, L.P.		LP Interest		149.30		18,166		19,600		0.27
Inland Land Appreciation Fund II, L.P.		LP Interest		211.00		27,951		25,936		0.36
Madison Place Associates, LLC		LP Interest		6.80		77,943		105,530		1.45
MPF Pacific Gateway - Class B	*	LP Interest		23.20		6,287		6,960		0.10
National Property Investors 6		LP Interest		7.00		145		129		-
NCP-Seven Liquidating Trust		LP Interest		79.00		1,694		1,691		0.02
Post Street Renaissance Partners Class A		LP Interest		9.10		177,844		163,094		2.24
Post Street Renaissance Partners Class D		LP Interest		11.60		542,115		481,488		6.60
Rancon Realty Fund IV		LP Interest		975.00		173,706		220,565		3.02
Rancon Realty Fund V		LP Interest		935.00		165,691		165,093		2.26
Secured Income, LP		LP Interest		25,600.00		223,232		224,512		3.08
Uniprop Manufactured Housing Income Fund II, LP		LP Interest		12,156.00		56,890		61,996		0.82
Total LP Interest						4,143,699		4,334,345		59.41

Coastal Realty Business Trust, REEP, Inc.	*	Investment Trust		72,320.00		72,320		73,043		1.00
Coastal Realty Business Trust, Secured Income	*	Investment Trust		37,577.00		327,671		329,550		4.52
Coastal Realty Business Trust, Series F2	*	Investment Trust		10,000.00		58,800		59,900		0.82
Coastal Realty Business Trust, Series H2	*	Investment Trust		47,284.16		246,351		274,248		3.76
Coastal Realty Business Trust, Series L2	*	Investment Trust		7,950.00		18,444		15,741		0.22
Coastal Realty Business Trust, Series Q	*	Investment Trust		10.00		467,341		414,987		5.69
Total Investment Trust						1,190,927		1,167,469		16.01

TTLC Note		Note				250,000		250,000		3.43
						250,000		250,000		3.43

Total Investments					$	6,735,644	$	6,855,708		93.99

* Investments in related parties.

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Statements of Operations

For The Three Months Ended September 30, 2013 and 2012

(Unaudited)


	For The Three Months Ended September, 30
	2013		2012

Investment income
Dividend and distribution income	$	49,473	$	-
Interest and other income		5,004		-
Total investment income		54,477		-

Operating expenses
Investment advisory fees		54,616		-
Administrative cost reimbursements		24,000		-
Organization costs		-		3,650
Amortization of deferred offering costs		70,804		-
Professional fees		73,366		-
Other general and administrative		9,591		809
Total operating expenses		232,377		4,459

Net investment loss		(177,900)		(4,459)

Net realized loss on sale of investments		(852)		-
Net unrealized gain on investments		84,075		-

Net decrease in net assets resulting from operations	$	(94,677)	$	(4,459)

Net decrease in net assets resulting from operations per share	$	(0.13)	$	(0.12)

Weighted average common shares outstanding		728,217		36,000

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Statements of Changes in Net Assets

For The Three Months Ended September 30, 2013 and Year Ended June 30, 2013

	For The Three Months Ended September 30, 2013		For the Year Ended June 30, 2012
	(Unaudited)

Operations
Net investment loss	$	(177,900)	$	(111,581)
Net realized gain (loss) on sale of investments		(852)		56,219
Net unrealized gain on investments		84,075		120,065
Net increase (decrease) in net assets resulting from operations		(94,677)		64,703

Capital share transactions
Issuance of common stock		-		6,922,170
Net increase in net assets resulting from capital share transactions		-		6,922,170

Total increase (decrease) in net assets		(94,677)		6,986,873

Net assets at beginning of period		7,293,932		307,059

Net assets at end of period	$	7,199,255	$	7,293,932

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Statement of Cash Flows

For The Three Months Ended September 30, 2013, and 2012

(Unaudited)


	For The Three Months Ended September 30,
	2013		2012

Cash flows from operating activities:
Net decrease in net assets resulting from operations	$	(94,677)	$	(4,459)
Adjustments to reconcile net decrease in net assets resulting from
operations to net cash used in operating activities:
Proceeds from sale of investments, net		10,580		-
Return of capital		11,189		-
Purchase of investments		(5,325)		-
Net realized loss on sale of investments		852		-
Net unrealized gain on investments		(84,075)		-
Amortization of deferred offering costs		70,804		-
Changes in assets and liabilities:
Accounts receivable		1,509		-
Due from related entities		(48,952)		-
Deferred offering costs		-		(56,181)
Other assets		(23,632)		2,500
Accounts payable and accrued liabilities		82,844		(31,164)
Due to related entities		(35,393)		-
Net cash from operating activities		(114,276)		(89,304)

Net decrease in cash and cash equivalents		(114,276)		(89,304)

Cash and cash equivalents at beginning of the period		262,806		161,069

Cash and cash equivalents at end of the period	$	148,530	$	71,765

The accompanying notes to financial statements are an integral part of these financial statements.

