MACKENZIE REALTY CAPITAL, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2021
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________ to __________
Commission file number 000-55006
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(Address of principal executive offices)
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(
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(Registrant’s telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last report)
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Securities registered pursuant to Section 12(b) of the Act: None
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.
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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Emerging growth company ☐
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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 February 14, 2022 was 13,393,523.90 .
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Page
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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1
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2
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3
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4
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5
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6
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7
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8
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9
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Item 2.
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30
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Item 3.
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45
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Item 4.
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46
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PART II.
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OTHER INFORMATION
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Item 1.
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47
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Item 1A.
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47
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Item 2.
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47
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Item 3.
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47
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Item 4.
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47
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Item 5.
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47
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Item 6.
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48
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49
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MacKenzie Realty Capital, Inc.
December 31, 2021
(Unaudited)
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Assets
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Real estate assets
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Land
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$
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Building, fixtures and improvements
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Intangible lease assets
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Less: accumulated depreciation and amortization
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(
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)
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Total real estate assets, net
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Cash
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Restricted cash
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Investments, at fair value
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| Unconsolidated investment (non-security), at fair value |
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| Investments income, rents and other receivables |
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|||
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Prepaid expenses and other assets
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||||
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Total assets
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$
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Liabilities
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||||
| Securities sold, not yet purchased, at fair value | $ | |||
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Mortgage notes payable, net
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Deferred rent and other liabilities
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||||
| Dividend payable |
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| Accounts payable and accrued liabilities |
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Below-market lease liabilities, net
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| Due to related entities |
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| Capital pending acceptance |
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Total liabilities
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Equity
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Common stock, $
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| Preferred stock, $ |
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Capital in excess of par value
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Accumulated deficit
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(
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)
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Total stockholders’ equity
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Non-controlling interests
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|||
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Total equity
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|||
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Total liabilities and equity
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$
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*Amount is less than $1.
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
June 30, 2021
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Assets
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Real estate assets
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Land
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$ | |||
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Building, fixtures and improvements
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Intangible lease assets
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Less: accumulated depreciation and amortization
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(
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)
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Total real estate assets, net
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Cash
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Restricted cash
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Investments, at fair value
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| Unconsolidated investment (non-security), at fair value |
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Investments income, rents and other receivables
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Prepaid expenses and other assets
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|||
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Total assets
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$
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Liabilities
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||||
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Mortgage notes payable, net
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$
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| Accounts payable and accrued liabilities | ||||
| Below-market lease liabilities, net |
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|||
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Deferred rent and other liabilities
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| Due to related entities |
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Total liabilities
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Equity
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Common stock, $
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|||
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Capital in excess of par value
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|||
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Accumulated deficit
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(
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)
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Total stockholders’ equity
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|||
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Non-controlling interests
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|||
| Total equity | ||||
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Total liabilities and equity
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$
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||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
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Three Months Ended
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Six Months Ended
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December 31, 2021
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December 31, 2021
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Revenue
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Rental and reimbursements
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$
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$
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Expenses
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Property operating and maintenance
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Depreciation and amortization
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Asset management fees to related party (note 6)
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Interest expense
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Administrative cost reimbursements to related party (note 6)
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General and administrative
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Professional fees
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Transfer agent cost reimbursements to related party (note 6)
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Directors’ fees
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Total operating expenses
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Operating loss
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(
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(
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Other income
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Dividend and distribution income from equity securities at fair value
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Net unrealized gain (loss) on equity securities at fair value
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(
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Net income from equity method investments at fair value
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Net realized gain from investments
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Net income
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Net loss attributable to non-controlling interests
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Net income attributable to preferred stockholders
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(
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)
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(
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Net income attributable to common stockholders
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$
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$
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||||
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Net income per share attributable to common stockholders
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$
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$
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||||
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||||||||
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Weighted average common shares outstanding
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|
||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
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Three Months Ended
December 31, 2020 |
Six Months Ended
December 31, 2020 |
||||||
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Investment income
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Non-controlled/non-affiliated investments:
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Dividend and operational/sales distributions
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$
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$
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||||
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Interest and other income
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||||||
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Affiliated investments:
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Dividend and operational/sales distributions
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Controlled investments:
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Dividend and operational/sales distributions
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Total investment income
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Operating expenses
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Base management fee (note 6)
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Amortization of deferred offering costs
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Administrative cost reimbursements (note 6)
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Professional fees
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Printing and mailing
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Transfer agent cost reimbursements (note 6)
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Directors’ fees
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||||||
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Portfolio structuring fee (note 6)
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Other general and administrative
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||||||
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Total operating expenses
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||||||
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Net investment loss
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(
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)
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(
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||||
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||||||||
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Realized and unrealized gain (loss) on investments
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||||||||
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Net realized gain (loss)
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||||||||
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Non-controlled/non-affiliated investments
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(
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)
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|||||
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Affiliated investments
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(
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)
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|||||
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Total net realized gain (loss)
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(
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)
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|||||
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Net unrealized gain (loss)
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||||||||
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Non-controlled/non-affiliated investments
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(
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)
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|||||
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Affiliated investments
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(
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)
|
|||||
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Controlled investments
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(
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)
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(
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)
|
||||
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Total net unrealized loss
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(
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)
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(
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)
|
||||
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|
||||||||
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Total net realized and unrealized loss on investments
|
(
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)
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(
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)
|
||||
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|
||||||||
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Net decrease in net assets resulting from operations
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$
|
(
|
)
|
$
|
(
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)
|
||
|
|
||||||||
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Net decrease in net assets resulting from operations per share
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$
|
(
|
)
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$
|
(
|
)
|
||
|
|
||||||||
|
Weighted average common shares outstanding
|
|
|
||||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
|
Common stock |
Preferred stock |
Total
Stockholders’
Equity
|
|||||||||||||||||||||||||||||||||
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Three Months Ended December 31, 2021
|
Number of
Shares
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Par
Value
|
Number of
Shares
|
Par
Value
|
Additional Paid-
in Capital
|
Accumulated Deficit
|
Non-controlling Interests
|
Total Equity
|
||||||||||||||||||||||||||||
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|
||||||||||||||||||||||||||||||||||||
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Balance, September 30, 2021
|
|
$
|
|
$ |
$
|
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$
|
(
|
)
|
$
|
|
$ | $ | |||||||||||||||||||||||
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Contributions by non-controlling interest holders
|
-
|
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- |
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|
|||||||||||||||||||||||||||||||
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Distributions to non-controlling interest holders
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-
|
|
- |
|
|
|
( |
) | ( |
) | ||||||||||||||||||||||||||
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Dividends to common stockholders
|
-
|
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- |
|
(
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)
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(
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)
|
- | ( |
) | |||||||||||||||||||||||||
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Dividends to preferred stockholders
|
- | - | ( |
) | ( |
) | - | ( |
) | |||||||||||||||||||||||||||
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Net income
|
-
|
|
- |
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|
( |
) | ||||||||||||||||||||||||||||
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Issuance of common stock through reinvestment of dividends
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- | - |
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Issuance of preferred stock
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-
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-
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* |
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Payment of selling commissions and fees
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-
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- |
(
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)
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( |
) | ( |
) | ||||||||||||||||||||||||||
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Repurchase of common stock
|
(
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)
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(
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)
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(
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)
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( |
) | ( |
) | |||||||||||||||||||||||||
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Balance, December 31, 2021
|
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$
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$ |
$
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$
|
(
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$ | $ | $ | |||||||||||||||||||||||||
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Common stock | Preferred stock | Total
Stockholders’
Equity
|
|||||||||||||||||||||||||||||||||
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Six Months Ended December 31, 2021
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Number of
Shares |
Par
Value |
Number of
Shares
|
Par Value |
Additional Paid-
in Capital
|
Accumulated Deficit
|
Non-controlling Interests
|
Total Equity
|
||||||||||||||||||||||||||||
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|
||||||||||||||||||||||||||||||||||||
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Balance, June 30, 2021
|
|
$
|
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$ |
$
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$
|
(
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)
|
$
|
|
$
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$
|
|
|||||||||||||||||||||
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Contributions by non-controlling interest holders
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-
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- |
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||||||||||||||||||||||||||||
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Distributions to non-controlling interest holders
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-
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- |
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(
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)
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(
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)
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||||||||||||||||||||||||||
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Dividends to common stockholders
|
-
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- |
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(
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)
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(
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)
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-
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(
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)
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|||||||||||||||||||||||||
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Dividends to preferred stockholders
|
- | - | ( |
) | ( |
) | - | ( |
) | |||||||||||||||||||||||||||
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Net income
|
-
|
|
- |
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(
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)
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|||||||||||||||||||||||||||
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Issuance of common stock through reinvestment of dividends
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- | - |
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|||||||||||||||||||||||||||
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Issuance of preferred stock
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-
|
-
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* |
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|
||||||||||||||||||||||||||||
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Payment of selling commissions and fees
|
-
|
|
- |
(
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)
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|
(
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)
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|
(
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)
|
|||||||||||||||||||||||||
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Repurchase of common stock
|
(
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)
|
(
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)
|
(
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)
|
|
(
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)
|
|
(
|
)
|
||||||||||||||||||||||||
|
Balance, December 31, 2021
|
|
$
|
|
$ |
$
|
|
$
|
(
|
)
|
$
|
|
$
|
|
$
|
|
|||||||||||||||||||||
*Amount is less than $1.
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
|
Three Months Ended
|
Six Months Ended
|
||||||
|
|
December 31, 2020
|
December 31, 2020
|
||||||
|
Operations
|
||||||||
|
Net investment loss
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Net realized gain (loss)
|
(
|
)
|
|
|||||
|
Net unrealized loss
|
(
|
)
|
(
|
)
|
||||
|
Net decrease in net assets resulting from operations
|
(
|
)
|
(
|
)
|
||||
|
|
||||||||
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Capital share transactions
|
||||||||
|
Issuance of common stock
|
|
|
||||||
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Issuance of common stock to redeem subsidiary’s non-controlling interest
|
|
|
||||||
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Selling commissions and fees
|
(
|
)
|
(
|
)
|
||||
|
Non-controlling interest in consolidated subsidary
|
|
|
||||||
|
Net increase in net assets resulting from capital share transactions
|
|
|
||||||
|
|
||||||||
|
Total decrease in net assets
|
(
|
)
|
(
|
)
|
||||
|
|
||||||||
|
Net assets at beginning of the period
|
|
|
||||||
|
|
||||||||
|
Net assets at end of the period
|
$
|
|
$
|
|
||||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
Six Months Ended
December 31, 2021
|
||||
|
Cash flows from operating activities:
|
||||
|
Net income
|
$
|
|
||
|
Adjustments to reconcile net income to net cash from operating activities:
|
||||
|
Net unrealized gain on equity securities
|
(
|
)
|
||
|
Net income from equity method investments at fair value
|
(
|
)
|
||
|
Net realized gain on investments
|
( |
) | ||
|
Straight - line rent
|
( |
) | ||
|
Depreciation and amortization
|
|
|||
|
Amortization of deferred financing costs
|
||||
|
Accretion of market lease and other intangibles, net
|
(
|
)
|
||
|
Changes in assets and liabilities:
|
||||
|
Investment income, rent and other receivables
|
|
|||
|
Due from related entities
|
( |
) | ||
|
Prepaid expenses and other assets
|
(
|
)
|
||
|
Accounts payable and accrued liabilities
|
|
|||
|
Deferred rent and other liabilities
|
|
|||
|
Due to related entities
|
|
|||
|
Net cash from operating activities
|
|
|||
|
Cash flows from investing activities:
|
||||
|
Proceeds from sale of investments
|
|
|||
|
Investments in real estate assets
|
(
|
)
|
||
|
Purchase of investments
|
(
|
)
|
||
|
Return of capital distributions
|
|
|||
|
Net cash from investing activities
|
|
|||
|
Cash flows from financing activities:
|
||||
|
Proceeds from mortgage notes payable
|
||||
|
Payments on mortgage notes payable
|
(
|
)
|
||
|
Dividend to stockholders
|
( |
) | ||
|
Payment of deferred financing costs
|
( |
) | ||
|
Proceeds from issuance of preferred stock
|
||||
|
Payment of selling commissions and fees
|
( |
) | ||
|
Contributions by non-controlling interests holders
|
||||
|
Distributions to non-controlling interests holders
|
(
|
)
|
||
|
Redemption of common stock
|
( |
) | ||
|
Capital pending acceptance
|
||||
|
Net cash from financing activities
|
|
|||
|
Net increase in cash and restricted cash
|
|
|||
|
Cash and restricted cash at beginning of the period
|
|
|||
|
Cash and restricted cash at end of the period
|
$
|
|
||
|
Cash at end of the period
|
$
|
|
||
|
Restricted cash at end of the period
|
|
|||
|
Total cash and restricted cash at end of the period
|
$
|
|
||
|
Supplemental disclosure of non-cash financing activities and other cash flow information
|
||||
|
Issuance of common stock through reinvestment of dividends
|
$ | |||
|
Cash paid for interest
|
$
|
|
||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
(Unaudited)
|
Six Months Ended
December 31, 2020
|
||||
|
Cash flows from operating activities:
|
||||
|
Net decrease in net assets resulting from operations
|
$
|
(
|
)
|
|
|
Adjustments to reconcile net decrease in net assets resulting from
|
||||
|
operations to net cash from operating activities:
|
||||
|
Proceeds from sale of investments, net
|
|
|||
|
Return of capital
|
|
|||
|
Purchase of investments
|
(
|
)
|
||
|
Net realized gain on investments
|
(
|
)
|
||
|
Net unrealized loss on investments
|
|
|||
|
Amortization of deferred offering costs
|
|
|||
|
Changes in assets and liabilities:
|
||||
|
Investment income, rent and other receivable
|
( |
) | ||
|
Due from related entities
|
(
|
)
|
||
|
Other assets
|
|
|||
|
Payment of deferred offering costs
|
(
|
)
|
||
|
Accounts payable and accrued liabilities
|
(
|
)
|
||
|
Due to related entities
|
(
|
)
|
||
|
Net cash from operating activities
|
|
|||
| Cash flows from investing activities: |
||||
|
Cash acquired through consolidation of subsidiary
|
||||
|
Net cash from investing activities
|
||||
|
Cash flows from financing activities:
|
||||
|
Proceeds from issuance of common stock
|
|
|||
|
Payment of selling commissions and fees
|
(
|
)
|
||
|
Change in capital pending acceptance
|
(
|
)
|
||
|
Net cash from financing activities
|
|
|||
|
Net increase in cash and cash equivalents
|
|
|||
|
Cash, cash equivalents and restricted cash at beginning of the period
|
|
|||
|
Cash, cash equivalents and restricted cash at end of the period
|
$
|
|
||
|
Cash and cash equivalents at end of the period
|
$ | |||
|
Restricted cash at end of the period
|
||||
|
Total cash, cash equivalents and restricted cash at end of the period
|
$ | |||
| Non-cash investing and financing activities: |
||||
|
Issuance of the Company’s common stocks to redeem subsidiary’s non-controlling interests
|
$ | |||
| Supplemental Disclosures: |
||||
|
Carrying value of a subsidary’s consolidated assets, liabilities and net assets:
|
||||
|
Assets:
|
||||
|
Real estate assets
|
$ | |||
|
Cash and restricted cash
|
$ | |||
|
Rents and other receivable
|
$ | |||
|
Other assets
|
$ | |||
|
Liabilities:
|
||||
|
Mortgage note payable
|
$ | |||
|
Accounts payable and accrued liabilities
|
$ | |||
|
Due to affiliates
|
$ | |||
|
Net assets
|
$ | |||
The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
MacKenzie Realty Capital, Inc.
