MKZR 10-Q Quarterly Report Sept. 30, 2018 | Alphaminr
MacKenzie Realty Capital, Inc.
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MKZR 10-Q Quarter ended Sept. 30, 2018

Balance Sheet
Cash Flow
Income Statement
MACKENZIE REALTY CAPITAL, INC.
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10-Q 1 mrc10q9302018.htm FORM 10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
☑
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 000-55006
MacKenzie Realty Capital, Inc.
(Exact name of registrant as specified in its charter)
Maryland
45-4355424
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
89 Davis Road, Suite 100, Orinda, CA 94563
(Address of principal executive offices)
(925) 631-9100
(Registrant's telephone number, including area code)
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)  Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☑
The number of the shares of issuer's Common Stock outstanding as of November 13, 2018 was 9,716,178.66.








TABLE OF CONTENTS


Page
PART I.
FINANCIAL INFORMATION
Item 1.
Consolidated Financial Statements (unaudited)
Item 2.
Item 3.
Item 4.
PART II.
OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Part I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

September 30, 2018
June 30, 2018
Assets
(Unaudited)
Investments, at fair value
Non-controlled/non-affiliated investments (cost of $63,606,316 and $64,558,777, respectively)
$
68,937,834
$
74,536,671
Non-controlled/affiliated investment (cost of $6,287 and $6,287, respectively)
6,613
6,613
Controlled investments (cost of $49,901 and $49,901, respectively)
41,945
41,222
Cash and cash equivalents
26,749,568
8,442,249
Accounts receivable
657,326
5,878,293
Other assets
644,738
374,634
Deferred offering costs, net
336,701
286,614
Total assets
$
97,374,725
$
89,566,296
Liabilities
Accounts payable and accrued liabilities
$
85,802
$
38,170
Income tax payable
10,930
37,153
Dividend payable
1,571,551
1,438,808
Capital pending acceptance
835,135
646,300
Due to related entities
2,252,878
1,807,028
Deferred tax liability, net
3,518
3,518
Total liabilities
4,759,814
3,970,977
Net assets
Common stock, $0.0001 par value, 80,000,000 shares authorized; 9,243,584.36 and 8,496,141.57 shares issued and outstanding, respectively
924
850
Capital in excess of par value
83,932,726
77,205,361
Accumulated undistributed net investment income
1,291,267
(1,580,433
)
Accumulated undistributed net realized gain
2,066,109
-
Accumulated undistributed net unrealized gain
5,323,885
9,969,541
Total net assets
92,614,911
85,595,319
Total liabilities and net assets
$
97,374,725
$
89,566,296
Net asset value per share
$
10.02
$
10.07

The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
1

MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
September 30, 2018
(Unaudited)
Name
Asset Type
Shares/Units
Cost Basis
Total
Fair Value
% of
Net Assets
American Finance Trust Inc., Class A
(3
)
Publicly Traded Company
10,661.86
$
169,494
$
162,701
0.18
Apartment Investment and Management Company
(3
)
Publicly Traded Company
30,000.00
1,325,822
1,323,900
1.43
Ashford Hospitality Trust, Inc.
(3
)
Publicly Traded Company
175,000.00
1,406,834
1,118,250
1.21
Bluerock Residential Growth REIT, Inc.
(3
)
Publicly Traded Company
145,000.00
1,383,080
1,421,000
1.53
Braemar Hotels & Resorts Inc.
(3
)
Publicly Traded Company
80,000.00
913,670
941,600
1.02
CBL & Associates Properties, Inc.
(3
)
Publicly Traded Company
90,000.00
499,361
359,100
0.39
City Office REIT, Inc.
(3
)
Publicly Traded Company
64,300.00
786,127
811,466
0.88
Independence Realty Trust, Inc.
(3
)
Publicly Traded Company
75,000.00
775,750
789,750
0.85
Omega Healthcare Investors, Inc.
(3
)
Publicly Traded Company
52,000.00
1,632,422
1,704,040
1.84
RLJ Lodging Trust
(3
)
Publicly Traded Company
42,000.00
914,814
925,260
1.00
Sabra Health Care REIT, Inc.
(3
)
Publicly Traded Company
75,000.00
1,669,232
1,734,000
1.87
VEREIT Inc.
(3
)
Publicly Traded Company
225,000.00
1,695,306
1,633,500
1.76
Total Publicly Traded Company
13,171,912
12,924,567
13.96
American Finance Trust Inc., Class B1
(4
)
Non Traded Company
14,792.94
186,008
221,154
0.24
American Finance Trust Inc., Class B2
(4
)
Non Traded Company
14,792.94
176,621
210,060
0.23
American Realty Capital Healthcare Trust III, Inc.
(4)(
5)
Non Traded Company
25,266.41
40,120
49,522
0.05
American Realty Capital New York City REIT, Inc.
(4)(
5)
Non Traded Company
194,578.12
2,476,389
2,531,461
2.73
Benefit Street Partners Realty Trust, Inc.
(4
)
Non Traded Company
65,833.25
840,754
887,432
0.96
BRE Select Hotels Corp. - Preferred A
(4
)
Non Traded Company
508,031.00
887,011
883,974
0.95
Carter Validus Mission Critical REIT
(4
)
Non Traded Company
51,372.87
202,001
225,527
0.24
Cole Credit Property Trust IV, Inc.
(4
)
Non Traded Company
107,330.31
658,771
851,129
0.92
Corporate Property Associates  17 Global Inc.
(4
)
Non Traded Company
116,154.26
957,111
1,161,543
1.25
Corporate Property Associates  18 Global A Inc.
(4
)
Non Traded Company
4,695.14
39,627
37,749
0.04
First Capital Real Estate Trust, Inc.
(4)(
5)
Non Traded Company
3,792.51
15,161
21,276
0.02
FSP 1441 Main Street
(4)(
5)
Non Traded Company
15.73
8,559
29,568
0.03
FSP 303 East Wacker Drive Corp. Liquidating Trust
(4
)
Non Traded Company
3.00
30
30
-
FSP Energy Tower
(4)(
5)
Non Traded Company
7.25
303,500
320,262
0.35
FSP Grand Boulevard
(4)(
5)
Non Traded Company
7.50
42,929
15,034
0.02
FSP Satellite Place
(4)(
5)
Non Traded Company
13.78
395,313
515,903
0.56
Griffin-American Healthcare REIT III, Inc.
(4
)
Non Traded Company
686.48
4,494
5,396
0.01
Griffin Capital Essential Asset REIT, Inc.
(4
)
Non Traded Company
28,641.60
196,636
250,614
0.27
GTJ REIT, Inc.
(4
)
Non Traded Company
1,000.00
11,620
11,610
0.01
Healthcare Trust, Inc.
(4
)
Non Traded Company
257,860.50
2,950,007
3,553,318
3.84
Highlands REIT Inc.
(4)(
5)
Non Traded Company
14,738,697.90
2,908,658
2,505,579
2.71
InvenTrust Properties Corp.
(4
)
Non Traded Company
12,117.65
33,719
21,206
0.02
KBS Legacy Partners Apartment REIT, Inc.
(4)(
5)
Non Traded Company
79,630.53
15,926
15,926
0.02
KBS Real Estate Investment Trust II, Inc.
(4
)
Non Traded Company
1,611,656.52
5,886,576
6,559,442
7.08
KBS Real Estate Investment Trust III, Inc.
(4
)
Non Traded Company
46,397.55
369,236
392,059
0.42
NorthStar Healthcare Income, Inc.
(4
)
Non Traded Company
800.00
5,608
5,112
0.01
Phillips Edison & Company, Inc
(4
)
Non Traded Company
152,725.85
1,105,937
1,427,987
1.54
Phillips Edison Grocery Center REIT II, Inc.
(4
)
Non Traded Company
34,851.10
521,858
650,670
0.70
Steadfast Apartment REIT
(4
)
Non Traded Company
570.25
5,552
7,008
0.01
Steadfast Income REIT
(4
)
Non Traded Company
49,904.48
377,718
407,720
0.44
Strategic Realty Trust, Inc.
(4
)
Non Traded Company
148,104.91
581,147
676,839
0.73
Summit Healthcare REIT, Inc.
(4)(
5)
Non Traded Company
1,360,694.88
1,846,468
2,285,967
2.47
The Parking REIT Inc.
(4)(
5)
Non Traded Company
17,989.90
230,880
204,545
0.22
Total Non Traded Company (1)
24,281,945
26,942,622
29.09
3100 Airport Way South LP
(4
)
LP Interest
1.00
355,000
380,226
0.40
5210 Fountaingate
(4
)
LP Interest
9.89
500,000
570,206
0.62
Addison NC, LLC
(4)(
5)
LP Interest
200,000.00
2,000,000
3,150,000
3.40
Arrowpoint Burlington LLC
(4
)
LP Interest
7.50
750,000
858,024
0.93
BR Cabrillo LLC
(4)(
5)
LP Interest
346,723.32
104,942
83,214
0.09
BR Jefferson Place Investment Co, LLC
(4
)
LP Interest
2,766,697.28
2,766,697
2,766,697
2.99
Britannia Preferred Members, LLC -Class 1
(4)(
5)
LP Interest
103.88
2,597,000
2,597,000
2.80
Britannia Preferred Members, LLC -Class 2
(4)(
5)
LP Interest
150,000.00
1,500,000
2,524,500
2.73
Capitol Hill Partners, LLC
(4
)
LP Interest
190,000.00
1,900,000
1,936,100
2.09
CRP I Roll Up, LLC
(4
)
LP Interest
4,500,000.00
4,500,000
4,770,000
5.15
CRP III Roll Up, LLC
(4
)
LP Interest
6,000,000.00
6,000,000
6,240,000
6.74
MPF Pacific Gateway - Class B
(2)(
4)(5)
LP Interest
23.20
6,287
6,613
0.01
Redwood Mortgage Investors VIII
(4
)
LP Interest
56,300.04
29,700
37,158
0.04
Satellite Investment Holdings, LLC - Class A
(4
)
LP Interest
22.00
2,200,000
2,200,000
2.38
Secured Income, LP
(4)(
5)
LP Interest
64,670.00
316,890
325,290
0.35
The Weatherly Building, LLC
(4)(
5)
LP Interest
17.50
118,721
118,721
0.13
The Weatherly, LTD
(4)(
5)
LP Interest
60.00
184,761
184,761
0.20
Uniprop Manufactured Housing Income Fund II, LP
(4
)
LP Interest
155,070.00
328,748
328,748
0.35
Total LP Interest
26,158,746
29,077,258
31.40
Coastal Realty Business Trust, REEP, Inc. - A
(2)(
4)(5)
Investment Trust
72,320.00
49,901
41,945
0.05
Total Investment Trust
49,901
41,945
0.05
Total Investments
$
63,662,504
$
68,986,392
74.50



