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EX-32.1 - CEO EXHIBIT 32.1 - MacKenzie Realty Capital, Inc.exhibit32ceo.htm
EX-32.2 - CFO EXHIBIT 32.2 - MacKenzie Realty Capital, Inc.exhibit32cfo.htm
EX-31.2 - CFO EXHIBIT 31.2 - MacKenzie Realty Capital, Inc.exhibit31cfo.htm
EX-31.1 - CEO EXHIBIT 31.1 - MacKenzie Realty Capital, Inc.exhibit31ceo.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



FORM 10-K



     
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________


Commission file number: 000-55006





MACKENZIE REALTY CAPITAL, INC.
(Exact Name of Registrant as Specified in its Charter)





     
Maryland
 
45-4355424
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
     
1640 School Street
Moraga, California
 

94556
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant's Telephone Number, Including Area Code: (925) 631-9100




Securities registered pursuant to Section 12(b) of the Act:


     
Title of Each Class
 
Name Of Each Exchange On Which Registered
None
 
None


Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 per share par value




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes   No 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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. (Check one):

Large accelerated filer    Accelerated filer          Non-accelerated filer      Smaller reporting company 
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes   No 

There is no established market for the Registrant's shares of common stock.  The Registrant is currently conducting an ongoing public offering of its shares of common stock pursuant to a Registration Statement on Form N-2, which shares are currently being offered and sold at a price of $10 per share.

The number of the issuer's Common Stock outstanding as of September 21, 2017 was 6,818,001.31.







TABLE OF CONTENTS

 
PART I 
 
Page
     
PART II
   
     
PART III
   
     
PART IV
   
   
 



 
 
PART I
Item 1. BUSINESS

Organization


MacKenzie Realty Capital, Inc. (together with its subsidiary as discussed below, the "Company", "we" or "us") is an externally managed non-diversified company that has elected to be treated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). Our investment objective is to generate both current income and capital appreciation through investments in real estate companies (as defined below). We are advised by MCM Advisers, LP (the "Adviser" or "MCM Advisers"). MacKenzie Capital Management, LP ("MacKenzie" or the "Administrator") provides us with non-investment management services and administrative services necessary for us to operate. The Company has elected to be treated as a real estate investment trust ("REIT") as defined under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").


The Company filed its initial registration statement in June 2012 with the Securities and Exchange Commission ("SEC") to register the initial public offering ("IPO") of 5,000,000 shares of the its common stock. The IPO commenced in January 2014 and concluded in October 2016. The Company filed a second registration statement with the SEC to register a subsequent public offering of 15,000,000 shares of its common stock that was declared effective by the SEC on December 20, 2016, and the offering commenced shortly thereafter.



Our wholly owned subsidiary, MRC TRS, Inc., ("TRS") was incorporated under the general corporation laws of the State of California on February 22, 2016, and operates as a taxable REIT subsidiary. TRS started its operation on January 1, 2017, and the financial statements of TRS have been consolidated with the Company's consolidated financial statements beginning with the quarter ended March 31, 2017.

Our investments generally 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% 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. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate. We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders. However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. 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 or originate (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% of our available capital, securities of issuers that own assets other than real estate.
 

 

 
Investment Strategy

Our investment objective is to generate both current income and capital appreciation through debt and equity real estate-related investments. Our Independent Directors (as defined in Part II, Item 10 of this Annual Report on Form 10-K) review our investment policies with sufficient frequency, but at least annually, to determine that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our Board of Directors meetings.
 
We seek to accomplish our objective by rigorously analyzing the net asset value ("NAV") of and risks associated with potential security acquisitions, and by adhering to a disciplined requirement that any security must be acquired at significant discount to its NAV. Although we may acquire any type of security by any method, we anticipate our acquisitions will generally be accomplished in the following ways:
 
·
Tender offers. We acquire shares of non-traded REITs ("NTRs") and other real estate companies via registered and non-registered tender offers (e.g., offers to purchase securities directly from the existing holders). This is generally our preferred acquisition method, as it allows us to name the price at which we are willing to buy such securities. By purchasing securities at significant discounts to NAV, we believe we reduce the risk of a loss of capital due to a decline in NAV while increasing total returns when the discount is realized. Also, by purchasing seasoned securities that are several years old, we significantly reduce our anticipated holding period and potentially increase our annualized rate of return.

·
Direct loans and private placements. We may occasionally make direct loans to private real estate companies and arrange for private placements of equity issued directly to us by private real estate companies.

·
Purchases of small-cap REITs on the open market. We believe that small-capitalization REITs (typically less than $250 million) are largely ignored by institutional investors and by Wall Street analysts, and as a result they often trade for significant discounts to their NAV. While these REITs tend to be highly illiquid with very small trading volumes, our smaller size allows us to focus on these REITs and to purchase their securities in meaningful quantities. Like shares of NTRs that we purchase at discounts to NAV, we believe these acquisitions can provide superior risk-adjusted returns.

Our Corporate Information

Our offices are located at 1640 School Street, Moraga, California 94556, and our telephone number is (925) 631-9100 or (800) 854-8357.

Investments

We engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and experience of the Adviser's investment team and our overall portfolio composition. We generally seek to acquire securities that produce ongoing distributable income for investors, yet with a primary focus on purchasing such securities at a discount from what the Adviser estimates to be the actual value of the real estate underlying the securities.


Types of Investments

We target the following real estate-related investments.

·
Real Estate-Related Limited Partnerships. Limited partnerships which may be public or private, and which were formed primarily to own real property. They may actively operate the property, they may develop the property, or they may passively own property operated by a third party.

·
REITs. Corporations or trusts that are formed to own real property and are exempted from federal corporate income tax if they distribute at least 90.0% of their net income in the form of dividends to their stockholders.

·
Other Real Estate-Related Investments. May include equity interests in LLCs, tenancies-in-common, mortgages, loans, bonds, or any security whose underlying value derives from real estate. We may invest in other real estate-related investment entities. 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 in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities.

Targeted Securities

Our Adviser has advised on a significant number of investments in the real estate industry. We leverage this prior investing experience to continue to target attractive investments in the real estate industry. Securities to be acquired by us generally consist of the following:

·
Securities Issued by Owners of Real Property. We acquire securities issued by limited partnerships, REITs or other investment entities that have invested directly or indirectly in real property, real estate joint ventures, or other real property based investments. We buy securities issued by entities owning a variety of property types, including apartments, shopping centers, office buildings, nursing homes, min-warehouses, and hotels.

·
Direct Real Property Obligations, Derivatives, and Other Securities. We may also acquire (i) individual mortgages secured by real property (i.e., originate, or 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 capital available for investment, securities of issuers that own assets other than real estate.

We generally acquire securities in one of two ways:

·
Securities Issued Previously Pursuant to a Registration Statement. In general, we seek to acquire securities originally registered by the issuer with the SEC. These target securities are typically public limited partnership interests and shares in REITs issued by national real estate syndicators and companies. These issuers typically have hundreds or thousands of limited partners or stockholders and own numerous real property assets.
·
Securities Issued in Private Transactions. We may acquire securities that are or were privately placed by issuers that (i) are limited partnerships, REITs, or other real estate-related entities, (ii) have sold their securities in private offerings to only a limited number of investors who have met suitability standards that are generally higher than those imposed by public partnerships, and (iii) have invested in only a single parcel or a few parcels of real property.


Investment Selection

Our Adviser's investment team is responsible for all aspects of our investment process. The current members of the investment team are C.E. Patterson, Glen Fuller, Chip Patterson, Robert Dixon, Paul Koslosky, and Christine Simpson. The investment strategy involves a team approach, whereby potential transactions are screened by various members of the investment team.

Our process for acquiring targeted real estate-related securities typically involves three steps: (i) identifying securities of the type we may be interested in acquiring; (ii) evaluating the securities to estimate their value to us, and (iii) either acquiring securities on national markets or locating securities holders who may be interested in selling such securities on secondary markets. Different circumstances may require different procedures, or different combinations of procedures, and we adjust our acquisition strategy to fit the circumstances. Nonetheless, the typical stages of our investment selection process are as follows:

Deal Generation/Origination

We source investments through long-standing relationships with industry contacts, brokers, commercial and investment bankers, entrepreneurs, services providers such as lawyers and accountants, as well as current and former clients, portfolio companies and investors. Our Adviser's investment team supplements these lead generators by also utilizing broader marketing efforts, such as advertisements in real estate periodicals, newspapers and other publications, attendance at prospective borrower industry conventions, active calling efforts to smaller private equity firms and sponsors, web presence and search tools.

Screening

In screening potential investments, the Adviser's investment team utilizes a value-oriented investment philosophy and commits resources to managing downside exposure.

Due Diligence

In conducting due diligence, the Adviser uses publicly available information as well as information from its relationships with former and current management teams, consultants, competitors and investment bankers. Our Adviser's due diligence typically includes:

·
review of historical and prospective financial information and regulatory disclosures;
·
research relating to the company's management, industry, markets, products and services and competitors;
·
verification of collateral; and
·
asset and business value appraisals by third party advisers.

Upon the completion of due diligence and a decision to proceed with an investment, the investment professionals leading the investment present the investment opportunity to the Adviser's investment team, which then determines whether to pursue the potential investment. Additional due diligence with respect to any investment may be conducted on our behalf by attorneys and independent accountants prior to the closing of the investment, as well as other outside third-party advisers, as appropriate. Any fees and expenses incurred by the Adviser to oversee due diligence investigations undertaken by third parties are subject to reimbursement by us, if not otherwise reimbursed by the prospective borrower, which reimbursements are in addition to any management or incentive fees payable by us under our Investment Advisory Agreement with the Adviser.

Managerial Assistance

As a BDC, we offer, and must provide upon request, significant managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may also receive fees for these services. The Adviser provides such managerial assistance on our behalf to portfolio companies that request this assistance.

Monitoring

Our Adviser monitors our investments on an ongoing basis. Our Adviser has several methods of evaluating and monitoring the performance and fair value of the portfolio companies in which we invest, which include the following:

·
Assessment of success in adhering to its business plan and compliance with covenants;
·
Periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;
·
Comparisons to our other portfolio companies in the industry, if any;
·
Attendance at and participation in board meetings; and
·
Review of monthly and quarterly consolidated financial statements and financial projections for portfolio companies.

Valuation Procedures

We determine our NAV consistent with accounting principles generally accepted in the United States of America ("GAAP") and the 1940 Act. Securities for which market quotations are readily available on an exchange will be valued at the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. To value securities that do not trade on a national exchange, we may use published secondary market trading information.


Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial portion of our portfolio, are valued as follows: (i) the securities are initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors reviews the valuations determined by the Adviser and, where appropriate and necessary, a third-party valuation firm, and uses such valuations, as adjusted by the Board if appropriate, to determine the fair value of the securities.

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

·
private placements and restricted securities that do not have an active trading market;
·
securities whose trading has been suspended or for which market quotes are no longer available;
·
debt securities that have recently gone into default and for which there is no current market;
·
securities whose prices are stale;
·
securities affected by significant events; and
·
securities that the Investment Adviser believes were priced incorrectly.

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

We compete for investments with other BDCs and investment funds (including private equity funds). Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles, such as hedge funds, those entities have begun to make non-traditional investments, including investments in real estate companies. As a result of these new entrants, competition for investment opportunities in real estate-related companies may intensify. Many of these entities have greater financial and managerial resources than we do, or may not be subject to comparable regulation. We believe we can compete with these entities primarily on the basis of the experience and contacts of the Adviser, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments. For additional information concerning the competitive risks we face, see "Risk Factors — Risk Relating to Our Business and Structure — We may face increasing competition for investment opportunities."

Staffing

We do not currently have any employees. Our day-to-day investment operations are managed by the Adviser. Our Adviser may hire additional investment professionals, based upon its needs. We also entered into an administration agreement with MacKenzie (the "Administration Agreement"), under which, we reimburse MacKenzie for our allocable portion of overhead and other expenses incurred by it in performing its obligations, including rent, the fees and expenses associated with performing compliance functions, and the compensation of our chief financial officer, our chief compliance officer (or "CCO"), and any administrative support staff.
Board Approval of the Investment Advisory Agreement
Our investment advisory and administrative services agreements were approved by our board of directors in May 2012, and renewed in October 2015, October 2016 and September 2017. Such approvals were made in accordance with, and on the basis of an evaluation satisfactory to our board of directors as required by, Section 15(c) of the 1940 Act and applicable rules and regulations thereunder, including a consideration of, among other factors, (i) the nature, quality, and extent of the advisory and other services to be provided under the agreements, (ii) the investment performance of the personnel who manage investment portfolios with objectives similar to ours, to the extent available,  (iii) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives, to the extent available and (iv) information about the services to be performed and the personnel performing such services under each of the agreements.
 

Item 1A. RISK FACTORS

Investing in our common stock involves a number of significant risks. In addition to the other information contained in the Registration Statement and any accompanying prospectus supplement, stockholders should consider carefully the following information regarding our common stock. The risks set out below may not be the only risks we face, but are the risks of which we are presently aware. If any of the following risk are realized, our business, financial condition and results of operations could be materially and adversely affected. In such case, our NAV and the price of our common stock could decline, and stockholders may lose all or part of their investment.

Risks Relating to Our Business and Structure
Lapses in internal controls including internal control over financial reporting could materially and adversely affect our operations and/or reputation.
We identified a material weakness in the manner by which we accounted for the portfolio structuring fee we pay to our Adviser upon the sale of shares, which caused the restatement of the audited financial statements as of June 30, 2016, and 2015 and for each of the three years in the period ended June 30, 2016. We corrected the accounting error in our restated financial statements, and instituted measures to more closely monitor our compliance with GAAP.

However, even diligent compliance efforts cannot assure the absence of accounting errors in the future, and if they occur, investors and others could lose confidence in our consolidated financial statements, which in turn could limit our ability to raise capital. Additionally, failure to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions, and cause us to incur substantial additional costs in future periods to implement remedial measures.

Our investment portfolio is recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there will be uncertainty as to the value of our portfolio investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined by us in accordance with our written valuation policy. Our Board of Directors has final responsibility for overseeing, reviewing and approving, in good faith, our estimate of fair value. Typically, there is no public market for the securities of the privately held companies in which we invest. As a result, we value these securities quarterly at fair value based on input from management and our audit committee, with the oversight, review and approval of our Board of Directors.

The determination of fair value and consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree, subjective and dependent on a valuation process approved by our Board of Directors. Certain factors that may be considered in determining the fair value of our investments include external events, such as private mergers, sales and acquisitions involving comparable companies. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, they may fluctuate over short periods of time and may be based on estimates. Our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Due to this uncertainty, our fair value determinations may cause our NAV on a given date to materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our common stock based on an overstated NAV would pay a higher price than the value of our investments might warrant. Conversely, investors selling shares during a period in which the NAV understates the value of our investments receive a lower price for their shares than the value of our investments might warrant.

We have limited operating history as a BDC.


We have limited operating history as a BDC, and therefore remain subject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we do not achieve our investment objective and that the value of our shares could decline substantially.

Our financial condition and results of operations depend on our ability to effectively manage and deploy capital.

