Attached files
file | filename |
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EX-31.2 - EXHIBIT 31.2 - CFO - MacKenzie Realty Capital, Inc. | exhibit31-2.htm |
EX-32.2 - EXHIBIT 32.2 CFO - MacKenzie Realty Capital, Inc. | exhibit32-2.htm |
EX-32.1 - EXHIBIT 32.1 PRESIDENT AND CEO - MacKenzie Realty Capital, Inc. | exhibit32-1.htm |
EX-31.1 - EXHIBIT 31.1- PRESIDENT AND CEO - MacKenzie Realty Capital, Inc. | exhibit31-1.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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☑
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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 September 30, 2015
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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 ☑ 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 ☑ 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 ☑
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The number of the shares of issuer's Common Stock outstanding as of November 13, 2015 was 2,736,117.90.
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Page
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements (unaudited)
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Item 2.
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Item 3.
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Item 4.
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PART II.
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OTHER INFORMATION
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Item 1.
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Item 1A.
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Item 2.
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Item 3.
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Item 4.
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Item 5.
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Item 6.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
MacKenzie Realty Capital, Inc.
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September 30, 2015
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June 30, 2015
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(Unaudited)
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Assets
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||||||||
Investments, at fair value (cost of $19,635,501 and $16,528,720, respectively)
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$
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22,305,418
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$
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18,645,022
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Cash and cash equivalents
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4,615,031
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4,297,086
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Accounts receivable
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145,380
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87,689
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Other assets
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176,277
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188,407
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Total assets
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$
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27,242,106
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$
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23,218,204
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Liabilities
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Accounts payable and accrued liabilities
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$
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101,856
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$
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18,045
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Income tax payable
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10,980
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-
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Capital pending acceptance
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563,230
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588,250
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Due to related entities
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202,394
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228,803
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Deferred tax liability
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39,431
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44,667
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Total liabilities
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917,891
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879,765
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Commitments and contingencies (Note 9)
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Net assets
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Common stock, $0.0001 par value, 80,000,000 shares authorized; 2,582,154.91 and 2,196,612.73 shares issued and outstanding, respectively
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258
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220
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Capital in excess of par value
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23,420,040
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20,061,251
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Accumulated undistributed net investment loss
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(634,970
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)
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(1,002,901
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)
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Accumulated undistributed net realized gain
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868,971
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1,163,566
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Accumulated undistributed net unrealized gain
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2,669,916
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2,116,303
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Total net assets
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26,324,215
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22,338,439
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Total liabilities and net assets
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$
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27,242,106
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$
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23,218,204
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Net asset value per Share
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$
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10.19
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$
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10.17
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The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
September 30, 2015
(Unaudited)
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 |
Ashford Hospitality Prime, Inc.
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(3)
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Publicly Traded Company
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54,027.00
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$ 795,610
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$ 757,999
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2.88
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Ashford Hospitality Trust, Inc.
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(3)
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Publicly Traded Company
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50,000.00
|
448,769
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305,000
|
1.16
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Bluerock Residential Growth REIT, Inc.
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(3)
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Publicly Traded Company
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46,429.00
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516,090
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556,219
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2.11
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CBL & Associates Properties, Inc.
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(3)
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Publicly Traded Company
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18,300.00
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348,730
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252,174
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0.96
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Equity Commonwealth
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(3) (5)
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Publicly Traded Company
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12,150.00
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311,114
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330,966
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1.26
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Independence Realty Trust, Inc.
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(3)
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Publicly Traded Company
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72,000.00
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542,232
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519,120
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1.96
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Lexington Realty Trust
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(3)
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Publicly Traded Company
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49,300.00
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528,497
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399,330
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1.52
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Liberty Property Trust
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(3)
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Publicly Traded Company
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14,000.00
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474,607
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441,140
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1.68
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One Liberty Properties, Inc.
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(3)
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Publicly Traded Company
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9,000.00
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206,110
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191,970
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0.73
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Rouse Properties Inc
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(3)
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Publicly Traded Company
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20,700.00
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377,231
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322,506
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1.23
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Senior Housing Properties Trust
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(3)
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Publicly Traded Company
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9,000.00
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201,135
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145,800
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0.55
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TIER REIT, Inc.
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Publicly Traded Company
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147,539.00
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1,920,247
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2,171,774
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8.25
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VEREIT Inc.
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(3)
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Publicly Traded Company
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74,800.00
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675,843
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577,456
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2.19
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Winthrop Realty Trust Shares of Beneficial Interest
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(3) (5)
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Publicly Traded Company
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38,500.00
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594,594
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552,860
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2.10
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Total Publicly Traded Company
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7,940,809
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7,524,314
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28.58
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Bluerock Residential Growth REIT, Inc. Class B3
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(4)
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Non Traded Company
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1,429.61
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15,781
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17,127
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0.06
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FSP South 10th Street Corp. Liquidating Trust
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(4) (5)
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Non Traded Company
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0.25
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151
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130
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-
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Hines Real Estate Investment Trust, Inc.
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(4)
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Non Traded Company
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2,692.31
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13,569
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12,922
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0.05
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InvenTrust Properties Corp.
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(4)
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Non Traded Company
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870,667.75
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2,165,485
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2,403,043
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9.13
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KBS Real Estate Investment Trust, Inc.
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(4)
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Non Traded Company
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507,341.67
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790,333
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1,811,210
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6.88
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Landmark Apartment Trust, Inc.
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(4)
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Non Traded Company
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200,839.56
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862,315
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1,138,760
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4.33
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SmartStop Self Storage, Inc.
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(4)
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Non Traded Company
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210,282.50
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1,865,340
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2,891,384
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10.98
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Strategic Realty Trust, Inc.
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(4)
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Non Traded Company
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5,198.53
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25,222
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23,601
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0.09
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Total Non Traded Company (1)
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5,738,196
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8,298,177
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31.52
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Del Taco Income Properties IV
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(4)
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LP Interest
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2,296.00
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59,696
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67,043
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0.25
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Del Taco Restaurant Properties I
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(4)
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LP Interest
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610.00
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459,570
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538,324
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2.04
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Del Taco Restaurant Properties II
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(4)
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LP Interest
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910.00
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184,367
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222,040
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0.84
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DRV Holding Company, LLC
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(4) (5)
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LP Interest
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250.00
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250,000
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315,028
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1.20
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Hotel Durant, LLC
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(4)
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LP Interest
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7.10
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577,299
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366,106
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1.39
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Inland Land Appreciation Fund II, L.P.