December 31, 2021
(Unaudited)
NOTE 1 – PRINCIPAL BUSINESS AND ORGANIZATION
MacKenzie Realty Capital, Inc. (the “Parent Company” together with
its subsidiaries as discussed below, the “Company”) was incorporated under the general corporation laws of the State of Maryland on January 25, 2012. The Parent Company was formerly a non-diversified, closed-end investment company that elected
to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). The Parent Company withdrew its election to be treated as a BDC on December 31, 2020. 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 of 5,000,000 shares of its common stock. The
initial public offering 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. The second offering commenced in December 2016 and concluded on October 28, 2019. The Parent Company filed a third registration
statement with the SEC to register a public offering of 15,000,000 shares of its common stock that was declared effective by the SEC
on October 31, 2019. The third offering commenced shortly thereafter and expired on October 31, 2020.
On October 23, 2020, holders of a majority of the outstanding common stock of
the Company authorized the Company’s board of directors to withdraw the Company’s election to be regulated as a BDC under the 1940 Act. The withdrawal was effective with the SEC on December 31, 2020, when the Company filed the appropriate form
with the SEC.
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. MacKenzie NY Real Estate 2 Corp., (“MacKenzie NY 2”), a wholly owned subsidiary of TRS, was formed for the
purpose of making certain limited investments in New York companies. The financial statements of TRS and MacKenzie NY 2 have been consolidated with the Parent Company.
On May 20, 2020, the Parent Company formed an operating partnership, MacKenzie Realty Operating
Partnership, LP (the “Operating Partnership”) for the purpose of acquiring and operating real estate assets. The Company owns all limited partnership units of the Operating Partnership except for 12,052.85 Class A Limited Partnership units, which is 0.82 %
of the Operating Partnership.
In March 2021, the Company together with its joint venture partners formed two operating companies: Madison-PVT Partners LLC (“Madison”) and PVT-Madison Partners LLC (“PVT”), to acquire and operate two residential apartment buildings located in Oakland, California. The Company owns 98.45 % and 98.75 % of equity units of Madison and PVT, respectively. The
joint venture partners own the remaining 1.55 % and 1.25 % equity units of Madison and PVT, respectively, and also hold a carried interest in both companies. The Company is the controlling majority owner of both companies; therefore,
effective March 31, 2021, the Company has consolidated the financial statements of these companies.
On April 13, 2021, the Company filed a preliminary offering circular pursuant to
Regulation A with the SEC to sell up to $50,000,000 of shares of the Company’s Series A preferred stock at an initial offering price of
$25.00 per share. The sale of shares pursuant to this offering began in November 2021 after the definitive version of the offering
circular was qualified by the SEC on November 2, 2021.
The Company is externally managed by MacKenzie Capital Management, LP
(“MacKenzie”) under the administration agreement dated and effective as of February 28, 2013 (the “Administration Agreement”). MacKenzie manages all Company affairs except for providing investment advice. MCM Advisers, LP (the “Investment
Adviser”) advises the Company in the Company’s assessment, acquisition and divestiture of securities under the advisory agreement amended and restated effective January 1, 2021 (the “Amended and Restated Investment Advisory Agreement”). MacKenzie
Real Estate Advisers, LP (the “Real Estate Adviser”; together, the “Investment Adviser” and the “Real Estate Adviser” may be referred to as “Adviser” or “Advisers” as appropriate) advises the Company in the Company’s assessment, acquisition and
divestiture of real estate assets. The Company pursues a strategy focused on investing primarily in real estate assets, and to a lesser extent (intended to be less than 20 % of our portfolio) 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 December
31, 2021, the Company has raised approximately $131.08 million, including proceeds from the Company’s dividend reinvestment
plan (“DRIP”) of approximately $11.89 million. Of the shares issued by the Company in exchange for the total capital raised as of December 31, 2021, approximately $9.92 million worth
of shares have been repurchased under the Company’s share repurchase program.
CHANGE IN STATUS
Prior to the termination of the Company’s status as a BDC, the Company recorded its investment in real estate securities at fair value and recorded the changes in
the fair value as an unrealized gain or loss. As a result of the termination of the Company’s status as a BDC, the Company is no longer subject to fair value accounting requirements. However, the Company has elected the fair value option (see
Note 2) to recognize and measure its investments in certain limited partnerships, limited liability companies and corporations that otherwise would have been required to be recognized and measured using the equity method of accounting.
Therefore, the Company continues to record the changes in fair value of these investments in the statement of operations. The Company also continues to recognize and measure its equity securities including investments in publicly traded
securities at fair value with changes in fair value recorded in the statement of operations.
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 Regulation S-X. The Company follows the accounting principles generally accepted in the United States of America (“GAAP”) and includes the accounts of the Company’s wholly owned
consolidated subsidiaries and majority-owned controlled subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Prior to the
termination of its status as a BDC, the Company was an investment company under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 946 (“ASC 946”). Under the 1940 Act rules, regulations pursuant to Article 6
of Regulation S-X and ASC 946, subject to certain inapplicable exceptions, the Company was precluded from consolidating portfolio company investments, including those in which the Company had a controlling interest, unless the portfolio company
was an investment company. Therefore, the Company’s portfolio company investments, including those in which the Company had a controlling interest, were 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 was 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 exceeded the tests of significance set forth in Rules 3-09 or 4-08(g) of Regulation S-X, the Company included required financial information for such subsidiary in the notes or as an attachment
to its consolidated financial statements.
As a result of the termination of the Company’s status as a BDC, the Company is no
longer an investment company under the FASB ASC 946. The Company discontinued applying the guidance in ASC 946 and began to account for the change in status prospectively by accounting for its investments in accordance with other GAAP as of the
date of the change in status.
The Company’s financial statements for the period subsequent to the termination of its BDC status are
prepared on a consolidated basis to include the financial position, results of operations, and cash flows of the Company and its wholly owned and majority-owned subsidiaries. This change in status and the application of different accounting
principles makes it difficult to compare consolidated financial statements for 2021 and 2020. As such, for the three and six months ended December 31, 2021, the consolidated statements of operations, changes in net assets (referred as “equity”
effective March 31, 2021) and cash flows have been presented as it would be for a REIT (on a “successor basis”). For the three and six months ended December 31, 2020, the consolidated statements of operations, changes in net assets, and cash flows
have been presented as they would be for an investment company (on a “predecessor basis”). The consolidated balance sheets at December 31, 2021 and June 30, 2021 have been presented on the successor basis.
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 necessarily 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, 2021, 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, 2021, other than those expanded upon and described herein.
Use of Estimates
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect reported asset values, liabilities, revenues, expenses and unrealized gains (losses) on investments during the reporting period. Material estimates that are susceptible to change, and actual results could
differ from those estimates.
Variable Interest Entities
The Company evaluates the need to consolidate its investments in securities in
accordance with ASC Topic 810, Consolidation (“ASC 810”). In determining whether the Company has a controlling interest in a variable interest entity and whether to consolidate the accounts of that entity,
management considers factors such as ownership interest, authority to make decisions and contractual and substantive participating rights of the partners, as well as whether the entity is a variable interest entity for which the Company is the
primary beneficiary. Refer to Note 5 for additional information.
Cash and Restricted Cash
The Company’s cash represents balances held in current bank accounts and
restricted cash includes escrow accounts for real property taxes, insurance, capital expenditures and tenant improvements, debt service and leasing costs held by lenders, and cash pledged as collateral for securities sold short. 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.
Restricted cash is subject to a legal or contractual
restrictions as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used. The Company considers cash pledged as collateral for
securities sold short to be restricted cash.
Investments Income Receivable
Investment income represent dividends, distributions, and sales proceeds
recognized in accordance with our revenue recognition policy but not yet received as of the date of the consolidated 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 investments income receivable balances outstanding as
of December 31, 2021 and June 30, 2021, are collectible and do not require recording any uncollectible allowance.
Rents and Other Receivables
The Company will periodically evaluate the collectability of amounts due from
tenants and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments under lease agreements. The Company exercises judgment in establishing these allowances and considers
payment history and current credit status of tenants in developing these estimates. The Company has determined that all rent receivable balances outstanding as of December 31, 2021 and June 30, 2021, 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 December 31, 2021, capital pending acceptance was $73,000 . As of
June 30, 2021, there was no capital pending acceptance.
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 public offerings 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. While the Company was a BDC, offering costs were 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 had not
been amortized upon the expiration or earlier termination of an offering were accelerated and expensed upon such expiration or termination. The offering costs incurred by the Company on the offering circular to sell the Series A preferred stock
have been classified as a reduction of equity.
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, 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 year ended December 31, 2020. Therefore, it did not incur any tax expense or excise tax on its income from operations during the quarterly periods within the tax year 2020. Similarly, for the tax year 2021, we
believe the Parent Company paid the requisite amounts of dividends during the year and met other REIT requirements such that it will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal
periods within the tax year 2021.
TRS and MacKenzie NY 2 are subject to corporate federal and state income tax on their taxable income at regular statutory rates. However, as of December 31, 2021, they did no 2 did no
The Operating Partnership is a limited partnership and its subsidiaries; Addison Property Owner, LLC (the “Property Owner”) and Hollywood Hillview Owner, LLC (the “Hollywood Hillview”)
are limited liability companies. Madison and PVT are also limited
liability companies. Accordingly, all income tax liabilities of these entities flow through to their partners, which ultimately is the Company. Therefore, no income tax provisions are recorded for these entities.
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 liabilities 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 recognizing, measuring, presenting, and disclosing uncertain tax positions in the financial statements. As of
December 31, 2021, and June 30, 2021, there were no
Equity Securities
The Company has minority and non-controlling equity investments in various limited
partnerships and non-traded entities, which do not have readily determinable fair values. The Company does not have controlling interests in these entities. Thus, these investments have been recorded as investments in equity securities in
accordance with ASC Topic 321, Investments – Equity Securities, and measured at fair value. The changes in the fair value of these investments are recorded in the consolidated statement of operations.
Equity Method Investments with Fair Value Option Election
The Company elected the fair value option of accounting for the investments listed
below that would have otherwise been recorded under the equity method of accounting. The primary purpose of electing the fair value option was to enhance the transparency of the Company’s financial condition. Changes in the fair value of these
investments, which are inclusive of equity in income, are recorded in the consolidated statement of operations during the period such changes occur. The below list of investments would have been accounted for under the equity method if the fair value method
had not been elected and have been included in investments in the consolidated balance sheet as of December 31, 2021 and June 30, 2021:
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
December 31, 2021
|
||||||
|
FSP Satellite Place
|
Corporation
|
Non Traded Company
|
|
%
|
$
|
|
||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
|
BP3 Affiliate, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Britannia Preferred Members, LLC - Class 1
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Britannia Preferred Members, LLC - Class 2
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Capitol Hill Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Citrus Park Hotel Holdings, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Dimensions 28, LLP
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
|
Lakemont Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Secured Income L.P.
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
|
Total
|
$
|
|
||||||||
|
Investee
|
Legal Form
|
Asset Type
|
% Ownership
|
Fair Value as of
June 30, 2021 |
||||||
|
FSP Satellite Place
|
Corporation
|
Non Traded Company
|
|
%
|
$
|
|
||||
|
5210 Fountaingate, LP
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
| Bishop Berkeley, LLC |
Limited Liability Company | LP Interest |
% | |||||||
|
BP3 Affiliate, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Britannia Preferred Members, LLC - Class 1
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Britannia Preferred Members, LLC - Class 2
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Capitol Hill Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Citrus Park Hotel Holdings, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Dimensions 28, LLP
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
|
Lakemont Partners, LLC
|
Limited Liability Company
|
LP Interest
|
|
%
|
|
|||||
|
Secured Income L.P.
|
Limited Partnership
|
LP Interest
|
|
%
|
|
|||||
|
Total
|
$
|
|
||||||||
Unconsolidated investments (non-securities) at
Fair Value
These are equity method investments that do not meet the consolidation
requirements under ASC topic 810. Under the 1940 Act, these investments are considered “voting securities” as opposed to “investment securities”. Therefore, the Company listed these equity method investments separately from rest of the equity
method investments at fair value in the consolidated balance sheets. As of December 31, 2021, the Company’s investments in BP3 Affiliate, LLC, Britannia Preferred Members, LLC - Class 1 and Class 2, and Dimensions 28, LLP were considered to be
voting securities under the 1940 Act and as of June 30, 2021, the Company’s investments in Bishop Berkeley, LLC, BP3 Affiliate, LLC, Britannia Preferred Members, LLC - Class 1 and Class 2, and Dimensions 28, LLP were considered to be voting
securities under the 1940 Act. Therefore, these investments were shown as unconsolidated investments (non-securities), at fair value in the consolidated balance sheets. For GAAP purposes, these investments have been recorded under the equity method
investments, for which the Company has elected the fair value option as discussed above.