Our ability to achieve our investment objective depends on our ability to effectively manage and deploy capital, which depends, in turn, on the Adviser's ability to identify, evaluate and monitor, and our ability to finance and invest in, companies that meet our investment criteria.

Accomplishing our investment objective on a cost-effective basis is largely a function of the Adviser's handling of the investment process, its ability to provide competent, attentive and efficient services and our access to investments offering acceptable terms. In addition to monitoring the performance of our existing investments, the Adviser's investment team is also called upon, from time to time, to provide managerial assistance to some of our portfolio companies. These demands on their time may distract them or slow the rate of investment.

Even if we grow and build upon our investment operations, failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects. The results of our operations depend on many factors, including the availability of opportunities for investment, readily accessible short- and long-term funding alternatives in the financial markets and economic conditions. Furthermore, if we cannot successfully operate our business or implement our investment policies and strategies as described herein, it could negatively impact our ability to pay dividends.

We are dependent upon the Adviser's key personnel for our success.

We depend on the diligence, skill and network of business contacts of the investment professionals of the Adviser. The investment professionals at the Adviser evaluate, negotiate, structure, close and monitor our investments. Our success depends on the continued service of our investment team and the other senior investment professionals available to the Adviser. We cannot assure you that unforeseen business, medical, personal or other circumstances would not lead any of the members of the investment team to terminate their relationship with us, and we do not purchase any "key man" insurance to cover the Adviser's personnel. The loss of one or more of the investment team or other senior investment professionals who serve on the Adviser's investment team could have a material adverse effect on our ability to achieve our investment objectives as well as on our financial condition and results of operations. In addition, we can offer no assurance that the Adviser will continue indefinitely as our investment adviser.

The members of the Adviser's investment team are and may in the future become affiliated with entities engaged in business activities similar to those conducted by us, and may have conflicts of interest in allocating their time. We expect that the investment team dedicates a significant portion of their time to our activities; however, they are engaged in other business activities which could divert their time and attention in the future.

Our success depends on the ability of the Adviser to attract and retain qualified personnel in a competitive environment.
Our growth requires that the Adviser retains and attract new investment and administrative personnel in a competitive market. Its ability to attract and retain personnel with the requisite credentials, experience and skills depends on several factors including its ability to offer competitive wages, benefits and professional growth opportunities. Many of the entities, including investment funds (such as private equity funds and mezzanine funds) and traditional financial services companies, with which it competes for experienced personnel have greater resources than the Adviser has.

We are dependent on MacKenzie Capital Management's key personnel for our success.

We depend on the skill, experience, and care of the professionals at MacKenzie to record, administer, and manage our business, including our stockholder records and financial records, prepare and file reports to our stockholders, SEC reports and our tax returns. We cannot assure you that these key personnel will not terminate their relationship with MacKenzie. The loss of one or more of these professionals could have a material adverse effect on our ability to achieve our business objectives.

There are significant potential conflicts of interest respecting the Adviser's activities that could impact our investment returns.

The Adviser's investment team presently manages 50 private funds. In addition, our executive officers and directors, as well as the current and future members of the Adviser, may serve as officers, directors or principals of other entities that operate in the same or a related line of business as we do. Accordingly, they may have obligations to investors in those entities, the fulfillment of which obligations may not be in the best interests of us or our stockholders. Any affiliated investment vehicle formed in the future and managed by the Adviser or its affiliates may, notwithstanding different stated investment objectives, have overlapping investment objectives with our own and, accordingly, may invest in asset classes similar to those targeted by us. As a result, the Adviser may face conflicts in allocating investment opportunities between us and such other entities. It is possible that, in the future, we may not be given the opportunity to participate in investments made by investment funds managed by the Adviser or an investment manager affiliated with the Adviser. In any such case, when the Adviser identifies an investment, it will be forced to choose which investment fund should make the investment. The Adviser has mitigated this risk by adopting an allocation policy designed to equitably distribute such investment opportunities consistent with the requirements of the 1940 Act.

If the Adviser forms other affiliates in the future, we may co-invest on a concurrent basis with such other affiliates, subject to compliance with our Charter, the 1940 Act, applicable regulations, regulatory guidance and our allocation procedures.

There are significant potential conflicts of interest respecting the Adviser's compensation that could impact our investment returns.

In the course of our investing activities, we pay management and incentive fees to the Adviser and reimburse the Adviser for certain expenses it incurs. As a result, investors in our common stock invest on a "gross" basis and receive dividends on a "net" basis after expenses, resulting in a lower rate of return than an investor might achieve through direct investments. Accordingly, there may be times when the management team of the Adviser has interests that differ from those of our stockholders, giving rise to a conflict. The Adviser is not reimbursed for any performance-related compensation for its employees.

There are significant potential conflicts of interest respecting our Administrator that could impact our investment returns.

Under the Administration Agreement with MacKenzie, MacKenzie granted us a royalty-free license to use the name "MacKenzie." Under the Administration Agreement, we have the right to use the "MacKenzie" name for so long as the Adviser or one of its affiliates remains our investment adviser. In addition, we pay MacKenzie, an affiliate of the Adviser, our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the compensation of MacKenzie's chief financial officer and any administrative support staff. These arrangements create conflicts of interest that our Board of Directors must continue to monitor.

There are significant potential conflicts of interest respecting related party transactions that could impact our investment returns.

In the ordinary course of business, we may enter into transactions with portfolio companies that may be considered related party transactions. Related party transactions carry with them the risk that their terms could benefit such parties, to our detriment. To ensure that we do not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we have implemented certain written policies and procedures, described in our prospectus contained in the Registration Statement, under "Certain Relationships and Transactions."

Our incentive fee structure and the formula for calculating the management fee may incentivize the Adviser to pursue speculative investments, use leverage when it may be unwise to do so, or refrain from deleveraging when it would otherwise be appropriate to do so.

The incentive fee payable by us to the Adviser may create an incentive for the Adviser to pursue investments on our behalf that are riskier or more speculative than would be the case in the absence of such compensation arrangement. The incentive fee payable to the Adviser is calculated based on a percentage of our return on invested capital. In addition, the base management fee is based on "Managed Funds", including assets acquired through the use of leverage. This may encourage the Adviser to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from de-levering when it would otherwise be appropriate to do so. Under certain circumstances, the use of leverage may increase the likelihood of default, which would impair the value of our common stock. In addition, the Adviser receives the incentive fee based, in part, upon net capital gains realized on our investments. This could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.

The incentive fee payable by us to the Adviser also may induce the Adviser to invest on our behalf in instruments that have a deferred interest feature, even if such deferred payments would not provide cash necessary to enable us to pay current dividends to our stockholders. Under these investments, we would accrue interest over the life of the investment but would not receive the cash income from the investment until the end of the term. Our net investment income used to calculate the income portion of our investment fee, however, includes accrued interest. Thus, a portion of this incentive fee would be based on income that we have not yet received in cash.

Although we do not currently expect to do so, we may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, will bear our ratable share of any such investment company's expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to the Adviser with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our stockholders will bear his or her share of the management and incentive fee of the Adviser as well as indirectly bearing the management and performance fees and other expenses of any investment companies in which we invest.

A general increase in interest rates will likely have the effect of making it easier for the Adviser to receive incentive fees, without necessarily resulting in an increase in our net earnings.

Any general increase in interest rates typically leads to higher investment returns on our investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase in the amount of incentive fees payable to the Adviser under the Advisory Agreement without any increase in performance on the part of the Adviser.

Our Adviser has the right to resign on 120 days' notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations.

Our Adviser has the right, under the Advisory Agreement, to resign at any time upon not less than 120 days' written notice, whether we have found a replacement or not. If the Adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 120 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay dividends are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Adviser and its affiliates. Even if we retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our financial condition, business and results of operations.

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

We have elected to be treated as a BDC under the 1940 Act. The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs must invest at least 70.0% of their gross assets in specified types of securities, primarily in private companies or thinly traded U.S. public companies, cash, cash equivalents, U.S. government securities and other highly rated debt investments that mature in one year or less. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to qualify, or maintain our qualification, as a BDC, we may be subject to the substantially greater regulation under the 1940 Act as a registered closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility, and could significantly increase our costs of doing business.

Regulations governing our operation as a BDC affect our ability to raise additional capital and the way in which we do so. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.

We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as "senior securities," up to the maximum amount permitted by the 1940 Act. However, we have no current intention to borrow money for investment purposes. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200.0% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for dividends to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred stock, the preferred stock would rank "senior" to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights, preferences, or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest.

We have and may continue to sell common stock at a price below NAV under certain circumstances.

We may not generally issue and sell our common stock at a price below NAV per share. We have, and may continue to, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per share of our common stock if our Board of Directors determines that such sale is in the best interests of the Company and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you may experience dilution.

We may borrow money, which would magnify the potential for gain or loss on amounts invested and will increase the risk of investing in us.

The use of leverage magnifies the potential for gain or loss on amounts invested and, therefore, increases the risks associated with investing in our securities. We may borrow from and issue senior debt securities to banks, insurance companies and other lenders in the future, however we have no current intention to borrow for investment purposes. Holders of these senior securities would have fixed dollar claims on our assets that would be superior to the claims of our common stockholders, and we would expect such lenders to seek recovery against our assets in the event of a default. If the value of our assets decreases, leveraging would cause NAV to decline more sharply than it would in the absence of leverage. Similarly, any decrease in our income would cause net income to decline more sharply than it would in the absence of leverage. Such a decline could also negatively affect our ability to make dividend payments on our common stock. Leverage is generally considered a speculative investment technique. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the management fee payable to the Adviser is based on our Managed Funds, including those assets acquired through the use of leverage, the Adviser has a financial incentive to incur leverage which may not be consistent with our stockholders' interests. In addition, our common stockholders will bear the burden of any increase in expenses that results from leverage, including any increase in the management fee payable to the Adviser.

As a BDC, we are required to meet an asset coverage ratio, defined generally under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200.0% after each issuance of senior securities. If this ratio declines below 200.0%, we may not be able to incur additional debt and could be required by law to sell a portion of our investments to repay some debt when it is disadvantageous to do so, which could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of any leverage that we employ would depend on the Adviser's and our Board of Directors' assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.

Any debt facility into which we may enter would likely impose financial and operating covenants that restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a REIT under the Code.
 
We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of portfolio dividend and fee income, 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. Results for any period should not be relied upon as being indicative of performance in future periods.

Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.

Under the Maryland General Corporation Law (or "MGCL") and our Charter, our Board of Directors is authorized to classify and reclassify any authorized but unissued shares of stock into one or more classes of stock, including preferred stock. Prior to issuance of shares of each class or series, the Board of Directors will be required by the MGCL and our Charter to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the Board of Directors could authorize the issuance of shares of preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for holders of our common stock or otherwise be in their best interest. The cost of any such reclassification would be borne by our common stockholders. Certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock. For example, holders of preferred stock would vote separately from the holders of common stock on a proposal to cease operations as a BDC. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two preferred stock directors. We currently have no plans to issue preferred stock. The issuance of preferred shares convertible into shares of common stock may also reduce the net income and NAV per share of our common stock upon conversion, provided, that we are only permitted to issue such convertible preferred stock to the extent we comply with the requirements of Section 61 of the 1940 Act, including obtaining common stockholder approval. These effects, among others, could have an adverse effect on your investment in our common stock.

 
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.

Our Board of Directors has the authority to modify or waive our investment objective, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. Our investment objective is not fundamental and may be changed without stockholder approval. Stockholders will receive notice within 60 days if the Board of Directors decides to change our investment objective. The principal investment strategies are not fundamental and may be changed without prior notice. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, NAV, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause shareholders to lose all or part of their investment.

There is a risk that our stockholders may not receive dividends or that our dividends may not grow over time.

We may make dividends on a quarterly basis to our stockholders only out of assets legally available for distribution. Our assets would be "legally available" if, after giving effect to the dividend, (i) we would be able to pay any outstanding debt, and (ii) our total assets would be greater than the sum of our total liabilities plus the amount needed to satisfy any preferential rights upon dissolution held by any stockholders who have preferential rights on dissolution superior to those receiving the dividend, if we were to be dissolved at the time of distribution. We plan on making dividends only from income and gains on our portfolio, do not plan to borrow to make distributions, and do not intend to make distributions from our offering proceeds, though we are not prohibited from borrowing for dividends or distributing up to approximately 5.0% of our offering proceeds. Funding dividends by returning capital would decrease invested assets, and borrowing to fund distributions would increase the risks associated with leverage as discussed elsewhere in this annual report.

We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions.
 
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.

We and our portfolio companies are subject to applicable local, state and federal laws and regulations. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our stockholders, potentially with retroactive effect. Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy to avail ourselves of new or different opportunities. Such changes could result in material differences to our strategies and plans and may result in our investment focus shifting from the areas of expertise of the Adviser's investment team to other types of investments in which the investment team may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
 
 

 
We incur significant costs as a result of being a public company.

As a public company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934 ("1934 Act"), as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC.
As a REIT, we are subject to a corporate level tax on certain built in gains if certain assets are sold during the 5-year period following REIT election.
A REIT generally operates without incurring any corporate level federal income tax, which is accomplished by the REIT annually distributing at least 90.0% of its REIT taxable income. If it satisfies the minimum distribution requirement, the REIT generally is entitled to a deduction for dividends paid. The REIT stockholders are then required to report the REIT dividend as ordinary income. A REIT stockholder's receipt of dividends generally will not qualify as qualified dividend income or for the dividends received deduction discussed above.
As a REIT, we are subject to a corporate level tax on certain built-in gains embedded in certain assets if such assets are sold during the 5-year period following conversion. Built-in gain assets are assets whose fair market value exceeds the REIT's adjusted tax basis at the time of conversion. In addition, a REIT may not have any earnings and profits accumulated in a non-REIT year. Thus, upon conversion to a REIT, the putative REIT is generally required to distribute to its stockholders all accumulated earnings and profits, if any. Such distribution would be taxable to the stockholders as dividend income, and, as discussed above, may qualify as QDI for non-corporate stockholders and for the dividends received deduction for corporate stockholders.

The foregoing is a general and abbreviated summary of the provisions of the Code and the Treasury Regulations in effect as they directly govern the taxation of us and our security holders. These provisions are subject to change by legislative and administrative action, and any such change may be retroactive. Security holders (and prospective holders) are urged to consult their tax advisers regarding specific questions as to U.S. federal, foreign, state, local income or other taxes.
 
 
 

 
Loss of our status as a REIT would have significant adverse consequences.

If we lose our REIT status in any taxable year, we would be subject to federal income tax (including any applicable minimum tax) on our taxable income computed in the usual manner for corporate taxpayers without any deduction for distributions to our stockholders. Unless entitled to relief under specific statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT status, assuming we had previously been treated as a REIT. To renew our REIT qualification at the end of such a four-year period, we would be required to distribute all current and accumulated earnings and profits before the end of the period and the funds available for satisfying our obligations and for distribution to our stockholders could be significantly reduced. In addition, we would be subject to the built-in gain tax based upon the values at the time of REIT election.
 
As a REIT, we are required to make distributions, other than capital gain distributions, to our stockholders each year in the amount of at least 90.0% of our REIT taxable income. As a result, we may continue to need additional capital to make new investments. If additional funds are unavailable or not available on favorable terms, our ability to make new investments will be impaired.