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(4) (5)
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LP Interest
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210.97
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8,667
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38,740
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0.15
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MPF Pacific Gateway - Class B
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(2) (4) (5)
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LP Interest
|
23.20
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6,287
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6,613
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0.03
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National Property Investors 6
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(4) (5)
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LP Interest
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7.00
|
145
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-
|
-
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Post Street Renaissance Partners Class A
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(4) (5)
|
LP Interest
|
9.10
|
16,981
|
23,396
|
0.09
|
Post Street Renaissance Partners Class D
|
(4) (5)
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LP Interest
|
21.60
|
105,623
|
149,619
|
0.57
|
Rancon Realty Fund IV
|
(4) (5)
|
LP Interest
|
1,016.00
|
184,474
|
238,618
|
0.91
|
Rancon Realty Fund V
|
(4) (5)
|
LP Interest
|
1,156.00
|
213,661
|
264,205
|
1.00
|
Resource Real Estate Investors 6, L.P.
|
(4)
|
LP Interest
|
35,100.00
|
180,990
|
195,859
|
0.74
|
Secured Income, LP
|
(4) (5)
|
LP Interest
|
64,177.00
|
560,403
|
748,946
|
2.85
|
The Weatherly, LTD
|
(4) (5)
|
LP Interest
|
60.00
|
672,000
|
716,186
|
2.72
|
The Weatherly Building, LLC
|
(4) (5)
|
LP Interest
|
17.50
|
392,000
|
417,776
|
1.59
|
Uniprop Manufactured Housing Income Fund II, LP
|
(4)
|
LP Interest
|
94,353.00
|
448,017
|
487,805
|
1.85
|
VWC Savannah, LLC
|
(4) (5)
|
LP Interest
|
8.25
|
825,000
|
825,532
|
3.14
|
Total LP Interest
|
|
|
|
5,145,180
|
5,621,836
|
21.36
|
|
|
|
|
|
|
|
Coastal Realty Business Trust, REEP, Inc. - A
|
(2) (4) (5)
|
Investment Trust
|
72,320.00
|
73,555
|
96,909
|
0.37
|
Coastal Realty Business Trust, Series H2- A
|
(2) (4)
|
Investment Trust
|
47,284.16
|
246,351
|
205,686
|
0.78
|
Total Investment Trust
|
|
|
|
319,906
|
302,595
|
1.15
|
|
|
|
|
|
|
|
BR Cabrillo LLC Promissory Note
|
(4) (5)
|
Note
|
|
366,318
|
433,404
|
1.64
|
BR Cabrillo LLC Promissory Note 2
|
(4) (5)
|
Note
|
125,092.45
|
125,092
|
125,092
|
0.48
|
Total Note
|
|
|
|
491,410
|
558,496
|
2.12
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
$ 19,635,501
|
$ 22,305,418
|
84.73
|
|
|
|
|
|
|
|
(1) Investments primarily in non traded public REITs or their successors.
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(2) Investment in related party. See additional disclosures in note 5.
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(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of September 30, 2015, the total percentage of non-qualifying assets is 19.65%, and as a business development company non-qualifying assets may not exceed 30% of our total assets.
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(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of September 30, 2015, 54.26% of the Company's total assets are in illiquid securities.
|
(5) Investments in non-income producing securities. As of September 30, 2015, 19.40% of the Company's total assets are in non-income producing securities.
|
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
June 30, 2015
Name
|
|
Asset Type
|
Shares/Units
|
Cost Basis
|
Total Fair Value
|
% of
Net Assets |
American Realty Capital Properties, Inc.
|
(3) (5)
|
Publicly Traded Company
|
54,800.00
|
$ 514,633
|
$ 445,524
|
1.99
|
Ashford Hospitality Prime, Inc.
|
(3)
|
Publicly Traded Company
|
15,800.00
|
274,131
|
237,316
|
1.06
|
Ashford Hospitality Trust, Inc.
|
(3)
|
Publicly Traded Company
|
30,000.00
|
299,917
|
253,800
|
1.14
|
CBL & Associates Properties, Inc.
|
(3)
|
Publicly Traded Company
|
18,300.00
|
348,730
|
296,460
|
1.33
|
Equity Commonwealth
|
(3) (5)
|
Publicly Traded Company
|
12,150.00
|
311,114
|
311,890
|
1.39
|
Lexington Realty Trust
|
(3)
|
Publicly Traded Company
|
49,300.00
|
528,497
|
418,064
|
1.87
|
Liberty Property Trust
|
(3)
|
Publicly Traded Company
|
5,500.00
|
195,750
|
177,210
|
0.79
|
One Liberty Properties, Inc.
|
(3)
|
Publicly Traded Company
|
9,000.00
|
206,110
|
191,520
|
0.86
|
Rouse Properties Inc
|
(3)
|
Publicly Traded Company
|
20,700.00
|
377,231
|
338,445
|
1.52
|
Senior Housing Properties Trust
|
(3)
|
Publicly Traded Company
|
9,000.00
|
201,135
|
157,950
|
0.71
|
Winthrop Realty Trust Shares of Beneficial Interest
|
(3) (5)
|
Publicly Traded Company
|
38,500.00
|
594,594
|
583,275
|
2.61
|
Total Publicly Traded Company
|
|
|
|
3,851,842
|
3,411,454
|
15.27
|
|
|
|
|
|
|
|
Bluerock Residential Growth REIT, Inc. Class B2
|
(4)
|
Non Traded Company
|
1,429.61
|
17,211
|
18,099
|
0.08
|
Bluerock Residential Growth REIT, Inc. Class B3
|
(4)
|
Non Traded Company
|
1,429.61
|
15,781
|
18,099
|
0.08
|
FSP South 10th Street Corp. Liquidating Trust
|
(4) (5)
|
Non Traded Company
|
0.25
|
152
|
130
|
-
|
Hines Real Estate Investment Trust, Inc.
|
(4)
|
Non Traded Company
|
2,692.31
|
13,569
|
12,949
|
0.06
|
InvenTrust Properties Corp.
|
(4)
|
Non Traded Company
|
853,577.92
|
2,128,695
|
2,424,161
|
10.85
|
KBS Real Estate Investment Trust, Inc.
|
(4)
|
Non Traded Company
|
205,831.73
|
322,025
|
642,195
|
2.87
|
Landmark Apartment Trust, Inc.
|
(4)
|
Non Traded Company
|
179,421.12
|
770,227
|
893,517
|
4.00
|
SmartStop Self Storage, Inc.
|
(4)
|
Non Traded Company
|
124,588.73
|
1,094,503
|
1,639,588
|
7.34
|
TIER REIT, Inc.