MacKenzie Realty Capital, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION

MacKenzie Realty Capital, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012, and has been active in matters relating to its organization as a non-diversified, closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). The Company is authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as Common Stock, with a $0.0001 par value per Share; and (ii) 20,000,000 are designated as Preferred Stock, with a $0.0001 par value per Share.

The Company filed a registration statement on June 1, 2012 and several pre- and post-effective amendments with the Securities and Exchange Commission (“SEC”) to register the initial public offering of 5,000,000 shares of common stock for sale. The registration statement was declared effective by the SEC on August 2, 2013. The Company commenced its operations on February 28, 2013. The Company intends to operate so as to qualify to be taxed as a real estate investment trust (“REIT”) as defined under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). The Company’s fiscal year-end is June 30.

The Company is managed by MacKenzie Capital Management, LP (“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013. MacKenzie manages all of the Company’s affairs except for providing investment advice. The Company is advised by MCM Advisers, LP (the “Adviser”) under the advisory agreement dated and effective as of February 28, 2013. The Company intends to pursue a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate. These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships, limited liability companies, and tenancies-in-common.

On February 28, 2013, the Company acquired, under an exchange agreement (“Contribution Agreement”), a portfolio of investments and cash (“Legacy Portfolio”) from eight private funds: MP Income Fund 16, LLC, MP Income Fund 18, LLC, MP Income Fund 19, LLC, MP Value Fund 5, LLC, MP Value Fund 7, LLC, MPF Flagship Fund 9, LLC, MP Income Fund 20, LLC, and Mackenzie Patterson Special Fund 6, LLC, which are collectively referred to as “Legacy Funds.” The Legacy Funds are managed by MacKenzie. The assets acquired from the Legacy Funds had a collective fair value of approximately $6.9 million ($6.4 million in investments and $500 thousand in cash) as of February 28, 2013. As consideration for the Company’s acquisition of the Legacy Portfolio, 692,217 shares of the Company’s common stock were issued to the Legacy Funds. In addition, in 2012 prior to the acquisition of the Legacy Portfolio, each of the Legacy Funds and MP Value Fund 8, LLC, a private investment fund managed by MacKenzie, purchased 4,000 shares of the Company’s common stock at $10 per share in order to provide the Company with funds to complete this exchange and prepare its initial public offering.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation: The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company’s assets and liabilities as of September 30, 2013 and the results of its operations for the three month period ended September 30, 2013 and 2012, which results are not necessarily indicative of results on an annualized basis. Statement of assets and liabilities amounts as of June 30, 2013 have been derived from audited financial statements. The Company follows the financial reporting standards for investment companies set forth in GAAP. Accordingly, the Company’s investments are recorded at estimated fair value in the statements of assets and liabilities with changes in unrealized gains (losses) in the fair value of such investments included within the Company’s statement of operations.

These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2013 included in the Company’s 10-K filed with the Securities and Exchange Commission.

Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to change relate to the determination of the valuation of investments. Actual results could differ from those estimates.

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

Cash and Cash Equivalents: The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to certain limits. At times the cash balances held in financial institutions by the Company may exceed these insured limits.

Organization Costs: Organization costs include, among other things, the cost of incorporation including the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the initial registration statement and auditing the initial seed capital statement of assets and liabilities. These costs are expensed as incurred. For the three months ended September 30, 2013 and September 30, 2012, the Company incurred organization costs of $0 and $3,650, respectively.

Deferred Offering Costs: The Company’s deferred offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statement. As of September 30, 2013, and June 30, 2013, the Company had deferred offering costs of $424,825. Offering costs have been deferred and will be expensed over a twelve month period beginning on August 2, 2013 (the effective date of the Company’s registration statement filed with the SEC). Amortization of the deferred offering cost for the three months ended September 30, 2013 and 2012, were $70,804 and $0, respectively.