As a REIT, we are required to distribute at least 90.0% of our REIT taxable income, and as such we may require additional capital to make new investments or carry existing investments. We may acquire additional capital from the issuance of securities senior to our common shares, including additional borrowings or other indebtedness or the issuance of additional securities. We may also acquire additional capital through the issuance of additional equity. However, we may not be able to raise additional capital in the future on favorable terms or at all. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may issue debt securities, other instruments of indebtedness or preferred stock, and borrow money from banks or other financial institutions, which we refer to collectively as "senior securities." If we issue senior securities, we will also be exposed to typical risks associated with leverage, including increased risk of loss. If we issue preferred securities which rank "senior" to our common shares in our capital structure, the holders of such preferred securities may have separate voting rights and other rights, preferences or privileges more favorable than those of our common shares, and the issuance of such preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for security holders or otherwise be in our best interest.
 
To the extent our ability to issue debt or other senior securities is constrained, we will depend on issuances of additional common shares to finance new investments. If we raise additional funds by issuing more of our common shares or senior securities convertible into, or exchangeable for, our common shares, the percentage ownership of our stockholders at that time would decrease, and stockholders may experience dilution.

As a REIT, we may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

Since we contemplate investing in real estate through partnerships and other REITs, we may have to recognize taxable income attributable to those investments prior to the time we receive cash distributions with respect to such investments. As indicated above, in order to benefit from REIT taxation, we need to distribute at least 90.0% of our REIT taxable income. If we do not receive cash representing such income at the same time as we recognize such income, we may have difficulty making distributions necessary to benefit from REIT taxation.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay tax in excess of the cash you receive.

We may in the future elect to pay dividends in our own stock, as opposed to cash. In such case or in the event you participate in the dividend reinvestment plan (our "DRIP"), you may be required to pay tax in excess of the cash you receive from us.
 

 
Risks Related to Our Investments

We have not yet identified the portfolio companies in which we will invest.

We have not yet identified all of the additional potential investments for our portfolio. As a result, you will be unable to evaluate any future portfolio company investments prior to purchasing our shares. Additionally, our stockholders will have no input with respect to such investment decisions. These factors increase the uncertainty, and thus the risk, of investing in our shares.

The achievement of our investment objectives cannot be guaranteed.

We may not be successful in locating real estate-related securities suitable for purchase. We may not be able to purchase securities at an acceptable price. Even if suitable securities are located at an acceptable price, our performance is affected by many factors that are beyond the control of the Adviser, including unpredictable economic and financial events. Accordingly, we do not guarantee our dividends or the return of your capital. For example, a review of the performance of prior funds sponsored by the Adviser reveals that not all such funds were successful, or will be successful, in producing their targeted returns.

The indirect ownership of real properties involves a number of risks.

Our investments are primarily in entities that directly or indirectly own real property, real estate joint ventures, or other real property-based investments. As a result, an investment in us is subject to all of the risks inherent in real estate investments. Among these are the following:

·
the operation of real property is subject to the general competitive conditions in the relevant real estate markets, which have suffered in the recent economic crisis;
·
downturns in local economies, overbuilding and other general economic conditions may adversely affect the operations of real property, especially with the current economic conditions;
·
indebtedness secured by a portfolio of real properties may bear a variable interest rate that could result in increased debt service payments (and reduced cash flow) if interest rates rise;
·
the lack or uncertainty of availability or high cost of financing, especially in current markets, may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales;
·
the availability and cost of financing or refinancing is uncertain, especially in current markets, and may adversely affect the ability of the real estate owners to sell their properties and the terms of any such sales (for example, some of the REITs in which previous funds have invested have struggled to refinance their existing indebtedness, resulting in a depressed stock price, and, in some cases, causing issuers to file for bankruptcy protection);
·
the real properties may be damaged and suffer losses which are not adequately insured;
·
property tax reform, rent control, and other regulatory and governmental action may adversely affect the value of the real properties; and
·
energy shortages and allocations and increased energy prices in the areas where the real properties are located may adversely affect their operations or otherwise reduce their value.
 

 
 
Investment in mortgage loans or issuers that own or originate mortgage loans involves a number of risks.

We may make investments in mortgage loans or in issuers that own or originate mortgage loans. As a result, an investment in the Company is subject to all of the risk inherent with mortgage loans. Among these are the following:

·
We are at risk of defaults by the borrowers on those mortgage loans. These defaults may be caused by many conditions beyond the control of us or the Adviser, including interest rate levels and local and other economic conditions affecting real estate values. Our Adviser will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans;
·
If an issuer in which we invest relies on originating, holding, or servicing mortgage loans for a significant portion of its income, defaults on such mortgage loans could impair the value of the issuer itself and consequently put our investment in such issuer at risk (for example, previous funds managed by the Adviser suffered losses investing in mortgage companies or originators);
·
Fixed-rate, long-term mortgage loans could yield a return that is lower than the then-current market rates if interest rates rise. If interest rates decrease, we could be adversely affected to the extent that mortgage loans are prepaid because we may not be able to generate equivalent returns upon reinvestment of the funds;
·
Declines in real estate values may induce mortgagors to voluntarily default on their loans, increasing the risk of foreclosure and loss of capital (for example, some of the hotel REITs have just "walked away" from the hotels they owned);
·
Issuers may file for bankruptcy if they cannot meet the demands of their debt service, and bankruptcy judges have wide latitude to modify the terms of indebtedness, which could result in lower than expected returns on our investment; and
·
Delays in liquidating defaulted mortgage loans could reduce our or an issuer's investment returns. If there are defaults under those mortgage loans, we or the issuer may not be able to repossess and sell the underlying properties quickly. The resulting time delay could reduce the value of our or the issuer's investment in the defaulted mortgage loans. An action to foreclose on a property securing a mortgage loan is regulated by state statutes and regulations and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. Further, given the recent economic events, foreclosure actions may flood the courthouses, causing further delays in prosecuting such actions. In the event of default by a mortgagor, these restrictions, among other things, may impede our or an issuer's ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due to us or the issuer on the mortgage loan. For example, previous funds managed by the Administrator have invested in a mortgage where the borrower defaulted. The Administrator began foreclosure proceedings in July 2007, but did not get a foreclosure sale set until December 2009 due to various circumstances beyond the control of our Adviser. Thereafter, the foreclosure was further delayed by a bankruptcy filing that has yet to be resolved.
 
We do not participate in the management of the real estate owned by our portfolio companies.

The issuers of the securities held by us typically have exclusive management and control of the operation of their real estate portfolios, and we therefore typically rely exclusively on the management capabilities of such issuers, regardless of whether the Adviser agrees with the decisions of such issuers (though as a BDC, we offer to provide managerial assistance to our portfolio companies). If the Adviser decides that an action taken by an issuer is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a challenge or lawsuit, which could be substantial, and there can be no certainty that legal action undertaken to halt any such actions would be successful.

Information on our target securities may be difficult to obtain.

Complete and current information regarding securities to be acquired and properties owned by issuers of such securities (particularly properties which may be performing poorly) may in many cases (particularly in the case of securities of companies not registered with the SEC) not be available to the Adviser or, even if available, it may not be economical for the Adviser to obtain such information. As a result, we may purchase securities with less than adequate information. Further, the information that is obtained may not be reliable. For example, prior funds sponsored by the Administrator invested in a company that filed for bankruptcy protection. Those funds lost all their invested capital. The company had falsely stated that none of its loans were cross‑collateralized (meaning that one failed property or development would not impair the value of the other properties). The company had several loans go into default, thereby impairing the value of all its remaining properties.

 
Investments in publicly traded securities present market risks that are less prevalent with private securities.

Publicly traded investments such as REITs present certain market risks that are not present when investing directly in real estate or in private partnerships that own real estate. The trading price of public securities can change in response to various factors, not all of which relate to the real estate owned by the entities. A "bear market" can cause all publicly traded securities to trade at lower prices, even if the fundamental economic factors driving the value of real estate remain unchanged. If the trading price of a public entity is adversely affected by such factors, it can be subject to takeover attempts by opportunistic investors who see the ability to acquire assets below NAV. Because we may not likely be a significant holder of such securities, there may be little or nothing that we or the Adviser can do to prevent the sale of such entities at prices that are below the estimated NAV of the real estate owned by the entities, which would adversely affect our performance.

Investments in privately held securities may present more risks than investments in publicly held securities.

Privately held partnerships and companies, unlike public entities, are not required to file periodic reports with the SEC or state securities regulators. As a result, the Adviser's evaluation of a possible investment in a private entity may be based on incomplete or misleading information. In addition, as privately held entities generally have significantly fewer investors than public companies, a private issuer may be more concerned about a possible takeover by an investor such as us. The private issuer may therefore be more reluctant to approve a transfer of securities to us or admit us as a record owner, which would result in the loss of rights associated with record ownership, including voting rights.

Accurate valuation of illiquid real estate-related securities is difficult.

Our Adviser uses techniques to value our target securities that necessarily involve reliance on both objective and subjective criteria and assumptions and predictions that may or may not be realized. As a result, despite the Adviser's analysis, there is no assurance that any investment by us will be on terms that reflect the true economic value of the securities purchased.

We compete with other entities and persons to purchase real estate-related securities.

The market for the real estate-related securities sought by us is limited and generally inefficient, and competition for these securities may reduce the availability and increase the prices of the securities. For example, in the previous two years, at least two new competitors have entered the marketplace buying some of the same type of securities that we target for acquisition.
 
Lack of Diversification.

Some of our investments and target portfolio companies are private partnerships or other privately held entities that invest in only a single parcel of real property. Due to such issuers' lack of diversification, the value of their securities may be more volatile than securities issued by entities with larger, more diverse portfolios.

 
 
The hotel and lodging industry has unique risks.

We have invested, and may invest in, interests in hotel or lodging property portfolios. An investment in these securities is subject to the special risks inherent in investments in the hotel and lodging industry. Lodging properties are management and labor intensive and particularly susceptible to the impact of economic and other conditions outside the control of the portfolio managers. Also, compared to other types of properties, hotel maintenance typically involves maintenance of corresponding personal property such as furniture and supplies. As a result, hotels may be exposed to more fluctuations in costs and inflation, and be subject to more potential liability, from events such as property loss or theft, labor difficulties, supplier problems and personal injuries. Demand for accommodations and related hotel services may vary seasonally and may be affected by economic recessions, changes in travel patterns caused by airline schedules and strikes and other factors, including current economic conditions. To meet competition in the industry, to maintain franchise standards, or to maintain economic values, continuing expenditures must be made for modernizing, refurnishing, and maintaining existing facilities prior to the expiration of their anticipated useful lives. If such expenditures are not made, the value and profitability of the hotels may be diminished. In addition, inflationary pressures could increase operating expenses of the hotels, including energy costs, above expected levels, and have secondary effects upon occupancy rates in such hotels by increasing the expense or decreasing the availability of means of travel. All of the factors noted above may contribute to producing operating results of wider variation than for other types of properties.

We are susceptible to claims under Federal and state securities laws.

Due in part to the diverse and relatively risky nature of our acquisition procedures, we may be more susceptible to investigations, litigation, or other proceedings under securities laws. Any such investigation, litigation, or other proceeding undertaken by state or Federal regulatory agencies or private parties could necessitate the expenditure of material amounts of our capital for legal and other costs. Moreover, the dedication of human and capital resources of the Adviser and MacKenzie to such proceedings could limit MacKenzie's effectiveness in managing the Company, even if we are ultimately successful in its defense. If and to the extent that claims or suits for rescission are brought and successfully concluded for acts or omissions constituting offenses under Federal or applicable state securities laws, we could be materially and adversely affected, jeopardizing our ability to operate successfully.

Our purchase of securities may be subject to complex tender offer rules.

Because of the nature of the market for real estate-related securities, we expect to buy securities from time to time through tender offers. Federal securities laws impose a number of obligations and requirements upon a party who undertakes a tender offer. Sanctions and penalties could be imposed on us if we do not fully comply with these complex requirements. Further, because of the perceived hostile nature of tender offers, some issuers may respond by taking legal action against us and our affiliates. We could be forced to bear some of the costs of a suit, which could be substantial, and there can be no certainty that we would be successful in fighting such a suit. Likewise, we may participate in legal actions against issuers to force them to provide investor lists when their governing documents so require, but the issuers refuse to comply.

Issuers of securities we own may vote to change the structure of the portfolio company or propose a "roll-up."

In recent years, general partners of portfolio company targets have successfully consolidated several related limited partnerships into larger entities (these consolidations are sometimes referred to as "roll-ups"). The new entities have usually been in the form of infinite-life REITs or master limited partnerships, and often are listed to trade on one of the stock exchanges. In other cases, limited partners have been asked to approve the conversion of their partnership interests into common stock of a new corporation or into unsecured debentures. In most roll-ups to date, the sponsoring general partners used an estimated market price for shares of the new entity to determine the exchange value for the limited partnership units. shares of the new entities may fall below the exchange value and historically have often traded substantially below the exchange value. If the Adviser decides that a roll-up proposed by a portfolio company is contrary to our interests, we may take legal action to protect our interests. We could be forced to bear the costs of a suit, which could be substantial, and there can be no certainty that legal action undertaken to halt a roll-up by a portfolio company would be successful.

Our Adviser may experience a substantial delay in identifying and locating suitable investments for us.

It may take time for the Adviser to identify suitable securities for investment. Moreover, once suitable securities are identified, a considerable delay may be experienced in consummating their purchase. In such event, corresponding delays would be experienced by us before distributions and allocations are received from our investments.

We may temporarily invest our cash reserves in volatile securities.

Our Adviser may at times make the decision to invest some of our cash reserves into publicly traded REITs. This action has risk associated with it as the market for such publicly traded assets may be volatile. In the past few years, some such investments made by other funds managed by the Adviser have declined dramatically in value, making it impossible to recover the cash reserves unless and until the market price of the securities returns to previous levels. In some cases, REITs have ceased operations, resulting in a loss of capital for such funds.

We may use leverage, including margin accounts.

We may utilize short-term borrowing and may acquire securities or make distributions through use of brokerage margin account loan agreements. Utilization of margin loans involves the risk of losses greater than the equity involved. Any such borrowing is subject to the leverage limitations under the 1940 Act that are described above.

The FDIC deposit insurance limits may be exceeded.

Our cash deposits with banks are insured by the Federal Deposit Insurance Corporation up to $250,000 per account. We may at times exceed such limits in our deposit accounts, which could subject us to a loss of any amount over such limit if the deposit institution were to fail.

The tax consequences of an investment in us depends on the activities and reporting positions taken by the entities in which we invest.

We have little or no control over the reporting activities of the issuers of securities we buy. Accordingly, it is not possible to determine the potential tax consequences generated by an investment in us. Our Adviser typically does not prepare or review income tax information returns of the issuers of securities in which we invest. These issuers have made and will make a number of decisions on such tax matters as the expensing or capitalizing of particular items, the proper period over which capital costs may be depreciated or amortized, the allocation of acquisition costs between real property, improvements and personal property, and many other items. An IRS audit of an issuer's information return may result in the disallowance of certain deductions and may cause audits of your individual returns. An opinion of counsel generally is not available with respect to these issues, either because they involve factual determinations, or because they involve legal doctrines not fully developed under existing case law.
 