Securities Sold, Not
Yet Purchased, at Fair Value
The Company may sell a security it does not own in anticipation of a conversion of a private equity investment to a publicly traded investment. When the Company sells a
security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which the Company sold the security short, or a loss, unlimited in amount, will be
recognized upon the termination of the short sale.
During the quarter ended December 31, 2021, the Company short sold Phillips Edison & Company, Inc. Class A shares. The Company presented the short sale in the consolidated balance sheet as securities sold, not yet
purchased, at fair value based on the security’s publicly traded price as of December 31, 2021, which is considered to be level 1 under the fair value hierarchy. In January 2022, the short sale liability was closed by delivering the Company’s
Phillips Edison & Company, Inc. Class B shares that converted to Class A shares in January 2022.
Impairment of Real Estate Assets
The Company continually monitors events and changes in circumstances that could
indicate that the carrying value of the Company’s real estate and related intangible assets may not be recoverable. When indicators of potential impairment emerge, the Company assesses whether the Company will recover the carrying value of the
asset through its undiscounted future cash flows and its eventual disposition. Based on this assessment, if the Company does not believe that it will recover the carrying value of the real estate and related intangible assets, the Company will
record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets. No
impairment charges were recorded for the period ended December 31, 2021.
Gain on Dispositions of Real Estate Investments
Gains on sales of rental real estate are not considered sales to customers and
will generally be recognized pursuant to the provisions of ASC 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which applies to sales or transfers to noncustomers of
nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business. Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20. ASC 610-20 refers to
the revenue recognition principles under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Under ASC 610-20, if the Company determines it does not have a controlling financial interest in
the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company will dispose of the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset
transfers to the buyer.
Reportable
Segments
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. The Company has one reportable segment, income-producing real estate properties, which consists of activities related to investing in real estate. The real estate properties are geographically diversified
throughout the United States, and the Company evaluates operating performance on an overall portfolio level.
NOTE 3 – INVESTMENTS IN REAL ESTATE
The following tables provide summary information regarding the Company’s operating properties,
which are owned through the Company’s subsidiaries: the Operating Partnership, Madison and PVT.
Consolidated
Operating Properties
|
Property Name:
|
|
|
|
|
|
Property Owner:
|
|
|
|
|
|
Location:
|
|
|
|
|
|
Number of Tenants:
|
|
|
|
|
|
Year Built:
|
|
|
|
|
|
Ownership Interest:
|
|
|
|
|
On October 4,
2021, through the Operating Partnership, the Company acquired a 90.0 % economic interest in Hollywood Hillview, a Delaware limited liability
company for approximately $7.78 million. The remaining 10 % economic interest in Hollywood Hillview is owned by an unaffiliated third party, True USA, LLC. Hollywood Hillview owns 100 % of the membership interests in PT Hillview GP, LLC (the “PT Hillview”), which is a special purpose limited liability company formed to
acquire, renovate, and own the 55 -unit multifamily building located at 6533 Hollywood Blvd., Los Angeles, CA (the “Hollywood Property”). All assets and liabilities of PT Hillview, including the Hollywood Property, are included in the real estate assets of the consolidated
balance sheet as of December 31, and June 30, 2021.
The following table presents the allocation of real estate assets acquired during the three months ended December 31, 2021. The acquisition was
considered asset acquisitions for accounting purposes.
|
Property Name:
|
|
|||
|
Acquisition Date:
|
|
|||
|
Purchase Price Allocation
|
||||
|
Land
|
$
|
|
||
|
Building
|
|
|||
|
Site Improvements
|
|
|||
|
Tenant Improvements
|
|
|||
|
Furniture, Fixtures & Equipment
|
|
|||
|
Lease In Place
|
|
|||
|
Leasing Commissions
|
|
|||
|
Total assets acquired
|
$
|
|
||
The total depreciation expenses of the Company’s operating properties for the three and six months ended December 31, 2021 were $685,449 and $1,287,569 ,
respectively.
Operating Leases:
The Company’s real estate assets are leased to tenants under operating leases
that contain varying terms and expirations. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains
substantially all the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company does not require a security deposit from tenants on its commercial real estate properties,
depending upon the terms of the respective leases and the creditworthiness of the tenants. Even when required, security deposits generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable
from a tenant exceeds the amount of the security deposit. Security deposits received in cash related to tenant leases are included in other accrued liabilities in the accompanying consolidated balance sheet and were immaterial as of December
31, 2021 and June 30, 2021.
The following
table presents the components of income from real estate operations for the three and six months ended December 31, 2021:
|
|
Three Months Ended
|
Six Months Ended
|
||||||
|
|
December 31, 2021
|
December 31, 2021
|
||||||
|
|
||||||||
|
Lease Income - Operating leases
|
$
|
|
$
|
|
||||
|
Variable lease income (1)
|
|
|
||||||
|
|
$
|
|
$
|
|
||||
| (1) |
|
As of December 31, 2021, the future minimum rental income from the Company’s
real estate properties under non-cancelable operating leases are as follows:
|
Year ended
June 30,:
|
Rental Income
|
|||
|
2022
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
Lease Intangibles, Above-Market Lease Assets and
Below-Market Lease Liabilities, Net
As of December 31, 2021, the Company’s acquired lease intangibles,
above-market lease assets and below-market lease liabilities were as follows:
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities
|
||||||||||
|
Cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average amortization period (years)
|
|
|
|
|||||||||
As of June 30, 2021, the Company’s acquired lease
intangibles, above-market lease assets and below-market lease liabilities, were as follows:
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market
Lease Liabilities |
||||||||||
|
Cost
|
$
|
|
$
|
|
$
|
|
||||||
|
Accumulated amortization
|
(
|
)
|
(
|
)
|
(
|
)
|
||||||
|
Total
|
$
|
|
$
|
|
$
|
|
||||||
|
Weighted average amortization period (years)
|
|
|
||||||||||
The Company’s amortization of lease intangibles, above-market lease assets and
below-market lease liabilities for the three months ended December 31, 2021, were as follows:
| Three Months Ended |
||||||||||||
|
December 31, 2021
|
||||||||||||
|
Lease Intangibles
|
Above-Market
Lease Asset
|
Below-Market Lease
Liabilities
|
||||||||||
|
Amortization
|
$
|
|
$
|
|
$ | ( |
) | |||||
The Company’s amortization of lease intangibles,
above-market lease assets and below-market lease liabilities for the six months ended December 31, 2021, were as follows:
|
|
Six Months Ended
|
|||||||||||
|
|
December 31, 2021
|
|||||||||||
|
|
Lease Intangibles
|
Above-Market Lease Asset
|
Below-Market Lease Liabilities
|
|||||||||
|
Amortization
|
$
|
|
$
|
|
$
|
(
|
)
|
|||||
The Company did no t have lease intangibles as of December 31, 2020. Therefore, it did no t have any amortization.
The following table provides the projected amortization expense and
adjustments to revenue from tenants for intangible assets and liabilities for the next five years:
|
Year Ended June 30, :
|
||||||||||||||||||||||||
|
2022 (remainder)
|
2023
|
2024
|
2025
|
2026
|
Thereafter |
|||||||||||||||||||
|
In-place leases, to be included in amortization
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||
|
Above-market lease intangibles
|
$
|
|
$
|
|
$
|
|
$
|
|
$
|
|
$ | |||||||||||||
|
Below-market lease liabilities
|
(
|
)
|
(
|
)
|
(
|
)
|
(
|
)
|
|
|||||||||||||||
|
Total to be included in revenue from tenants
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
(
|
)
|
$
|
|
$ | |||||||||
NOTE 4 – INVESTMENTS
The following table summarizes the composition of the Company’s equity method
investments with fair value option election and other equity securities at fair value as of December 31, 2021 (successor basis):
|
Asset Type
|
Fair Value
December 31, 2021
|
|||
|
Publicly Traded Companies
|
$
|
|
||
|
Promissory Note
|
||||
|
Non Traded Companies
|
|
|||
|
Non Traded Company (Equity method investment with fair
value option election)
|
|
|||
|
LP Interests
|
|
|||
|
LP Interests (Equity method investment with fair value
option election)
|
|
|||
|
Investment Trust
|
|
|||
|
Total
|
$
|
|
||
The following table summarizes the composition of the Company’s equity method
investments with fair value option election and other equity securities at fair value as of June 30, 2021 (successor basis):
|
Asset Type
|
Fair Value
June 30, 2021
|
|||
|
Publicly Traded Companies
|
$
|
|
||
|
Non Traded Companies
|
|
|||
|
Non Traded Company (Equity method investment with fair
value option election)
|
||||
|
LP Interests
|
|
|||
|
LP Interests (Equity method investment with fair value
option election)
|
||||
|
Investment Trust
|
|
|||
|
Total
|
$
|
|
||
The Company’s
above total investments at fair value are disclosed in two separate lines as investments and unconsolidated investments (non-securities) in the consolidated balance sheet as of December 31, and June 30, 2021.
The following table presents fair value measurements
of the Company’s investments as of December 31, 2021, according to the fair value hierarchy that is described in our annual report on Form 10-K (successor basis):
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Publicly Traded Companies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non Traded Companies
|
|
|
|
|
||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
| Promissory Note | ||||||||||||||||
|
Investment Trust
|
|
|
|
|
||||||||||||
|
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
| Liability |
||||||||||||||||
|
Securities Sold, Not Yet Purchased
|
$ | $ | $ | $ |
The following table presents fair value measurements of the Company’s investments as of June 30,
2021, according to the fair value hierarchy that is described in our annual report on Form 10-K (successor basis):
|
Asset Type
|
Total
|
Level I
|
Level II
|
Level III
|
||||||||||||
|
Publicly Traded Companies
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Non Traded Companies
|
|
|
|
|
||||||||||||
|
LP Interests
|
|
|
|
|
||||||||||||
|
Investment Trust
|
|
|
|
|
||||||||||||
|
Total
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
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 six months ended December 31, 2021 (successor
basis):
|
Balance at July 1, 2021
|
$
|
|
||
|
Purchases of investments
|
|
|||
|
Transfers to Level I
|
(
|
)
|
||
|
Proceeds from sales, net
|
( |
) | ||
|
Return of capital distributions
|
(
|
)
|
||
|
Net realized gain
|
|
|||
|
Net unrealized gains
|
|
|||
|
Ending balance at December 31, 2021
|
$
|
|
The transfer of $230,160 of investments from Level III to Level I category during the six months ended December 31, 2021 resulted from one of the Company’s investments converting from a non-traded REIT
to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the period.
For the six months ended December 31, 2021, changes in unrealized gains, net
included in earnings relating to Level III investments still held at December 31, 2021 were $6,731,322 .
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 six months ended December 31, 2020 (predecessor basis):
|
Balance at July 1, 2020
|
$
|
|
||
|
Purchases of investments
|
|
|||
|
Transfers to Level I
|
(
|
)
|
||
|
Consolidation of the Operating Partnership
|
(
|
)
|
||
|
Proceeds from sales, net
|
(
|
)
|
||
|
Return of capital
|
(
|
)
|
||
|
Net realized gains
|
|
|||
|
Net unrealized losses
|
(
|
)
|
||
|
Ending balance at December 31, 2020
|
$
|
|
The transfer of $1,900,470 of investments from Level III to Level I category during the six months ended December 31, 2020 resulted from one of the Company’s investments converting from a non-traded REIT
to publicly traded REIT. Transfers are assumed to have occurred at the beginning of the period.
For the six months ended December 31, 2020, changes in unrealized losses, net included in earnings
relating to Level III investments still held at December 31, 2020 were $1,836,915 .
The following table shows quantitative information about significant
unobservable inputs related to the Level III fair value measurements used at December 31, 2021 (successor basis):
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable Inputs Used
|
Range
|
Weighted
Average
|
||||||||
|
Non Traded Company
|
$
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|||||||
| |
Liquidity discount
|
||||||||||||
|
Non Traded Companies
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
||||||||||
|
Liquidity discount
|
|
|
|
||||||||||
|
SEC filings
|
|||||||||||||
|
Non Traded Companies
|
|
Market Activity
|
Secondary market industry publication
|
||||||||||
|
Contracted sale of the property
|
|||||||||||||
|
LP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|
|
||||||
|
Liquidity discount
|
|||||||||||||
|
LP Interest
|
|
Discounted Cash Flow
|
Discount rate
|
|
|
||||||||
|
LP Interests
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
||||||||||
|
Contracted sale of the property
|
|||||||||||||
|
LP Interest
|
Market Activity
|
Contracted sale of the property
|
|||||||||||
|
Investment Trust
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
||||||||
|
Liquidity discount
|
|
|
|||||||||||
|
Promissory Note
|
Estimated Liquidation Value |
Forbearance agreement
|
|||||||||||
|
$
|
|
||||||||||||
The following table shows quantitative information about
significant unobservable inputs related to the Level III fair value measurements used at June 30, 2021 (successor basis):
|
Asset Type
|
Fair Value
|
Primary Valuation
Techniques
|
Unobservable Inputs Used
|
Range
|
Wt.