Income Taxes: The Company intends to elect to be treated for federal income tax purposes, and intends to qualify thereafter, as a REIT under Subchapter M of the Code. Generally, a REIT is exempt from federal income taxes if it distributes at least 90% of “Investment Company Taxable Income,” as defined in the Code, each year. The Company intends to distribute sufficient dividends to maintain its REIT status each year. The Company is also subject to nondeductible federal excise taxes if it does not distribute at least 85% of net ordinary income, 95% of the realized net short-term capital gains in excess of realized net long-term capital losses, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes. The Company will generally endeavor each year to avoid any federal excise taxes.

Per Share Information: Net increase or decrease in net assets resulting from operations per common share is calculated using the weighted average number of common shares outstanding for the periods presented.

Subsequent Events: Subsequent events are events or transactions that occur after the date of the statements of assets and liabilities but before the date the financial statements are available to be issued. Subsequent events that provide additional evidence about conditions that existed at the date of the statement of assets and liabilities are considered in the preparation of the financial statements presented herein. Subsequent events that occur after the date of the statement of assets and liabilities that do not provide evidence about the conditions that existed as of the date of the statement of net assets are considered for disclosure based upon their significance in relation to the Company’s 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. The Company believes that the carrying amounts of its financial instruments, consisting of cash, accounts receivable from affiliates, interest payable to affiliates and other accrued expenses and liabilities approximate the fair values of such items.

Valuation of Investments: The Company’s financial statements include investments that are measured at their estimated fair values in accordance with GAAP. A fair value measurement represents the price at which an orderly transaction would occur between willing market participants at the measurement date. The Company develops fair values for investments based on available inputs which could include pricing that is observed in the marketplace. Examples of market information that the Company attempts to obtain include the following:

•	Recent quoted trading prices for the same or similar securities;

•	Recent purchase prices paid for the same or similar securities;

•	Recent sale prices received for the same or similar securities;

•	Relevant reports issued by industry analysts and publications; and

•	Other relevant observable and unobservable inputs, including liquidity discounts.

After considering all available indications of the appropriate rate of return that market participants would require, the Company considers the reasonableness of the range indicated by the results to determine an estimate that, in its opinion, is most representative of fair value.

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

The markets for many of the real estate securities in which the Company invests are generally illiquid. Establishing fair values for illiquid investments is inherently subjective and is often dependent upon significant estimates and modeling assumptions. If either the volume and/or level of trading activity for an investment has significantly changed from normal market conditions, or price quotations or observable inputs are not associated with orderly transactions, the market inputs used might not be relevant. For example, recent quoted trading prices might not be relevant if a ready market does not exist for the quantity of investments that the Company may wish to sell.

In circumstances where relevant market inputs cannot be obtained, increased analysis and management judgment are required to estimate fair value. This generally requires the Company to establish the use of internal assumptions about future cash flows, including the cash flows of underlying real property, and appropriate risk-adjusted discount rates. Regardless of the valuation inputs used, the objective of fair value measurement is unchanged from what it would be if markets were operating at normal activity levels and/or transactions were orderly; that is, to determine the current exit price.

The Company is under no compulsion to dispose of its investments, and expects to hold them for a substantial period of time. Therefore, estimated values as determined above may not reflect amounts that could be realized upon actual sale at a future date.

Revenue Recognition: Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the investment. Investments are disposed of on a first-in, first-out basis unless otherwise specifically identified.

Distributions received from investments are evaluated by management and recorded as dividend income or a return of capital (reduction of investment) on the ex-dividend date. Operational dividends or distributions received from portfolio investments are recorded as investment income. Distributions resulting from the sale or refinance of an investee’s underlying assets are compared to the estimated value of the remaining assets and are recorded as a return of capital or as investment income as appropriate.

Dividends and Distributions: Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a quarterly dividend or distribution is approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our earnings for the quarter.

NOTE 3 – INVESTMENTS

The following table summarizes the composition of the Company’s investments at fair value as of June 30, 2013 and September 30, 2013:

	June 30, 2013				September 30, 2013
Asset Type	Cost		Fair Value		Cost		Fair Value
Public REIT	$	1,062,727	$	1,032,257	$	1,062,727	$	1,024,075
Non-traded REIT		88,291		71,637		93,616		77,137
LP Interest		4,143,699		4,334,345		4,121,078		4,403,806
Investment Trust		1,190,927		1,167,469		1,190,927		1,167,469
Note		250,000		250,000		250,000		250,000
Total		6,735,644		6,855,708		6,718,348		6,922,487

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

Fair Value Measurements

GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observables used in measuring investments at fair value. Market price is impacted by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observables and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following categories:

	Level I –		Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities. The Company does not adjust the quoted price for these investments even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.
	Level II –		Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.
	Level III –		Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

The following table summarizes the valuation of the Company’s investments as of September 30, 2013:

Asset Type	Total		Level I		Level II		Level III
Public REIT	$	1,024,075	$	1,024,075	$	-	$	-
Non-traded REIT		77,137		-		-		77,137
LP Interest		4,403,806		-		-		4,403,806
Investment Trust		1,167,469		-		-		1,167,469
Note		250,000		-		-		250,000
Total	$	6,922,487	$	1,024,075	$	-	$	5,898,412

The following table summarizes the valuation of the Company’s investments as of June 30, 2013:

Asset Type		Total		Level I		Level II		Level III
Public REIT	$	1,032,257	$	1,032,257	$	-	$	-
Non-traded REIT		71,637		-		-		71,637
LP Interest		4,334,345		-		-		4,334,345
Investment Trust		1,167,469		-		-		1,167,469
Note		250,000		-		-		250,000
Total	$	6,855,708	$	1,032,257	$	-	$	5,823,451

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

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) for the period ended September 30, 2013:

Balance at July 1, 2013	$	5,823,451
Purchases of investments		5,325
Proceeds from sales, net		(10,581)
Return of capital		(11,189)
Net realized loss on sale of investments		(852)
Net unrealized gain		92,258
Ending balance at September 30, 2013	$	5,898,412

Balance at July 1, 2012	$	-
Purchases of investments		5,674,404
Proceeds from sales		(254)
Net realized loss on sale of investments		(1,234)
Net unrealized gain		150,535
Ending balance at June 30, 2013	$	5,823,451

For the three months ended September 30, 2013 and 2012, changes in unrealized gain included in earnings relating to level III investments still held at September 30, 2013 and 2012 were $242,898 and $0, respectively.

The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at September 30, 2013:

Asset Type

Fair Value

Primary Valuation Techniques

Unobservable Inputs Used (1)

Range

Wt. Average

Non-traded REIT

12,123

Market Activity

Secondary market industry publication

Non-traded REIT

5,500

Market Activity

Acquisition cost

Non-traded REIT

59,514

Combination

Sponsor provided value, secondary market bid

LP Interest

107,221

Discounted Cash Flow

Discount rate

22% - 26%

22%

Term

6 months

LP Interest

2,776,855

Market Activity

Secondary market industry publication

Acquisition cost

Contracted sale of security

Contracted sale of property

LP Interest

1,519,730

Net Asset Value

Capitalization rate

6% - 10%

Appraisal and merger price

Sponsor provided value

Comparable sales reports

Investment Trust

679,439

Market Activity

Secondary market industry publication

Investment Trust

414,987

Net Asset Value

Comparable sales reports

Investment Trust

73,043

Direct Capitalization method

Capitalization rate

Note

250,000

Discounted Cash Flow

Discount rate

5,898,412

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2013:

Asset Type

Fair Value

Primary Valuation Techniques

Unobservable Inputs Used (1)

Range

Wt. Average

Non-traded REIT

12,123

Market Activity

Secondary market industry publication

Non-traded REIT

59,514

Combination

Sponsor provided value, secondary market bid

LP Interest

107,221

Discounted Cash Flow

Internal Rate of Return

22% - 26%

22%

Term

6 months

LP Interest

2,719,163

Market Activity

Secondary market industry publication

Acquisition cost

Contracted sale of security

Contracted sale of property

LP Interest

1,507,961

Net Asset Value

Capitalization rate

6% - 10%

Appraisal and merger price

Sponsor provided value

Comparable sales reports

Investment Trust

679,439

Market Activity

Secondary market industry publication

Investment Trust

414,987

Net Asset Value

Comparable sales reports

Investment Trust

73,043

Direct Capitalization method

Capitalization rate

Note

250,000

Discounted Cash Flow

Discount rate

5,823,451

Valuation Technique Terms:

(1)All investment valuations generally contain a liquidity discount of 33%.

NOTE 4 – RELATED PARTY TRANSACTIONS

Investment Advisory Agreement:

The Company entered an investment advisory agreement with the Adviser. Under the Investment Advisory Agreement, the Company will pay the Adviser a fee for its services consisting of three components — a portfolio structuring fee, a base management fee and a subordinated incentive fee.

The portfolio structuring fee is for the Adviser’s initial work performed in connection with the acquisition of all the Company’s assets and equals 3.5% of the gross proceeds from the sale of the Company’s shares.

The base management fee is calculated based on the Company’s “managed funds,” which are the value of the Company’s shares plus any borrowing for investment purposes. The base management fee will range from 1.5% to 3.0%, depending on the level of the “managed funds.”

MacKenzie Realty Capital, Inc.