(1) Investments primarily in non-traded public REITs or their successors.
(2) Investment in affiliated companies. See additional disclosures in Note 5.
(3) Non-qualifying assets under Section 55(a) of the 1940 Act. As of September 30, 2018, the total percentage of non-qualifying assets is 13.27%, 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 September 30, 2018, 57.57% of the Company's total assets are in illiquid securities.
(5) Investments in non-income producing securities. As of September 30, 2018, 18.00% 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.
2

MacKenzie Realty Capital, Inc.
Consolidated Schedule of Investments
June 30, 2018
Name
Asset Type
Shares/Units
Cost Basis
Total
Fair Value
% of
Net Assets
Ashford Hospitality Trust, Inc.
(3
)
Publicly Traded Company
175,000.00
$
1,406,834
$
1,417,501
1.65
Bluerock Residential Growth REIT, Inc.
(3
)
Publicly Traded Company
20,600.00
182,202
183,752
0.21
Braemar Hotels & Resorts Inc.
(3
)
Publicly Traded Company
26,627.00
302,176
304,080
0.36
CBL & Associates Properties, Inc.
(3
)
Publicly Traded Company
90,000.00
499,361
501,300
0.59
Independence Realty Trust, Inc.
(3
)
Publicly Traded Company
75,000.00
775,750
773,250
0.90
Omega Healthcare Investors, Inc.
(3
)
Publicly Traded Company
40,000.00
1,240,862
1,240,000
1.45
RLJ Lodging Trust
(3
)
Publicly Traded Company
22,000.00
485,195
485,100
0.57
Sabra Health Care REIT, Inc.
(3
)
Publicly Traded Company
50,000.00
1,089,260
1,086,500
1.27
VEREIT Inc.
(3
)
Publicly Traded Company
90,000.00
671,176
669,600
0.78
Total Publicly Traded Company
6,652,816
6,661,083
7.78
American Finance Trust, Inc.
(4
)
Non Traded Company
30,640.52
396,760
528,550
0.63
American Realty Capital Healthcare Trust III, Inc.
(4)(
5)
Non Traded Company
3,365.50
6,024
6,495
0.01
American Realty Capital New York City REIT, Inc.
(4)(
5)
Non Traded Company
94,009.22
1,248,021
1,222,120
1.43
Behringer Harvard Opportunity REIT I, Inc.
(4)(
5)
Non Traded Company
1,174,053.09
1,361,313
2,289,404
2.67
Benefit Street Partners Realty Trust, Inc.
(4
)
Non Traded Company
61,599.19
786,860
830,357
0.97
BRE Select Hotels Corp. - Preferred A
(4
)
Non Traded Company
271,720.00
472,572
472,793
0.55
Carter Validus Mission Critical REIT
(4
)
Non Traded Company
1,750.00
9,636
8,330
0.01
Cole Credit Property Trust IV, Inc.
(4
)
Non Traded Company
4,146.04
32,235
35,863
0.04
First Capital Real Estate Trust, Inc.
(4)(
5)
Non Traded Company
3,792.51
15,161
21,883
0.03
FSP 1441 Main Street
(4)(
5)
Non Traded Company
15.73
8,559
28,847
0.03
FSP 303 East Wacker Drive Corp.
(4
)
Non Traded Company
3.00
87,115
188,760
0.22
FSP Energy Tower
(4)(
5)
Non Traded Company
7.25
303,500
301,373
0.35
FSP Grand Boulevard
(4
)
Non Traded Company
7.50
294,179
239,625
0.28
FSP Satellite Place
(4)(
5)
Non Traded Company
13.78
395,313
499,140
0.58
Griffin-American Healthcare REIT III, Inc.
(4
)
Non Traded Company
686.48
4,494
4,469
0.01
Griffin Capital Essential Asset REIT, Inc.
(4
)
Non Traded Company
28,641.60
196,636
245,745
0.29
GTJ REIT, Inc.
(4
)
Non Traded Company
1,000.00
11,620
11,750
0.01
Healthcare Trust, Inc.
(4
)
Non Traded Company
166,597.06
1,932,444
2,329,027
2.72
Highlands REIT Inc.
(4)(
5)
Non Traded Company
14,105,177.43
2,798,421
2,397,880
2.80
Hospitality Investors Trust, Inc.
(4
)
Non Traded Company
154,881.43
1,084,916
1,355,213
1.58
InvenTrust Properties Corp.
(4
)
Non Traded Company
5,250,278.49
9,319,713
9,292,993
10.86
KBS Legacy Partners Apartment REIT, Inc.
(4)(
5)
Non Traded Company
79,630.53
15,926
15,926
0.02
KBS Real Estate Investment Trust II, Inc.
(4
)
Non Traded Company
1,556,922.33
5,699,860
6,336,674
7.40
KBS Real Estate Investment Trust III, Inc.
(4
)
Non Traded Company
46,397.55
368,523
400,411
0.47
NorthStar Healthcare Income, Inc.
(4
)
Non Traded Company
800.00
5,608
5,360
0.01
Phillips Edison & Company, Inc
(4
)
Non Traded Company
57,695.27
419,976
534,258
0.62
Phillips Edison Grocery Center REIT II, Inc.
(4
)
Non Traded Company
13,845.24
203,263
257,383
0.30
Steadfast Income REIT
(4
)
Non Traded Company
49,904.48
377,718
448,641
0.52
Strategic Realty Trust, Inc.
(4
)
Non Traded Company
123,181.24
484,741
561,706
0.66
Summit Healthcare REIT, Inc.
(4)(
5)
Non Traded Company
1,293,278.16
1,729,182
2,043,379
2.39
The Parking REIT Inc.
(4
)
Non Traded Company
13,045.00
164,282
182,760
0.21
Total Non Traded Company (1)
30,234,571
33,097,115
38.67
3100 Airport Way South LP
(4
)
LP Interest
1.00
355,000
378,060
0.44
5210 Fountaingate
(4
)
LP Interest
9.89
500,000
555,728
0.65
Addison NC, LLC
(4)(
5)
LP Interest
200,000.00
2,000,000
3,000,000
3.50
Arrowpoint Burlington LLC
(4
)
LP Interest
7.50
750,000
869,072
1.02
BR Axis West Investment Co. LLC
(4
)
LP Interest
3,403,633.00
3,403,633
3,403,633
3.98
BR Cabrillo LLC
(4)(
5)
LP Interest
346,723.32
104,942
86,681
0.10
Britannia Preferred Members, LLC
(4)(
5)
LP Interest
150,000.00
1,500,000
2,547,000
2.98
Capitol Hill Partners, LLC
(4
)
LP Interest
190,000.00
1,900,000
1,919,000
2.24
CRP I Roll Up, LLC
(4
)
LP Interest
4,500,000.00
4,500,000
4,672,350
5.46
CRP III Roll Up, LLC
(4
)
LP Interest
6,000,000.00
6,000,000
6,101,400
7.13
MPF Pacific Gateway - Class B
(2)(
4)(5)
LP Interest
23.20
6,287
6,613
0.01
Redwood Mortgage Investors VIII
(4
)
LP Interest
56,300.04
29,700
37,158
0.04
Rosewood Hillsboro Holdings, LLC
(4
)
LP Interest
3,200,000.00
1,300,000
1,300,000
1.52
Satellite Investment Holdings, LLC - Class A
(4
)
LP Interest
22.00
2,200,000
2,200,000
2.57
Secured Income, LP
(4)(
5)
LP Interest
64,670.00
316,890
320,763
0.37
The Weatherly Building, LLC
(4)(
5)
LP Interest
17.50
392,000
1,784,033
2.08
The Weatherly, LTD
(4)(
5)
LP Interest
60.00
672,000
3,058,343
3.57
Uniprop Manufactured Housing Income Fund II, LP
(4
)
LP Interest
155,070.00
647,225
1,445,252
1.69
Total LP Interest
26,577,677
33,685,086
39.35
Coastal Realty Business Trust, REEP, Inc. - A
(2)(
4)(5)
Investment Trust
72,320.00
49,901
41,222
0.05
Total Investment Trust
49,901
41,222
0.05
OrCal and MIC Promissory Note
(4
)
Note
1,100,000
1,100,000
1.29
Total Note
1,100,000
1,100,000
1.29
Total Investments
$
64,614,965
$
74,584,506
87.14