Our taxable gain or loss will likely be measured by the issuer's tax basis in the real property, rather than by our purchase price for its securities.

Some of our investments are and will be made through partnerships and other REITs. The Federal income tax basis of the real estate held by those entities may be based upon their purchase price paid, as opposed to the purchase price we paid to acquire those securities. Thus, there is a risk that we may have to report more income or gain on such entities disposition of its real estate than the amount of income or gain we would have reported if we purchased the real property directly.

 
An issuer of securities in which we invest could be deemed a "publicly traded partnership."

Some of our investments are and will be made through partnerships. If interests in a partnership are traded on an established exchange or readily tradable on a secondary exchange (or substantial equivalent) the partnership is treated as a publicly traded partnership. As such, the partnership might be treated as a C corporation, resulting in its income being subject to double level taxation. In addition, the real estate held within the partnership would no longer be taken into account in satisfying the REIT asset test.
 
The lack of liquidity in our investments may adversely affect our business.

We invest in many companies whose securities are not publicly traded, and whose securities are subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. As a result, we do not expect to achieve liquidity in our investments in the near-term. Our investments are usually subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
 
Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as "follow-on" investments, in order to (i) increase or maintain in whole or in part our equity ownership percentage; (ii) exercise warrants, options or convertible securities that were acquired in the original or a subsequent financing; or (iii) attempt to preserve or enhance the value of our investment. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we do not want to increase our concentration of risk, we prefer other opportunities, we are subject to BDC requirements that would prevent such follow-on investments, or the follow-on investment would affect our REIT tax status.

Our portfolio may lack diversification among portfolio companies, subjecting us to a risk of significant loss if one or more of these companies fail to perform.

Our portfolio may hold a limited number of portfolio companies. We do not have fixed guidelines for diversification, and our investments may be concentrated in relatively few companies. As our portfolio is less diversified than the portfolios of some larger funds, we are more susceptible to failure if a single investment fails. Similarly, the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment.
 

 
We do not intend to concentrate our portfolio on any specific geographic area, however, we may be subjected to a risk of significant loss if there is a downturn in an area in which a number of our investments are concentrated.
We do not intend to concentrate our portfolio on any specific geographic areas. However, a downturn in an area in which we are invested could significantly impact the aggregate returns we realize. Some of our portfolio companies have a heavy concentration in one particular state.  In the table below, we list such investments if they represent 5.0% or higher of the total fair value of our portfolio as of June 30, 2017.


 
States
 
Investments (Fair Value)
   
% of total Fair Value
 
 
           
Texas
 
$
4,133,722
     
8.6
%
California
 
$
3,441,679
     
7.2
%
Connecticut
 
$
2,400,000
     
5.0
%
Georgia
 
$
2,393,117
     
5.0
%
 
We may not realize gains from our equity investments.

We may invest in warrants or other equity securities. Investments in equity securities involve a number of significant risks, including the risk of further dilution as a result of additional issuances, inability to access additional capital and failure to pay current dividends. Investments in preferred securities involve special risks, such as the risk of deferred distributions, credit risk, illiquidity and limited voting rights. In addition, we may from time to time make non-control, equity investments in portfolio companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We often seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
 
 
 
 
 
 
 
 
 

 
Item 1B. Unresolved Staff Comments

None.

Item 2. PROPERTIES

We do not own any real estate or other physical properties. We use the office space of the Administrator located at 1640 School Street, Moraga, California 94556 and reimburse the cost to the Administrator pursuant to the Administration agreement. We believe that the office facilities of the Administrator are suitable and adequate for our business as it is currently conducted.

Item 3. LEGAL PROCEEDINGS

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our securities are currently not listed on any exchange, and we do not intend to list our securities on any securities exchange until at least 2024. Therefore, we do not expect a public market for them to develop in the foreseeable future. Therefore, a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, if at all.

We are currently offering shares of our common stock on a continuous basis at a current offering price of $10 per share. We may not generally issue and sell our common stock at a price below NAV per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current NAV per share of our common stock if our Board of Directors determines that such sale is in the best interests of the Company and our stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount).

Holders

As of September 21, 2017, we had 6,818,001.32 shares of common stock outstanding, held by a total of 1,803 stockholders.

Dividends and Taxable Income

We pay quarterly dividends to stockholders to the extent that we have income from operations available. Our quarterly dividends, if any, will be determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our shares. Any dividends to our stockholders will be declared out of assets legally available for distribution. In no event are we permitted to borrow money to make dividends if the amount of such dividend would exceed our annual accrued and received revenues, less operating costs. Dividends in kind are not permitted, except as provided in our Charter.

 
We have elected to be treated as a REIT under the Code. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we 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 the taxable income, we will either be subject to U.S. federal corporate income tax on our undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. We are also subject to tax on built-in gains we realize during the first five years following REIT election.

We have a dividend reinvestment plan (DRIP) that provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the DRIP is permitted by the state in which the stockholders resides. 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.

During the years ended June 30, 2017 and 2016, we issued 211,519.67 and 104,128.70 shares of our common stock, respectively, in connection with the DRIP.

The following tables reflect the cash dividends per share that the Company has paid on its common stock during the years ended June 30, 2017 and 2016.
 
 
 
Dividends
 
During the Quarter Ended
 
Per Share
   
Amount
 
Three months ended September 30, 2016
 
$
0.250
   
$
942,659
 
Three months ended December 31, 2016
   
0.250
     
1,131,115
 
Three months ended March 31, 2017
   
0.175
     
864,875
 
Three months ended June 30, 2017
   
0.210
     
1,107,372
 
 
 
$
0.885
   
$
4,046,021
 
 
               
 
 
Dividends
 
During the Quarter Ended
 
Per Share
   
Amount
 
Three months ended September 30, 2015
 
$
0.300
   
$
623,394
 
Three months ended December 31, 2015
   
0.210
     
520,306
 
Three months ended March 31, 2016
   
0.250
     
676,145
 
Three months ended June 30, 2016
   
0.175
     
557,661
 
 
 
$
0.935
   
$
2,377,506
 
 
On August 21, 2017, the Company's Board of Directors approved a dividend of $0.175 per share to the holders of record on June 30, 2017, which was paid on September 7, 2017.

Recent Sale of Unregistered Securities

None.

 
Issuer Purchases of Equity Securities

The following table presents information with respect to the Company's purchases of its common stock during the year ended June 30, 2017 and 2016:
 
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans
 
 
 
 
 
During the year ended June 30, 2017:
 
 
 
 
August 24, 2016 through September 26, 2016
                          17,910.76
 $                                9.00
                          17,910.76
                                    -
December 7, 2016 through January 9, 2017
                          30,908.70
 $                                9.00
                          30,908.70
                                    -
February 21, 2017 through March 23, 2017
                          24,867.09
 $                                9.00
                          24,867.09
                                    -
May 23, 2017 through June 27, 2017
                          28,009.74
 $                                9.00
                          28,009.74
                                    -
 
                        101,696.29
 $                                9.00
                        101,696.29
 
During the year ended June 30, 2016:
 
 
 
 
December 7, 2015 through January 7, 2016
                          74,285.56
 $                                9.00
                          74,285.56
                                    -
February 18, 2016 through March 21, 2016
                          51,994.84
 $                                9.00
                          51,994.84
                                    -
May 26, 2016 through June 26, 2016
                          43,327.08
 $                                9.00
                          43,327.08
                                    -
 
                        169,607.49
 $                                9.00
                        169,607.49
 
Item 6. SELECTED FINANCIAL DATA

The selected financial data below reflects our operations for our fiscal years ended June 30, 2017 ("Fiscal 2017"), June 30, 2016 ("Fiscal 2016"), June 30, 2015 ("Fiscal 2015"), June 30, 2014 ("Fiscal 2014") and June 30, 2013 ("Fiscal 2013"). The selected financial data have been derived from audited consolidated financial statements. The data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
 
 
 
For the Year Ended
 
Consolidated statement of operations data:
 
June 30, 2017
   
June 30, 2016
   
June 30, 2015
   
June 30, 2014
   
June 30, 2013
 
Total investment income
 
$
4,770,584
   
$
2,636,405
   
$
602,569
   
$
623,944
   
$
77,900
 
Total operating expenses
 
$
3,035,978
   
$
1,828,418
   
$
1,334,151
   
$
972,484
   
$
189,481
 
Income tax (expense) benefit
 
$
(800
)
 
$
1,412
   
$
188,949
   
$
(373,580
)
 
$
-
 
Net investment income (loss)
 
$
1,733,806
   
$
809,399
   
$
(542,633
)
 
$
(722,120
)
 
$
(111,581
)
Net realized gain on sale of investments
 
$
1,596,367
   
$
2,809,740
   
$
1,578,081
   
$
632,703
   
$
56,219
 
Net unrealized gain (loss) on investments
 
$
2,023,069
   
$
(16,668
)
 
$
1,803,714
   
$
192,524
   
$
120,065
 
Net increase in net assets resulting from operations
 
$
5,353,242
   
$
3,602,471
   
$
2,839,162
   
$
103,107
   
$
64,703
 
Weighted average common Shares outstanding
   
5,183,166
     
3,073,448
     
1,541,525
     
763,813
     
269,268
 
 
                                       
Per Share data:
                                       
Net investment income (loss) per Share
 
$
0.33
   
$
0.26
   
$
(0.35
)
 
$
(0.95
)
 
$
(0.41
)
Net realized gain on sale of investments per Share
 
$
0.31
   
$
0.91
   
$
1.03
   
$
0.83
   
$
0.21
 
Net unrealized gain (loss) on investments
 
$
0.39
   
$
(0.01
)
 
$
1.17
   
$
0.25
   
$
0.44
 
Net increase in net assets resulting from operations per Share
 
$
1.03
   
$
1.16
   
$
1.85
   
$
0.13
   
$
0.24
 
Dividend paid per Share
 
$
0.885
   
$
0.935
   
$
0.825
   
$
0.175
   
$
-
 
 
                                       
Consolidated statement of assets and liabilities data:
 
June 30, 2017
   
June 30, 2016
   
June 30, 2015
   
June 30, 2014
   
June 30, 2013
 
 
                                       
Investments at fair value
 
$
47,885,527
   
$
39,176,772
   
$
18,645,022
   
$
5,905,995
   
$
6,855,708
 
Cash and cash equivalents
 
$
11,849,712
   
$
2,350,435
   
$
4,297,086
   
$
3,522,751
   
$
262,806
 
Total assets
 
$
62,504,852
   
$
42,315,221
   
$
23,218,204
   
$
9,546,162
   
$
7,593,598
 
Total liabilities
 
$
2,515,327
   
$
1,983,030
   
$
857,975
   
$
781,373
   
$
299,666
 
Total net assets
 
$
59,989,525
   
$
40,332,191
   
$
22,360,229
   
$
8,764,789
   
$
7,293,932
 
Net asset value per Share at end of the year
 
$
9.84
   
$
9.94
   
$
10.18
   
$
9.81
   
$
10.02
 
Shares outstanding at end of the year
   
6,096,772.85
     
4,057,319.49
     
2,196,612.73
     
893,807.67
     
728,217.00
 
 

 
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements by MacKenzie Realty Capital, Inc. contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, future events or our future performance or financial condition. In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading "Risk Factors" above.

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 have elected to be treated as a REIT under the Code and as a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we 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 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 generally 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. 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 in which we invest may 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.

Investment income

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

Expenses

Our primary operating expenses include the payment of: (i) base management fees and investment advisory fees (which include the Portfolio Structuring Fee) to the Adviser; (ii) our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement; and (iii) other operating expenses as detailed below. Our investment advisory fees compensate our Investment Adviser for its work in identifying, evaluating, negotiating, closing, monitoring and servicing our investments. See "Investment Advisory Agreement." Our expenses must be billed to and paid by us, except that a sponsor may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We bear all other expenses of our operations and transactions, including:

·
the cost of calculating our NAV, including the cost of any third-party valuation services;
·
the cost of effecting sales and repurchases of our shares and other securities;
·
interest payable on debt, if any, to finance our investments;
·
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party advisory fees;
·
transfer agent and safekeeping fees;
·
fees and expenses associated with marketing efforts;
·
federal and state registration fees, any stock exchange listing fees in the future;
·
federal, state and local taxes;
·
Independent Directors' fees and expenses;
·
brokerage commissions;
·
fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;
·
direct costs and expenses of administration and sub-administration, including printing, mailing, long distance telephone and staff;
·
fees and expenses associated with independent audits and outside legal costs;
·
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
·
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.

In addition, we incurred $550,000 of organization and offering expenses in connection with our initial public offering. All additional amounts with respect to shares sold pursuant to the initial public offering were paid by our Adviser. Similarly, we will bear organization and offering expenses in connection with our current public offering up to $1,650,000. Any additional amounts with respect to shares being sold pursuant to the second public offering will be paid by our Adviser.

 
Dividend Policy

We pay quarterly dividends to our stockholders to the extent that we have income from operations available. Our quarterly dividends, if any, are determined by our Board of Directors after a quarterly review and distributed pro-rata to holders of our shares. Any dividends to our stockholders are declared out of assets legally available for distribution. In no event are we permitted to borrow money to pay dividends if the amount of such dividend would exceed our annual accrued and received revenues, less operating costs. Dividends in kind are not permitted, except as provided in our Charter.

We have elected to be treated as a REIT under the Code and as a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. We can offer no assurance that we will achieve results that will permit the payment of cash dividends required by the Code and, to the extent that 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.

Our current intention is to make any dividends in additional shares under our DRIP to stockholders who have elected to participate in our DRIP unless participation in the DRIP is restricted by a state securities regulator.

Critical Accounting Policies

In addition to the discussion below, our critical accounting policies are discussed in note 2 of our consolidated financial statements, which are part of this Annual Report beginning on page F-1.

Revenue Recognition

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

Realized gains or losses on investments are recognized in the period of disposal, distribution, or exchange and are measured by the difference between the proceeds from the sale or distribution and the cost of the investment. Investments are disposed of on a first-in, first-out basis. Net change in unrealized gain (loss) reflects the net change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gains or losses.


Fair Value Measurements

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

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

Level I –       Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I are publicly traded equity securities. The Company does not adjust the quoted price for these investments even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level II –     Price inputs are quoted prices for similar financial instruments in active markets; quoted prices for identical or similar financial instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable in active markets. Investments which are generally included in this category are publicly traded equity securities with restrictions.

Level III –    Pricing inputs are unobservable and include situations where there is little, if any, market activity for the investment. Fair values for these investments are estimated by management using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, financial condition, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant judgment by management. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had an active market for these investments existed.

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

Valuation of Investments

The Company's consolidated financial statements include investments that are measured at their estimated fair values in accordance with GAAP. Our valuation procedures are summarized below:

Securities for which market quotations are readily available on an exchange will be valued at such price as of the closing price on the day closest to the valuation date. Where a security is traded but in limited volume, we may instead utilize the weighted average closing price of the security over the prior 10 trading days. We may value securities that do not trade on a national exchange by using published secondary market trading information. When doing so, we first confirm that the trading price is sufficient under GAAP to determine the fair value of the security.
 