Notes to Financial Statements (continued)

September 30, 2013

(Unaudited)

The subordinated incentive fee has three parts—income, capital gains and liquidation. The income component is (i) 100% of the Company’s preliminary net investment income for any calendar quarter that exceeds 1.75% (7% annualized) but is less than 2.1875% (8.75% annualized) of the Company’s “contributed capital;” (which is defined as the number of Shares outstanding, multiplied by the price at which the Shares are sold), and (ii) 20% of the Company’s preliminary net investment income for any calendar quarter that exceeds 2.1875% (8.75% annualized) of the Company’s “contributed capital.” The capital gains component is (i) 100% of the Company’s realized capital gains annually generated by its investments above 7% and up to 8.75% of the Company’s “contributed capital,” and (ii) 20% of the Company’s realized capital gains above 8.75% of the Company’s “contributed capital,” all computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The capital gains component may not in any event exceed 20% of the Company’s realized capital gains, net of all realized capital losses and unrealized capital depreciation. The liquidation component will be 20% of the amount by which all distributions to stockholders exceed the “contributed capital,” less all previously- paid capital gains fees, provided that the liquidation component may not exceed 20% of all of the Company’s realized capital gains as of the date of liquidation.

The base management fee for the three months ended September 30, 2013 and 2012 were $54,616 and $0, respectively, and were recorded as investment advisory fees on the statements of operations. The amount of $54,616 payable to the Adviser as of September 30, 2013 was offset against the receivable from the Adviser as of September 30, 2013 as noted below under organization and offering costs reimbursement.

There were no portfolio structuring fee and subordinated incentive fees incurred from the inception through September 30, 2013.

Organization and Offering Costs Reimbursement:

As provided in the agreement between the Adviser and the Company, organization and offering costs incurred and paid by the Company in excess of $550,000 will be reimbursed by the Adviser. As of September 30, 2013 and June 30, 2013, the Company had incurred $721,195 and $617,627 of organization and offering costs, respectively. Thus, according to the agreement, $171,195 and $67,627 of the amount were reimbursable from the Adviser as of September 30, 2013 and June 30, 2013, respectively. As of September 30, 2013, the Adviser has reimbursed Company in the amount of $67,627. The remaining reimbursable amount of $103,568 was recorded as due from related entities in the statements of assets and liabilities.

Administration Agreement:

The Company entered into an administration agreement with MacKenzie. Under this agreement, the Company reimburses MacKenzie for its allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing the Company with other administrative services, subject to the Independent Directors’ approval. In addition, the Company will reimburse MacKenzie for the fees and expenses associated with performing compliance functions, and allocable portion of the compensation of the Company’s Chief Financial Officer, Chief Compliance Officer, Financial Reporting Manager, and any administrative support staff.

The administrative cost reimbursements for the three months ended of September 30, 2013 and 2012 were $24,000 and $0, respectively.

Investments:

Coastal Realty Business Trust (“CRBT”): CRBT is a Nevada business trust whose trustee is MacKenzie and whose beneficiaries are the Company and various private funds managed by MacKenzie. Its purpose is to own various investments on behalf of such funds. Each CRBT Trust Series (“Series”) pools capital from several funds managed by MacKenzie and invests (generally) in shares of private REITs as provided for in the Trust Agreement. Each Series participant is limited by the terms of the agreement and, as such, an interest in a Series has no redemption rights.

●

The Company has a 16.46% interest in CRBT, REEP, which owns a beneficial interest in a non-managing general partnership interest in Secured Income, LP.

●

The Company has a 16.46% interest in CRBT, Secured Income, which owns a beneficial interest in Secured Income, LP.

●

The Company has a 7.52% interest in CRBT, Series F2, which acquires and manages a real estate portfolio consisting mainly of office properties located in the United States.

●

The Company has a 55.77% interest in CRBT, Series H2, which invests in shares of a REIT that owns a real estate portfolio totaling 170 properties located in the United States and Canada. These properties include senior housing, hotels and resorts, golf courses, and marinas, among others.

●

The Company has a 7.94% interest in CRBT, Series L2, which invests in shares of a REIT that acquires and manages a diversified real estate portfolio, primarily comprised of retail, office, hotel, multi-family, and industrial properties.

●

The Company has a 5.27% interest in CRBT, Series Q, which invests in units of a limited partnership formed for the purpose of acquiring, refurbishing, and operating the Prescott Hotel and Postrio Restaurant located near Union Square in San Francisco, California.

MPF Pacific Gateway: The Company has a 15.82% interest in MPF Pacific Gateway, which is a holding company that owns an investment in a REIT Liquidating Trust. MPF Pacific Gateway is managed by MacKenzie.