|
(4)
|
Non Traded Company
|
186,508.00
|
2,401,668
|
3,189,287
|
14.28
|
Total Non Traded Company (1)
|
|
|
|
6,763,831
|
8,838,025
|
39.56
|
|
|
|
|
|
|
|
Del Taco Income Properties IV
|
(4)
|
LP Interest
|
2,296.00
|
59,696
|
65,275
|
0.29
|
Del Taco Restaurant Properties I
|
(4)
|
LP Interest
|
591.00
|
443,823
|
492,172
|
2.20
|
Del Taco Restaurant Properties II
|
(4)
|
LP Interest
|
892.00
|
179,815
|
200,878
|
0.90
|
DRV Holding Company, LLC
|
(4) (5)
|
LP Interest
|
500.00
|
500,000
|
552,785
|
2.47
|
El Conquistador Limited Partnership
|
(4)
|
LP Interest
|
2.00
|
80,976
|
47,107
|
0.21
|
Hotel Durant, LLC
|
(4)
|
LP Interest
|
7.10
|
577,299
|
366,106
|
1.64
|
Inland Land Appreciation Fund II, L.P.
|
(4) (5)
|
LP Interest
|
210.97
|
8,667
|
30,956
|
0.14
|
MPF Pacific Gateway - Class B
|
(2) (4) (5)
|
LP Interest
|
23.20
|
6,287
|
6,613
|
0.03
|
National Property Investors 6
|
(4) (5)
|
LP Interest
|
7.00
|
145
|
151
|
-
|
Post Street Renaissance Partners Class A
|
(4) (5)
|
LP Interest
|
9.10
|
16,981
|
20,336
|
0.09
|
Post Street Renaissance Partners Class D
|
(4) (5)
|
LP Interest
|
21.60
|
105,623
|
130,036
|
0.58
|
Rancon Realty Fund IV
|
(4) (5)
|
LP Interest
|
1,016.00
|
185,651
|
406,400
|
1.82
|
Rancon Realty Fund V
|
(4) (5)
|
LP Interest
|
1,156.00
|
213,661
|
233,455
|
1.05
|
Resource Real Estate Investors 6, L.P.
|
(4)
|
LP Interest
|
35,100.00
|
180,990
|
175,501
|
0.79
|
Secured Income, LP
|
(4) (5)
|
LP Interest
|
64,177.00
|
560,403
|
748,946
|
3.35
|
The Weatherly, LTD
|
(4) (5)
|
LP Interest
|
60.00
|
672,000
|
672,000
|
3.01
|
The Weatherly Building, LLC
|
(4) (5)
|
LP Interest
|
17.50
|
392,000
|
392,000
|
1.75
|
Uniprop Manufactured Housing Income Fund II, LP
|
(4)
|
LP Interest
|
53,202.00
|
237,401
|
276,118
|
1.24
|
VWC Savannah, LLC
|
(4) (5)
|
LP Interest
|
8.25
|
825,000
|
825,532
|
3.70
|
Total LP Interest
|
|
|
|
5,246,418
|
5,642,367
|
25.26
|
|
|
|
|
|
|
|
Coastal Realty Business Trust, REEP, Inc. - A
|
(2) (4) (5)
|
Investment Trust
|
72,320.00
|
73,555
|
96,909
|
0.44
|
Coastal Realty Business Trust, Series H2- A
|
(2) (4)
|
Investment Trust
|
47,284.16
|
246,351
|
188,191
|
0.84
|
Total Investment Trust
|
|
|
|
319,906
|
285,100
|
1.28
|
|
|
|
|
|
|
|
BR Cabrillo LLC Promissory Note
|
|
Note
|
346,723.32
|
346,723
|
468,076
|
2.10
|
Total Note
|
|
|
|
346,723
|
468,076
|
2.10
|
|
|
|
|
|
|
|
Total Investments
|
|
|
|
$ 16,528,720
|
$ 18,645,022
|
83.47
|
(1) Investments primarily in non traded public REITs or their successors.
|
(2) Investment in related party. See additional disclosures in note 5.
|
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of September 30, 2015, the total percentage of non-qualifying assets is 14.69%, and as a business development company non-qualifying assets may not exceed 30% of our total assets.
|
(4) Investments in illiquid securities, or securities that are not traded on a national exchange. As of June 30, 2015, the Company has 65.61% of its assets in illiquid securities.
|
(5) Investments in non-income producing securities. As of June 30, 2015, the Company has 25.52% of its assets in non-income producing securities.
|
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
For The Three Months Ended
September 30, |
|||||||
|
2015
|
2014
|
||||||
Investment income
|
||||||||
Dividend and distribution income
|
$
|
626,166
|
$
|
59,520
|
||||
Interest and other income
|
52,402
|
12,148
|
||||||
Total investment income
|
678,568
|
71,668
|
||||||
|
||||||||
Operating expenses
|
||||||||
Base management fee
|
178,887
|
89,720
|
||||||
Administrative cost reimbursements
|
30,000
|
30,000
|
||||||
Amortization of deferred offering costs
|
-
|
35,402
|
||||||
Professional fees
|
72,728
|
75,362
|
||||||
Other general and administrative
|
30,434
|
31,653
|
||||||
Total operating expenses
|
312,049
|
262,137
|
||||||
|
||||||||
Net investment income (loss)
|
366,519
|
(190,469
|
)
|
|||||
|
||||||||
Realized and unrealized gain on investments
|
||||||||
Net realized gain
|
328,799
|
132,498
|
||||||
Net unrealized gain
|
553,614
|
607,494
|
||||||
Total net realized and unrealized gain on investments
|
882,413
|
739,992
|
||||||
|
||||||||
Income tax (provision) benefit (note 2)
|
1,412
|
(213,152
|
)
|
|||||
|
||||||||
Net increase in net assets resulting from operations
|
$
|
1,250,344
|
$
|
336,371
|
||||
|
||||||||
Net increase in net assets resulting from operations per Share
|
$
|
0.50
|
$
|
0.32
|
||||
|
||||||||
Weighted average common Shares outstanding
|
2,476,514
|
1,066,094
|
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
|
For The Three
Months Ended |
For The Year
Ended |
||||||
|
September 30, 2015
|
June 30, 2015
|
||||||
|
(Unaudited)
|
|||||||
Operations
|
||||||||
Net investment income (loss)
|
$
|
366,519
|
$
|
(363,162
|
)
|
|||
Net realized gain
|
328,799
|
1,578,081
|
||||||
Net unrealized gain
|
553,614
|
1,803,714
|
||||||
Income tax (provision) benefit
|
1,412
|
188,949
|
||||||
Net increase in net assets resulting from operations
|
1,250,344
|
3,207,582
|
||||||
|
||||||||
Dividends
|
||||||||
Dividends to stockholders from net realized gain
|
(623,394
|
)
|
(972,586
|
)
|
||||
|
||||||||
Capital share transactions
|
||||||||
Issuance of common stock
|
3,722,968
|
12,925,611
|
||||||
Issuance of common stock through reinvestment of dividends
|
112,344
|
78,373
|
||||||
Selling commissions and fees
|
(476,486
|
)
|
(1,665,330
|
)
|
||||
Net increase in net assets resulting from capital share transactions
|
3,358,826
|
11,338,654
|
||||||
|
||||||||
Total increase in net assets
|
3,985,776
|
13,573,650
|
||||||
|
||||||||
Net assets at beginning of period
|
22,338,439
|
8,764,789
|
||||||
|
||||||||
Net assets at end of period
|
$
|
26,324,215
|
$
|
22,338,439
|
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
For The Three Months Ended
September 30, |
|||||||
|
2015
|
2014
|
||||||
|
||||||||
Cash flows from operating activities:
|
||||||||
Net increase in net assets resulting from operations
|
$
|
1,250,343
|
$
|
336,371
|
||||
Adjustments to reconcile net increase in net assets resulting from
|
||||||||
operations to net cash from operating activities:
|
||||||||
Proceeds from sale of investments, net
|
1,545,423
|
790,480
|
||||||
Return of capital
|
1,177
|
20,781
|
||||||
Purchase of investments
|
(4,324,583
|