 
Securities for which reliable market data are not readily available or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or Board of Directors, does not represent fair value, which we expect will represent a substantial portion of our portfolio, shall each be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuation conclusions are documented and discussed with our senior management; and (iii) the Board of Directors will discuss valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where appropriate and necessary, the respective third‑party valuation firms. The recommendation of fair value will generally be based on the following factors, as relevant:
·
the nature and realizable value of any collateral;
·
the portfolio company's ability to make payments;
·
the portfolio company's earnings and discounted cash flow;
·
the markets in which the issuer does business; and
·
comparisons to publicly traded securities.
Securities for which market data is not readily available or for which a pricing source is not sufficient may include the following:
·
private placements and restricted securities that do not have an active trading market;
·
securities whose trading has been suspended or for which market quotes are no longer available;
·
debt securities that have recently gone into default and for which there is no current market;
·
securities whose prices are stale;
·
securities affected by significant events; and
·
securities that the Investment Adviser believes were priced incorrectly.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements will express the uncertainty of such valuations, and any change in such valuations, on our consolidated financial statements.
Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of June 30, 2017 and 2016:
 
 
 
June 30, 2017
   
June 30, 2016
 
Asset Type
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Publicly Traded Companies
 
$
16,839,158
   
$
16,862,458
   
$
10,917,013
   
$
11,475,174
 
Non Traded Companies
   
14,122,019
     
15,071,280
     
11,406,586
     
11,609,041
 
LP Interests
   
12,689,630
     
15,917,632
     
14,390,162
     
15,793,475
 
Investment Trusts
   
112,019
     
34,157
     
258,435
     
195,065
 
Notes
   
-
     
-
     
104,942
     
104,017
 
Total
 
$
43,762,826
   
$
47,885,527
   
$
37,077,138
   
$
39,176,772
 
 

 
 
Determination of NAV

We determine the NAV of our investment portfolio at the end of each quarter by subtracting our total liabilities from the fair value of our gross assets. We value our assets and determine our NAV consistent with GAAP and the 1940 Act, and report our NAV in our periodic reports filed with the SEC under the 1934 Act. Our valuation procedures are summarized above under the critical accounting policies section:

Our NAV as of June 30, 2017, was $9.84 per share, compared to $9.94 per share at June 30, 2016, a $0.10 per share decrease of approximately 1.0%. The net decrease was due to decreases resulting from (i) dividends to stockholders of $0.78 per share, which was calculated using the weighted average shares outstanding during the year ended June 30, 2017, (ii) and issuance of shares, net of selling commissions and dealer manager fees, below NAV, resulting in a decrease of $0.37 per share. The decreases in NAV were partially offset by the increases from (i) net investment income of $0.33 per share (ii) net realized gain on sale of investments of $0.31 per share (iii) a net unrealized gain of $0.39 per share and (iii) repurchases of outstanding shares below NAV resulting in an increase of $0.02 per share.

Results of Operations

Investment income

Investment income is made up of dividends, distributions from operations, distributions from sales/capital transactions, interest and other investment income. Distributions from sales and capital transactions are treated as realized gain from capital transactions for the purposes of calculating the subordinated advisory fees.
 
Dividend and distribution income: Dividend and distribution income for Fiscal 2017 was $4.74 million compared to $2.52 million for Fiscal 2016. This increase of $2.22 million or 88.1% was attributed to three factors: (i) eight investments (BR Riverside Investment. Co, LLC, Satellite Investment Holdings, LLC, Resource Real Estate Investors 7, L.P., Arrowpoint Burlington, LLC, Apple REIT Ten, Inc., Apple Hospitality REIT, Inc., American Finance Trust, Inc., and Chatham Lodging Trust) generated $1.07 million higher dividend/distributions in Fiscal 2017 compared to Fiscal 2016, due to the fact that these investments were purchased towards the end of Fiscal 2016 generating income for a short period; (ii) Larger amount of sales distributions (which are not considered return of capital) received during Fiscal 2017 compared to Fiscal 2016, resulting in an increase of $0.48 million-- the Company received $1.88 million of sales/liquidation distributions from FSP 1441 Main Street, KBS Real Estate Investment Trust, Inc., Rancon Realty Fund IV, Hines REIT, Costal Realty Business Trust, REEP, Inc.-A, and Secured Income, LP during Fiscal 2017 compared to $1.40 million received during Fiscal 2016 from five investments listed in the following paragraph; and (iii) a net increase in our investment portfolio by $6.69 million since June 30, 2016, generating additional dividend/distribution of $0.67 million during Fiscal 2017.

Dividend and distribution income for Fiscal 2016 was $2.52 million compared to $0.53 million for Fiscal 2015. The increase of $1.99 million or 374% was mainly due to large sales distributions received during Fiscal 2016: $1.4 million of the increase during Fiscal 2016 resulted from sales distributions received from Uniprop Manufactured Housing Income Fund II, LP, Rancon Realty IV, Resource Real Estate Investors 6, L.P, KBS Real Estate Investment Trust, Inc., InvenTrust Properties Corp. and BR Cabrillo LLC. The remaining increase of approximately $0.59 million was attributed to an increase in our investment portfolio of $20.5 million since June 30, 2015.

Interest and other income: Interest and other income for Fiscal 2017 and 2016 were $0.04 million compared to $0.11 million, respectively. This decrease of $0.07 million was due to decrease in the Company's debt securities portfolio.

Interest and other income for Fiscal 2016 and 2015 remained comparable at $0.11 million and $0.07 million, respectively, as the Company's debt securities investment portfolio remained the same.

Operating Expenses

Base management fee:

The base management fee for Fiscal 2017 was $1.27 million compared to $0.85 million for Fiscal 2016. The increase was due to the increase in the managed funds during Fiscal 2017. The managed funds as of June 30, 2017, were $60.97 million compared to $40.57 million as of June 30, 2016.

The base management fee for Fiscal 2016 was $0.85 million compared to $0.50 million for Fiscal 2015. The increase was due to the increase in the managed funds during Fiscal 2016. The managed funds as of June 30, 2016, were $40.57 million compared to $21.94 million as of June 30, 2015.

 
 
Portfolio structuring fee:

The portfolio structuring fee for both Fiscal 2017 and 2016 was $0.58 million. The fee remained comparable due to the fact that the Company raised comparable amounts of new capital through issuance of new shares in each of these two years. The Company issued new shares with total gross proceeds of $19.30 million in Fiscal 2017 and $19.25 million in Fiscal 2016.

The portfolio structuring fee for Fiscal 2016 was $0.58 million compared to $0.39 million for Fiscal 2015. The increase was due to the increase in issuance of the Company's shares during Fiscal 2016. During Fiscal 2016, the Company issued shares with gross proceeds of $19.25 million as compared to $12.93 million in Fiscal 2015.

Subordinated incentive fee:


Subordinated incentive fee has two parts—the income fee and the capital gains fee. The capital gains fee is based on realized gains (including distributions received from sales/capital transactions) and the income fee is based on net investment income.

There were no subordinated income fees for Fiscal 2017 and Fiscal 2016, due to the fact that the Company did not meet the net investment income threshold that triggers the subordinated income fee.

There was no income fee for Fiscal 2016, compared to $0.02 million for Fiscal 2015. The decrease in the subordinated income fee was due to the increase in contributed capital during Fiscal 2016. The increase in capital contribution raised the net investment income threshold which the Company did not meet during Fiscal 2016.

The capital gain fee for Fiscal 2017 was $0.23 million compared to $0 for Fiscal 2016. The increase was due to net realized gains (including the distributions received from sales/capital transactions) for Fiscal 2017 being greater than the threshold of 7% of the Company's contributed capital. Total net realized gains for Fiscal 2016 was below the threshold of 7% of the Company's contributed capital.

There was no capital gain fees for Fiscal 2016 or 2015 as the Company's net realized gains (including the distributions received from sales/capital transactions) were below the threshold of 7% of the Company's contributed capital for both years.
Administrative cost reimbursements:

Costs reimbursed to Mackenzie for Fiscal 2017 and 2016 were $0.22 million and $0.12 million, respectively. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie since June 30, 2016, as a result of increase in the Company's operating activities.


Costs reimbursed to MacKenzie for both Fiscal 2016 and 2015 were $0.12 million. The amounts remained unchanged during these two years as the allocable portion of overhead and other expenses incurred by MacKenzie also remained comparable during those periods.
Amortization of deferred offering costs:


Amortization of deferred offering costs for Fiscal 2017 were $0.31 million compared to $0 for Fiscal 2016. The increase was due to the Company incurring additional offering costs on its second registration statement during Fiscal 2017 after the conclusion of the IPO in October 2016.

 
 
Amortization of deferred offering costs for Fiscal 2016 were $0 compared to $0.04 million for Fiscal 2015. The decrease was due the deferred offering costs of $0.42 million incurred by the Company on its first registration statement being fully amortized as of September 30, 2014.

Other operating expenses: Other operating expenses for Fiscal 2017 were $0.42 million as compared to $0.29 million for Fiscal 2016. The increase was due to the increase in the Company's investment activities resulting in higher professional fees including the audit fees.

Other operating expenses for Fiscal 2016 and 2015 remained comparable at $0.29 million and $0.27 million, respectively.


Net realized gain on sale of investments



 
Total net realized gains for Fiscal 2017 was $1.60 million realized from (i) sales of fourteen publicly traded securities with net realized gains of $0.42 million, and (ii) sales and merger of four non-traded REITs with net realized gains of 1.37 million, (iii) offset by net realized loss of $0.19 million from sales and liquidations of seven limited partnership interests.
Total gains realized for Fiscal 2016 were $2.81 million realized from (i) sales and merger of four non-traded REITs with net realized gains of $2.49 million and (ii) disposals and partnership liquidations of eleven limited partnership interests for net realized gains of $0.37 million (iii) offset by total net realized loss of $0.05 from sales of seven publicly traded securities.

Total net realized gains for Fiscal 2015 were $1.58 million, which was realized from (i) disposals of ten publicly traded securities with net realized gains of $0.90 million, (ii) disposal of four non-traded REIT securities with net realized gains of $0.66 million, and (iii) disposals of two partnership interests with total realized gains of $0.02 million. The net realized gains from publicly traded securities were primarily from the disposal of Apple Hospitality REIT, Inc., Xenia Hospitality REIT, Inc., and Empire State Realty Trust, Inc. The net realized gains from the non-traded REIT securities were primarily from the disposal of TIER REIT, Inc. shares.


 Net unrealized gain (loss) on investments





During Fiscal 2017, the Company recorded unrealized gains of $2.02 million, which were net of the reclassification adjustment of $1.36 million of realized gains. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2016, that was realized during Fiscal 2017. Accordingly, the net unrealized gains excluding the reclassification adjustment were $3.39 million, which resulted from fair value appreciation of $1.64 million of non-traded REIT securities and $1.94 million from limited partnership interests, offset by fair value depreciation of $0.19 million of publicly traded securities and investment trusts.

During Fiscal 2016, the Company recorded unrealized losses of $0.02 million, which were net of the reclassification adjustment of $0.80 million of realized gains. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2015, that was realized during Fiscal 2016. Accordingly, the net unrealized gains excluding the reclassification adjustment were $0.78 million, which resulted from fair value appreciation of $0.91 million of limited partnership interests and $0.12 million of publicly traded securities, offset by total fair value depreciation of $0.25 million of non-traded REIT securities, investment trusts, and notes.

During Fiscal 2015, the Company recorded unrealized gain of $1.80 million, which were net of the realized gain reclassification adjustment of $0.05 million. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2014, that was realized during Fiscal 2015. Accordingly, the net unrealized gains excluding the reclassification adjustment were $1.85 million, which resulted from fair value appreciation of $2.00 million of non-traded REIT securities, $0.30 million of limited partnership interests and $0.12 million of debt securities, offset fair value depreciations of $0.49 million of publicly traded securities and $0.08 million of investment trusts.


 

Income tax provision (benefit)

We did not record any income tax expenses for Fiscal 2017, or 2016, or 2015, as we have elected to be treated as a REIT for tax purposes beginning with the tax year ended December 31, 2014. As a REIT, the Company is not 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.


The Company satisfied the annual dividend payment and other REIT requirements for the tax year ended December 31, 2016, 2015, and 2014. Therefore, the Company did not incur any tax expense or excise tax for those periods. In addition, during tax year ended December 31, 2017, we intend to pay dividends sufficient to avoid incurring income taxes. Therefore, the Company did not record any income tax provisions during the years ended June 30, 2017, 2016, and 2015.

TRS is subject to federal and state income taxes as it is a taxable REIT Subsidiary. For Fiscal 2017, TRS did not have any taxable income; therefore, TRS did not record any federal income tax provisions. The income tax expense of $800 for Fiscal 2017, was the minimum state tax paid by TRS. The income tax benefit of $1,412 reflected in the consolidated statements of operations for Fiscal 2016, was the adjustment for the difference between the actual and estimated tax on the built-in gains realized during the 2014 tax year. The income tax benefit of $188,949 reflected in the consolidated statements of operations for Fiscal 2015, was the reversal of income tax provisions recorded during the period from January 1, 2014, through June 30, 2014, during which the Company had not qualified to be treated as a REIT. This reversal occurred after the Company qualified to be treated as a REIT during the quarter ended December 31, 2014. For Fiscal 2014, the Company recorded income tax provision of $373,580 treating the Company as a corporation for federal and state income tax purposes since we did not reach to our REIT qualification conclusion until the quarter ended December 31, 2014. Of the total tax provision, $188,949 was reversed in Fiscal 2015 after the Company qualified to be treated as a REIT beginning with tax year 2014.

Liquidity and Capital Resources

Capital Resources

We commenced our IPO of 5,000,000 shares in January 2014 and concluded the offering in October 2016. As of the date of conclusion, we sold 4,248,933.5 shares with gross proceeds of $42.46 million, issued 223,151.28 shares under our DRIP with gross proceeds of $2.01 million, and redeemed 187,518.23 shares under our share Repurchase Program at an aggregate price of $1.69 million. In August 2016, we filed a new registration statement with the SEC to register the public offering of 15,000,000 shares of the Company's common stock. This new registration statement was declared effective by the SEC on December 20, 2016. In the current public offering, we plan to raise total gross proceeds of up to $150 million. As of June 30, 2017, we sold 1,066,558 shares with gross proceeds of $10.67 million, issued 101,216.80 shares under our DRIP with gross proceeds of $0.91 million and redeemed 83,785.53 shares under our share Repurchase Program at an aggregate price of $0.75 million. We do not have any plans to issue any preferred equity. We plan to fund future investments with the net proceeds raised from our second offering and any future offerings of securities and cash flows from operations, as well as interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. We may also fund a portion of our investments through borrowings from banks and issuances of senior securities; however, we do not have any current plans to borrow money. As of June 30, 2017, we were selling our shares on a continuous basis at a price of $10 which may be below NAV per share from time to time, as approved by our stockholders.

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

Our primary uses of funds are investing in portfolio companies, paying cash dividends to holders of our common stock (from investment income and realized capital gains), making payments to any lenders or senior security holders, paying operating expenses.  If all of the shares registered under our second registration statement in the second public offering are sold, we will receive investable cash totaling approximately $130.5 million.