NOTE 5 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights of the Company for the three months ended September 30, 2013 and the year ended June 30, 2013.

	For The Three months ended September 30, 2013	For The Year Ended June 30, 2013

Per Share Data:

Beginning net asset value	$	10.02		$	8.53

Net investment loss (1)		(0.24)			(0.41)
Net realized gain (loss) on sale of investments (1)		(0.01)			0.21
Net unrealized gain on investments (1)		0.12			0.44
Net increase (decrease) in net assets resulting from operations		(0.13)			0.24

Issuance of common stock above net asset value		-			1.25
Ending net asset value	$	9.89		$	10.02

Weighted average common shares outstanding		728,217			269,268
Shares outstanding at the end of period		728,217			728,217
Net assets at the end of period	$	7,199,255		$	7,293,932
Average net assets (2)	$	7,246,594		$	3,789,098

Ratios to average net assets
Total expenses		3.21	%		5.00	%
Net investment loss		(2.45)	%		(2.94)	%
Total rate of return (2) (3)		(1.31)	%		1.71	%

(1)	Based on weighted average number of shares of common stock outstanding for the period.

(2)	Average net assets were derived from the beginning and ending period-end net assets.

(3)	Total return is calculated based upon the change in value of the net assets. An individual shareholder’s return may vary from this return based on the time of capital transactions.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements by MacKenzie Realty Capital, Inc. (the “Fund,” ”we,” or “us,”) contained herein, other than historical facts, may constitute “forward-looking statements.” These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as “may,” “might,” “believe,” “will,” “provided,” “anticipate,” “future,” ”could,” “growth,” “plan,” “intend,” “expect,” “should,” “would,” “if,” “seek,” “possible,” “potential,” “likely” or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. 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 Registration Statement filed on Form N-2.

We may experience fluctuations in our operating results due to a number of factors, including the return on our equity investments, the interest rates payable on our debt investments, the default rates on such investments, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

Overview

We have elected to be regulated as a business development company (“BDC”) and we are classified as a non-diversified closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). We also intend to elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”) as soon as we are able to so qualify. As a BDC we are subject to numerous regulations and restrictions.

We were formed to continue and expand the business of our portfolio of assets we acquired from eight private funds, which we refer to as our “Legacy Funds,” and which are managed by an affiliate of our investment adviser. The portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million on February 28, 2013, including approximately $6.45 million of debt and equity investments issued by 47 portfolio companies (the “Legacy Portfolio”). As consideration for our acquisition of that portfolio, 692,217 shares of our common stock (“Shares”) were issued to the Legacy Funds. We intend to invest primarily in debt and equity real estate-related securities with the receipt of proceeds from our initial public offering which we are commencing at this time (the “IPO”).

Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of June 30, 2013 and September 30, 2013:

	June 30, 2013				September 30, 2013
Asset Type	Cost		Fair Value		Cost		Fair Value
Public REIT	$	1,062,727	$	1,032,257	$	1,062,727	$	1,024,075
Non-traded REIT		88,291		71,637		93,616		77,137
LP Interest		4,143,699		4,334,345		4,121,078		4,403,806
Investment Trust		1,190,927		1,167,469		1,190,927		1,167,469
Note		250,000		250,000		250,000		250,000
Total	$	6,735,644	$	6,855,708	$	6,718,348	$	6,922,487

Net Asset Value

Our net asset value as of September 30, 2013 on a GAAP basis was $9.89 per Share, as compared to $10.02 per Share at June 30, 2013, a $0.13 per Share decrease of approximately 1.3%. However, management recognizes that the deferred offering costs have zero liquidation value and it will be expensed over one year period beginning August 1, 2013. Thus, management has determined that the non-GAAP net asset value per share of common stock, net of deferred offering costs as of September 30, 2013 and June 30, 2013, were $9.40 and $9.43 per Share, respectively. The $0.03 decrease was due to net investment loss excluding amortization of deferred offering costs of $0.15 per Share, which was offset by net unrealized gain on investments of $0.12 per Share.

Reconciliation of GAAP and non-GAAP basis net asset value per Share:

	September 30, 2013		June 30, 2013

GAAP basis net asset value per Share	$	9.89	$	10.02

Deferred offering costs (net of accumulated amortization) per Share		(0.49)		(0.59)

Non-GAAP net asset value (net of Deferred offering cost) per Share	$	9.40	$	9.43

Investment Plan

We commenced our operations on February 28, 2013 with the acquisition of the Legacy Portfolio. Our investments are generally expected to range in size from $10 thousand to $3 million, similar to the investments in the Legacy Portfolio. However, we may make larger investments from time to time on an opportunistic basis. We intend to focus primarily on real estate-related securities. We will purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers. We will invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.