)
|
(3,156,122
|
)
|
||||
Net realized gain
|
(328,799
|
)
|
(132,498
|
)
|
||||
Net unrealized gain
|
(553,614
|
)
|
(607,494
|
)
|
||||
Amortization of deferred offering costs
|
-
|
35,402
|
||||||
Changes in assets and liabilities:
|
||||||||
Accounts receivable
|
(57,691
|
)
|
(6,460
|
)
|
||||
Other assets
|
37,830
|
(18,518
|
)
|
|||||
Accounts payable and accrued liabilities
|
82,793
|
54,800
|
||||||
Income tax payable
|
10,980
|
(28,839
|
)
|
|||||
Due to related entities
|
(26,409
|
)
|
(25,160
|
)
|
||||
Deferred tax liability
|
(5,236
|
)
|
241,991
|
|||||
Net cash from operating activities
|
(2,367,786
|
)
|
(2,495,266
|
)
|
||||
|
||||||||
Cash flows from financing activities:
|
||||||||
Proceeds from issuance of common stock
|
3,722,968
|
3,024,594
|
||||||
Dividends to stockholders
|
(511,050
|
)
|
(255,442
|
)
|
||||
Payment of selling commissions and fees
|
(501,167
|
)
|
(392,992
|
)
|
||||
Change in capital pending acceptance
|
(25,020
|
)
|
(130,200
|
)
|
||||
Net cash from financing activities
|
2,685,731
|
2,245,960
|
||||||
|
||||||||
Net increase (decrease) in cash and cash equivalents
|
317,945
|
(249,306
|
)
|
|||||
|
||||||||
Cash and cash equivalents at beginning of the period
|
4,297,086
|
3,522,751
|
||||||
|
||||||||
Cash and cash equivalents at end of the period
|
$
|
4,615,031
|
$
|
3,273,445
|
||||
|
||||||||
Non-cash financing activities:
|
||||||||
Issuance of common stock through reinvestment of dividends
|
$
|
112,344
|
$
|
1,574
|
The accompanying Notes to Financial Statements are an integral part of these financial statements.
MacKenzie Realty Capital, Inc.
September 30, 2015
(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 its initial registration statement on June 1, 2012, 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 various post-effective amendments since the SEC granted the initial effectiveness for the purpose of updating the Registration Statement. The most recent post-effective amendment was filed on November 4, 2015, which the SEC declared effective on the same day. 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, as amended. The Company qualified to be treated as a REIT for income tax purposes beginning with the tax year ended December 31, 2014, and made its REIT election in its 2014 tax return, which was filed on September 15, 2015.
The Company is externally managed by MacKenzie Capital Management, LP ("MacKenzie") under the administration agreement dated and effective as of February 28, 2013 (the "Administration Agreement"). MacKenzie manages all of 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 and renewed on October 23, 2014, and again on October 23, 2015. The Company pursues 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 $0.5 million 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 September 30, 2015, cumulative contributions of approximately $23.4 million (inclusive of the $6.9 million initial Legacy Funds capital investment), representing 2,582,154.91 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 Articles 6 and 10 of Regulation S-X contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's assets and liabilities as of September 30, 2015, and the results of its operations for the three months periods ended September 30, 2015, and 2014, which results are not necessarily indicative of results on an annualized basis. The statement of assets and liabilities as of June 30, 2015, 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, 2015, included in the Company's annual report on Form 10-K filed with the SEC.
There have been no changes in the significant accounting polices from those disclosed in the audited financial statements for the year ended June 30, 2015, other than those expanded upon and described below.
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. Cash and cash equivalents are carried at cost which approximates fair value. There were no cash equivalents held as of September 30, 2015 and June 30, 2015.
Capital Pending Acceptance
The Company 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 September 30, 2015, and June 30, 2015, capital pending acceptance were $563,230 and $588,250, respectively.
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 as a REIT, the Company 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 meets 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. The Company qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made the REIT election in its 2014 tax return. As such, the Company did not record any tax provision for the period of January 1, 2015, through September 30, 2015. As a REIT, the Company is; however, subject to tax on any built-in gains it realizes during the first ten tax years following REIT election.
Prior to the effective date of REIT election, the Company had net unrealized built-in gain of $239,595, for which the Company recorded an estimated tax liability of $95,431 as of December 31, 2013. Accordingly, in each subsequent tax years, the Company only records the difference between the actual and estimated tax on the built-in gains it realizes during each tax year as income tax expense or benefit. The difference between the actual and estimated tax on the built-in gains realized during tax year 2014 was an over accrual of $1,412, which the Company recorded it as Income tax benefit during the three months ended September 30, 2015, after the 2014 tax return was filed in September 2015.
For the three months ended September 30, 2014, the Company recorded income tax provision of $213,152 as a corporation for income tax purposes since the REIT qualification conclusion wasn't reached until the quarter ended December 31, 2014. This tax provision amount was reversed in the quarter ended December 31, 2014, after the Company concluded that it met the REIT qualification.
The following table shows the tax effect of the cumulative temporary differences resulting from the net unrealized built-in gains, which are subject to tax, as of September 30,:
2015
|
2014
|
|||||||
Unrealized gain on investments, net
|
$
|
98,997
|
$
|
920,083
|
The effective tax rate as of September 30, 2015 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 to the 2014 realized and unrealized built-in gain that is not exempt from tax. 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.