 
Cash Flows:

Fiscal 2017

For Fiscal 2017, we experienced a net increase in cash of $9.50 million. During this period, we generated $14.42 million of cash from our financing activities and used $4.92 million in operating activities.

The net cash outflow of $4.92 million from operating activities was primarily due to the cash outflow of $34.81 million from purchases of investments offset by cash inflows of $26.39 million from sales of investments, $2.17 million from distributions received from our investments that are considered return of capital and $1.33 million from investment income, net of the Company's operating expenses.


The net cash inflow of $14.42 million from financing activities resulted from the sale of shares in the IPO and the second public offering with gross proceeds of $19.48 million (adjusted for the $0.18 million of increase in capital pending acceptance) offset by cash outflows of $0.92 million from share redemptions, $2.14 million from dividend payments and $2.00 million from selling commissions and fees payments.

Fiscal 2016

For Fiscal 2016, we experienced a net decrease in cash of $1.95 million. During this period, we generated $15.38 million of cash from our financing activities and used $17.33 million in operating activities.

Net cash outflow of $17.33 million from operating activities was primarily due to the cash outflow of $30.64 million from purchases of investments offset by cash inflows of $12.50 million from sales of investments, $0.41 million from distributions received from our investments that are considered return of capital and $0.40 million from investment income, net of the Company's operating expenses.

Net cash inflow of $15.38 million from financing activities resulted from the sale of Shares under our current offering with gross proceeds of $20.28 million (adjusted for the $1.03 million of increase in capital pending acceptance) offset by cash outflows of $1.53 million from Share redemptions, $1.44 million from dividend payments and $1.93 million from payment of selling commissions and fees.

Fiscal 2015

For Fiscal 2015, we experienced a net increase in cash of $0.77 million. During this period, we generated $10.93 million of cash from our financing activities and used $10.16 million of cash in operating activities.

Net cash outflow of $10.16 million from operating activities was primarily due to purchase of investments of $17.56 million and $0.80 million of cash used for operating expenses, net of cash received from investment income. These operating activities cash outflows were offset by cash inflow of $8.20 million from sales of investments and return of capital from our investments.

Net cash inflow of $10.93 million from financing activities resulted from the sale of 1,294,097 Shares with gross receipts of $13.14 million (adjusted for the $0.21 million of increase in capital pending acceptance) offset by the payment of selling commissions and fees of $1.31 million and dividends of $0.89 million.
 
Contractual Obligations

We have entered into two contracts under which we have material future commitments, the Advisory Agreement, under which the Adviser serves as our investment adviser, and the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Advisory Agreement in future periods (after the up-front payment of the portfolio structuring fee during the IPO) are (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 is 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. If we do borrow money, we 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. 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our portfolio, as well as our future investments, primarily consists 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 June 30, 2017, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 77% of our total assets as of that date. As discussed in Note 3 – Investments to our financials statement, these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment portfolio also includes shares of publicly traded REITs, which are valued at recently quoted trading prices. Our investment strategy represents a high degree of business and financial risk due 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and notes to the consolidated financial statements are set forth beginning on page F-1 in this Annual Report on Form 10-K and are incorporated herein by reference.
 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure 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.

As disclosed in the Form 10-K/A for the fiscal year ended June 30, 2016, we had identified a control deficiency in our financial reporting process that constituted a material weakness, which caused the restatement of the audited financial statements as of June 30, 2016, included in the Form 10-K/A for the fiscal year ended June 30, 2016. It was determined that we did not maintain effective review controls over the accounting for portfolio structuring fees; specifically, the review of accounting treatment related to significant agreements. As a result of our incorrect application of ASC 505, we accounted for the portfolio structuring fee charged by our Adviser as reduction in the proceeds from the sale of the Company's common stock instead of as an operating expense in the financial statements included in the original Form 10-K for the year ended June 30, 2016.

In light of the material weakness referred to above, the Company designed and implemented additional controls, including the performance of additional review analyses and procedures, in order to conclude that the consolidated financial statements are fairly presented, in all material respects, in accordance with GAAP. The additional controls implemented include the performance of additional analyses and procedures with respect to the accounting for sales of common stock.  Additional review of the consolidated financial statements were performed by the Chief Financial Officer, President, General Counsel, and audit committee to insure that the portfolio structuring fee is properly accounted for as an operating expense and not as a reduction to equity.

After the implementation of the above controls, management has concluded that the material weakness disclosed in the Form 10-K/A for the fiscal year ended June 30, 2016, has been remediated during the fiscal year ended June 30, 2017.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP.
 
 

Our internal control over financial reporting includes those policies and procedures that:

1.
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and the dispositions of our assets;
2.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and
3.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management's assessment of the effectiveness of our internal control system as of June 30, 2017, was based on the framework for effective internal control over financial reporting described in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, as of June 30, 2017, our system of internal control over financial reporting was effective at the reasonable assurance level.

This annual report does not include an attestation report of the Company's independent registered public accounting firm regarding control over financial reporting. Management's report was not subject to attestation by the company's independent registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street and Consumer Protection Act, which exempts non-accelerated filers from the auditor attestation requirement of section 404 (b) of the Sarbanes-Oxley Act.

Changes in Internal Control over Financial Reporting

Except as noted in the preceding paragraphs, there were no changes to the Company's internal control over financial reporting (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that occurred during the year ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. OTHER INFORMATION

None.

 

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors and Executive Officers

Our business and affairs are managed under the direction of our Board of Directors. Accordingly, our Board provides broad supervision over our affairs, including supervision of the duties performed by the Adviser and MacKenzie. Certain employees of MacKenzie are responsible for our day-to-day operations. The names, ages and addresses of our Directors and specified executive officers, together with their principal occupations and other affiliations during the past five years, are set forth below. Each Director and officer holds office for a one year term to which he or she is elected and until his successor is duly elected and qualifies, or until he resigns or is removed in the manner provided by law. Our Board consists of a majority of Independent Directors. The Director who is an "interested person" (as defined in the 1940 Act) is referred to as an "Interested Director," a director who is not an Interested Director is referred to herein as an "Independent Director." The address for all officers and Directors is 1640 School Street, Moraga, California 94556. None of our Directors or officers serve as a director for any other company which (i) has a class of securities registered under section 12 of the 1934 Act, (ii) is subject to section 15(d) of the 1934 Act, or (iii) is registered as an investment company under the 1940 Act; and we only have one investment portfolio.

Board of Directors
Name and Age
Position(s) Held with the Company
Term of Office and Length of Time Served
Principal Occupation(s) During Past 5 Years
C.E. "Pat" Patterson†, 76
Chairman of the Board of Directors
Since 2012
Mr. Patterson is co-founder and president of MacKenzie and the Adviser, and a director of their general partner, and a beneficial owner of all three companies, all since 1982. Mr. Patterson has spent his entire business career in the financial services industry. In 1982, Mr. Patterson founded Patterson Financial Services, Inc. (now MCM Advisers) with Berniece A. Patterson as a financial planning firm. As president of the Adviser, Mr. Patterson is responsible for all investment counseling activities. He supervises the analysis of investment opportunities for the clients of the firm. In February 1988, Mr. Patterson co-founded the predecessor of MacKenzie, which acts as the general partner and Manager to a number of prior investment funds. Mr. Patterson is the president of MacKenzie. Mr. Patterson is a former Certified Financial Planner, has completed the College of Financial Planning's Due Diligence course, and is a past member of both the Institute of Certified Financial Planners and the International Association for Financial Planning.
Tim Dozois, 55
Director
Since 2012
Mr. Dozois has been the Acting General Counsel and Secretary for Pendrell Corporation, a NASDAQ-listed company specializing in intellectual property solutions, since June of 2010. Prior to joining Pendrell, he spent more than 20 years supporting clients with securities law compliance, mergers, acquisitions, and real estate acquisition, financing, and management. From 1996 until 2010, Mr. Dozois served as an equity partner of Davis Wright Tremaine LLP, a Seattle-based law firm of approximately 500 lawyers. Mr. Dozois received his B.S. in Financial Management from Oregon State University and his J.D from the University of Oregon School of Law, where he was Order of the Coif.
Tom Frame, 75
Director
Since 2012
Mr. Frame was a co-founder of TransCentury Property Management and solely founded Paradigm Investment Corporation. TransCentury began in May of 1973 and has syndicated and managed over 10,000 residential units. During the last 35 years, Mr. Frame has been a principal in the acquisition, financing, restoration, and sale of over $500,000,000 in residential and commercial real estate. Paradigm was founded in June 1986 to sponsor and manage private, closed end "mutual funds." The last of the funds successfully liquidated in December of 2000. Mr. Frame received a BA degree from the University of Kansas in Mathematics in June 1964, a Juris Doctor degree from the San Francisco Law School in June 1975, and a MBA with honors from Pepperdine University in April 1986. Mr. Frame is currently managing his own investments which include residential units, commercial property, and a portfolio of securities.
† As a principal of both MacKenzie and the Adviser, Mr. Patterson is an Interested Director.
 

 
 
Executive Officers

Our current officers are listed in the chart below. As affiliated persons of MacKenzie and/or the Adviser, the officers are "interested persons," as that term is defined in Section 2(a)(19) of the 1940 Act. The address for all officers is 1640 School Street, Moraga, California 94556.

Name and Age
Position(s) Held with the Company
Term of Office and Length of Time Served
Principal Occupation(s) During Past 5 Years
Robert Dixon, 46
Chief Executive Officer and President
Since 2012
Robert E. Dixon has been the senior vice president and co-chief investment officer of MacKenzie and the Adviser since 2005, and a director of their general partner, and a beneficial owner of all three companies since 2005. Mr. Dixon is C.E. and Berniece Patterson's son-in-law. Robert Dixon served as an officer and director of Sutter Holding Company, Inc. from March 2002 until 2005. Mr. Dixon has been president of Sutter Capital Management since its founding. Mr. Dixon received his Master of Business Administration degree from Cornell University in 1998 and has held the Chartered Financial Analyst® designation since 1996. Mr. Dixon received his bachelor's degree in economics from the University of California at Los Angeles in 1992.
Paul Koslosky, 55
Chief Financial Officer and Treasurer
Since 2012
Mr. Koslosky has been the chief financial officer and treasurer for the Adviser and MacKenzie since 2004. He owns a beneficial interest in each MacKenzie, the Adviser and their general partner. He is responsible for accounting and reporting for MacKenzie, the funds it manages, and other related business interests. Mr. Koslosky graduated from California State University, Hayward in 1983 with a Bachelor of Science degree in Business Administration. Prior to joining MacKenzie in 1997, he spent five years with Zellerbach Paper Company, a billion-dollar paper distributor, as staff accountant and, eventually, financial reporting manager. He worked for Doric Development, an Alameda, California real estate developer with numerous related business interests. At Doric he served as accounting manager responsible for the accounting and reporting for commercial development and construction. From 1995 to 1997 he served as controller at Doric.
Glen Fuller, 44
Chief Operating Officer
Since 2012
Mr. Fuller has been senior vice president and secretary of MacKenzie since 2000 and the Adviser since 2000, and a director of their general partner, and a beneficial owner of all three companies since 2000. Mr. Fuller is Berniece Patterson's son and C.E. Patterson's stepson. Prior to becoming senior vice president of MacKenzie, he was with MacKenzie for two years as a portfolio manager and research analyst. Prior to joining MacKenzie, Mr. Fuller spent two years running the over the counter trading desk for North Coast Securities Corp. (previously Morgan Fuller Capital Group) with responsibility for both the proprietary and retail trading desks. Mr. Fuller was also the registered options principal and registered municipal bond principal for North Coast Securities Corp., a registered broker-dealer. Mr. Fuller previously held his NASD Series 7, general securities registration. Mr. Fuller has a Bachelor of Arts in Management.
Chip Patterson, 46
General Counsel and Secretary
Since 2012
Chip Patterson has been the senior vice president and general counsel of MacKenzie and the Adviser since 2003, a director of their general partner since 2003, and a beneficial owner of all three companies since 2003. Chip Patterson is C.E. Patterson's son and Berniece Patterson's stepson. Chip Patterson graduated magna cum laude from the University of Michigan Law School with a Juris Doctor Degree and with high distinction and Phi Beta Kappa from the University of California at Berkeley with a Bachelor of Arts Degree in Political Science. Prior to joining MacKenzie in July 2003, he was a securities and corporate finance attorney with the national law firm of Davis Wright Tremaine LLP.
Jeri Bluth, 42
Chief Compliance Officer
Since 2012
Ms. Bluth has been the Chief Compliance Officer for MacKenzie and the Adviser since 2009. She owns a beneficial interest in each MacKenzie and the Adviser. Mrs. Bluth oversees compliance for all the funds advised by the Adviser, and she oversees the Company's compliance with its Code of Ethics, Bylaws, Charter, and applicable rules and regulations. Mrs. Bluth began her career with MacKenzie Patterson Fuller, Inc. in July of 1996 in the Investor Services Department. During Mrs. Bluth's career with MacKenzie, she graduated from St. Mary's College of California in June 2001, with a Bachelor of Arts degree in Business Management.
Christine Simpson, 52
Chief Portfolio Manager
Since 2012
Mrs. Simpson has been employed by MacKenzie and its affiliates since 1990, and has been the Adviser's Senior Vice President of Research and Trading since 2005. Mrs. Simpson is responsible for handling the day-to-day operations of The Adviser's research department. During Mrs. Simpson's career with MacKenzie, she graduated: with a Bachelor of Arts degree in Business Management from St. Mary's College of California in October 2004 (with honors), with a Master's of Science degree in Financial Analysis and Investment Management in September 2006, and a Master's in Business Administration in June 2008.



Section 16(a) Beneficial Ownership Reporting Compliance

Under the federal securities laws, our directors, executive (and certain other) officers and any persons holding more than 10% of our common stock are required to report their ownership of our common stock and any changes in that ownership to us and the SEC. Specific due dates for these reports have been established by regulation, and we are required to report any failure to file by these dates in Fiscal 2017. To our knowledge, based solely on a review of the copies of beneficial ownership reports furnished to us and written representations that no other reports were required, during Fiscal 2017, all of our directors, officers and more than 10% beneficial owners complied with all applicable 1934 Act §16(a) filing requirements, except for the following: (i) Messrs. Dozois and Frame were late in reporting singular purchases of the Company's common stock; (ii) Mr. Pat Patterson was late in reporting two indirect acquisitions of common stock by two limited partnerships in which Mr. Patterson and his spouse have ownership interests; (iii) Messrs. Chip Patterson, Dixon and Fuller filed late amendments to Form 4s to include the indirect acquisitions of common stock by a limited partnership that were attributable to the filers due to the ownership in the limited partnership by the filer's minor children; and (iv) Messrs. Chip Patterson, Koslosky, Dixon, Fuller and Mses. Bluth and Simpson were late in reporting the indirect acquisition in common stock by a limited partnership in which the filers have ownership interests.

Code of Ethics

We have adopted a Code of Ethics which applies to, among others, our senior officers, including our Chief Executive Officer and Chief Financial Officer, as well as all of our officers, directors and employees. Our Code of Ethics requires that all employees and directors avoid any conflict, or the appearance of a conflict, between an individual's personal interests and our interests. Pursuant to our Code of Ethics, each employee and director must disclose any conflicts of interest, or actions or relationships that might give rise to a conflict, to our Chief Compliance Officer. Our Audit Committee is charged with approving any waivers under our Code of Ethics.