Average
|
||||||||
|
Non Traded Company
|
$
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|
||||||
|
Liquidity discount
|
|
|
|
||||||||||
|
Non Traded Companies
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
||||||||||
|
Liquidity discount
|
|
|
|
|
|||||||||
| Bankruptcy filing | |||||||||||||
|
Non Traded Companies
|
|
Market Activity
|
Secondary market industry publication
|
||||||||||
| Underlying property sales contract | |||||||||||||
| Acquisition cost | |||||||||||||
|
LP Interests
|
|
Direct Capitalization Method
|
Capitalization rate
|
|
|
|
|
||||||
|
Liquidity discount
|
|
|
|
|
|||||||||
|
LP Interests
|
|
Discounted Cash Flow
|
Discount rate
|
|
|
|
|
||||||
|
Discount term (months)
|
|
||||||||||||
|
LP Interests
|
|
Estimated Liquidation Value
|
Sponsor provided value
|
||||||||||
|
Underlying property sales contract
|
|||||||||||||
|
Liquidity discount
|
|
|
|
|
|||||||||
| Appraisal | |||||||||||||
|
Investment Trust
|
|
Direct Capitalization Method
|
Capitalization rate
|
||||||||||
| Liquidity discount | |||||||||||||
|
$
|
|
||||||||||||
Impact of COVID-19 Pandemic
The COVID-19 pandemic and related changes in tenant behavior have adversely
impacted the fair value of our investments as of December 31, 2021 and June 30, 2021, and the values assigned as of this date may differ materially from the values that we may ultimately realize with respect to our investments. The impact of
the COVID-19 pandemic may not yet be fully reflected in the valuation of our investments as our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of
time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the quarter for which we are reporting. Additionally, we may not
have yet received information or certifications from our portfolio companies that indicate any or the full extent of declining performance or non-compliance with debt covenants, as applicable, as a result of the COVID-19 pandemic. As a result,
our valuations at December 31, 2021 and June 30, 2021, may not show the complete or continuing impact of the COVID-19 pandemic and the resulting measures taken in response thereto. Accordingly, we may continue to incur additional net unrealized
losses or may incur realized losses subsequent to December 31, 2021, which could have a material adverse effect on our business, financial condition and results of operations.
Summarized or Separate Audited Financial Statements for Equity Method Investments
(Fair Value Option)
Our investments in securities are generally in small and
mid-sized companies in a variety of industries. In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, we must determine which of our equity method investments measured at fair value under the Fair Value Option are considered
“significant,” if any. Regulation S-X mandates the use of three different tests to determine if any of our investments are considered significant investments: the investment test, the asset test, and the income test. Rule 3-09 of Regulation
S-X requires separate audited financial statements for any significant equity method investments in an annual report if any of the three tests exceed 20%. Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual
report if any of the three tests exceeds 10%. For interim reporting, under SEC Rule 10-01(b)(1), the investment and income tests prescribed under Rule 3-09 should be applied to all of our equity method investments measured at fair value under
the Fair Value Option and if either of the two tests exceed 20%, summarized income statement information of each equity method investee is required to be disclosed separately. The summarized income statement information is not required for
any equity method investee that would not be required, pursuant to Rule 13a-13 or 15d-13, to file quarterly financial information with the SEC if it were a registrant.
In addition to the SEC rules, ASC 323-10-50-3(c) requires summarized financial
statements of its equity method investments, including those reported under the fair value option, if they are material individually or in aggregate. The Company’s equity method investments accounted under the fair value option were material in
aggregate as of December 31, 2021. The aggregated summarized financial information of the investees is as follows:
|
Total Assets
|
$
|
|
||
|
Total Liabilities
|
$
|
|
||
|
Total Equities
|
$
|
|
||
|
Total Revenues
|
$
|
|
||
|
Total Expenses
|
$
|
|
||
|
Total Net Loss
|
$
|
(
|
)
|
Unconsolidated
Significant Subsidiaries
In accordance with SEC Rules 3-09 and 4-08(g) of Regulation S-X, we must
determine which of our investments in securities are considered “significant subsidiaries,” if any. Regulation S-X mandates the use of three different tests to determine if any of our controlled investments are significant subsidiaries: the
investment test, the asset test, and the income test. Rule 3-09 of Regulation S-X requires separate audited financial statements for any unconsolidated majority-owned subsidiary in an annual report if any of the three tests exceed 20%. Rule
4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%.
As
of December 31, 2021 and June 30, 2021, none of our investments in securities was considered a significant subsidiary under the SEC rules described above.
NOTE 5 – VARIABLE INTEREST ENTITIES
A variable interest in a variable interest entity (VIE) is an investment or
other interest that will absorb portions of the VIE’s expected losses and/or receive portions of the VIE’s expected residual returns. The Company’s variable interests in VIEs include limited partnership interests. VIEs sometimes finance the
purchase of assets by issuing limited partnership interests that are either collateralized by or indexed to the assets held by the VIE.
The enterprise with a controlling financial interest in a VIE is known as the
primary beneficiary and consolidates the VIE. The Company determines whether it is the primary beneficiary of a VIE by performing an analysis that principally considers: (a) which variable interest holder has the power to direct activities of the
VIE that most significantly impact the VIE’s economic performance; (b) which variable interest holder has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE; (c) the
VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (d) the VIE’s capital structure; (e) the terms between the VIE and its variable interest holders and other parties
involved with the VIE; and (f) related-party relationships. The Company reassesses its evaluation of whether an entity is a VIE when certain reconsideration events occur. The Company reassesses its determination of whether it is the primary
beneficiary of a VIE on an ongoing basis based on current facts and circumstances.
Nonconsolidated VIEs
As of December 31, 2021 and June 30, 2021, ten
The table below presents a summary of the nonconsolidated VIEs in which the Company holds variable
interests:
|
Total Nonconsolidated VIEs
|
As of December 31, 2021
|
As of June 30, 2021 | ||||||
|
Fair value of investments in VIEs
|
$
|
|
$ | |||||
|
Carrying value of variable interests - assets
|
$
|
|
$ | |||||
|
Carrying value of variable interests - liabilities
|
$
|
|
$ | |||||
|
Maximum Exposure to Loss:
|
||||||||
|
Limited Partnership Interest
|
$
|
|
$ | |||||
The Company’s exposure to the obligations of VIEs is generally limited to the carrying value of the
limited partnership interests in these entities.
NOTE 6 – RELATED PARTY TRANSACTIONS
Advisory Agreements Effective Through December 31, 2020:
Under the Amended and Restated Investment Advisory Agreement, the
Company paid 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 was for the Adviser’s initial work
performed in identifying, evaluating, and structuring the acquisition of assets. The fee equaled 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 were performed on an ongoing basis in anticipation of deploying new capital, generally within 15 days of the receipt of capital. Therefore, this fee was expensed in the period the capital was accepted.
The base management fee was calculated based on the Company’s Gross
Invested Capital plus any borrowing for investment purposes. The base management fees ranged from 1.5 % to 3.0 %, depending on the level of Gross Invested Capital.
The subordinated incentive fee had two parts—income and capital gains.
The incentive fee components (other than during liquidation) were designed so that neither the income incentive fee nor the capital gains incentive fee was payable to the Adviser unless our stockholders had 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 (the “Income Fee”) was 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 (the “Capital Gains Fee”) was
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 the Contributed Capital on an annualized basis up to 8.75 % of Contributed Capital, which thresholds were 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
was 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 was capped so that under no circumstance would it have exceeded 20 % of the
realized capital gains for the measurement period.
Advisory Agreements Effective January 1, 2021:
As discussed in Note 1, on January 26, 2021, the board of directors of the
Company approved, effective January 1, 2021, two advisory agreements, an Advisory Management Agreement with the Real Estate Adviser
and the Amended and Restated Investment Advisory Agreement with the Investment Adviser.
The terms of the Advisory Management Agreement with the Real Estate Adviser
provide that the Company will continue to pay an Asset Management Fee on essentially the same terms as it was paying the Investment Adviser prior to 2021, namely based upon a percentage of Invested Capital (3 % of the first $20 million, 2 % of the next $80 million, and 1.5 % over $100 million). Invested
Capital is equal to the amount calculated by multiplying the total number of outstanding shares, preferred shares, and the partnership units (units in our operating partnership issued by us and held by persons other than us) issued by the Company
by the price paid for each or the value ascribed to each in connection with their issuance. The Advisory Management Agreement also provides for a 2.5 %
Acquisition Fee on new (non-security) purchases, subject to certain limitations designed to eliminate incentives to “churn” Company assets. The new Advisory Management Agreement also provides for an incentive management fee that is equal to 15 % of all distributions once shareholders have received cumulative distributions equal to 6 % from the effective date of the Agreement. The Company will not pay any Property Management Fees, Debt Financing Fees, or Disposition Fees to the Real Estate Adviser.
The Investment Adviser will receive an annual fee equal to $100 for providing the investment advice to the Company as to its securities portfolio under the Amended and Restated Investment Advisory Agreement.
During the three and six months ended December 31, 2021, the Company incurred
the asset management fees of $677,622 and $1,354,174 ,
respectively.
During the three and six months ended December 31, 2020, the Company incurred the base management
fees of $677,490 and $1,335,376 ,
respectively. The portfolio structuring fees for the three and six months ended December 31, 2020 were $1,827 and $6,679 , respectively, under the previous advisory agreement with the Investment Adviser.
The asset management and base management fees mentioned above were based on the
following quarter ended Invested Capital segregated in two columns based on the annual fee rate:
|
Asset/Base Management Fee Annual %
|
3.0%
|
|
2.0%
|
|
1.5%
|
|
Total Invested
Capital
|
|||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2021
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
December 31, 2021
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
|
Quarter ended:
|
||||||||||||||||
|
September 30, 2020
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
December 31, 2020
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||
During the three and six months ended December 31, 2021, the Company did no
Similarly, the Company did no
Organization and Offering Costs Reimbursement:
As provided in the previous advisory agreement with the Investment Adviser and the
prospectus of the Company, offering costs incurred and paid by the Company in excess of $1,650,000 on the third public offering were
reimbursed by the Investment Adviser except to the extent that 10 % in broker fees are not incurred (the “broker savings”). In such case,
the broker savings were available to be paid by the Company for marketing expenses or other non‑cash compensation. Total offering costs incurred on the third public offering as of the termination date of October 31, 2020 were $624,188 which were below the reimbursement threshold. Therefore, there were no amounts reimbursable from the Investment Adviser as of the offering termination date.
Of the cumulative offering costs incurred on the third public offering by the
Company as of the offering termination date of October 31, 2020, MacKenzie had paid on behalf of the Company a total of $346,349 . The
Company had fully reimbursed MacKenzie as of June 30, 2021.
The third public offering terminated on October 31, 2020. Therefore, the
remaining deferred offering costs that had not been amortized as of the termination date were fully expensed as of December 31, 2020. Therefore, there were no 200,126 and $342,015 ,
respectively.
As of December 31, 2021, the Company has incurred $422,624 of offering costs on its offering circular to sell the preferred stock. These costs are recorded as a reduction to capital in excess of par
value in the consolidated balance sheet as of December 31, 2021. Of these total offering costs, MacKenzie had paid $242,409 on behalf
of the Company. Therefore, the amount has been recorded as due to related entities in the consolidated balance sheet as of December 31, 2021.
Administration Agreement:
Under the Administration Agreement, the Company reimburses MacKenzie for its
allocable portion of overhead and other expenses it incurs in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and record keeping services at
such facilities, as well as providing the Company with other administrative services, subject to the independent directors’ approval. In addition, the Company reimburses MacKenzie for the fees and expenses associated with performing compliance
functions, and its allocable portion of the compensation of the Company’s Chief Financial Officer, Chief Compliance Officer, Director of Accounting and Financial Reporting, and any administrative support staff.
Effective November 1, 2018, transfer agent services are also provided by MacKenzie
and the costs incurred by MacKenzie in providing the services are reimbursed by the Company. No fee (only cost reimbursement) is being paid by the Company to MacKenzie for this service.
The administrative cost reimbursements for the three and six months ended December
31, 2021, were $152,400 and $304,800 ,
respectively. The administrative cost reimbursements for the three and six months ended December 31, 2020, were $155,200 and $310,400 , respectively. Transfer agent services cost reimbursement for the three and six months ended December 31, 2021, were $26,600 and $53,201 , respectively.
Transfer agent services cost reimbursement for the three and six months ended December 31, 2020, were $30,800 and $61,600 , respectively.
The table below outlines the related party expenses incurred for the six months
ended December 31, 2021 and 2020, and unpaid as of December 31, 2021, and June 30, 2021.
|
Six Months Ended
|
Unpaid as of
|
|||||||||||||||
|
Types and Recipient
|
December 31, 2021
|
December 31, 2020
|
December 31, 2021
|
June 30, 2021
|
||||||||||||
|
Asset management fees- the Real Estate Adviser
|
$
|
|
$
|
|
$
|
|
$
|
|
||||||||
|
Base management fees- the Investment Adviser
|
|
|
|
|
||||||||||||
|
Portfolio structuring fees- the Investment Adviser
|
|
|
|
|
||||||||||||
|
Administrative cost reimbursements- MacKenzie
|
|
|
|
|
||||||||||||
|
Transfer agent cost reimbursements - MacKenzie
|
|
|
|
|
||||||||||||
|
Organization & Offering Cost(2) - MacKenzie
|
|
|
|
|
||||||||||||
|
Other expenses(1) - MacKenzie
|
|
|
||||||||||||||
|
Due to related entities
|
$
|
|
$
|
|
||||||||||||
(1) Expenses paid by MacKenzie on behalf of the Company to be reimbursed to MacKenzie.
(2) Offering costs paid by MacKenzie - discussed in Note 6 under organization and offering costs reimbursements.
Affiliated Investments:
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 December 31, 2021, and June 30, 2021:
| • |
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.
|
NOTE 7 – 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 and to purchase additional securities based on the account equity (including cash).