NOTE 3 –INVESTMENTS
The following table summarizes the composition of the Company's investments at cost and fair value as of September 30, 2015, and June 30, 2015:
|
September 30, 2015
|
June 30, 2015
|
||||||||||||||
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
Publicly Traded Company
|
$
|
7,940,809
|
$
|
7,524,314
|
$
|
3,851,842
|
$
|
3,411,454
|
||||||||
Non Traded Company
|
5,738,196
|
8,298,177
|
6,763,831
|
8,838,025
|
||||||||||||
LP Interest
|
5,145,180
|
5,621,836
|
5,246,418
|
5,642,367
|
||||||||||||
Investment Trust
|
319,906
|
302,595
|
319,906
|
285,100
|
||||||||||||
Note
|
491,410
|
558,496
|
346,723
|
468,076
|
||||||||||||
Total
|
$
|
19,635,501
|
$
|
22,305,418
|
$
|
16,528,720
|
$
|
18,645,022
|
The following table presents fair value measurements of the Company's investments measured at fair value on a recurring basis as of September 30, 2015, according to the fair value hierarchy:
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Publicly Traded Company
|
$
|
7,524,314
|
$
|
7,524,314
|
$
|
-
|
$
|
-
|
||||||||
Non Traded Company
|
8,298,177
|
-
|
17,127
|
8,281,050
|
||||||||||||
LP Interest
|
5,621,836
|
-
|
-
|
5,621,836
|
||||||||||||
Investment Trust
|
302,595
|
-
|
-
|
302,595
|
||||||||||||
Note
|
558,496
|
-
|
-
|
558,496
|
||||||||||||
Total
|
$
|
22,305,418
|
$
|
7,524,314
|
$
|
17,127
|
$
|
14,763,977
|
The following table presents fair value measurements of the Company's investments measured at fair value on a recurring basis as of June 30, 2015, according to the fair value hierarchy:
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
Publicly Traded Company
|
$
|
3,411,454
|
$
|
3,411,454
|
$
|
-
|
$
|
-
|
||||||||
Non Traded Company
|
8,838,025
|
-
|
36,198
|
8,801,827
|
||||||||||||
LP Interest
|
5,642,367
|
-
|
-
|
5,642,367
|
||||||||||||
Investment Trust
|
285,100
|
-
|
-
|
285,100
|
||||||||||||
Note
|
468,076
|
-
|
-
|
468,076
|
||||||||||||
Total
|
$
|
18,645,022
|
$
|
3,411,454
|
$
|
36,198
|
$
|
15,197,370
|
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 September 30, 2015:
Balance at July 1, 2015
|
$
|
15,197,370
|
||
Purchases of investments
|
1,768,847
|
|||
Transfers to Level I
|
(3,189,287
|
)
|
||
Proceeds from sales, net
|
(324,119
|
)
|
||
Return of capital
|
(1,177
|
)
|
||
Net realized gain
|
(6,857
|
)
|
||
Net unrealized gain
|
1,319,200
|
|||
Ending balance at September 30, 2015
|
$
|
14,763,977
|
For the three months ended September 30, 2015, changes in unrealized gain included in earnings relating to Level III investments still held at September 30, 2015, was $1,285,481.
The transfers of $3,189,287 from Level III to Level I category during the three months ended September 30, 2015, relates to changes in tradability of the securities in an active market due to one of the Company's investments converting from a private REIT shares to public REIT shares.
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 September 30, 2014:
Balance at July 1, 2014
|
$
|
4,207,480
|
||
Purchases of investments
|
2,712,405
|
|||
Proceeds from sales, net
|
(790,480
|
)
|
||
Return of capital
|
(20,781
|
)
|
||
Net realized gain
|
132,498
|
|||
Net unrealized gain
|
743,647
|
|||
Ending balance at September 30, 2014
|
$
|
6,984,769
|
For the three months ended September 30, 2014, changes in unrealized gain included in earnings relating to Level III investments still held at September 30, 2014 was $743,647.
The Level II investments as of September 30, 2015, and June 30, 2015, with total fair value of $17,127 and $36,198, respectively, included investments in a non-traded REIT, which were valued using quoted prices for similar security in an active market.
The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at September 30, 2015:
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
Non Traded Company
|
$ 8,281,050
|
Market Activity
|
Sale of company
|
||
Secondary market industry publication
|
|||||
LP Interest
|
1,353,954
|
Market Activity
|
Secondary market industry publication
|
||
LP Interest
|
4,267,882
|
Net Asset Value (1)
|
Underlying asset appraised value
|
||
Capitalization rate
|
6.5% - 8.5%
|
6.9%
|
|||
Comparable sales report
|
|||||
Contracted sale of property
|
|||||
Discount rate
|
40.0%
|
||||
Liquidity discount
|
15.0% - 38.0%
|
27.4%
|
|||
Sponsor provided value
|
|||||
Investment Trust
|
205,686
|
Market Activity
|
Secondary market industry publication
|
||
Investment Trust
|
96,909
|
Net Asset Value (1)
|
Capitalization rate
|
6.6%
|
|
Liquidity discount
|
28.0%
|
||||
Note
|
558,496
|
Net Asset Value (1)
|
Liquidity discount
|
15.0%
|
|
Sponsor provided value
|
|||||
$ 14,763,977
|
Valuation Technique Terms:
(1) Internally calculated investee's net asset value.
The following table shows quantitative information about significant unobservable inputs related to the Level III fair value measurements used at June 30, 2015:
Asset Type
|
Fair Value
|
Primary Valuation Techniques
|
Unobservable Inputs Used
|
Range
|
Wt. Average
|
Non Traded Company
|
$ 8,801,827
|
Market Activity
|
Acquisition Cost
|
||
Secondary market industry publication
|
|||||
LP Interest
|
2,879,480
|
Market Activity
|
Acquisition Cost
|
||
Secondary market industry publication
|
|||||
LP Interest
|
2,762,887
|
Net Asset Value (1)
|
Capitalization rate
|
6.5% - 7.5%
|
6.7%
|
Comparable sales report
|
|||||
Contracted sale of property
|
|||||
Liquidity discount
|
10.0% - 40.0%
|
30.8%
|
|||
Sponsor provided value
|
|||||
Investment Trust
|
188,191
|
Market Activity
|
Secondary market industry publication
|
||
Investment Trust
|
96,909
|
Net Asset Value (1)
|
Capitalization rate
|
6.6%
|
|
Liquidity discount
|
28.0%
|
||||
Note
|
468,076
|
Net Asset Value (1)
|
Liquidity discount
|
15.0%
|
|
Sponsor provided value
|
|||||
$ 15,197,370
|
Valuation Technique Terms:
(1) Internally calculated investee's net asset value.
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 September 30, 2015, the Company had $4,725,096 of margin credit available for cash withdrawal or the ability to purchase up to $9,450,192 in additional shares. As of June 30, 2015, the Company had $3,001,900 of margin credit available for cash withdrawal or the ability to purchase up to $6,003,976 in additional shares. As of September 30, 2015, and June 30, 2015, 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 at an annual rate as a percentage of our Managed Funds (the number of Shares issued multiplied by the price at which such Shares are issued in the Offering ($10), plus any borrowed funds). The base management fee will be 3.0% of the first $20 million of our Managed Funds, 2.0% of the next $80 million of our Managed Funds, and 1.5% of our Managed Funds in excess of $100 million
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 months ended September 30, 2015 and 2014, were $111,689 and $93,132, respectively.