(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, 2018, the total percentage of non-qualifying assets is 7.44%, 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, 2018, 75.84 % of the Company's total assets are in illiquid securities.
(5) Investments in non-income producing securities. As of June 30, 2018, 21.96% 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.
3
MacKenzie Realty Capital, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended
September 30,
2018
2017
Investment income
Non-controlled/non-affiliated investments:
Dividend and operational/sales distributions
$
5,437,141
$
603,019
Interest and other income
143,878
28,853
Non-controlled/affiliated investments:
Dividend and operational/sales distributions
-
789
Total investment income
5,581,019
632,661
Operating expenses
Base management fee (note 5)
512,179
388,917
Portfolio structuring fee (note 5)
211,692
201,902
Subordinated incentive fee (note 5)
1,565,729
-
Administrative cost reimbursements (note 5)
156,000
108,000
Amortization of deferred offering costs
105,179
122,702
Professional fees
86,075
110,997
Directors' fees
15,500
18,500
Printing and mailing
30,091
14,717
Other general and administrative
26,874
27,062
Total operating expenses
2,709,319
992,797
Net investment income before taxes
2,871,700
(360,136
)
Income tax provision (benefit) - (note 2)
-
13,210
Net investment income (loss)
2,871,700
(373,346
)
Realized and unrealized gain (loss) on investments
Net realized gain (loss)
Non-controlled/non-affiliated investments
3,637,660
848,583
Total net realized gain
3,637,660
848,583
Net unrealized gain (loss)
Non-controlled/non-affiliated investments
(4,646,379
)
649,246
Non-controlled/affiliated investments
-
(696
)
Controlled investments
723
313,223
Total net unrealized gain (loss)
(4,645,656
)
961,773
Total net realized and unrealized gain on investments
(1,007,996
)
1,810,356
Net increase in net assets resulting from operations
$
1,863,704
$
1,437,010
Net increase in net assets resulting from operations per share
$
0.21
$
0.22
Weighted average common shares outstanding
9,004,403
6,577,208



The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
4

MacKenzie Realty Capital, Inc.
Consolidated Statements of Changes in Net Assets


Three Months Ended
Year Ended June 30,
September 30, 2018
June 30, 2018
(Unaudited)
Operations
Net investment income
$
2,871,700
$
2,227,199
Net realized gain
3,637,660
2,691,773
Net unrealized gain (loss)
(4,645,656
)
5,846,839
Net increase in net assets resulting from operations
1,863,704
10,765,811
Dividends
Dividends to stockholders
(1,571,551
)
(6,759,484
)
Capital share transactions
Issuance of common stock
7,039,757
23,007,310
Issuance of common stock through reinvestment of dividends
655,801
2,340,042
Redemption of common stock
(284,131
)
(1,454,120
)
Selling commissions and fees
(683,988
)
(2,293,765
)
Net increase in net assets resulting from capital share transactions
6,727,439
21,599,467
Total increase in net assets
7,019,592
25,605,794
Net assets at beginning of the period
85,595,319
59,989,525
Net assets at end of the period
$
92,614,911
$
85,595,319



The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
5

MacKenzie Realty Capital, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

Three Months Ended
September 30,
2018
2017
Cash flows from operating activities:
Net increase in net assets resulting from operations
$
1,863,704
$
1,437,010
Adjustments to reconcile net increase in net assets resulting from
operations to net cash from operating activities:
Proceeds from sale of investments, net
20,026,294
15,372,752
Return of capital
7,220,964
96,702
Purchase of investments
(22,657,140
)
(23,867,620
)
Net realized gain on investments
(3,637,660
)
(848,583
)
Net unrealized (gain) loss on investments
4,645,656
(961,773
)
Amortization of deferred offering costs
105,179
122,702
Changes in assets and liabilities:
Accounts receivable
5,220,967
1,849,897
Other assets
(262,453
)
(792,622
)
Payment of deferred offering costs
(155,266
)
(27,544
)
Accounts payable and accrued liabilities
62,581
454,561
Income tax payable
(26,223
)
26,209
Due to related entities
445,850
(198,027
)
Deferred tax liability
-
(14,599
)
Net cash from operating activities
12,852,453
(7,350,935
)
Cash flows from financing activities:
Proceeds from issuance of common stock
7,039,757
6,730,057
Redemption of common stock
(284,131
)
(357,002
)
Dividends to stockholders
(783,007
)
(599,811
)
Payment of selling commissions and fees
(706,588
)
(592,653
)
Change in capital pending acceptance
188,835
(994,890
)
Net cash from financing activities
5,454,866
4,185,701
Net increase (decrease)  in cash and cash equivalents
18,307,319
(3,165,234
)
Cash and cash equivalents at beginning of the period
8,442,249
11,849,712
Cash and cash equivalents at end of the period
$
26,749,568
$
8,684,478
Non-cash financing activities:
Issuance of common stock through reinvestment of dividends
$
655,801
$
434,005




The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
6

MacKenzie Realty Capital, Inc.
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)

NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION

MacKenzie Realty Capital, Inc. (the "Parent Company" together with its subsidiary as discussed below, the "Company" ) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. It is a non-diversified, closed-end investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended ("1940 Act"). The Parent 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 Parent Company is authorized to issue 100,000,000 shares, of which (i) 80,000,000 are designated as Common Stock, with a $0.0001 par value per share; and (ii) 20,000,000 are designated as Preferred Stock, with a $0.0001 par value per share. The Parent Company commenced its operations on February 28, 2013, and its fiscal year-end is June 30.

The Parent 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 its common stock. The IPO commenced in January 2014 and concluded in October 2016. The Parent 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.

The Parent Company's 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 Parent Company beginning with the year ended June 30, 2017. On December 20, 2017, a wholly owned subsidiary of TRS, MacKenzie NY Real Estate 2 Corp., ("MacKenzie NY 2"), was formed for the purpose of making certain limited investments in New York companies. The financial statements of MacKenzie NY 2 have been consolidated with the Company beginning with the quarter ended March 31, 2018.
The Company is externally managed by MacKenzie Capital Management, LP ("MacKenzie") under the administration agreement dated and effective as of February 28, 2013 (the "Administration Agreement"). Pursuant to the Administration Agreement, MacKenzie manages all of the Company's affairs except for providing investment advice. The Company is advised by MCM Advisers, LP (the "Adviser") under the advisory agreement amended and restated effective October 1, 2017, and subsequently amended October 23, 2018 (the "Amended and Restated Investment Advisory Agreement"). The Company pursues a strategy focused on investing primarily in illiquid or non-traded debt and equity securities issued by U.S. companies generally owning commercial real estate.  These companies are likely to be non-traded REITs, small-capitalization publicly traded REITs, public and private real estate limited partnerships and limited liability companies.

As of September 30, 2018, the Company has raised approximately $89.1 million from the public offerings, including proceeds from the Company's dividend reinvestment plan ("DRIP") of approximately $5.9 million. Of the shares issued by the Company in exchange for the total capital raised as of September 30, 2018, approximately $4.2 million worth of shares have been repurchased under the Company's share repurchase program.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation Policy

The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of the Company's wholly owned consolidated subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. Under the 1940 Act rules, regulations pursuant to Article 6 of Regulation S-X and Topic 946 of the Accounting Standards Codification, as amended (the "ASC"), of the Financial Accounting Standards Board ("FASB"), Financial Services-Investment Companies, the Company is precluded from consolidating portfolio company investments, including those in which the Company has a controlling interest, unless the portfolio company is an investment company or a controlled operating company which provides substantially all of its services to benefit the Company , such as an investment adviser or transfer agent. None of the Company's investments qualifies for these exceptions. Therefore, the Company's portfolio company investments, including those in which the Company has a controlling interest, are carried on the consolidated statements of assets and liabilities at fair value with changes to fair value recognized as net unrealized gain (loss) on the consolidated statements of operations until the investment is realized, usually upon exit, resulting in any gain or loss on exit being recognized as a realized gain or loss. However, in the event that any controlled subsidiary exceeds the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, the Company will include required financial information for such subsidiary in the notes or as an attachment to its consolidated financial statements.

The unaudited consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company's results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

These unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2018, included in the Company's annual report on Form 10-K filed with the SEC.

There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2018, other than those expanded upon and described below.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These balances are insured by the Federal Deposit Insurance Corporation ("FDIC") up to certain limits. At times the cash balances held in financial institutions by the Company may exceed these insured limits. Cash and cash equivalents are carried at cost which approximates fair value. There were no cash equivalents held as of September 30, 2018, and June 30, 2018.
Accounts Receivable

Accounts receivable represent dividends, distributions and sales proceeds recognized in accordance with our revenue recognition policy but not yet received as of the date of the financial statements. The amounts are generally fully collectible as they are recognized based on completed transactions. The Company monitors and adjusts its receivables and those deemed to be uncollectible are written-off only after all reasonable collection efforts are exhausted. The Company has determined that all account receivable balances outstanding as of September 30, 2018, are collectible and do not require recording any uncollectible allowance.

Capital Pending Acceptance

The Company conducts closings for new purchases of the Company's common stock twice per month and admits new stockholders effective beginning the first of each month. Subscriptions are effective only upon the Company's acceptance. Any gross proceeds received from subscriptions which are not accepted as of the period-end are classified as capital pending acceptance in the consolidated statements of assets and liabilities. As of September 30, 2018, and June 30, 2018, capital pending acceptance was $835,135 and $646,300, respectively.


Organization and Deferred Offering Costs




Organization costs include, among other things, the cost of legal services pertaining to the organization and incorporation of the business, incorporation fees and audit fees relating to the IPO and the initial statement of assets and liabilities. These costs are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the registration statements and pre- and post-effective amendments. Offering costs are capitalized as deferred offering costs as incurred by the Company and subsequently amortized to expense over a twelve-month period. Any deferred offering costs that have not been amortized upon the expiration or earlier termination of an offering will be accelerated and expensed upon such expiration or termination.


The offering costs incurred in connection with the current public offering through September 30, 2018, were $1,130,821. These offering costs are deferred and expensed over a twelve-month period beginning from the date the registration was declared effective by the SEC. The offering costs incurred and paid by the Company in excess of $1,650,000 on this public offering will be reimbursed by the Adviser as discussed in Note 5. Amortization of these deferred costs for the three months ended September 30, 2018 and 2017 were $105,179 and $122,702, respectively. Accumulated amortization of these deferred costs as of September 30, 2018, and June 30, 2018, were $794,120 and $688,941, respectively.


Income Taxes and Deferred Tax Liability

The Parent Company has elected to be treated as a REIT for tax purposes under the Code and as a REIT, it 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. To the extent that it satisfies the annual distribution requirement but distributes less than 100% of its taxable income, it is either subject to U.S. federal corporate income tax on its undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year.

The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax years ended December 31, 2017. Therefore, it did not incur any tax expense or excise tax during the quarterly periods within the tax year 2017. Similarly, for the tax year 2018, the Parent Company plans to pay the requisite amounts of dividends to stockholders during the year such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during the quarterly periods within the tax year 2018.

The Parent Company is subject to tax on built-in gains it realizes during the first five years following REIT election. Prior to the REIT effective date, the Parent Company recorded an estimated built-in gains liability on the entire unrealized built-in gains as deferred tax liabilities. Therefore, in each subsequent period it only records the difference between the actual and the previously recorded estimated tax liability on the built-in gains it realizes during the period as built-in gain tax adjustment. For the three months ended September 30, 2018, the Parent Company did not realize any built-in gains. Therefore, there was no built-in gain tax adjustment. The built-in gain tax adjustment for the three months ended September 30, 2017, was $13,210 and it was recorded as an income tax provision on the consolidated statements of operations.

The remaining net unrealized built-in gains, which are subject to tax, as of September 30, 2018 and June 30, 2018 were $8,025. The deferred tax liabilities relating to those net unrealized built-in gains as of September 30, 2018 and June 30, 2018, were $3,518.

TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2018, they did not have any taxable income for tax year 2018. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during the quarterly periods within the tax year 2018.
The Company and its subsidiaries follow ASC 740, Income Taxes, ("ASC 740") to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to the net unrealized investment gain (losses) on existing investments. In estimating future tax consequences, the Company considers all future events, other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates will be recognized as income or expense in the period of enactment. In addition, ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. As of September 30, 2018, and June 30, 2018, there were no uncertain tax positions. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014‑09, Revenue from Contracts with Customers (Topic 606). ASU 2014‑09 supersedes the revenue recognition requirements under ASC 605, Revenue Recognition , and most industry‑specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All of the Company's income is not within the scope of ASU 2014-09. As a result, the Company's timing of its revenue recognition remains the same and the adoption of the standard did not have any impact on the Company's consolidated financial statements.
In August 2018, the FASB issued guidance which changes the fair value disclosure requirements. The new guidance includes new, eliminated and modified fair value disclosures. Among other requirements, the guidance requires disclosure of the range and weighted average of the significant unobservable inputs for Level 3 fair value measurements and the way it is calculated. The guidance also eliminated the following disclosures: (1) amount and reason for transfers between Level I and Level II, (2) policy for timing of transfers between levels of the fair value hierarchy and (3) valuation processes for Level 3 fair value measurement. The guidance is effective for all entities for interim and annual periods beginning after December 15, 2019. Early adoption is permitted upon issuance of the guidance. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.
NOTE 3 –INVESTMENTS

The following table summarizes the composition of the Company's investments at cost and fair value as of September 30, 2018, and June 30, 2018:

September 30, 2018
June 30, 2018
Asset Type
Cost
Fair Value
Cost
Fair Value
Publicly Traded Companies
$
13,171,912
$
12,924,567
$
6,652,816
$
6,661,083
Non Traded Companies
24,281,945
26,942,622
30,234,571
33,097,115
LP Interests
26,158,746
29,077,258
26,577,677
33,685,086
Investment Trusts
49,901
41,945
49,901
41,222
Note
-
-
1,100,000
1,100,000
Total
$
63,662,504
$
68,986,392
$
64,614,965
$
74,584,506
The following table presents fair value measurements of the Company's investments as of September 30, 2018, according to the fair value hierarchy that is described in our annual report on Form 10-K:
Asset Type
Total
Level I
Level II
Level III
Publicly Traded Companies
$
12,924,567
$
12,924,567
$
-
$
-
Non Traded Companies
26,942,622
-
431,214
26,511,408
LP Interests
29,077,258
-
-
29,077,258
Investment Trusts
41,945
-
-
41,945
Total
$
68,986,392
$
12,924,567
$
431,214
$
55,630,611
The following table presents fair value measurements of the Company's investments as of June 30, 2018, according to the fair value hierarchy that is described in our annual report on Form 10-K:
Asset Type
Total
Level I
Level II
Level III
Publicly Traded Companies
$
6,661,083
$
6,661,083
$
-
$
-
Non Traded Companies
33,097,115
-
-
33,097,115
LP Interests
33,685,086
-
-
33,685,086
Investment Trusts
41,222
-
-
41,222
Notes
1,100,000
-
-
1,100,000
Total
$
74,584,506
$
6,661,083
$
-
$
67,923,423
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2018:

Balance at July 1, 2018
$
67,923,423
Purchases of investments
12,201,495
Transfers to Level I and II
(396,760
)
Proceeds from sales, net
(15,365,903
)
Return of capital
(7,220,962
)
Net realized gains
2,947,946
Net unrealized gains
(4,458,628
)
Ending balance at September 30, 2018
$
55,630,611
The transfers of $396,760 from Level III to Level I and II categories during the three months ended September 30, 2018 results from one of the Company's investments converting from a private REIT to publicly traded REIT.
For the three months ended September 30, 2018, changes in unrealized loss included in earnings relating to Level III investments still held at September 30, 2018, were $3,128,451.
The following is a reconciliation of the beginning and ending balances for investments measured at fair value on a recurring basis using significant unobservable inputs (Level III of the fair value hierarchy) for the three months ended September 30, 2017:

Balance at July 1, 2017
$
31,023,069
Purchases of investments
11,664,924
Proceeds from sales, net
(3,294,495
)
Return of capital
(96,702
)
Net realized gains
1,273,402
Net unrealized gains
774,001
Ending balance at September 30, 2017
$
41,344,199

For the three months ended September 30, 2017, changes in unrealized gains included in earnings relating to Level III investments still held at September 30, 2017 were $1,598,718.



The following table shows quantitative information about significant unobservable inputs related to the Level II and III fair value measurements used at September 30, 2018:
Asset Type
Fair Value
Primary Valuation Techniques
Unobservable Inputs Used
Range
Wt. Average
Level II
Non Traded Companies
$                   431,214
Market Activity
Publicly traded price of convertable security
$                   431,214
Level III
Non Traded Companies
$    24,214,773
Market Activity
Acquisition Cost
Secondary market industry publication
Non Traded Companies
2,296,635
Net Asset Value (1)
Capitalization rate
5.5% - 8.9%
7.9%
Liquidity discount
5.0% - 65.0%
28.4%
Sponsor provided value
LP Interests
5,363,698
Market Activity
Acquisition Cost
LP Interests
15,734,500
Discounted Cash Flow
Underlying note discount rate
15.0% - 20.0%
15.9%
Discount term (months)
22.0 - 27.0
26.1
LP Interests
7,979,060
Net Asset Value (1)
Capitalization rate
5.4% - 7.5%
5.5%
Discount rate
30.0%
Discount term (months)
10.0
Liquidity discount
5.0% - 50.0%
18.9%
Sponsor provided value
Contracted sale price of underlying property
Investment Trust
41,945
Net Asset Value (1)
Capitalization rate
6.0%
Liquidity discount
25.0%
$              55,630,611

Valuation Technique Terms:

(1)
The net asset value of the issuer's shares was calculated by the Company.


The following table shows quantitative information about significant unobservable inputs related to the Level II and Level III fair value measurements used at June 30, 2018:

Asset Type
Fair Value
Primary Valuation Techniques
Unobservable Inputs Used
Range
Wt. Average
Non Traded Companies
$              28,675,305
Market Activity
Acquisition Cost
Secondary market industry publication
Contracted sale price of security
Non Traded Companies
4,421,810
Net Asset Value (1)
Capitalization rate
8.0% - 8.9%
8.6%
Liquidity discount
10.0% - 64.0%
25.4%
Sponsor provided value
LP Interests
4,703,633
Market Activity
Acquisition Cost
LP Interests
12,973,750
Discounted Cash Flow
Underlying note discount rate
15%
Discount term (months)
30.0
LP Interests
16,007,703
Net Asset Value (1)
Capitalization rate
5.4% - 8.0%
5.6%
Discount rate
20.0% - 30.0%
25.4%
Liquidity discount
6.0% - 50.0%
11.9%
Discount term (months)
4.0 - 13.0
8.9
Sponsor provided value
Contracted sale price of underlying property
Investment Trust
41,222
Net Asset Value (1)
Capitalization rate
6.00%
Liquidity discount
25.0%
Note
1,100,000
Discounted Cash Flow
Discount rate
24.0%
Discount term (months)
2.0
$              67,923,423
Valuation Technique Terms:

(1)
The net asset value of the issuer's shares was calculated by the Company.

NOTE 4—MARGIN LOANS

The Company has a brokerage account through which it buys and sells publicly traded securities. The provisions of the account allow the Company to borrow on certain securities held in the account. Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held in a brokerage account. As of September 30, 2018, the Company had $8,225,945 of margin credit available for cash withdrawal or the ability to purchase up to $16,451,890 in additional shares. As of June 30, 2018, the Company had $10,946,343 of margin credit available for cash withdrawal or the ability to purchase up to $22,198,676 in additional shares. As of September 30, 2018, and June 30, 2018, the Company had not drawn any amount or purchased any shares under this short-term credit line.


NOTE 5 –RELATED PARTY TRANSACTIONS

Amended and Restated Investment Advisory Agreement :

Under the Amended and Restated Investment Advisory Agreement, the Company will pay the Adviser a fee for its services consisting of three components — a portfolio structuring fee, a base management fee, and a subordinated incentive fee.

The portfolio structuring fee is for the Adviser's initial work performed in identifying, evaluating and structuring the acquisition of assets. The fee equals 3.0% of the gross invested capital ("Gross Invested Capital"), which equals the number of shares issued, multiplied by the offering price of the shares sold ($10.00, regardless of whether or not shares were issued with volume or commission discounts), plus any borrowed funds. These services are performed on an ongoing basis in anticipation of deploying new capital, generally within 15 days of the receipt of capital.  Therefore, this fee is expensed in the period the capital is accepted.

The base management fee is calculated based on the Company's Gross Invested Capital plus any borrowing for investment purposes. The base management fees range from 1.5% to 3.0%, depending on the level of Gross Invested Capital.

The subordinated incentive fee has two parts—income and capital gains. The incentive fee components (other than during liquidation) are designed so that neither the income incentive fee nor the capital gains incentive fee is payable to the Adviser unless our stockholders have first received dividends at a rate of at least 7.0% per annum for the relevant measurement period (a fiscal quarter, for the income incentive fee; a fiscal year, for the capital gains incentive fee).
The income incentive fee ("Income Fee") is calculated and payable quarterly in arrears as follows: (i) the sum of preliminary net investment income for each fiscal quarter since the effective date of the Amended and Restated Investment Advisory Agreement (October 1, 2017) exceeding  7% of the "Contributed Capital" (which equals the number of shares issued multiplied by the maximum public offering price at the time such shares were sold, regardless of whether or not shares were issued with volume or commission discounts or through the DRIP, as such amount is computed from time to time) on an annualized basis up to 8.75% of Contributed Capital;  and (ii)  20.0% of our preliminary net investment income for each fiscal quarter after the effective date exceeding  8.75% of Contributed Capital at an annualized rate; minus (iii) the sum of all previously paid income incentive fees since the effective date, plus (iv) any incremental income incentive fee payable resulting from the reanalysis after calculation of the capital gains incentive fee.
The capital gains incentive fee ("Capital Gains Fee") is calculated and payable in arrears as of the end of each fiscal year as follows: (i) the sum of all "capital gains" (calculated as net realized capital gains less unrealized capital depreciation) for each fiscal year after the effective date exceeding 7% of Contributed Capital on an annualized basis up to 8.75% of Contributed Capital, which thresholds are reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income);  and (ii)  20.0% of all capital gains for each fiscal quarter after the effective date exceeding  8.75% of Contributed Capital at an annualized rate, which threshold is reduced by (but not below zero) the cumulative preliminary net investment income for each fiscal quarter since the effective date (or, increased, in the case of negative cumulative preliminary net investment income); minus (iii) the sum of all previously paid income incentive fees since the effective date and prior to the end of such fiscal year; less (iv) the aggregate amount of all capital gains incentive fees paid in prior fiscal years ending after the effective date. To the extent that such calculation would result in a capital gains incentive fee that exceeds 20% of all realized capital gains for the measurement period, the capital gains incentive fee shall be capped so that under no circumstance does it exceed 20% of the realized capital gains for the measurement period.

The portfolio structuring fees for the three months ended September 30, 2018 and 2017, were $211,692 and $201,902, respectively.

The base management fees for the three months ended September 30, 2018 and 2017, were $512,179 and $388,917, respectively. These base management fees were based on the following quarter ended Gross Invested Capital segregated in two columns based on the annual fee rate:
Base Management Fee Annual %
3.0%
2.0%
Total Gross Invested Capital
Quarter ended:
September 30, 2018
$               20,000,000
$               72,435,844
$                    92,435,844
Quarter ended:
September 30, 2017
$               20,000,000
$               47,783,337
$                    67,783,337
Organization and Offering Costs Reimbursement:


As provided in the Amended and Restated Investment Advisory Agreement, offering costs incurred and paid by the Company in excess of $1,650,000 on the second public offering will be reimbursed by the Adviser. The offering costs incurred in connection with this public offering as of September 30, and June 30, 2018 were $1,130,821 and $975,555, respectively, both of which were below the reimbursement threshold. Accordingly, there were no amounts reimbursable from the Adviser as of September 30, and June 30, 2018. Of the total offering costs incurred by the Company as of September 30, 2018 and June 30, 2018, MacKenzie had paid $125,252 and $237,149 on behalf of the Company. Therefore, these amounts were recorded as payable to MacKenzie and included as a part of due to related entities in the statements of assets and liabilities as of September 30 and June 30, 2018.


Administration Agreement:

Under the Administration Agreement, the Company reimburses MacKenzie for the Company's allocable portion of overhead and other expenses that MacKenzie incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services, performing compliance functions, providing the services of the Chief Financial Officer, Chief Compliance Officer, Director of Financial Reporting, and any administrative support staff, as well as providing the Company with other administrative services, subject to the Independent Directors' approval. The administrative cost reimbursements for the three months ended September 30, 2018 and 2017, were $156,000 and $108,000, respectively.