Amounts borrowed are collateralized by the securities held in the account and bear interest at a negotiated rate payable monthly. Securities pledged to secure margin balances cannot be specifically identified as a portion of all securities held
in a brokerage account are used as collateral. As of December 31, 2021, the Company had no margin credit available for cash
withdrawal; however, it had the ability to purchase up to $5,210,642 in additional securities. As of June 30, 2021, the Company had no no
NOTE 8 – MORTGAGE NOTES
PAYABLE AND DEBT GUARANTY
Property Owner Note
Payable
Property Owner is the
obligor under a note payable to Wells Fargo Bank, NA in the original loan amount of $32,000,000 at an interest rate of LIBOR plus 3.75 %. The loan originally matured on November 1, 2019 ,
and is secured by the properties owned by Property Owner.
On June 8, 2020, as
part of the Contribution Agreement, the Company agreed to guarantee the loan and the maturity date of the loan was extended to April 30, 2021, with an option to further extend the maturity date to April 30, 2022. In April 2021, the Company
exercised the option and extended the loan maturity date to April 30, 2022 . The principal balance of the loan immediately prior to the
Loan Modification Agreement was $25,827,107 . The new loan principal amount due under the modified agreement was $24,404,257 , and the interest rate was modified to be equal to the Federal Funds Rate plus 3.75 %. The outstanding loan amounts as of December 31, 2021 and June 30, 2021, were $23,357,787
and $23,568,330 , respectively. The loan requires payments only of interest through the maturity date; however, certain provisions of
the loan agreement allow the lender to apply excess cash flow during a cash trap period to the principal balance.
Under the Loan
Modification Agreement and Replacement Guaranty, the Company guaranteed only the “Recourse Obligations” under the loan, which are triggered only if the guarantor of the loan engages in “Bad Boy Acts” (such as fraud, intentional misrepresentation,
willful misconduct, waste, conversion, intentional failure to pay taxes or maintain insurance, filing for bankruptcy, etc.). As of December 31, 2021 and June 30, 2021, the Company has not recorded any debt guaranty obligation because (i) the
Property Owner was current on the loan payments, (ii) the Company believes the Property Owner has sufficient cash flow to meet its monthly payments, and (iii) the Company has not engaged in inappropriate actions that would give rise to a guaranty
obligation. In addition, the appraised value of the collateral was higher than the loan balance as of December 31, 2021 and June 30, 2021.
Madison and PVT Notes
Payable
On
February 26, 2021, Madison and PVT obtained mortgage loans from First Republic Bank in the amounts of $6,737,500 and $8,387,500 , respectively, both at a fixed interest rate of 3.0 one year 2.75 April 1, 2031 360 months of amortization period. The remaining unpaid principal
balance is due at maturity date. As of December 31, and June 30, 2021, the outstanding loan amounts were $6,737,500 8,387,500
PT Hillview Notes
Payable
On October 4, 2021,
PT Hillview entered into a loan agreement with Ladder Capital Finance in the amount of $17,500,000 . The annual interest rate shall
equal to the greater of (i) a floating rate of interest equal to 5.5 % plus LIBOR, and (ii) 5.75 %. The loan was obtained to finance the acquisition of Hollywood Property. The loan matures on October 6, 2023 and can be extended for two successive 12 month terms (the “Maturity Date”) and is secured by the Hollywood Property. The loan requires interest only monthly payments with the principal
balance due at maturity date. Interest is due based on a 360 day amortization period. As of December 31, 2021, the outstanding loan
amounted to $15,000,000 .
The Company (along
with three other principals of True USA) guaranteed: (1) the “Recourse Obligations” as defined in the loan agreement, which are triggered only if the borrower of the loan engages in “Bad Boy Acts” (such as fraud, intentional misrepresentation,
willful misconduct, waste, conversion, intentional failure to pay taxes or maintain insurance, filing for bankruptcy, ADA noncompliance, and environmental contamination, etc.), (2) a “Debt Service and Carry Guaranty” under the loan, which
guarantees the payment of interest on the loan and other “Basic Carrying Costs”, and (3) a “Guaranty of Completion” guaranteeing that the redevelopment work contracted to be performed will be completed as agreed. The Company was comfortable
issuing such guarantees because the loan provides for a substantial “Carrying Costs” reserve and for the full funding of the construction contract, which is subject to a guaranteed maximum price.
NOTE 9 – EARNINGS PER
SHARE
Basic earnings per share is computed
using the weighted average number of shares outstanding. Diluted earnings per share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to potentially diluted securities.
The following table sets forth the
computation of basic and diluted earnings per share for the six months ended December 31, 2021 and 2020:
|
Six Months Ended
December 31, 2021
|
Six Months Ended
December 31, 2020
|
|||||||
|
(Successor Basis)
|
(Predecessor Basis)
|
|||||||
|
Net income (loss) attributable to common stockholders
|
$
|
|
$
|
(
|
)
|
|||
|
Basic and diluted weighted Average common shares outstanding
|
|
|
||||||
|
Basic and diluted earnings per share
|
$
|
|
$
|
(
|
)
|
|||
NOTE 10 – SHARE
OFFERINGS AND FEES
The Company did no t issue any new common shares during the six months ended December 31, 2021 as the third public offering terminated on October 31, 2020. During the
six months ended December 31, 2021, the Company issued 57,052.24 common shares with total gross proceeds of $526,310 under the DRIP.
During the six months
ended December 31, 2020, the Company issued 21,720 common shares with gross proceeds of $218,439 . For the six months ended December 31, 2020, the Company incurred selling commissions and fees of $18,060 . The Company’s third public offering terminated on October 31, 2020. In addition to the common shares sold through our public offering, in October 2020, the Company issued 504,091.15 common shares at $7.85 per
share, which was the most recent NAV, to the Class A unit holders of the Operating Partnership as discussed in Note 1.
During the six months
ended December 31, 2021, the Company issued 3,520 preferred shares with gross proceeds of $88,000 . For the six months ended December 31, 2021, the Company incurred syndication costs of $431,424 in relation to preferred shares offering.
NOTE 11 – SHARE
REPURCHASE PLAN
On May 11, 2020,
after assessing the impacts of the COVID-19 pandemic, the Company’s board of directors unanimously approved the suspension of the Company’s Share Repurchase Program. As a result, the Company did no t repurchase any shares during the three months ended December 31, 2020. The Company resumed the Share Repurchase Program on March 19, 2021.
During the six
months ended December 31, 2021, the Company repurchased its own shares as noted in the below table:
|
Period
|
Total Number
of shares Repurchased
|
Repurchase Price
Per Share
|
Total Repurchase
Consideration
|
|||||||||
|
During the quarter ended December
31, 2021:
|
||||||||||||
|
December
22, 2021
|
|
$
|
|
$
|
|
|||||||
|
|
$
|
|
||||||||||
NOTE 12 – STOCKHOLDER
DIVIDENDS
On March 31, 2020,
after assessing the impacts of the COVID-19 pandemic, the Company’s board of directors unanimously approved the suspension of regular quarterly dividends to the Company’s stockholders. Therefore, the Company did no t declare any dividend for the quarter ended December 31, 2020.
On May 10, 2021,
the board of directors resumed the quarterly dividends. Accordingly, on July 9, 2021 , the Company declared a dividend of $0.06 per common share for the quarter ended June 30, 2021, and on September 13, 2021 , it declared a dividend of $0.07 per common share for the quarter ended
September 30, 2021. The dividend declared on July 9, 2021 was paid on July 26, 2021 , and the dividend declared on September 13, 2021
was paid on October 29, 2021 . The board intends to continue such regular dividends so long as it is supported by the previous
quarter’s income, but may increase or decrease the dividend accordingly.
On December 20, 2021 , the Company declared a dividend of $0.08 per common share and $0.375 per Series A preferred share for the quarter ended December 31,
2021. As there were no holders of preferred stock prior to December 1, 2021, the Board approved $0.125 per preferred share
to preferred shareholders of record as of December 31, 2021.
The following table
reflects the dividends per share that the Company has declared on its common stock and preferred during the six months ended December 31, 2021:
|
|
Dividends
|
|||||||||||||||
|
|
Common stock
|
Preferred stock
|
||||||||||||||
|
During the Quarter Ended
|
Per Share
|
Amount
|
Per Share
|
Amount
|
||||||||||||
|
|
$
|
|
*
|
$
|
|
$
|
|
$
|
|
|||||||
|
|
|
|
|
|
||||||||||||
|
$
|
|
$
|
|
$
|
|
$
|
|
|||||||||
|
*
|
|
During the six
months ended December 31, 2021, the Company paid total dividends of $1,731,481 of which $526,310 has been reinvested under the Company’s DRIP.
Total dividends
declared by the Operating Partnership for the Class A unit holders during the six months ended December 31, 2021, was $2,531 ($0.21 per unit), of which $723 ($0.06 per unit) was related to dividend declared for the quarter ended June 30, 2021.
Holders of the
Company’s preferred shares are entitled to receive, when and as authorized by the Company’s board of directors and declared out of legally available funds, cumulative cash dividends on each preferred share at an annual rate of 6 %. This is a preference, not a guarantee, but is a term contained in the preferred designation of the Company’s Charter; however, the board could
suspend the dividend at any time, although it would continue to accrue. The dividend must be paid before the common shares can be paid a dividend, and before the Adviser can receive any incentive management fee. During the six months ended
December 31, 2021, the Company declared total dividends to preferred shares of $440 .
|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Statements by MacKenzie Realty Capital, Inc., its wholly owned subsidiary MRC TRS, Inc. and its majority owned subsidiaries; MacKenzie Realty Operating Partnership, LP,
Madison-PVT Partners LLC and PVT-Madison Partners LLC (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, stockholders 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 effect of the withdrawal of our BDC election, 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
Historically, we were an externally managed non-diversified closed-end management investment company that elected to be treated as a BDC under the 1940 Act, but we withdrew our election to be
treated as a BDC on December 31, 2020. Our objective remains 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 Advisers, and MacKenzie provides the non-investment management services and administrative services necessary for us to operate.
Authorization to Withdraw BDC Election
On October 23, 2020, holders of a majority of the outstanding common stock of the Company approved the authorization of the Company’s board of directors to withdraw the Company’s election to be
regulated as a BDC under the 1940 Act. The Company submitted the withdrawal to be effective with the SEC on December 31, 2020.
Withdrawal of our election to be regulated as a BDC does not affect our registration under Section 12(g) of the Exchange Act, and we continue to file periodic reports on Form 10-K, Form 10-Q, and
Form 8-K, as well as file proxy statements and other reports required under the Exchange Act. As a result of the withdrawal of our election to be regulated as a BDC, we are no longer be treated as an investment company for purposes of applying
GAAP, which results in a significant change in our future financial statement presentation. The most notable changes to the format of our consolidated financial statements include the removal of the Consolidated Schedule of Investments and
Financial Highlights and the consolidation of majority owned subsidiaries onto our financial statements. Exclusive of our subsidiary MacKenzie Realty Operating Partnership, LP (the “Operating Partnership”), we expect our other equity investments,
both public and private, to continue to be reported at fair value within our consolidated financial statements under provisions of GAAP. We intend to, where appropriate, provide supplemental non-GAAP information in order to enhance our investors’
overall understanding of our consolidated financial statements.
The Company undertook several steps to meet the requirements for withdrawal of its election to be regulated as a BDC, including (i) preparing a plan of operations in contemplation of such a
change to the status of the Company, (ii) evaluating potential investments in real estate assets that will allow the Company to transition to direct real estate asset investments, (iii) reviewing the potential adjusted investment strategy with
potential capital providers, and (iv) consulting with outside counsel as to the requirements for withdrawing its election as a BDC.
During this transition period, the Company has begun liquidating, and plans to continue to liquidate, most of its securities portfolio. By the end of the first year after withdrawal of its
election, the Company anticipates that its securities portfolio will comprise less than 20% of its assets.
Investment Plan
Now that we are no longer a BDC, we generally seek to invest in real estate assets. We intend to invest at least 80% of our total assets in equity or debt in real estate assets. We can invest up
to 20% of our total assets in investment securities of real estate companies. A real estate company is one that (i) derives at least 50% of its revenue from the ownership, construction, financing, management or sale of commercial, industrial or
residential real estate and land; or (ii) has at least 50% of its assets invested in such real estate. We will not invest in general partnerships, joint ventures, or other entities that do not afford limited liability to their security holders.
However, limited liability entities in which we invest may hold interests in general partnerships, joint ventures, or other non-limited liability entities. When purchasing securities, we generally favor 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.
Our investment objective is to generate current income and capital appreciation through the acquisition of real estate assets and debt and equity real estate-related investments. Our independent
directors review our investment policies periodically, at least annually, to confirm that our policies are in the best interests of our stockholders. Each such determination and the basis thereof are contained in the minutes of our board of
directors’ meetings.
We seek to accomplish our objective by rigorously analyzing the value of and risks associated with potential acquisitions, and, for up to 20% of our total assets, by acquiring real estate
securities at significant discounts to their net asset value.
We intend to expand our investment strategy to include acquisition of distressed real properties. Like our other investments, we would expect to hold distressed properties and infuse funds as
necessary to extract unrealized value.
We will engage in various investment strategies to achieve our overall investment objectives. The strategy we select depends upon, among other things, market opportunities, the skills and
experience of the Adviser’s investment team and our overall portfolio composition. We generally seek to acquire assets that produce ongoing distributable income for investors, yet with a primary focus on purchasing such assets at a discount from
what the Adviser estimates to be the actual or potential value of the real estate.
The Company’s investment strategies since its inception have included making loans to or investments in previously syndicated projects that had encountered difficulties with occupancy, financing,
tenant improvements or other cash needs. Since entering the recent recession, certain of our portfolio companies have encountered additional cash shortfalls, and, in some cases, we have provided additional capital to the extent that we now own the
majority of the project (such as Addison Corporate Center). In such cases, we intend to consolidate the portfolio company into our financial statements, which is a key reason for dropping our BDC status.