Distributions from Investments

We intend to generate revenues in the form of capital gains and dividends on dividend-paying equity securities or other equity interests that we acquire, in addition to interest on any debt investments that we hold. Further, we may generate revenue in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees will be generated in connection with our investments and recognized as earned.

Results of Operations

Three Months Ended September 30, 2013 and 2012:

Income: Total investment income during the three months ended September 30, 2013 and 2012 were $54,477 and $0, respectively. All of such income was dividend and distribution income. We had no investment activity before February 28, 2013.

Expenses: Total expenses for the three months ended September 30, 2013 and 2012 were $232,377 and $4,459, respectively. This net increase of $227,918 or 5,111% was the result of the commencement of operations, preparing for the IPO, and general and administrative expenses related to ongoing operating costs such as investment advisory fees, administrative cost reimbursements, amortization of deferred offering cost, board meetings, accounting fees, insurance and supplies.

Net unrealized gain on investments: Total unrealized gain on investments for the three months ended September 30, 2013 and 2012, were $84,075 and $0, respectively. The increase was due to an increase in the fair value of the investment portfolio. We did not own any securities prior to February 28, 2013. Of the gain, $92,082 was due to an increase in the fair value of limited partnership investments and $176 was due to an increase in the fair value of non-traded REIT investments. The unrealized gains on limited partnership interests and non-traded REITs were offset by unrealized losses on public REITs of $8,182, which was due to a decrease in the fair value of public REIT investments.

Liquidity and Capital Resources

We are currently in the process of raising capital through the IPO. We do not have any plans to issue any preferred equity. We will generate cash from the net proceeds of the IPO and any future offerings of securities and cash flows from operations, including earnings on investments in the Legacy Portfolio and future investments, as well as interest earned from the temporary investment of cash in U.S. Government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities. After our initial closing in the IPO, we will sell our Shares on a continuous basis at a price of $10; however, if our NAV per Share increases above $10 per Share, we will sell our Shares at a higher price as necessary to ensure that Shares are not sold at a price which, after deduction of selling commissions and dealer manager fees, is below our NAV per Share, unless we have operative stockholder approval to sell Shares below NAV. We have obtained stockholder approval to sell below NAV at a special meeting of stockholders held on September 13, 2013. In connection with each closing on the sale of Shares in the IPO, our Board of Directors or a committee thereof is required to make the determination within 48 hours of the time that we price our Shares for sale that we are not selling our common stock at a price below our then current NAV, unless we have operative stockholder approval to sell Shares below NAV.

Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors at least quarterly. The maximum amount of such borrowing is limited by the 1940 Act.

Our primary use of funds will be investments in portfolio companies, cash distributions to holders of our common stock (primarily from investment income and realized capital gains), payments to any lenders or senior security holders, and the payment of operating expenses. Immediately after the IPO and depending on its size, we expect to have cash resources of approximately $43.4 million.

We do not currently generate sufficient operating income to sustain our operations. However, existing cash balances, when combined with our liquid REIT holdings which could be sold to generate cash, are sufficient to sustain our operations for the foreseeable future, and we might be able to reposition portions of our portfolio into more income-producing assets in order to generate sufficient income to sustain our operations.

Contractual Obligations

We have entered into two contracts under which we have material future commitments, the Advisory Agreement, under which MCM Advisers, LP (the “Adviser”) serves as our investment adviser, and the Administration Agreement, under which MacKenzie Capital Management, LP (“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 Agreement in future periods (after the up-front payment of the portfolio structuring fee during the IPO) will be (i) a percentage of the value of our “Managed Funds”; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation). Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Borrowings

We do not have any current plans to borrow money or issue preferred securities. In the event that we do so borrow, we would expect to be subject to various customary covenants and restrictions on our operations, such as covenants which would (i) require us to maintain certain financial ratios, including asset coverage, debt to equity and interest coverage, and a minimum net worth, and/or (ii) restrict our ability to incur liens, additional debt, merge or sell assets, make certain investments and/or distributions or engage in transactions with affiliates.

Critical Accounting Policies

The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions. Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management’s most difficult, complex or subjective judgments.

Valuation of Portfolio Investments

We will determine the NAV of our investment portfolio each quarter (and as of each bi-monthly closing when our IPO continues) by subtracting our total liabilities from the fair value of our gross assets. We will conduct the valuation of our assets and determine our NAV consistent with GAAP and the 1940 Act, and report our NAV in our periodic reports filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “1934 Act”).

Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may also use published secondary market trading information for securities that do not trade on a national exchange in order to value assets. When doing so, we determine whether the trading price obtained is sufficient according to GAAP to determine the fair value of the security. If determined adequate, we use the trading price obtained.

Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or our Board of Directors, does not represent fair value, which we expect will represent a substantial majority of the investments in our portfolio, will each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third-party valuation firms.

The recommendation of fair value will generally be based on the following factors, as relevant:

the nature and realizable value of any collateral;

the portfolio company’s ability to make payments;

the portfolio company’s earnings and discounted cash flow;

the markets in which the issuer does business; and

comparisons to publicly traded securities.

Securities for which market data are not readily available or for which a pricing source is not sufficient may include the following:

private placements and restricted securities that do not have an active trading market;

securities whose trading has been suspended or for which market quotes are no longer available;

debt securities that have recently gone into default and for which there is no current market;

securities whose prices are stale;

securities affected by significant events; and

securities that the Investment Adviser believes were priced incorrectly.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.

The preparation of financial statements in conformity with GAAP requires management to estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Distributions to Stockholders

To the extent that we have cash available, we intend to distribute quarterly dividends to our stockholders, beginning with our first full quarter after the first closing of sales pursuant to the IPO. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our Shares. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make distributions if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.

We currently expect to elect to be taxed, and intend to qualify annually thereafter, as a REIT under the Code when we become eligible to make that election. If we elect to be treated as a REIT, we will be required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90% of our REIT taxable income. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.

Our current intention is to make any distributions in additional Shares under our dividend reinvestment plan (“DRIP”) out of assets legally available therefore, unless a stockholder elects to receive dividends and/or long-term capital gains distributions in cash, or participation in the DRIP is restricted by a state securities regulator.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Legacy Portfolio, as well as our future investments, will primarily consist of equity and debt securities issued by smaller U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange, and our investments in these securities are considered speculative in nature. Our investments do and will often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and return of capital.

Financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 100% of our total assets at September 30, 2013. As discussed in Note 3 to our financials statement (“Investments”), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy represents a high degree of business and financial risk due to the fact that portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.

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 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, 2013, 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

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in our registration statement on Form N-2, which could materially affect our business, financial condition or operating results. The risks described in our registration statement on Form N-2 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 28, 2013, we acquired the Legacy Portfolio. As consideration for the acquisition of that portfolio, 692,217 Shares were issued to the Legacy Funds (the “Legacy Portfolio Acquisition”). The portfolio had a fair value, as determined by our Board of Directors, of approximately $6.92 million as of February 28, 2013. Each Legacy Fund received a portion of the 692,217 shares issued in connection with the Legacy Portfolio Acquisition.

The common stock issued to the Legacy Funds was issued under the registration exemption provided for in Section 4(a)(2) of the Securities Act of 1933, as amended (the “1933 Act”). With respect to these exemptions, neither we, nor any person acting on our behalf, offered or sold the securities by means of any form of general solicitation or advertising. Prior to making any offer or sale in connection with the Legacy Portfolio Acquisition, we had reasonable grounds to believe and believed that each Legacy Fund (i) was capable of evaluating the merits and risks of the investment, (ii) was able to bear the economic risk of the investment, (iii) was provided with the opportunity to ask questions of our management respecting our business plans and finances, (iv) received access to all material company contracts and agreements, and (v) possessed the requisite experience in business and financial matters to enable

them to appreciate the risks of investing in the common stock. Each Legacy Fund represented in writing that the common stock purchased was being acquired for investment for such purchaser’s own account, and agreed that the stock would not be sold, without registration under the 1933 Act or exemption from the 1933 Act. Each Legacy Fund understood that the shares were not registered under the 1933 Act and the restrictions on their transferability.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None

tem 4.

MINE SAFETY DISCLOSURES

None

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS

	Exhibit	Description



31.1			Section 302 Certification of Robert Dixon (President and Chief Executive Officer)

31.2			Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)

32.1			Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)

32.2			Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)

SIGNATURE

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, 2013	By:	/s/ Robert Dixon


Date: November 13, 2013	By:	/s/ Paul Koslosky

EXHIBIT INDEX

Exhibit	Description

31.1	Section 302 Certification of Robert Dixon (President and Chief Executive Officer)

31.2	Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)

32.1	Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)

32.2	Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)

MacKenzie Realty Capital, Inc. - FORM 10-Q - November 13, 2013

Attached files

MacKenzie Realty Capital, Inc. Reports