Attached files
file | filename |
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EX-32.2 - CFO - MacKenzie Realty Capital, Inc. | exhibit322.htm |
EX-31.2 - CFO - MacKenzie Realty Capital, Inc. | exhibit312.htm |
EX-31.1 - CEO - MacKenzie Realty Capital, Inc. | exhibit311.htm |
EX-32.1 - CEO - MacKenzie Realty Capital, Inc. | exhibit321.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
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(Mark one)
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R
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2014
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£
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________
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Commission file number 000-55006
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MacKenzie Realty Capital, Inc.
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(Exact name of registrant as specified in its charter)
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Maryland
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45-4355424
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1640 School Street, Moraga, California 94556
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(Address of principal executive offices)
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(925) 631-9100
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(Registrant’s telephone number, including area code)
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________________________________________________________________
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes £ No £
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer £ Accelerated filer £ Non-accelerated filer R Smaller reporting company £
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R
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The number of the shares of issuer’s Common Stock outstanding as of February 12, 2015 was 1,683,965.47.
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TABLE OF CONTENTS
Page
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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1
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2
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3
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4
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5
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6
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7-19
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Item 2.
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20-25
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Item 3.
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26
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Item 4.
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26
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PART II.
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OTHER INFORMATION
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Item 1.
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26
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Item 1A.
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26
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Item 2.
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26
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Item 3.
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26
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Item 4.
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26
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Item 5.
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26
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Item 6.
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27
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28
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MacKenzie Realty Capital, Inc.
Statements of Assets and Liabilities
December 31, 2014
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June 30, 2014
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(Unaudited)
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Assets
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Investments, at fair value (cost of $10,088,822 and $5,593,407, respectively)
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$ | 11,185,831 | $ | 5,905,995 | ||||
Cash and cash equivalents
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3,437,927 | 3,522,751 | ||||||
Accounts receivable
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189,277 | 12,869 | ||||||
Other assets
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257,048 | 69,145 | ||||||
Deferred offering costs (net of accumulated amortization of $424,825 and $389,423, respectively)
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- | 35,402 | ||||||
$ | 15,070,083 | $ | 9,546,162 | |||||
Liabilities
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Accounts payable and accrued liabilities
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$ | 55,876 | $ | 58,378 | ||||
Income tax payable
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76,915 | 160,362 | ||||||
Capital pending acceptance
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525,002 | 380,200 | ||||||
Due to related entities
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81,432 | 57,915 | ||||||
Deferred tax liability
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18,516 | 124,518 | ||||||
Total liabilities
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757,741 | 781,373 | ||||||
Net assets
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Common stock, $0.0001 par value, 80,000,000 shares authorized; 1,466,476.46 and 893,807.67 shares issued and outstanding respectively
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147 | 89 | ||||||
Capital in excess of par value
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13,705,122 | 8,591,878 | ||||||
Retained earnings
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607,073 | 172,822 | ||||||
Total net assets
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$ | 14,312,342 | $ | 8,764,789 | ||||
Net asset value per share of common stock (note 6)
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$ | 9.76 | $ | 9.81 |
The accompanying Notes to Financial Statements are an integral part of these financial statements.
Name
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Asset Type
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Shares/Units
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Cost Basis
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Total Fair Value
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% of Net Assets
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Agree Realty Corporation
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Publicly Traded Company
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4,200.00 | $ | 117,893 | $ | 130,578 | 0.90 | ||||||||||||||
American Realty Capital Properties, Inc.
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Publicly Traded Company
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47,000.00 | 441,695 | 425,350 | 2.94 | ||||||||||||||||
Apartment Investment and Management Company
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Publicly Traded Company
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3,888.00 | 115,163 | 144,439 | 1.00 | ||||||||||||||||
Ashford Hospitality Prime, Inc.
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Publicly Traded Company
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12,800.00 | 224,201 | 219,648 | 1.52 | ||||||||||||||||
Associated Estates Realty Corporation
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Publicly Traded Company
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4,000.00 | 69,920 | 92,840 | 0.64 | ||||||||||||||||
CBL & Associates Properties Inc.
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Publicly Traded Company
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18,300.00 | 348,730 | 355,386 | 2.46 | ||||||||||||||||
Equity Commonwealth
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Publicly Traded Company
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8,450.00 | 213,362 | 216,912 | 1.50 | ||||||||||||||||
FelCor Lodging Trust Incorporated
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Publicly Traded Company
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6,300.00 | 51,604 | 68,166 | 0.47 | ||||||||||||||||
Lexington Realty Trust
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Publicly Traded Company
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29,300.00 | 326,891 | 321,714 | 2.23 | ||||||||||||||||
Liberty Property Trust
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Publicly Traded Company
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5,500.00 | 195,750 | 206,965 | 1.43 | ||||||||||||||||
One Liberty Properties, Inc.
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Publicly Traded Company
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9,000.00 | 206,110 | 213,030 | 1.47 | ||||||||||||||||
Rouse Properties Inc
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Publicly Traded Company
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15,200.00 | 280,717 | 281,504 | 1.95 | ||||||||||||||||
Senior Housing Properties Trust
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Publicly Traded Company
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9,000.00 | 201,135 | 198,990 | 1.38 | ||||||||||||||||
Winthrop Realty Trust Shares of Beneficial Interest
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Publicly Traded Company
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38,500.00 | 597,020 | 600,215 | 4.16 | ||||||||||||||||
Total Public Traded Company
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3,390,191 | 3,475,737 | 24.05 | ||||||||||||||||||
Apple Hospitality REIT, Inc.
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Non Traded Company
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90,622.37 | 608,599 | 779,353 | 5.40 | ||||||||||||||||
Bluerock Residential Growth REIT, Inc. Class B1
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Non Traded Company
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1,429.61 | 18,641 | 15,225 | 0.11 | ||||||||||||||||
Bluerock Residential Growth REIT, Inc. Class B2
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Non Traded Company
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1,429.61 | 17,211 | 15,225 | 0.11 | ||||||||||||||||
Bluerock Residential Growth REIT, Inc. Class B3
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Non Traded Company
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1,429.61 | 15,781 | 15,225 | 0.11 | ||||||||||||||||
FSP South 10th Street Corp. Liquidating Trust
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Non Traded Company
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0.25 | 225 | 499 | - | ||||||||||||||||
Hines Real Estate Investment Trust, Inc.
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Non Traded Company
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2,692.31 | 13,569 | 12,466 | 0.09 | ||||||||||||||||
Landmark Apartment Trust, Inc.
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Non Traded Company
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84,520.14 | 346,454 | 469,932 | 3.25 | ||||||||||||||||
SmartStop Self Storage, Inc.
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Non Traded Company
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9,756.94 | 70,593 | 86,154 | 0.60 | ||||||||||||||||
TIER REIT, Inc.
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Non Traded Company
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861,299.08 | 1,771,421 | 2,118,796 | 14.67 | ||||||||||||||||
Total Non Traded Company (1)
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2,862,494 | 3,512,875 | 24.34 | ||||||||||||||||||
Brown Palace Hotel Associates, LP
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LP Interest
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0.25 | 1,913 | 2,095 | 0.01 | ||||||||||||||||
Del Taco Income Properties IV
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LP Interest
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2,296.00 | 59,696 | 59,558 | 0.41 | ||||||||||||||||
Del Taco Restaurant Properties I
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LP Interest
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417.00 | 306,918 | 354,867 | 2.46 | ||||||||||||||||
Del Taco Restaurant Properties II
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LP Interest
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644.00 | 123,206 | 150,380 | 1.04 | ||||||||||||||||
DRV Holding Company, LLC
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LP Interest
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500.00 | 500,000 | 536,160 | 3.71 | ||||||||||||||||
El Conquistador Limited Partnership
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LP Interest
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2.00 | 80,976 | 80,540 | 0.56 | ||||||||||||||||
Hotel Durant, LLC
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LP Interest
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7.10 | 577,299 | 367,271 | 2.54 | ||||||||||||||||
Inland Land Appreciation Fund II, L.P.