As of September 30, 2015, Managed Funds were $25,777,367. Thus, the base management fee for the three months ended September 30, 2015, was 3% of $20,000,000 plus 2% of the remaining $5,777,367, for a total of $178,887. As of September 30, 2014, Managed Funds were $11,962,664. Thus, the base management fee for the three months ended September 30, 2014, was 3% of $11,962,664 for a total of $89,720.
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 September 30, 2015, and June 30, 2015, the Company had incurred $1,018,678 and $963,726 of organization and offering costs, respectively. Thus, according to the agreement, $468,678 and $413,726 of the amount were reimbursable from the Adviser as of September 30, 2015, and June 30, 2015, respectively. As of September 30, 2015, the Adviser has reimbursed the Company in the amount of $413,726 and the remaining reimbursable amount of $54,953 was settled through an offset against the amount payable to the Adviser as of September 30, 2015.
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 months ended September 30, 2015 and 2014, were $30,000.
The table below outlines the related party expenses incurred for the three months ended September 30, 2015 and 2014 and unpaid as of September 30, 2015, and June 30, 2015.
For The Three Months Ended
|
Unpaid as of
|
|||||||||||||||
Types and Recipient
|
September 30, 2015
|
September 30, 2014
|
September 30, 2015
|
June 30, 2015
|
||||||||||||
Portfolio Structuring fee- the Adviser
|
$
|
111,689
|
$
|
93,132
|
$
|
-
|
$
|
-
|
||||||||
Base Management fees- the Adviser
|
178,887
|
89,720
|
178,887
|
159,710
|
||||||||||||
Subordinated incentive fee-the Adviser
|
-
|
-
|
46,748
|
46,748
|
||||||||||||
Administrative Cost Reimbursements- MacKenzie
|
30,000
|
30,000
|
30,000
|
30,000
|
||||||||||||
Others expenses (1) -MacKenzie
|
1,712
|
638
|
||||||||||||||
Organization & Offering Cost Reimbursement by the Adviser
|
(54,953
|
)
|
(8,293
|
)
|
||||||||||||
Due to related entities
|
$
|
202,394
|
$
|
228,803
|
(1) Expenses paid by MacKenzie on behalf of the Company to be reimbursed to MacKenzie.
Related Party Investments:
Name of issuer and title of issue
|
Number of shares
|
Amount of equity in net profit and loss
|
Amount of dividends/interest
|
Fair Value at
|
||||||||||||
|
||||||||||||||||
Controlled Investments:
|
||||||||||||||||
|
||||||||||||||||
September 30, 2015
|
For The Three Months Ended
September 30, 2015
|
September 30, 2015
|
||||||||||||||
|
||||||||||||||||
Coastal Realty Business Trust, REEP, Inc. - A
|
72,320.00
|
$
|
-
|
$
|
-
|
$
|
96,909
|
|||||||||
Coastal Realty Business Trust, Series H2- A
|
47,284.16
|
$
|
2,364
|
$
|
2,364
|
$
|
205,686
|
|||||||||
|
||||||||||||||||
June 30, 2015
|
For The Year Ended June 30, 2015
|
June 30, 2015
|
||||||||||||||
|
||||||||||||||||
Coastal Realty Business Trust, REEP, Inc. - A
|
72,320.00
|
$
|
2,170
|
$
|
2,170
|
$
|
96,909
|
|||||||||
Coastal Realty Business Trust, Series H2- A
|
47,284.16
|
$
|
14,776
|
$
|
14,776
|
$
|
188,191
|
|||||||||
|
||||||||||||||||
Non-Controlled/Affiliate Investment:
|
||||||||||||||||
|
For The Three Months Ended
September 30, 2015
|
September 30, 2015
|
||||||||||||||
September 30, 2015
|
||||||||||||||||
|
||||||||||||||||
MPF Pacific Gateway - Class B
|
23.20
|
$
|
-
|
$
|
6,613
|
|||||||||||
|
||||||||||||||||
June 30, 2015
|
For The Year Ended June 30, 2015
|
June 30, 2015
|
||||||||||||||
|
||||||||||||||||
MPF Pacific Gateway - Class B
|
23.20
|
$
|
-
|
$
|
6,613
|
Coastal Realty Business Trust ("CRBT"):
CRBT is a Nevada business trust whose trustee is MacKenzie. Each series of the trust has its own beneficiaries and own assets. The Company owns two series of CRBT and is the only beneficiary of such series. Under the terms of the agreement, there are no redemption rights to any of the series participants.
The Company is the sole beneficiary of the following series as of September 30, 2015, and June 30, 2015:
·
|
CRBT, REEP, Inc.-A, which has an ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland.
|
·
|
CRBT, Series H2-A, which invests in shares of a REIT that owns a real estate portfolio totaling 105 properties within asset classes of ski and mountain lifestyle, senior housing, attractions, marinas and other lifestyle properties located in the United States and Canada.
|
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 September 30, 2015, and June 30, 2015, the Company had has a 15.82% of ownership interest in MPF Pacific Gateway.
NOTE 6 – FINANCIAL HIGHLIGHTS
The following is a schedule of financial highlights of the Company for the three months ended September 30, 2015, and the year ended June 30, 2015.
|
For The Three months ended
|
For The Year Ended
|
||||||
|
September 30, 2015
|
June 30, 2015
|
||||||
Per Share Data:
|
||||||||
|
||||||||
Beginning net asset value
|
$
|
10.17
|
$
|
9.81
|
||||
|
||||||||
Net investment income (loss) (1)
|
0.15
|
(0.24
|
)
|
|||||
Net realized gain (1)
|
0.13
|
1.03
|
||||||
Net unrealized gain (1)
|
0.22
|
1.17
|
||||||
Income tax (provision) benefit (1)
|
-
|
0.12
|
||||||
Net increase in net assets resulting from operations
|
0.50
|
2.08
|
||||||
|
||||||||
Issuance of common stock below net asset value (1) (4)
|
(0.23
|
)
|
(1.09
|
)
|
||||
Dividends to stockholders from net realized gains (1) (6)
|
(0.25
|
)
|
(0.63
|
)
|
||||
Ending net asset value
|
$
|
10.19
|
$
|
10.17
|
||||
|
||||||||
Weighted average common Shares outstanding
|
2,476,514
|
1,541,525
|
||||||
Shares outstanding at the end of period
|
2,582,155
|
2,196,613
|
||||||
Net assets at the end of period
|
$
|
26,324,215
|
$
|
22,338,439
|
||||
Average net assets (2)
|
$
|
24,331,327
|
$
|
15,551,614
|
||||
|
||||||||
Ratios to average net assets
|
||||||||
Total expenses (5)
|
1.28
|
%
|
6.21
|
%
|
||||
Net investment income (loss) (5)
|
1.51
|
%
|
(2.34
|
) %
|
||||
Total rate of return (2) (3) (5)
|
5.14
|
%
|
20.63
|
%
|
(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 stockholder's return may vary from this return based on the time of capital transactions.