The Codes of Ethics can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 942-8090. The Codes of Ethics are also available on the EDGAR database on the SEC's internet site at www.sec.gov, and, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102.

Audit Committee

The Board of Directors has established an Audit Committee in accordance with 1934 Act §3(a)(58)(A). The Audit Committee operates under a charter approved by our Board of Directors, which contains the responsibilities of the Audit Committee. The Audit Committee's responsibilities include establishing guidelines and making recommendations to our Board of Directors regarding the valuation of our loans and investments, selecting our independent registered public accounting firm, reviewing with such independent registered public accounting firm the planning, scope and results of their audit of our consolidated financial statements, pre‑approving the fees for services performed, reviewing with the independent registered public accounting firm the adequacy of internal control systems, reviewing our annual consolidated financial statements and periodic filings and receiving our audit reports and consolidated financial statements. The audit committee is currently composed of Messrs. Dozois and Frame, neither of whom is an "interested person" of ours as that term is defined in Section 2(a)(19) of the 1940 Act. Mr. Dozois serves as chairman of the audit committee.

Item 11. EXECUTIVE COMPENSATION

We do not have a compensation committee because our executive officers do not receive any direct compensation from us.
 
 

Compensation of Directors

Our Independent Directors receive an annual retainer of $28,000. This amount was increased from $20,000 in October 2016. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting in person and $500 for each telephonic meeting, and also receive $500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each committee meeting. In addition, the chairman of the audit committee receives an annual fee of $1,000 and each chairman of any other committee receives an annual fee of $1,000 for their additional services, if any, in these capacities. No compensation is expected to be paid to directors who are "interested persons" as that term is defined in 1940 Act §2(a)(19).

The following table details the compensation accrued to Directors fees during Fiscal 2017. We maintain no pension, equity participation or retirement plans for our Directors. However, both Independent Directors have been investing a portion of their compensation into Shares of the Company beginning this fiscal year, and have stated that they intend to continue to do so.
 
Name & Position
 
Fiscal Year 2017 Fees (1)
 
C.E. "Pat" Patterson (Chairman of the Board of Directors)
 
$
-
 
Tim Dozois (Independent Director)
   
30,000
 
Tom Frame (Independent Director)
   
30,000
 
Total Fees
 
$
60,000
 
 

Compensation of Executive Officers

None of our officers receives direct compensation from us. We have not compensated our executive officers in any of the last three fiscal years. We do not provide any bonus, stock options, stock appreciation rights, non-equity incentive plans, non-qualified deferred compensation or pension benefits to our executive officers. Further, we have no agreements with any officer pertaining to change in control payments. All of our officers and staff are employed by MacKenzie or the Adviser, which pay all of their cash compensation.

Compensation Committee Interlocks and Insider Participation

We do not have a separate compensation committee utilized to determine the appropriate compensation payable to our executive officers and Directors. The Audit Committee, however, is responsible for, among other things, annually reviewing and approving the compensation policies for our Directors.
 

 
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table shows the amount of our common stock beneficially owned and based on a total of 6,818,001.32 shares of our common stock outstanding on September 21, 2017, as of that date, by (1) each of our directors and nominees for director, (2) our executive officers and (3) all directors and executive officers as a group. To our knowledge, no other person owns more than 5% of our common stock. The number of shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the Securities and Exchange Commission (the "SEC") and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days of September 21, 2017, through the exercise of any instrument. Unless otherwise indicated, each person has the sole investment and voting power, or shares such powers with his spouse, with respect to the shares set forth in the table. Unless known otherwise by us, the beneficial ownership information is based on each beneficial owner's most recent Form 3, Form 4, Form 5, Schedule 13D or Schedule 13G, as applicable.  With respect to the Executive Officers listed below, they are limited partners of MPF Successors, LP, as well as officers of its general partner, which owns 40,097.41 shares in us.  Mr. C. E. Patterson and his spouse are the sole beneficial owners of 7,824.21 shares owned in a personal holdings limited partnership, and the executive officers below are also in control of its general partner. Thus, they are all deemed to have voting and dispositive control over such shares and the number of shares owned below is the number of shares owned by MPF Successors, LP and the personal holding partnership. The address of each beneficial owner is 1640 School Street, Moraga, CA  94556.


Name and address of Beneficial Owner
Nature of Beneficial Ownership
Number of Shares Owned
Percent of Class
Independent Directors:
 
 
 
Tim Dozois
Directly held
                            2,111.00
*
Tom Frame
Directly held
                            1,478.08
*
Interested Director:
 
 
 
C.E. "Pat" Patterson
Indirectly held
                          47,921.62
*
Executive Officers
 
 
 
Robert Dixon
Indirectly held
                          47,921.62
*
Glen Fuller
Indirectly held
                          47,921.62
*
Chip Patterson
Indirectly held
                          47,921.62
*
Paul Koslosky
Indirectly held
                          47,921.62
*
Directors and Officers as a group (9 person)
Indirectly held
                          51,510.70
*

* Represents less than 1% of the number of shares outstanding.



Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


We are managed by MacKenzie, which is owned by three sub-partnerships that are owned in varying percentages by MacKenzie and the Adviser employees and the extended family of Messrs. C.E. Patterson, Chip Patterson, Glen Fuller and Robert Dixon. The general partner of MacKenzie is MCM-GP, Inc., a California corporation owned by the same individuals. The majority of the beneficial interests of MacKenzie are owned by C.E. Patterson, Berniece A. Patterson, Robert Dixon, Glen Fuller, and Chip Patterson, in addition to other family members. Certain non-family employees of MacKenzie own minority interests in MacKenzie that represent in the aggregate less than 10% of the equity in MacKenzie. MacKenzie manages all of our affairs except for providing investment advice.

We are advised by the Adviser, whose investment team members have an average of nearly 20 years of experience investing in real estate-related securities. The Adviser is registered with the SEC and is owned by the same beneficial owners and in the same proportions as MacKenzie. The Adviser is led by its investment team: C.E. Patterson, Founder and Managing Director of the General Partner of MacKenzie and the Adviser; Glen W. Fuller, who serves as Chief Operating Officer and Managing Director of the General Partner of MacKenzie and the Adviser; Chip Patterson, who serves as Managing Director and General Counsel, and Director of the General Partner of MacKenzie and the Adviser; Robert E. Dixon, who serves as Chief Investment Officer and Managing Director of the General Partner of MacKenzie and the Adviser; Paul F. Koslosky, who serves as Chief Financial Officer and Treasurer of the General Partner of MacKenzie and the Adviser; and Christine E. Simpson, who serves as Chief Portfolio Manager and Senior Vice President of Research for the General Partner of MacKenzie and the Adviser.

We have entered into two affiliated contracts—the Advisory Agreement, under which the Adviser serves as our investment adviser, and the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Investment Advisory Agreement in future periods (after the up-front payment of the Portfolio Structuring Fee) are (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). In Fiscal 2017, 2016 and 2015, Management fees accrued and payable to the Adviser under the Advisory Agreement were $1,499,272, $845,264 and $520,243, respectively. Administration fees accrued and payable under the Administration Agreement for Fiscal 2017, 2016 and 2015, were $220,000, $120,000 and $120,000. Administration Agreement fees occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it is liable for any expenses we incur as a result of such withdrawal.

The 1940 Act extensively regulates conflicts of interests between BDCs, their directors, investment advisers and their affiliates. For example, the 1940 Act and rules thereunder generally prohibit a BDC's employees, officers, directors, investment adviser and their affiliates from (i) selling securities or property to the BDC, (ii) buying securities or property from the BDC, (iii) borrowing money or property from the BDC, or (iv) entering into joint transactions with the BDC or a company controlled by it. The 1940 Act further prohibits a wider group of persons affiliated with a BDC from entering into such transactions with a BDC unless approved by the BDC's stockholders.

In order to ensure that we do not engage in any transactions with any persons affiliated with us that are prohibited by the 1940 Act, we have implemented certain written policies and procedures whereby our executive officers screen each of our transactions for any possible affiliations between the issuer in which we invest, us, companies controlled by us and our executive officers and directors. We do not enter into any agreements unless and until we are satisfied that doing so does not violate our Charter or raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and exemptive or other relief for such transaction. Our Board of Directors review these procedures on an annual basis.

Our directors have been divided into two groups — interested directors and Independent Directors. An interested director is an "interested person" as defined in 1940 Act §2(a)(19). Our only interested director is C.E. "Pat" Patterson. Our independent directors are Tim Dozois and Tom Frame.
 
 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES:

The following table presents fees incurred for professional services rendered by Moss Adams, the Company's independent registered public accounting firm, for Fiscal 2017, Fiscal 2016, and Fiscal 2015:

Fee Category
 
Fiscal Year 2017
   
Fiscal Year 2016
   
Fiscal Year 2015
 
Audit Fees
 
$
123,500
   
$
75,500
   
$
74,500
 
Audit-Related Fees
   
-
     
-
     
-
 
Tax Fees
   
-
     
-
     
-
 
Total Fees
 
$
123,500
   
$
75,500
   
$
74,500
 

Audit Fees were for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Moss Adams in connection with statutory and regulatory filings or engagements and include quarterly reviews and security counts.
 
Audit-Related Fees were for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under "Audit Fees." These services include accounting consultations in connection with acquisitions, consultations concerning financial accounting and reporting standards.

Tax Fees were for professional services for federal, state and international tax compliance, tax advice and tax planning and include preparation of federal and state income tax returns, and other tax research, consultation, correspondence and advice.
 
All Other Fees are for services other than the services reported above. During Fiscal 2017, 2016 and 2015, we paid Moss Adams LLP $46,000, $20,000 and $16,700, respectively for their review of the Registration Statement. However, these amounts were reimbursed by the Adviser under the Advisory Agreement.
 
The Audit Committee has concluded the provision of the non-audit services listed above is compatible with maintaining the independence of Moss Adams LLP. Moss Adams LLP did not bill the Adviser or MacKenzie, for any non-audit services in Fiscal 2017, 2016 or 2015.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
 
The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.


 
PART IV

Item 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this Annual Report on Form 10-K:


2.
The Exhibits listed in the Exhibit Index below.
  
 
Exhibit No. 1
Description of Document
 
 
3(i)
 
 
3(ii)
 
 
10.1
 
 
10.2
 
 
10.3
   
10.4
 
   
10.5
   
10.6
   
10.7
 
 
10.8
 
 
10.9
 
 
10.10
 
 
10.11
   
10.12
   
10.13
 
 
10.14
 
 
14
 
 
 
 
 
 
 
 
  

All other exhibits for which provision is made in the applicable regulations of the Securities and Exchange Commission are not required under the related instruction or are inapplicable and therefore have been omitted.













Index to Audited Consolidated Financial Statements
 
Consolidated Financial Statements

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

 
 
 
 
 
 


Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders
MacKenzie Realty Capital, Inc. and Subsidiary

We have audited the accompanying consolidated statements of assets and liabilities of MacKenzie Realty Capital, Inc. and Subsidiary (the "Company"), including the schedule of investments, as of June 30, 2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended June 30, 2017. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MacKenzie Realty Capital, Inc. and Subsidiary as of June 30, 2017 and 2016, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2017, in conformity with accounting principles generally accepted in the United States of America.


/s/ Moss Adams LLP
San Francisco, California
September 21, 2017
 
 
 
 



MacKenzie Realty Capital, Inc.
Consolidated Statements of Assets and Liabilities


 
 
 
June 30, 2017
   
June 30, 2016
 
Assets
           
Investments, at fair value (cost of $43,762,826 and $37,077,138, respectively)
 
$
47,885,527
   
$
39,176,772
 
Cash and cash equivalents
   
11,849,712
     
2,350,435
 
Accounts receivable
   
2,240,815
     
438,956
 
Other assets
   
284,991
     
349,058
 
Deferred offering costs, net
   
243,807
     
-
 
Total assets
 
$
62,504,852
   
$
42,315,221
 
 
               
Liabilities
               
Accounts payable and accrued liabilities
 
$
78,865
   
$
90,956
 
Capital pending acceptance
   
1,803,090
     
1,616,490
 
Due to related entities
   
588,009
     
230,221
 
Deferred tax liability, net
   
45,363
     
45,363
 
Total liabilities
   
2,515,327
     
1,983,030
 
 
               
Net assets
               
Common stock, $0.0001 par value, 80,000,000 shares authorized; 6,096,772.85 and 4,057,319.49 shares issued and outstanding, respectively
   
610
     
406
 
Capital in excess of par value
   
55,606,134
     
37,256,225
 
Accumulated distribution in excess of net investment income
   
(1,354,197
)
   
(619,875
)
Accumulated undistributed net realized gain
   
1,614,277
     
1,595,801
 
Accumulated undistributed net unrealized gain
   
4,122,701
     
2,099,634
 
Total net assets
   
59,989,525
     
40,332,191
 
 
               
Total liabilities and net assets
 
$
62,504,852
   
$
42,315,221
 
 
               
Net asset value per Share
 
$
9.84
   
$
9.94
 
 
 
 
 
 
 
 
 










The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
June 30, 2017
 
 
Name
 
Asset Type
 Shares/Units
 Cost Basis
 Total
Fair Value
 % of
Net Assets
Ambase Corporation
(5)
Publicly Traded Company
        201,200.00
 $           333,468
 $                195,164
            0.31
Apartment Investment and Management Company
(3)
Publicly Traded Company
          34,000.00
           1,477,221
                1,460,980
            2.44
Ashford Hospitality Prime, Inc.
(3)
Publicly Traded Company
        156,000.00
           1,594,743
                1,605,240
            2.68
Ashford Hospitality Trust, Inc.
(3)
Publicly Traded Company
        188,000.00
           1,188,646
                1,143,040
            1.91
Care Capital Properties Inc.
(3)
Publicly Traded Company
          65,200.00
           1,700,409
                1,740,840
            2.90
CBL & Associates Properties, Inc.
(3)
Publicly Traded Company
        108,000.00
              915,434
                   910,440
            1.52
Chatham Lodging Trust
(3)
Publicly Traded Company
          33,000.00
              666,902
                   662,970
            1.11
Equity Commonwealth
(3)(5)
Publicly Traded Company
          12,150.00
              311,114
                   383,940
            0.64
Equity Residential
(3)
Publicly Traded Company
          15,000.00
              995,497
                   987,450
            1.65
Independence Realty Trust, Inc.
(3)
Publicly Traded Company
        160,000.00
           1,479,050
                1,579,200
            2.63
New York REIT, Inc.
(3)
Publicly Traded Company
        152,000.00
           1,308,259
                1,313,280
            2.19
Omega Healthcare Investors, Inc.
(3)
Publicly Traded Company
          52,000.00
           1,699,573
                1,717,040
            2.86
One Liberty Properties, Inc.
(3)
Publicly Traded Company
          32,561.00
              745,499
                   762,904
            1.27
Store Capital Corp.
(3)
Publicly Traded Company
          43,000.00
              980,329
                   965,350
            1.61
VEREIT Inc.
(3)
Publicly Traded Company
        131,000.00
           1,072,538
                1,066,340
            1.78
Washington Prime Group Inc.
(3)
Publicly Traded Company
          44,000.00
              370,476
                   368,280
            0.61
Total Publicly Traded Company
     