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LP Interest
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210.97 | 8,667 | 27,591 | 0.19 | ||||||||||||||||
MPF Pacific Gateway - Class B
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(2 | ) |
LP Interest
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23.20 | 6,287 | 6,265 | 0.04 | ||||||||||||||
National Property Investors 6
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LP Interest
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7.00 | 145 | 110 | - | ||||||||||||||||
Post Street Renaissance Partners Class A
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LP Interest
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9.10 | 16,981 | 18,251 | 0.13 | ||||||||||||||||
Post Street Renaissance Partners Class D
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LP Interest
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21.60 | 105,623 | 116,702 | 0.81 | ||||||||||||||||
Rancon Realty Fund IV
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LP Interest
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1,005.00 | 181,251 | 306,525 | 2.12 | ||||||||||||||||
Rancon Realty Fund V
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LP Interest
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1,154.00 | 213,281 | 228,988 | 1.59 | ||||||||||||||||
Secured Income, LP
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LP Interest
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64,177.00 | 560,403 | 732,901 | 5.07 | ||||||||||||||||
Uniprop Manufactured Housing Income Fund II, LP
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LP Interest
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53,202.00 | 237,401 | 249,517 | 1.73 | ||||||||||||||||
Total LP Interest
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2,980,047 | 3,237,721 | 22.41 | ||||||||||||||||||
Coastal Realty Business Trust, REEP, Inc. - A
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(2 | ) |
Investment Trust
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72,320.00 | 73,555 | 94,739 | 0.66 | ||||||||||||||
Coastal Realty Business Trust, Series H2- A
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(2 | ) |
Investment Trust
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47,284.16 | 246,351 | 256,753 | 1.78 | ||||||||||||||
Total Investment Trust
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319,906 | 351,492 | 2.44 | ||||||||||||||||||
BR Cabrillo LLC Promissory Note
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Note
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296,188.13 | 296,188 | 388,006 | 2.69 | ||||||||||||||||
TTLC Note
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Note
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250,000.00 | 239,996 | 220,000 | 1.52 | ||||||||||||||||
Total Note
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536,184 | 608,006 | 4.21 | ||||||||||||||||||
Total Investments
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$ | 10,088,822 | $ | 11,185,831 | 77.45 | ||||||||||||||||
(1) Investments primarily in non traded public REITs or their successors.
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(2) Investment in related party
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The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
Schedule of Investments
June 30, 2014
Name
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Asset Type
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Shares/Units
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Cost Basis
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Total Fair Value
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% of Net Assets
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Agree Realty Corporation
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Publicly Traded Company
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4,200.00 | $ | 117,893 | $ | 126,966 | 1.45 | ||||||||||||||
Apartment Investment and Management Company
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Publicly Traded Company
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3,888.00 | 115,163 | 125,466 | 1.43 | ||||||||||||||||
Ashford Hospitality Prime, Inc.
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Publicly Traded Company
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12,800.00 | 224,201 | 219,648 | 2.51 | ||||||||||||||||
Associated Estates Realty Corporation
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Publicly Traded Company
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4,000.00 | 69,920 | 72,080 | 0.82 | ||||||||||||||||
CBL & Associates Properties Inc.
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Publicly Traded Company
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5,000.00 | 95,057 | 95,000 | 1.08 | ||||||||||||||||
CommonWealth REIT
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Publicly Traded Company
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8,450.00 | 213,363 | 222,404 | 2.54 | ||||||||||||||||
Empire State Realty OP, L.P.
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Publicly Traded Company
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19,176.00 | 255,281 | 303,940 | 3.47 | ||||||||||||||||
Empire State Realty OP, L.P. - Series 250
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Publicly Traded Company
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1,757.00 | 24,728 | 27,426 | 0.31 | ||||||||||||||||
Empire State Realty OP, L.P. - Series 60
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Publicly Traded Company
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4,974.00 | 64,081 | 78,191 | 0.89 | ||||||||||||||||
Empire State Realty Trust, Inc. Class A
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Publicly Traded Company
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4,832.00 | 64,217 | 79,728 | 0.91 | ||||||||||||||||
FelCor Lodging Trust Incorporated
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Publicly Traded Company
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6,300.00 | 51,604 | 66,213 | 0.76 | ||||||||||||||||
Lexington Realty Trust
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Publicly Traded Company
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10,800.00 | 123,452 | 118,908 | 1.36 | ||||||||||||||||
Rouse Properties Inc
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Publicly Traded Company
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9,500.00 | 176,525 | 162,545 | 1.85 | ||||||||||||||||
Total Public Traded Company
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1,595,485 | 1,698,515 | 19.38 | ||||||||||||||||||
Apple Hospitality REIT, Inc.
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Non Traded Company
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21,539.39 | 116,937 | 194,931 | 2.22 | ||||||||||||||||
BellaVista Capital, Inc.
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Non Traded Company
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123,987.00 | 49,595 | 49,595 | 0.57 | ||||||||||||||||
Hines Real Estate Investment Trust, Inc.
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Non Traded Company
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2,692.31 | 13,569 | 13,058 | 0.15 | ||||||||||||||||
Total Non Traded Company (1)
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180,101 | 257,584 | 2.94 | ||||||||||||||||||
Brown Palace Hotel Associates, LP
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LP Interest
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0.25 | 1,913 | 1,932 | 0.03 | ||||||||||||||||
Del Taco Income Properties IV
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LP Interest
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2,296.00 | 59,696 | 64,472 | 0.74 | ||||||||||||||||
Del Taco Restaurant Properties I
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LP Interest
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417.00 | 306,918 | 330,798 | 3.77 | ||||||||||||||||
Del Taco Restaurant Properties II
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LP Interest
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632.00 | 120,803 | 152,129 | 1.74 | ||||||||||||||||
DRV Holding Company, LLC
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LP Interest
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500.00 | 500,000 | 500,000 | 5.70 | ||||||||||||||||
El Conquistador Limited Partnership
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LP Interest
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2.00 | 80,976 | 94,754 | 1.08 | ||||||||||||||||
Hotel Durant, LLC
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LP Interest
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7.10 | 577,299 | 367,461 | 4.19 | ||||||||||||||||
Inland Land Appreciation Fund II, L.P.
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LP Interest
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210.97 | 8,667 | 26,234 | 0.30 | ||||||||||||||||
Inland Land Appreciation Fund, L.P.
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LP Interest
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149.37 | 18,166 | 19,418 | 0.22 | ||||||||||||||||
MPF Pacific Gateway - Class B
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(2 | ) |
LP Interest
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23.20 | 6,287 | 6,264 | 0.07 | ||||||||||||||
National Property Investors 6
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LP Interest
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7.00 | 145 | 95 | - | ||||||||||||||||
Post Street Renaissance Partners Class A
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LP Interest
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9.10 | 16,981 | 16,981 | 0.19 | ||||||||||||||||
Post Street Renaissance Partners Class D
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LP Interest
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11.60 | 56,729 | 58,319 | 0.67 | ||||||||||||||||
Rancon Realty Fund IV
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LP Interest
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997.00 | 179,266 | 312,659 | 3.57 | ||||||||||||||||
Rancon Realty Fund V
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LP Interest
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1,150.00 | 212,541 | 245,629 | 2.80 | ||||||||||||||||
Secured Income, LP
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LP Interest
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26,600.00 | 232,732 | 249,242 | 2.84 | ||||||||||||||||
Uniprop Manufactured Housing Income Fund II, LP
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LP Interest
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47,304.00 | 207,996 | 234,155 | 2.67 | ||||||||||||||||
Total LP Interest
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2,587,115 | 2,680,542 | 30.58 | ||||||||||||||||||
Coastal Realty Business Trust, REEP, Inc.