The Company intends to continue its historical activities related to tender offers for shares of non-traded REITs in order to boost its short-term cash flow and to support its distributions,
subject to the constraint that such securities will not exceed 20% of our portfolio. The Company believes this niche strategy will allow it to pay distributions that are supported by cash flow rather than paying back investors’ capital, although
there can be no assurance that some portion of any distribution is not a return of capital.
Rental and reimbursement
We generate rental revenue by leasing office space and apartment units to the building’s tenants. These tenant leases fall under the scope of ASC 842, and are classified as operating leases.
Revenues from such leases are recognized on a straight-line basis over the terms of the lease agreements.
Investment income
We generate revenues in the form operating income, 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) advisory fees to our Advisers; (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 and Real Estate 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 operating and maintaining real estate properties
|
| • |
the cost of calculating our net asset value, including the cost of any third-party valuation services;
|
| • |
the cost of effecting sales and repurchases of our shares and other securities;
|
| • |
interest payable on debt, if any, to finance our investments;
|
| • |
fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and third-party
advisory fees;
|
| • |
transfer agent and safekeeping fees;
|
| • |
fees and expenses associated with marketing efforts;
|
| • |
federal and state registration fees, any stock exchange listing fees in the future;
|
| • |
federal, state and local taxes;
|
| • |
independent directors’ fees and expenses;
|
| • |
brokerage commissions;
|
| • |
fidelity bond, directors and officers errors and omissions liability insurance, and other insurance premiums;
|
| • |
direct costs and expenses of administration and sub-administration, including printing, mailing, and staff;
|
| • |
fees and expenses associated with independent audits and outside legal costs;
|
| • |
costs associated with our reporting and compliance obligations under the 1934 Act, the 1940 Act and applicable federal and state securities laws; and
|
| • |
all other expenses incurred by either MacKenzie or us in connection with administering our business, including payments under the Administration Agreement that are based upon our allocable portion of overhead and other expenses
incurred by MacKenzie in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and
related expenses of our chief compliance officer and our chief financial officer and any administrative support staff.
|
Portfolio Investment Composition
Beginning with the withdrawal of our election to be treated as a BDC on December 31, 2020, we began transforming our portfolio of investments in an orderly fashion into one comprised of
controlled real estate investments (either wholly owned or controlled through voting securities). As of December 31, 2021, we still owned various real estate limited partnerships and REITs that are listed in the “Investments, at fair value” in
the table below. We also owned various investments in entities that own real estate which gave us enough control such that the investments are not securities for 1940 Act purposes, but not enough to consolidate the financials of such entities
with our own; these are listed below as “Unconsolidated investments (non-securities), at fair value.” As a result of the change in the Company’s status and applying the new basis of accounting, on the effective date of the termination of the
Company’s status as a BDC, the Company recorded the fair value of the investments as the new carrying value of the investments. The following table summarizes the composition of our investments at fair value as of December 31, 2021:
|
Investments, at fair value
|
Fair Value
December 31, 2021 |
|||
|
3100 Airport Way South LP
|
$
|
287,197
|
||
|
5210 Fountaingate
|
2,000
|
|||
|
American Healthcare REIT, Inc. - Class I
|
358,245
|
|||
|
Britannia Holdings, LLC
|
3,014,838
|
|||
|
Capitol Hill Partners, LLC
|
1,065,900
|
|||
|
Citrus Park Hotel Holdings, LLC
|
5,000,000
|
|||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
39,776
|
|||
|
Corporate Property Associates 18 Global A Inc.
|
37,843
|
|||
|
Franklin BSP Realty Trust, Inc. - Common Stock
|
2
|
|||
|
Franklin BSP Realty Trust, Inc. - Series F Convertible Preferred Stock
|
3,029,384
|
|||
|
FSP Energy Tower I Corp. Liquidating Trust
|
10,702
|
|||
|
Healthcare Trust, Inc.
|
2,722,479
|
|||
|
Highlands REIT Inc.
|
3,750,385
|
|||
|
HGR Liquidating Trust
|
10,976
|
|||
|
Independence Realty Trust, Inc.
|
1,162
|
|||
|
KBS Real Estate Investment Trust II, Inc.
|
1,447,259
|
|||
|
Lakemont Partners, LLC
|
799,550
|
|||
|
Moody National REIT II, Inc.
|
16,354
|
|||
|
Phillips Edison & Company, Inc. (Phillips Edison Grocery Center REIT I)
|
7,795,966
|
|||
|
Satellite Investment Holdings, LLC - Class B
|
5,633
|
|||
|
Secured Income, LP
|
309,123
|
|||
|
SmartStop Self Storage REIT, Inc Class A
|
113,420
|
|||
|
SmartStop Self Storage REIT, Inc Class T
|
9,272
|
|||
|
Strategic Realty Trust, Inc.
|
337,197
|
|||
|
Summit Healthcare REIT, Inc.
|
1,705,418
|
|||
|
Total
|
$
|
34,880,865
|
||
|
|
||||
|
Unconsolidated investments (non-securities), at fair value
|
||||
|
BP3 Affiliate, LLC
|
$
|
1,668,000
|
||
|
Britannia Preferred Members, LLC - Class 2
|
5,295,921
|
|||
|
Britannia Preferred Members, LLC - Class 1
|
6,864,000
|
|||
|
Dimensions28 LLP
|
14,640,912
|
|||
|
Total
|
$
|
28,468,833
|
||
Properties
In addition to our investment securities, we currently own and manage one commercial real estate property (Addison Corporate Center) located in Windsor, CT and three residential apartments:
Commodore Apartments and Pon De Leo Apartments, located in Oakland, CA and the Hollywood Property located in Los Angeles, CA. The Addison Corporate Center and the Hollywood Property are owned through our subsidiary, the Operating Partnership, the
Commodore Apartments are owned through our subsidiary Madison, and the Pon De Leo Apartments are owned through our subsidiary PVT.
Addison Corporate Center contains 605,502 square feet, of which approximately 185,000 square feet is office space and the remainder is designated as flex office/warehouse space. As of December
31, 2021, the property is approximately 60% occupied by 6 tenants. The following table shows the largest tenants and square footage occupied:
|
Largest Tenants
Business
|
Business
|
Square Ft.
Occupied
|
Rent per
annum
|
Lease
Expiration
|
Renewal
options
|
|||||
|
Sun Life
|
Insurance
|
100,623
|
$
|
1,635,124
|
5/31/22
|
No
|
||||
|
Triumph
|
Aircraft Design, Manufacturing, and Engineering
|
88,255
|
$
|
345,077
|
5/31/27
|
No
|
||||
|
Belcan
|
Global Engineering and Consulting
|
66,072
|
$
|
1,156,260
|
9/30/29
|
No
|
||||
|
Quest Diagnostics
|
Laboratory Services
|
65,459
|
$
|
1,210,992
|
10/31/25
|
1, 3 years
|
||||
The following information pertains to lease expirations at the Addison Corporate Center:
|
Year
|
Number of Leases Expiring
|
Total Area
|
Annual Rent
|
Percentage of Gross
Rent
|
||||||||||
|
2022
|
2
|
122,289
|
$
|
2,393,434
|
46
|
%
|
||||||||
|
2025
|
2
|
70,164
|
$
|
1,295,682
|
25
|
%
|
||||||||
|
2027
|
1
|
88,255
|
$
|
345,077
|
7
|
%
|
||||||||
|
2029
|
1
|
66,072
|
$
|
1,156,260
|
22
|
%
|
||||||||
Commodore Apartments is a mid-rise apartment building built in 1912 and has 48 units. As of December 31, 2021, Commodore Apartment building is approximately 93.8% occupied. Pon De Leo
Apartments is also a mid-rise apartment building built in 1929 and has 39 units. As of December 31, 2021, Pon Do Leo Apartment building is approximately 97.4% occupied.
The following table provides information regarding each of the Oakland properties:
|
Property Name
|
Sector
|
Location
|
Square
Feet
|
Units
|
Percentage
Leased
|
Annual
Base Rent
|
Monthly Base
Rent/Occupied
Unit
|
|||||||||||||
|
Pon De Leo
|
Multi-Family Residential
|
Oakland, CA
|
36,654
|
39
|
97.4
|
%
|
$
|
1,055,448
|
$
|
2,315
|
||||||||||
|
Commodore
|
Multi-Family Residential
|
Oakland, CA
|
31,156
|
48
|
93.8
|
%
|
$
|
947,131
|
$
|
1,754
|
||||||||||
Hollywood Hillview Apartments (“Hollywood Property”), located in Los Angeles, CA, is a mid-rise apartment building built in 1917 and has 55 units. The property contains approximately 37,000
square feet of net rentable area, of which 8,560 square feet is retail space. All of the retail space is currently occupied by restaurants and nightclubs. The apartment units are 24.5% occupied as of December 31, 2021 as leases were allowed to
expire by the previous owner.
There are currently extensive apartment renovations taking place until April of 2022 in order to reposition the complex as a premier rental with significant rate increases over previous years.
All required capital for the renovations have been either prefunded in cash or through lender commitments. Renovations are currently under budget and on time. Marketing and lease up are expected to begin in May or June 2022.
There are no present plans for the improvement or development of any property except for the Hollywood Property. Each property is being held for income production and increased occupancy and/or
rental rates. We have property and liability insurance policies on all three properties which we believe are adequate.
The markets in which the Company’s properties (those consolidated and those that are not yet consolidated) operate are highly competitive, and each property faces unique competitive challenges
based upon local economic, political, and legal factors. Our West coast multi-family properties, the Pon De Leo and the Commodore, are generally restricted from raising rents by local rent control laws. Two of our unconsolidated investments in
apartment properties, Lakemont Partners and Capitol Hill, are also subject to rent control. Rent control can result in average rents that are significantly below market, and this provides some buffer against declining rents in a recession.
However, in order to encourage development, rent control usually does not apply to newer properties. Since older properties may be unable to raise rents as needed, they may be unable to make improvements that could allow them to compete with
newer properties.
Our consolidated office property, Addison Corporate Center, is a class B suburban office property located in Windsor, Connecticut. Addison must compete with every other office property in the
market, as well as facing the uncertainty of workers returning to the office after COVID-19. Our unconsolidated investment in an office property, Britannia Business Center, faces the same competitive factors in its sub-market, the San Francisco
suburban East Bay.
Our unconsolidated investment in a hotel property, Citrus Park Hotel, is a Courtyard by Marriott located in the Tampa/St. Petersburg market that competes for business and leisure travel. Citrus
Park suffered a significant decline during 2020 as a result of a drastic reduction in business and leisure travel but is expected to recover as travel returns to normal.
Investments as of June 30, 2021
The following table summarizes the composition of our investments at fair value as of June 30, 2021:
|
Investments, at fair value
|
Fair Value
June 30, 2021 |
|||
|
3100 Airport Way South LP
|
$
|
283,750
|
||
|
5210 Fountaingate
|
30,574
|
|||
|
Benefit Street Partners Realty Trust, Inc.
|
2,693,265
|
|||
|
Capitol Hill Partners, LLC
|
1,007,000
|
|||
|
CBL & Associates Properties, Inc. - Preferred D
|
169,200
|
|||
|
CIM Real Estate Finance Trust, Inc.
|
3,197,484
|
|||
|
Citrus Park Hotel Holdings, LLC
|
5,000,000
|
|||
|
CNL Healthcare Properties, Inc.
|
1,071,445
|
|||
|
Coastal Realty Business Trust, REEP, Inc. - A
|
34,714
|
|||
|
Corporate Property Associates 18 Global A Inc.
|
34,603
|
|||
|
FSP 303 East Wacker Drive Corp. Liquidating Trust
|
773
|
|||
|
FSP Energy Tower I Corp. Liquidating Trust
|
10,479
|
|||
|
FSP Grand Boulevard Corp. Liquidating Trust (Residual)
|
4,597
|
|||
|
FSP Satellite Place Corp.
|
2,867,911
|
|||
|
Griffin-American Healthcare REIT III, Inc.
|
329,522
|
|||
|
Griffin Capital Essential Asset REIT, Inc.
|
519,666
|
|||
|
Healthcare Trust, Inc.
|
2,588,464
|
|||
|
Highlands REIT Inc.
|
3,047,188
|
|||
|
HGR Liquidating Trust
|
50,488
|
|||
|
InvenTrust Properties Corp.
|
3,248,093
|
|||
|
KBS Real Estate Investment Trust II, Inc.
|
1,788,593
|
|||
|
KBS Real Estate Investment Trust III, Inc.
|
721,172
|
|||
|
Lakemont Partners, LLC
|
817,770
|
|||
|
Moody National REIT II, Inc.
|
19,240
|
|||
|
New York City REIT, Inc Cl B
|
283,249
|
|||
|
Phillips Edison & Company, Inc. (Phillips Edison Grocery Center REIT I)
|
6,131,261
|
|||
|
Satellite Investment Holdings, LLC - Class B
|
4,745
|
|||
|
Secured Income, LP
|
267,734
|
|||
|
Sila Realty Trust, Inc.
|
1,366,105
|
|||
|
SmartStop Self Storage REIT, Inc Class A
|
76,312
|
|||
|
SmartStop Self Storage REIT, Inc Class T
|
6,239
|
|||
|
Steadfast Apartment REIT
|
503
|
|||
|
Strategic Realty Trust, Inc.
|
376,482
|
|||
|
Summit Healthcare REIT, Inc.
|
1,747,701
|
|||
|
The Parking REIT Inc.
|
113,516
|
|||
|
Total
|
$
|
39,909,838
|
||
|
Unconsolidated investments (non-securities), at fair value
|
Fair Value
June 30, 2021 |
|||
|
Bishop Berkeley, LLC
|
$
|
5,142,164
|
||
|
BP3 Affiliate, LLC
|
1,668,000
|
|||
|
Britannia Preferred Members, LLC - Class 2
|
5,891,945
|
|||
|
Britannia Preferred Members, LLC - Class 1
|
6,448,000
|
|||
|
Dimensions28 LLP
|
11,449,296
|
|||
|
Total
|
$
|
30,599,405
|
||
Results of Operations
COVID-19 pandemic
Considerable uncertainty still surrounds the COVID-19 pandemic and its potential effects, and the
extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of the COVID-19 pandemic, including social distancing and other restrictions on travel, congregation, and business
operations have already resulted in significant negative economic impacts, including steep declines in certain stock market segments and in the traded prices for certain real-estate related assets. As a result of these impacts, we experienced a
large decrease in fair values of some of our investments during the year ended June 30, 2021, and 2020. In addition, some of the companies in which we have invested have cancelled their quarterly dividends and distributions for the current and
future quarters. The long-term impact of the COVID-19 pandemic on the United States and world economies remains uncertain, but may result in a world-wide economic downturn, the duration and scope of which cannot currently be predicted.