The table below outlines the related party expenses incurred for the three months ended September 30, 2018, and 2017 and unpaid as of September 30, 2018, and June 30, 2018.
Three Months Ended
Unpaid as of
Types and Recipient
September 30, 2018
September 30, 2017
September 30, 2018
June 30, 2018
Portfolio Structuring fee- the Adviser
$
211,692
$
201,902
$
-
$
-
Base Management fees- the Adviser
512,179
388,917
512,179
474,807
Subordinated Incentive fee - the Adviser
1,565,729
-
1,565,729
1,092,351
Administrative Cost Reimbursements- MacKenzie
156,000
108,000
48,000
-
Organization & Offering Cost (2) - MacKenzie
125,252
237,149
Other expenses (1) - MacKenzie
1,718
2,721
Due to related entities
$
2,252,878
$
1,807,028

(2) Offering costs paid by MacKenzie- discussed in Note 5 under organization and offering costs reimbursements. These are amortized over twelve-month period as discussed in Note 2 .

Investments in Affiliated Companies :
September 30, 2018
Name of issuer and title of issue
Fair Value at
Gross Reductions (1)
Net Realized Gains (losses)
Net Change in Unrealized Gains/(Losses)
Fair Value at
Interest/Dividend/Other income
Year Ended
June 30, 2018
September 30, 2018
September 30, 2018
Non-Controlled/Affiliate Investment:
MPF Pacific Gateway - Class B
$
6,613
$
-
$
-
$
-
$
6,613
$
-
$
6,613
$
-
$
-
$
-
$
6,613
$
-
Controlled Investments:
Coastal Realty Business Trust, REEP, Inc. - A
$
41,222
$
-
$
-
$
723
$
41,945
$
-
$
41,222
$
-
$
-
$
723
$
41,945
$
-
June 30, 2018
Name of issuer and title of issue
Fair Value at
Gross Reductions (1)
Net Realized Gains (losses)
Net Change in Unrealized Gains/(Losses)
Fair Value at
Interest/Dividend/Other income
Year Ended
June 30, 2017
June 30, 2018
June 30, 2018
Non-Controlled/Affiliate Investment:
MPF Pacific Gateway - Class B
$
7,309
$
-
$
-
$
(696
)
$
6,613
$
789
$
7,309
$
-
$
-
$
(696
)
$
6,613
$
789
Controlled Investments:
Coastal Realty Business Trust, REEP, Inc. - A
$
30,374
$
-
$
-
$
10,848
$
41,222
$
-
Coastal Realty Business Trust, Series H2- A
3,783
(7,705
)
(54,413
)
58,335
-
-
MC 15 Preferred Equity, LLC
3,250,000
(2,501,557
)
1,557
(750,000
)
-
1,690,000
$
3,284,157
$
(2,509,262
)
$
(52,856
)
$
(680,817
)
$
41,222
$
1,690,000


Coastal Realty Business Trust ("CRBT"):

CRBT is a Nevada business trust whose trustee is MacKenzie. Each series of the trust has its own beneficiaries and own assets. The Company owns two series of CRBT and is the only beneficiary of such series. Under the terms of the agreement, there are no redemption rights to any of the series participants. The Company and TRS are the sole beneficiaries of the following series as of September 30, 2018, and June 30, 2018:

·
CRBT, REEP, Inc.-A, which has an ownership interest in one of three general partners of a limited partnership which owns one multi-family property located in Frederick, Maryland.

·
CRBT, Series H2-A, which invests in shares of a REIT that owns a real estate portfolio totaling 105 properties within asset classes of ski and mountain lifestyle, senior housing, attractions, marinas and other lifestyle properties located in the United States and Canada. During the quarter ended December 31, 2017, the underlying REIT made a liquidating distributions of $7,705 and dissolved. The Company had a cost basis of $62,118 at the time of the final liquidation.

MC 15 Preferred Equity, LLC:

MC 15 Preferred Equity, LLC is a holding company that owns preferred equity of a company that owns a commercial real estate property in Austin, Texas. The Company is a co-manager of MC 15 Preferred Equity, LLC and owns 55.8% ownership interest in the company. During the year ended June 30, 2018, MC 15 Preferred Equity, LLC dissolved after it received the preferred equity distributions from the underlying real estate company and distributed the proceeds to its members in accordance with the operating agreement.

MPF Pacific Gateway:

MPF Pacific Gateway, which is managed by MacKenzie, is a holding company that owns an investment in a REIT Liquidating Trust. As of September 30, 2018, and June 30, 2018, the Company had a 15.82% of ownership interest in MPF Pacific Gateway.


NOTE 6 – FINANCIAL HIGHLIGHTS

The following is a schedule of financial highlights of the Company for the three months ended September 30, 2018, and the year ended June 30, 2018.
For The Three Months Ended
For The Year Ended
September 30, 2018
June 30, 2018
Per Share Data:
(Unaudited)
Beginning net asset value ("NAV")
$
10.07
$
9.84
Net investment income (loss) (1)
0.32
0.30
Net realized gain (1)
0.40
0.36
Net unrealized gain (loss) (1)
(0.51
)
0.79
Net increase in net assets resulting from operations
0.21
1.45
Issuance of common stock above (below) NAV (1) (4)
(0.09
)
(0.32
)
Redemption of common stock below NAV (1) (6)
-
0.01
Dividends to stockholders (1) (5)
(0.17
)
(0.91
)
Ending NAV
$
10.02
$
10.07
Weighted average common Shares outstanding
9,004,403
7,440,841
Shares outstanding at the end of period
9,243,584
8,496,142
Net assets at the end of period
$
92,614,911
$
85,595,319
Average net assets (2)
$
89,105,115
$
72,792,422
Ratios to average net assets
Total expenses (7)
3.04
%
6.52
%
Net investment income (7)
3.22
%
3.06
%
Total rate of return (2) (3) (7)
2.09
%
14.79
%

(1) Based on weighted average number of shares of common stock outstanding for the period.
(2) Average net assets were derived from the beginning and ending period-end net assets.
(3) Total rate of return is based on net increases (decreases) in net assets resulting from operations. An individual stockholder's return may vary from this return based on the time of capital transactions.
(4)       Net of sales commissions and dealer manager fees of $1.00 per share.
(5) Dividends are determined based on taxable income calculated in accordance with income tax regulations which may differ from amounts determined under GAAP.
(6) Amounts based on differences between the actual redemption price and the NAVs preceding the redemptions .
(7)       Not annualized for interim reporting periods.

NOTE 7 – SHARE OFFERINGS AND FEES

During the three months ended September 30, 2018, the Company issued 706,146 shares with gross proceeds of $7,039,757 and 72,866.83 shares pursuant to the DRIP at $9 per share with gross proceeds of $655,801. For the three months ended September 30, 2018, the Company incurred selling commissions and fees of $683,988.

During the three months ended September 30, 2017, the Company issued 673,005 shares with gross proceeds of $6,730,057 and 48,223 shares pursuant to the DRIP at $9 per share with gross proceeds of $434,005. For the three months ended September 30, 2017, the Company incurred selling commissions and fees of $668,039.

NOTE 8 – SHARE REPURCHASE PLAN

Pursuant to the Company's share repurchase program, during the three months ended September 30, 2018, the Company made a tender offer to purchase its own shares at $9 per share. The Company repurchased 31,570.04 shares for a total of $284,131. Similarly, during the three months ended September 30, 2017, the Company submitted a tender offer and repurchased a total of 39,666.90 shares for a total of $357,002.

NOTE 9 –STOCKHOLDER DIVIDENDS AND INCOME TAXES

The following table reflects the dividends the Company declared on its common stock:
Dividends
For The Three Months Ended
Per Share
Amount
September 30, 2018
$
0.175
$
1,571,551
$
0.175
$
1,571,551

During the three months ended September 30, 2018, the Company paid dividends of $1,438,808, which were declared as of June 30, 2018. Of this total, $655,801 were reinvested in the DRIP.

The following table reflects the dividends the Company paid on its common stock:
Dividends
For The Three Months Ended
Per Share
Amount
September 30, 2017
$
0.175
$
1,033,816
$
0.175
$
1,033,816

On October 23, 2018, the Company's Board of Directors approved a monthly dividend of $0.05833 per share to the holders of record on each October 31, 2018, November 30, 2018, and December 31, 2018, for a total of $0.175 for the quarter, which does not include any dividend the Board may declare on or before December 31, 2018 to meet REIT distribution requirements for 2018.


Income Taxes
While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is December 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.

For income tax purposes, dividends paid to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. The tax character of dividends paid to stockholders for the tax years ended December 31, 2017, (the most recent tax year end completed and filed) were as follows:
December 31, 2017
Capital gain
$
3,798,189
Ordinary income
1,046,997
Total dividends
$
4,845,186
Because of the difference between our fiscal and tax year ends, the final determination of the tax character of dividends will not be made until we file our tax return for the tax year ended December 31, 2017.

The components of undistributed earnings on a tax basis as of December 31, 2017 (the most recent tax year end completed and filed) were as follows:
December 31, 2017
Undistributed long term capital gain
$
114,401
Unrealized fair value appreciation
4,939,463
$
5,053,864
The following table presents the aggregate gross unrealized appreciation, depreciation, and cost basis of investments for income tax purposes as of:
September 30, 2018
June 30, 2018
Aggregate gross unrealized appreciation
$
7,101,162
$
11,257,709
Aggregate gross unrealized depreciation
(1,527,252
)
(840,942
)
Net unrealized appreciation
$
5,573,910
$
10,416,767
Aggregate cost (tax basis)
$
63,412,482
$
64,167,738

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

Statements by MacKenzie Realty Capital, Inc. and its wholly owned subsidiary MRC TRS, Inc. (the "Company," "we," or "us") contained herein, other than historical facts, may constitute "forward-looking statements."  These statements may relate to, among other things, future events or our future performance or financial condition.  In some cases, you can identify forward-looking statements by terminology such as "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative of such terms or comparable terminology.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any anticipated results, levels of activity, performance or achievements expressed or implied by such forward-looking statements, including an economic downturn could impair our portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities; and interest rate volatility could adversely affect our results, particularly if we elect to use leverage as a part of our investment strategy.  For a discussion of factors that could cause our actual results to differ from forward-looking statements contained herein, please see the discussion under the heading "Risk Factors" in our Annual Report on Form 10-K.

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. Our wholly owned subsidiary, MRC TRS, Inc., is subject to corporate federal and state income tax on its taxable income at regular statutory rates.

We are managed by the Adviser, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.

Investment Plan

Our investments are generally expected to range in size from $10,000 to $3 million. However, we may make smaller or larger investments from time to time on an opportunistic basis. We focus primarily on real estate-related securities. We purchase most of our securities (i) directly from existing security holders, (ii) through established securities markets, and (iii) in the case of unregistered, privately offered securities, directly from issuers. We invest primarily in debt and equity securities issued by U.S. companies that primarily own commercial real estate that are either illiquid or not listed on any exchange.

We generally seek to invest in interests of real estate-related limited partnerships and REITs. Under normal market conditions, we invest at least 80.0% of our total assets in common stocks and other equity or debt securities issued by real estate companies, including REITs and similar REIT-like entities. 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) investment advisory fees to our 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. Our expenses must be billed to and paid by us, except that MacKenzie may be reimbursed for actual cost of goods and services used by us and certain necessary administrative expenses. We will bear all other expenses of our operations and transactions, including:

·
the cost of calculating our NAV;
·
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, and any stock exchange listing fees in the future;
·
federal, state, and local taxes, if any;
·
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, including printing, mailing, 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 will be 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, our Chief Financial Officer, Director of Accounting and Financial Reporting, General Counsel, and any administrative support staff.

In addition, we will bear organization and offering expenses in connection with our current public offering up to $1,650,000. Any additional organization and offering expenses will be paid by our Adviser.


Portfolio Investment Composition

The following table summarizes the composition of our investments at cost and fair value as of September 30, 2018, and June 30, 2018:

September 30, 2018
June 30, 2018
Asset Type
Cost
Fair Value
Cost
Fair Value
Publicly Traded Companies
$
13,171,912
$
12,924,567
$
6,652,816
$
6,661,083
Non Traded Companies
24,281,945
26,942,622
30,234,571
33,097,115
LP Interests
26,158,746
29,077,258
26,577,677
33,685,086
Investment Trusts
49,901
41,945
49,901
41,222
Note
-
-
1,100,000
1,100,000
Total
$
63,662,504
$
68,986,392
$
64,614,965
$
74,584,506
Net Asset Value

September 30, 2018 vs. June 30, 2018:

Our NAV as of September 30, 2018, was $10.02 per share compared to $10.07 per share as of June 30, 2018, a $0.05 per share decrease of approximately 0.50%. The net decrease during the three months was due to decreases resulting from (i) a dividend to stockholders of $0.17 per share (on a weighted average basis) (ii) net unrealized loss of $0.51 per share and (iii) issuance of shares (net of selling commissions and dealer manager fees) below NAV per share resulting in a decrease of a $0.09 per share. The decreases were offset by increases resulting from (i) net investment income of $0.32 per share and (ii) net realized gain on sale of investments of $0.40 per share.

Results of Operations


Three Months Ended September 30, 2018, and 2017:


Investment Income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. Total investment income for the three months ended September 30, 2018, and 2017, was $5.58 million and $0.63 million, respectively. The increase of $4.95 million or 785.7%, was primarily due to an increase of $4.36 million in our distribution income from sales or capital transactions during 2018. During the three months ended September 30, 2018, the Company received total sales or capital distributions of $4.38 million from four securities as compared to only $0.02 million from two securities during the three months ended September 30, 2017. The remaining increase of $0.59 million was attributed to the increase in our overall investment portfolio since September 30, 2017. The Company had an investment portfolio with a total cost basis of $53.01 million as of September 30, 2017, which increased to $63.66 million as of September 30, 2018.

Operating Expenses:

Base management fee: The base management fee for the three months ended September 30, 2018 was $0.51 million as compared to $0.39 million for the three months ended September 30, 2017. This increase of $0.12 million, or 30.8% was due to an increase in the Gross Invested Capital by $24.66 million from $67.78 million as of September 30, 2017, to $92.44 million as of September 30, 2018.



Portfolio structuring fee : The portfolio structuring fees for the three months ended September 30, 2018, and 2017 were $0.21 million and $0.20 million, respectively. The fees were comparable as the Gross Invested Capital from the issuance of new shares during the three months periods of 2017 and 2018 also were comparable. During the three months ended September 30, 2018, the Company raised $7.04 million of new capital through issuance of new shares excluding the DRIP, which was comparable to the $6.73 million of new capital raised during September 30, 2017.

Administrative cost reimbursements: Costs reimbursed to MacKenzie for the three months ended September 30, 2018, was $0.16 million as compared to $0.11 million for the three months ended September 30, 2017. The increase was primarily due to an increase in the allocable portion of overhead and other expenses incurred by MacKenzie since September 30, 2017, as a result of the increase in the Company's operating activities.

Subordinated incentive fee: The subordinated incentive fee has two components; Capital Gains Fee and Income Fee. Capital Gains Fee is based on realized gains (including the distributions received from sales/capital transactions) and the Income Fee is based on net investment income.

There was no Income Fee for the three months ended September 30, 2018. Capital Gains Fee was $1.57 million for the three months ended September 30, 2018. Capital Gains Fee was accrued as of September 30, 2018 because the cumulative net realized gains exceeded the threshold of 7% of the Contributed Capital. The Company records the Capital Gains Fee accrual on the consolidated statements of operations and statements of assets and liabilities when net realized capital gains less unrealized capital depreciation on its investments exceed the incentive fee threshold of 7% of Contributed Capital. However, the actual incentive fee payable to the Adviser related to capital gains will be determined and payable in arrears at the end of each fiscal year. There was neither Income Fee nor Capital Gains Fee for the three months ended September 30, 2017. This was because the cumulative net investment income and net realized gains were below the threshold of 7% of Contributed Capital.

Other operating expenses: Other operating expenses include amortization of deferred offering costs, professional fees, directors' fees printing and mailing, and other general and administrative expenses. Other operating expenses for the three months ended September 30, 2018, were $0.28 million as compared to $0.29 million for the three months ended September 30, 2017. The decrease of $0.01 million or 3.4% was mainly due to a decrease in amortization of the deferred offering costs on the second public offering during the three months ended September 30, 2018.

Net realized gain on investments:
Total net realized gains for three months ended September 30, 2018 and 2017, were $3.64 million and $0.85 million, respectively. Total realized gains for the three months ended September 30, 2018, was realized from sales of one publicly traded security with realized gains of $0.69 million and four non-traded REIT securities with realized gains of $2.95 million. Total realized gains for the three months ended September 30, 2017, were realized from liquidations of four non-traded REIT securities with total realized gains of $0.76 million and a liquidation of a limited partnership interest with realized gains of $0.51 million offset by a total net realized loss of $0.42 million from the disposal of fourteen publicly traded securities.
Net unrealized gain/loss on investments:

During the three months ended September 30, 2018, we recorded net unrealized losses of $4.65 million, which were net of $1.24 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gains as of June 30, 2018, that were realized during the three months ended September 30, 2018. Accordingly, the net unrealized losses excluding the reclassification adjustment for the three months ended September 30, 2018, were $3.41 million, which resulted from fair value depreciation of $4.19 million from limited partnership interests and $0.19 million from publicly traded REIT securities offset by fair value appreciation of $0.97 million from non-traded REIT securities. The large fair value depreciation in limited partnership interests resulted from distributions of sales proceeds by three partnerships (The Weatherly, LTD, The Weatherly Building, LLC and Uniprop Manufactured Housing Income Fund II) following the sales of underlying properties. The Company recorded $4.25 million of distribution income, which is a part of the investment income discussed above, from these three partnerships during the three months ended September 30, 2018.