|
(4) Net of sales commissions and dealer manager fees of $1.30 per share.
|
(5) Not annualized for the three months ended Septemebr 30, 2015.
|
(6) Dividends are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP.
|
NOTE 7 – SHARE OFFERINGS AND FEES
During the three months ended September 30, 2015, the Company issued 322,297.54 shares at $10 per share with gross proceeds of $3,222,975, 50,762 shares at volume discount prices between $9.80 and $9.90 with gross proceeds of $499,993 and 12,482.64 shares under the Company's dividend reinvestment plan ("DRIP") at $9 per share with gross proceeds of $112,344. For the three months ended September 30, 2015, the Company incurred selling commissions and up front fees of $476,486, of which $111,689 represents the portfolio structuring fees paid to the Adviser under the Investment Advisory Agreement.
During the three months ended September 30, 2014, the Company issued 302,302 shares at $10 per share with gross proceeds of $3,023,020 and issued 174.83 shares under the Company's dividend reinvestment plan ("DRIP") at $9 per share with gross proceeds of $1,574. For the three months ended September 30, 2014, the Company paid selling commissions and up front fees of $392,992, of which $93,132 represents the portfolio structuring fees paid to the Adviser under the Investment Advisory Agreement.
NOTE 8 –STOCKHOLDER DIVIDENDS AND INCOME TAXES
During the three months ended September 30, 2015, the Company declared and paid a dividend of $0.30 per share with total dividend amount of $623,394, of which $112,344 was reinvested under DRIP.
For the three months ended September 30, 2014, the Company declared and paid a dividend of $0.30 per share with total dividend amount of $255,442, of which $1,574 was reinvested under DRIP.
On November 4, 2015, the Company's Board of Directors approved a quarterly dividend of $0.21 per share to the holders of record on September 30, 2015, with the expected payment in November 2015.
Income Taxes
While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is December 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.
For income tax purposes, dividends paid and distributions made to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. The tax character of dividends paid to stockholders during the tax years ended December 31, 2014 (the most recent tax year end), were as follows:
Ordinary income - earnings and profits from pre REIT qualification
|
$
|
103,874
|
||
Capital gain
|
469,230
|
|||
Ordinary income- Post REIT qualification
|
-
|
|||
Return of capital
|
-
|
|||
Total dividends
|
$
|
573,104
|
For the tax year ending December 31, 2015, the tax character of dividends paid to stockholders through September 30, 2015, is expected to be capital gains. Because of the difference between our fiscal and tax year ends, the final determination of the tax character of dividends will not be made until we file our tax return for the tax year ending December 31, 2015.
As of December 31, 2014, the components of distributable earnings on a tax basis were as follows:
Undistributed ordinary income
|
$
|
-
|
||
Undistributed long term capital gain
|
6,372
|
|||
Unrealized fair value appreciation
|
1,120,925
|
|||
$
|
1,127,297
|
The following table presents the aggregate gross unrealized appreciation, depreciation, and cost basis of investments for income tax purposes as of:
|
September 30, 2015
|
June 30, 2015
|
||||||
|
||||||||
Aggregate gross unrealized appreciation
|
$
|
3,670,984
|
$
|
2,909,892
|
||||
Aggregate gross unrealized depreciation
|
(998,543
|
)
|
(825,283
|
)
|
||||
Net unrealized appreciation (depreciation)
|
$
|
2,672,441
|
$
|
2,084,609
|
||||
|
||||||||
Aggregate cost (tax basis)
|
$
|
19,632,977
|
$
|
16,560,414
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
As of June 30, 2015, the Company committed to loan an additional $172,000 to BR Cabrillo, LLC. The loan is disbursed upon borrower's request and accrues interest at the rate of 15% per annum. As of September 30, 2015, the Company has disbursed $125,092 of the total commitment with the remaining commitment of $46,908. The Company has concluded that no accounting recognition or reporting for the estimated fair value of the undisbursed commitment is necessary as of September 30, 2015, because the loan terms continue to be equivalent to the market terms for such commitments, and the borrower's credit condition has not changed significantly. As of September 30, 2015, the Company has sufficient unencumbered liquid assets to cover the amount of currently unfunded commitments.
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 are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. Our objective is to generate both current income and capital appreciation through real estate-related investments. We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and we made our REIT election in our 2014 tax return. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we 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 Legacy Portfolio. The Legacy 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. As consideration for our acquisition of that portfolio, 692,217 Shares were issued to the Legacy Funds.
We are managed by the Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Investment Plan
Our investments are generally expected to range in size from $10,000 to $3 million. However, we may make smaller or larger investments from time to time on an opportunistic basis. We focus primarily on real estate-related securities. We 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 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.
We generally seek to invest in interests of real estate-related limited partnerships and REITs. Under normal market conditions, we invest at least 80.0% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. For purposes of the REIT rules, a real estate company is one that (i) derives at least 50.0% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50.0% of its assets invested in such real estate. We do not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities that we may invest in may in turn hold interests in general partnerships, joint ventures, or other non-limited liability entities. We generally consider purchasing securities issued by entities that have (i) completed the initial offering of their securities, (ii) operated for a period of at least two years, and typically more than five years, from the completion of their initial offering, and (iii) fully invested their capital in real properties or other real estate-related investments.
We may also acquire (i) individual mortgages secured by real property (i.e., we may originate such loans or we may purchase outstanding loans secured by real estate), (ii) securities of issuers that own mortgages secured by income producing real property, and (iii) using no more than 20.0% of our available capital, securities of issuers that own assets other than real estate.
Revenues
We generate revenue 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.