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(2 | ) |
Investment Trust
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72,320.00 | 73,555 | 90,400 | 1.03 | ||||||||||||||
Coastal Realty Business Trust, Secured Income
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(2 | ) |
Investment Trust
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37,577.00 | 327,671 | 352,096 | 4.02 | ||||||||||||||
Coastal Realty Business Trust, Series H2
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(2 | ) |
Investment Trust
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47,284.16 | 246,351 | 254,389 | 2.90 | ||||||||||||||
Coastal Realty Business Trust, Series L2
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(2 | ) |
Investment Trust
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7,950.00 | 18,444 | 17,411 | 0.20 | ||||||||||||||
Coastal Realty Business Trust, Series Q
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(2 | ) |
Investment Trust
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10.00 | 48,894 | 50,264 | 0.57 | ||||||||||||||
Total Investment Trust
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714,915 | 764,560 | 8.72 | ||||||||||||||||||
BR Cabrillo LLC Promissory Note
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Note
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275,795 | 275,794 | 3.15 | |||||||||||||||||
TTLC Note
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Note
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239,996 | 229,000 | 2.61 | |||||||||||||||||
Total Note
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515,791 | 504,794 | 5.76 | ||||||||||||||||||
Total Investments
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$ | 5,593,407 | $ | 5,905,995 | 67.38 | ||||||||||||||||
(1) Investments primarily in non traded public REITs or their successors.
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(2) Investment in related party
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The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
Statements of Operations
For The Three and Six Months Ended December 31, 2014 and 2013
(Unaudited)
For The Three Months Ended
December 31,
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For The Six Months Ended
December 31,
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2014
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2013
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2014
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2013
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Investment income
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Dividend and distribution income
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$ | 100,705 | $ | 86,838 | $ | 160,222 | $ | 136,312 | ||||||||
Interest and other income
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12,606 | 7,458 | 24,754 | 12,461 | ||||||||||||
Total investment income
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113,311 | 94,296 | 184,976 | 148,773 | ||||||||||||
Operating expenses
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Investment advisory fees
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109,980 | 54,616 | 199,700 | 109,233 | ||||||||||||
Administrative cost reimbursements
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30,000 | 12,000 | 60,000 | 36,000 | ||||||||||||
Amortization of deferred offering costs
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- | 106,206 | 35,402 | 177,010 | ||||||||||||
Professional fees
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38,027 | 21,388 | 113,390 | 84,254 | ||||||||||||
Other general and administrative
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32,606 | 19,940 | 64,253 | 40,031 | ||||||||||||
Total operating expenses
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210,613 | 214,150 | 472,745 | 446,528 | ||||||||||||
Net investment loss
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(97,302 | ) | (119,854 | ) | (287,769 | ) | (297,755 | ) | ||||||||
Net realized gain on sale of investments
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189,256 | 410,262 | 321,754 | 409,410 | ||||||||||||
Net unrealized gain on investments
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176,927 | 48,249 | 784,421 | 132,324 | ||||||||||||
Total net realized and unrealized gain on investments
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366,183 | 458,511 | 1,106,175 | 541,734 | ||||||||||||
Income tax (provision) benefit (note 2)
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402,101 | (172,384 | ) | 188,949 | (172,384 | ) | ||||||||||
Net increase in net assets resulting from operations
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$ | 670,982 | $ | 166,273 | $ | 1,007,355 | $ | 71,595 | ||||||||
Net increase in net assets resulting from operations per share
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$ | 0.50 | $ | 0.23 | $ | 0.84 | $ | 0.10 | ||||||||
Weighted average common shares outstanding
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1,334,447 | 728,217 | 1,200,270 | 728,217 | ||||||||||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
For The Six Months Ended December 31, 2014 and The Year June 30, 2014
For The Six
Months Ended
|
For The Year
Ended
|
|||||||
December 31, 2014
|
June 30, 2014
|
|||||||
(Unaudited)
|
||||||||
Operations
|
||||||||
Net investment loss
|
$ | (287,769 | ) | $ | (290,587 | ) | ||
Net realized gain on sale of investments
|
321,754 | 632,703 | ||||||
Net unrealized gain on investments
|
784,421 | 192,524 | ||||||
Income tax (provision) benefit
|
188,949 | (373,580 | ) | |||||
Net increase in net assets resulting from operations
|
1,007,355 | 161,060 | ||||||
Capital share transactions
|
||||||||
Issuance of common stock
|
5,725,916 | 1,655,901 | ||||||
Dividend to Stockholders
|
(442,254 | ) | (130,850 | ) | ||||
Selling commissions and fees
|
(743,464 | ) | (215,254 | ) | ||||
Net increase in net assets resulting from capital share transactions
|
4,540,198 | 1,309,797 | ||||||
Total increase in net assets
|
5,547,553 | 1,470,857 | ||||||
Net assets at beginning of period
|
8,764,789 | 7,293,932 | ||||||
Net assets at end of period
|
$ | 14,312,342 | $ | 8,764,789 | ||||
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
Statements of Cash Flows
For The Six Months Ended December 31, 2014, and 2013
(Unaudited)
For The Six Months Ended
December 31,
|
||||||||
2014
|
2013
|
|||||||
Cash flows from operating activities:
|
|
|||||||
Net increase in net assets resulting from operations
|
$ | 1,007,355 | $ | 71,595 | ||||
Adjustments to reconcile net increase in net assets resulting from
|
||||||||
operations to net cash used in operating activities:
|
||||||||
Proceeds from sale of investments, net
|
2,102,153 | 721,763 | ||||||
Return of capital
|
85,573 | 185,730 | ||||||
Purchase of investments
|
(6,361,387 | ) | (484,936 | ) | ||||
Net realized gain on sale of investments
|
(321,754 | ) | (409,410 | ) | ||||
Net unrealized gain on investments
|
(784,421 | ) | (132,324 | ) | ||||
Amortization of deferred offering costs
|
35,402 | 177,010 | ||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable
|
(176,408 | ) | (238,773 | ) | ||||
Other assets
|
(187,903 | ) | (17,753 | ) | ||||
Accounts payable and accrued liabilities
|
(2,502 | ) | (192,307 | ) | ||||
Income tax payable
|
(83,447 | ) | - | |||||
Due to related entities
|
23,517 | 12,822 | ||||||
Deferred tax liability
|
(106,002 | ) | 124,333 | |||||
Net cash from operating activities
|
(4,769,824 | ) | (182,250 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from issuance of common stock
|
5,725,916 | - | ||||||
Dividend to Stockholders
|
(442,254 | ) | - | |||||
Payment of selling commissions and fees
|
(743,464 | ) | - | |||||
Change in capital pending acceptance
|
144,802 | - | ||||||
Net cash from financing activities
|
4,685,000 | - | ||||||
Net decrease in cash and cash equivalents
|
(84,824 | ) | (182,250 | ) | ||||
Cash and cash equivalents at beginning of the period
|
3,522,751 | 262,806 | ||||||
Cash and cash equivalents at end of the period
|
$ | 3,437,927 | $ | 80,556 |
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
Notes to Financial Statements
December 31, 2014
(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 operation 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 the Company’s common stock. The initial registration statement was declared effective by the SEC on August 2, 2013, and the offering commenced shortly thereafter. The Company filed post-effective amendments No. 3 and 4 on May 14, 2014 and August 6, 2014, respectively, for purpose of updating the initial registration statement. The Company commenced its operations on February 28, 2013 and its fiscal year-end is June 30.