MacKenzie and our Advisers have taken numerous steps, and will continue to take further actions, to address the COVID-19 pandemic. They implemented business continuity plans and the management team is in place to
respond to changes in the global environment quickly and effectively. To protect the health and safety of their team members, they successfully transitioned almost their entire workforce to remote work environments. They are working closely with
our clients to support them as necessary and as seamlessly as possible.
The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response and assessing potential impacts to our financial position and operating results. This includes the evaluation
and implementation of certain efforts to help us mitigate the impact that reduced revenues from distributions and capital events may have on our fiscal year 2022 financial results. We are focusing on maintaining a strong balance sheet and
liquidity position and searching for opportunistic investments. In anticipation of reduced revenues and uncertain future economic conditions, the board of directors had discontinued distributions starting March 2020 and share redemptions starting
May 2020. However, after reassessing the Company’s cash flow, the board of directors reinstated the quarterly distributions in May 2021. The board intends to continue quarterly distributions so long as it is supported by the previous quarter’s
income, but may increase or decrease the distribution accordingly. Further, the board authorized a repurchase offer in March 2021 for those who needed liquidity (at a substantial discount to NAV), and has recently opened the Share Repurchase
Program in cases of the death or disability of a stockholder.
Due to the termination of the Company’s BDC status effective December 31, 2020, during the three and six months ended December 31, 2021, the Company operated as an operating REIT. However, during the three and six
months ended December 31, 2020, the Company operated as a BDC.
Three Months Ended December 31, 2021 and 2020
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from the Company’s one commercial real estate property and two residential apartments. During the three months ended December 31, 2021, the
Company generated $2.57 million in rental and reimbursements revenues, of which $2.03 million was generated from the Addison Corporate Center tenants and $0.54 million from the two residential apartments. There were no rental revenues during the
three months ended December 31, 2020 as the Company did not own any real estate properties.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. During the three months ended
December 31, 2021, we received $1.21 million of distributions from operations, sales, and liquidations as compared to $1.02 million during the three months ended December 31, 2020. The increase of $0.19 million or 19% was primarily due to sales
distributions from Citrus Park Hotel Holdings, LLC and Dimensions28 LLP. During the three months ended December 31, 2021, we received dividends, interest, and other investment income of $0.30 million as compared to $0.67 million received during
the three months ended December 31, 2020.
Operating Expenses:
The Company’s base management, portfolio structuring, and subordinated incentive fees were based on the investment advisory agreement that was effective through December 31, 2020, and,
subsequent to December 31, 2020, based upon the base management and advisory fees under the advisory agreement that was effective January 1, 2021.
Asset/base management fee:
The asset management fees under the new advisory agreement for the three months ended December 31, 2021 were $0.67 million. The base management fee under the previous advisory agreement for the
three months ended December 31, 2020 was $0.68 million. The asset management fees are essentially on the same terms as the base management fees the Company was paying the Adviser prior to 2021, namely based upon a percentage of Invested Capital,
which is equal to the amount calculated by multiplying the total number of outstanding common shares, preferred shares, and the partnership units (units in our operating partnership issued by us and held by persons other than us) issued by the
Company by the price paid for each or the value ascribed to each in connection with their issuance. The decrease of $0.01 million, or 1.47% was due to a lower increment in the invested capital for the three months ended December 31, 2021 as
compared to the three months ended December 31, 2020.
Incentive management fee or subordinated incentive fee:
Under the new Advisory Management Agreement, the Company pays an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions
equal to 6% from the effective date of the Agreement. Under the previous advisory agreement that was effective through December 31, 2020, the subordinated incentive fee had two components: a Capital Gains Fee and an Income Fee. The Capital Gains
Fee was based on realized gains (including the distributions received from sales/capital transactions) and the Income Fee was based on net investment income. The Company did not incur any incentive management fee for the three months ended
December 31, 2021. Similarly, the Company did not incur any subordinated incentive fee (Capital Gains Fee or Income Fee) during the three months ended December 31, 2020. This was because the cumulative net investment income and net realized gains
were below the threshold of 7% of Contributed Capital.
Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the three months ended December 31, 2021, were $0.15 million as compared to $0.16 million for the three months ended December 31, 2020. The slight decrease was
due to a decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to December 31, 2020, as a result of the decrease in the Company’s capital raising activities.
Transfer agent cost reimbursement paid to MacKenzie for three months ended December 31, 2021 and 2020 were both $0.03 million.
Property operating and maintenance expenses:
Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other
administrative expenses incurred in the operation of the Company’s commercial and residential real estate assets. During the three months ended December 31, 2021, the Company incurred operating and maintenance expenses of $1.84 million, of which
$1.38 million mainly incurred in the operation of Adison Corporate Center. Operating and maintenance expenses incurred in the operation of two residential apartments were $0.46 million. The Company did not have such expenses during the three
months ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.
Depreciation and amortization:
During the three months ended December 31, 2021, the Company recorded depreciation and amortization of $1.11 million, of which $0.96 million was the depreciation and amortization of real estate
and intangible assets it owned through the Operating Partnership. $0.15 million of the total was related to the depreciation and amortization of real estate assets and intangibles owned through Madison and PVT. The Company did not have such
expenses during the three months ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.
During the three months ended December 31, 2020, the Company had deferred offering costs amortization of $0.20 million, which was related to offering costs incurred by the Company on its third
public offering that terminated in October 2020. The remaining unamortized balance of those deferred offering costs were fully amortized in October 2020 after the termination of the offering. Therefore, there was no such amortization during the
three months ended December 31, 2021.
Interest Expense:
Interest expense for the three months ended December 31, 2021 was $0.50 million, of which $0.38 million was incurred on the notes payable associated with the Addison Corporate Center and $0.12
million was incurred on the two mortgage notes payable associated with the two residential apartments. The Company did not incur any interest expense during the three months ended December 31, 2020 as it did not have any notes payable outstanding
as of December 31, 2020.
Other operating expenses:
Other operating expenses include professional fees, directors’ fees, printing and mailing expenses, and other general and administrative expenses. Other operating expenses for the three months
ended December 31, 2021 and 2020, were $0.30 million and $0.21 million, respectively. The increase was due to increase in audit fees.
Net realized gain/loss on investments:
During the three months ended December 31, 2021, the Company had realized gain of $3.75 million as compared to an immaterial amount during the three months ended December 31, 2020. Total
realized gains for the three months ended December 31, 2021, were realized from sales of six non-traded REIT securities with net realized gain of $3.75 million.
Net unrealized gain/loss on investments:
During the three months ended December 31, 2021, we recorded net unrealized gains of $1.63 million, which were net of $0.10 million of unrealized gains reclassification adjustment. The
reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains excluding the reclassification adjustment for the three
months ended December 31, 2021, were $1.73 million, which resulted from fair value appreciation of $1.60 million from limited partnership interests, $0.25 million from non-traded REIT securities, $0.01 million from investment trust, and offset by
fair value depreciation of $0.13 million from publicly traded REIT securities.
During the three months ended December 31, 2020, we recorded net unrealized losses of $6.96 million and did not have any reclassification adjustments as there were no realized gains during
three months ended December 31, 2020. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. The net unrealized losses for the three months ended
December 31, 2020, resulted from fair value depreciations of $7.94 million from limited partnership interests partly offset by fair value appreciations of $0.52 million from non-traded REIT securities and $0.46 million from publicly traded REIT
securities. The large decrease in partnership interests was mainly due to the decline in the underlying property value of the Operating Partnership before consolidation resulting from unfavorable leasing activities as a result of the COVID-19
pandemic.
Income tax provision (benefit):
The Parent Company has elected to be treated as a REIT for tax purposes under the Code and, as a REIT, 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 year ended December 31, 2020. Therefore, it did not incur any tax expense or excise tax on its
income from operations during the quarterly periods within the tax year 2020. Similarly, for the tax year 2021, we believe the Parent Company paid the requisite amounts of dividends during the year and met other REIT requirements such that it
will not owe any income taxes. Therefore, the Parent Company did not record any income tax provisions during any fiscal periods within the tax year 2021.
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 December 31, 2021, they did not have any taxable
income for tax years 2020 or 2021. Therefore, TRS and MacKenzie NY 2 did not record any income tax provisions during any fiscal period within the tax year 2020 and 2021.
The Operating Partnership is a limited partnership and its wholly owned subsidiary, the Property Owner, is a limited liability company. Accordingly, all income tax liabilities of these two entities flow through to
their partners, which is the Company. Therefore, no income tax provisions are recorded for these two entities.
Six Months Ended December 31, 2021 and 2020
Rental and reimbursements revenues:
Rental and reimbursement revenues are generated from the Company’s one commercial real estate property and two residential apartments. During the six months ended December 31, 2021, the Company
generated $5.29 million in rental and reimbursements revenues, of which $4.21 million was generated from the Addison Corporate Center tenants and $1.08 million from the two residential apartments. There were no rental revenues during the six
months ended December 31, 2020 as the Company did not own any real estate properties.
Investment income:
Investment income was made up of dividends, distributions from operations, distributions from sales/capital transactions, interest, and other investment income. During the six months ended
December 31, 2021, we received $3.35 million of distributions from operations, sales, and liquidations as compared to $1.88 million during the six months ended December 31, 2020. The increase of $1.47 million or 78% was primarily due to sales
distributions from Bishop Berkeley after the sale of its underlying property during the six months ended December 31, 2021. We received total sales distributions of $3.90 million from Bishop Berkeley, of which $3.87 million was considered return
of capital, resulting in $4.20 million of investment income from sales distributions. During the six months ended December 31, 2021, we received dividends, interest, and other investment income of $0.67 million as compared to $1.02 million
received during the six months ended December 31, 2020.
Operating Expenses:
The Company’s base management, portfolio structuring, and subordinated incentive fees were based on the investment advisory agreement that was effective through December 31, 2020, and,
subsequent to December 31, 2020, based upon the base management and advisory fees under the advisory agreement that was effective January 1, 2021.
Asset/base management fee:
The asset management fees under the new advisory agreement for the six months ended December 31, 2021 were $1.35 million. The base management fee under the previous advisory agreement for the
six months ended December 31, 2020 was $1.34 million. The asset management fees are essentially on the same terms as the base management fees the Company was paying the Adviser prior to 2021, namely based upon a percentage of Invested Capital,
which is equal to the amount calculated by multiplying the total number of outstanding common shares, preferred shares, and the partnership units (units in our operating partnership issued by us and held by persons other than us) issued by the
Company by the price paid for each or the value ascribed to each in connection with their issuance. The increase of $0.01 million, or 0.8% was due to a slight increase in the invested capital by $0.24 million from $134.00 million as of December
31, 2020, to $134.24 million as of December 31, 2021.
Incentive management fee or subordinated incentive fee:
Under the new Advisory Management Agreement, the Company pays an incentive management fee that is equal to 15% of all distributions once shareholders have received cumulative distributions
equal to 6% from the effective date of the Agreement. Under the previous advisory agreement that was effective through December 31, 2020, the subordinated incentive fee had two components: a Capital Gains Fee and an Income Fee. The Capital Gains
Fee was based on realized gains (including the distributions received from sales/capital transactions) and the Income Fee was based on net investment income. The Company did not incur any incentive management fee for the six months ended December
31, 2021. Similarly, the Company did not incur any subordinated incentive fee (Capital Gains Fee or Income Fee) during the six months ended December 31, 2020. This was because the cumulative net investment income and net realized gains were below
the threshold of 7% of Contributed Capital.
Administrative cost reimbursements and Transfer agent reimbursements:
Costs reimbursed to MacKenzie for the six months ended December 31, 2021, were $0.30 million as compared to $0.31 million for the six months ended December 31, 2020. The slight decrease was due
to a decrease in the allocable portion of overhead and other expenses incurred by MacKenzie in comparison to December 31, 2020, as a result of the decrease in the Company’s capital raising activities.
Transfer agent cost reimbursement paid to MacKenzie for six months ended December 31, 2021 and 2020 were $0.05 million and $0.06 million, respectively.
Property operating and maintenance expenses:
Operating and maintenance expenses mainly consists of real estate taxes, utilities, repair and maintenance, cleaning, landscape, security, property management fees, insurance, and various other
administrative expenses incurred in the operation of the Company’s commercial and residential real estate assets. During the six months ended December 31, 2021, the Company incurred operating and maintenance expenses of $3.24 million, of which
$2.55 million mainly incurred in the operation of Adison Corporate Center. Operating and maintenance expenses incurred in the operation of two residential apartments were $0.69 million. The Company did not have such expenses during the six months
ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.
Depreciation and amortization:
During the six months ended December 31, 2021, the Company recorded depreciation and amortization of $2.08 million, of which $1.78 million was the depreciation and amortization of real estate
and intangible assets it owned through the Operating Partnership. $0.30 million of the total was related to the depreciation and amortization of real estate assets and intangibles owned through Madison and PVT. The Company did not have such
expenses during the six months ended December 31, 2020 as it did not own and operate any real estate assets as of December 31, 2020.