         16,839,158
              16,862,458
          28.11
             
American Finance Trust, Inc.
(4)
Non Traded Company
          80,424.07
           1,369,194
                1,467,735
            2.44
American Realty Capital New York City REIT, Inc.
(4)
Non Traded Company
          29,037.15
              388,505
                   465,466
            0.78
Behringer Harvard Opportunity REIT I, Inc.
(4)(5)
Non Traded Company
        764,723.91
              843,192
                   963,552
            1.61
Benefit Street Partners Realty Trust, Inc.
(4)
Non Traded Company
          12,016.08
              162,207
                   144,794
            0.24
Carter Validus Mission Critical REIT
(4)
Non Traded Company
            1,750.00
                14,886
                     16,695
            0.03
Cole Credit Property Trust IV, Inc.
(4)
Non Traded Company
          68,963.94
              404,177
                   578,607
            0.96
First Capital Real Estate Trust, Inc.
(4)(5)
Non Traded Company
            3,792.51
                15,161
                     15,170
            0.03
FSP Energy Tower
(4)(5)
Non Traded Company
                   7.00
              294,350
                   270,177
            0.45
FSP Grand Boulevard
(4)
Non Traded Company
                   7.00
              279,104
                   228,207
            0.38
FSP 1441 Main Street
(4)
Non Traded Company
                 15.73
                  8,559
                       8,555
            0.01
FSP Satellite Place
(4)(5)
Non Traded Company
                   5.00
              195,035
                   193,117
            0.32
FSP South 10th Street Corp. Liquidating Trust
(4)(5)
Non Traded Company
                   0.25
                     151
                              1
               -
Healthcare Trust, Inc.
(4)
Non Traded Company
          61,158.56
              669,205
                1,072,110
            1.79
Highlands REIT Inc.
(4)(5)
Non Traded Company
     2,084,327.91
              508,857
                   458,552
            0.76
Hospitality Investors Trust, Inc.
(4)
Non Traded Company
               114.02
                  1,137
                       1,112
               -
InvenTrust Properties Corp.
(4)
Non Traded Company
     2,031,268.94
           4,262,262
                4,021,912
            6.70
KBS Legacy Partners Apartment REIT, Inc.
(4)
Non Traded Company
          20,158.17
              122,938
                   121,151
            0.20
KBS Real Estate Investment Trust, Inc.
(4)
Non Traded Company
     1,640,455.20
           3,132,551
                3,231,697
            5.39
Phillips Edison Grocery Center REIT I, Inc
(4)
Non Traded Company
            1,950.00
                17,439
                     15,912
            0.03
Sentio Healthcare Properties, Inc.
(4)
Non Traded Company
          71,693.46
              530,655
                   813,004
            1.36
Strategic Realty Trust, Inc.
(4)
Non Traded Company
          42,288.14
              167,662
                   161,118
            0.27
Summit Healthcare REIT, Inc.
(4)(5)
Non Traded Company
        587,596.80
              734,792
                   822,636
            1.37
Total Non Traded Company (1)
     
         14,122,019
              15,071,280
          25.12
             
5210 Fountaingate
(4)(5)
LP Interest
                   9.89
              500,000
                   511,730
            0.84
Addison NC, LLC
(4)(5)
LP Interest
        200,000.00
           2,000,000
                2,400,000
            4.00
Arrowpoint Burlington LLC
(4)
LP Interest
                   7.50
              750,000
                   736,394
            1.23
BR Cabrillo LLC
(4)(5)
LP Interest
        346,723.32
              104,942
                     86,681
            0.14
Britannia Preferred Members, LLC
(4)(5)
LP Interest
        150,000.00
           1,500,000
                2,017,500
            3.36
Inland Land Appreciation Fund II, L.P.
(4)(5)
LP Interest
               210.97
                  2,700
                     21,099
            0.04
MC 15 Preferred Equity, LLC
(2)(4)(5)
LP Interest
        250,000.00
           2,500,000
                3,250,000
            5.42
MPF Pacific Gateway - Class B
(2)(4)(5)
LP Interest
                 23.20
                  6,287
                       7,309
            0.01
Rancon Realty Fund IV Liquidating Trust
(4)(5)
LP Interest
            8,408.97
                  6,307
                     36,327
            0.06
Redwood Mortgage Investors VIII
(4)
LP Interest
          53,848.09
                29,070
                     35,540
            0.06
Resource Real Estate Investors 6, L.P.
(4)
LP Interest
          42,600.00
              101,814
                   101,814
            0.17
Satellite Investment Holdings, LLC - Class A
(4)
LP Interest
                 22.00
           2,200,000
                2,200,000
            3.67
Secured Income, LP
(4)(5)
LP Interest
          64,177.00
              315,109
                   235,530
            0.39
Strategic Realty Operating Partnership, LP
(4)
LP Interest
          20,433.01
                78,951
                     77,850
            0.13
The Weatherly, LTD
(4)(5)
LP Interest
                 60.00
              672,000
                1,065,862
            1.78
The Weatherly Building, LLC
(4)(5)
LP Interest
                 17.50
              392,000
                   621,753
            1.04
Uniprop Manufactured Housing Income Fund II, LP
(4)
LP Interest
        133,191.00
              705,450
                1,174,745
            1.96
VWC Savannah, LLC
(4)(5)
LP Interest
                   8.25
              825,000
                1,337,498
            2.23
Total LP Interest
     
         12,689,630
              15,917,632
          26.53
             
Coastal Realty Business Trust, REEP, Inc. - A
(2)(4)(5)
Investment Trust
          72,320.00
                49,901
                     30,374
            0.05
Coastal Realty Business Trust, Series H2- A
(2)(4)(5)
Investment Trust
          47,284.16
                62,118
                       3,783
            0.01
Total Investment Trust
     
              112,019
                     34,157
            0.06
       
 
 
 
Total Investments
     
 $      43,762,826
 $           47,885,527
          79.82
 
 
(1) Investments primarily in non-traded public REITs or their successors.
(2) Investments in affiliated companies. See additional disclosures in note 5.
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of June 30, 2017, the total percentage of non-qualifying assets is 26.67%, 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, 2017, 49.63% of the Company's total assets are in illiquid securities.
(5) Investments in non-income producing securities. As of June 30, 2017, 23.88% of the Company's total assets are in non-income producing securities.
 
 
 The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
June 30, 2016
 
 
Name
 
Asset Type
 Shares/Units
 Cost Basis
 Total
Fair Value
 % of
Net Assets
Ambase Corporation
(5)
Publicly Traded Company
        250,000.00
 $           424,397
 $                357,500
            0.88
Ashford Hospitality Prime, Inc.
(3)
Publicly Traded Company
          54,027.00
              795,610
                   763,942
            1.90
Ashford Hospitality Trust, Inc.
(3)
Publicly Traded Company
        150,000.00
              912,218
                   805,500
            2.00
Bluerock Residential Growth REIT, Inc.
 
Publicly Traded Company
        147,858.00
           1,621,715
                1,922,154
            4.77
CBL & Associates Properties, Inc.
(3)
Publicly Traded Company
          54,000.00
              646,753
                   502,740
            1.25
Chatham Lodging Trust
(3)
Publicly Traded Company
          15,000.00
              323,032
                   329,700
            0.82
Equity Commonwealth
(3) (5)
Publicly Traded Company
          12,150.00
              311,114
                   353,930
            0.88
Independence Realty Trust, Inc.
(3)
Publicly Traded Company
          72,000.00
              542,232
                   588,960
            1.46
Liberty Property Trust
(3)
Publicly Traded Company
          14,000.00
              474,607
                   556,080
            1.38
New York REIT, Inc.
(3)
Publicly Traded Company
          72,000.00
              789,642
                   666,000
            1.65
One Liberty Properties, Inc.
(3)
Publicly Traded Company
          22,500.00
              510,055
                   536,625
            1.33
Sabra Health Care REIT, Inc.
(3)
Publicly Traded Company
          26,300.00
              538,275
                   542,832
            1.35
TIER REIT, Inc.
 
Publicly Traded Company
        147,649.00
           1,922,622
                2,263,459
            5.62
VEREIT Inc.
(3)
Publicly Traded Company
        126,800.00
           1,104,741
                1,285,752
            3.19
Total Publicly Traded Companies
     
         10,917,013
              11,475,174
          28.48
             
American Finance Trust, Inc.
(4)
Non Traded Company
          12,948.60
              235,213
                   242,657
            0.60
Apple REIT Ten, Inc.
(4)
Non Traded Company
        260,641.12
           2,410,057
                2,820,137
            7.00
American Realty Capital New York City REIT, Inc.
(4)
Non Traded Company
               936.48
                16,257
                     16,257
            0.04
FSP Energy Tower
(4) (5)
Non Traded Company
                   7.00
              294,350
                   225,132
            0.56
FSP Grand Boulevard
(4)
Non Traded Company
                   7.00
              279,104
                   294,021
            0.73
FSP 1441 Main Street
(4)
Non Traded Company
                 11.55
              398,163
                   415,800
            1.03
FSP Satellite Place
(4)
Non Traded Company
                   5.00
              195,035
                   176,836
            0.44
FSP South 10th Street Corp. Liquidating Trust
(4) (5)
Non Traded Company
                   0.25
                     151
                             -
               -
Highlands REIT Inc.
(4)
Non Traded Company
     1,902,983.81
              463,329
                   418,656
            1.04
InvenTrust Properties Corp.
(4)
Non Traded Company
     1,940,749.73
           4,106,446
                3,376,905
            8.38
KBS Real Estate Investment Trust, Inc.
(4)
Non Traded Company
     1,171,821.66
           2,676,386
                3,245,946
            8.06
Phillips Edison Grocery Center REIT I, Inc
(4)
Non Traded Company
            1,950.00
                17,439
                     17,394
            0.04
Sentio Healthcare Properties, Inc.
(4)
Non Traded Company
          13,039.18
                91,663
                   118,265
            0.29
Strategic Realty Trust, Inc.
(4)
Non Traded Company
            5,245.47
                24,406
                     23,237
            0.06
Summit Healthcare REIT, Inc.
(4) (5)
Non Traded Company
        171,494.39
              198,587
                   217,798
            0.54
Total Non Traded Companies (1)
     
         11,406,586
              11,609,041
          28.81
             
Arrowpoint Burlington LLC
(4)
LP Interest
                   7.50
              750,000
                   750,000
            1.86
BR Beach House Investment Co, LLC
(4)
LP Interest
     1,499,804.92
           1,499,805
                1,499,805
            3.72
BR Riverside Investment Co, LLC
(4)
LP Interest
     2,237,500.00
           2,238,638
                2,237,500
            5.55
Britannia Preferred Members, LLC
(4) (5)
LP Interest
        150,000.00
           1,500,000
                1,899,000
            4.71
DRV Holding Company, LLC
(4) (5)
LP Interest
               250.00
              250,000
                   353,418
            0.88
Inland Land Appreciation Fund II, L.P.
(4) (5)
LP Interest
               210.97
                  8,667
                     24,046
            0.06
MC 15 Preferred Equity, LLC
(4) (5) (2)
LP Interest
        250,000.00
           2,500,000
                2,500,000
            6.20
MPF Pacific Gateway - Class B
(4) (5) (2)
LP Interest
                 23.20
                  6,287
                       7,309
            0.02
Rancon Realty Fund IV
(4) (5)
LP Interest
            1,016.00
              184,474
                   185,085
            0.46
Redwood Mortgage Investors VIII
(4)
LP Interest
          54,129.40
                29,169
                     33,019
            0.08
Resource Real Estate Investors 6, L.P.
(4)
LP Interest
          42,600.00
              169,548
                   169,974
            0.42
Resource Real Estate Investors 7, L.P.
(4)
LP Interest
          11,500.00
                36,820
                     48,645
            0.12
Satellite Investment Holdings, LLC - Class A
(4)
LP Interest
                 22.00
           2,200,000
                2,200,000
            5.46
Secured Income, LP
(4) (5)
LP Interest
          64,177.00
              560,403
                   765,632
            1.90
The Weatherly, LTD
(4) (5)
LP Interest
                 60.00
              672,000
                   675,378
            1.68
The Weatherly Building, LLC
(4) (5)
LP Interest
                 17.50
              392,000
                   393,970
            0.98
Uniprop Manufactured Housing Income Fund II, LP
(4)
LP Interest
        113,764.00
              567,351
                1,006,811
            2.50
VWC Savannah, LLC
(4) (5)
LP Interest
                   8.25
              825,000
                1,043,883
            2.59
Total LP Interests
     
         14,390,162
              15,793,475
          39.19
             
Coastal Realty Business Trust, REEP, Inc. - A
(2) (4) (5)
Investment Trust
          72,320.00
                73,555
                     99,078
            0.25
Coastal Realty Business Trust, Series H2- A
(2) (4)
Investment Trust
          47,284.16
              184,880
                     95,987
            0.23
Total Investment Trusts
     
              258,435
                   195,065
            0.48
             
BR Cabrillo LLC Promissory Note
(4) (5)
Note
 
              104,942
                   104,017
            0.26
Total Note
     
              104,942
                   104,017
            0.26
       
 
 
 
Total Investments
     
 $      37,077,138
 $           39,176,772
          97.22

(1) Investments primarily in non-traded public REITs or their successors.
(2) Investments in affiliated companies. See additional disclosures in note 5.
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of June 30, 2016, the total percentage of non-qualifying assets is 16.38%, 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, 2016, the Company has 65.46% of its assets in illiquid securities.
(5) Investments in non-income producing securities. As of June 30, 2016, the Company has 21.75% of its assets in non-income producing securities.
 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements.

MacKenzie Realty Capital, Inc.
Consolidated Statements of Operations

 
 
 
Year Ended June 30,
 
 
 
2017
   
2016
   
2015
 
Investment income
                 
Dividend and operational/sales distributions
 
$
4,735,171
   
$
2,522,528
   
$
532,036
 
Interest and other income
   
35,413
     
113,877
     
70,533
 
Total investment income
   
4,770,584
     
2,636,405
     
602,569
 
 
                       
Operating expenses
                       
Base management fee (note 5)
   
1,267,074
     
845,264
     
495,285
 
Portfolio structuring fee (note 5)
   
578,890
     
575,961
     
390,210
 
Subordinated incentive fee (note 5)
   
232,198
     
-
     
24,958
 
Administrative cost reimbursements (note 5)
   
220,000
     
120,000
     
120,000
 
Amortization of deferred offering costs
   
314,826
     
-
     
35,402
 
Professional fees
   
232,419
     
140,550
     
145,597
 
Directors' fees
   
60,000
     
48,000
     
48,500
 
Other general and administrative
   
130,571
     
98,643
     
74,199
 
Total operating expenses
   
3,035,978
     
1,828,418
     
1,334,151
 
 
                       
Net investment income (loss) before taxes
   
1,734,606
     
807,987
     
(731,582
)
Income tax expense (benefit)- (note 2)
   
800
     
(1,412
)
   
(188,949
)
Net in