The Company was formed with the intention of qualifying to be taxed as a real estate investment trust (“REIT”) as defined under Subchapter M of the Internal Revenue Code of 1986 and the Company has been operated in a manner that allows the Company to qualify as a REIT. Therefore, when the Company files its 2014 tax return, the Company will elect to be treated as a REIT for income tax purposes beginning with tax year ended December 31, 2014
The Company is managed by MacKenzie Capital Management, LP (“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013 (the “Administration Agreement”). MacKenzie manages all of 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 “Investment Advisory Agreement”). The Investment Advisory Agreement was subsequently amended on August 6, 2014. 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 (the “Contribution Agreement”), a portfolio of investments and cash (the “Legacy Portfolio”) from eight private funds collectively referred to as the “Legacy Funds,” which 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, the Company issued 692,217 shares of the Company’s common stock 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.
As of December 31, 2014, cumulative contributions of approximately $14.7 million (inclusive of the $6.9 million initial Legacy Funds capital investment), representing 1,466,476.46 shares, have been received.
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 December 31, 2014 and the results of its operations for the three and six months periods ended December 31, 2014 and 2013, which results are not necessarily indicative of results on an annualized basis. The statement of assets and liabilities as of June 30, 2014 has been derived from audited financial statements. The Company follows the GAAP financial reporting standards for investment companies. 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, 2014 included in the Company’s annual report on Form10-K filed with the SEC.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect reported asset values, liabilities, revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to change, and actual results could differ from those estimates.
Cash 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 and Deferred Offering Costs
Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the initial registration statement and the initial statement of assets and liabilities. These costs are expensed as incurred. Deferred offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statements and pre- and post-effective amendments. These offering costs were deferred and expensed over a twelve month period beginning on August 2, 2013 (the effective date of the Company’s registration statement filed with the SEC).
As provided in the Investment Advisory Agreement, the organization and offering costs incurred and paid by the Company in excess of $550,000 are reimbursed by the Adviser. Accordingly, the Company incurred and paid the non-reimbursable organization costs of $125,175 and offering costs of $424,825 totaling $550,000 during the period from January 25, 2012 (inception) through June 30, 2013. All organization and offering costs incurred by the Company subsequent to June 30, 2013 were reimbursed by the Adviser as disclosed in Note 5. The non-reimbursable organization costs of $125,175 were expensed as incurred during the period from January 25, 2012 (inception) through June 30, 2013. The non-reimbursable offering costs of $424,825 were deferred and 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 and six months ended December 31, 2014 were $0 and $35,402, respectively. Amortization of the deferred offering cost for the three and six months ended December 31, 2013 were $106,206 and $177,010, respectively. As of December 31, 2014, the deferred offering costs have been fully amortized.
Income Taxes and Deferred Tax Liability
Under ASC 740-10-25, the Company accounts for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, the Company considers all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment.
The Company was formed with the intention of qualifying to be taxed as a REIT and the Company has been operated in a manner that will allow the Company to qualify as a REIT. Therefore, when the Company files its 2014 tax return, the Company will elect to be treated as a REIT for income tax purposes beginning with tax year ended December 31, 2014. After the Company has qualified as a REIT, it will not be subject to federal income taxes on amounts that it distributes to the stockholders, provided that, on an annual basis, it distributes at least 90% of its REIT taxable income to the stockholders and meet certain other conditions. To the extent that the Company satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it will be subject to an excise tax on its undistributed taxable income.
Because the Company has been operated in a manner it believes will allow it to qualify as a REIT and it is making its REIT election for its tax year ended December 31, 2014, the tax provision amount for the quarter ended December 31, 2014 was recorded based on its qualification to be treated as a REIT for tax year ended December 31, 2014. As such, during the quarter ended December 31, 2014, an income tax benefit of $402,101 was recorded in order to reverse the income taxes, which was based on corporate tax rates, recorded for the period of January 1, 2014 through September 30, 2014 and record the expected 2014 tax liability and deferred tax liability for the built-in gain the Company had as of December 31, 2013. Accordingly, the income tax payable of $76,915 in the statement of assets and liabilities as of December 31, 2014 reflects the tax amount payable for tax year ended December 31, 2014 resulting from 2014 asset disposals which had built-in gain prior to the effective date of the Company’s REIT election. Deferred tax liability of $18,516 in the statement of assets and liabilities as of December 31, 2014 relates to the built-in gain tax on assets the Company held as of December 31, 2014 and has built-in gain prior to the effective date of the Company’s REIT election.
The provision for income taxes included in the financial statements includes both a current portion and a deferred portion. The following table shows the breakdown between the current and deferred income taxes for the periods presented:
For The Three Months Ended
December 31,
|
For The Six Months Ended
December 31,
|
|||||||||||||||
2014
|
2013
|
2014
|
2013
|
|||||||||||||
Current tax provision (benefit)
|
||||||||||||||||
Federal
|
$ | (46,615 | ) | $ | 41,013 | $ | (63,823 | ) | $ | 41,013 | ||||||
State
|
(7,493 | ) | 7,038 | $ | (19,124 | ) | 7,038 | |||||||||
Total Current
|
(54,108 | ) | 48,051 | (82,947 | ) | 48,051 | ||||||||||
Deferred tax provision
|
||||||||||||||||
Federal
|
$ | (297,022 | ) | 106,122 | $ | (90,474 | ) | 106,122 | ||||||||
State
|
(50,971 | ) | 18,211 | $ | (15,528 | ) | 18,211 | |||||||||
Total deferred
|
(347,993 | ) | 124,333 | (106,002 | ) | 124,333 | ||||||||||
Federal
|
(343,637 | ) | 147,135 | (154,297 | ) | 147,135 | ||||||||||
State
|
(58,464 | ) | 25,249 | (34,652 | ) | 25,249 | ||||||||||
Total tax provision (benefit)
|
$ | (402,101 | ) | $ | 172,384 | $ | (188,949 | ) | $ | 172,384 | ||||||
The following table shows the tax effect of the cumulative temporary differences as of December 31,
|
||||||||||||||||
2014 | 2013 | |||||||||||||||
Unrealized gain on investments
|
$ | 46,487 | $ | 312,126 |
The effective tax rate as of December 31, 2014 was 39.8%; 34.0% U.S. statutory federal income tax rate and 5.8% California state tax, net of U.S. federal income tax benefit. This effective tax rate was applicable on the 2014 realized and unrealized built-in gain which are not tax exempted for REITs. Offering costs amortizing into the statement of operations are not considered deductible for income tax purposes and result in the effective tax rate on reported financial statement income to be larger than would otherwise be expected.
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.
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.
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.
Interest Income
Interest income is derived from the investments in notes and recorded on the accrual basis to the extent amounts are expected to be collected. Accrued interest is evaluated for collectability. When a debt security becomes 90 days or more past due and the Company does not expect the debtor to be able to service all of its debt or other obligations, the debt security will generally be placed on non-accrual status and the Company will cease recognizing interest income on that debt security until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a debt security’s status significantly improves with respect to the debtor’s ability to service the debt or other obligations, or if a debt security is sold or written off, it will be removed from non-accrual status. As of December 31, 2014 and June 30, 2014, the Company did not have any investments that were more than 90 days past due or on non-accrual status. Additionally, the Company is not aware of any material changes to the creditworthiness of the borrowers underlying its debt investments.