During the three months ended September 30, 2017, we recorded net unrealized gains of $0.96 million, which was net of $0.86 million of unrealized gains reclassification adjustment. The reclassification adjustment was the accumulated unrealized gain as of June 30, 2017, that was realized during the quarter. Accordingly, the net unrealized gains excluding the reclassification adjustment for the three months ended September 30, 2017, was $1.82 million, which resulted from fair value appreciation of (i) limited partnership interests by $1.00 million, (ii) non-traded REIT shares by $0.58 million and (iii) publicly traded REIT shares by $0.23 million.


Income tax provision (benefit):

The Parent Company satisfied the annual dividend payment and other REIT requirements for the tax years ended December 31, 2017. Therefore, it did not incur any tax expense or excise tax during the quarterly periods within the tax year 2017. Similarly, for the tax year 2018, the Parent Company plans to pay the requisite amounts of dividends to stockholders during the year such that the Parent Company will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during the quarterly periods within the tax year 2018.

The Parent Company is subject to tax on built-in gains it realizes during the first five years following REIT election. Prior to the REIT effective date, the Parent Company recorded an estimated built-in gains liability on the entire unrealized built-in gains as deferred tax liabilities. Therefore, in each subsequent period it only records the difference between the actual and the previously recorded estimated tax liability on the built-in gains it realizes during the period as built-in gain tax adjustment. For the three months ended September 30, 2018, the Parent Company did not realize any built-in gains. Therefore, there was no built-in gain tax adjustment. The built-in gain tax adjustment for the three months ended September 30, 2017, was $13,210 and it was recorded as an income tax provision on the consolidated statements of operations.

TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on its taxable income at regular statutory rates. However, as of September 30, 2018, they did not have any taxable income for tax year 2018. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during the quarterly periods within the tax year 2018.


Liquidity and Capital Resources


Capital Resources

We are offering to sell shares under the offering with a total gross proceeds of $150 million, although the Company believes it is improbable that all such shares will be sold prior to the end of the offering. As of September 30, 2018, we sold 4,073,637 shares with gross proceeds of $40.71 million, issued 434,088.51 shares in our DRIP with gross proceeds of $3.91 million, and repurchased 276,924.50 shares in our share repurchase program at an aggregate price of $2.49 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. We currently do not have any plans to borrow money on a long-term basis or issue debt securities; however, from time to time we may draw on the margin line of credit on a temporary basis to bridge our investment purchases and sales or capital raising. As of September 30, 2018, 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 (primarily from investment income and realized capital gains), and the payment of operating expenses.  If all the shares registered under our second registration statement in the second public offering are sold, we would receive investable cash totaling approximately $130.5 million, of which approximately $39.35 million has been received as of September 30, 2018.

Cash Flows:
Three months ended September 30, 2018:

For the three months ended September 30, 2018, we experienced a net increase in cash of $18.31 million. During this period, we generated cash of $5.46 million from our financing activities and $12.85 million from our operating activities.

The net cash inflow of $12.85 million from operating activities resulted from $25.46 million from sales of investments, $7.22 million from distributions received from our investments that are considered return of capital and $2.81 million from investment income, net of operating expenses, offset by cash outflow of $22.64 million from purchases of investments.

The net cash inflow of $5.46 million from financing activities resulted from the sale of shares under our current public offering with gross proceeds of $7.23 million (adjusted for $0.19 million of increase in capital pending acceptance) offset by cash outflows of $0.28 million from share redemptions, $0.78 million from payments of cash dividends, and $0.71 million from payments of selling commissions and fees.

Three months ended September 30, 2017:

For the three months ended September 30, 2017, we experienced a net decrease in cash of $3.17 million. During this period, we generated cash of $4.18 million from our financing activities and used $7.35 million in operating activities.

The net cash outflow of $7.35 million from operating activities resulted from $23.87 million used for purchases of investments and $0.12 million used for operating expenses, net of investment income. The cash outflows were offset by cash inflows of $16.54 million from sales of investments and $0.10 million from distributions received from our investments that were considered return of capital.

The net cash inflow of $4.19 million from financing activities resulted from the sale of shares under our public offering with gross proceeds of $5.74 million (adjusted for the $0.99 million of decrease in capital pending acceptance), offset by cash outflows of $0.36 million from share redemptions, $0.60 million from dividend payments, and $0.59 million from selling commissions and fees payments.

Contractual Obligations

We have entered into two contracts under which we have material future commitments: (i) the Amended and Restated Investment Advisory Agreement, under which the Adviser serves as our investment adviser, and (ii) the Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon proper notice. Payments under the Amended and Restated Investment Advisory Agreement in future periods (after the up-front payment of the portfolio structuring fee during the public offering) will be (i) a percentage of the value of our Gross Invested Capital; and (ii) incentive fees based on our income and our performance above specified hurdles (except in the year of liquidation).  Payments under the Administration Agreement will occur on an ongoing basis as expenses are incurred on our behalf by MacKenzie. However, if MacKenzie withdraws as our administrator, it will be liable for any expenses we incur as a result of such withdrawal.


Off-Balance Sheet Arrangements


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

Borrowings



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


Critical Accounting Policies

The financial statements included in this report are based on the selection and application of critical accounting policies, which require management to make significant estimates and assumptions.  Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. There have been no changes in the significant accounting policies from those disclosed in the audited financial statements for the year ended June 30, 2018, included in the Company's annual report on Form 10-K for the fiscal year ended June 30, 2018.

Dividends to Stockholders

We intend to pay quarterly dividends to our stockholders to the extent that we have income from operations available. Our quarterly dividends, if any, will be determined by our Board of Directors near the beginning of each quarter based on the estimated quarterly income and will be paid pro-rata to holders of our shares. Any dividends to our stockholders will be declared out of assets legally available for distribution.  In no event are we permitted to borrow money to pay dividends (or make distributions) if the amount of such distribution would exceed our annual accrued and received revenues, less operating costs.

We qualified and elected to be taxed as a REIT beginning with the tax year ended December 31, 2014. As a REIT, we are required to distribute at least 90% of our REIT taxable income to the stockholders and meet certain other conditions. Our current intention is to make any dividends in additional shares under our DRIP out of assets legally available therefore, unless a stockholder elects to receive dividends in cash, or their participation in our DRIP is restricted by a state securities regulator. If one holds shares in the name of a broker or financial intermediary, they should contact the broker or financial intermediary regarding their election to receive dividends in cash. We can offer no assurance that we will achieve results that will permit the payment of any cash dividends and, if we issue senior securities, we are prohibited from paying dividends if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if dividends are limited by the terms of any of our borrowings.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our current investment 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 often include securities that are subject to legal or contractual restrictions on resale that adversely affect the liquidity and marketability of such securities. As a result, we are subject to risk of loss which may prevent our stockholders from achieving price appreciation, dividend distributions and a return of their capital.
At September 30, 2018, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented 93% of our total assets as of that date. As discussed in Note 3 to our financial statements ("Investments"), these investments primarily consist of securities in companies with no readily determinable market values and as such are valued in accordance with our fair value policies and procedures. Our investment strategy exposes us to a high degree of business and financial risk because portfolio company investments are generally illiquid and in small and middle market companies. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending investments in portfolio companies made according to our principal investment strategy.

Item 4. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act) during the fiscal quarter ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

There have been no material changes to our risk factors discussed in "Risk Factors" in our annual report on Form 10-K for the fiscal year ended June 30, 2018 except for the below addition.
We may be subject to adverse legislative or regulatory tax changes that could reduce the value of our common stock.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation, or administrative interpretation, or any amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation, or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation. In addition, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
The 2018 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2018 Tax Legislation that could affect us and our stockholders include, among others:
•
temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;
•
permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;
•
permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;
•
reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;
•
limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of our REIT taxable income (determined without regard to the dividends paid reduction);
•
generally limiting the deduction for net business interest expense in excess of 30% of a business's "adjusted taxable income," except for taxpayers that engage in certain real estate businesses (including most equity REITs) and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods); and
•
eliminating the corporate alternative minimum tax.
Many of these changes that are applicable to us are effective beginning with our 2018 taxable year, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the IRS and the U.S. Department of the Treasury, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors and auditors to determine the full impact that the 2018 Tax Legislation as a whole will have on us.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Issuer Purchases of Equity Securities

The following table presents information with respect to the Company's purchases of its common stock during the period covered by this report:
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
August 17, 2018 through September 17, 2018
31,570.04
$  9.00
31,570.04
-
Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

None.

Item 6.  EXHIBITS

Exhibit
Description





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MACKENZIE REALTY CAPITAL, INC.
Date: November 13, 2018
By: /s/ Robert Dixon __________________
President and Chief Executive Officer
Date: November 13, 2018
By: /s/ Paul Koslosk y_________________
Treasurer and Chief Financial Officer
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