Portfolio Investment Composition
The following table summarizes the composition of our investments at cost and fair value as of September 30, 2015, and June 30, 2015:
|
September 30, 2015
|
June 30, 2015
|
||||||||||||||
Asset Type
|
Cost
|
Fair Value
|
Cost
|
Fair Value
|
||||||||||||
Publicly Traded Company
|
$
|
7,940,809
|
$
|
7,524,314
|
$
|
3,851,842
|
$
|
3,411,454
|
||||||||
Non Traded Company
|
5,738,196
|
8,298,177
|
6,763,831
|
8,838,025
|
||||||||||||
LP Interest
|
5,145,180
|
5,621,836
|
5,246,418
|
5,642,367
|
||||||||||||
Investment Trust
|
319,906
|
302,595
|
319,906
|
285,100
|
||||||||||||
Note
|
491,410
|
558,496
|
346,723
|
468,076
|
||||||||||||
Total
|
$
|
19,635,501
|
$
|
22,305,418
|
$
|
16,528,720
|
$
|
18,645,022
|
Net Asset Value
Our net asset value ("NAV") as of September 30, 2015, was $10.19 per Share, compared to $10.17 per Share at June 30, 2015, a $0.02 per Share increase of approximately 0.20%. The net increase during the quarter was primarily due to increases resulting from (i) net realized gain on sale of investments of $0.13 per Share (ii) net unrealized gains on investments of $0.22 per Share and (iii) net investment income of $0.15 per Share. The increases were offset by decreases resulting from (i) issuance of Shares (net of selling commissions and dealer manager fees) below NAV per Share resulting in decrease of a $0.23 per Share and (ii) a dividend to stockholders of $0.25 per Share.
Results of Operations
Three Months Ended September 30, 2015 and 2014:
Investment Income: Investment income was primarily made up of dividend, distribution, interest and other investment income. Total investment income for the three months ended September 30, 2015 and 2014, were $678,568 and $71,668, respectively. The increase of $606,900, or 847%, was primarily due to the Company receiving a large non-recurring distribution of $380,870 from Rancon Realty Fund IV during the three months ended September 30, 2015. To a lesser extend, the increase was due to an increase in our investment portfolio size by approximately $11.54 million in cost basis since September 30, 2014. The cost basis of our investment portfolio was $19.64 million as of September 30, 2015, compared to $8.1 million as of September 30, 2014.
Operating Expenses: Total operating expenses for the three months ended September 30, 2015 and 2014, were $312,049 and $262,137, respectively. This net increase of $49,912, or 19%, was primarily attributed to increases in the base management fee of $89,167 offset by decreases in amortization of deferred offering cost of $35,402, professional fees of $2,634, and other general and administrative expenses of $1,219. The increase in the base management fee was due to the increase in capital contributions. As of September 30, 2015, we issued 1,385,870.41 additional shares ($13.81 million in gross capital contribution) since September 30, 2014. The decrease in amortization of deferred offering cost was due to deferred offering cost of $424,825 being fully amortized as of September 30, 2014.
Net realized gain on investments: We had total realized gains on the sale of investments of $328,799 for the three months ended September 30, 2015, as compared to $132,498 for the three months ended September 30, 2014. This increase of $196,301 or 148%, was primarily due to increase in investment sales activities in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Investments with cost basis of $1.22 million were sold in the three months ended September 30, 2015, compared to sales of investments with cost basis of $0.66 million in the three months ended September 30, 2014.
Net unrealized gain on investments: Total unrealized gain on investments for the three months ended September 30, 2015 and 2014, were $553,614 and $607,494, respectively. The decrease of $53,880 or 9% in the three months ended September 30, 2015, was primarily due to higher amount of unrealized gain realized during the three months ended September 30, 2015, compared to September 30, 2014. During the three months ended September 30, 2015, we recorded net unrealized gain of $882,413, of which $328,799 was realized during the quarter. During the three months ended September 30, 2014, we recorded net unrealized gain of $739,992, of which $132,498 was realized during the quarter. The increase in net unrealized gain of $142,421 (inclusive of realized gains) was due to the increase in our investment portfolio of $11.56 million in cost basis since September 30, 2014.
Income tax provision (benefit): For the three months ended September 30, 2015, we did not record any income tax provision as we have qualified and elected to be treated as a REIT beginning with the tax year 2014. As a REIT, we are; however, subject to income taxes on our built-in gains realized during the first ten tax years following REIT election. Prior to the effective date of REIT election, we had net unrealized built-in gain of $239,595, for which we recorded an estimated tax liability of $95,931 as of December 31, 2013. Accordingly, in each subsequent tax year, we only record the difference between the actual and estimated tax on built-in gains we realize during each tax year. The difference between the actual and estimated tax on the built-in gains realized during tax year 2014 was an over accrual of $1,412, which we recorded as Income tax benefit during the three months ended September 30, 2015. For the three months ended September 30, 2014, we recorded an income tax provision of $213,152, treating the Company as a corporation for federal and state income tax purposes as we did not reach our REIT qualification conclusion until the quarter ended December 31, 2014. This tax provision amount was reversed in three months ended December 31, 2014, after the REIT qualification determination was made.
Liquidity and Capital Resources
Capital Resources
We filed a 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 initial public offering ("IPO"). As of September 30, 2015, we have sold 1,705,439.54 Shares at $10 per Share with gross proceeds of $17,054,395, 127,296 shares at volume discount prices between $9.70 and $9.90 with gross proceeds of $1,249,974, and issued 21,202.37 Shares under our DRIP at an average price of $9 per Share with gross proceeds of $190,827. 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, use of our margin credit, 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. Our stockholers have most recently approved our ability to sell shares below NAV on November 12, 2015.
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 uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (primarily from investment income and realized capital gains), making 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 three months ended September 30, 2015, we experienced a net increase in cash of $317,945. During this period, we generated $2,685,731 of cash from our financing activities and used $2,367,786 of cash in operating activities. Net cash outflow from operating activities was primarily due to purchases of investments of $4,324,583, offset by cash inflow of $1,545,425 from sales of investments. Cash inflow from financing activities resulted from the sale of 373,059.54 Shares with gross receipts of $3,722,968, offset by the payment of selling commissions and fees of $501,167, stockholder dividends of $511,050 and a decrease in capital pending acceptance of $25,020.
Contractual Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Agreement, under which the Adviser serves as our investment adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Advisory 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. There have been no changes in the significant accounting polices from those disclosed in the audited financial statements for the year ended June 30, 2015.
Dividends 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 will be 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.
We qualified to be taxed as a REIT beginning with the tax year ended December 31, 2014, and made our REIT election in our 2014 tax return. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. Our current intention is to make any dividends in additional Shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state securities regulator. If one holds Shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.
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 September 30, 2015, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 82% of our total assets as of that date. As discussed in Note 3 to our financial statements ("Investments"), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy represents a high degree of business and financial risk due to the fact that portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.
Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended September 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
None.
There have been no material changes to our risk factors discussed in "Risk Factors" in our annual report on Form 10-K for the fiscal year ended June 30, 2015.
None.
None.
Not applicable.
None.
Exhibit
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Description
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MACKENZIE REALTY CAPITAL, INC.
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Date: November 13, 2015
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By: /s/ Robert Dixon__________________
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President and Chief Executive Officer
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Date: November 13, 2015
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By: /s/ Paul Koslosky_________________
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Treasurer and Chief Financial Officer
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