Dividends and Distributions
Dividends (and distributions, if any) to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a quarterly dividend (or distribution, if any) is approved quarterly by the Board of Directors and is generally based upon management’s estimate of the Company’s earnings for the quarter.
Capital Pending Acceptance
The Company generally admits new stockholders monthly and subscriptions are effective only upon the Company’s acceptance. Any gross proceeds received from subscriptions which are not accepted as of the period-end are classified as capital pending acceptance in the statements of assets and liabilities. As of December 31, 2014 and June 30, 2014, capital pending acceptance were $525,002 and $380,200, respectively.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The update supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The adoption of the amended guidance in ASU 2014-09 is not expected to have a significant effect on our financial statements.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements — Going Concern (subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance relative to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Management is currently evaluating the standard and its operational and related disclosure requirements.
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:
•
|
Recently 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.
The real estate securities in which the Company invests are, due to the absence of an efficient market, 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, recently 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.
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 actively 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 an active 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.
NOTE 3 –INVESTMENTS
The following table summarizes the composition of the Company’s investments at cost and fair value as of December 31, 2014 and June 30, 2014:
December 31, 2014
|
June 30, 2014
|
|||||||||||||||
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
Publicly Traded Company
|
$ | 3,390,191 | $ | 3,475,737 | $ | 1,595,485 | $ | 1,698,515 | ||||||||
Non Traded Company
|
2,862,494 | 3,512,875 | 180,101 | 257,584 | ||||||||||||
LP Interest
|
2,980,047 | 3,237,721 | 2,587,115 | 2,680,542 | ||||||||||||
Investment Trust
|
319,906 | 351,492 | 714,915 | 764,560 | ||||||||||||
Note
|
536,184 | 608,006 | 515,791 | 504,794 | ||||||||||||
Total
|
$ | 10,088,822 | $ | 11,185,831 | $ | 5,593,407 | $ | 5,905,995 | ||||||||
The following table presents fair value measurements of the Company’s investments measured at fair value on a recurring basis as of December 31, 2014 according to the fair value hierarchy:
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Publicly Traded Company
|
$ | 3,475,737 | $ | 3,475,737 | $ | - | $ | - | ||||||||
Non Traded Company
|
3,512,875 | - | - | 3,512,875 | ||||||||||||
LP Interest
|
3,237,721 | - | - | 3,237,721 | ||||||||||||
Investment Trust
|
351,492 | - | - | 351,492 | ||||||||||||
Note
|
608,006 | - | - | 608,006 | ||||||||||||
Total
|
$ | 11,185,831 | $ | 3,475,737 | $ | - | $ | 7,710,094 |
The following table presents fair value measurements of the Company’s investments measured at fair value on a recurring basis as of June 30, 2014 according to the fair value hierarchy:
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Publicly Traded Company
|
$ | 1,698,515 | $ | 1,288,958 | $ | 409,557 | $ | - | ||||||||
Non Traded Company
|
257,584 | - | - | 257,584 | ||||||||||||
LP Interest
|
2,680,542 | - | - | 2,680,542 | ||||||||||||
Investment Trust
|
764,560 | - | - | 764,560 | ||||||||||||
Note
|
504,794 | - | - | 504,794 | ||||||||||||
Total
|
$ | 5,905,995 | $ | 1,288,958 | $ | 409,557 | $ | 4,207,480 | ||||||||
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 three month period ended December 31, 2014:
Balance at July 1, 2014
|
$ | 4,207,480 | ||
Purchases of investments
|
3,597,452 | |||
Proceeds from sales, net
|
(1,076,634 | ) | ||
Return of capital
|
(20,781 | ) | ||
Net realized gain on sale of investments
|
200,671 | |||
Net unrealized gain
|
801,906 | |||
Ending balance at December 31, 2014
|
$ | 7,710,094 | ||
For the six months ended December 31, 2014, changes in unrealized gain included in earnings relating to Level III investments still held at December 31, 2014 was $852,804.
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 year ended June 30, 2014:
Balance at July 1, 2013
|
$ | 5,823,451 | ||
Purchases of investments
|
824,900 | |||
Transfer to Level I
|
(55,597 | ) | ||
Proceeds from sales, net
|
(1,537,952 | ) | ||
Return of capital
|
(1,304,778 | ) | ||
Net realized gain on sale of investments
|
398,431 | |||
Net unrealized gain
|
59,025 | |||
Ending balance at June 30, 2014
|
$ | 4,207,480 | ||
For the fiscal year ended June 30, 2014, changes in unrealized gain included in earnings relating to Level III investments still held at June 30, 2014 was $290,795.
The transfer of $55,597 from Level III to Level I during the year ended June 30, 2014 relates to changes in tradability of the securities in an active market due to one of the Company’s investments in an LP Interest converting to Public REIT shares during the year.
There were no Level II investments as of December 31, 2014. Level II investments as of June 30, 2014 with total fair value of $409,557 included investments in thinly-traded public REITs which were valued using the ten day average trading prices of their stock.
The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at December 31, 2014:
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
|||||||||
Non Traded Company
|
$ | 3,512,376 |
Market Activity
|
Secondary market industry publication
|
||||||||||
Non Traded Company
|
499 |
Net Asset Value (1)
|
Sponsor provided value
|
|||||||||||
LP Interest
|
1,148,439 |
Market Activity
|
Secondary market industry publication
|
|||||||||||
LP Interest
|
2,089,282 |
Net Asset Value (1)
|
Capitalization rate
|
6.4% - 9.5 | % | 7.0 | % | |||||||
Comparable sales report
|
||||||||||||||
Contracted sale of property
|
||||||||||||||
Liquidity discount
|
7.0% - 40.0 | % | 32.4 | % | ||||||||||
Sponsor provided value
|
||||||||||||||
Investment Trust
|
256,753 |
Market Activity
|
Secondary market industry publication
|
|||||||||||
Investment Trust
|
94,739 |
Net Asset Value (1)
|
Capitalization rate
|
6.4 | % | |||||||||
|
||||||||||||||
Note
|
220,000 |
Discounted Cash Flow
|
Quoted market prices
|
|||||||||||
Discount rate
|
11.8 | % | ||||||||||||
Term (in years)
|
3.5 | |||||||||||||
Note
|
388,006 |
Net Asset Value (1)
|
Liquidity discount
|
15.0 | % | |||||||||
Sponsor provided value
|
||||||||||||||
$ | 7,710,094 |
Valuation Technique Terms:
(1) Internally calculated investee's net asset value, which is the estimated total assets minus the value of all liabilities.
The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2014:
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
|||||||||
Non Traded Company
|
$ | 257,584 |
Market Activity
|
Contracted security purchase price
|
||||||||||
Secondary market industry publication
|
||||||||||||||
|
||||||||||||||
LP Interest
|
8,196 |
Discounted Cash Flow
|
Sponsor provided value
|
|||||||||||
Liquidity discount
|
15 % - 31.5 | % | 28 | % | ||||||||||
LP Interest
|
2,134,737 |
Market Activity
|
Secondary market industry publication
|
|||||||||||
Contracted security purchase price
|
||||||||||||||
LP Interest
|
537,609 |
Net Asset Value (1)
|
Capitalization rate
|
6.5% - 9.5 | % | 7 | % | |||||||
Liquidity discount
|
10% - 35 | % | 29 | % | ||||||||||
Investment Trust
|
623,896 |
Market Activity
|
Secondary market industry publication
|
|||||||||||
Investment Trust
|
140,664 |
Net Asset Value (1)
|
Capitalization rate
|
6.3 | % | |||||||||
Liquidity discount
|
10% - 31.5 | % | 24 | % | ||||||||||
|
||||||||||||||
Note
|
504,794 |
Market Activity
|
Contracted security purchase price
|
|||||||||||
Discounted Cash Flow
|
Term (in years)
|
4.0 | ||||||||||||
Quoted market prices
|
||||||||||||||
Discount rate
|
11.6 | % | ||||||||||||
$ | 4,207,480 |
Valuation Technique Terms:
(1) Internally calculated investee's net asset value, which is the estimated total assets minus the value of all liabilities.
NOTE 4—MARGIN LOANS
The Company has a brokerage account through which it buys and sells publicly-traded securities. The provisions of the account allow the Company to borrow between 50% and 70% of the equity of certain securities held in the account. Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account are used as collateral. As of December 31, 2014, the Company had $2,052,104 of margin credit available for cash withdrawal or the ability to purchase up to $4,104,208 in additional shares. As of June 30, 2014, the Company had $1,275,165 of margin credit available for cash withdrawal or the ability to purchase up to $2,550,330 in additional shares. As of December 31, 2014 and June 30, 2014, the Company had not drawn any amount or purchased any shares under this short-term credit line.
NOTE 5 –RELATED PARTY TRANSACTIONS
Investment Advisory Agreement:
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 of the Company’s assets and equals 3.0% 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 equal the price at which the Company’s shares are issued plus any borrowing for investment purposes. The base management fees range from 1.5% to 3.0%, depending on the level of the “managed funds.”
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” (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 portfolio structuring fees for the three and six months ended December 31, 2014 were $80,878 and $174,010, respectively. The Company did not issue stock in its initial offering until January 2014 and therefore, the Company did not incur any portfolio structuring fees for the three and six months ended December 31, 2013.
The base management fees for the three and six months ended December 31, 2014 were $109,980 and $199,700, respectively. The base management fees were recorded as investment advisory fees on the statements of operations and due to related entities in the statements of assets and liabilities.
Organization and Offering Costs Reimbursement:
As provided in the Investment Advisory Agreement, organization and offering costs incurred and paid by the Company in excess of $550,000 will be reimbursed by the Adviser. As of December 31, 2014 and June 30, 2014, the Company had incurred $944,105 and $806,672 of organization and offering costs, respectively. Thus, according to the agreement, $394,105 and $256,672 of the amount were reimbursable from the Adviser as of December 31, 2014 and June 30, 2014, respectively. As of December 31, 2014, the Adviser has reimbursed the Company in the amount of $323,150 and the remaining reimbursable amount of $70,955 was settled through an offset against the amount payable to the Adviser as of December 31, 2014.
Administration Agreement:
Under the Administration 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 reimburses MacKenzie for the fees and expenses associated with performing compliance functions, and its 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 and six months ended of December 31, 2014, were $30,000 and $60,000, respectively.
The table below outlines the related party expenses incurred for the six months ended December 31, 2014 and the year ended June 30, 2014 and unpaid as of December 31, 2014 and June 30, 2014.
For The Six months ended
|
For The Year ended
|
Unpaid as of
|
||||||||||||||
Types and Recipient
|
December 31, 2014
|
June 30, 2014
|
December 31, 2014
|
June 30, 2014
|
||||||||||||
Portfolio Structuring fee- the Adviser
|
$ | 174,010 | $ | - | $ | 1,856 | $ | 441 | ||||||||
Base Management fees- the Adviser
|
199,700 | 54,616 | 109,980 | 67,000 | ||||||||||||
Administrative Cost Reimbursements- MacKenzie
|
60,000 | 24,000 | 30,000 | 12,000 | ||||||||||||
Others expenses (1) -MacKenzie
|
11,999 | - | 10,551 | 972 | ||||||||||||
Organization & Offering Cost Reimbursement by the Adviser
|
(70,955 | ) | (22,498 | ) | ||||||||||||
Due to related entities
|
$ | 81,432 | $ | 57,915 |
(1) Expenses paid by MacKenzie on behalf of the Company to be reimbursed to MacKenzie.
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.
During the quarter ended December 31, 2014, all Series in which the Company had ownership interests in either transferred the Series’ underlying investments to the funds that owned the Series and dissolved, or transferred the Company’s share of the underlying investment and formed a new Series where the Company is the 100% owner of the Series.
The Company had investment in the following Series as of December 31, 2014:
●
|
The Company has a 100% ownership interest in CRBT, REEP, Inc.-A, which has ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland. During the quarter ended December 31, 2014, the Company received the general partner ownership interest, which this Series currently owns, from CRBT, REEP, Inc., as distribution-in-kind proportionate to the Company’s ownership share in Series REEP, Inc. The Company afterwards exchanged the general partner interest for 100% of ownership interest in CRBT, REEP, Inc-A.
|
●
|
The Company has 100% ownership interest in CRBT, Series H2-A, 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. During the quarter ended December 31, 2014, the Company received shares of the underlying REIT, which this Series currently owns, from CRBT, Series H2 as distribution-in-kind proportionate to the Company’s ownership share in Series H2. The Company afterwards exchanged the underlying REIT’s shares for 100% of ownership interest in CRBT Series, H2-A.
|
●
|
The Company had an ownership interest in CRBT, Series L2, which invested in shares of a REIT that acquired and managed a diversified real estate portfolio, primarily comprised of retail, office, hotel, multi-family, and industrial properties. During the quarter ended December 31, 2014, this Series transferred all its underlying investments to the MacKenzie-managed funds which owned this Series (including the Company) proportionate to their ownership interest and dissolved as of December 31, 2014.
|
●
|
The Company had an ownership interest in CRBT, Secured Income, which invested in units of a limited partnership, which owns one multi-family property located in Frederick, Maryland. During the quarter ended December 31, 2014, this Series transferred its investments in the limited partnership to the MacKenzie-managed funds which owned this Series (including the Company) proportionate to their ownership interest and dissolved as of December 31, 2014.
|
●
|
The Company had an ownership interest in CRBT, Series Q, which invested 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. During the quarter ended December 31, 2014, this Series transferred all its ownership interests in the limited partnership to the MacKenzie-managed funds which owned this Series (including the Company) proportionate to their ownership interest and dissolved as of December 31, 2014.
|
|
As of June 30, 2014, the Company had investments in these Series (each described above): CRBT, REEP, Inc., CRBT, Secured Income, CRBT, Series H2, CRBT, Series L2, and CRBT, Series Q.
MPF Pacific Gateway:
MPF Pacific Gateway, which is managed by MacKenzie, is a holding company that owns an investment in a REIT Liquidating Trust. As of December 31, 2014 and June 30, 2014, the Company had a 15.82% of ownership interest in MPF Pacific Gateway.
NOTE 6 – FINANCIAL HIGHLIGHTS
For The Six months ended
|
For The Year Ended
|
|||||||
December 31, 2014
|
June 30, 2014
|
|||||||
Per Share Data:
|
||||||||
Beginning net asset value
|
$ | 9.81 | $ | 10.02 | ||||
Net investment loss (1)
|
(0.24 | ) | (0.38 | ) | ||||
Net realized gain on sale of investments (1)
|
0.27 | 0.83 | ||||||
Net unrealized gain on investments (1)
|
0.65 | 0.25 | ||||||
Income tax (provision) benefit
|
0.16 | (0.49 | ) | |||||
Net increase (decrease) in net assets resulting from operations
|
0.84 | 0.21 | ||||||
Issuance of common stock below net asset value (4)
|
(0.52 | ) | (0.24 | ) | ||||
Dividends to stockholders
|
(0.37 | ) | (0.18 | ) | ||||
Ending net asset value
|
$ | 9.76 | $ | 9.81 | ||||
Weighted average common shares outstanding
|
1,200,270 | 763,813 | ||||||
Shares outstanding at the end of period
|
1,466,476 | 893,808 | ||||||
Net assets at the end of period
|
$ | 14,312,342 | $ | 8,764,789 | ||||
Average net assets (2)
|
$ | 11,538,566 | $ | 7,791,777 | ||||
Ratios to average net assets
|
||||||||
Total expenses (5)
|
4.10 | % | 11.74 | % | ||||
Net investment loss (5)
|
(2.49 | )% | (3.73 | )% | ||||
Total rate of return (2) (3)
|
8.73 | % | 2.07 | % |
(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.
|
(4)
|
$0.13 per share is attributed to sales commissions and dealer manager fees.
|
(5)
|
Not annualized for the six months ended December 31, 2014.
|
NOTE 7 – SHARE OFFERINGS AND FEES
During the six months ended December 31, 2014, the Company issued 571,896 shares at $10 per share with gross proceeds of $5,718,960 and issued 772.80 shares under the Company’s dividend reinvestment plan (“DRIP”) at $9 per share with gross proceeds of $6,956. For the six months ended December 31, 2014, the Company paid selling commissions and up front fees of $743,464, of which $174,010 represents the portfolio structuring fees paid to the Adviser under the Investment Advisory Agreement.
During the six months ended December 31, 2013, the Company did not issue any shares and did not incur any offering commissions or other fees.
NOTE 8 –STOCKHOLDER DIVIDENDS
The following table reflects the cash dividend per share that the Company paid on its common stock during the six months ended December 31, 2014 :
Dividends
|
||||||||
For the Quarter Ended
|
Per Share
|
Amount
|
||||||
Three months ended September 30, 2014
|
$ | 0.300 | $ | 255,442 | ||||
Three months ended December 31, 2014
|
$ | 0.175 | $ | 186,812 |
The Company’s income from operations, which included realized and unrealized gain from the sale of investments, was greater than the amount of the above dividend. Thus, on a GAAP basis, our income from operations exceeded our dividend. Conversely, on a tax basis, some of the dividend will be considered return of capital and will be paid from funds other than operational cash flow.
The Company did not declare or distribute any dividends during the six months ended December 31, 2013.
On January 28, 2015, the Company’s Board of Directors approved a quarterly dividend of $0.175 per share to the holders of record on December 31, 2014 with the expected payment date in February, 2015. This dividend amount represents an annualized distribution yield of 7.0% based on the Company’s current public offering price of $10.00 per share, if it were maintained for a twelve-month period.
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, including an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading “Risk Factors” in our 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 intended 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 of December 31, 2014, we believe we have met the qualifications to be treated as a REIT. Therefore, when we file our 2014 tax return, we will elect to be treated as a REIT beginning tax year ended December 31, 2014. As a REIT, we will not be subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of our taxable income, we will be subject to an excise tax on our undistributed taxable income.
We were formed to continue and expand the business of the 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 continuing at this time (the “IPO”).
Portfolio Investment Composition
The following table summarizes the composition of our investments at cost and fair value as of December 31, 2014 and June 30, 2014:
December 31, 2014
|
June 30, 2014
|
|||||||||||||||
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
Publicly Traded Company
|
$ | 3,390,191 | $ | 3,475,737 | $ | 1,595,485 | $ | 1,698,515 | ||||||||
Non Traded Company
|
2,862,494 | 3,512,875 | 180,101 | 257,584 | ||||||||||||
LP Interest
|
2,980,047 | 3,237,721 | 2,587,115 | 2,680,542 | ||||||||||||
Investment Trust
|
319,906 | 351,492 | 714,915 | 764,560 | ||||||||||||
Note
|
536,184 | 608,006 | 515,791 | 504,794 | ||||||||||||
Total
|
$ | 10,088,822 | $ | 11,185,831 | $ | 5,593,407 | $ | 5,905,995 | ||||||||
Net Asset Value
Our net asset value (“NAV”) as of December 31, 2014, was $9.76 per Share, compared to $9.81 per Share at June 30, 2014, a $0.05 per Share decrease of approximately 0.50%. The net decrease was primarily due to decreases resulting from (i) issuance of Shares (net of selling commissions and dealer manager fees) below NAV per Share resulting in decrease of $0.53 per Share (ii) a dividend to stockholders of $0.37 per Share and (iii) net investment loss of $0.24 per Share (which includes the amortization of deferred offering cost of $0.03 per Share). The decreases in NAV were offset by increases resulting from (i) net realized gain on sale of investments of $0.27 per Share (ii) net unrealized gains on investments of $0.66 per Share and (iii) income tax benefit of $0.16 per Share resulting from reversal of prior periods tax provisions in anticipation of our qualification to be taxed as a REIT for our 2014 tax year.
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.
Revenues
We plan to generate revenue primarily from dividends and/or capital gains from our investments. 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 December 31, 2014 and 2013:
Investment Income: Total investment income for the three months ended December 31, 2014 and 2013 was $113,311 and $94,296, respectively. Investment income was primarily made up of dividend, distribution and interest income. The increase of $19,015, or 20%, was primarily due to increase in investment portfolio size by approximately $3.4 million in cost basis since December 31, 2013. The cost basis of our investment portfolio was $10.1 million as of December 31, 2014 compared to $6.7 million as of December 31, 2013.
Operating Expenses: Total operating expenses for the three months ended December 31, 2014 and 2013 were $210,613 and $214,150, respectively. This net decrease of $3,537, or 2%, was primarily attributed to decrease in amortization of deferred offering cost of $106,206 offset by increases in investment advisory fees of $55,364, administrative costs reimbursements of $18,000, professional fees of $16,639 and other general and administrative expenses of $12,666. The decrease in amortization of deferred offering cost was due to deferred offering cost of $424,825 being fully amortized as of the quarter ended September 30, 2014. The increases in investment advisory fees, administrative cost reimbursements and other general and administrative expenses were primarily due to the increase in capital contributions and subsequent investment activity since December 31, 2013. We issued approximately 738,259 Shares ($7.4 million in gross capital contribution) in the calendar year ended December 31, 2014.
Net realized gain on investments: We had total realized gains on the sale of investments of $189,256 for the three months ended December 31, 2014, as compared to $410,262 for the three months ended December 31, 2013. This is a decrease of $221,006 or 54%, was primarily due to a large gain of $227,299 realized on Empire State operating partnership roll-up transaction in the quarter ended December 31, 2013. The Company had owned several non-traded operating partnership units which rolled up to a publicly traded REIT during the quarter ended December 31, 2013, as a result the Company received shares of the publicly traded REIT, for which the Company recognized a gain of $227,299. There were no such transactions during the quarter ended December 31, 2014.
Net unrealized gain on investments: Total unrealized gain on investments for the three months ended December 31, 2014 and 2013 was $176,927 and $48,249, respectively. The increase of $128,678 or 267% in the three months ended December 31, 2014 was primarily due to an increase in our overall investment portfolio resulting in a higher amount of unrealized gain. We had an investment portfolio with a cost basis of $6.7 million as of December 31, 2013, which increased to $10.1 million as of December 31, 2014.
Income tax provision (benefit): For the three months ended December 31, 2014, we recorded an income tax benefit of $402,101 as compared to income tax provision of $172,384 for the three months ended December 31, 2013. This is a decrease of $574,485 or 333% which was due to the reversal of income tax liability of accrued as of September 30, 2014 after we determined that we will qualify as a REIT for the tax year ended December 31, 2014 during the quarter ended December 31, 2014. As of September 30, 2014, we had accrued a total tax liability of $498,032 ($131,523 as the current income tax liability and $366,509 as the deferred tax liability), of which we reversed $402,601 of tax liability ($54,608 of the current tax liability and $347,993 of the deferred tax liability) leaving the total tax liability of $95,431 ($76,915 as current tax payable and $18,516 as deferred tax liability) accrued as of December 31, 2014. The income tax liability of $76,915 and deferred tax liability of $18,516 as of December 31, 2014 represent built-in gain tax on assets already disposed in 2014 and asset that we held as of December 31, 2014 that has built-in gain prior to the effective date of the Company’s REIT election.
Six Months Ended December 31, 2014 and 2013:
Investment Income: Total investment income for the six months ended December 31, 2014 and 2013 was $184,976 and $148,773, respectively. Investment income was primarily made up of dividend, distribution and interest income. The increase of $36,203, or 24%, was primarily due to an increase in our investment portfolio size by approximately $3.4 million in cost basis since December 31, 2013. The cost basis of our investment portfolio was $10.1 million as of December 31, 2014 compared to $6.7 million as of December 31, 2013.
Operating Expenses: Total operating expenses for the six months ended December 31, 2014 and 2013 were $472,745 and $446,528, respectively. This net increase of $26,217, or 6%, was primarily due to increases in investment advisory fees of $90,467, administrative costs reimbursements of $24,000, professional fees of $29,136 and other general and administrative expenses of $24,222 offset by decrease in amortization of deferred offering cost of $141,608. The decrease in amortization of deferred offering cost was due to deferred offering cost of $424,825 being fully amortized as of the quarter ended September 30, 2014. The increases in investment advisory fees, administrative cost reimbursements and other general and administrative expenses were primarily due to the increase in capital contributions and subsequent investment activity since December 31, 2013. We issued approximately 738,259 Shares ($7.4 million in gross capital contribution) in the calendar year ended December 31, 2014.
Net realized gain on investments: We had total realized gains on the sale of investments of $321,754 for the six months ended December 31, 2014, as compared to $409,410 for the six months ended December 31, 2013. This decrease of $87,656, or 21%, was primarily due to a large gain of $227,299 realized on Empire State operating partnership roll-up transaction in the quarter ended December 31, 2013. The Company had owned several non-traded operating partnership units which rolled up to a publicly traded REIT during the quarter ended December 31, 2013, as a result the Company received shares of the publicly traded REIT, for which the Company recognized a gain of $227,299. The realized gain from the Empire State rollup transaction in 2013 was partly offset by an increase in number of sales transactions in the six months ended December 31, 2014.
Net unrealized gain on investments: Total unrealized gain on investments for the six months ended December 31, 2014 and 2013 was $784,421 and $132,324, respectively. The increase of $652,097, or 493%, in the six months ended December 31, 2014 was primarily due to increase in fair value of three investments (Apple Hospitality REIT,Inc., Landmark Apartment Trust, Inc, and TIER REIT, Inc), which produced a large unrealized gain of $563,612 in the six months ended December 31, 2014. Those assets were newly purchased assets since December 31, 2013. The additional increase in unrealized gain was due to an increase in our investment portfolio of $3.4 million in cost basis since December 31, 2013, resulting in additional unrealized gain over a greater number of investments. As of December 31, 2014, we had investments with a cost basis of $10.1 million, compared to $6.7 million as of December 31, 2013.
Income tax provision (benefit): For the six months ended December 31, 2014, we recorded an income tax benefit of $188,949 as compared to income tax provision of $172,384 for the six months ended December 31, 2013. This is a decrease of $361,333 or 210% in income tax provision which was due to the same reasons as explained above under the three months ended section.
Liquidity and Capital Resources
Capital Resources
We filed a Registration Statement on Form N-2 (“Registration Statement”) with the Securities and Exchange Commission (“SEC”) to register the sale of 5,000,000 Shares, under which we seek to raise up to $50,000,000 in our IPO. The initial sales of our Shares occurred in January 2014 and, as of December 31, 2014, we have sold 1,465,692 Shares at $10 per Share with gross proceeds of $14,656,920, and issued 784.46 Shares under our dividend reinvestment plan (“DRIP”) at $9 per Share with gross proceeds of $7,066. We do not have any plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised in 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; however, we do not have any current plans to borrow money. We are currently selling our Shares on a continuous basis at a price of $10 which may be below NAV per Share from time to time, as approved by our stockholders.
Our aggregate borrowings (if any), secured and unsecured, are expected to be reasonable in relation to our net assets and will be reviewed by the Board of Directors, at least quarterly. The maximum amount of such borrowing is limited by the 1940 Act.
Our primary use of funds is investing in portfolio companies, cash dividends 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. If we sell all of the Shares registered under the Registration Statement in the IPO, we expect to have cash resources of approximately $43.5 million.
Cash Flows:
For the six months ended December 31, 2014, we experienced a net decrease in cash of $84,824. During this period, we generated $4,685,000 of cash from our financing activities and used $4,769,824 of cash in operating activities. Net cash outflow from operating activities was primarily due to purchase of investments of $6,361,387, offset by cash inflow of $2,102,153 and $85,573 from sales of investments and return of capital from our investments, respectively. Cash inflow from financing activities resulted from the sale of 571,896 Shares with gross receipts of $5,718,960 and 772.80 of DRIP Shares with gross proceeds of $6,956, offset by the payment of selling commissions and fees of $743,464, stockholder dividends of $442,254 and an increase in capital pending acceptance of $144,802.
Contractual Obligations
We have entered into two contracts under which we have material future commitments, the Advisory Agreement, under which the Adviser serves as our investment adviser, and 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 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 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 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 SEC under the Securities Exchange Act of 1934 (“1934 Act”).
We report our investments at fair value and in order to determine the fair value of investments, we follow the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
Securities for which market quotations are readily available on an exchange are 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 is generally based on the following factors, as relevant:
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the nature and realizable value of any collateral;
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the portfolio company’s ability to make payments;
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the portfolio company’s earnings and discounted cash flow;
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the markets in which the issuer does business; and
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comparisons to publicly traded securities.
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Securities for which market data are not readily available or for which a pricing source is not sufficient may include the following:
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private placements and restricted securities that do not have an active trading market;
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securities whose trading has been suspended or for which market quotes are no longer available;
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debt securities that have recently gone into default and for which there is no current market;
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securities whose prices are stale;
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securities affected by significant events; and
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securities that the Adviser believes were priced incorrectly.
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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 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 and expenses during the reporting period. Actual results could differ from those estimates.
Distributions to Stockholders
We began paying dividends to our stockholders on May 9, 2014, for the first calendar quarter of 2014, and to the extent that we have income from operations available, we intend to pay quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and paid pro-rata to holders of our Shares. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to pay dividends (or make distributions) if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.
As of December 31, 2014, we believe we have met the qualifications to be treated as a REIT. Therefore, when we file our 2014 tax return, we will elect to be treated as a REIT beginning tax year ended December 31, 2014. As a REIT, we will be required by the Code 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 cash distributions required by the Code 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 dividends in additional Shares under our DRIP to stockholders who have elected to participate in our DRIP unless participation in the DRIP is restricted by a state securities regulator.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our 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 a return of their capital.
At December 31, 2014, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 74% of our total assets as of that date. 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.
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 December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
There have been no material changes to our risk factors discussed in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended June 30, 2014.
None.
None.
Not applicable.
None.
Exhibit
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Description
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Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
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Section 302 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
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Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
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Section 1350 Certification of Paul Koslosky (Treasurer and Chief Financial Officer)
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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.
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Date: February 12, 2015
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By: /s/ Robert Dixon__________________
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President and Chief Executive Officer
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Date: February 12, 2015
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By: /s/ Paul Koslosky_________________
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Treasurer and Chief Financial Officer
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