During the six months ended December 31, 2020, the Company had deferred offering costs amortization of $0.34 million, which was related to offering costs incurred by the Company on its third
public offering that terminated in October 2020. The remaining unamortized balance of those deferred offering costs were fully amortized in October 2020 after the termination of the offering. Therefore, there was no such amortization during the
six months ended December 31, 2021.
Interest Expense:
Interest expense for the six months ended December 31, 2021 was $0.85 million, of which $0.61 million was incurred on the notes payable associated with the Addison Corporate Center and $0.24
million was incurred on the two mortgage notes payable associated with the two residential apartments. The Company did not incur any interest expense during the six months ended December 31, 2020 as it did not have any notes payable outstanding
as of December 31, 2020.
Other operating expenses:
Other operating expenses include professional fees, directors’ fees, printing and mailing expenses, and other general and administrative expenses. Other operating expenses for the six months
ended December 31, 2021 and 2020, were $0.57 million and $0.37 million, respectively. The increase was due to increase in audit fees.
Net realized gain/loss on investments:
During the six months ended December 31, 2021, the Company had realized gain of $4.35 million as compared to $1.02 million during the six months ended December 31, 2020. Total realized gains
for the six months ended December 31, 2021, were realized from sales of a publicly traded REIT security with total realized gains of $0.07 million and twelve non-traded REIT securities with net realized gain of $4.28 million.
Net unrealized gain/loss on investments:
During the six months ended December 31, 2021, we recorded net unrealized gains of $4.92 million, which were net of $1.72 million of unrealized gains reclassification adjustment. The
reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly, the net unrealized gains excluding the reclassification adjustment for the six
months ended December 31, 2021, were $6.64 million, which resulted from fair value appreciation of $3.08 million from limited partnership interests, $3.54 million from non-traded REIT securities, $0.01 from investment trust and $0.01 million from
publicly traded REIT securities.
During the six months ended December 31, 2020, we recorded net unrealized losses of $10.14 million, which
were net of $0.81 million of unrealized gains reclassification adjustments. The reclassification adjustments are the accumulated unrealized gains or losses as of the end of prior period that are realized during the current period. Accordingly,
the net unrealized losses excluding the reclassification adjustment for the six months ended December 31, 2020, were $9.33 million, which resulted from fair value depreciation of $7.32 million from limited partnership interests, $1.36 million
from non-traded REIT securities, and $0.65 million from publicly traded REIT securities. The large decrease in fair value of partnership interests was mainly due to the decline in the underlying property value of the Operating Partnership
before consolidation resulting from unfavorable leasing activities as a result of the COVID-19 pandemic.
Income tax provision (benefit):
Income tax provision for six months ended December 31, 2021 and 2020 are discussed above under the three months ended section.
Liquidity and Capital Resources
Capital Resources:
We offered to sell up to 5 million shares under our first public offering and up to 15 million shares
each under our second and third public offerings. As of December 31, 2021, the Company has raised total gross proceeds of $119.10 million from the issuance of shares under the three public offerings, $42.46 million from our first public
offering, which concluded in October 2016, $67.99 million from the second public offering, which concluded in October 2019, and $8.65 million from our third public offering, which concluded in October 2020. In addition, we have raised $12.13
million from the issuance of shares under our dividend reinvestment plan (“DRIP”). Of the total capital raised from the public offerings as of December 31,
2021, we have used $9.92 million to repurchase shares under the Company’s share repurchase program. In April 2021, we filed a preliminary offering statement pursuant to Regulation A with the SEC to sell up to $50,000,000 of shares of the
Company’s Series A preferred stock at an initial offering price of $25.00 per share (the “Offering Circular”). The sale of shares pursuant to the offering began after the Offering Circular was qualified by the SEC in November 2021. We plan to
fund future investments with the net proceeds raised from our preferred equity 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. While we were a BDC, we did not borrow money
on a long-term basis or issue debt securities at the Company level; however, now that our BDC status is withdrawn, we may borrow money within the underlying companies in which we have majority ownership. In addition, 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.
We intend to utilize leverage to enhance the total returns of our portfolio, and we expect to have greater flexibility in raising debt capital, following the withdrawal of our BDC election.
Historically, we have only been able to access leverage at attractive costs through a credit facility.
We also expect to have greater flexibility in issuing securities with common equity participation features (such as warrants and convertible notes) and/or additional classes of stock (such as
preferred) in order to facilitate capital formation now that we are no longer subject to the restrictions of the 1940 Act.
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 will no longer be limited by the 1940 Act.
We used the funds raised from our public offerings to invest in portfolio companies, paying cash dividends to holders of our common stock (from investment income and realized capital gains),
and paying operating expenses.
The Company finished the three months ended December 31, 2021 with cash and cash equivalents, restricted cash, and receivables of $27.3 million, and approximately $3.37 million of current
liabilities. Because of its strong liquidity and the liquidity preservation measures taken by the board, the Company is currently capable of meeting all of its obligations and continue its operations for the foreseeable future. The Company
intends to continue to qualify as a REIT and to meet the associated testing requirements, including paying out at least 90% of its taxable income.
Cash Flows:
Six months ended December 31, 2021 (Successor basis):
For the six months ended December 31, 2021, we experienced a net increase in cash of $17.57 million. During this period, we generated cash of $2.25 million from our operating activities, $2.49
million from our investing activities and $12.83 million in our financing activities.
The net cash inflow of $2.25 million from operating activities resulted from $5.44 million of rental revenues and $3.35 million of investment income offset by $6.54 million of cash used in
operating expenses.
The net cash inflow of $2.49 million from investing activities resulted from real estate acquisitions through our subsidiaries of $21.78 million and purchases of equity investments of $3.23
million offset by cash inflows of $23.30 million from sale of investments and $4.20 million from distributions received from our investments that are considered return of capital.
The net cash inflow of $12.83 million from financing activities resulted from payment of dividends of $1.21 million, $0.06 million redemption of common stocks, payment of deferred finance cost
amounting to $0.78 million, payment of syndication cost amounting $0.43 million and payment on existing note payables of $0.71 million offset by cash inflows of contributions by non-controlling interests holders amounting to $0.86 million, $0.09
million proceeds from issuance of preferred stock, $0.07 million change in capital acceptance, and $15.00 million proceeds from note payables.
Six months ended December 31, 2020 (Predecessor basis):
For the six months ended December 31, 2020, we experienced a net increase in cash of $5.20 million. During this period, we generated cash of $3.14 million from our operating activities, $1.93
million from investing activities and $0.13 million from our financing activities.
The net cash inflow of $3.14 million from operating activities resulted from $10.94 million from distributions received from our investments that are considered return of capital and $5.26
million from sales and liquidations of investments offset by $12.69 million of cash used in purchasing investments and $0.37 million used in operating expenses, net of investment income.
The net cash inflow of $1.93 million from investing activities resulted from the consolidation of the Operating Partnership as of December 31, 2020.
The net cash inflow of $0.13 million from financing activities resulted from the sale of shares under our third public offering with gross proceeds of $0.14 million (net of $0.09 million of
decrease in capital pending acceptance) offset by cash outflows of $0.01 million from payments of selling commissions and fees.
Contractual Obligations
We have entered into two contracts under which we have material future commitments: (i) the Advisory Agreement, under which the Real Estate Adviser serves as our adviser, and (ii) the
Administration Agreement, under which MacKenzie furnishes us with certain non-investment management services and administrative services necessary to conduct our day-to-day operations. Each of these agreements is terminable by either party upon
proper notice. Payments under the Advisory Agreement in future periods will be (i) a percentage of the value of our Invested Capital, (ii) Acquisition Fees, and (iii) incentive fees based on our performance above specified hurdles. 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.
Borrowings
We do not have any current plans to borrow money at the Company level. 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. While we do not have any plans to borrow money at the Parent Company level, we borrow money within the underlying companies in
which we have majority ownership. As of December 31, 2021, total loan outstanding at the underlying companies amounted to $52,206,329.
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, 2021, included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2021.
Distributions to Stockholders
We pay quarterly distributions to stockholders to the extent that we have income from operations available. Our quarterly distributions, if any, will be determined by our board of directors
after a review and distributed pro-rata to holders of our shares; we declare distributions on a monthly basis, but pay each quarter. Any distributions to our stockholders will be declared out of assets legally available for distribution. In no
event are we permitted to borrow money to make distributions if the amount of such distributions would exceed our annual accrued and received revenues, less operating costs. Distributions in kind are not permitted, except as provided in our
Charter.
We have elected to be treated as a REIT under the Code. As a REIT, we are not subject to federal income taxes on amounts that we distribute to the stockholders, provided that, on an annual basis, we distribute at
least 90% of our REIT taxable income to the stockholders and meet certain other conditions. To the extent that we satisfy the annual distribution requirement but distribute less than 100% of the taxable income, we will either be subject to U.S.
federal corporate income tax on our undistributed taxable income or 4% excise tax on catch-up distributions paid in the subsequent year. We are also subject to tax on built-in gains we realize during the first five years following REIT election.
Our DRIP provides for reinvestment of our dividends and other distributions on behalf of stockholders for any individual stockholder who elects to participate in the DRIP, provided that the DRIP is permitted by the
state in which the stockholders resides. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions.
On March 31, 2020, after assessing the impacts of the COVID-19 pandemic, the Company’s board of directors unanimously approved the suspension of regular quarterly distributions to the Company’s stockholders,
effective immediately. On May 10, 2021, the board of directors reinstated the quarterly distributions after reassessing the cash flow of the Company and intends to continue such distribution so long as it is supported by the previous quarter’s
income, but may increase or decrease the distribution accordingly. Accordingly, on July 9, 2021, the Company declared a dividend of $0.06 per common share for the quarter ended June 30, 2021, and on September
13, 2021, it declared a dividend of $0.07 per common share for the quarter ended September 30, 2021. The dividend declared on July 9, 2021 was paid on July 26, 2021, and the dividend declared on September 13, 2021 was paid on October 29, 2021.
The board intends to continue such regular dividends so long as it is supported by the previous quarter’s income, but may increase or decrease the dividend accordingly.
On December 20, 2021, the Company declared a dividend of $0.08 per common share and $0.375 per Series A preferred share for the quarter ended December 31, 2021. As there were no holders of
preferred stock prior to December 1, 2021, the Board approved $0.125 per preferred share to preferred shareholders of record as of December 31, 2021.
Our current securities portfolio, as well as our future investments in securities, 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. However, now that we are no longer a BDC, most of our investments will be investments in real estate or interests in real estate that are not subject to the same market risks, but are instead subject to market risk associated
with changes in interest rates both in terms of variable-rate debt and the price of new fixed-rate debt upon maturity of existing debt and for acquisitions.
At December 31, 2021, financial instruments that subjected us to concentrations of market risk consisted principally of equity investments, which represented approximately 37%
of our total assets as of that date. As discussed in Note 4 – Investments, to our consolidated financial statements, these investments primarily consist of securities in companies with no readily determinable market values and as such are valued
in accordance with our fair value policies and procedures. Our investment portfolio also includes shares of publicly traded REITs, which are valued at recently quoted trading prices. Our investment strategy represents a high degree of business
and financial risk due primarily to the general illiquidity of our investments. We may make short-term investments in cash equivalents, U.S. government securities and other high-quality investments that mature in one year or less, pending
investments in portfolio companies made according to our principal investment strategy.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) or 15d-15(e) of the 1934 Act) as of the end of the period covered by this report as required by paragraph (b) of Rule 13a-15 or 15d-15 of the 1934 Act. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports we file or submit under the 1934 Act is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting (identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the 1934 Act)
during the fiscal quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
None.
There have been no material changes to our risk factors discussed in “Risk Factors” in our annual report on Form 10-K for the fiscal year ended June 30, 2021.
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
|
||||||||||||
|
|
||||||||||||||||
|
During the quarter ended December 31, 2021:
|
||||||||||||||||
|
December 1, 2021 through December 31, 2021
|
5,607.87
|
$
|
9.84
|
5,607.87
|
-
|
|||||||||||
|
|
5,607.87
|
5,607.87
|
-
|
|||||||||||||
None.
Not applicable.
None.
|
Exhibit
|
Description
|
|
Section 302 Certification of Robert Dixon (President and Chief Executive Officer)
|
|
|
|
|
|
Section 302 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
|
|
|
|
|
|
Section 1350 Certification of Robert Dixon (President and Chief Executive Officer)
|
|
|
|
|
|
Section 1350 Certification of Angche Sherpa (Treasurer and Chief Financial Officer)
|
|
|
101.INS
|
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
|
|
|
|
|
101.SCH
|
Inline XBRL Taxonomy Extension Schema Documents.
|
|
|
|
|
101.CAL
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
|
|
101.DEF
|
Inline XBRL Taxonomy Extension Definition Linkbase Document.
|
|
101.LAB
|
Inline XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
|
|
101.PRE
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
104
|
Cover Page Interactive Data File (formatted as inline XBRL and contained Exhibit 101).
|
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: February 14, 2022
|
By:
|
/s/ Robert Dixon | |
|
|
President and Chief Executive Officer
|
||
|
|
|
||
|
Date: February 14, 2022
|
By:
|
/s/ Angche Sherpa | |
|
|
Treasurer and Chief Financial Officer
|
||
49
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Consolidated Financial StatementsNote 1 Principal Business and OrganizationNote 2 Summary Of Significant Accounting PoliciesNote 3 Investments in Real EstateNote 4 InvestmentsNote 5 Variable Interest EntitiesNote 6 Related Party TransactionsNote 7 Margin LoansNote 8 Mortgage Notes Payable and Debt GuarantyNote 9 Earnings Per ShareNote 10 Share Offerings and FeesNote 11 Share Repurchase PlanNote 12 Stockholder DividendsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits